The number of comment letters issued by the SEC continued to decline during 2021. Comment letters that reference quarterly (10-Q) or annual (10-K) reports fell by 14% during 2021. Comment letters that reference current reports (Form 8-K) fell by 10%.
The SEC’s Division of Corporation Finance (Corp Fin) issues comment letters during a review process. Corp Fin reviews the filings of reporting companies at least once every three years. Not all reviews result in SEC comments.
Comments on annual and quarterly reports focused on the management discussion and analysis (MD&A) section. As discussed in our previous blog, climate change was an area of focus for the SEC. Many comments discussed the potential impact of climate change on trends and uncertainties. Comments also discussed COVID’s impact on trends and uncertainties and the use of non-GAAP metrics in the MD&A section.
The SEC continued to focus on the use of non-GAAP metrics in earnings releases during reviews of event reports. Many comments asked companies to reexamine or remove certain non-GAAP metrics or reconciling items. And an increase in “Big R” restatements resulted in more comments about Items 4.02.
The number of comment letter conversations declined significantly during 2021. A conversation is a set of letters from the SEC to a company (an UPLOAD) and from a company to the SEC (a CORRESP) during a single review process.
The number of letters per conversation rose to its highest level in the past five years. A high number of letters per conversation may indicate that the SEC is scrutinizing responses more closely than in recent years.
This was evident with climate change-related comment letters. Every conversation that included climate change questions involved more than one round of questions.
Comment Letter Issues
The SEC continues to concentrate on many of the same issues. The only change among the top five issues cited during 2021 was a swap between 8-K comments and revenue comments. The rise of 8-K comments is linked to the rise in “Big R” restatements during 2021. The decline in revenue comments may signal a de-emphasis of revenue now that the ASC 606 standard has been effective for several years.
Climate change was the sixth most-cited issue in 2021. Climate change was not cited in any 8-K, 10-Q, or 10-K comment letters between 2017 and 2020.
We’ll take a closer look at the top five comment letter issues in upcoming blogs.
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