Will Senate Restrict Open Data in Financial Regulation? H.R. 5405 Would Raise Barrier to Modernization
The U.S. federal government is slowly transforming its information from disconnected documents into open data. Our Coalition scored its first major legislative victory earlier this year with the passage of the DATA Act, the nation’s first open data law. On May 9, 2014, after Representative Darrell Issa and Senator Mark Warner successfully marched the bill through a gridlocked Congress, President Obama signed it into law. The DATA Act is a mandate for the government to adopt comprehensive data standards for all of its spending information and to publish that information online.
Spending is a great start. But other areas of the federal government’s information need transformation, too. And financial regulation should be next.
U.S. financial regulators have yet to adopt comprehensive data standards for the information they collect under the securities laws, the commodities laws, and the Banking Act. If they standardized this information, and made the public portions of it available online—investors could make better decisions, enforcers could deploy analytics to find the next Enron, and early-stage companies could access capital more cheaply.
Comprehensive, searchable data on smaller companies would enable analysts to cover and recommend them more cheaply. Without open data in financial regulation, buyers are less likely to invest.
Rep. Patrick McHenry and Theo Francis of WSJAt Data Transparency 2014 last week, Representative Patrick McHenry (R-NC) put it this way: “When the NFL is providing more data on their players than the SEC is providing on public companies, that’s deeply troublesome. When I can find a fourth-option wide-receiver—all the data I need on whether or not to start that player this week in my Fantasy Football league—yet I see a company with a market cap of $450 million and I can’t get a damn bit of information about them, that is troublesome.”
In 2009, the Securities and Exchange Commission took an initial step towards opening up financial regulatory information by requiring public companies to submit their financial statements in the eXtensible Business Reporting Language (XBRL) format. But after this important step, the transformation to open data stalled. The SEC stills collects two versions of every financial statement: an XBRL version and a document version. Further, until three months ago the agency had taken no serious steps toward enforcing the quality of the XBRL version. Without assurance of data quality, investors have been reluctant to use XBRL data. And despite calls from investors, industry, Congress, and its own staff, the agency still has no plan to transform its hundreds of other forms from documents into data.
Recently the SEC has begun to resume its stalled transformation. In July, it took its first steps toward quality enforcement. And its brand-new chief economist, Mark Flannery, also joined us last week at DT2014. His comments show the agency’s recognition that open financial data is good for investors and companies alike: “Helping smaller companies to improve the quality of their data is important because their ability to disseminate machine-readable financial information critically enhances their ability to access capital in financial markets.” Flannery went on to explain that open data in SEC reporting improves accountability to investors and companies’ ability to automate compliance.
“DERA staff is working with outside contractors on ‘Inline-XBRL.’ Consistent with its name, this new technology would allow companies to integrate (or embed) the XBRL tagging of the financial statements directly into their standard HTML formatted 10-K and 10-Q filings. This effectively eliminates the need to reconcile separate HTML and XBRL versions of the financial statement content, thus reducing the possibility of rekeying or similar errors.”
But the SEC’s positive steps toward quality enforcement and toward a single open data version may be coming too late.
Over the last five years, without quality enforcement by the SEC, investors and the companies that help them get their information have not wanted to rely on iffy XBRL financial statement data. As a result, some companies have concluded that the additional expense of preparing the data version on top of the paper-based document version is not justified.
This cost is not large; the Financial Executives Research Foundation found a median preparation cost of $2,000 (page 18) for small companies’ annual financial statements. And companies that modernize their compliance processes with software like Wdeskor Active Disclosure don’t see any additional cost at all.
But with XBRL data not being used, it is unsurprising that Members of Congress might think it’s a good idea to try to deliver small compliance savings to some companies by passing a law exempting them from preparing the XBRL version of their financial statements. That has been Rep. Robert Hurt’s (R-VA) idea, and the Biotech Industry Organization’s, since 2013. Last spring Rep. Hurt proposedlegislation that would force the SEC to stop requiring companies with annual revenues under $250 million—61percent of all public companies—to submit the open data version of their financial statements. The SEC would only collect the document version from these companies.
On September 16, 2014, the House of Representatives passed a bill that included Rep. Hurt’s proposal. H.R. 5405, a compilation bill introduced by Representative Mike Fitzpatrick and a number of other Republican members, was assembled and brought to passage on the House floor by the leadership of the Financial Services Committee (in order to give Members a piece of legislation to run on in the current election cycle). Buried among many minor changes to the securities laws is Rep. Hurt’s language.
If considered and passed by the Senate and signed into law by President Obama, this exemption would be a major setback for open data. Cutting off the flow of open data from the majority of public companies would reduce investors’ information options, impede the SEC’s enforcement efforts, and raise small companies’ capital formation costs.
Moreover, this law would raise a permanent statutory barrier to the much-needed broad modernization of U.S. financial regulatory reporting from documents into data. With most financial statements remaining exempt, the SEC would be unable to transform its whole disclosure system.
Open data—standardized and published—could transform financial regulation from disconnected, unsearchable, unstructured documents into structured information, easily distilled into actionable insights. The benefit to investors, regulators, markets, and filers would be immense. But not if the Senate passes and President Obama signs H.R. 5405.