Until recently, I’ve firmly believed that the SEC’s use of the bully pulpit can be effective in getting companies to act – or refrain from acting – in a certain way. Speeches by Commissioners and members of the SEC Staff usually have an impact on corporate behavior. However, the use of non-GAAP financial information – or, more correctly, the improper use of such information – seems to persist despite jawboning, rulemaking and other attempts to stifle the practice.
Concerns about the (mis)use of non-GAAP information are not new. In fact, abuses in the late 1990s and early 2000s led the SEC to adopt Regulation G in 2003. It’s hard to believe that Reg G has been around for 13+ years, but at the same time it seems as though people have been ignoring it ever since it was adopted. Over the last few months, members of the SEC and its Staff have devoted a surprising amount of time to jawboning about the misuse of non-GAAP information; for example, the SEC’s Chief Accountant discussed these concerns in March 2016; the Deputy Chief Accountant spoke about the problem in early May 2016; and SEC Chair White raised the subject in a speech in December 2015. And yet, the problem seems to persist.
The latest salvo from the SEC is a new set of CD&Is – Compliance and Disclosure Interpretations – reminding issuers to tread carefully when they put out non-GAAP information. The following are just some of the items on the SEC’s list of no-nos:
- performance measures that exclude normal, recurring, cash operating expenses necessary to operate a registrant’s business;
- using non-GAAP measures inconsistently from one period to the next; and
- non-GAAP measures that are adjusted only for non-recurring charges when there have been non-recurring gains.
Some commentators have noted that a number of the interpretations in the CD&Is are new. That’s true, but several of the practices criticized in the CD&Is (including those above) seem so obviously wrong-headed that one might ask why they need to be specifically cited for people to avoid them. Why would anyone think that these practices are appropriate? Phrased otherwise, don’t these make you wonder if the “perpetrators” knew or should have known that they were not complying with the spirit of Reg G?
Another troubling aspect of the CD&Is is that they address long-standing requirements of Reg G that don’t seem terribly complicated. For example, there is quite a bit of discussion about circumstances in which non-GAAP disclosures are given greater prominence than GAAP numbers. Does the term “prominent” really need to be explained in such detail? Does it remind anyone but me of the phrase “it depends upon what the meaning of ‘is’ is”?
And so it goes – for 12+ pages (of relatively fine print, I might add).
One of my Gunster colleagues has suggested that a major problem with non-GAAP information is that no one is really taking responsibility for it. I’m sure he’s right – the lawyers think the accountants should be/are responsible for policing them, and the accountants think that non-GAAP information is the lawyers’ responsibility. However, I’ve certainly been in situations where bankers or corporate communications types get carried away with accentuating the positive and don’t focus on (or maybe just ignore) the rules surrounding the use of non-GAAP information, and no one else picks up on it.
Given the years of unsuccessful jawboning – and rulemaking – on this subject by SEC members and Staff, I wonder why the SEC went to the trouble of yet another round of “guidance” on a topic that seems so self-evident. My conclusion is that the SEC wants to give companies one last clear chance to get their act together before launching a round of enforcement actions. To my knowledge (though I haven’t checked), the SEC has not initiated any enforcement proceedings arising from the misuse of non-GAAP information, but that may be cold comfort for companies that step close to or over the line. And if it can happen in the “stale” area of Section 16, it can happen here, too.
Thus my suggestion – Mind the GAAP!