SEC Comment Letters: An Eight Year Trend

The total amount of comment letters stemming from 10-K and 10-Q filings has once again decreased (as shown in the chart below). From 2017 to 2018, total comment letters decreased by roughly 26%, which is slightly steeper than the decline we’ve seen in the past (13% from 2016 to 2017 and 10% from 2015 to 2016). Similarly, the number of conversations largely followed the same declining pattern.

The reasons for the overall decline were mostly consistent with previous years: general decline in the number of SEC registrants, which has dropped by almost half since early 2000s, and a principle-based approach to issuing comments. While all companies are reviewed, the comments are issued only if the disclosure is substantially unclear.

The government shutdown in December 2018 also could have contributed to the decline. During the shutdown, reviews were not performed and thus, comments were not issued. However, the effect on 2018’s count was likely limited since the shutdown only affected the second half of December; though there may be a more pronounced effect on Q1 2019.

The decline in 8-K comments was even sharper: 54.5% between 2017 and 2018, in comparison to 31.5% between 2016 and 2017 and an increase of 112.4% between 2015 and 2016. As we discussed in our previous blog, the rise of 8-K comments was largely attributed to the SEC’s review of non-GAAP disclosures, in particular undue prominence in presentation of non-GAAP. Examples include presentation of non-GAAP numbers ahead of the comparable GAAP numbers and missing reconciliation between GAAP and non-GAAP values. Based on our analysis, non-GAAP appears to remain on the Corp Fin agenda. However, the 2018 reviews appear to be more targeted, with a higher percentage of non-GAAP reviews focusing on tailored accounting and aggressive adjustments.

Other metrics that could be helpful in evaluating high level trends for comment letters include duration of the review and number of letters. Longer conversations may signal more complex questions or topics that sparked more scrutiny.

In 2018 it took, on average, 37 days and 3.4 letters to resolve SEC comments. This is a slight decline (about 10%) from the 2017 numbers for both metrics.

The count of letters in the conversation includes both the initial letter from the SEC and the SEC closing letter. Therefore, from a practical perspective, the average of 3.4 letters to resolve comments means that most of the reviews are resolved after just one round of comments.

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