The comment letter process
The SEC Filing Review Process
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:
- Issuers with material restatements of financial results;
- Issuers that experience significant volatility in their stock price as compared to other issuers;
- Issuers with the largest market capitalization;
- Emerging companies with disparities in price to earnings ratios;
- Issuers whose operations significantly affect any material sector of the economy; and
- Any other factor that the SEC may consider relevant.
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.
Responding to SEC comment letters
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:
- Own the process—Companies should leverage the knowledge and experience of their auditors and SEC counsel, but it’s important to maintain ownership. As with any project, there should be a clear owner and project manager coordinating the input from various sources and developing a response.
- Don't rush—Companies should evaluate how long they believe it will take to respond. Although the letter from the SEC staff will request a response in 10 business days, it is acceptable for management (usually through their counsel's call to the SEC staff) to request more time if 10 days is not sufficient. A thoughtful and complete response is better than a quick reply.
- Think about future filings—Companies should discuss letters received before they plan to file a registration statement with their auditors and counsel to determine if there are any implications on the content and timing of the registration statement. Questions about timing can also be discussed with the SEC staff as well as the possibility of an expedited review of the company's response.
- Ask the SEC staff—Companies can call the SEC staff if they do not understand the comment. The objective should not be for the company to explain their position, but to gain clarification when a comment or aspect of the comment is unclear.
- Remember that comments become public—Comments become part of the public domain once submitted and resolved. Comments and the related responses are posted to the SEC's website no earlier than 20 days after the review is completed or the registration statement is declared effective. Even those comment letters related to Emerging Growth Companies that have filed registration statements confidentially are eventually made public. CorpFin will redact any information subject to a Company's Rule 83 confidential treatment request without evaluating the substance of that request.
- Don't rely solely on precedent—The use of previous comments and responses of other companies may be helpful in responding but should not be the primary basis of the response. Each comment is based on specific facts and circumstances and may involve different levels of materiality. Accordingly, the reason the SEC staff accepted a response for one company may not be applicable in another situation. Make sure the response is appropriate based on the company’s specific facts and applicable accounting literature.
- Address the intent of the question—Consider, if possible, the objective of the comment. Sometimes providing a complete answer that addresses the intent of the question can reduce the likelihood that the SEC staff will ask follow-up questions on the same comment.
- Provide planned disclosures—Many comments will request additional disclosure in future filings. To ensure there is a meeting of the minds, provide the SEC staff with a draft of the applicable disclosure in the response, even if the data used is from a prior period. This will allow the SEC staff to assess whether the proposed disclosure sufficiently addresses their comment and may prevent future comments on the same disclosure.
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.
Closing a filing review
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
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