Thursday, August 21, 2008

Society of Corporate Secretaries and Governance Professionals Comment on SEC XBRL Proposal

With the SEC moving towards interactive XBRL filings of financial statements, the Society of Corporate Secretaries and Governance Professionals has voiced concerns with liability and the presentation of executive compensation information. The SEC proposal would require the submission of interactive data-formatted financial statements according to a phase-in schedule beginning with domestic and foreign large accelerated filers with a worldwide public common equity float above $5 billion. The comment period on Release No. 33-8924 ended on August 1, 2008.

The Society believe that addressing liability issues separately for the Interactive Data in Viewable Form will encourage users to rely on individual pieces of financial data without referring to the disclosures that accompany financial information in the filing. Thus, when the Interactive Data in Viewable Form complies with or is deemed to comply with the requirements of proposed Rule 405 of Regulation S-T, said the Society, there should be no additional exposure to, or standard of liability for, that data. Rather, any liability should arise only with respect to the disclosures in the related official filing.

Moreover, the Society opined that the proposed requirement to post a data file on the issuer’s website isolates the financial statement disclosures from the context and disclosures that normally accompany that information when set forth in a complete annual report on Form 10-K. The Society suggested that this separate posting requirement should either not be adopted or the posting should be insulated from all liability, with any liability instead resting solely on the corresponding disclosures made in the underlying document from which the financial statements have been extracted. If the SEC retains an obligation for issuers to post an interactive data file on their websites, continued the Society, the Commission should clarify that this applies only to the file submitted with the issuer’s most recently filed Form 10-K and files submitted with any subsequent interim reports.

More broadly, the Society said that creating new standards of liability for interactive data files, whether it is a good faith or reasonably practicable standard, is neither necessary nor appropriate. While the SEC may retain authority to impose consequences for a filing that fails to satisfy the XBRL requirements, the group observed, liability attached to interactive data should be limited to cases involving fraud for deliberately manipulating or misusing the tags. Further, compliance with Rule 405 should be enforced solely by the SEC.

The distinction of liability between Interactive Data in Viewable Form and the substantive content of the financial and other disclosures is unclear. Because the Interactive Data in Viewable Form is intended to be displayed identically in all material respects to the corresponding information in the related official filing, reasoned the Society, only the related official filing should be subject to liability.

With regard to the disclosure of executive compensation, the Society’s main concern relating to interactive data submissions stems from the fact that currently executive compensation data does not have the same degree of comparability among companies as does financial data. Items, such as bonuses, non-equity incentive plan compensation, and non-qualified deferred compensation earnings, are comprised of different elements at different companies. At many companies, the compensation awards that are commonly known to employees as bonuses end up being included in the non-equity incentive plan compensation column in the Summary Compensation Table, while at other companies they end up reported in the bonus column.

In addition, under the SEC’s current method of calculating the value of options for purposes of disclosure in the Summary Compensation Table, two executives at different companies who were granted options equal in worth based on total fair value at grant could have drastically different values under the options column in the Summary Compensation Table, and in an interactive data comparison table, because one executive was age 54 and the other was age 55.

In order for an investor to have an understanding and appreciation of why those numbers are different, they would have to read the accompanying footnotes and narrative to the Summary Compensation Table, which likely would not be included in a comparison table created using interactive data.

The Society is also concerned that interactive disclosure of executive compensation data would encourage users to decouple the numerical data from the narrative explanations of that data, which would antithetical to the SEC’s new executive compensation regime. In the Society’s view, a core principle of the new regime is providing narrative disclosure needed to understand the information presented in the individual tables. To allow the investor to easily compare companies’ numerical data, while omitting a similar comparison of the narrative, would heighten the possibilities for materially misleading comparisons.

In order to preserve the concept that the narrative and numerical disclosures are inextricably linked, the Society suggested that, if tagging were to be required, the requirement should be such that any comparison of numerical data must require the accompanying narrative disclosure to travel with the numbers and appear in close proximity in the resulting comparison.