The initial SEC open meeting for 2017, held on March 1, was no ordinary open meeting. At only two commissioners, the SEC is at less than half its full strength. The meeting was the first since Chairman Mary Jo White left the Commission. And it was the first open meeting under the pro-deregulation Trump administration. Prior to the meeting, I wondered if it would provide any indication of what we can expect over the next four years. As it turns out, something interesting did come out of the meeting, just not in the way I had expected.
First, a little background before we get to the open meeting. The asset management industry has long had two issues involving redundant stores of data. The first involves the same data being reported in multiple venues. Forms N-PORT and N-MFP and N-SAR contain information that is also reported in financial statements. Financial statements contain information that is also reported in the prospectus. Fact sheets have information that is also reported on Form N-PORT and on financial statements and in prospectuses. All that redundant reporting creates the potential for waste and risk. The potential to add work to source, transform, load, and adjust the same data multiple times. The potential to increase the risk of reporting information inconsistently and the risk of not being able to effectively explain legitimate differences to a regulator.
The second issue involves maintaining a single data store as you move through a reporting process. If, for example, you store data for a set of financial statements in a financial reporting database, then move that data into a series of Word or Excel files for internal review, and then move that data once again into a PDF file for external review and distribution, you would be left with three separate data stores. At each stage, including the PDF stage, you will likely manually adjust the data. Those adjustments would then need to be manually – and redundantly – transferred to the other two redundant stores of data so that you are ready for the next reporting period. A single process creates three redundant data sets to be maintained, adjusted, and reconciled.
All of the problems associated with data stored and used redundantly for different purposes and in different forms of output – inefficient redundant work, wasteful reconciliations, and the risk of unsynchronized reporting – are problems that the industry has been diligently working to solve by doing more with a single data store and fewer systems. In our 2016 survey, the number of respondents for whom data centralization was a top priority nearly doubled from 2014 to 2016. In that same survey, 72% of respondents reported that consolidating systems would help with operational efficiency.
Regulatory action by the SEC over the past eight years has exacerbated the issue and the motivation to mitigate the negative consequences. Regulations have not only created more reporting using the same data, as with Form N-PORT and Form N-MFP, but have also created more redundant data sets as you move through a process. In 2009 the SEC released a final rule requiring prospectus risk/return summary information (Form N-1A Items 2, 3, and 4) to be reported in XBRL. That same information was already reported in a human viewable format, HTML or ASCII, creating the potential for redundant information as you move through the process of creating a prospectus – in Word, in PDF, in HTML, and then again in XBRL. In response, fund firms had to either deal with redundant data or produce both the XBRL and HTML output in a single integrated system, with most firms choosing the latter, according to the SEC.
Which finally brings us to the March 2 open meeting. The SEC proposed rules that would change the format of the risk/return summary from XBRL to Inline XBRL. With Inline XBRL, the machine-readable part is imbedded in the human-viewable part of the prospectus rather than existing as a separate file. In effect, the SEC has moved from creating a data redundancy problem and leaving it up to firms to solve that problem, to mandating an integrated solution to solve the problem they created eight years ago. As noted in the proposed rule, the SEC expects that the required integrated reporting will “increase the efficiency and lower the cost of compliance”. The SEC created the problem in 2009, and is now proposing a requirement that would solve that problem in 2017.
Managing data adds value, reporting on it is a commodity. To maximize quality, efficiency, and control, focus on the content, then centralize and automate the reporting. Over the past eight years, mainly in response to regulatory changes, the industry has been moving away from document management and towards data management. It may be too early to tell how the newly constituted SEC will influence regulation as a whole, but for at least its first foray into rule making, it has aligned itself with the industry in moving from a document-centric to a data-centric world.