Second Circuit to Issuers: You Need Not Disclose Every Single Asset in Your Registration Statements


That was the Second Circuit’s message to companies in a September 25, 2013 order by upholding dismissal of claims against defendant Royal Bank of Scotland (“RBS”) for alleged failure to disclose enough information about its exposure to subprime mortgages. In so doing, the Court reaffirmed longstanding principles at the heart the securities laws and issued an opinion as applicable to technology companies as it is to banks.

RBS had issued five offering documents in 2005 and 2006, which plaintiff alleged contained a number of misstatements and omissions. Among others, the complaint alleged RBS had misstated its exposure to subprime mortgages, falsely claimed it had effective risk controls, and failed to disclose an inadequate capital base.

The Second Circuit held that RBS had no legal obligation to describe its assets in more detail than it did. The bank had disclosed that it was exposed to billions worth of securitized assets, including “US securitization of residential mortgages.” It did not, however, disclose that it “had accumulated a significant concentration of subprime mortgages,” as plaintiffs contended it should have. However, the Court disagreed. It held that issuers need not “identify every type of asset a security contains” as long as they “provide extensive descriptions of the security’s contents that are broad enough to cover the type of asset at issue.” The Court also found that RBS was not liable for opinions about its risk controls and capital base without plausible allegations that RBS believed those opinions to be false.

The opinion is notable for a couple of reasons. First, it reaffirms the principle first articulated by Supreme Court’s 1976 opinion in TSC Industries v. Northway that the securities laws should not encourage management, out of fear from exposure to substantial liability, to simply “bury the shareholders in an avalanche of trivial information—a result that is hardly conducive to informed decisionmaking.” As a corollary, plaintiffs should not be allowed to use the benefit of hindsight to make monumental what appeared trivial at the time.

Second, the Second Circuit’s opinion is applicable to any number of companies in countless industries. How much detail must a technology company disclose about its patent portfolio? Or a real estate developer about its commercial versus residential holdings? Or a gas and oil company on the locations of its oil reserves? The answers to each of these questions turns on the facts and circumstances of each company and case, but the general principle is this: as long as the issuer describes the general category of assets in enough detail—what it is, its value, how it’s valued, what risks it faces, how those risks could impact value, among others—it need not itemize each and every subcategory therein.