The SEC Division of Corporation Finance recently provided guidance on its filing review and comment letter process. For reporting companies and those professionals serving them that are not familiar with the review and comment letter process, the guidance provides a useful summary of not only the process, but also the Division of Corporation Finance’s views of the purposes of the review and comment letter process. The following is a summary of the guidance provided.

The Division of Corporation Finance selectively reviews filings made under the Securities Act of 1933 and the Exchange Act to monitor and enhance compliance with applicable accounting and disclosure requirements. Section 408 of the Sarbanes-Oxley Act of 2002, “Enhanced Review of Periodic Disclosures by Issuers”, requires the SEC to review disclosures made by reporting companies that have a class of securities traded on a national securities exchange or traded on an automated quotation system of a national securities association on a regular and systematic basis. Under Section 408, the SEC must review each reporting company at least once every three years.

For purposes of scheduling reviews, Section 408 requires the SEC to consider a number of factors, including whether the company: (i) has issued a material restatement of financial results; (ii) has experienced significant volatility in its stock price as compared to other issuers; (iii) has a large market capitalization; (iv) is an emerging company that has had a significant disparity in its price to earnings ratio; and (v) has operations that significantly affect any material sector of the economy. The SEC may also consider other factors it considers relevant.

The scope of the SEC’s review varies. The level of review may be:

  • a full, cover-to-cover review of the applicable filing in which the Division staff reviews the entire filing for compliance with applicable federal securities laws and regulations;
  • a financial statement review in which the staff examines financial statements and related disclosure, such as Management’s Discussion and Analysis of Financial Condition and Results of Operations, for compliance with applicable accounting standards and federal securities laws and regulations; or 
  • a targeted issue review in which the staff examines the filing for one or more specific items of disclosure for compliance with applicable accounting standards and/or the disclosure requirements of the federal securities laws and regulations.

The Division of Corporation Finance performs its primary review function through twelve offices staffed mostly with accountants and lawyers. Each of the twelve offices focuses on particular industries and has specialized industry, accounting and disclosure expertise. Much of the Division of Corporation Finance’s review involves evaluating disclosure from a potential investor’s perspective and asking questions that an investor might ask when reviewing the document. When the staff identifies areas where it believes a company can improve its disclosure or enhance its compliance with applicable disclosure requirements, it provides comments to the company. Typically, the comments are issued via written correspondence to the filing company known as a “comment letter.” Importantly, in addition to a first level examiner, in nearly all cases, a second person reviews a filing and proposed comments (a “reviewer”). This second-level review process helps achieve consistency in comments across filing reviews. Many reviews do not result in the issuance of any comments.

In its comments, the staff may request that a company provide additional or different disclosure in documents already filed with the SEC, or in future filings. As discussed in previous Comment Letter Trends columns, the staff will review not only a company’s filings, but also other publicly available information, such as press releases, earnings calls archives, and company web sites.

The Division of Corporation Finance views the comment process as a dialogue with the company about its disclosure. As the Division of Corporation Finance’s guidance makes clear, companies should not hesitate to request the staff to clarify or reconsider a comment or a staff member’s view of the company’s response to a comment at any point in the review process. The Division of Corporation Finance does not require that any formal protocol be followed in consulting with the staff when seeking reconsideration. However, the guidance does suggest that a company first contact the individual staff member that reviewed the company’s filings. If a satisfactory resolution is not reached and a company wishes to seek more senior-level reconsideration of a matter, the guidance suggests that the company should then contact the Legal Branch Chief in the applicable Assistant Director Office and then proceed to the Assistant Director, Associate Director and finally the Deputy Director or Director.

With respect to accounting and financial disclosure matters, the guidance suggests that after discussion with the examiner, a company may wish to speak with the Accounting Branch Chief in the applicable Assistant Director Office. Thereafter, the company may wish to contact the Senior Assistant Chief Accountant for the applicable Assistant Director Officer and then the Associate Chief Accountant for that office and then the Division’s Chief Accountant. The guidance also suggests that the company should feel free to involve the SEC’s Office of the Chief Accountant (distinct from the Division’s Office of Chief Accountant) at any stage in the review process. Generally, the SEC’s Office of the Chief Accountant addresses questions concerning the application of GAAP and the Division’s Office of Chief Accountant addresses concerns regarding the age, form and content of financial statements. The Commission’s Office of the Chief Accountant has issued its own guidance with respect to the review process.

When the Division of Corporation Finance completes its review process with respect to a company’s filing or filings, it makes publicly available its comment letters and the company’s response letters via EDGAR. The Division makes the correspondence available no earlier than 20 business days after it has completed its review or declared a registration statement effective. In making correspondence publicly available, the Division redacts any information subject to a confidential treatment request without evaluating the substance of the confidential treatment request. If, however, a request is made for that redacted information, the Division will then undertake a substantive review of the confidential treatment request.

For those that are new to the review and comment process, reviewing the Division’s guidance as well at the Office of the Chief Accountant’s Guidance will provide a useful guide with respect to the SEC process. For those more seasoned, the guidance is a useful resource to refresh your understanding of the process and to provide the names of individuals at the Division of Corporation Finance you may wish to contact during the review process.