Monday, February 11, 2008
SEC Commissioner Paul S. Atkins, at the SEC Speaks in 2008 conference, chided the agency for its failure to achieve predictability. Here is an excerpt on his discussion of the always troublesome definition of "materiality:"
One of the most glaring examples of lack of predictability is determining what constitutes materiality. The crux of our federal disclosure system is that all material information must be disclosed — with an emphasis on material. Yet the age-old question is: What does it mean to be "material"?
Issuers, investors, and regulators have struggled with applying the materiality test since the enactment of the securities laws. Materiality is an objective test: the Supreme Court has said that something is material if "there is a substantial likelihood that a reasonable shareholder would consider it … as having significantly altered the 'total mix' of information made available."
It is not enough that some investors may view a fact as important; rather, it must be important to the reasonable investor. ...In TSC Industries, the Supreme Court clearly understood the problem of materiality. In the unanimous opinion written by Justice Thurgood Marshall, the Court observed that "[s]ome information is of such dubious significance that insistence on its disclosure may accomplish more harm than good." The potential liability for a fraud violation can be great and, so Justice Marshall explained, "If the standard of materiality is unnecessarily low, not only may the corporation and its management be subjected to liability for insignificant omissions or misstatements, but also management's fear of exposing itself to substantial liability may cause it simply to bury the shareholders in an avalanche of trivial information — a result that is hardly conducive to informed decisionmaking."