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.

The amount of high speed algorithmic trading is attracting a lot of attention and raising concern about fairness, legality, and threats to the market.

Small investors simply can’t compete with the computing power of hedge funds, institutional investors, and other high volume, automated traders. Their systems are programmed to find and instantly act on minuscule movements in trading activity: profits can be made whether a share price is going up or down.

Even NYSE has lost significant trading business to the brokers’ servers that are located on their premises, issuing automated buy/sell orders. To recapture the trading revenue, NYSE is finishing construction on a 400,000-square-foot data center in Mahwah, New Jersey that will be capable of handling a million messages a second, and every trade in every exchange worldwide.

Such a large influence in the market is viewed with concern by some economists who believe that automated trading by such a dominant sector has the potential for dramatic, high-speed crashes. For example, a tiny price change could trigger a stampede of stop-loss orders too fast for human intervention – and happening too fast for brokers to validate their clients’ margins.

Proponents defend high speed trading

Proponents of high frequency trading argue that everyone benefits. It creates liquidity and reduces market volatility. It is so efficient at matching sellers with willing buyers at specific prices, that the selling price (and broker fee) stays a bit lower. So do the overall spreads. Besides, they say, the main people to be hurt in the case of a sudden drop are the high-speed traders themselves.

But potential wounds may not all be self-inflicted. High speed automated trading is now so pervasive that most small investors are not aware that their own portfolios that are managed by institutional investors who use quantitative trading.

The SEC is concerned about fairness

The Securities and Exchange Commission recently proposed a rule, though it has not yet acted on it, to eliminate “flash orders.” Flash trading allows the buyer or seller to freeze an order placed on an exchange for a half-second, which is now plenty of time for high-speed computers to detect the pending market activity and make an automated response. Not only is this unfair to the individual investor, it smacks of illegal “front running.”

Congress offers a Transactions Tax bill

Congress, in an appeal to Main Street, is working on a bill to tax high-speed trades and deter high-volume speculators. Introduced by U.S. Sen. Tom Harkin ( D-Iowa), bill S.2927 would impose a $150-billion-a-year tax on securities transactions which would go toward job creation. The bill, now in the House for consideration, exempts mutual funds, pensions and retirement accounts, and annual trading activity under $100,000.

Expect a fight!

Employment in business and financial operations occupations is projected to grow by 18 percent, resulting in 1.2 million new jobs, according to the Occupational Handbook and Career Guide published by the Bureau of Labor. The report projects how many jobs the economy will generate over the next decade and in what industries and occupations. Here’s what it predicts for the finance industry:

• The finance and insurance industry is expected to increase by 5 percent from 2008 to 2018.

• Financial examiner jobs are projected to grow more than 40 percent from 2008 to 2018, mainly spurred by increasing financial regulations

• Employment in the securities, commodity contracts, and other financial investments and related activities industry is projected to expand 12 percent by 2018, which reflects the number of baby boomers in their peak savings years, the growth of tax-favorable retirement plans, and the globalization of securities markets.

• Employment in the credit intermediation and related activities industry, which includes banks, will grow by about 5 percent, adding 42 percent of all new jobs within the finance and insurance sector.

• Increasing financial regulations and the need for greater accountability will drive demand for accountants and auditors, adding roughly 279,400 jobs to this occupation from 2008 to 2018. Further, an increasingly competitive business environment will grow demand for management analysts, an occupation that is expected to add 178,300 jobs. Together, these two occupations are anticipated to account for 38 percent of new business and financial operations jobs.”

The full report paints an interesting picture of ongoing changes in the nation. Not surprising, over half of the top-growing occupations are in the area of health care – for both baby boomers and their pets.

Increasingly, companies are including sustainability statements in their annual reports. Some even argue that this is already a requirement, given that the SEC requires companies to report a known trend with uncertain consequences, which is a good description of climate change.

While few would go as far in interpreting SEC reporting requirements as a mandate -as does the former XBRL-US Steering Committee chairman, Daniel Roberts – the pressure is mounting from the SEC for companies to report on CSR/ESG (Corporate Social Responsibility / Environmental, Social and Governance) issues in their regulatory filings.

A number of organizations are advocating for sustainability reporting, such as the Global Reporting Initiative. But the Carbon Disclosure Project isn’t waiting for any government. It already gets voluntary disclosures from over 2,500 companies, including 330 members of the U.S. S&P 500. Why would these corporations annually disclose greenhouse gas emissions and climate change strategies? They share the belief that any company that is working to curb emissions today is girded for the future and therefore worthy of investment.

“Triple Bottom Line” reporting is another term for this type of reporting which adds ecological and social performance into the traditional economic performance reporting framework.

We at EDGAR Online would like to add that XBRL would be an ideal technical solution for sharing the new information online, as consistently structured data. An XBRL taxonomy for sustainability reporting could be created for tagging all types of information that gets reported. Such data from various organizations could be accessed and shared online, for automated analysis, regardless of what software was used to create the original report.

We look forward to writing about that development in the future!

1. Everyone in their executive suites was above average when compared with peers at other giant banks that didn’t need a bailout.
2. They couldn’t pay in company stock because it was actually worthless, though it was actively trading around $40 on the NYSE.
3. “But, Mom, all the other kids have one.”

Check your answers.

The seven TARP recipients companies that had not yet paid back the emergency funds were therefore subject to governmental authority when it came to setting salary and bonuses for their top 25 executives. They pleaded their cases to Kenneth Feinberg, the government’s special master for executive compensation.

1. Both Citigroup and Bank of America used this reasoning.
2. A.I.G made this argument during a behind-the-doors argument.
3. This is how Warren Buffet, most definitely not a TARP recipient, scorned the process in which U.S. companies give executives compensation “ridiculously out of line with performance.”

While Feinberg’s final rulings forced lower pay packages, the Banks have ended the year doing quite well. Each Bank of America executive, for example, was awarded an average of $6.5 million. Make that $6.2 million for Citigroup’s management.

The TARP seven are Chrysler Financial, General Motors, Chrysler, General Motors Acceptance Corporation, Citigroup, Bank of America, and A.I.G.

[Hats off to Steven Brill, whose New York Times story, “What’s a Bailed-Out Banker Really Worth?” is the source for our quiz this month.]