In the following guest post, Jay Knight, a member in the Bass, Berry & Sims law firm, provides some recommendations on what do to when responding to filing comments from the SEC. I would like to thank Jay for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Jay’s article.
During my tenure on staff in the Securities and Exchange Commission’s (SEC) Division of Corporation Finance, I had the opportunity to engage in the full spectrum of interactions with outside parties. Throughout the SEC comment letter process, I often would find myself interacting with management, outside securities counsel, the independent auditor, as well as others. Set forth below are some practical tips that you may want to employ when responding to SEC comments in connection with the standard SEC filing review in the Division of Corporation Finance.
- Know where the comment came from. At the outset, it is important to know your audience with the SEC. You should find out in what division or office the staff member works. If a company receives a comment letter from the SEC, find out which office or division sent the letter, as written on the letter. Once you know the name of the office, do some more research to learn about that division’s or office’s role within the SEC’s Division of Corporation Finance. This may seem elementary, but it was surprising the number of interactions I had where the other party made incorrect assumptions on this essential issue.
- Read the comment letter When a company receives a comment letter, it seems natural to go straight to the body of the document and to read the numbered comments. How many did we get? Are any of them difficult? However, it is equally important to read the lead-in to the comments as well as the final closing paragraphs. The lead-in paragraphs often tell you what type of review the staff conducted—a limited review (also called a monitor) or a full review. A limited review is used if the Staff is targeting the review for only certain issues (e.g., financial statements, Section 5 matters, etc.). A full review is essentially a full legal and accounting review of the filing, usually with two attorneys and two accountants on the filing.
For limited reviews, the first sentence of the letter often reads, “We have limited our review of your filing to those issues we have addressed in our comments.” Along with the actual comments, the heading above the comments will reveal the filings that were reviewed by the Staff (e.g., Forms 10-Q, 8-K, etc.). For full reviews, the first sentence often reads, “We have reviewed your filing and have the following comments.”
The closing paragraph is also important because it gives the contact information of the person(s) you should call if you have questions about the comments. The title of the contact person(s) also reveals whether the comments issued were legal and accounting comments, or a mixture of both.
- Consider response letter timing. For Form 10-K comment letters, the SEC comment letter will often state in the lead-in, “Please respond to these comments within 10 business days by providing the requested information or advise us as soon as possible when you will respond.” After reading the comment letter carefully and consulting with your team, assess how long you will need to respond. If you think the 10-day deadline is not realistic, then feel free to ask the Staff for an extension. The Staff is usually accommodating to such requests to the extent the requests are reasonable given the nature of the comments (e.g., a week or two extension is often reasonable). While in many cases the extension is granted on a simple phone call, sometimes the Staff will require that a written extension request be filed on EDGAR. (It depends on varying group practice on this issue.)
For comment letters related to transactions (e.g., IPOs, S-4 mergers, etc.), the Staff’s comment letter does not give a specific response due date. However, if a company takes longer than 90 days to respond to comments, the Staff may take longer than 10 days to review the responses when they eventually get filed, possibly as long as 30 days. (This is because the passage of time may “restart” the review process for them.) So, it is important when you have an active registration statement either to respond within a reasonable period of time or to keep the Staff informed of changes in your deal timeline.
- Assign ownership of each comment to the appropriate team. While the company’s outside securities counsel will often play the role of quarterback to collect and then weave the responses together in a single response letter, it is important to assign each of the comments to the right personnel at the outset so that subject matter experts are taking the lead in the response. For example, accounting comments go to the finance team. In an S-4 joint merger proxy statement situation, there are multiple parties collaborating on the document, so it is important to divvy out the comments to the appropriate person(s). I consider it best practice to articulate a specific timeline with deadlines for the entire response process, including the deadline(s) for when the various workstreams should circulate proposed responses to the larger group for their review. Project management requires communication to all parties involved related to deadlines and required approvals.
- Assess if the comment is a “futures” comment or is asking for an amendment. In connection with 10-K reviews, the Staff often has the choice of issuing a “futures” comment (i.e., comply with the comment in your next applicable periodic report) or a comment requesting an amendment to the applicable filing (e.g., 10-K/A). It is critical to your response that you determine what type of comment has been issued. If the comment itself is unclear, you should review the introductory language to the comment letter for clues, as the Staff typically begins the comment letter with a selection of a “futures” comment letter template or an “amendment” comment letter template. While these are only templates and can be modified by the Staff to fit the particular facts, below are sample introductory paragraphs which demonstrate the differences:
“Amend” comment letter introductory paragraph: “We have reviewed your filing and have the following comments. Where indicated, we think you should revise your documents in response to these comments [emphasis added]. If you disagree, we will consider your explanation as to why our comment is inapplicable or a revision is unnecessary. Please be as detailed as necessary in your explanation. In some of our comments, we may ask you to provide us with information so we may better understand your disclosure. After reviewing this information, we may or may not raise additional comments.”
“Futures” comment letter introductory paragraph: “We have reviewed your filing and have the following comments. If you disagree with a comment, we will consider your explanation as to why it is inapplicable or a revision is unnecessary. Please be as detailed as necessary in your explanation. In some comments we have asked you to provide us with additional information so we may better understand your disclosure. You should comply with the remaining comments in future filings, as applicable [emphasis added]. Confirm in writing that you will do so and also explain to us how you intend to comply. Please do so within the time frame set forth below. Please understand that after our review of your responses, we may raise additional comments.”
- Check precedent and peer disclosures. When preparing a draft response, it is best practice to do a thorough search on EDGAR to see if the same or similar comment has been issued to other registrants. How have other companies responded to the comment? Were their arguments winning arguments? In most cases, you should be able to find helpful precedent response letters to help inform the company’s response in your particular situation.
- Consider if confidential treatment is necessary. Occasionally, it will be necessary for a company to include confidential information in its response in order to fully address the Staff’s comment. In these situations, the company may want to request confidential treatment for these portions of its response letter, so that confidential information (such as a trade secret) does not become publicly available after the conclusion of the review process when the letter becomes public on EDGAR.
- Be careful when emailing the Staff. In today’s business world, firing off an email is as routine as getting a cup of coffee. However, when sending an email to the SEC you should consider whether the Staff will later need to post that email on EDGAR as “correspondence” for all the company’s shareholders and public to see. Therefore, I suggest never emailing the Staff substantive comments if the correspondence is in connection with an SEC review process.
- Calling. After you file the response letter on EDGAR, consider calling the Staff to confirm receipt. You also may offer the Staff courtesy redlined copies of any amended filing. (This is usually done in the ’33 Act context, but less so in 10-K reviews.) In the ’33 Act context, a call to the Staff is also helpful in order to convey the proposed deal timeline. This helps the Staff allocate resources and can sometimes speed up the review cycle to help accommodate deal events, such as kicking off the roadshow.
- Appeals. Although the vast majority of comments are resolved with the Staff directly responsible for issuing the comment letter, an impasse can occur. In this situation, an appeal to a Staff member higher within the organizational chain may be necessary. Before you appeal, however, make a good faith attempt to resolve the comment with the Staff listed on your comment letter (for either the legal or accounting track of comments), including the examiner and reviewer.
You may also require a call with higher level Staff (such as the Assistant Director) if a speedy resolution of the comment is needed because an external event is rapidly approaching. For example, the roadshow, or a stockholder meeting in connection with a merger, has been scheduled. Sometimes the higher level Staff can help to prioritize internal workloads, enabling a quicker response time.
About the author:
Jay H. Knight is a member at Bass, Berry & Sims where he focuses his practice on securities offerings, mergers and acquisitions, real estate capital markets, structured finance, and the general representation of public companies and underwriters. Prior to joining Bass, Berry & Sims in 2012, Jay served in several positions in the Division of Corporation Finance at the SEC over a period of approximately five years, most recently serving as special counsel. He is the co-editor of the firm’s Securities Law Exchange blog featuring commentary and practical insight on SEC updates. He can be reached at firstname.lastname@example.org.
The author would like to thank Timothy Van Hal, an associate at Bass, Berry & Sims, for his assistance with this article.