In case you were questioning whether the SEC continues (assuming it reopens at some point) to address the inappropriate use of non-GAAP financial measures with the same level of gravity as in prior years, you might take note of this recent (cusp of SEC shutdown) enforcement action against ADT. In the proceeding, the SEC sought a cease-and-desist order, alleging that the company violated the non-GAAP disclosure requirements. Interestingly, however, the allegations did not involve any of the more thorny issues regarding individually tailored recognition measures that the SEC sometimes considers misleading, but rather the more prosaic “equal or greater prominence” requirements.
You might recall that Item 10(e)(1)(i)(A) of Reg S-K provides that, when a company includes a non-GAAP financial measure in an SEC filing, it must present the most directly comparable GAAP measure with equal or greater prominence relative to the non-GAAP measure. In two of ADT’s earnings releases, which were furnished to the SEC on Form 8-K under Item 2.02, ADT presented non-GAAP financial measures, including adjusted EBITDA, adjusted net income and free cash flow before special items, without giving equal or greater prominence to the comparable GAAP measures. (As noted in the Order, Instruction 2 of Item 2.02 of Form 8-K states that the “requirements of paragraph (e)(1)(i) of Item 10 of Regulation S-K…shall apply to disclosures under this Item 2.02.”)
In the headlines of both of the press releases, for example, ADT described an increase in “adjusted EBITDA” without any mention of net income or loss, the comparable GAAP measure. Similarly, the “highlights” section of one of the releases included three bullets (out of nine) that were “adjusted” figures—and all non-GAAP measures—without citing the comparable GAAP measures. Moreover, all of the non-GAAP measures presented in “highlights” showed an increase in income, while the comparable GAAP measures, which were not presented in “highlights” at all and shown instead in the regular text of the release, reported an increase in net losses. Given the nature of the allegations, the SEC apparently considered it unnecessary to expressly characterize these presentations as “misleading.”
In the settled action, ADT was ordered to cease and desist and pay a fine of $100,000.