SEC rulemaking coming on FDTA

The Securities and Exchange Commission will introduce two rule proposals designed to help address the huge complexities and major concerns around the Financial Data Transparency Act that the municipal finance community has expressed since its passage.

That’s according to Mary Simpkins, senior special counsel at the SEC’s Office of Municipal Securities, speaking at the SEC’s 2023 Municipal Securities Disclosure Conference on Wednesday. Simpkins said the commission is early in the process of evaluating the needs and concerns of the market but that a joint resolution with other regulators will likely come next year.

“There’s going to be a joint rulemaking with our other regulators and then probably in 2026, there’s going to be a rulemaking based on the standards in the joint rulemaking that are specific to the municipal market,” Simpkins said. “So we will be soliciting comment and we hope everyone will comment.”

“We’re not going to impose any standards that aren’t feasible or practicable,” she added. “Also, we can tailor the standards to reduce the burdens on smaller issuers and other market participants and also to avoid disruption. We anticipate this is going to be a phased-in process, not something that’s going to happen overnight. It’s going to be a long process.”

The SEC has been tasked with overseeing the FDTA’s implementation, therefore that the Commission will be coming forward with new rules to address its complexities wasn’t entirely surprising to many of the attendees at Wednesday’s event, but it was still welcomed.

The panel also gave issuers and market leaders the opportunity to weigh in on the enormous complexities of the act and its general incompatibility with the municipal market as it functions now. For example, the law requires issuers to reconfigure their disclosure packages in machine-readable format, making PDFs obsolete. PDFs are the current backbone of the EMMA system.

“This process has been driven by moneyed special interests not with the best interest of the muni space and the community and investors and analysts,” said Ben Watkins, director of bond finance for the state of Florida. “The conclusion that I come to is FDTA as a way to improve transparency and disclosure in the muni space is a ruse and structured data is not nirvana.”

“Is the transparency actually being accomplished, and as well as of course, the cost and the resources necessary for staff?” said Rachael Eubanks, state treasurer for the State of Michigan. “This is not just impacting us at the state level, but also anyone that issues to any of our conduit programs and any of the local units of government that use it as well.”

Watkins used the example of the City of Tallahassee, Florida, that currently has $790 million in outstanding debt which can’t be compared to other cities in simple ways.

“Sure, you can compare yourselves to all the cities using XBRL but it really has no meaningful information for credit analysis, because there are probably seven different credits that roll up into that number and some of the information that’s produced necessarily because of the standardization and the uniformity is so general that it is to be of no meaningful value for purposes of investment, credit analysis, and therefore investment decision making,” Watkins said. “That is a huge issue that is going to be confronted and I’m just talking about the 2,300 local governments in Florida.”

“‘I’ve heard the argument about liquidity and efficiency in our marketplace, the more burdens you create for the small governments in this country to finance infrastructure, they’re gonna go to alternatives,” Walkins said. “And what does that mean? They’re going to go to the bank. And they’re going to withdraw from participation in the public markets,” he added. “I would argue that it not doesn’t serve to enhance liquidity, it actually is going to detract from liquidity.”

Joel Black, chair of the Governmental Accounting Standards Board, which creates, modifies and maintains the accounting and financial reporting standards for state and local governments, said they’re involved in developing the taxonomy to the rule, because it will eventually modify their own processes but how involved, and how long it will take is still unanswered in these initial stages.

“You ask how long will it take?” Black said. “It depends on how many resources we put on it and if the market and the Commission decides that, hey, we really want the GASB to work on this rule, this taxonomy, we can staff up and hire more people and have that happen sooner rather than later. It will still be a lot of time, because it depends on how many resources we devote to it. If we only keep the resources that we have devoted to it now, it’s years to get to that process.”