SEC seeks to "blow up" forms-based system

THE US Securities and Exchange commission has launched a study that could lead to the scrapping of its 75-year-old system that requires companies to file disclosures on prescribed forms like 10Ks, Form 4s and DEF 14As.

Revealed first in a speech Monday night by Chairman Chris Cox at Stanford University and announced in a news release Tuesday, the 21st Century Disclosure Initiative will  “produce a comprehensive conceptual blueprint by the end of calendar 2008 for overhauling completely the SEC’s current forms-based system.”

Bill Lutz, a plain language disclosure expert, will lead a complete overhaul of SEC’s disclosure gathering and dissemination system.

The project fits in with the SEC’s push to mandate eXtensible Business Reporting Language (XBRL), which breaks down traditional document-based disclosures into individually tagged data elements that can be read and recompiled by software according to an investor’s preferred way of viewing the information.

Referring to XBRL in his speech, Cox said that “if using XBRL to atomize the data in a form is a good idea… wouldn’t it be an even more revolutionary idea to blow up the forms themselves?”

Cox has appointed Bill Lutz, a communications consultant and former English professor at Rutgers University who worked on the SEC’s plain English handbook under former Chairman Arthur Levitt, as project director for the study. Lutz will lead a dedicated team of specialized professionals and support staff that will work as a separate unit within the SEC.

After presenting its blueprint, a follow-on advisory committee will be appointed in 2009 to consider the questions in more detail and seek public input before making specific recommendations to the SEC for action.

“Ideal disclosure system of the future”

Cox made it clear that Lutz and his group will have an open mandate to “conceive a blueprint for the ideal disclosure system of the future.”

“To encourage a fundamental rethinking, the project won’t proceed from the premises of the current reporting system. It will start from scratch, from the ground up, freed from any conventions,” he said in his speech.

The SEC chairman, whose term expires in January, said the study would consider:

• How best to match the capabilities of modern information technology with the SEC’s regulatory aims and the needs of investors.
• Different ways that disclosure information could be collected from registrants.
• How information collected by the SEC is organized in digital form.
• How to get the best real-time distribution of financial and narrative disclosure to investors.

Idea incubating for 3 years

Interestingly, Cox said the idea for the 21st Century Disclosure Initiative has been in the works for 3 years and was the brainchild of Alan Beller, the SEC’s former Director of the Division of Corporation Finance, who also conceived the e-Proxy process.

As project director, Lutz will bring considerable real-world communications experience to the table. According to this bio,  he has written plain English disclosures for a wide range of companies and securities industry organizations, including the US Postal Service, AAL Capital Management Corporation, Addison Design of New York, Bell Atlantic, The Dreyfus Corporation, Herman Miller Inc., Charles Schwab & Co. and Whirlpool Corporation.

Last year, with a nod from Cox, he led a project to overhaul Pfizer’s proxy statement as a model for how the text-heavy documents can be made more interesting and useful. However, as this article in the New York Times tells it, he ended up butting heads with the SEC’s Division of Corporation Finance over the content of that effort, something many IR departments likely can relate to.

In the late 90’s when I was producing plain language materials for retail investors on behalf of the Canadian securities industry, I had the good fortune to hear Lutz speak on his favorite topic. I recall that he was a superb presenter who used an overhead projector instead of a PowerPoint presentation.

There can be little doubt that the 21st Century Disclosure Initiative is a project of vital importance. Anything that makes SEC filings more usable and readable will make a big difference to the ability of investors to inform and protect themselves. 

However, as accomplished as he is, I cannot help but wonder how Lutz and his team can possibly succeed in their monumental task of coming up with a workable alternative to the SEC’s 75-year-old disclosure model in just 6 months.

After all, the list of Edgar forms (PDF 532KB) alone runs to 61 pages!