Public Company Reporting and Corporate Governance

By: Glen Schleyer Sullivan & Cromwell LLP

THIS ARTICLE DISCUSSES RECENT DEVELOPMENTS RELATING to U.S. public company reporting and corporate governance and the outlook going forward. The U.S. election season and the change in administration have resulted in a period of more limited activity by the Securities and Exchange Commission (SEC), which operated with only three commissioners for all of 2016 and only two (less than a quorum) from January through early May of 2017. However, the SEC staff has remained active, and there have been continuing developments in the rollout (and potential roll-back) of disclosure and governance regulations called for by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank or the Dodd-Frank Act) (111 P.L. 203, 124 Stat. 1376).

Intensified Scrutiny of Non-GAAP Financial Measures by SEC Staff

In May 2016, the SEC’s Division of Corporation Finance issued new guidance in the form of Compliance and Disclosure Interpretations (C&DIs) identifying a number of potentially problematic uses of non-generally accepted accounting principles (non-GAAP) financial measures. This 2016 guidance represented a more restrictive stance by the staff, particularly compared to 2010 staff guidance that was widely viewed as emphasizing flexibility. The 2016 guidance was accompanied by public statements by SEC staff members of their intent to increase scrutiny of non-GAAP usage in SEC filings.

As of April 14, 2017, the SEC staff had publicly released more than 500 comments to nearly 250 companies challenging the calculation and presentation of non-GAAP financial measures in filings made subsequent to this guidance. Based on an analysis of these comments, the following have been the most common areas of SEC staff focus during this period, in descending order of frequency:

• GAAP measure not given equal or greater prominence (C&DI 102.10)
• Inadequate explanation of usefulness of non-GAAP measure
• Misleading adjustments, such as exclusion of normal recurring cash expense (C&DI 100.01)
• Inadequate presentation of income tax effects of non-GAAPmeasure (C&DI 102.11)
• Individually tailored revenue recognition or measurement methods (C&DI 100.04)
• Misleading title or description of non-GAAP measure
• Use of per share liquidity measures (C&DI 102.05)

As indicated previously, five of these top seven areas relate specifically to concerns addressed by the May 2016 guidance, with the comments usually citing the relevant C&DI, while the other two reflect continued focus on issues (explanation of usefulness and misleading titles) that have long been the subject of staff comment. This demonstrates that the staff’s efforts to monitor and enforce compliance are expanding, rather than replacing, its traditional areas of focus regarding non-GAAP measures.

To read the full practice note in Lexis Practice Advisor, follow this link.

Glen Schleyer is a partner at Sullivan and Cromwell. He has broad experience advising on a variety of registered and unregistered securities offerings, including initial public offerings, secondary offerings, structured transactions, complex debt issuances, and exchange offers. He advises numerous corporate clients on ongoing public company matters, including their 1934 Act periodic reports, Section 13(d) and Section 16 reporting, executive compensation matters, corporate governance, and regulatory compliance.

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