The Financial Data Transparency Act (FDTA) of 2022 has emerged as a point of contention within the municipal securities market. As the deadline for public comment approached on October 21, participants across the spectrum—including issuers from local governments to regulatory bodies—voiced their apprehensions regarding the law’s implications. Primarily, critics argue that the FDTA represents an unwelcome federal mandate that may particularly disadvantage smaller issuers and push municipalities toward riskier borrowing practices in the private market.
Participants warn that the FDTA could be considered an example of regulatory overreach, effectively pushing government entities into the hands of private lenders. Numerous commenters from agencies such as the Government Finance Officers Association (GFOA) to smaller municipal issuers expressed their belief that the law imposes an unfunded federal mandate that complicates the existing fabric of municipal finance. Critics claim that the imposition of these stringent data standards may not only be unnecessarily burdensome but could also diminish the unique, self-regulatory nature of the municipal securities market.
Charles Samuels, representing the National Association of Health & Educational Facilities Finance Authorities, articulated the sentiments of many by asserting that the FDTA seeks to address a “problem that does not exist.” He emphasized that the stark contrast between the skeptical views of many municipal participants and the enthusiasm from technology vendors seeking to profit from compliance illustrates the divide in opinions. Vendors seemingly endorse the changes for financial gain, coining the phrase “ka-ching, ka-ching” to highlight their financial motivations.
From the perspective of municipal issuers, the transition to machine-readable formats for disclosures raises practical implementation concerns. According to estimates from the California State Association of County Auditors, the costs of converting existing financial statement data alone could reach approximately $20 million for California counties. Such financial burdens are particularly daunting for smaller issuers, which typically lack the resources needed for substantial compliance investments.
Many critics argue that the technology-driven nature of the proposed rule risks creating confusion and complications in an already complex system. This fear resonates particularly strongly among issuers who have built tailored solutions to meet their unique reporting requirements. The prospect of modifying their systems to comply with new, potentially unfamiliar standards ignites fears of inefficiency and additional costs that could further strain their fiscal resources.
A more profound concern revolves around the possibility that the regulatory pressures instigated by the FDTA may drive issuers away from the public market altogether. The National Association of Bond Lawyers (NABL) cautioned that should the compliance burdens become overwhelming, small- and medium-sized issuers may be compelled to seek out less regulated avenues for financing. Such a shift would not only eliminate the transparency the FDTA intends to introduce but could also adversely affect liquidity in the municipal market, increasing overall borrowing costs.
The implications extend beyond local issuers, as the potential exodus to the private market could reduce investor confidence and make it more challenging for municipalities to secure the financing they need to operate effectively. This concern is exacerbated by the potential unintended consequence of diminishing competition, which could lead to higher costs for taxpayers in the long run.
Supporters of the FDTA, including some academic voices like Marc Joffe of the Cato Institute, voiced a contrasting opinion. Joffe pointed out a troubling pattern in the responses from issuers—many comments echoed similar criticisms, suggesting a possibly coordinated effort to lobby against the act rather than a genuine conflict over constructive feedback. Advocates for the FDTA argue that advancements in transparency should not merely be stymied by concerns over implementation costs but should be viewed as potential opportunities for improvement.
Moreover, proposals from academics at the University of Michigan, who are working on developing a free, open-source generator for Adaptable Common Financial Reports (ACFR), suggest that solutions to the cost concerns associated with compliance might exist. Such initiatives could facilitate a smoother transition while alleviating burdensome financial obstacles for issuers.
As the Securities and Exchange Commission heads into the next stages of rulemaking for the FDTA, it faces the tough challenge of balancing the desire for increased transparency with the need to avoid unintended consequences threatening the stability of the municipal market. While the overarching goal of enhanced data transparency is commendable, careful consideration must be afforded to the diverse needs of the various market participants to ensure that the final regulations do not adversely affect the very market they aim to fortify. The upcoming rules are expected to be finalized by the end of 2026, setting the stage for future discussions around governance, compliance, and the path forward for municipal finance.