As part of our ongoing series of conversations with compliance and risk experts, we spoke with Hudson Hollister, founder and executive director of the Data Transparency Coalition, a trade association pursuing the publication of government information as standardized, machine-readable data. Hollister talks about the SEC’s efforts to modernize its disclosure regime and EDGAR filing system, moving from text-based to data-based disclosures, and the reform legislation in Congress.
You and your organization have been very vocal with the view that the Securities and Exchange Commission must be more data-focused with how it handles company filings. How so?
Even if the SEC completes its current EDGAR modernization project, we will still be stuck with a document-based system. If you look at the annual reports on the Form 10-K, there are so many pieces that would be so much more useful if they expressed as structured data. Because they are just plain text, they aren’t of as much use to investors.
Give us an example.
One of those pieces is the list of subsidiaries that must be disclosed to the SEC as Exhibit 21. For investors, it’s just a text-based list that lacks data fields or identification codes for each subsidiary. Because of variations in company names, it is very hard for investors and analysts to parse and map out the subsidiaries of each public company. That’s just one example. There are so many things in SEC disclosure that would be much more useful if the same information were expressed in structured data.
You were on staff at the SEC in 2008 and involved with then-Chairman Christopher Cox’s 21st Century Disclosure Initiative to rethink financial disclosure. Why do efforts like that never go very far?
It happens a lot that the SEC has promised or initiated disclosure and EDGAR modernization efforts. I can name five, and none of them have seemed to come to any satisfying conclusion. When I was part of the 21st Century Disclosure Initiative, they didn’t do any of the things we recommended.
The challenge whenever there is one of these initiatives is that most of the people who pay close attention are concerned with the substance of what gets disclosed, rather than whether it is disclosed as structured data or not. That’s fine, because the substance is what ultimately matters, but there is so much political disagreement over the substance that it impedes any of these other efforts. In our view, agnostic to substance, whatever is disclosed should be collected and published as structured data.
The Data Transparency Coalition has worked with a bipartisan group of lawmakers on the Financial Transparency Act. That legislation would require financial regulators to adopt consistent data fields for the information they collect and make that information publicly available. Why is this such a focus for you and the coalition?
ABOUT HUDSON HOLLISTER
Hudson Hollister is the founder and executive director of the Data Transparency Coalition. Prior to founding the Data Transparency Coalition, he served as counsel to the Committee on Oversight and Government Reform of the U.S. House of Representatives and as an attorney fellow in the Office of Interactive Disclosure at the Securities and Exchange Commission. Before his government service, he was a securities litigator in the Chicago office of Latham & Watkins. Hollister can be reached at email@example.com.
Some provisions apply specifically to the SEC, and that’s because [the SEC] has made it abundantly clear that stronger direction from Congress is needed. The legislation provides that. We think it would be beneficial to investors, to regulators, and to all the companies and financial entities that have to do reporting. U.S. financial regulators are behind the global curve in collecting information and publishing it using modern technology, and for the most part, regulators don’t use consistent electronic fields and formats—certainly not across the different regulators, and sometimes not even across different offices at the same regulator.
And that is such a crisis because …
We saw that happen with the Bernie Madoff fraud. His firm was interacting with different offices of the SEC. It was sometimes investigated by the Division of Enforcement; sometimes investigated by the Office of Compliance Inspections and Examinations; and submitting forms to other offices. After the fraud was revealed and investors lost all their money, the SEC’s Inspector General released a report that broke the news that none of the different SEC offices that had been investigating, examining, or receiving information from Madoff knew that the others had been too. Each office was unaware of the other’s interactions with the firm. The SEC does not have a consistently applied electronic identifier for all the different entities that file and submit information to it. If it can’t reliably track the entities, it won’t have a consistent data field for more granular stuff.
ABOUT THE FINANCIAL TRANSPARENCY ACT
The following is from a summary of the Financial Transparency Act, legislation currently pending in Congress. The summary was prepared by the Data Transparency Coalition.
It directs all eight major U.S. financial regulatory agencies to adopt consistent data standards for all of the information they collect from industry under existing securities, commodities, and banking laws. Each agency must adopt electronic fields and formats to replace document-based forms, following the lead of the Office of Financial Research of the U.S. Treasury Department where applicable.
Office of Financial Research and LEI
It directs the OFR to adopt data standards for concepts that reach across multiple regulators. Specifically mandates the adoption of the Legal Entity Identifiers across all financial regulatory reporting regimes, to allow easy matching of filings from the same entity with multiple regulators.
Open Data Publication
For information existing laws already require to be published, it requires agencies to make such information available online as open data—electronically searchable, downloadable in bulk, and without license restrictions.
Fixing Data Reporting at the SEC
It requires the Securities and Exchange Commission, for the short term, to replace its current duplicative financial statement reporting requirement—where public companies must submit each statement once as a document and again as data—with a single filing in the inline XBRL format.
Source: Data Transparency Coalition.
There is plenty of controversy over XBRL, a machine-readable, structured data format. Critics say the requirement is expensive and unproductive, and Congress is mulling an exemption for smaller or emerging growth companies. What’s your take on the debate?
The SEC adopted the XBRL format for the financial statement portion of the 10-Ks and 10-Qs about six years ago, but it has been a failure so far—perhaps not an unmitigated failure, but a failure nonetheless. I’ve talked to many would-be users of XBRL data, and some of these companies have determined that the quality of the XBRL data is so bad that it’s cheaper for them to keep using the unstructured data.
There is one primary reason for this lack of uptake of XBRL data: The SEC has continued to collect two versions of every financial statement, once as data and again as a text-based document. Because they are still doing that, this means that the reviewers within the Commission continue to focus on the documents and have largely ignored, except for one enforcement action last year, XBRL.
The legislation that proposes to exempt it would apply to about 60 percent of companies. That bill is based on justified frustration: Companies are spending money to prepare a data version of their financials, and it isn’t getting used. The proponents of that bill are correct to point that out, but they are incorrect about what they say it costs to prepare XBRL versions of the financial statements. There was a study by the American Institute of CPAs that says for smaller companies, $75 million in annual revenue and below, the median cost is about $8,000 a year. Nevertheless, critics are correct that if the SEC doesn’t make changes, this whole project of doing a data version of the financial statement isn’t worth it.
I don’t know of a single other regulator throughout the world that has adopted XBRL but still requires companies to do the old fashioned text version as well. When you make that comparison, the SEC is backwards.
Thank you, Hudson.