On June 27, 2016, Securities and Exchange Commission (“SEC”) Chair Mary Jo White, speaking at the International Corporate Governance Network’s Annual Conference in San Francisco, reiterated the SEC’s growing concern regarding the use by public companies of non-GAAP financial measures. In her keynote address, Chair White lamented that “[i]n too many cases, the non-GAAP information, which is meant to supplement the GAAP information, has become the key message to investors, crowding out and effectively supplanting the GAAP presentation.” While companies are allowed to present non-GAAP financial measures in their public disclosures to enable them to convey a clearer picture of their results of operations and “tell their own stories” to investors, Chair White voiced her concern that recently, companies have been “taking this flexibility too far and beyond what is intended and allowed by our rules.”

Chair White’s comments echoed a statement she made in a December 2015 speech that these non-GAAP financial measures may be a source of confusion as well as similar sentiments expressed by senior SEC staff in the past few months, articulated in recent speeches and pronouncements by James Schnurr, the SEC’s Chief Accountant, Wesley R. Bricker, the SEC’s Deputy Chief Accountant and Mark Kronforst, the Chief Accountant in the SEC’s Division of Corporation Finance. In a March 2016 speech delivered at the 12th Annual Life Sciences Accounting and Reporting Congress, Mr. Schnurr pointed out that the staff of the SEC’s Division of Corporation Finance (the “Staff”) has observed a significant and “troubling increase” over the past few years in the use of non-GAAP financial measures, the nature of non-GAAP adjustments being made by companies, as well as the prominence being given by analysts and the media to these non-GAAP financial measures in their coverage. In early May of this year, Mr. Bricker noted that certain company practices related to non-GAAP financial measures have caused SEC concern for being potentially misleading to investors. These practices include, among others, apparent cherry picking adjustments within a non-GAAP financial measure; adjustments to remove normal, cash operating expenses; and the use of individually-tailored accounting principles to calculate non-GAAP earnings. Last midMay, Mr. Kronforst declared that there will be an “uptick” in the number of SEC comments to companies with respect to their non-GAAP financial measure disclosures and expressed the view that the next reporting quarter would be a great opportunity for companies to “self-correct” their disclosures.