SEC, market need to hammer out uncertainties in muni disclosure law

A controversial new law requiring cities and states to standardize their disclosure raises a bevy of questions that market participants and regulators will need to answer to pave the way for implementation.

That’s the message from Ernesto Lanza of Ballard Spahr, who wrote a white paper on the newly passed Financial Disclosures Transparency Act along with the firm’s Teri Guarnaccia and Kimberly Magrini.

“The ability to collect data in a structured way makes a lot of sense, but it’s going to be an interesting journey to get to something that works,” Lanza said. “There’s a lot of uncertainties to be dealt with and decisions to be made by regulators, hopefully along with people who understand the market.”

Signed into law by President Biden on Dec. 23, the Financial Disclosure Transparency Act sparked controversy and opposition from muni market participants who have long debated the topic of disclosure in the self-regulated muni market. Opponents dubbed it an unfunded mandate that overlooks the muni market’s diversity and will “dumb down” credit analysis, while some buysiders, who have long clamored for improved disclosure, chimed in with their support of the new law.

The FDTA allows a four-year timeline before the rules become effective. Unlike the other financial regulators who will craft similar standards for other markets, the SEC is required by the law to consult with muni market participants in establishing the new muni market standards.

Among the many questions that remain unclear is which information submitted to the Municipal Securities Rulemaking Board will be subject to the new law. Will it apply only to financial statements or more?

It’s “unclear whether the SEC would seek to make all or certain portions of the official statement beyond any attached financial statements subject to the Municipal Market Data Standards,” Ballard Spahr says in the paper. “Similarly, it is unclear whether the SEC would seek to make the information included within the 16 categories of continuing disclosures set out in SEC Rule 15c2-12…also subject to the Municipal Market Data Standards.”

Other questions: What, if anything, will be the enforcement mechanism to ensure that an issuer undertakes the standards? What about disclosure on outstanding bond issues that go out for 20 or 30 years?

The process “gets a little complicated pretty quickly in terms of how a mandate operates and how people physically make submissions,” Lanza said. “It’s good that there’s at least four years to work through, because it’s a lot of stuff.”

The FDTA calls for a two-stage rule-making process. First, all the financial regulators together will embark on joint rulemaking, and then the SEC will undertake a specific rulemaking for the municipal market standards.

“A lot of the questions may not be resolved until second stage, but people need to be thinking about it during the first stage, because the joint standards will set the stage” for the municipal standards, said Lanza, who worked at the SEC for almost three years before returning to Ballard Spahr in July 2022.

The timeline calls for federal regulators to have proposed rules for comment on joint standards by June 2024, with a final joint rulemaking for joint data standards adopted by December 2024.

From mid to late 2026, the SEC is likely to publish proposed muni standards for comment, followed by the MSRB likely publishing similar proposed rule changes for comment, according to Ballard Spahr.

The SEC is expected to issue a final rule adopting muni standards by December 2026, with an 2027 effective date.

The Government Finance Officers Association will work to educate lawmakers during the period before final standards, said the GFOA’s federal liaison Emily Brock in a recent interview.

“There’s motivation to educate the new Congress because if there’s a two-year timeline, we may need to call on Congress to put things into perspective for more realistic expectations,” Brock said. The GFOA is watching for the “taxonomies and templates” that regulators are considering during the rulemaking period, she said. “Constant communication is our goal here,” Brock said.

The idea of structured data has been around since the formation of the Electronic Municipal Market Access website in 2008, said Lanza, who helped create EMMA.

“The question of XBRL was raised back then and this is the end point,” said Lanza, referring to eXtensible Business Reporting Language. “But there’s a lot of work to be done.”