Risk & Compliance

SEC Likes Its Own Plain English

An attorney's review of SEC comments on public filings demonstrates that regulators don't like their own wording tinkered with.
Tim ReasonJuly 14, 2006

Two years ago, the Securities and Exchange Commission began publicly releasing letters its staff writes to public companies when they have a comment — typically an objection of some kind — on the company’s public filing. A recent review of comments made about company 10Q filings suggests a consistent trend: the SEC doesn’t like it when corporate attorneys change the commission’s wording.

The review, conducted by Steve Quinlivan and Jill Radloff of Minneapolis law firm Leonard, Street and Deinard, was aimed at attorneys and did not examine the comments for trends in how the SEC’s staff responded to accounting or footnote disclosures. It did, however, look at the sorts of things — such as the language of the filing — that a company’s general counsel might change, and that might cause a filing to run afoul of SEC staffers. The review was recently highlighted on a popular blog for corporate attorneys at www.thecorporatecounsel.net.

It will come as no surprise to most finance executives that the SEC was quick to comment if a company used a non-GAAP financial measure without properly reconciling it to GAAP — that’s a clear violation of Reg G. Beyond that, however, there were many comments that focused not on the numbers, but on the words.

For example, the SEC was careful to note that its comments for one filing also applied to others. Most companies spend their time and energy on their annual report, notes Quinlivan. “You file your 10K, and then your 10Qs throughout the year follow the same form — why rethink all that brain damage?” he asks. Why indeed? The SEC reviews typically included a long letter referring to the company’s 10K, followed by multiple short comments noting that changes the staff wanted made in the 10K MD&A should also be included in the 10Q. “A lot of comments would basically say that [the company] should go back and clean up the 10Q in the same manner as the 10K,” says Quinlivan.

By far, however, the largest number of comments over language stemmed from items 307 and 308(c) of Regulation S-K, which were promulgated in response to the Sarbanes-Oxley Act. Companies are painfully aware of Section 404 of Sarbanes-Oxley, which requires that they attest to the adequacy of their internal controls over financial reporting on an annual basis. Similarly, Section 307 of regulation S-K requires the CEO and CFO to disclose their conclusions — quarterly — regarding the effectiveness of disclosure controls and procedures. Section 308(c) requires them to make quarterly disclosures of “any change in internal control over financial reporting.”

“The SEC requires strict adherence to the particularities of 307,” Quinlivan and Radloff note in their report. Attempts to shorten the SEC’s written definition of disclosure controls and procedures frequently drew comments from SEC staff.

Likewise, in Section 308(c), companies ran into trouble if they wrote “no significant changes” instead of the SEC’s “any change.” That slight difference in semantics could, of course, be seen as an effort to slip changes past investors. But the SEC also objected to companies that, for example, substituted the phrase “timely alert” for the SEC’s phrase “to allow timely decisions regarding disclosure.”

“The SEC has this plain English idea,” says Quinlivan, referring to the commission’s recent emphasis on requiring company filings to be clearly written in simple terms. But, he says, companies that tried to simplify the SEC’s own definition of Section 307 or Section 308(c) — or reword them in any fashion — typically received a comment letter objecting to the change. “You’re damned if you do and damned if you don’t,” he says.