SEC strategy to balance benefits and risks of FDTA implementation
The recently passed Financial Disclosure Transparency Act (FDTA) requires the US Securities and Exchange Commission (SEC) and other regulators to adopt data standards for — inter alia — municipal data collection and reporting. Although the act passed in December 2022, the details of implementation are still a work in progress.
In a recent speech, SEC Commissioner Hester Pierce outlined four principles that she believes should guide the SEC and other regulators in implementing the FDTA (and structured data projects in general) to ensure it effectively balances the benefits with the burden and costs.
Firstly, in general she believes that regulators should have a strategic implementation vision for structured data. This means understanding where structured data requirements are most helpful and implementing requirements accordingly. Additionally, regulators should have an overall plan that prioritises where structured data can produce the most benefits, including initiatives to improve the utility of structured data for investors.
Secondly, cost concerns should be taken seriously, and regulators should consider and weigh up the costs and benefits when imposing structured data requirements. Pierce notes that it is particularly important to be sensitive to costs faced by municipal issuers, who are often budget constrained. The SEC could also explore feasible phase-in periods and accommodations for smaller entities.
Thirdly, Pierce advises that regulators should constrain the urge for more data, being careful not to ask for new data collections that do not follow a legitimate regulatory need.
Finally, Pierce argues that the SEC should preserve flexibility in the face of changing technology to ensure rules do not bake in what could become obsolete.
Pierce also notes that machine-readable rules could be the next horizon, with machine-executable rules potentially holding the key to automating compliance in the future. {Ed — we agree — it’s called an XBRL taxonomy!}
While there are some concerns around the implementation of structured data in municipal filings with the FDTA, the benefits are clear. By taking a strategic approach, being mindful of the risks, and ensuring market participants are consulted during implementation, the SEC and other regulators can work to ensure the FDTA provides the intended benefits to investors, citizens, and the financial industry.
Read the speech here.
