SEC Comment Letters: A Six Year Trend

In this annual blog, we aim to discuss macro trends in SEC Comment Letters issued between 2010 and 2016. We typically focus on comments related to annual and quarterly filings of 10-K filers. This year, however, we provide some insight into the prominence of 8-K reviews.

As we can see from the chart below, the major trend in 10-K and 10-Q letters remained intact. The number of SEC Comment Letters declined by roughly 66% since 2010, and by about 14% from 2015.The chart below presents the total number of comment letters by the year of origination, for the 10-K and 10-Q filings and, as a separate series, for the 8-K filings.

Other trends related to the 10-K and 10-Q metrics also remained largely unchanged, including: the average length of the review was 45 days in 2016, in comparison to 46 days in 2015, and the number of letters per conversation was about 4 letters per conversation in both 2015 and 2016.

With no significant developments in the 10-K reviews, let’s go back to the first chart to look at 8-K letters. The 8-K trend between 2010 largely followed the 10-K pattern, with a steady decline between 2010 and 2015. In 2016, however, we see a sharp increase in the number of 8-K letters.

The 2016 count of 1,251 8-K SEC Comment Letters was more than twice that of the 2015 (in 2015, we identified only 589 letters). The change of trend, while interesting, was anticipated. In the second half of 2016, after forceful speeches and numerous warnings, the SEC initiated a massive Regulation G compliance campaign with focus on undue prominence of non-GAAP presentation in earnings releases which are frequently furnished as SEC exhibits to 8-K filings. (Our analysis of SEC non-GAAP comments was discussed here)

Of note is that while many companies adjusted their non-GAAP presentation in response to SEC comments, as of May 2017, we were still seeing numerous non-GAAP comment letters.

As with most SEC reviews, the non-GAAP comments typically requested additional disclosure in future filings. Non-GAAP comments were one of the most common, but not exclusive reasons for an 8-K review. Other reasons include restatement disclosures submitted on 8-K Item 4.02, questions about auditor changes, and reviews of acquisition disclosures submitted on 8-K Item 2.01.