The House Committee on Financial Services has voted to approve legislation that would require the U.S. Securities and Exchange Commission (SEC) to stop collecting searchable XBRL data from most public companies. Rep. Robert Hurt’s (R-VA) Small Company Disclosure Simplification Act, H.R. 1965, passed, 44 votes to 11. All Republicans voted in support; 14 Democrats voted yes; 11 Democrats voted no.
Before the final vote, every Democrat voted in favor of amendments to narrow the scope of the bill.
This is the second time the Small Company Disclosure Simplification Act has been approved by the same committee. In March 2014, the committee passed the same bill by a more lopsided vote of 51 to 5, with all Republicans and nearly all Democrats supporting. At that time, no amendments were proposed. (Republicans, holding the majority in the House of Representatives, have enjoyed a corresponding majority on the committee’s membership since 2011.)
Democrats’ Support for Amendments Will Raise Future Roadblocks
Even though today’s result is technically the same, the implications are different.
A contested bill – with one side uniformly in favor, the other seeking changes – has a smaller chance of becoming law. House leadership is less likely to seek full House passage using the special, fast-track “suspension of the rules” procedure usually employed for minor measures, because suspension requires a supermajority. With every committee Democrat on record desiring changes, the suspension procedure is riskier. Moreover, the bill won’t be included in bipartisan packages built to attract large majorities of Republicans and Democrats (as happened last year).
And the more collegial Senate Banking Committee, rumored to be focusing this year on bipartisan reforms, will put other priorities first.
Rep. Keith Ellison (D-MN), who voted for the bill in March 2014 but then changed his views, led the opposition to it this year. In a subcommittee hearing last month, Ellison told his colleagues he’d changed his mind because the cost of XBRL reporting is much lower than claimed by supporters, and the potential value of open corporate financial data is too important to sacrifice. And today Ellison offered the two amendments that, though they failed on near-perfect party lines, showed Democrats’ concerns.
But because H.R. 1965 ultimately passed with a large majority, as Democrats who’d supported amendments nevertheless voted in favor of the underlying bill, supporters of open data will have to continue to share their views with Members of the House beyond the Financial Services Committee and with key Senators.
Rep. Hurt’s Justified Frustration Remains Unaddressed
The Small Company Disclosure Simplification Act is based on justified frustration with the SEC’s failure to make its open data reporting requirement work properly for investors, markets, and public companies.
Since the SEC continues to require every public company to report its financial statements twice – once as an old-fashioned plain-text document and again as XBRL data – the agency and companies have continued to focus on the document versions and neglect the data versions. The quality of XBRL data, though improving, has been poor, earning investors’ distrust. As a result, smaller companies don’t experience the broader investor attention and lower capital costs that data reporting should bring.
The SEC must fix its XBRL reporting requirement – first, by getting rid of the current duplicative document-plus-data regime and switch instead to collecting a single, searchable filing; second, by improving data quality; and finally, by making a plan to modernize its whole disclosure system from documents into open data. For much more on this overdue transformation, check out the Coalition’s infographic (PDF).
Ellison Amendment Illuminates Need for SEC Change
Today, Rep. Ellison’s second amendment, even though it was rejected by Republicans, illuminated the need for the SEC to address the justified concerns behind H.R. 1965.
The amendment would keep the original bill’s exemption from XBRL reporting for most public companies – but only until the SEC adopts the inline XBRL format, allowing companies to report their financial statements once, rather than twice. Inline XBRL is both human-readable and machine-readable, and its adoption by the SEC, in place of today’s document-plus-data regime, is the crucial first step to resolve the underlying problems of the SEC’s open data reporting regime.
Thus, the Ellison amendment would have turned Rep. Hurt’s bill into a proactive push for the SEC to take action, sending a clear message to the agency: Move to inline XBRL, or lose the right to collect XBRL data from most public companies. SEC Chair Mary Jo White has told Congress that her agency relies on XBRL data to help protect investors and ensure compliance with securities laws.
The Ellison amendment’s message, even in defeat, should push the SEC to take action. Unless it fixes its underlying failure to make XBRL data work properly for investors, its internal staff, and public companies, Rep. Hurt’s frustration will remain justified and eventually the Small Company Disclosure Simplification Act, or something like it, will pass – and, in fact, should pass!
A Bipartisan Solution Offers the Way Forward
Today, Rep. Hurt, even in supporting his measure to diminish the SEC’s open data reporting mandate, told his colleagues he believes the long-term objective of consolidated reporting through inline XBRL reporting is “worthy.” We believe Congress can agree on a bipartisan, long-term mandate for the SEC and other regulators to ultimately transform all their disclosure requirements from documents into searchable data – while also addressing the reasons why the current XBRL reporting requirement has disappointed investors, markets, and companies.
A bipartisan group of Members of Congress has introduced the Financial Transparency Act, which provides just such a mandate.
Cosponsors include three Republican members of the Financial Services Committee who supported H.R. 1965 today: Reps. Randy Hultgren (R-IL), Patrick McHenry (R-NC), and David Schweikert (R-AZ). Also cosponsoring are three Democrats: Ellison, Rep. Carolyn Maloney (D-NY), and Rep. John Delaney (D-MD).
The future of open data reporting at the SEC – and other agencies, too – depends on what happens next.