On the Radar
SEC Comment Letter Considerations, Including
The global business landscape has been changing rapidly, with the COVID-19 pandemic, Russia’s invasion of Ukraine, supply-chain and labor issues, inflation, and rising interest rates affecting markets worldwide over the past year. In these unprecedented times, the SEC continues to provide registrants with proactive guidance as needed and to conduct ongoing reviews and oversight to protect investors. To help the SEC meet its responsibilities under the Sarbanes-Oxley Act, the SEC’s Division of Corporation Finance (the “Division”) continues to selectively review documents filed by registrants under the Securities Act of 1933 and the Securities Exchange Act of 1934. Under the Division’s filing review process, the Division performs some level of review of each registrant at least once every three years and may issue comments to such registrants. The analysis herein summarizes the comments the Division issued during its reviews of periodic filings of public companies.
Top 10 Topics in Reviews
The table below summarizes comment letter trends by topic in the 12-month period ended July 31, 2022 (“review year 2022” or the “current year”).
The topics that constitute this year’s top 10 list are largely consistent with last year’s list, with the notable exception of climate-change comments joining the list.1 The topics of MD&A and non-GAAP measure disclosures remain the two most significant sources of SEC staff comments since the staff remains laser-focused on them. Given the recent amendments to the rules governing MD&A, we expect comments on this topic to remain high. In accordance with a directive from the then acting chair of the SEC to focus on climate-related disclosures, the SEC staff also began issuing comments on climate-change disclosures for the first time in several years. We also observed an increased number of comments related to acquisitions, mergers, and business combinations following a rise in merger and acquisition activity over the past several years. Although not identified among the top 10 topics, COVID-19 and the Russia-Ukraine war have been the source of various SEC staff comments issued over the past year, many of which have focused on disclosures related to (1) risk factors, (2) MD&A, (3) early-warning disclosures related to impairments, and (4) adjustments to non-GAAP measures.
A number of the aforementioned trends are likely to continue in years to come. While it is difficult to predict what new comment letter trends are on the horizon, we look to the Commission’s priorities to help us predict topics of focus in the coming year. Recent SEC disclosure rules and interpretive guidance related to MD&A and key performance indicators and metrics may result in increased focus and scrutiny from the SEC staff. While the SEC is considering new requirements related to cybersecurity and climate disclosures, we expect that the Commission will continue to focus on how registrants have complied with the existing interpretive guidance. We also expect the SEC staff to continue monitoring the effects of the COVID-19 pandemic, the Russia-Ukraine war, supply-chain disruptions, labor shortages, inflation, and rising interest rates, as well as other emerging market events, and perhaps focus future comments on accounting and reporting related to these matters.
Long-Term Review Trends
Here’s how the numbers have played out over the past five years:
As the chart above illustrates, while there has been a notable decline in the number of reviews with comment letters over the past several years, that trend reversed in review year 2022. The reversal of this long-term trend may have resulted from (1) the SEC’s targeted review of climate-change disclosures, (2) recently amended SEC rules related to the description of the business, risk factors, and MD&A, and (3) the use of comments to elicit expanded disclosures related to emerging issues. Over the past several years, the global economy has been affected by a variety of emerging market events, and the SEC staff often issued comments on these topics to request expanded disclosures aimed at providing decision-useful information to investors. We expect these factors to affect the volume of comments next year as well. In addition, we expect the number of comments to grow next year because of a rise in the number of public companies over the past several years, which is largely attributable to increased transaction activity related to traditional initial public offerings (IPOs) and special-purpose acquisition companies (SPACs)2 in 2020 and 2021.
The SEC continues to prioritize reviews of larger companies, with large accelerated filers representing 61 percent of the reviews with comment letters in the current year even though they represented only 31 percent of the Forms 10-K filed. In addition, during the current year, approximately 50 percent of reviews with comment letters were for registrants generating $1 billion or more of revenue, although these larger registrants represented only 22 percent of the Forms 10-K filed.
Priorities on the Horizon
Broader SEC priorities often influence comment letter trends. As registrants start to prepare for the 2022 annual reporting cycle, they may find it helpful to consider the following SEC priorities:
For a comprehensive discussion of comment letter trends affecting SEC filers, see Deloitte’s Roadmap SEC Comment Letter Considerations, Including Industry Insights.
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Unless noted otherwise, comment letter trend information in the 2022 edition of this publication:
Was derived from data provided by Audit Analytics.
Is related to reviews conducted by the Division of Forms 10-K, 10-K/A, 10-Q, and 10-Q/A (which are referred to generally as “filings”).
Is based on SEC uploads (i.e., comment letters that the SEC issued to registrants) and does not include registrant responses.
Does not include the SEC’s “closing letter” communicating that its review is complete.
Includes only information related to reviews that have been closed and subsequently posted to EDGAR. Accordingly, the statistics presented may be affected by reviews that are still ongoing or have recently been closed.
Pertains to 12-month periods ended July 31 (“review years”).
May be different upon comparisons with the 2021 edition of this publication because additional 2021 reviews were closed and posted to EDGAR after that edition was issued. Information in this publication is based on comment letters that were closed (i.e., the SEC issued a closing letter to the registrant) within the corresponding 12-month period ended July 31.
A SPAC is a newly formed company that raises cash in an IPO and uses that cash, the equity of the SPAC, or both to fund the acquisition of a private operating company.
Sample Letter to Companies Regarding Climate Change Disclosures.