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The SEC brought a settled enforcement action against ADT Inc. because it did not afford equal or greater prominence to comparable GAAP financial measures in two of its earnings releases containing non-GAAP financial measures – ADT’s Q4 2017 and Fiscal Year 2017 Earnings Release dated and furnished to the Commission on March 15, 2018 (the “FY 2017 Earnings Release”) and ADT’s Q1 2018 Earning Release dated and furnished to the Commission on May 9, 2018 (the “Q1 2018 Earnings Release”).

As alleged by the SEC, ADT did not comply with the rules. But it raises the troubling inference that the SEC is going to ratchet up compliance issues with the non-GAAP rules to enforcement level activity.  ADT has a relatively short history as a public reporting company, and it is somewhat surprising, without knowing more, that an enforcement action resulted without a warning in a comment letter.  There is no way to draw a line between what happened to ADT and perhaps other more technical foot faults on the non-GAAP rules, so issuers should procced with caution and in full compliance with the rules. ADT agreed to pay a civil monetary penalty of $100,000.

Turning back to the details, in the headline of the FY 2017 Earnings Release, ADT presented its adjusted EBITDA for fiscal year 2017 and stated that adjusted EBITDA was up 8% year-over-year, without mentioning ADT’s net income or loss (the comparable GAAP financial measure) in the headline.

Amongst other things, In the headline of the Q1 2018 Earnings Release, ADT presented its adjusted EBITDA (a non-GAAP financial measure) for the first quarter of 2018 and stated that adjusted EBITDA was up 7% year-over-year, without mentioning ADT’s net income or loss (the comparable GAAP financial measure) in the headline.

As many know, Item 10(e)(1)(i)(A) of Regulation S-K provides that an issuer, when including a non-GAAP financial measure in a filing with the Commission, must include a presentation, with equal or greater prominence, of the most directly comparable financial measure or measures calculated and presented in accordance with GAAP. Instruction 1 of Item 2.02 of Form 8-K states that the “requirements of this Item 2.02 are triggered by the disclosure of material non-public information regarding a completed fiscal year or quarter. Release of additional or updated material non-public information regarding a completed fiscal year or quarter would trigger an additional Item 2.02 requirement.” Instruction 2 of Item 2.02 of Form 8-K states that the “requirements of paragraph (e)(1)(i) of Item 10 of Regulation S-K (17 CFR 229.10(e)(1)(i)) shall apply to disclosures under this Item 2.02.”

ADT did not admit nor deny the findings in the SEC order.