Institute for Financial Transparency

Shining a light on the opaque corners of finance


Since when are Bribes not material?

The US Treasury released a report calling for the repeal of the section of the Dodd-Frank Act requiring companies disclose if they are bribing foreign officials.

The Mnuchin lead Treasury made its case for repealing this disclosure by saying it was not material.  The report explained what is material information that must be disclosed:

An important principle underlying federal securities laws is the materiality requirement for disclosures. Materiality is an objective standard based on the reasonable investor, as opposed to a subjective standard that is based on what a particular investor may view as important. Unfortunately, amendments in Dodd-Frank to the federal securities laws have imposed requirements to disclose information that is not material to the reasonable investor for making investment decisions, including information related to conflict minerals (Section 1502), mine safety (Section 1503), resource extraction (Section 1504), and pay ratio (Section 953(b)).

It cited the Supreme Court decision supporting this view of materiality.

In TSC Industries v. Northway, 426 U.S. 438, 445 (1976), the Supreme Court stated in that “[t]he question of materiality, it is universally agreed, is an objective one, involving the significance of an omitted or misrepresented fact to a reasonable investor.” The Court then held that a fact is material “if there is a substantial likelihood that a reasonable shareholder would consider it important.” Id. at 449.

And then observed,

Treasury recognizes that the original support for such provisions was well-intentioned. However, federal securities laws are ill-equipped to achieve such policy goals, and the effort to use securities disclosure to advance policy goals distracts from their purpose of providing effective disclosure to investors.

Hmmm…. wouldn’t investors want to know if a company they were planning on investing in or held an investment in was breaking a law and potentially subject to a very large fine?

Treasury suspected this argument for reducing disclosure was susceptible to being undermined by this simple question.  So it threw out several more equally invalid arguments.

If the intent is to use the law to influence business conduct, then this effort will be undermined by imposing such requirements only on public companies and not on private companies. In addition, such requirements impose significant costs upon the public companies that are widely held by all investors.

Clearly Treasury is hoping someone won’t find these argument flawed.