Excerpts Concerning Smaller Public Companies from SEC Roundtable on Interactive Data
The following excerpts highlight comments of special interest to smaller public companies from the SEC Roundtable on Interactive Data held on June 12, 2006 at SEC Headquarters in Washington, D.C.1
Topic One: What incentives would encourage smaller public companies to submit data to the SEC in an interactive data format? Or, similarly, how can the SEC encourage broader application, interest and usage of interactive data by smaller public companies in SEC filings?
- “The SEC should employ both a carrot and a stick. The ultimate incentive is investor confidence. A company unwilling or unable to report information transparently when mature technology is available is worthy of investor skepticism and regulatory attention. Good corporate citizens should eagerly embrace interactive data.”2
“SEC sourced interactive data places content equally in the hands of individual and professional investors, and allows low-cost use of powerful database tools instead of today’s ubiquitous spreadsheets.”3
- “A lot of [our engaged investors] go to smaller stocks which the only source [of information] . . . would either be from the company or from the EDGAR database. So this is an engaged group. They’re looking for the ability [to] access data [on a] real time basis [and have that information] updated, once they had invested, [with] any new filings. This group is probably the group most likely to benefit from XBRL and data tagging and the nature of what is being proposed.”4
- “We suspect that data procurement that now takes us weeks or days or hours could be accomplished in a fraction of those times.”
“We currently spend days downloading, building and checking our database of information on corporations each month. We spend more time adjusting that data to improve its use for our purposes. We hope that interactive data could reduce these times from days to perhaps hours.
. . . .
“[I]nteractive data offers us more time to be doing what we’re paid to do which is analyze the information and gaining insight from that and less time just getting data ready for analysis where we spend too much time.”5
- “[I]f we can have the investor and analyst community make a much stronger statement to companies that they want and need this data in XBRL, then you are going to take the interest within a company from the financial reporting segment over into investor relations, senior management and those kinds of levels which is going to, given that it’s coming from your shareholders, or representatives of your shareholders, is going to get quite a bit of attention.
“I can honestly say [there] are not roadblocks or issues even for smaller companies to adopting XBRL.
“I think where the resistance or the trepidation comes from is a lack of knowledge or proper understanding. So if we can bring resources to bear to bridge that maybe through a tool kit, through hands-on workshops where you walk people through how you tag documents, things of that kind of nature, to take it from this level we’re talking down to the details to show people that you can file a document for literally – our first document was $300. That was our total out-of-pocket cost. Even for a small company, $300 is not a lot of money. And it was about 80 hours of effort. I know resources are a constraint, but 80 hours is not that much of a constraint for any company. And, if it is, there are now organizations such as EDGAR online that will tag it for you. So you can circumvent the resource issue.”6
Topic Two: Are sufficient tools available in the marketplace to use interactive data in SEC filings? What types of tools would investors/analysts like to have? What are the costs versus the benefits of using available tools?
- “The industrial base for data storage, transmission and manipulation is actually quite mature. Whether one favors XML-files or SQL based solutions, both in reality offer much functional equivalence. For end users, the range of choices is expanding rapidly as prices fall (e.g., MySQL, Google spreadsheet, etc.). The SEC should focus on gathering and disseminating interactive data and leave consumption choices to the private marketplace.7
“As soon as the SEC makes public interactive data widely available, every media outlet that focuses on investors, [such as] Google, Yahoo!, [and] all the rest of them, will take that data and they will . . . almost immediately start processing it, distilling it and offering it to users in a variety of different ways.”8
- “[T]here is a very large ecosystem of companies, mid-market, smaller companies that generate or move the kind of data that we’re talking about and so far they have not really realized a lot of customer demand. So the typical supply-and-demand incentives that are present in the market has not yet appeared with respect to XBRL.
“[T]here probably needs to be incentives of some kind put into place to cause both the data providers and data movers within the ecosystem as well as the smaller organizations who are expected to report this kind of information to the SEC and analysts to actually embrace XBRL.”9
Topic Three: Could XBRL tagging or other data tagging for use with interactive data serve to increase the chance of analyst coverage of smaller and medium-size companies?
- “Regulation FD [and the] decimalization [of quotes] have broken [Wall] Street’s research business model. When machine readable data can feed analysis engines via RSS notices, new forms of coverage may evolve via broker or media channels. [Wall] Street analysts [and] vendors need to improve analysis techniques to add value and that ultimately benefits the investor. [Interactive data] may help small caps achieve [a] greater degree of “visibility” for investors, auditors and regulators.”10
- “[T]he interactive data project will allow you to get to what you want to do faster. And what we want to do as investors is not spend a lot of time cleaning the data, looking for clean historicals, accurate current financial statements. That’s part of it, but what we really want to spend our time on is forecasting the future. And that’s where we believe we add value. So any tool that will give us accurate information in a manipulable format is a big plus from out point of view . . . .
“I do think this can accelerate the investment process for us and I do think that beyond the core group of companies that an analyst would cover, this could allow us to create better intelligence screens which would bring small and mid-size companies that we might not normally look at to our attention at which point we can then begin to do the much more detailed work that could lead to investment decisions. So whether you call that coverage of a company, it is certainly attention towards companies that we may not have otherwise looked at.
“As a research director, the analyst’s time is our most precious asset and we want that pointed towards areas where they can generate a return for our participants. So what you would do as an analyst is clearly you’re going to cover the 20-plus names that are the biggest market caps that you have to cover from an index point of view. Beyond that you want to screen as many names as possible.
. . . .
“[T]ools driven by interactive data [provide] . . . . a real potential benefit for the efficiency and breadth of buy side coverage.”11
- “CEOs and CFOs, CFOs in particular, . . . spend 40 percent of their time in my industry if they are a development-stage biotechnology company just meeting with investors and analysts . . . soliciting coverage. Otherwise they are left in the depths . . . of having one or two analysts covering them tending to be the underwriters.
“The benefits to small and mid-size companies in my industry group should be readily apparent . . . .
“The biggest roadblock for me covering more companies was never the science, it was all of the legwork to simply bring it up to the state of readiness. All the forecasting, et cetera, would be readily enhanced.
“So my suggestion is that for that cost consideration whatever it might be in dollars certainly it’s not as burdensome as SOX compliance and to that end I would point out that these companies ought to look at expanded coverage and expanded ownership base, the constant need to access capital, and realize that as they are able to speak to more and more investors and to gain increased coverage, one of the great benefits, of course, that is also going to accrue to them conceivably is that they have many more sources to tap.
“But, look, how do you incentivize them? Although I think it may be readily apparent, how about linking it to the Securities Offering Reform Initiative [adopted by the SEC in July 2005] by which they could benefit from things that might normally accrue to otherwise well-known-seasoned-issuers?”12
Topic Four: What downsides might we experience in encouraging data submission to the SEC in an interactive format?
- “Financial reporting will forever be a game where Investor Relations spins the story to put a company’s best foot forward and investors reformulate the numbers to uncover what lies beneath. Enabling analysis to occur instantly will change corporate behavior and empower all investors equally.”13
- “Based on our own experience using interactive data, I don’t think you should underestimate even for the retail investors that it takes you to actually asking a completely different set of questions to what you were asking before. Because what the interactive data does is highlight differences, gaps, inconsistencies which you would never have been able to see in an efficient way before. So it actually takes you down the path of better understanding which several of the other panelists have said. So I don’t think you should underestimate the path that this leads you to. Don’t look at it where it is today.
“[P]eople are scared of change . . . . Therefore, some of the people who purportedly would demand this information may actually be a little anxious as to what it does to their own activities. So, again, I wouldn’t let that be too much of a barrier because as you start to play with this you really appreciate the value that you can get out of it.”14
Topic Five: Can using interactive data help smaller public companies comply with the internal control requirements of Section 404 of the Sarbanes-Oxley Act of 2002?
- “I picture a world in which XBRL does not stand alone. There are many other initiatives going on in the XML world. One is called internal control XML. It is based on the framework. It is using an idea where a risk control library gets created that includes businesses’ processes, risk controls, testing procedures, and so forth, all of which would work directly for SOX compliance.”15
- “[M]ost large enterprises today are tagging their data internally but they are using proprietary accounting systems. There are some offerings in the marketplace right now both by consultancies and large enterprises like Cisco, for example, that are trying to take that proprietary tagged information and migrate it to XBRL. So I think it makes an enormous amount of sense.
“If you’re an auditor and you want to know where a piece of financial information came from within the enterprise, you are going to want it tagged in some way so you can trace it down and verify the origin. It is really the same concept whether it’s XBRL or a proprietary accounting system.”16
- “I think tagging data is the equivalent of classifying data and the auditor’s report has long covered the classification of data in financial statements and footnotes. So I would think that investors would greatly benefit from similar assurance about the classification of data in the tagging process. I would think that could be done through the standard auditor’s report.
“With regard to data that’s tagged on unaudited information which I hope occurs as we broaden the tagging universe, I would hope that management’s report on internal control and management’s assertion about controls would cover the data tagging process as well as the other aspects of control.”17
1 Securities and Exchange Commission, Transcript of Interactive Data Roundtable (June 12, 2006), available at http://www.sec.gov/spotlight/xbrl/xbrlofficialtranscript0606.pdf [hereinafter Roundtable Transcript].
2 R. Christopher Whalen, Managing Director, Institutional Risk Analytics, Interactive Data: Making the Pipeline a Reality 12 (June 12, 2006), available at http://www.sec.gov/news/press/4-515/cwhalen051206.pdf [hereinafter Whalen Presentation].
3 Id. at 10.
4 Roundtable Transcript, supra note 1, at 123:14-20 (statement of Dr. John Markese, President and Chief Executive Officer, American Association of Individual Investors).
5 Id. at 151:13-21, 155:3-7 (statement of Gregory J. Jonas, Managing Director, Moody’s Investor Services).
6 Id. at 160:8-15, 24-25, 160:1-14 (statement of John Stantial, Director of Financial Reporting, United Technologies Corp.).
7 Whalen Presentation, supra note 2, at 19.
8 Roundtable Transcript, supra note 1, at 162:19-25 (statement of R. Christopher Whalen, Managing Director, Institutional Risk Analytics).
9 Id. at 159:1-6, 14-18 (statement of Dr. William L. Guttman, Venture Partner, TL Ventures).
10 Whalen Presentation, supra note 2, at 15.
11 Roundtable Transcript, supra note 1, at 155:23-156:22, 175: 6-12 (statement of Thomas M. Franks, Director of Global Research, TIAA-CREF).
12 Id. at 173:2-9, 13-14, 173:19-174:12 (statement of Mark Augustine, Augustine Consulting).
13 Whalen Presentation, supra note 2, at 13.
14 Roundtable Transcript, supra note 1, at 161:21-162:14 (statement of Trevor Harris, Vice Chairman of Client Services, Morgan Stanley).
15 Id. at 179:10-16 (statement of Dr. Clinton E. White, Jr., Professor of Accounting & MIS, University of Delaware).
16 Id. at 177:22-178:9 (statement of R. Christopher Whalen, Managing Director, Institutional Risk Analytics).
17 Id. at 178:21-179:8 (statement of Gregory J. Jonas, Managing Director, Moody’s Investors Service).