Summary

The Financial Data Transparency Act (FDTA), passed as part of the National Defense Authorization Act for fiscal year 2023, aims to enhance the interoperability of financial regulatory data across nine federal agencies, including the U.S. Securities and Exchange Commission (SEC). By December 2024, these agencies are required to develop and implement a set of shared data standards for certain "Collections of Information" reported by financial entities and data collected on behalf of the Financial Stability Oversight Council (FSOC).

The SEC and other agencies recently proposed joint standards, which include common identifiers, principles-based standards for data transmission and structuring, and alignment with the Paperwork Reduction Act of 1995 (PRA). These standards will impact various aspects of the financial and municipal securities markets.

The Upshot

• Published in the Federal Register on August 22, 2024, the joint standards include (a) eight common identifiers pertaining to entities, geographic locations, dates, and certain products and currencies; (b) a principles-based joint standard regarding the transmission and structuring of data; and (c) the adoption of the definition of “Collections of Information” in accordance with the PRA.
• Implications of any judicial interpretations, such as those stemming from the Loper Bright Enterprises v. Raimondo ruling, may also play a critical role in shaping the future of regulatory compliance and market operations under the FDTA.
• The public comment period on the joint standards is open until October 21, 2024. The determining standards will be set in December 2024, and agency-specific rulemaking is intended to be in place by 2026.

The Bottom Line

The proposed joint standards encourage a framework for data reporting that seeks to improve transparency and efficiency across various markets, including the municipal securities market. As the regulatory landscape continues to evolve, it is important to remain informed about potential changes. Attorneys in Ballard Spahr’s Municipal Securities Regulation and Enforcement Group are closely monitoring the developments and are available for counsel.

Overview.

The Financial Data Transparency Act (FDTA) was passed as a title in the National Defense Authorization Act (NDAA) on December 23, 2022, for fiscal year 2023. It directs nine federal agencies, including the U.S. Securities and Exchange Commission (the SEC), to promote the interoperability of financial regulatory data through agency-specific rulemaking that implement a final set of joint standards.

The FDTA, which amends subtitle A of the Financial Stability Act of 2010 (the Financial Stability Act) by adding a new section 124, directs the nine agencies to develop a set of shared data standards for (1) certain “Collections of Information” reported to each agency by financial entities, and (2) the data collected from the agencies on behalf of the Financial Stability Oversight Council (FSOC). The FDTA requires the agencies, including the SEC, to issue a final joint rule within two years of December 23, 2022, and apply those standards to themselves and other self-regulating organizations, including in the case of the SEC, the Municipal Securities Rulemaking Board (the MSRB). Furthermore, the FDTA directs the agencies, including the SEC, to issue individual rules adopting applicable data standards for specified Collections of Information, and to incorporate and ensure compatibility with, to the extent feasible, the joint standards within two years of the adoption of the joint standards.

On August 2, 2024, the SEC and the other applicable agencies proposed joint standards under the FDTA that will establish technical standards for data submitted to certain financial regulatory agencies, including self-regulatory agencies such as the MSRB. The proposed joint standards are set forth below. These joint standards will also apply to the municipal securities market, impacting not only the format in which municipal market data will be transmitted to the market, most likely through changes to Rule 15c2-12 requirements, but also other aspects of the municipal market including potentially the use of CUSIP as the common identifier of municipal securities, all as further discussed herein. While the FDTA requires the final rule for the joint standards to be adopted within two years of December 23, 2022, the implementation timeline for municipal securities market data remains unknown.

FDTA Requirements.

The FDTA generally requires the joint standards to include the following characteristics:

• Common identifiers: Non-proprietary legal identifiers for financial products, transactions, and instruments that are available under an open license at no cost to the public;
• Searchable and machine-readable: Data that is easy to use and can be fully searched;
• High quality: Data that uses schemas to enable high quality;
• Standards: Data that incorporates standards developed and maintained by voluntary consensus standards bodies;
• Interoperability: Agencies, in establishing the joint standards, should seek to promote interoperability of financial regulatory data across members of FSOC; and
• Accounting and reporting principles: Data that is consistent with, uses, and implements applicable accounting and reporting principles.

Proposed Rule and Public Comment Period.

On August 2, 2024, the SEC and the other applicable agencies issued joint standards under the FDTA that propose to establish technical standards for data submitted to certain financial regulatory agencies, including self-regulatory agencies such as the MSRB. The agencies, including the SEC, are currently inviting public comment on the joint standards through October 21, 2024.

The joint standards include:

(a) eight common identifiers related to entities, geographic locations, dates, and certain products and currencies;

(b) a principles-based joint standard with respect to transmitting and structuring data; and

(c) the use of the definition of “Collections of Information” in accordance with the Paperwork Reduction Act of 1995.

Joint Standards:

Common Identifiers.

The joint standards include identifiers related to entities, geographic locations, dates, and certain products and currencies. These identifiers are free of charge to any user and under an open license.

Legal Entity Identifier (LEI) is the common entity identifier specified under the joint standards. LEI is a global identifier standard, developed by the International Organization for Standardization (ISO), that uniquely and unambiguously identifies a legal entity. The full name of the LEI established is ISO-17442 – Financial Services – the Legal Entity Identifier (LEI).

The following identifiers are also common identifiers under the joint standards, each applicable to certain specified instruments:

• ISO 4914 – Financial services – Unique product identifier (UPI);
  • This common identifier applies to the identification of swaps and security-based swaps.
• ISO 10962 – Securities and related financial instruments – Classification of financial instruments (CFI) code;
  • This common identifier applies to the identification of financial instruments that are not swaps or security-based swaps.
• Financial Instrument Global Identifier (FIGI) established by the Object Management Group;
  • This common identifier applies to the identification of financial instruments.
• ISO 8601 – Date and time format, using the basic format option;
  • This common identifier applies to the identification of dates.
• U.S. Postal Service Abbreviations as published in Appendix B of Publication 28, Postal Addressing Standards;
  • This common identifier applies to the identification of states, possessions, or military “states” of the United States of America or geographic directional.
• Geopolitical Entities, Names, and Codes (GENC) standard (country codes); and
  • This common identifier applies to the identification of countries and their subdivisions.
• ISO 4217 – Currency Codes.
  • This common identifier applies to the identification of currencies.

The agencies note in the joint standards that to the extent a financial instrument could be identified by more than one of the joint standards, the application of the joint standards to specific Collections of Information would take effect through adoption by an agency of agency-specific rulemaking or other action (such as, if a financial instrument can be identified using CFI and FIGI, agencies can determine not to require both).

Data Transmission and Schema and Taxonomy Format Standards.

For the joint standards related to data transmission and schema and taxonomy formats, the agencies propose in the joint standards to establish that the data transmission or schema and taxonomy formats used have, to the extent practicable, four properties, derived from the requirements of the FDTA, as follows:

• Render data to be fully searchable and machine-readable;
• Enable high-quality data through schemas, with accompanying metadata in machine-readable taxonomy or ontology models, which clearly define the semantic meaning of the data;
• Ensure that a data element or data asset that exists to satisfy an underlying regulatory information collection requirement be consistently identified as such in associated machine-readable metadata; and
• Be nonproprietary or available under an open license.

With respect to the standard to require data be fully searchable and machine-readable, the agencies propose to the extent practicable and where Collections of Information is pursuant to regulatory requirements, that a schema and taxonomy should include machine-readable metadata to track the applicable regulatory requirements. The agencies have also noted that regulatory requirements should be easily identifiable for data assets that are Collections of Information subject to the Paperwork Reduction Act of 1995 (PRA). The joint standards state that agencies may also identify applicable regulatory requirements on a data-element level.

Below are some examples of data transmission formats identified in the joint standards that may satisfy the properties specified in the joint standards:

• Methods of using Comma Separated Values (CSV) or other delimiter separated files,
• eXtensible Markup Language (XML),
• Java Script Object Notation (JSON)
• HyperText Markup Language (HTML)
• 33 Portable Document Format (PDF)
• XML Schema Definition (XSD),
• eXtensible Business Reporting Language (XBRL) Taxonomy
• JSON Schema are currently available schema and taxonomy formats that have these properties.

As it relates to the municipal securities market, offering documents and continuing disclosure materials are typically provided to market participants in PDF format. The agencies note in the joint standards that PDF format may satisfy the standard if the data within the PDF conforms to specification “A” (PDF/A) which uses advanced features for tagging fields with a reference schema and taxonomy and provides necessary metadata that allows for automated data extraction. PDF documents whose data does not conform to any such schema and taxonomy would not be considered machine-readable as that term is defined in the FDTA because the data contained in such PDF documents cannot be easily processed by a computer without human intervention while ensuring no semantic meaning is lost.

The joint standards use a list of properties rather than any specific data transmission or schema and taxonomy formats for several reasons according to the agencies. First, since the list of properties is derived from the requirements listed in FDTA, any data transmission or schema and taxonomy format data standards with these properties would satisfy the FDTA’s requirements. Second, data transmission or schema and taxonomy formats that have these properties are likely to be interoperable with each other. Lastly, this approach will allow the agencies to adopt new open-source file formats as they are developed, and maintain consistency with the joint standards.

“Collections of Information.”

The joint standards adopt the definition “Collections of Information” established in the PRA for purposes of establishing data standards as required by the FDTA, as it is already a widely recognized and used term among the agencies.

The definition of “Collections of Information” in the PRA, (A) means obtaining, causing to be obtained, soliciting, or requiring the disclosure to third parties or the public, of facts or opinions by or for an agency, regardless of form or format, calling for either – (i) answers to identical questions posed to, or identical reporting or recordkeeping requirements imposed on, ten or more persons, other than agencies, instrumentalities, or employees of the United States; or (ii) answers to questions posed to agencies, instrumentalities, or employees of the United States which are to be used for general statistical purposes; and (B) shall not include a Collections of Information described under section 3518(c)(1) of the PRA, which generally relates to information collected (a) during federal criminal investigations or during a related disposition of such matter, and (b) during (i) a civil action where the United States or any official or agency thereof is a party or (ii) an administrative action or investigation involving an agency against specific individuals or entities.

The FDTA limits the applicability of the joint standards to certain Collections of Information. Collections of Information that do not include reporting requirements (such as, recordkeeping and third-party disclosure collections) and information that is not reported to an agency by a specified type of financial entity are outside of the scope of the FDTA. Each implementing agency is permitted to interpret the scope to its own Collections of Information in agency-specific rulemakings.

Additionally, specified Collections of Information that are not regularly reported to the relevant agency, or that are not subject to the “monetary policy” exception are also outside the scope of the FDTA. The “monetary policy” exception is an exemption under Title 5 Part I Chapter 8, Section 807 of the U.S. Code related to congressional review of agency rulemaking which states that nothing in Chapter 8 (congressional review of agency rulemaking) applies to rules concerning monetary policy proposed or implemented by the Federal Reserve or Federal Open Market Community (FOMC). This means that the information covered by the term Collections of Information is limited to information regularly reported to agencies (such as, the SEC) and information required to be provided in connection with rules or policy imposed by the Federal Reserve and FOMC.

With respect to Collections of Information by the SEC, the joint standards and the FDTA do not change existing reporting obligations and do not impose new information collection requirements. This means that for municipal securities the same information required to be reported by issuers of municipal securities under Rule 15c2-12 prior to the joint standards and the FDTA remains the same as it was prior to the enactment of each.

Agency-Specific Rulemaking.

The FDTA requires the agencies to adopt by rule applicable data standards for certain Collections of Information that are regularly filed with or submitted to an agency. Such standards adopted by an agency must incorporate and ensure compatibility with, to the extent feasible, the applicable joint standards. Pursuant to the FDTA, the agencies, including the SEC as it relates to municipal securities, must adopt any rules regarding the data standards contained in the joint standards under each agency’s respective agency-specific rulemaking authority no later than two years after the final joint standards are promulgated. If the final joint standards are adopted in December 2024, the agencies, including the SEC, must adopt its own rules implementing the data standards contained in the joint standards by December 2026.

The agencies (a) may scale data reporting requirements to reduce any unjustified burden on smaller entities affected by the regulations and (b) must seek to minimize disruptive changes to those entities or persons. Additionally, Section 5891(c) of the FDTA provides that nothing in the FDTA may be construed to prohibit an agency from tailoring the data standards when those standards are adopted.

To the extent an agency has separate authority to adopt data standards, the agency may adopt other standards beyond the joint standards, and as noted earlier, the FDTA does not impose new information collection requirements on the agencies.

Request for Comment on Accounting and Reporting Taxonomies.

The agencies are also requesting comment on whether or not a joint standard with respect to, or a specific taxonomy for, accounting and reporting should be included in the joint standards. Some examples of the taxonomies that have been developed and are currently being used by the agencies and standard-setting bodies for the Collections of Information include the, FFIEC Consolidated Reports of Condition and Income (FFIEC Call Report) Taxonomy, the Financial Accounting Standards Board’s U.S. Generally Accepted Accounting Principles (U.S. GAAP) Financial Reporting taxonomy, and the International Accounting Standards Board’s International Financial Reporting Standards Taxonomy. These taxonomies are currently used and may continue being used in connection with the Collections of Information. The FDTA does not specifically require the establishment of specific taxonomies as joint standards and it’s not clear to the agencies that the establishment of specific taxonomies is necessary to achieve the aims of the data standards specified in the FDTA and the joint standards. While the agencies did consider establishing joint standards related to taxonomies, they are not currently proposing to do so.

What does this mean for the municipal securities market?

The FDTA, as discussed above, requires the agencies (including the SEC) to issue rules adopting the joint standards no later than two years after the date in which the joint standards are adopted. Meaning any such rules issued by the SEC adopting the data standards set forth in the joint standards will be in place by no later than December 2026, since the joint standards will be adopted in December 2024. However, the date of implementation of the data standards as it relates to municipal market data information submitted to the MSRB remains unknown at this time.

As it relates to the municipal securities market, first, the joint standards bring into question whether the use of CUSIP as the common identifier of municipal securities, which has been the common practice since 1983, will continue in both the immediate (e.g. within the next two years) and the distant future. CUSIP, which is widely used specifically in the municipal securities market to identify individual securities, is proprietary and not under an open license in the United States. The use of CUSIP by the MSRB to categorize securities on EMMA may not comply with the requirements of the FDTA and the joint standards because the FDTA and the joint standards specifically require that a common identifier be open-source and non-proprietary, both of which CUSIP is not. The most likely scenario, particularly in the immediate future as a result of the joint standards is that CUSIP will remain as a standard way by which municipal securities are identified, in addition to the SEC using its agency-specific rulemaking ability under the FDTA to identify another common identifier noted in the joint standards to be applicable to municipal securities, such as FIGI or another common identifier related to financial instruments.

Second, the joint standards seek to standardize how municipal market data will be transmitted to investors and the public at-large. The joint standards state that formats such as PDFs that conform to PDF/A specification will likely comply with its data transmission standards because PDF/A uses advanced features for tagging fields with a reference schema and taxonomy and provides necessary metadata that allows for automated data extraction which as a result makes it a machine-readable format as required by the joint standards. The data transmission standards adopted in the joint standards may have an impact on the delivery of information to municipal market participants because although most, if not all, offering documents and continuing disclosure documents are typically submitted to EMMA and other repositories, such as MuniOS.com in PDF or PDF/A format, metadata is not always embedded into such documents.

Third, the proposed joint standards suggest that all information required to be reported to the MSRB under Rule 15c2-12 will likely be captured within the definition of “Collections of Information” and thus be subject to the data standards set forth in the joint standards. That being said, the FDTA does not require any additional information to be reported that was not already subject to a reporting requirement prior to the enactment of the FDTA and the adoption of the joint standards. The information reported to pursuant to Rule 15c2-12 will remain the same, but the delivery and formatting of such information must comply with other portions of the joint standards.

However, as a result of the U.S. Supreme Court decision in Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. Department of Commerce to overrule its 1984 decision in Chevron v. Natural Resources Defense Council, which gave rise to the “Chevron doctrine,” it remains to be seen whether and to what extent implementation of the FDTA requirements through Rule 15c2-12 pushes the limits of the SEC’s rulemaking power under federal securities laws, especially in light of the Tower Amendment.

The Chevron doctrine generally states that if Congress has not directly addressed the question at the center of a legal dispute, a court was required to uphold the agency’s interpretation of the statute as long as it was reasonable. The Supreme Court in Loper found the Chevron doctrine to be inconsistent with the Administrative Procedure Act (APA), a federal law that sets out the procedures that federal agencies must follow as well as instructions for courts to review actions by those agencies. The majority opinion noted that the APA directs courts to “decide legal questions by applying their own judgment” and therefore “makes clear that agency interpretations of statutes — like agency interpretations of the Constitution — are not entitled to deference.” Under the APA, the majority opinion concluded, “it thus remains the responsibility of the court to decide whether the law means what the agency says.”

The “Tower Amendment” refers to a 1975 addition to the Securities Exchange Act of 1934, as amended, that prohibits both the SEC and the MSRB from directly or indirectly requiring issuers of municipal securities to file documents with the SEC and the MSRB prior to a sale. In addition, it restricts the MSRB (but not the SEC) from requiring any issuer of municipal securities directly or indirectly, through a broker dealer, municipal advisor, or otherwise to furnish to the MSRB or to a purchaser any information with respect to such issuer.

Although the FDTA specifically states in Section 5826 that it does not require the disclosure of any additional information that was not required to be disclosed prior to the enactment of the FDTA, the decision in Loper and the Tower Amendment, taken together, could invite a legal challenge to the FDTA as it relates to imposing data standards on municipal securities since the FDTA (an act of Congress) seeks to set new requirements related to the filing of documents with the SEC and the MSRB prior to a sale, which could be argued as being inconsistent with the prohibitions set forth in the Tower Amendment.

Lastly, as discussed above, the SEC and the other agencies have the ability under the joint standards to adopt by rule (a) applicable data standards for certain Collections of Information, and (b) to scale data reporting requirements to reduce any unjustified burden on smaller entities. In adopting any rules, it must seek to minimize disruptive changes to those entities or persons. As a result, the agency-specific rulemaking ability under the FDTA may lead to further changes to the joint standards as they relate to municipal securities in the future. However, as noted earlier, such agency-specific rulemaking must take effect not later than two years after the final joint standards are promulgated, which is December 2026.

What happens next?

The public comment period on the joint standards is open until October 21, 2024. The determining standards will be set in December 2024, and agency-specific rulemaking is intended to be in place by 2026.