How Edgar came of age - opinion

Author: | Published: 30 Nov 2012
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David Bernstein
The implementation of the SEC's electronic filing system in 1994 added a new dimension to the public company concept, says David Bernstein of K&L Gates

1994 was the year Edgar came of age. For those who are not familiar with Edgar (the Electronic Data-Gathering, Analysis, and Retrieval), it is the system for electronic filing of reports with the US Securities and Exchange Commission (SEC).

Edgar was actually born in 1983, when the SEC first proposed requiring companies registered with the SEC (including all those with equity securities listed in the US) to use an electronic filing system. Not everybody was sure an electronic filing system would work. In 1987, US Congress required the SEC to certify that it would not adopt any rule requiring electronic filing by all registrants until mandatory electronic filings from a significant test group had been received and reviewed by the SEC for at least six months.

Voluntary use and testing of a pilot system began as early as 1984. However, it was not until 1992 that it was replaced by the operational system, allowing the implementation of Edgar to move forward. Between April and December 1993, the SEC designated approximately 3,500 mandatory filers for the test required by Congress. That test was conducted between January 1 and June 30 1994. Then, the SEC staff evaluated the test results and reported that Edgar met or exceeded each element required for the SEC to mandate electronic filing by all US domestic registrants. Accordingly, on December 19 1994, the Commission announced that mandatory electronic filing for all publicly traded US companies would be phased in on previously announced schedule.

The effect Edgar has had on the availability of information about publicly traded US companies cannot be overstated. All publicly traded US companies are required to file reports of some kind with the SEC. For most, these include: an annual report that contains detailed financial and non-financial information about the company; quarterly reports containing interim financial information; current reports with regard to a limited number of particularly important events; and, proxy materials relating to matters presented for shareholder votes which must at least once a year include information about compensation of, and material business relationships with, directors and senior officers. In addition, directors, executive officers and large shareholders are required to report changes in their shareholdings.

Instant access

Before Edgar, reports were principally accessed through service bureaus, which would, on request, reproduce particular reports and deliver them by courier. This was expensive and time consuming. As a result, people normally did not seek to access to reports and other materials unless there was a clear need for them. Thanks to Edgar, things are very different now. Anybody who has access to the internet has virtually instantaneous access to everything that is filed with the SEC (and everything that has been filed since 1994). If a banker, lawyer or accountant is told that a company is thinking about doing a transaction involving X Company, a likely response is: "Hold on a minute and let me see what X Company looks like."

Instant access has led to a major reduction in the times within which reports of important events must be filed. A major benefit of this instant access is lost if the information is old news before it is filed. Therefore, prodded by the Sarbanes Oxley Act, the SEC changed its rules to require a Current Report of a material event to be filed within four business days after the event occurs. In 1994, these had to be filed within five business days or 15 calendar days after an event occurred (depending on the nature of the event). Similarly, reports of purchases and sales of stock of a company by its directors, officers and large stockholders – which in 1994 had to be filed within 10 days after the end of the month in which the transaction took place – must now be filed by the end of the second business day after they occur.

Further, the fact that reports are filed and accessed electronically, rather than on paper, is undoubtedly one of the key factors that has enabled the SEC to significantly increase the amount of information it requires companies to include in their reports. Current Reports filed with the SEC have, to a substantial extent, replaced press releases as the principal means of announcing important corporate events. And now, the SEC requires companies to code financial information in the reports they file in a way that makes it possible to abstract particular statistics from reports filed by dozens, or even hundreds, of companies.

A matter of time

But the system is not an unmixed blessing. It has never been as easy to file reports on EDGAR as had originally been envisioned. The skills required to so-called edgarise reports that must be filed with the SEC mean that, instead of companies or their law or accounting firms edgarising materials, most reports are sent to financial printers for edgarising. This adds an element of time and cost to using Edgar. Further, there is an argument that the amount of information in reports filed electronically constitutes an information overload, and that has led a large number of individual (as opposed to institutional) security holders to stop reading materials on the companies in which they own shares. However, there is no doubt that on balance, Edgar was a major step in providing transparency of companies publicly traded in the US – a principal objective of US securities laws since they were first enacted in the mid-1930's.

It's worth noting that Edgar is not unique. Companies in many countries are required to make filings in a manner that enables them to be accessed electronically. And Edgar itself has advanced a long way since 1994. Among other things, the SEC now permits companies to save the cost of hardcopy annual reports and proxy materials to shareholders by simply telling shareholders how to access those materials on the internet. But 1994 is the year that Edgar came of age, changing the future of public company management and investment.

For more of IFLR's 30th anniversary coverage see http://www.iflr.com/30th-anniversary

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