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Why investors should worry about 2016 election now

While the next election won't take place until over a year and a half from now, political fundraising has already started. If you're an investor, you should be concerned.

Loan money
Hans Neleman | Getty Images

Many incorrectly believe that as a result of the Citizens United Supreme Court decision, corporations, like a person, can give directly to political candidates. They cannot. But far worse, thanks to a loophole in our system, corporations can spend unlimited amounts of money to influence elections without having to disclose any of it to their shareholders.

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When a corporation spends money in support of a political cause or candidate, it aligns itself with that cause or candidate, in the process putting itself at risk for alienating consumers and investors who don't share the same beliefs. This happened to Target back in 2010, when the retail giant contributed $100,000 to a pro-business group in Minnesota that ended up running ads supporting a gubernatorial candidate who wanted to ban same-sex marriage. When the contribution was later discovered, it sparked a controversy that resulted in a nationwide boycott and PR nightmare that forced the company's chief executive to issue an apology.

Corporations spend millions to build and protect their brands. If a company opts to spend general funds in a way that could seriously jeopardize one of its most prized assets, its shareholders have a right to know about it. So how are these undisclosed political contributions even possible?

It's called a 501(c) organization, a nonprofit entity that corporations can donate as much as they want to without having to report any of the contributions. The organization then uses its resources to support candidates who espouse its views and attack those who don't. This is all perfectly legal, so long as the tax exempt entity doesn't coordinate directly with any of the campaigns it's helping.

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Untraceable corporate political spending is a threat to our democracy and a major concern for shareholders who own and invest in corporations.

When the Citizens United decision was written, eight of the justices agreed that disclosure was important, and to some degree even premised their decision on the idea that it would be a reality for the newly enabled corporate spending. In his majority opinion, Justice Anthony Kennedy wrote, "With the advent of the Internet, prompt disclosure of expenditures can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions and supporters. Shareholders can determine whether their corporation's political speech advances the corporation's interest in making profits, and citizens can see whether elected officials are 'in the pocket' of so-called moneyed interests."

Kennedy's sentiments were unfortunately out of sync with the real requirements in place, and so to close this loophole, the Securities and Exchange Commission (SEC) — the federal agency with jurisdiction — needs to approve a rule requiring corporations to disclose their political contributions to shareholders. The rule was proposed in 2010 in a petition from 10 prominent securities academics, and has received support from multiple state treasurers, pension funds, and prominent private sector backers like John Bogle, the founder and former CEO of Vanguard. So why the delay?

The SEC regularly complains that it's underfunded and as a result of increased responsibilities in the wake of Dodd-Frank, understaffed. As a former banking lobbyist, I can attest that there is merit to these complaints, but I'm unwilling to accept this excuse forever, especially on such an important issue to investors, who the agency was created to protect.

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Without action, the situation is only going to get worse. According to the Center for Responsive Politics, in the 2012 presidential election, upwards of $300 million in dark money was spent — a number that will surely be dwarfed by similar spending in 2016. Setting aside whether you believe unlimited corporate contributions are a valid expression of free speech or not, disclosure and transparency are essential.

It's time for SEC Chair Mary Jo White to put this rule on the agency's agenda, and for the SEC commissioners to approve it.

Jonathan Kuhl is a senior associate at Civitas Public Affairs. He was previously a registered federal lobbyist for Credit Suisse. Follow him on Twitter @JonathanKuhl.