This week, the Council of Institutional Investors submitted the foreshadowed rulemaking petition to the Securities and Exchange Commission requesting the removal of the CD&A’s exemption from the SEC’s strict Non-GAAP reconciliation rules required in other public filings to clarify "CD&A references to non-GAAP financials that are not always clear, and may mislead investors." CII's rulemaking submission comes shortly after a push by Democrat SEC Commissioner Robert Jackson on the issue of Non-GAAP metrics and called for compensation committees to explain any adjustments in a Wall Street Journal op-ed he coauthored with former Fidelity Vice President Robert Pozen. CII's rulemaking petition seeks to build on the arguments in the Jackson article and, as noted, calls for the end of the exemptions in the CD&A from more stringent Non-GAAP reconciliation reporting requirements that apply to financial reporting elsewhere in the federal securities laws such as annual reports. Specifically, in the federal securities laws, Regulation G defines the requirements around the disclosure of Non-GAAP reconciliation. Regulation G requires two separate disclosures must accompany Non-GAAP financial measures:
- The most directly comparable financial measure calculated and show in accordance with GAAP; and
- Quantitative reconciliation of the differences between that GAAP measure and the Non-GAAP measure used.
Currently, a CD&A instruction states that Regulation G does not apply to the CD&A and instead "disclosure must be provided as to how the number is calculated from the registrant's financial statements." CII is very quick to say that it does not object to the use of Non-GAAP metrics and that the intent of the push for change is to only receive more clarity as to the reconciliation with GAAP.
The SEC is under no obligation to do anything with public rulemaking petitions other than acknowledge its receipt. However, given the attention on Non-GAAP metrics recently by Democrat SEC Commissioner Robert Jackson, internal chatter and attention on this issue could increase significantly - especially with the push now being led by the investor community in CII.