The House recently passed its version of the James M. Inhofe National Defense Authorization Act for Fiscal Year 2023 (NDAA) and opted to include several non-defense-related provisions contained in the Financial Data Transparency Act of 2022 that would require the SEC and banking regulators to adopt data standards for making data submitted to these agencies by the persons and entities they regulate fully searchable and machine-readable. Although the provisions for both the SEC and banking regulators are nearly identical, exemptions would apply to some of the SEC provisions and the SEC also must establish a corporate financial data quality program. The NDAA passed the House by a vote of 350-80. The NDAA now goes back to the Senate.
Amended House NDAA. The House version of the NDAA includes a version of the Financial Transparency Act (H.R. 2989), sponsored by the outgoing Rep. Carolyn Maloney (D-NY) and House Financial Services Committee Ranking Member (soon to be Chair) Patrick McHenry (R-NC), that was included in an amendment that largely tracked a stand-alone version of the Financial Data Transparency Act that previously passed the House by a vote of 400-19 in October 2021. The equivalent Senate version (S. 4295) is sponsored by Sen. Mark Warner (D-Va). The data standards, if enacted, would require financial regulators to adopt rules that make financial agency data collection and dispersion open source and electronically searchable and downloadable in bulk without license restrictions.
“The Financial Transparency Act will vastly improve the transparency and legal compliance of our financial system,” said Rep. Maloney via press release. “This transformational provision will finally make key information more accessible to regulators, investors, and the public while reducing the burden for company compliance.”
According to Rep. McHenry, the data standards provisions will aid the technologies that are “pillar[s]” within the U.S. financial markets. Said Rep. McHenry: “It just makes sense for financial regulators to use that same technology to make public data more easily accessible. Streamlining data sets benefits everyone from financial institutions to startups by increasing transparency and decreasing regulatory burdens.
At the time Reps. Maloney and McHenry introduced the Financial Data Transparency Act during the first session of the 117th Congress, they issued a joint press release in which Rep. Maloney said the bill would bring financial regulators “into the 21st century” and in which McHenry noted how the COVID-19 pandemic had placed a premium of the use of technology.
Senator Warner also commented on the inclusion of the Financial Data Transparency Act in the draft NDAA. The senator observed that the bill would mandate that financial regulators implement “common data formatting standards that promote the usability and organization of financial data they already collect from regulated institutions–rules that will make data easier for the public to use and for agencies to process.”
Data standards, exemptions. Division E, Title LVIII of the House version of the NDAA contains the Financial Data Transparency Act, which would add a new Section 124 to the Financial Stability Act of 2010 (i.e., Title I of the Dodd-Frank Act). The data standards provision would apply to Treasury, the SEC, the FDIC, the OCC, the CFPB, the Fed, the National Credit Union Administration, and the Federal Housing Finance Agency. However, a separate provision states that in the case of the Fed and the Federal Open Market Committee, the Financial Data Transparency Act would not apply to activities related to monetary policy.
The data standards, however, would appear not to apply to CFTC, which is not included on the list of “covered agencies.” Similar exclusions of the CFTC from Dodd-Frank Act provisions generally applicable to most, if not all, federal financial regulators have resulted in the CFTC sometimes taking the initiative to voluntarily comply with Dodd-Frank Act provisions it was excluded from and/or prompting lawmakers to introduce legislation to apply such provisions to the CFTC. The Financial Data Transparency Act, however, does reference Section 2 of the Dodd-Frank Act, which includes the CFTC as being among the several “primary financial regulatory agenc[ies].” The Financial Data Transparency Act would grant the Treasury Secretary authority to designate as “covered agencies” any such primary financial regulators.
The data standards would have to include common identifiers (including common nonproprietary legal entity identifiers) for collections of information reported to federal financial agencies and, to the extent practicable, achieve six objectives:
- Render data fully searchable and machine-readable;
- Use schema and metadata to clearly define the semantic meaning of the data;
- Ensure that data elements or data assets used for information collection are consistently identified in machine-readable metadata;
- Be nonproprietary or made available under an open license;
- Incorporate standards developed and maintained by voluntary consensus standards bodies (although it unclear exactly what the scope of this component is, it at least suggests on its surface some of the same consensus mechanisms that apply to blockchain technology); and
- Use, be consistent with, and implement applicable accounting and reporting principles.
Scalability of rules. The several provisions applicable to each federal financial regulator would provide generally for the scalability of the rules to be adopted implementing the required data standards. For each of the covered agencies, except the FHFA, the agency may scale the data reporting requirements to reduce any unjustified burden on smaller regulated entities. In the case of the SEC, the relevant provision would provide that the SEC may seek to scale the requirements for emerging growth companies, lending institutions, accelerated filers (i.e., among other things, a company with aggregate worldwide market value of $75 million or more, but less than $700 million), and other small issuers as identified by a study to be conducted by the SEC.
Moreover, each federal financial agency must seek to minimize disruptive changes to persons affected by the proposed data standards provisions. With respect to the FHFA, only this latter requirement to minimize disruptive changes would apply because the statute, as drafted, does not mention scalability in the context of the FHFA.
SEC-specific exemptions. The House version of the NDAA’s Financial Data Transparency Act contains several provisions that would apply only to the SEC. For one, the draft legislation would permit the SEC to exempt from the data standards requirement exhibits, signatures, and certifications required by various SEC regulations to be filed with or furnished to the Commission. The exemption for these types of information would apply to: (1) Investment Company Act registration statements and reports; (2) corporate disclosures under the Securities Act; (3) periodic and current corporate disclosures under the Exchange Act; and (4) proxy or consent solicitation materials under the Exchange Act.
The SEC also must adopt data standards for the MSRB and for national securities associations or SROs. With respect to the MSRB, the SEC must consult with market participants about the proposed data standards. Data standards for the MSRB and for SROs would be subject to the same Commission discretion about scalability and the same requirement that the Commission minimize disruptions flowing from the data standards as were discussed above.
SEC data quality program, study. Unlike other federal financial agencies, the Financial Data Transparency Act would require the SEC to establish a program to improve the quality of corporate financial data filed with or furnished to the Commission by companies under the Securities Act, the Exchange Act, and the Investment Company Act. The program would need to be created within180 days of enactment of the NDAA.
The Commission would have to designate an official within the Office of the Chair to oversee the program. The goals of the program would be to improve data quality and make data useful to investors. The program would authorize the SEC’s Division of Corporation Finance to issue staff comment letters to companies seeking corrections of errors in companies’ filings. The program also would have to issue a report, from which smaller issuers would be identified for purposes of the scaling of the SEC’s data standards. The SEC program would sunset seven years after enactment of the NDAA.
Comptroller General report. Lastly, the Comptroller General would be required to report to Congress regarding the feasibility, costs, and potential benefits of further building out the taxonomy developed under the Financial Data Transparency Act to create “a federal governmentwide regulatory compliance standardization mechanism similar to Standard Business Reporting.” The report would be due three years after the enactment of the NDAA.