XBRL Exemption Bill Threatens to Close the Books on Open Data at the SEC

Financial Regulation

XBRL Exemption Bill Threatens to Close the Books on Open Data at the SEC

By Hudson Hollister

Update – March 14, 2014

The House Financial Services Committee has voted to approve H.R. 4164.


The technology industry can create new value out of government information–when it’s transformed into open data.

Some of our Coalition members, like BrightScope and Socrata, are eager to republish it to help investors and citizens make better decisions. Others, like Teradata and Elder Research, deploy Big Data analytics to help government better enforce existing laws and stop fraud. And a third group, including WebFilings, Level One Technologies, StreamLink Software, and RR Donnelley, can automate government reporting and cut compliance costs.

All of these opportunities are good for society as well as helping our member companies grow their businesses and create jobs. And all of them depend on the same simple transformation. They only become possible after government information is transformed from disconnected documents into open data–electronically structured and electronically searchable.

That’s why we support the Securities and Exchange Commission’s attempt to transform its corporate disclosure system from documents into data. In 2009, the SEC started phasing in the eXtensible Business Reporting Format (XBRL) for public company financial statements. Investors, markets, and the public now have access to a complete, rich data set of all U.S. public company finances. That data set supports free tools for investors like RankandFiled.com, which we celebrated last week. It is also used by infomediaries like Morningstar and Thomson Reuters to enrich the data they deliver to paying clients.

To be sure, the transformation of public company financial statements from documents into data has not been perfect. As academics, Congressional critics, and the SEC’s own Investor Advisory Committee have all pointed out, the SEC does not enforce the data quality, which makes it more difficult to use. The SEC still requires public companies to submit a legacy plain-text version of each financial statement alongside the XBRL data version, which leads to unnecessary complications. And given that the SEC’s Corporation Finance division still checks the math of financial statements manually, the agency hasn’t fully embraced the transformation yet. We pointed out these shortcomings yesterday in our comment on the SEC’s 2014-2018 strategic plan.

But the slowness of the transformation is no reason to stop transforming altogether. Unfortunately, that is just what Rep. Robert Hurt (R-VA) and Rep. Terri Sewell (D-AL) have proposed in Congress.

Tomorrow morning, March 13, the Financial Services Committee of the House of Representatives will consider a bill that could move the SEC’s corporate disclosure system backwards, from data transparency to disconnected documents again. The committee will vote on Rep. Hurt and Rep. Sewell’s H.R. 4164 (bill text), the Small Company Disclosure Simplification Act. The bill requires the SEC to exempt companies with annual revenues under $250 million from the obligation to file their financial statements in the XBRL format.

Here is why the Small Company Disclosure Simplification Act is a bad idea, and why Congress should reject it.

1. Investors need structured data financial statements. The same academic study that faulted the SEC’s failure to enforce data quality also confirmed that investors prefer structured data to old-fashioned documents. And last summer, the SEC’s Investor Advisory Committee told the agency that it should transform everything that companies file–not just the financial statements, but everything else as well!–from disconnected documents into open data.

2. Structured data financial statements are not expensive. Reps. Hurt and Sewell are selling their proposal as a cost-saving measure for small public companies, claiming that XBRL-formatted financial statements cost “tens of thousands of dollars” to create. Last fall the Financial Executives Research Foundation found that small companies spent a median of $2,000 to create the XBRL-formatted financial statement for each annual report (page 19). Some XBRL providers offer transformation services as cheap as $700 per report. Since companies must submit one annual report and three quarterly ones each year, the median cost for a year of XBRL financial statements is surely less than $10,000, with a low-end cost of $2,800 or less. 

3. An incomplete data set would hurt investors. Any exemption hurts the value of the data set for investors and markets, because it means the data set will no longer be complete. Even if some exempted companies continue to voluntarily submit XBRL-formatted financial statements, as the proposal allows them to do, investors and markets will no longer have confidence that the data set gives them the full picture. They will be forced to rely on manually-generated data sets based on the old-fashioned paper financial statements–data sets that are much less accurate and much less detailed, but complete.

4. An incomplete data set would hurt public companies, too. “By allowing companies to avoid reporting financial results in the SEC’s standardized language, companies will be left out of the computerized screens that investors like my company use to search for new investments,” said Alfred Berkeley, former president of the NASDAQ stock market and now a member of Princeton Capital Management, in reaction to news of the bill’s introduction. “Being left out of search mechanisms is akin to being left out of a search engine on the web: you will not be discovered by many investors. As a result, costs of capital will increase, not decrease. The bill is fraught with unintended consequences.”

5. “Small Company Disclosure Simplification” is the wrong name. Sixty-one percent of all U.S. public companies had revenues under $250 million in 2012, the last full year for which statistics are available. (We generated that figure using the XBRL data set, by the way.) Rep. Hurt and Rep. Sewell’s proposal doesn’t just exempt small companies. It exempts medium and fairly large companies, too. If it becomes law, investors will only be able to be confident that the data set covers 40% of the U.S. public equity market.

7. Opposition is growing. The Data Transparency Coalition represents over 20 tech and consulting firms–some large, some small, all passionate about creating new value with government data. The Small Company Disclosure Simplification Act would cut off our ability to create value from public company financial statements. We hope the House Financial Services Committee, and the rest of Congress, will reject it.

If you agree, please contact the members of the House Financial Services Committee, right away, to share your opposition.

For an update, watch this blog–or join us next week in Washington for breakfast with five regulators and a discussion of what’s next for structured data in financial reporting.