According to SEC Chair White, regulators are looking – and not happily – at companies’ increasing use of customized financial disclosures.  In fact, her recent remarks suggest that additional regulation is not being ruled out to curb the use of such “bespoke” data.

For some of us it may seem like only yesterday – though it was actually in 2003 – that the SEC adopted Regulation G to address the then-growing concern that companies were developing odd ways of communicating financial information to make their numbers look better.   In general, Reg G says that companies

  1. cannot make non-GAAP disclosures more prominent than GAAP disclosures;
  2. need to explain why they use non-GAAP disclosures; and
  3. must provide a reconciliation showing how each non-GAAP measure derives from the GAAP financial statements.

So far, so good.  However, some companies give little more than lip service to these requirements.  For example, it’s not unusual to see Item 2 addressed by a statement along the lines of “investors who follow the company use this measure to assess its performance.”  And, more recently, companies seem to be developing more peculiar ways of showing performance, such as excluding the effects of some taxes but not others.  This creativity may not be as arch as excluding recurring items or turning losses into gains, but it still makes regulators uneasy.

Somewhat surprisingly, the SEC has not rattled its sabre on this topic very often or very sternly.  Rather, it has generally addressed the use of bespoke financial data through comment letters on specific SEC filings.  Comment letters (and responses) are made public, but they lack the impact of rulemaking – or speechifying.

The issuer community may not be very excited about the likelihood of new rules on the topic.  Among other things, Chair White isn’t likely to remain in place too much longer – even if the Democrats retain the White House – and it’s unclear whether her successor or the other Commissioners are as interested in this topic as she is.  However, it’s way too early to discount the possibility that new rules will emerge.  And once the SEC starts looking into the practices that lead to new rules, it may find other areas of bespoke disclosure that need fixing.

In other words, companies would be well advised to carefully consider whether and how to customize their financial data and would also be wise to put appropriate, non-boilerplate, disclosures around them.  Why tempt fate?

Let me know your thoughts.