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This Minor SEC Regulation Change Could Have Major Consequences, Experts Warn

Finance conceptThe Obama administration quietly introduced a change to securities law that dates back to George W. Bush’s presidency. Under the proposed changes, the U.S. Securities and Exchange Commission has reduced regulations surrounding the amount of information that companies have to share with the public concerning the reporting of financial errors.

Currently, SEC regulations state that companies have to disclose information on reporting errors to the public — including shareholders — no matter what mistakes may have occurred.

But the SEC is now opting for greater deregulation, says The Huffington Post, in order to help companies of all sizes avoid reporting on errors in public filings that are “immaterial” to overall operations.

This, says critics, is where problems may arise, despite the change sounding inconsequential to many. The definition of what is or isn’t immaterial is now left up to management to decide, and disregards what any corporate accountants may have to say about it.

Damon Silvers, a member of the Investor Advisory Committee, said that this move may prove detrimental for investors. “The feeling of this body is that more disclosure is better than less, in general,” he told HuffPo.

Rather than forcing auditors to show that an error was “immaterial” in financial reporting, they now have to prove that it was material instead.

That can be a challenge for some companies that have multimillion-dollar budgets.

Joseph Carcello, head of the Department of Accounting and Information Management at the University of Tennessee’s Haslem College of Business, and a member of the Investor Advisory Committee, explained that it also makes the auditors’ jobs more difficult. “Management is given tremendous discretion in judging this, and it will make it very difficult for auditors to say, ‘You don’t think this is material, but we do, so put it in,'” he said.

Congress has tried to reduce the amount of reporting necessary for businesses for some time. Back in January, the U.S. House of Representatives passed the Promoting Job Creation and Reducing Small Business Burden Act, which included provisions for easing financial reporting for smaller companies; however, the bill (H.R. 37) never made it past the House floor.

Proponents of the SEC’s new change say that the ease in regulations will benefit smaller businesses, also called Emerging Growth Companies or EGCs.

The proposed change in regulation perhaps arrives at a strange time for the SEC. The Obama administration has also made two nominations to fill vacancies in the agency, and one, Lisa Fairfax, is an outspoken critic of the Wall Street bailout and deregulation issues.

Fairfax is also a George Washington University law professor who is an expert on shareholder activism, corporate governance, and corporate securities. She would be the third African-American commissioner of 99 confirmed commissioners in the agency’s history, according to the Washington Post.

The other nominee, Hester Peirce, is a Republican and a critic of greater regulation policies. She is a senior research fellow at the Mercatus Center think tank at George Mason University.

The two would sit on the five-seat commission, which is chaired by Mary Jo White. White, who advocated for the new changes in reporting, is the wife of John White, former SEC Director of Corporate Finance under George W. Bush’s administration.