Responding To SEC Comments
The SEC Division of Corporation Finance, referred to as “CorpFin” in the industry, reviews and comments upon filings made under the Securities Act of 1933 such as S-1 and S-3 registration statements and the Securities Exchange Act of 1934 such as quarterly reports on Form 10-Q, annual reports on Form 10-K and periodic 8-K filings. The purpose of a review by CorpFin is to ensure compliance with the disclosure requirements under the federal securities laws, including Regulation S-K and Regulation S-X, and to assist in enhancing such disclosures as to each particular company. CorpFin’s primary objective really is to improve disclosure which is thought to be the foundation of protecting investors.
CorpFin also monitors for violations of the anti-fraud provisions of the federal securities laws and may refer a matter to the Division of Enforcement where they have material concerns over the adequacy and accuracy of reported information or other potential securities law violations. CorpFin maintains an Office of Enforcement Liaison to make such referrals.
CorpFin selectively reviews filings, although generally all first-time filings, such as an S-1 for an initial public offering or Form 10 registration under the Exchange Act, are fully reviewed. Forms 8-K reporting a change of auditor, a material acquisition, or a change in financial statements are almost always reviewed. Also, the Sarbanes-Oxley Act of 2002 requires that CorpFin review all public companies at least once every three years.
Although the Sarbanes-Oxley Act specifies certain factors that the SEC should consider when scheduling reviews, such market capitalization, financial restatements, volatility of the company’s stock price and the price/earnings ratio, CorpFin does not publicly disclose the criteria it uses to identify companies and filings for review. For a publicly reporting company, it is important to remember that your filings may be reviewed at any time and periodic comment letters are a standard part of being public. There are three basic levels of review: 1) a “full review” in which a filing will be reviewed from cover to cover, including both legal and accounting aspects and format for compliance with the federal securities laws; 2) A partial review which may include either legal or accounting, but generally a partial review is related to financial statements and related disclosures, including MD&A; or 3) A targeted review in which CorpFin will examine the filing for one or more specific items of disclosure. Although not a designated level of review, CorpFin sometimes “monitors” a filing, which is a term used for a light review.
Reviewers are appointed files based on industry sectors. CorpFin has broken down its reviewers into eleven broad industry sectors: healthcare and insurance; consumer products; information technologies and services; natural resources; transportation and leisure; manufacturing and construction; financial services; real estate and commodities; beverages, apparel and mining; electronics and machinery and telecommunications. Each industry office is staffed with an assistant director and approximately 25 to 35 professionals, primarily accountants and lawyers. Each filing has more than one reviewer with a frontline contact person and supervisor. A full review file will have an accounting and legal reviewer as well as a supervisor.
Neither the SEC nor the CorpFin evaluates the merits of any transaction or makes an assessment or determination as to whether a transaction or company is appropriate for any particular investor or the marketplace as a whole. The purpose of a review is to ensure compliance with the disclosure requirements of the securities laws. CorpFin may ask for increased risk factors and clear disclosure related to the merits or lack thereof of a particular transaction, but they do not assess or comment on the merits beyond the disclosure.