The Financial Data Transparency Act's data standards, expected as proposed rules this Summer, may seem like they will be a big step in modernizing municipal market disclosure, but more work will be needed in order to accommodate the complexities of the muni market.
That's according to panelists at this year's National Federation of Municipal Analysts Annual Conference on Wednesday.
The Securities and Exchange Commission is developing the rulemaking proposal with other Financial Security Oversight Council members such as Treasury and is tasked with developing legal entity identifiers, among other things, to help identify the thousands of different issuers across the country. Emily Brock, director of the federal liaison center for the Government Finance Officers Association
Dave Sanchez, director of the Office of Municipal Securities at the SEC noted that while legal entity identifiers may be a step in the right direction, the formats that are currently out there, like the Global Legal Entity Identifier Foundation the Commission is working with, may be too crude an instrument for the muni market.
"It's very clear that that existing format does not accommodate the complexities of munis and there'll be some additional work that's needed," Sanchez said. "If you think that LEI off the shelf is going to fix naming conventions for munis or accurately identify who is the responsible entity or who is the responsible source of revenues or debt, it's not. There needs to be additional work done."
Sanchez used the example of the move to a one-minute trade reporting under Municipal Securities Rulemaking Board Rule G-14 to illustrate.
"Everybody's in favor of progress, people want things to work more smoothly," Sanchez said. "But then when we get into the nitty gritty, on Rule G-14, the broker-dealers are saying I have to do this all by telephone, sorry. If you believe it or don't believe it, this is the argument that always comes up in munis, the issue of there is complexity in the muni market that is very real that you have to account for," he added. "We can't just think that something like a new data standard is going to fix everything immediately because it probably won't."
The proposed rules for FDTA are expected in June, kicking off the six month comment period that is expected to end by the end of the year. Sanchez noted that that timeline is suggested, as it's in the law but there's no requirements for not meeting the timeline and that the usual six month timeline is "usually not realistic," Sanchez said.
Panelists mentioned the use of artificial intelligence and what, if any application it may have to the muni market.
"One of the great things about FDTA, particularly stage two, is that we do have a lot discretion about whether things are feasible, practical, necessary, so if some alternative solution presents itself, then people can make a comment or an argument that this or that may not be necessary because an alternative solution presented itself," Sanchez said. "I do think, however, generally speaking, AI is one of those things where it's over promising and under delivering, particularly once you get into complex things like evaluating issuers financial statements."
The MSRB is not an FSOC member and therefore won't be involved in developing the data standards themselves, but will play a crucial role for the muni market once those standards are rolled out.
"We are going to be heavily involved in the implementation phase of whatever data standards are promulgated, specifically because the MSRB serves as the industry's repository for all of the data and all of the disclosure information that is subject to the FDTA," said Mark Kim, chief executive officer of the MSRB. "We certainly anticipate needing to make changes to EMMA to incorporate machine readable data that is going to come to us in a structured format, whatever that may be."
"The MSRB will very likely have to do a whole suite of rulemaking on its end," Sanchez said.
Once the June regulations come out and the market begins to digest and comment on what's to come, educating issuers will be the next frontier and will likely carry a much longer timeframe than the end of this year, as specific rulemaking isn't expected until the end of 2026.
"I travel a lot across the country to talk with issuers and I would say 9% or 10% of issuers even understand that this is law," GFOA's Emily Brock said. "It's gonna take a lot more effort on our part in timing and education and the whole market's part on effort and education to make sure that this happens to the intent that Congress had when they wrote the bill."
Other large rulemaking initiatives, such as the controversial SEC climate disclosure rule that was rolled out in March but is paused due partly to the large number of lawsuits the Commission is facing, may not hit the muni market at all, despite some arguing that it could serve as a mold for future muni-related rulemaking.
"The specific format I do not see moving into the muni bond space because again, the corporate disclosure regime was very different is very different," Sanchez said. "The muni disclosure regime has always been principles- based so that specific format would literally take an act of Congress to impose on the municipal market," he added. "But the focus on materiality is very important."
"I've been saying for the last few years, we're in the same place we always were. Are any of these things material to your ability to repay bonds?" Sanchez said, noting that there are things in the law that could be useful for issuers to go through as an exercise.
