XBRL, the Proxy Statement, and the SEC's Ambivalence about Data Tagging (Part 1)
In the first decade of the new millenium, the SEC was at the forefront of ensuring the electronic readability of financial information. By 2009, the Commission had put in place an ambitious rule that required the use of XBRL. See Jeremy Liltes, Enhancing SEC Disclosure with Interactive Data ("In 2009, the Commission adopted an ambitious rule (the Interactive Financial Data Rule) that mandated the submission of financial statement data in eXtensible Business Reporting Language (XBRL). That same year, the SEC also began requiring the use of interactive formats for mutual fund risk/return data, nationally recognized statistical rating organization ratings (NRSRO) data, and Form D notices of exempt offerings.").
Thereafter, however, the emphasis on electronic readability and tagging went into a black hole, with little additional progress. In 2013, the Investor Advisory Committee, after little more than a year into its existence, adopted a recommendation calling on the SEC to embrace tagging. The recommendation encouraged the SEC to embrace a culture of "Smart Disclosure" that promoted "the collection, standardization, and retrieval of data filed with the SEC using machine-readable data tagging formats." In addition, however, the recommendation called the tagging of "portions of the proxy statement . . . that relate to executive compensation"
The SEC has, since the adoption of the recommendation, occasionally reintroduced XBRL and tagging back into the regulatory framework. But at the same time, the Commission has missed a number of opportunities to promote a culture of smart disclosure. In adopting Regulation A+, the Commission required that Part 1 of Form 1-A be in XML through an online fillable form that "which captures key information about the issuer and its offering using an easy to complete online form". This is the approach used for Form D. The approach allows the information to be read electronically and facilitates compliance by providing an online form that can be filled out by those engaging in a Regulation A+ Offering.
But the same release also, with little analysis, declined to require that the financial statements be tagged. As the adopting release stated:
- Although we solicited comment on whether issuers conducting Tier 2 offerings should be required to provide their financial statements to the Commission and on their corporate websites in interactive data format using XBRL, we are not adopting any such requirement in the final rules. 461 Commenters that addressed this issue opposed requiring the use of XBRL in Regulation A filings.462 We agree and do not believe that requiring the use of XBRL in Regulation A filings would be an appropriately tailored requirement for smaller issuers at this time.
The release cited only three letters (BIO Letter; MoFo Letter; US Chamber of Commerce). The letters did little besides assert that the requirement would be costly. The MOFO Letter simply stated that the approach was not approrpriate but provided no analysis. See MOFO Letter ("We do not believe it would be appropriate to require Tier 2 issuers to present their information in an interactive data format."). The Chamber complained of cost but provided no support. See Chamber Letter ("XBRL remains a work in process and has undergone a number of growing pains that make compliance with it costly, particularly for small issuers. An exemption to XBRL compliance for Tier 2 issuers would allow these businesses to focus more of their resources on raising capital, expanding their operations, and creating jobs.").
Finally, BIO gave the issue the most extended treatment but again, while objecting on the basis of cost, provided no supporting data. See BIO Letter ("The cost burden of such a requirement, and therefore the amount of capital diverted from R&D, would be significant – a harmful burden that would divert capital raised in the offering to reporting rather than research.").
At least one commissioner objected to this treatment. See Helping Small Businesses and Protecting Investors, Remarks of Commissioner Aguilar, March 25, 2015 ("I would have also liked to see the increased use of tagged data, particularly using XBRL, to allow the SEC and the public to better analyze an issuer’s information. Today’s amendments require tagged data in XML fillable format in only certain documents, including Part I of Form 1-A and Part I of Form 1-K. However, unlike registered companies, companies using Regulation A-plus will not be required to submit financial statements using XBRL format.").
The paucity of authority is noticeable since the conclusions may easily be wrong. To the extent that costs of tagging financial statements was ever actually prohibitive, that is no longer the case. Since the adoption of the 2009 requirements, third party venders have entered the market and provided greater efficiencies. According to noe study, the costs of tagging financial statements can be $2000 or less. See Leslie Kramer, The Future of Financial Reporting, Financial Executives International, Dec. 1, 2014 ("a survey done by Financial Executive International found that the median annual cost for small companies to file these reports is just $2,000, and that there are third-party providers offering XBRL preparation services at even lower prices.").