New York Clearing House Association L.L.C.

December 13, 2002

Mr. Jonathan G. Katz,
Securities and Exchange Commission,
450 Fifth Street, NW,
Washington, D.C. 20549-0609.

Re: Conditions for Use of Non-GAAP Financial
Measures: File No.S7-43-02                        

Dear Mr. Katz:

The New York Clearing House Association L.L.C. (the "Clearing House")1, an association of major commercial banks, appreciates the opportunity to comment on the Securities and Exchange Commission's proposed rule (the "Proposal") on the conditions for use of non-GAAP financial measures.

The Clearing House supports the Commission's objective to eliminate the abuses that have occurred in connection with certain companies' presentation of so-called "pro forma" earnings. Many of the specific recommendations in the Proposal advance this goal without any significant adverse consequences. We are deeply concerned, however, that in two critical respects the Proposal will produce the counter-productive result of less meaningful disclosure.2 Companies would thereby be precluded from presenting information that they and investors believe enable investors to make the most informed decisions about companies in which they invest. As discussed below, we believe that the Commission can achieve its goal without this adverse impact on disclosure.

Our two principal concerns relate to two of the prohibitions in the proposed revision of Item 10 of Regulation S-K. The first is the absolute prohibition on non-GAAP per share measures under all circumstances. This ban would mean that the single data point most relied on by investors could not be used. As discussed below, the heart of the Sarbanes-Oxley provision which gives rise to the Proposal (Section 401(b) is a process of reconciliation. We believe that this very same approach could be applied to non-GAAP reported earnings per share, as opposed to an absolute ban.

The second is that the registrant would be barred from using non-GAAP performance measures if the "adjust[ment]" is "reasonably likely to recur" and eliminates or smooths "items identified as non-recurring, infrequent or annual". If this provision bars adjustments that are "reasonably likely to recur" only if the registrant identifies the items as "non-recurring, infrequent or unusual", then the impact would not be severe. If, however, the provision is designed to bar all "reasonably likely to recur" adjustments, then the impact would be severe. In the balance of this letter, we address the possibility that, if the latter reading were adopted, it would mean that many of the current non-GAAP financial disclosures that both companies and investors believe are meaningful could not be made in any form.

The Commission has stressed the value of companies' presenting financial information in a way that will enable investors to view a company's financial performance in the same way that management does. Stated simply, that objective would be subverted by these two restrictions on the use of non-GAAP financial measures. For a wide variety of reasons, management may view financial performance on a basis other than that indicated by generally accepted accounting principles. These can include the extraordinary or unusual nature of an item, limited relation of an item to the company's core business, anomalies in GAAP itself (which, as just one major example, includes both historical and current accounting), and, in a regulated industry such as banking, the requirements or guidance of the regulators. We believe that, in the vast majority of cases, management's objective in using non-GAAP financial measures is not enhanced earnings, but improved disclosure.

For many of the same reasons, investors and analysts seek this information, which they find useful in making investment decisions and recommendations. Non-GAAP performance measures are considered useful because they allow investors and analysts to analyze trends in a business that may be more indicative of both past performance and future results. The Clearing House is particularly concerned that the Proposal will eliminate an important measure used by investors and analysts to evaluate the operating performance of banking organizations, with the consequence that investment in banking organizations will be discouraged.

It may be helpful to provide several examples of non-GAAP financial information that investors and management alike have found useful, but could no longer be presented under the Proposal.

The first example is the presentation of "managed" basis results for businesses where the securitization of receivables is a fundamental methodology of business operations, e.g., credit card businesses. Because this item obviously recurs, such a presentation would be totally barred by the more draconian reading of the "likely to recur" test. The presentation of financial information on a managed basis is generally accepted industry practice for consumer banks with significant securitization activities. Managed basis reporting adjusts the revenues and expenses of the business as if the receivables had neither been held for securitization nor sold. This non-GAAP presentation is widely accepted in the industry because it provides useful representation of volumes in the credit card business and overall operating trends.

The second example is the reporting of non-GAAP financial information that excludes charges resulting from acquisitions. For most companies, it would be very difficult to conclude that such charges are not likely to recur. Yet, a company's inability to disclose the impact of an occasional acquisition or an unusually large acquisition prevents that company from presenting operating trends that it believes are relevant to investors and prevents investors from receiving that information.

The third example relates to extraordinary one-time events such as the World Trade Center disaster. The prohibition on disclosing the per share impact precludes investors from receiving information on the most common measurement of a company's results.

We further note that neither Section 401(b) of the Sarbanes-Oxley Act nor its legislative history requires or even suggests these two prohibitions. The statute only requires the application of a Rule 10b-5-type standard to the non-GAAP financial measure and reconciliation. The legislative history focuses on the reconciliation. Sen. Rep. No. 107-205, 107 Cong. 2d Sess. at 29 (2002).

As we stated at the outset, the Clearing House agrees fully with the Commission's efforts to prevent financial reporting abuse -- whether in pro forma presentations or elsewhere. Such abuse by even a small number of companies has a negative impact on all companies because of a resultant widespread distrust as to the accuracy of all financial reports. Accordingly, we endorse most of the Commission's proposed requirements [One possible additional requirement would be an explicit statement that the non-GAAP financial information is supplemental.]

The Clearing House believes, however, that the blanket exclusion of all recurring items from consideration as adjustments to non-GAAP performance, as well as all non-GAAP per share information, is inconsistent with the underlying premise that non-GAAP performance measures can provide valuable insight into a company's results of operations. As long as a non-GAAP performance measure is appropriately explained and reconciled to GAAP-based measures, financial statement users will understand the purpose of these disclosures and benefit from their presentation. Rather than prohibit the adjustment of a non-GAAP performance measure solely on the basis of whether the underlying adjustment is reasonably likely to recur, or all per share information, the Clearing House believes the rule should focus on ensuring that management clearly states the nature of the adjustment, its supplemental nature and the reasons why it provides useful information to users of the financial statements.

As reiterated throughout this letter, a principal reason why non-GAAP financial information is provided is that investors find it useful. Inherent in any decision to ban this information must be a conclusion that it is not material. Accordingly, we believe the Commission should be willing to acknowledge explicitly in the final rule that the disclosure of non-GAAP financial information of the type barred by Item 10 would not violate Regulation FD.

* * *

The Clearing House would welcome the opportunity to work with the Staff in development of the conditions for use of non-GAAP measures. If you have any questions, please contact Norman R. Nelson at (212) 612-9205.

Very truly yours,

[Jeffrey Herbert]

1 The members of the Clearing House are: Bank of America, National Association, The Bank of New York, Bank One, National Association, Citibank, N.A., Deutsche Bank Trust Company Americas, Fleet National Bank, HSBC Bank USA, JPMorgan Chase Bank, LaSalle Bank National Association, Wachovia Bank, National Association, and Wells Fargo Bank, National Association.
2 As discussed below, only one of these issues may actually exist.