Rep. Robert Hurt’s (R-VA) recently-reintroduced Small Company Disclosure Simplification Act, now H.R. 1965, was considered by the House Financial Services Committee’s capital markets subcommittee on April 29, 2015. By eliminating the mandate for the Securities and Exchange Commission to collect financial information in the XBRL open data format from the majority of U.S. public companies, H.R. 1965 would effectively derail the open data transformation at the SEC.
Webcast and testimony for last week’s hearing are available here.
At the hearing, Reps. Carolyn Maloney (D-NY) and Keith Ellison (D-MN) criticized H.R. 1965. Rep. Maloney told her colleagues she believes the free availability of searchable data on public companies’ financial performance encourages investment. Ellison, who originally supported the bill when it was first considered by the House Financial Services Committee in March 2014, said he had changed his mind and now opposes the bill.
“I originally voted for H.R. 1965 last session. But after digging into the issue of XBRL, I have come to wonder whether or not I cast the right vote. You don’t hear Members of Congress admit that they didn’t vote the right way often, but the reason is I’ve done some research and found the cost of XBRL filings is lower than expected. And I think that it’s a good idea to move toward a 21st century searchable electronic database, not away from it.”
Reps. Maloney and Ellison cited a study by the the American Institute of CPAs, which found that for smaller issuers ($75 million in revenue and below) the median annual cost to prepare XBRL filings is approximately $8,000 per year. The AICPA finding is contrary to Rep. Hurt’s main justification for the Small Company Disclosure Simplification Act — that XBRL reporting is too expensive for small companies.
At the hearing Rep. Hurt asked Theresa Gabaldon, a law professor at George Washington University, to comment on testimony by her fellow witness, PTC Therapeutics CFO Shane Kovacs, that his company spends $50,000 annually on XBRL. Ms. Gabaldon rightly called PTC Therapeutics an “unfortunate outlier.” Indeed, according to the AICPA study, $50,000 is the highest amount that any company in PTC Therapeutics’ class spends to prepare structured-data filings.
As Rep. Maloney stated, the true cost of XBRL, reflected by the AICPA study, is simply not an onerous one for a U.S. public company. Investors need access to financial data on all public companies, even if they are getting it through intermediaries rather than directly, in order to make decisions.
Before Wednesday’s hearing, Rep. Darrell Issa (R-CA) expressed a desire to bring supporters and detractors of XBRL together to agree on long term modernization goals. In a letter to the leadership of the Financial Services Committee, Rep. Issa pointed out that H.R. 1965 would impede the long-term transformation of the SEC’s disclosure system from documents into searchable data.
“Human- and machine-readable data reporting would best serve investors, allow companies to automate compliance tasks, and give the SEC more efficient ways of analyzing disclosures. Unfortunately, in its current form the Small Company Disclosure Simplification Act would make this transformation more difficult. By simply banning data reporting for most companies, the proposal would erect a statutory barrier to long-term modernization.”
And it’s not just Members of Congress who have expressed opposition to eliminating most open data at the SEC. The technology industry, financial commentators, and the SEC itself have done so as well.
As Daniel Castro and Josh New of the Center for Data Innovation wrote in The Hill in February 2015, “While there is a legitimate need for reform, rolling back these filing requirements would be a large step backwards for public financial transparency.” Fortune ran an op-ed by Columbia Business School student Ethan Rouen, who concluded: “XBRL is broken, but that does not diminish its potential importance to markets and regulators. By voting to eliminate reporting requirements for a majority of publicly traded firms, Congress is doing a disservice to investors …”
The Coalition has published an infographic (PDF) explaining the justified frustration behind H.R. 1965 — and the reasons why the Hurt proposal would, however, move the SEC in the wrong direction.
The SEC has weighed in against the Hurt proposal too. In response to Rep. Ellison’s Questions for the Record after April 29, 2014, Financial Services Committee hearing, SEC Chair Mary Jo White said Rep. Hurt’s proposal would make it more difficult to deliver searchable information to investors. Furthermore, last week the SEC issued a new rule requiring public companies to disclose the relationship between executive pay and financial performance — in XBRL. This is just the latest in a series of actions by the agency showing a willingness to move towards an open data future.
It is unlikely that Rep. Hurt’s reintroduction of the Small Company Disclosure Simplification Act will improve the proposal’s chances in the Senate, where Banking Committee members have expressed their opposition and Banking Committee leadership have chosen not to include it in financial services reform packages under consideration. Nevertheless, H.R. 1965 represents a shortsighted fix to the SEC’s bumpy, but still needed, transformation of its information from disconnected documents into open data — an overarching longer-term goal we can all agree on.