Back in June, the SEC announced that it would make comment letters available to the public. Most of the letters, written by the Commission’s Corporation Finance and Investment Management divisions, provide public companies with comments on their disclosures, specifically noting where the filing could be improved or enhanced.
The SEC’s plan was to release comment letters, as well as company responses to those letters, relating to disclosures made after August 1, 2004.
But Compliance Week has learned that the comment letters are not yet available, any may not be for some time. That’s apparently because of technology hurdles, as well as complications related to the release of the letters. “The staff continues to consider the issues—both legal and technical,” says SEC spokesman John Heine. “It will be a while until the system takes hold.”
Even so, industry insiders say that technology may not be the key obstacle to getting comment letters into the hands of the public, and that internal dissent at the Commission is actually a bigger problem.
Why So Important?
Though most public companies would prefer to keep their correspondence with Commission staffers under wraps, the comment letters can be quite valuable to corporate executives and securities experts.
That’s partially because the letters often set forth staff positions about a particular topic. And while those positions refer only to a specific filing and do not constitute official SEC policy, they can still be helpful when considering how the Commission might interpret—or react to—related issues. In addition, the correspondence can help companies in preparing their own responses to comment letters.
Gavin
“SEC comment letters, and their responses, are analytically rich,” commented SEC Insight president John Gavin in a letter regarding the Commission’s decision to release the letters. According to Gavin, whose research firm uses legal means to acquire such letters, “We consistently find them to be an important and helpful supplement to some of the more formal disclosure and communication mechanisms available to, and employed by, registrants.”
Currently, the SEC releases certain comment letters and responses only when firms such as Gavin’s submit Freedom of Information Act requests. “For years—decades—the Commission has received Freedom of information Act requests,” notes Heine at the SEC.
Washington, D.C.-based Global Securities Information claims to own the most comprehensive collection of staff comments and issuer responses. The firm provides access to public filings in "EDGAR," the Commission’s electronic document dissemination service. In a letter to the SEC, GSI CEO Phil Brown claimed to have created and paid for over 8,000 FOIA's to date, and to have 6,000 pending requests.
The Commission's decision to release the comment letters was in part due to the high volume of FOIA requests. “Since Enron,” notes Gavin at SEC Insight, “the number of FOIA requests for SEC comment letters has risen sharply.”
Brown at GSI claims that his company had much to do with the Commission's decision. “We’re the reason they are going through and putting the letters out there,” he says. “Last year, we had 75 to 85 percent of the letters.” Of course, the SEC's move now threatens GSI's investment. “Obviously, I have a vested interest,” says Brown. “We built the system, the database … we spent hundreds of thousands of dollars.”
So Where Are The Letters?
The Commission’s plan was to release comment letters and responses that were related to disclosures made after August 1. According to Heine at the SEC, correspondence would be slotted for release to the public 45 days after the SEC staff no longer anticipates any further revisions. The comment letter would physically be released 20 days after that point.
Assuming that timing, then the first letters should have been released in early October.
So are any SEC comments and responses available yet? The short answer, according to Heine, is “No.” That's because of a couple challenges, he says. “One issue is legal. The other is a technical issue.”
On the technology side, the hurdle seems related to integration of the documents with EDGAR. “The systems have to be in place,” says Heine. “When the comment letters become available, they will be posted on the EDGAR site.”
Another SEC spokesman confirmed that the Commission is “still working through some of the technical issues and hope to soon have an announcement as to how it will work; but we’re not there yet.”
But some, including EDGAR data providers like GSI who have already integrated comment letters into their systems, believe that technology is not an obstacle at all.
Instead, some believe that SEC staff—particularly those involved in examining public companies—are opposed to the effort to release comment letters, largely because they don't want their work scrutinized by the public.
According to one former SEC staffer, there is a "huge variation" in the quality and legal sufficiency of some of the comment letters. As a result, the authors of the letters are not interested in opening their correspondence to critique that they, for example, missed something material, or inadvertently contradicted the comments of other SEC staffers—or possibly even members of the Commission.
To those ends, there is concern that SEC staffers can ostensibly "game" the system to delay the release of their comment letters. For example, letters are to be released 45 days after the SEC staff no longer anticipates any further exchanges; however, that judgment is entirely subjective—SEC staffers can simply argue, "We're not done yet," even if the dialogue with the company has been going on for years. The American Bar Association’s Committee on Federal Regulation of Securities addressed this issue in a letter of their own to the SEC, noting that “it is not always clear when the review is completed.”
In addition, correspondence to be released will be related to disclosures made after August 1. However, SEC staffers can theoretically prevent the release of those letters by arguing they originated from disclosures prior to that date. In other words, an examination covering disclosures filed, for example, yesterday, would still not be released if the filing that “is the primary focus of the review” was filed before August 1, 2004.
Heine at the SEC would not comment on any internal or legal issues related to the release of comment letters.
As for the timing of the release of the letters, Heine is not sure when they'll be ready.
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