Yesterday, the U.S. House Appropriations Committee approved its fiscal year 2014 financial services and general government appropriations bill and an accompanying report. Deep within the report is the Committee’s recognition that corporate disclosures must be provided in an accessible format, which means the SEC must replace outdated document-based forms with open data. Open data is standardized, structured, and available for instant electronic analysis – far more accessible than the unstructured plain-text forms the SEC uses today.
In 2009, the SEC began requiring public companies to submit copies of each financial statement in the eXtensible Business Reporting Language (XBRL) format, alongside the existing plain-text filings. The adoption of XBRL could have started the transformation of corporate disclosures into open data.
But because the SEC does not enforce the quality of these submissions, investors do not find them useful. Moreover, most of the information that companies file with the SEC beyond the financial statements – proxy filings, transaction reports, compensation disclosures, earnings releases, registration statements, prospectuses – is still trapped in inaccessible documents and has to be manually re-entered for investors, or SEC enforcement staff to be able to analyze it.
The bottom line? In the United States, corporate disclosure should be in open data, but it isn’t.
Fortunately, the SEC’s paymasters in Congress are noticing.
Yesterday, at the urging of Rep. Mike Quigley (D-IL), the Appropriations Committee amended its report to specifically cite the SEC’s adoption of XBRL for corporate financial statements. The amended report also asks the SEC to explain to Congress how it intends to ensure that corporate disclosures are available to investors in an accessible format in the future.
After incorporating some of Rep. Quigley’s suggestions, the committee report’s SEC section includes the following language:
Disclosures. Corporate disclosures are at the core of investor protection but, to be effective, disclosures must be timely, accurate, and understandable to both retail and institutional investors. Corporate disclosures should also be provided to investors in an easily accessible format. Voluminous, overly-complex, Iegalistic and immaterial corporate disclosures both increase investor confusion and discourage shareholder participation in important corporate governance matters. Recent SEC actions to improve investor access to corporate disclosures, including the new eXtensible business reporting language (XBRL) electronic data filing requirements, have so far been met with limited success. The committee requests a report from the SEC within 90 days of this Act on (i) the SEC’s efforts to update the Federal` securities laws to ensure that investors are receiving timely, accurate, and meaningful corporate disclosures in an understandable and accessible format; (ii) the effects of unnecessary and burdensome corporate disclosure obligations on public companies; (iii) the SEC’S efforts to appropriately scale disclosure requirements under the Federal securities laws for smaller public companies, which generally have fewer resources to devote toward costly compliance functions; and (iv) the SEC’s efforts to permit public companies to issue a simplified or one-page summary of their quarterly and annual filings to enhance the retail investor’s understanding of material information that is important to an investment decision.
(NOTE: The Appropriations Committee has not yet published the amended version of the report. This blog post will be updated once a link to the amended version is available.)
The next step for the appropriations bill and its report, complete with Rep. Quigley’s open data shout-out, is consideration by the full House of Representatives. The House is expected to pass the appropriations bill, but its future in the Senate is uncertain.
Nevertheless, the SEC should respond in good faith to the Appropriation’s Committee’s questions, regardless of the future of the appropriations bill. Does the SEC intend to enforce the quality of the existing financial statement data – without which the transformation to open data can’t be worthwhile?
(The SEC’s Office of Interactive Disclosure has occasionally issued bulletins explaining common problems in XBRL submissions, the last of which was in December 2011. But the SEC’s Division of Corporation Finance, which is responsible for corporate disclosures, has never rejected an XBRL submission that contained errors – even though similar errors, when contained in the plain-text financial statements, trigger a quick rebuke. Understandably, the errors continue.)
Moreover, what is the SEC’s plan to transform all of its corporate disclosures into an “accessible” format? (Is there a plan?)
To continue to collect almost all corporate information except the financial statements as plain-text documents – not open data – denies investors from easy access to the data they need to make their decisions. It also makes the SEC’s own efforts to use data analysis to catch accounting fraud far more difficult than they need to be.
Rep. Quigley should be commended for pursuing open data in corporate disclosure. Our Coalition will work with Rep. Quigley and other Congressional supporters of open data to get his questions answered.
Ultimately, we believe Congress should confirm that all U.S. financial regulatory reporting – to the whole raft of U.S. financial regulators – should be in open data instead of inaccessible documents. Congress could do that by amending the securities laws, the commodities laws, the Banking Act, the Sarbanes-Oxley Act, and Dodd-Frank to say so.
It may sound like a tall order, but that’s exactly what the Financial Industry Transparency Act would do.