Clawbacks, Fiduciary Duties, and Block-Tagging (Part 4)
As we have previously noted on this Blog, XBRL and data tagging was, for awhile, at the forefront of SEC consideration then, after 2009, mostly disappeared. That, however, changed. The SEC's Investor Advisory Committee recommended increased using of tagging. A number of commissioners have actively supported an increased use of structured data. Few rules or proposals go forward without some evidence that tagging was at least considered.
This increased focus on tagging could be seen in the clawback rule proposal (Rule 10D-1). The provision would require certain specified disclosure in the proxy statement. Specifically, the proxy statement would need to include, whenever there has been a triggering restatement, the amount of excess incentive based compensation, the amount still outstanding, and the identification of persons where the company decided not to persue the compensation, including the dollar amount of their excess incentive-based compensation.
The proposal would require that the information be block-text tagged using XBRL. Block-text tagging involves the tagging of narrative (in a block) rather than a specific financial term. The proposal is significant for two reasons. First, the SEC currently requires block text tagging in very narrow circumstances, limited mostly to footnotes in the financial statements (although in some cases certain specific information within the footnote also must be tagged) and swap data repository financial resports. See Exchange Act Release No. 74246 (Feb. 11, 2015) ("The Commission believes that block-text tags of complete footnotes and schedules in an SDR's financial reports will provide sufficient data structure for the Commission to assess and analyze effectively the SDR's financial and operational condition. Thus, the Commission believes that it is not necessary to impose additional costs on SDRs to provide detailed tagged footnotes and schedules in SDRs' financial reports."). Second, the SEC currently does not require tagging of any kind in the proxy statement (although has proposed the tagging of the data in the proposed "pay versus performance" rule).
The clawback proposal would, therefore, require block tagging of some of the narrative in the proxy statement. The pay versus performance proposal also would require some block tagging but in a much more limited fashion. See Exchange Act Release No. 74835 (April 29, 2015) ("The proposal would require registrants to tag separately the values disclosed in the required table, and to separately block-text tag the disclosure of the relationship among the measures, the footnote disclosure of deductions and additions used to determine executive compensation actually paid, and the footnote disclosure regarding vesting date valuation assumptions.").
The proposal, therefore, opens the door to block tagging of text in the body of an SEC filing, something that can be applied in other areas such as the MD&A. See Exchange Act Release No. 59324 (Jan. 30, 2009) (noting commentator that supported "the application of interactive data format to MD&A because of a belief that interactive data format for MD&A disclosures would be more useful to investors than detailed tagging of the footnotes to the financial statements" and "recommended block tagging each section of the MD&A, with some level of detailed tagging for the numbers and tables.").
Block text tagging would allow investors to use tools to extract this information in a cost effective manner, making the clawback process more transparent and facilitating comparisons among companies. Proxy statements, in their current format, are largely unreadable. See Remarks by Chair Schapiro, July 1, 2009 (" I have heard from both investors and companies a shared concern that our proxy statements are in danger of becoming unreadable, because there is so much information packed into them."). Particularly for small investors, anything that allows information to be extracted and presented in a more accessible and informative manner will be an improvement and potentially increase the likelihood that these investors will return their proxy.
Commissioner Stein, in her public remarks, emphasized the importance of this step.
- In line with the Commission’s recent proposed rule on Pay Versus Performance, this proposal provides that disclosures will be tagged in eXtensible Business Reporting Language, or XBRL. As I have noted before, tagging increases comparability across companies. It also improves investors’ and other market participants’ ability to search for the information they care about. I am pleased to see that we are continuing to include tagging in our proposed rules and are recognizing the importance of structured data going forward.
Likewise, Commissioner Aguilar noted the proposed use of XBRL. See Remarks by Commissioner Aguilar ("In addition, the required disclosures under these proposed rules would have to be provided in interactive data format using XBRL data tagging, making it easier for the SEC staff and investors to review.").
Commissioner Piwowar, in his dissent, raised issues with the use of XBRL in the proxy statement. As he stated:
- today’s proposal requires the disclosures to be coded and tagged in XBRL format as a separate exhibit. This proposal, like pay versus performance, seeks to extend interactive data for proxy statements in a piece-meal fashion. Would it be better to have a more comprehensive approach to providing interactive data contained in the proxy statement, as well as the non-financial section of the annual report on Form 10-K, rather than adding individual items in an ad hoc manner?
Tagging the entire proxy statement would be beneficial. Unfortunately, there is little likelihood such a possibility will surface anytime soon. The Division of Corporation Finance is working on a disclosure effectiveness project but has focused on the periodic reports, with proxy disclosure relegated to a "later phase."