Archive for the ‘Small Company Disclosure Simplification Act’ Category
Despite repeated legislative defeats, Representative Hurt from Virginia’s 5th district has re-introduced legislation to create a two-tier caste system among publicly traded companies.
According to this most recent legislation (which is identical to language that failed to pass in 2014), some companies would continue reporting their quarterly and annual financial information in the XBRL format, as they have since 2011. Other companies, however, would suddenly be exempt from this requirement, and they would revert back to a reporting standard that was cutting edge in 1996.
As this new legislation—HR 1965—is identical to HR 4164 which was introduced in 2014, you can read our post regarding that legislation for more detail. However, the main points are the same:
If this poorly considered bill manages to gain passage—either on its own or as an amendment to a larger bill—the partial elimination of the XBRL filing requirement would be deeply damaging to the national standards of public disclosure and financial reporting. Additionally, the SEC’s ability to discover investor fraud would be unnecessarily and dramatically hamstrung by this bill. Lastly, and rather ironically even by congressional standards, this bill will be considerably detrimental to the same companies that it is meant to help, because exempting small companies from XBRL reporting will create a permanent underclass of less visible, and undiscoverable investment opportunities.
It’s a bad bill with dubious benefits and destructive consequences.
Feel free to contact me any time.
Stewart Walker – SVP, Director of Sales
Even as the misguided efforts to minimize the reach of XBRL reporting continue in Congress, the SEC has increasingly endorsed and strengthened its commitment to this important advancement in financial disclosure and data availability. Recently, the SEC has taken aggressive steps to promote and protect XBRL data.
On February 19th, 2015, SEC Commissioner Luis Aguilar endorsed the Investor Advisory Committee’s (IAC) 2013 recommendation to have issuers provide information in an interactive data format. Speaking at the SEC Speaks conference, Commissioner Aguilar promoted the SEC’s adoption of machine-readable XBRL format and promoted the notion that it would be a great benefit to investors Proxy information were also presented in XBRL. Commissioner Aguilar said: “For instance, it has been suggested that the better use of 21st century technology in the proxy process may facilitate how shareholders can more effectively receive and understand how their companies are performing, and to better put that performance into perspective. Indeed, it’s only logical to expect that better informed investors would likely participate in greater numbers.”
Aguilar went on to endorse the IAC’s recommendation that the SEC “immediately prioritize tagging important information with respect to various corporate governance issues, including portions of the proxy statement that relate to executive compensation and matters voted upon by shareholders.” His support is supported by the fact that “tagging the voting data and results contained in certain forms could result in more informed voting and investment decisions, and would facilitate comparisons among public companies.”
At the same SEC Speaks conference, the SEC’s Investor Advocate, Rick Fleming, criticized the regressive XBRL proposal put forward by Representative Robert Hurt.
Representative Hurt’s proposal would create an exemption from the XBRL filing requirements for certain small companies, which would exclude more than 60 percent of all public companies. Mr. Fleming said that if this were signed into law, it “would seriously impede the ability of the SEC to bring disclosure into the 21st Century.” He continued, “If Congressional action is needed, it should be used to press the SEC to move forward in its efforts to make disclosure more accessible and useful for investors.”
The SEC has only increased its commitment to the XBRL reporting requirement, and they have also massively increased its use of the data. Investment decisions by analysts and enforcement decisions by the SEC will increasingly be driven by the information provided in the XBRL data, and for that reason RDG has, since its very inception, been committed to having the best people creating the highest quality code.
XBRL is the future of financial disclosure, and RDG can help public companies create excellent and usable data. Please contact us to learn more about our Full Service Tagging Services and our XBRL Quality Assurance Services.
Feel free to contact me any time.
Stewart Walker – SVP, Director of Sales
In the Opening Remarks at the SEC’s Investor Advisory Committee on Oct. 9, 2014, SEC Chair Mary Jo White discussed recent developments in the “Commission’s rulemaking agenda.” Chair White touched on reforms to enhance the transparency of money market funds, she described “two quite significant Dodd-Frank Act rulemakings,” and she touted a “very successful year in terms of both the breadth and quality” of SEC enforcement. For more detail, you can read the full remarks here, but Chair White did something that really caught our attention. Chair White made explicit mention of XBRL and other structure data initiatives, and described a deeper commitment by the SEC to the XBRL requirement.
Chair White described the use of structure data as an “important, ongoing priority,” and she said the SEC is continuing to find “ways to improve the quality and usefulness of structured data while reducing the burdens on companies as much as possible.”
Chair White also referenced a report by the Division of Economic and Risk Analysis (DERA) regarding its assessment “of the use of custom tags in XBRL exhibits.” As Chair White explained, DERA also “performed an analysis of calculation errors in companies’ XBRL,” which led to the Division of Corporation Finance issuing ‘Dear CFO’ letters to “several companies that failed to include all required calculation relationships in their XBRL data.”
These explicit mentions of XBRL by the Chair of the SEC were significant in their own right, especially in light of the continued and misguided efforts within the halls congress to gut the XBRL requirement. However, we were particularly happy to hear Chair White’s glowing introduction to Dr. Mark Flannery. Dr. Flannery recently joined the Commission staff as the new Chief Economist and Director of the Division of Economic and Risk Analysis (DERA). As Chair White explains it, DERA is one of the “primary Divisions that is leading the structured data initiatives.” Chair White said that while Dr. Flannery is new to the SEC, he is “long conversant with the use and value of structured data.” White also referred to Dr. Flannery’s inaugural speech as the Director for DERA and described the speech as being “dedicated entirely to the topic of structured data.”
Dr. Flannery’s speech to the Data Transparency Coalition’s Fall Policy Conference on Sept. 30, 2014 was indeed entirely about structured data. He explained the “important role that high-quality financial information plays in the efficient operation of capital markets and their oversight by regulators,” and he made clear that the SEC is “committed to improving the availability of financial information through the presentation and analysis of structured data.” He addressed the ongoing need to increase the quality of the available XBRL data, and he made clear that “making useable data available to the public is a key function of many of the Commission’s disclosure rules.”
Flannery’s speech enumerated many of the uses—and users—of structured data, stating that the SEC staff themselves are huge consumers of the data. The division that Flannery now oversees, the Division of Economic and Risk Analysis (DERA) uses structured data in their “economic analysis of rules, risk assessment and market supervision initiatives” as well as to “support enforcement actions and compliance programs.”
Dr. Flannery expanded on the SEC’s continuing and increasing commitment to the XBRL and other structured data initiatives in the face of those who would “advocate an exemption of the requirements for smaller companies.” He said that removing the XBRL requirement for smaller companies would, in fact, be a detriment to those companies because “their ability to disseminate machine-readable financial information critically enhances their ability to access capital in financial markets.” If XBRL becomes the standard for financial reporting only for large companies, smaller companies will be overlooked by financial analysts and institutional investors.
Although he dismissed the notion of removing the XBRL mandate, Flannery was sensitive to the fact that any new regulatory requirement does impose additional burden on companies of all sizes. Flannery said that the SEC is “taking the most prudent course, continuing its efforts to monitor filing quality and educate filers,” and he explained that as is the case with “all new compliance experiences, time is required for sufficient learning to overcome the inevitable start-up problems and costs that companies incur.”
After saying that the SEC is exercising gradualism and patience as the XBRL mandate enters maturity, Flannery did make clear that the “DERA staff will continue to address the quality of XBRL submissions by periodically analyzing their content for accuracy and completeness,” and that “where appropriate, DERA staff will work closely with the Division of Corporation Finance to provide guidance to filers.”
In concluding his inaugural speech as Director of DERA, Dr. Flannery said that “ensuring that market participants have access to useable, high-quality” structured data was the primary purpose of the initial SEC XBRL mandate in 2009, and he said that he and his staff at “DERA are committed to helping fulfill that original aim.”
The SEC is committed to XBRL, and they are committed to high quality, useable XBRL data.
RDG Filings can provide your company with a Full Service Tagging Solution or with XBRL Quality Assurance Services, both of which will vastly improve the quality and usability of the XBRL data you are submitting to the SEC and create significant cost efficiencies for your company.
Feel free to contact me any time.
Stewart Walker – SVP, Director of Sales
H.R. 4164, the Small Company Disclosure Simplification Act, is deeply flawed. The incorrect facts used to justify this bill are relatively insignificant compared to the bill’s inevitable and destructive consequences.
If this poorly considered bill manages to gain passage—either on its own or as an amendment to a larger bill—the partial elimination of the XBRL filing requirement would be deeply damaging to the national standards of public disclosure and financial reporting. Additionally, the SEC’s ability to discover investor fraud would be unnecessarily and dramatically hamstrung by this bill. Lastly, and rather ironically even by congressional standards, this bill will be considerably detrimental to the same companies that it is meant to help.
H.R. 4164 has been introduced by Rep. Robert Hurt of Virginia’s 5th district and co-sponsored by Rep. Terri Sewell of Alabama’s 7th district with the stated intent of reducing the compliance burden on smaller companies by eliminating their XBRL disclosure requirement. It is true that the bill would save some publically traded companies between eight and fifteen thousand dollars per year, but H.R. 4164 would have profound and pernicious impacts that far outweigh these dubious benefits.
Hurting Small Companies by Creating a Financial Reporting Caste System
The reduction in XBRL regulations proposed in H.R. 4164 would actually hurt the smaller companies it is designed to help. If this bill becomes law, and if XBRL becomes the standard for financial reporting only for large companies, smaller companies will be overlooked by financial analysts and institutional investors. Analysts and major investors will not have the tools necessary to discover opportunities among the smaller companies that are exempted from XBRL reporting. In the wake of H.R. 4164, future investment dollars will stream only to companies whose financial information can be clearly and transparently reviewed in the XBRL format. Exempting small companies from XBRL reporting will create a permanent underclass of less visible, and undiscoverable investment opportunities.
Putting Investors at Risk
The value of XBRL data goes beyond stock analysis. XBRL represents a significant improvement in the SEC’s ability to identify and eliminate investor and financial fraud by companies of all sizes. H.R. 4164 represents a massive regulatory loophole that a fraudulent company could drive an Enron-sized truck through.
Misrepresenting the Value of XBRL Data
Rep. Hurt’s press release of March 6, 2014 regarding this bill rehashes the specious claim that “evidence suggests that less than ten percent of investors actually use XBRL.” XBRL is not designed for the individual investor, but it is and will be of tremendous value to institutional investors and analysts and the companies they choose to invest in.
News Flash: The Stone Age is Over
XBRL is the future of financial reporting, and delaying its use will set the world of financial reporting and oversight back to a technology (HTML) that was developed in 1996. XBRL is a tremendous and necessary advancement, and instead of pushing a reversion to decades old standards, the government should be demanding higher quality, more transparent data.
Overstating the Regulatory Burden of XBRL
Rep. Hurt’s press release of March 6, 2014 includes the assertion that XBRL filing costs public companies “tens of thousands of dollars” annually. That may be true for those companies getting horrendously overcharged by their current provider, but not for those companies working with RDG Filings. RDG is among the leading XBRL service providers, and despite the fact that we provide the highest level of service and data quality available, our clients have annual costs significantly lower than the exaggerated costs put forward by Rep. Hurt.
An independent survey conducted by Financial Executives Research Foundation (FERF) indicated that the median cost for the most recent 10-K filing was $2,000 for smaller reporting companies. An XBRL exemption for smaller issuers would mean an annual savings of only $8,000. To be honest, the cost of XBRL reporting can vary depending on the complexity of the financials, but even at the highest end, the “burden” of XBRL reporting is not significant enough that the savings would outweigh the benefits of XBRL for both companies and shareholders.
Distorting of the Impacts of XBRL
Rep. Hurt’s press release of March 6, 2014 states that the XBRL requirement has “a negative effect on small companies, particularly innovative startups that need additional capital to expand their operations and grow.” The preponderance of recent data belies this claim. The IPO market is thriving again, even as XBRL is a known regulation these IPOs must accept. XBRL has had no evident impact on the currently robust IPO market.
The Obvious Conclusions
The long-in-short of the unintended consequences of this bill is simple: H.R. 4164 would kill hundreds of high-quality American jobs, create a divisive caste system of public companies, increase the risk of investor fraud, and hamstring smaller companies’ ability to earn future investment dollars. These sacrifices will be made in exchange for an annual savings of eight to fifteen thousand dollars for public companies.
H.R. 4164 is a bad bill, and it should not become a bad law.