Grundfest and Beller Propose On-Line Questionnaire Driven Disclosure Regime as Part of SEC's 21st Century Disclosure Initiative

Former SEC Commissioner Joseph Grundfest and former Corporation Finance Director Alan Beller have proposed reform of the SEC’s disclosure process that would replace the great majority of forms with an on-line questionnaire driven disclosure regime subject to mandatory updating according to a schedule defined by the Commission. In their belief, the questionnaire-driven approach is superior to XBRL tagging of information for non-financial disclosure. The proposal relates only to disclosures outside of the financial statements that accompany or are incorporated into these filings. Those financial statements can be submitted electronically with XBRL tagging. Similarly, the proposals also do not address filings that are already highly structured and amenable to XBRL tagging, such as listings of mutual fund company portfolio holdings.

The proposal by the former officials is part of the SEC’s 21st Century Disclosure Initiative. Announced in late June, this initiative is an ambitious effort to examine fundamental questions about the way the SEC acquires information from the regulated community, including public companies, and the way it makes that information available to investors and the markets. The first phase of the study will be completed by the end of 2008, when a follow-on advisory committee will be appointed to consider the questions in more detailed fashion through a public consultative process. Mr. Beller was the originator of the idea for the initiative; and former Commissioner Grundfest helped to kick it off. \

According to Chairman Cox, the project aims to produce a comprehensive conceptual blueprint for overhauling completely the SEC's current forms-based system and replacing it with one that truly meets investors' needs. At the kickoff, Chairman Cox even posited that, if using XBRL to atomize the data in a form is a good idea, would it not be an even more revolutionary idea to blow up the forms themselves.

Under the proposal, said the former officials, the Commission could elicit all the information currently generated by its forms-based filing system at a dramatically lower cost to filers. It would also facilitate rapid, low-cost construction of databases that promote ready comparison of disclosures across registrants and over time. The system also promises to eliminate the filing of duplicative information and can automatically focus attention on changes from prior disclosures, thereby facilitating SEC review while simultaneously calling the market’s attention to matters most likely to influence price formation. This new regime would also allow the Commission to achieve the significant potential benefits of a company-based disclosure system without seeking legislative authority, and without running the risk of changes to the liability structure provided under the current offerings-based disclosure regime.

The former officials propose that the Commission abandon all forms currently used in its disclosure mechanism, including Forms 10-K, 10-Q, and 8-K. The proposal envisions an on-line questionnaire composed of a combination of binary (yes/no) responses, pull-down menus, numeric fields, and textual responses. Information corresponding to current 10-K disclosure requirements would be updated annually; while information corresponding to current 10-Q disclosure requirements would be updated quarterly.

Essentially, the proposed on-line questionnaire-driven approach will generate an evergreen incrementally updated disclosure database. It will also centralize all exhibits in a single on-line location. Changes or amendments to already filed materials will be easily recognizable through the application of track change tools. The addition of new exhibits would then also occur in a form that can be easily traced by the Commission and the market.

In the view of the former commissioner, this feature helps solve a problem plaguing the current forms-based disclosure regime. Currently, exhibits are presented as attachments to the forms with which they are initially filed. However, when the exhibits are listed as incorporated by reference, any user seeking to find the original text has to search to find the original filing to which the exhibit was attached in order to identify the document itself. This is often a time-consuming process. By providing an automatic direct link to the exhibit itself, without requiring any refilling of the materials that have already been posted as responses to prior questions, the questionnaire approach reduces search costs for users without increasing costs for filers.