Last week the SEC announced plans to replace its EDGAR system for electronically filing financial disclosures with a new one. The replacement, called "IDEA" will use interactive data to power a range of electronic applications, some to be provided by the SEC, others by the private sector. The Commission says that it will be working quite quickly but that it will take five years to bed down. What will it look like? What should preparers and users expect? What are the challenges? Where are the opportunities? Over the next few days I’ll provide a few half-educated guesses.
Today though, a little history. Financial crises are soon followed by new types of regulation. It was the Wall Street crash of 1929 and resulting Great Depression that gave rise to the disclosure based regime that is widely (although not universally) used around the world.
In 1933, President Franklin D Roosevelt, in announcing the formation of the SEC’s immediate predecessor, set out a new way of thinking about regulation. Prior to the creation of the SEC, the regulators themselves examined drafts of company public statements. They were attempting to judge their veracity and reliability. There was a significant onus on the government itself to ensure that scams, rumours and plain bad information were not publicised and traded on. The crash brought about a rethink.
In signing the 1933 legislation into law, Roosevelt introduced the idea of corporate transparency. He said:
“Of course, Federal Government cannot and should not take any action which might be construed as approving or guaranteeing that newly issued securities are sound in the sense that their value will be maintained or that the properties which they represent will earn a profit.
There is, however, an obligation upon us to insist that every issue of new securities to be sold in interstate commerce shall be accompanied by full publicity and information, and that no essentially important element attending the issue shall be concealed from the buying public.
This proposal adds to the ancient rule of caveat emptor, the further doctrine "let the seller also beware." It puts the burden of telling the whole truth on the seller. It should give impetus to honest dealing in securities and thereby bring back public confidence.”
(See H.R.Rep. No. 85, 73 Congress, First Session 2 (1933) for the quote and the Financial History of the United States for a fascinating insight into the pressures, for and against, the new approach that Congress weighed up.)
Since the formation of the SEC, the US, and the majority of other securities markets, have relied on a positive obligation on those seeking investment from the public to provide honest statements about their businesses and not to omit material information from such statements. These obligations are backed by lawyers and their investor clients that are willing to enforce them (the obligation is to show that nothing material has been omitted, which is difficult to prove) and by the markets themselves – stocks that seem to lack full transparency tend to be punished in terms of growth and valuation as a multiple of earnings.
Transparency (mostly) works. The fact that the Commission is concentrating on the use of technology to improve a proven recipe, rather than throwing out the current system should be welcome. The regulatory tide has not yet risen too high, despite some of the wilder pressures that these agencies are under, given the impact of the current credit crunch.
So, at a macro level, the IDEA announcement is merely reinforcing disclosure-based securities regulation.
We should also take away the fact that XBRL and the idea of structured, computer readable performance reporting is now completely embedded within the SEC. Anyone that has been hoping, or betting, for something else, should think again.
The fact that IDEA is being presented as a platform is also important. Infomediaries, portals and investment houses of all sorts should be thinking about how to incorporate the use of the platform into their development plans.
It would be particularly surprising if the SEC was the only securities regulator, companies registrar or exchange around the world that came to the conclusion that a platform of the sort described last week is the right IDEA for the future of disclosure-based regulation.
Tomorrow, a few predictions through a cloudy crystal ball.