Investors may determine the materiality of public statements

Investors may determine the materiality of public statements

by | Jun 28, 2021 | Firm News

Federal securities laws generally do not require public companies to reveal all their material statements or financial information. As reported by Compliance Week, the U.S. Securities and Exchange Commission only requires disclosure of a material fact that a “reasonable investor” may want to know. In matters of compliance, the SEC both creates and enforces its rules.

Unless a specified duty to shareholders exists, a company may choose not to publish pertinent information regarding its operations. Investors, however, may hold management and a board of directors accountable for an omission they believe is material.

Information or statements of matters not subject to disclosure

Political donations, for example, generally do not require disclosure to the public. If a company’s supply chain poses a negative threat to the environment, management may not have a legal obligation to provide specific details.

The risks of a harmful supplier in a supply chain may not always classify as “material” to an investor. Accordingly, the SEC may not penalize a company for failing to provide information about the potential for harm related to upstream suppliers. Some investors, however, may find it relevant if a supplier’s practices have a negative impact on the environment.

Material information the SEC requires companies to disclose

Prior to 2020, the SEC required disclosing material information that included product offerings, source of raw materials and competitors. As noted by Chief Learning Officer magazine, legislative updates now require disclosure of material information about a public company’s human capital.

Because the value of a stock may no longer rely on manufacturing, trading prices may center on a company’s management team and employees. If a reasonable investor wants to know information about an organization’s human capital, the company must provide it. Failing to disclose material statements may result in a breach of duty action filed by aggrieved investors.