The SEC’s IDEA: Reading the tea leaves…

Yesterday, I said that the SEC is probably onto something with its IDEA announcement. They are moving, in a very public, very clear and pretty determined manner towards a new era for disclosure based regulation. It’s interesting to see the number of articles that take a very different, rather more skeptical view. The adversarial nature of the relationship between companies, lawyers and the Commission clearly isn’t going to disappear any time soon. But if you take the broad view, then the IDEA announcement is more than mere marketing (although it is that too). It’s a stake in the ground about the way that disclosure-based regulation will work for the next decade or two.

And it’s more of the same, just in electronic form.

More of the same with a vengeance, that is. Changing the focus of disclosure onto the internet will have significant repercussions for many of today’s actors. Here are a few fuzzy predictions.

  1. If it moves, tag it

    XBRL, or interactive data, involves wrapping definitions around information, with XML tags, or (strictly) elements. The information can be a single number, a paragraph of text, a picture or chart, or any combination of these.

    IDEA will drive the SEC and every other regulator, to require information to be marked up in this way. Today the focus is on financial statements. In five years’ time, it will likely include a much wider range of information, including prospectus documents and proxy statements covering information like compensation and related party dealings. Regulators will undoubtedly extend their requirements to also cover specialist disclosures such as those made about Oil and Gas reserves, pharmaceutical approvals, lending covenants and risk transfers. They won’t necessarily be asking for more information. But there will be an ongoing balancing act, not to mention conflict, between questions about liability and the burden that additional structured disclosures impose on Issuers on the one hand, with the utility that such structured information provides to the market overall on the other. Presumably, given recent market turmoil and the opaque nature of a range of financial instruments, the playing field is going to be tilted towards disclosure for quite some time.

  2. Market markup

    Those tags are going to end up everywhere. Markets will rely on them and ask for more. Where? Earnings releases for a start. Macro-economic data. Yes, governments themselves will need to get down and dirty mapping their own statistical disclosures to appropriate tags. Industry and corporate metrics: national and regional car sales, home loan approvals, airline miles flown. If you compile valuable information and today distribute it in a press release or on a web site in text, PDF, HTML or even Excel format today, you’ll be doing the same thing, but in XBRL tomorrow.

    Even the markets themselves will get in on the act, as research information (especially estimates) that are today distributed to investors and analysts in PDF and HTML will get tagged and shipped out as interactive data, for use and assimilation into other people’s systems, models and ideas.

  3. Joined-up thinking

    The architecture of the IDEA system, and many other, similar ones around the world will be service oriented, or SOA, based. This is a relatively new way of designing computer systems, but it gives rise to new capabilities as it is much easier for people to build on them. SOA allows so called "mash-ups" of information to be put together, using different data sources and different services that act on that information. Other countries will certainly develop similar systems. Expect, therefore, for infomediaries like ThomsonReuters, and FactSet, to facilitate the comparison of disclosures made by the same company in different countries, as well as international industry and peer comparisons that will make your head spin. They’ll be well placed to do that because they are good at making judgements about the comparability of different accounting rules across international boundaries. But expect others, including ratings agencies, new start-up players and the regulators themselves, to get in on the act.

  4. A galaxy of applications

    The free provision of company and mutual fund performance data and metadata in a searchable, organised format will greatly improve the capability of investors and other stakeholders to better understand different securities.

    Whether it is:

    • MSN Money, providing automated peer comparison tables to retail investors;
    • A large hedge fund looking for arbitrage opportunities; or
    • the SEC itself, sniffing through corporate filings, looking for anomalies and compliance violations or the illegitimate resurrection of a business following investor fraud;

    the scope and variety of applications are difficult to attempt to define.

    Some applications will be private, for the use of the SEC. Others will be private for the use of financial institutions, and trading houses. Others will be open to the world. Some will mash up information from multiple sources and some will, in turn, allow others to use (for free or for a fee) the information that they produce.

    There are some clear commonalities though. The IDEA platform will need to scale to service lots of different users of lots of different applications. Local staging, storage and transformation of data, including information unique to specific companies, will be the main technical challenge for application builders.

  5. One document. Different views.

    One aspect of XBRL that has a lot of people stumped is how to view it. Issuers are concerned about the way that the SEC viewer applications will represent their disclosures on a web page or in Excel. Here comes the XBRL consortium to the rescue. The Inline XBRL (iXBRL) specification lets you create a web page that looks and feels exactly the way you want it to, but that contains XBRL markup wrapped around every relevant fact. The markup is not generally visible to a human being, but can be immediately consumed by computers. One document, two different views. Inline XBRL lets preparers format their documents the way that they want to, including in a way that looks exactly like today’s regulatory filings. At the same time, the content that the regulators require, or the markets demand, must be machine readable and it is right there in the document. Next to all the tags that people are already familiar with, like <bold> and <italics> are some new ones that say <cash> and <AccountingPolicies>.

    IDEA and its counterpart services run by other securities regulators, companies registrars and exchanges will almost certainly receive and republish entire iXBRL documents that can be read by humans and computers alike, rather than just getting the raw, computer-readable information contained in an XBRL data document. This is important for any number of reasons, including one very good one: because the filings will just be web pages containing some specialised, if hidden, tags they will be searchable via ubiquitous systems like Google. Architected correctly, it will also keep the costs down.

  6. Metadata matters

    The important thing about XBRL is the X. It stands for extensible, an ugly, if descriptive word. XBRL has three layers:

    • A specification. Think of it as the alphabet and rules of grammar;
    • Taxonomies. These are loose-leaf dictionaries of terms that define specific concepts, using the alphabet set out in the specification and obeying its rules of grammar; and
    • Instance, or data documents, that use the words in the dictionary to communicate performance reports.

    Notice that taxonomies are "loose leaf" dictionaries. If the dictionary contains a suitable word, you need to use it. If it doesn’t, you need to add a new page to the dictionary, containing your new word and its definition. This is the idea of extensibility.

    Companies will use and no doubt abuse the idea of extensibility in XBRL for a year or two. It will settle down before long. All the extensions that apply to specific companies will need to be catalogued and referenced appropriately. Doing so will ensure the operation of the analytical "electronic applications" that will form part of IDEA, as well as external applications such as those run by portals like Yahoo Finance and Microsoft Money.

    Just as importantly, companies will need to treat their own extensions as an important corporate asset. They are very public statements about specific and important aspects of corporate disclosure.

What should actors on the disclosure stage be doing? Tomorrow there will be a few suggestions.

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