[House Report 115-1094]
[From the U.S. Government Publishing Office]
115th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 115-1094
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SMALL COMPANY DISCLOSURE SIMPLIFICATION ACT OF 2018
_______
December 21, 2018.--Committed to the Committee of the Whole House on
the State of the Union and ordered to be printed
_______
Mr. Hensarling, from the Committee on Financial Services, submitted the
following
R E P O R T
together with
MINORITY VIEWS
[To accompany H.R. 5054]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 5054) to provide an exemption for emerging
growth companies and other smaller companies from the
requirements to use Extensible Business Reporting Language
(XBRL) for financial statements and other periodic reporting,
and for other purposes, having considered the same, report
favorably thereon without amendment and recommend that the bill
do pass.
PURPOSE AND SUMMARY
On February 15, 2018, Representative David Kustoff
introduced H.R. 5054, the ``Small Company Disclosure
Simplification Act of 2018.'' H.R. 5054 provides a voluntary
exemption for all Emerging Growth Companies (EGCs) and other
issuers with annual gross revenues under $250 million from the
U.S. Securities and Exchange Commission's (SEC) requirements to
file their financial statements in an interactive data format
known as eXtensible Business Reporting Language (XBRL). The
exemption will be for either five years or two years after the
SEC establishes that the benefits of XBRL to smaller issuers
outweigh the costs, whichever occurs first. The bill also
directs the SEC to conduct an economic analysis on the costs
and benefits of XBRL to smaller issuers and to report to
Congress on the SEC and investors' use of the information.
BACKGROUND AND NEED FOR LEGISLATION
The goal of H.R. 5054 is to reduce unnecessary regulatory
costs on small companies. In the 2000s, the SEC began to phase-
in the use of ``interactive'' data for securities filings.
Interactive data formats can be applied to data-much like bar
codes are applied to merchandise-to allow computers to
recognize data and feed it into analytical tools. XBRL is an
interactive data format developed specifically for business and
financial reporting. In 2003, the SEC required the submission
in an XBRL format for reports of securities holdings and
transactions under section 16(a) of the Securities Exchange Act
of 1934 (Exchange Act). In 2009, the SEC issued three final
rules to require XBRL tagging of disclosure information for
operating companies, mutual funds, and credit rating agencies.
The XBRL requirements impose disproportionate burdens on
small businesses but, for many of these companies, yield little
or no discernable value to investors. The additional burdens on
small businesses include cost, additional personnel, management
and audit committee time and attention, liability for any
misstatements that result from the miscoding of their data, and
the need for extensive reviews, tests, and additional
documentation in order to submit their SEC filings in XBRL
format. The phase-in period for smaller reporting companies was
a minor concession for a rule that otherwise was not scaled for
smaller companies. The SEC's XBRL requirement simply has been
inconsistent with its statutory mission to facilitate capital
formation. The mandate does not promote growth and job creation
and does not ease compliance burdens for smaller companies,
known as EGCs, created by Title I of the Jumpstart Our Business
Startups (JOBS) Act (P.L. 112-106).
The Wall Street Journal has reported that companies have
spent billions on XBRL compliance, with costs for individual
investors as high as $500,000. At a May 23, 2018, Subcommittee
on Capital Markets, Securities, and Investment hearing, Brian
Hahn, Chief Financial Officer, GlycoMimetics, Inc., testified
on behalf of BIO that:
XBRL is an attempt to make it easier for investors to
compare financial data, but as with many of the issues
I have discussed today, it disproportionately affects
smaller issuers due to its one-size-fits-all approach.
The simple fact is, biotech investors are less
concerned with the reporting metrics that XBRL
compares, and more concerned with the actual science of
the company and their path toward FDA approval, and,
ultimately, getting a drug on the market and to
patients.
On March 1, 2017, the SEC proposed amendments to improve
the quality and accessibility of data submitted by public
companies and mutual funds using XBRL. The proposals would
require the use of ``Inline'' XBRL, which the SEC believes has
the potential to benefit investors and other market
participants while decreasing, over time, the cost of preparing
information for submission to the SEC. Despite the greater
clarity and efficiencies provided by these amendments, concerns
about the costs to smaller companies persist.
The SEC's amendments to XBRL are a step in the right
direction to reduce the costs for larger companies; however,
they do not adequately address the concerns for small and
emerging companies. The costly requirements from XBRL add to
the litany of regulatory requirements that prevent companies
from going public. Exempting these small and emerging companies
from the cost burdens associated with submitting financial data
in XBRL format would help to ensure that these companies can
invest in the growth of the business rather than purchase
software to comply with a data-tagging mandate. As SEC
Commissioner Hester Peirce noted in her public statement on
June 28, 2018, about the SEC's actions to require inline XBRL,
``Today's rule will require the adoption of very specific
technology to be used in a very specific way on an ambitious
timeline. When we issue such a mandate, it has wide-ranging
effects on the industry, including knock-on effects on vendors,
investors, and others who interact with the relevant filers. By
mandating the use of inline XBRL, we are privileging one form
of technology over present and potential future competitors.''
As Thomas Quaadman, Executive Vice President, Center for
Capital Markets Competitiveness, U.S. Chamber of Commerce
testified at the May 23, 2018 Subcommittee hearing:
H.R. 5054 would afford the SEC time to fix some of
the deficiencies associated with XBRL. The optional
exemption for EGCs and small issuers appropriately
grants company boards and their shareholders the
ultimate authority to decide whether or not using XBRL
is in the best long term interest of the company. This
is preferable to a top-down mandate from the SEC for
issuers of all sizes to comply with a system that is
clearly facing a number of short-term issues.
On June 28, 2018, the SEC voted to adopt amendments to XBRL
requirements for operating companies and funds. The SEC stated
in its press release that the ``amendments are intended to
improve the quality and accessibility of XBRL data.'' The
amendments, which will go into effect in phases, require the
use of Inline XBRL for financial statement information and
risk/return summaries. The amendments also eliminate the
requirements for operating companies and funds to post XBRL
data on their websites. Commissioner Peirce again noted,
``Moreover, it is not clear how useful XBRL is to small
filers'' investors. According to comments we received, small
company investors in certain sectors do not currently use XBRL.
Before requiring small filers to invest considerable resources
in implementing inline XBRL, we should be sure that the data is
actually useful to their investors.''
Large accelerated filers that use U.S. GAAP will be
required to comply with the XBRL mandate beginning with fiscal
periods ending on or after June 15, 2019. Accelerated filers
that use U.S. GAAP will be required to comply beginning with
fiscal periods ending on or after June 15, 2020. All other
filers will be required to comply beginning with fiscal periods
ending on or after June 15, 2021. Filers will be required to
comply beginning with their first Form 10-Q filed for a fiscal
period ending on or after the applicable compliance date.
Even though the SEC's final rule does not include any
exemption for EGCs or smaller reporting companies from the XBRL
mandate, the Committee will monitor the phased-in approach for
smaller entities. The SEC estimates that there are
approximately 1,163 filers, other than investment companies,
that may be considered small entities and are subject to the
inline XBRL amendments. All of these filers will be required to
comply with the amendments by the end of the phase-in. The SEC
should use its general exemptive authority to extend the phase-
in for smaller entities and EGCs.
HEARINGS
The Committee on Financial Services held a hearing
examining matters relating to H.R. 5054 on May 23, 2018.
COMMITTEE CONSIDERATION
The Committee on Financial Services met in open session on
June 7, 2018, and ordered H.R. 5054 to be reported favorably to
the House by a vote of 32 yeas to 23 nays (recorded vote no.
FC-182), a quorum being present.
COMMITTEE VOTES
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. The
sole recorded vote was on a motion by Chairman Hensarling to
report the bill favorably to the House without amendment. The
motion was agreed to by a recorded vote of 32 yeas to 23 nays
(recorded vote no. FC-182), a quorum being present.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
COMMITTEE OVERSIGHT FINDINGS
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the findings and recommendations of
the Committee based on oversight activities under clause
2(b)(1) of rule X of the Rules of the House of Representatives,
are incorporated in the descriptive portions of this report.
PERFORMANCE GOALS AND OBJECTIVES
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee states that H.R. 5054
will reduce regulatory burdens by exempting EGCs and other
smaller companies from the requirement to file SEC reports
using XBRL.
NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX EXPENDITURES
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
CONGRESSIONAL BUDGET OFFICE ESTIMATES
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, December 20, 2018.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 5054, the Small
Company Disclosure Simplification Act of 2018.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Stephen
Rabent.
Sincerely,
Keith Hall,
Director.
Enclosure.
H.R. 5054--Small Company Disclosure Simplification Act of 2018
Under current law, securities issuers who are required to
file certain reports with the Securities and Exchange
Commission (SEC) must provide that information in a specific
data format known as eXtensible Business Reporting Language
(XBRL). H.R. 5054 would direct the SEC to conduct an analysis
and report on the costs and benefits of the requirement to use
XBRL. Under the bill, issuers with total annual gross revenues
of less than $250 million would be exempt from the XBRL
requirements for a minimum of three years and maximum of five
years after enactment. The length of the exemption would depend
on the outcome of the SEC analysis and report. H.R. 5054 also
would exempt emerging growth companies from the XBRL reporting
requirement.\1\
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\1\An emerging growth company is one that has issued or proposes to
issue stock and had total annual gross revenues of less than $1.07
billion during its most recently completed fiscal year; companies can
retain that designation for up to five years.
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Using information from the SEC on the costs of similar
activities, CBO estimates that implementing H.R. 5054 would
cost $1 million for the agency to amend its reporting rules,
conduct the analysis, and prepare a report. However, the SEC is
authorized to collect fees sufficient to offset its annual
appropriation; therefore, CBO estimates that the net effect on
discretionary spending would be negligible, assuming
appropriation actions consistent with that authority.
Implementing H.R. 5054 also could substantially increase
the costs to the SEC by requiring the agency to engage in a
more labor intensive process to review and analyze financial
data presented in alternative forms to XBRL. However, any such
costs would depend on the number of companies that elect to
stop using XBRL and on the outcome of the required SEC report;
therefore, CBO has no basis for estimating any such increase in
SEC costs.
Enacting H.R. 5054 would not affect direct spending or
revenues; therefore, pay-as-you-go procedures do not apply.
CBO estimates that enacting H.R. 5054 would not increase
net direct spending or on-budget deficits in any of the four
consecutive 10-year periods beginning in 2029.
H.R. 5054 contains no intergovernmental mandates as defined
in the Unfunded Mandates Reform Act (UMRA). If the SEC
increased fees to offset the costs associated with implementing
the bill, H.R. 5054 would increase the cost of an existing
mandate on private entities required to pay those fees.
However, the fee increase would depend in part on the number of
companies that elect to stop using XBRL. CBO cannot determine
the number of those companies and therefore has no basis to
estimate whether the additional fees would exceed the threshold
established in UMRA ($160 million in 2018, adjusted annually
for inflation).
The CBO staff contacts for this estimate are Stephen Rabent
(for federal costs) and Rachel Austin (for mandates). The
estimate was reviewed by H. Samuel Papenfuss, Deputy Assistant
Director for Budget Analysis.
FEDERAL MANDATES STATEMENT
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995.
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
ADVISORY COMMITTEE STATEMENT
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
APPLICABILITY TO LEGISLATIVE BRANCH
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of the section
102(b)(3) of the Congressional Accountability Act.
EARMARK IDENTIFICATION
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
DUPLICATION OF FEDERAL PROGRAMS
In compliance with clause 3(c)(5) of rule XIII of the Rules
of the House of Representatives, the Committee states that no
provision of the bill establishes or reauthorizes: (1) a
program of the Federal Government known to be duplicative of
another Federal program; (2) a program included in any report
from the Government Accountability Office to Congress pursuant
to section 21 of Public Law 111-139; or (3) a program related
to a program identified in the most recent Catalog of Federal
Domestic Assistance, published pursuant to the Federal Program
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No.
98-169).
DISCLOSURE OF DIRECTED RULEMAKING
Pursuant to section 3(i) of H. Res. 5, (115th Congress),
the following statement is made concerning directed rule
makings: The Committee estimates that the bill requires one
directed rule making within the meaning of such section. The
directed rulemaking requires the SEC to revise its regulations,
under parts 229, 230, 232, 239, 240, and 249 of title 17 of the
Code of Federal Regulations, to exempt EGCs and companies with
total annual gross revenues of less than $250,000,000 from the
requirements to use XBRL for financial statements and other
periodic reporting required to be filed with the Commission.
SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION
Section 1. Short title
This section cites H.R. 5054 as the ``Small Company
Disclosure Simplification Act of 2018''.
Section 2. Disclosure to multi-class share structures
This section exempts EGCs and for five years, or until the
Commission completes a cost benefit analysis, companies with
total annual gross revenues of less than $250,000,000 from the
requirements to use XBRL for financial statements and other
periodic reporting required to be filed with the Commission.
Section 3. Analysis by the SEC
This section requires that the SEC do an analysis of the
costs and benefits of XBRL. Specifically, the analysis will
focus on the effects of XBRL on competition, capital formation,
the costs to issuers of submitting data and the benefits it
provides the Commission in monitoring the securities markets.
Section 4. Report to Congress
This section requires the Commission to submit a report, no
later than one year after enactment, to the Committee on
Financial Services of the House of Representatives and the
Committee on Banking, Housing, and Urban Affairs of the Senate
regarding the progress in implementing XBRL reporting, the use
of XBRL data by Commission officials, the use of XBRL by
investors, the result of the conducted analysis and any other
information the Commission deems necessary.
Section 5. Definitions
This section defines the terms ``Commission'', ``emerging
growth company'', ``issuer'', and ``securities laws'' as they
are defined in the section 3 of the Securities Exchange Act of
1934.
CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
H.R. 5054 does not repeal or amend any section of a
statute. Therefore, the Office of Legislative Counsel did not
prepare the report contemplated by clause 3(e)(1)(B) of rule
XIII of the House of Representatives.
MINORITY VIEWS
H.R. 5054 would exempt most public companies from the
requirement to file financial statements in a standard,
computer-readable format, called eXtensible Business Reporting
Language (``XBRL''). The bill also directs the SEC to conduct a
retrospective study to determine whether, in hindsight, the
exemption makes sense. The bill would potentially harm smaller
public companies by undermining the ability of analysts,
investors, and the public to efficiently research these firms.
XBRL-formatted data can be processed by software to allow
for sophisticated viewing and analysis. In 2009, the SEC
adopted a rule requiring public companies to submit their
filings in the XBRL format as an exhibit to the company's
human-readable documents. In its release, the SEC found that
the benefits of computer-readable financial data to the
investing public and the filers themselves outweighed the
potential costs of the new requirement.
H.R. 5054 would create exemptions for emerging growth
companies (i.e., newly public companies with less than $1
billion in revenues, $700 million in public float, and $1
billion in nonconvertible debt) and companies with less than
$250 million in annual revenues from the XBRL filing
requirement. These exemptions would apply to more than 60% of
public companies.
The Committee on Financial Services first considered
identical legislation more than four years ago. Information has
since been produced that demonstrates the importance of
computer-readable financial data to investors, regulators, and
public companies. For example, an August 2017 study of filings
from 880 small companies revealed that investors downloaded
financial records in XBRL format nearly twice as often as
conventional data files. This study suggests that investors
find machine-readable data useful as they seek to obtain
specific information about issuers, compare information across
different issuers, or observe how issuer-specific information
changes over time.
Additionally, the SEC has indicated that it relies on XBRL
data to protect investors and root out bad actors in our
capital markets. In a May 3, 2018 speech, Scott Bauguess, the
SEC's Deputy Chief Economist and Deputy Director of the
Division of Economic and Risk Analysis, stated, ``the agency's
commitment to investor protection involves the use of
sophisticated data analytics to ensure that we have insight
into the market, particularly as we seek potential market
misconduct.''
Regarding costs, preliminary results from a 2018 survey of
XBRL filing agents for 1,300 small public companies show that
the average company paid less than $6,000 for XBRL filing
services in 2017, a 41% decline since the Committee first
considered this exemption in 2014. The median costs were
approximately $2,500--a modest cost that would not seem to
outweigh diminishing the accessibility and utility of public
company financial data. Importantly, on June 28, 2018, the SEC
adopted amendments to its rules to require the use of the new
Inline XBRL format, which will further reduce the costs of XBRL
filings by streamlining the filing process. These developments
suggest that H.R. 5054 is unwarranted and could negatively
affect investors and the companies the bill purports to help.
H.R. 5054 is opposed by AFL-CIO, Americans for Financial
Reform, Consumer Federation of America, and the Council of
Institutional Investors because investors, regulators, and
market researchers heavily rely on XBRL data.
For the aforementioned reasons, we oppose H.R. 5054.
Maxine Waters.
William Lacy Clay.
Stephen F. Lynch.
Carolyn B. Maloney.
Daniel T. Kildee.
Michael E. Capuano.
[all]