The Financial Transparency Act

The Financial Transparency Act of 2015 is a bipartisan proposal in Congress to transform U.S. financial regulatory reporting from disconnected documents into open, searchable data.

The Financial Transparency Act, H.R. 2477 (full text), would require the eight major U.S. financial regulatory agencies to adopt consistent data fields and formats for the information they already collect from industry under existing securities, commodities, and banking laws. For information that existing laws already require them to publish, the Financial Transparency Act directs agencies to make such information available online as open data — electronically searchable, downloadable in bulk, and without license restrictions.

Representative Darrell Issa (R-CA) introduced the Financial Data Transparency Act with eleven bipartisan original cosponsors on May 20, 2015. The Data Coalition is working to build support for the passage and full implementation of the Financial Transparency Act.

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What does the Financial Transparency Act do?

1. Data Standardization

Directs all eight major U.S. financial regulatory agencies to adopt consistent data standards for all of the information they collect from industry under existing securities, commodities, and banking laws. Each agency must adopt electronic fields and formats to replace document-based forms, following the lead of the Office of Financial Research (OFR) of the U.S. Treasury Department where applicable.

2. Office of Financial Research and LEI

Directs the OFR to adopt data standards for concepts that reach across multiple regulators. Specifically mandates the adoption of the Legal Entity Identifier (LEI) across all financial regulatory reporting regimes, to allow easy matching of filings from the same entity with multiple regulators.

3. Open Data Publication

For information existing laws already require to be published, requires agencies to make such information available online as open data — electronically searchable, downloadable in bulk, and without license restrictions.

4. Fixing Data Reporting at the SEC

Requires the Securities and Exchange Commission, for the short term, to replace its current duplicative financial statement reporting requirement, in which public companies must submit each statement once as a document and again as data, with a single filing in the inline XBRL format.

Why is the Financial Transparency Act needed?

Most U.S. financial regulators do not use data standards to organize the information they collect from regulated entities. Regulators use inconsistent identifier codes for entities, instruments, and transactions. Too many financial regulatory filings are still collected as documents – paper, PDF files, plain-text HTML – instead of using structured data formats like XML and XBRL.

This is a problem because when regulators collect and disclose information in, say, the ubiquitous Portable Document Format (PDF), they create substantially more work for those who want to use it – investors, markets, tech companies, and even the regulators’ own staff.

PDFs are nice because they look the same on your computer screen as they do when they’re printed out. But they lock valuable data away from the user, making large scale data analysis and parsing nearly impossible. It’s really easy to turn structured data into a PDF. It’s really hard to turn a PDF into structured data.

“When a government agency publishes its data and documents as PDFs, it makes us Open Government advocates and developers cringe, tear our hair out, and swear a little (just a little).” –Sunlight Foundation

Regulators’ failure to adopt consistent data fields and formats hurts regulated entities, too. If regulators specified predictable data standards, software could help public companies, banks, and financial firms automate their compliance tasks by pulling information automatically from internal systems. Without data standards, automation isn’t possible.

Data standards would make regulatory filings more transparent, useful, and efficient – for everyone who generates, collects, and uses the information they contain.

Regulatory filings should use consistent identifier codes for entities and other concepts, allowing firms to quantify exposure to an entity or product; markets to aggregate all data on a given entity; and regulators to avoid Madoff-style silo failures. Regulatory filings should also use structured data formats so that data flows into databases without manual re-entry. Structured data formats would allow filers to automate disclosure; markets to digest financial information cheaply, reducing filers’ costs of capital; and regulators to use analytics to find fraud, risk, and irregularities.

In the same way that the DATA Act of 2014 is transforming government spending, the Financial Transparency Act will transform financial regulatory reporting.

 

Needed at the SEC: Full Transformation

The need for the Financial Transparency Act is perhaps best illustrated by the U.S. Securities and Exchange Commission (SEC). Like other regulators, the SEC has taken some steps toward using data standards for information filed by public companies, but without full modernizing its whole disclosure system from documents to data – hurting investors, companies, and its own mission.

In 2009, the SEC started requiring U.S. public companies to report their financial statements in the eXtensible Business Reporting Language (XBRL), a structured data format. In XBRL, each line item and each number has a unique electronic tag, which means a structured-data financial statement can be automatically read by software.

The SEC’s adoption of XBRL was one of the U.S. government’s biggest and earliest open data efforts. In fact, it happened so early that the term “open data” wasn’t even in common use yet.

XBRL should have been the start of a complete modernization of the SEC’s disclosure system. It should have transformed the U.S. capital markets, bringing better data for investors, analytics for SEC staff, and automated reporting for companies. But it wasn’t and it didn’t.

The SEC never got rid of the old-fashioned document version of financial statements, and has continued to require companies to report each financial statement twice: once as a document, and again as data. SEC staff continue to focus on the document version, ignoring the data version – leading to poor quality for the data version. As a result, investors have not embraced the data version and companies see it as an unnecessary addition to their compliance requirements. Meanwhile, the SEC never got around to modernizing the rest of the hundreds of forms it collects from public companies.

In 2014, the SEC made an impressive shift, in rhetoric and in action, towards modernization. Nevertheless, without a legislative mandate, the SEC’s disclosure system will continue to lag behind what technology makes possible.

Open data—standardized and published—could transform financial regulation from disconnected, unsearchable, unstructured documents into structured information, easily distilled into actionable insights. The benefit to investors, regulators, markets, and filers would be immense.

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Section-by-section summary of the Financial Transparency Act

Title I: Office of Financial Research.

 

Section 101. Authority to promulgate data standards for use by member agencies.

Section 101 requires the Office of Financial Research of the Treasury Department to promulgate data standards for the information that financial regulatory agencies collect from the entities they regulate. Section 101 is limited to the nine member agencies of the Financial Stability Oversight Council.

 

Section 102. Specific data standards and characteristics.

Section 102 directs the Office of Financial Research to promulgate common identification codes and common formats for the information that financial regulatory agencies collect from their regulated entities and/or report to the Financial Stability Oversight Council. Section 102 specifically requires the Office of Financial Research to promulgate a common identifier for legal entities – codifying the existing effort to promote the universal use of the Legal Entity Identifier (LEI), which has been ongoing since 2010, and which has so far been adopted by the CFTC, FDIC, and Federal Reserve. Section 102 requires these data standards to be machine-readable, nonproprietary, and consistent with applicable accounting and reporting principles. Section 102 further requires the Office of Financial Research to seek to promote interoperability of financial regulatory reporting data across separate agencies.

 

Section 103. Open data publication by the Office of Financial Research.

Requires the Office of Financial Research to publish information as open, searchable data. Applies only to information that the Office of Financial Research is already required to publish under the Dodd-Frank Act.

 

Section 104. Rulemaking.

Sets a two-year deadline for rulemaking under Section 101.

 

Section 105. Classified and protected information.

Provides that nothing in this title shall require the Office of Financial Research to publicly disclose information that would not be disclosed in response to a Freedom of Information Act request, or classified information.

 

Section 106. No new disclosure requirements.

Provides that nothing in this title shall require the Office of Financial Research to collect additional information – only to standardize information being collected already.

 

Title II. Securities and Exchange Commission.

 

Section 201. Data standards requirements for the Securities and Exchange Commission.

Directs the SEC to adopt consistent data standards for information that it collects from regulated entities under existing law. Requires these data standards to be machine-readable, nonproprietary, and consistent with applicable accounting and reporting principles. Requires the SEC to follow any applicable guidance by the Treasury Department as it adopts these data standards. Covers the following reporting regimes: (a) investment advisers’ reports under the Investment Advisers Act of 1940; (b) mutual fund filings under the Investment Company Act of 1940; (c) ratings agencies’ submissions under the Securities Exchange Act of 1934; (d) asset-backed securities disclosures under the Securities Act of 1933; (e) corporate registration statements and prospectuses under the Securities Act of 1933; (f) periodic and current corporate disclosures under the Securities Exchange Act of 1934; (g) proxy materials under the Securities Exchange Act of 1934; and (h) securities-based swap filings under the Dodd-Frank Act.

Section 201 also imposes a two-year deadline for the rulemaking it requires and permits the SEC to scale data reporting requirements in order to reduce unjustified burdens on smaller entities, as determined by the study required under Section 205. Requires the SEC to seek to minimize disruption for regulated entities as it adopts data standards.

 

Section 202. Open data publication by the Securities and Exchange

Requires the SEC to publish information as open, searchable data. Applies only to information that the SEC is already publishing under existing law.

 

Section 203. Data transparency at the Municipal Securities Reporting Board.

Requires the MSRB, which is under the supervision of the SEC via Section 15B of the Securities Exchange Act of 1934, to adopt data standards for the information it collects from municipal securities issuers and advisors. Requires these data standards to be machine-

readable, nonproprietary, and consistent with applicable accounting and reporting principles. Requires the MSRB to follow any applicable guidance by the OFR as it adopts these data standards. Sets a two-year deadline for rulemaking and permits the MSRB to scale data reporting requirements in order to reduce unjustified burdens on smaller entities. Requires the MSRB to minimize disruption for regulated entities as it adopts data standards.

 

Section 204. Data transparency at national securities associations.

Requires national securities associations registered under Section 15A of the Securities Exchange Act of 1934, such as the Financial Industry Regulatory Authority (FINRA), to adopt data standards for the information they collect from listed companies. Requires these data standards to be machine-readable, nonproprietary, and consistent with applicable accounting and reporting principles. Requires national securities associations to follow any applicable guidance by the OFR as they adopt these data standards. Sets a two-year deadline for rulemaking and permits national securities associations to scale data reporting requirements in order to reduce unjustified burdens on smaller entities. Requires national securities associations to minimize disruption for those affected by data standards as they implement these requirements.

 

Section 205. Shorter-term burden reduction and disclosure simplification at the Securities and Exchange Commission; sunset.

Requires the SEC to take certain steps to improve its existing use of searchable data for corporate disclosures. Unlike the other sections, sunsets after seven years. Requires the SEC to (a) replace its existing XBRL regime with a data that is both human-readable and machine-

readable, as is already proposed within the agency and has the support of the Division of Economic and Risk Analysis and three Commissioners; (b) improve the quality of corporate financial information submitted as searchable data; and (c) submit a regular report to the House Financial Services Committee and Senate Banking Committee on these efforts.

Section 205 applies the same scaling and disruption-minimization provisions as Section 201 to the shorter-term rulemaking required here.

 

Section 206. No new disclosure requirements.

Provides that nothing in this title shall require the collection of additional information – only the standardization of information being collected already.

 

Title III-Title IX: These parallel titles cover the following agencies.

 

Title III. Federal Deposit Insurance Corporation.

Title IV. Office of the Comptroller of the Currency.

Title V. Consumer Financial Protection Bureau.

Title VI. Federal Reserve.

Title VII. Commodity Futures Trading Commission.

Title VIII. National Credit Union Administration.

Title IX. Federal Housing Finance Agency.

 

Sections 301, 401, 501, 601, 701, 801, 901. Data standards requirements.

Directs each agency to adopt consistent data standards for information that it collects from regulated entities under existing law. Requires these data standards to be machine-readable, nonproprietary, and consistent with applicable accounting and reporting principles. Requires each agency to follow any applicable guidance by the Office of Financial Research as it adopts these data standards.

 

Section 302, 502, 602,702, 802, 902: Open data publication.

Requires each agency to publish information as open, searchable data. Applies only to information that the agency is already publishing under existing law.

(In Title IV, which covers the Office of the Comptroller of the Currency, an open data publication provision is included in the same section with the data standards requirement for the OCC, which means there is no separate open data publication section in this Act for the OCC and Title IV has slightly different section numbering from the other parallel titles.)

 

Section 303, 402, 503, 603, 703, 803, 903. Rulemaking.

Sets a two-year deadline for rulemaking under Sections 301, 401, 501, 601, 701, 801, 901. Permits each agency to scale data reporting requirements in order to reduce unjustified burdens on smaller entities. Requires each agency to minimize disruption for regulated entities as they adopt data standards.

 

Sections 304, 403, 504, 604, 704, 804, 904. No new disclosure requirements.

Provides that nothing in this title shall require the collection of additional information – only the standardization of information being collected already.