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Comments of Lynn E. Turner

June 7, 2010

invited response to

Confusion about Reg FD Application to "Governance" Information


For a report of this and other comments, see

June 10, 2010 Forum Report:

Comments on Reg FD Application, Resolving One of Questions


Mr. Turner was the chief accountant of the SEC at the time of its adoption of Regulation FD, and was also responsible for the referenced 1999 Staff Accounting Bulletin 99 that defined SEC views of materiality for financial reporting.



Comments of

Lynn E. Turner

June 7, 2010


The SEC has long looked to the court cases on how it defines materiality.  The cases most often cited are noted below: TSC Industries v. Northway, Inc., 426 U.S. 438, 449 (1976) and also Basic, Inc. v. Levinson, 485 U.S. 224 (1988).


I have clipped the following from Staff Accounting Bulletin No. 99 (see attached) which addresses materiality in the context of financial statements.  But it cites the same cases - see highlights from SAB 99 below.  The SEC would look to these cases to determine if something was material - is there "...a substantial likelihood that the . . . fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available."  If so, if it is a fact on governance, would the reasonable investors have considered it material?  


From SAB 99:

"...Materiality concerns the significance of an item to users of a registrant's financial statements. A matter is "material" if there is a substantial likelihood that a reasonable person would consider it important. In its Statement of Financial Accounting Concepts No. 2, the FASB stated the essence of the concept of materiality as follows:

The omission or misstatement of an item in a financial report is material if, in the light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item.3

This formulation in the accounting literature is in substance identical to the formulation used by the courts in interpreting the federal securities laws. The Supreme Court has held that a fact is material if there is –

a substantial likelihood that the . . . fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information made available. 4

Under the governing principles, an assessment of materiality requires that one views the facts in the context of the "surrounding circumstances," as the accounting literature puts it, or the "total mix" of information, in the words of the Supreme Court. In the context of a misstatement of a financial statement item, while the "total mix" includes the size in numerical or percentage terms of the misstatement, it also includes the factual context in which the user of financial statements would view the financial statement item. The shorthand in the accounting and auditing literature for this analysis is that financial management and the auditor must consider both "quantitative" and "qualitative" factors in assessing an item's materiality.5 Court decisions, Commission rules and enforcement actions, and accounting and auditing literature6 have all considered "qualitative" factors in various contexts."






TSC Industries v. Northway, Inc., 426 U.S. 438, 449 (1976). See also Basic, Inc. v. Levinson, 485 U.S. 224 (1988). As the Supreme Court has noted, determinations of materiality require "delicate assessments of the inferences a 'reasonable shareholder' would draw from a given set of facts and the significance of those inferences to him . . . ." TSC Industries, 426 U.S. at 450."




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