By Mark S. Nelson, J.D.
The SEC’s Investor Advisory Committee published a final version of its preliminary views on the agency’s disclosure effectiveness initiative in which the panel spotlighted several proposals, including non-GAAP financial measures. The letter, coming just weeks after issuance of a draft version, also turned up some areas of disagreement among IAC members. The panel offered its views as part of the SEC’s Regulation S-K concept release and as part of its consultative duties under a related provision in the Fixing America’s Surface Transportation (FAST) Act.
Non-GAAP disclosures. The IAC noted growing worries over non-GAAP financial disclosures as evidenced by the SEC’s latest Compliance & Disclosure Interpretations. Overall, the IAC said non-GAAP measures should not convey inaccurate information, but the requirements for them also could be updated to provide for review by a company’s outside auditor.
Item 10(e) of Regulation S-K governs non-GAAP financial measures included in SEC filings and requires the most directly comparable GAAP financial measure to be presented with “equal or greater prominence” to the non-GAAP measure. Regulation G covers registrants’ public disclosures of material information that includes a non-GAAP financial measure. The Commission’s non-GAAP financial measures release provides guidance on how to present this information.
Should non-GAAP rules apply more widely? The SEC’s new non-GAAP C&DIs provide examples of what the SEC staff could view as misleading non-GAAP disclosures. SEC Chief Accountant James Schnurr previously called attention to the sometimes “troubling” use of these measures and the prominence they are given not just by companies but also by analysts and others who report on companies’ fortunes.
The question for disclosure reform is whether the rules for non-GAAP disclosures sweep broadly enough. The IAC said the “equal or greater prominence” requirement could be extended to areas outside the context of SEC filings. But some IAC members questioned the benefits of doing this when the prominence requirement already applies in other settings, such as earnings release disclosures on Form 8-K.