Accounting

The SEC Does Read Comment Letters


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The U.S. Securities and Exchange Commission (SEC) encourages the public to comment on proposed rules during an open comment period. But what impact will your comment letter have on the final rule? And what are the characteristics of a good comment letter?

©Jacob Ammentorp Lund/ISTOCK/THINKSTOCK

A new research report from Financial Executives Research Foundation (FERF), “Do Public Comment Letters on Proposed SEC Regulations Matter?”, sponsored by RR Donnelley, finds that comments letters from the public can have a profound influence on the SEC’s final rule.

Researchers at Case Western University examined comment letters reviewed by SEC staff when the commission was finalizing its Crowdfunding (Release Nos. 33-9974) and Pay Ratio Disclosure (Release Nos. 33-9877) rules. In the case of the Crowdfunding release, approximately 50 percent of the comment letters submitted by constituents were referenced by the SEC in the final regulation or its explanatory footnotes. Letters received from businesses and associations provided the most influence when it came to the changes made to the proposed rule.

For the Pay Ratio release, approximately 7 percent of the comment letters received were referenced in the consideration of the final rule. Even though the majority of the comments were sent by individuals, businesses and associations were referenced most frequently.

There are a variety of reasons a company would decide to send a comment letter. Companies may choose to comment because a proposal will affect them directly. A company may comment because it believes has a responsibility to the profession and accounting standard-setters.

Bob Laux, Senior Director, Financial Accounting and Reporting at Microsoft, says Microsoft not only comments when the potential rule impacts the company, but also when a proposed rule differs from the company’s overall views on accounting principles. He explains: “If we believe that a proposal is not effective for disclosure purposes, we will propose a different alternative – even if there is no direct impact to us. The regulators put a lot of work into the proposals – so we want to take the time to respond.”

If a company decides to comment, it would then weigh whether it should respond individually or as part of a consortium. Lorraine Malonza, Managing Director of Technical Activities at FEI and liaison for FEI’s Committee on Corporate Reporting (CCR), believes the more comments received by the SEC, the more issues can be raised.

Because CCR is comprised of more than 40 of the Fortune 100, industry and implementation issues vary. She explains, “Filing as a consortium, there are additional insights from a larger group, a chance to get perspectives from different demographics, company sizes, industries and business types. However, this may be overshadowed if the consortium is not well respected or if there are divergent views that may compromise the message in the final letter.”

Project interviewees agree on one important point: express your point of view clearly. Very short letters that simply indicate support or disapproval are not as beneficial to the SEC staff as those that provide real insights. Wayne Carnall, Partner at PwC, suggests letters should address how the proposal can be improved. Even if you support the proposal, address possible implementation problems and the cost effectiveness of the proposal. Comment letters should provide specific examples and empirical evidence if possible.

Download “Do Public Comment Letters on Proposed SEC Regulations Matter?” on the FERF website.