Mutual funds are popular because it’s a cost-effective way for an individual to have a diverse portfolio (of stocks, bonds, money market instruments and other securities) that is managed by a financial professional. The only real decision the individual investor has to make is which mutual fund or funds to invest in. Many mutual funds actually underperform the market, so this is a particularly important decision! The new SEC rules are designed to help.

The SEC’s new rule requires mutual funds to “provide risk/return summary information in a form that is intended to improve its usefulness to investors.” The summary includes a description of the fund’s objective, strategy, risk, fees and administrative costs, part performance and annual total returns. You get

• basic information for evaluating the fund
• all in one place
• written in plain language AND written in a format that computers can read
• filed with the SEC and posted available on the mutual funds’ website.

It’s not that mutual funds didn’t previously report this information. But finding it all, or using it in any type of software application, would take serious dedication. If you wanted to track performance, monitor changes, or compare various mutual funds, you would have to regularly devote many hours of reading, copying, and pasting updated information.

The summarized risk/return information, because it will be formatted as XBRL data, will be downloadable directly into spreadsheets, for automated analysis using off-the-shelf software such as Excel or the SEC Mutual Fund Viewer, or with more user-friendly applications such as EDGAR Pro or I-Metrix.  As the SEC says, “any investor with a computer and an Internet connection will have the ability to acquire and download interactive data that have generally been available only to intermediaries and third-party analysts.”

You will be able to compare mutual funds on whatever basis you select as most important to you, whether that be fees versus returns, or the make up of the portfolio, or investment strategies and more.

The new SEC requirement doesn’t kick in until January 2011, but a lot of leading mutual funds are already complying, using the SEC’s voluntary filing program. You can go to the SEC website for a preview of what’s to come.

Attention mutual fund managers

If you want to join the voluntary program and get a jump start on the SEC rules, contact EDGAR Online to learn more about the EZ Start XBRL Filing Solution for Mutual Fund clients. 

The required 10-K forms companies must file with the SEC contains much more detail (and fewer omissions) than the glossy Annual Report marketing brochure companies put out each year to impress their shareholders and attract more investors. In the 10-K form, all companies have to supply the same kind of information, and follow the same overall format, although they still have a lot of flexibility in telling their stories.

Let’s take a look inside these bulky, small print documents to see how they are organized. Then, let’s see how to actually find and use the information you want!

How the 10-K is organized

The Management’s Discussion and Analysis (MD & A)

Part 1 describes the business

• Overview of the company and its business model
• All the properties it owns
• Any legal proceedings
• Matters that will require shareholder approval

Part 2 discloses the numbers and what’s behind them

• Management’s Discussion and Analysis
• Quantitative and qualitative disclosures about market risk
• Financial statements and supplementary data
• Changes in and disagreements on accounting and financial disclosures

The Management’s Discussion and Analysis (MD&A) generally makes for good reading. It’s primarily the executive team’s explanation of the financials. The people running the company must describe the year’s operations; offer an assessment of how the company fared; and say how they think the company will do in the coming year, given their stated goals and outline their plans to achieve them.

Part 3 gives information on the people running the business

• Directors and officers
• Executive compensation
• Security ownership of certain beneficial owners and management
• Certain relationships and related transactions
• Principal accounting fees and services

Note: Starting in 2011, in a response to public outcry over the financial crisis and who was responsible, the SEC will require much more information about the board of directors, including their qualifications and other boards they serve on, and more about their responsibilities in overseeing the company.

Part 4 includes the exhibits and financial schedules

How to actually find and use the information you need

Corporations, like people, tend to tell their stories in flattering lights, and seek to bury negative information in small type and footnotes, or in legalese, obtuse language. So knowing where the information should be is not a guarantee of finding it. For example, a footnote regarding executive compensation might explain that an amount has increased by 4%, but you’d have to find and read back through years of reports to find the actual number the percentage increase is based on.

Transparency is the main reason that the SEC has changed the rules for how companies report their information.

It used to be that companies could simply file an electronic copy of the paper-based 10-K report form. They filed a PDF and/or html document. An investor would still have to read every word and number, and then copy and paste numbers into an Excel spreadsheet.

Now, companies are required to switch to an interactive data format called XBRL, which can be instantly searched and analyzed by computer software. These put individual investors on an equal playing field with large companies that do financial analysis. It also means you don’t have to follow the paper-based format to find information. Any specific information you want can be automatically flowed into a spreadsheet for analysis — and hundreds of companies can be instantly compared!

In the first year of the XBRL mandate, only the largest 500 companies were required to file in XBRL, but by 2011, all public companies will report the annual and quarterly in this format. The XBRL data is available from the SEC website and from other sources, such as a live, EDGAR Online data feed.

Initially, a company has to submit just their financials in the XBRL format, but in their second year submissions, the detailed information (numbers and text) in the notes of an annual or quarterly report must also be formatted as XBRL.

For those of our newsletter readers who are not subscribers to I-Metrix, you can play around with XBRL data at www.tryXBRL.com or get a 7-day free subscription to compare what it is like to read (and copy and past) information from an annual report, to simply entering what you want into a search box and letting the software do the work.

The gesture-activated interface used in that film was developed by John Underkoffler, president of Oblong Industries, who has unveiled the “g-speak Spatial Operating Environment” a new computer platform. By wearing a special glove or finger camera, the user can interact with the room’s computers and screens, and even collaborate with other gloved users to manipulate objects in space.

The gesture interface technology is the most significant advance in computer interfaces since the 1980s and is about to seen in a variety of new game consoles, televisions and computers be offered by Microsoft, Hitachi and PC makers.

A demonstration video is posted on the Oblong site. Get ready!

1. H & R Block (HRB)
2. Jackson Hewitt Tax Services (JTX)
3. AGL Resources Inc. (AGL)
4. Morgan Stanley (MS)

Part B If the executives at this company do not use the entire amount for tax preparations, the remaining amount may be applied to which of the following choices?

1. Country club fees or car service
2. Business clothing or fitness centers
3. Legal fees or car insurance
4. Financial planning or estate planning

Check your answers.

The answer to Part A is 3. AGL Resources, Inc. This operator of natural gas distribution systems reimburses the cost of tax preparation to its executives up to $15,000. Our advice to H & R Block and Jackson Hewitt, since you offer tax services, is that you might want to call on these executives and try to get some of that $15,000 perk!

The answer to Part B is 4, AGL Resources, Inc. Here’s how you can find this out.

Schedule 14A is the SEC form used to disclose executive compensation information, so log in to I-Metrix or EDGAR Pro and view the AGL Resources SCHEDULE 14A files, 2/16/2010.)

To do this, type in “AGL” in the search box.

Next, click on the Pre 14A form, then click to “View Entire PRE 14A Filing”.

Then, here’s what you’ll find by searching the text (Ctrl F) for “Financial Planning”:

“Financial planning/tax returns preparation perquisite —Provides reimbursement to executives of up to $15,000 per year for Company-mandated tax return preparation. The Company requires professional tax return preparation as a means of ensuring full tax compliance by our executives. To the extent that the entire amount is not used for tax preparation, it may be applied to financial or estate planning. We do not provide any other perquisites such as executive life insurance, or country club memberships to our executives.

Benefits such as temporary housing allowances or the temporary use of a company car may be provided in the event of relocation or other exceptional circumstances.”

SEC REQUIRES COMPANIES TO USE NEW DATA STANDARD

In 2009 the U.S. Securities and Exchange Commission ruled that any company that sells stock to U.S. investors must file their annual and quarterly reports in a new data format called XBRL. The eXtensible Business Reporting Language is an open standard that turns financial statements into computer-readable “interactive data.” The phased-in mandate started in 2009 with the top 500 largest companies. Approximately 1,500 more start filing XBRL data in 2010. Next year, all public companies will file interactive data.

ACCURACY IS THE CRITICAL TEST

“There is a good deal of misinformation circulating about the quality of XBRL produced by various vendors,” says Moyer, and the entire industry watched closely as the first wave of XBRL reports began arriving at the SEC – the final judicator of the accuracy of the XBRL translations.

Since the SEC’s mandate kicked in, EDGAR Online has submitted more filings to the SEC than any other provider – and all have been free of any error. “We are very proud of the fact that EDGAR Online’s XBRL filings consistently pass the SEC’s high levels of quality and validation checks and that we have completed another peak filing season without a single customer having to file an amendment,” said Moyer.

Congratulating the members of EDGAR Online’s Xcelerate team, Moyer praised them for having…”pulled off a herculean effort with unmatched levels of quality, volumes and timing – making many months of hard work, preparation and investment pay off for EDGAR Online, for our collaborator RR Donnelley, and for the entire financial reporting industry.”

By November, the team had reached the milestone of creating over 1,000 XBRL translations, for clients.

This and more was discussed during the February 10^th conference call to release 4^th Quarter 2009 results. You can listen to the complete archived event here.

The full text of the new guidance has been posted on the SEC website.

The issue quickly became controversial, even though, when the SEC decided to issue some guidance, the agency was careful to point out that it was not making new rules or taking a position on global warming: it would simply clarify the existing rules. By issuing new guidance, said SEC Chairman Mary Shapiro, the SEC “will help to ensure that our disclosure rules are consistently applied, regardless of the political sensitivity of the issue at hand, so that investors get reliable information.” (Her full comments can be seen in this video broadcast of the meeting.)

Specifically, the SEC’s interpretative guidance highlights areas and issues that may trigger disclosure requirements if business operations are materially affected. These include:

• Recent regulatory, legislative and other developments regarding green house gas emissions of state and national governments and international accords
• The potential impact of climate change-related matters that may require significant capital expenditures to reduce emissions or participate in cap-and-trade

The SEC guidelines explain how and where these disclosures should be made, such as under the heading Risk Factors, or in the Management’s Discussion and Analysis.

Aside from what must be disclosed under current rules, the agency acknowledges a growing public pressure for companies to disclose more information related to greenhouse gas emissions and climate change. The SEC guidelines list various reporting mechanisms outside the SEC where companies can voluntarily provide more information to investors, such as the Climate Registry, the Carbon Disclosure Project, and the Global Reporting Initiative.

Bundle is a clever new online service that compiles spending data from Citi and other third party data supplies to instantly generate detailed stats and charts on how America is spending its money. You can break it down in detail, by location, age, income, married, single, with or without kids. How are you doing?

It’s new, but the more data Bundle has to work with, the more effective and granular the capabilities will get. The company is seeking data vendors to increase the size of its database.

This could be complicated! What Wall Street companies and their employees aren’t using social networks like LinkedIn and Facebook and Twitter to talk with customers, business associates, and friends? These social networks blur the already fuzzy lines between what is business and what is personal these days.

Securities Industry News has outlined steps for companies to control these communications, but, “there’s no perfect solution” for any company wanting to follow the FINRA’s guidelines.

1. Lee Iacocca
2. Sam Nunn
3. Kenneth Duberstein
4. David Z. Smith

Check your answer!

The answers are 2 and 3. Sam Nunn, the former U.S. Senator of Georgia (1972-1996) is the current CEO of the Nuclear Threat Initiative. Kenneth M. Duberstein, former Director of Conoco and President Regan’s White House Chief of Staff, is the Chair and CEO of the Duberstein Group and serves on the boards of The Boeing Company, Mack-Cali Realty Corporation, and The Travelers Companies, Inc.

How do you find the answer?

After public outcry over the management, or mismanagement, of companies that have cost taxpayers while enriching its executives and directors, the SEC expanded its disclosure requirements to answer investor concerns such as who is in charge, what qualifies a board member, how directors are overseeing risks, what other boards do they serve, and how they are being paid?

Unfortunately, it will be a full year before all that information is available in next year’s annual reports. For now, it requires a little digging:

Start by logging into your I-Metrix or EDGAR Pro (or sign on for a free trial).

1. Click the Search Tab and click the Annual Reports Section (to help minimize unrelated results).

2. Enter the last name of the person you are researching in the Section Text Search box and click Search. In this case, we researched Sam Nunn.

3. In the Search results we see four annual reports that mention Nunn in their text.

4. To verify that he is listed as a director, rather than appearing in the document some other reason, click the company’s 10K link. You will go directly to the section in the annual report where Nunn’s name appears.

Will the SEC’s Expanded Proxy Disclosure Requirements really give investors more information for evaluating the leadership of a company and for valuing its stocks?  We’ll run this quiz again next year, once 2010 annual reports are filed, to see.

The goal of the SEC is to give investors more information for evaluating the leadership of a company and for valuing its stocks. But it will be a full year before the additional information is available, since the agency’s Expanded Proxy Disclosure Requirements passed on December 16 won’t kick in for proxy statements, annual reports, and registration statements until February, 2010.

Here are some of the investor concerns that the new disclosure requirements attempt to address:

• Do your compensation policies create a risk?

Specifically, you’ll be able to read a narrative discussion of large company’s compensation policies for all employees in general – not just the top executive officers – but ONLY IF these policies are reasonably likely to create a potential adverse effect on the company. [We’re thinking big bonus structures here; however, it would be pretty easy to argue that they don’t harm a company.]

• What is the value of stock and stock option awards?

Companies already have to report the dollar value of awards granted to named executives and directors, but going forward, they now must disclose the aggregate date fair value of all equity-based grants during the fiscal year. And going backwards, they have to re-compute the value of the stocks and stock options given to any named executive or director for all previous years. That will give investors a fuller picture of total compensation; especially since companies also have to clarify that performance-based equity awards should be valued on the probable versus maximum value of the award (which still needs to be included in a footnote).

• What qualifies your directors?

There will be more information, in an expanded narrative, about how each director (or nominee) qualifies to be on the board; other board positions they hold or have held during the last five years; and any relevant legal proceedings during the last ten years.

• How does your board manage risk?

“Aren’t the directors the ones who are supposed to be minding the shop?” That’s a question we heard al lot last year, as even CEO’s were caught unawares at the beginning of the mortgage crisis. The expanded proxy disclosure requirements will give the public more information on a company’s leadership structure, including whether the CEO and the Chairman of the Board are separate positions, why, and what roles they play in leading the company. What role does it have in risk oversight?

• What do you pay your compensation consultants?

A great deal of criticism this year has been directed at the way compensation consultants are hired to recommend enormous packages, which the board approves for themselves. The new SEC rules seek to determine if there are potential conflicts of interest of compensation consultants, and require companies to disclose what these consultants are paid – but only in certain circumstances.

• More diversity is encouraged.

Lack of diversity among the board members has been blamed for insular thinking and “scratch my back I’ll scratch yours” decisions. We assume this is why the expanded SEC rules say more about the nominating process and whether a company considers diversity. Companies that have such a policy, even if they don’t define “diversity”) need to explain how it is being implemented and whether it is effective.

[This may become an exercise in creative writing, but we applaud the suggestion that the issue is at least considered.]

We’ve just included the highlights here, but you can read the official SEC’s expanded Proxy Disclosure Requirements, along with their guidelines to help companies follow the new rules.

It is well worth noting the dissention expressed by SEC Commissioner Kathleen L. Casey, who found some of the new rules to be overly burdensome, or are not likely to result in the kind of information that can really help investors, or could result simply in “boilerplate” responses from reporting companies.