This Comment considers whether a violation of Item 303 of Regulation S-K automatically satisfies the materiality element of a Rule 10b–5 cause of action. While Item 303 requires disclosure of all information that is “reasonably likely” to the have a material effect on the company’s performance, Rule 10b–5 limits disclosure to material information determined by a balancing of the magnitude of the event and the probability it will occur.
This Comment first surveys court decisions regarding how Item 303 materiality relates to Rule 10b–5 and determines that courts disagree on the implications of Item 303. Although a federal district court and a circuit court of appeals categorically rejected the notion that violations of Item 303 can support a Rule 10b–5 claim, this Comment argues that they can, provided the violation meets the materiality standards outlined by the Supreme Court.
Second, this Comment analyzes the conceptual gap between Item 303 and Rule 10b–5 disclosure requirements through a series of hypothetical scenarios. Although not ideal for plaintiffs, these hypotheticals demonstrate both the over- and under-inclusivity of Item 303 with respect to Rule 10b–5.
Accordingly, this Comment concludes that a shortcut approach to Rule 10b–5 via Item 303 is not feasible. While Item 303 violations could be material, not all violations will meet Rule 10b–5. Thus, some plaintiffs would have to establish materiality separately.
Finally, this Comment provides an alternative, yet weaker, means of recovery through SEC enforcement and creation of “fair funds” for plaintiffs whose Rule 10b–5 claims failed because the Item 303 violation did not pass muster under Basic v. Levinson.
This Comment ultimately concludes that Item 303, while indirectly useful to investors, is not a plaintiff’s silver bullet against companies who fail to adequately disclose.