The staff in the SEC’s Division of Corporation Finance (CorpFin) has a long history of reviewing filings made under the Securities Act of 1933 and the Securities Exchange Act of 1934. The intent of the review is to monitor and enhance compliance with applicable disclosure and accounting requirements.
Until Sarbanes-Oxley, these reviews were periodic and not subject to specific intervals. Section 408 of the Sarbanes-Oxley Act requires the SEC to review companies who issue Exchange Act reports at least once every three years, with many companies being reviewed more frequently. In addition to the scheduled reviews, the SEC staff also conducts targeted reviews.
CorpFin does not publicly disclose the criteria it uses to select companies and filings for review, but Section 408 asks the SEC to consider the following selection criteria:
Once a company's filing is selected, the extent of the review may be (1) a full cover-to-cover review, (2) a review of the financial statements and related disclosures (e.g., MD&A), or (3) a targeted review of one or more specific items of disclosure. The identified reviewer of the filing concentrates on critical disclosures that appear to conflict with SEC rules or the applicable accounting standards and on disclosures that appear to be materially deficient in explanation or clarity. The reviewer evaluates the disclosure from a potential investor’s perspective and asks questions that an investor might ask when reading the document.
CorpFin performs its reviews through 11 Assistant Director (AD) offices organized based on specialized industry, accounting, and disclosure expertise. A registrant’s AD assignment is shown in EDGAR following the basic company information that precedes the company’s filing history. This organizational structure can sometimes explain why multiple companies in the same industry receive very similar comments around the same time.
Comments are based primarily on a company’s disclosure and other public information, such as information on the company’s website, in press releases, or discussed on analyst calls. Nonpublic information, such as whistleblower tips and PCAOB inspection reports, can also be a source of comments. Comments reflect the SEC staff’s understanding of the applicable facts and circumstances. In comments, the SEC staff may request that a company provide additional supplemental information so that they can better understand the company’s disclosure, or may ask that the company provide additional or different disclosure in a future filing or change the accounting and/or revise the disclosure by filing an amendment.
When responding to the SEC staff, keep these best practices in mind:
The company or its representatives should feel free to involve the SEC’s Office of the Chief Accountant (OCA) (distinct from CorpFin's Office of the Chief Accountant) at any stage in this process. Generally, OCA addresses questions concerning the application of GAAP while CorpFin resolves matters concerning the age, form, and content of financial statements required to be included in a filing.
When a company has resolved all comments on an Exchange Act registration statement, a periodic or current report, or a preliminary proxy statement, CorpFin provides the company with a letter to confirm that its review of the filing is complete.
When a company has resolved all comments on a Securities Act registration statement, the company may request that the SEC declare the registration statement effective so that it can proceed with the transaction.
A more detailed discussion of the filing review process used by the Division of Corporation Finance can be found on the SEC's website at: http://www.sec.gov/divisions/corpfin/cffilingreview.htm