SEC Comment Letters

The SEC reviews filings on a rotating basis. Where staff have questions, they issue an SEC comment letter, and the company responds in writing. The exchange may run through several rounds until the matter is resolved.

The correspondence is made public afterwards, subject to a delay and to redaction of anything granted confidential treatment. By the time it is visible the matter is settled, which is why these are research documents rather than news.

• RevenueRevenueWhat a company billed customers over the period, before any cost is subtracted.Read the full explanation recognition, particularly where arrangements are complex.
• Non-GAAPNon-GAAP measureA company's own adjusted figure, which must be reconciled to the GAAP number it departs from.Read the full explanation measures and whether they are given undue prominence.
• Segment identification and whether reportable segments have been aggregated.
• Impairment testing and the assumptions behind it.
• Whether a risk factor is generic where a specific one is warranted.

The response letters are the more useful half. A company explaining to a regulator why its revenue recognition policy is appropriate has to be specific in a way that a filing footnote does not.

On a company's EDGAR index they appear as UPLOAD for the staff letter and CORRESP for the company's response. Because they are filed under form types nobody watches, they attract very little attention relative to their content.

A comment letter is not an enforcement action and most are routine. It is a review, and the absence of one means only that the filing has not been selected, not that it was found satisfactory.

Comment letters are not random. The Division of Corporation Finance reviews filings on a cycle and concentrates on a recognisable set of topics, which makes the letters a reasonable guide to where disclosure is generally weakest.

• Non-GAAP measures, and particularly whether the GAAPGAAPThe standardised US accounting rules a filed statement must follow.Read the full explanation measure is presented with equal prominence and whether an adjustment described as non-recurring actually is.
• Revenue recognition, especially where performance obligations or timing are involved.
• Management's discussion, where the staff frequently asks for the reasons behind a change rather than a restatement of the numbers.
• Segment identification, and whether reported segments match how the business is actually reviewed.
• Impairment assessments and the assumptions behind them.

A letter is not an accusation. The great majority are resolved with additional disclosure in the next filing, and the process is a normal part of reporting rather than an enforcement action. A small proportion lead to restatements, and those are visible in the correspondence.

Comment letters and the company's responses are filed on EDGAR under their own form types, and they are published only after the review is complete. That delay is why they are a good history and a poor early warning.

An exchange usually runs to several rounds. Reading them in order shows what the staff asked, how the company answered, and whether the staff accepted the answer or pressed further, which is a more informative record than any single letter.

A comment letter is the only place in the disclosure record where an independent, trained reader states publicly which parts of a company's filings were unclear enough to require an explanation. That makes the questions more useful than the answers.

• Each question identifies a specific accounting judgement rather than a general concern, which narrows exactly where to look.
• The company's reply frequently contains reconciliations and calculations prepared for the staff and published nowhere else.
• A multi-round exchange shows which answers were accepted and which were pressed further.
• A resolution requiring changed disclosure tells you what future filings will have to say.

The letters are also a guide to what is ordinary. Reading several across one industry shows which questions recur everywhere, and a question asked of one company and of none of its competitors is the one that repays attention.