Wait for it… In our extensive experience over the last several months, the biggest issue in proxy drafting for 2017, so far, has been the use of non-GAAP financial measures. The lead article in the January-February 2017 issue of The Corporate Counsel, “Taking a Closer Look at the Earnings Disclosure Process,” focuses on this issue and I wanted to follow-up on it.

As readers know, instruction five to Item 402(b) provides that "Disclosure of target levels that are non-GAAP financial measures will not be subject to Regulation G and Item 10(e); however, disclosure must be provided as to how the number is calculated from the registrant's audited financial statements." However, the SEC staff has confirmed that this instruction is limited to CD&A disclosure of target levels that are non-GAAP financial measures. It does not extend to non-GAAP financial information that does not relate to the disclosure of target levels, but is nevertheless included in the CD&A or other parts of the proxy statement.

“If non-GAAP financial measures are presented in CD&A or in any other part of the proxy statement for any other purpose, such as to explain the relationship between pay and performance or to justify certain levels or amounts of pay, then those non-GAAP financial measures are subject to the requirements of Regulation G and Item 10(e) of Regulation S-K.”

Many companies want to discuss their financial performance for the year in the proxy statement as an introduction to the CD&A, and these companies want to use the financial metrics they believe are most important to their company. This type of disclosure would not appear to fall within the exception of instruction five and the CDIs. I believe (and pray) that we caught and revised all such uses in the proxy statements of our clients, but I assume that not all companies will make these revisions. And God only knows if the revisions we have made will pass muster with the SEC. So how will the SEC apply this new position and what will the SEC do about non-compliant disclosures? One would hope that, since this is new and everyone is feeling their way along, the SEC will go easy on us all this year—especially in cases where we (the company and its advisors) have at least made an effort to comply. However, the fact is, of course, that no one knows (except maybe the SEC staff)!

The use of non-GAAP financial measures is, of course, relevant well beyond the area of executive compensation, but no one cares about that other stuff.