Tuesday, June 21, 2011

Is it "material"?

GIPS(R) (Global Investment Performance Standards) compliant firms are now required to have an error correction policy. This calls for firms to establish rules for materiality, something many struggle with from a definitional perspective.

The CFA Institute's Standards of Practice Handbook provides a definition of this term in relation to "material nonpublic information": "Information is 'material' if its disclosure would likely have an impact on the price of a security or if reasonable investors would want to know the information before making an investment decision. In other words, information is material if it would significantly alter the total mix of information currently available regarding a security such that the price of the security would be affected."

Might this not serve as the basis for a definition of materiality relative to errors? Perhaps "Errors are 'material' if their disclosure would likely have an impact on the assessment of the composite or strategy, or if reasonable investors would want to know the information before making an investment decision. In other words, errors are material if they would significantly alter the total mix of information currently available regarding a composite, such that the assessment of the composite would be affected."

Thoughts?

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