SEC’s Division of CorpFin Disclosure Review and Comment Process

Posted by on April 16, 2018

SEC’s Division of Corporation Finance’s Disclosure Review and Comment Process- Today is the first in a LawCast series talking about the SEC’s Division of Corporation Finance’s disclosure review and comment process. Back in March 2016 I wrote a blog and did a Lawcast series on the SEC’s Division of Corporation Finance – which I will refer to as CorpFin – internal review process, review levels and breakup of industry sector reviewers. On March 22, 2018 CorpFin updated its “Filing Review Process” page on the SEC website.

At the end of each calendar year, the big four accounting firms generally publish studies on CorpFin’s comment priorities. Their studies, and other recent publications, uniformly found that the number of comments, especially in a registration process, has dramatically declined. I have noticed this trend as well in my practice.

Also consistent in numerous reports is a list of recent comment priorities, including: (i) non-GAAP financial measures; (ii) application of the new revenue recognition standards; (iii) disclosure of cyber risks and cyber incidents; (iii) management, discussion and analysis presentation and disclosures, including segment reporting and income taxes; (iv) disclosures of intangible assets and goodwill; (v) state sponsors of terrorism; (vi) related to acquisitions, mergers and business combinations; and (vii) signatures, exhibits and agreements.

This past year, in September 2017, the SEC Office of Inspector General published an Evaluation of the Division of Corporation Finance’s Disclosure Review and Comment Letter Process (the “September 2017 Report”). The purpose of the Inspector General’s examination and report was to review CorpFin’s process for issuing, tracking and facilitating public access to comment letters and related correspondence.

In addition to summarizing the September 2017 Report, this Lawcast series includes information on the updated CorpFin Filing Review Process page and general commentary and information on the process.
CorpFin reviews and comments upon filings made under the Securities Act of 1933 and the Securities Exchange Act of 1934. The purpose of a review by CorpFin is to ensure compliance with the disclosure requirements under the federal securities laws, including Regulation S-K and Regulation S-X, and the general anti-fraud provisions which require disclosure of material information necessary to make required disclosures, not misleading. The standard for required disclosure is generally the materiality of the information. In TSC Industries, Inc. v. Northway, Inc., the U.S. Supreme Court defined materiality as information that would have a substantial likelihood of being viewed by a reasonable investor as having significantly altered the total mix of information available.

CorpFin selectively reviews filings, although generally all first-time filings, such as an S-1 for an initial public offering or Form 10 registration under the Exchange Act, are fully reviewed. The Sarbanes-Oxley Act of 2002 requires that CorpFin review all public companies at least once every three years. Section 408 of the Sarbanes-Oxley Act requires CorpFin to focus on companies that have the largest market capitalization. Section 508 of the Sarbanes-Oxley Act specifies certain factors that the SEC should consider when scheduling reviews, including market capitalization, financial restatements, volatility of the company’s stock price and the price/earnings ratio.