While the bank’s management had known since 2013 that some employees had created deposit and credit-card accounts for customers without their knowledge, the accounts were a tiny portion of Wells Fargo’s business. The settlement, which included a $185 million fine, was less than 1% of last year’s earnings. The matter was “not a material event,” Chief Executive John Stumpf told a Senate panel last week.
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The standards for determining whether a piece of information is material differ somewhat depending on the regulator involved. And some regulators are considering changes in existing standards around what is material information. In short, it is something of a gray area.
Generally speaking, materiality depends on whether a reasonable investor would consider the information important enough to affect the investor’s decision to buy a company’s securities.
Many companies and investors use a rule of thumb that something has to make up at least a specific portion of the company’s business to be considered material–10% of revenues, for instance, or 5% of earnings. But companies are supposed to go beyond the numbers and consider “qualitative” factors as well.