An Analysis Of 2021 And 2022 SEC Comments Issued To REITs - Securities

For the past several years, fewer and fewer reviews of filings by the Securities and Exchange Commission ("SEC") have resulted in comments being issued to public reporting companies; however, sources reveal that trend reversed in 2022, indicating the possibility of increased SEC scrutiny of disclosure made in public filings. Reinforcing the prospect of the SEC's enhanced review of company filings, news sources have cited the growing number of SEC comments issued to companies within the first two months of 2023 regarding calculation of non-GAAP measures. Given this seemingly global trend of increased SEC scrutiny, and with REITs being the subject of headlines over the past few months, we expect the SEC to keep a close eye on the disclosure that REITs make.

In this client alert, we (1) summarize the SEC's review process for filings that REITs make under the Securities Act of 1933, as amended (the "Securities Act"), and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and (2) explore SEC comments issued to REITs during 2021 and 2022.

The SEC's Division of Corporation Finance (the "Division") reviews filings made under the Securities Act and Exchange Act to monitor compliance with applicable disclosure and accounting requirements. The Division assigns filings made by companies in a particular industry to one of nine industry offices whose staff members have specialized review expertise. The staff of the Office of Real Estate & Construction (the "Staff") review filings made by REITs.

Review of Registration Statements

A registration statement filed by a company for an offering of securities is subject to review by the SEC before the offering can commence. Note that the discussion below does not extend to automatic shelf registration statements and registration statements on Form S-8 as these registration statements automatically become effective.

Review of S-11

For initial Securities Act registration statements, a company may confidentially submit its draft registration statement ("DRS") for Staff review provided that the company confirms in a cover letter that it will publicly file the registration statement and nonpublic draft submissions at least 15 days prior to any road show or the requested effective date of the registration statement.

Once the DRS has been submitted, the Staff will determine whether the registration statement should be reviewed in depth, receive a limited review, or be cleared without review. The Staff usually determines within two to five business days after the date of the filing whether the DRS will be reviewed. If the Staff decides not to review, they can make the S-11 effective within 48 hours after notifying the registrant of their decision not to review. However, it is rare that an initial registration statement would not be reviewed by the Staff. Full review of the S-11 entails a thorough review of the registration statement by an examiner and a staff accountant. The examiner reviews all aspects of the registration statement other than the accounting aspects while the staff accountant reviews the financial statements and accounting-related issues.

The Staff generally tries to issue an initial comment letter within 30 days of the date of the initial confidential submission or public filing.

Review of S-3

A Form S-3 registration statement is a short-form registration statement available to eligible companies. To be able to use Form S-3, a registrant must:

Be organized under the laws of the United States;
Have a class of securities that is registered pursuant to Section 12(b) or 12(g) of the Exchange Act;
Have been subject to Section 12 or 15(d) of the Exchange Act for the past 12 months and has filed all Exchange Act filings required to be filed for at least the past 12 months;
Have timely filed all Exchange Act reports required to be filed during the past 12 months and any portion of the month before filing the registration statement, including the registrant's:
- Proxy statement or information statement; and
- Reports on Form 10-K, Form 10-Q and Form 8-K.

When a Form S-3 registration statement is filed, the Staff will first screen the Form S-3 to ensure the registrant's eligibility to use the form. Once the registrant is confirmed to be eligible to use Form S-3, similar to other registration statements, the Staff will determine whether the registration statement should be reviewed (and, if so, whether the filing will be subject to a full or a limited review). The Staff's decision typically will be relayed to the registrant within two to five business days. Unlike long-form registration statements on Form S-11, the Staff is much more likely to decide not to review a Form S-3.

Review of Exchange Act Reports

The Sarbanes-Oxley Act of 2002 ("SOX") requires the Division to undertake some level of review of each reporting company at least once every three years. In addition to the required review, the Division selectively pulls certain filings for evaluation. The Division does not set forth the criteria used for determining which companies to selectively review, but Section 408 of SOX sets forth several factors that may be considered, including:

whether the company has issued material restatements of its financial results;
whether the company has experienced significant volatility in its stock price;
the company's market capitalization;
whether the company is an emerging company with a disparity in its price to earnings ratio;
whether the company's operations significantly affect any material sector of the economy; or
any other factor the Division considers relevant.

If the Division selects a company or a filing for review, the extent of that review will depend on many factors, including the criteria set forth above. The scope of a review may be:

A full cover-to-cover review;
A financial statement review in which the Staff will examine the financial statements and related disclosures, such as Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"); or
A targeted-issue review in which the Staff will examine the filing for one or more specific items of particular focus for the SEC.

Receiving Staff Comments

Most commonly, the Staff provides a company with comments where it believes a company has not complied with the SEC's rule requirements, should enhance its disclosures and/or can provide additional information.

There are generally three types of comments issued:

Substantive comments requesting revisions to the disclosure to provide clarity with regard to language that is ambiguous or that is inconsistent with other disclosure included or incorporated by reference in the filing;
Comments requesting supplemental information to assist the Staff in assessing the company's disclosure; and
Comments regarding technical or procedural deficiencies, such as the inclusion of certain required exhibits and the appropriateness of adjustments to non-GAAP measures.

Generally, comments are provided to the company in the form of a written comment letter. In certain circumstances, the Staff may provide oral comments in addition to (and occasionally in lieu of) a written comment letter. If a company receives oral comments, the company should ask the Staff examiner how he or she would like to receive the company's response. Best practice is to respond to oral comments with a written letter to document formally the oral comment that was conveyed and the company's response.

It is possible that Staff review may involve multiple rounds of comments and responses. When all issues relating to a review are resolved to the Staff's satisfaction, the SEC advises the company by letter, often preceded by a phone call from the Staff examiner, that it has no further comments, and that the Staff's review is complete. All comment letters and related responses are posted to SEC's EDGAR website approximately 20 business days after the review has been completed. However, a company can request confidential treatment of portions of its response letters. If this request is granted, only the non-confidential portions of a response letter are made publicly available.

PRACTICE NOTE: The best way to avoid drawing comment is to be prepared. Registrants should understand the regulations and keep apprised of developments in SEC rules and disclosure practice. For instance, COVID-19, inflation and the war in Ukraine have all resulted in the Staff pushing for enhanced disclosures. Due to the global implications of such topics, the SEC's focus was, frankly, predictable and understandable. Being prepared also means reviewing relevant comment letters and responses—as well as any disclosure changes that resulted from the comment letters—to discern what topics are of particular interest to the SEC and how the comments ultimately were resolved, all of which should inform the Company's disclosures in periodic reports and registration statements, as applicable

Responding to Staff Comments

Most comment letters request that the recipient reply with a written response to the comments therein within 10 business days. If the company believes it needs more time to respond to the Staff's comments, the company should contact the Staff to request additional time as soon as possible or seek clarification on any of the comments.

Key considerations and best practices for drafting a response letter include:

Assess the nature of the comment(s) and allocate responsibility to address each comment. In some cases, it may be necessary or advisable to seek input from outside legal counsel and auditors.
Prepare a shell response letter as soon as possible. The shell response should include an introductory paragraph explaining that the correspondence is being submitted in response to a comment letter received by the company regarding the applicable filing (or, if applicable, that the company is responding to an oral comment) as well as a reproduction of each of the Staff's comments, each of which would be followed by a space for the company's responses. This will ensure that you clearly and directly address every comment issued.
Receipt of a comment does not necessarily mean that the Staff has reached a final conclusion on the topics addressed in the comment. For that reason, if the company does not agree with the Staff's request for suggested or amended disclosure, the company should feel free to identify the points raised by the Staff with which it respectfully disagrees. When explaining such divergence of opinion, the company should provide the Staff with any bespoke facts and circumstances and provide as much insight as possible into the judgments it made in applying the relevant regulations or guidance.
Best practice is to review recent comment letters and responses to keep apprised of trends relating to SEC comments issued to peer companies before a comment letter has been received. Reviewing publicly available correspondence can also prove useful when weighing how to respond to a comment letter; however, companies should be careful not to rely too heavily on previously published correspondence when crafting their response letters. For a stronger, more compelling response, registrants should cite authoritative literature and SEC guidance whenever possible.
If the comment requests additional or revised disclosure in future filings, consider including the proposed additional or revised disclosure in the response letter, and identifying the page in the filing where the revised or additional disclosure appears, to minimize the chances of receiving future comments relating to the applicable disclosure.
Remember that comments and responses are made public on the SEC's EDGAR website after the review process has ended. While this may be helpful in terms of reviewing responses to comments from similarly situated companies, it also means that your responses ultimately will be publicly available. Accordingly, be mindful of what you provide in response and consider ahead of responding whether to request confidential treatment.

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Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.