Corporate speech, securities regulation, and an institutional approach to the First Amendment.

• Author: Siebecker, Michael R.

ABSTRACT

Does the First Amendment shield politically tinged corporate speech from the compelled disclosure and reporting requirements embedded in the U.S. securities laws? The question arises in the securities regulation context because of an impending jurisprudential train wreck between the Supreme Court's commercial speech doctrine and its approach to corporate political speech. As corporations begin mixing commercial messages with political commentary, First Amendment jurisprudence simply provides insufficient guidance on the role government should play in regulating that speech. Although First Amendment jurisprudence generally counsels against governmental restrictions on corporate political speech without regard to the truth or falsity of the message, a different branch of that same jurisprudence suggests governmental regulation of commercial speech remains essential to ensure consumers receive accurate information and to maintain market efficiency. Unfortunately, the Supreme Court has never articulated sufficiently clear definitions of "commercial" or "political" speech, or the boundaries between them, to address claims of politically tinged corporate speech. Because the securities laws essentially operate through content-based regulation of compelled speech, which often touches inherently political matters, the securities laws seem especially vulnerable to constitutional attack.

Considering the limitations of current speech jurisprudence, this Article examines whether the "institutional approach" to the First Amendment advocated by Frederick Schauer provides a theoretical basis for maintaining a robust securities regulation regime. Following that approach, a determination of speech rights in any particular institutional setting should depend on an assessment of the societal importance of the institution as well as the relationship between speech rights and the institution's basic role. The Article concludes that an institutional approach to First Amendment jurisprudence not only provides sufficiently strong reasons for insulating the securities regulation regime from the First Amendment's reach, but also lends strong support for embracing a new institutional approach to First Amendment jurisprudence itself.

TABLE OF CONTENTS INTRODUCTION I. THE IMPENDING JURISPRUDENTIAL COLLISION BETWEEN COMMERCIAL SPEECH AND CORPORATE POLITICAL SPEECH A. The Rise of Socially Responsible Investing B. Corporate Responses to Socially Responsible Investing C. Nike, Inc. v. Kasky II. THE LIMITATIONS OF FIRST AMENDMENT THEORY 628 A. Commercial Speech Doctrine B. Corporate Political Speech C. Securities Regulation Adrift III. A NEW INSTITUTIONAL APPROACH 646 A. The Nature of the Problem B. The Tenets of Schauer's Solution IV. SECURITIES REGULATION AND THE INSTITUTIONAL APPROACH A. The Institutional Importance of Securities Regulation B. The Nexus Between Speech Restrictions and Securities Regulation 1. Gun Jumping and Market Conditioning Encouraged 2. Investor Solicitation Rules Thwarted 3. Securities Act Antifraud Provisions Sidestepped 4. Exchange Act Fraud Rules Circumvented 5. Periodic Reporting Rendered Unreliable 6. "Super Safe Harbors" Created 7. Plain English Requirement Ignored 8. Shareholder Proposals Threatened V. NIKE REVISITED CONCLUSION INTRODUCTION

Does the First Amendment protect from regulation any corporate speech that touches some political chord or matter of public concern? If so, does the First Amendment shield politically tinged corporate speech from the compelled disclosure and reporting requirements embedded in the U.S. securities laws and regulations? For those especially concerned with the integrity of the U.S. capital markets, obtaining an answer to that second question remains a paramount concern. Crafting a general theory addressing the political speech rights of corporations, however, need not necessarily precede a determination of the proper reach of the U.S. securities laws. Instead, an examination of the institutional justifications for maintaining a robust securities regulation regime, based on Frederick Schauer's newly developed "institutional approach" to the First Amendment, (1) might provide sufficiently strong reasons for insulating the American system of compelled corporate reporting and disclosure from constitutional attack.

Motivating the need for a new institutional analysis is an impending jurisprudential train wreck in the realm of securities regulation. Speeding from one direction is the "commercial speech" doctrine, a much-criticized set of standards articulated by the Supreme Court that permits substantial regulation of false or misleading commercial speech. Charging from the opposite course is the Supreme Court's somewhat disjointed First Amendment jurisprudence regarding corporate political speech that does not take the truth or falsity of the communication into account. The track itself--the conduit for the collision--is the system of compelled disclosure and reporting contained in the U.S. securities laws and regulations. Fueling the engines on both sides are a confluence of external pressures: a recent surge in socially responsible investing (SRI), defined as the integration of social, environmental, and political criteria into the investment decision-making process; (2) a concomitant growing need for corporations to establish a public record on those issues relevant to the SRI community; and an increasingly vigilant shareholder advocacy movement monitoring and testing the truth of corporate communications.

Perhaps surprisingly, few scholars even recognize that the Supreme Court's jurisprudence in the areas of commercial speech and corporate political speech are hurtling towards each other along the same track. Certainly many question the commercial speech doctrine's basic design and reach. (3) Others separately criticize the intellectual integrity of the Supreme Court's justifications for subjecting corporations to significant regulation in the electoral context while granting them significant political speech rights in other areas. (4) Still, there seems to be no general recognition that the clean distinction between political and commercial speech cannot endure. As a result, little attention has been paid to what impact the impending collision of those two areas of First Amendment jurisprudence might have on other areas of the law.

Some recent cases make clear, however, that the Supreme Court's forced divide between commercial speech and corporate political speech is intellectually unstable. Companies have begun to assert that when factual disclosures are intertwined with even minimal political commentary, the entire amalgam becomes fully protected political speech under the First Amendment. For example, in Nike, Inc. v. Kasky, (5) a case fully argued before the Supreme Court prior to being remanded for additional fact-finding, Nike argued that it could not be held liable under a California consumer fraud statute for any potentially false or misleading statements made to the press about its overseas labor policies, because those statements were part of an ongoing public debate about international labor practices. (6) In essence, Nike's claim effectively called for collapsing the commercial speech doctrine into the Supreme Court's political speech jurisprudence, forcing a union of standards not easily wed.

If corporations like Nike continue to blur the distinction between the commercial and the political, maintaining the current jurisprudential divide would require the Supreme Court to address some extremely difficult--yet very basic--questions that it has not yet answered with any clarity: What is commercial speech? What is political speech? When does commercial speech become political speech? Drawing those definitional lines presents a monumental jurisprudential task with far-reaching consequences perhaps too difficult to predict. In light of the attempt to collapse the distinction between political and commercial speech already brought before the Supreme Court in Nike, and with other cases sure to follow, such substantial theoretical excavation and remodeling of First Amendment jurisprudence seems unavoidable.

But why do the U.S. securities laws provide the conduit for the collision between political and commercial speech? Were corporations to find broad political protection under the First Amendment for factual disclosures, the detailed system of mandatory reporting and disclosure provided by the U.S. securities laws could be undone. Private causes of action for securities fraud currently recognized by the Supreme Court would lose their theoretical underpinnings, and the system of forced public transparency for public corporations and sales of securities would become muddied by political maneuvering. Investors could be left foundering without reliable information upon which to base investment decisions, and gross market inefficiencies could potentially result if market prices rested on infirm or false factual assumptions. Perhaps in no other institutional setting would a revamping of the distinction between commercial and political speech rights for corporations have a greater impact.

Some might suggest that questioning the First Amendment's impact on the stability of the system of mandatory reporting and disclosure under the U.S. securities laws simply raises a false concern. After all, even though the Securities and Exchange Commission (SEC) regulates with a very heavy hand the precise content of corporate disclosures, the Supreme Court has never seriously suggested that the securities laws or the agency that enforces them are vulnerable to attack under the First Amendment. Although decades ago some predicted a similar collision between the securities laws and the First Amendment, none occurred. (7) In fact, the Court has hinted on several occasions that the securities regulation regime sits comfortably outside the protective reach of the First...