SEC reveals details on FDTA rollout

The Securities and Exchange Commission is starting to fill in some details to the rollout of the law that will transform the format of issuer disclosures submitted to EMMA.

“The level of complication on the municipal side is definitely much more,” said Dave Sanchez, director of the SEC’s Office of Municipal Securities. “We’re very conscious of it and I have a feeling that you guys will keep us very conscious.” 

The comments came during a free-flowing discussion on Monday at the Government Finance Officers Association Winter Meeting. 

The Federal Data Transparency Act that was signed into law at the end of 2022 requires that municipal securities disclosures be converted into a machine-readable format.  Since then, the market has been grappling with how that is going to happen. 

According to the SEC, phase one of implementation will include developing a taxonomy for the new system that everybody can agree on.

“We’re working on a financial statement taxonomy,” said Joel Black, chair of the Governmental Accounting Standards Board. “We’re starting with GAAP, our goal in creating that would be to not make it too prescriptive, to provide optionality and a level of detail.” 

Phase one will also require issuers to set up a “legal entity identifier,” a confusing term as the same words used with capital letters already exists in the municipal market. 

 “The Legal Entity Identifier that uses the capital letters is an expense, it costs money to get an LEI,” said Emily Brock, director of the Federal Liaison Center, GFOA. “Some of us have them because we’ve issued swaps before. However, not all of us have them. The progress of that part of the rule seems to be the most pressing, because it’s the most urgent.” 

According to Sanchez adding another LEI to the acronym collection is vital for bringing the identity of bond obligors out into the open. “To search for obligors under the current system on EMMA does not work, it has never worked,” he said.  “Even though people have wanted it to work, it still has not been fixed.”  

Due to the complex nature of the muni market the regulators have received questions and suggestions about implementing the FDTA gradually on a sector-by-sector basis or based on the size of the issuer. 

Sanchez said all those options are still on the table while pointing to evidence that the law may benefit smaller issuers more than burden them.

“The value really is to the smaller issuers who might have their bonds completely ignored,” Sanchez said. “It’s much easier to compare them to one another, and to everybody else, this may provide more value to them.”   

A number of muni-focused organizations including GFOA and the National Association of Bond Lawyers is keeping the FDTA active on their radar screens as the plan moves forward.   

The upcoming deadlines for phase one include publishing proposed rules by June 2024, which will kick off the public comment period. Determining the standards is set for December 2024, with specific rulemaking to be in place by 2026. 

Proponents of the FDTA include the ratings agencies and other analysts, software designers and traders in the data and industry standards businesses. 

The SEC is overseeing the implementation in conjunction with the Treasury, the GASB, the Municipal Securities Rulemaking Board and six other regulatory agencies.  

The corporate side of the securities industry has been required to use machine readable format since 2009, which the regulators frequently cite as proof the system can be implemented, even in the complex world of munis.