How Will the SEC Expand the Use of Machine-Readable Data?

Introduction

Important changes for the presentation of corporate data in public company filings with the U.S. Securities and Exchange Commission (“SEC”) are in the offing. The SEC’s December 2023 report on the use of machine-readable corporate data[1] under the Financial Data Transparency Act of 2022 (“FDTA” or the “Act”)[2] updates the status of the SEC’s efforts to improve the quality and expand the scope of the machine-readable data it collects.

The FDTA compels the SEC’s Division of Corporation Finance (“CorpFin”) to issue comments on the quality of the machine-readable data currently being filed by corporate issuers. It also requires the SEC and other federal financial regulatory agencies to devise common machine-readable data standards and then implement those standards in their respective regulatory regimes over the next three years. Finally, it requires the SEC to apply those standards to much more data than is currently required. Over time, these new requirements will increase the cost and complexity of preparing SEC filings.

FDTA Background

Congress passed the FDTA as part of a “must pass” defense bill at the end of 2022.[3] The FDTA requires eight federal financial regulators[4] to set data standards for the collection of information “financial entities” report to each agency. The Act has strict deadlines for rulemaking – the agencies are directed jointly to propose rules within 18 months of passage[5] and adopt rules within two years.

Besides the data standards, the agencies are directed to require “all [reporting] entities” to obtain a “common non-proprietary legal entity identifier,” commonly referred to as an LEI. [6] Global financial regulators have been advocating for widespread adoption of LEIs since the 2008 financial crisis. The hope is that LEIs can give regulators greater insights into the relationships among reporting entities and thus better understand the risk of market instability.[7]

The SEC’s Mandate under the FDTA

The FDTA requires the SEC to make virtually all the information in registration statements, periodic reports and proxy statements machine-readable.[8] (Currently, corporate issuers tag only their financial statements and some other discrete information.) The Act also directs the SEC (and the other regulators) to adopt its own data standards consistent with, “to the extent feasible,” the joint agency standards.[9] The SEC may scale the requirements for smaller entities[10] and may otherwise “seek to minimize disruptive changes” to all reporting entities. The Act permits the SEC to exempt “exhibits, signatures and certifications” from the data standards, which suggests that all other information should be subject to the new standards. The Act directs the SEC to have its rules take effect within two years of the joint agency rulemaking. These rulemaking timelines seem ambitious.

The SEC is also directed to “establish a program to improve the quality of corporate financial data.” The program requires CorpFin to issue comment letters “requiring correction of errors” in filings and other reports furnished to the Division.[11]

SEC’s Machine-Readable Data Program

The SEC started to require corporate issuers to make their financial statements machine-readable in 2009[12] and it has continued to expand the scope of entities and information subject to these requirements since.[13] Besides financial information, corporate issuers have been required to tag the cover page of their filings, filing fee information, and other select items.[14] As noted above, the FDTA now requires the SEC to make virtually all the information in registration statements, periodic reports and proxy statements machine-readable.

In September 2023, CorpFin posted a sample letter to companies regarding their XBRL disclosures.[15] The staff acknowledged that the passage of the FDTA prompted these comments; it had not previously issued many comments about XBRL compliance. Because many companies rely on financial printers to tag their filings for them, responding to these comments may require the issuer (and counsel) to consult with the filing agent.

Finally, the FDTA requires the SEC to submit semi-annual reports to Congress until 2029.[16] The semi-annual reports serve as report cards on the SEC’s implementation of FDTA. The report published by the SEC in December 2023 was its second report[17] and identified new rules that called for machine-readable data, adding information in Schedules 13D and 13G for the first time.[18] It also updated statistics in its discussion of costs and benefits and identified particular Enforcement matters that were aided by analysis of machine-readable data.

What’s Next?

For now, the key take-aways for public companies are:

• be prepared to address the forthcoming requirement to obtain a legal entity identifier (“LEI”)[19];
• expect comments from the CorpFin staff on the quality of machine-readable data in SEC filings; and
• anticipate that the SEC will significantly expand the information required to be reported in machine-readable format over the next few years, and look for opportunities to contribute to the SEC’s rulemaking process.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Capital Markets and Securities practice.

[1] “Machine-readable” refers to the electronic coding of information so that a computer can readily extract data and compare them with other data similarly coded. Machine-readable data is also sometimes referred to as “structured data.” There are a number of technical standards currently available; the SEC generally relies on eXtensible Business Reporting Language (“XBRL”). The process for making data machine-readable is often referred to as “tagging.”

[2] James M. Inhofe National Defense Authorization Act, Pub. L. 117-263, 136 Stat. 2395 (Dec 23, 2022). The FDTA is Title LVIII of that Act.

[3] Senators Mark Warner (D-VA) and Mike Crapo (R-ID) had introduced the FDTA earlier in the legislative session as a stand-alone bill. At the time, the sponsors said the act was “designed to modernize the collection and dissemination of financial data by federal financial regulators, making that information more accessible, more uniform, and ultimately more useful to investors and consumers.”

[4] The eight agencies are Department of Treasury, SEC, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Bureau of the Consumer Financial Protection, Federal Reserve Board, National Credit Union Administration, and Federal Housing Finance Agency.

[5] The SEC has included this proposed rulemaking in its Fall 2023 Unified Agenda of Regulatory and Deregulatory Actions (“Reg Agenda”) with action currently estimated for April 2024. The FDIC, CFPB, OCC, NCUA, and FHFA have also included this proposed rulemaking in their Reg Agendas but with action currently estimated for June 2024.

[6] It is not clear if each separate legal entity within a reporting entity will be required to get its own unique identifier.

[7] For more background on LEIs, see Legal Entity Identifier - Frequently Asked Questions | Office of Financial Research and FSB LEI Report not embargoed Jun2012.

[8] The full list of SEC filings subject to the FDTA is: investment adviser reports; investment company registration statements and reports; nationally recognized statistical rating organization submissions and publications; asset-backed securities disclosure; registration statements under the Securities Act of 1933; periodic and current disclosures under the Securities Exchange Act of 1934 (“the Exchange Act”); corporate proxy and consent solicitations materials under Section 14 of the Exchange Act; security-based swap reports; information submitted to the Municipal Securities Rulemaking Board; and information submitted to any registered national securities association.

[9] As mentioned above, the SEC has generally relied on XBRL as the standard for these disclosures. One open question presented by the FDTA is whether the joint agency rulemaking will also select XBRL as the financial regulation standard, and if it does not, what will become of the SEC’s XBRL program.

[10] The Act specifies “emerging growth companies, lending institutions, accelerated filers, smaller reporting companies and other smaller issuers.”

[11] The Act also requires the SEC Chair to designate an official in his or her office to be responsible for improving corporate data quality. Besides improving data quality, the program is also intended to make the corporate data in SEC filings “useful to investors.”

[12] Interactive Data to Improve Financial Reporting, Rel. No 33-9002 (Jan. 30, 2009) Final Rule: Interactive Data to Improve Financial Reporting (sec.gov).

[13] See generally SEC.gov | Structured Disclosure at the SEC: History and Rulemaking. Some important milestones for corporate issuers have been Inline XBRL Filing of Tagged Data (sec.gov); and Filing Fee Disclosure and Payment Methods Modernization (sec.gov).

[14] Some have called for a more strategic expansion of tagging requirements, and welcome the FDTA as such an opportunity. SEC.gov | Escaping the Data Swamp: Remarks before the RegTech 2023 Data Summit.

[15] SEC.gov | Sample Letter to Companies Regarding Their XBRL Disclosures[1].

[16] In each report, the SEC is required to:

[17] Its first report was published in June 2023. 2023 Semi-Annual Report to Congress (sec.gov).

[18] Modernization of Beneficial Ownership Reporting, Rel. No. 33-11253 (Oct. 23 2023); Investment Company Names, Rel. No. 33-11238 (Sept. 20, 2023).

[19] Get an LEI: Find LEI Issuing Organizations - LEI – GLEIF