ANALYSIS: SEC’s Data Tagging Will Ensnare Companies Next Year

In 2024, the SEC will use investigative tools powered with artificial intelligence to better identify companies that violated disclosure requirements. Similar to speed cameras enhancing traffic control for police, this data tagging technology—known as Inline XBRL—will allow the Securities and Exchange Commission to more effectively analyze large quantities of corporate disclosures in support of the agency’s enforcement activities.

As we approach 2024, the extensive list of corporate filings that are now required to be filed in the Inline XBRL format will continue to grow. As a result of the avalanche of SEC rulemaking, many public companies likely overlooked, or didn’t fully appreciate, the seemingly simple data tagging provision stated in most of the recently finalized rules, such as the SEC’s cybersecurity risk governance rule or its proposed climate change disclosure rule.

But this data tagging format on corporate filings will enhance the SEC’s ability to initiate enforcement actions against public companies—which have already begun to increase in frequency since the amended Inline XBRL format was fully implemented.

Inline XBRL Explained

Formally known as the Inline eXtensible Business Reporting Language, Inline XBRL is a structured data language within the SEC’s EDGAR system that allows companies to file their Form 10-Q, Form 10-K, and cover page of the Form 8-K in a single document that’s both human-readable and machine-readable.

The Inline XBRL format differs from a standard corporate filing form because the XBRL filing includes specific taxonomy codes to classify the financial data. All companies were to file using this format by late 2021.

Inline XBRL will be instrumental to the SEC’s investigative efforts in 2024. The SEC’s Corporate Finance Division must review each public company’s annual disclosures at least once every three years under the Sarbanes-Oxley (SOX) Act. The data tagging technology will allow for a faster and more in-depth review.

In its semi-annual report to Congress on XBRL data, the SEC said that about 75% of the information required from public companies contains the disclosures with machine-readable data. Without this XBRL data, the alleged disclosure violations would have been “significantly more difficult to detect and pursue in a cost-effective or timely manner,” the report said.

The SEC used machine-readable data to make preliminary assessments of compliance with the recently adopted Pay Versus Performance rule, the report said.

Since 2021, SEC Filing Violations Have Increased

Bloomberg data shows that since the introduction of the Inline XBRL requirement, enforcement actions have increased.

A breakdown of the 217 SEC enforcement actions against public companies from Jan. 1, 2021 to Oct. 31, 2023 from the Bloomberg Law SEC Admin Enforcement Analytics tool by rule violation shows notable increases from 2021 to 2022, with 2023 on track to tie or overtake in some areas.

The actions pertained to the following sections of the Securities Exchange Act (SEC Act) and its underlying rules:

• Section 13(a);
• Section 13(b)2(A);
• Rule 12b-20; and
• Rule 13a-1.

Enforcement actions for disclosure violations of Section 13(b)2(A)—which relies more heavily than other sections on the financial data and statements in the disclosure—stand out: They more than doubled from eight in 2021 to 19 in 2022. There have been 18 such actions this year, with likely a handful more before year’s end.

Inline XBRL data tagging also exists on a public company’s quarterly reports, Form 10-Q, and cover letter of Form 8-K.

SEC enforcement actions for these filings relate to the following SEC Act rules:

• Rule 13a-11; and
• Rule 13a-13.

SEC actions related to Form 10-Q and Form 8-K have increased over the past two years, indicating that the SEC staff is likely utilizing the XBRL data in its corporate investigations, even if the agency hasn’t publicly disclosed this fact. Form 8-K and 10-Q related actions for 2023 will likely exceed 2022 totals.

SEC’s Tagging: Insights for 2024

Attorneys can glean information about what data tags the SEC staff will prioritize for its 2024 investigations from the agency’s standard taxonomies list for operating companies, which is publicly available and updated annually.

Based on the final 2023 XBRL taxonomies and proposed 2024 XBRL taxonomies releases, the SEC has created new taxonomy codes to data tag for the following rules:

• Insider Trading Arrangements and Related Disclosure Rule; and
• Listing Standards for Recovery of Erroneously Awarded Compensation.

In 2024, the SEC will continue its use of data tagging technology to more efficiently identify and process enforcement matters, with immediate targets on insider trading and executive pay clawback violations. Companies should be prepared for the SEC’s data technology to continue to evolve and scrutinize the corporate disclosures that are required to incorporate it.

Access additional analyses from our Bloomberg Law 2024 series here, covering trends in Litigation, Transactions & Contracts, Artificial Intelligence, Regulatory & Compliance, and the Practice of Law.

Bloomberg Law subscribers can find related content on our Corporate Governance Practice Page resource.

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