Investment Counsel Association of America
December 12, 2002
Via Electronic Filing
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: Proposed Rule: Conditions for Use of Non-GAAP Financial Measures; Release Nos. 33-8145; 34-46788; File No. S7-43-02
Dear Mr. Katz:
The Investment Counsel Association of America1 appreciates the opportunity to submit comments related to the Commission's proposed new rules and amendments that address the disclosure or release of certain financial information by public companies that is derived on the basis of methodologies other than in accordance with Generally Accepted Accounting Principles ("GAAP").2 ICAA members collectively manage trillions of dollars in assets for institutional and individual investors, and rely heavily on the financial materials of issuers. Investment advisers require a clear, complete, and accurate representation of issuer financial results to make appropriate investment decisions on behalf of their clients. Unfortunately, some issuers have released pro forma financial information that obscures rather than clarifies the issuer's results.3 Accordingly, the ICAA strongly supports the proposal to reconcile non-standardized financial presentations of issuers with GAAP-based measures consistent with the requirements of Section 401(b) of the Sarbanes-Oxley Act of 2002.4 We commend the Commission's efforts to improve the transparency and quality of disclosure of non-GAAP financial presentations.
The proposal would increase disclosure requirements associated with the use of non-GAAP information in several areas. First, newly proposed Regulation G would require that disclosure or release of non-GAAP financial measures by public companies be presented together with the most comparable GAAP financial measures and a qualitative reconciliation of the differences between the non-GAAP measures and the GAAP financial measures.5 Second, the proposal would amend Item 10 of Regulation S-K and Item 10 of Regulation S-B to provide for more detailed disclosure related to the use of non-GAAP financial measures in filings submitted to the Commission. Finally, the proposal would require companies under new Item 1.04 "Disclosure of Results of Operation and Financial Condition" to file Form 8-K within two business days of any public announcement or release disclosing material non-public information regarding the company's results of operations or financial condition for an annual or quarterly fiscal period that has ended.
We have the following responses and recommendations with respect to some of the Commission's specific requests for comment:
- Review by Auditors. The ICAA agrees with the Commission that investors may be confused as to whether the comparison and reconciliation of non-GAAP measures with GAAP measures has been reviewed or audited by the company's independent accountants. We support a requirement that the company disclose the extent to which its outside auditors have performed such a review or audit with respect to the full comparative presentation and reconciliation.
- Discussion of the Purpose of Non-GAAP Material. We agree with the Commission's proposed requirement that companies discuss the reason they have used non-GAAP financial measures and explain how the presentation of the material is useful to investors. This discussion is important for providing context to investors and the securities markets and should be included in all Commission filings and communications subject to Regulation G. As an alternative, the company could provide this discussion in materials filed with the Commission and provide a reference of this discussion together with a brief explanation as to how to access the filing in other communications.
- Website Postings. As proposed, Regulation G would permit a company that releases non-GAAP information in an oral, telephonic, webcast, broadcast or similar presentation to provide the required GAAP comparative information on the company's website so long as the company discloses the location and availability of the required information during the presentation. We support this aspect of the proposal. Given the convenience to investors of using the Internet to access information and the limited effort and cost to companies in posting such information, we believe that a company with an electronic presence should be required to post its non-GAAP financial information together with its GAAP comparison and reconciliation on its website concurrent with filings or within a reasonable period after making a communication subject to Regulation G requirements.6 We believe this same standard should apply to information disclosed in Item 1.04 of Form 8-K. As an alternative, a company could provide a link to the Commission's website along with an explanation of the information that can be accessed.
- Detail of Disclosure Requirements. The Commission has generally required more detailed disclosure requirements for non-GAAP financial measures that are included in Commission filings. The Commission has asked whether the same level of detail should be required in all cases. We believe a higher level of detail is appropriate in Commission filings, and may not be suitable in other presentations or communications. Moreover, we are concerned that such a requirement could detract from more important information in the presentation or communication.
- Presentation and Location of Information. The Commission has requested comment on whether non-GAAP financial measures should be presented in a separate section of Commission filings. We believe that the use of non-GAAP financial measures should be clearly identified in a consistent manner to foster understanding by investors. Separating non-GAAP financial information from other financial information, however, may detract from the reader's understanding of the financial condition of the company or give undue prominence to the non-GAAP financial information. We recommend that the Commission provide more guidance to companies on options for presenting non-GAAP financial measures and the required comparisons with GAAP measures.
- Benefit. The ICAA believes that the Commission's proposal would offer significant benefits to the investing community by providing greater detail, context, and access to the financial condition of a company. This information will foster greater confidence in each investment decision and in the securities markets.
We appreciate the opportunity to comment on this important development and would be pleased to provide any additional information.
KAREN L. BARR
cc: Harvey L. Pitt, Chairman
Cynthia A. Glassman, Commissioner
Roel C. Campos, Commissioner
Harvey J. Goldschmid, Commissioner
Paul S. Atkins, Commissioner
|1|| The ICAA is a national not-for-profit association that consists exclusively of SEC-registered investment adviser firms. Founded in 1937, the ICAA today has a membership of approximately 300 firms that collectively manage more than $3 trillion in assets for a wide variety of institutional and individual clients. For more information, please visit www.icaa.org.
|2|| Conditions for Use of Non-GAAP Financial Measures, Release No. 33-8145; 34-46788; File No. S7-43-02 (Nov. 4, 2002) ("Proposal").
|3|| See, e.g., In re Trump Hotels & Casino Resorts, Inc. SEC File No. 3-10680 (Jan. 16, 2002) (finding that an earnings release citing pro forma figures created a misleading impression that the company exceeded earnings expectations).
|4|| Pub. L. No. 107-204, 116 Stat. 745 (2002). Section 401(b) generally directs the Commission to adopt rules requiring that pro forma financial information included in any report filed with the Commission or in any public disclosure be presented in a manner that is: (i) not materially misleading and (ii) reconciled with GAAP principles.
|5|| The Proposal would also amend annual report Form 20-F for non-U.S. private issuers to incorporate the proposed amendments to Item 10 of Regulation S-K.
|6|| We have previously recommended to the Commission that the substance of Item 10 disclosure on Form 8-K should be posted directly on the website of each company that has an electronic presence, concurrent with filing. See Letter from Karen L. Barr, General Counsel, ICAA to Jonathan G. Katz, U.S. Securities and Exchange Commission re: Form 8-K Disclosure of Certain Management Transactions, (June 27, 2002).