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.”

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Tags: California Public Employees’ Retirement System, CalPERS, CEOs, Disclosure, Frost, law, Materiality, SEC

The US Justice Department has reached a settlement of its civil forfeiture cases against assets acquired by Low Taek Jho and his family for using funds that were allegedly misappropriated from Malaysia’s sovereign wealth fund 1MDB, and laundered.

The allegedly ill-gotten assets were found in the US, UK and Switzerland, and are estimated to be worth more than $700 million. The Justice Department said the settlement brings the total amount the US has recovered or assisted in recovering to more than $1 billion in assets associated with the international money laundering and bribery scheme. It is the largest civil forfeiture ever conducted by the Justice Department.

“As alleged in the complaints, Jho Low and others, including officials in Malaysia and the United Arab Emirates, engaged in a brazen multi-year conspiracy to launder money embezzled or otherwise misappropriated from 1MDB,” General Brian Benczkowski, assistant attorney of the Justice Department’s Criminal Division, said in a statement. “And he used those funds, among other things, to engage in extravagant spending sprees, acquiring one-of-kind artwork and luxury real estate, gambling freely at casinos, and propping up his lavish lifestyle.”

Benczkowski said the settlement agreement forces Low and his family to relinquish hundreds of millions of dollars in ill-gotten gains that were intended to be a nest egg for people of Malaysia. He said it also sends the message that the US “will not be a safe haven for the proceeds of corruption.”

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According to the civil forfeiture complaints, more than $4.5 billion in funds belonging to 1MDB were allegedly misappropriated from 2009 through 2015 by high-level officials of the fund. That occurred through a criminal conspiracy involving international money laundering and bribery. The sovereign wealth fund was created by the government of Malaysia to promote economic development in the country through global partnerships and foreign direct investment.

In the settlement, Low, his family, and a Cayman Islands entity serving as the trustees overseeing the allegedly pilfered assets, agreed to forfeit all assets subject to pending forfeiture complaints in which they have a potential interest. The trustees are also required to cooperate and assist the Justice Department in the transfer, management and disposition of the assets.

The assets subject to the settlement agreement include high-end real estate in Beverly Hills, New York and London, and a luxury boutique hotel in Beverly Hills. Also included were tens of millions of dollars in business investments that Low allegedly made with funds misappropriated from 1MDB.

The assets being forfeited in the settlement are in addition to nearly $140 million in assets previously forfeited in connection with Low’s investment in a business entity related to the Park Lane Hotel in New York. There was also a super yacht worth more than $120 million.

Low also faces separate charges in the Eastern District of New York for allegedly conspiring to launder billions of dollars embezzled from 1MDB, and for allegedly conspiring to violate the Foreign Corrupt Practices Act (FCPA) by paying bribes to various Malaysian and Emirati officials.