With potential for delay in FDTA implementation, some hoping for a revisit on munis
5 min read
The change of presidential administrations and resulting agency staff turnover could delay implementation of the Financial Data Transparency Act, and what that might portend for the legislation as it relates to municipal securities is a topic of some debate.
While they disagree about whether Congress should reconsider the FDTA as it relates to municipal securities, both Marc Joffe, a visiting fellow at the California Policy Center who thinks the legislation will benefit muni market investors, and Charles Samuels, an attorney at Mintz who believes it could force issuers to buy technology that quickly becomes obsolete, agree that the change of administrations could cause delay in the act’s implementation.
“We were expecting that the first round of FDTA regulations would be finalized at the end of 2024,” Joffe said. “That didn’t happen during the change of administrations and it does seem that the transition over to the Trump Administration has delayed the finalization of the first round of regulations.”
Signed into law on Dec. 23, 2022, the FDTA is designed to modernize the collection and dissemination of financial data by federal financial regulators, making that data more uniform, easier to access and ultimately more useful to investors.
Not everyone is a fan of the legislation, however. Prior to its enactment, municipal bond issuer groups expressed concern in a letter to U.S. senators that the FDTA “would result in an unfunded mandate on state and local governments,” given the costs associated with compliance.
The first round involves interagency standards, including security identifiers, Joffe said.
“And the main issue there was whether federal agencies will continue requiring the use of CUSIPs or
Delayed implementation of the first round of regulations could mean that “we may or may not catch up on the second round – the one that would involve the potential implementation of XBRL for ACFR reporting,” Joffe said.
The second round of regulations involves agency-specific rulemaking by the Securities and Exchange Commission and other agencies with respect to entities within their purview.
XBRL is a free, open data standard that enables financial and business data to be expressed in digital, machine-readable format. XBRL is used by publicly listed companies for their financial reporting.
An Annual Comprehensive Financial Report – or ACFR for short – is a set of financial statements for a state, municipality or other governmental entity that complies generally accepted accounting principles as set by the Governmental Accounting Standards Board.
For many investors, the municipal bond market “remains a black box; they don’t really understand what they’re getting into,” Joffe said.
“So really, investors would benefit from having a way to easily access financial statistics from governments that they’re considering lending money to,” he said. “And because we don’t have any kind of standards and we’re stuck with legacy PDFs, retail investors really have very poor access to streamlined or standardized information.”
Samuels, the Mintz attorney, said the first stage of the FDTA’s implementation hasn’t progressed beyond the proposed multi-agency regulation. In August 2024, the SEC and other agencies published a notice of proposed rulemaking in the Federal Register inviting public comment by Oct. 21, 2024 on “a proposed rule to establish data standards to promote interoperability of financial regulatory data across these agencies.”
While the FDTA called for agencies to jointly promulgate final rules establishing data standards no later than two years after the FDTA’s enactment, the agencies failed to meet that December 2024 deadline.
“I think that what’s happened is with the election, certain turnover of personnel and the president’s executive orders basically stopping pretty much all rulemaking, that these regulations, which weren’t necessarily high priorities or that popular with the agencies anyways, have now come to a halt,” Samuels said. “Whether in this administration they get started again, you know, I think is quite questionable.”
In the meantime, what was already viewed by the municipal issuer community as a “quite marginal piece of legislation that didn’t seem to have many benefits but potentially a lot of burdens, probably becomes more and more obsolete over time,” Samuels said.
“Particularly with the development of AI, it could be that the whole premise of the FDTA doesn’t even make any sense,” the attorney said. “The idea was that you needed to put these financial documents filed with the government in a form so they could be digitally very search friendly for users like potential buyers of municipal bonds.”
Now, however, “with AI, that may already exist [or] be on the threshold of existing,” Samuels said.
Just as there were technology companies that “in a Washington technique known as rent-seeking” got the FDTA pushed through in order to get issuers to buy their technology and services, “now there’s … a whole AI revolution just even over the last few years since the law was passed that may make this whole thing completely irrelevant,” he said.
The muni market “is right now focused on the budget reconciliation tax legislation,” Samuels said, alluding to concerns that the municipal bond tax exemption could be in jeopardy, which have eased a bit since the House passed a budget reconciliation package that left the exemption unscathed.
“But we will get past that,” the attorney said of the tax exemption worries. “And I would hope that we would ask congress to reconsider [the FDTA] at least as it applies to municipal securities.”
Michael Decker, senior vice president for research and public policy at the Bond Dealers of America, thinks it would make sense to ask Congress to reconsider the FDTA as it applies to municipal securities.
“I think that there’s something to the notion that the whole concept of needing machine-readable documents is going to be obsolete at some point, probably sooner rather than later, because AI and machine-learning tools are rapidly advancing and are designed specifically for this type of application,” Decker said.
Joffe rejected the notion that AI will render the FDTA irrelevant.
“The critics of this have been saying that for years,” he said, adding that “PDF versions of paper ACFRs” remain in use. “So it doesn’t seem that AI has really touched the municipal market as much as some might have hoped.”
While it would be nice to think that “a load of heterogeneous information” could be put into an AI system that will “magically” standardize it, “I don’t think that’s very likely,” Joffe said.
As for the idea that the Congress should revisit the FDTA with respect to its application to the municipal securities market, “That’s just nonsense, it’s not going to get repealed,” he said.
“It’s important to recognize that the FDTA was bipartisan legislation,” Joffe said, adding that “the law is not so specific that it would preclude regulators from interpreting it in a way that remains technology-forward.”
