[588] in Public-Access_Computer_Systems_Forum
SEC'S EDGAR SYSTEM
daemon@ATHENA.MIT.EDU (James P Love)
Wed Jun 24 10:42:10 1992
Date: Wed, 24 Jun 1992 09:16:15 CDT
Reply-To: Public-Access Computer Systems Forum <PACS-L%UHUPVM1.BITNET@mitvma.mit.edu>
From: James P Love <LOVE%PUCC.BITNET@mitvma.mit.edu>
To: Multiple recipients of list PACS-L <PACS-L%UHUPVM1.BITNET@mitvma.mit.edu>
----------------------------Original message----------------------------
For Release Monday, June 22, 1992
NADER GROUP CHARGES SEC EDGAR SUBCONTRACTOR WITH CONFLICT OF
INTEREST, ASKS FOR EXPANDED PUBLIC ACCESS TO CORPORATE DISCLOSURE
INFORMATION SYSTEM
Regarding: The SEC's EDGAR information system
FMI: James Love 609/683-0534
Ralph Nader, Alison Weaver 202/387-8030
On Monday, June 22, 1992, the Securities and Exchange Commission
(SEC) was asked to modify a $68 million contract for its new
electronic database for corporate disclosure filings. Consumer
advocate Ralph Nader presented SEC Chairman Richard C. Breeden
with a letter signed by more than 200 journalists, economists,
librarians, business professionals and citizen groups, asking the
SEC to broaden access to the database system, and to exercise
greater control over the management of the electronic records of
the system.
The dispute concerns the SEC's new Electronic Data Gathering,
Analysis and Retrieval (EDGAR) system, which will automate the
process of filing, storing and retrieving the reports
corporations must make to the SEC for purposes of public
disclosure, such as 10k reports and stock prospectuses.
Nader said "The records that will be collected and stored by the
EDGAR system represent one of the world's most important and
valuable databases of corporate activities." The information is
of great interest to investors, journalists, academics, citizen
groups and others who investigate corporate activities.
The EDGAR system, which is slated to become operational early
next year, has been under development since 1983. When the SEC
first began work on EDGAR it entered into a contract with Arthur
Anderson & Co., the accounting firm. This contract was the
subject of considerable controversy, based upon fears that the
contractor would have privileged or proprietary access to the SEC
filings. A central issue in this early controversy concerned the
SEC's attempts to obtain free data processing services from
Arthur Anderson in return for giving the firm exclusive rights to
sell the electronic copies of the SEC filings.
In 1987 Congress passed legislation that prohibited the SEC from
entering into "barter" arrangements for data processing services,
and it required equal access to the EDGAR data.
In 1989 the SEC awarded a new contract for EDGAR to BDM
International and several subcontractors, including Mead Data
Central, the owner of LEXIS/NEXIS, a large commercial database
service. The Mead subcontract includes the public dissemination
of the electronic versions of the EDGAR filings, as well as the
management of an online "text management" service for the SEC
staff and public reading rooms. Through its subcontract, Mead
totally controls access to the electronic versions of the EDGAR
database.
In a June 22, 1992 letter to SEC Chairman Richard C. Breeden,
Nader said "The current EDGAR subcontract with Mead is woefully
inadequate in terms of public access to the information system,
and in fact, does little more than subsidize Mead's own business
of selling access to public records."
Nader's analysis is based upon a study of the EDGAR system
carried out by the Taxpayer Assets Project (TAP), a group started
by Ralph Nader to investigate the management of government
property, including government information. This group has
written an article critical of the EDGAR system for the academic
journal, Government Publication Review, which will be published
next year, along with a rebuttal written by the SEC staff.
According to James Love, the Director of the Taxpayer Assets
Project and the author of the EDGAR study, "while the EDGAR
system will cost the taxpayers more than $68 million to develop,
there will be very little public access to this important data.
The problem is not simply the result of an oversight, but rather
the product of a glaring conflict of interest involving the
subcontractor Mead Data Central, which owns LEXIS/NEXIS, one of
the nation's largest online information services. Mead's
conflict is simple. The greater the public access to the EDGAR
database, the fewer customers Mead will have for its high priced
LEXIS/NEXIS service."
The crux of the dispute concerns the types of information
products and services that Mead must provide at cost under its
SEC contract, and what products and services will be defined as
"enhanced," and sold at unregulated prices.
According to Love, "Mead defined the public dissemination program
as narrowly as possible. The least expensive method of receiving
electronic records from the system will cost more than $30,000
per year, and access to a complete set of filings, including the
online service, will cost more than $400,000 per year. The only
'public' that will be served by this will be large institutional
users, including data vendors."
"In a number of subtle ways Mead has not only placed huge
barriers to individual access to the EDGAR database, forcing the
public to turn to commercial database companies like LEXIS/NEXIS
to obtain access to these records, but they have also created
large barriers for other database companies. Most important,
Mead only sells copies of the EDGAR filings from a single day's
transactions, and Mead is not required by the SEC to maintain any
inventory of back files. Thus, it is impossible for any new
entrants in this market to obtain the historical records that are
needed to create a complete database. This will predictably lead
to less competition in the commercial database market, directly
benefiting Mead at the expense of the public.
"Among the more novel features of the SEC/Mead contract is that
the federal government will not receive current or complete
copies of its own database in electronic media. According to SEC
staff, this is a deliberate effort to prevent the public from
obtaining the EDGAR records under the Freedom of Information Act
(FOIA). We were surprised to find out that the only copies of
the data that the government will now receive will be in
microfiche, a technology of a bygone era," Love said.
The electronic version of the database will be stored by Mead in
Ohio. Mead will provide 650 SEC government terminals with online
searching of a portion of the EDGAR database. While Mead will
receive about $13.5 million from the government for this service,
the SEC will never own the computers which are used to store and
search the data, and Mead will retain ownership of the software
which is used to search the database.
Alarmed by the SEC's contract with Mead, more than 200
journalist, economists, librarians, business professionals and
citizen groups signed a letter asking SEC Chairman Breeden,
Representative Ed Markey (D-MA) and Senator Herbert Kohl (D-WI)
to make a number of modifications in the management of the
electronic copies of the EDGAR database and to expand public
access to the EDGAR system.
Among the signatures of that letter are Patricia Glass Schuman,
President of the American Library Association, Arthur Curley,
Director of the Boston Public Library, Andy Scott, Executive
Director of Investigative Reporters and Editors (IRE), Penny
Loeb, reporter for New York Newsday, Zvi Griliches,
President-elect of the American Economic Association, executives
from Apple, Digital, Sequent, and Performance Systems
International and other firms, and citizen groups such as
Computer Professionals for Social Responsibility (CPSR), the
Pension Rights Center, the National Family Farm Coalition, and
the Electronic Frontier Foundation.
These citizens are asking the SEC to allow the public to obtain
remote online access to the $13.5 million text retrieval service
managed by Mead. The SEC is asked to sell the public
subscriptions to the online service, priced at the "incremental
cost" of access to the system, for individuals and businesses who
want to search EDGAR from their homes and offices. The SEC was
also asked to provide free access to EDGAR through the federal
depository library program, the program set up in the middle of
the 19th century to provide universal access to federal
information resources.
According to Love, "The 'incremental cost' of access to the EDGAR
system will be very low, according to one study as low as $2 per
hour for the data charges. In contrast, commercial services,
such as LEXIS/NEXIS or Dialog, now charge hundreds of dollars per
hour to search these records online. Why will it be so much
cheaper to search the SEC's system than to use a commercial
service? There are enormous economies of scale in online
systems. The government is already paying Mead $13.5 million to
provide this service to 650 government terminals. This covers
the large fixed costs of storing the data and developing the
software to search it. The cost of adding additional users is
very low, almost a trivial expense. The most expensive thing for
the users will be the cost of the telephone call."
If the SEC agrees, the public will be able to dial into the EDGAR
system from their homes and offices and obtain low cost access to
an enormously important source of information about corporate
activities. Not only will the users be able to retrieve the full
text of particular documents, but they will be able to search for
documents on the basis of key words. For example, one could
search for 10K reports that mention Ross Perot's name.
According to Love, "This will benefit small investors, many of
who cannot afford the high priced online services that currently
provide this information, as well as journalists and citizens who
want to use the database to investigate corporate activities on a
wide range of matters."
The citizens are also asking the SEC to disseminate EDGAR filings
on CD-ROMs, which provide researchers and libraries with the
ability to search SEC records from their own desktop computers
without running up long-distance telephone calls or SEC searching
charges. "The SEC is being asked to meet with journalists,
librarians and researchers to identify the types of CD-ROM
products the SEC should provide from the EDGAR system. Why
should the public be forced to pay commercial data vendors
thousands of dollars for these products when the SEC can print
its data on CD-ROMs for less than the cost of a cheeseburger?"
Love said.
"It is important for the SEC to modify this contract now, before
the system becomes operational early next year. Moreover,
Congress is considering two bills that would provide very
important opportunities for online public access to government
database systems, and the EDGAR system should be one of the
systems that is included. These bills are the "GPO Gateway to
Government" (S. 2813), introduced by Senator Gore (D-TN), and the
"GPO Wide Information Network for Data Online" (GPO WINDO, HR
2772), introduced by Representative Rose (D-NC)," Love said.
In his letter to Breeden, Nader asked that the SEC "take
immediate steps to modify the SEC/Mead contract in order to
exercise greater control over the database itself, and to require
that EDGAR contractors provide the types of information products
and services that the taxpaying public, which financed the EDGAR
system, benefit from regularly."
Love added, "Mead is going to fight this. EDGAR is one of the
most economically valuable database systems in the federal
government. Mead will lose a huge market if the public can
obtain access to the database directly from the SEC. On the
other hand, the public has a lot to gain. We shouldn't have to
pay Mead as consumers for something we have alread paid for as
taxpayers."
2 page appendix to follow
-----------------------------------
FACTS ABOUT THE EDGAR SYSTEM
The EDGAR system is one of the world's most important and
valuable databases on financial matters. It will receive
approximately 11 million pages of filings per year from thousands
of corporations whose securities are traded in the United States.
The taxpayers are paying $68 million to set up the system,
including a $13.5 million contract with Mead Data Central to
provide sophisticated online searching services for 650 terminals
at the SEC. The Mead contract, however, will provide for
extremely limited public access to the database, forcing most
Americans to use high priced commercial services for access to
these public records.
There are two kinds of services that Mead will provide under its
contract with the SEC. So called "regulated" services are the
ones where the SEC sets the price. "Enhanced" services are
everything else, and Mead can charge whatever the market will
bear.
WHAT THE "REGULATED" DISSEMINATION PROGRAM WILL INCLUDE:
1. Copies of the current day's filings on magnetic tape. The
cheapest version of this service will cost more than $30,000
per year.
2. High speed (real time) online access to 72 hours of filings.
The projected cost of this service is more than $200,000 per
year.
3. Limited online searching access in terminals in reading
rooms in three cities (NY, Chicago, and Washington, DC).
WHAT THE "REGULATED" DISSEMINATION PROGRAM WON'T INCLUDE:
1 Any back files of the data.
2 Cumulative filings, such as filings by quarter or year, even
though many users, including smaller data vendors, would
find it easier and cheaper to buy and process data in this
format.
3. Remote online access. (Except for the high speed access to
72 hours of filings that will cost more than $200,000 per
year.)
4. CD-ROM products, even though this is one of the most
important and popular formats for reading and searching
large databases.
WHO CONTROLS ACCESS TO THE ELECTRONIC COPIES OF THE DATABASE?
Mead. Under the current contract, the government won't even
receive copies of its own database in an electronic format,
except for an incomplete set of records at the termination of the
contract in 1997. The government won't receive copies of the
daily tapes that are sold to the public, and it will not have
possession of the backup copies of the database. The SEC is
allowing Mead to set up a complicated system of storing the
backup copies of the database with a third party, in order to
prevent the public from obtaining the database under the Freedom
of Information Act (FOIA).
WHO WILL OWN THE HARDWARE AND SOFTWARE PURCHASED UNDER THE MEAD'S
$13.5 MILLION TEXT RETRIEVAL CONTRACT?
Mead will own the computers. Mead will also own the proprietary
software used to search the database.
WHAT WOULD IT COST TO PROVIDE PUBLIC ONLINE ACCESS TO EDGAR?
According to a 1989 study by Mead, not much. The costly parts of
the EDGAR system are the fixed costs associated with receiving
and processing filings, storing the data, and developing the
retrieval software. The incremental costs of access are
surprisingly low. According to Mead's 1989 analysis, the cost of
the computer and telecommunications hardware that would be
necessary to provide at least 2.2 million hours of "prime time"
access to EDGAR would be less than $5 million, or a little more
than $2 per hour. This would be a one-time cost. Once the
system was up and running, Mead said it would cost about $.25 per
hour to operate, at that level of capacity utilization.
Hardware costs have fallen dramatically since 1989, so these
numbers are undoubtedly lower today.
THE TAXPAYER ASSETS PROJECT
The Taxpayer Assets Project (TAP) was started by Ralph Nader in
1989 to investigate the management and sale of government
property. Over the past two years TAP has focused on the
management of federal timber and mineral resources, information
resources, and the sale or transfer of property rights from
government funded research and development, such as patents on
pharmaceutical drugs developed with federal funding. For more
information contact James Love, Director, at 609/683-0534. P.O.
Box 19367, Washington, DC 20036.
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