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Adoption and Use of XBRL in SEC Financial Disclosure and Regulation

Merrill Disclosure Solutions | March 18, 2015

Hudson Hollister -SEC Adoption of XBRL

An interview with Hudson Hollister, executive director of Data Transparency Coalition

The SEC's adoption of XBRL for financial disclosure and regulation is part of a wider movement to shift US government information from documents to structured, searchable data. To get a sense of where the SEC's commitment to XBRL use now stands, Dimensions spoke by telephone with one of structured data's leading proponents, Hudson Hollister. As the founder and executive director of the Data Transparency Coalition (DTC), Mr. Hollister leads an alliance of organizations trying to persuade policymakers to adopt structured data for the collection, storage, and use of information by all areas of the federal government. Before founding the Coalition, he served as counsel to the Committee on Oversight and Government Reform in the US House of Representatives and as an Attorney Fellow in the Office of Interactive Disclosure at the SEC.

What is the Data Transparency Coalition?

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The Data Transparency Coalition is a trade association of technology and consulting firms seeking to transform government information into searchable data. We are seeking that transformation by trying to persuade policymakers to enact policies such as the DATA Act [Digital Accountability and Transparency Act of 2013], which became law in 2014 and which requires the government to transform its own financial information from disconnected documents into open, standardized data.

We are also seeking that transformation for financial regulation. We believe the SEC and the other financial regulators need to adopt consistent data formats-such as XBRL -and consistent data identifiers -such as the Legal Entity Identifier - to transform all the information they collect under the securities laws, the commodities laws, and the Banking Act into standardized and searchable data. The companies in the Data Transparency Coalition support our campaign and have become members because they have the solutions that can deliver accountability to investors, help agencies, enforce the laws and rules, and automate compliance for the regulated entities. But they can do all that only if our policy agenda succeeds-if the regulators adopt standardized data formats and identifiers for all the information they collect.

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How did the Coalition get involved with XBRL use and quality?

From the start, we have supported this transformation from documents to standardized data across the board, for all kinds of government information. We focused on the information that has the most value, and that is one reason why we worked so hard to pass the DATA Act -because federal spending information is of crucial importance to government and to society. The information that is collected under the financial regulatory rules and laws is also very valuable. Our capital markets are the largest in the world and, if they function properly, they can bring incredible economic power. The proper communication to investors of the financial information that is collected by the regulators is crucial for the proper functioning of the capital markets.

Does the Coalition lobby Congress on XBRL-related financial issues?

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We are the only trade association that is lobbying Congress to adopt data transparency policies-and also to stop anti-transparency policies, such as the proposal by Congressman Robert Hurt [i.e., the Small Company Disclosure Simplification Act] to require the SEC to stop using data and regress to using documents for 61% of public companies.

What do you think will eventually happen with that proposal, passed by the House, to exempt some public companies from the XBRL requirement?

The supporters of that proposal are acting on justified frustration. It is clear that the SEC has not made much progress since the XBRL requirement was adopted in 2009. We do not believe that the Senate Banking Committee will act quickly on it. The Coalition has been briefing the key members of the Senate Banking Committee and their staff. We are hearing that they want to take a good look at the issue of SEC disclosures and at the need to transform SEC disclosures from documents into data, before they act. In addition, President Obama has issued a veto threat against the larger package of bills that the XBRL exemption proposal is contained within. The veto threat has nothing to do with XBRL-it has to do with other parts of that package. But it underscores that the bill in which the exemption passed is not going to become law as such.

What is your assessment of the SEC's approach to XBRL adoption?

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So far, the SEC's adoption of XBRL, six years ago, has been a failure. Now, I would not call it an unmitigated failure. Certainly, private-sector innovators such as Calcbench have shown that, despite its quality problems, XBRL-tagged information can still be made very valuable and useful to investors. However, the SEC has not begun to use structured data for its own Corporation Finance reviews, the agency has made very little effort to enforce the quality of XBRL data, and the structured-data-reporting regime is still limited to financial statements and has not extended to any of the other hundreds of forms that the agency collects. As a result, the theoretical benefits of transforming government information from documents into searchable data have not been realized in the SEC's disclosure regime.

Why has the SEC's XBRL adoption gone wrong?

In a sense, what has happened is understandable. The XBRL reporting requirement was championed by [former SEC Chair] Christopher Cox. His successor, Mary Schapiro, did not support data transparency in the way he did-and, frankly, the industry did not stay involved. There is no relationship between the industry and the chair of the SEC, the commissioners of the SEC, or the SEC's Division of Corporation Finance. Since all of those connections were allowed to atrophy after Christopher Cox left the SEC and since the agency no longer felt any outside encouragement to continue to develop its data regime, it is understandable that the XBRL reporting regime began to stagnate.

What has the SEC done right with XBRL?

The SEC has continued to require companies to report in XBRL. Although Mary Schapiro did not care about the XBRL requirement, she at least did not discontinue it. The XBRL reporting requirement remains the most ambitious move toward open data throughout any type of US government reporting. It is still a good foundation.

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Furthermore, during the past year, we have seen more positive progress at the SEC than ever before. We think that progress is the result of Congressional pressure. The questions that the SEC is now getting from the House Oversight Committee, from the Financial Services Committee, and from the House Appropriations Committee are resulting in the first minor but significant steps toward quality enforcement that the SEC's Division of Corporation Finance took in July 2014-and also has resulted in the publication of face financial data as a single data set in December 2014.

Now, of course, for those first steps toward improvement to have happened, they had to be championed from inside. We need to credit Craig Lewis, the former chief economist and director of the SEC's Division of Economic and Risk Analysis (DERA), with the publication of the structured-data sets. We also should credit Mike Starr, who was the deputy chief accountant of the SEC when he wrote the original version of what became the “Dear CFO” letter that was released last year. Two years elapsed between the time when he wrote that letter and the time when the final version was released-which shows that without more leadership at the SEC, it is still difficult to get progress. [See the April 2013 issue of Dimensions for an interview with Craig Lewis when he was chief economist and director of DERA.]

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What is the significance of the new structured-data sets, which aggregate XBRL-tagged financial data?

The availability of the information in a single data set removes a significant barrier to its use. Before the SEC published XBRL-tagged financial data in a single data set, to use that XBRL information, you would have had to pull each individual XBRL filing from EDGAR-thousands of separate files-and combine all of them into a database yourself before you could use it.

What changes would the Coalition want the SEC to make in its actions or rules about XBRL?

Well, the first priority clearly is to stop requiring companies to report both a document and a data version of their financials. [SEC Chair] Mary Jo White has told Congress that her staff is reviewing the possibility of moving to the inline XBRL format, in which companies would make a single submission that has XBRL tags embedded in it. Mark Flannery, currently the chief economist of DERA, confirmed in the Coalition's conference last year that the SEC is evaluating that move. We have heard that there is significant support for that change in the Division of Corporation Finance and among the SEC commissioners. When the SEC moves from requiring companies to report the same information twice to the use of that single combined submission, public companies' compliance costs will drop, and it will become much easier to add more tags, to add more structure, to the information that is being submitted. That is the clear first step.

The next step that the SEC must take is to better enforce the quality of the data that it is collecting and publishing. Much of that will happen if the SEC combines its separate document and data submissions into one. If Corporation Finance staffers are reviewing only one thing, they will find many of the types of errors that are making it difficult today for the data sets to be usable.

Finally, over the longer term, the SEC needs to transform its whole disclosure system from outdated and disconnected documents into searchable data. That means the adoption of data tags for all the information that public companies and other regulated entities report. Now, this will not happen fast, but it has to be the plan.

What major changes in SEC disclosure rules do you expect?

As reported by Columbia University in 2012, investors are demanding searchable data, not documents. That long-term transformation is also necessary, I believe, to realize the goals laid out in the current Corporation Finance disclosureeffectiveness initiative that is going on right now. For the effectiveness of corporate disclosure to be maximized, the basic unit of disclosure should be searchable data instead of paper-based documents.

What will happen in 2015 with XBRL development at the SEC?

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Based on what we are hearing from the SEC, we believe that the agency is ready to adopt the inline XBRL format. We believe there is some urgency for this. If the SEC does not act soon, it is possible that Congress will approve the proposal that has already passed in the House-to require the agency to not use XBRL data and go back to using documents for 61% of public companies. That proposal would erect a statutory barrier preventing modernization. If the SEC does not act soon, Congress may be convinced that the SEC is not serious about fixing its data disclosure regime-fixing the quality problems and re-energizing this modernization. If the SEC does move to inline XBRL, reducing some corporate compliance costs and showing a determination to restart the stalled transformation, I think that Congress will take notice.

What would you say to the CFO of a company who thinks that the XBRL requirement is a waste of time or money?

I would say that the CFO should look at what is happening in jurisdictions outside the United States. Around the world, most jurisdictions are switching from documents to data-without lingering at the dual-submission stage, as the SEC has for six years-and the transformation is benefiting listed companies, investors, and agencies. There cannot be very many of those CFOs left at the larger companies, because most of the larger end of the market has switched to disclosure products that do not make any distinction between documents and data: disclosure products that make it possible to enter the information and automatically generate both the XBRL version and the old-fashioned document version, so they do not have to worry about preparing two separate submissions.

For smaller companies that have not yet automated their close processes, I would encourage them to read what the SEC is saying, especially in its most recent strategic plan, about the ultimate future of disclosure. Even though the progress of XBRL adoption has been slow, the strategic plan makes it clear that the SEC leadership finally does want to move away from documents and toward data and believes that it will benefit investors, the SEC, and the companies that are part of the capital markets.

How is the quality of XBRL filings currently?

From what our members tell us, the quality is poor but salvageable. It is possible to make corrections and deliver information that is really useful to investors.

What must be done to promote the use of XBRL data among investors, analysts, and others in the market?

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I have always thought that investors should not have to know about XBRL. They should just experience better products, better searches, and better functionality as a result of what XBRL delivers. The use of XBRL by vendors and other intermediaries is crucial. I would say that to improve the use of XBRL, the quality has to be better. But more importantly, the whole filing, not just the numbers and the footnotes, should be [structured] data.

It is interesting that when the SEC started to transform disclosures from documents into data, it began with the most complicated aspect of disclosure: the US GAAP financial statements. There are plenty of areas of disclosure-such as the ownership structure of a company, the list of subsidiaries, or the list of directors and officers-that are simpler and could have been transformed into data first and could have delivered functionality and value far faster.

As disclosure continues to be transformed from plain text into searchable data, then the products that vendors offer will show improvements. Investors may notice the improvements, but they will not know about the XBRL tagging-and they should not have to know.

In your previous jobs with the SEC and a key Congressional committee, you were very involved with XBRL issues. Now that you are on the outside, working with companies and investors, what message about XBRL would you give to your former bosses and colleagues?

When I have my regular meetings with staffers in Congress, I continue to say that by transforming documents into searchable data, we are not just going to make the capital markets work better. We are going to make compliance and reporting cheaper for companies, investors, and government-and that means economic growth. That means we improve our society. I am very optimistic about the potential of structured data to transform government and society for the better for all of us in the coming years.

And what message would you give to the SEC staff?

To the staff of the Division of Corporation Finance, I would say: “Do not give up.” I hear from attorneys and accountants who are relatively junior that they would prefer not to have to double-check the math of financial statements with calculators. I do not think they will have to continue doing that for much longer. As the SEC embraces more data-tagging, the staff who right now spend their time mechanically, manually checking US GAAP rules will be able to deploy their expertise more efficiently.

To the SEC commissioners themselves, I would say that this is an opportunity to lead. The modernization of the SEC's disclosure systems is going to transform the capital markets in ways that Sarbanes-Oxley and Dodd-Frank never could. Even though the structured-data initiative does not make the political headlines that those legislative changes did, ultimately it is more consequential.

NOTE: The views expressed here are entirely Mr. Hollister's, and they do not necessarily reflect those of the Data Transparency Coalition, Merrill Corporation, or any other organization.

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