Yesterday’s post discussed the SEC staff’s recently announced position that Item 10(e)(1)(A) of Regulation S-K requires that issuers disclose comparable GAAP financial measures before non-GAAP financial measures. Item 10(e)(1)(A) requires only that issuers afford GAAP financial measures “equal or greater prominence” as non-GAAP measures. What then is the legal significance of the staff’s position that GAAP financial measures must come first? Specifically, does an issuer violate the law if it fails to afford primacy of place to GAAP measures?
As I noted, the SEC adopted Item 10(e)(1)(A) in response to Section 401(b) of the Sarbanes-Oxley Act. The statute, however, does not refer to “equal or greater prominence” much less impose a requirement that GAAP financial measures precede non-GAAP financial measures. Item 10(e)(1)(A) expressly requires equal or greater prominence but does not specifically require that GAAP financial measures go first. Thus, the question becomes whether an issuer violates the law when it acts contrary to a staff interpretation.
One objection might be that the staff’s interpretation of Item 10(e)(1)(A) constitutes a rule that must be adopted pursuant to the notice and comment provisions of the Administrative Procedure Act, 5 U.S.C. § 553. However, the staff announced its interpretation in a Compliance and Disclosure Interpretation (C&DI). The SEC itself takes the position that a C&DI is not a rule:
The interpretations presented below reflect the views of the staff of the Division of Corporation Finance. They are not rules, regulations, or statements of the Commission. Further, the Commission has neither approved nor disapproved these interpretations.
Even more tellingly, the SEC declares that C&DI’s are incomplete and not binding:
These positions do not necessarily contain a discussion of all material considerations necessary to reach the conclusions stated, and they are not binding due to their highly informal nature.
The question in litigation won’t be whether the staff’s interpretation of Item 10(e)(1)(A) is binding on issuers, but whether it is correct. If the court agrees with the staff’s view, then an issuer placing a non-GAAP measure first will be violating the rule itself, not the C&DI. Although the question of judicial deference owed to an agency’s interpretation of its own rules is delphic, at least one federal court has said that SEC guidance in a C&DI is not entitled to any deference beyond its power to persuade. Chechele v. Elstain, 2012 U.S. Dist. LEXIS 23975, 10-11 (S.D.N.Y. Feb. 24, 2012). See also Should Judicial Deference To The SEC Be Strong, Weak or Non-Existent?