Securities Laws


Establishing a securities violation is only half of the battle.

In SEC enforcement cases, the concept of materiality is an important one. As a preliminary matter, due to the Commission’s crushing case load and limited resources, only the most significant cases can be investigated. Furthermore, many securities violations require that the charged misconduct be material. As a general rule, materiality has been defined as what a reasonable investor would have considered significant in making investment decisions.

There are two common approaches for establishing materiality.

Quantitative Materiality

This approach attempts to assess the materiality of misstatements or omissions by assessing the percentage in which they deviated from reality. As a general rule of thumb, although the number can be smaller, more than a 5% deviation is considered material.

Qualitative Materiality

Depending upon the surrounding circumstances, even misstatements and omissions that are quantitatively small can be qualitatively material. In Staff Accounting Bulletin No. 99, the SEC has provided a non-exhaustive list of factors that could make statements or omissions qualitatively material including, but not limited to:

  • whether the misstatement arises from an item capable of precise measurement or whether it arises from an estimate and, if so, the degree of imprecision inherent in the estimate;
  • whether the misstatement masks a change in earnings or other trends;
  • whether the misstatement hides a failure to meet analysts’ consensus expectations for the enterprise;
  • whether the misstatement changes a loss into income or vice versa;
  • whether the misstatement concerns a segment or other portion of the registrant’s business that has been identified as playing a significant role in the registrant’s operations or profitability;
  • whether the misstatement affects the registrant’s compliance with regulatory requirements;
  • whether the misstatement affects the registrant’s compliance with loan covenants or other contractual requirements;
  • whether the misstatement has the effect of increasing management’s compensation—for example, by satisfying requirements for the award of bonuses or other forms of incentive compensation; and
  • whether the misstatement involves concealment of an unlawful transaction.

Seek Help. Due to the importance and complexity of this area of the law, potential SEC whistleblowers are encouraged to consult a securities attorney and/or review our Securities Law Primer.

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