For years, the U.S. Chamber has been a leading voice in the debate around corporate disclosure. Effective disclosure is a cornerstone of our capital markets, giving investors information they need about public companies so they can make informed investment decisions.
However, as annual and quarterly reports from public companies have grown in both size and complexity, serious questions have been raised about the utility of current disclosures and the Securities and Exchange Commission’s (SEC) role in reforming existing and proposing new disclosure rules.
What is Materiality?
At the center of corporate disclosure in the United States is the longstanding materiality standard. “Materiality” is an important principle to anyone who invests their savings in the stock market. Put simply, the standard ensures that investors have the information they need while protecting them from “information overload” and preventing regulators or politicians from using corporate disclosure to pursue objectives that may be at odds with investor interests.
In 1976 Justice Thurgood Marshall articulated a meaningful and lasting definition of materiality. Writing for the majority of the Supreme Court in the TSC Industries, Inc. vs. Northway, Inc. decision, Justice Marshall cautioned that the “disclosure policy” under the Federal securities laws is “not without limit” because investors could be overwhelmed with information that is not central to their decision-making. The Court – in both the TSC decision and subsequent Basic, Inc. v. Levinson decision – rejected the argument that information is material if it “might” be important to an investor and explained that information is material if “there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote” or whether to buy, sell, or hold a security.
This standard formulated by the Court helps guard against the politicization of disclosure and underscores the original purpose of the Federal securities laws. The Chamber has fought on several fronts to maintain the materiality standard and keep politics out of disclosure. These efforts include:
- Working closely with the SEC on its efforts to update current rules and eliminate any outdated or unnecessary disclosure requirements. The Chamber released a disclosure reform report in 2014 and a report on the materiality standard in 2017 that influenced eventual reforms implemented by the SEC.
- Advocating for Congress to pass laws to modernize disclosure and reinforce the materiality standard, including the Disclosure Modernization and Simplification Act which was signed into law in 2015. The Chamber has also testified numerous times before Congress about the importance of materiality.
- When necessary, the Chamber has gone to the courts when mandates stray from the core purpose of disclosure. For example, the courts agreed with the Chamber that parts of the Dodd-Frank “conflict minerals” rule violated the First Amendment.
In early October, Sen. Mike Rounds introduced the Mandatory Materiality Requirement Act of 2022, which would require the SEC to only adopt a disclosure requirement if it meets the Supreme Court definition of materiality. The Chamber strongly supports this legislation, which is even more important and relevant today as the SEC is currently undertaking an unprecedented regulatory agenda that could include expansive new disclosure mandates related to climate change, cybersecurity, human capital management and other issues.
Whatever the topic, the Chamber will continue to advocate that the materiality standard remains central to corporate disclosure and that the interests of investors are not jeopardized by politicized agendas or rulemakings.
About the authors
Director, Center for Capital Markets Competitiveness