The ADT enforcement action is a strong reminder that the SEC regards compliance with the “equal or greater prominence” requirement as a serious matter, and will take enforcement action in appropriate cases. As companies with calendar fiscal year ends approach “earnings season,” companies and their counsel should review earnings releases and SEC filings that contain non-GAAP financial measures for compliance with all applicable SEC non-GAAP disclosure requirements, including the “equal or greater prominence” requirement.

This enforcement action reflects SEC guidance contained in the 12 new or revised Compliance and Disclosure Interpretations (C&DIs) on the use of non-GAAP financial measures published by the SEC on May 17, 2016, discussed in our May 19, 2016 and June 20, 2016 client alerts. These C&DIs affected both communications subject to Regulation G – which applies to all public disclosures by reporting companies that contain non-GAAP measures – and filings subject to Item 10(e) of Regulation S-K – which applies to certain reports filed with the SEC under the Securities Act of 1933 and the Securities Exchange Act of 1934, including earnings releases furnished pursuant to Item 2.02 of Form 8-K, like the two earnings releases involved in this enforcement action. Significantly, C&DI 102.10 identified “[o]mitting comparable GAAP measures from an earnings release headline or caption that includes non-GAAP measures” as a disclosure that would cause a non-GAAP measure to be more prominent than the comparable GAAP measure. The full text of Question 102.10 reads as follows:

Question 102.10

Question: Item 10(e)(1)(i)(A) of Regulation S-K requires that when a registrant presents a non-GAAP measure it must present the most directly comparable GAAP measure with equal or greater prominence. This requirement applies to non-GAAP measures presented in documents filed with the Commission and also earnings releases furnished under Item 2.02 of Form 8-K. Are there examples of disclosures that would cause a non-GAAP measure to be more prominent?

Answer: Yes. Although whether a non-GAAP measure is more prominent than the comparable GAAP measure generally depends on the facts and circumstances in which the disclosure is made, the staff would consider the following examples of disclosure of non-GAAP measures as more prominent:

• Presenting a full income statement of non-GAAP measures or presenting a full non-GAAP income statement when reconciling non-GAAP measures to the most directly comparable GAAP measures;
   
• Omitting comparable GAAP measures from an earnings release headline or caption that includes non-GAAP measures;
   
• Presenting a non-GAAP measure using a style of presentation (e.g., bold, larger font) that emphasizes the non-GAAP measure over the comparable GAAP measure;
   
• A non-GAAP measure that precedes the most directly comparable GAAP measure (including in an earnings release headline or caption);
   
• Describing a non-GAAP measure as, for example, “record performance” or “exceptional” without at least an equally prominent descriptive characterization of the comparable GAAP measure;
   
• Providing tabular disclosure of non-GAAP financial measures without preceding it with an equally prominent tabular disclosure of the comparable GAAP measures or including the comparable GAAP measures in the same table;
   
• Excluding a quantitative reconciliation with respect to a forward-looking non-GAAP measure in reliance on the “unreasonable efforts” exception in Item 10(e)(1)(i)(B) without disclosing that fact and identifying the information that is unavailable and its probable significance in a location of equal or greater prominence; and
   
• Providing discussion and analysis of a non-GAAP measure without a similar discussion and analysis of the comparable GAAP measure in a location with equal or greater prominence.
  [May 17, 2016]