On November 12, 2009, the SEC announced the settlement of its
first Regulation G enforcement action. Regulation G prohibits the
presentation of non-GAAP financial measures in a misleading way and
requires companies to present—alongside the non-GAAP
financials—the most directly comparable GAAP measures and
a clearly understandable reconciliation of the GAAP and non-GAAP
measures. Although the SEC created Regulation G in 2003 in the wake
of the Sarbanes-Oxley Act, this is the first time the SEC has used
it as a basis of an enforcement action.
In this case, the SEC alleged that the CEO, CFO and other senior
officers of SafeNet, Inc. directed SafeNet employees to use
improper accounting procedures to intentionally misstate the
financial condition of the company, as well as to mischaracterize
these accounting issues on a company earnings call. Specifically,
the SEC claimed that SafeNet employees improperly classified
ordinary operating expenses as nonrecurring expenses and excluded
significant recurring operating expenses from its non-GAAP results
in order to meet earnings targets. In addition, the SEC asserted
that SafeNet officers engaged in a stock option backdating
scheme.
While the SafeNet case involved fraud related to pro forma
financial statements and the Regulation G claim itself was only one
part of the SEC's prosecution, the case nevertheless serves as
a good reminder of Regulation G's two principal mandates:
- Don't confuse or mislead. The SEC pursued SafeNet and its
employees because they reported non-GAAP financial measures in ways
the SEC viewed as misleading to investors.
- Reconcile to GAAP. Companies must present the most directly comparable GAAP measures and a clearly understandable reconciliation of the GAAP and non-GAAP measures.
Additional Information
Read the SEC's Litigation Release announcing the enforcement action and settlement here and find more practical tips about Regulation G in The Public Company Handbook (Third Edition).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.