Current and former officials from the SEC’s Division of Corporation Finance offered their views on the SEC’s comment letters on issuer filings at the AICPA’s Annual Conference on Current SEC and PCAOB Developments. Former Corp Fin director Brian Lane, now with Gibson Dunn, noted that the makeup of the staff has changed since he left in 1999. During his tenure, the vast majority of the staff consisted of attorneys, but there has been a big shift to accountants since then, he observed.
Review of outside information. Christine Davine of Deloitte & Touche, who moderated the panel, noted that more comment letters have been referring to information in company press releases or on a company website and inquired as to how the staff considers that information in the review process. Associate Director Kyle Moffatt, who will take over the role of acting chief accountant when the Division’s current chief accountant, Mark Kronforst, departs in January, says that the Division takes a number of things into account, including company websites, investor slides, what analysts are saying, and what goes on in the industry itself. If necessary, he said, the staff will request more details or insight on items to be considered for disclosure.
Lane said that some of his clients have received comments where the SEC staff had reviewed an investor presentation. These clients might try to tell him that the information in the investor presentation isn’t important, but he noted that during the presentation itself, the client “made it sound like the second coming.” He urged issuers to be very mindful of these investor presentations because they are fertile ground for SEC staff to review.
Process. Lori Locke, who served at CorpFin and is currently VP and corporate controller at Gannett, was asked what happens when her company receives an SEC comment letter. Locke explained that they will assemble a working group who will assess the time it will take to complete the review, look at the nature of the comment, and put together a schedule. She warned that formulating a response to a comment letter takes longer than one might think, but she also advised that if an extension is needed, the company can contact the SEC staff. A one or two week extension is fine, she said, but a month extension is probably too long. She also recommended pulling together contemporaneous documentation to make it easier and faster to respond to the SEC’s comments.
When asked why the average number of comment letters received and the number of comments per review have gone down, Lane said that experience is a good teacher. There have been fewer IPOs recently, resulting in a more mature collection of public companies that have gone through the process and know what to do, he said.
Communicating with staff. Locke said that when it comes to communicating with SEC staff, the first time to reach out is to seek clarification. Issuers should also contact the staff if they want to provide additional context to the filings that were reviewed. Locke advised that anything told to the staff over the phone should be put in writing as well.
Davine inquired when a client should request a face-to-face meeting with the SEC rather than communicating over the phone. Lane said that there are practical reasons that the staff prefers phone calls, such as bringing in people who work remotely. However, in-person conferences may be useful for situations such as a pre-IPO or if it is something really important, such as discussing a new segment.
Moffatt assured that the staff is always willing to listen. Counsel should let the staff know if they feel they’re not being heard, or if they want to appeal, or if they want others involved, he said.
Non-GAAP and MD&A. Davine noted that management discussion and analysis (MD&A) has historically been the top area for SEC comments, but it has been supplanted by comments on non-GAAP measures this year. According to Moffatt, companies have been doing a good job of complying with the revised Compliance & Disclosure Interpretations (C&DIs) on non-GAAP financial measures issued in May 2016, so for the most part, these staff comments are in clean-up mode. However, the staff will continue to monitor these kinds of disclosures, he advised, noting that the staff does look outside the filings to statements like earnings releases.
When asked about what kinds of issues registrants should focus on in MD&A, Lane pointed to the recent efforts to reform the tax code. Issuers should take into account how taxes might affect business and if the impact of any legislation should be disclosed in the company’s risk factors.