A plea for smart data from the SEC's investor advocate

For more than 80 years, securities laws have required sellers of securities to disclose all material facts to prospective investors. “This disclosure requirement is a cornerstone of fair and efficient markets,” says Rick Fleming, the Securities and Exchange Commission’s Investor Advocate. Unfortunately, disclosure delivery methods have not kept pace with changes in technology

Speaking at the recent XBRL U.S. Investor Forum in New York City, Fleming stressed that there is much that can be done to improve the delivery of information into the modern marketplace.

That said, in some areas the SEC is already “making great strides” to employ data analytics, Fleming said. The Commission’s internally-developed Corporate Issuer Risk Assessment tool aggregates and organizes XBRL-tagged financial data filed by issuers. The Division of Enforcement uses this tool to detect anomalous patterns in financial statements that may warrant further inquiry.

SEC staff uses another internally-developed tool, the Financial Statement Query Viewer, to search financial statement data and footnotes across different periods and companies. There is also a text analytics initiative that allows staff to identify inconsistencies in narrative disclosures, discrepancies between narrative and numeric disclosures, narrative trending, changes in risk profiles based on sentiment, and other interesting phenomena.

“These types of tools enable the staff to discern norms, outliers, and patterns in ever larger quantities of information,” Fleming said. ‘As you can imagine, investors can benefit from having similar tools of this nature. Data analytics is useful not only for regulatory purposes, but also for helping investors determine whether a security is a good investment.’

Fleming said that it is encouraging to see that the SEC has made progress in utilizing structured data to enhance the disclosure of information to investors. For example, it now requires regulated entities to make a wide range of filings in structured data formats.

What more can be done? Fleming had a few suggestions.

He would like the SEC to embrace Legal Entity Identifiers with the goal of making public company disclosure interoperable with disclosure to other reporting regimes. He would also like to see the Commission require block-tagging of narrative text disclosures. It could, and should in his view, also require detail-tagging within narrative text disclosures.

“Rulemaking is not a simple process,” Fleming conceded. “Whenever changes are proposed to securities law disclosure requirements, a common dynamic plays out. Investors tend to favor as much disclosure as possible, while corporate issuers and preparers warn of the burdens and costs of providing the disclosure. The Commissioners must then weigh the competing interests and decide which policies to adopt.”

Nevertheless, “this is one area where technology provides the opportunity for a win-win, because investors and companies can both benefit from greater utilization of structured data,” he said. “However, the benefits are sometimes indirect, so it may take time before market participants and policymakers can see that the benefits ultimately will justify the costs.”