By:  Cydney Posner

Today, SEC Today reported on the evaluation by the SEC’s Office of the Inspector General of Corp Fin’s preliminary review process. The report includes three recommendations for Corp Fin:

  • enhance consideration of risk factors when selecting companies for preliminary review;
  • maintain surveillance of the largest companies; and
  • manage its work loads more efficiently.
OIG noted that Corp Fin has made substantial changes in the selection process, moving from a mechanical screening process to a more substantive preliminary review process. Corp Fin usually conducts full reviews for an IPO, as well as for contested proxy contests, tender offers and going-private transactions. In addition, because two-thirds of the issuers subject to review have a December 31 fiscal year-end, OIG found that companies with other fiscal year-ends receive financial statement or full reviews approximately 15% more often than December 31 fiscal year-end companies.

With respect to risk-based review criteria, OIG noted that Corp Fin has been testing reports by a number of private vendors to see if

they can help to identify companies with problems. Data-tagging may help in that process, as may additional use of financial ratios and analyses and trading data suggested by OIG. OIG observed that Corp Fin generally relies on only one of the SOX factors--large market cap--to determine the timing of reviews. SOX also requires Corp Fin to consider other factors, including material restatements, significant volatility

in stock prices as compared to others, disparities in price-earnings ratios (with respect to emerging companies) and operations that may have a significant impact on a material sector of the economy. A senior member of Corp Fin advised SEC Today that, although it was difficult to incorporate all of the risk factors, the staff does consider all of them in making review decisions over the three-year cycle. OIG suggested that Corp Fin continuously monitor developments at the largest companies through press releases, trading data and Forms 8-K to help identify material issues affecting those companies when the staff performs its preliminary reviews

OIG also reported that Corp Fin did not review all companies during its first review cycle, excluding some companies that were not required to file periodic reports after the first year or those that could deregister based on the small number of shareholders or limited asset size. OIG viewed that as inappropriate in the absence of a formal legal opinion from the Office of the General Counsel.

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