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Chairman Kanjorski, Ranking Member Garrett, and distinguished members of the Committee, it is a privilege to testify in this forum today. My name is J.W. Verret.  I am an Assistant Professor of Law at George Mason Law School, a Senior Scholar at the Mercatus Center at George Mason University and a member of the Mercatus Center Financial Markets Working Group.  I also direct the Corporate Federalism Initiative, a network of scholars dedicated to studying the intersection of state and federal authority in corporate governance.

The one group with the most to gain from H.R. 4537, “The Shareholders Protection Act of 2010,” are large institutional shareholders that have unique conflicts of interest.  The group that stands to suffer the most from the legislation under consideration today are ordinary main street shareholders who hold shares through their 401(k)s.

There are two types of shareholders in American publicly traded companies.  The first are retail investors, or ordinary Americans holding shares through retirement funds and 401(k)s.  Half of all American households own stocks in this way.  The other type of investor is the institutional investor, including union pension funds as well as state pension funds run by elected officials.  H.R. 4537 seeks to give those institutional investors leverage over companies for political purposes at the expense of retail investors.  We have seen numerous instances where institutional shareholders use their leverage to achieve political goals, like Capler’s insistence on environmental or health policy changes paid for by ordinary shareholders.

H.R. 4537 attempts to contort the securities laws to regulate campaign finance risking and limiting the ability of companies to communicate with legislators by giving special interest institutional shareholders, such as unions, power to stop those communications.  This bill does not limit union political spending in any way and has nothing to do with the investor protection goals of the Securities Exchange Act.

Shareholders have two available remedies if they become dissatisfied with the performance of their companies. Shareholders can sell their shares, or they can vote for an alternative nominee in the next annual election of the Board.  They do both with some frequency.  In the rare event that political advocacy actually results in corruption, there is a third line of defense in place.  If the Audit Committee of the Board of Directors, which