SEC Isn't Waiting on a Congressional Mandate to Start Standardizing Financial Data

Mark Van Scyoc /

Seven years after the Great Recession, federal financial regulators appear all onboard for standardizing and digitizing the data they monitor from industry filings, even if allies in the transparency community argue that progress would be greater if Congress made the conversion effort mandatory.

Officials from the Securities and Exchange Commission, the Treasury Department and the Federal Deposit Insurance Corp. told the nonprofit Data Coalition’s “Financial Data Summit” on Tuesday that they see “great progress” in efforts by some 20 agencies to streamline and ease access to financial trends to head off a repeat of the collapse of much of Wall Street in 2009.

The key, most said, is public-private collaboration that combines industry’s technical expertise with agency capacity to set the policy agenda.

“This is no longer the time for document-based forms but a move to structured data,” said Hudson Hollister, a former SEC attorney now executive director of the Data Coalition, referring to the 600 types of filing forms that companies must submit to the SEC’s EDGAR system. “We’re seeing the apostles of structured data in industry, regulatory agencies and Congress.”

He called on Congress to pass the Financial Transparency Act (H.R. 2477) introduced last year by Rep. Darrell Issa, R-Calif., which would require nine major financial agencies to adopt data standards.

But agency officials and industry vendors at the event made it clear that standardizing data is well under way, noting that the push has support from SEC Chair Mary Jo White and Commissioner Kara Stein, among others.

 “We’ve made significant progress in filling critical gaps,” said Dick Berner, director of the Treasury Department’s Office of Financial Research. He cited as a “good case study” the government’s seven-year-old global effort to spread the use of standardized “legal entity identifiers” on financial documents and make meta-analysis easier. 

Three main obstacles slowing progress, Berner said, are “the growing volume of information, the need for data security to achieve a balance between security and access, and a frequent lack of alignment between the incentives of industry and regulators.” Industry has the technical experts, but officials have the ability to “solve the collective action problem,” he said.

Treasury has pilot projects designed to avoid duplication in regulatory requirements to reduce the burden on industry, he said. “I think we’ve made the financial system more resilient since the crisis, but we have more work to do,” he said. One problem is that the “costs are borne up front and the benefits later.” That means the government must either make standardization a mandate or make it so compelling that it will be adopted.

Scott Bauguess, deputy director of the SEC’s division of economic and risk analysis, noted that for years, government’s risk analysis of private entities was done through history-based data, but that digital tools now allow for real-time analysis. It boils down to usability of data, to text analysis and finding things quickly.” Because of “information overload,” the key is what data to focus on. “The best standards bodies tend not to be government but those who are using it.”

Jay Brown, a member of the SEC’s investor advisory committee, pointed to progress in the fact that seven SEC rules published in 2015 mentioned structured data, as opposed to none just a few years ago. The SEC’s Division of Economic and Risk Analysis, created in 2009, got a huge budget increase this year and is now bigger than its investment management division, he said.

Mike Willis, assistant director, Office of Structured Disclosure, announced that his office launched a new website on Tuesday. He displayed a chart showing that the number of SEC data elements now in structured format has hit 120 million and that 200,000 text documents created since 1993 are now online and searchable. Turning data into “machine-readable formats,” he noted, “lowers costs, provides greater accuracy and makes [filings] more timely.”

The vendors who spoke and displayed wares at the summit were both for-profit and nonprofit. Financial consultant Allan Mendelowitz, president of a foundation that produced a standards set called ACTUS, described the mistakes made in 2008 that failed to predict the demise of Lehman Brothers and the government takeover of Fannie Mae and Freddie Mac. “Accounting data is static,” he noted, and many the assessments made before the crisis offered “no insight into linkages and the interconnectedness of financial markets that led” to the collapse. Structured data improves risk management, he said, which helps industry and regulators do a better job.

Mike Starr, a former SEC financial executive now with Workiva, said tools such as his company’s “WDesk” draw on single databases to allow users to create text and charts and have helped reduce errors in SEC filings by 50 percent. “This transformation is not about technology, which exists, but the real challenge is changing the culture within agencies, creating a process to enable people to work harder.” 

Emily Huang, co-founder of idaciti, which has sold two tools to the SEC, lauded the agency’s progress in a difficult task. “They encourage private companies to build a solution,” she said. “I’d never build just for the SEC, but to sell for customers.”

On the pending Issa legislation, which sits in the Financial Services and Agriculture committees without a Senate companion bill, Hollister said his team is building co-sponsorship. Interest is rising, he said, as evidenced in the number who recently voted against a bill from Rep. Robert Hurt, R-Va., that would do the opposite of opening financial data. H.R. 1965 would exempt small businesses from obligations to file with the SEC using eXtensible Business Reporting Language, which Hurt said has “has proven to be an example of a regulation where the costs currently outweigh potential benefits for small, innovative companies.”

The SEC declined to comment on pending legislation.

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