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Speech From the Office of the Investor Advocate Addresses FASB’s Proposals Regarding the Definition of Materiality

On August 22, the Investor Engagement Advisor in the Office of the Investor Advocate, Stephen Deane, gave a speech to the Tulsa chapter of the Institute of Management Accountants in which, among other things, he addressed two proposals by the Financial Accounting Standards Board (FASB) to revise the definition of materiality under generally accepted accounting standards.

In 2015, FASB proposed two updates that would remove its definition of materiality established in Concepts Statement No. 8 in favor of relying on the US federal courts’ definition of materiality, under which “information is material if there is a substantial likelihood that the omitted or misstated item would have been viewed by a reasonable resource provider as having significantly altered the total mix of information.” In doing so, FASB emphasized that materiality is a “legal concept” and that removal of its definition would align FASB’s understanding of materiality with the legal concept of materiality.

Mr. Deane noted, however, that investors and investor groups raised several concerns with regards to the FASB’s proposals, including that the proposals would reduce the flow of information to investors and shift decision-making on materiality from accountants to lawyers. He further acknowledged the lack of an existing framework for the evaluation of whether a disclosure is “material,” including who should make that determination for the purposes of the accounting standards, and as a result, the “inconsistent application of the materiality standard.”

In response to the FASB proposals, Mr. Deane noted the Office of the Investor Advocate’s proposal to adopt a hybrid approach rooted in both a prior FASB definition of materiality that more closely aligns with the definition adopted by the US Supreme Court (in Concepts Statement No. 2), as well as the Securities and Exchange Commission Staff Accounting Bulletin 99, which provides a “helpful framework for evaluating materiality decisions” and takes into account “quantitative factors and qualitative factors”

The full text of Mr. Deane’s speech is available here.

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About this Author

Mark D. Wood, corporate securities lawyer Katten Muchin Chicago Law firm
Partner

Mark D. Wood is head of Katten's Securities practice and concentrates in corporate and securities law. Mark represents public companies, issuers and investment banks in initial public offerings (IPOs) and other public offerings, private investment in public equity (PIPE) transactions, debt securities and other securities matters.

Mark also represents clients in complex corporate transactions, including tender offers, mergers, acquisitions, dispositions, going-private transactions, private equity investments, joint ventures and...

312-902-5493
Mark Reyes Securities Lawyer Katten Muchin law firm Chicago office
Partner

Mark J. Reyes concentrates his practice in corporate and securities matters, including representing issuers and investors in public offerings and private placements of equity and debt securities and advising clients in complex corporate transactions such as mergers, acquisitions, private investments in public equity (PIPEs), private equity investments and joint ventures. He also counsels public companies on securities law compliance, disclosures and corporate governance matters.

Shown below is a selection of Mark’s engagements.

  • Representation of hospitality company in connection with its initial public offering and listing on NYSE, as well as ongoing counseling with respect to compliance with securities laws and NYSE rules, disclosure and corporate governance matters.
  • Representation of NASDAQ-listed public company in the banking industry in connection with strategic transactions, capital raising transactions, compliance with securities laws and NYSE rules, disclosure and corporate governance matters, including strategic acquisitions, notes offering and at-the-market offering.
  • Representation of clean tech manufacturer for industrial equipment in connection with alternative public offering and listing on NASDAQ, as well as ongoing counseling with respect to compliance with securities laws and NASDAQ rules, disclosure and corporate governance matters.
  • Representation of NASDAQ-listed issuer in connection with selling stockholder block trades.
  • Representation of NYSE-listed industrial manufacturer with respect to compliance with securities laws and NYSE rules, disclosure and corporate governance matters.
  • Representation of NASDAQ-listed medical device company with respect to compliance with securities laws and NASDAQ rules, disclosure and corporate governance matters.
312-902-5612
Shannon Traylor, Corporate Attorney, Katten Law Firm
Associate

Shannon Traylor concentrates her practice in general corporate matters.

While attending law school, Shannon was a member of the Virginia Journal of International Law and its submission review board. Prior to law school, Shannon worked in the Washington, DC area for a nonprofit devoted to nuclear nonproliferation.

202-625-3798