On St. Lucia's Day (December 13), the staff of the Securities and Exchange Commission published updates to its compliance and disclosure interpretations (CD&Is) with respect to non-GAAP financial measures.  The following new CD&I caught my eye:

Question 100.06

Question: Can a non-GAAP measure be misleading, and violate Rule 100(b) of Regulation G, even if it is accompanied by disclosure about the nature and effect of each adjustment made to the most directly comparable GAAP measure?

Answer: Yes. It is the staff’s view that a non-GAAP measure could mislead investors to such a degree that even extensive, detailed disclosure about the nature and effect of each adjustment would not prevent the non-GAAP measure from being materially misleading. [December 13, 2022]

The staff's position seems to be nonsensical - if there is "extensive, detailed disclosure" how could investors possibly be misled?  Notably, the CD&I provides no example. 

In general, a disclosure will be misleading as a result of a factual misstatement and/or omission.  The CD&I posits neither.  In some cases, the courts have stated that a disclosure is misleading if it affirmatively creates "an impression of a state of affairs that differs in a material way from the one that actually exists".  Brody v. Transitional Hospitals Corp., 280 F. 3d 997, 1006 (9th Cir. 2002).   However, the posited existence of "extensive, detailed disclosure about the nature and effect of each adjustment" would seem to preclude any reasonable investor from gaining a false impression.  

This CD&I is an example of what I call "penumbra regulation".   This occurs when a regulator adopts a rule that delimits certain boundaries, it then tries to expand those boundaries by casting larger shadow over the area.  This tactic accomplishes at least two objectives.  First, it expands the formal rule without the necessity of an amendment which would require public notice and comment.  Second, it provides the agency with flexibility in enforcing the rule.   

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