In a recent speech, Commissioner Kara Stein addressed a number of disclosure related concerns, including cyber disclosures and ESG disclosures. Just as many of us had been reading about a decline in the number of SEC Staff comments regarding the use of non-GAAP measures in SEC filings, Commissioner Stein’s remarks seemed to focus renewed attention on this issue. Commissioner Stein cited studies that show that approximately 97% of S&P 500 companies cite at least one non-GAAP metric in their reports. In addition to echoing prior Staff concerns regarding the possibility that the use of non-GAAP measures may be misleading or may “disguise financial performance,” Commissioner Stein raised a new issue—the lack of uniform standards for non-GAAP measures. Hopefully, such concerns can be allayed with more detailed disclosures, rather than prescriptive standards regarding frequently used non-GAAP measures. Commissioner Stein also focused on “key performance indicators” (KPIs). While remarks from Commission Staff representatives in recent months have indicated that attention is being paid during disclosure reviews on the use of “tailored” performance measures reported by registrants, Commissioner Steins’ comments appear to reflect some intensified focus. Commissioner Stein noted that more and more companies are provided tailored measures of financial performance, which may include same store sales, sales per square foot, customer churn rates, sales conversion rates, customer retention, etc. Stein also noted that non-GAAP measures and KPIs appear to be used in the private markets, with forward-looking adjustments, such as cost savings. While noting that many of these measures may be used by the key decision makers within companies to track the companies’ performance and, therefore, may provide useful insights for investors, the lack of transparency regarding the calculation of many such measures, the lack of comparability as to such measures, and the possible selective use of such measures may raise investor protection concerns. See the full text of the Commissioner’s remarks here.
On October 1, 2018, a public petition was filed with the US Securities and Exchange Commission for a rulemaking on environmental, social and governance (ESG) disclosure. The Petition was authored by two law professors and signed by investors and associated organizations representing more than $5 trillion in assets under management.
This Legal Update outlines what the petition’s authors are requesting—and why.