Preparing for SEC Comment Letters and Avoiding Frantic Fridays

Preparing for SEC comments letters might seem daunting, but having key information at your fingertips and a tactical plan in place can put you way ahead. Comment letters are known to hit CFOs’ fax machines just after close of market on otherwise quiet Friday afternoons. In most cases, the SEC will ask the company to respond to its inquiry within 10 business days.

Technically speaking, Section 408 of the Sarbanes-Oxley Act of 2002 requires the Securities and Exchange Commission to review the filings of public registrants at least once every three years. And that review may be sooner if the company has reported a material misstatement, experienced significant volatility in its stock price or been affected by something the SEC deems relevant. Based on its review, the SEC issues a comment letter to start the dialogue with the company. It usually requests supplemental information so that SEC staff can better understand the company’s accounting and disclosures. Depending on the company, its activities and transactions, and the transparency of its disclosures, these letters can include a handful or dozens of comments.

Comment responses should be both thoughtful and careful—you can’t do that if you’re in panic mode, so follow these steps to create a useful plan for the inevitable:

Create your plan

It’s a given that responding to SEC inquiries requires time, resources and efficient project management capabilities.

First, create a SEC review preparedness folder on your company’s intranet—it should include copies of the following documentation so no time is wasted tracking down this basic information when it comes time to respond:

• All technical accounting memos, whether written by the company or your auditors
• Correspondence with your auditors and legal counsel regarding key accounting and disclosure decisions
• Any materiality assessments that were performed for evaluation of errors, disclosures and the like
• Documentation regarding key transactions, including impairments, business acquisitions and restructuring activities
• Restatement documentation (if applicable)

Second, create a tactical plan that identifies who should be engaged in the response and how efforts will be coordinated. Consider the following steps:

1. Create a response team, which may include both accounting and legal personnel, capable of drafting responses.
2. Determine who should be engaged in the review. Legal counsel and the auditors are a given, but what about your disclosure committee and board of directors?
3. Coordinate a call with key accounting members, legal counsel, outside legal advisors and your auditors.
4. Develop a timeline, including when information will be gathered and when responses are due, allowing enough time for review.
5. Assign a project coordinator to consolidate comments and keep everyone up-to-date and on schedule.

With key information at your fingertips and a tactical plan in mind, you won’t be shaken when your SEC inquiry letter arrives.