Mutual Fund Industry Joins SECís XBRL Voluntary Filing Program

The good news is commercial strength taxonomy is finally being built.

September 6, 2007
by Liv Watson

The question is: How will the new mutual fund taxonomy be maintained and updated 24/7? In June, the Securities and Exchange Commission (SEC) released a final ruling allowing mutual funds to submit data of their risk and return summaries in XBRL (eXtensible Business Reporting Language) commencing August 20, 2007. Each data element, such as a prospectus about a fund's investment objectives and strategies, risks, costs and historical performance, will be individually tagged to an XBRL Taxonomy. The Investment Company Institute (ICI) is taking the leadership role in funding and developing the Mutual Fund taxonomy and promoting the mutual fund industry to disclose their risk/return summary information to SEC’s “Interactive Data” Voluntary Program in XBRL.

Development of Taxonomies

The ICI approach opens up another taxonomy development model in which the SEC works closely with industry groups to develop taxonomies that their members can use to file regulatory disclosure information. But what is still lacking is a long-term sustainable maintenance plan to keep these taxonomies available 24/7. In this month’s column I will discuss how taxonomies have been developed thus far.

Historically, US-GAAP Taxonomies were developed by volunteers to working groups within the XBRL International consortium. During the early days most of the work was done by members volunteering both technical and accounting domain expertise. Like any free labor there is no free lunch. Volunteers contributed when the priority of their “regular job” permitted. If the marketplace is going to invest in implementing XBRL into their core reporting processes they need to know that the taxonomies are of commercial strength, meeting current reporting practices and that taxonomies must be maintained when new rules and regulations change.

ICI is in a unique situation, since it is a very powerful organization representing U.S. investment companies. ICI was founded in 1940 and its membership includes 8,806 mutual funds, 667 closed-end funds, 449 exchange-traded funds and four sponsors of unit investment trusts. Mutual fund members, a trusted source with the ability to maintain and update XBRL taxonomy, serves 93.9 million individual shareholders and manages $11.231 trillion in investor assets. It is this taxonomy that the SEC endorsed for the final ruling.

What do YOU think a sustainable taxonomy development model should look like? E-mail your responses to Liv Watson.

Last year the SEC funded XBRL U.S. with $5.50 million to build out the US-GAAP taxonomy. The lingering question is who and how the taxonomy will be maintained and updated in the future. Should FASB take that role or should the marketplace develop taxonomies as a collaborative product for its users? Sustainable organizations that are committed to the maintenance and the development of taxonomies are equal in importance to taxonomies that can be fully tested according to current reporting practices before filing in XBRL is considered for mandate by the SEC.

XBRL and the World

In China and Spain, XBRL is the legal file format in which every company reports and there is an infrastructure in place for maintenance and updating taxonomy. In China, for example each stock exchange is responsible for maintenance and updates.

In Spain, the local SEC stepped up as the competent authority to maintain and update its capital market taxonomy. Only a little over one year ago the SEC opened up the voluntary filing in XBRL to public companies and the mutual fund filing program is a natural extension of that project to determine the usefulness of “interactive data.” However, these are still considered a pilot project.

SEC’s Role in XBRL

At some point the SEC must recommend that XBRL become a legal file format in order to promote market confidence, stimulate the marketplace to get prepared and tip the scale to mass adoption of the standard. However they have not made public any such information for maintaining and updating the U.S. taxonomy. There are obviously several models of infrastructure and maintenance that can be considered and I am very interested in hearing comments on this subject from my readers.

To learn more about XBRL from the industry experts and global luminaries, join us at the 16th XBRL International Conference in Vancouver, Canada, December 3-6, 2007.

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Liv Watson is an accountant and Vice President of Global Strategy for Norwalk, Connecticut-based EDGAR Online Inc. (NASDAQ: EDGR) — a provider of global business and financial information.