Client Alert

SEC Proposes Mandatory Interactive Data Tags Filings

June 23, 2008

On May 30, 2008, the SEC published for comment proposed rules intended to integrate interactive data tagging technology into the SEC filing process. The proposed rules are part of a wider SEC initiative to streamline company filings, and simultaneously provide investors with better, faster and more meaningful information about reporting companies. SEC Chairman Christopher Cox has advised that the SEC is committed to the eventual replacement of its EDGAR system with the interactive data tagging technology. This new tagging structure will provide more timely access to financial reports and will ultimately be less costly to both filers and investors.

Background

Where it All Began

In 2004, the SEC began assessing the merits of interactive data and its potential for improving the timeliness and accuracy of financial disclosure and analysis of SEC filings. As part of this evaluation, it adopted rules in March 2005 permitting filers, on a voluntary basis, to provide financial disclosure in interactive data format as an exhibit to certain filings on its EDGAR electronic filing system. Over 75 companies, spanning over a wide range of industries and having a total market cap of $2 trillion, have chosen to participate in this voluntary program.

Based on its findings during the monitoring of the voluntary program, the SEC is now proposing rules to require financial reporting using interactive data. The proposed rules would apply to domestic and foreign reporting companies that prepare their financial statements in accordance with U.S. generally accepted accounting principles (GAAP), and foreign private issuers that prepare their financial statements in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Interactive data would be required to be provided on a company’s website and as exhibits to the filer’s registration statements and periodic reports, as well as to transition reports for a change in fiscal year.

Advantages of Interactive Data Tags

Interactive data tags would create new ways for investors, analysts and others to retrieve and use financial information in documents filed with the SEC. All of the key information in a financial document will be tagged so that software can then instantaneously recognize it. Once the tags are applied to all the requisite documents, users will be able to download a company’s financial information directly into spreadsheets, analyze it using commercial off-the-shelf software, or use it within investment models in other software formats. Such interactive data can be dynamically searched and analyzed, facilitating the comparison of financial and business performance across companies, reporting periods and industries.

Interactive data could also provide a significant opportunity to automate regulatory filings and business information processing, with the potential to increase the speed, accuracy and usability of financial disclosure. Although costs are expected to go up significantly in the first few years after the proposed rules become effective, they should rapidly decrease shortly thereafter. To the extent investors currently are required to pay for access to disclosure that has been extracted and reformatted into an interactive data format by third-party sources, the availability of this information could allow investors to avoid such costs. In addition, companies are expected to develop their own customized templates that can be used over and over again.

The Art of Interactive Data Tagging

Interactive data tagging under the proposed rules would require the use of eXtensible Business Reporting Language (XBRL). Current SEC filings are required to be made in HTML or ASCII format, both of which are static in nature. XBRL, however, is an open standard that defines or “tags” data using standard definitions. The tags establish a consistent structure of identity and context. This consistent and dynamic structure can be recognized and processed by a variety of different software applications. Software applications, such as databases, financial reporting systems and spreadsheets, recognize and process tagged financial information.

In 2006, the SEC contracted with XBRL U.S., a non-profit organization that includes companies, public accounting firms, software developers, filing agents, data aggregators, stock exchanges, regulators, financial services companies and industry associations, to develop the standard list of tags necessary for financial reporting in interactive format consistent with U.S. GAAP and SEC regulations. Such interactive financial reporting requires a standard list of tags, which cover a variety of financial concepts that software applications can use to identify what the tagged item represents and how it relates to the other items in the report. The tags will be applied to both monetary and nonmonetary financial information, and will contain descriptive labels, definitions and authoritative references to U.S. GAAP and SEC regulations where applicable. All of these tags will provide the contextual information necessary for interactive data to be recognized and processed by various software programs.

Interactive data tags need not be manually affixed to financial reports. Applying such tags to financial statements is accomplished using commercially available software that guides a preparer in mapping information in the financial statements to the appropriate tags in the standard list. Each element in the standard list of tags has a standard label. A company would then be able to match the standard labels to each caption in its financial statements. However, a company will have the ability to create custom tags that fit its particular needs if the standard collection of tags falls short.

On the global front, the International Accounting Standards Committee Foundation (IASCF) has developed a separate list of tags based on IFRS. To create interactive data under this system, an issuer generally would need to follow the same mapping, extension and tagging process as would a company that uses the list of tags for U.S. GAAP financial statement reporting.

Summary of Proposed Rules

The proposed interactive data requirements would not change the information currently reported, but would add an additional requirement. Companies would be required to include financial statements in a new format as an exhibit to their public filings. Thus, the proposal will not alter the disclosure or formatting standards of periodic reports, registration statements, or transition reports, which would continue to be available as HTML or ASCII posted on EDGAR for those who prefer to view the traditional text-based document.

The principal elements of the proposed rules are as follows:

• Domestic and foreign large accelerated filers using U.S. GAAP that have a worldwide public common equity float above $5 billion as of the end of their most recently completed second fiscal quarter would provide to the SEC a new exhibit to their public filings. The exhibit would contain their financial statements and any applicable financial statement schedules in interactive data format. The requirement would apply beginning with fiscal periods ending on or after December 15, 2008.
• All other domestic and foreign large accelerated filers using U.S. GAAP would be subject to the same interactive data reporting requirements the following year, beginning with fiscal periods ending on or after December 15, 2009.
• All remaining filers using U.S. GAAP, including smaller reporting companies, and all foreign private issuers that prepare their financial statements in accordance with IFRS as issued by the IASB, would be subject to the same interactive data reporting requirements beginning with fiscal periods ending on or after December 15, 2010.
• Filers providing financial statements in interactive data format would be required to use the most recent and appropriate list of tags released by XBRL U.S. or the IASCF.
• A filer subject to the proposed rules also would be required to post those financial statements in interactive data format on its corporate website on the same day it filed, or was required to file, the related registration statement or report with the SEC, whichever is earlier.
• Financial statement footnotes and financial statement schedules initially would be tagged individually as a block of text. After a year of such tagging, a filer also would be required to tag the detailed disclosures within the footnotes and schedules.
• The initial interactive data exhibit of a filer would be required within 30 days of the earlier of the due date or filing date of the related report or registration statement, as applicable. In year two, a filer would have a similar 30-day grace period for its first interactive data exhibit that includes detailed tagging of its footnotes and schedules.
• Filers that do not comply with the proposed rules, but who are required to do so, would not be eligible to use the short forms S-3, F-3 or S-8, or elect under Form S-4 or F-4 to provide information at the reduced level prescribed by Form S-3 or F-3. Similarly, such filers would not be deemed to have available adequate current public information for purposes of the resale exemption safe harbor provided by Rule 144. A filer that was deemed not current solely as a result of noncompliance with these rules, however, would be deemed current and timely upon providing the interactive data to the SEC.
• Hardship exemptions would be available for the inability to submit interactive data electronically on a timely basis. Rule 201 under Regulation S-T provides for temporary hardship exemptions when an issuer experiences unanticipated technical difficulties that prevent timely preparation and submission of an electronic filing. Rule 202 under Regulation S-T provides for continuing hardship exemptions upon a written request if information otherwise required to be submitted in electronic format cannot be filed without undue burden or expense.
• “Raw” interactive data, which is only machine readable, would be subject to the federal securities laws in a manner similar to that of the voluntary program and, as a result, (i) would not be deemed “filed” for purposes of specified liability provisions, (ii) could be excluded from the officer certification requirements under Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934 and (iii) would be protected from liability for failure to comply with the proposed tagging and related requirements if the interactive data file either (x) met the requirements or (y) failed to meet those requirements, but the failure occurred despite the issuer’s good faith and reasonable effort, and the issuer corrected the failure as soon as reasonably practicable after becoming aware of it.
• By contrast, “viewable” interactive data, which is the XBRL data that can be downloaded and viewed by users from the SEC’s website, would be considered “filed” and subject to all the same liability under the federal securities laws as the corresponding information in the traditionally formatted financial statements included in the filing.

Impact

By enabling filers to further automate their financial disclosure processes with the SEC, interactive data may eventually help filers improve the speed at which they can generate financial information, while reducing the cost of filing and potentially increasing the accuracy of the data. For example, with standardized interactive data tags, registration statements and periodic reports may require less time for information gathering and review. Also, standardized interactive data tagging may enhance the ability of in-house financial professionals to identify and correct errors in an issuer’s registration statements and periodic reports filed in traditional electronic format.
However, should XBRL become a required part of SEC filings, the potential for material misstatements due to the tagging process could become a real concern. Companies are likely to demand some level of third-party assurance on the tagging process and its compliance with technical specifications. Auditors currently attest to the material accuracy of financial statements filed with the SEC using GAAP as the criteria to measure against any filings. However, such attestation currently does not apply to the creation of XBRL documents.

Comments Sought

Comments with regard to the SEC proposal are due by August 1, 2008. Information on submitting comments to the SEC can be found on the SEC’s website at www.sec.gov/rules/submitcomments.htm.