SEC Comment Letter Considerations, Including Industry Insights

The topics that constitute the current year’s top 10 list are largely consistent with the prior year’s list. However, the topic of income taxes and that of intangible assets and goodwill have joined the top 10 list, while the topic of signatures, exhibits, and agreements and that of debt have dropped out of the top 10.2 Comments on MD&A and non-GAAP measure disclosures continue to increase in number, and these topics are still the two most significant sources of SEC comments by a wide margin since the staff remains laser-focused on them. Given the SEC staff’s focus on ensuring that disclosures provide decision-useful information from management’s perspective, we expect the volume of comments on MD&A to remain high. We also observed an increased number of comments related to intangible assets and goodwill, which rose from 11th place in 2023 to 6th place in 2024 because of an increase in comments asking for expanded “early-warning” disclosures about potential impairments. In addition, income taxes moved up five spots to 10th place because of an increase in comments on tax-related disclosures required by ASC 740.

Further, although not identified as a separate top 10 topic, the impacts of higher interest rates, inflation, and supply-chain issues remained a source of SEC comments over the past year. Such comments have focused on disclosures related to the effects of these macroeconomic and geopolitical challenges on a registrant’s (1) risk factors, (2) MD&A, (3) market risk disclosures, (4) early-warning disclosures about impairments, and (5) adjustments to non-GAAP measures. At a recent conference, the SEC staff has advised registrants that as inflation and interest rates moderate, its equally important to provide transparent, company-specific disclosures about such trends so that investors can understand how and when companies are affected by these changing macroeconomic factors.

Further, although not identified as a separate top 10 topic, the impacts of higher interest rates, inflation, supply-chain issues, COVID-19, and the Russia-Ukraine war remained a source of SEC comments over the past year. Such comments have focused on disclosures related to the effects of these macroeconomic and geopolitical challenges on a registrant’s (1) risk factors, (2) MD&A, (3) early-warning disclosures about impairments, and (4) adjustments to non-GAAP measures.

A number of the aforementioned trends are likely to continue in years to come since comment letter topics have been largely consistent year over year. 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. The SEC staff has spoken extensively about disclosures related to AI, and we expect the staff to comment on such disclosures in future reviews. Given that the staff often focuses on compliance with new reporting requirements, we expect to see comments on new disclosures required under U.S. GAAP about supplier finance programs and segment reporting, as well as comments on new cybersecurity disclosures required under SEC regulations. In addition, we expect the SEC staff to continue monitoring the impacts of interest rates, inflation, geopolitical conflicts, and concerns about the commercial real estate market, and perhaps focus future comments on accounting and reporting related to these matters. These events, coupled with the staff’s focus on ensuring that MD&A provides useful information to investors, mean that comments on MD&A are likely to remain elevated.

As the charts above illustrate, while there was a notable decline in the number of reviews with comment letters and the number of comment letters issued on Forms 10-K and 10-Q from the beginning of review year 2020 through the end of review year 2021, the trend started to reverse in review year 2022, with a substantial increase in review year 2023. While down slightly from the prior year in both reviews with comment letters (an 8 percent decrease from the prior year) and the overall number of comment letters (an 8 percent decrease from the prior year), the volume of reviews and comment letters in review year 2024 represents an increase of more than 50 percent over the average seen from the beginning of review year 2020 through the end of review year 2022. We expect comment letter activity to remain elevated for the following reasons:

• Increase in the number of public companies — Throughout calendar years 2020 and 2021, the volume of traditional IPOs and SPAC transactions reached record levels, with more than 800 companies going public during this time frame. Consequently, there was an increase in the number of Forms 10-K filed by public companies, which are subject to recurring SEC staff review. With more public companies subject to review, we expect a higher level of comment letter activity than in past years.
• 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. This trend shows no signs of stopping, especially with the transformational impacts of AI affecting business worldwide. The SEC staff often issues comments on the impacts of emerging market events to request expanded disclosures aimed at providing decision-useful information and greater transparency to investors.

Although the number of reviews with comment letters remains elevated, the vast majority of reviews conducted by the SEC do not result in a comment letter. In the SEC’s fiscal year ended September 30, 2023, the SEC staff reviewed approximately 3,300 companies as part of the annual review process. However, only about 25 percent of the reviews of those companies resulted in a comment letter.