By Rodney F. Tonkovic, J.D.
In remarks entitled "Escaping the Data Swamp," Commissioner Peirce offered four principles to guide regulators in implementing Congress's new structured data requirements. Regulators, she said, should have a strategic vision in implementing structured data. They must also take costs concerns seriously, collect only what data is needed, and keep up with changing technologies. Peirce was invited to speak at the RegTech 2023 Data Summit by former Commissioner Luis Aguilar.
Passage of the FDTA. The remarks addressed Congress's enactment of the Financial Data Transparency Act. The FDTA's data standards provision requires joint rulemaking by financial regulators (in a two-year timeline) on data standards for information collection and reporting. Among other criteria, the data must be interoperable, fully searchable, and machine-readable. This "structured data"—which consists of standardized pieces that are identifiable and accessible by both humans and computers—has been a part of the SEC rulebook for some time.
Peirce admitted that she has not always shared the enthusiasm of the SEC staff toward structured data. With the passage of the FDTA, she noted, however, that she has been thinking about the topic with an open mind. There are still pitfalls associated with structured data, she warned, such as its cost, usefulness to the public, and the possibility of embedded standards becoming obsolete. To that end, Peirce offered four principles that she believes should guide the SEC and other regulators in implementing the Act.
Strategic vision. First, Peirce recommends that regulators have a strategic vision for implementing structured data. By this, she means that regulators must understand where structured data requirements would be most helpful and implement the requirements accordingly. Here, she commended Commissioner Uyeda, who has raised concerns about the SEC's "piecemeal" approach to integrating structured data into its rules.
According to Peirce, understanding where structured data mandates produce the greatest benefits would facilitate better prioritization. A strategic approach should also include initiatives to improve the utility and relevance of structured data for all investors, she said, adding that people are more likely to use structured data filings if they are accurate and comparable.
Cost concerns. Regulators must also seriously consider both the expected costs and expected benefits when considering how to impose the requirements. Whether the benefits are worth the costs firms will bear must carefully be considered. Peirce singled out municipal issuers as an area of concern: this category contains a wide diversity of issuers, many of which have budget constraints and issue bonds only infrequently. A bungled implementation could cause these entities to reduce their voluntary filings or otherwise avoid the costs of structured data, she said.
Peirce said she was still hopeful that costs may not be a significant concern in most cases. Costs have dropped over time, and companies may find that the up-front cost of integrating Inline XBRL into operations lowers long-run compliance cost, she said. Plus, the FDTA preserves agencies' authority to scale requirements—e.g., though phase-in periods or exemptions—to minimize disruptive changes to the affected parties.
Urge for more. Third, regulators must restrain their appetite for data as it becomes easier and cheaper to collect, store, and analyze. They should only collect what is needed for their regulatory mission, not all the data that might someday be handy, she said. The FDTA concentrates on making existing data collection more efficient, she observed, so regulators should only ask for what meets a legitimate regulatory need.
Changing tech. Finally, the standards need to be flexible in the face of rapidly changing technology. Embedding specific technological requirements in rule text can saddle registered entities with unnecessary burdens as technology changes, she said, and multi-agency rules can be particularly inflexible. One way to avoid embedding a particular structured data technology into the rules may be to set broad objectives in regulation and to save technical specifications for filer manuals. It may also be more prudent to proceed via notice-and-comment rulemaking, she said.
The future. Peirce closed her remarks by looking to what the future might hold. She noted that commentators have broached the possibility of machine-executable rules, meaning that compliance could be automated. "Machine-readable rules are more in line with my limited government approach," Peirce said. She also noted that FINRA has started to develop a machine-readable rulebook and that other regulators—but not the SEC—have run similar experiments. Peirce remarked that it is a struggle to write rules in Plain English and wondered if they could successfully be reduced to taxonomies. To start the ball rolling, she concluded, the SEC could take incremental steps like tagging no-action letters and comment letters.