A Minneapolis law firm has published a survey of comment letters from the Securities and Exchange Commission, providing a no-nonsense reminder to corporations that want to avoid headaches with their financial filings: Obey the rules, right down to the letter.
The firm of Leonard, Street and Deinard reviewed a random sample of publicly available SEC comment letters issued to registrants, and “found that indeed there was a common pattern to the comments issued,” according to its alert on the topic.
Overall, routine SEC comments issued in connection with Form 10-Q “were not onerous,” the alert said. Most can be avoided by registrants “who strive toward literal compliance with the requirements of the form and making updates as needed by the rulemaking process.”
Quinlivan
“The SEC takes compliance with the literal terms of the forms seriously,” says Stephen Quinlivan, a shareholder at the firm. “Failure to comply with the terms of the form and resulting comment letters can delay significant corporate transactions such as mergers and securities offerings.” Quinlivan says companies ought to do “a complete form check for each and every 10-Q.”
Among the comments he reviewed, the largest number related to disclosures surrounding controls and procedures required by Items 307 and 308(c) of Regulation S-K.
Item 307 requires disclosure of the conclusions of the registrant’s principal executive and principal financial officers, or persons performing similar functions, regarding the effectiveness of the registrant’s disclosure controls and procedures as of the end of the period covered by the report.
The SEC repeatedly issued comments to registrants who incorrectly referenced a period other than the end of the period covered by the report, Quinlivan’s firm found. Registrants that made incorrect disclosures apparently failed to update their disclosures following changes in rules promulgated by the SEC.
ICFR AND DC&P
The excerpt below is from Regulation S-K, Item 307, titled "Disclosure Controls and Procedures," as well as Item 308(c), titled, "Changes in Internal Control Over Financial Reporting." Both are courtesy of The Securities Lawyer's Deskbook, published by The University of Cincinnati College of Law:
Item 307
Disclose the conclusions of the registrant's principal executive and principal financial officers, or persons performing similar functions, regarding the effectiveness of the registrant's disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by the report, based on the evaluation of these controls and procedures required by paragraph (b) of Rule 13a-15 or Rule 15d-15 under the Exchange Act.
Item 308(c)
Changes in internal control over financial reporting. Disclose any change in the registrant's internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the registrant's last fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.
Source
Regulation S-K, Item 307: Disclosure Controls and Procedures and
Item 308(c): Changes in Internal Control Over Financial Reporting
(Securities Lawyer's Deskbook, The University of Cincinnati College of Law)
The SEC also objected to registrants that attempted to shorten the definition of “disclosure controls and procedures” set forth in the rules. In particular, the Commission objected where registrants defined disclosure controls and procedures, but didn’t include the statement that disclosure controls and procedures include those designed to ensure that information required to be disclosed is accumulated and communicated to the issuer’s management to allow timely decisions regarding disclosure. The SEC objected to registrants modifying the statement “to allow timely decisions regarding disclosure” by substituting language such as “timely alert.”
Likewise, the SEC required strict adherence to the text of Item 308(c). That provision requires a registrant to disclose any change in its internal control over financial reporting identified in connection with the evaluation required under Exchange Act rules that occurred during the registrant’s last fiscal quarter, if that change has materially affected (or is reasonably likely to do so) the registrant’s internal control over financial reporting.
Specifically, the SEC objected to issuers who stated there were “no significant changes” as opposed to “any change” as required by the Item 308(c). The SEC also objected to issuers who tried to abbreviate the disclosure by, for instance, omitting the statement that there were no changes “reasonably likely to affect” the registrant’s internal controls over annual reporting.
With respect to the Management’s Discussion and Analysis, Leonard Street’s alert notes that the SEC often didn’t comment specifically, but required conforming changes consistent with comments on Form 10-K MD&A. “This places a premium on ‘getting the Form 10-K right,’ to ensure compliance in subsequent quarters,” according to the alert.
Specific comments were given to registrants that used non-GAAP financial measures in ways inconsistent with SEC rules. The SEC issued comments to those who aggregated reasons for changes to line-items in financial statements without quantitatively specifying the amount related to each change. The SEC also issued comments to registrants whose Section 302 certifications departed from the text required by the related rule.
Leonard, Street and Deinard's review of the SEC comment letters, as well as related coverage and resources, can be found in the box above, right.
SEC Approves Nasdaq, NASD Regulatory Reshuffle
The SEC has approved a joint plan for allocating regulatory responsibilities between Nasdaq and the National Association of Securities Dealers, aimed at reducing regulatory duplication for firms that are common members of both.
The plan, approved by the SEC in a July 12 order, allocates regulatory responsibility to NASD for the oversight and enforcement of all Nasdaq rules that are identical or substantially similar to the rules of the NASD for common members of Nasdaq and NASD.
The SEC said the proposed plan should reduce unnecessary regulatory duplication, by assigning to the NASD certain responsibilities for common members that would otherwise be performed by both Nasdaq and NASD, and that the reorganization promotes efficiency by reducing costs to common members.
Nasdaq and NASD will undergo an annual review of the Nasdaq Certification to add Nasdaq rules that are identical or substantially similar to NASD rules; delete Nasdaq rules that are no longer identical or substantially similar to NASD rules; and confirm that the remaining rules on the Nasdaq Certification continue to be Nasdaq rules that are identical or substantially similar to NASD rules.
The approval order can be found in the box at right.
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