A slippery slope appeared during the Wednesday meeting discussing the Securities and Exchange Commission’s 21st Century Disclosure Initiative. What if companies had to be filing financial information all the time?
The initiative, announced last June, is intended to modernize the disclosure system so that the information the commission requires from operating and investment companies is more useful and transparent. The central idea: to create a company filing system that would replace the EDGAR database, and collect a company’s financial data in an interactive data file that works like a database.
“We are at the tipping point of major change of how investors in the external community will access and analyze information,” said Liv Watson, of IRIS Business Services Private Limited and a founder of the eXtensible business reporting language.
One of the benefits of the proposal is that corporate information becomes “dynamic.” And while investors and analysts would surely enjoy this, it could come with costs for companies that will find themselves under pressure to produce numbers more frequently.
“The pressure will be on to move to an evergreen filing system,” said Douglas Chia, senior counsel and assistant corporate secretary at Johnson & Johnson. “There’s no reason companies can’t make real-time disclosure.”
William Lutz, an English professor at Rutgers University who is working on the initiative, said last August that the familiar paper-based 8-Ks and 10-Ks will “simply die.” But companies may be reluctant to replace them with raw, real-time numbers.
“In practice it sounds wonderful, but it sounds hellacious to implement,” said Joseph Grundfest, a professor at Stanford University’s Law School.
Chia argued that companies will likely demand that liability standards on financial data be relaxed in exchange for continuous disclosure, as errors would be more frequent. Steven Bochner, a partner at Wilson Sonsini Goodrich & Rosati, said that the expenses of an electronic company file system would be felt more for small businesses and that they should not be forced to update their information more frequently than they already do. Watson agreed, saying that a framework for continuous auditing and assurances was needed before continuous reporting could happen.
“People are going to be resistant,” said Chia “Especially large issuers who can’t disclose on a dime.”
For its part, the SEC has said that it does not see the need for legislative action in order to implement the system. Grundfest said that demands for more frequent reporting would most likely start out as “temporarily voluntary.” But, he continued, “sooner or later those who didn’t comply would have hell to pay.”
The SEC expects to have a final report on the initiative completed by December 31.