Appendix B — Best Practices for Working With the SEC Staff | DART

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Appendix B — Best Practices for Working With the SEC Staff

B.1 Managing Unresolved SEC Comment Letters

The best practices below are intended to help registrants resolve any staff comment letters in a timely manner. Unresolved comments may affect a registrant’s ability to issue financial statements and an auditor’s ability to issue the current-year audit report. In addition, when responding to staff comment letters, registrants should be mindful of their responses because all responses to staff comment letters are made publicly available and become part of a registrant’s “total mix of information” and disclosure records (i.e., investors may read such responses similarly to how they interpret a registrant’s other filings and publicly available information). A registrant should therefore do the following:

Review the comment letter immediately and respond to the SEC staff reviewer (named in the letter) within the time indicated in the comment letter (usually 10 business days). If possible, the registrant should not request an extension, since this may delay resolution of the comment letter. However, in certain circumstances, the registrant should consider requesting an extension to provide a more thorough and complete response that addresses all of the staff’s comments.
If the registrant does not fully understand any specific comment, it should contact its SEC staff reviewer quickly for clarification so that it can provide an appropriate response.
Consider the impact the comment letter may have on its ability to issue the financial statements.
Consult with its SEC legal counsel about the impact the comment letter may have on the certifications contained in its Form 10-K or Form 10-Q.
Consult with its auditors to discuss the impact the comment letter may have on their ability to issue the current-year audit report.
Include in the response a discussion of supporting authoritative accounting literature and references to the specific paragraph(s) from the standard(s).
Because some comments may request disclosure in future filings, the registrant should consider including such disclosure in the response letter to potentially eliminate additional requests from its SEC staff reviewer.
If an immaterial disclosure is requested, the registrant should consider explaining why the disclosure is immaterial instead of including the immaterial disclosure in future filings.
Maintain contact with its SEC staff reviewer and make the reviewer aware of the registrant’s required timing (on the basis of its current-year filing deadlines).
If the registrant has not received a follow-up letter or been contacted within two weeks of filing the initial response letter, the registrant should contact its SEC staff reviewer to determine the status of the comments. The registrant should promptly address any follow-up questions.
If the registrant is uncertain about whether its review has been completed without further comments, it should ask the SEC staff reviewer about the status of the review. If the review is complete, the registrant should ask the reviewer for a completion letter.

Further, at recent AICPA Conferences, the SEC provided the following additional recommendations and reminders for registrants to consider when communicating with the SEC staff during the comment letter process:

Just because the staff asks a question does not mean that it has reached a conclusion or that a change is required.
A registrant should not agree to include a disclosure in future filings solely to expedite the completion of a review.
If a registrant believes that a comment concerns an immaterial matter, the registrant should communicate that belief to the staff early in the review process.
A registrant should use caution when analogizing to other registrants’ fact patterns since a small difference in facts could make a meaningful difference in the response.
A registrant should ensure that the SEC staff is provided enough time to appropriately evaluate substantive new information during the review process.
Provide the staff with contact information for the responding company and its outside counsel.
Clearly and directly address all issues raised in the comments.
When calling the staff with an interpretive or procedural question, do not assume that the staff has all the facts. Responding registrants should do the appropriate research, provide sufficient background information, and present an analysis that points to relevant authoritative literature.
The scope of the staff’s review encompasses information beyond the review of specific filings to include other information, such as press releases, information on a registrant’s Web site, analyst calls, investor presentations, and other documents such as sustainability reports.

B.1.1 Oral Comments

In certain circumstances, the SEC staff may provide oral comments to a registrant instead of a written comment letter. At the 2018 AICPA Conference, Cicely LaMothe, then associate director of the Division, offered insight into the staff’s practice of providing oral comments. She noted that as the staff completes its review, it may reach out to registrants by phone to (1) facilitate the timely closure of an ongoing staff review, (2) address time-sensitive matters, or (3) discuss minor points of clarification.

The registrant should ask the SEC staff reviewer how he or she would like to receive the registrant’s response to the oral comments. If the reviewer requests a response via EDGAR, a registrant should respond with a written letter. If the reviewer requests an oral response or identifies no preference, a registrant should still, although it is not required to do so, consider responding to the staff’s comments with a letter to formally document the registrant’s understanding of the staff’s comments and the discussions held as well as the registrant’s response.

Separately, the SEC staff may also contact a registrant to discuss publicly reported significant events, such as a cyber breach affecting the registrant, before commencing a review or issuing any written comments.

B.1.2 Disclosure Requirements

Under the Securities Offering Reform, large accelerated filers, accelerated filers, and well-known seasoned issuers must disclose in their Forms 10-K the substance of any material unresolved SEC staff comments that were issued 180 or more days before the end of the current fiscal year.

B.2 Rule 3-13 Waivers and Other Requests

As stated in the FRM, the CF-OCA performs the following functions that may result in communications with companies and their advisers:1

“Acts on behalf of the Commission to grant relief under Rule 3-13 of Regulation S-X. The staff has authority, where consistent with investor protection, to permit registrants to omit, or substitute for, required financial statements.”
“Answers interpretive request letters and provides informal interpretive advice about the form and content of financial statements and other financial information required to be included in Commission filings.”
“Helps identify and explain the applicable rules, regulations, forms, and guidance that affect the form and content of financial statements and other financial information required to be included in Commission filings.”

B.2.1 Rule 3-13 Waivers

Rule 3-13 has historically given the staff the authority to permit the omission or substitution of certain financial statements otherwise required under Regulation S-X “where consistent with the protection of investors.” The SEC staff has recommended that when a registrant prepares a prefiling letter to request a waiver from the CF-OCA, the registrant should consider the following to facilitate a prompt response:

Be thorough and provide all relevant facts.
Propose solutions and adequate support for the proposals.
Include support related to why the waiver request is consistent with the protection of investors.
Show the letter to the registrant’s auditors and have them weigh in before sending it.
For requests related to acquisitions, provide the results of all significance tests, including the inputs used if the calculations are not straightforward.

The SEC staff has also indicated that it is available to discuss potential waiver fact patterns by phone in advance of a registrant’s submission of a written request.

Examples of waiver requests under Rule 3-13 include:

Omission of one or more years of historical financial statements for a recently acquired business that is subject to Regulation S-X, Rule 3-05.2
Omission of certain financial statements of an equity method investment that is subject to Regulation S-X, Rule 3-09.

While many of the SEC’s recent rulemaking activities (e.g., those that improve disclosures for business acquisitions) are intended to modernize the requirements and expected to reduce the number of waivers, registrants may still seek modifications to their reporting requirements under Rule 3-13 as the SEC staff continues to entertain those requests. Requests for relief under Rule 3-13 should be submitted by online form.

Separately, registrants may also be faced with complex accounting matters. Registrants are encouraged to submit a prefiling letter to the OCA on the proposed application of U.S. GAAP to resolve these complex issues before filing. For best practices related to consulting with the OCA, see the guidance on the SEC’s Web site.

B.2.2 Requests for Informal Interpretive Guidance

Registrants may reach out to the CF-OCA to seek informal interpretive guidance on a named or unnamed basis by e-mail, phone, or online form. Given the nature of the informal discussions, statements made by the staff are intended to be helpful but cannot be relied upon since they are not binding.

Footnotes

Page 2 of the FRM provides contact information for each of the respective CF-OCA functions listed.

Although a registrant may be granted relief from providing financial statements and related pro forma requirements in accordance with Rule 3-05 before consummating an acquisition, the registrant would still be required to file an Item 2.01 Form 8-K to disclose the completion of the acquisition. The waiver under Rule 3-13 applies only to the historical and pro forma financial statement requirements and does not provide relief from filing the Item 2.01 Form 8-K.