The Comment Letter Is an Examination

What Comments Mean

Staff comments take several forms. Some ask the company to revise disclosure. Some ask the company to provide supplemental information to the staff. Some ask the company to explain its analysis, for example of an accounting position or a legal conclusion. Some ask the company to tell the staff whether it considered something. Each form deserves a different kind of response.

Comments are also rarely isolated. A question about revenue recognition in the notes may relate to a question about MD&A, a risk factor, and the business description. A good response treats the letter as a whole and considers how a change in one place affects every other place the same subject appears.

The Response Is Public

After the staff completes its review, comment letters and company responses are generally made public on EDGAR, typically no earlier than twenty business days after completion. Everything the company writes in its response should be written on the assumption that investors, analysts, plaintiffs' lawyers, competitors, and future regulators will read it. Companies may request confidential treatment for specific information under the Commission's rules, but the request must be justified and properly made.

How to Respond Well

Answer the question asked. Evasive or partial responses generate follow-up comments and extend the review. If the staff asks why, explain why.

Do not concede what is not true, and do not argue what cannot be won. Some comments reflect a misunderstanding that should be politely corrected with support. Others reflect a disclosure gap the company should simply fix. Distinguishing between them is a judgment call.

Coordinate management, auditors, and counsel. Accounting comments must be answered consistently with the audited financial statements and the auditor's views. The worst responses are those in which the legal, accounting, and business answers do not agree.

Show the change. When the company revises disclosure in response to a comment, the response letter should identify where the revision appears so the staff can confirm it easily.

Do not open new issues. A response that volunteers new, unsupported assertions invites new comments. Say what is necessary and support it.

Keep the calendar. The staff expects responses in a reasonable time, and delays in a registration statement review delay the offering itself.

When Amendment Is Required

For a pending registration statement, responses are typically accompanied by an amendment reflecting the revised disclosure. For periodic reports, the staff may accept revisions in future filings when the issue is not significant enough to require amending the past report. Whether an amendment of a previously filed report is necessary depends on the materiality of the issue, and it is sometimes a matter for negotiation with the staff. If the question involves the reliability of previously issued financial statements, it may also trigger a separate 8-K obligation.

Why It Matters Beyond the Review

Comment letter histories are read. Underwriters review them. Acquirers review them. The Division of Enforcement can review them. A pattern of recurring comments about the same subject is a signal. A candid, well-supported response is evidence of a company that takes its disclosure seriously.

Appendix A contains the checklist I use when a client receives a comment letter.