SEC Mandates XBRL Filings by July 2009

The Securities and Exchange Commission has given corporations one final farewell gift before the end of the Bush Administration: six more months to comply with the new XBRL mandate.

The SEC approved the mandate on a four to one vote last week, requiring all companies and mutual funds to use XBRL technology when filing financial reports. But the 500 largest U.S. public companies scheduled to go first under the new rule won’t need to start until July 2009, six months later than the SEC originally proposed.

Specifically, an initial group of domestic and foreign large accelerated filers that use U.S. accounting principles and have a worldwide public float above $5 billion will be subject to interactive data reporting beginning with their first quarterly report on Form 10-Q or annual report on Form 20-F or Form 40-F, as applicable, for fiscal periods ending on or after June 15, 2009. So, calendar year-end companies’ first required XBRL exhibit will be in connection with their June 30 Form 10-Q.

Tishler

The text of the adopting release hasn’t yet been posted to the SEC Website, and the rule will become effective 60 days after its publication in the Federal Register. But “the good news is that the largest companies get a little extra time,” says John Tishler, a partner in the law firm Sheppard Mullin Richter & Hampton.

All other domestic and foreign large accelerated filers using U.S. GAAP will follow in 2010, and all other remaining filers in 2011. All XBRL-tagged documents will be included as exhibits to standard EDGAR-based SEC filings. (Mutual funds will be providing risk-return summary information in XBRL.)

Blaszkowsky

Some have raised questions about investors’ and companies’ readiness for XBRL, but David Blaszkowsky, head of the SEC’s Office of Interactive Disclosure, said the marketplace is “already mobilized to support it, and more offerings will become available rapidly as both the buy and sell side become familiar with it.”

The adoption of XBRL rules marks the culmination of years of work by the Commission staff. The SEC first embarked on an initiative to assess the benefits of interactive data back in 2004. The SEC’s momentum around XBRL picked up speed after Chairman Christopher Cox, an ardent supporter of the technology, took the helm in August 2005. Cox made it clear repeatedly during the past year that he wanted a final rule on XBRL in place during 2008.

“This shouldn’t be particularly onerous to deal with and it isn’t expected to be that costly, so some companies might decide to bite the bullet early on the theory that there’s an IR benefit to doing so.”

— Michael Littenberg,

Partner,

Schulte Roth & Zabel

Cox—who said the rules “represent a giant step in the SEC’s achieving its full disclosure mission”—stressed that they don’t change the information companies provide but rather revolutionize “the way they provide it” by letting investors find, view, and compare specific pieces of financial data, rather than pore through text-based reports as people do now.

Like the original proposal, the final XBRL rule excludes interactive data files from the officer certification requirements under Securities and Exchange Act regulations; and it does not require issuers to obtain auditor assurance.

Another important provision for filers: The XBRL submissions will be subject to limited liability similar to that of the SEC’s voluntary XBRL filing program. But in a change from the proposing release, the final rule phases out the limited liability provision over a two-year period for each company and terminates it completely in October 2014.

Berkenblit

Howard Berkenblit, a partner at the law firm Sullivan & Worcester, says the temporary liability provision should give companies comfort. “It allows companies to grapple with the new rule without too much fear that they’d have a major problem if they screw something up during the first couple of years, but they acted in good faith,” he says.

Commissioner Luis Aguilar, the lone dissenting vote in last week’s meeting, objected to the limited liability provisions, which he said “significantly weaken” the SEC’s traditional liability provisions in a way that puts investors at risk of suffering losses caused by misleading disclosures.

LONE DISSENTER

Below are remarks from SEC Commissioner Luis Aguilar, who voted against the XBRL rule.

There are two principal steps to the limitation on liability regulation set forth in Rule 406T of today’s rulemaking. These steps work to peel away the armor that liability protections provide to investors against false statements and misleading disclosures. The first step of the liability carve out is section 406T(b). This part says that the interactive data is deemed not part of a registration statement, and not part of a prospectus, and otherwise carved out from all liability to investors for false statements other than fraud. On top of this carve out—not separate from, but in addition to—is section 406T(c), which further limits the residual antifraud liability if an issuer made a good faith attempt to prepare the interactive data file and amends the file if it becomes aware of a failure to prepare it properly, even if investors already relied on a falsehood.

What do these liability carve outs mean for investors? It means that if an issuer fails to use reasonable care in preparing the disclosure, an investor relying on misleading disclosure may have no recourse. Approving a disclosure regime that sticks investors with losses caused by an issuer who did not use reasonable care is not acceptable to me.

Some are critical of imposing our traditional standard of liability in a situation where an issuer is required to use new technology, particularly when the new technology can lead to significant benefits for investors. But this view fails to understand that investors have to be able to rely on the disclosures for these benefits to arise. As a Commissioner, it is my responsibility to make sure that investor protections are safeguarded.

Some also have suggested that limiting liability is a way to reduce an issuer’s costs of using a new technology and the related costs of compliance. But this thinking is misguided. Liability limitations do not magically reduce costs, instead they shift costs from one party to another— in this case, from issuers to investors—who would bear the costs of relying on erroneous information.

If there is so little confidence in the XBRL preparation technology that we believe it necessary to provide such a dramatic exculpation from liability, then perhaps the technology is not ready—in which case we should not be putting investors at risk of relying on inaccurate information.

In the past, the Commission has required the use of new technology for disclosures without undercutting investor protection. When the Commission required issuers to start using EDGAR and make electronic filings, the Commission provided only the smallest, most narrowly tailored of safe harbors. In that occasion, the Commission provided “a safe harbor against liability for errors in, or omissions from, documents in electronic format resulting solely from electronic transmission errors beyond the control of the electronic filer.” Today’s action far exceeds what we’ve done before.

While I understand that the limitations on liability sunset as to each filer on a rolling 24 months basis similar to the phase in, I am concerned about the exposure to investors during that time. I would not want to expose investors for even 24 hours, much less 24 months. In fact, because of the staggered phase in of the requirement to provide interactive data, the sacrifices to investor protection and skewed incentives caused by the liability carve outs will last well into the next decade.

To conclude, I want issuers and investors to know I strongly support incorporating interactive data into SEC disclosures. If the rules before us today simply required supplemental financial statement information using interactive data on a responsible timeline, I would wholeheartedly endorse them. But instead, the easy choice of bringing the benefits of interactive data to investors and issuers is being tied to an unacceptable limitation on liability.

It departs from our best traditions, and shackles investors with the risks and costs arising from errors and misstatements in interactive data, even though issuers control the process of preparing the disclosure and are in the best position to ensure its accuracy and reliability.

I am not prepared to reduce the level of protection that I believe investors are entitled to. Using new technology to improve disclosure is a good thing — but not when it dilutes investor protection.

In these times of market turmoil, investors need to know the SEC is looking out for them.

Source

Commissioner Luis Aguilar.

Aguilar

“If there is so little confidence in the XBRL preparation technology that we believe it necessary to provide such a dramatic exculpation from liability, then perhaps the technology is not ready—in which case we should not be putting investors at risk of relying on inaccurate information,” he said.

Compliance Details

In their first year of compliance (whenever that may be for any particular filer), companies need tag their statements’ footnotes and schedules in block text only; that information will then need to be tagged in individual detail starting with the second year of compliance. But in a change from the proposing release, the final rule won’t require tagging of narrative disclosures; such tagging is merely permitted.

Companies can also adopt the rule early. While most observers expect many smaller companies to put off compliance until it’s required, Michael Littenberg of the law firm Schulte Roth & Zabel says some mid-size and smaller companies may want to adopt early for investor relation reasons.

Littenberg

“For small and mid-sized companies that don’t have a lot of analyst following, this may give them some additional visibility,” Littenberg says. “This shouldn’t be particularly onerous to deal with and it isn’t expected to be that costly, so some companies might decide to bite the bullet early on the theory that there’s an IR benefit to doing so.”

Companies will be required to provide the interactive data to the SEC and post it to their company Website at the same time as the related report or registration statement, with two exceptions. The rule permits a 30-day grace period for a company’s first interactive data exhibit and for its first XBRL exhibit that requires detailed tagging of the footnotes and schedules. Interactive data information posted on company Websites must remain there for 12 months.

Filers that don’t provide or post required interactive data on the date required would be deemed not current with their Exchange Act reports, and consequently wouldn’t be eligible to use short-form registration. They also wouldn’t be deemed to have available adequate current public information for purposes of the resale exemption safe harbor provided by Rule 144 until they make the required disclosure.

Interactive data will be required with periodic annual and quarterly reports, transition reports for a change in fiscal year, reports on Forms 8-K and 6-K that contain updated or revised versions of financial statements that appeared in a periodic report, and Securities Act registration statements.