U.S. Securities and Exchange Commission
Report to the Congress on Section 107 of the
National Securities Markets Improvement Act of 1996
Privatization of EDGAR
September 1997
Background
The U.S. Securities and Exchange Commission (SEC), since September 1984, has been engaged in efforts to develop and operate a filing system under which all SEC registrants required to file disclosure material with the agency would submit the great majority of their information electronically. As of May 1996, this fundamental objective was achieved. The system built to accomplish electronic filing for the SEC is called EDGAR, which stands for Electronic Data Gathering, Analysis and Retrieval.
EDGAR is operated today under an eight-year contract awarded in January 1989 to BDM International, Incorporated.
1 EDGAR has progressed steadily from a small pilot program serving several hundred volunteer filers with few functional capabilities and no automated dissemination to a mature, highly reliable, full-featured system that has changed dramatically the corporate disclosure process. Issuers, SEC staff, and especially the investor community have adapted to and benefited from the technology that now delivers corporate reports to the world's desktop computers within minutes of being filed.
Since becoming operational in April 1993, EDGAR has received and successfully processed 1.3 million documents submitted in approximately 491,000 separate submissions from over 28,000 filing entities. If test filings are included, the number increases to almost 2.3 million documents received and processed. All documents are available to SEC staff from a single, fully word-searchable, textual database that contains nearly 53 gigabytes of data. No group, however, appears to have benefited more from EDGAR than small and individual investors who are now able to access corporate disclosure information for free on internet sites sponsored by the SEC and others. Usage of the SEC site has grown steadily since it was opened in September 1995, to the point where 17 gigabytes of data were downloaded in a single day during the latest (March 1997) 10-K annual report filing peak.
EDGAR system performance has been well above contractual requirements. Overall on-line availability for filers through February 1997 is 99.9 percent. The system has also proved to be relatively easy to use. Filers have consistently experienced success rates above 95 percent the first time they attempt to file any document. The newly installed backup system was available in time to respond to a serious electrical outage at the Virginia Operations Center on March 21, 1997. By the end of the day, over 1,200 filings had been received on the backup system by filers who barely missed a beat.
Although EDGAR has proven a real success, the system is in need of technical and functional upgrades in several areas. In addition, in 1996 the Congress directed the SEC to explore the possibility of privatizing some or all of EDGAR.
The Move to Privatize EDGAR
Privatizing some or all of the EDGAR system has been seen as a possibility from the earliest days of design and development. The EDGAR contract, in fact, is currently structured so that two of EDGAR's three subsystems (Receipt & Acceptance and Analysis & Review) are paid for with appropriated funds, while the third EDGAR subsystem (Dissemination) is privately financed by the EDGAR contractor, which recovers its expenses through the regulated sale of electronically filed information. This contract structure was designed to comply with the requirements of Section 35A of the Securities Exchange Act of 1934 (15 USC 7811), which established limits on the extent to which non-appropriated resources could be used to finance the system.
As the SEC began planning the competition for a new EDGAR contract in the middle of 1995, the Congress expressed an interest in increasing the extent to which EDGAR was privatized. The National Securities Markets Improvement Act of 1996, enacted October 11, 1996, formalized those expressions of interest with the following language:
Sec. 107. PRIVATIZATION OF EDGAR.
(a) Examination. - The Commission shall examine proposals for the privatization of the EDGAR system. Such examination shall promote competition in the automation and rapid collection and dissemination of information required to be disclosed. Such examination shall include proposals that maintain free public access to data filings in the EDGAR system.
(b) Report. - Not later than 180 days after the date of enactment of this Act, the Commission shall submit to the Congress a report on the examination under subsection (a). Such report shall include such recommendations for such legislative action as may be necessary to implement the proposal that the Commission determines most effectively achieves the objectives described in subsection (a).
2
Actions Taken
The SEC has taken the actions required by the legislation cited above. This report provides the results of SEC review of proposals received in response to the Commission's Request for Proposals for the new EDGAR contract and formalizes SEC briefings and oral discussions held between SEC and Congressional staff pursuant to the statutory requirements of Section 107.
Privatization proposals were solicited through several mechanisms starting in August 1995 when the agency hosted an EDGAR Technology Conference. The idea of privatization was raised with panelists and several hundred participants including filers, filing agents, commercial information disseminators, securities analysts, individual investors, and other users of SEC information.
Shortly after the conference, the SEC issued two Requests for Information (RFI), one in September 1995 and the second in January 1996, dealing in large part with the question of privatization. The SEC also participated in a panel discussion arranged by the National Academy of Sciences on December 1, 1995 to consider privatization and to obtain industry thoughts on appropriate technologies for the next generation EDGAR system. The two RFIs and the National Academy of Sciences panel were all helpful to the SEC in understanding how privatization might be addressed in its EDGAR Request for Proposals (RFP).
The EDGAR RFP, issued on October 30, 1996, solicited from all offerors a separate privatization proposal. There were no constraints placed on offerors as to proposed sources of revenue or business models or any limitations relating to the dissemination of SEC filings. The privatization proposals were analyzed and Congressional staff briefed on the results.
Discussion of Privatization Options
Based on information acquired in response to its RFP and other information-gathering efforts, the SEC offers the following discussion of privatization, organized along the lines of EDGAR's three subsystems: (1) Receipt and Acceptance, (2) Analysis and Review, and (3) Dissemination.
Receipt and Acceptance Subsystem
Privatization of the processes associated with the receipt and acceptance of corporate filings made to the SEC could theoretically be accomplished through two different approaches. The first would be to eliminate all government participation in the receipt and acceptance of corporate filings. The second approach would be to have the government remain the legal recipient of corporate filings, but to permit the offeror to finance the EDGAR "front end" with a user (filer) fee.
Scenarios in which the privatization of document receipt and acceptance are accomplished by eliminating most or all federal involvement were seen generally as problematic. The basis for the most serious concerns are founded in Section 13 of the Securities Exchange Act of 1934:
Section 13. Periodical and Other Reports
(a) Every issuer of a security registered pursuant to section 12 of this title shall file with the Commission, [emphasis added] in accordance with such rules and regulations as the Commission may prescribe as necessary and appropriate for the proper protection of investors and to insure fair dealing ....
Although one might construct a legislative proposal that removes the statutory obligation presented above, the rationale underlying the Exchange Act statute would be extremely difficult to overcome. Having private entities competing to receive corporate filings and to make them available to SEC staff and to investors would introduce serious concerns with regard to the possible loss of investor confidence. Investors rely heavily upon a neutral, disinterested party's receiving and disseminating all documents immediately and completely on an absolutely equitable and impartial basis. The prospect of commercial entities acting, not as impartial agents of the government, but as independent, potentially self-interested participants in this part of the capital formation process was consistently viewed as unacceptable.
Consequently, the act of receiving and accepting corporate filings was generally acknowledged by those participating in the discussion to be an inherently governmental function, best performed by the government directly or by a private party acting under contract as an agent of the government.
The second approach to privatizing the Receipt and Acceptance subsystem was for a government-sponsored contractor to perform the necessary work, financing the process through a filer fee. Here, the issue came down simply to the desirability of taking a step which many viewed as the imposition of a new tax. Even though a relatively modest annual fee could effectively finance all of EDGAR, not just Receipt and Acceptance, the consensus was that it was not desirable to impose separate fees upon filers, given the fact that corporations already pay fees whenever they register new issues.
Analysis and Review Subsystem
EDGAR's Analysis and Review subsystem supports the SEC staff members in the Divisions of Corporation Finance and Investment Management responsible for reviewing corporate disclosure documents. Although no offeror disputed that these staff activities are inherently governmental in nature, opportunities for privatization within this subsystem exist in that the private sector can (and does) develop and offer a wide array of software and analytical services needed by SEC staff and others to perform their jobs. Software for document storage and retrieval, full text searches, specialized databases, document formatting, and financial evaluations are just some of the many products that are either presently available or will be developed as electronic filing matures. The SEC intends to take full advantage of these private sector products, thereby avoiding the cost of developing and maintaining its own applications and services.
Dissemination Subsystem
The EDGAR Dissemination subsystem has been privatized since the inception of the project and remains the portion of the system that best lends itself to extensive private sector involvement. In reviewing both the history of Congressional involvement in EDGAR dissemination and its privatization options in this area, the SEC concluded that it should modify its approach to dissemination in ways that better respond to the Congressional intent communicated in the sentence in Section 107 of the National Securities Markets Improvement Act of 1996, which states: "Such examination shall include proposals that maintain free public access to data filings in the EDGAR system."
An approach to dissemination that retains free public access while stimulating the widest possible competition among private sector information service companies was seen as an extremely desirable privatization outcome. As a result, the SEC intends not only to maintain, and possibly improve, existing free public access, but also to foster competition among information providers by making the delivery of EDGAR data as inexpensive and useful as possible.
Conclusions Concerning Privatization
Privatization with respect to the EDGAR recompetition means working with the Dissemination subsystem to give the private sector the easiest possible access at the lowest possible cost to corporate disclosure documents. By so doing, the SEC will have created an environment in which entrepreneurial energies can be brought to bear in the creation of many new and useful products. These products will find their ways to SEC staff use, and to the desktops of individual investors as well as to the analytical routines and information services used by the most sophisticated traders, fund mangers, and market participants. The resulting improvements in products will give all investors better information with which to make investment decisions.
Future Actions
Having examined the issue of EDGAR privatization from as many different perspectives as possible, the SEC has worked with Congressional staff to fashion and implement a series of recommendations concerning the second phase of the EDGAR solicitation:
- The SEC is finalizing the second phase of the EDGAR RFP and expects to issue it by mid-September.
- The second phase of the EDGAR RFP will require that the EDGAR Dissemination subsystem be restructured to disseminate paid subscription EDGAR data on a real-time, high-volume basis at the lowest possible cost to both end users and information resellers thereby stimulating the most extensive competition possible for the creation of value-added products.
- The second phase of the RFP will require that the EDGAR Dissemination subsystem retain an SEC-sponsored internet site that continues to provide free access to SEC filings.
- The second phase of the RFP indicates that the SEC reserves the right to recompete the contract after three years in order to expand EDGAR privatization should the opportunity to do so be present. The three-year period is important because it provides the new contractor with sufficient time to upgrade and modernize EDGAR. Once modernization is completed, the task of privatizing EDGAR is made somewhat easier because both the learning curve for companies new to EDGAR, and the investment required, are reduced. The SEC will continue to work with the Congress on this important initiative. Since Section 35A of the Securities Exchange Act of 1934 places limitations on opportunities for privatization, the Congress should consider whether to preserve or repeal portions of this provision during the next three years.
- The SEC has submitted reprogramming requests to both the House and Senate Appropriations Subcommittees to set aside a specified portion of excess 1997 fees currently being paid by filers for the sole purpose of financing EDGAR modernization over a three-year period.
EDGAR is consistently cited among the more successful technology initiatives undertaken by the United States government. With the continued attention of expert SEC staff, and the continued support of Congress, we will make EDGAR better still, to the benefit of all who use the EDGAR system: public companies, government regulators, the securities industry, and American investors.
1The SEC extended the EDGAR contract a minimum of one year (beyond the original eight years) to allow sufficient time to address the privatization initiative.
2National Securities Markets Improvement Act of 1996, P.L. 104-290 (October 11, 1996).
http://www.sec.gov/news/studies/edgpriv.htm
