The SEC Has a Few Questions for You

Receiving a comment letter is no cause for panic, particularly if you know what to expect.

It was a letter that Tom Cawley, CFO of Peet’s Coffee & Tea, couldn’t ignore.

Seven months after the company filed its 2008 annual report, there it was: a missive from the Securities and Exchange Commission seeking certain clarifications about the company’s assumptions and business relationships.

Some day there may be an app for that, but today it’s the envelope no CFO looks forward to opening, even if the inquiry proves to be fairly routine.

That was the case for Cawley, who had to supply answers to 11 questions, including two minor points in the management discussion and analysis (MD&A) section of the company’s 10-K. In his written response, Cawley disclosed the source for Peet’s claim of a 12% uptick in grocery specialty-coffee spending and clarified his company’s relationship with a coffee distributor.

That the SEC zeroed in on that facet of the 10-K did not surprise Cawley in the least. “The MD&A is the part that changes every year,” he says. “It’s talking about where the business is going, and where you’ve been, and what’s driving the [underlying] economics.” Indeed, the MD&A was the topic cited most frequently in 2009 by the SEC in its reviews of U.S. publicly traded companies’ annual and quarterly filings, according to a CFO analysis of data compiled by Audit Analytics.

After the MD&A, the SEC has been focusing on two of the most controversial issues of the day: executive compensation and fair-value accounting. While most of the agency’s concerns cluster around what might be considered a top 10 list of trouble spots (see “The SEC’s Top 10 Concerns” at the end of this article), it also sends comment letters simply to ask for missing data that a company believes isn’t material or doesn’t apply to it (such as, in Peet’s case, whether it has any off-balance-sheet arrangements), or to address current topics of concern. Today, for example, it may probe a firm’s ties to business partners that operate in countries deemed state sponsors of terrorism.

The good news for companies is that when it comes to SEC comment letters, history does, in fact, repeat itself. “The top-10 list has been fairly consistent for at least the last five years,” says Bridgette Hodges, partner in charge of SEC regulatory matters at Grant Thornton, who has been tracking SEC comment letters since 2004.

Three Is the Magic Number

Ever since the SEC began making the letters public on the Edgar database six years ago, outside advisers, including accounting and law firms, have been helping companies stave off probing SEC queries by spotting trends and suggesting their clients add preventive disclosures.

The assistance is welcome because a company’s likelihood of getting reviewed has increased in recent years. More than 2,200 companies received a letter last year on their quarterly and annual filings, a 73% increase over 2005, according to CFO’s analysis. Under the Sarbanes-Oxley Act, the SEC must look at one filing from each public company at least once every three years. (The commission may also pay particular attention to certain types of companies at any given time, as well as to firms with the largest market caps or the most volatile stock prices.)


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