Willkie Farr & Gallagher
December 13, 2002
U.S. Securities and Exchange Commission
Attn: Jonathan G. Katz,
Re: SEC Release No. 33-8145; 34-46788
Ladies and Gentlemen:
This letter reflects my views as well as those of certain of our NYSE-listed clients in the real estate, telecommunications infrastructure and insurance industries.
We applaud the intention of Congress to compel greater transparency in the use of "pro forma" financial information. We believe, however, that the Commission's proposal goes well beyond Congress' intent, as embodied in Section 401(b) of the Sarbanes-Oxley Act of 2002 (the "Act"), by potentially limiting and, indeed, eliminating the disclosure by companies of certain "non-GAAP financial measures" (as such term is defined in the Release) that are useful to investors.
We find nothing in the Act's legislative history to suggest that Congress was, as suggested by the Release, "specifically concerned with pro forma results that are prepared or derived on a basis other than GAAP" except to the extent necessary to ensure that such results were simultaneously presented and appropriately reconciled with the more universal GAAP presentation. Moreover, one could argue that Congress sought only to regulate attempts to use pro forma results as part of an effort to effectively restate historical GAAP results, but not to impede the disclosure by companies of alternative, clearly identified, non-GAAP analytical benchmarks. Thus, for example, one could argue that Congress was concerned with attempts to provide a "better measure" of historic GAAP income through the selective exclusion of certain "non-recurring" expense items, but was unconcerned with use of standalone, clearly identified and widely accepted analytical benchmarks, such as EBITDA, that are presented as supplemental disclosures to GAAP results in order to highlight certain aspects of these results.
The following elements of the proposed rule are likely have the effect of limiting or eliminating the use by companies of non-GAAP financial measures:
While we acknowledge the opportunities for abuse in this area, we believe that many non-GAAP financial measures in most instances represent valuable financial benchmarks for corporations and investors alike. Indeed, we believe that the use of such measures may enable companies to provide a fairer presentation of their particular financial performance than could be obtained solely from their GAAP results; the need for a "fair presentation" versus a slavish devotion to GAAP results was acknowledged and, indeed, encouraged by the Commission in its recent Release No. 33-8124 (August 28, 2002).
We concur that the abuse of non-GAAP financial measures should be prohibited by the Commission; respectfully, however, we would submit that their use, should not. In this regard, we would urge the Commission to consider that the disclosure of pro forma financial information is currently the subject of Commission disclosure and anti-fraud rules, including proposed rulemaking which would enhance the oversight of audit committees in this area. We appreciate and support the Commission's proposal not to allow Regulation G to become a new basis for private rights of action under Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Nonetheless, we fear that the Commission's proposed rules may pose a risk of chilling, rather than encouraging, valuable, appropriate and supportable disclosures.