Dear Mr. Katz,
Subject : File No. S7-43-02
Proposed rule: Conditions for Use of Non-GAAP Financial Measures
We thank you for the opportunity to comment on the proposed rules for conditions for use of Non-GAAP financial measures under Section 401 (b) of the Sarbanes-Oxley Act (SOA). We consider the following comments form part of a constructive regulatory dialogue between the United States and the European Union because the Act has also important effects on US-listed EU companies and EU auditors.
The adoption of the Sarbanes-Oxley Act is a US reaction to US financial reporting scandals. The Act aims at restoring investors' confidence in US capital markets. The European Commission and our 15 Member States share these concerns and could in principle support many measures of the Act. This is also to a large extent the case for Sections 401 (b) that sets out conditions for use of Non-GAAP financial measures.
We understand that the SEC is faced with a great challenge in having to implement fundamental changes to US securities laws in a very short timeframe. But, EU companies and EU auditors require the same legal clarity as their US counterparts.
The rule proposes to attach certain conditions to the inclusion in Commission filings of "non-GAAP financial measures" and to adopt a new Regulation G that would regulate public disclosures by "or on behalf of" reporting companies of material information that includes a non-GAAP financial measure.
The proposed rule only provides limited exemptions to foreign issuers:
From a EU regulatory perspective these limited exception do not seem to be sufficient. For the following reasons, we would suggest that EU foreign private issuers should be entirely exempted from the conditions applicable to 20-F filings and from the public disclosure conditions of proposed Regulation G:
- Non-GAAP financial measures are seldom "expressly permitted" under home country GAAP, making the exception for such disclosures of little value.
- It will often be ambiguous under foreign legal regimes whether a given person is acting "on behalf of" an issuer in connection with a public disclosure of a non-GAAP financial measure.
- With regard to the exemption in Regulation G, it will often be unclear whether an announcement is made "outside the United States," and there remains unclarity in how to determine whether a website announcement is "targeted" to U.S. investors.
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We trust that our comments will help the definition of further SEC rules to be in the best interest of US and also EU companies and auditors with transatlantic business links.