Now that XBRL use in financial statements is well established among filers, capital markets, and regulators alike, what comes next for structured data in SEC reporting? Hints emerged during The Promise of Structured Data: True Modernization of Disclosure Effectiveness, a recent speech by SEC Commissioner Allison Herren Lee delivered to the XBRL US Investor Forum 2020, Ready for Anything—Using Data in Perilous Times.
Commissioner Lee states that the SEC’s ongoing spate of rulemaking to modernize disclosure should now address the application of structured data requirements beyond financial statements: “As we continue to modernize, we should consider obvious places where structuring could be relatively simple and would provide significant transparency benefits.” She discusses the potential for XBRL tagging of data in the MD&A section, earnings releases, and proxy-voting disclosures, and she points out the benefits of XBRL for new types of mandatory SEC disclosures: climate-change risks and other environmental, social, and governance (ESG) issues, which increasingly influence investors’ decisions.
Beyond financial statements: proxy voting, MD&A, earnings releases, identifiers
Commissioner Lee identifies several key areas ripe for the SEC to expand the use of structured data. One is the disclosure of proxy-voting data on Form N-PX. Under the Dodd-Frank Act, the SEC proposed a rule in 2010 that would require institutional investment managers to report their proxy votes on executive compensation, a long list of yes or no votes formatted to tag easily. This “say on pay” rule has, a decade later, still not been finalized.
What data would be included in an XBRL mandate for proxy-voting disclosure? “The most basic information that an investor might want: how their money is being voted in corporate elections, and whether their shares are being voted in their best interest or in accordance with their instructions,” explains the commissioner. “We could bring much greater clarity and transparency to investors regarding how their voting rights are being exercised with the simple expedient of finalizing this rule and adding a requirement, as discussed in the proposal, to tag the Form N-PX voting data.”
Commissioner Lee also supports the expansion of structured data to the MD&A and earnings releases, noting “disclosures under MD&A may benefit from some simple block tagging that could greatly enhance comparability of certain relatively consistent types of information disclosed in MD&A. And earnings releases, particularly given their often market-moving nature, appear to be another well-suited candidate for tagging.”
Financial identifiers, such as the Legal Entity Identifier (LEI) and the Unique Product Identifier (UPI), offer another avenue to enhancing usability (and would align the SEC with growing LEI adoption by other regulators internationally). “As the utility of the LEI increases and work on other identifiers progresses, the Commission should carefully consider adapting its regulations and forms to incorporate them,” she suggests. “One advantage of these uniform identifiers is that they are open, not subject to commercial licensing, and freely available.” A working group formed by XBRL International has published an LEI XBRL taxonomy, which, she notes, “can be used in XBRL applications to unambiguously identify companies. The potential to more easily link LEIs within regulatory reports facilitates both research and meeting regulatory requirements such as know your customer and anti-money laundering. Overall, this promises another means of enhancing the usability of data in the Commission’s filings.”
ESG disclosures and their structured reporting could “develop in tandem”
Notably, Commissioner Lee’s speech looks ahead at new topics for required SEC disclosures and the related structured reporting of them. Specifically, she discusses the introduction of mandatory ESG disclosures. This initiative would be novel territory for the SEC. To date, the SEC’s XBRL mandate has been focused on the types of financial disclosure that already existed in non-structured ways. The new ESG disclosures that the commissioner envisions would give the SEC the opportunity to develop disclosure requirements and their structured format at the same time. “Instead of an ex post facto application of structuring requirements, the two could develop in tandem.”
She emphasizes that “climate and other ESG-related metrics are of ever-increasing importance to investors, surpassing even traditional financial statement metrics for many.” Yet for the most part, ESG disclosure requirements remain neither required nor standardized, so “developing standardized climate and ESG disclosure requirements should be a top priority for the Commission. As we consider this, we should also consider how to make the data disclosed under such requirements as usable as possible, including through tagging requirements.”
This subject is a topic of interest for Ms. Lee. In another recent speech, Playing the Long Game: The Intersection of Climate Change Risk and Financial Regulation, she envisioned corporate disclosure on major financial risks presented by climate change. Where should the SEC start? Her vision is clear: “Data. All policy should proceed from a foundation and clear-eyed analysis of accurate, reliable data.” Next comes consistent standardized disclosure. “The SEC should work with market participants toward a disclosure regime specifically tailored to ensure that financial institutions produce standardized, comparable, and reliable disclosure of their exposure to climate risks,” she concluded.
XBRL errors and needless extensions may warrant third-party audits
Commissioner Lee reiterates the SEC’s longstanding emphasis on accurate XBRL tagging and error prevention. Research indicates that material errors in SEC-filing data, including mistakes in XBRL tagging, are likely to be especially problematic for investors in areas such as revenues, net income, and assets. In addition, the commissioner observes, overuse of custom XBRL tags continues to hinder comparability of financial disclosures.
To help improve XBRL quality, some observers suggest that auditors should also be responsible for checking XBRL tags. While the SEC has “specifically declined to require any auditor assurance related to XBRL or even transparency around any auditor involvement,” Ms. Lee observes, it may be appropriate to “revisit the issue of third-party verification, including whether in an Inline environment, review of the tags should be part of the audit.” [Editor’s Note: With President Biden’s nomination of Gary Gensler to chair the SEC, these priorities may change.]
To read the full article in Dimensions Vol. 2021, No. 1, click here.
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