What happens when a company doesn’t return or fully comply with an Securities and Exchange Commission comment letter?
Receiving a comment letter from the SEC might cause a CFO to suffer some heartburn, but usually the process is no cause for undue concern. Under the Sarbanes-Oxley Act of 2002, public companies have to undergo an SEC review process at least once every three years. Most of the questions the SEC asks in comment letters are routine, and the expectation is that the company will respond within ten business days. For most companies, ten days is sufficient to provide the answer.
If the SEC is satisfied with the company’s response, then it typically issues a “closing letter,” which states that the SEC has completed its review. But what happens when companies fail to fully address the SEC’s concerns?
Some SEC comment letter discussions end without a closing letter. For example, Bear Stearns received numerous SEC letters that requested clarification about the company’s accounting for certain derivatives. The company requested an extension on Oct. 24, 2007, and took an additional 126 days to respond. When the company finally responded on Jan. 31, 2008, significant portions of the answer were redacted based on a request for confidentiality. A subsequent SEC comment letter went unanswered, as the company was sold to JPMorgan in a bailout deal.
Receiving a comment letter from the SEC might cause a CFO to suffer some heartburn, but usually the process is no cause for undue concern.
In other cases, companies will receive closing letters after promising to make certain changes to future filings. For the most part, the changes are made and the SEC does not have to raise the same issue in subsequent reviews. Occasionally, however, companies do not make the proposed changes and basically ignore the SEC. In such cases, the SEC will send a non-compliance letter. Since last year, 11 companies have received letters along these lines. For example:
Your response to our previous comment 1 in your letter dated November 6, 2015 indicates you planned to file the required amendment to the Form 10-K for the year ended December 31, 2014 no later than January 1, 2016. As this date has passed, please tell us when you plan to file the required amended Form 10-K. [link]
In some extreme cases the SEC may decide to terminate the review and make the communication public immediately, skipping over the normal delay. While researching our comment letters database for a recent blog post, we came across an interesting example of one such letter. This particular conversation included 17 letters and lasted roughly 358 days before ending earlier this year in an unusual manner—without successful resolution and with no closing letter.
We issued comments on the above captioned filing … and have read your responses … but continue to have concerns regarding several issues raised in our comments, including the potential impact of the Federal Controlled Substances Act on your business operations. Please note that we are terminating our review of your Form 10-K and will take further steps as we deem appropriate. [link]
Since December 2004, 982 unique companies have received similar comment letters. While a majority of those companies are small, OTC, or foreign filers, almost 12 percent have a market cap of at least $50 million.
Companies that have received such letters are at risk for further review by the SEC. For example, the SEC will not declare any registration effective until all comments are resolved and efforts to raise capital may be impeded.
The Audit Analytics Comment Letter solution covers 270,000 comment letters that have each been reviewed and categorized according to our proprietary taxonomy of almost 3,000 issues and citations, which allow for unparalleled research. For more information about comment letters, please contact us at firstname.lastname@example.org.