Speech by SEC Commissioner:
Remarks Regarding Interactive Data Releases
Commissioner Luis A. Aguilar
December 17, 2008
New technologies should not be encouraged at the expense of investor protection. Accordingly, I cannot support the adoption of the two interactive data initiatives before us today. I cannot support them because they significantly weaken the liability provisions of the SEC's disclosure regime that have effectively protected investors for decades.
I do believe that new technology — such as XBRL — can improve the methods that companies use to disclose information to their shareholders and to the public, and that new technology can make that information easier for investors to receive, to understand and to use.
I believe there potentially are great benefits to investors receiving disclosures in interactive data, but only if investors and other users of interactive data have confidence in the quality of these disclosures. The liability provisions of the securities laws are an important means of providing that confidence by creating appropriate incentives among issuers and investors.
The rules before us today would put in place a broad exemption from liability for interactive data disclosures. Limiting our traditional liability provisions in this way puts investors at greater risk of receiving misleading disclosures and suffering the losses caused by such disclosures. Putting the burden on an investor for an issuer’s negligence is unacceptable.
If you look across the dias today, I know that every one of the Commissioners supports advancing the use of interactive data. The real question before us is whether we support interactive data initiatives that fail to provide the investor protections intrinsic to the SEC's disclosure regime. Because of my strong belief in the SEC mission of investor protection, I cannot support these rules.
My concern is heightened by the fact that the Commission is considering taking such actions when the markets are in turmoil and at a time when investor confidence has been seriously shaken. Now, more than ever, investors need to have confidence in the SEC.
If the Commission adopts the rules before us today, it would be an unacceptable and unprecedented departure from the Commission’s traditional approach to liability and the important investor protections it provides.
There are two principal steps to the limitation on liability regulation set forth in Rule 406T of today’s rulemaking. These steps work to peel away the armor that liability protections provide to investors against false statements and misleading disclosures. The first step of the liability carve out is section 406T(b). This part says that the interactive data is deemed not part of a registration statement, and not part of a prospectus, and otherwise carved out from all liability to investors for false statements other than fraud. On top of this carve out — not separate from, but in addition to — is section 406T(c), which further limits the residual antifraud liability if an issuer made a good faith attempt to prepare the interactive data file and amends the file if it becomes aware of a failure to prepare it properly, even if investors already relied on a falsehood.
What do these liability carve outs mean for investors? It means that if an issuer fails to use reasonable care in preparing the disclosure, an investor relying on misleading disclosure may have no recourse. Approving a disclosure regime that sticks investors with losses caused by an issuer who did not use reasonable care is not acceptable to me.
Some are critical of imposing our traditional standard of liability in a situation where an issuer is required to use new technology, particularly when the new technology can lead to significant benefits for investors. But this view fails to understand that investors have to be able to rely on the disclosures for these benefits to arise. As a Commissioner, it is my responsibility to make sure that investor protections are safeguarded.
Some also have suggested that limiting liability is a way to reduce an issuer’s costs of using a new technology and the related costs of compliance. But this thinking is misguided. Liability limitations do not magically reduce costs, instead they shift costs from one party to another — in this case, from issuers to investors — who would bear the costs of relying on erroneous information.
If there is so little confidence in the XBRL preparation technology that we believe it necessary to provide such a dramatic exculpation from liability, then perhaps the technology is not ready — in which case we should not be putting investors at risk of relying on inaccurate information.
In the past, the Commission has required the use of new technology for disclosures without undercutting investor protection. When the Commission required issuers to start using EDGAR and make electronic filings, the Commission provided only the smallest, most narrowly tailored of safe harbors. In that occasion, the Commission provided “a safe harbor against liability for errors in, or omissions from, documents in electronic format resulting solely from electronic transmission errors beyond the control of the electronic filer.” Today’s action far exceeds what we’ve done before.
While I understand that the limitations on liability sunset as to each filer on a rolling 24 months basis similar to the phase in, I am concerned about the exposure to investors during that time. I would not want to expose investors for even 24 hours, much less 24 months. In fact, because of the staggered phase in of the requirement to provide interactive data, the sacrifices to investor protection and skewed incentives caused by the liability carve outs will last well into the next decade.
To conclude, I want issuers and investors to know I strongly support incorporating interactive data into SEC disclosures. If the rules before us today simply required supplemental financial statement information using interactive data on a responsible timeline, I would wholeheartedly endorse them. But instead, the easy choice of bringing the benefits of interactive data to investors and issuers is being tied to an unacceptable limitation on liability.
It departs from our best traditions, and shackles investors with the risks and costs arising from errors and misstatements in interactive data, even though issuers control the process of preparing the disclosure and are in the best position to ensure its accuracy and reliability.
I am not prepared to reduce the level of protection that I believe investors are entitled to. Using new technology to improve disclosure is a good thing — but not when it dilutes investor protection.
In these times of market turmoil, investors need to know the SEC is looking out for them.