The Securities and Exchange Commission (SEC) is facing criticism after the organization the SEC designated as responsible for setting accounting standards for public companies, the Financial Accounting Standards Board (FASB), drafted new rules that reduce corporate disclosure requirements.

The new rules proposed by the FASB would change the definition of “materiality” regarding what information a company must disclose on its official financial statements. Under the proposed rules, the standard for what constitutes material information would be lowered and allow public companies to withhold more information from investors and the public.

The current standard of materiality provided by the FASB is that an item of information must be disclosed if 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.” In other words, companies must disclose something that would make a potential investor change their mind about investing with the company.

The proposed rules lower the bar to a standard set by the Supreme Court for securities fraud. Changing the definition of materiality to the lower standard of fraud from the current more encompassing standard gives companies even more room to withhold information from regulators and the public.

As David Dayen argues over at Naked Capitalism:

The Supreme Court’s materiality standard is applied under SEC Rule 10b-5, a rule that targets securities fraud. It comes from a 1988 case, Basic v. Levinson, which determines materiality as whether a reasonable investor would have viewed whatever was undisclosed as something that would have altered the “total mix” of information about the company.

That’s pretty similar to the current FASB standard. But think about it. Basic v. Levinson defines when a lack of disclosure rises to the level of securities fraud. That’s necessarily a higher standard than the positive obligation to disclose. “I want to know more as an investor than what it would take for the thing to be a fraud,” said Damon Silvers, policy director at the AFL-CIO. The legal standard, then, creates a higher threshold for materiality – though nobody really knows how high – subject to the whims of the company and its auditor. And every time the courts tinker with the standard – and we know the pro-corporate tilt of this Court – the materiality standard would change. [emphasis added]

Not surprisingly, the proposal to lower disclosure standards for public companies has not gone over well with reformers. Lack of disclosure has caused or worsened every financial crisis in American history, including the recent 2008 crash.

CREDO Action has launched a petition calling on the SEC to not adopt the proposed rules which would allow “Wall Street corporations to hide the truth about their financial health from investors.” The public comment period on the proposed rules ends on December 8th.