Recently, the SEC’s Division of Enforcement appears to have taken a particular interest in companies’ compliance with Regulation G and Item 10(e) of Regulation S-K, which govern the use of non-GAAP financial measures. Typically, the SEC has addressed any alleged non-compliance with these rules through comment letters issued by the Division of Corporation Finance. However, in recent weeks, multiple companies have reported receiving correspondence from the Division of Enforcement, alleging violations based upon earnings releases containing non-GAAP financial measures in headlines and summary bullet points without there being an equal or greater prominence presentation of the most directly comparable GAAP financial measures.
Item 10(e) of Regulation S-K, adopted in 2002, requires that companies presenting a non-GAAP financial measure in either (1) an SEC filing or (2) an earnings release furnished to the SEC must include a presentation, “with equal or greater prominence,” of the most directly comparable financial measure presented in accordance with GAAP. Until recently, the SEC’s Compliance and Disclosure Interpretations, or CDIs, regarding non-GAAP financial measures did not specifically address what disclosure would, or would not, comply with the prominence requirement. However, in May 2016, the SEC updated its guidance to include a non-exclusive list of examples of non-GAAP disclosure that the SEC’s staff would consider to be in violation of the prominence rule. Among the examples provided: omitting comparable GAAP measures from an earnings release headline or caption that includes non-GAAP measures (see Question 102.10, available at https://www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm).
Given the SEC’s focus, all companies should carefully review their use of non-GAAP financial measures in their filings and earnings releases and ensure that their use conforms to the SEC’s rules and most recent guidance.