How to Answer an SEC Comment Letter

An SEC official provides some fundamental advice about handling queries from the regulator. An old-fashioned telephone conversation is at the top o...
Marie LeoneSeptember 23, 2009

The Securities and Exchange Commission is extending an invitation to public companies to “pick up the phone” and start a “dialogue” with its Division of Corporation Finance, says an SEC official. At an industry meeting held in New York last Friday, Steven Jacobs, an associate chief accountant with the division, told an audience of accounting experts that companies could do a lot to head off major accounting conflicts by simply becoming more engaged in the SEC financial-statement review process.

Speaking at a conference sponsored by the New York State Society of Certified Public Accountants, Jacobs laid out a list of what he called “tips” for dealing with SEC comment letters, which follow a financial-statement review if the regulator has questions about a company’s filings.

He said that too often, companies that receive a comment letter from the SEC rush to restate financial results without first discussing the matter with the reviewers. “We ask a question, and the next thing you know the company has restated,” said Jacobs. At the other end of the spectrum, “just giving a quick response” and providing a terse explanation of why the accounting is correct will likely trigger a second comment letter on the same subject, and may even raise SEC staffers’ suspicions, he added.

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“Don’t restate your financial statements right away” after receiving an SEC comment letter, Jacobs said, but rather, “take advantage of the opportunity [afforded by the review] to explain your accounting in sufficient detail to the SEC staff.”

“Sufficient” in this case means discussing the supporting authoritative accounting literature on which the company is relying, down to the paragraph within the standard. That’s something the company should provide in any comment letter response, and will put companies “in the best position for dealing with the staff,” Jacobs said. It will also likely speed the process and cut down on business interruptions associated with the comments, something many companies now complain about to the SEC.

Beyond complaining, there are a number of reasons why public companies should pick up the phone or otherwise respond quickly to an SEC comment letter. A prime one: when company accountants don’t understand what SEC staffers are looking for. It is not always easy to clearly articulate the full scope of a question or answer in writing, Jacobs opined, and a telephone conversation would assure that the issuer’s response addresses the staffs’ concerns.

Not being able to meet the response deadline — now 10 business days from the receipt of a letter — is also a good reason to call. “Pick up the phone and call the staff and set expectations,” said Jacobs, who admitted the deadline is tight and acknowledged staffers may extend it in some cases. “Everyone on the staff would rather get a more thorough and complete response that’s been through an appropriate level of review than to hear back within 10 days.”

SEC spokesman John Nester explained to that the staff asks for a response within 10 days to start the “conversation,” always keeping in mind that the commission must balance the goals of investor protection — namely, enhanced or revised disclosure — with a company’s need to provide a full response. Companies are asked to submit a letter in response to comments or an amendment to the filing under review, or with a phone call to tell the SEC when it can expect either, noted Nester, who added: “We use 10 days to ‘start’ the process.”

For letters that only ask the issuer to revise a disclosure in future filings rather than work through a restatement, Jacobs says it’s also a “good practice” to, in short order, acknowledge that you received the comment and provide a draft of the revised disclosure, or at least a template of what the disclosure may look like. In that way, the issuer can make sure the SEC staff is comfortable with the revision before it picks up the company’s next filing to review.

From an administrative perspective, the SEC wants to see comment letter correspondence on the public Edgar filing system. Confidential information can be redacted on publicly available filings, but the company must still give the staff a complete response, asserted Jacobs.

About 75% of the staff at the Division of Corporation Finance is dedicated to the filings review process. According to the Sarbanes-Oxley Act, the SEC must review the financial filings of publicly traded companies at least once every three years. In 2008 the regulator scrutinized the filings of nearly 5,000 issuers, or 38% of the public companies in the country, up from 33% and 36% for 2006 and 2007, respectively.

Last year it took the SEC 25.2 days, on average, to review and comment — when necessary — on registration statements. For reviews of annual Form 10-Ks, the waiting period is much longer. Comments on 10-Ks are sent back to the company any time between the filing date and the end of its next fiscal year.