Mutual fund companies are finding that it's not too early to start tagging fund data with the international extensible business reporting language (XBRL) code the Securities and Exchange Commission has required them to begin using in July, though companies may find it's easier to outsource the job.
"XBRL does not force companies to do better reporting or be more transparent, but it does make it easier to search for information," for both professional portfolio managers and investors, said Sue Childs, executive vice president at New York-based EDGAR Online. "It will change the way people receive, transmit and analyze information."
The new reporting language will make it much easier for users to compare funds and is part of a broader effort by the SEC to improve transparency. The actual tagging process is somewhat complicated and time consuming, but the end result is a data set that is surprisingly versatile. Investors can use software tools to compare two or three funds side by side and check things like fees, expense ratios and investment objectives among funds all over the world.
"Whether it's the individual investor or an employee at a financial publisher who's poring over a company report, the need to search for and extract particular information in such documents can be time consuming," the SEC said. "As with any conversion from manual to automated processes, replacing document-based reporting with data-based reporting also promises tremendous cost savings to any company that undertakes it."
While the cost of data tagging is not expected to be substantial, it is a disruptive, time-consuming technology that will require mutual fund boards to amend their compliance requirements.
"Boards should make sure their compliance program oversees the tagging to make sure it's done properly," said Domenick Pugliese, a partner in the investment management group at the New York law firm Paul Hastings. "Their biggest concern should be with the mechanics of who's doing the tagging."
The SEC has said the tagging and software changes should take about 12 to 13 hours per fund per year, Pugliese said, and the cost should come out of general fund expenses.
Compliance departments are already pretty strained, and most firms will probably outsource the tagging task to various financial service printers, he said.
For companies that don't have the time, staff or interest to do their own XBRL tagging once a year, firms like RR Donnelley can do all the tagging and filing for them.
"Our solution is full service," said Craig Clay, executive vice president of sales and services at Chicago-based RR Donnelley. "Companies provide us with the forms that need to be filed in XBRL. We do the filing and return the forms, complete with XBRL tags. We're taking care of the work for them, verses having them become XBRL experts."
Several years ago, RR Donnelley and EDGAR Online saw the international movement toward the open-source, non-proprietary XBRL standard and decided to partner together in 2006.
"RR Donnelley knew that XBRL would change the way our clients report," Clay said. "The big difference with our solution is that our clients are coming to us and we are providing back their XBRL credentials. EDGAR Online updates and manages the latest taxonomy, and if there's a [Financial Accounting Standards Board] rule change, we'll stay on top of that."
Broker/dealers and financial advisers will utilize this tool to help their clients, but Pugliese doubts most shareholders will start picking out their funds themselves.
"The new rules are intended not only to make financial information easier for investors to analyze, but also to assist in automating regulatory filings and business information processing," said the SEC's final ruling on data tagging, released last month. "Interactive data has the potential to increase the speed, accuracy and usability of financial disclosure and eventually reduce costs."
The SEC's final rule on XBRL tagging, published on Feb. 10, requires the 500 largest companies to publish using XBRL starting April 13. Mutual funds should start tagging by this July and will be required to file risk and return information under XBRL starting Jan. 1, 2011.
The XBRL rule adds the tagging requirement but doesn't remove or change any current disclosure requirements under the federal securities laws, the SEC said.
The rule has a grace period until 2014, when filings will be subject to complete liability. Until then, XBRL filings are only subject to antifraud liability, Pugliese said.
SEC Commissioner Luis Aguilar voted against both data-tagging rules in December because companies won't be liable for errors in data-tagged information during the phase-in of the program; they will only be liable for fraudulent information.
"Putting the burden on the investor for an issuers' negligence is unacceptable," Aguilar said. "In these times of market turmoil, investors need to know that the SEC is looking out for them."
More than 100 U.S. and international companies have been participating in a voluntary XBRL tagging program that began in 2005.
The voluntary program allowed companies to submit financial statements in an interactive format, though these companies are still required to file financial statements in the American Standard Code for Information Interchange (ASCII) or in HyperText Markup Language (HTML). Mutual funds started voluntarily filing in XBRL in 2007.
The SEC said getting an early start on XBRL reporting can help companies reduce the need for repetitive data entry, reduce the likelihood of human error and help them have one less problem to worry about later on.
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