The Benefits of Structured Data for Investors
Rick A. Fleming
Financial Regulation Summit:
Data Transparency Transformation
March 24, 2015
Thank you, Hudson [Hollister], for that kind introduction. It is a pleasure to be here today. It is also a bit daunting, to be honest, because I am speaking to people who are much smarter than me when it comes to structured and interactive data. I am also mindful of the fact that most of you are not securities lawyers, so I will try my best to bridge the gap between my area of expertise and yours.
I have the privilege of serving as the SEC’s first Investor Advocate. Simply put, my job is to provide a voice for investors as policies are being considered at the SEC and self-regulatory organizations (“SROs”). My Office’s goal is to help ensure that policymakers appropriately consider the needs of investors. I also report to Congress twice per year, and I am authorized to recommend legislation that may be beneficial for investors.
Much of the information that flows from a public company to its investors actually goes through the SEC in the form of mandatory filings. Therefore, the SEC’s requirements for the collection and presentation of that data are very important to investors and the capital markets. Today, I want to discuss ways to leverage technology to make this information more accessible and meaningful for investors. Of course, the views I express are my own and do not necessarily reflect those of the Commission, the Commissioners, or Commission staff.
Since the adoption of the first federal securities law in 1933, disclosure has been the foundation of investor protection. In the midst of the Great Depression, President Roosevelt recommended the original legislation and urged Congress to require sellers of securities to provide full disclosure of all important information about securities being offered for sale. “This proposal,” said Roosevelt, “adds to the ancient rule of caveat emptor, the further doctrine, ‘Let the seller also beware.’ It puts the burden of telling the whole truth on the seller.”
From these roots arose a requirement for companies issuing securities to disclose all “material” information to prospective investors. Thus, the definition of “materiality” is important, because it controls what must be provided to investors. In short, information is “material” if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision.
There are a variety of filing requirements in the securities laws, but this afternoon I want to focus on two of the basic ones. First, if a company wants to sell securities to the public, it must register the securities with the SEC by filing a “registration statement.” This registration statement includes a prospectus that many people are familiar with—it’s a lengthy document that discloses the financial information about a company, describes how the money from the securities offering will be used, lists the risks associated with the investment, and numerous other things. Then, once the company has offered its securities to the public, it must file periodic reports with the SEC to make sure the public has access to reasonably current information about the company.
As I’ve said, the fundamental purpose of all this information is to help each investor make an informed decision about whether to buy or sell securities. However, if you think about it, the information also serves a very practical secondary purpose—it helps to establish a fair price for securities in the marketplace, as investors decide whether to buy or sell at various price points in light of the most recent data about a company.
As so often happens, the length of these disclosure documents has grown over time. Some observers, including SEC Chair Mary Jo White, have questioned whether disclosure may be losing its effectiveness because it is overwhelming for the average investor. Others decry the increased regulatory burden on the companies that produce the disclosure documents. Thus, various efforts have been undertaken over the years to streamline disclosure.
Section 108 of the JOBS Act mandated that the SEC conduct a review of Regulation S-K, which contains many of the disclosure requirements, to determine how it could be updated to modernize and simplify the registration process and reduce the burdens upon emerging growth companies. Notably absent was any mention of the investors who use the information or the materiality of the information.
The SEC’s Division of Corporation Finance issued the report required by the JOBS Act, and they are now taking this idea a step further by undertaking a review the financial reporting requirements of Regulation S-X as well as the disclosure requirements of Regulation S-K. Fortunately, according to Keith Higgins, the Director of the Division of Corporation Finance, the Division will not only determine whether the requirements of those regulations can be updated to reduce the costs and burdens on companies issuing securities, but they will endeavor to continue providing material information to investors.
To me, it seems entirely sensible to review the SEC’s disclosure requirements to eliminate duplication and to re-evaluate whether all the items being disclosed are still material. Indeed, we should also consider whether additional items should be disclosed. However, in our search for disclosure that is less burdensome and more meaningful, the answer is NOT to eliminate disclosure of facts that are likely material to investors.
This is where technology comes in. So often, issues before the SEC tend to pit the interests of investors against those of businesses, but in my view, technology provides us a potential win-win solution in the area of disclosure reform. It allows the SEC to provide robust disclosure to investors in a more meaningful way, while at the same time making the filing process less burdensome and more beneficial for issuers.
I am not the advocate for issuers, but let me start with them. I can understand their frustration with the SEC filing requirements. Corporate disclosures are filed electronically, but in HTML or ASCII format. The financial statements must also be tagged in XBRL, but the XBRL version is submitted as a supplement to the underlying document.
I’ve never actually submitted a 10-K or 8-K to the SEC, but I have faithfully filed my taxes every year with the IRS, and I honestly can’t remember the last time I filled out an actual Form 1040. I, like millions of taxpayers, use a vendor that created a program to walk me through a long series of questions, and at the end it magically compiles all of my answers into a completed 1040 with all of the exhibits. I also appreciate the fact that it pre-populates many of my answers from the prior year so that I don’t have to waste time every year trying to find the social security numbers for all six of my children. This audience understands the possibilities far better than me, but from my simplistic viewpoint it seems that the SEC should be able to facilitate similar technologies to simplify the filing process for SEC forms.
More importantly, if we capture all of the information in a tagged format, it could be made more readily available to market participants who trade shares of the company. Smaller companies, in particular, are likely to see an increase in analyst coverage if information about those companies becomes easier to access. This should enhance the liquidity of those shares which, in turn, should make it easier for smaller companies to raise capital.
Investors would also benefit from having access to data that is interactive. Currently, it is a challenge to find a specific piece of data (such as earnings per share) within the relevant filing for the correct company. That challenge is magnified if the investor wants to establish trend lines or compare the performance of one company to the performance of other companies in the same industry. By capturing the data in a structured format, the SEC could better control the display of the information and layer it in a way that makes it easier to navigate. Tools could also be created, either by the SEC or private vendors, to provide helpful summaries and graphics, improve search and filtering capabilities, highlight the changes from previous filings, and make many other improvements.
These improvements would enhance the usefulness of data for the individual investor who chooses to research an investment opportunity by reviewing the company’s SEC filings. But even more important, in my view, the structured data would improve the tools of portfolio and investment managers, buy-side or sell-side equity analysts, credit analysts, and other sophisticated consumers of investor disclosures. As you are well aware, smart and enterprising vendors can transform dynamic data into a wide variety of products that would help analysts mine mountains of data with a few keystrokes. Structured data would allow the analyst to slice and dice data in myriad ways to compare multiple companies or conduct other complex research.
By giving the sophisticated market participant this capability, the SEC would help the individual mom-and-pop investor in at least two ways. First, it is important to remember that an “institutional investor” like a pension fund or mutual fund is essentially just a pool of retail investors. Thus, by giving the buy-side analyst better tools to research the market, the SEC would benefit all the investors in the pool. Second, investors of all sizes benefit from efficient markets, and sophisticated market participants facilitate the discovery of fair prices in the marketplace.
There are many types of SEC filings that would benefit from structured data (particularly proxy statements), and the SEC has recently begun taking some positive steps forward as it conducts rulemakings that involve filing requirements. However, the Commission’s review of the disclosure requirements under Regulation S-K and Regulation S-X gives us a golden opportunity to address some of the shortcomings of the data we collect under those rules. We should not just concern ourselves with the content of the information that companies must provide to investors, but we should also try to enhance the display and usability of that information. Otherwise, our efforts to improve disclosure will be largely wasted.
While structured data is an esoteric topic for many of us—the kind of topic I never dreamed I would speak about—I have become convinced that it is an important area of focus for my Office and the SEC as a whole. The three-part mission of the SEC is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. In my view, better use of structured data would help the SEC achieve all three goals.
Thank you. Are there any questions?
 Section 4(g)(4)(E) of the Securities Exchange Act of 1934 authorizes the Investor Advocate, among other things, to propose to Congress any legislative, administrative, or personnel changes that may be appropriate to mitigate certain problems and to promote the interests of investors. 15 U.S.C. § 78d(g)(4)(E).
 77 CONG. REC. S937 (Mar. 29, 1933).
 Basic, Inc. v. Levinson, 485 U.S. 224 (1988).
 Securities Act of 1933, Sec. 5, 15 U.S.C. § 77e.
 Securities Act of 1933, Sec. 7, 15 U.S.C. § 77g.
 Securities Exchange Act of 1934, Sec. 13, 15 U.S.C. § 78m.
 For an explanation of reasons for the increased size of disclosure documents, see Mary Jo White, Chair, U.S. Securities & Exchange Commission, The Path Forward on Disclosure, Oct. 15, 2013, available at http://www.sec.gov/News/Speech/Detail/Speech/1370539878806.
 See, e.g., IPO Task Force, Rebuilding the IPO On-Ramp: Putting Emerging Companies and the Job Market Back on the Road to Growth, Oct. 20, 2011, at 21, available at www.sec.gov/info/smallbus/acsec/rebuilding_the_ipo_on-ramp.pdf.
 See Keith F. Higgins, Director, Division of Corporation Finance, Disclosure Effectiveness: Remarks Before the American Bar Association Business Law Section Spring Meeting, Apr. 11, 2014, available at http://www.sec.gov/News/Speech/Detail/Speech/1370541479332.
 Jumpstart Our Business Startups Act, Pub. L. No. 112-106, 126 Stat. 306 (2012), available at http://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf.
 SEC, Report on Review of Disclosure Requirements in Regulation S-K, Dec. 2013, available at http://www.sec.gov/news/studies/2013/reg-sk-disclosure-requirements-review.pdf.
 Keith F. Higgins, Director, Division of Corporation Finance, Disclosure Effectiveness: Remarks Before the American Bar Association Business Law Section Spring Meeting, April 11, 2014, available at http://www.sec.gov/News/Speech/Detail/Speech/1370541479332.
 For example, non-financial factors that were generally immaterial to investors in prior generations may be considered highly material by the Millennial generation.
 See Institute for Corporate Responsibility at George Washington University and the Center for Audit Quality, Initiative on Rethinking Financial Disclosure, Nov. 2014, available at http://business.gwu.edu/about-us/research/institute-for-corporate-responsibility/research-projects/rethinking-financial-disclosure/.