How to Answer an SEC Comment Letter

An SEC official
provides some fundamental advice about handling queries from the
regulator. An old-fashioned telephone conversation is at the top of the
list.

Marie Leone
- CFO.com | US

September 23, 2009

The Securities and Exchange Commission is extending an invitation to
public companies to "pick up the phone" and start a "dialogue" with its
Division of Corporation Finance, says an SEC official. At an industry
meeting held in New York last Friday, Steven Jacobs, an associate chief
accountant with the division, told an audience of accounting experts
that companies could do a lot to head off major accounting conflicts by
simply becoming more engaged in the SEC financial-statement review
process.

Speaking at a conference sponsored by the New York State Society of
Certified Public Accountants, Jacobs laid out a list of what he called
"tips" for dealing with SEC comment letters, which follow a
financial-statement review if the regulator has questions about a
company's filings.

He said that too often, companies that receive a comment letter from
the SEC rush to restate financial results without first discussing the
matter with the reviewers. "We ask a question, and the next thing you
know the company has restated," said Jacobs. At the other end of the
spectrum, "just giving a quick response" and providing a terse
explanation of why the accounting is correct will likely trigger a
second comment letter on the same subject, and may even raise SEC
staffers' suspicions, he added.

"Don't restate your financial statements right away" after receiving
an SEC comment letter, Jacobs said, but rather, "take advantage of the
opportunity [afforded by the review] to explain your accounting in
sufficient detail to the SEC staff."

"Sufficient" in this case means discussing the supporting
authoritative accounting literature on which the company is relying,
down to the paragraph within the standard. That's something the company
should provide in any comment letter response, and will put companies
"in the best position for dealing with the staff," Jacobs said. It will
also likely speed the process and cut down on business interruptions
associated with the comments, something many companies now complain
about to the SEC.

Beyond complaining, there are a number of reasons why public
companies should pick up the phone or otherwise respond quickly to an
SEC comment letter. A prime one: when company accountants don't
understand what SEC staffers are looking for. It is not always easy to
clearly articulate the full scope of a question or answer in writing,
Jacobs opined, and a telephone conversation would assure that the
issuer's response addresses the staffs' concerns.

Not being able to meet the response deadline — now 10 business days
from the receipt of a letter — is also a good reason to call. "Pick up
the phone and call the staff and set expectations," said Jacobs, who
admitted the deadline is tight and acknowledged staffers may extend it
in some cases. "Everyone on the staff would rather get a more thorough
and complete response that's been through an appropriate level of
review than to hear back within 10 days."

SEC spokesman John Nester explained to CFO.com that the staff asks
for a response within 10 days to start the "conversation," always
keeping in mind that the commission must

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