This past Boxing Day, the SEC delivered another reminder that it remains intensely focused on public companies' disclosure of non-GAAP financial measures. In an agreed cease-and-desist order released on December 26, 2018, ADT Inc. (ADT) agreed to pay a $100,000 fine to settle an accusation that it failed to comply with Item 10(e) of Regulation S-K. Item 10(e) requires, among other things, that any disclosure of a non-GAAP financial measure in an SEC filing must be accompanied by disclosure of the most directly comparable GAAP financial measure with equal or greater prominence. ADT violated this requirement in its 2017 full-year earnings release and first quarter 2018 earnings release by presenting its adjusted EBITDA and (in the case of the first quarter 2018 release) other non-GAAP financial measures in the headlines and highlights sections of those releases while relegating the comparable GAAP measures to the body of the release.
The past several years have seen renewed focus by the SEC on companies' use of non-GAAP financial measures in their public statements. In May 2016, the SEC staff issued interpretive guidance relating to the use of non-GAAP financial measures, which clearly cautioned companies that they could run afoul of Item 10(e) if they were to present non-GAAP measures in an earnings release headline or caption without preceding it with the comparable GAAP measure.
The ADT settlement should serve as a reminder that the SEC views compliance with its non-GAAP disclosure rules as an important priority and that it will monitor and vigorously enforce those rules.
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