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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 future SEC disclosure priorities, including climate change, financial technology, and evolving risk.

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Overview on SEC comment letter considerations

The global business landscape has been changing rapidly, with higher interest rates, tightening credit, inflation, supply-chain and labor issues, geopolitical conflicts, and concerns about the real estate and banking sectors affecting markets worldwide over the past few years. As these trends persist, the transformative effects of generative artificial intelligence (often referred to as “gen AI”) may also have a significant impact on financial markets. The SEC continues to undertake rulemaking and provide registrants with proactive guidance as needed to respond to recent market developments while conducting ongoing reviews and oversight to protect investors. Under the leadership of Chair Gary Gensler, who took office in April 2021, the Commission has pursued a comprehensive rulemaking agenda embodying three key themes: efficiency and competition, integrity and disclosure, and resiliency of the markets. In the past year, the SEC has issued final rules on disclosure topics such as cybersecurity, share repurchases, and “clawback” policies and has continued to consider feedback received on proposed rules related to climate-change disclosures and special-purpose acquisition companies (SPACs).1 At the same time, the SEC has been addressing other issues in the marketplace, including significant growth in crypto assets and the rise of gen AI and data analytics.

On the Radar: SEC comment letter considerations, including industry insights

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 and may issue comments to such registrants.

The analysis herein summarizes the comments the Division issued during its reviews of periodic filings of public companies.

Top 10 topics in reviews

The table below summarizes comment letter trends by topic in the 12-month period ended July 31, 2023 (“review year 2023” or the “current year”).

The topics that constitute the current year’s top 10 list are largely consistent with the prior year’s list, with debt joining the top 10 list and climate change dropping out of the top 10.2 Comments on MD&A and non-GAAP measure disclosures continue to increase in number, and these topics are still the two most significant sources of SEC comments. We also observed an increased number of comments related to acquisitions, mergers, and business combinations, which rose from 10th place in 2022 to 5th place in 2023 (tied for 5th with signatures, exhibits, and agreements) after a rise in merger and acquisition activity over the past several years. In addition, debt moved up two spots to 10th place.

Conversely, climate change (ranked 8th in 2022) fell just outside the top 10 list in 2023. The decrease in rank is largely due to the broad increase in SEC comments issued in the current year from prior years, which led to a decline in reviews with climate-change comments as a percentage of total SEC reviews that resulted in a comment letter. However, the SEC staff continues to issue comments on this topic and issued such comments to a similar number of registrants in both review year 2023 and review year 2022. The staff has begun to release climate-change-related comment letters for reviews conducted in the late summer and fall of 2023 and continues to focus on climate-change disclosures in advance of an expected final rule.

Further, although not identified as a separate top 10 topic, the impacts of higher interest rates, inflation, supply- chain issues, COVID-19, and the Russia-Ukraine war remained a source of SEC comments over the past year. Such comments have focused on disclosures related to the effects of these macroeconomic and geopolitical challenges on a registrant’s (1) risk factors, (2) MD&A, (3) early-warning disclosures about impairments, and (4) 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 non-GAAP measures and key performance indicators and metrics may result in increased focus and scrutiny from the SEC staff. Given that the staff often focuses on compliance with new reporting requirements, we expect to see comments on disclosures about cybersecurity risks and share repurchases next year. As the SEC works toward issuing a final rule on climate-change disclosures, we expect the Commission to remain focused on how registrants have complied with the existing interpretive guidance. In addition, we expect the SEC staff to continue monitoring the impacts of higher interest rates, tightening credit, inflation, supply-chain and labor issues, geopolitical conflicts, and concerns about the real estate and banking sectors, as well as other emerging market events, and perhaps focus future comments on accounting and reporting related to these matters. These events, coupled with the staff’s focus on ensuring that MD&A provides useful information to investors, mean that comments on MD&A are likely to stay elevated. The staff may also comment on disclosures about the known trends and uncertainties related to income tax as a result of the Inflation Reduction Act and the implementation of the Pillar Two rules issued by the Organisation of Economic Co-operation and Development.

Long-term review trends

Here’s how the numbers have played out over the past five years:

As the charts above illustrate, while there was a notable decline in the number of reviews with comment letters and the number of comment letters issued on Forms 10-K and 10-Q from review year 2019 through review year 2021, the trend started to reverse in review year 2022, with an even greater increase in review year 2023. The volume of reviews and comment letters in the current year exceeds the volume seen in any given year since review year 2018, with the number of comment letters issued in review year 2023 exceeding the total number of comment letters issued in review years 2021 and 2022 combined. The current year’s uptick in both reviews with comment letters (a 74 percent increase from the prior year) and the overall number of comment letters (an 85 percent increase from the prior year) is most likely the result of (1) an increase in the number of public companies, (2) a decline in traditional IPO and SPAC transaction activity, and (3) the use of comments by the SEC staff to elicit expanded disclosures related to emerging issues. Throughout calendar years 2020 and 2021, the volume of traditional IPOs and SPAC transactions reached record levels, with more than 800 companies going public during this time frame. Consequently, there was an increase in the number of Forms 10-K filed by public companies, which are now subject to recurring SEC staff review. We then saw a slowdown in the IPO and SPAC market beginning in 2022 and continuing throughout 2023, which may have allowed the SEC staff to devote more time to both triennial reviews required by the Sarbanes-Oxley Act and additional selective reviews of existing public companies. Further, over the past several years, the global economy has been affected by a variety of emerging market events, and the SEC staff often issues comments on these topics to request expanded disclosures aimed at providing decision-useful information and greater transparency to investors. We expect that each of the factors listed above will lead to continued increases in both the number of reviews with comment letters and the number of comment letters issued on Forms 10-K and 10-Q in subsequent years.

Priorities on the horizon

Broader SEC priorities often influence comment letter trends. As registrants start to prepare for the 2023 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.

Endnotes

1 A SPAC is a newly formed company that raises cash in an initial public offering (IPO) and uses that cash, the equity of the SPAC, or both to fund the acquisition of a private operating company.

2 The number of reviews with a comment in 2023 may be subject to change as more 2023 reviews with comment letters are posted to EDGAR.

3 Sample Letter to Companies Regarding Climate Change Disclosures.

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