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115th Congress    }                                  {        Report
                        HOUSE OF REPRESENTATIVES
 2d Session       }                                  {       115-1094

======================================================================



 
          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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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]