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SEC Takes Next Leap Into Computer Age

SLOWLY sinking under a blizzard of paper - about 13 million pieces a year at last count - the Securities and Exchange Commission (SEC) decided to join the computer age and require companies to file electronically.

That was back in 1983. Eleven years and a mountain of policy issues later, the government body is about to mandate electronic filing of compliance documentation for the country's 15,000 publicly held companies (those whose shares are listed on various markets for stock).

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A pilot program using volunteer electronic filers ran until 1992. Then, starting in April 1993, groups of several hundred companies at a time were phased in every few months. The program rounded the final bend in January of this year, when a six-month congressionally mandated test period began. The SEC will report to Congress on the test's success at the end of this month, and then the whole process becomes official and final. All remaining companies will come on-line by May 1996.

The implications for the financial industry are broad.

Quarterly financial information filed on paper was only immediately accessible to one or two people at the SEC and in its public reference room. Now its electronic successor will be piped to multiple databases around the country within 30 minutes of reaching the shareholder watchdog organization.

Subscribers to such databases as the Dow Jones or Standard and Poor's will get almost instant access to the information. Using technology to spread this data further and faster will in turn improve the stock market's efficiency, enabling share prices to quickly reflect the knowledge and opinions of investors.

``It's the beginning of equity of access to the information,'' says David Copenhafer, director of the office of planning, administration, and security at the SEC.

Some companies critical

Getting rid of the paper trail has not been without hitches or criticism. Computerizing the filing process has been so long in the making, some firms thought that the SEC was simply crying wolf and did little to prepare. Others, who took a closer look at EDGAR, the Electronic Data Gathering, Analysis, and Retrieval system designed to handle the data, labeled it outdated even before its inauguration.

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``A lot of people have a problem with it [EDGAR] because it makes you take a step backward,'' says Gary Purnhagen, manager of technical services at Bowne & Co., the country's largest financial printer with headquarters in New York.

Mr. Purnhagen is referring to the EDGAR program's use of ASCII, a widely used but relatively primitive file format that was common in the early 1980s but has since been surpassed by more sophisticated formats. (Most software programs today no longer use ASCII.)

This means that SEC filers will not be able to send graphs, charts, maps, or photographs, which are beyond the scope of ASCII. These have to be described in plain English in the electronic document with a paper copy of the graphic sent by mail. Nor can ASCII handle such basics as foreign currency symbols, including the yen sign and pound sterling. These have to be written out too.

Avoiding favoritism

The SEC says it was not cost but the desire to avoid favoritism that led to the choice of ASCII.

``It was an effort to avoid giving one vendor or software manufacturer a very substantial leg up or entree into a large number of corporate offices. And also to avoid disadvantaging companies that had investments in other software packages,'' Mr. Copenhafer explains. ``We decided that the least painful way to go was this lowest common denominator of information interchange and settled on ASCII.''

This low-tech format is the SEC's greatest challenge, Copenhafer says adding that the documents are not physically very attractive. ``It would be nice to put some visual appeal back into the documents themselves,'' he says.

Another shortfall is the freestyle nature of company reports. Unlike the IRS's electronic tax filing system, where figures go in designated boxes to aid number crunching, SEC filings are essentially unstructured. ``There's no formatting structure that would allow the computer to interpret the current financial data,'' Copenhafer says. This means that spotting a company ripe for an SEC audit has not gotten much easier.

The SEC played with a couple of artificial intelligence programs during the EDGAR pilot - one a financial statements analyzer - but found that they required huge amounts of computer processing and programming to work effectively.

But the issue has not been laid to rest. Companies will soon have to file a ``financial data schedule'' - a compilation of key numbers from the report, which the computer will then use to calculate ratios and thereby identify aberrations.

One-stop filing for companies needing to send financial data to both the SEC and state commissions, which currently only accept paper, is just around the corner, Copenhafer says. In a new system being worked out with NASAA (North American Securities Adminstrators Association), a document filed electronically to the SEC would automatically be routed onto the NASAA computer.

The last link in the chain is the national archives. Here documents are still stored on microfiche - a system that is rapidly growing obsolete because of CD-ROM technology and needs to be updated, Copenhafer says. For all the market efficiency and computer sophistication, however, Copenhafer returns to the simpler bonus. ``It will be great to get rid of some of this paper,'' he says.

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