The SEC announced new rules on March 20, 2019, that demonstrate its ongoing commitment to modernize disclosure through the use of structured data such as XBRL: 1) a final rule, FAST Act Modernization and Simplification of Regulation S-K; and 2) a proposed rule, Securities Reform for Closed-End Investment Companies. Mandated by the FAST Act, the final rule is far-reaching, with varied provisions to streamline and improve information for both companies and investors. The proposed rule for investment companies would introduce structured data into reporting by business development companies (BDCs) and closed-end funds.
The impetus for each rule began in a congressional act requiring the SEC to modify specific reporting. The impact on each group of affected issuers is significant. This was no ordinary rule adoption. “Rather than simply enacting the congressional requirements, the SEC took full advantage of the opportunity to extend its focus by adopting Inline XBRL for several new areas of reporting,” said Jennifer Froberg, EDGAR Specialist at Toppan Merrill, in remarks to Dimensions. “The path of each rule reflects how deeply integral XBRL-tagged data has become to the SEC, its mission, and the capital markets it serves.”
Slow path to the FAST Act
Congress enacted the FAST Act in late 2015. Among other things, the bill required the SEC to study and report on ways to improve disclosure for both investors and filers. During 2016, the SEC responded by issuing its well-publicized S-K Concept Release. It requested public comment on numerous topics, such as “recommendations to enhance and modernize EDGAR, including enhanced functionality associated with structured data.” The new rules under the FAST Act that took effect on May 2nd implement many of those ideas to improve and modernize disclosure.
Disclosure modernization has long been an SEC priority. SEC Commissioner Kara Stein famously called for a “revolution” to make structured data the bedrock of financial reporting. William Hinman, director of the SEC’s Division of Corporation Finance, testified to the House Committee on Financial Services on SEC initiatives to update and simplify disclosure requirements. SEC Commissioner Robert Jackson has added his voice as well. [See February/March 2019 Dimensions.]
Many of the SEC’s modernization ideas originate from its Investor Advisory Committee, a consultative group that considers and advocates new disclosure concepts. The IAC has long supported structured data, including XBRL. In 2013, it issued recommendations that eventually informed the FAST Act final rules. [For more, see the interview with IAC member Paul Mahoney in the April/May 2019 issue of Dimensions.]
Overview of FAST Act final rule provisions
The SEC intends these new rules to improve and streamline disclosure in several ways, including:
• Inline XBRL for all information on covers of Forms 8-K, 10-Q, 10-K, 20-F, and 40-F, corresponding to the phase-in period for filing financial statements with Inline XBRL.
• Hyperlinks for all information incorporated by reference in registration statements, prospectuses, and Exchange Act reports filed on EDGAR.
• HTML format and exhibit hyperlinks for disclosures by mutual funds.
New Inline XBRL-tagging requirements
The final rules require tagging of all cover-page data on Forms 8-K, 10-Q, 10-K, and 20-F, and 40-F annual reports. This expansion in the use of Inline XBRL will be phased in to match the rule for filing financial statements with Inline XBRL (starting in July and August of this year). As explained in a commentary from law firm Skadden Arps Slate Meagher & Flom, the tagging requirement has a three-year phase-in period:
• Large accelerated filers: disclosures for fiscal periods ending on or after June 15, 2019
• Accelerated filers using US GAAP: disclosures for fiscal periods ending on or after June 15, 2020
• All other filers: disclosures for fiscal periods ending on or after June 15, 2021
New rules bring all regulatory-compliance teams into XBRL reporting
These rules mark an important milestone in the history of the SEC’s XBRL requirement. “Traditionally, XBRL has been the domain of academics, accountants, and analysts,” observed Toppan Merrill’s Jennifer Froberg. “The new cover tagging will involve all regulatory-compliance teams in the preparation of structured Inline XBRL reporting.”
That includes the legal department. Of the forms covered by the new rules, Form 8-K is the only one whose filing is typically managed by legal personnel. Form 8-K is also the only one that, until now, has not had any XBRL-tagging requirement (except when an 8-K included restated XBRL-tagged financials). As a result, legal departments are now directly involved with the XBRL requirement for the first time. “Managing the filing of Form 8-K will require the legal department to consider the XBRL tags and the method in which the tags are required to be embedded into the cover-page information,” warns Lou Rohman, vice president of XBRL Services at Toppan Merrill, in a blog commentary on this development.