What Defines ‘Materiality’? CalPERS’ CEO Likens New SEC Disclosure Rules to Allowances in Sexual Harassment

Earlier this summer the Securities and Exchange Commission proposed some significant changes to disclosure requirements largely intended to improve disclosures for investors and simplify compliance efforts for registrants.

The rules signify the first time in over thirty years that the SEC is looking to transform disclosure requirements for companies. As being such, people are playing close attention as to whether the SEC is doing it right, given the significant time lag between updates.

Marcie Frost, CEO of the California Public Employees’ Retirement System took the opportunity to represent the pension’s thoughts on the proposed “principled-based” disclosures, which could lead to ambiguity and less informed disclosures.

“The moves to principles-based disclosure could lead to more transparency, but could make it easier for registrants to avoid certain disclosures required under the existing rules,” Frost said in the letter. “Much depends on how registrants institute the changes and how the registrants apply the concept of materiality as transformed in the proposed rule.”

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Materiality, a principle metric measuring the degree in which information would affect the judgment of an informed investor, was a key concern in Frost’s letter.

To illustrate her point, Frost said: “consider sexual harassment laws where a registrant could argue that those laws are not material to its business but faces violations or allegations that could be material. Here, there would be no requirement to disclose a material compliance concern with an ‘immaterial’ law, regardless of the magnitude of the violations…While some might argue that double materiality is purely a theoretical or academic construct, we distinguish the proposed rule as having practical implications.”

“We opposed modifications to the use of materiality in a manner that reduces disclosures…Instead of clarifying materiality, the commission makes the concept substantially more confusing in a manner that would only benefit those trying to avoid disclosure. The commission does not use a single definition for the concept,” she said in the statement.

‘Double materiality’ is another such concept that she argues could be problematic, in response to the SEC’s claim stating otherwise. The theory relates to ‘layers’ of materiality whereby one action could be considered in some sense but not another, and reporters can choose which layer to follow when disclosing information.

Aside from materiality concerns, Frost brought up a few other situations the SEC shed light upon such as human capital management, and suggested they expand their current provisions to include the number of full-time, part-time and contingent workers, employee turnover rates, and diversity statistics. “While we would like to see this new focus result in additional transparency, we do not believe that the commission’s current approach will provide sufficient comparable disclosure to aid investors.”