WEBMASTER NOTE: This is the unedited transcript of the Interactive Data Roundtable held on June 12, 2006, which we received directly from the court reporter. We are posting the transcript in this form to make it available as soon as possible. 1 THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION 2 3 In the Matter of: ) 4 ) File No. 4-515 5 INTERACTIVE DATA ROUNDTABLE ) 6 7 Administrative Proceeding 8 PAGES: 1 through 188 9 PLACE: Securities and Exchange Commission 10 100 F Street, N.E., Room L-002 11 Washington, D.C. 12 DATE: Monday, June 12, 2006 13 14 The above-entitled matter came on for hearing, pursuant 15 to notice, at 9:44 a.m. 16 17 For the United States Securities and Exchange Commission: 18 Commissioner Christopher Cox, Chairman 19 Commissioner Cynthia A. Glassman 20 Commissioner Paul A. Atkins 21 Commissioner Roel C. Campos 22 Commissioner Annette Nazareth 23 24 Diversified Reporting Services, Inc. 25 (202) 467-9200 1 C O N T E N T S 2 PAGE 3 SESSION ONE: Improving the Quality of Mutual Fund Disclosure 4 Opening Remarks: Chairman Christopher Cox 5 5 Moderator: Andrew J. Donohue 13 6 Moderator: Susan Ferris Wyderko 17 7 Panel One: What types of Information are Most Useful 8 To Mutual Fund Investors? 9 Participants: 10 Barbara Roper, Consumer Federation of America 18 11 Don Phillips, Morningstar, Inc. 24 12 Henry H. Hopkins, T. Rowe Price Group, Inc. 28 13 William Dwyer, Linsco/Private Ledger Corp. 32 14 Elisse B. Walter, NASD 38 15 Panel Two: How Can the Commission Leverage the Power of 16 the Internet to Provide Mutual Fund 17 Investors with Better Information? 18 Moderator Andrew J. Donohue 61 19 Moderator Susan Nash 62 20 Dr. William D. Lutz, Rutgers University 63 21 Paul Schott Stevens, Investment Company Institute 70 22 Tim Buckley, Vanguard 74 23 Paul G. Haaga, Jr., Capital Research and Management Co. 79 24 SESSION TWO: Getting Analysts and Investors 25 Significantly Better Information 1 C O N T E N T S (Continued) 2 Opening Remarks: Chairman Cox 105 3 Opening Address: Anne M. Mulcahy, Xerox Corporation 108 4 Opening Presentations: Opportunities for Data Analysis 5 in the New World of Interactive Data 6 Moderator Corey Booth 120 7 Participants: 8 Dr. John Markese, American Association of Individual 9 Investors 121 10 Trevor Harris, Morgan Stanley 125 11 Lawrence J. Salva, Comcast Corporation 135 12 R. Christopher Whalen, Institutional Risk Analytics 140 13 Panel Discussion: Exchange and Analysis of 14 Information via Interactive Data 15 Moderator Scott Taub 148 16 Moderator James M. Daly 149 17 Participants: 18 Gregory J. Jonas, Moody's Investors Service 150 19 Thomas M. Franks, TIAA-CREF 155 20 Cathy Baron Tamraz, Business Wire 157 21 Charles Gregson, PR Newswire Association LLC 157 22 Dr. William L. Guttman, Venture Partner, TL Ventures 158 23 Mr. Stantial, Director of Financial Reporting, United 24 Technologies Corporation 159 25 Trevor Harris, Morgan Stanley 161 1 C O N T E N T S (Continued) 2 R. Christopher Whalen, Institutional Risk Analytics 162 3 Dr. Clinton E. White, Jr., University of Delaware 163 4 Mark Augustine, Augustine Consulting 165 5 Trevor Harris, Morgan Stanley 165 6 Lawrence Salva, Comcast Corporation 166 7 Dr. John Markese, American Association of individual 8 Investors 170 9 Cathy Baron Tamraz, Business Wire 171 10 Mark Augustine, Augustine Consulting 172 11 Thomas M. Franks, TIAA-CREF 174 12 Mr. Stantial, Director of Financial Reporting, United 13 Technologies Corporation 176 14 Gregory J. Jonas, Moody's Investors Service 178 15 Dr. Clinton E. White, Jr., University of Delaware 179 16 R. Christopher Whalen, Institutional Risk Analytics 180 17 Trevor Harris, Morgan Stanley 180 18 Cathy Baron Tamraz, Business Wire 181 19 Congressman Richard Baker, Chairman, House Subcommittee 20 on Capital Markets 183 21 Closing Remarks 22 Chairman Christopher Cox 184 23 24 25 1 P R O C E D I N G S 2 9:44 a.m. 3 SESSION ONE: IMPROVING THE QUALITY OF MUTUAL FUND DISCLOSURE 4 CHAIRMAN COX: Good morning and welcome. Thank you 5 all for joining us today. And welcome to our first in our 6 series of roundtables on interactive data. Our aim is to 7 make financial disclosures more user friendly to the average 8 investor. I'm Chris Cox, the Chairman of the Securities and 9 Exchange Commission. We have all of our commissioners here 10 and an outstanding panel. I'm very much looking forward to 11 this. 12 I should start by telling you that we at the 13 Securities and Exchange Commission hope to lead by example 14 here. We have recently launched on our website a beta 15 version of a full text search capability to allow investors 16 to search the entire content of SEC filings. We welcome 17 feedback as we seek to expand and enhance this new web tool 18 for investors. 19 I see a lot of surprised looks here. This is a new 20 announcement I think for most of you and we consider this to 21 be a very big deal indeed. 22 We have also launched a separate search to help 23 mutual funds investors more quickly identify information on 24 their fund and share class. Previously, details on a 25 specific fund share class were nearly impossible to dig out 1 of our electronic database. As with the full text search, we 2 encourage and welcome your suggestions on how we can improve 3 this capability. 4 It has been six years since the dotcom meltdown and 5 yet during all of that time, consumer appetite for new uses 6 of the Internet has been increasing nonstop. Nielson Media 7 Research now reports that the total number of Americans with 8 home Internet access is over 200 million. The PEW Internet 9 and American Life Project reports meanwhile that the growth 10 rate of high speed Internet to home users has doubled in the 11 past year. These same surveys show that large majorities say 12 that the Internet has improved their ability to get health 13 care information, to shop, to pursue hobbies and also to do 14 their jobs. And the Internet continues to grow as a central 15 source of news for tens of millions of Americans. 16 The time is well past when we should think of the 17 Internet as a medium that's accessible only to an economical 18 elite. According to the New York Times, the digital divide 19 is rapidly closing. 20 The Internet, this great instrument of national and 21 international communication, is also a critical engine of 22 American productivity. Wharton School Professor Jeremy 23 Siegel points out in his book, "The Future for Investors," 24 that going back to Gutenberg and even further back all the 25 way to Silon's invention of paper in China almost 2000 years 1 ago, every time we open up a new communications technology, 2 invariably it has led to expanded economic opportunity and 3 growth. 4 So the question for us today is how do we put the 5 current communications technology to the service of the 6 American investor. How do we harness the Internet which is 7 serving so many customers in so many other ways to deliver 8 the maximum benefit to those in our regulated capital 9 markets. 10 In many ways, the American investor is still 11 waiting for the Internet revolution. Yes, many people have 12 embraced online trading. Still more do research and check 13 quotes by the Internet, but most of America's more than 90 14 million investors are not enjoying anything close to the full 15 potential of the Internet to provide customized financial 16 information. 17 Some of our morning panelists have the unenviable 18 task of digging into the dense documents that we see in 19 today's status quo. Their job is to fish out the data and 20 retype it into their own more user friendly services. But 21 they and all American investors can at least imagine the 22 possibilities if all company and mutual fund financial 23 information were available to everyone for free in real time 24 directly from the source and in a format that allows the 25 investor, the analyst or the financial publisher total 1 control. They could use this information for comparison, for 2 further research or for new analytical tools, whatever they 3 chose. 4 Today most investors are still receiving stacks of 5 paper, that high tech invention of 105AD. Whether these 6 stacks are corporate proxy materials or mutual fund 7 prospectuses or other reports, investors typically find them 8 equally difficult to understand. 9 Yes, these documents have allowed countless 10 Americans to treat insomnia without resorting to 11 pharmaceuticals but they have also proven deeply flawed as 12 vehicles to inform the investor. 13 For mutual fund investors who are the focus of this 14 morning's discussions, the mailed prospectus is too often a 15 dense blob of legalese, difficult to search, time consuming 16 to read, impossible to navigate quickly. For these reasons, 17 the mutual fund prospectus seems almost designed for digital 18 distribution. It's a document that almost nobody wants to 19 read in full but from which many people want to glean key 20 facts. 21 Interactive data, the tagging of these key facts so 22 that they can easily be identified and extracted offers the 23 possibility of dramatic improvement over traditional 24 disclosure delivery for mutual fund investors. 25 Let me emphasize one important point here. I 1 believe that the Internet offers powerful new ways to put 2 investors in the driver's seat when it comes to the financial 3 disclosures they want, the way they want them. The Internet 4 offers investors more control and expanded choices. But one 5 choice that will always remain is to continue to receive 6 paper. Interactive data is not a replacement for paper. It 7 is a compelling new option and I believe a superior option 8 for investors who will be free to choose. Many investors 9 would welcome a choice. 10 Instead of a dense unsearchable morass of 11 lawyerisms, imagine disclosure documents with the flexibility 12 of your favorite website giving you access to basic 13 information and then myriad options to drill down more deeply 14 for more information on a particular topic or to make a 15 comparison. 16 Think of how that capability that we now have with 17 flash demonstrations, pop-up references and instant 18 cross-referencing that can happen on a web page. Think of 19 how that could improve life for the average investor, from 20 the novice to the professional money manager. 21 So let's imagine an investor having instant access 22 to exactly the items that she is seeking and enjoying the 23 ability to make comparisons among funds and across time. She 24 is able to immediately examine expense ratios or performance 25 and instantly compare these numbers to those of competitors. 1 Or maybe what she really cares about are the top 50 holdings 2 of a given fund. 3 Interactive data means liberating all of the 4 individual facts in large disclosure documents so you can 5 easily call up what you want without having to read the 6 60-page blob. 7 Recent evidence suggests that it isn't just average 8 investors who have difficulty navigating that blob. James 9 Choi of the Yale School of Management along with colleagues 10 at Harvard and the University of Pennsylvania recently 11 presented mutual fund prospectuses to students at Harvard and 12 MBA candidates at the University of Pennsylvania's Wharton 13 School. 14 They found that even students at these elite 15 American universities when given fund prospectuses end up 16 choosing higher fees when selecting among funds tracking the 17 exact same stock index. Of course, it's not our job to tell 18 people which funds to select or how much to pay for fund 19 management. What is our job is to provide investors with 20 easy access to the information that they want in order to 21 make an informed decision. That is why I found it 22 particularly troubling that at the outset of the study the 23 students ranked expenses as their most important investment 24 criterion. And yet they seemed unable to invest on that 25 basis when given mutual fund prospectuses to read. 1 On the other hand, when given simply summaries of 2 the expense data, the students apparently opted for 3 substantially lower fees. If true, these findings suggest 4 that even graduate students with a high level of financial 5 literacy and undergrads with SAT scores in the 99th 6 percentile have difficulty comprehending a mutual fund 7 prospectus. 8 The obvious solution is to move away from a dense 9 document of legalese and toward a simple summary that allows 10 investors to drill down for more detail on whatever topics 11 they choose. And the obvious medium to deliver those 12 enhancements is the Internet. 13 I am happy to report that the spread of interactive 14 data for investors of all types has recently gained a new 15 champion. Just a few days ago I received a note from UCLA 16 computer science Professor Leonard Klinerock. As some of you 17 know, Dr. Klinerock created the basic principles of packet 18 switching back in the 1960s and his computer at UCLA was the 19 very first node of the Internet. In fact, his team at UCLA 20 sent the very first message over the Internet so normally I 21 value his opinion on matters such as this. 22 Here is what he has written to us, quote: "We are 23 likely to be surprised, even amazed at what the individual 24 investor will be able to extract and deduce from this wealth 25 of information once we transform the paper data in SEC 1 filings and annual reports into an interactive electronic 2 live format. No longer will the well endowed financial firms 3 be the only ones who can afford to compile comparative data, 4 but now even the individual investor will have the same 5 access on a level playing field. One's ingenuity will be the 6 limit to evaluation and decision making. Making accurate 7 real time interactive data available through the Internet so 8 that it can be instantly processed and compared on a personal 9 computer using one's favorite software package is an obvious 10 beneficial and urgent proposition. It's hard to believe that 11 financial reporting is only now emerging from the dark ages 12 and catching up to the 21st Century." 13 So with that to set the scene, I want you to know 14 I'm very much looking forward to hearing from our panelists 15 on ways to encourage more investor friendly communications. 16 And leading what I am sure will be a thoughtful discussion 17 this morning are my colleagues, Buddy Donohue and Susan 18 Wyderko. 19 Buddy, as you perhaps know is our new director of 20 the Division of Investment Management. Susan is most 21 recently acting director of the Division of Investment 22 Management. Unfortunately, as in sports, we at the SEC 23 sometimes lose our players to free agency and so we are sad 24 to learn that our director of the Office of Investor 25 Education and Assistance which is Susan's main job will soon 1 be leaving the Commission. But I want you to know that she 2 has been extraordinarily effective and respected leader and 3 most recently served investors in a very distinguished way as 4 the acting director of the Division of Investment Management. 5 So these two leaders of the SEC I think are extraordinarily 6 well equipped to help lead us in this panel discussion this 7 morning. 8 We have very much to learn from all of those on our 9 panel who are gracious enough to participate. I want to 10 thank each of you very much for being here. I very much 11 appreciate it. All of us on the Commission do and I look 12 forward to listening now to the rest of the day's events. 13 Thanks very much. 14 Over to you, Buddy. 15 PANEL ONE: WHAT TYPES OF INFORMATION ARE MOST USEFUL 16 TO MUTUAL FUND INVESTORS? 17 MR. DONOHUE: Thank you for the kind introduction, 18 Chairman Cox. I am very pleased to be here both as the new 19 director of the Division of Investment Management and as a 20 moderator for today's roundtable. 21 Before I begin today I need to note that the views 22 expressed today by me and all the SEC moderators throughout 23 the day are our own and do not necessarily reflect the views 24 of the Commission or of our colleagues on the staff of the 25 Commission. 1 For all the reasons the Chairman just outlined, the 2 interactive data initiative promises to improve the quality 3 of disclosure to the average investor to revolutionize how 4 investors access, use and ultimately understand information. 5 We want to empower investors to make better decisions for 6 their families, their retirement, their healthcare, their 7 education and their savings. 8 It makes sense to start our discussion with the 9 investment that ordinary Americans rely on more than any 10 other, the mutual fund. At the SEC we already require mutual 11 funds to disclose a great deal of important information in a 12 number of filings. 13 I have with me documents filed for one particular 14 fund during the past 12 months. You can see that the sheer 15 volume of this information would make it difficult for the 16 most diligent investor to unearth the nuggets that he or she 17 seeks. Much of this information is delivered directly to 18 investors typically in paper. Funds provide the prospectus 19 to each investor who purchases shares and many funds send a 20 new prospectus to every existing shareholder every year. For 21 those investors who want to go beyond the prospectus funds 22 make statements of additional information available upon 23 request. In addition, funds provide the shareholder reports 24 to each shareholder twice a year. When a mutual fund holds a 25 shareholder meeting, the fund sends its proxy statement to 1 the shareholders. 2 Other reports are available through the 3 Commission's EDGAR website. These electronic only documents 4 can provide information to investors and others who both know 5 about them and know how to find and use them. These include 6 semiannual reports on Forms NCSR and NSAR as well as 7 quarterly reports of portfolio holdings on Form NQ. In 8 addition annual proxy voting records filed on Form NPX 9 generally are available as electronic documents posted on 10 fund websites. Particularly savvy investors can also use 11 EDGAR to review the other information contained in Part C of 12 the mutual fund registration statements. 13 These SEC filings do not include the myriad of fund 14 advertisements, sales literature and other materials that 15 funds choose to use in communicating with their shareholders. 16 These two add to the total mix of information confronting 17 investors. 18 Now, I don't want to suggest that any of these 19 documents is not useful or does not contain information that 20 could be important to an investor. I believe quite the 21 opposite in fact. That buried within this paper are probably 22 all the essential data that a typical investor would need and 23 want as well as a great deal of other important information 24 that is used by financial advisors, retirement plan sponsors, 25 third party analysts and other intermediaries who help 1 investors. 2 To state the obvious, though, the average investor 3 will access to this stack of paper or even with access to the 4 online equivalence of this paper will have a difficult time 5 figuring out what the critical information much less finding 6 and digesting it in a timely manner and will have an even 7 harder time comparing it against the information in the 8 similar stacks of disclosure for other comparable funds. 9 It's a lot of information and I think it is time we 10 confront two questions head on. First, is there a better way 11 to highlight the key information that is critical to a 12 typical investor? We need to find a life raft to throw out 13 to the millions of mutual fund investors to keep them from 14 drowning in this sea of information. Perhaps a short summary 15 of the most essential information. 16 Second, how can we tame this massive data and make 17 it usable whether for a fund investor or one of the many 18 intermediaries who digest the information and repackage it 19 for the investors. It is here that interactive data holds so 20 much promise. Perhaps interactive data could help investors 21 quickly pull up and compare the after-tax return information 22 for five different funds at a glance or it might allow a 23 retirement plan fiduciary to track changes in the portfolio 24 holdings of a fund to better assess how closely the stated 25 objectives and strategies of the fund are followed. Or 1 perhaps it will give an aggressive journalist the opportunity 2 to move from a portfolio manager's name and background in a 3 prospectus to the detailed information about that manager's 4 potential conflicts in the statement of additional 5 information to the most recent Code of Ethics provisions 6 governing these conflicts filed with Form NCSR. The 7 possibilities are endless and full of great promise. 8 The purpose of the two panels this morning is to 9 discuss how we, the policy makers, investor advocates, 10 industry leaders, academics and others can start to realize 11 this promise. The task is daunting but the reward, the 12 empowerment of the individual investors, is great. 13 Before I proceed with the panel, I would like to 14 say a special thanks to my co-moderator, Susan Wyderko. As 15 acting director of the division, Susan was instrumental in 16 moving forward the division's thinking on interactive data 17 and improved mutual fund disclosure as well as in providing 18 the impetus for today's morning's roundtable session. We 19 would not be having today's discussion without Susan's 20 inspiration and efforts. 21 And with that I'd like to ask Susan to introduce 22 our panelists. 23 MS. WYDERKO: Thank you, Buddy. 24 We are very lucky this morning to have two very 25 distinguished groups of panelists coming from a wide range of 1 perspectives. I want to thank everyone this morning for your 2 time and your energy that you are devoting to us. 3 We have divided our discussions this morning into 4 two general topics. The first panel which you see before you 5 right now will focus on the types of information that are 6 most useful to mutual fund investors. The second panel will 7 focus on how the Commission can better leverage the power of 8 the Internet to provide mutual fund investors with better 9 information. 10 Now I'm going to briefly introduce the panelists. 11 I encourage you to look for more information on the 12 Commission's website. They are a very distinguished group. 13 Farthest away from me is Barbara Roper. Barb is 14 the director of Investor Protection at the Consumer 15 Federation of America. She is a leading spokesperson on 16 investor protection issues. 17 Next to Barb is Don Phillips. Don is the managing 18 director of Morningstar and he is responsible for corporation 19 strategy, research and corporation communications. 20 Next to Don is Henry Hopkins. Henry is a vice 21 president and chief legal counsel in the T. Rowe Price Fund 22 Group and a very distinguished member of the Investment 23 Company Bar. 24 Next in line is Bill Dwyer who is managing Director 25 of National Sales for Linsco/Private Ledger with 1 responsibility for retirement and management of the firm's 2 financial advisors. 3 Finally, but not least, we have Elisse Walter who 4 is senior executive vice president at the NASD. Among other 5 things, Elisse oversees the Investment Company regulation and 6 leads NASD's investor education efforts. 7 I'm going to start by inviting each of our 8 panelists to provide a brief perspective on the information 9 that is most useful for fund investors. 10 Barb, I'm going to start with you. I know the CFA 11 has done a lot of research in this area, so let's start with 12 you. 13 MS. ROPER: A wise man once said that giving 14 investors the information they need in a form they can 15 understand is what distinguishes investing from roulette. We 16 are pleased to participate in today's roundtable because we 17 believe the review that the SEC is undertaking has the 18 potential to greatly enhance the useability of the 19 information that mutual fund investors receive. 20 For the past 18 months CFA has been engaged in a 21 research project in which we have asked many of the questions 22 that we're discussing here today about the information that 23 mutual fund investors need and find useful. 24 We started with the literature review where we 25 looked at the recommendations of experts from regulators, 1 industries, investor advocates, personal finance writers and 2 others. And what we found was agreement to the point of near 3 unanimity about the basic factors that investors should 4 consider when selecting a mutual fund. 5 These closely track the content of the original 6 fund profile with highest priority given to investment 7 objectives and strategies, risks, costs, and past performance 8 particularly as it relates to the volatility of past returns. 9 When you look at a more detailed level, there is 10 more variation in the recommendations on the best way to 11 evaluate risk, for example, or the relative importance of 12 costs, but our research suggests that the general question of 13 what information is essential to an informed mutual fund 14 purchase has really been answered to the general satisfaction 15 of experts from all constituencies. 16 We also found that that information is widely 17 available to investors and it comes from a lot of different 18 sources and in a lot of different formats. And while the 19 quality and usability varies, it is often quite good. 20 There are two areas where we think there is a need 21 and a possibility for improvement. One, narrative risk 22 disclosures often consist of little more than boilerplate 23 that does little to assist an investor who is seeking to 24 determine whether one fund is more or less risky than another 25 comparable fund. 1 And, second, the fee table is too cluttered and it 2 is too hard to get the key information about what you're 3 paying for the fund and what you're paying for the services 4 of a broker or adviser in recommending that fund. But, as I 5 say, we have a general agreement among the experts about how 6 investors should go about selecting a mutual fund. 7 Unfortunately we're releasing a survey today, a 8 consumer survey that shows that many/most investors' actual 9 mutual fund purchase practices don't remotely resemble the 10 expert recommendations. There is not time to go over that in 11 detail here but the gist of it here is that there are 12 significant differences in the factors they consider most 13 important, the value they place on the prospectus and other 14 written disclosures and the degree to which they research the 15 funds that are recommended to them by financial 16 professionals. 17 So what are the reasons for the gap? 18 Two leap to mind. If you look at what the experts 19 recommend you do to select a mutual fund, it's too much work. 20 The handful of people who are willing to do that much work 21 already work for Don. 22 (Laughter.) 23 Secondly, the expert recommendations treat everyone 24 as if they were a direct purchaser of mutual funds. And, as 25 you know, most people purchase their funds either through a 1 workplace-based retirement plan where they typically choose 2 from a relatively limited menu of funds or through a 3 financial professional who makes the selection for them. 4 It is unreasonable to assume that they will either 5 want or need the same information as the direct purchaser. 6 Our research suggests that even the direct purchasers don't 7 necessarily want as much information as the experts think 8 they need. 9 So what are the implications of that for how we do 10 mutual fund disclosure? 11 Well, one of the implications for us has been that 12 CFA has abandoned our former opposition to the sale of funds 13 from an abbreviated disclosure document. It seems pointless 14 to continue to insist on full prospectus delivery to all 15 investors when most investors do not appear to find the 16 prospectus of great value. 17 It also seems to us that given investors' somewhat 18 limited attention spans for these issues, we need to make it 19 as easy as possible for them to get the information they 20 really need and to understand the information they get. 21 Before you immediately conclude that the original 22 profile is the right approach, however, we would encourage 23 the Commission to study the really innovative approaches that 24 many fund companies and others take when they prepare these 25 abbreviated disclosure documents for use on their websites. 1 Many of them are able to provide somewhat more detail than 2 the original profile provided but in a user friendly format 3 that gives the investors far more control over how they 4 access that data an dhow much information they choose to 5 review. 6 I also think it is important to keep in mind the 7 different needs of different types of investors. And I would 8 just like to suggest that for those who invest through 9 financial professionals the most important information they 10 need may have nothing to do with mutual funds. Our research 11 suggests that most of these investors do little or no 12 research of the funds that are recommended to them. 13 Arguably the information they need is the 14 information that helps them make an informed selection among 15 financial professionals. And unlike information about mutual 16 funds that is not information that is typically readily 17 available. 18 So we would like to encourage the Commission to 19 seriously consider developing a plain English disclosure 20 document that brokers, financial planners and investment 21 advisors alike would be required to provide to all 22 prospective clients that covers the key issues including 23 conflicts of interest that are relevant to the selection of a 24 financial professional. 25 And before I close I would like to make a couple of 1 comments about the Internet disclosure issue. Our survey 2 offers both sort of hope and caution on that. CFA is a 3 strong supporter of making greater use of the Internet to 4 communicate with investors because we believe it has the 5 potential to both reduce the cost and improve the quality and 6 timeliness of disclosures. 7 When we asked investors about their willingness to 8 use the Internet, however, we found on the positive side vast 9 majorities of investors have access to the Internet and are 10 willing to use it for at least some purposes, but there does 11 remain resistance among certain investors, particularly older 12 investors, for certain purposes. 13 One of the things that we found that I think is 14 perhaps most relevant to our discussion today is that current 15 investors, those who identified themselves as current 16 investors who had bought most of their funds through a 17 financial professional, just under half said they would be 18 willing to use the Internet to receive periodic disclosure 19 documents. And just over a third said they would be willing 20 to use the Internet to communicate with their financial 21 professional. 22 I think we need to understand the reasons behind 23 and the intensity of that resistance if we are going to 24 develop Internet disclosure policies that benefit all 25 investors. 1 MS. WYDERKO: Thanks, Barb. 2 Don, Morningstar has a lot of experience providing 3 investors and intermediaries with information about mutual 4 funds, so let's hear from you. 5 MR. PHILLIPS: Thank you very much, Susan. Thank 6 you for the opportunity to participate in this discussion. 7 First, before I start, I would like to say that 8 clearly there is something about the system that works very 9 well. We often get hung up on ways that we can improve and 10 that is also important, but something does work. 11 At Morningstar we are now tracking funds around the 12 globe and nowhere else are costs as low and as transparency 13 is great is in the United States. So there is something very 14 right about the system. 15 And also in the aggregate, if you look at investor 16 dollars, they tend to flow to lower cost organizations and 17 the better performing funds. So there is something that is 18 working with the system, but the reason the system works so 19 well is that we are constantly asking how can it improve. 20 And that is why I think this discussion is timely. 21 Clearly, there is room for improvement on the 22 current prospectus. I would argue that there are two major 23 audiences it serves and it is not serving either as well as 24 it might. One is the individual investor who is trying to 25 make a decision. I think Chairman Cox correctly described 1 the situation. It's bombarding investors with way more 2 information than they can handle and that they can 3 intelligently assimilate. It is not helping them make 4 decisions. And that is why the move towards a simplified 5 prospectus makes all the sense in the world to get some 6 minimum level of disclosure out there to people at the point 7 or near the point of the purchase agreement. 8 But as Barbara mentioned, the vast majority of 9 investors aren't making their decisions in isolation. They 10 are putting money into a fund with the help of some sort of a 11 professional, whether it's a financial advisor or whether 12 it's an employer who is selecting funds for a 401(k) plan, 13 whether it's the press or third party research companies, 14 these are people that have a professional and sometimes even 15 a fiduciary responsibility to out and seek out all of the 16 information. 17 And the current dense prospectus in a 18 non-electronic form isn't the tool that the need. Even the 19 early tagging efforts here have been done mostly with the 20 legal mindset, not with the database management mindset. And 21 so I think there is ample opportunity to improve to get the 22 information out there. So you can have firms like 23 Morningstar spending our time and energy thinking about what 24 this information means not simply on the processing of the 25 information. I think all parties will benefit from that. 1 I think what you need are two different documents 2 because there really are two different needs. Perhaps a 3 simplified print document also available electronically for 4 individuals, the focus is on the information investors need 5 to know. And then a tagged electronic document that helps 6 the individuals who want to make further inquiries but also 7 helps this professional audience that's focused on 8 information that investors as shareholders have a right to 9 know. And this may be more detailed information than would 10 come up in any summary of 10 or 12 points that would go into 11 the summary. 12 I would give just an example. While much of the 13 focus I'm sure will be on what goes into the simplified 14 document, a tremendous amount of benefit can come from the 15 information that goes in the longer document. 16 For example, one of the SEC's recent initiatives is 17 to require disclosure on fund managers' compensation 18 structure. Not the exact dollar amount that they're paid, 19 but what is the structure, what incentives does that create. 20 Now I would argue that very few investors have actually read 21 this, but I would argue that it's making a difference in the 22 retail market and it is helping investors. 23 In the wake of this required disclosure, we have 24 had major fund companies come to us and say, "We're 25 rethinking our compensation structure." Some major fund 1 groups have come to us and said, "In the 1990s we simply gave 2 managers more money if they ran a bigger fund. It was more 3 profitable to the firm. The PMs knew that, they asked for 4 more money, we had to give it to them." 5 Now in the wake of having to disclose this, we can 6 go back and say, "That's really not a defensible practice." 7 And we're tiering their compensation more to be performance 8 relative to peers saying if they beat their peer group, we'll 9 get the assets. But under the former system, these fund 10 companies are saying, they were in fact incentivizing 11 managers to be out promoting their fund not managing it. 12 On another scale, a major no-load fund company came 13 to us and said that a marketing consultant had told them in 14 the Nineties the way to move the needle in the no-load world 15 was to get a lot of individual years where your fund was in 16 the top decile. And they structured all of their 17 compensation to get single year performances in the top 18 decile. And they said, "We got a lot of that type of 19 performance. The problem was we were in the top decile one 20 year and we were in the bottom decile the next year." And 21 they said, "The marketing consultants were right. When we're 22 in the top decile we got a lot of assets, but we were 23 attracting the most fickle types of investors, people who 24 loved us when we were at the top but hated us as soon as we 25 dropped out of the top 10 percent. And, in essence, we were 1 incentivizing our managers to scour their long-term 2 performance records just to get in these short-term fickle 3 investors." 4 They said, "In the wake of having to disclose this, 5 we're changing our procedures and moving from a one-year 6 period to a three or a five-year period and stretching out 7 the time periods." 8 Well, think about that. For years fund companies 9 have gone to investors and said, "Buy an equity fund with a 10 long-term horizon. Be thinking out five/ten years and, yet, 11 major fund companies were rewarding managers on the basis of 12 10 or 12 months worth of performance." 13 This disclosure which very few investors have seen 14 I think now is changing behavior in the industry and better 15 aligning the interests of individual investors with those of 16 fund managers. So I would encourage the Commission to not 17 only think in terms of print and electronic but to think in 18 terms of these two different audiences: what an individual 19 investor might need to know and what a professional or an 20 informed individual has a right to know. Both of those have 21 a part in improving the investor experience. 22 Thank you very much for the opportunity to 23 participate. 24 MS. WYDERKO: Thanks, Don. 25 Next, Henry, we would like to hear your perspective 1 as a representative of a large fund group. 2 MR. HOPKINS: Good morning. Can you hear me? 3 Okay. Good morning. 4 Since the prospectus disclosure regime was first 5 established over 73 years ago, much has changed. This new 6 environment strongly justifies some rethinking. Not of the 7 basic investor protections of the 33 and 40 Acts but of ways 8 those laws apply to mutual fund prospectuses. 9 When these acts were adopted, communications were 10 crude compared to today's digital, fiber optic, microwave and 11 satellite global networks. The age of personal computers and 12 the birth of the Internet have revolutionized the 13 transmission of and access to information. The financial 14 news media now covers the mutual fund industry to such an 15 extent that little happens without the public knowing about 16 it. The beneficiaries have been the investing public who can 17 now easily access a wide spectrum of quality information 18 instantaneously. As a result the prospectus of old has 19 become a roadblock for investors on today's information 20 highway. 21 Before outlining T. Rowe Price's recommendations, I 22 would like to set the stage by reviewing a number of the 23 findings of the ICI's 2006 study on the information needs of 24 fund investors. 25 First, shareholders prefer receiving a concise 1 summary of fund information before buying. Second, a large 2 majority of shareholders do not consult fund prospectuses 3 before purchasing. They view prospectuses as being difficult 4 to understand and too long. Third, fund shareholders use the 5 Internet regularly most particularly to gather investment 6 information. 7 The question for discussion today is how can we 8 improve the disclosure regime. Studies have shown that when 9 it comes to providing most investors with fund information 10 less is best. Out of that realization was born the current 11 profile, a document designed to give investors just the right 12 amount of information. The develop of the profile was not 13 something that just came out of the blue. It represents the 14 culmination of decades of work and, in fact, many failed 15 attempts to build a better disclosure mousetrap. 16 The profile is an excellent well organized 17 disclosure document whose content requirements were 18 substantiated by SEC-sponsored focus groups and an industry 19 pilot program. As good a disclosure document as it is, the 20 use of the profile has been disappointing at best. The cause 21 is self-evident. The profile did not replace the full 22 statutory prospectus and incorporation by reference was not 23 permitted thereby creating liability concerns. 24 In our view, wholesale changes to the profile rule 25 are not necessary to significantly improve the mutual fund 1 disclosure scheme. First, permit a fund's profile to be used 2 as its primary selling document provided investors have the 3 option of either accessing the full prospectus via the 4 Internet or requesting a hard copy. 5 Second, make the profile a statutory prospectus by 6 incorporating by reference the full prospectus just as the 7 prospectus currently is permitted to incorporate the SAI by 8 reference. 9 Third, retain the ability of funds to use different 10 versions of the profile to reflect the availability of 11 different services for different classes of investors. 12 Fourth, amend the profile rule to require 13 disclosure of a fund's top 10 and quarter-end holdings. 14 Now, skeptics argue that investors should be 15 provided a full statutory prospectus just as when they 16 purchased the securities of an operating company. My 17 rebuttal is two-fold. First, under recent amendments to SEC 18 rules, underwriters and operating companies in public 19 offerings no longer need to physically deliver a final 20 prospectus. Rather, they can rely on the availability of the 21 prospectus on the issuer's website. 22 Second, prospectuses for operating companies are 23 never required to be delivered to purchases of shares in the 24 secondary market which is where most investors purchase their 25 shares. Under the integrated disclosure system and the 1 efficient market theory, the price of an operating company's 2 shares is deemed to reflect all material information about 3 the company so there is no need to deliver a disclosure 4 document. This same principle is all the more true for 5 mutual funds whose prices are completely transparent since 6 the business of a mutual fund is solely that of acquiring the 7 securities of operating companies that meet its investment 8 objective. 9 In conclusion, we believe that our recommendations 10 should transform the profile into the much needed mutual fund 11 disclosure document for the 21st Century. Thank you. 12 MS. WYDERKO: Thanks, Henry. 13 Bill, your company works with mutual fund investors 14 across the country. Let's hear your perspective. 15 MR. DWYER: Thank you, Susan. And thank you, also, 16 Director Donohue, for inviting me here today. 17 Since LPL is not a nationally branded name I 18 thought I'd give you some background on who we are. LPL is 19 the nation's leading independent broker dealer. We have 20 7,000 financial advisors across the country that 21 independently own and operate their businesses. By industry 22 standards, they are very experienced. They typically are in 23 their mid-40s and have about 15 years of experience in the 24 business. And in most case have their name on the door 25 primarily in suburban and rural communities all across the 1 country. 2 That being said, the two things that I think are 3 really pertinent about that is that they work with investors 4 across the spectrum. When you work in a small community, 5 you're going to work with the smallest of investors, you're 6 going to work with the near mass affluent and also the 7 extremely wealthy. 8 It is important to them that disclosure should be 9 appropriate. It protects them as well in this process. 10 Advisors don't want to be misunderstood or have a client come 11 back and say that they have been misunderstood because 12 paramount to them in the business is the goodwill and their 13 name. It is the most valuable commodity they have as a 14 service organization servicing the public. 15 Don's comments about the significance of mutual 16 funds is a tool and how well they've been handled here are 17 very appropriate. With trillions of dollars invested in 18 mutual funds, they are the instrument of choice with our 19 advisors in particular, whether that's in a brokerage 20 account, whether that's in sub-accounts through an annuity 21 product or whether that is on an advisory basis, they are far 22 and away the preferred vehicle to work with the investor 23 dollar. 24 To that end, there are three unintended 25 consequences that we really don't want to see happen and some 1 of these have been expressed as well. One is -- and Henry 2 just said it in a different way -- less is more. At some 3 point, we really don't want the investor to become so 4 frustrated and so skeptical of the process that appears to go 5 on with these stacks of paperwork that Director Donohue 6 showed us here earlier that they can get through. 7 Secondly, we don't want the advisors to give up on 8 the product. One thing you have to be careful of is that you 9 don't inadvertently overburden particular vehicles so that 10 advisors move away from that valuable tool and move to other 11 products. We think that is very important that disclosure be 12 equitable across the spectrum of product. 13 We also don't want advisors to give up their 14 licenses. I can't tell you how frequently I have 15 conversations where advisors say, "Gee, I can just become an 16 RIA and give up my brokerage license, face one-time 17 disclosure -- comprehensive, albeit, to an ADV, but still we 18 don't believe that the consumer is best served at a broad 19 level if advisors are kind of moving toward giving up their 20 securities licenses. 21 There are cases where fee base is not the best 22 alternative and we would encourage that regulation not become 23 so stringent that people look to move away from those 24 securities licenses. 25 What are investors most interested in receiving? 1 Barbara's comments were interesting. Help in 2 determining and meeting investment goals is far and away what 3 clients come to an investment professional for. Education of 4 all the vehicles that are available to them to invest are 5 paramount in this process. Mutual funds today, of course, 6 are the topic of choice and there is tremendous amounts of 7 information available to the professional advisor provided 8 through industry sources like the SEC and the NASD as well as 9 mutual funds and independent organizations such as Don's. 10 When you finally get down to the specific 11 investment, performance was the number 1 thing as I polled 12 our advisors that they were interested that clients wanted to 13 know. They then wanted performance on a relative basis. How 14 is that on a market basis? So they wanted information about 15 the markets that that particular fund was concentrating on. 16 Risk and risk on a relative basis, again. What risk meant on 17 a very personal level to that client was how that fit into 18 their tolerance for risk. 19 Investment objectives of the fund were also 20 paramount. They wanted to make sure in many cases that the 21 funds culturally fit the investors -- that their holdings 22 culturally fit where the investor wanted to be. 23 And then way down the list, ironically, was the 24 cost of doing business in general. Not just the cost within 25 the fund, but the cost of doing business. Perhaps because 1 these investors have come to a professional advisor, the 2 reality is they know what they're going to pay. They want to 3 make sure that it's fair and that they get a reasonable value 4 for what they're paying. 5 Certainly, the NASD has thoroughly vetted this 6 issue and, as I prepared for this and saw the thousands and 7 thousands of pages that have been written on this, Profile 8 Plus as proposed by the NASD seems to be a strong solution to 9 the many points that consumers are looking to see. 10 That's not a segue yet, Elisse, but I just thought 11 I'd put that out there. 12 (Laughter.) 13 The information then finally also has to be cost 14 effective. The challenge in the securities business today is 15 actually providing advice and doing it profitably. Being 16 able to stay in business. This should mean that the use of 17 the Internet is an obvious choice to maximize a reduction in 18 paper and optimize the cost-effectiveness as we deliver 19 information. 20 Timely execution is also important. If there are 21 going to be signatures, they should be electronic signatures 22 wherever possible. Certainly, paper will not go away, but 23 the Internet provides a valuable, valuable tool that 24 investors can work with and get pertinent information on a 25 timely basis. 1 Cost effective and efficient to implement. You 2 know, if you look at excessive and unnecessary disclosure, 3 you find out that the manufacturers of product are burdened. 4 You find out that the distributors of product, whether that 5 be a broker dealer or other channels, are burdened. You find 6 out that the advisors are burdened with excessive disclosure. 7 And, in the end, the consumer ends up paying for all of that. 8 That's a condition that just cannot exist. 9 The consumer ends up paying either by people moving 10 away from providing advice to small investors or by cost 11 precluding them from participating in valuable vehicles. 12 Again, we would be strong proponents of the Profile 13 Plus as an alternative and we finally see it as an evolving 14 work. The goal here is not to continue to heap on more and 15 more data but, in fact, to replace other vehicles that are in 16 place and as the Profile Plus would evolve, it would become 17 more robust and remove pages and pages. 18 One advisor said to me, in closing, he said, "You 19 know, it amazes me that I can go get some really, really 20 powerful medicine and all the pertinent disclosures I need to 21 know are wrapped around that little bottle. But, yet, in 22 this business, we have to put out reams and reams of 23 paperwork to try and disclose the risk." 24 Thanks for allowing me to participate. 25 MS. WYDERKO: Thanks, Bill. You're absolutely 1 right that the NASD has done a lot of thinking about the 2 kinds of information that mutual fund investors want to see. 3 So, Elisse, why don't you wrap up our summary 4 remarks? 5 MS. WALTER: Thank you, Susan, and thank you very 6 much for inviting NASD to participate in this critically 7 important event. At the risk of completely destroying a 8 sports analogy, I feel like the clean-up batter. I think 9 that's right. Hopefully, I will add some remarks from the 10 regulatory, including Investor Education, point of view. 11 What has struck me sitting here this morning is the 12 general consensus among the members of this panel. Perhaps 13 surprising given the diversity of our backgrounds and the 14 different points of view that we represent. 15 There is a vast array of information as we have all 16 said in the public domain about mutual funds. But as the 17 Commission is recognizing by holding this forum, we need to 18 take action to make the federally mandated disclosure more 19 useful to the millions of Americans who purchase funds. 20 Disclosure simply should not be just a vehicle to protect 21 issuers and intermediaries from liability. It should inform 22 investors and help them to make better decisions. 23 We all recognize that the overwhelming majority of 24 investors won't read long complicated documents like the 25 traditional prospectus. As Barb highlighted, we need to 1 create mandated disclosures that investors can manage easily. 2 And we need to avoid disclosure creep. As Henry said, less 3 is best. Investors must be able to digest, comprehend and 4 retain the information. 5 And we should also note and act on the fact that, 6 as Bill stated, if a disclosure is unduly complex or the 7 manner in which it is provided is unduly cumbersome, 8 investment professionals will be wary of selling these 9 products and may well turn to others which may not be as good 10 for the investors they serve. 11 The Fund Profile already adopted by the Commission 12 was a giant step in the right direction. I believe that we 13 can improve on that concept and address the issues that seem 14 to have prevented its widespread use. 15 As Bill noted, last year the Mutual Fund Task 16 Force, a group principally industry which NASD organized, 17 recommended that the Commission adopt a new mandated point of 18 sale disclosure document which it called the Profile Plus. 19 NASD, itself, has endorsed that proposal. 20 The Profile Plus builds on both the profile 21 prospectus and the Commission's proposed new point of sale 22 disclosure about fees, expenses and conflicts of interest. 23 We believe it would provide meaningful disclosure both 24 because of what it does include -- key information about a 25 fund, objectives, risks, fees, performance and also 1 information about dealer fees and conflicts of interest. 2 It also is important for what it does not include. 3 It deviates from the profile because it doesn't include 4 information such as redemption information that is not 5 important at the time of sale. It avoids lengthy narrative 6 and uses graphics where possible and it omits information or 7 less interest to investors such as the breakdown of the 8 expense ratio. It is simple. It provides performance 9 numbers, for example, without the hypothetical illustration 10 from the prospectus. And the Profile Plus also works because 11 by linking the short form disclosure to the full prospectus 12 using hyperlinks, as Chairman Cox said, the Profile Plus 13 harnesses the power of the Internet in this particular 14 respect which is very important. Whatever happens should use 15 that power. It doesn't force disclosure into one size fits 16 all. 17 Investors can choose for themselves the level of 18 detail they want. And, as Don said, institutions and 19 professionals will continue to have the benefit of the longer 20 disclosures. But it offers investors this tailoring ability 21 without sacrificing comparability. And we believe it also 22 addresses the liability concerns that have plagued the 23 Profile prospectus. 24 Some have suggested that oral disclosure is 25 preferable. We agree with Chairman Cox that investors should 1 be offered a choice. Detailed oral disclosure is confusing 2 and difficult to retain and while some investors are not 3 ready to use the Internet for this purpose, many are. As the 4 CFA survey reported, even among those 65 and over, the most 5 Internet resistant group, a significant number are willing to 6 use the Internet for some purposes. And all the investor 7 research today shows that a majority of investors are 8 Internet savvy. The resistance of some should not be a 9 reason to preclude those who want to use the Internet from 10 opting for Internet delivery. 11 Others have suggested that even with Internet 12 delivery the investment should be held up until the broker 13 can obtain assurances that the investor has read the 14 disclosure. We believe strongly that imposing such a 15 requirement would not be investor friendly. The ability of 16 investors to invest as they choose to do should not be 17 impeded. 18 Two more brief thoughts before I close. As the 19 Commission moves forward, it should be sure to address the 20 needs of retirement plan investors. Of course, working 21 closely with the Department of Labor. 22 And, finally, this is a beginning. This effort 23 should not stop with mutual funds but should extend to other 24 investment vehicles as well. Thank you. 25 MR. DONOHUE: I want to thank the panelists for 1 their prepared remarks. We have about 15 minutes now within 2 which to have some questions asked and I would encourage the 3 Commissioners, although I'm sure no encouragement is 4 necessary, if there are questions to certainly jump in. 5 I will first defer to the Commissioners if there 6 are any questions that they might want to ask the panelists. 7 COMMISSIONER ATKINS: Well, just one. I guess as 8 we talk about the liability issues that have come up with 9 respect to the Profile prospectus and perhaps also of the 10 Profile Plus, I was just curious if you all have any, you 11 know, particulars as to what we need to do, whether it's a 12 Safe Harbor in that respect. We were talking about -- Mr. 13 Hopkins mentioned that making it a statutory prospectus might 14 help solve that problem, whether there are other ways as well 15 of addressing that? 16 MS. WALTER: Commissioner Atkins, I think there are 17 a number of different ways to do it. When the Mutual Fund 18 Task Force came up with the Profile Plus what it in effect 19 was advocating was a step less that access equals delivery. 20 Because what the task force said and we at NASD agree is that 21 if you deliver a short form document and it hyperlinks to the 22 larger document, that that really is delivery of the larger 23 document and that simply could be done as an interpretive 24 matter. 25 So, if the Commission didn't feel comfortable going 1 all the way to access equals delivery as it has in the 2 corporation context, that might be one solution. 3 MR. HOPKINS: I would agree wholeheartedly. I 4 think incorporation by reference, the prospectus into the 5 Profile is the simple solution. And it avoids having to 6 reach the conclusion that Internet access equals delivery. 7 MS. ROPER: Obviously, it is an issue that is much 8 easier when you're talking about Internet delivery because it 9 really does -- if you link it, you have delivered it. The 10 investor has the choice whether they read it or not just as 11 they have a choice whether they read the print document that 12 they receive in the mail. 13 For those who choose not to use the Internet, it is 14 a more difficult issue and I don't know that I have a 15 specific solution there. 16 COMMISSIONER NAZARETH: As you know, one of the 17 features of the point of sale disclosure was this really, you 18 know, two-page hard-copy document. And perhaps Elisse can 19 address this. I know one of the controversial elements of 20 that was whether or not that was in fact a step backward or 21 whether we should encourage people to look at such a document 22 online and have the online document supplement oral 23 disclosure. Can you sort of address again where your group 24 came out on that? 25 MS. WALTER: Where the task force came out was that 1 for those people who were comfortable with Internet 2 disclosure that it really was a more effective way to deliver 3 the information. There was great concern among the members 4 of the task force and we share that that the oral disclosure 5 would confuse and be difficult to deal with. 6 So for those who were willing to deal with the 7 Internet and we think there will be many, it is a more 8 powerful form of disclosure. It leaves the oral conversation 9 that may be taking place when the fund is being recommended 10 or the investor calls to place an order on the questions that 11 the investor has. 12 Now, for those who are not comfortable with 13 Internet delivery, it would be worth having an abbreviated 14 form of oral delivery that would be more capable of being 15 retained than the lengthy delivery of repeating the whole 16 document and to have that serve as a substitute and then 17 provide the prospectus or perhaps just the two-page document 18 later on with the confirmation. 19 We are quite concerned that investors will not want 20 to delay the consummation of their transaction until the 21 document arrives in the mail and we don't think that we 22 should interfere with their investment choices including the 23 time in which they want to place their order. 24 COMMISSIONER CAMPOS: I wholeheartedly agree. 25 COMMISSIONER GLASSMAN: I thought that one of the 1 issues regarding Internet delivery, at least in some of the 2 research that we had done, was that although the investors 3 are interested in using Internet delivery, it was difficult 4 for them to be on the phone with their investment provider 5 and use the Internet at the same time. That was a challenge. 6 MS. WALTER: It was for some and it wasn't for 7 others. There were a significant number who said, when we 8 went back -- and if you'll recall, Commissioner Glassman, at 9 your request we did some further investor research 10 specifically about that issue and we determined that I 11 believe it was a little bit less -- it was hovering around 12 half felt comfortable accessing the Internet while they were 13 on the phone. Others felt that they would continue in a 14 later phone call. Others felt that they would access the 15 information later but wanted to proceed. And we really think 16 that that ought to be at the investor's option and it ought 17 to be presented to them quite neutrally so that they can 18 decide the way they feel most comfortable. 19 MS. ROPER: You also don't have to be on the 20 Internet at the same time you're on the phone. If you have 21 downloaded a link and you've pulled up the document, you can 22 go off line. If you have received it out and printed it out, 23 I mean, virtually instantaneous delivery, you're talking 24 about a delay of perhaps, you know, five minutes that I think 25 most people are willing to tolerate. 1 So it does not require that you have the 2 technological ability to be online and on the phone at the 3 same time. And I actually think the model that Chairman 4 Glauber has talked about recently of having the broker talk 5 to the client about the document while they have the either 6 Internet document in front of them is the most useful one if 7 we want the investor to actually understand it. 8 COMMISSIONER CAMPOS: In this kind of a 9 conversation context what should the broker dealer maintain 10 as evidencing the conversation with the investor? 11 MS. WALTER: Well, clearly, it's one of the 12 concerns that people have about oral disclosure. It's not 13 very easy to police. And unfortunately for those who are on 14 the edge and unscrupulous, it's probably fairly easy to gain 15 on because you're going to end up with a notation in a file 16 that an oral conversation took place. 17 Whereas, if in fact the broker is e-mailing the 18 investor a hyperlink to the document, then you will at least 19 have a record that that e-mail has been sent and received. 20 But one way or the other, however the scenario is set up, 21 however the requirements are set up, it will be clear that 22 the brokers will have to maintain a record which will be 23 auditable by examiners when they go in to make sure that they 24 have fulfilled their obligation. 25 COMMISSIONER GLASSMAN: To follow up on that, how 1 difficult is it to follow up the oral disclosure with 2 something that's sent later with a confirm if the security is 3 purchased? 4 MS. WALTER: You know, I really should defer in 5 part to Bill and Henry on this. I think it is really more a 6 question of the expense of the system. And to the extent 7 that you have to not only do the Internet disclosure which is 8 quite inexpensive and really does conserve costs and you have 9 to do another mailing, that obviously just adds another cost 10 to the system. Is it a great cost? If you're just sending 11 the two-page document, it obviously isn't terribly bulky, but 12 it is an added cost. 13 COMMISSIONER GLASSMAN: It wouldn't be an 14 additional mailing because the confirm is mailed, correct? 15 So it could be something in the confirm mailing. 16 CHAIRMAN COX: Don, I wonder if I could put a 17 question directly to you. You mentioned this army of people 18 that look at information whether or not the customer ever 19 sees it. And I'm quite interested in what your forecast is 20 of what use might be made not only by Morningstar but other 21 people that are in the business of intermediating some of 22 this disclosure if a whole lot of information in mutual fund 23 prospectuses were tagged. Help us imagine some of what might 24 come of that. 25 MR. PHILLIPS: Well, right now, a tremendous amount 1 of our time and energy goes into just establishing and 2 maintaining a clean database. And, yet, the real value that 3 we bring to the equation is the exercise of judgment about 4 that information. 5 And I think the same is true for these 6 intermediaries. And right now the time and energy, the 7 daunting part of the task is just how do you get this 8 information into a position where you can start extracting 9 value from it. 10 And that's why I think the move to make it easier 11 to do that and have more people thinking about what the 12 information means is a healthy one. 13 If I'm going to go buy a car or a big screen TV or 14 some other expensive consumer item, I can do a whole lot of 15 research on the Internet. And the comparative information 16 might be provided not by the person who makes or sells it but 17 by some third party in many cases lending it some objectivity 18 and in other cases you've got to be careful what you run into 19 on the Internet. But the ability to use the Internet as a 20 tool for comparative shopping is one of the things that makes 21 it a great tool. 22 What might I be able to see crop up in the form of 23 web-provided information as a customer if I want to do a 24 little bit of research before I call my broker or my 25 financial advisor. 1 Well, today you can already get a tremendous amount 2 of information because there are parties like Morningstar and 3 a number of newspapers and other organizations do have a lot 4 of information out there. 5 MR. PHILLIPS: Yes, of course. I understand that. 6 I guess I'm thinking what would be the increment, what 7 additional information might we get? 8 MR. PHILLIPS: Well, I think what you would do is 9 you would free up more parties to think about this 10 information, how you present it, how you interpret it. The 11 classic mistake that Wall Street makes is we throw lots and 12 lots of information at people and pretend that we've educated 13 them. And people don't relate to big tables of numbers. 14 And, at the end of the day, that's still what this will be. 15 What they relate to are pictures. They relate to 16 advice and counsel. And that's what you need is to empower 17 people to be focusing on the interpretation of this, the 18 counsel that goes along with this. 19 You could argue that making this information more 20 accessible to the public would be a disadvantage to a group 21 like Morningstar since we have assembled big databases. But 22 we think that our real value added again is not just you 23 having the data but how we think about it. And what you 24 would be doing by this is inviting more competition for our 25 firm and for others but it would be a healthy process because 1 you would get us all focused on the value added part. How do 2 you interpret this? 3 And there are major advantages that third party 4 firms will continue to have in that a legal document or the 5 discrimination documents can't offer the opinion as to 6 whether this is the right fund. 7 And the real art of investing is taking all that 8 investment information and matching it to the investor. And 9 I think that by making the investment information more 10 accessible, you can allow more people to focus on the real 11 art of investing, matching the right investment to the right 12 investor. 13 And that's where, that's where the process often 14 breaks down because many people can't participate because 15 they don't have the data to begin with or they have been 16 freed up to focus on the matching up of the data which really 17 is the key to creating a good investor experience. 18 MR. HOPKINS: If I could just interject? I don't 19 think by providing this data in an easily accessible form 20 we're going to have a million little Morningstars making the 21 same analysis that Don's company does. That's number 1. 22 Number 2, what we provide retail shareholders which 23 is the Profile versus what we provide our 401(k) retirement 24 participants is quite different. Actually, we do not use the 25 Profile with our 401(k)7 business. We use the Morningstar 1 profiles for each of our funds. 2 And I think if there is one area that the 3 Commission should examine and that is what should 4 participants in these plans be given. 5 Right now there really is very little guidance and 6 everyone is sort of doing their own thing. Whereas, in the 7 retail side, we have a very distinct prospectus and profile. 8 So that's an area I think where we need some discussion. And 9 I would propose that in the area of the retirement business 10 that it could be something other than the profile. It could 11 be something like, you know, the Morningstar investment 12 profile as an example, which is a very simple way to provide 13 information to a certain segment of investors that don't even 14 need as much as in the profile. But a lot of discussion and 15 thought has to go into deciding how are we going to best 16 provide this very large segment of the mutual fund investing 17 public with appropriate information to make decisions. 18 MS. WALTER: I think, Chairman Cox, the real 19 increment will come with respect to the retail investor. If 20 you have all of this data tagged and, therefore, there can be 21 an easy way for investors to be able to choose what 22 information, beyond the short form disclosure document, they 23 want, they will be able to get to it more easily. And I 24 would like to think they would be more likely to look at the 25 things that particularly interest them. 1 And it also comes about because of the short form 2 disclosure document, if that is done in a standardized format 3 so that it's readily comparable, there can be a library, an 4 electronic library of those established. And, in act, NASD 5 has offered to put some of its resources behind establishing 6 such a library so that investors can easily when they're 7 considering what fund or what fund share class to invest in, 8 they can bring up the documents, very short form, comparable 9 format and make a very easy simple comparison. And that is 10 something that is very difficult for people to do today. 11 MS. ROPER: I guess I look at it a little 12 differently. I don't see investors as being interested in 13 setting up lots of pieces of information side-by-side and 14 making the analysis themselves about which is going to be the 15 best funds based on those factors. 16 But I do see the potential of the Internet to allow 17 a kind of comparative shopping that does that comparison for 18 them. You know, if I buy a car, I can say I want a car that 19 gets this many miles per gallon and I want it to have these 20 kinds of crash test results. And, you know, whatever the 21 factors I want. There is no reason you couldn't do -- that 22 someone couldn't develop the same kind of thing for mutual 23 funds on the Internet. 24 I want a fund, you know, a large cap stock fund 25 with expense ratio of some whatever percentage. And whatever 1 factors that I want to put into that. And I don't have to 2 sit down and look side-by-side at all the different funds 3 that have those characteristics. It can spit it out for me. 4 There is some of that available in sometimes 5 somewhat crude form on the Internet now. And I think if we 6 make it easier to tag that data we're going to see more of 7 that kind of thing. 8 MR. DWYER: You know, I might just add to that, 9 that typically when you refer to buying things over the 10 Internet and doing background information -- maybe you're 11 going to go buy a microwave, for example, and you want to do 12 a Consumer Report study, you're generally not going to buy a 13 portfolio of microwaves. You're not going to buy a suite of 14 them unless it's an institutional buy. So what Don alludes 15 to is the art of investing is really where it goes. 16 Your conversation tends to separate a little bit 17 the Internet and the advisor. The reality is professional 18 advisors today use the Internet every day in working with 19 their clients to go over their portfolios, to go over the 20 account status at any given point, and to go over investment 21 recommendations that they're making going forward. So it is 22 a very viable vehicle that advisors are using already today. 23 And I think it really needs to be looked -- you can get so 24 wrapped up in disclosure on a given entity that it's really 25 relevant to "I can fully understand it, but if it doesn't fit 1 my need, then it's still a bad investment." 2 One advisor said that everyone seems to be focused 3 on the sticker on the window of the car as opposed to what's 4 under the hood. And when you have that car that can't get 5 you up the hill, then that's a problem at any price. 6 So I think the Internet is a valuable tool in the 7 education process that the advisor uses with the client and, 8 again, streamlined disclosure for them to work with is very 9 valuable. 10 COMMISSIONER CAMPOS: If we're done with that 11 question, I have another one if I could. 12 Henry brought up the retirement sector and I wrote 13 a short article a few months ago about the terribly different 14 requirements on the retail side of mutual funds versus the 15 retirement side where if you have insurance products or bank 16 products other than ERISA rules which only 17 encourage -- don't require -- disclosure, there is not much 18 available to retirement investors. And, in particular, given 19 the fact that defined benefit plans are on their way out, 20 defined contribution plans are pretty much the norm, we have 21 essentially in my view retirees and the boomers essentially 22 driving blind to sort of emphasize the problem. Because 23 they're getting very erratic and not very much disclosure 24 because they're not required to essentially especially with 25 some of these products. 1 Do any of you feel that this is a problem? Some 2 have said maybe I'm an alarmist and we shouldn't worry about 3 this. But it seems to me that at a minimum some type of 4 profile, a summary disclosure should be required to 401(k) 5 and other self-management retirees. 6 MS. ROPER: I couldn't agree more. This is for 7 many people, not only the major way they invest, but the 8 first way they invest. And they enter that arena with the 9 least amount of information that we provide in any context. 10 And I don't see any reason why different types of 11 investments should come with different types of disclosure. 12 Just as I think all financial professionals should have 13 comparable up front disclosures that they have to provide to 14 aid an informed decision among professionals, it shouldn't 15 matter whether it happens to by tradition have been regulated 16 under the Insurance Division or some other division, you 17 ought to be able to get some basic information about every 18 investment you've considered that allows you to determine is 19 this appropriate for my needs. And among the types of 20 products that is appropriate for my needs, is it a good 21 choice for me? 22 MR. HOPKINS: You know, it's a little different 23 situation when you face making an investment in your 24 company's 401(k) program because the company has already 25 selected certain options that you choose from. So it's not 1 like the retail investor that has the whole universe of 2 mutual funds they must select from. The company has already 3 done the research and has a reasonable component of funds 4 that you must select. So that the information generally that 5 is provided to participants within a program is less. 6 The surprising thing to me is that there has not 7 been any agreement between the Department of Labor and the 8 SEC in coming together with what should be the minimum amount 9 of information to provide this segment of the investing 10 public which, as Barbara said, in many times it's the first 11 time the person has invested and many times they are the 12 least trained and able to make investment decisions. 13 COMMISSIONER CAMPOS: My research showed that even 14 in the menu situation where you're getting a basic equity 15 index and maybe a fixed income product, very little 16 information as to making the choice is among the select menu 17 we're being provided. 18 MR. HOPKINS: A lot of the companies, you know, 19 want to streamline what goes to their employees and so it's 20 sort of a consolidation to have, you know, a one-page concise 21 summary of each fund as opposed to either prospectuses or 22 even profiles. 23 MR. DONOHUE: One of my more important functions is 24 to see if we can maintain a schedule. I think Susan has one 25 last question and I think, Susan, I'll turn it to you. 1 MS. WYDERKO: Thanks, Buddy. The topic of this 2 panel is what types of information do mutual fund investors 3 find most helpful. And I think what we've said is that the 4 answer can depend on the investor and the answer often 5 depends on the channel in which they're getting the 6 information, the time at which they're getting the 7 information. 8 Now, we in the government, pass regulations. And 9 the cost of getting those regulations is very high. If we 10 get the answer wrong, the cost is very high. We can't adjust 11 easily. So give us some practical advice. 12 How do we, the SEC, go about figuring out which of 13 the different kinds of information are the most important to 14 put on a streamlined document? 15 MS. WALTER: I think the answer is many fold. 16 There's been a lot of consumer research done. The CFA, the 17 ICI, NASD, the Commission, we have all done a lot of consumer 18 research. 19 I know that our Mutual Fund Task Force brought to 20 bear on many of what I consider to be people at the NASD 21 excepted some of the great minds in the industry. And they 22 took a look at the information including the information that 23 was required in the original profile and added to it to a 24 certain extent to focus on dealer conflicts as the Commission 25 had and subtracted from it and came out with a rather 1 streamlined list of items that we felt were the items that 2 were critical to give at the point of sale. Not to continue 3 to emphasize that one proposal, an awful lot of thought went 4 into that and it is that body of information or something 5 very similar to that that I think gives you what you need. 6 MR. HOPKINS: Yes, I would say that the research 7 and effort that went into the profile produced an excellent 8 document, a disclosure document, and I think all we need to 9 do is simply build upon that and confirm those findings, that 10 they're just as true today as they were when that document 11 was created. 12 MS. ROPER: I would say that I think the profile 13 effort did a very good job of defining the categories of 14 information that we need to give investors. Where I think we 15 would benefit from additional research is on how best to 16 present that information to investors to ensure that they 17 understand it. 18 And when I say to ensure that they understand it, I 19 don't necessarily mean to ensure that they like it. People 20 like the profile. What we don't know is whether they can 21 then make an informed decision based on the information that 22 they got in the profile. 23 And I think the kind of testing you have done in 24 other contexts to determine the usability of information 25 could help us to refine the basic profile concept to make 1 sure that it conveys information in a way that investors can 2 use and understand. 3 MR. PHILLIPS: And I think the key thing would be 4 to have two different mindsets. When you're thinking of the 5 profile, it really does get down to what information do 6 investors need. And that's very difficult to figure out 7 exactly what the key things are going to be. 8 We used to have analysts who were starting off at 9 Morningstar and they would say, "Well, tell me which order to 10 look at the numbers and the information on the page." 11 And we'd say, "Well, it's always something 12 different. It's the exercise of judgment." 13 And we had one page that we used to use in training 14 and it was a fund where I maintained the most important thing 15 you could know about the fund was the address. And it was a 16 convertible bond fund that had an expense ratio close to 3 17 percent a year which was causing it to significantly 18 underperform its category year in and year out. And the 19 address was Penthouse Suite, something or other Wilshire 20 Boulevard, Beverly Hills, California. 21 So, you're never going to come up with the perfect 22 document that has all the information that people need to 23 know. But I do think that the efforts for the profile have 24 been very good and, if not exactly perfect, maybe that one 25 outlying fact that you would want on a certain fund, it is 1 awfully close to the information people need. 2 But it needs to be backed up and supplemented by 3 the larger prospectus which is guided not by this 4 paternalistic idea of what investors need to know or what we 5 think they need to know, but what as investors, as 6 shareholders, have a right to know and what the third parties 7 that are helping investors make decisions have a 8 responsibility to know about a fund. 9 And I think if you have got that safety net of that 10 broader document with a right to know mindset, then even if 11 we are a little off on what the need-to-know information is, 12 investors will be well protected. 13 MR. DONOHUE: Don, I think that's a good point to 14 end our first session. 15 Thank you all. 16 (Brief Recess.) 17 PANEL TWO: HOW CAN THE COMMISSION LEVERAGE THE POWER OF THE 18 INTERNET TO PROVIDE MUTUAL FUND INVESTORS WITH 19 BETTER INFORMATION? 20 MR. DONOHUE: I'd like to start our second panel 21 now. Today we are standing at an information crossroads. As 22 Chairman Cox outlined in his opening remarks, we are moving 23 from a world where paper was the norm for information 24 delivery to a world where the Internet increasingly is the 25 medium of choice. 1 Over 200 million Americans have home Internet 2 access. Their Internet experience is improving rapidly as 3 broadband connections proliferate and the demographics of 4 those with Internet access increasingly mirror the general 5 population. 6 The Internet has done far more than simply move 7 paper documents online. It has caused a see change in our 8 expectations of how quickly and easily information should be 9 available. Recent book by Internet design expert, J. Cobb 10 Nielson, explains that Internet users typically are looking 11 for answers to questions. In Nielson's words, "It's almost 12 like the web is swamp. People are fishing in that big swamp 13 and dragging out something that hopefully will be a nugget of 14 gold but could be an alligator." 15 Our second panel this morning will explore how we 16 can use the Internet and interactive data to help mutual fund 17 investors find the nuggets of gold they seek among the swamp 18 of available information. 19 Now I'll turn the mike over to Susan Nash, an 20 associate director in the Division of Investment Management 21 whose office is spearheading our reexamination of mutual fund 22 disclosure and the role that interactive data can play. 23 Susan will introduce our four distinguished panelists. 24 Susan? 25 MS. NASH: Thanks, Buddy. 1 Farthest from me is Bill Lutz. Bill is a professor 2 of English at Rutgers University and an expert on plain 3 language. I know that Bill has been instrumental in helping 4 a number of funds to rewrite their prospectuses to make them 5 easier for investors to understand. 6 Next to Bill is Paul Stevens. Paul is the 7 president and chief executive officer of the Investment 8 Company Institute, the National Association of US investment 9 companies. 10 Next to Paul is Tim Buckley. Tim heads up 11 Vanguard's Information Technology Division and in that job he 12 is responsible for Vanguard's utilization of technology to 13 provide services to Vanguard's millions of shareholder 14 accounts. 15 And, finally, Paul Haaga is executive vice 16 president and a director of Capital Research and Management 17 Company as well as chairman of the executive committee. 18 As with the first panel, we will open the 19 discussion by inviting each of our panelists to provide some 20 perspective on how the Internet could be used more 21 effectively to provide better information to mutual fund 22 investors. 23 Bill, can you give us your vantage point as an 24 expert in the area of communications with investors? 25 DR. LUTZ: I'm the outsider here, I'm the academic 1 which means I'm allowed to be very abstract and 2 non-practical. Although I have written 58 mutual fund 3 prospectuses into plain English, today I work on Item 7 of 4 the 10-K. That is the MD&A in plain English. I don't know 5 which of the two I would rather choose. I think the third 6 option is having my fingernails slowly extracted one by one 7 in which case, I would go with the latter. 8 (Laughter.) 9 We were asked when we were invited to this panel to 10 prepare five points so I will give you the five points. One, 11 the effects of the Internet will be as great as if not 12 greater than the introduction of moveable type in the 13 mid-15th Century. 14 Two, the Internet is moving us back to the oral 15 tradition replacing important elements of the print 16 tradition. 17 Three, the Internet is a medium that doesn't simply 18 transmit data, it creates information. 19 Four, the Internet as it develops will become a 20 dynamic blending of the visual and the verbal allowing users 21 to interact with the data to create the information they 22 want. 23 Five, information is that which reduces 24 uncertainty. That definition comes from the now classic 25 monograph, "The Mathematical Theory of Information," 1 published in 1949 by Claude Shannon and Warren Weaver. 2 Let me repeat that. Information is that which 3 reduces uncertainty. 4 It is important that we distinguish our terms. 5 Much of what we are talking about is not information, it is 6 data. Those piles of folders were data, they were not 7 information. And we are drowning in data and we have too 8 little information. And we need to sort the two and decide 9 which it is we are doing. 10 I am the only person and I am the English professor 11 who is going to use PowerPoint right now. Only a little bit 12 because I am going to show, not tell. 13 We start with the Shannon and Weaver definition. 14 But what does this mean? Like all definitions, this one is 15 simple but profound in its implications. And this is what I 16 want you to start thinking about, the implications of this. 17 What does this mean? For those of you who have 18 traveled to London and have ridden the Underground or the 19 Metro in Paris or even the Metro in Washington, D.C., this is 20 the London underground map of 1913. When you take a subway, 21 what do you want to know? How do I get from A to B and how 22 much is it going to cost me. 23 Look at this underground map. We have the Thames 24 River on it, but look at all the roads that are on there, 25 there are parks that are marked. I don't need to know this 1 on a subway map. 2 Well, they simplified it. Notice how a lot of 3 those features were removed by 1932. Now it's focusing just 4 on the lines. But do I really need to know the directions 5 that they go in relationship to each other? No. 6 This is the map today. It tells me how I get to 7 from point A to point B and because of the zone structure in 8 London, I know how much the fare is going to be or how to 9 look up my fare. That's all I need to know. Any additional 10 information I can look for it someplace else. This is called 11 information architecture in which we have a hierarchy of 12 information here. 13 Now, by the way, if you are one who rides this a 14 lot, you quickly learn the limitations of this map. For 15 example, you learn that you will never ever transfer stations 16 at Bank because although on the map they intersect, they 17 intersect only because you walk about a mile underground. 18 The same thing in Paris at the Chatelet stop. Never change 19 trains at Chatelet. You'll spend your life walking 20 underground in Paris. So there are limitations to this, but 21 it gives me the information that I'm looking for. 22 By the way, there's another map you can buy in 23 London that will tell you that information if you really want 24 it. So this is that which reduces uncertainty. Now which 25 map would you rather use? This one or this one? This is the 1 new New York City Subway Map. This is data overload. I 2 really don't need to know the route that the path train takes 3 to New Jersey if I'm riding the New York City Subway. I 4 don't need to know all those highways and streets that are 5 mapped on there. And notice also that the map is trying to 6 following the geographical layout and just for good measure 7 bus routes are thrown in. No one in New York City uses this 8 map. You can't. It is data overload. It's not information, 9 it is data overload. 10 How do I get from Point A to Point B? I bought a 11 different subway map. Everybody else does because it's 12 simplified and it gets rid of all this extraneous data. 13 So, if we think of the prospectus as a document 14 loaded with data but no information, because people look at a 15 prospectus to reduce uncertainty to make certain decisions. 16 As a simple example, I'm surprised no one has mentioned when 17 we go online to look for an airplane ticket, we want to know 18 when does the plane leave, when does it arrive and how much 19 will it cost me. Those are the first three questions we have 20 answered. After that, we may want to know my seat assignment 21 and then, you know, do they serve meals, what type of 22 aircraft. But notice that the first screens that you 23 interact with give you that essential information. That is 24 what data hierarch is. That's why it is so important that we 25 try to determine what it is that investors need to know. 1 But, if we look at the Internet as a means for 2 creating information, for transforming data into information 3 that the individual wants, then we will completely rethink. 4 We don't have to worry about using the information as a pipe 5 to deliver. It is not a delivery system, it is a medium for 6 creating through interaction. And it is not a replacement 7 for the Post Office. It is an entirely new medium for the 8 creation of information just as the development of moveable 9 type was when we moved from the oral tradition to the print 10 tradition. So now we need to think of it that way. 11 If we create a truly interactive means of 12 delivering this information, we don't have to worry what we 13 put up there. You can throw everything in there because 14 people will have the power to do it. 15 As one who has just purchased recently three 16 electronics on the Internet doing exactly what we're talking 17 about, I went on line, I said this is what I want to get. It 18 popped up, gave me three choices. I looked up each of the 19 choices for the features I wanted and made my decision. Then 20 I looked for the cheapest place to buy it. This is the way 21 we need to think about the delivery of data to anybody who is 22 going to invest in a mutual fund. 23 There is no reason why you cannot do exactly what 24 Barbara said earlier, why can't I ask for, "I want a mutual 25 fund with these features," and it will pop up or the three or 1 five or four. That's what I did when I was looking for my 2 DVD recorder. I said I want something that will do this. 3 And it popped up with five examples for me. This is how we 4 need to think about it. 5 I am very much a print person. I'm in English 6 literature -- and I also worked on the Profile Prospectus by 7 the way. If you go back into the files, you will find that 8 one of the three sample profile prospectuses was called "The 9 Grendell Fund." 10 (Laughter.) 11 I had to slip that one in and originally named it 12 the Rothguard, but nobody could pronounce that one. 13 So what we need to do is break from the print 14 tradition. And there is no reason why we can't use natural 15 language questioning to give the information and think we 16 solve a lot of problems that we're all worried about here. 17 The conflict between disclosure, liability and the 18 information that the investor seeks. Those are three 19 different purposes. And we have been trying to come up with 20 a mutual fund prospectus that does all three things for all 21 three functions and it doesn't work. It ends up being 22 unreadable. So we need to change the way we think about it 23 and use the Internet the way it can be used, to create 24 information for each individual. 25 MS. NASH: Thanks, Bill, those were informative 1 insights. 2 Paul, I know that the ICI has recently done some 3 research in the area of mutual fund investors' information 4 needs as well as fund investors' use of the Internet. Could 5 you share your perspective with us? 6 MR. STEVENS: Yes, Susan, thank you very much. 7 Thank you, as well, Buddy, and Chairman Cox and members of 8 the Commission for this opportunity to present the ICI's 9 views. 10 We believe the Commission deserves great credit for 11 recognizing that the time is right to seize upon the 12 potential of the worldwide web as a means to better inform 13 investors. In 2005, a survey that we conducted found that 90 14 percent of US fund investors have access to the Internet. 15 Most of them use it regularly. In fact, 90 percent of that 16 90 with access use it at least once or two times a week. The 17 vast majority of them are on line everyday. And that typical 18 among their uses of the Internet are for financial purposes. 19 But just as important and I think this is part of 20 the calculus here, the Internet can serve us far more than a 21 stand-in for paper documents, the current method that we use 22 to provide data or hopefully information. It can, in fact, 23 as you have observed, Chairman Cox, put investors in control 24 when it comes to information about their investments. 25 It is with this in mind that I'm particularly 1 pleased to be able to report that the ICI has launched what 2 we think of as a ground-breaking project to help realize that 3 vision. We are working to extend the XBRL taxonomy to cover 4 the risk-return summary that's included in all fund 5 prospectuses. 6 ICI has engaged Pricewaterhouse Coopers, the 7 experts in XBRL international there to help develop this new 8 taxonomy. We have also formed a very broad working group 9 enlisting our members along with other stakeholders who will 10 be involved in XBRL reporting for mutual funds. 11 We expect to complete the project by the first 12 quarter of 2007 and then we will launch an education program 13 to encourage mutual funds to use this tagging in their EDGAR 14 filings. 15 Now what, may you ask, is the significance of this 16 effort? The current XBRL tagging system for mutual funds as 17 you probably know principally focuses on financial 18 statements. For operating companies, the financials contain 19 most of the information that shareholders want. But for 20 mutual funds and for fund investors, financial statements 21 frankly are of secondary importance. By contrast for almost 22 a decade under the SEC's disclosure rules, the risk-return 23 summary has highlighted the crucial information that 24 investors use in deciding which funds to buy. 25 Now, ICI research about the use and preferences for 1 information among fund shareholders and investors confirms 2 that recent fund buyers look primarily for information that 3 is included in this risk-return summary. It's information 4 such as the fund's fees and expenses, its historical 5 performance and its risk characteristics. XBRL tagging can 6 help turn the risk-return summary into an even more powerful 7 tool than the Commission envisioned when it first adopted it 8 in 1998 as a way to help investors compare one fund with 9 another through the standardization of the information and 10 the format in which it's presented. 11 Now, to our knowledge, ICI is the only US financial 12 services industry organization actively working to extend 13 XBRL beyond financial data. Widespread use of this new 14 taxonomy will introduce millions of investors and their 15 advisors to the benefits of XBRL and we are proud to be 16 leading this new effort. 17 Beyond XBRL, we would urge the Commission to 18 consider other reforms that will help bring fund disclosure 19 into the 21st Century. In the new system we would encourage 20 you to consider, funds and their intermediaries could deliver 21 a clear concise disclosure document at least to those 22 investors who have not affirmatively opted to receive 23 information online. The document could be much like the 24 profile prospectus. It would include a prominent statement 25 that additional disclosures, detailed disclosures that is to 1 say the prospectus and statement of additional information as 2 they exist today would be available on the funds website or 3 upon request in a paper form. 4 That sets up sort of a win-win system it seems to 5 us. All investors would receive the most important 6 information about a fund, the information that they consider 7 to be most important. It would come to them in a form far 8 more likely actually to be used by them, but all investors 9 and other market participants would still have available the 10 full panoply of information that's contemplated by the 11 Commission's disclosure rules. 12 Now, in addition, it seems to us quite clear that 13 substantial numbers of investors are prepared today to rely 14 exclusively on electronic communications with their fund 15 company. And to serve this group of investors, the 16 Commission should clarify its rules that it will allow 17 Internet-on funds or fund share classes in a way that is not 18 possible today. 19 We believe as other panelists this morning have 20 indicated that the Commission should harness the power of the 21 Internet as a tool for providing important point of sale 22 disclosures to brokerage customers. And, frankly, we would 23 agree with NASD Chairman Bob Glauber that this should extend 24 not just to mutual funds but also to ETFs, separately managed 25 accounts and annuities, products as to which point of sale 1 disclosure information is no less important. 2 In summary, if we take advantage of the best that 3 the Internet offers, we can craft a fund disclosure system 4 that will serve the broad interests of the financial market 5 place and also the interests of average fund investors. 6 Disclosures that millions more shareholders actually use, 7 that it seems to us would be a true revolution and it is one 8 that is within our reach. 9 Thank you very much. 10 MS. NASH: Thanks, Paul. The extension of the 11 taxonomy to the risk-return summary is an exciting develop 12 and we appreciate your efforts in that regard. 13 Moving to Tim next. Tim, you have a particular 14 vantage point as one who is really responsible for using 15 technology to actually communicate with millions of your 16 investors. Can you share your insights with us? 17 MR. BUCKLEY: Sure, Susan, thank you. And thank 18 you to Chairman Cox and Commissioners. We're thrilled to be 19 here. I'm thrilled to be here on behalf of Vanguard to 20 discuss interactive data and leveraging the Internet. 21 It is clear there is a lot of momentum building. A 22 lot of momentum today around revolutionizing disclosure. And 23 we at Vanguard believe the time is right. Why is the time 24 right? The data standards are there. The standards for 25 sharing information, making it accurate, timely and easy and 1 also convenient. 2 On top of that, the Internet is where people have 3 gone to invest. In many ways the revolution has already come 4 to investing. And I'll just give you some good data on the 5 penetration of the Internet to investors. But I'll give you 6 a little bit about Vanguard's background. 7 This is something we've been doing for about 11 8 years now. We launched Vanguard.com in 1995. It was more of 9 a curiosity then. People went out there and they weren't 10 inundated with information. In fact, they only got a couple 11 of things. They get fund prices and yields and some 12 objectives on funds. Only a few thousand people went there. 13 but by 1998 when we started putting account balances out 14 there, it was amazing. People started going. They had a 15 reason to out there to check the web. 16 And then in 2000, people could manage their whole 17 portfolio online. We saw a million people go out there. And 18 today we have 4 million people online. Eighty percent of our 19 contacts come in through the web. We will on a busy day have 20 500,000 people log on and check their account and interact 21 with Vanguard that way. 22 So what does this tell you? It tells you that 23 people have matured online. They have matured already. And 24 they are ready to embrace a change in disclosure, a change in 25 the way we flow information to them. 1 So how do you get at that? What do you do? Well, 2 an essential part of it is tagging the information and making 3 it easy and not doing it in a proprietary way. With XBRL and 4 the work of the ICI with specifically XBRL for investment 5 management, there are the tags out there that we can easily 6 share information so that when we tag it, it can be easily 7 produced somewhere else. So you can get information on the 8 Vanguard Funds whether at a competitor's site, whether at the 9 SEC site or at the Yahoo! or a Google. But that information 10 can be published in a timely and accurate way. So it's out 11 there. 12 One caution I would have, though, is that let's not 13 go about tagging everything we possibly can tag. I'll be the 14 IT guy here for a second and say, well, that's a sure-fire 15 way to end up escalating costs beyond where they need to go. 16 First, we need to decide what is the most relevant 17 information. What information do we want people to act on 18 and prioritize that information. There are over 700 tags in 19 the library. I won't go through each one of them. We have 20 limited time. But there is a lot of great information in 21 here and there is a lot of information in here the investor 22 would not know what to do with. It would look like the old 23 London subway. So we need to prioritize those tags. 24 It is something we have done at Vanguard. If you 25 go to our site and you look up one of the Vanguard funds, you 1 will see that we have tried to give a concise snapshot, a 2 snapshot of the information that is essential to making an 3 investment decision. And it's high level information, but 4 you can drill down on it and get more in-depth information 5 and you can actually drill down and get access to the 6 prospectus as well. 7 We on a daily basis have millions of visits to 8 those web pages to get information on our funds. And it is a 9 rare event that somebody will call Vanguard and not have 10 looked at that website. They will have looked at it for 11 information, become more educated to ask us questions. And 12 it much the same for our advisory business. We have 13 thousands and thousands of advisors who use our website as 14 well for support material on our funds where they can easily 15 get information to share with their investors. 16 So what do we envision going forward in the future? 17 We would love to see what we do on a proprietary basis be 18 done more broadly, be done across the industry where you 19 could pull up not a Vanguard site but maybe it's at the SEC 20 site or maybe it's through Yahoo! or Google, you could pull 21 up a Vanguard fund and you could pull up an American fund and 22 you could compare those as an advisor or as an investor. You 23 could compare them easily with standards that are out there, 24 but not standards across 700 pieces of information but maybe 25 the 10 or 12 that matter the most. Information along the 1 way. 2 So how about the long run? Well, we certainly 3 believe that tagging more information would benefit, would 4 benefit many people. Maybe not the massive investors but 5 certain other parties, more sophisticated investors would 6 benefit from it. But, again, I do worry about just opening 7 it up to say let's keep tagging the whole universe. Rather, 8 let's define the universe first. Let's know the road that 9 we're taking and the end that we want to achieve. Let's 10 decide on the criteria we want to use. 11 We have experience of building these tools before 12 to search against fund criteria and we can tell you there is 13 certain criteria that are used and certain criteria that are 14 never used and actually very few people use the really 15 in-depth sophisticated searches. They rely more on those 10 16 or 12 pieces of information. 17 So overall, we're very excited about what the 18 Commission is up to around changing disclosure and really 19 around leveraging technology, leveraging data tagging, 20 leveraging the Internet. We think great things can happen 21 especially over the short term as we adopt XBRL standards. 22 Thank you. 23 MS. NASH: Thanks, Tim, an interesting perspective. 24 Paul, your firm often communicates through 25 financial intermediaries. Can you give us your perspective 1 on how the Internet would be helpful in that environment? 2 MR. HAAGA: Thank you very much, Susan, and thank 3 you for having me participate in this. 4 I think everything has been said but not by 5 everybody. And so I've got a written statement in which I 6 address a lot of the questions that my colleagues have 7 addressed and I think I'll just rely on that and maybe try to 8 add a few perspectives to what they've given. 9 The first is the question that Chairman Cox asked 10 previously about the use of XBRL and data tagging by research 11 analysts. I know you're going to hear a lot about that this 12 afternoon but let me just weigh in on behalf of our research 13 analysts. While they don't use XBRL itself extensively 14 because there is a limited number of companies that have 15 that. They are very interested in it and they do use I think 16 FAX Set and there's a Capital ID is another one. But we are 17 very encouraging as analysts about the use of these tagging 18 and data search protocols. 19 Second is that everybody has talked this morning 20 about the point of sale and the investor buying shares. And 21 that's understandable because the disclosure obligations are 22 keyed off the investor's purchase of shares. But I think 23 that's the third most important time that investors need in 24 their investing life. The second most important is while 25 they're owning the shares and the very most important is 1 while they're withdrawing their shares and trying not to 2 outlive their income and retirement. And that I hope that 3 while we're focusing on the information needs of the 4 purchaser we can also remember the owner and the withdrawer 5 because they are very important as well. 6 Third, we're talking a lot about delivery and about 7 the types of information that people need, the categories of 8 information. While we're doing that, let's not forget that 9 vocabulary matters. It's much harder to regulate, it's much 10 harder to specify and, yet, the difference between knowledge 11 and information is really going to make or break this effort. 12 I am reminded of what happened in 1994 when the 13 bond funds tanked. This is a true story. There was a bond 14 fund investor who stood up at a shareholders meeting and was 15 very upset about the law. He said, "You know, I understood 16 that my account value could fluctuate, but I didn't think it 17 would go down." 18 (Laughter.) 19 As Chairman Cox eloquently said capital markets 20 rely on trust and jargon and legalese are not trusted by 21 investors. 22 And, fourth, while I think it's very important and 23 I certainly agree with Chairman Cox and others that simply 24 moving information data pages from paper to the website 25 shouldn't be our only goal. We should also find better ways 1 to research and use them. 2 At the same time there are some very immediate 3 benefits that can be gained simply by moving some paper to 4 the Internet. Several of my colleagues have held up pieces 5 of paper or piles of paper. Let me go them one better. One 6 of our mutual funds, Growth Fund of America, when it prints 7 its annual report, it fills 17 tractor-trailers. Of that 8 material, just taking out the actual report letter and just 9 focusing on the financial statements which, frankly, I think 10 especially the footnotes are the part that is least often 11 read. That is 600,000 pounds. Six hundred thousand pounds, 12 three hundred tons, one fund, one report and they do two a 13 year to 5.6 million people. 14 If that information could be put on the Internet, 15 there would be a direct and immediate savings to 16 shareholders. So, let's please put some things up on the 17 Internet that are now in paper immediately while we are 18 developing our data tagging and search capabilities. 19 Thank you. 20 MS. NASH: Thanks, Paul. 21 I'd like to switch gears now and have interaction 22 among the panelists and with, hopefully, the Commissioners. 23 So I'll invite the Commissioners to join in with any 24 questions. 25 CHAIRMAN COX: Well, while people are thinking of 1 their questions, I just want to make sure I understand your 2 last point. Can you give us a little more detail about 3 that. I want to make sure I understand exactly what you're 4 describing with all those tractor-trailers. 5 MR. HAAGA: Right. The mutual funds I think 6 because they are corporations they get confused with being 7 businesses. And the securities law require businesses to 8 send out financial statements and that includes footnotes 9 describing valuation methods and other things, a lot of 10 things that never change. 11 The only important part of the financial statement 12 for a mutual fund is the expenses and the summary portfolio 13 and, yet, there are multiple additional pages that are both 14 the full financial statements and the footnotes to those 15 statements and they have to be mailed out to shareholders. 16 We can save a little bit by house-holding, but they have to 17 be mailed out to shareholders every six months. 18 And I can't imagine they are looked at or read, but 19 a person who owns our funds for 20 years gets them 40 times 20 in paper. I'll bring a copy of the report. I won't bring in 21 a tractor-trailer. 22 CHAIRMAN COX: Actually, I get the point. You 23 don't need to bring it in at all. 24 Well, while I've got you, I take it that, from your 25 remarks, that if XBRL tagging were more generally available 1 that your analysts would make great use of it. 2 MR. HAAGA: Yes, definitely. 3 CHAIRMAN COX: And is that the sense of other 4 panelists? That in addition to what we've been focused on 5 that within mutual funds there would be great utility to 6 this? 7 MR. BUCKLEY: Well, whether it's the people 8 managing the portfolio or the mutual fund shareholders 9 themselves, the benefits are much the same. When you think 10 about information once it's tagged you know it's tagged at 11 the source. So it's at its most accurate point, if you will. 12 And then it can be delivered in a timely fashion when it is 13 tagged and then it can be published or pulled, that that's 14 almost instantaneous. And so you don't have to wait to get 15 that from a third party. 16 Morningstar does some great work for fund investors 17 but, yet, we have to wait until that data has been aggregated 18 and then it's published from them. When it's tagged, it can 19 be taken straight from the source. So that goes for our fund 20 managers as well. They see the same benefits on tagging of 21 other securities information. 22 COMMISSIONER GLASSMAN: How difficult is it to 23 develop the taxonomy? It's easier for mutual funds I think 24 than corporations; but in general, how difficult is it? 25 MR. STEVENS: I can report only second-hand 1 information, Commissioner Glassman, because I am not involved 2 in the effort myself. But what I could say is that the 3 process we will follow will be getting sort of a straw man, a 4 taxonomy that Pricewaterhouse Coopers and the experts that 5 are resident there will develop for us. 6 We will then have a very large working group who 7 will go through in considerable detail just to make sure that 8 there is agreement about the architecture that's been put 9 together so that people will buy into it. And at that point 10 it will include, as I have said, the elements of the 11 risk-return summary. 12 If memory serves and I don't know that I remember 13 the exact number, but I believe it is something in the order 14 of 157 particular data elements that would be tagged within 15 this portion of the prospectus. After that, individual funds 16 would have to go in and look at their own risk-return 17 summaries on a fund-by-fund basis and apply the tags. There 18 would have to be some attention to doing this accurately 19 because when it is done by third parties in particular there 20 will be a degree of error that is probably greater than we 21 would hope for. 22 So it is a fairly painstaking effort just with this 23 fairly confined portion of the current prospectus, the 24 risk-return summary. 25 And then after the dataset, the taxonomy is put 1 together, you actually have to have an organization that will 2 maintain it over time. And the Institute is wrestling with 3 what our role or some other organization's role would be in 4 that regard. Depending on how many tags, I'm told, you have 5 some way of calculating how many full-time equivalents you 6 would have to have. But that gives you a sense of the effort 7 just with respect to this portion of the prospectus. If you 8 tried to tag all of the data that Buddy had in those redwell 9 folders over there, it would expand many, many times. 10 That may eventually where we get, but we are just 11 embarking on a road and our focus has been what's going to be 12 most important for individual investors and, in particular, 13 the key information that the Commission had identified that 14 is of real significance to them. 15 MR. BUCKLEY: And I'll comment a little bit on the 16 actual tagging of the information. Once the taxonomy is 17 established, as long as we are tagging information that's 18 fairly common and you expect the information that's so 19 critical to investing to be common, that at least for 20 Vanguard it would be a fairly easy task. That's held in 21 enterprise data stores and the such. So it's easy to do. 22 Tagging can get very complex and expensive when you 23 start tagging exotic instruments and things like that when 24 you want to know every single holding of a fund, not just the 25 top 50 holdings. So it is all in how we define what we want 1 to tag that will define the costs. 2 I can't speak for the smaller companies, they may 3 have a different challenge, but certainly you could expect 4 common information can be tagged very easily and especially 5 the information we've talked about today. That could be 6 tagged more easily than the more detailed information down 7 the road. 8 COMMISSIONER CAMPOS: If I could just interject a 9 little bit. If we go back to Professor Lutz's very revealing 10 lecture where information is that which reduces uncertainty, 11 and I'm just thinking because everything else is data, what 12 really does meet that threshold as to information. It seems 13 as if you are almost requiring an analytical element or else 14 it's just data. Right? 15 So I'm just wondering if you're promoting the 16 concept that something beyond the data elements that we've 17 come to think about in terms of this is required? In other 18 words, is there an analytical, an interpretive component 19 that's necessary for it to be useful to investors and should 20 we be thinking in some terms like that for the future? 21 DR. LUTZ: Well, we all create information. What 22 is information to one person may not be information to 23 another. As we have even heard in the panel this morning, 24 one investor might want to focus on one aspect of a mutual 25 fund and someone else may not care about that at all. So we 1 create the information. 2 What we are talking about particularly with XBRL 3 and with the use of the Internet, I can go in and ask 4 questions to get the information that I want based upon the 5 data that is presented. 6 I think the problem is -- and someone said earlier 7 -- that we have been trying to tell investors what is 8 important to them and I don't think that's going to work. It 9 hasn't worked. I think that was what we tried to do when we 10 thought if we rewrote the prospectus into plain language 11 everybody could understand it and make informed decisions and 12 that never worked. 13 I think what we can do now is say to people, 14 "Here's the data. Look for your information." And I can, 15 you know, put on my turban and start predicting the future, 16 but I don't think it's too difficult to see that at a point 17 there would be third party vendors who are going to sell or 18 give away software packages to investors to access that data 19 in the way that they want it. I mean we do this already now 20 in a limited way on the Internet. 21 It would probably would be packaged with my next 22 version of Quicken or Microsoft Money. I mean they already 23 have sophisticated tools there now. 24 I think we have to get away from this idea that we 25 are going to tell people, give them this information. They 1 are going to create it. What our job is is to get the data 2 and as others with more expertise than I have said, we have 3 to do it with the XBRL and overcome those technical aspects. 4 But we can see already from Vanguard and from any number of 5 other sites that people are willing to go in there and get 6 their information. 7 Again, I will use the analogy of the travel 8 websites and how quickly they just pretty much ended the 9 travel industry as travel consultants because we can do it 10 now. And we do it not because those websites tell us what we 11 should know. They simply allow us to find the information 12 that we want and I think that's what we are talking about 13 here. Let the investors be able to find quickly and easily 14 the information they want. And there's been enough research 15 that's been done that we have got a pretty good limited 16 universe. 17 When we worked on the profile prospectus years ago, 18 we quickly came up with the 10 questions that got to the 19 heart of things. And I don't think that has changed all that 20 much, not substantially in the years since. So that is what 21 we're talking about and that's what I see is the promise of 22 this. 23 I'm sorry to keep repeating this, but I think we 24 have to keep clear in our minds that there is a difference 25 between data and information. And also to not think of the 1 Internet as a pipeline even though we like to use this 2 metaphor. If we think of it that way, we're not going to 3 really use it. It is a medium, an interactive medium that 4 creates information. 5 One brief analogy, nobody buys an album anymore. 6 They download their play list. They create their own albums. 7 I was in London in April what I think, one of the 8 more significant events of my lifetime took place. The 9 number 1 song in England, top of the charts was available 10 online. It did not exist on a CD and there were no plans to 11 put it out as a CD either. And that to me is significant. 12 We have interactive television. We have television 13 on demand. This is the way things are going. We will all 14 create -- we create our own newspapers on line. We I think 15 need to start getting the investment community into this mix 16 quickly where investors can create their information and we 17 will simply provide them with the tools. 18 MR. DONOHUE: A question for the panel. 19 Paul, did you have a comment you wanted to make? 20 MR. STEVENS: Commissioner Campos, this history is 21 one that is particularly important to understand about how 22 the profile or how the risk-return summary was developed. 23 Bill was there. I was involved when I was general counsel of 24 the ICI, but there was an effort to make at least this part 25 of the prospectus to be informative and not just giving a lot 1 of data. It really was the intent to make it the better 2 London subway map. 3 And just to give you one example, how do you 4 explain to people like Paul Shareholder that funds can 5 fluctuate down as well as up in value? Well, there's a bar 6 graph that's here of the total returns of the fund over time 7 which was intended graphically to emphasize it can go below 8 zero and it can go above zero as well. 9 So there has been a good bit of thought given by 10 the Commission, its staff, by outside consultants and others 11 to making at least this part of the required disclosure more 12 than just data to make it informative. 13 MR. DONOHUE: A question I have for the panel, what 14 would you think the appropriate role for the Commission in 15 what really is an evolution that's going on such that the 16 Commission doesn't wind up being an impediment or rather may 17 help as a facilitator? 18 MR. HAAGA: I think the Commission -- and thank you 19 for not wanting to be an impediment -- the Commission, what 20 they really need to do, they do need to specify some minimum 21 amounts of information. It's clear. And I think adopting 22 something along the lines of the profile would be good. We 23 have talked a lot about the Profile Plus and I was also 24 involved in developing that. 25 But one of the things we did was to find out what 1 information people want. We went and looked at what they pay 2 for and what they pay for, by and large, is the Morningstar 3 one-pagers that had concise information in the same place for 4 every fund. 5 And so I guess I would commend the Commission to 6 please just, you know, enact a profile that would involve 7 some standardized placement of information and types of 8 information and then let other things go. Relax the 9 advertising rules, at least the delivery requirements 10 relating to the advertising rules, allow more information to 11 be developed by the funds themselves. And I think you will 12 be pleased by the outcome. 13 MS. NASH: One of the things I think that people do 14 like about Morningstar is that you find everything in one 15 place in the same order. In some of the past iterations that 16 the Commission has gone through on disclosure reform, the 17 industry has asked for flexibility in presentation, 18 flexibility in presenting one fund by itself or multiple 19 funds together, that kind of thing. 20 I would ask the panelists for their views on going 21 forward as we begin this process do you think the Commission 22 should be more prescriptive, less prescriptive than it's 23 been. Because one thing I hear Bill and I think Barbara 24 saying is that information architecture is very important, 25 how it looks, how it feels, how you get at it. 1 But I have a question about whether the Commission 2 can ever really be the one to specify exactly how that should 3 all work. I am wondering what the panelists think about that 4 issue. 5 MR. BUCKLEY: Information architecture is very 6 important but we have to realize that at Vanguard we serve 7 very different client groups. And for each client group we 8 will have a different information architecture. 9 What is more important is that the Commission come 10 out and say here are the 10 or 12 pieces of information we 11 want to make sure are there on every page and not get caught 12 up in the visual design. 13 We have best practice in visual design we're 14 willing to share. But let us architect it according to our 15 website, according to our clients and according to our 16 experience and let's worry about the information that is on 17 the page, the 10 or 12 important pieces of information. 18 Because we do have a fiduciary duty to make sure they see 19 that information. And different shareholders will see it in 20 a different way. A 401(k) participant is not the same as a 21 retail participant -- sorry, a retail shareholder. And a 22 retail shareholder for us is not the same as an advisor. 23 MR. STEVENS: Susan, it seems to me that your 24 question and Buddy's are a little bit related. I think some 25 degree of flexibility is appropriate and some degree of 1 standardization is as well. And perhaps you can look at this 2 at least with the portion of the prospectus that would be 3 data tagged in such a way that, well, if it was not presented 4 exactly the same way, the fact that it is tagged would make 5 it accessible and would provide a tool that would facilitate 6 additional flexibility. 7 The other thing I would say is that the Commission 8 should take a very serious view about trying to avoid adding 9 to the key body of information, make a serious judgment now 10 and try to adhere to it. Because one of the things that we 11 have experienced is that under the pressure of events, the 12 spotlight of a particular situation, some new disclosure 13 items becomes all-fired important. And it may be to some 14 people, it may be for some period of time. But, you know, I 15 mean we've gone through this history together in so many ways 16 and I think that we understand that there is a body of 17 information that is all weather and it ought to be there. 18 And so resisting changing that body I think is going to be 19 something that would be important for the Commission to try 20 to discipline itself around as well. 21 DR. LUTZ: One of the things that I run into in the 22 corporations that I work with in financial disclosure is the 23 extreme conservatism in presenting data. They are afraid to 24 make it look, well, to use the terms of Chairman Cox, to make 25 it look like USA Today Money Section. They are really afraid 1 to do that for any variety of reasons. 2 I think the more that the Commission can encourage 3 companies to be creative in disclosure as long as it does not 4 mislead or distort but really and truly communicates, that's 5 the first thing. 6 The second thing is that if you're doing this on 7 the web, there is no more harsher audience than the people on 8 the web. If your site doesn't work, you will pay for it and 9 you will find very quickly that you're going to have to 10 change your ways. And I think the public will educate you 11 very quickly. But I do think more encouragement for people 12 to use information design and to do things in a creative way 13 to communicate with people would really help because 14 companies are, quite frankly, afraid to try something new. I 15 mean, "The old 8-point type worked just fine, thank you. And 16 we'll stay with that." And even if they know it will be 17 better, nobody wants to take the risk. 18 And I think a second thing and I am surprised no 19 one has mentioned this and I'm going to wear my other hat as 20 a lawyer, is there are legal issues in the regulatory issues. 21 I think we need to take a look at what's holding companies 22 back because they're afraid of or they don't have a clear 23 understanding that this is okay according to the regulations. 24 And I think we need to take a look at those as well. 25 CHAIRMAN COX: Well, may I take the opportunity 1 then to ask you a question? You said that companies aren't 2 willing to take the risk. And earlier in your prepared 3 remarks you described three distinct purposes that we're 4 trying to achieve with our mutual fund prospectuses. They 5 are not necessary in consonance with one another and yet 6 we're trying to do them all in the same document. 7 Do you have any suggestions of how we might 8 differently attack this problem so that we can achieve each 9 of those three separate purposes perhaps in a different way. 10 In particular, the liability piece. 11 DR. LUTZ: The liability is always the first thing 12 that I run into when I work with companies. And they 13 interpret liability to mean if I vary from the previous 14 format, form or wording, then I'm getting into liability 15 trouble. And it is only if I can show them an example of 16 someone who has done it and hasn't gotten into trouble that 17 they're willing to do it. 18 I do not think that liability and disclosure and 19 information that the investor seeks are mutually 20 incompatible. Stop and think. If we make the disclosure 21 accessible, informative and easily understandable, what's the 22 problem? We have covered information disclosure and 23 liability. 24 And I think that we need to take a broader view and 25 not have -- everybody is worried about their own little area 1 and I think we have to see all of this as -- 2 CHAIRMAN COX: This problem is exactly as you 3 described. And even though you are exactly right about why 4 people shouldn't behave that way, they do. And they do even 5 though you and others have amply explained to them the 6 benefits of behaving differently. What can change this? 7 DR. LUTZ: I think I would go back to the original 8 plain English project when we made the decision to show not 9 tell. And I think the pilot project that we are currently 10 doing with the XBRL is exactly the way to go. 11 We did a similar pilot project. We rewrote the 12 MD&A's into plan language. We rewrote mutual fund 13 prospectuses into plain language cooperating with companies. 14 They used it as their filings. They had no problems with 15 their filings. Then we could go out to others and say, "Go 16 thou and do likewise and you will not suffer." And that made 17 a big difference. 18 I think we have to do it by showing people how to 19 do it, showing that they won't get into trouble if they do it 20 this way. And then they can imitate it. We all learn by 21 imitation. 22 MR. STEVENS: Let me see if I can take a stab at 23 this because it is extraordinarily important to the success 24 of any kind of initiative in this area. 25 I think one of the ways we get hung up is on the 1 language that we use around these issues. And securities 2 lawyers are always talking about the delivery of the 3 prospectus. 4 Think about the mutual fund prospectus. How do we 5 deliver it? We put it in the mail. It comes to someone's 6 mailbox. They've got to go get it out of the mailbox. 7 They've got to sit down, open the envelope and read it. But 8 we are hung up on this notion of delivery. 9 CHAIRMAN COX: You skipped a step. They have to 10 schedule a few hours to do that. 11 MR. STEVENS: Yeah, take some time out of their 12 busy schedule, right. 13 CHAIRMAN COX: That's right. 14 MR. STEVENS: But what we're really doing is making 15 the information available to them. And that's how I think we 16 need to think about what the law requires of us. And what 17 Bill has described about the Internet, it is at least as 18 good, and if we make the information of a higher quality and 19 more useful, an even better way of doing exactly the same 20 thing effectively that we do via the US Postal Service making 21 the information available. 22 And, therefore, if it has been made available to 23 the investor via the Internet, it is no less effective from 24 the point of view of "delivering the prospectus" for the 25 securities laws purposes. I think, you know, you need to 1 conceptualize what it is that the law requires of us. 2 Now, what we're trying to do is develop -- 3 CHAIRMAN COX: Do I understand you to be saying 4 that you can deliver the legally tested boilerplate which 5 nobody except the courts and the lawyers can understand 6 because it's part of what's available on the Internet, but 7 then if you put a plain English gloss on top of it that makes 8 it clear what the heck you are talking about, you won't get 9 in trouble for skipping the other? 10 MR. STEVENS: No. I think the point is to try to 11 improve the quality of all of the disclosure. 12 The point is the system as it now delivers a mass 13 of information or data and you do not perfect the delivery on 14 the basis of whether someone finds that to be useful or 15 actually indeed uses it. 16 So, via the Internet, you're accomplishing the same 17 purpose but with the hopes of actually doing it in such a 18 form that people will put it to use and find it altogether 19 more valuable than what they do in the current system. 20 In sum, the liability question has got to be 21 answered, but I don't think it's that hard. The harder thing 22 is how you craft the information when it is delivered in an 23 alternative way in a way that will invite people to use it 24 more effectively. 25 MR. HAAGA: This is not a liability comment, but I 1 think we shouldn't lose sight of the flexibility that putting 2 things on the Internet gives us. Right now when we prepare a 3 prospectus, we have to have a document that we really hope is 4 going to last a year because we send out 17 tractor-trailers 5 full of prospectuses; whereas, if we get stuff up on the 6 Internet there will be the flexibility to update and improve 7 things as time goes by. I think that will give us a lot of 8 comfort being a little more flexible and experimental in what 9 we say. 10 DR. LUTZ: I just want to quote Arthur Leavitt 11 whose favorite comment was, "Disclosure is not disclosure if 12 it doesn't communicate." 13 MR. DONOHUE: A question for the panel. The ICI is 14 taking the lead right now on developing the taxonomy. What 15 would be the most productive steps and the role of the 16 Commission that would be envisioned by the panelists as that 17 process progresses and reaches some observations, 18 conclusions, recommendations? 19 MR. STEVENS: Well, first, we very much hope that 20 you will take part in the working group. I think there will 21 be members of the staff who will be taking part because we 22 want to make sure we get the effort correct. 23 I think once we have the taxonomy developed 24 thinking about what incentives can be provided to mutual 25 funds to begin filing their EDGAR filings with the tags would 1 be useful. It is not as important to my members to get, you 2 know, accelerated effectiveness of their filings and things 3 of that nature, so perhaps some other incentives could be 4 looked to to encourage a voluntary program. 5 CHAIRMAN COX: Do you have any suggestions? 6 MR. STEVENS: Well, I think looking at the 7 XBRLized, if that's a verb, risk-return summary and how it 8 would fit in as a part of a broader disclosure reform would 9 be a huge incentive. Because if you had a larger group of 10 funds that were involved in that voluntarily and the 11 Commission made it clear that over time it wished to move to 12 a point where, you know, the profile would be the principal 13 document that's provided and the rest of the information 14 while we continue to improve it and its utility would be put 15 on the Internet, that would be a tremendous incentive, I 16 think. That's the broader concept of the kinds of reforms 17 that the Commission could consider and that this effort would 18 fit into. 19 MR. HAAGA: Yeah, I think that we have enormous 20 incentives to participate beyond just the XBRL part because 21 the entire project here is enormously valuable to us and to 22 our shareholders. 23 DR. LUTZ: I think pilot projects are extremely 24 useful. They are practical. They uncover problems. They 25 give solutions. And they build a spirit of cooperation and 1 confidence and trust and provides a means to show people the 2 way they should be going and the way they can go. 3 I think taking the Profile Prospectus maybe and 4 doing something with that in cooperation with companies who 5 would volunteer. It builds a sense of confidence and 6 understanding. And we all learn together as we work on it. 7 MR. BUCKLEY: I'll just comment quickly here. If 8 it is that that profile that's on line, the concise 9 disclosure, and we don't have to deliver the truckloads of 10 prospectus and all, then there is a huge financial incentive, 11 but there is also one where when we look at it, so as a 12 mutual company, we pass those financial benefits onto our 13 shareholders. But that is not even the greatest one. 14 The greatest one is that we will actually know that 15 our shareholders are getting better disclosure, that they're 16 getting this information in a more timely way and in a more 17 interactive way and one that can be easily absorbed that's 18 useful and usable especially if we have picked those 10 or 12 19 critical elements to show in that concise presentation. 20 I think there is huge incentive if we know what the end is is 21 out there. 22 MS. NASH: Just to hark back to one concept that 23 Barbara Roper raised. She talked about the importance of 24 investor education. I guess my question for the panelists is 25 if we move further to doing disclosure through the Internet, 1 does it give us a better chance to integrate investor 2 education with disclosure of a fund's particular information. 3 Or are those two functions that are separate and we should 4 look at them separately? 5 MR. HAAGA: I'll start. I think disclosure and 6 education should be looked at together and I think one of the 7 mistakes we've made in the past is conflating the two and 8 thereby putting too much burden on the prospectus as serving 9 too many purposes and too many masters. And I think if we 10 -- I've already mentioned the flexibility of using the 11 Internet -- we use advisors, as you know, to work with our 12 shareholders and so we are not, happily, relying solely on 13 the Internet or on our mailings to do all the education 14 function. Nonetheless, even we think we can improve things 15 if we get more flexibility. 16 MR. BUCKLEY: We, of course, deal with the advisors 17 as well as the direct investor and I'll use the direct 18 investor here. They certainly use the educational tools we 19 put out there but not in the amount that you might think or 20 might hope. So we have always taken a different approach 21 which is let's put something out there in plain English so 22 they don't need a pop-up. They don't need someone to explain 23 what fees are. They don't need someone to explain what 24 holdings are or what information they should be looking at. 25 That that should be actually part of the actual disclosure on 1 the fund that is on the web. That it is easy, so easy to 2 understand that you don't need the education. 3 Education is out there and it is probably on many 4 of the sites already today. But the ideal here is to make 5 these concise and clear in what we present on our funds 6 online. 7 MR. STEVENS: Susan, I think again that the 8 educational purpose will be advanced by a focus as tight as 9 possible on what the key information you want to impart. 10 There has been a lot of emphasis in our marketplace on 11 consideration of the effect of fees and expenses on long-term 12 performance of mutual funds. 13 I think the research information now indicates that 14 recent fund purchasers have looked at that as a key element 15 of information. If you look at trends in fund fees and 16 expenses, they are down considerably, even The Wall Street 17 Journal's report of our most recent research today. 18 That it seems to me is an educational success. And 19 if there are five or six other bits of information that you 20 really want to drill into the investing public, this is the 21 key stuff that you ought to be focused on, then that sort of 22 high quality document that you will draw people's attention 23 to will have a very direct educational benefit. 24 DR. LUTZ: I think also, again I'm going back to 25 the interactive nature of the Internet, that you can serve 1 whether somebody is just a beginner or a sophisticated 2 investor, that website will serve them. 3 I don't know if you are a fan of Wikipedia, but if 4 you look up something on Wikipedia, you can get all the 5 backgrounds you need as you read the article and if you need 6 to branch off and come back, it's a very rudimentary way of 7 using the Internet. But it shows you the possibility that 8 you can educate the investor even as the investor is just 9 looking for basic information. 10 If you go to the IBM website, they do this in a 11 limited way with their online annual report where they have a 12 section that says, "How to read our annual report." And they 13 go through and they take each section of it in the financial 14 section and then they'll saying, "This is what these numbers 15 mean." And then you can link over to their current report 16 and then after you have read what cash flow is supposed to 17 be, you can go over and look at the IBM cash flow for that 18 report. 19 So, again, we need to think of the expansive -- it 20 is, you know, people have to start reading science fiction to 21 understand what's going on. The word "cyberspace" comes from 22 science fiction. Cyberspace is unlimited. We are still 23 thinking of print in bound books. There is no limit when you 24 get on the Internet. And when you get into that area of 25 information, it is infinite. We have to stop thinking of 1 books. I mean it's tough. So we can educate investors. We 2 can inform them. And we can give the financial analyst the 3 information all in the same website if we think about the way 4 that we should be using it and the way we should be designing 5 it. 6 MR. DONOHUE: This morning's panels have given us 7 much to reflect on. I want to thank each of our panelists 8 again for taking time out of your busy schedule to join us. 9 Your perspectives have been very illuminating. 10 Before we adjourn, I would like to acknowledge 11 several members of the Division of Investment Management who 12 along with Susan Nash and Susan Wyderko, labored hard and 13 long behind the scenes to make this morning's session 14 possible, Brent Fields, Chris Kysa, David Schwartz, Debbie 15 Skeins, Dui Chang and Evelyn Malone. 16 That wraps up this morning's sessions. The 17 roundtable will convene again at 1:15. Thank you all. 18 (Whereupon, at 12:17 p.m., a luncheon recess was 19 taken. Reconvened at 1:18 p.m.) 20 SESSION TWO: GETTING ANALYSTS AND INVESTORS SIGNIFICANTLY 21 BETTER INFORMATION 22 CHAIRMAN COX: Good afternoon. Welcome now to the 23 second half of our program. I want to thank you once again 24 for all coming today. Perhaps we have had a little bit of 25 in-and-out and not all the same people. We have a very, very 1 outstanding panel awaiting us and I want to make sure that we 2 give ample time for that. 3 This morning we explored the potential of 4 interactive data and the Internet to make mutual fund 5 information more user friendly to the individual investor. 6 This afternoon we are going to be focused on ways that 7 interactive data can improve the usefulness of information 8 provided by companies of all kinds to investors of all kinds, 9 large and small. 10 For institutional investors just as much as for the 11 more than 40 million individual investors in the United 12 States of America who directly own stocks, interactive data 13 offers the opportunity to analyze companies with information 14 that is highly current, easily obtained and presented in 15 exactly the way the investor wishes to view it. 16 This afternoon we will hear from this distinguished 17 panel of analysts and investors who will help us focus on how 18 interactive data could be most useful in evaluating 19 companies. We will see a brief demonstration. And we will 20 hear from our panel on the types of new tools that could help 21 us all spend more time on analysis and less time on data 22 entry and verifying numbers and other manual tasks. 23 Of course, all of the potential benefits of 24 interactive data will only be realized if it is hassle-free 25 and cost effective particularly from the standpoint of the 1 companies that produce it. That is why the Securities and 2 Exchange Commission has created the interactive data test 3 group, to allow companies voluntarily to file their reports 4 using an interactive format so that we and they can 5 simultaneously learn from the experience. 6 So far companies representing more than 1 trillion 7 dollars in market value have volunteered to be a part of this 8 pilot. They are already tagging their financial statements 9 and other data to allow for enhanced analysis. The 10 interactive data test group has something to do with the 11 selection of our next speaker. 12 As I have noted several times today I think that 13 interactive data has the potential exert an enormous positive 14 influence on our capital markets. And, so, for this 15 afternoon's address, I asked our staff to see if we couldn't 16 book someone who is equally influential. In fact, I 17 specifically asked that one o Time Magazine's 100 Most 18 Influential People from 2006 be our speaker. Then we 19 whittled it down. 20 Angelina Jolie's PowerPoint presentation was we 21 thought too cumbersome. And the Pope wanted to focus 22 exclusively on software engineering issues which we thought 23 would be better for a later program. 24 (Laughter.) 25 So we whittled it down to three finalists and now I 1 have to tell you that publicly we'll offer our apologies to 2 George Clooney and Oprah and we decided to go with the one 3 woman who is by far the most qualified to address these 4 issues because she is, her company is a member of our 5 interactive data test group. Analyst Mulcahy is the chairman 6 and CEO of Xerox Corporation. She also serves on the boards 7 of Catalyst, Citigroup, Fuji, Xerox and Target Corporation. 8 As an English and journalism major she has agreed to deliver 9 her remarks in plain English. 10 She began her career at Xerox as a field sales rep 11 in 1976. She rose through the ranks in sales and went on to 12 serve as vice president for Human Resources, then chief staff 13 officer, then corporate senior vice president and then 14 president and COO. In 2001, she became Xerox's chief 15 executive officer and the following year, she added the 16 title, "Chairman." 17 Well, I would guess that Ms. Mulcahy doesn't object 18 to being included on Time Magazine's list along with Ms. 19 Jolie and Mr. Clooney. I have a feeling that she's probably 20 happier to be included on Barron's Magazine's list of the 21 World's Best CEOs. And with the recent addition of Xerox to 22 our group of interactive data trailblazers, she's joined 23 still another impressive list. Please welcome Anne Mulcahy. 24 MS. MULCAHY: Thank you, Chairman Cox, for that 25 lovely and entertaining introduction. I really appreciate it 1 and my kids were, I have to say, very unimpressed with being 2 part of the Baron's list, but the Time's 100 they thought was 3 pretty cool. 4 And I'm just really delighted to be here today and 5 it is a topic that we care a lot about. I have to tell you 6 truth be told that any CEO who receives an invitation to 7 visit the SEC does take a deep breath, but this was an 8 invitation that certainly I could have refused but wanted to 9 accept a great deal. 10 It is both a pleasure and a privilege to be here 11 and to have the opportunity to share some of my thoughts with 12 you on the future of financial reporting and more 13 specifically I'm going to touch on three subjects briefly. 14 The first, why are we participating in the SEC's interactive 15 data test group. Next, do we have any advice as we take on 16 this very complex and challenging task? And, third, maybe 17 just some thinking about some pitfalls along the way as well. 18 So, it's a good road map for my remarks and let me start with 19 why Xerox is part of this test. 20 I would say that it's very much part of our 21 tradition to volunteer, to push the envelope and to use 22 technology specifically to make our lives easier and more 23 productive. Actually, years ago, Xerox was part of the EDGAR 24 pilot from concept to launch. There is no question that our 25 entire company cares a lot and actually is built on 1 innovation. So being on the ground floor of something like 2 this is something we like. We like to think that it's part 3 of our DNA. 4 Certainly another reason that we felt it was 5 important to participate is because we believe that the 6 potential is enormous. Applying the possibilities of 7 interactive data to financial reporting not only makes it 8 more effective, it makes it more expansive, more transparent, 9 more useful, more helpful to investors and potential 10 investors large and small. So I think the goals are pretty 11 significant. 12 Victor Hugo once had famously quoted -- was quoted 13 as, "No army can resist the power of an idea whose time has 14 come." And I think it's a most appropriate quote. The 15 Commission's embrace of interactive data is clearly an idea 16 whose time has come. 17 It's been 20 years since EDGAR was developed and 18 certainly it's been tweaked here and there over the years, 19 but it is essentially the same platform it was when it was 20 launched in the late 1980s. So, EDGAR may have stood still 21 but the world certainly hasn't. 22 So if you reflect, you would think back and say 23 when we started EDGAR, there wasn't an Internet, there wasn't 24 a Google, Blackberries, iPods, cell phones didn't take 25 messages or photos. People went to libraries to do their 1 research and overnight delivery of business documents was 2 considered fast. So you all have a context that you could 3 talk about and there's no shortage of examples. But the 4 point is it is time to move on to the next level. We do 5 believe that interactive data holds the promise of 6 transforming the way we report and retrieve financial 7 information. 8 So for companies like Xerox, we will be able to 9 prepare and file information more easily and effectively. 10 And we will have the assurance knowing that it will be 11 available to institutions and individuals faster than today 12 and that the accuracy will also be improved considerably. 13 And just as importantly, it will give the public an 14 improved capability to analytically understand financial 15 information. And that's really a big deal. 16 And where it gets kind of exciting for us is making 17 financial documents interactive. This is an area we know 18 well. We actually refer to it as smart document management 19 and it is something that we have been providing to our 20 customers now for a number of years. 21 Documents can be imbedded with intelligence and, 22 for example, we can make documents easier for our customers 23 to retrieve them. They can carry their own translation 24 requirements, they can carry their own histories of where 25 they were created and how they've been used. And although it 1 has been made possible by digital technology, technology 2 alone is not sufficient. 3 I think we have all learned that the bigger 4 challenge is that new technology always requires changes in 5 the way people work. Productivity is not what you get 6 imbedded in software code and business improvements don't 7 come in a box and greater transparency doesn't come because 8 of legislation alone. Technology is an enabler, not a 9 result. It's a means, not an end. And that is really why 10 this group is so important. It is where the rubber meets the 11 road. 12 The Commission quite correctly, in my view, 13 understands the need to integrate technology with the way 14 real people do real work in the real world. What looks good 15 in the lab often doesn't work well in the office. 16 To get at this issue, we have actually been 17 conducting a lot of studies throughout the US and Europe and 18 I would say that the results are somewhat of a wake-up call 19 for industry and government alike. 20 Less than half -- 48 percent to be precise -- of 21 senior managers think IT makes their jobs easier. In fact, 22 one-third believe it makes their work more complicated. 23 Research also shows that 1 in 5 workers spends at least 60 24 percent of their time dealing with documents. That's 29 25 weeks of work all spent managing about 1.3 trillion documents 1 produced in offices each year. Many of these, potentially 2 most of these documents still exist on paper, but there are 3 an increasingly amount of them that are done in digital form 4 on computer screens, whether they're in your Blackberries or 5 on your web pages, that's where information is living today. 6 Managing that reality really does require a very different 7 approach from the past. 8 The old world of IT was made up of the little "i" 9 and the big "T". The focus was always on the technology. 10 The new world of IT is focused on the big "I" and the little 11 "t". It is all about what really matters and that is the 12 information. So, big "i" little "T" is about how the 13 information flows, where it goes, who it touches, what value 14 it delivers and not just how the technologies work. 15 I have to say for the past half century we have 16 actually been thinking just the opposite. It was all about 17 machines, processing data, and certainly with very little 18 attention paid to the way we process the information building 19 in our information infrastructures. But that truly is 20 starting to change now. 21 In every business organization, people are thinking 22 of the best way to capture, manage and deliver content. And 23 they desperately need solutions and services that guarantee 24 business continuity, foster collaboration and ensure legal 25 and regulatory compliance and it has to be more cost 1 effective. And all those roads lead back to smarter document 2 management, a way to streamline document processes by working 3 smarter with documents and more importantly the information 4 they contain. 5 So under the leadership of Chairman Cox, the SEC is 6 helping lead the way. And the shear size, the visibility and 7 the critical nature of financial filing and reporting makes 8 this one of the most significant applications of document 9 technology anywhere, period. And that is why Xerox is so 10 interested in being a part of this project and that may be 11 the understatement of all time. 12 So we are excited about this project and I am going 13 to move on to the second item I was asked to address and that 14 is what advice would I give to this community as we explore 15 this new frontier together. 16 I'm sure I'm not going to say anything that is 17 radically new. As a matter of fact, my advice is more likely 18 to be reinforcing of the direction that is already being 19 taken rather than setting out a new direction. But it is all 20 about executing and alignment. So here it goes. 21 First, I think it is really critical that a lot of 22 listening is done. I would dare say that the vast majority 23 of us in the pilot, if not all, share a very common set of 24 objectives. We want greater speed, more transparency, 25 improved accuracy, more consistency and comparability across 1 companies, better search capability and less complexity. A 2 pretty tall order. But, if we balk at something or support a 3 change or question a policy, I think it is because we really 4 care. So listening to these views can only enhance the 5 outcome of the product. 6 I have to say this one I really think we know from 7 experience. We've been doing a lot of listening at Xerox 8 lately and it has helped our company improve enormously. One 9 of the hallmarks that we like to think about at the new Xerox 10 is a deep desire to be connected to the realities of our 11 customers. And we work with a passion and persuasiveness 12 that we hope no other company in our industry can match. 13 What we learn really is the foundation and it 14 informs all our research and development efforts today. And 15 what we're finding out is that customers are just not 16 interested anymore in technology for the sake of technology. 17 They want help in solving their problems, boosting 18 productivity, growing their revenues, producing higher levels 19 of customer value for their customers. And the only way you 20 really help is to really listen to what their issues and 21 their challenges are. 22 Second, you have to collaborate with your various 23 customers, companies that will input into this system, the 24 regulators who will manage it, the investors who will rely on 25 it and perhaps most importantly the public who has a right to 1 it. And, fortunately, they are all represented today and 2 that's a good thing. It's really a good start to make sure 3 we understand who are customers and constituencies are. 4 But a lot of the real collaboration is going to 5 take place in the trenches. And I think some of it is going 6 to be messy and a little frustrating as well. This will all 7 be about listening to things that you probably won't want to 8 hear, probably getting thrown off schedule and being tempted 9 to begin to disregard input and feedback. And that would be 10 really a rift. This is really an opportunity to listen, to 11 respond and to stay on course. 12 Third is getting it roughly right before you 13 launch. I have to tell you, as a product developer, we have 14 lots of experience with this and the price you pay not to get 15 a product roughly right is extraordinarily expense. And that 16 means to say that timetables and schedules are really 17 important but, you know what? They are arbitrary devices. 18 You have to be their master and not the other way around and 19 take the time that you need to get it right. 20 It is essential in my judgment that we actually 21 launch a product that really does meet the satisfaction of 22 the constituencies. And speaking from experience 23 technological graveyards are filled with products that failed 24 miserably out of the box and then they are never able to 25 recover. So once interactive data is out of the box, you do 1 have to live with the vast majority of consequences and the 2 public can be quite unforgiving. 3 So next might seem like it's a contrast to my 4 previous statement, but it's about launching a product that 5 is roughly right, but it doesn't have to be perfect. Nothing 6 in this world achieves perfection, but I have to tell you 7 that engineers and programmers always strive for it. And at 8 some point someone does have to step in and say, "Enough." 9 So it is a fine line to walk this line between good enough 10 and perfect and I think the two pieces of guiding advice 11 would be listen to your customers and then be decisive. 12 Fifth is about keeping it simple. There is a lot 13 of complexity in interactive data but your users don't have 14 to see it. I think the genius of the first Xerox copier 15 which came out in 1959 was actually its simplicity to use. 16 There certainly was a lot that was going on behind the 17 curtain, but for the user all they did was kind of push the 18 green button and the copy came out. And I think it is just 19 an extraordinary goal that we should strive for from a 20 technology perspective. 21 I can't stress this point enough that there really 22 is an opportunity to design for simplicity even though the 23 design itself may be complex. I have to say, and it's kind 24 of my pet peeve, I still get very annoyed when I have to push 25 Control Alternate and Delete to activate my computer. Why 1 not just one button? And I am sure there are good reasons, 2 but I think those are the things that have to be thought 3 through that are just opportunities to kind of simplify and 4 streamline as we launch this approach. Do whatever it takes 5 to make it user friendly and intuitive. 6 So let me turn to the last issue I was asked to 7 discuss and that is what bumps in the road I see ahead of us. 8 And it is actually because the promise of interactive data is 9 so enormous that therein lies the risk. Nothing of great 10 importance comes easily. And although we all agree on the 11 conceptual description and the general direction, the devil 12 always lies in the details. So it will be fair to say that 13 we will definitely face unforeseen technical challenges. 14 This is a time when naysayers are really out and in a 15 leadership position. Skeptics are a lot easier to find than 16 supporters. And a lot of advice to turn back and not throw 17 good money after bad. I think you can expect that public use 18 of this system may be less than you hoped for, at least in 19 the early days, and there may be lots of comment whether it 20 is from the press or Congress about the cost of doing this as 21 well. 22 And despite our best efforts my guess will be there 23 will be a fair amount of complexity as well. I think that is 24 something that we should expect and ensure that we are 25 prepared for. In many ways, it is actually a sign that you 1 are on the right track. 2 Change is really, really tough. People hate change 3 and, quite frankly, it is human nature. We have experienced 4 an enormous amount of change at Xerox over these last five 5 years and what we have discovered is that people are willing 6 to change when there are three conditions that are in place. 7 The first is that the pain of the status quo 8 actually has to be greater than the pain of change. So 9 people have to have a perspective about what they're leaving 10 behind and why it is so important that they move forward. 11 There has to be a clear vision so they have to see 12 that this change is going to lead to a better future. So it 13 really has got to have concrete goals that are well 14 understood by all the constituencies. And there is no more 15 important time for our communications to be open, honest and 16 extremely direct. 17 So I think it is very appropriate that we keep on 18 pointing to a brighter future, keep listening to the 19 customers and also the critics and keep the communications 20 open. And during that whole time believing in what you do 21 and having a passion for it is hugely important as well. I 22 know I do. 23 So I began this talk by talking about this famous 24 quote from Victor Hugo, "No army can withstand the power of 25 an idea whose time has come." But when I wrote it I said I 1 wasn't quite sure I had it exactly. So I actually Googled 2 that quote to make sure that I had quoted Victor Hugo right 3 and while I was doing that I found another quote that 4 actually was better. I'll use the quote now. It says, "Of 5 course, you have critics. It is the story of every man who 6 has done a great deal or created a new idea. It is the cloud 7 that thunders around everything that shines. Don't bother 8 yourself about it. Keep your mind clear and your focus 9 true." 10 That's not a bad piece of advice to certainly end 11 my talk on. I have to tell you that at Xerox we are actually 12 very proud to be associated with your work. You can count on 13 us, by the way, to be both supporters but also constructive 14 critics as well. 15 I just want to thank you for inviting me to share 16 our thoughts and this is an invitation that we're delighted 17 we accepted. Thank you very much. 18 MR. BOOTH: Thank you, Anne, very much for those 19 perspectives. Very illuminating I am sure for everyone. 20 My name is Corey Booth and I am the Chief 21 Information Officer of the SEC. I can't help noting I am 22 actually the third speaker of the day with an English degree 23 who seems to have lost their way but ended up in an 24 interesting place. 25 My role today is to kick off the afternoon panels 1 and most importantly to introduce four speakers who are going 2 to start us off and give us their perspectives first before 3 we get into the panel, per se. 4 First, I'd like to introduce Dr. John Markese, the 5 president and chief executive officer for the American 6 Association of Individual Investors, a not-for-profit 7 educational institution. John presents investment seminars 8 and writes columns on stock analysis, portfolio management, 9 mutual funds and other financial topics and is a strong 10 advocate for the empowerment of the individual investor 11 through improved information and tools. 12 Please welcome John Markese. 13 MR. MARKESE: Thank you, Corey. I'd like to thank 14 the Commission for this opportunity to speak. I thought I 15 would take some time and tell you how individual investors 16 actually use information this afternoon. A little bit about 17 our association so you can understand what I mean by an 18 individual investor. 19 We have been around since 1978 and about 1980 we 20 started writing about how to use your computer to make 21 intelligent investment decisions. Now those computers are 22 starting to show up on the Antiques Roadshow today, but we do 23 have powerful computers now available to everyone. 24 Our average member and I am going to say this a 25 little bit unfortunately is in their late 50s. We try with 1 all our might, we can't seem to get young people involved. 2 Mostly male, again that's unfortunate, but we are hoping 3 there are other readers to these memberships. And they have 4 advance degrees, not necessarily in finance. In fact, not in 5 finance the case. 6 If you think about investors with that background, 7 I'm going to give you a little bit of the hierarchy. There 8 is the investor that basically takes advice from a 9 professional. There is a second level that I will say looks 10 at Value Line. Let me speak about the third level, the 11 engaged investor that is going to use the database. 12 Now, in the early Nineties, our members came to us 13 and said, "Well, we now have these computers. You've been 14 writing about this. We want to screen large databases." 15 So we went out and talked to data vendors, 16 analysts, analyst quotations, large databases and I have to 17 say we begged, we implored, we cajoled and I think we even 18 cried trying to get a comprehensive database at a reasonable 19 price. And we did. 20 What we did with that is we wrote software allowing 21 them to screen, individual investors to screen a database of 22 almost at 9000 firms, 2200 individual variables that they 23 could screen on, 7 to 10 years of data. We also gave them 50 24 screens from Warren Buffet to Can Slim, if you're familiar 25 with that and we allowed them to create their own screens. 1 And so what they are doing -- and, again, this is 2 the cutting edge investor that is most likely to use 3 interactive data -- what they're doing out there is screening 4 this database which is a updated on our website weekly. We 5 send out CDs monthly. They are screening through this large 6 database with these either pre-arranged screens or their own 7 custom screens, they're finding investments of interest. 8 And then here's where they interact with EDGAR 9 hopefully. They go to that EDGAR database, they pull up the 10 original documents, the 10-Ks, the the Qs, they look at the MD&A, 11 they look at the numbers, again, although we have great faith 12 in the numbers we receive, and they do an in-depth analysis. 13 The probably peak at Value Line if there is a Value Line. 14 A lot of them go to smaller stocks which the only 15 source then would either be from the company or from the 16 EDGAR database. So this is an engaged group. They're 17 looking for the ability, access data, real time basis, update 18 once they had invested, any new filings. This group is 19 probably the group most likely to benefit from XBRL and the 20 data tagging and the nature of what is being proposed. 21 So going forward, here is what I see. Hopefully 22 with tagging, these data providers will provide 23 data -- again, we begged low prices, but they could be 24 lower -- give us low prices because of the ease of extracting 25 this data. Hopefully it's now accurate and it's more timely. 1 And with that lower cost allow more investors to participate 2 at that level. 3 Secondly, they are going to have to give up more 4 value here because, as you know, if their prices are going to 5 come down, which I assume they would, they are going to have 6 to give us something else. And what I would propose and I 7 think has been asked earlier this morning, "Well, what else 8 would come forth?" I would hope that these data providers 9 would go in and find industry by industry what the value 10 drivers are. 11 In other words, five of the top specific to the 12 industry variables and whether it is book-to-bill ratio or 13 the load factors or average volume or same store sales, 14 whatever, they would then report on those levels of 15 information so an individual investor picking a stock can 16 then look at the peer group and make comparisons to make 17 qualitative and quantitative comparisons and then be able to 18 look at the EDGAR site, pull up and tag even the footnotes, 19 the MD&A detail and then make an intelligent investment 20 decision. 21 So that's what my hope for is, in the forward 22 moving of the XBRL. I think we are close, but I also think 23 we have to have an exhaustive standardized comprehensive and 24 I'm going to say this again, standardized, to make this low 25 cost and make the ability of the individual investor with any 1 simple software -- and, by the way, I did talk to software 2 providers and data providers. Software providers are ready 3 in the wings to come out with a lot of detailed templates for 4 investors they can either download into Excel spreadsheets or 5 we can attach them to the screening devices that are already 6 available. 7 So I commend the Commission again. Anything that 8 is, in terms of data that is cheaper, more accurate, more 9 timely, more comprehensive, all of our members would vote a 10 very loud, "Yes." Thank you. 11 MR. BOOTH: Thanks very much, John. 12 Next up we have Trevor Harris, managing director 13 and vice chairman of Client Services at Morgan Stanley. 14 Trevor has been heavily involved in accounting and company 15 valuation issues and academia as well as at Morgan Stanley 16 and is at the forefront of Morgan Stanley's efforts to 17 approve the use of financial data in the firm's Equity 18 Research. 19 Trevor. 20 MR. HARRIS: Thank you, Corey. Chairman Cox, thank 21 you for inviting me. 22 I am going to try very hard to do an interactive 23 live presentation for you. It's been a bit of a 24 technological challenge getting this working so I'm not sure 25 it is going to work, but we will certainly try it. 1 I do want to make one caveat is that to the extent 2 I can show you this data, it is all for illustrative purposes 3 only and so it should not be relied on in any way. 4 What we have been doing at Morgan Stanley since I 5 arrived in 1997, we have been involved in actually trying to 6 work with interactive data because we have been a strong 7 believer in it and we are trying to utilize the benefits of 8 it. So, I am going to start off with, hopefully, it's just a 9 very quick perspective on both the way investors do analysis 10 on the buy side and sell side, a little bit of what we are 11 doing in a live way if I can, and then I am going to try and 12 actually access the SEC website. I originally wanted to do 13 this with our own software, but this is a commercial vendor 14 that does it, so I can show you how it all interlinks as this 15 data becomes more available to us. 16 So, if we think about the investment analysis 17 process, buy side and sell side analysts and investors are 18 really looking at risk-reward trade-offs from a specific 19 point of view. 20 We are trying to understand the sustainability and 21 growth of different drivers in performance of the business. 22 So we are looking at what actually drives business as well as 23 the credibility and quality of management. 24 We use historical information, but actually the 25 focus -- and this is both financial reporting and other, but 1 the focus is to create forecasts both of different duration 2 and detail. So we do actually enjoy some of the complexity 3 that people have already talked about. 4 And what we are trying to do is assess both 5 stock- specific or company-specific value and uncertainty 6 relative to price and that's both on an absolute and a 7 relative basis. And, clearly, as others have already talked 8 about, we are concerned with the reliability, the consistency 9 and the comparability. And these are all the attributes we 10 are trying to incorporate. 11 Importantly, we want to understand the economic 12 activity. And to some extent you have to deal with 13 complexity, you cannot avoid complexity to understand the 14 economic activity and timeliness is, of course, critical. 15 So with that perspective, what is it we have actually been 16 doing? 17 And I would argue that any of these data providers, 18 anyone who is going to try and do this from an investor's 19 point of view has essentially these same five building 20 blocks. 21 The first is in order to get particularly global 22 comparability where we focus on the economic activity and try 23 to separate the operating from the funding criteria or the 24 funding parts of the business, we had to create our own set 25 of broad general as well as the industry-specific metrics. 1 So just to be very clear, we are dealing with 2 interactive data. We are creating our interactive data which 3 I'm going to show you in a second, hopefully, before this has 4 become available on the public sites. 5 What we have then done, and I'm going to show you 6 in a second, is we actually take our analysts' models and we 7 tag them with XBRL tags and integrate those into financial 8 models so that we can use that both for valuation, for 9 comparison and, most importantly, for many of the 10 constituents, it has helped us to get additional insights and 11 ask additional questions. So you actually get to understand 12 why is Company A suddenly got an operating profit or an 13 operating margin going in one direction while Company B is 14 going in a different direction. 15 So you start to ask different questions and you can 16 add complexity as we've done with something like pension 17 data. This is a bit difficult to see on the screen, but this 18 is an example of how you would actually take an analyst's 19 model -- and remember, all of this has been put in by hand 20 initially because we didn't have the interactive data, adding 21 a tagging editor to it and then that provides actually tagged 22 elements. 23 Now, what I had hoped to show you a little later 24 was how we could bring in the data -- we have a prototype 25 where we are actually bringing the data from the SEC's 1 website and automatically tag it. 2 So the key here is that the time that it will ave 3 is enormous in terms of the input that investors have. And, 4 actually, there was an interesting article on Motley's Fool I 5 think it was this weekend talking about exactly that process. 6 The other thing that it does which is relevant is 7 it actually validates the model. So what we actually have 8 found is by going through electronic data, what we've heard 9 before from one of the other speakers, was it actually 10 creates a much more transparency and accuracy. 11 So this is the process that's gone through with the 12 analysts' models. And what I am going to try to do now is to 13 actually show you a live demo of some of that information. 14 So the starting point here -- let me show you what 15 we have is. I have taken in from our database, so this is 16 live connected to the web right now. And what we have 17 actually done is we have listed a set of companies here. And 18 the companies I've chosen are based because one of these UTX 19 actually has a listing on the web, so it is actually filed an 20 XBRL document with the voluntary program. So I'm going to 21 try and bring that in in a second. 22 And what you can do is, you can do the type of 23 comparative analysis, the screens and comparisons that the 24 previous speakers spoke about. And actually, just to give 25 you one example, by clicking on this particular metric, 1 showing you just the earnings per share number, what we can 2 then do is actually start to drill down to get to the 3 different layers of complexity. 4 So certain investors clearly just want to look at 5 summary statistics. Other investors want to get deeper and 6 deeper. So this is a net operating profit. You can go 7 deeper into the operating expense numbers. And just to keep 8 going, you can see this is a typical type of disclosure. But 9 what we have also done where it's material is certainly gone 10 into all sort of pension information. 11 So this is -- actually, I chose just the first 12 company, Boeing, but UTX would have the same information. 13 And you can see how much detail and complexity that's 14 actually include in here. 15 So the point of this is that you can deal real 16 quickly -- and notice this is both historic and forecasted 17 information that you can deal very quickly in going from very 18 high level to very complex information. 19 So how does this actually help us in terms of 20 investment decisions? That's some of the relative 21 information. Here's something that's very specific and 22 absolute. And this is where, from an individual investor's 23 point of view, I think this would be personally much more 24 helpful than some of the information we see with ratings and 25 other types of simple metrics. 1 So let me explain to you very quickly what's here. 2 On the left-hand side here where my arrow is pointing, this 3 is actually the stock price over the last 12 months for 4 United Technologies. 5 What I have done is I have created three valuations 6 using a very sophisticated proprietary valuation model -- and 7 I'm going to show you in a second how quickly we can 8 manipulate that as well as some scenarios. So it gives us an 9 ability to do scenario analysis -- and I stress again this is 10 all hypothetical data at the moment which I've adjusted. 11 So you can see where the price is relative to your assessment 12 of the stock. 13 Now, to show you the nature of the interactive 14 data, this is what is underlying it and you can see there is 15 a lot of information, both historical and forecasted 16 information. And to give you -- and this is where I am 17 hoping it is going to work. We will take a quick chance 18 here. To show you just how easily you can start to build 19 scenarios if you have this interactive data, on the left-hand 20 graph here, I have operating revenue growth as well as 21 operating revenue. Then we have operating margins, operating 22 asset efficiency, various leverage criteria and so on. 23 And let's assume that an individual investor if 24 they had this application or our own internal people or our 25 clients felt that the operating revenue forecast was a little 1 too pessimistic because the economy is going to get much 2 better -- and please watch the other screens as I just move 3 this. 4 All I have to do is move that up and I'm going to 5 do something a bit extreme just for effect. And you will 6 also see at the top on the screen is a valuation. It has 7 adjusted the revenue, it adjusted all the margins, the asset 8 efficiency, the leverage and so on and gave us a new 9 valuation. So the ability to do scenarios is fundamentally 10 different and clearly much more efficient. 11 So how then does this relate? 12 There are many other obviously applications around 13 us, but the question then is how do we actually bring this to 14 the interactive site. 15 Now, what I had hoped to do was show you how we 16 could pull it in and then just tag it automatically to be 17 able to pull into that system. 18 What I am going to try to do instead is, this is a 19 commercial application, that Hitachi has put out. This is 20 experimental right now. You go to the SEC plug-in and it is 21 now searching hopefully and going to the website and try and 22 actually find -- with some luck, we are getting there. It 23 will actually going to the SEC's website and try to pull in 24 what's actually available. 25 There we go. And you will see it is now looking to 1 the website. I'm going to go down to the UTX filing that's 2 there. We open that filing. And basically what it is doing 3 is it's pulling in the information from the SEC's website. 4 And, again, in our system, this would automatically 5 simultaneously be tagging it to introduce in our models. 6 This would be if an investor had a particular style sheet or 7 a template, this is a simple template we created and, again, 8 with a little bit of luck, you will see that it will provide 9 us with updated -- as I said, with a bit of luck. 10 But what this should be doing is pulling it into an 11 actual -- no. It didn't pull it in for the moment. But it 12 would actually pull the data in to a spreadsheet. 13 I'm going to move to my final slide, but I'm going 14 to try -- I have a way I think of pulling the original 15 filing, perhaps not that one. 16 I think if I pull in this one, I'll come back to 17 it. I'm going to open it. This one I think is going to work 18 better. 19 And, again, one of the issues as Ms. Mulcahy said 20 is -- there we go. It pulls it in and you've got the data 21 into a format that is useful to you. In our case, it goes 22 straight into the analysts' models and we can update it. 23 So what does this actually mean? Just to conclude 24 here. If we can actually take this data and get it in that 25 form, it will certainly improve the analysis from a 1 transparency timeliness point of view and our ability to deal 2 with complexity. 3 You cannot get simplicity without incorporating 4 that complexity. But you can only really deal with that if 5 you actually have something like interactive data. And, 6 clearly, one of the things that I don't think happens enough 7 is, people don't focus enough on the risks. They focus on 8 the expected value, intrinsic value, but they don't focus on 9 risks enough. That's something it will do. 10 The other question we always get is, does this mean 11 that analysts will cover all the companies. The answer is 12 no. But clearly to the extent that we can save significant 13 amount of input information, we all have the objective of 14 extending coverage to more and more companies. So, it 15 clearly adds to the number of companies that are covered both 16 by buy side and sell side. 17 And then the last part which is perhaps just as 18 important is instead of spending significant amounts of time 19 just in pulling in data which is essentially a non-useful 20 task other than for the insight, those people who are 21 investing in fundamental analysis can actually spend their 22 time on the analysis and the insight. So it changes the 23 dynamic and we can actually I think make the capital markets 24 much more efficient for everyone. Thank you. 25 MR. BOOTH: Thank you very much for that 1 demonstration. 2 Now, I'd like to introduce Larry Salva, the senior 3 vice president and chief accounting officer and controller 4 for Comcast Corporation. Larry has been at Comcast since 5 2000 after holding a variety of leadership positions at 6 Pricewaterhouse Coopers and elsewhere within the accounting 7 profession. 8 He is also the chair of the Committee on Corporate 9 Reporting for Financial Executives International, one of the 10 leading professional organizations for executives in the 11 finance function. Please welcome Larry Salva. 12 MR. SALVA: Thanks, Corey. 13 I'm going to take John's lead and since I don't 14 have a visual presentation just take the opportunity to speak 15 from my seat here. 16 In spite of attempts over the last several years to 17 educate the financial community, according to a 2005 survey 18 by Computer Sciences Corporation and the Financial Executives 19 Research Foundation, it still indicated that over 70 percent 20 of financial executives have little or no knowledge about the 21 XBRL standard. And XBRL is still in the early stages of its 22 adoption curve probably somewhere between the first phase in 23 which enthusiasts and visionaries get interested in the 24 technology and the standard and the group that is actually 25 going to give it critical mass. And that's are users defined 1 as the pragmatists. 2 And I like to think of myself as a pragmatic 3 person, but I have to say at least Comcast is still not, to 4 my embarrassment, Comcast is still not in the voluntary 5 program. And that's partly because of perception, partly 6 because of reality. 7 What I would like to do -- and I recognize that 8 this is a conference assembled mostly representing analysts 9 and users, but I was happy to have been invited to perhaps 10 represent the views of preparers and maybe some of the 11 obstacles in terms of why preparers aren't jumping into the 12 pool quite as quickly as we would like, I actually do recall 13 I served on the Commission staff when the EDGAR Pilot Branch 14 was operating. And sometimes it does take awhile for 15 technology to take hold. 16 Clearly, there are advantages to jumping in early. 17 And why a company should participate would include to better 18 understand XBRL, to influence its direction, to evaluate it, 19 to prepare to comply with what will eventually become a 20 potential future requirement to use XBRL in filings. It 21 holds the potential clearly to improve efficiencies of 22 financial reporting within the organization not just 23 externally. And clearly, you know, we anticipate improving 24 transparency of financial information to investors, analysts, 25 regulatory agencies, rating agencies and lenders. 1 I recall sitting at an open Commission meeting and 2 it was 20 years ago where Commissioner at the time envisioned 3 a day where we wouldn't have financial statements where 4 investors would just go in and look at data within a 5 company's database and get the information that they were 6 interested in. 7 And while we may never pull down that firewall for 8 companies to let that kind of transparency in, data tagging 9 clearly or so-called barcoding of financial data clearly can 10 improve the ability, the transparency of financial reporting. 11 Unfortunately, the timing of XBRL might have been 12 just a little bit off. You know, its infancy, if you will, 13 or introduction where it should have gotten traction may have 14 coincided with where corporate America felt the burden of 404 15 reporting, the staff resource constraints that we've 16 been -- all of a sudden accountants and financial reporting 17 people are in great demand. And financial reporting groups 18 have felt the pressure and the short resources. 19 So, while a lot have heard that it doesn't take 20 much to get involved and maybe the investment is up front, it 21 is that up-front investment that is being resisted at least 22 by many of my peers on the Committee on Corporate Reporting, 23 the larger companies that didn't feel like they had that 24 resource available to them. 25 I think as time goes on they are finding that 1 resource. We're getting up to that point now where we are 2 getting the breathing room and we can invest in it. I am 3 glad to see that six of the twenty volunteer companies in the 4 volunteer group are members of the Committee on Corporate 5 Reporting. 6 The payback at least to a large company sometimes I 7 think is difficult to quantify. Much has been said about the 8 possibility of increasing accurate information and coverage 9 on small to medium-size enterprises, those that might have no 10 analyst coverage or that analyst coverage might be sparse. 11 And certainly anything that you can do to increase the 12 accuracy and the coverage of small and medium size 13 enterprises would make sense for that segment of the market. 14 I think in speaking to the Investor Relations group 15 within my own company, they don't have the sense that we're 16 missing or that buyers, buy side analysts are getting data 17 incorrect about our company or that we're not on their radar 18 screen as an investment opportunity. But that shouldn't in 19 my opinion be an impediment to our involvement in the 20 program. I have pushed and will continue to push for our 21 involvement in the voluntary program. Again, I'm dealing 22 more with the resource constraints than anything else rather 23 than the lack of enthusiasm for the project. 24 The SEC XBRL voluntary program does provide -- it 25 provides an excellent way to participate in the development 1 and evolution of XBRL. And that is an opportunity to test 2 the perceptions and shape or determine the future reality. 3 Clearly, the perceived benefits to businesses would 4 be more efficient preparation of financial statements, lower 5 cost of producing the information, increased accuracy, more 6 timely information, process efficiencies and clearly reduced 7 data entry and manual effort. 8 And the ease of implementation at least as I 9 understand it is it doesn't require a system-wide 10 implementation. You can make a small investment up front and 11 it can be deployed in phases, essentially a top-down approach 12 starting with the primary financial statements and then 13 expanding into data in lower and lower layers with a flexible 14 architecture in using existing business rules. It should be 15 easy to modify. 16 So the opportunity does exist. It is one that many 17 companies are jumping into on the early end and I think that 18 this will naturally evolve in its adoption curve. And I 19 think we are at that inflection point where many companies 20 will be very interested in how the volunteer program goes and 21 what benefits can be achieved by companies by participating. 22 Thank you. 23 MR. BOOTH: Thanks, Larry. 24 Finally, let me present Christopher Whalen, 25 managing director of Institution Risk Analytics, a research 1 firm specializing in data-intensive analysis of companies. As 2 a former investment banker and journalist as well as a 3 staffer at the US House of Representatives and the Federal 4 Reserve Bank of New York, Chris has seen the securities 5 industry from all angles and is a close observer of the 6 development of interactive data. 7 Chris. 8 MR. WHALEN: Thank you, Corey. 9 IRA was created in 2003 by myself and my business 10 partner, Dennis Santiago, who is one of the great old men of 11 the financial data world. And we did it to perform analytics 12 on structured data. That is to say interactive data. Even 13 though today we still have to use data that comes from vended 14 sources other than the data that we get from the FDIC, we 15 could see that the marketplace was moving in this direction. 16 So we find the Commission's interest in this subject both 17 timely and extremely well considered. 18 I would like to briefly give you some thoughts and 19 answer some questions that I've heard from staff and from our 20 colleagues at the SEC over the last couple of years from the 21 perspective of builder of analytic systems. 22 We have been a member of the XBRL consortium since 23 last year and I would like to think that we occupy kind of 24 both sides of the divide, the enthusiasts group and also the 25 pragmatist group. 1 On the one hand we entirely buy into the vision of 2 XBRL. We see its utility. We see its value in enabling 3 public companies, private companies, other organizations to 4 describe the financial information in their businesses. And 5 yet at the same time as an organization that has to deliver 6 workable, reliable transparent analytics today to end users, 7 we take somewhat of a conservative approach in terms of 8 making it work because at the end of the day whether you're 9 talking to Wall Street investors or risk managers or any 10 other consumers of financial information, they want 11 reliability and they want timeliness. 12 Now, when we talk about interactive data, we think 13 of it in three ways. Interactive data is organized to ensure 14 that the content can be used at every step in the process. It 15 is interoperable in that it can be used by disparate 16 technologies and can be used equally and seamlessly. And 17 most importantly, interactive data for us is distilled so 18 that each step in the pipeline adds value to the next user 19 downstream. 20 Now, both of our colleagues, John and Rupert showed 21 you the distillation process. The screening techniques, the 22 normalization, the standardization of different accounting 23 treatment for disparate companies. This is what adds value 24 to financial data. It is not just having it tagged. Tagged 25 is good. When we get a diskette from the FDIC, now 1 especially that they have implemented XBRL, we have extremely 2 high confidence that all of the numbers on that diskette are 3 right. So we can get on with the analytics. 4 But the tagging is really only the beginning of the 5 distillation process. And that is one of the points that I 6 really wanted to allude to day. 7 Now, one of the interesting questions that we have 8 been asked was what are the sources of data used by 9 investors. And I think John highlighted that very nicely. 10 For me, having worked as an analyst, when one of my companies 11 or banks reported its financial results, you almost always 12 got the data directly from them. You got it in a press 13 release. You were on their mailing list to receive an Excel 14 spreadsheet. And that was pretty much the numeric data that 15 they would eventually or simultaneously file with the SEC. 16 Now, that didn't mean that maybe years ago working 17 as a banker on a fairness opinion, we wouldn't make extensive 18 use of EDGAR. We would. But that was usually in the context 19 of inputting the numbers from a physical EDGAR document into 20 an Excel spreadsheet and then staying up all night eating 21 Chinese food, proofreading the document to make sure it's 22 right because at Bear Sterns, for example, you never wanted 23 to answer no to the question, "Have you checked every number 24 in this document?" 25 Now, another question that we have been asked a lot 1 is could interactive data change or have a positive impact on 2 real time analysis. Would greater use of interactive data 3 improve the ability of retail investors, especially retail 4 investors, to access and understand financial reports? 5 Well, I think the answer is yes. I mean clearly 6 interactive data is going to allow analysts to move from 7 simply observing financial numbers to understanding what 8 those numbers mean in context. 9 But I think even more importantly for me, if all 10 investors were able to access as-filed data from the FDIC, it 11 would level the playing field between the professionals and, 12 as John pointed out, the interested individuals, the people 13 who subscribe to Value Line and keep them piled up in the 14 corner of the study because they just can't bring themselves 15 to throw them away. 16 And, you know, it is really striking. You can't 17 criticize the SEC or the EDGAR system. It has evolved in a 18 very orderly, very I think rational sort of fashion from a 19 technology perspective. When the first filings were made at 20 the SEC, the filer community, the smart institutional 21 investors immediately started gaming the system. They would 22 hire couriers to go down and pick up a document as soon as it 23 was filed. You had whole cottage industries that were formed 24 around this. 25 Over the years as EDGAR has progressed, it has 1 become more accessible and more transparent to investors, 2 more useful particularly to small investors. But there is 3 still an enormous degree of disparity and unfairness in the 4 current system. Even the timing of the release of data from 5 the EDGAR system so vastly advantages the professional 6 investor. 7 I think that that, if nothing else, that should 8 drive the Commission to act. And that should also I think 9 give the Commission the confidence, indeed even the courage 10 to act. Because until the individual investor with an 11 Internet connection can get access to the same information 12 that a professional can get -- in many cases at great 13 cost -- I think the job is still undone. 14 Now, another interesting question that I've been 15 asked is assuming that a sufficient number of companies were 16 to adopt the tagging regime, what obstacles would get in the 17 way of using it. 18 Well, I think Trevor illustrated that today. You 19 can't just take the as-filed numbers and do work with them. 20 If you have got one satellite TV company that capitalizes a 21 set-top box and another one that expenses the set-top box, 22 you have got to normalize those two before you can do a 23 valuation analysis of the two companies. 24 So to me and really to my firm, assuring a 25 sufficient degree of uniformity in filings is almost a 1 prerequisite if you want that data ready to eat when it is 2 disseminated by EDGAR. I'm not sure you do. But I am just 3 saying from a financial analytical perspective, if you want 4 an investor to be able to download five companies from EDGAR, 5 put them in their Excel spreadsheet and immediately starting 6 running ratios and screens on them, you are going to have to 7 have some degree of commonality. 8 Now, having worked with the FDIC data for a number 9 of years, it's very easy. All banks basically have the same 10 accounting, the same reporting taxonomy. So running 11 analytics on them is a relatively easy matter. But when you 12 get outside the financial world and you are into the much 13 larger universe of non-financial companies and, indeed, under 14 our GAAP system, they all have very different ways of 15 describing their businesses. And they cling to that right of 16 describing their businesses differently. 17 Now, one of the more interesting points that I was 18 asked about is what incentives would encourage companies to 19 submit data in an interactive data format. 20 I think both myself and my partner, Dennis, believe 21 very strongly that the Commission ought to employ the carrot 22 and the stick. You know, a company that is unwilling or 23 unable to report information transparently when this 24 technology is, as Ms. Mulcahy, is very mature I think is 25 worthy of investor skepticism and regulatory attention. 1 There is going to come a point when all, especially 2 the large accelerated filers should not be asked why don't 3 you get involved in XBRL but why aren't you involved. You 4 know, "What's the problem?" 5 I am reminded of Chairman Greenspan's comments a 6 couple of weeks ago about the credit derivative market when 7 he was worrying about the fact that we are still processing 8 these contracts by hand. And he looked at the audience at 9 the Bond Market Association and said, "Why do we have a 10 problem?" 11 I think this is the same sort of things. The 12 vendors could handle us quite easily. The corporations might 13 not even know. They could just the submit the document that 14 they are already filing with you now and the vendors could 15 tag it and that would be it. 16 Just one final point and then I want to allow us to 17 get into our discussion. The thing that I would really, 18 especially having worked as an analyst recently and having 19 seen the changes that are going on in the Wall Street 20 business models, you know, would interactive data help get 21 more analysts coverage for companies? Well, maybe. 22 I'm not sure what entities will be providing that 23 coverage. I'm not sure that it's going to be a broker 24 dealer. It might be a media company. It might be the 25 companies themselves if they could access as-filed data from 1 the SEC and generate peer group information using that data 2 with no commentary and just release that to their investors. 3 The model is so broken now that I think, as you 4 have already seen in the newspaper, more and more broker 5 dealers are going to be getting their researchers out of the 6 publication business and into the transaction business. And 7 I think it is very possible that you are going to see most of 8 the traditional Wall Street research sector disappear. 9 I am not sure that's a bad thing though, because, 10 frankly, having worked for two very large retail brokerages, 11 I'm not sure that the little guy was ever terribly benefitted 12 by the institutional researchers' work output. Before Reg FD 13 the researchers were going on the banking calls and, you 14 know, they were very much part of the transaction process and 15 I think the little guy was probably off with his Value Line 16 book. 17 So with that, let me stop there. We did file a 18 complete document today with the Commission which I would 19 refer you to and I will be happy to answer any questions you 20 might have. 21 MR. BOOTH: Thanks very much to all four of you for 22 those introductory thoughts. Now I'd like to turn the floor 23 over to the panel as a whole for the balance of the afternoon 24 and also to introduce our two SEC moderators for the 25 discussion. 1 Sitting down in front unfortunately with their 2 backs to the audience, we have Scott Taub, the acting chief 3 accountant, and Jim Daly, associate director for the Division 4 of Corporation Finance. 5 Guys. 6 MR. TAUB: Corey, thank you. And as far as having 7 our backs to the audience, I suppose you're probably seeing 8 our best side anyway back there. It's all right. 9 Just to kick things off, we have assembled a fairly 10 large panel and we have a fairly limited amount of time, 11 about an hour, to deal with these topics. So Jim and I are 12 going to tee up the issues in the order that we have selected 13 them. We will look to panelists, turn over your cards when 14 you have comment, just flip them on the side so that we can 15 call on you in order. 16 We will try to make sure that everybody who wants 17 to comment on a particular topic gets a chance to do so. 18 However, given the limited amount of time, we may feel the 19 need to move onto another topic in order to make sure that 20 we're able to get to everything that we'd like to get to 21 during this hour. 22 Commissioners, certainly please free to ask 23 questions as well, turn your cards up if we haven't given you 24 the opportunity to ask a question that you would like to ask. 25 We believe that we have a very good panel and we are looking 1 forward very much to what input you can all give us. 2 I'll turn over Jim to introduce the rest of the 3 panelists and get things kicked off. 4 MR. DALY: Thank you, Scott. 5 Moving from right to left for the remaining 6 panelists, Mark Augustine is with the healthcare investment 7 group called Augustine Consulting and provides proprietary 8 biotechnology industry research to various hedge fund and 9 mutual fund clients. 10 Cathy Baron Tamraz is the president and chief 11 executive officer of Business Wire. 12 Thomas Franks is the head of Global Equity Research 13 and TIAA-CREF. 14 Continuing to move to the left, Charles Gregson is 15 the CEO of PR Newswire. He assumed that position in April 16 2005. 17 William Guttman is a venture partner with TL 18 Ventures where he has focused on software and financial 19 technology investments. 20 Greg Jonas is the managing director of Moody's 21 Accounting Specialist Group and his group assesses the credit 22 risk of borrowers. 23 John Stantial is the director of Financial 24 Reporting for United Technologies Corporation. 25 Clinton E. White Jr., is a professor at the 1 University of Delaware and he has published numerous article 2 in academic professional journals on this issue and a number 3 of XBRL issues as they relate to accounting matters. 4 Now, what I thought we would do, as Scott 5 mentioned, given the fact we have such a large panel is tee 6 up some questions, probably picking and directing them to two 7 panelists at a time. And then after that anyone can add 8 additional thoughts that they think are appropriate as well 9 as the Commission can add its views or questions as well. 10 So the first question I'd like to tee up, on the 11 matter of access and accuracy, goes to Mr. Jonas and Mr. 12 Franks. Would greater use of interactive data improve the 13 ability of retail and/or institutional investors to access 14 and understand reported financial data? How could the use of 15 interactive data increase the depth of information used in 16 financial analysis or otherwise facilitate the quality of 17 financial analysts? 18 The important thing to understand here is that 19 investors come in all shapes and sizes, institutions versus 20 retail. So maybe you could bring your perspective as well as 21 you answer that question. 22 MR. JONAS: Jim, thank you. I certainly appreciate 23 the privilege of being here today to say a few words about 24 interactive data that we think could be of significant 25 benefit to investors. 1 We see that it can help us do our work at Moody's 2 in at least five ways. Let me mention them and then briefly 3 touch on each. 4 First is improving the speed of data access. 5 Second is the completeness of data access making 6 sure that we've got the whole picture. 7 Third is improving the accuracy of the data that we 8 use. 9 And fourth is possibly improving the comparability 10 of the information we use. 11 And, finally, understanding the source and the 12 context of company data when we build databases. 13 Speed of data access first. We suspect that data 14 procurement that data procurement that now takes us weeks or 15 days or hours could be accomplished in a fraction of those 16 times. Let me give you a couple of examples. 17 We currently spend days downloading, building and 18 checking our database of information on corporations each 19 month. We spend more time adjusting that data to improve its 20 use for our purposes. We hope that interactive data could 21 reduce these times from days to perhaps hours. 22 On the research side, a typical research project 23 involves searching the SEC filings for text-searching 24 software. Two projects that I was recently involved in in 25 just the past couple of weeks identified 50 companies most 1 affected by the FASB's proposal to get the balance sheet 2 right for pension accounting. 3 As another example, you know, we spent dozens of 4 hours identifying and downloading 404 reports that reported 5 material weaknesses. And, again, we hope that interactive 6 data could dramatically reduce those times. 7 The second benefit we perceive is completeness of 8 data access. Interactive data can reduce the risk that our 9 queries of SEC filings would miss important stuff. Tech 10 searches are notoriously bad at flagging all relevant data. 11 And, in part, this is because companies can call the same 12 thing different names. Further, companies can report 13 information in different places. And to reduce the risk that 14 we overlook something important, we often perform redundant 15 manual steps. Standardized tagging of information can help 16 us ensure that we identify all the data that meets our search 17 criteria. And that is very important that we not overlook 18 something. 19 The third benefit I mentioned was accuracy of data 20 access. Our processes today to accessing data include many 21 manual interventions, each of which increases the risk of 22 human error. 23 For example, our statistical analysts download data 24 classified in our reporting framework, manually input data 25 into the templates we use to adjust financial statements and 1 then perform procedures to ensure that the processes have 2 produced a reliable result. Using interactive data could 3 reduce the amount of human intervention in this process and 4 reduce human error. It might also allow automated quality 5 control procedures to ensure the reliability of the database 6 rather than requiring extensive manual processes. 7 The fourth benefit I mentioned, and for me among 8 the most important, is improving the comparability of company 9 data. Comparability is essential to the rating and research 10 processes as I suspect it is to almost all of business 11 analysis. Ratings that we use are relative not absolute 12 measures of credit risk. We compare companies to those of 13 their industry peers. We compare companies with those that 14 are at similar rating levels. We compare domestic companies 15 with international counterparts. 16 Now, today's comparability surely can be improved 17 and the Commission has been outspoken on a number of these 18 areas so I won't belabor them. But US GAAP differs from 19 other GAAPs. Companies apply different estimates and 20 judgments in measuring data. Companies display unclassified 21 information differently on the face of the financial 22 statements. And these differences give us huge headaches in 23 the analytical community. 24 Interactive data can improve comparability. Data 25 tagging is not just about technology. It is equally about 1 the classification of information. Boundless flexibility in 2 tagging data is the enemy of comparability. Limiting 3 flexibility in tagging is essential to the value to 4 interactive data to investors. 5 So thoughtful data tagging I think can actually 6 improve comparability in a major way. Let me give you one 7 example. Consider retailers. Some retailers view their 8 store costs as part of operating expenses and include them in 9 cost of good sold where they affect reported gross margin. 10 Other retailers use store costs as selling costs 11 and include them in SG&A where they don't affect gross 12 margin. So gross margin and SG&A costs of retailers are not 13 comparable. Further, investors do not have the data needed 14 to make them comparable. But tagging store costs could offer 15 management and investors the best of both worlds. Management 16 could classify store costs as it deems best consistent with 17 the way it manages the business. Yet, investors can download 18 data and classify it in a comparable way essential to 19 financial analysis. So XBRL offers the best of both worlds. 20 My final point and then I'll be silent is to 21 understand the source and context of company data. 22 Interactive data can allow the analyst to instantly backtrack 23 from a data point to the source of that data point. And that 24 backtracking can help the analyst see to better understand 25 the data in the context in which the data was presented. 1 That is key to analytical effort. 2 So, in conclusion, you know, why we're really fired 3 up about this is that it offers -- interactive data offers us 4 more time to be doing what we're paid to do which is analyze 5 the information and gaining insight from that and less time 6 just getting data ready for analysis where we spend too much 7 time. Thanks. 8 MR. DALY: Thank you. 9 Mr. Franks. 10 MR. FRANKS: Thank you. 11 Let me just first say that my point of view is 12 going to be from the institutional investor where at 13 TIAA-CREF we have over 50 investment professionals on the 14 research side really aligned by industry will be performing 15 the analysis prior to investment decision. And I see, as was 16 just touched on, an enormous opportunity to improve the 17 efficiencies of particular pieces of the investment process 18 particularly early on as a screening tool in particularly 19 small or mid-cap names. 20 MR. DALY: Could you pull your might just a little 21 bit closer? 22 MR. FRANKS: Sure. I think, as was just touched 23 on, the interactive data project will allow you to get to 24 what you want to do faster. And what we want to do as 25 investors is not spend a lot of time cleaning the data, 1 looking for clean historicals, accurate current financial 2 statements. That's part of it, but what we really want to 3 spend our time on is forecasting the future. And that's 4 where we believe we add value. So any tool that will give us 5 accurate information in a manipulable format is a big plus 6 from our point of view. I don't think it will ever replace 7 the Ks and the Qs which are going to contain information that 8 probably cannot be tagged and is a rich source of information 9 of the company, in the footnotes, in the discussion sections 10 which it will probably be beyond the scope of this exercise 11 to really tag. And, if you're investing large amounts of 12 money, you will have to go through in detail no matter what. 13 But I do think this can accelerate the investment 14 process for us and I do think that beyond the core group of 15 companies that an analyst would cover, this could allow us to 16 create better intelligence screens which would bring small 17 and mid-size companies that we might not normally look at to 18 our attention at which point we can then begin to do the much 19 more detailed work that could lead to investment decisions. 20 So whether you call that coverage of a company, it is 21 certainly attention towards companies that we may not have 22 otherwise looked at. 23 MR. DALY: Thank you. This next question is for 24 Ms. Tamraz and Mr. Gregson. What sources of data are 25 primarily used by analysts, investors or other users -- the 1 media, for example -- for research today for official filings 2 for the SEC, third party financial databases, manually re-key 3 data. What sources do you look to? 4 MS. TAMRAZ: Well, Dow Jones, Reuters, Bloomberg, 5 Thompson Financial, you know, services like that are the 6 sources, but I think it all starts before that. And 7 representing the news distribution service and the commercial 8 news wires, I think interactive data all starts with the 9 press release. 10 In our service, the press release is already being 11 distributed in XML and XBRL to me is just an extension of XML 12 and it is further tagging of the financial data. So I think 13 that is going to be enormously useful for everyone, the 14 individual investor and the professional investor, media, et 15 cetera, to analyze companies and make buying decisions. So I 16 was happy and thankful to be invited here today because I 17 think the press release is at the heart center of interactive 18 data and provides that source being pushed out to Dow Jones, 19 Reuters, Bloomberg, et cetera, is key to taking that 20 information and analyzing it. 21 MR. GREGSON: I'm just really endorsing what Cathy 22 said. The news release is the primary source of data for 23 newsrooms and for a large number of people who are required 24 to comment instantly on what companies are saying. And the 25 use of their interactive data will enable the media to 1 comment much more effectively and much more rapidly on what 2 companies are saying, particularly in their earnings 3 statements. 4 I think that the two newswires working together to 5 develop a taxonomy for text as well as supporting the 6 financial taxonomies will make the press release 7 significantly more valuable to both retail and institutional 8 investors. So we thoroughly endorse the efforts of the SEC 9 to ensure that this standard is rolled out. 10 MR. DALY: The last question in this area goes to 11 Mr. Guttman and Mr. Stantial. What incentives would 12 encourage companies to submit data in an interactive data 13 format? We have heard about the carrot and the stick 14 already. What perceived risks by Company C in submitting the 15 data in an interactive data format as a result? 16 DR. GUTTMAN: Well, let me just as a private equity 17 investor much of what we are talking about today is kind of 18 an unrealizable dream at least in the area that I work in, 19 but I do have the privilege of working with a number of 20 companies and have invested in a number of companies that 21 generate or move data of the kind that we're talking about 22 today. 23 I think that one of the things -- and I had an 24 opportunity to speak with them before coming to today's 25 panel. And I think the question is very interesting because 1 there is a very large ecosystem of companies, mid-market, 2 smaller companies that generate or move the kind of data that 3 we're talking about and so far they have not really realized 4 a lot of customer demand. So the typical supply-and-demand 5 incentives that are present in the market had not yet 6 appeared with respect to XBRL. 7 I think it also raises the corollary point that 8 there are a huge number of listed securities and that the 9 cost of implementing XBRL don't scale. So it is not -- in 10 other words, the large companies that are presumably a part 11 of the test group, that's a relatively small expense for them 12 relative to the scale of their organization. So I think that 13 as others have mentioned during the course of the panel, 14 there probably need to be incentives of some kind put into 15 place to cause both the data providers and data movers within 16 the ecosystem as well as the smaller organizations who are 17 expected to report this kind of information to the SEC and 18 analysts to actually embrace XBRL. 19 MR. STANTIAL: I would like to approach this 20 question a little bit differently and maybe a liberal 21 interpretation of incentive. Barring a mandated requirement 22 file, we did think about this quite a bit, but really didn't 23 think there was say a traditional incentive that the 24 Commission would provide that would really make us any more 25 interested than we already were. But having said that, I 1 think the real issue here is how do we get broader 2 application, interest and usage of XBRL by companies. 3 And using that kind of avenue for incentive, there 4 were kind of two thoughts. One is really this community 5 here, the investors and analysts. You know, right now XBRL 6 is very much within the financial reporting realm and in some 7 regards that's harmful. 8 I think if we can have the investor and analyst 9 community make a much stronger statement to companies that 10 they want and need this data in XBRL, then you are going to 11 take the interest within a company from the financial 12 reporting segment over into investor relations, senior 13 management and those kinds of levels which is going to, given 14 that it's coming from your shareholders or representatives of 15 your shareholders is going to get quite a bit of attention. 16 The other way I would focus and it just may be a 17 very liberal interpretation of incentives would be to take 18 resources that are available whether it's the Commission or 19 consortiums or whomever and find ways to bridge these, and 20 I'll call them, perceived roadblocks to adopting XBRL. And I 21 have heard some of them even this afternoon on the panel 22 having now filed I think six or seven XBRL documents 23 including the one that was profiled on the Morgan Stanley 24 product, they really I can honestly say are not roadblocks or 25 issues even for smaller companies to adopting XBRL. 1 I think where the resistance or the trepidation 2 comes from is a lack of knowledge or proper understanding. 3 So if we can bring resources to bear to bridge that maybe 4 through a tool kit, through hands-on workshops where you walk 5 people through how you tag documents, things of that kind of 6 nature, to take it from this level we're talking down to the 7 details to show people that you can file a document for 8 literally -- our first document was $300. That was our total 9 out-of-pocket cost. Even for a small company, $300 is not a 10 lot of money. And it was about 80 hours of effort. I know 11 resources are a constraint, but 80 hours is not that much of 12 a constraint for any company. And, if it is, there are now 13 organizations such as EDGAR online that will tag it for you. 14 So you can circumvent the resource issue. 15 But I think it is that kind of information that 16 needs to come out into practical terms and then I think that 17 will really help some of these more companies into the fold. 18 MR. DALY: Mr. Harris. 19 MR. HARRIS: Thank you. I just wanted to add one 20 point that relates to all three of your questions really. 21 Based on our own experience using interactive data, I don't 22 think you should underestimate even for the retail investors 23 that it takes you to actually asking a completely different 24 set of questions to what you were asking before. Because 25 what the interactive data does is highlight differences, 1 gaps, inconsistencies which you would never have been able to 2 see in an efficient way before. So it actually takes you 3 down the path of better understanding which several of the 4 other panelists have said. So I don't think you should 5 underestimate the path that this leads you to. Don't look at 6 it where it is today. 7 The other thing I would just mention relative to 8 the last set of comments is people are scared of change as 9 Ms. Mulcahy said. Therefore, some of the people who 10 purportedly would demand this information may actually be a 11 little anxious as to what it does to their own activities. 12 So, again, I wouldn't let that be too much of a barrier 13 because as you start to play with this you really appreciate 14 the value that you can get out of it. 15 MR. DALY: Mr. Whalen. 16 MR. WHALEN: Just to take that comment a step 17 further, in most cases when you get vended interactive data 18 today, you're not allowed to redistribute that outside your 19 organization. As soon as the SEC makes public interactive 20 data widely available, every media outlet that focuses on 21 investors, Google, Yahoo!, all the rest of them, will take 22 that data and they will do exactly what Rupert is talking 23 about. They will almost immediately start processing it, 24 distilling it and offering it to users in a variety of 25 different ways to capture exactly the value proposition that 1 he just outlined. 2 MR. DALY: We'll try to circle back on this, but 3 let's move onto Scott. 4 MR. TAUB: I would like to ask a few questions that 5 really build on some things that people have already said in 6 the opening presentations and then in answer to the last few 7 questions. 8 Let me start if I can with Dr. White. In addition 9 kind of the basic financial statements, I would like to hear 10 from people about what other items should be tagged. 11 Footnotes, MD&A, perhaps filings that don't even include 12 financial statements. What kinds of documents ought to be 13 tagged and why would the additional tagging produce benefits? 14 MR. WHITE: There is already talk about -- there is 15 quite a bit of talk in the academic community in fact and it 16 has also been picked up by the SEC. For example, Corey Booth 17 mentioned at the 13th XBRL International Conference that 18 there were several leverage points that had been identified. 19 And I couldn't agree more. These are footnotes, 8-Ks and 20 10-Qs. 21 It seems to me that the 8-K is a no-brainer because 22 you have triggering events, you have the need to disclose 23 very timely important information for investors. It is a 24 rather structured environment. So it seems to me that the 25 8-K is because a no-brainer to develop the appropriate 1 taxonomies and reporting mechanisms. 2 Something that would add extreme value at the 3 moment to what we already have to the taxonomies that we 4 already have is the tagging of footnotes. Now, I'm thinking 5 about tagging at a higher level as opposed to trying to 6 create a taxonomy that picks up all the nuances that you find 7 in footnotes. But that to me is one of the most difficult 8 pieces or sections of any set of financial information is the 9 complexity that is disclosed in the footnotes. It can 10 totally change the meaning of a set of data that appears in 11 the financial statements by reading the footnotes and fully 12 understanding what they say. So to me it's basically a 13 no-brainer, footnotes, 8-Ks, 10-Qs. 14 MR. TAUB: There's been a few comments about the 15 importance of standardization in terms of getting the most 16 benefits out of data tagging. However, as I think all of our 17 panelists know, US GAAP and the SEC's reporting rules 18 regarding financial statements and related information tend 19 to be very flexible. That is there are no limits to the 20 captions a company can use in its filings nor in the 21 narrative disclosures that it makes. 22 So trying to get to thoughts about how important is 23 standardization versus the maintaining the flexibility that 24 is currently allowed in our reporting system. I think we 25 have heard from everybody except Mr. Augustine. So, perhaps 1 I'll look to you to start this one off. 2 MR. AUGUSTINE: Thank you and thank you for having 3 me here. I think it's a difficult question. Certainly 4 reconciliation of GAAP and non-GAAP earnings is a very 5 important part of what the analyst and an investor would 6 spend his or time doing. That is part of the discussion that 7 goes to the fine print in the footnotes to the financials as 8 to what is so important about the seeming minutiae but really 9 what can make a critical difference in interpretation of such 10 results. So I don't think that question should be taken very 11 lightly, but I certainly don't have any real closure on it. 12 In my nine years as a sell side biotechnology 13 research analyst, reconciliation of GAAP and non-GAAP 14 earnings is something that we encountered routinely, but in 15 terms of how often it became an issue of conversation between 16 investor and analyst or companies and investors on conference 17 calls, the answer is very infrequently. And so it might be 18 best to get some experience or comments from people with 19 other industries where this might be much more germane to 20 their day-to-day. 21 MR. TAUB: Okay. Trevor Harris. 22 MR. HARRIS: Thank you, Scott. 23 I think we have to be very careful what that word 24 standardization means. There are other countries that have 25 uniform accounting practices where every journal entry is 1 dictated and I would not say that automatically leads to more 2 informative information. 3 In addition, companies are complex and different. 4 And that is part of the information we need. And I think you 5 can go to Greg Jonas' point is we are very happy for the 6 companies to tell us the way that they think the information 7 should be portrayed. To the extent that we have tagged data 8 elements that deal with that complexity, we can reorganize 9 them in the way we want. 10 Our experience with our clients is that different 11 investors want different things. And we actually create 12 custom metrics so that they can create any metric they want 13 which is very easy to do with tagged data, it's almost 14 impossible to do without. 15 So actually I would be very 16 careful -- standardization at some level makes sense, but 17 what that word really means and how far you take it can 18 actually be very dangerous in terms of the information that 19 you provide. 20 MR. TAUB: Thanks. Mr. Salva. 21 MR. SALVA: Yeah, thanks, Scott. Just to echo what 22 Trevor just indicated because I thought of that as Greg was 23 giving his example of store costs and what belongs in margin 24 or what might be in margin for one company versus another. 25 As you know, US GAAP doesn't necessarily ensure 1 comparability from company to company because of the 2 selections of alternative accounting principles that can be 3 applied and not just principles but also classification. I 4 think there is a lot of flexibility on the part of commercial 5 companies to classify costs in different ways. They look at 6 them for internal management reporting purposes differently 7 and sometimes appropriately because the underlying economics 8 drive different presentations or selection of accounting 9 principles. So we do have to be careful in terms of 10 believing that by data tagging or standardization will lead 11 to comparability. 12 What it will do is it will facilitate analysis so 13 that underlying differences can be ferreted out. I think 14 that is what Trevor might mean by it leads you down a 15 different path of questions that you might not ever get to 16 because you are too distracted by trying to get to the data 17 to analyze. 18 MR. TAUB: I believe Chairman Cox has a question. 19 CHAIRMAN COX: Yes. I just want to make sure that 20 I'm learning the right lesson from listening to all these 21 comments. Synthesizing what discussion has just occurred, I 22 think what I'm hearing is that if we want ready-to-eat 23 comparability, if I've got the term correctly from earlier, 24 we want ready-to-eat comparability, we might find ourselves 25 disappointed. It's a big world. There are a lot of 1 different ways to report a lot of things. 2 But if what we want is to have the kinds of movable 3 pieces that will let us reassemble things to our own 4 satisfaction and particularly if we are willing to see a role 5 for intermediaries and third parties between this data and 6 retail customers for a variety of purposes we might find 7 ourselves highly satisfied. Is that about right? 8 MR. WHALEN: If you have a thorough tagging regime, 9 no matter how the companies try and obfuscate, the analysts 10 armed with the tagged data, much like Rupert is doing now by 11 hand, are going to be able to sort it out. And that's really 12 I think the very exciting possibility. It will make the IR 13 professionals' job a lot hard and it will make both the 14 professional street analyst and also the independent analyst, 15 the journalist, all the other parties that want to be 16 consumers of that data that much more effective. 17 CHAIRMAN COX: And I just want to add an additional 18 layer of potential complexity here and see just how much 19 satisfaction we might yearn for at least potentially in the 20 future. 21 Is it possible to imagine a future in which the 22 analyst can use this data tagging in order to do a much 23 better job of comparing GAAP and IFRS financials? 24 MR. HARRIS: No question. We are doing that really 25 currently today. We cover our global universe, many 1 companies reporting under IFRS, many under non-other 2 international GAAPs and US GAAP, so there is no question that 3 it does facilitate those kinds of analysis. 4 But if I may try to give you an illustration? 5 There are many companies that have kept the finance 6 subsidiaries which actually are integrated in the way that 7 they actually run their operating businesses. 8 For our classification, we happen to treat those as 9 operating entities because there is no way to separate how 10 much of the value is from the financing business and how much 11 is from the let's say the production side of the business. 12 In other companies they are so clearly distinct, we make that 13 separation. 14 To get the right analysis about the sustainability 15 and growth of profits, you have to deal with those kinds of 16 distinctions. Other people may have different views of that. 17 Some regions deal with it differently. But once it's tagged 18 and once you understand that source, you can actually look at 19 it both ways so that you can actually make those comparisons 20 more meaningful at virtually no cost. 21 And that's the key is you can make all these 22 comparisons very simply and then see which gives you the 23 better insight about what's happening going forward. 24 MR. TAUB: Mr. Jonas put his card up, down and back 25 up again, so we'll give him a shot. 1 MR. JONAS: I just can't help myself but I 2 absolutely agree with the point Chairman Cox just made except 3 that on international standards the division for the future 4 is conversions with US GAAP so that we have one body of 5 global GAAP in that we don't have to rely on tagging 6 technology to help put a band-aid on two diverse GAAPs. 7 MR. TAUB: We've heard a number of people make 8 comments that through tagged data analysts would have more 9 time and perhaps more capability to perform analyses that are 10 not currently performed. 11 I guess I'd like to get views from Mr. Markese 12 regarding whether these same benefits would accrue to 13 individual investors were we to get into a tagged data 14 format. 15 MR. MARKESE: Well, it's an uneven playing field on 16 a cost basis, an access basis. We all know that. But what 17 we're talking about in the professional models are a richness 18 of data that simply is not available to the individual 19 investor but would be with tagging. 20 I mentioned those value drivers, I mentioned the 21 quantitative things we can pull out. What we need is peer 22 group comparisons, for instance. When you do get down, you 23 screen down your finest that you like, how do you compare 24 that? And there are different ways of creating industries. 25 And the depth of information available on that again is not 1 available to individual investors today, but with tagging it 2 would be cheaper and I assume more available at lower cost. 3 MS. TAMRAZ: I just want to make a comment about 4 that because I was interested in some remarks that Corey 5 Booth made in talking about simplifying some of the coding 6 and I think this is where news services like Business Wire 7 and Peer Newswire can be helpful because we have got an idea 8 going that we might provide some simple tagging for companies 9 where it wouldn't have to be that complex but yet it would 10 provide some of the main information that would be used for 11 analysis and that might be very helpful for the downstream 12 for the end user to read some of the simple tags to make 13 decisions without it being so complicated. 14 But Corey said I think the idea of using XBRL to 15 encode earnings release information is a very powerful one 16 whether it takes place through the SEC 8-Ks and 10-Qs or 17 through the press release services. This type of information 18 is often relatively simple and condensed and shouldn't 19 require massive taxonomies, but it is also very valuable and 20 time-sensitive information. 21 I think that is a really good direction to go in 22 because there are many out there that are not as 23 sophisticated as, you know, the big guys. And if we provide 24 something that is a little more easy to use and readable I 25 think that will be very good for the individual investor. 1 MR. TAUB: Sticking with the theme of perhaps the 2 smaller companies for a moment and perhaps even smaller 3 investors, we have heard reports that the costs are fairly 4 low. Mr. Stantial I think provided some comments in that 5 regard. But the other thing we have also heard a couple of 6 people mention is the possibility that XBRL tagging or other 7 data tagging for use with interactive data might indeed 8 increase analyst coverage. It occurs to me that this would 9 be potentially of benefit to smaller and medium-size 10 companies if it were to occur. 11 I guess I would like to solicit a few more thoughts 12 from people as to whether this would occur. I see Mr. 13 Augustine nodding his head. 14 MR. AUGUSTINE: I'd love to help you out. I mean 15 covering the biotechnology industry, you have to understand 16 there are more than 300 public companies. I covered 27 at my 17 peak with a support staff of two people, so I covered less 18 than 10 percent. How did I choose those companies? There 19 were 12 I had to cover. 20 Why? Because they were liquid. They traded a lot. 21 They got the institutional investor votes. They were Amgen 22 and Genentech and a handful of other profitable companies. 23 There are only a dozen profitable companies in my industry. 24 So how do I choose the remaining 15 or 20 to round out my 25 coverage? 1 Well, I might get an idea in a technology and 2 believe that it may work, but it also is the case that CEOs 3 and CFOs, CFOs in particular, they spend 40 percent of their 4 time in my industry if they are a development-stage 5 biotechnology company just meeting with investors and 6 analysts like soliciting coverage. Otherwise they are left 7 in the depths that were described by earlier speakers of 8 having one or two analysts covering them tending to be the 9 underwriters. 10 So here I am in an industry that is 11 capital-intensive. It's $800 million to make a drug. It 12 takes 12 years and very few of the companies are actually 13 covered. The benefits to small and mid-size companies in my 14 industry group should be readily apparent. It's the 15 opportunity to furnish somebody with full historical 16 financials and all they have to do going forward is project 17 on the fate of one or two products in development. I mean 18 that's a no-brainer for me as an analyst. 19 The biggest roadblock for me covering more 20 companies was never the science, it was all of the legwork to 21 simply bring it up to the state of readiness. All the 22 forecasting, et cetera, would be readily enhanced. 23 So my suggestion is that for that cost 24 consideration whatever it might be in dollars certainly it's 25 not as burdensome as SOX compliance and to that end I would 1 point out that these companies ought to look at expanded 2 coverage and expanded ownership base, the constant need to 3 access capital, and realize that as they are able to speak to 4 more and more investors and to gain increased coverage, one 5 of the great benefits, of course, that is also going to 6 accrue to them conceivably is that they have many more 7 sources to tap. 8 But, look, how do you incentivize them? Although I 9 think it may be readily apparent, how about linking it to The 10 Securities Offering Reform Act of 2005 by which they could 11 benefit from things that might normally accrue to otherwise 12 the well-known investors. 13 Once you reduce the research black-out periods that 14 arbitrarily seemingly to an investor or analyst kept me and 15 others from writing when actionable events occurred in those 16 companies and make it easier for them to get on file so that 17 we don't have to sit there with $200 million shells in our 18 face every other week because they are worried about being 19 able to take advantage in a timely fashion opportunistically 20 of an appreciating stock price. I think that is an example 21 in my industry that I know well. 22 MR. TAUB: Mr. Franks. 23 MR. FRANKS: Thank you. 24 Some similar observations. This will becoming from 25 the buy side where if we have 50 analysts you can only ask 1 someone to be an expert on 20 to 40 companies. And that is 2 going to get you a 1000 to 2000 companies. And clearly there 3 is more investible opportunities out there particularly in 4 areas that are less covered, so you would want to look at 5 those as well. 6 As a research director, the analyst's time is our 7 most precious asset and we want that pointed towards areas 8 where they can generate a return for our participants. So 9 what you would do as an analyst is clearly you're going to 10 cover the 20-plus names that are the biggest market gaps that 11 you have to cover from an index point of view. Beyond that 12 you want to screen as many names as possible. 13 I used to be a semiconductor analyst. You would 14 always cover Intel, always have an opinion on Intel, but 15 getting down into the sub-billion-dollar market cap companies 16 using your industry expertise to identify investment 17 opportunities is value add on the buy side. And with tools 18 driven by interactive data, if you can be screening 200 names 19 and similar to biotech, there is a lot of small semiconductor 20 names, doing various types of analysis which will differ over 21 where you are in the cycle and what type of company they are 22 and say, "This looks interesting. Let me spend some time 23 there." Begin to dig in the Qs and Ks, figure out why this 24 company is trading where it is, you may not think it's an 25 opportunity at that point. Then you drop it. You may think 1 it is an opportunity you continue to develop your model's 2 forecast forward and invest accordingly. So it's a real 3 potential benefit for the efficiency and breadth of buy side 4 coverage. 5 MR. TAUB: Thank you. Let me move to a slightly 6 different topic. There has been some talk of to what extent 7 auditors would need to be involved in attesting to the 8 accuracy of XBRL data. For our voluntary program we have had 9 one company, United Technologies, that has gotten its auditor 10 involved and the auditor has reported on that data using 11 guidance put out by the PCAOB. 12 Is it necessary for auditors to be involved with 13 XBRL data? Are there different types of attestations that 14 auditors should be asked to do in terms of XBRL. Mr. 15 Stantial, you have had some experience here if I might look 16 to you to begin. 17 MR. STANTIAL: Yes. I'll answer two parts. We had 18 auditors go through partly because we wanted them to learn 19 the process with us. None of the firms having gone through 20 this, then they weren't sure as well what it all really 21 entailed. So, similar to us, we wanted to get the learning 22 curve out of the way so we could proceed in the future 23 efficiently. 24 In general, I think auditor's assurance is 25 essential. You are taking an area that people as has been 1 noted have a fair amount of trepidation to begin with. It's 2 major change. Although the taxonomy is out there, for 3 instance, the commercial and industrial taxonomy has 4 something like 1500 tags right now. It is probably half of 5 what it needs to be. So there is a lot of room right now for 6 companies to be extending tags in order to meet the full 7 scope of their financials. 8 And even though a lot of the conversation now is 9 just on the basic financials, there is no reason not to go 10 ahead and use the tags that are developed to do your MD&A, 11 your footnotes and everything else. They are there. They 12 are not as mature. But given that then I think people would 13 want to know that you had some independent review of either 14 what companies did to extend accounts or how they applied 15 some of these less mature tags or filled in the voids, and 16 perhaps not being intimate with what XBRL means and the whole 17 process then to have an outside party just sort of fill in 18 your insecurity with that level of assurances that you would 19 want then to use the data unencumbered and freely. 20 MR. TAUB: Mr. Whalen. 21 MR. WHALEN: Just as a follow-up to that, if you 22 think of it, most large enterprises today are tagging their 23 data internally but they are using proprietary accounting 24 systems. There are some offerings in the marketplace right 25 now both by consultancies and large enterprises like Cisco, 1 for example, that are trying to take that proprietary tagged 2 information and migrate it to XBRL. So I think it makes an 3 enormous amount of sense. 4 If you're an auditor and you want to know where a 5 piece of financial information came from within the 6 enterprise, you are going to want it tagged in some way so 7 you can trace it down and verify the origin. It is really 8 the same concept whether it's XBRL or a proprietary 9 accounting system. 10 MR. TAUB: Mr. Jonas, perhaps for the last comment 11 on this. And maybe have you thought about whatever auditor 12 involvement there is, is there a report needed beyond the 13 standard auditor's report to cover the XBRL information? 14 MR. JONAS: Well, if we are successful in getting 15 investors to increasingly rely on interactive data, you know, 16 errors in the tags will flow right through to the investor's 17 databases possibly misleading their analysis. So companies 18 and auditors could perform all other steps in the preparation 19 and audit process correctly, but if the data tags are wrong, 20 we could end up like fumbling the ball here on the goal line. 21 I mentioned before that I think tagging data is the 22 equivalent of classifying data and the auditor's report has 23 long covered the classification of data in financial 24 statements and footnotes. So I would think that investors 25 would greatly benefit from similar assurance about the 1 classification of data in the tagging process. I would think 2 that could be done through the standard auditor's report. 3 With regard to data that's tagged on unaudited 4 information which I hope occurs as we broaden the tagging 5 universe, I would hope that management's report on internal 6 control and management's assertion about controls would cover 7 the data tagging process as well as the other aspects of 8 control. 9 MR. TAUB: Dr. White? 10 DR. WHITE: I picture a world in which XBRL does 11 not stand alone. There are many other initiatives going on 12 in the XML world. One is called internal control XML. It is 13 based on the frame work. It is using an idea where a risk 14 control library gets created that includes businesses 15 processes, risks, controls, testing procedures and so forth, 16 all of which would work directly for SOX compliance. 17 So to me, and this is one of the roles of academics 18 obviously, some research being carried forward in using a 19 combination of these technologies that are all working 20 towards the same goal makes total sense. And, again, as an 21 academic we need access to data. And so if we can overcome 22 that hurdle where we can get access to real world data and be 23 able to do some experimentation, we can make a significant 24 contribution here. 25 MR. TAUB: Thank you. I'll turn it over to Jim to 1 go through our last group of questions. 2 MR. DALY: The last session is on tools for 3 interactive data use. And I would offer this up to Mr. 4 Whalen and Mr. Harris. They have talked pretty much on some 5 tools that they have used and have experience with, but are 6 there sufficient tools in the marketplace today to use 7 interactive data overall? What type of tools would investors 8 and analysts like to have and what are the costs versus the 9 benefits for those tools? 10 MR. WHALEN: Well, I think the answer is that there 11 is a very mature and very rapidly growing set of tools, from 12 storing and gathering data down to the actual analysis of 13 data. Could we use more tools? Sure. But I think if you 14 offer interactive data to this marketplace, you will see a 15 proliferation of tools that will even exceed what's already 16 out there starting with Microsoft, looking at Google 17 launching their own spreadsheet, all the proprietary 18 offerings out there that retail investors can get from 19 websites and other organizations. I think if you enable them 20 by making this data publicly available, the options will be 21 limitless. 22 MR. DALY: Mr. Harris. 23 MR. HARRIS: Yes, I would really just endorse that. 24 I don't think -- it's a chicken-and-egg situation. To the 25 extent that there is interactive data in our case, we started 1 building a suite of applications for that. To the extent 2 that it becomes more publicly available, I just think there 3 is almost limitless tools that would be made readily 4 available very quickly and it would help all of Mr. Markese 5 and other investors, too. 6 MR. WHALEN: Could I add something quickly? We 7 really should not underestimate the systemic influence on 8 both the academic community and the risk management community 9 as to what tools we develop because of the availability or 10 the lack of availability of data. If graduate students in 11 business schools who are working on new behavioral models for 12 analyzing corporate behavior had access to structured machine 13 readable data from the SEC, I can't even imagine what they 14 would be doing. The tools we have today are a function of 15 the data availability. We are still living with what was 16 available 10 and 15 years ago. 17 MR. DALY: Ms. Tamraz. 18 MS. TAMRAZ: Well, I think talking about tools, it 19 is a chicken-and-egg thing and you have got to get the news 20 tagged first and then the tools will be created to process 21 that news. And, again, I think Business Wire and Peer 22 Newswire we are uniquely positioned to push XBRL forward. 23 For instance, we just rolled out a tool in March 24 called Earnings Direct. So the company, the issuer can 25 convert their company data into XBRL by downloading an Excel 1 template, populating it and XBRL tagging it, uploading it, 2 sending it back to us and then we are pushing it out to the 3 community that is going to use it and analyze it. And, 4 again, Peer Newswire is doing similar work in this area. 5 Together we have been pushing forward the whole tagging of 6 financial information. And I think that is really key to 7 this whole process. 8 Business Wire alone issues more than a quarter of a 9 million press releases a year. And you have got about 50 10 percent of the marketplace, so you can see how many news 11 releases are going out and if they were tagged I'm sure there 12 would be a proliferation of tools to receive them, analyze 13 them and act on them. So it really is a chicken-and-egg 14 thing. 15 And also peer pressure is also a wonderful thing. 16 I know everyone is saying well, the SEC should mandate it, 17 but with the voluntary program, I have to say we have done 18 some filings for Altria and a few other companies and 19 XBRLized them and the phone has been ringing because nobody 20 wants to be left off the bus as the bus move forwards. So I 21 think it is going to start to grow. 22 MR. DALY: Anything else? Any final comment from 23 anyone? 24 Mr. Chairman? 25 CHAIRMAN COX: Well, thank you very much. I'm about 1 prepared to wrap this up. So before I do, I want to thank 2 all of our panelists and thank all of you who have joined us 3 today and offer a special word of thanks to the people that 4 are still with us for staying with us all day. 5 We actually have one more panelist on this vital 6 issue still today. This additional perspective comes to us 7 from the Chairman of the House Subcommittee on Capital 8 Markets, Richard Baker, who is actually in Louisiana but 9 through the miracle of modern technology he is going to be 10 our last presenter on what has been an absolutely outstanding 11 panel. So we are now going to give Chairman Baker the last 12 word. 13 CHAIRMAN BAKER: Technology is a powerful force in 14 the world of commerce creating opportunity, products and 15 services. Technology deployed in the regulatory world can 16 have a parallel effect. Data tagging methodology such as 17 Extensible Business Reporting Language can be a powerful tool 18 to achieve many valuable goals. 19 The investing world is a dynamic place with more 20 individual investors in the market than any time in history, 21 second in value only to home ownership. Investment 22 portfolios for the individual are growing household wealth to 23 record levels. 24 Yields to investors can be significantly enhanced 25 with the reduction in regulatory charges. Merely reducing 1 the flow of paper can be a significant saving, but it is 2 actually possible, at least in my opinion to reduce the 3 paperwork burden on business, lowering the regulatory costs 4 while improving access to needed information for the 5 individual investor. XBRL I believe offers that clear 6 potential. 7 I commend Chairman Cox for issuing guidance on the 8 use of data tagging. I am anxious to work with him and the 9 agency in deploying this important technology to assist the 10 marketplace and individual investors. Having timely access 11 to usable information is a powerful tool for all 12 stakeholders. This is a terrific opportunity to employ 13 incredible technology and obtain tangible benefits not 14 possible before. 15 Thanks for the opportunity to participate in your 16 interactive data roundtable. 17 CHAIRMAN COX: We are grateful for Chairman Baker's 18 thoughts on the potential of interactive data and I think his 19 remarks show the support for improving the flow of 20 information throughout our capital markets through XBRL, 21 through data tagging in the ways that we have discussed 22 today, extends from regulators and investors and companies 23 and analysts to the Congress. 24 I would like to take just a moment now to recognize 25 a few key members of our staff here at the SEC who helped 1 plan this afternoon's program. 2 First, thanks to Susan Nash for our Investment 3 Management contribution and her thoughtful effort moderating 4 a second panel today. And, Susan, also for your ongoing 5 efforts to employ technology in ways that will help mutual 6 fund investors. 7 Thanks to Corey Booth who, as you know, is our CIO 8 here at the SEC, not only for your great work today but also 9 for your continuing leadership of our technology initiatives. 10 Scott Taub, who's served as a co-moderator here 11 this afternoon, our acting chief accountant, is doing 12 excellent work on our interactive data project as is Jim Daly 13 in Corporation Finance. You did an outstanding job with this 14 panel, but very importantly the day before and tomorrow as 15 well. 16 I would also like to thank Jim for not only making 17 this roundtable such a success but also helping to grow our 18 interactive data group. We can be very proud of the 19 volunteers that we have had sign up for that already. 20 And final thanks and especially so to Jeff Nauman 21 and Bridgett Litman for their tireless efforts to make 22 interactive data a reality and to empower America's 23 investors. This has been an excellent roundtable. To all of 24 our presenters, in particular, to the Commissioners who have 25 been here, as you've noticed, all day long, to members of the 1 news media, interested observers and, of course, those who 2 are watching on the web, your energy and your enthusiasm on 3 behalf of America's investors is enormously appreciated. 4 Thanks very much and good afternoon. 5 (Whereupon, at 3:17 p.m., the Interactive Data 6 Roundtable proceedings were concluded.) 7 * * * * * 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 1 PROOFREADER'S CERTIFICATE 2 3 In the Matter of: INTERACTIVE DATA ROUNDTABLE 4 Witness: Administrative Proceeding 5 File Number: 4-515 6 Date: Monday, June 12, 2006 7 Location: Washington, D.C. 8 9 10 This is to certify that I, Don R. Jennings (the 11 undersigned), do hereby swear and affirm that the attached 12 proceedings before the U.S. Securities and Exchange 13 Commission were held according to the record and that this is 14 the original, complete, true and accurate transcript that has 15 been compared to the reporting or recording accomplished at 16 the hearing. 17 18 19 20 _________________________ _____________________________ 21 (Proofreader's Name) (Date) 22 23 24 25