There is a particular circular logo that always worries even the most experienced CFO. It is a simple logo and it means that the SEC has looked at your filings and has some questions. If the letter is something as serious as a Wells Notice, then you need to engage with your outside counsel right away and I can’t really give advice as I am not a lawyer.
Comment letters are a lot more common. You can expect that your filings will be reviewed every 2-3 years and every special filing you make (like an S-1) will draw a comment letter every time. They are common, and the typical result is improved disclosure the next time you do a filing. A bad outcome is the need to restate which can have significant personal and valuation of the company repercussions. A disaster is a Wells Notice and a full legal investigation.
When I first started, responding to a comment letter was much more difficult and you needed to rely much more heavily on your auditors and your lawyers as they had many examples of responses from their client base and you typically had nothing except for anything you had done yourself or within your company in the past. Ever since the SEC made comment letter responses available online, you should be much more capable of answering them yourself or with a lot less help from your outside advisors.
Here is my general advice on what to do when you receive a comment letter.
As a general comment, you are dealing with very experienced accounting and legal professionals at the SEC. The team that reviews filings and comments on them tend to be very experienced accountants and lawyers who read and comment on filings for a living. Their letter is reviewed by even more experienced staff before it is sent to you. The SEC monitors trends and usually every year there are specific areas of accounting and disclosure that get extra questions for just about every filer that it applies to. Unless you do actually have a very severe issue, there pretty much is no intent to “get you”. I have found 100% of the SEC staff I have worked with over the years to be professional and courteous and generally helpful where they can be helpful. They tend to be pretty flexible where they can be.
Expect an iterative process. There was one pretty long letter that I responded to that the SEC accepted all my answers the first time, but usually is takes 2-3 rounds of replies with more questions.
The first thing you need to do is read it through at least once. You don’t need to fully understand or do any deep research at this point, but make sure that you and your Controller have read the comment letter and have a general idea of what is in it and what the main questions seem to be. You will be very quickly involving others in the process, and they will be relying on you, so make sure that you know how serious the letter appears to be. It usually is pretty easy to identify the most important questions, as the examiner normally makes them pretty clear. There might be a question or two that are trickier and if answered the wrong way will cause a spiral into more questions and a much higher chance of restating.
Now inform your boss and the audit committee. This should be done quickly, your process of reading and getting a general understanding should not take long at all and you need to treat every comment letter with a sense of urgency. It is a good idea to inform your lawyers and auditors immediately and I advise that you copy legal counsel on your communications where appropriate as it is possible that the comment letter will result in legal action against your firm or you personally. The SEC does not allow you to use them as a direct legal defense and your work on replying to a comment letter can be discoverable if not protected. If you are not sure what that means and how to protect yourself and your company, seek legal advice.
I always have a very strong sense of ownership of what we file. I have always found that my reporting is better after I get and respond to an SEC comment letter. You will be engaging and using outside help, but you own the comment letter responses just like you own the filings you did. Do not allow the outside advisors to take over the process. They are not always on your side. If something needs to be restated, or if more serious issues come up, they may also have the agenda of protecting themselves. Remember that auditors commonly get sued as well if accounting issues come up from an SEC review. That means that they are very much on your side until they are not. Chances are pretty good that it will not be an issue but do remember that they have their own priorities and that may mean protecting their business just like you are trying to protect yourself and your company.
Now that your boss and the Audit Committee are informed, you should have also formed a small team to actually answer the comment letter. You need to divide up the comments and delegate them to the people best able to answer the questions (and this may be you). Personally, I think the company should write the first draft of all the responses but you may not have the expertise. If you do not, remember it because you have a skill set hole in your company that may need to be fixed later after the comment letter process is done.
Now that the SEC has made other comment letter responses public, you should be able to find the same questions answered by other companies. There is no rule against using other responses word for word. No such thing as plagiarism or copyright when reviewing SEC submissions. If you check competitors or similar companies and they have identical questions, then you know that those questions are focus areas for the SEC this cycle. Look at the answer(s) that the SEC accepted in the past and consider if the same answers or something very close also applies to you.
I cannot emphasize this enough. Prior SEC filings are a huge resource and you should absolutely use them to guide your answers. There are no prizes for brilliance and answering every question yourself with completely original answers.
Dire warnings aside about making sure you understand the risk that outside advisors may have their own agenda, your auditors are a very good resource. If you are using a Big 4 firm, then their SEC advisory group will have people that recently worked at the SEC. They probably have other clients who have received comment letters from your examiner and have more personal read on his or her style. When it comes to very technical accounting questions, your technical partner can be a big help in drafting a response that cites the correct and most compelling parts of GAAP.
I personally like my responses to be direct and to the point. Sometimes your advisors like to toss in introductory phrases like “we respectfully submit”. I never answer like that. Many times the comment letter asks you to enhance your disclosure in the future. Unless the suggestion has some fundamental error in it (which I have never found in any comment letter I have received), the correct response is to say that in future filings you will do what is requested. List out what was requested and what you agreed to. When the SEC asks for support for your current accounting, provide it in a straightforward manner. Your examiner will have several open files and comment letters they are responsible for. The more clearly you write and the more simply you write, the easier you will make it for them.
One final resource is the examiner themselves. Sometimes their questions are not very clear. You are allowed to call them up and talk to them. Like your written answers, you need to be careful what you discuss with them, but as I said earlier, they are not out to “get you”. They are limited in what they can answer. You cannot run a response by them, all responses must be submitted in writing and they can only respond in writing. However, they can clarify what a question means. You can call them and let them know that you are on a tight deadline for a filing and that you would appreciate them working as fast as possible. Sometimes it can help to have a personal relationship when they have to make a final call on an accounting item. If you are more than just text on paper, maybe something will go your way. I know that it even helps me to respond when I have a voice to go with the words on the paper.
Before you send in your response, give it one last read through. Make sure all responses follow the standard format of repeating their question and then responding. Make sure you are sure the questions are actually responded to. Double check the wording to make sure it is direct and clear. Make sure each one has enough detail but not too much that it clouds your answer. If you see an answer that disagrees with a disclosure request, ask yourself why you are not just agreeing to the additional disclosure. Sometimes if you agree then you are actually agreeing to accounting that you do not think is right, but normally fighting over disclosure requirements is just not worth it.
There is an almost certain chance that you will receive another comment letter on your responses that focus on the questions that either were not fully answered or where the examiner disagrees with you or feels that there is insufficient support for your answer. If they disagree, then you are starting to have a problem. You need to be extremely careful with any question in the second set of comments because those are the ones that the examiner is most interested in.
Hopefully you will make it through the response process with nothing more than agreeing to improve disclosures in future filings. Don’t forget to actually improve disclosures when you agree to it. It should be part of your reporting checklist to ensure that you disclose what you agreed to and how you agreed to.