Finance Law Institute: Capital Markets...

The LGBT Bar: 2017 Lavender Law Conference

Finance Law Institute: Capital Markets Panel

CLE Course MaterialsPresented by Daniel Winterfeldt, Chris Leuking, Isaac Osaki and Robert Ellison

August 4, 2017

“Green Bonds” Presentation Slides, Robert Ellison (August, 2017) Page 3

“A Fresh Look at Use of Non-GAAP Financial Measures” Presentation Slides, Latham & Watkins LLP (Aug. 4, 2017)

9

“CHOICE Act 2.0 Passes the House: What Is the ‘CHOICE’?” Reena Sahni, John Cannon, Nathan Greene, Geoffrey Goldman, Daniel Laguardia, et al. (July 20, 2017)

Page 69

“Updated Non-GAAP Guidance: The First 150 Comment Letters,” Harald Halbhuber (Oct. 19, 2016)

Page 89

“SEC Staff Updates Guidance on Use of Non-GAAP Financial Measures,” Robert Ellison, et al. (May 23, 2016)

Page 96

“New IPO Policy Signals Pragmatic Regulatory Approach,” Alexander Cohen, Paul Dudek and Joel Trotter, Law360 (July 24, 2017)

online link

“Financing Green: The Rise of the Green Bond,” Robert N. Freedman, Law360 (June 26, 2014)

online link

Panelist Profiles Page 100

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Green Bonds

São Paulo, August 2017

Robert Ellison, PartnerShearman & Sterling LLP, São Paulo

Contents

Green Bonds | Agosto de 20172

1. Introduction 3

2. Advantages 8

3. Uncertainties and challenges 10

4. The “Green Bonds Principles” Initiative 11

5. Brazilian Examples 18

6. Practical Steps 19

1. Introduction


What are Green Bonds?

Regular corporate senior notes

Regular corporate credit of the issuer, not the credit risk of a specific project

Rank pari passu with the issuer’s other senior debt

Proceeds are identified for use in certified climate-friendly or socially responsible projects

Performance/success of the “Green” project does not affect the redemption or credit of the Green Bond

Renewable energy generation Hydro Wind Solar Geothermal Energy transmission,

distribution Energy efficiency (e.g.

smart-grid management)

Clean water; waste water sanitation Sustainable transport Other infrastructure

projects

1. Introduction (Cont.)


Traditional Green Project

Categories:

Later extensions, non-energy

sectors:

Can Nuclear Power be a Green Project? Climate-friendly

projects by “dirty” oil companies?

Current debates:



First issuances around 2007 Initial issuers were Multilateral and

Development Finance institutions (World Bank, IFC, etc.) Recent growth in total Green Bond

issuances worldwide: 2013 $11 billion 2014 $36 billion 2015 $42 billion 2016 $81 billion

History of Green Bonds



Unilever (world’s second-largest consumer-goods company) and Toyota Proceeds used for typical

business activities of the company Neither company is in the

energy sector Neither company is known

for being particularly “green”

BNDES (2017), Fibria(2017), Suzano (2016), BRF(2015)

Growth of corporate

Green Bonds in 2014, the “year

of the corporates”:

Brazilian issuers:



What are Green Bonds not? They are not Project Bonds Limited recourse: not corporate credit risk of the issuer Matched to the Green Project on a back-to-back risk

basis Highly structured Term (prazo) of the Project Bond linked to project

development schedule

Não são Debentures de Infraestrutura da lei brasileira 12.431/2011 Emissão em reais Lei brasileira aplicável “Projetos de prioridade” aprovados pelo ministério

responsável pelo setor Caraterísticas mínimas: prazo médio ponderado mínimo de 04 anos recompra e pré-pagamento proibidos nos primeiros

02 anos; etc. Não são Debentures de Infraestrutura da lei

brasileira 12.431/2011 (Cont.) Tratamento tributário: IR taxa zero IOF taxa zero para investidores estrangeiros

Not Debentures de Infraestrutura

2. Advantages


Generally the same as regular bonds Lower Green Bond pricing

would mean the market is “subsidizing” environmental projects Will governments offer

incentives to pricing?

Funds / money managers with renewable / clean energy mandate or focus Socially Responsible

Investment Funds (SRIs) Life insurance companies Investors wanting to improve

“green” profile without exposure to individual projects

Pricing?

Broader investor

pool? Anecdotally,

maybe…

2. Advantages (Cont.)


Sustainability report Consumer-facing

company Reputation for social

contribution Investor relations

Issuer’s corporate “green” profile

3. Uncertainties and Challenges

What is “green”?

How to monitor the green project?

How to hold/manage the proceeds until use in the green project?

No regulator has regulated Green Bonds

Consequences if green target is not met?


4. Green Bonds Principles


Voluntary code of conduct to standardize transparencyNo specific green targets or exhaustive list of project typesFive main components: Use of proceeds Project evaluation and selection Management of the proceeds prior

to use Periodic reporting External review

Introduced January 2014Initial consortium of 13 investment banks (now more than 80, plus law firms, NGOs, etc.)Available via International Capital Market Association (ICMA):www.icmagroup.org/greenbonds

4. Green Bonds Principles (Cont.)


Must provide clear environmental benefitsBenefits to be

assessed and, where feasible, quantified by the issuer

Use of proceeds:



renewable energy (including production, transmission, appliances and products) energy efficiency (buildings, energy

storage, smart grids) pollution prevention and control

(sanitation, greenhouse gas control, soil remediation, producing energy or products from waste and remanufacturing) sustainable management of living

natural resources (agriculture, fishery, aquaculture, forestry, farm inputs) terrestrial and aquatic biodiversity

conservation

GBPcategories: clean transportation (electric, hybrid,

public, rail, non-motorized, infrastructure for clean energy vehicles) sustainable water management (clean

or drinking water, sustainable urban drainage systems, river training, flood mitigation) climate change adaptation

(information support systems, climate observation, early warning systems) eco-efficient products, technologies

and processes (environmentally friendly products, packaging, distribution)

GBPcategories:



The issuer of a Green Bond should outline: a process to determine how the projects

fit within an eligible Green Project category the Green Project eligibility criteria it

applies its environmental sustainability

objectives. High level of transparency is encouraged GBP recommend an External Review to

supplement the issuer’s evaluation and selection criteria

Project evaluation

and selection:



Tracking (but not formally ring-fenced or sequestered): credited to a sub-account moved to a sub-portfolio otherwise tracked by the issuer in an

appropriate manner attested to by a formal internal process balance adjusted periodically when

money used for eligible Green Projects Disclose temporary placement

procedures to investors GBP recommends auditor to verify

tracking and allocation of funds

Management of the

proceeds prior to use:



Annual or semi-annual reporting Newsletter or report Disclose allocation of money

to project(s) Disclose ongoing

environmental impact, if feasible

Periodic reporting:



Selection process and framework defined by issuer consider review of this definition

by a second party, such as consultant consultants can help define

selection process and framework for first-time issuer

Verification of framework and green project Certification of green project

External review levels



University of Oslo CICERO (Centre for International Climate and Environmental Research) Climate Bonds Initiative

certification standard

Examples:

Practical Steps


Identify appropriate asset/project for Green Bond financingDrafting Use of Proceeds to comply with GBPSelect type of agency to certify “Green Use of Proceeds”Select form of holding funds until dispersedSelect type of follow-on verification / disclosureDetermine target investors and marketing strategyExecution

5. Brazilian Green Bond Examples


BRF Brasil Foods

Amount: € 500million

Issuance date: June 2015

Maturity: 7 years

Coupon: 2.750% (BBB by S&P)

Use of Proceeds:

Renewable energyWater and waste managementRecyclable materialsSustainable forestryGHG emission reductionRaw material reduction

Verification: Continuous monitoring, annual review by company or third-party

Management of proceeds prior to use: Cash equivalents and short-term marketable securities

Reporting: Annual statement

5. Brazilian Green Bond Examples (Cont.)


Suzano

Amount: US$ 500 million

Issuance date: July 2016

Maturity: 10 years

Coupon: 5.75% (rated BB+ by S&P)

Use of Proceeds:

Resources to sustainably manage forestsRestoration of native forest cover from degraded landMaintenance and development of conservation areasDevelopment and installation of technologies and systems that improve the quality of treated wastewaterDevelopment of projects increasing energy efficiencyDevelopment of projects that reduce GHG

Verification: Verification by an external auditor, and through an annual compliance review with an environmental consultant.

Management of proceeds prior to use: Cash, cash equivalents and/or financial investments which consist of mainly bank deposits, repurchase commitments, investment funds, time deposits and cash available abroad in U.S. dollars

Reporting: Publication of annual compliance review with environmental consultant and reporting on several impact metrics



Fibria

Amount: US$ 700 million

Issuance date: January 2017

Maturity: 10 years

Coupon: 5.5% (rated BB- by S&P and Fitch)

Use of Proceeds:

Sustainable forest management for certified eucalyptus plantationsRestoration of native forests and conservation of biodiversityWaste managementSustainable water managementRenewable energy

Verification: Monitor, internal records of allocation of net proceeds, report from external auditor

Management of proceeds prior to use: Cash, cash equivalents and/or marketable securities in accordance with cash management policies

Reporting: Publication of Fibria report on website, assertion by management that the net proceeds of the offering were allocated to Eligible Green Projects, publication of report from external auditor



BNDES

Amount: US$ 1,000 million

Issuance date: May 2017

Maturity: 7 years

Coupon: 4.750% (rated Ba2 by Moody’s and BB by Fitch)

Use of Proceeds: Financing or refinancing of projects related to the development, construction orexpansion of facilities for new and existing solar and wind projects

Verification: Internal tracking of allocation of net proceeds, approval from Board of Executive Directors, requirement of proofof compliance with environmental regulation

Management of proceeds prior to use: Cash, cash equivalents or Brazilian government securities

Reporting: Publication of annually updated information on website, publication of assurance from external auditor

“O Brasil está atrasado nesse tipo de emissão.

Mas a oferta de green bonds é uma tendência global que vai ganhar corpo.”(Marcelo Bacci, diretor financeiro e de relações com investidores da Suzano)


Contact:


Shearman & Sterling – São Paulo

Robert Ellison – PartnerAv. Brig. Faria Lima, 3400 – 17º andar

São Paulo – SP 04538-132 Tel: +55 11 3702 2220

Mobile: +55 11 98330 3876 email: [email protected]

shearman.comshearman.comCopyright © 2017 Shearman & Sterling LLP. Shearman & Sterling LLP is a limited liability partnership organized under the laws of the State of Delaware, with an affiliated limited liability partnership organized for the practice of law in the United Kingdom and Italy and an affiliated partnership organized for the practice of law in Hong Kong.*Dr. Sultan Almasoud & Partners in association with Shearman & Sterling LLP

As one of the first law firms to establish a presence in key international markets, Shearman & Sterling has led the way in serving clients wherever they do business. This innovative spirit and the experience we have developed over more than 140 years make us the “go-to” law firm.

From major financial centers to emerging markets, we have the reach, depth and global perspective necessary to advise our clients on their most complex worldwide business needs.

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A Fresh Look at Use of Non-GAAP Financial

Measures

August 4, 2017

Privileged & Confidential

• Renewed focus by SEC staff on companies’ use of non-

GAAP measures since May 2016 SEC guidance

• SEC rules on non-GAAP measures originally adopted in

2003 as a mandate of Section 401(b) of the Sarbanes-

Oxley Act of 2002

• Since adoption, SEC Division of Corporate Finance has

periodically issued interpretative guidance (most recently

in May 2016)

• Market practice for compliance with non-GAAP measures

regulations has varied – not a primary focus of SEC staff

review at least until recently

2

Why a Fresh Look?

Recent Focus on Non-GAAP Measures

• Audit Analytics found that 96% of the

S&P 500 used at least one non-GAAP measure in Q4 2016 earnings releases

• Key regulators have expressed concerns over the widespread use and possible

abuse of non-GAAP measures

� most recently, in SEC Chief Accountant

Wesley R. Bricker’s keynote address at

the Dec. 2016 AICPA conference on

current SEC and PCAOB developments

• The SEC staff issued C&DIs on the use

of non-GAAP measures in May 2016

� no rule changes, however new guidance

marks a significantly more exacting

approach to non-GAAP compliance

� may depart from prior market practice

3

• Definition of Non-GAAP Financial Measure: a numerical

measure of a registrant’s historical or future financial

performance, financial position or cash flows that excludes

(includes) amounts, or is subject to adjustments that have

the effect of excluding (including) amounts that are included

(excluded) from the most directly comparable GAAP

measure

• Non-GAAP Measures Include: measures calculated using

elements derived from GAAP financial presentation but not

presented in accordance with GAAP

� e.g., EBIT, EBITDA or Free Cash Flow

4

Definition of Non-GAAP Financial Measure

The definition of non-GAAP financial measures excludes:

• Subcomponents of a GAAP financial statement line item (as long as such subcomponent amounts presented are calculated in accordance with GAAP)

� e.g., revenue for specific products

• Operating and other statistical measures

� e.g., backlog, number of stores/customers/transactions, customers

gained/lost, production metrics, customer renewal rates

• Ratios or statistical measures that are calculated using exclusively one or both of:

� financial measures calculated in accordance with GAAP

� operating measures or other measures that are not non-GAAP measures

• Financial measures required to be disclosed by GAAP, SEC rules or government or stock exchange regulation

Definition of Non-GAAP Financial Measure (cont.)

5

Measure Non-GAAP?

Amounts of expected indebtedness X

Net Debt �

Amounts of planned future repayments X

Estimated revenue (expense) of a new product line* X

Revenue for a particular product* X

Measure of profit (loss) and total assets for each segment Xrequired to be disclosed under ASC 280

EBITDA �

Sales per square foot* X

Same store sales* X

*Assumes underlying numbers are in accordance with GAAP

Definition of Non-GAAP Financial Measure (cont.)

6

General Use of Non-GAAP Financial Measures

7

Any public disclosure by Exchange Act registrants of material

information that includes a non-GAAP measure must

accompany the non-GAAP measure with:

• the most directly comparable GAAP measure; and

• a quantitative reconciliation of the difference between the

GAAP measure and non-GAAP measure

� by schedule or other clearly understandable method

� for forward-looking non-GAAP measures, the reconciliation need only be quantitative to the extent available without unreasonable efforts

� Expect the SEC staff to be highly skeptical of any claim that it would be too burdensome or an unreasonable amount of work to provide a reconciliation to a forward-looking GAAP measure

Regulation G

8

A non-GAAP measure, taken together with the information

accompanying that measure, cannot be misleading by:

• containing an untrue statement of a material fact; or

• omitting to state a material fact necessary in order to make

the presentation of the non-GAAP measure, in light of the

circumstances under which it is presented, not misleading

Regulation G (cont.)

9

Whenever a non-GAAP measure is used in an SEC filing, it is

subject to requirements beyond those in Regulation G:

• the most directly comparable GAAP financial measure must be presented in the SEC filing with equal or greater prominence

• the SEC filing must also contain a statement disclosing:

� the reasons why management believes the presentation of the non-

GAAP measure provides useful information to investors regarding the registrant’s financial condition and results of operations; and

� any additional purposes for which the registrant’s management uses

the non-GAAP measure, to the extent material

Item 10(e) of Regulation S-K

10

Non-GAAP measures contained in an SEC filing cannot:

• be presented on the face or in the notes of GAAP financial

statements or on the face of Article 11 pro forma financial

information

• use titles or description that are the same as, or confusingly

similar to, titles or descriptions used for GAAP financial

measures

Item 10(e) of Regulation S-K (cont.)

11

Non-GAAP measures presented in an SEC filing cannot reflect

certain adjustments, depending upon whether the measure is

a “measure of performance” or a “measure of liquidity”

• In analyzing this designation, SEC staff will focus on the

substance of the non-GAAP measure, and not

management’s characterization of the measure

• Non-GAAP measures contained in materials furnished to

the SEC under Item 2.02 of Form 8-K (e.g., an earnings

release) or in a press release announcing a material

transaction are not subject to these restrictions on the

nature of adjustments to the non-GAAP measure


12

Whenever a non-GAAP measure is presented in a report filed with, or an Item 2.02 Form 8-K furnished to, the SEC, the most directly comparable GAAP measure must be presented with “equal or greater prominence”

• prominence depends upon the facts and circumstances in which the

disclosure is made

Examples of what the SEC staff would consider “undue prominence” of

a non-GAAP measure:

• presenting a full income statement of non-GAAP measures, including a full non-GAAP income statement when reconciling to GAAP

• using an earnings release headline or caption that includes a non-GAAP

measure but omitting the comparable GAAP measure in the headline or caption

• using a style of presentation (e.g. bold, large font) emphasizing non-GAAP measures concomitantly with a less prominent style


“Equal or Greater Prominence”

13

• having a non-GAAP measure precede the comparable GAAP measure, including in

an earnings release headline

• describing a non-GAAP measure (e.g., “exceptional” or “record performance”)

without at least an equally prominent descriptive characterization of the comparable

GAAP measure

• providing tabular disclosure of non-GAAP measures without preceding it with an

equally prominent tabular disclosure of the comparable GAAP measures (or

including it in the same table)

• excluding a quantitative reconciliation with respect to a forward-looking non-GAAP

measure in reliance on the “unreasonable efforts” exception without disclosing that

fact and identifying the unavailable information and its probable significance with

equal or greater prominence

• providing discussion and analysis of a non-GAAP measure without similar

discussion and analysis of the comparable GAAP measure in a location with equal

or greater prominence


“Equal or Greater Prominence”

14

Non-GAAP performance measures may not make adjustments to eliminate or smooth items identified as non-recurring, infrequent or unusual, when the nature of the charge or gain is such that it is reasonably likely to occur with two years or there was a similar charge or gain with the prior two years

• The prohibition is based on the description of the charge or gain, not its nature

• The practical effect of the two year look back/look forward test means the excluded item cannot appear more than once over a five year period


Measures of Performance

15

Non-GAAP liquidity measures may not make adjustments for charges or liabilities that required, or will require, cash settlement or would have required cash settlement absent an ability to settle in another manner

• EBIT and EBITDA are explicitly excluded from this restriction

• If a non-GAAP liquidity measure includes income taxes, it might be acceptable to adjust GAAP taxes to show taxes paid in cash

• SEC staff interpretative positions:

� “Free Cash Flow” that deducts capital expenditures from GAAP cash flows

from operating activities does not violate this restriction

� The three major categories of the statement of cash flows should be

prominently presented when a non-GAAP liquidity measure is presented


Measures of Liquidity

16

Certain adjustments may cause the SEC staff to view a non-GAAP measure as misleading:

• presenting a non-GAAP performance measure that excludes

normal, recurring, cash operating expenses necessary to operate a registrant’s business

• adjusting a particular charge or gain in the current period when other similar charges or gains were not also adjusted in prior periods:

� unless the change between periods is disclosed and the reasons for

it explained; and

� depending upon the significance of the change, it may be necessary to recast prior measures to conform to the current presentation and

place disclosure in the appropriate context

Potential Restrictions on Non-GAAP Adjustments

17

• adjusting for non-recurring charges when there were non-recurring gains during the same period; and

• using individually tailored recognition and measurement methods for financial statement line items

Adjustments in deriving a non-GAAP measure should not be shown “net of tax” (performance only)

A separate adjustment for “income taxes” should be shown and clearly explained

For a non-GAAP performance measure, the registrant should include current and deferred income tax expense commensurate with the non-GAAP measure of profitability

Potential Restrictions on Non-GAAP Adjustments (cont.)

18

Non-GAAP Financial Measures Special Circumstances

19

Non-GAAP measures contained in a standard earnings release must comply

with Regulation G

Because an earnings release filed as an Item 2.02 Form 8-K is deemed “furnished to,” and not “filed with,” the SEC, some, but not all, of the

additional requirements of Item 10(e) of Regulation S-K are applicable

Therefore, earnings releases furnished on Form 8-K that contain non-GAAP

measures must comply with Regulation G and must include:

• a presentation of the most directly comparable GAAP measure with equal

or greater prominence

• a statement disclosing the reasons why management believes that

presentation of the non-GAAP measure provides useful information to

investors regarding the registrant’s financial condition and results of operations

• to the extent material, additional purposes, if any, for which management uses the non-GAAP measure

Earnings Releases

20

Any registrant that releases a non-GAAP measure orally, telephonically, by

webcast, by broadcast or by similar means may provide the accompanying information and disclosure by posting the information simultaneously on its

website and disclosing the location and availability of the required

information during the presentation

• Any financial and statistical information contained in the presentation

must also be provided, including any information provided in connection with Q&A

• A registrant may satisfy this requirement by posting an audio file of the

initial webcast, if all required information is contained in the audio file

• Required information that is intended to be released orally, etc., must be

posted at the same time the oral presentation is made

• Unexpected disclosure (for example, as part of Q&A) must be posted

promptly after disclosed orally

Earnings Releases (cont.)

21

Measures of segment profit or loss and segment total assets and additional financial information for each segment required or expressly permitted to be disclosed under ASC 280 are excluded from the definition of non-GAAP measure

Any discussion of segment profitability (determined in accordance with ASC 280) in a registrant’s MD&A, if such a discussion is necessary to an understanding of the business, should also include a complete discussion of the reconciling items that apply to the segment

• Based on the reconciliation required in the financial statement footnote by ASC 280

Segment Information

22

Any segment measures that are adjusted beyond the measures prescribed in ASC 280 constitute non-GAAP measures and are subject to Regulation G and Item 10(e) of Regulation S-K

• The presentation of the total segment profit or loss measure in any context other than the reconciliation in the financial statements footnote required by ASC 280 would constitute the presentation of a non-GAAP measure

Segment Information (cont.)

23

As a general rule, the SEC’s non-GAAP rules do not prohibit non-GAAP per share financial measures

• The SEC has noted, however, that per share measures that are prohibited specifically under GAAP or other SEC rules continue to be

prohibited in materials filed with or furnished to the SEC:

� Accounting Series Release No. 142

� Accounting Standards Codification 230

• Non-GAAP liquidity measures that measure cash generated must not be

presented on a per share basis in a document filed with, or furnished to, the SEC

� The SEC staff has stated that whether per share data is prohibited depends

upon whether the non-GAAP measure can be used as a liquidity measure

regardless of whether management presents it solely as a performance

measure

� The staff will analyze this issue in light of the substance, not management’s

characterization

Per Share Measures

24

• Non-GAAP per share performance measures should be reconciled to

GAAP earnings per share

• Any non-GAAP per share financial measures not presented on a diluted basis should be evaluated in light of:

� the general requirement that the presentation of a non-GAAP measure cannot

be misleading; and

� the requirements of GAAP

� e.g., Accounting Standards Codification 260, Earnings per Share

Per Share Measures (cont.)

25

EBIT and EBITDA are exempt from the prohibition on excluding, from non-GAAP liquidity measures, charges or liabilities that required, or will require, cash settlement, or would have required cash settlement absent an ability to settle in another manner

• “Earnings” means net income as presented in the GAAP statement of

operations

• Measures not derived from net income are not exempt from this

restriction

EBIT or EBITDA presented as a performance measure should be reconciled to net income, as opposed to operating income or cash flow line items

• EBIT or EBITDA may not be presented on a per share basis

EBIT, EBITDA and Adjusted EBITDA

26

“Credit Agreement EBITDA” (subject to adjustments beyond traditional EBITDA) will generally be viewed as adjusted EBITDA under rules for non-

GAAP final measures:

• use generally must comply with the requirements of Regulation G (including reconciliation to GAAP)

• except as noted below, use in an SEC filing would likely violate Item

10(e) due to its containing adjustments that will settle in cash

“Credit Agreement EBITDA” will be deemed “required by SEC rule” and,

therefore, will not constitute a non-GAAP measure in the event that:

• the registrant’s credit agreement contains a covenant referring to EBITDA

calculated other than as contemplated above; and

• management believes that (a) the credit agreement is a material agreement; (b) the covenant is a material term of the credit agreement;

and (c) information about the covenant is material to an investor’s understanding of the registrant’s financial condition and/or liquidity

EBIT, EBITDA and Adjusted EBITDA (cont.)

27

In such case, the registrant may disclose the covenant measure as calculated under the credit agreement as part of its MD&A

• The SEC staff has advised that the registrant also consider disclosing:

� the material terms of the credit agreement (including the covenant)

� the amount or limit required for compliance with the covenant

� the actual or reasonably likely effects of compliance or non-compliance with the covenant on the registrant’s financial condition or liquidity

EBIT, EBITDA and Adjusted EBITDA (cont.)

28

Free cash flow, calculated as cash flows from operating activities adjusted to deduct capital expenditures, is permitted in SEC filings, even though it adjusts for amounts to be settled in cash, subject to the following guidance:

• The SEC filing should include a clear description of how the measure is

calculated and the necessary reconciliation

• In the SEC filing, the presentation should avoid inappropriate or

potentially misleading inferences about the term’s usefulness

� e.g., reference availability for discretionary expenditures without

consideration of other non-discretionary expenditures

• Free cash flow cannot be presented in SEC filings (including earnings

releases furnished on Form 8-K) on a per share basis

Free Cash Flow

29

In connection with a REIT’s use of FFO in an SEC filing:

• The SEC staff accepts NAREIT’s definition of FFO in effect as of May 17, 2016 as a performance measure

• The SEC has expressly noted that this measure may be presented

on a per share basis

• Any adjustments made to NAREIT FFO must otherwise comply with Item 10(e) of Regulation S-K as a non-GAAP performance measure and must

not be misleading

• The SEC staff will analyze whether adjusted FFO is a measure of

liquidity or performance depending upon the nature of the

adjustments

� This could affect whether adjustments are appropriate under Item 10(e)

• Adjusted FFO found to be a liquidity measure cannot be presented on a per share basis

Funds From Operations (FFO)

30

The requirements of Regulation G and Item 10(e), as

applicable, apply equally to non-GAAP measures that are

historical and those that are forward-looking

• A quantitative reconciliation for a forward-looking non-

GAAP measure, detailing the differences between the

forward-looking non-GAAP measure and the appropriate

forward-looking GAAP measure is required to the extent

available without “unreasonable efforts”, as noted above

Forward-Looking Non-GAAP Measures

31

If the GAAP financial measure is not accessible on a forward-looking basis without unreasonable efforts, the registrant is required to:

• disclose this fact

• provide reconciling information that is available without unreasonable efforts

• identify information that is unavailable and disclose its probable significance

The SEC staff has indicated that presentation of any forward-looking non-GAAP measure in an earnings release or in a filing with the SEC that is not accompanied by the above-disclosure is unduly “prominent” in violation of the rules

Forward-Looking Non-GAAP Measures (cont.)

32

General Rule: Regulation G applies to FPIs

Exception: Regulation G does not apply to public disclosure of

non-GAAP financial measures by an FPI if:

• the securities of the FPI are listed on an exchange or inter-dealer quotation system outside the U.S.;

• the non-GAAP measure is not derived from or based on a measure calculated and presented in accordance with U.S. GAAP; and

• the disclosure is made by or on behalf of the FPI outside the U.S., or is included in a written communication that is released by or on behalf of the FPI outside the U.S.

Foreign Private Issuers

Application of Regulation G

33

The exception applies even when one or more of the following

circumstances are present:

• a written communication is released in the U.S. as well as outside the U.S., so long as the communication is released in the U.S.

contemporaneously with, or after, the release outside the U.S. and is not

otherwise targeted at persons located in the U.S.

• third parties (including U.S. and foreign journalists) have access to the

information

• the information appears on one or more websites maintained by the FPI,

so long as the websites, taken together, are not available exclusively to,

or targeted at, persons located in the U.S.

• the information is included in a submission to the SEC on a Form 6-K,

following the disclosure or release of the information outside the U.S.


Application of Regulation G (cont.)

34

FPIs are subject to Item 10(e) of Regulation S-K with respect to the use of non-GAAP measures in filings with the SEC on Form 20-F

• Filers on Form 40-F under the Multi-Jurisdictional Disclosure System are not subject to these requirements (only subject to Regulation G)

A non-GAAP measure otherwise prohibited in a Form 20-F, is permitted in the filing if such measure is:

• required or expressly permitted by the standard-setter that establishes

the GAAP used in the FPI’s primary financial statements; and

• included in the FPI’s annual report or financial statements used in its

home country jurisdiction or market

Note that the remaining requirements of Item 10(e) of Regulation S-K would continue to apply to such permitted non-GAAP measures in Form 20-F filings


Non-GAAP Measures in SEC Filings

35

For an FPI whose primary financial statements are prepared in accordance with non-U.S. GAAP, “GAAP” means the principles under which the primary financial statements are prepared

For an FPI who includes a non-GAAP measure derived from, or based on, a measure calculated in accordance with U.S. GAAP, “GAAP” means U.S. GAAP for purposes of the application of the requirements of Regulation G to the disclosure of such measure

36


What is “GAAP” for an FPI?

Recent SEC Comment Letters and Recommendations for

Public Companies

37

From May 2016 to April 2017, the SEC staff has publicly released close to

300 comment letters (containing over 500 comments) to nearly 250 companies. Topics included:

Recent SEC Comment Letters

• Failing to disclose comparable GAAP

measure or reconcile to comparable

GAAP measure

• Failing to provide separate reconciliations

for each non-GAAP measure

• Inadequate disclosure regarding why each

non-GAAP measure is useful to investors

• Using non-GAAP measures with

confusingly similar titles to GAAP

measures

• Presenting a total segment profit or loss

measure in any context other than

required by GAAP

• Reconciling EBITDA or Adjusted EBITDA

to a GAAP measure other than net income

• Excluding charges from non-GAAP liquidity

measures that require cash settlement

• Staff disagreeing with company’s

categorization of a non-GAAP measure as

either “liquidity” or “performance”

• Presenting per share data for liquidity

measures

• Using “Free Cash Flow” or “EBITDA” not

calculated in typical manner

• Using non-GAAP measures on face of

GAAP financial statements

38

Recent SEC Comment Letters (cont.)

• Placing undue prominence on non-GAAP

measures by:

• discussing non-GAAP results before GAAP results

• including reconciliations that begin with the non-GAAP measure rather than beginning with the GAAP measure

• including non-GAAP measures in headlines, bullets tables, executive summaries or quotations without including comparable GAAP measures

• providing percentages or prior period discussion for non-GAAP measures without comparable discussion for GAAP measures

• including a full “non-GAAP income statement”

• Using non-GAAP ratios or per share

results without comparable GAAP ratios

or results

• Presenting non-GAAP measures on a

“net of tax” basis

• Failing to reconcile non-GAAP forecasts

or failing to provide disclosure required

for “unreasonable efforts” exception

• Picking certain adjustments to manage or

“smooth” non-GAAP results

• Adjusting for items that are determined to

be normal or recurring

• Using non-GAAP measures that are

inconsistent with the use of such

measures in prior periods

• Using non-GAAP items in an earnings

call without making the required

reconciliations publicly available

• Using individually tailored recognition and

measurement methods

39

• Conduct a careful review generally of all non-GAAP reporting practices,

testing against the new C&DIs in each respect

• Ensure that equal or greater prominence to GAAP measures is given, bearing in mind that the GAAP measure must actually appear first in

each instance, including in headings

• Confirm that the standard for omitting a reconciliation for forward-looking non-GAAP metrics is satisfied, because the staff now requires strict

compliance and supplemental disclosure for any omitted forward-looking

reconciliation (despite past reliance on a limited exception to the reconciliation requirement)

• Avoid unfounded reliance on historical practice, including practices by

industry peers, given the staff's renewed focus on non-GAAP compliance and the strict approach that they have now announced

Recommendations for Public Companies

40

20 Jul 2017

CHOICE Act 2.0 Passes the House:What Is the ‘CHOICE’?

On June 8, 2017, the House of Representatives passed an amended

version of H.R. 10, the Financial CHOICE Act of 2017, or CHOICE Act

2.0, which scales back or eliminates many of the post-crisis financial

reforms that were promulgated by the Dodd-Frank Wall Street Reform

and Consumer Protection Act including, for example, the Volcker

Rule, the authority of the Financial Stability Oversight Council to

designate systematically important financial institutions, and the

orderly liquidation authority. In addition, CHOICE Act 2.0 proposes a

number of capital market reforms directed at easing the regulatory

burden on smaller issuers. The passage of CHOICE Act 2.0 represents

a significant step towards financial regulatory reform that the

Republican leadership has been calling for since the passage of the

Dodd-Frank Act.

CHOICE Act 2.0 as passed by the House has evolved since Republican

Representative Jeb Hensarling first introduced the bill in 2016 and

1

the House Financial Services Committee passed “version 2.0” of the

bill on May 4, 2017. One significant change from to version 2.0 as

passed by the Committee was the omission of a provision that would

have repealed the “Durbin Amendment.” A highly contested

provision, the Durbin Amendment limits interchange fees charged in

connection with debit cards, and was removed by House Republicans

in an effort to obtain the votes needed to pass the legislation through

the House.

In light of the bill’s many sweeping changes to the current financial

regulatory landscape, the prospects of CHOICE Act 2.0 being

approved in its current form by the Senate are slim. The Senate is

more likely to pursue legislation that is more limited in scope than the

current bill.

While CHOICE Act 2.0 covers a broad range of topics, certain core

themes, aside from generally revisiting Dodd-Frank Act reforms,

emerge from the bill’s provisions, including: (1) dramatically

curtailing financial regulatory discretion and encouraging

transparency in, and oversight over, regulation and supervision; (2)

reining in the ability of the Federal Reserve and others to implement

the kinds of interventionist measures that were taken at the height of

the financial crisis and generally chipping away at Federal Reserve

independence; (3) effecting changes with an aim to facilitate smaller

company capital formation; (4) repealing many of the public company

disclosure requirements mandated by the Dodd-Frank Act and

considered by the Republican leadership as outside the scope of the

SEC’s purview; (5) limiting the impact of regulation on community

banks; and (6) encouraging increased coordination among regulatory

agencies.

2

Subsequent to the House passage of CHOICE Act 2.0, the Treasury

Department released the first of a series of reports entitled “A

Financial System That Creates Economic Opportunities: Banks and

Credit Unions,” produced in response to the Presidential executive

order on core principles for regulating the financial system, which

directs the Department to examine existing financial regulation and

make recommendations to the President on suggested reforms. While

CHOICE Act 2.0 and the Treasury Report touch on many similar

topics, there are certain notable differences, including:

[1]

While CHOICE Act 2.0 would repeal the Volcker Rule in its

entirety, the Treasury Report does not propose the elimination

of the Volcker Rule. Instead, the Treasury Report recommends

exempting entities with $10 billion or less in assets from the

Rule’s scope and suggests that regulatory agencies modify

certain concepts and defined terms in order to reduce the

complexity of the Volcker Rule.

■

While critical of the Consumer Financial Protection Bureau, the

Treasury Report, unlike CHOICE Act 2.0, would permit the CFPB

to continue enforcing against covered persons for unfair,

deceptive, or abusive acts or practices, while recommending that

the CFPB more clearly define its interpretations of the UDAAP

standard. Like CHOICE Act 2.0, the Treasury Report advocates

for the elimination of the CFPB’s supervisory authority, noting

that this authority is duplicative of the supervisory authority of

the prudential regulators, and recommends that the CFPB be

funded through Congressional appropriations, thereby

increasing Congressional oversight of the agency.

■

A majority of the recommendations in the Treasury Report are■

3

Because the Treasury Report recommends reform that is more

modest that those that would be enacted by CHOICE Act 2.0, and the

Report’s recommendations are the product of Treasury’s

collaborative discussions with regulators, it may be that the reforms

implemented by Congress or the regulatory agencies (or both) will be

more reflective of the Treasury Report’s recommendations rather

than CHOICE Act 2.0 provisions. Republican leaders also may choose

to pursue adoption of certain financial reforms that can be tied to

spending, revenues or deficit reduction through the budget

reconciliation process, where changes would require only a majority

vote in the Senate. The Congressional Budget Office estimates that

enacting CHOICE Act 2.0 would result in a reduction of budget deficits

by $33.6 billion, with the majority of such savings resulting from

elimination of the orderly liquidation fund and subjecting the CFPB

and other agencies to the Congressional appropriations process.

Nevertheless, the passage of CHOICE Act 2.0 represents a major first

step towards financial deregulation. CHOICE Act 2.0, together with

the Treasury Report, will certainly be influencing the regulatory

agenda for the federal financial regulators for the months and years to

come. This note highlights the key takeaways of CHOICE Act 2.0. We

will continue to track the progress of CHOICE Act 2.0 as it makes its

way through Congress.

Key Takeaways

capable of being implemented directly by the various federal

financial industry regulators without Congressional action,

making many of the recommendations, in theory, less difficult to

institute.

4

Set out below are key takeaways for each of the titles of CHOICE Act

2.0. For a more detailed summary of each title, please click on the

hyperlinked title headings that follow.

Title I: Ending “Too Big To Fail”

Repeal of the Orderly Liquidation Authority. CHOICE Act 2.0

would repeal the orderly liquidation authority (“OLA”) created

under the Dodd-Frank Act, which enables federal regulatory

authorities to place a large financial company into a receivership

if its failure under ordinary insolvency law would have a serious

adverse impact on US financial stability. In its place, CHOICE Act

2.0 would create a new Subchapter V under Chapter 11 of the

Bankruptcy Code, which is tailored to address the failure of large,

complex financial institutions. Such proposed legislation is

largely consistent with prior versions of proposals seeking to

adopt a specialized subchapter of the Bankruptcy Code for large,

complex financial institutions.

■

FSOC Reforms. Title I would make significant changes to the

membership, structure, powers and functions of the Financial

Stability Oversight Council (“FSOC”). Specifically, the FSOC’s

authority to designate a firm as a systemically important

financial institution would be repealed, along with all

designations previously made. FSOC would also no longer have

the authority to designate central counterparty clearinghouses

and payment systems as systemically important financial market

utilities.

■

Elimination of the Office of Financial Research. Title I would■

5

eliminate the Office of Financial Research, an independent office

that was created within the Department of the Treasury by the

Dodd-Frank Act.

Biannual Resolution Plans. Title I would reduce the frequency of

living will submissions to every 2 years and eliminate the role of

the Federal Deposit Insurance Corporation (“FDIC”) in the

process. The Board of Governors of the Federal Reserve System

(the “Federal Reserve”) would be required to provide feedback to

banking organizations within six months of their submissions of

the living wills, and to publicly disclose its resolution plan

assessment frameworks for notice and comment.

■

Reforms Stress Test Regime. Title I would overhaul the current

stress testing regime for banking organizations, including

extending the Comprehensive Capital Analysis and Review

(“CCAR”) cycle to every two years, eliminating the Dodd-Frank

Act Stress Tests (“DFAST”) for banking organizations that are not

bank holding companies (“BHCs”) and increasing the

transparency of the stress testing process.

■

Curb Emergency Assistance. Title I would curb the federal

regulatory agencies’ ability to assist large financial institutions

that encounter financial distress. For example, it would repeal

the provisions of the Dodd-Frank Act that currently permit the

FDIC and the Federal Reserve to create a widely available

program to guarantee obligations of solvent financial firms and

their affiliates in the event of a liquidity event and limit the use of

the Exchange Stabilization Fund (“ESF”).

■

6

Title II: Demanding Accountability from Wall Street

Increase Maximum Regulatory Penalties. Title II would increase

the maximum penalties that regulators could impose under

certain federal laws, including: the Securities Act of 1933 (the

“Securities Act”), the Securities Exchange Act of 1934 (the

“Exchange Act”), the Investment Advisers Act of 1940 (the

“Advisers Act”), the Investment Company Act of 1940 (the “‘40

Act”), the Financial Institutions Reform, Recovery, and

Enforcement Act of 1989 (“FIRREA”), the Home Owners’ Loan

Act, the Federal Deposit Insurance Act, the Federal Credit Union

Act, the Federal Reserve Act, and the Bank Holding Company Act

of 1956 (“BHC Act”).

Title III: Demanding Accountability from Financial Regulators

■

Require Cost-Benefit Analysis. Title III would require federal

financial regulatory agencies to conduct quantitative and

qualitative cost-benefit analyses when proposing new

regulations. Specifically, the agencies could not propose new

rulemakings without first analyzing the effectiveness of such rule

and its burden on potential stakeholders, especially local

entities, governments or private sectors.

■

Periodic Review of Regulators. Within one year of enactment of

CHOICE Act 2.0 and every five years thereafter, each federal

financial regulatory agency would be required to submit to

Congress and post on their public website, a plan to modify,

streamline, expand or repeal existing regulations to make its

regulatory program more effective or less burdensome.

■

[2]

7

Congressional Approval of Major Rules. Title III requires each

“major rule” (as defined within CHOICE Act 2.0) of a federal

financial regulatory agency to be approved by a joint resolution

of Congress within 70 session days or legislative days of its

submission to Congress before it could take effect.

Eliminate Chevron Deference. Title III would eliminate the

so-called Chevron doctrine of judicial deference for federal

financial regulatory agencies, under which judges generally defer

to an agency’s reasonable statutory and regulatory

interpretation where a statutory or regulatory provision

contains a gap or ambiguity. CHOICE Act 2.0 would implement

the repeal two years after enactment rather than immediately, as

was stipulated in earlier iterations of the bill.

■

Asserting Congressional Control. Title III would bring the FDIC,

FHFA, OCC, the examination and supervision functions of the

NCUA, and the non-monetary functions of the Federal Reserve

into the Congressional appropriations process.

■

Requiring Coordination in Enforcement Actions. Title III would

require the federal financial regulatory agencies to implement

policies and procedures to minimize duplication of efforts with

other federal and state authorities when bringing administrative

or judicial action against an individual or entity, and establish a

“lead agency” for joint investigations, administrative actions or

judicial actions.

■

Criminalizing Disclosure of Individual Information. Title III

would create a misdemeanor offense for any employee of a

■

8

Federal department or agency who discloses individually

identifiable information contained in confidential agency records

without authorization.

Title IV: Facilitating Capital Formation for Small Businesses,

Innovators and Job Creators

“JOBS Act 2.0.” Title IV is primarily focused on easing the

regulatory hurdles of smaller companies related to raising capital

and on providing a smoother transition for smaller companies

that have completed an initial public offering. Title IV covers a

range of areas, including raising the shareholder thresholds

triggering public company status, expanding private offering

exemptions, delaying the impact of certain requirements of the

Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and

expanding the availability of shelf offerings to smaller

companies. Some of the key changes include:

■

Eliminating the 500 non-accredited investor threshold triggering

registration under Section 12(g), leaving as the Section 12(g)

registration triggers $10 million in assets and at least 2,000

holders of record. The SEC would be required to index the $10

million asset trigger for inflation every five years. In addition,

the threshold that allows a company to cease reporting as a

public company would be increased to fewer than 1,200

shareholders (up from 300).

■

Creating a new “micro offering” exemption for offerings of less

than an aggregate of $500,000 in a 12-month period, increasing

the Regulation A+ offering ceiling to $75 million in a 12-month

■

9

period (up from $50 million) and revamping the existing

crowdfunding rules.

Revising the definition of “general solicitation” in a private

offering to exclude presentations and related advertising for

events sponsored by venture capital or angel investor groups,

and expanding the exemption for private resales of securities by

allowing general solicitation and eliminating information

requirements for sales made on accredited investor-only

platforms.

■

Restricting the SEC from adopting some of the investor

protections it has proposed to add to certain JOBS Act private

offering reforms.

■

Allowing all companies, regardless of their size, that are seeking

to go public to use the JOBS Act provisions to “test the waters”

and make all registration statement filings with the SEC on a

confidential basis, with the requirement to file publicly 15 days

before the start of the roadshow.

■

Delaying the Sarbanes-Oxley Act 404(b) requirement for a

company to have its auditor attest and report on management’s

assessment of internal controls for up to 10 years for companies

with revenue of less than $50 million.

■

Allowing all companies with listed equity securities, regardless of

public float, to conduct shelf offerings on Form S-3.

■

10

Expanding the availability of well-known seasoned issuers

(“WKSI”) status, and the related offering communication rules to

business development companies and closed-end funds.

■

Codifying existing staff position providing an exemption from

broker-dealer registration and registration for a category of

broker-dealers engaged in advising companies on M&A

transactions.

Title V: Relief from Regulatory Burden for Community Financial

Institutions

■

“Ability to Repay” Safe Harbors. Title V makes various revisions

to the regulatory framework for residential mortgage lending,

including providing a safe harbor from consumers’ “ability to

repay” requirements that are originated by a depository

institution and are maintained in the portfolio of such institution.

■

Tailoring to Community Banks. Federal banking regulators

would have increased responsibilities and accountability for all

future rulemakings, as CHOICE Act 2.0 would require that

regulators take into consideration certain factors, such as the

necessity, appropriateness and impact of rulemakings, and tailor

each rulemaking to limit the regulatory compliance impact, cost,

liability risk and other burdens on institutions within their

respective jurisdictions. Further, banking agencies would be

required to disclose how they have complied with this

requirement in each rulemaking release and submit an annual

report to Congress regarding their compliance.

■

11

Oversight of Supervisory Functions. An Office of Independent

Examination Review would be created within the Federal

Financial Institutions Examination Council (“FFIEC”), which

would investigate regulators’ examination practices and receive

petitions from financial institutions for review of supervisory

determinations.

■

Overturning Madden v. Midland Funding, LLC. The “valid when

made” doctrine would be codified, such that the interest rate

applicable to a loan would remain valid after a loan is transferred

if the interest rate was valid under the laws applicable to the

lender at the time the loan was originated, irrespective of

whether the loan’s interest rate would violate a state usury law

applicable to the transferee of such loan.

■

FIRREA Actions. The Act would also limit the subpoena power of

the Attorney General in investigating possible violations under

FIRREA and clarifies the circumstances under which banks may

be prosecuted for fraud or related financial crimes under

FIRREA.

Title VI: Regulatory “Off Ramp” for Strongly Capitalized,

Well-Managed Banking Organizations

■

Title VI provides that qualifying banking organizations (“QBOs”),

by virtue of maintaining an average leverage ratio of 10%, would

become exempt from various federal laws and regulations,

including: (i) all capital and liquidity requirements, (ii) all laws

and regulations that would permit federal banking agencies to

object to a capital distribution, including CCAR, (iii)

■

12

consideration by federal banking agencies of financial stability-

related factors in connection with certain events and

applications (e.g., examinations and applications relating to

M&A), (iv) the deposit concentration limit, (v) certain limitations

on large acquisitions made by banking holding companies and

financial holding companies, and (vi) certain “enhanced

prudential standards” established by Section 165 of the

Dodd-Frank Act (e.g., living wills, stress testing and single

counterparty credit limits). Notably, few large banks would be

able to satisfy the capital standards required to become QBOs

today without raising more capital.

Title VII: Consumer Financial Protection Bureau

Reforming CFPB’s Structure. Title VII introduces a series of

reforms to the Consumer Financial Protection Bureau (the

“CFPB”). The CFPB would be renamed the “Consumer Law

Enforcement Agency” and while it would still be led by a single

Director, the President would now be able to remove the Director

at will. Additionally, the President, rather than the Director,

would be able to appoint the agency’s Deputy Director. A Senate-

confirmed inspector general would also be created for the

agency.

■

The agency would no longer be funded through the Federal

Reserve System and instead would receive funding through the

Congressional appropriations process.

■

CFPB Limited to Enforcement. The CFPB would be stripped of its

supervisory and examination powers, but retain its enforcement

■

13

authority, although such authority would be reduced. The CFPB

would lose its ability to promulgate and enforce rules addressing

unfair, deceptive, or abusive acts and practices by financial

institutions, and the ability to limit or prohibit the use of

arbitration agreements where they violate public interest. The

CFPB would no longer be responsible for regulating small dollar

credit, including payday and vehicle title loans. Its complaint

database would no longer be made publicly available.

Status of Durbin Amendment. While the bill that originally

passed the Committee contained a provision that would repeal

the Durbin Amendment, which limits fees charged in connection

with debit cards, House Republicans removed this repeal from

the bill before the full House vote.

Title VIII: Capital Markets Reform

■

Title VIII of CHOICE Act 2.0 covers amendments to a wide range

of areas from SEC funding and appropriations to its internal

operations and functioning. It also makes specific changes to the

powers, policies and procedures of the Enforcement Division,

changes to the regulation of rating agencies and changes to

corporate governance practices. Finally, Title VIII repeals a

range of the Dodd-Frank Act rulemaking mandates and directives

to conduct studies and prepare reports. Some of the key changes

include:

■

Significant changes to enforcement, including limiting the SEC’s

ability to seek relief through administrative proceedings,

mandated presentations and notifications to the SEC following

■

14

Wells notices, providing for limitations on the duration of

investigations and for timely notices of the closing of

investigations, creating an “enforcement ombudsman” with

confidential communication procedures, elimination of

automatic disqualification of exemptions, and the requirement

that an updated enforcement manual be published with priorities

and trends.

Eliminating compensation for whistleblowers who were

responsible for or complicit in misconduct.

■

Changing the pleading standards in connection with derivative

suits against investment companies.

■

Repealing the Department of Labor’s “fiduciary rule.”■

Significant changes to the shareholder proposal rules, including

increasing the stock ownership thresholds necessary to submit

shareholder proposals to be voted on at annual shareholders

meetings, increasing the stock ownership thresholds necessary

for shareholders to resubmit proposals that were voted down at

prior annual meetings and allowing companies to exclude

shareholder proposals submitted on behalf of shareholders.

■

Prohibiting the SEC from adopting a rule that provides that a

company must use a single ballot in connection with a contested

election for its board of directors.

■

Fixing the income test of the accredited investor definition at■

15

$200,000 per year (or $300,000 including spouse’s income)

and the net worth test to $1 million. Each test would be adjusted

for inflation every five years.

Eliminating the Sarbanes-Oxley Act 404(b) requirement to have

an auditor attest and report on management’s assessment of

internal controls for companies with a market cap of less than

$500 million (from $75 million).

■

Repealing the conflict minerals, resource extraction and mine

safety disclosure requirements.

■

Repealing the Dodd-Frank Act provisions related to pay ratio,

hedging disclosures and restrictions on incentive compensation

at certain financial institutions, and restricting the scope of the

proposed compensation claw back rule.

■

Requiring the CFTC and SEC to review and harmonize swaps and

security-based swaps rules.

Title IX: Repeal of Volcker Rule

■

Title IX would repeal Section 619 of the Dodd-Frank Act,

commonly known as the Volcker Rule, in its entirety.

Title X: Federal Reserve Reform and Emergency Lending

Authority

■

16

Reforming the Monetary Function. In an effort to increase

transparency and predictability of the process of the Federal

Reserve regarding monetary policy, Title X would establish a

rule-based process by which the Federal Open Markets

Committee (“FOMC”) would set interest rates. The bill would also

provide for the Comptroller General to perform an annual audit

of the Federal Reserve and the Federal Reserve Banks. FOMC

meetings would also be recorded, with transcripts being made

publicly available. Additionally, a Centennial Monetary

Commission would be established and tasked with reviewing the

operation, history and impact of the Federal Reserve’s monetary

policy on the economy and making certain related legislative

recommendations.

Limiting the Emergency Authority. Title X would limit the

Federal Reserve’s emergency lending authority under Section

13(3) of the Federal Reserve Act by: (i) only permitting

emergency lending in unusual and exigent circumstances “that

pose a threat to the financial stability of the United States,” (ii)

adding to existing approval requirements for emergency lending,

the approval of at least nine Federal Reserve Bank presidents,

(iii) revising collateral requirements to, among other things,

prohibit the acceptance of equity collateral, (iv) requiring

regulatory certification of an institution’s solvency, and (v)

establishing a minimum interest rate for loans made under this

authority.

Title XI: Insurance Reform

■

Title XI would abolish the Federal Insurance Office and create

instead, the Office of Independent Insurance Advocate within the

■

17

Footnotes

[1] For an overview of the Presidential executive order, you may wish to refer to our client

publication: “An Annotated Guide to Trump’s Executive Order on Financial Regulatory

Reform,” available at: http://www.shearman.com/en/newsinsights/publications/2017/02

/guide-to-trump-order-on-financial-reg-reform

[2] Federal financial regulatory agencies for purposes of Title III are: the Federal Reserve,

CFPB, Commodity Futures Trading Commission (“CFTC”), FDIC, Federal Housing Finance Agency

(“FHFA”), Office of the Comptroller of the Currency (“OCC”), National Credit Union

Administration (“NCUA”) and Securities and Exchange Commission (“SEC”).

Treasury Department, with the head of the new Office being the

independent member with insurance expertise on the FSOC. The

Office would not have general supervisory or regulatory

authority over the business of insurance, thereby preserving the

traditional state-based system of insurance regulation in the

United States.

18

Reena SahniPartner / New York+1 212 848 7324

John CannonPartner / New York+1 212 848 8159

Nathan GreenePartner / New York+1 212 848 4668

Geoffrey GoldmanPartner / New York+1 212 848 4867

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Authors & Contributors

19

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20

CLIENT PUBLICATION

CAPITAL MARKETS | OCTOBER 19, 2016

Updated Non-GAAP Guidance: The First 150 Comment Letters

In May of this year, the staff of the SEC’s Division of Corporation Finance updated its C&DIs regarding the use of non-GAAP financial measures. We summarized the May 2016 update in an earlier client publication. Since the update, the staff has issued over 150 comment letters on non-GAAP measures that have become publicly available. We have reviewed the comment letters and company responses and summarize the most frequent and interesting issues.

SEC Comments and Enforcement

The SEC staff comment letters were often issued in conjunction with a review of the company’s 10-K and 10-Qs, and included comments on earnings releases and slide presentations. Most of the disclosures that the staff commented on predated the May 2016 update, so companies had not been able to take the update into account in preparing them. Consistent with expectations, the staff did not ask companies to amend their past filings, but was satisfied with company undertakings to modify their disclosures going forward.

In addition to the comment letters from the staff of the SEC’s Division of Corporation Finance, which reviews companies’ filings in the ordinary course, we understand that the SEC’s Division of Enforcement has sent letters to some companies, asking about their past compliance with the non-GAAP rules. The SEC also recently brought an enforcement action where it alleged truly fraudulent manipulation of a non-GAAP measure. While those enforcement letters so far do not seem to have spread more widely and the facts in the recent enforcement action were particularly egregious, together they are a timely, and perhaps not entirely coincidental, reminder of the importance that the SEC attaches to this topic.

This client publication highlights some of the areas of concern that the staff of the SEC’s Division of Corporation Finance focused on in its comment letters since the May 2016 update. Some comments were more sector-specific, such as those regarding Cash Available for Distributions or similar metrics by non-MLP companies in the oil and gas sector. We have limited ourselves to comments that were fairly common, or that could be relevant for companies in a wide range of industries.

SEC Staff May Be Listening to Your Earnings Call

In several of the letters, the SEC staff commented not just on non-GAAP measures used in SEC filings and earnings releases, but also on those referred to on earnings calls. For example, one comment letter asked why the company had not provided a reconciliation of some non-GAAP measures that management discussed on the call, but which were not included in the earnings release and therefore not reconciled there.

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Equal or Greater Prominence

By far the most common comment, appearing in roughly 40% of the letters, asked for compliance with the requirement to include a presentation of the most directly comparable GAAP financial measure “with equal or greater prominence.” This applies whenever a non-GAAP measure is included in a document filed with the SEC or, for US domestic issuers, in an earnings release furnished to the SEC under Item 2.02 of Form 8-K (but not to earnings call transcripts or slides not required to be furnished under Item 2.02). The May 2016 update specifically characterized it as non-compliant with the equal or greater prominence requirement to have a non-GAAP measure precede the most directly comparable GAAP measure—something that was previously not explicit.

Headlines, Bullets, Tables. In many instances, the comment was triggered by headlines, bullets or tables that either mentioned only non-GAAP measures, or mentioned them first, before providing the corresponding GAAP numbers. The May 2016 update had expressly highlighted this as inconsistent with the requirement.

CEO Quotes. A brief comment from the CEO is a standard feature of many earnings releases that gives management an opportunity to share its perspective. Understandably, management would like to avoid cluttering this with references to GAAP measures that are disclosed elsewhere and may interrupt the flow. In a few letters, the SEC staff highlighted CEO quotes that only mentioned non-GAAP performance, but usually in the context of earnings releases that also gave non-GAAP measures greater prominence in other ways.

Narrative. The May 2016 update stated that it was impermissible to provide discussion and analysis of a non-GAAP measure without a similar discussion and analysis of the comparable GAAP measure in a location of equal or greater prominence. Several comment letters raised this point when a narrative discussion of a company’s performance in MD&A or an earnings release was framed primarily or exclusively around non-GAAP measures. What the staff apparently considered permissible, however, is a combined discussion of factors that affected both GAAP and non-GAAP performance to avoid unnecessary repetition.

Derivative Non-GAAP Measures. The staff often treated non-GAAP margins, ratios and per-share metrics as separate financial measures. In the staff’s view, these measures may require not only separate reconciliation, but also a presentation of the comparable GAAP measure in a location of equal or greater prominence. For example, the staff found a presentation of Adjusted EBITDA as a percentage of sales to require a presentation of net income as a percentage of sales that preceded it.

Reasons

Close to 30% of the comment letters asked companies to provide more detail and specificity when explaining why the company believes its non-GAAP measures provide useful information to investors regarding the company’s financial condition and results of operations. This statement of reasons is required when non-GAAP measures are included in SEC filings or in earnings releases of US domestic issuers that are furnished on Form 8-K.

Specific to the Company’s Circumstances. The comments in this area emphasized the need for adequately detailed information specific to the company’s circumstances. Boilerplate statements that management believes that the company’s non-GAAP measures provide investors with helpful supplemental information, or that analysts find them useful, may not suffice.

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For Each Non-GAAP Measure. The staff asked some companies for expanded disclosures regarding the usefulness of each of their non-GAAP measures. Sometimes, the staff focused on particular adjustments and queried how they were consistent with the measure’s intended purpose, as further discussed below.

Labeling

About a quarter of the comment letters included comments about the proper labeling of non-GAAP measures. Once again, the SEC staff relied on the broad principle of preventing misleading disclosure, rather than on specific rules about labeling that apply only to SEC filings.

Using GAAP Names for Non-GAAP Measures. Several comments asked companies to clearly and consistently identify non-GAAP measures as such. Companies would sometimes introduce a non-GAAP measure, but then use the GAAP name for the same measure elsewhere in the document without clearly identifying it as non-GAAP every time. Similarly, and consistent with prior practice, the staff asked companies not to use labels like “EBITDA” or “Free Cash Flow” for measures that included adjustments beyond those customarily made for measures with these names, unless the label includes terms such as “as adjusted.”

Using “Pro Forma” for Non-S-X Compliant Pro Forma Information. Companies that have announced or consummated a significant acquisition frequently want to present their financial metrics on a basis that illustrates the effect of the acquisition. These metrics are often referred to as “pro forma” to distinguish them from the acquiror’s historical standalone financial information. In a number of comment letters, the SEC staff took the view that the term “pro forma” should be reserved for financial measures that have been prepared in accordance with the SEC’s rules for pro forma financial statements in Regulation S-X.

Core vs. Non-Core. Some companies use the term “core” to refer to earnings or costs that they report on a non-GAAP basis, designating revenues or costs that they eliminate through adjustments as “non-core.” The SEC staff commented on this terminology in several letters, asking companies to clarify how they define “core” for this purpose, or questioning whether use of the term was appropriate when the relevant adjustments seemed inherent to the company’s core business operations and kept reoccurring over several years. Some companies were able to provide satisfactory explanations, others decided to change the terminology. A similar comment related to calling certain non-GAAP adjustment items included in operating income “non-operating.”

Potentially Impermissible Adjustments

Prior to the May 2016 update, non-GAAP adjustments were generally viewed as permitted if they were sufficiently transparent so as not to mislead investors, subject to a handful of specific prohibitions for SEC filings. Under the new interpretations, some non-GAAP adjustments are presumed to be misleading, and therefore impermissible. Below are some of the adjustments that the SEC staff raised most often as problematic. Overall, it appears that the staff will apply the updated C&DIs rigorously, but more as rebuttable presumptions than as absolute prohibitions. Where companies can make a strong case for why a particular non-GAAP measure is useful to investors, they may be able to persuade the staff that it remains permissible, even if the relevant adjustments fall into these categories.

Normal, Recurring Cash Operating Expenses. The staff had highlighted this category in the updated C&DIs. Examples in the recent comment letters include store closing costs, store opening costs and rent expense for retailers; harbor fees paid by an oil storage provider; cost of land purchases in cost of sales for an engineering

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and construction services company; facility deactivation costs for an energy company; litigation settlements; and acquisition-related expenses (discussed below). Some of these comments resulted in additional disclosure, others led to the elimination of the adjustment in subsequent periods.

Acquisition-Related Expenses. Adjustments for acquisition-related expenses are a standard feature of many non-GAAP measures. Companies often add back transaction expenses or costs of integrating the acquired business and realizing expected synergies. While not specifically highlighted in the May 2016 update, the SEC staff challenged these adjustments in several comment letters, particularly when it viewed acquisitions not as one-time events, but as part of the company’s growth strategy. For example, the staff pointed out that one company had made more than ten acquisitions in the past six years, four alone in the past two years, with two new acquisitions already pending. Most companies that received this comment successfully responded with detailed explanations and expanded disclosures, but some stopped using the relevant measure or adjustment.

Tailored Recognition and Measurement Methods. The May 2016 update specifically highlighted accelerated revenue recognition, but also mentioned other non-GAAP recognition and measurement methods as potentially misleading. Examples from the comment letters include adjustments to neutralize the net effect from the deferral of revenues and the related cost of sales; including principal collections on finance leases in revenues of equipment leasing companies; and adjustments for purchase accounting (discussed below). While the May 2016 update suggests that non-GAAP revenue recognition methods are inherently suspect, the staff may consider arguments as to why a particular method may be appropriate in special circumstances. It helps when the company can demonstrate that its treatment of non-cash revenue reflects widespread industry practice. As a rule, adjustments that eliminate deferral and effectively turn “revenues” into “billings” are not permitted. However, the staff has confirmed that companies can supplement revenue numbers with properly characterized disclosures of billings or bookings, which are not considered non-GAAP measures.

Purchase Accounting Adjustments. Several letters included comments on non-GAAP adjustments seeking to reverse the impact of purchase accounting in connection with acquisitions. Purchase accounting can increase costs through higher depreciation and amortization charges from asset write-ups to fair value. It can also reduce revenues recognized post acquisition from target companies as their deferred revenue balances are written down to fair value. Again, the staff queried the appropriateness of non-GAAP adjustments that neutralize these effects, especially with respect to revenue recognition, but seemed receptive to arguments about the usefulness of the measures if accompanied by expanded disclosure.

Cash-Based Adjustments for Performance Measures. The staff queried whether it was appropriate to adjust performance measures for items that never run through the income statement, even though they represent cash received, such as principal repayments collected on a long-term receivable. Conversely, where non-GAAP adjustments are defined or explained on the basis that they are non-cash, the staff may challenge whether the relevant non-GAAP measure is in fact a performance measure rather than a liquidity measure. One of the reasons the distinction can be significant is because liquidity measures may not be presented on a per share basis. In the May 2016 update the staff specifically said that it would focus on the substance of the non-GAAP measure and not management’s characterization of it.

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Definitions, Explanations and Disclaimers. As discussed above, the staff has been very focused on how companies define their non-GAAP measures and explain the reasons why they believe the measures are useful to investors. The staff will often scrutinize individual adjustments against these definitions and explanations and point out inconsistencies. For example, if the company’s stated rationale for the non-GAAP measure is that it enhances comparability across periods, the staff may question adjustments that appear in multiple periods, even when they are not labeled “non-recurring.” The staff may also challenge adjustments based on a perceived inconsistency with protective disclaimer language. Where a company explained non-GAAP adjustments as items not representative of its ongoing operating performance, the staff asked it to reconcile this with a warning elsewhere that similar charges would occur in the future.

Reconciliation

Many letters also commented on the content or format of the reconciliation of non-GAAP measures to the comparable GAAP measures. Some of these simply asked companies to provide additional detail and explanation for certain adjustments, particularly when they carried generic names like “Other.” Areas of particular focus with respect to reconciliations included the following:

Tax Effects. The May 2016 update included guidance on how to present the income tax effects of non-GAAP adjustments, and this came up in many comment letters. Most of the comments asked companies not to show adjustments “net of tax,” but instead to present the relevant item before tax, and show the tax effect in a separate reconciliation line, with appropriate explanatory disclosure consistent with the applicable C&DI.

Separate Reconciliation for Each Non-GAAP Measure. In a few letters, the staff asked companies to separately reconcile each non-GAAP measure, even if it could be derived from other non-GAAP measures for which a reconciliation was provided. For example, companies were required to reconcile non-GAAP EPS to GAAP EPS even if the company already reconciled non-GAAP net income to GAAP net income.

Constant Currency. While the C&DIs regarding constant currency presentation did not change in the May 2016 update, many of the staff’s recent comment letters addressed this topic. A reconciliation of constant currency revenues to GAAP revenues is required even when the presentation only discusses the year-over-year change on a constant currency basis. The company also must clearly explain its method of calculation.

Full Non-GAAP Income Statement. Several letters reminded companies of the staff’s position that a reconciliation that includes a full non-GAAP income statement violates the mandated equal or greater prominence for GAAP measures. Similarly, the staff asked companies to start reconciliation tables with the relevant GAAP measure at the top.

Financial Guidance

Companies often have a practice of reporting management’s expectations for future performance, referred to as “financial guidance,” “earnings guidance” or “outlook,” on a non-GAAP basis. The SEC’s non-GAAP rules have always required that such forward-looking non-GAAP measures be accompanied by a quantitative reconciliation to the comparable GAAP measures “to the extent available without unreasonable efforts.” Many companies that provide financial guidance do not include reconciliations to GAAP guidance in reliance on this exemption.

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The SEC’s 2003 adopting release for its non-GAAP rules contemplated that if the GAAP financial measure is not accessible on a forward-looking basis, the registrant must disclose that fact and provide reconciling information that is available without an unreasonable effort. Furthermore, the registrant must identify information that is unavailable and disclose its probable significance. The May 2016 update combined these requirements with the rule of equal or greater prominence, suggesting that the disclosure about the unavailability of forward-looking GAAP information and its probable significance itself needed to appear in a location of equal or greater prominence.

Many recent comment letters reminded companies that omitted a reconciliation of their non-GAAP financial guidance of the need to make these disclosures. However, most of the letters did not repeat the statement from the new C&DIs that these disclosures had to appear in a location of equal or greater prominence. Some companies responded to the comment by committing to reconcile their forward-looking non-GAAP measures to the comparable GAAP measures in subsequent filings or earnings releases. Others expanded their disclosures, typically by adding a statement after the financial guidance statement in the earnings release that highlighted the unavailability of financial guidance on a GAAP basis and referred readers to a later part of the document for more detail. Some of the latter companies included in their disclosures certain quantitative information about omitted non-GAAP adjustments that could already be quantified, such as those for announced or completed acquisitions.

Conclusion

The SEC staff remains focused on the use of non-GAAP measures. This first round of comment letters illustrates how the SEC staff intends to apply the May 2016 update in practice and should prove useful for companies in anticipating potential comments. While most of the disclosures that the staff commented on in this round were issued prior to the May 2016 update, companies have since gone through at least one full cycle of quarterly earnings with an opportunity to reflect the update in their SEC filings and earnings releases. It remains to be seen what types of comments the staff will have on these more recent disclosures.

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AUTHOR

Harald Halbhuber New York +1.212.848.7150 [email protected]

CONTACTS

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PARIS | ROME | SAN FRANCISCO | SÃO PAULO | SAUDI ARABIA* | SHANGHAI | SINGAPORE | TOKYO | TORONTO | WASHINGTON, DC

This memorandum is intended only as a general discussion of these issues. It should not be regarded as legal advice. We would be pleased to provide additional details or advice about specific situations if desired.

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Copyright © 2016 Shearman & Sterling LLP. Shearman & Sterling LLP is a limited liability partnership organized under the laws of the State of Delaware, with an affiliated limited liability partnership organized for the practice of law in the United Kingdom and Italy and an affiliated partnership organized for the practice of law in Hong Kong. *Dr. Sultan Almasoud & Partners in association with Shearman & Sterling LLP

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CLIENT PUBLICATION

Capital Markets | May 23, 2016

SEC Staff Updates Guidance on Use of Non-GAAP Financial Measures

On Tuesday May 17, 2016, the staff of the SEC’s Division of Corporation Finance issued new

C&DIs relating to Regulation G (which governs use of non-GAAP financial measures in public

disclosures generally) and Item 10(e) of Regulation S-K (which governs use of non-GAAP

financial measures in filings with the SEC and, in part, earnings releases).

These interpretations are the latest development in a recent resurgence of concern about the

misuse of non-GAAP financial measures reflected in statements by SEC Chair Mary Jo White

and members of the SEC staff as well as in prominent press articles. Companies should expect

an environment of additional scrutiny around non-GAAP measures, the potential for an increase

in SEC comments in this area and the possibility of future rulemaking. Given the current climate,

companies and audit committees should quickly familiarize themselves with the new guidance

and engage in a thorough review of their practices relating to use of non-GAAP measures.

New Guidance for Non-GAAP Measures in all Public Disclosures 1

This guidance applies to Regulation G. The new guidance under Regulation G includes the following

interpretations:

Some adjustments, while not expressly prohibited, may be misleading and violate Rule 100(b) of 2

Regulation G. The interpretation cites as an example presenting a performance measure that excludes normal,

recurring, cash operating expenses necessary to operate the business.

Non-GAAP measures may violate Rule 100(b) if presented inconsistently between periods. The

interpretation indicates that adjusting a charge or gain in the current period but not adjusting for similar charges

or gains in prior periods may be misleading unless the change is disclosed and the reasons for it explained.

1 Any company that has a class of securities registered under Section 12 of the Securities Exchange Act of 1934 or is required to file reports under

Section 15(d) of the Act must comply with Regulation G. Foreign private issuers are not excluded from the scope of Regulation G. By

interpretation, the Staff has also expressed an expectation that voluntary filers (such as debt-only issuers that continue to report due to covenant

obligations after their 15(d) obligations are suspended) should also comply.

2 Rule 100(b) states that “[a] registrant, or a person acting on its behalf, shall not make public a non-GAAP financial measure that, taken together

with the information accompanying that measure and any other accompanying discussion of that measure, contains an untrue statement of a

material fact or omits to state a material fact necessary in order to make the presentation of the non-GAAP financial measure, in light of the

circumstances under which it is presented, not misleading.

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Depending on the significance of the change, prior period measures may need to be conformed to the current

presentation.

Non-GAAP measures may violate Rule 100(b) if they exclude charges but not gains. The interpretation

cites as an example adjusting only for non-recurring charges when there were also non-recurring gains that

occurred during the same period.

Non-GAAP measures that substitute tailored revenue recognition and measurement methods may violate

Rule 100(b). The interpretation specifically rejects using a non-GAAP performance measure that is adjusted to

accelerate revenue recognized ratably over time under GAAP as though it was earned when customers are

billed. The interpretation also indicates that using non-GAAP measures that involve tailored recognition and

measurement methods for line items other than revenue may violate the Rule.

Reliance on Rule 100(b) as the basis for the Regulation G interpretations suggests a movement to a principles-

based analysis that may be difficult for companies to navigate and may force a more conservative approach to

some non-GAAP measures.

New Guidance for Non-GAAP Measures in SEC Filings and Earnings Press Releases

This guidance applies to Item 10(e)(1)(i) of Regulation S-K.3 The new guidance includes the following:

Equal Prominence Requirement. The interpretation most likely to require companies to reevaluate their

disclosure practices is the specific guidance given on the “equal prominence” requirement.4 The interpretation

provides the following examples where the Staff would consider the disclosure of a non-GAAP measure to be

more prominent (and therefore in violation of the rule):

Presenting a full income statement of non-GAAP measures or a full non-GAAP income statement when reconciling

non-GAAP measures to the most directly comparable GAAP measures

Omitting comparable GAAP measures from an earnings release headline or caption that includes non-GAAP

measures

Presenting a non-GAAP measure using a style that emphasizes the non-GAAP measure over the GAAP measure

(bold text or a larger font)

A non-GAAP measure that precedes the most directly comparable GAAP measure (including in an earnings release

headline)

3 While most earnings releases are “furnished” rather than “filed” with the SEC, instruction 2 to Item 2.02 of Form 8-K makes Regulation S-K Item

10(e)(1)(i) applicable to such earnings releases. Item 10(e)(1)(i) includes the equal prominence requirement, the requirement to present a

quantitative reconciliation to the most directly comparable GAAP measure, the requirement to disclose the reasons management thinks the non-

GAAP measure provides useful information for investors, and the requirement to disclose the other purposes, if any, for which management uses

the non-GAAP measure.

4 Regulation S-K Item 10(e)(1)(i)(A) requires a presentation, with equal or greater prominence, of the most directly comparable financial measure

or measures calculated and presented in accordance with GAAP.

3

Describing a non-GAAP measure as, for example, “record performance” or “exceptional” without at least an equally

prominent descriptive characterization of the comparable GAAP measure

Providing a table of non-GAAP measures without preceding it with an equally prominent table of comparable GAAP

measures or including them in the same table

Excluding a reconciliation with respect to a forward-looking non-GAAP measure in reliance on the “unreasonable

efforts” exception without identifying the information that is unavailable and its probable significance in a location of

equal or greater prominence

Providing discussion and analysis of a non-GAAP measure without a similar discussion and analysis of the

comparable GAAP measure in a location of equal or greater prominence

New Guidance for Non-GAAP Financial Measures in SEC Filings

This guidance applies to Item 10(e) of Regulation S-K. The new guidance includes the following interpretations:

Non-GAAP liquidity measures (even ones management presents solely as performance measures)

cannot be presented on a per share basis. Non-GAAP per share performance measures are permitted as they

may be meaningful from an operating standpoint. However, non-GAAP liquidity measures that measure cash

generated must not be presented on a per share basis in documents filed with or furnished to the SEC. Whether

per share data is prohibited depends on whether the non-GAAP measure can be used as a liquidity measure,

even if management presents it solely as a performance measure. The interpretations cite free cash flow, EBIT

and EBITDA as examples of non-GAAP measures that may not be presented on a per share basis.

Income tax effects on non-GAAP measures should be provided depending on the nature of the measures.

For a liquidity measure that includes income taxes, it might be acceptable to adjust GAAP taxes to show taxes

paid in cash. For a performance measure, current and deferred income tax expense should be included

commensurate with the non-GAAP measure of profitability. Adjustments to arrive at a non-GAAP measure

should not be presented “net of tax” but instead should be shown as a separate adjustment and clearly explained.

Next Steps for Companies

SEC registrants and voluntary filers should take note of the increasing scrutiny and public concern over non-GAAP

financial measures and take the following steps in light of the new SEC staff guidance:

Evaluate the non-GAAP measures the company uses in light of the Staff’s focus on Rule 100(b). Could any of

the measures presented be considered misleading based on the new Regulation G interpretations or by

analogy?

Review past practices with respect to the equal prominence rule, particularly in earnings releases, and consider

whether those practices are consistent with the specific examples in the new interpretation.

Review the new guidance with the disclosure committee. Review conclusions as to the company’s practices

relating to non-GAAP measures with the Audit Committee.

Review disclosure controls and procedures to ensure they adequately address the use and presentation of non-

GAAP financial measures.

For additional information, please contact one of the Shearman & Sterling attorneys below.

CONTACTS

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Copyright © 2016 Shearman & Sterling LLP. Shearman & Sterling LLP is a limited liability partnership organized under the laws of the State of Delaware, with an affiliated limited liability partnership organized for the practice of law in the United Kingdom and Italy and an affiliated partnership organized for the practice of law in Hong Kong. *Dr. Sultan Almasoud & Partners in association with Shearman & Sterling LLP





































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08/01/2017 5:21 PM

The LGBT Bar 2017 Lavender Law Conference – Finance Law Institute

Capital Markets Panel Speaker Profiles

Robert Ellison

Robert is a resident partner in Shearman & Sterling’s São Paulo office, focuses his practice on financings for non-US companies and cross-border M&A transactions. He speaks English, French, Italian, Portuguese and Spanish. Mr. Ellison, who joined Shearman & Sterling in 1994, was Managing Partner of the firm’s Rome office for six years and practiced in the Paris office for seven years, in addition to practicing in New York. He is ranked as a “leading lawyer” by both Chambers Guide to the Global Legal Profession and IFLR 1000 Americas – 2012 Edition, was named as a “Latin America Legal Star” in 2014 and 2012 by Latin Business Chronicle, and was listed as “first class” in Who’s Who Legal – Brazil 2010.

Christopher Lueking

Christopher is in his twenty-ninth year of practice with Latham & Watkins. Mr. Lueking’s practice focuses on corporate finance, securities and public and private company representation, including initial public, secondary, high yield bond and private securities offerings, and counseling companies on securities and corporate governance matters. He is Chair of the Industrials & Manufacturing Industry Group. Mr. Lueking's practice includes representation of issuers and investment banks in public offerings of equity and high yield debt as well as investors and issuers in venture capital transactions.

Isaac Osaki

Ike is general counsel for the Latin America region of Bank of America Merrill Lynch. In addition, Mr. Osaki is head of the legal team supporting the Global Rates and Currencies businesses, the regulatory reform and resolution planning efforts of Global Banking and Markets (GBAM), and the GBAM traded products Agreements and Documentation Group. Before assuming his current role, Mr. Osaki was the chief compliance officer of Global Wealth and Investment Management, composed of Merrill Lynch Wealth Management and U.S. Trust, co-chief compliance officer of Merrill Lynch, Pierce, Fenner & Smith Incorporated, and the head of Registration and Licensing. Mr. Osaki was formerly the general counsel of Merrill Lynch Wealth Management and prior to that, the head of the legal team supporting the fixed income origination businesses at Banc of America Securities, including debt capital markets, leveraged finance, structured finance, credit derivatives, principal finance, leasing, and asset-based lending. Mr. Osaki joined Banc of America Securities as assistant general counsel for Global Corporate and Investment Banking covering M&A advisory services and debt and equity capital markets. Prior to joining Banc of America Securities, Mr. Osaki was an associate at Cadwalader, Wickersham & Taft in its corporate group and before that, the corporate group of Locke Lord. Mr. Osaki is a graduate of Rice University and Columbia Law School. He is a member of the New York and Texas bars and is FINRA Series 7, 14, and 24 registered.

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Daniel Winterfeldt

Daniel is a partner in Reed Smith’s Financial Industry Group. Currently based in Reed Smith’s London office, Daniel’s practice focuses on representing U.S., UK, European and Asian investment banks and corporate issuers in a wide range of securities transactions, including Rule 144A and Regulation S equity and debt offerings; Category 3, Regulation S transactions for US companies listing in the United Kingdom; rights offerings; exchange offers; equity-linked securities offerings; initial public offerings and secondary and follow-on offerings of equity securities, including SEC-registered transactions. He also provides ongoing U.S. securities advice to the London Stock Exchange through the Forum for U.S. Securities Lawyers in London, which Daniel is the founder and co-chair.

Finance Law Institute: Capital Markets...

Documents

Transcript of Finance Law Institute: Capital Markets...