SEC Comment Letter Process Insights
The SEC is required to review the filings of public companies at least once every three years, with many companies selected for review more frequently. Comments from those reviews are largely based on a registrant’s disclosures and other publicly available information, including press releases, analyst calls and information on the registrant’s website. However, non-public information such as whistleblower tips and PCAOB inspection reports can also be considered.
When issuing comments, the SEC staff (the “staff”) may request internal documentation, including calculations, to support the disclosure. The staff may also request modified or incremental disclosures in a future filing or for the company to revise the disclosure in a previous filing via an amendment. Multiple rounds of comments from the staff may be required before the issues identified are clarified or resolved.
The SEC provided some practical insights and highlighted best practices in the comment letter process at the recent 2018 AICPA Conference on Current SEC and PCAOB Developments:
- Assess materiality – Management should assess and address materiality early in the comment letter process. If management believes the comment is related to a matter that is immaterial to the company, addressing this upfront with the staff is appropriate and will ensure all parties are using their time and resources most effectively.
- Clarify with the SEC staff – Asking clarifying questions to the staff regarding their comments is an important step in the process that ensures management is appropriately addressing the matter.
- Address the question – Management should not be selective in their response to addressing the comment. A thorough and thoughtful response is the best way to limit subsequent requests and minimize the comment letter process timeline. An appropriate response includes an analysis of the authoritative literature and does not place undue reliance on responses from other companies on similar issues.
- Advocate for your disclosure – Just as it is important to clearly understand the staff’s comment, it is equally important to ensure the staff understands the rationale for the current disclosure. The staff do not have access to all the information regarding the company that management does. At times, an explanation of the rationale for the disclosure will provide appropriate context and detail to the staff in order to conclude that the current disclosure is appropriate. Conversely, companies should not revise disclosures solely to resolve comments if management believes the current disclosure is appropriate and supportable.
- Take the time to respond appropriately – Although the comment letter will typically request a response in 10 business days, a thorough response is preferred and a request for more time is acceptable.
- Consider pending filings – A company may receive a comment letter while preparing an upcoming filing. If possible, management should address the comment within their existing filing timeline if the comment is relatively minor. However, when the comment is more substantial, requesting more time from the staff to appropriately analyze and consider the response is acceptable. As such, the comment will not be addressed in the upcoming filing.
- Ask for follow up – Communication with the SEC is not always written. At times, the staff may call the registrant in connection with an ongoing review where a written comment letter has not yet been sent or if there is a time sensitive matter impacting the business, such as relevant current events. If management receives a call and believes the staff’s question is more than a request for minor clarification, they should request a follow-up call with all key stakeholders, including accounting and finance leaders and legal counsel. When making this request, management should explain that a more robust discussion with the individuals who have the requested information would make for a more meaningful discussion. Finally, do not hesitate to request clarification of the staff’s comment or to have the comment repeated so that it can be written word for word.
Considering these insights and tips will help ensure an efficient and successful comment letter process. When a company has sufficiently addressed and resolved all comments, the SEC will send the company a letter to confirm that its review is complete.