House Financial Services Committee Continues Four-Year Campaign to Eliminate Most Open Data on Corporate Finance


For over four years, the Biotechnology Innovation Organization and the leadership of the House Financial Services Committee have been trying to pass a bill that would prevent the U.S. Securities and Exchange Commission from collecting searchable financial data from most public companies.

The Small Company Disclosure Simplification Act would exempt all companies below $250 million in annual revenue–over 60 percent of all public companies–from the obligation to report their financial statements in the eXtensible Business Reporting Language (XBRL) open data format.

The Small Company Disclosure Simplification Act, most recently introduced as H.R. 5054, is counterproductive. It would prevent the SEC from modernizing its disclosure system from the current outdated document-based one into a modern data-centric one.

Exact representation of what the Small Company Disclosure Simplification Act will prevent you from doing with most U.S. public companies’ financial information.

Fortunately, it is probably never going to become law.

It has never even been introduced, much less considered, in the Senate. Over the years, Republicans and Democrats on the Senate Banking Committee have signaled many times that they would not support the bill if it came before them.

Three times–most recently, yesterday–Chairman Jeb Hensarling (TX-5-R) has pushed the Small Company Disclosure Simplification Act through his committee. Yet support for the bill has dropped every time.

On March 14, 2014, the committee approved the bill by a lopsided margin, 51 to 5.

On May 20, 2015, the committee approved it again, a bit more narrowly, 44 to 11.

Yesterday, the committee approved the bill a third time, 32 to 23. Every Democrat present voted no. For the first time, one Republican disregarded Chairman Hensarling’s recommendation and voted no, and another Republican abstained.

For years, supporters of the Small Company Disclosure Simplification Act have raised the same four easily-refuted arguments.

Claim: Investors do not use XBRL data. In Financial Services subcommittee hearings, supporters have testified that “only 11% of investors use [XBRL data] extensively,” citing a CFA Institute study. Yesterday, some committee members saw this as a reason to vote yes.

But the figure is misleading.

The same study shows that 89% of investors receive at least some of their information from third-party data companies, such as Morningstar and Thomson Reuters. Those third-party providers are themselves gathering XBRL data and using it to create products for investors.

Morningstar and Thomson Reuters publicly oppose the Small Company Disclosure Simplification Act because it would cut off their market-wide supply of searchable data.

Furthermore, the CFA Institute published a blog post refuting the misinterpretation of its study.

Claim: XBRL costs companies $50,000 a year. Multiple biotech executives have testified, most recently in May, that their companies spend $50,000 to $60,000 each year to prepare financial statements in the XBRL format.

If their testimony is true, these executives are paying too much, and their investors should ask why. A 2014 study by the American Institute of CPAs and XBRL US showed that the average cost for small companies was $10,000 annually.

Two days ago, the American Institute of CPAs and XBRL US released a new version of that study, showing that the average cost for small companies has dropped to $5,850 annually.

And the median cost is even lower: $2,500 annually.

Claim: XBRL is outdated and the SEC should simply adopt blockchain! Supporters of the Small Company Disclosure Simplification Act argue that the SEC should somehow replace XBRL-based reporting with a blockchain.

This argument misunderstands how both XBRL and blockchain truly work.

Any blockchain-based reporting system would require some sort of standardized, machine-readable input. In other words, there must be an underlying data standard before any kind of information can be communicated using a blockchain.

Currently, XBRL is the only underlying data standard that has been developed for corporate financial statements–the only way to make financial statements ready to be communicated on a blockchain.

The SEC cannot get rid of XBRL and then somehow put the old-fashioned plain-text financial statement documents onto a blockchain. That would be impossible.

This argument boils down to “XBRL bad, blockchain good,” without understanding either technology.

Claim: Investors can rely on companies’ voluntary compliance. Chairman Hensarling has said that companies under the $250 million revenue cutoff should be able to decide whether to report in the XBRL format or not, following investors’ demand.

Voluntary exemptions might make sense for the content of corporate disclosure. Congress and the SEC have rightly decided to require larger companies to produce more-detailed disclosures, and allow smaller companies to choose whether or not to do so.

But a voluntary exemption makes no sense for the format of corporate disclosure. To allow small companies to report the same financial information in a different format than the rest of the markets would sacrifice electronic comparability.

Most individual investors don’t know which format companies use to report their financial information, nor should they be expected to demand a particular format. Most investors rely on data companies for that–the same data companies who are opposing the Small Company Disclosure Simplification Act.

What’s next? Supporters of the Small Company Disclosure Simplification Act are right about only one thing: the SEC has done a poor job of making its XBRL system easy to understand and use.

First, the SEC’s XBRL format is much more complicated than it needs to be. Second, for nearly ten years, the SEC has required companies to report their financial statements twice — once as a document, and again as XBRL — which forces them to check back and forth between to the two versions to make sure they agree, adding more work.

For these two reasons, XBRL data collected by other regulators around the world is easy for companies to report, and easy for investors and markets to absorb. XBRL data in the United States is hard.

But the right response is for Congress to direct the SEC to fix XBRL — not regress back to a documents-only system, for more than half of all public companies, the way the Small Company Disclosure Simplification Act would require.

We are certain that Congress will eventually do the right thing.

But we have one more question.

Given all this, why are the biotech industry and the Financial Services Committee leadership so fixated on the Small Company Disclosure Simplification Act? (Yesterday, Chairman Hensarling told his committee that biotech is the primary beneficiary of the bill’s exemption.)

It’s clearly the wrong policy idea. It won’t earn the Senate’s consideration. And opposition is getting stronger, not weaker.