June 2013

Will the SEC be eliminating the XBRL requirement?It has been four years since XBRL became a four letter word to issuers and nearly eight years since the SEC introduced the concept to issuers, yet XBRL hasn’t fulfilled the SEC’s prediction of XBRL increasing the “speed, accuracy and usability of financial disclosure.”  Largely, the reason for the failed prediction is that many potential users haven’t yet discovered the “usefulness” of XBRL.  Eight years, however, seems like plenty of time for the usefulness of XBRL to catch on.  Given that investors and analysts aren’t using the XBRL data, isn’t it time for the SEC to waive the white flag and eliminate the XBRL filing requirement?

XBRL, of course, was the SEC’s way of racing into the 21st Century.  With high hopes in 2004, then-SEC Chair William Donaldson initiated a study to see how interactive data could benefit the Commission and investors.  In the final rule release, the Commission noted potential benefits such as more financial information being available to investors; less costly and more timely financial information; fewer errors; and increased comparability and interpretation of financial data.  While these benefits have been largely unrealized, the expected costs incurred by issuers have been realized.  Given the ability to look at the XBRL mandate now with real cost and benefit data, it seems that the Commission should re-evaluate the original mandate.

In the meantime, XBRL may be remembered by us in the same vein as Betamax and the Laserdisc – great technology that just never caught on.  Of course, the only difference between failed Continue Reading Time to throw XBRL in the trash bin?

With newer methods to communicate and interact with the so-called social network popping up on almost a daily basis, securities regulators have been giving more and more attention to social media and how companies and certain regulated professionals are employing it. As we discussed in a previous blog, the SEC has signed off on public companies utilizing social media for disclosure purposes, provided that, among other things, companies disclose to investors the types of social media outlets they will employ for such purposes. The SEC has issued guidance on the use of social media by public companies for Regulation FD and other disclosure purposes, which can be found in this SEC Press Release and in the SEC’s report on its investigation of the Facebook postings made by Netflix’s CEO.

Now it appears that social media is gaining the attention of FINRA as well, the primary self-regulatory organization for registered broker-dealers. As reported in a recent article on CNN, FINRA wants state privacy laws to provide exemptions for registered broker-dealer firms that would permit such firms to access Facebook and other social media accounts of their associated persons (i.e., stockbrokers). Because of the prominence and proliferation of Facebook and the personal or sensitive nature of the information contained on an individual’s Facebook page and other social media accounts, state legislatures have proactively enacted legislation that prevent or restrict companies from monitoring employees through social media. According to the National Conference on State Legislatures, six states enacted legislation in 2012 that prohibits employers from requesting or requiring an employee, student or applicant to disclose a user name or password for a personal social media account.

FINRA is concerned, however, that prohibiting access to employee social media accounts may affect a registered broker-dealer’s ability to fully comply with its mandated supervisory duties under federal laws and regulations. For example, registered broker-dealers are required to maintain copies of all “business communications” as discussed in guidance issued by FINRA in Regulatory Notice 11-39. Under Rule 17a-4(b)(4) of the Exchange Act, “business communication” includes “[o]riginals of all communications received and copies of all communications sent (and any approvals thereof) by the member, broker or dealer (including inter-office memoranda and communications) relating to its business as such, including all communications which are subject to rules of a self-regulatory organization of which the member, broker or dealer is a member regarding communications with the public.” Thus, if a stockbroker is using social media to Continue Reading Social media and brokers: FINRA wants broker-dealers to be “friends” with their employees

Nasdaq pays record fine for Facebook IPOMay 29, 2013 was a bad day at the office for The Nasdaq Stock Market, LLC as it agreed to pay a $10 million fine to settle allegations arising from the troubled May 18, 2012 Facebook IPO. This payment was announced by the SEC in a press release which was highly critical of Nasdaq management and its role in this IPO. This was the largest fine ever assessed against an exchange. This fine was a clear message to the securities exchanges to focus on their systems and processes and ensure that they are ready to successfully run transactions like the Facebook IPO. 

The SEC also issued an Administrative Order that describes the Facebook IPO and Nasdaq’s mistakes and securities law violations in detail. The Order also describes several instances where Nasdaq violated its own policies during the IPO. It is clear from this Order that the SEC is angry about the problems with the Facebook IPO and that it holds Nasdaq management responsible. The SEC is very concerned with future offerings and the ability of exchanges to manage them as the size, velocity and complexity of the offerings continues to increase. The SEC confirms that it is the responsibility of an exchange’s management to anticipate the problems that occur in these offerings and to have systems in place that can handle them. It is no longer sufficient to blame these problems on “technical glitches”, especially when so much money and credibility are at stake. The Order also censured Nasdaq and its affiliate, Nasdaq Execution Services, LLC. Matt Phillips has a nice summary of these Facebook IPO problems and the SEC Order on his blog. 

The Nasdaq’s actions before and during the Facebook IPO have been roundly criticized by commentators and industry experts and now by the SEC. Nasdaq management conducted system tests prior to the Facebook IPO, but the extent of these tests was woefully inadequate. They conducted tests using 40,000 orders, but almost 500,000 orders were waiting when the Nasdaq opened trading in Facebook stock. This huge volume of advance orders and the continuing high volume of orders quickly overwhelmed the exchange’s systems. In response to these numbers and panicked calls and emails from brokers (who apparently had no idea of how many shares they had purchased or their actual exposure), Nasdaq management held a “Code Blue” emergency call and made a few software adjustments which they thought would fix the problems. These adjustments did not work, however, and brokers continued to panic. Nasdaq management finally discovered that about 30,000 Facebook orders that had been placed earlier in the day had never been executed. Many of these shares were then sold into the open market, which depressed the stock price until brokers stepped in to help support it. Facebook shares were priced at $38.00 at the start of the IPO but closed that day at $38.23. This was a major disappointment, and the stock price has significantly retreated from that level. Facebook’s most recent price was Continue Reading The SEC gets tough – Nasdaq to pay record $10 million fine to settle Facebook IPO allegations