Speech by SEC Chairman:
Address to the Investment Company Institute's 2007 General Membership Meeting
Chairman Christopher Cox
U.S. Securities and Exchange Commission
May 10, 2007
Good morning. I want to thank Paul Stevens for including me in this general membership meeting, and for all he has done to advance the interests of investors. I'd also like thank all of you who've announced your participation in the initiative to use interactive data to make mutual fund disclosure understandable and accessible to the growing numbers of Americans who now count themselves as investors.
You've all heard about the SEC's war on complexity. A major part of this initiative is our support for efforts in the private sector, like yours at ICI, to use interactive data. There's no question this initiative will improve the quality of the information investors receive about their funds.
Earlier this year, the SEC proposed a new rule that will enable mutual funds to submit the information in the risk/return summary portion of the prospectus in a tagged, electronic format. Since this information includes the objectives and strategies of the fund, as well as the risks and expenses involved in an investment decision, putting it into an interactive format will be especially useful for investors. It will allow them to access the data they need quickly and reliably. Not only investors, but analysts, brokers, advisers, and other market participants as well, will be able to find what they need with a few mouse clicks — without having to pore over pages and pages of lengthy printed documents. This is a significant step forward. Using the information we gain from this, the Commission can then evaluate the proposed interactive formats so we can determine how to implement interactive data most effectively on a broader scale.
All of you at the ICI played a critical role in developing the taxonomy for the risk/return information, and for that I salute you. One of your first challenges has been dealing with narrative, as opposed to simply numerical, information. I'm grateful for the ICI's leadership in meeting this challenge, and for your hard work on the taxonomy.
And speaking of taxonomies: isn't it ironic that a word like "taxonomy" has crept into an effort to stamp out complexity. But if we can just imagine the mutual fund market as a vast zoo, with nearly every genus and species represented, then perhaps speaking of taxonomies will begin to feel comfortable.
One thing is certain: in a very short while, everyday investors will come to find interactive data indispensable. Since nearly half of all households in the United States own mutual funds to provide for their children's schooling, their retirements, and many other basic needs, it's for them that we're working to make interactive data a reality.
Of course, the best information doesn't always mean the most information. The best information means disclosure that is readily accessible, easily understandable, and comparable from one fund to another. Interactive data can help meet each of these needs.
And as interactive data becomes more widespread, we can expect investors will benefit further from the development of new software tools provided by analysts, brokers, web services, and other intermediaries. It's easy to imagine that an investor will be able to go to a Web site, select two mutual funds from a list of offerings, and with a few clicks of the mouse see a comparison of the strategies, returns, and expenses of the two funds. Some of these tools exist today, but they've been developed the old-fashioned way — using static documents, which is both more costly and less reliable than accessing information produced in an interactive format. What you're on the threshold of accomplishing is a revolution in the way investors acquire fund data, and a revolutionary improvement in that data's reliability and usefulness to investors.
At the SEC, we're thinking about the kinds of interactive data tools that investors might someday soon have at their fingertips. I'd like to show you a brief demonstration of the kinds of useful things our "imagineers" at the SEC think investors might be able to do with interactive mutual fund disclosure.
[Chairman Cox begins live computer demonstration]
Our goal here is very simple: it's to make mutual fund comparison easier for investors. But before I show you what you'll be able to do in the near future, let me give you a sense of the state of affairs today, without interactive data. As you'll see, the process today is rather cumbersome.
Let's say that today you want to compare two mutual funds: ABC Growth Fund and XYZ Growth Fund. First, you'll have to decide what's important to you. Let's say you're interested in the expenses of the funds — sales fees, 12b-1 fees, management fees, and other expenses. [Chairman Cox displays a simple spreadsheet showing two funds, with headings for various expenses]
One place you might look for these expenses is on the SEC Web site. [http://www.sec.gov and http://www.sec.gov/edgar/searchedgar/companysearch.html are displayed]
Using the SEC's EDGAR database, you can start by searching for the ABC Fund family. [Various complex EDGAR screens are displayed] Now, we'll click on "Find Companies." At this point you'd have to be smart enough to type "N-1A" in the appropriate box. [Laughter] And then you'd click "Retrieve Selected Filings." After a few more screens, you'll finally find the specific registration statement for ABC Growth Fund that you're looking for. So now let's click on that. [Fictional registration statement for ABC Growth is displayed]
So finally, we've gotten to a registration statement. And now we come to what I'm generously going to call "Step 3." [Laughter] This step consists in finding the expense disclosure within in the registration statement. Happily, we can use the Windows search function. When Windows first came along, the idea that you could search through text was remarkable, but today we all know how to do that — and indeed it's become a rather cumbersome chore. We'll type the search term "Fees" in the text box, and then click "Find Next." And that gets us down to the disclosure we're looking for, on page 5 of the registration statement.
And now, we're at "Step 4." In this step, you have to cut and paste the expense data into your own spreadsheet. [Chairman Cox cuts and pastes first one number from the registration statement, and then another, and so on, representing the various mutual fund expenses to be copied from EDGAR into the spreadsheet]
And once you've done all of that, you can calculate the total fund operating expenses for the ABC Fund. But since you're doing this manually, you might want to perform Step 6, and double check your work. [Chairman Cox corrects spreadsheet] Here, the math doesn't seem right — maybe we made a mistake in our spreadsheet formulas. There's always a risk of error doing this work the way it's done today.
Now, of course, we're exactly half done. Since you want to compare all this data to the comparable figures for the XYZ Fund, you'll need to repeat all of these steps. You'll be pleased to know I won't burden you with all of that in this live presentation. [Laughter] Instead, I'll just skip ahead to a completed spreadsheet that contains all of the expense information for both the ABC Fund and the XYZ Fund.
And after all that, we have it: we finally can see that the XYZ Fund is a lot more expensive than the ABC Fund. Little wonder that not too many investors try this at home. Certainly, there are plenty of services that attempt to get this information to investors, but look at how difficult it can be for them to compile this information in the first place.
So now let's have a look at what we're thinking about for a radically different way that you might soon be able to use interactive data to perform mutual fund comparisons much more quickly and easily. [Chairman Cox displays prototype SEC webpage showing mutual fund analysis tool]
To do the same comparison we've just seen, you'd start by selecting the funds you're interested in from a user-friendly list, which includes headings for fund families and sub-categories for each separate class of funds. [Chairman Cox clicks on list]
So let's select the ABC fund family, then Growth Fund, and then Class A. Now let's do the same for the XYZ Growth Fund's "A" shares. Once we've selected the funds to compare, we can choose a topic for comparison. Let's click on expenses. [Chairman Cox click on "Expenses" button from list of report parameters]
Just like that, the comparison that took you so long to compile the old fashioned way (that is, today's way) is laid out before you.
And now that we've got the expense comparison report in front of us, we discover that it's interactive, too. For example, you can expand particular parts of the report, depending on whether you prefer a tabular format or a bar chart. Or, let's say you want to compare the expenses you'd incur on an initial investment of $10,000. Just enter your initial contribution, and then the amount of any annual contribution you expect to make. We'll assume zero to keep it simple. Next, enter your anticipated annual return. Now, just click "Chart". [Cost comparison chart is displayed] Now you've got a chart showing you the annual expenses of the two funds, side-by-side.
The power of this tool is that it draws directly from the source data filed with the SEC. There is no intermediate step of a data provider mining the data from EDGAR, loading it into its own database, scrubbing it for errors, and, finally, reformatting it in a way that is useful to customers.
This spry little tool that I've just demonstrated is just a hint of what we can expect third-party providers might develop for you to tap into the capabilities of interactive data on the SEC website, or on a fund's own website. For analysts and investors alike, tagging the data in XBRL will make understanding mutual funds far more efficient than it is today — and it will make it virtually error-free.
To encourage the rapid deployment of interactive data for the benefit of investors, I expect that my fellow Commissioners and I will very soon act on a final version of our proposed mutual fund interactive data rule. I've also asked the staff to undertake a second initiative that will allow America's mutual fund investors to choose to receive their SEC-mandated disclosures in paper or electronic form, as they wish. Customers who don't want thick documents clogging their mailboxes would no longer have to put up with it, simply because they're required by our rules. Instead, the SEC would allow consumer preference to determine the format in which mutual fund disclosure is provided.
There's ample good reason for this. Nielsen Net Ratings reports that two-thirds of all Americans now use the Internet at home. The Pew Internet and American Life survey finds that online banking and bill-paying are particular favorites. When it comes to managing their financial lives, it's clear that millions of the people we serve would prefer the Internet — and with it, the enormously more powerful tools that are available to search through long documents, and use the information that's in them.
If the SEC goes this way, we won't be pioneers. In fact, the federal government is already headed in this direction with the retirement accounts of its own employees. As you know, our U.S. government equivalent of a 401(k) plan is the Thrift Savings Plan. And it generally just assumes we want the convenience of online tools. It rarely sends paper unless we specifically request it.
So our staff is busy crafting a proposed rule for the Commission to consider that will encourage more investor-friendly disclosure, in interactive data format. We're also continuing to focus on improving and simplifying mutual fund disclosure in other ways. From the input of investor advocates, third-party users of fund disclosure, and others, a strong consensus has emerged for the creation of more succinct, easy-to-understand disclosure documents that highlight the key information about mutual funds that's most important to investors. The Commission's staff is strongly supportive of a new, streamlined disclosure document for investors that will provide better and more detailed information about investment objectives, strategies, risks, and costs. Ideally, that information could be made available online, or in writing — as the investor prefers.
But beyond mutual funds, the SEC is also examining the adequacy of disclosures about the entirety of what goes into a typical 401(k) plan. We're interested in both the disclosures by the constituent investments in the 401(k), and the aggregate disclosures by the plan — including the overall expenses, and the overall performance of all the investments in the account.
We hope to make it far easier for busy Americans to understand the expenses they're being charged in connection with their investments, and the after-tax, after-inflation returns they're actually getting, compared to an appropriate index. In this work, we're closely collaborating with the Department of Labor — and we're confident we can achieve a great deal in the coming months.
We've focused on this area because of what's at stake. The revolutionary shift from company-guaranteed pension plans to investor-directed vehicles such as 401(k) plans and other defined contribution retirement plans means that millions of Americans will be active investors not only throughout their working lives, but long after they expected to be retired. That's an investor revolution that potentially affects every American.
As a nation, we've got to get this right. The more than $3 trillion that Americans already invest through defined contribution plans is, as I'm sure you know, nearly half in mutual funds. And with the number of elderly Americans expected to grow 80% within the next 25 years, these already eye-popping numbers will grow further still. We want to be sure that today's retirees, and tomorrow's, have the information they'll need to successfully manage their savings through a retirement that, actuarially speaking, is guaranteed to be far longer than their parents'.
And while we're doing this, we'll continue to work to purge all of the legalese from these disclosures, and convert them into plain English. Getting rid of gobbledygook is no easy task, of course. Just look at how easily words like "taxonomy" creep into speeches about plain English. And it isn't just legalese that's hard to understand. Often there are problems in simplifying ordinary prose. Just ask yourself: Why is "abbreviated" such a long word? [Laughter]
So we'll stay at it. And at the same time, we'll be examining the different types of disclosure that 401(k) participants receive, which today vary from full prospectuses and shareholder reports to one-page charts that contain extremely limited information. Our goal, working with our fellow regulators, is to develop an approach to 401(k) disclosures that permits each investor to obtain the information necessary to inform a sound investment decision. And undoubtedly, here as with mutual fund disclosure, there will be a significant future role for interactive data.
ICI's embrace of interactive data is just the latest step forward in a private sector-led advancement that's taking hold around the world. Extensible Business Reporting Language — the hidden computer tags that make the data interactive — is already being used extensively in the financial services industry. In particular, banks use it in their reports to the FDIC, to the Federal Reserve, and to the Comptroller of the Currency. And there, the transition to interactive data has gone so smoothly that many of you may not even realize that your financial institutions are using it. That's the result we always hope for with innovation.
Interactive data has proven to be a painless, productivity-enhancing improvement that helps people get their work done faster, cheaper, and better than before. For about a year now, 8,200 U.S. financial institutions have been using XBRL to submit their quarterly Call Reports to U.S. banking regulators. As a result, the investing and lending public has faster access to the financials of U.S. banks. And there's been another important dividend: The error rate has also dropped way down, to nearly zero. Before the introduction of interactive data, fully 30% of banks' quarterly filings included basic math errors. Now those errors are gone. And now banks can even provide narrative, because as the ICI knows, that can be XBRL-tagged as well. As a result of this improvement, today only 5% of original reports need additional work. Before, as much as 34% of bank call reports were returned to banks for additional clarification. And the old system lacked the technology to submit notes.
Better, faster, more efficient sharing of data is the story of XBRL and interactive data whether we look at bank Call Reports, at SEC Form 4s, or even at tax filings in the United Kingdom, where the Parliament has mandated XBRL's future use for all company filings with Her Majesty's Customs and Revenue.
We're working now to see to it that someday soon, every mutual fund and every public company uses interactive data in reporting to the SEC. Even before the mutual fund filings start, we've already got a significant and growing number of companies that are filing their reports in the new format. Today's XBRL filers with the Commission represent more than a trillion dollars of market cap, spread across various industries — companies large and small, foreign and domestic. I think if you talk to these companies, they'll tell you it's been surprisingly painless and inexpensive — a "non-event" is the phrase that keeps coming up. And companies are excited to be on the cutting edge of financial reporting.
So for those of you who are preparing to use interactive data in your mutual fund prospectuses, congratulations. And if you're not already planning on using interactive data, I urge you to consider doing so. The rest of the world is moving on from the static-data system that's been around in one form or another since Gutenberg. Our financial reporting shouldn't be left behind.
Interactive data, and the improvements we're planning together for mutual fund and 401(k) disclosure, are all part of sharpening our markets' competitive edge in this increasingly global world of finance. As regulators, we know there are really only two basic ways for us to improve: reduce the cost of regulation, and improve the quality of the product. Interactive data lets us accomplish both.
And I know that each of you in this room is working hard every day to sharpen your competitive edge in your industry. It's because of your dedication that America's financial services industry and our capital markets remain the best in the world. I want to thank you for your work in making our markets competitive, for facilitating capital formation in this country, and for helping families and individual American investors achieve their dreams. That's the SEC's mission, too, and we're proud to be your partners.