The American public relies on good information to make decisions about what products to buy at the grocery store, for purchasing or renting a home, and for understanding what characteristics of a car meet individual needs. Investment decisions on Wall Street are no different – reliable and clear information is needed in the marketplace to make good financial decisions.
Today, the ability for companies, government, and the American people to access data about regulated firms across the country is limited by an arcane regulatory reporting infrastructure. The Financial Transparency Act (H.R. 4476), co-sponsored by Reps. Carolyn Maloney (D-NY) and Patrick McHenry (R-NC) is a direct response to this problem and would improve the reporting infrastructure for regulated firms to improve accountability. The legislation has clear benefits for the American public, investors, government regulators, and private sector firms.
Why is the Financial Transparency Act needed and what would it do?
The Financial Transparency Act responds to recommendations provided by the U.S. Treasury Department in a 2017 report regarding reduction of regulatory overlap and duplication for banks and credit unions. The report, in response to an Executive Order on principles for regulating the financial system (E.O. 13772), calls for improved data sharing and reductions in reporting burdens and duplication.
The Financial Transparency Act addresses longstanding data deficiencies in regulatory reporting. The bill would require the eight financial regulatory member-agencies of the U.S. Financial Stability Oversight Council to adopt and apply uniform data standards (i.e. a common data format) for the information collected from regulated entities. As a consequence, the data standards will enable better information processing, software-enabled filing preparation, and data reconciliation. These features collectively are the basis for retail investors, regulators, and the market having better information for selecting investment opportunities and understanding risks.
How will the Financial Transparency Act help government operate more efficiently?
The Financial Transparency Act establishes a framework that can be used to improve regulatory reporting efficiency in coming years, reducing compliance overhead and the level of effort required for submitting financial reports. It also sets the stage for financial regulators to have access to higher quality data so they can spend their time focused on enforcement rather than tracking down inadvertent errors in reports.
The adoption of business reforms in the Financial Transparency Act have been adopted elsewhere. For example, in Australia, Standard Business Reporting was estimated to save nearly $1 billion in compliance costs over just a two-year period. Streamlining regulatory reporting frees up valuable time and energy that can also support private sector innovation and productivity growth.
Why does the legislation require a common legal entity identifier?
The Financial Transparency Act requires regulators to adopt a common legal entity identifier. The absence of a common identifier today increases errors, limits the ability to draw comparisons across companies, and reduces the ability to provide effective oversight. The Federal Reserve, among others, has extolled the benefits of applying such an identifier for these purposes. Others stakeholders have described the benefits for anti-money laundering efforts.
If such an entity identifier had been in place decades ago, regulators may have been able to act more quickly in responding to the 2008 financial crisis. For example, better information would have been known in advance about the Lehman Brothers’ practices and the financial systems risk.
The G-20 backed Legal Entity Identifier (LEI) is a likely standard, non-proprietary, verified, and globally managed system used by other regulators around the world that could be rapidly adopted under the Financial Transparency Act.
Has the Data Coalition taken a position on the Financial Transparency Act?
Representing members from the data analytics, technology, and management fields, the Data Coalition formally endorsed the Financial Transparency Act in September 2019. The Data Coalition has supported earlier versions of this legislation in the 114th and 115th Congress.
What other organizations endorsed the Financial Transparency Act?
Other transparency organizations and financial firms quickly endorsed the legislation after it was filed, and more are expected to endorse in the near future: