While new regulations about financial certification and board independence have grabbed the lion’s share of the headlines, the Securities and Exchange Commission (SEC) has steadily inaugurated new regulations, some of them far more onerous or confusing for public companies than the more famous offspring of the Sarbanes-Oxley Act.
Regulation G, the SEC’s set of rules for how public companies use financial measures not part of Gaap (generally accepted accounting principles) in public disclosure, is one of those sleeper regulations. For companies accustomed to communicating financials in ways that don’t conform to Gaap, Regulation G is creating a lot of headaches.
In a nutshell, Reg G requires companies to reconcile pro-forma numbers and other financial measures not calculated and presented in accordance with Gaap to appropriate Gaap measures. Pro-forma earnings are not the only non-Gaap measures that need to be reconciled; Ebitda (earnings before interest, taxes, depreciation and amortization) is another example of a non-Gaap measure that would need to be reconciled to Gaap.
Regulation G is sweeping in scope; it concerns non-Gaap measures in all forms of disclosure, from earnings releases to presentations and information posted on the corporate web site.
‘The SEC has gotten a lot of questions about Regulation G,’ says Alan Beller, director of the commission’s division of corporation finance. Since the rule took effect on March 28, 2003, the SEC has received a number of phone calls from companies, he says. On June 13, the SEC published 33 of the most frequently asked questions related to Reg G along with the commission’s official responses on its web site (www.sec.gov).
In its FAQ, the SEC answers questions covering everything from the transition to Reg G to the requirements for foreign private issuers. The SEC notes that any registration statement filed after March 28 must comply with Reg G if it includes non-Gaap financial measures.
Documents containing non-Gaap financial measures posted by a company to its web site prior to March 28 do not have to be removed, even if they don’t contain the Reg G reconciliation. However, all non-Gaap financial measures posted to a company’s web site after that date are subject to Reg G.
Beller says he has no way of tracking how many companies Regulation G affects, but he suspects it’s in the thousands. ‘We know it’s a very substantial percentage,’ he confirms.
A June 2003 survey by the National Investor Relations Institute (Niri) suggests that Reg G’s reach is very broad indeed. According to that survey, 56.1 percent of companies are reporting earnings results in Gaap and non-Gaap in contrast to 26.4 percent reporting in Gaap only and 16.3 percent now reporting in Gaap only but previously using non-Gaap. Of those companies that say they now report in Gaap only, 46.7 percent claim to be doing so ‘because of the requirement in Reg G.’
SEC chairman William Donaldson sees Reg G and other new SEC requirements as part of the SEC’s overarching goal ‘to restore investor confidence and to make sure people know there’s a tough cop on the beat who’s not going to tolerate some of the fraud that’s gone on.’
Although companies have posed questions about Reg G to the SEC and Niri, these new rules haven’t caused much filing confusion, according to the financial printers who assist companies with Edgar compliance. Financial printers maintain that Reg G is not nearly as significant an issue as other new requirements, particularly the Section 16 requirement that decreases the deadline for filing change of ownership documents from ten days to two.
‘Niri has been discussing Regulation G a lot, but our clients are not discussing it,’ explains Michael Becker, manager of global disclosure services for Business Wire. ‘Niri has put out a lot of information but it hasn’t been a major concern.’
Even if Regulation G isn’t causing too much mayhem for issuers, it’s yet another regulatory change that will contribute to even greater compliance costs. David Copenhafer, director of Edgar services for Bowne & Co, points out that ‘for certain firms, there may be costs associated with moving to state their financials in ways that comply with Reg G.’
Beller believes that most of the confusion surrounding Reg G will prove short-lived as companies get used to a whole new way of doing business.
