SEC Open Data Loses House Battle – but is Winning War

Financial Regulation

SEC Open Data Loses House Battle – but is Winning War

Yesterday, for the third time in 18 months, the House of Representatives passed a multi-part financial services package bill with Rep. Robert Hurt’s (R-VA) anti-open data proposal included. Rep. Hurt’s Small Company Disclosure Simplification Act would require the Securities and Exchange Commission to exempt most U.S. public companies from the obligation to file open data financial statements in the XBRL format. The overall package bill, H.R. 1675, now makes its way to the Senate.

But thanks to new House Speaker Paul Ryan’s commitment to permitting members to offer, and debate, more amendments on the House floor, supporters of open data had an opportunity to register their objections. One amendment to defang Hurt’s proposal failed by a relatively narrow 27-vote margin and earned support from 21 Republicans as well as most Democrats.

And, as debate over the merits of open data reporting continued, the White House issued a veto threat to H.R 1675, the overall legislation. The White House’s Statement of Administration Policy specifically cited the package bill’s inclusion of Rep. Hurt’s proposal as one of the reasons why President Obama’s advisors would recommend he veto the legislation, should it pass the Senate.

Yesterday’s debates, votes, and White House statement sent a clear message to the Senate: restricting open data is controversial. If the Senate Banking Committee wants to craft a broadly popular financial services bill that will earn Democratic votes and President Obama’s signature, the committee should leave out Rep. Hurt’s open data exemption and use the more popular parts of H.R. 1675 instead.

Here’s what happened yesterday, why it matters – and why supporters of open data should take note of Rep. Hurt’s main argument.

Declining Support for Open Data Exemption

The floor of the House of Representatives, scene of yesterday’s battle over SEC open data reporting. Attendance was somewhat more sparse than depicted here.

The first financial services package bill to include Rep. Hurt’s Small Company Disclosure Simplification Act passed the House by a vote of 320 to 102, on September 16, 2014. There was no discussion of the Hurt provision.

The second such bill passed the House by a vote of 271 to 154, on January 14, 2015. Several Democrats objected to the package bill’s inclusion of Rep. Hurt’s open data exemption.

Yesterday’s package bill passed the House by a vote of 265 to 159, but only after a bipartisan group of open data supporters had waged two amendment battles and offered spirited debate.

Yesterday’s Issa Amendment: 21 Republicans On Record for Open Data

First, Reps. Darrell Issa (R-CA) and Jared Polis (D-CO) offered an amendment to reduce the scope of the Small Company Disclosure Simplification Act’s exemption. Under the Issa amendment, the SEC would only be required to exempt brand-new public companies making their initial public offerings, instead of a majority of all existing public companies, from the obligation to file open data financial statements.

For small public companies, said Issa, the estimated $8,000 median annual cost of filing open data is “de minimis” compared to the overall costs of going public. And that cost is worth the advantages of “a digital format that the world can look at and evaluate” over document-based financial statements.

Supporting Issa, Rep. Carolyn Maloney (D-NY) pointed out that most securities regulators around the world have adopted the XBRL format, and that “removing the requirement for 60 percent of the firms is step backward for corporate transparency.”
Issa’s amendment was rejected, 221 votes to 194. But 20 Republicans broke ranks with Rep. Screen Shot 2016-02-03 at 3.44.19 PMHurt to join Issa and nearly all Democrats in supporting the amendment. This tally marked the first time SEC open data has earned Republican votes – signaling that Hurt’s proposal can no longer expect the Republican unanimity it has previously earned in committee and on the H
ouse floor.

Previous financial services package bills with Hurt’s proposal, since they passed with unified Republican majorities and no Republican amendment attempts, implied Republicans support limitations on open data. But yesterday, Rep. Issa’s push to reduce the scope of the open data exemption sent the first signal to Senate Banking Committee Republicans that there is no Republican consensus on this issue.

Yesterday’s Ellison Amendment: Democrats Unify Against Hurt

Second, Rep. Keith Ellison, joined by Reps. Maloney, Polis, and Mike Quigley (D-IL), offered an amendment to simply strip the Small Company Disclosure Simplification Act out of the package bill. Ellison criticized Rep. Hurt’s claim that open data reporting costs small companies as much as $50,000 per year.

Although corporate executives testifying before the House Financial Services Committee in 2013 claimed that figure, Ellison said, the later American Institute of CPAs / XBRL US study finding a median cost to small companies of $8,000 per year showed the 2013 witnesses were “outliers.”

Ellison’s amendment was also rejected, 248 votes to 173, this time on party lines. Only eleven Democrats voted against the amendment and in favor of the Hurt proposal. Five Democrats who had previously supported Rep. Hurt’s proposal in  committee now switched to oppose it on the House floor, including Rep. Terri Sewell, who had once cosponsored the Small Company Disclosure Simplification Act alongside Hurt.

When Rep. Hurt first proposed his open data limitation in early 2014, almost every Democrat on the House Financial Services Committee voted for it. House Democrats have now entirely reversed. The vote on Ellison’s amendment completed the Democratic shift from fully supporting limitations on open data to almost unanimously opposing them.

Screen Shot 2016-02-03 at 4.01.47 PM
Since the Senate requires a 60-vote majority to pass most legislation, the Senate Banking Committee Republican leadership will be aware that at least some Democratic support is necessary for a package bill to succeed. The vote on the Ellison amendment signals to the Banking Committee that the Hurt proposal can’t get it.

President Obama’s Veto Threat

As House members debated whether the SEC should keep its open data reporting requirement, the White House issued a Statement of Administration Policy opposing the package bill, H.R. 1675: “If the President were presented with H.R. 1675, his senior advisors would recommend he veto the bill.”

The statement singled out Rep. Hurt’s open data restriction as one of three reasons why the package would face a veto: “Open data disclosure systems benefit investors, issuers, and the public, increasing transparency of publicly traded companies by making their filings more easily accessible. Impeding regulators’ ability to use 21st century technological tools to regulate markets and protect investors is contrary to the SEC’s mission.”

Congress can override a Presidential veto with a two-thirds majority, which requires 290 votes in the House and 67 in the Senate. Since the final tally on H.R. 1675, 265 to 159, fell far short of two-thirds, the veto threat is a death knell for the bill.

House leaders who want to pass the more popular parts of H.R. 1675 will be looking for ways to gather additional Democratic support and get above 290 House votes, work with the White House to avoid a veto, or both. Yesterday’s debate, amendments, and veto show that they cannot gather such support for a package bill that includes an open data exemption.

But Don’t Forget: SEC Open Data Still Needs Work

During debate over the Issa and Ellison amendments, Rep. Hurt made a point that open data supporters must heed. “If the SEC had effectively implemented XBRL, we wouldn’t be having this conversation. But the SEC has not.”

Rep. Hurt was right.

The SEC’s open data reporting requirement was a failure for years. The agency took no steps to enforce the quality of XBRL financial statements until mid-2014, five years after announcing the requirement. For years, poor data quality discouraged investors, and the analysts serving them, from trying to use XBRL data to make investment decisions.

Rep. Hurt also claimed most investors have never heard of XBRL. That’s not so much a problem. Investors don’t need to know the digital platforms they use are ingesting XBRL data, so long as those platforms work properly. But poor data quality has meant those platforms are hard to develop. Calcbench and idaciti are prominent, encouraging exceptions.

Most of all, the SEC’s decision to continue requiring companies to report every financial statement twice – once as a document, and again as XBRL data – has impeded progress. Corporate financial officers and SEC staff still mostly rely on document-based financial statements to track corporate finance and review filings for compliance. And the duplicative nature of the SEC’s current system imposes compliance costs that cannot be justified.

The work of the newly-founded industry Data Quality Committee offers hope that XBRL financial statements may become reliable enough for investors to trust them. And for years the SEC has been signaling a future move away from documents-plus-data toward a single submission. (As Merrill Corporation reported this week, the SEC has begun using XBRL data for industry-wide economic analysis, even if it hasn’t yet automated the review of corporate filings.)

The Data Quality Committee must succeed, and the SEC must eliminate duplicative reporting. The Data Coalition will keep fighting against proposals like Rep. Hurt’s to gain enough time for this crucial progress to happen.

But if the quality of XBRL data does not improve to the point where it becomes commercially acceptable, and if the agency does not end its seven-year transitional phase of requiring companies to file documents plus data, then Rep. Hurt’s proposal deserves to pass.