Federal Securities Lawyer & Attorney : Porter Wright Law Firm : Securities Exchange Law : Serving Ohio, Washington DC, Florida

SEC Commissioners will meet on Monday to consider implementation of a plan to require companies to file financial statement information in an interactive format known as XBRL (extensible business reporting language).

XBRL or data tagging is the process of identifying accounting principals with unique data tags that allow financial statements to be easily downloaded into various applications for quick comparisons over time and across industries. Currently more than 70 companies voluntarily disclose financial information using XBRL in an SEC pilot program, and at least 20 mutual funds voluntarily submit risk/return summaries from their prospectuses in XBRL.

Mandatory XBRL reporting is predicted to take several years to implement while the SEC deals with the following questions/concerns:

• XBRL is predicted to increase transparency and usability of financial information, but what will it cost companies to comply?
  
• What liability should result if financial information is improperly “tagged” and therefore mistakenly misleading? Should XBRL documents be considered “furnished” rather than “filed” during a phase-in period?
  
• How much time will auditing and finance professionals need to learn the new system? The SEC’s Advisory Committee on Improvements to Financial Reporting has suggested the SEC wait three years.
  

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The IRS issued Revenue Ruling 2008-13 to clarify what constitutes “performance-based” compensation under Internal Revenue Code Section 162(m).  This classification is important because Code Section 162(m) generally prohibits public companies from deducting compensation in excess of $1 million to the CEO and certain named executive officers.  If the compensation is performance-based, however, this deduction limitation does not apply.

Under prior guidance, an executive could receive a performance award (either cash or equity) upon involuntary termination without cause, termination for good reason, or retirement, without regard to whether performance goals were actually met. In Revenue Ruling 2008-13, the IRS reversed its position, holding that such an award will not be treated as performance-based compensation under Code Section 162(m). This ruling puts many executive compensation plans and employment agreements at risk in light of the new restrictions on deductions for non-performance-based compensation that exceeds $1 million.

For more information on this latest guidance, you may view our recent law alert.

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Earlier this week the US Department of Treasury released its self-commissioned study, the “Blueprint for a Modernized Financial Regulatory Structure.” In part in response to the current financial crises of lenders and investment banks, the Department of Treasury has proposed an overhaul of the way the federal government regulates securities, banks, investment banks, and the various services they offer.

One theme of the Blueprint is to give more power to the Federal Reserve, especially in the context of regulating banks and investment banks. Some commentators are predicting that investment banks will eventually have to fully report all direct and indirect holdings of securities, including the amount and the basic characteristics.

The Blueprint is unclear on whether increased power for the Federal Reserve means decreased power for the SEC, but some are predicting as much. What is clear is that the Blueprint calls for some significant changes to how the SEC operates, including the following:

• Create “core principles” to apply to securities clearing agencies and exchanges;
• Make it easier for securities products to be approved;
• Expand registration of investment companies, including registration of new “global” investment companies; and,
• the most significant: merge with the Commodity Futures Trading Commission

Most politicians predict the Blueprint will not become law and even Treasury Secretary Henry Paulson has called it “aspirational.”

Interestingly, the Blueprint calls for increased regulation across the board—presumably because market participants have failed to regulate themselves in the form of how they value their assets and liabilities—and at the same time calls for streamlining the rule-making process of self-regulatory organizations to allow US markets to remain competitive worldwide.

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