Sunlight on Iran: How Reductive Standards of Materiality Excuse Incomplete Disclosure Under the Securities Laws
64 Pages Posted: 3 Sep 2010 Last revised: 25 Dec 2010
Date Written: September 2, 2010
U.S. federal securities law protects investors by requiring companies to disclose information that is “material,” information that would be significant to a reasonable person making an investment decision. In recent years, the SEC has interpreted that standard in a reductive manner, enabling companies to limit disclosure to information that is currently, financially significant. But what about things that investors care about that do not currently have a reliably quantifiable impact on the company’s bottom line? What about management integrity? What about a company’s climate change impact? Most importantly for the purposes of this article, what about a company’s business operations in Iran? This article examines the doctrine of materiality as it has informed disclosure of several issues, and as it is currently being used by reporting companies to avoid disclosure of activities in Iran. The reductive standard relies on notions of informational efficiency implausible after the financial crisis, undercuts crucial U.S. foreign policy, and fails to protect investors. Consequently, this article argues that the SEC should use a broader understanding of materiality: the statute allows this, the legislative history encourages it, the Supreme Court has clarified it, and the SEC has traditionally employed a broad standard. It is the right thing to do.
Keywords: Iran, securities, SEC, materiality, disclosure
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