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Perspectives

SEC comment letter industry insights and trends

On the Radar: SEC comment letter considerations

This issue of On the Radar contains SEC comment letter considerations, including an update on SEC’s priorities, a summary of comment letter trends related to the top 10 topics of frequent comment, and topics of focus related to disclosures associated with financial statement accounting, SEC reporting, initial public offerings, foreign private issuers, and industry-specific matters.

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Overview on SEC comment letter considerations

Despite the global pandemic that has continued to affect markets worldwide over the past two years, the SEC remained steadfast in 2021 to provide investors continued support and oversight during such challenging times. In addition to acquiring new leadership with the appointment of Gary Gensler as chair of the SEC in April 2021, the Commission oversaw exponential growth in the capital markets through traditional initial public offerings (IPOs) and special-purpose acquisition companies (SPACs), significant growth in crypto assets, and the rise of financial technology and data analytics.

To help the SEC meet its responsibilities under the Sarbanes-Oxley Act, the SEC’s Division of Corporation Finance (the “Division”) continues to selectively review documents filed by registrants under the Securities Act of 1933 and the Securities Exchange Act of 1934. Under the Division’s filing review process, the Division performs some level of review of each registrant at least once every three years. However, many registrants are reviewed more frequently, and they may or may not receive a comment letter from the Division.

On the Radar: SEC Comment Letter Considerations Including Industry Insights

By the numbers

In spite of the challenges facing registrants in the current year, the number of comments issued by the SEC staff was the lowest it has been in recent years. Here’s how the numbers have played out over the past five years:

Review year 2021 saw a decline in reviews with comment letters of approximately 23% from the prior year, extending the downward trend over the past five years. The SEC has consistently prioritized the reviews of accelerated and large accelerated filers; as a result, these filers were subject to approximately 80% of the reviews with comment letters in the current year even though they represented only 40% of the registrants that were eligible for a filing review. In addition, during the current year, approximately 54% of reviews with comment letters were of registrants generating $1 billion or more of revenue, although registrants in this category represented only 23% of the registrants that were eligible for a filing review.

Top 10 topics in reviews

The table below summarizes comment letter trends by topic in the 12-month period ended July 31, 2021 (“review year 2021” or the “current year”).

The topics that constitute this year’s top 10 list are largely consistent with last year’s list. MD&A and non-GAAP measure disclosures continue to be the two most significant sources of SEC staff comments, and given that many registrants will soon be required to apply the provisions of the SEC’s new final rule amending MD&A, we expect comments in this area to remain high. While the number of reviews with comments in nearly all of the top 10 categories declined during the current year, we saw an increased number of reviews with comments on signatures, exhibits, and agreements (which was largely attributable to a rise in the number of first-time issuers) and heightened SEC staff scrutiny of “exclusive forum” provisions in registrants’ charters, bylaws, and articles of incorporation. Although not identified as a top 10 topic, COVID-19 has been the source of a number of SEC staff comments issued over the past year, which have focused on disclosures related to the pandemic’s effect on a registrant’s (1) risk factors, (2) MD&A, (3) early-warning disclosures related to impairments, and (4) COVID-19-related 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. Recent SEC disclosure rules and interpretive guidance related to significant acquisitions and dispositions, pro forma financial information, registered debt securities, human capital resources, MD&A, and key performance indicators and metrics may result in increased focus and scrutiny from the SEC staff. We also expect the staff to continue monitoring the effects of the COVID-19 pandemic and perhaps focus future comments on accounting and reporting related to the pandemic and the associated economic uncertainty. As noted in the next section, we have recently started to see public comments on climate-related disclosures, and we believe that the staff is likely to continue focusing on this issue in the coming year.

Priorities on the horizon

Notwithstanding the incremental workload caused by the pandemic and the demands on SEC staff as the capital markets experience unprecedented expansion, the SEC’s planned oversight, rulemaking, and enforcement work continues. As registrants start to prepare for the 2021 annual reporting cycle, they may find it helpful to consider the following SEC priorities:

Continue your SEC comment letter considerations learning

For a comprehensive discussion of comment letter trends affecting SEC filers, see Deloitte’s Roadmap SEC Comment Letter Considerations, Including Industry Insights.

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