On October 18th your NIRI Houston chapter hosted Kerry Burke, partner at Covington & Burling, LLP. Kerry regularly advises on securities and general corporate matters, including periodic reporting under the Securities Exchange Act and on other securities law compliance issues.
At our NIRI Houston luncheon, Kerry provided us an overview of the SEC’s renewed focus on non-GAAP measures enforced under Reg G and Item 10(e) of Regulation S-K. Kerry indicates the SEC is increasingly concerned with potential investor confusion non-GAAP measures create and the apparent desire to rely on non-GAAP measures when attempting to explain quarterly performance. The SEC is particularly concerned with quarterly variance in the prominence of non-GAAP measures, the tendency to place GAAP measures deeper in the quarterly release than non-GAAP measures and not including proper reconciliation tables within the quarterly release.
Kerry also indicates the SEC will continue its focus on proper disclosure and is prepared to enforce GAAP measure clarity through the filing process, issuance of enforcements and if necessary, additional rulemaking.
Kerry’s suggestion to avoid SEC scrutiny:
- Make sure non-GAAP measures and GAAP measures are equally represented in investor communications
- Once a non-GAAP measure is introduced, be consistent in its use
- Ensure the non-GAAP measurement is relevant for investors, not just management
- Reconcile to the GAAP Income Statement, Balance Sheet and Statement of Cash Flows
If you’d like to review her presentation, which includes many examples, please click here.