How to Address SEC Comment Letters

Submitting filings to the U.S. Securities and Exchange Commission often comes with the possibility that the SEC will issue a comment letter in response. SEC comment letters aim to clear up an inconsistency, inaccuracy or vagueness in the filing. When companies receive one of these letters, they have a relatively short time to provide a comprehensive and accurate response. Timely and effective responses do more than ensure compliance — they also affect investor confidence in the business. With a set of clear strategies for approaching a comment letter, companies can ensure compliance and avoid common problems.

What Is an SEC Comment Letter?

When a public company submits a filing to the SEC, the commission may choose to review the filing. On occasion, it will send comments to the business and require a response. The SEC is likely to create comments on filings that appear to have inconsistent, inaccurate, or misleading information. These comments could come on a 10-K or other types of SEC filings, like 10-Q filings, registration statements and proxy statements. Comment letters may request clarification on specific details of the disclosure, compliance with reporting standards, an additional disclosure or more information about the business’s accounting or financial information.

Common Areas Addressed in SEC Comment Letters

When the SEC reviews a filing for registrants, the commission may compare existing filings or other documentation to confirm that the information is consistent, accurate and complete. As such, they are more likely to issue a comment letter for the following:

• Inconsistent financial disclosures or questionable accounting practices
• Incomplete risk management disclosures that fail to identify all risk factors
• Vague or unclear statements in the Management’s Discussion and Analysis section
• Excessive reliance on data gained from non-GAAP financial measures
• Inconsistent depictions of executive compensation and governance disclosures

Step-by-Step Guide to Responding to SEC Comment Letters

While SEC comment letters are not issued for every filing, they are frequent enough that most companies will encounter one at some point. Organizations that are well-prepared for the process are better positioned to achieve a timely and satisfactory resolution. The following steps offer guidance for crafting a thorough, accurate and prompt response.

1. Careful review and analysis: Before starting to craft correspondence, companies should confirm that they understand the comments and how best to approach answering them. Legal, corporate finance and compliance teams should review the comments and make notes of specific points brought up in the letter.
2. Assemble an internal response team: Comment letters may require attention from various stakeholders in the company, such as legal counsel, the CFO, compliance officer or other subject-matter experts. Companies should create a team to respond to the letter, ideally with a project manager to keep the process moving. Every member of the team ought to know what they are responsible for producing, whether it is assembling data or crafting a response.
3. Prepare clear, comprehensive responses: Because SEC comment letters usually arise from inconsistent or incomplete data, comprehensive responses are key. The team should break down each comment and confirm that they can answer each one clearly and concisely. Companies should cite additional information and references to other filings or different financial statements as support. If necessary, explaining reasoning or methodologies can help to clarify inconsistent or conflicting information.
4. Engage with the SEC if clarification is needed: On comments that are unclear or confusing, SEC staff will provide clarification on request. Instead of risking providing an incomplete or inaccurate answer, companies should communicate promptly and directly with the SEC to gain clarity on specific points. Keeping a record of these discussions will help to provide documentation and support for responses.
5. Review, edit and approve: In advance of submitting the correspondence, the company should conduct an internal and external review. Key stakeholders in the organization should edit and approve the response, specifically looking for issues of accuracy and completion. An external review from legal counsel or compliance specialists can help to confirm that the company is compliant with regulatory requirements.
6. Timely submission of responses: The SEC typically requires a response to comment letters within 10 business days, formally submitting through EDGAR with proper formatting. SEC staff may agree to an extension of the deadline upon request.

Best Practices and Mistakes to Avoid

Companies that seek to provide clarification on SEC comment letters, without having to repeat the process, should follow these best practices:

• Provide clear, professional communication that offers transparency.
• Confirm that each point is clearly addressed.
• Avoid elaborating unnecessarily.
• Give additional data or citations from existing filings as support for the response.
• Rely on external experts to ensure that business administrators understand the regulations and requirements of the comment.
• Remember that SEC comments and company responses become a matter of public record a few weeks after the comments have been resolved.

Companies may encounter challenges when drafting responses to SEC comment letters. Incomplete or inaccurate replies often result in follow-up inquiries, while overly lengthy or unfocused responses can introduce confusion rather than clarity. To satisfy regulatory expectations, the SEC requires a clear and comprehensive response submitted by the stated deadline. It is essential that organizations allocate sufficient time for careful review and preparation to ensure the submission is both accurate and timely, minimizing the risk of further complications.

Utilizing SEC Experts for Guidance

Registrants filing with the SEC must address comment letters or risk the following consequences:

• Additional scrutiny of company filings, possibly leading to SEC audits
• Delays in regulatory approval and publishing of disclosures
• Potential damage to investor trust in the organization once the comments become public

At DFIN, we specialize in helping businesses to meet compliance standards accurately and completely. Our SEC reporting software assists companies in assembling data and presenting it in documents that meet SEC standards, with tools and services including ActiveDisclosure, EDGAR filing support, and consultations with compliance experts. Contact us to learn more about how to improve the financial reporting process. With expert guidance from DFIN, you can streamline your approach, enhance compliance and assemble effective, timely responses to an SEC comment letter.