Fine wines may improve with age; SEC comments likely do not. Here are some tips on how to approach lingering SEC comments when preparing a public company’s annual report on Form 10-K/Form 20-F.
How can you tell if any SEC comments are unresolved?
When comments are resolved to the SEC Staff’s satisfaction, a company will receive confirmation to that effect from the SEC Staff, which will also be filed on EDGAR.
If the company has not yet received this confirmation, it is likely that the comments are not yet resolved. If there is uncertainty on this score, consider reaching out to the examiner to confirm the status of the comments. Remember: It’s not your opinion that matters, it’s the SEC Staff’s.
OK, so there are unresolved comments. Do they need to be disclosed in the 2010 Form 10-K/Form 20-F?
It depends. Item 1B of Form 10-K and Item 4A of Form 20-F require that accelerated filers, large accelerated filers and WKSIs make certain disclosures with respect to unresolved written comments regarding their periodic or current reports that they received not less than 180 days before the end of the fiscal year to which the Form 10-K/20-F relates. The issuer must disclose the substance of such unresolved comments that the issuer believes are material. The issuer may disclose other relevant information, including its position with respect to the unresolved comment.
Seems like a lot of factors jammed in a short item, right?
Well, here’s a quick and easy checklist to help determine whether disclosure is required:
- Is the company an accelerated filer, a large accelerated filer or a WKSI?
- If yes, continue.
- If no, stop‑disclosure is not required under this item.
- Were the comments at issue written or communicated orally in an informal process?
- If written, continue.
- If oral, stop – disclosure is likely not required under this Item (except in the unlikely event that the oral comments indicated that prior written comments are unresolved).
- Were the comments at issue received 180 days or more before the end of the fiscal period for the Form 10-K at issue? (In other words, for a December 31 fiscal year end, were the comments received on or before the prior July 4, which is December 31 minus 180 days?)
- If yes, continue.
- If no, stop – disclosure is not required under this Item.
- Are the comments unresolved as of the date of the filing of the Form 10-K or Form 20-F?
- If yes, continue.
- If no, stop – disclosure is not required under this Item.
- Does the issuer believe that the unresolved comments are material?
- If yes, disclosure is likely required, assuming you passed through each of the above steps to get to this one. (Potential Pitfall: who’s to say it’s material? See below for more of a discussion on this one.)
- If no, stop – disclosure is likely not required under this Item.
How do we determine whether an unresolved comment is material enough to disclose under this Item?
This is a facts-and-circumstances question that will vary by company, by comment and by report. Some issuers choose to disclose any unresolved comments regardless of materiality, in order to avoid further comments from the SEC Staff on this particular item. Others may determine that none of the comments are material, although that approach might draw a comment on the failure to disclose unresolved comments. If you find yourself in this situation, let’s talk.
Looks like we may need to disclose material unresolved comments. What do we need to say?
The disclosure requirements are not specific: “disclose the substance of any such unresolved comments that the registrant believes are material. Such disclosure may provide other information including the position of the registrant with respect to any such comment.” Thus, the level of disclosure is largely up to the company, being mindful of the requirements of Rules 10b-5 and 12b-20, of course.
The company should disclose the substance or topic of the unresolved comment or comments. The disclosure does not need to provide the entire text of the comments or the company’s response. However, it should indicate what the comment addresses, such as revenue recognition policies or particular business Item disclosures. The company may, but does not need to, include a statement as to its position on the comment.
The upshot is that, in most cases, the disclosure can be brief and succinct. Most disclosure for this item does not extend past one or two short paragraphs.