Issuer data standards: a natural evolution or a dumbing down?

As a closely watched financial disclosure bill inches closer to law with a Senate vote as soon as this week, municipal market participants are pondering its potential risks and rewards.

The Financial Disclosure Transparency Act, as included in the National Defense Authorization Act of 2023 that was passed by the House last week, would move municipal issuers and other financial entities toward a financial reporting standard like eXtensible Business Reporting Language, or XBRL. The bill does not name a specific standard.

Late, spotty or nonexistent disclosure has long been a challenge in the muni market despite federal law and rules designed to improve it. But some of the same participants who have pushed for improved disclosure, like the National Federation of Municipal Analysts, worry that the FDTA won’t solve the market’s disclosure problem.

The FDTA “doesn’t actually fix any of the problems we have,” said Matt Fabian, a partner at Municipal Market Analytics Inc. “The entire goal is to sell software.”

Issuers are lobbying hard against the measure, with the Government Finance Officers Association putting the cost of compliance at $1.5 billion or more and arguing that a technology standard ignores inherent differences among the roughly 40,000 unique municipal issuers.

The Senate may take up the NDAA as soon as this week. It’s possible that lawmakers attempt to amend the NDAA, but it’s considered unlikely that the FDTA language would change.

Last week’s House-passed version featured a number of changes from an original version, changes perceived to benefit the muni market. Among other things, the latest version shifts responsibility for the rulemaking and oversight to the Securities and Exchange Commission from the Municipal Securities Rulemaking Board, and assigns to the SEC the responsibility to scale the standards to reduce any “unjustified burden.” It also prohibits any new disclosure information categories.

“Major changes were made to shift this to SEC and to require focus on small entities,” said Charles Samuels of Mintz Levin, counsel to the National Association of Health & Educational Facilities Finance Authorities.

“There are still outstanding questions on some of the language, and it would have been ideal to see it dropped, but under the circumstances the muni lobby had a big impact,” Samuels said.

A source familiar with the legislation said the latest House-passed version “reflects a compromise and the many suggestions that they received” from muni issuer advocates.  

Assuming the Senate passes the NDAA, the FDTA requires joint rulemaking among financial regulators, which is also a change from the original version, where Treasury was lead rule maker, said Nick Hart, president of the Data Foundation, a nonpartisan think tank that supports the bill.

After a notice of proposed rulemaking is posted, the public will be invited to comment.

If enacted, Fabian said the new requirements may undermine the market by “dumbing down” investment decisions as well as pushing issuers out of the public market and possibly even drawing more Congressional rules in the future.

“The data will be much less reliable than the data the analysts can input themselves,” Fabian said. “You’re de-emphasizing credit. It’s a spread-tightener for the industry theoretically because more people will be investing with less regard for credit.”

For others, the data standards mark a natural next step in the evolution of data standards over time.

“This bill is not just about the muni market; it’s about the entirety of the financial regulatory system,” Hart said. “This is the logical next step in a movement that has been underway for years.”

A machine-readable language like XBRL is “the natural evolution of data transparency,” said Richard Ciccarone, president of Merritt Research Services, which provides muni borrower information and data to investors.

“To get electronic reporting of that data is a reasonable evolution of making data available to investors,” Ciccarone said. “There are so many credits potentially to review by a municipal bond institutional investor that you need efficient methods in order to do that within reason.”

Ciccarone recalled the days when firms like Merritt, which has been around since 1986, had to write letters to the MSRB to get information on specific bonds, and when the SEC implemented rule 15c2-12, which improved secondary market disclosure.

“Each time these major achievements have happened, they’ve made it better not only for investors, but for the intermediaries who are providing that information to their clients,” he said.