Support Learning and Insight

It’s more important than ever to understand the challenges facing financial executives. Support the Financial Education & Research Foundation today.

Compliance Merrill

The SEC Doubles Down on Expanding XBRL Use


Sponsored by Merrill

Recent developments demonstrate the SEC’s growing commitment to the use of XBRL in interactive filings; XBRL tagging in proxy statements, and SEC analysts are mining XBRL submissions with new technology.

Filers, take note: Two recent developments demonstrate the SEC’s growing commitment to the use of XBRL in interactive filings. For the first time ever, the SEC is extending the requirement for XBRL tagging to proxy statements. Under proposed rules, proxy statements will disclose and tag in XBRL a company’s pay-for-performance and clawback arrangements

The XBRL requirement in the proposed rules should come as no surprise. As Dr. Mark Flannery, the head of the SEC’s Division of Economic and Risk Analysis (DERA), explained to Dimensions: “Every time there is a new form, or every time a form is revised, DERA – in particular, the Office of Structured Data – will look at whether there is a good role for tagging or structuring the data that is being requested … I believe that more tagged data generally is better.” Considering the low costs and big benefits of XBRL tagging, DERA would like to have more XBRL in SEC filings, although, he emphasized, it is the Commission that ultimately decides what is appropriate.

Further evidence of the SEC’s commitment? A recent announcement that the SEC will be giving a significant number of its analysts licenses for the XBRL data-mining platform from Calcbench. This will include Calcbench’s normalized metrics, raw XBRL search tools, and data on XBRL filing errors.

These developments are part of the Commission’s newly energized focus on making SEC filings interactive so that analysts, investors, and other market participants can analyze and compare data or text more quickly and easily.

XBRL disclosure in your upcoming proxy statement

The new rules proposed in Release No. 34-74835 will require an issuer’s proxy statement to disclose pay-for-performance provisions for its executives and present related data in a special table.

  • Disclosures in the special table, including any footnote disclosures, will be in an interactive data format, using XBRL.
  • Interactive data must appear as an exhibit to the definitive proxy or information statement filed with the SEC and be prepared using a specified list of XBRL tags.
  • For smaller reporting companies, the new XBRL reporting will be phased in.
  • Filers must tag the numerical data disclosed in the special table and must separately tag certain disclosures in block-text.
The SEC contemplated alternatives to expanding the XBRLtagging requirement beyond numbers and into text. For example, it considered not requiring issuers to block-tag the graphical or narrative disclosures after the table. However, the incremental costs of this additional XBRL tagging are low enough to warrant the new requirement, since tagging will benefit anyone trying to extract those disclosures from a large pool of filings.

The introduction of XBRL in the proxy statement may foretell how XBRL will be further expanded to text in the future, including the tagging of disclosures that are only text. For example, the SEC proposes tagging text-based clawback disclosures for incentive-based executive compensation, in Release No. 33-9861.

Why the SEC supports XBRL

The two releases provide some insight into why the SEC strongly supports XBRL and what its vision is for how XBRL will change investors’ behavior. As the SEC explains in the releases: “We believe requiring the data to be tagged would lower the cost to investors of collecting this information, would permit data to be analyzed more quickly by investors and other end-users than if the data was provided in a nonmachine-readable format, and would facilitate comparisons among public companies. In addition, requiring the data to be tagged would facilitate analysis of how information related to a single issuer changes over time.”

Jennifer Froberg, EDGAR Specialist at Merrill Corporation, told Dimensions: “The SEC anticipates the accessibility of the XBRL data may improve shareholder understanding and impact shareholder voting at the annual meeting for the Board of Directors. It understands that XBRL would allow investors and shareholders to more easily analyze and compare data, which Merrill has also been advocating as a key benefit of XBRL tagging.”

XBRL in SEC rules: The new norm

Hudson Hollister, the executive director of the Data Transparency Coalition (DTC), predicts that the recent developments are just the start of XBRL use in the proxy statement. “The adoption of a structured data format for pay-for-performance is the start of a much larger transformation for the proxy statement,” he told Dimensions. “The proxy statement contains a great deal of information that is numeric and tabular in nature – ripe for transformation into structured data.”

Mr. Hollister also explained that if the Financial Transparency Act becomes law (a major goal of the DTC), the SEC must adopt structured data standards for all filings. Regardless of whether it becomes law, he believes the SEC is “on the road” to altering its disclosure system into structured, searchable data. “The information contained in the proxy statement will be automatically compiled, transmitted, disseminated, and absorbed by investors,” which he sees as good news for more than just investors. For issuers, the software used to prepare SEC filings, including proxy statements, in interactive data formats will assist with a company’s compliance burdens and reduce costs.

What to do now before the next proxy season

Clearly the SEC is committed to expanding XBRL use and requiring more incoming disclosure to be structured for computer consumption, although it remains uncertain when the SEC will finalize the pay-for-performance rules and make the disclosure mandatory. Yet according to attorney Mike Melbinger, who chairs the Employee Benefits and Executive Compensation Practice at Winston & Strawn, companies still need to take steps for this upcoming proxy season.

This is particularly true if they use a performance goal other than relative Total Shareholder Return (TSR). He reads the proposed rules as “unambiguously” relying on TSR for reporting the relationship between executive compensation and financial performance. Therefore, compensation committees should understand that the rules likely will require companies to report their TSR and compare it in easy-to-read chart form against the average TSR of their peers. This will lead proxy statement readers to focus on the

company’s actual and relative TSR, regardless of the metrics it uses for its performance-based compensation.

He suggested to Dimensions that companies not currently using relative TSR should consider two choices for upcoming proxy seasons: either switch to TSR as a performance measure, or explain in the Compensation Disclosure & Analysis (CD&A) section why the performance metric being

used is better. While this is “not impossible,” he indicates, “it may be a challenge to get proxy statement readers to focus on the compensation committee’s explanation of the unique performance measures it actually uses.” He advises that charts are preferable to text for this purpose.

For more details of the SEC’s pay-for-performance proposal, see this summary from Merrill Corporation.