Hawkins Reviews Financial Transparency Data Act
Hawkins Delafield & Wood, New York City's legendary municipal law firm, published a "Hawkins Advisory" that reviews the Financial Data Transparency Act of 2022 (FDTA), which was signed into law on December 23, 2022; developments in enforcement actions regarding limited offerings; and the status of certain pending rulemaking by the Securities and Exchange Commission (SEC) and the Municipal Securities Rulemaking Board (MSRB).
Financial Data Transparency Act
The FDTA launched a rulemaking initiative requiring federal financial regulatory agencies (including the SEC) to establish new data standards for certain financial data reported to such agencies or published by them. Of particular importance to the municipal securities market, the FDTA tasks the SEC with implementing these data standards to the extent applicable in connection with information submitted to the MSRB, including information filed by municipal issuers and obligated persons through the MSRB's Electronic Municipal Market Access website (EMMA).
Several features of the FDTA are worth noting.
First, it is expected that the scope of municipal securities information to be collected or made publicly available should not expand as a result of the enactment of the FDTA and the data standards established thereunder. Notably, with respect to municipal market information, the FDTA expressly states that it may not be construed to affect the operation of existing limits (i.e., the Tower Amendment) upon the authority of the SEC and MSRB to require filings by, or on behalf of, municipal issuers prior to the sale of municipal securities or of the MSRB to require a municipal issuer to furnish information.
Second, significant municipal market input will be available to the SEC as it develops and implements the new data standards. The FDTA requires the SEC to consult market participants in the initial establishment of the new data standards. It is Hawkins' present understanding that a number of industry groups, including the National Association of Bond Lawyers (NABL), the Government Finance Officers Association (GFOA), the Securities Industry and Financial Markets Association (SIFMA), and the Governmental Accounting Standards Board (GASB), and individual market participants, such as affected municipal issuers and obligated persons, are considering commenting on both the data standards and their implementation.
Third, the FDTA authorizes the SEC to scale the data standards to reduce any unjustified burden on smaller regulated entities and requires the SEC to seek to minimize disruptive changes to the persons affected by the rules. However, given the vast differences in size and sophistication that exist in the municipal securities market, especially with respect to less frequent issuers and other obligated persons, the new data standards may require many municipal market participants to incur additional technology, personnel, and compliance costs. Some of these implementation expenditures could be burdensome.
Fourth, rulemaking under the FDTA will happen in two phases, and it will likely be several years before the new data standards are effective and their full scope is known.
Marlo Oaks, Utah State Treasurer, has averred that the Federal Government cannot force States (and constituent municipalities and instrumentalities) to provide any disclosure. He specifically mentioned under the Securities Exchange Act of 1934 "Neither the [SEC] nor the [MSRB] is authorized…by rule or regulation, to require any issuer of municipal securities, directly or indirectly through a pur-chaser or prospective purchaser of securities from the issuer, to file with the [SEC] or the [MSRB] prior to the sale of such securities by the issuer any application, report, or document in connection with the issuance, sale, or distribution of such securities. [15 U.S.C. § 78o-4(d)(1)].
The [MSRB] is not authorized…to require any issuer of municipal securities, directly or indirectly through a municipal securities broker, municipal securities dealer, municipal advisor, or otherwise, to furnish to the MSRB or to a purchaser or a prospective purchaser of such securities any application, report, document, or information with respect to such issuer… [15 U.S.C. § 78o-4(d)(2)]."
The Treasurer of Mecklenburg County, North Carolina, and the Treasurer of the City of Charlotte have both told Smith's Research & Gradings the costs of complying with ESG disclosure is estimated to be in the range of hundreds of thousands of dollars — per year. The ESG disclosure would be deemed an enormous burden, which would prevent these municipalities from being able to borrow in the public markets.
Clearly, Hawkins Advisory on the FDTA highlights what is going to be a highly controversial subject for municipal issuers in 2023.
Advt. Smith's Regulars are encouraged to attend Smith's Affordable Housing Conference in March to learn more about it during the Legal Panel featuring Hawkins.