The Coalition has long opposed Rep. Robert Hurt’s Small Company Disclosure Simplification Act (H.R. 1965), which would severely disrupt the SEC’s ability to collect open data financial statements from most public companies, and regress to only collecting the information as plain-text documents. H.R. 1965 is back on the House of Representatives’ agenda. It has been included in a package bill the House is scheduled for a vote this Wednesday.
Since the Republican majority has endorsed the overall package already, the House will probably approve the package, sending it to the Senate, and taking H.R. 1965 along with it.
House Passage – then Oblivion in the Senate?
This news will disappoint supporters of open data in financial regulatory reporting – but it shouldn’t surprise them. The House has already approved package bills with the Small Company Disclosure Simplification Act nestled inside at least twice, in September 2014 and again in January 2015.
The Senate Banking Committee didn’t act on either of the previous two packages, and we hope they will set this harmful bill aside again this time. Two members of the Banking Committee, Senators Mark Warner (D-VA) and Mike Crapo (R-ID), are supporters of the SEC’s use of open data for corporate financial statements. Last summer Warner and Crapo sent a letter to the SEC asking it to move faster to improve the data quality and reduce the costs of open data reporting. (The SEC’s response was positive but vague.)
So why are Rep. Hurt and the Republican leadership sending the Senate yet another package with this bill inside? One reason might be that Rep. Hurt has announced his retirement. He’ll leave the House at the end of 2016. Any legislator about to retire will be eager to get his unapproved bills through the chamber to wind up a successful term in office.
The upcoming vote is still meaningful. Strong Democratic opposition to the Small Company Disclosure Simplification Act would send a signal to the Senate Banking Committee that this bill would probably face President Obama’s veto – and so it’s not worth the Senate’s time. So supporters of open data should still contact their Member of Congress to oppose H.R. 1965.
And watch this space for updates.
In Case You Need a Refresher …
The facts of H.R. 1965 are these.
The Small Company Disclosure Simplification Act is based on justified frustration with the SEC’s failure to make data reporting worthwhile for public companies – but the right response is to fix the data reporting, not regress to only using documents.
If you’re a visual learner, stop reading and check out our infographic here.
Since 2009 the SEC has been requiring public companies to file every financial statement twice – once as a document and again as data. To reduce costs, the SEC should switch to a single submission that’s both human-readable and machine-readable, like many foreign regulators have done.
But those costs aren’t high. According to the only comprehensive study, performed by the American Institute of CPAs and XBRL US, the median cost of XBRL reporting to small issuers ($75 million in revenue and below) is $8,000 per year. The cost would be lower if companies didn’t have to file everything twice (and compare the two versions back and forth).
HR 1965 is based on much higher claimed costs, but these claims are anecdotal. In 2013, a biotech executive testified before a House subcommittee that his company had spent $50,000 on XBRL reporting that year. The AICPA study shows this company is one part of a very tiny minority.
The SEC has surely failed to properly police the quality of XBRL-formatted financial statements, and that’s because the SEC’s internal processes are completely outdated. Lawyers and accountants at the Division of Corporation Finance are still manually checking the math of financial statements, using the old-school document versions, with pencils and calculators. Because the SEC has not started using software to automate these CorpFin processes, it has continued to rely on the documents instead of the data, and it hasn’t developed a way to reject poor-quality XBRL-formatted financial statements. So the quality of the data set – though improving – is still not getting the enforcement it deserves, and investors remain suspicious of it.
The SEC filing industry is trying to address the quality problems itself, though the Data Quality Committee, which started its work last year. If that effort succeeds, and if the SEC finally replaces its current duplicative requirement with a single filing that’s both human- and machine-readable, the frustrations justifying H.R. 1965 will finally go away.
But if Congress exempts all companies below $250 million in revenue – a majority of public companies – from data reporting, there will be a permanent statutory barrier to ever fixing the quality problems and making life simpler for investors, for analysts inside the SEC, and for the companies themselves.