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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.
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.
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: