On February 10, 2016 the courts issued a decision addressing regulatory investigations that must be disclosed. This affects the SEC Rule 17h regarding required legal disclosure. – Read the full text report.
This significant decision will affect SEC Rule 17h with regards to reporting broker-dealers. This rule states that material legal disclosures must be reported to the SEC on a quarterly basis. A majority of companies refer to their accountants and/or auditors to figure out the materiality factor. A common practice approach has been to focus on the numerical information rather than a legal argument. However, this particular decision may encourage companies to look at their legal disclosure aspects from a different point of view.
This report states that; “The question is not whether [a defendant's] silence can give rise to liability, but whether liability may flow from his or her decision to speak concerning material details without revealing certain additional known facts necessary to make his statements not misleading. This question is answered by the text of Rule 10b-5(b) itself: it is unlawful for any person to 'omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.”
Marina Baranovsky from Scitus Consulting an expert in this field noted that this argument of materiality of legal proceedings is very different than balance sheet materiality approach. The potential effect of the misstatement on trends, especially trends in profitability is an issue that compliance supervisors need to continually be on alert for.
Ms. Baranovsky commented that it will be interesting to see how this significant decision will affect SEC Rule 17-H reporting Broker-Dealers in the future. Many companies in the past referred to its accountants and/or auditors to figure out the materiality factor.
However, this particular decision may encourage companies look at their materiality of legal disclosures from a different point of view. This broadens the focus from primarily numerical reports which were more simplistic, to a combination of numerical, legal and ethical considerations.
About James Cella
James Cella is the President of a growing and innovative compliance technology provider called SiteQuest Compliance. James is a customer-centric individual and focuses on building and sustaining positive and lasting relationship with his clients and partners. James and his family are "super fans" of Utah Football and have attended nearly every home game since 2002. Go Utes!