Accounting

Avoiding Material Omissions Under the Federal Securities Laws (Portfolio 5509)

  • This Portfolio discusses one of the most challenging problems in the federal securities laws: complying with rules against lying through omission.

Description

This Portfolio discusses one of the most challenging problems in the federal securities laws: complying with rules against lying through omission. Lying through omission consists of making statements that paint an incomplete or inaccurate picture, and not revealing other material information necessary to present the entire truth. The federal securities laws require public companies, whenever they speak, to disclose all material information that would be necessary to present the truth entirely. This duty, which the Portfolio calls the “duty to avoid material omissions,” is found in both SEC anti fraud and financial reporting rules. Failure to comply with this duty can, in extreme cases, result in criminal prosecution.

This Portfolio discusses the legal foundations of the duty to avoid material omissions. The duty is worded generally, and contains subtleties that may seem difficult to apply in concrete settings. In order to illustrate the varied applications of the duty, the Portfolio discusses numerous SEC enforcement cases. Drawing upon these cases and other pertinent authorities, the Portfolio explains the conceptual boundaries of the duty and suggests numerous practical guidelines for complying with the duty.

Readers should appreciate that this Portfolio is intended first and foremost to provide practical assistance to the management and directors of public companies, and is not meant to be a traditional legal treatise. Consequently, the Portfolio is written in the vernacular as much as possible, and gives preference to comprehensibility for the layperson over technical legal considerations. The Portfolio has been written primarily to help company managers and directors resolve questions of whether to disclose particular information. Readers are also urged to consult with legal counsel concerning the scope of their company’s duty to disclose information.

The concept of materiality plays a critical role in determinations of whether to record particular numbers or other information in company financial statements. In making those decisions, accountants and auditors are required to apply certain tests for materiality that overlap in part with the tests this Portfolio describes. The duty to avoid material omissions, along with other relevant tests, applies to any financial statements governed by the federal securities laws (such as those filed with the SEC). A separate Portfolio will address other aspects of materiality in connection with complying with generally accepted accounting principles (GAAP).

This Portfolio should be cited as Bloomberg Tax Portfolio 5509, Wang, Avoiding Material Omissions Under the Federal Securities Laws (Accounting Policy and Practice Series).

Table of Contents

I. Nature of Duty
II. Legal Foundations of Disclosure Requirements
III. Development of the Duty to Avoid Material Omissions
IV. The Heart of the Duty to Avoid Material Omissions: Materiality
V. The Duty to Correct Prior Disclosures
VII. Application of the Duty to Avoid Material Omissions in the SEC Enforcement Process
VIII. Planning Points: Practical Guidelines for Evaluating Materiality of Undisclosed Information
IX. Conclusion

wang-leonard-2015
Leonard Wang
Tax Management Portfolio Authors
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