Worried issuers weigh in on FDTA

Municipal market participants this week laid out their doubts about a data standards law in a blizzard of comments to the Securities and Exchange Commission.

A similar refrain came from issuers big and small: the Financial Data Transparency Act of 2022 represents regulatory overreach and an unfunded federal mandate that will especially burden small issuers. The FDTA carries the risk of driving cities and states into the private borrowing market, they warned.

The public comments came ahead of an Oct. 21 deadline that marked the end of the first comment period for the FDTA's complex and years-long rulemaking process. Muni-specific rules won't come until 2026, but most lobbyist heavyweights, from the Government Finance Officers Association to the National Association of Lawyers and Bond Dealers of America, weighed in with their concerns.

They warned of the law's potential harm to a market that's famously bespoke and self-regulated.

"The municipal securities industry response can be summarized as 'this dog won't hunt'," said Charles Samuels of Mintz Levin, counsel to the National Association of Health & Educational Facilities Finance Authorities, which filed a comment on Oct. 21 that called the FDTA a law that "essentially seeks a solution for a problem that does not exist."

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In contrast to the skeptical muni crowd, "the technology and other vendor commenters, who are trying to make a buck, have submitted comments that can be summarized as 'ka-ching, ka-ching'," Samuels said.

Enacted in December 2022, the FDTA requires that municipal securities disclosures be converted into a machine-readable format. In the municipal market it's garnered the most controversy from cities, states and other issuers who worry that the shift to machine-readable standards will be confusing and expensive.

The first glimpse of the proposed rule came Aug. 1. The agencies closed the comment period on Oct. 21 despite requests from many groups, including the American Bankers Association, for additional time.

Marc Joffe, a policy analyst at the Cato Institute and an FDTA proponent, said many of the issuer comments echoed the same points, "almost like this was an orchestrated attempt to file comments with the same talking points.

"Further I find it interesting that the letters open with 'I believe in transparency' but then fail to make constructive suggestions as to how the greater transparency envisaged by FDTA could be accomplished," Joffe said.

Many issuers warned of high implementation costs, with the California State Association of County Auditors estimating a "minimum of $20 million for the California counties to convert our existing financial statement data to the new data reporting standards."

The GFOA questioned the value of the data for buy-and-hold muni investors, saying "the FDTA was an initiative of data brokers looking for another product to sell, and not of investors seeking useful data."

It pegged the cost of implementing the FDTA for roughly 50,000 issuers at more than $1.5 billion within the first two years, adding that "a disproportionate burden would likely be placed on smaller entities with the fewest resources."

In response, Joffe said academics at the University of Michigan, who submitted their own letter, are developing a "free, open-source XBRL ACFR generator" that would eliminate issuers' cost concerns.

Like other muni participants, the National Association of Bond Lawyers warned issuers may flee the public market if regulators fail to strike a proper balance.

"The burdens imposed by new data standards could outpace any promise of new market efficiencies and risk driving a larger share of state, local, nonprofits, and conduit borrowers into the private placement market or to seek other, less-regulated sources of financing," NABL said. "Such a result would also likely impact the liquidity in the municipal market and increase the borrowing costs for market participants."

The Bond Dealers of America said it's worried the FDTA would increase the regulatory burden on broker-dealers.

"As the SEC moves to the second stage of FDTA rulemaking, we ask the commission to minimize the role and burden underwriters have in policing municipal issuer disclosure and to minimize the reporting burdens on municipal issuers, especially small issuers," the BDA said. "If the SEC imposes a machine readable reporting requirement on municipal issuers, it is important that underwriters not be burdened with policing issuer compliance."

The current timeline calls for final rulemaking to be released in December, with the SEC publishing proposed muni market-specific standards in 2026, followed by the Municipal Securities Rulemaking Board's proposal and call for comments. By the end of 2026, the SEC is expected to issue its final rule for municipal market standards with the effective dates coming in 2027 or after.