A new act signed into law in late 2022 changes financial reporting for businesses and public agencies. So, what is the Financial Data Transparency Act of 2022?
Originally proposed as a standalone bill known as the Financial Transparency Act, this legislation was included in the National Defense Authorization Act, which was signed into law by President Biden in December 2022. This new legislation requires financial regulatory agencies to switch to a new set of data standards that are focused on discoverability and transparency.
Passed with wide bipartisan support, the Financial Data Transparency Act intends to streamline the process of reporting by creating uniform standards and eliminating proprietary formats that slowed down reporting and sowed confusion.
Reporting Changes Under the Financial Data Transparency Act
The Financial Data Transparency Act requires companies to adopt electronic reporting forms instead of paper-based forms. The act also calls for the use of open-source data formats rather than proprietary data formats.
In addition, the act mandates that companies use standardized language, so that regulators can more easily compare reports from different entities. Regulators themselves will need to comply with a new set of data collection and dispersal standards designed to increase transparency.
Access is a key point of this new legislation. The Financial Data Transparency Act requires that no license restrictions or access restrictions be placed on data. It must be downloadable and electronically searchable.
These changes will ensure that the major financial regulatory agencies report information in a consistent manner. Not only does this have implications for data accuracy, but it will also make it easier for regulators to review and analyze data.
Who Must Adhere to the New SEC Transparency Rules?
Major U.S. financial regulators are required to adopt and implement uniform and nonproprietary data standards for the collection and dissemination of information under the new law. The purpose of this requirement, as stated above, is to create a uniform means of conveying common legal identifiers for financial products, instruments and transactions. These regulators include:
- The Federal Reserve
- The Securities and Exchange Commission (SEC)
- The Federal Deposit Insurance Corporation (FDIC)
- The Office of the Comptroller of the Currency (OCC)
- The Consumer Financial Protection Bureau (CFPB)
- The Federal Housing Finance Agency (FHFA)
- The National Credit Union Administration (NCUA)
- The Commodity Futures Trading Commission (CFTC)
- The Municipal Securities Rulemaking Board (MSRB)
Rationale Behind the Financial Data Transparency Act
The driving force behind the Financial Data Transparency Act is the SEC’s desire to modernize reporting standards and create one unified standard that makes everything much smoother and easier. This means retiring the collection of information in static formats such as PDF and plain-text HTML. These formatting options are seen as problematic because they effectively prevent regulators and investors from easily finding the data they seek. They also have no standards for structuring information and feature identifier codes that are frequently inconsistent with each other.
By adopting XBRL across the board as the one accepted format, regulators will be able to avoid manually searching through documents for the information they need. All identifier codes will be consistent, as well, enabling easy automated scanning of data from all sources.
Benefits of the Financial Data Transparency Act
Transparency benefits companies and markets by creating an even playing field. Everyone from tech startups to banks and financial institutions are now subject to the same reporting requirement. Requiring greater transparency should make it more difficult for organizations to get away with financial abuse, such as fraud.
On the regulatory side, financial regulators should receive accurate, searchable data faster than before. They should be able to make decisions quickly and respond with more agility to changing market forces.
Financial reporting is due for modernization, and we at DFIN support these efforts to update reporting requirements. The Financial Data Transparency Act takes a major step toward this goal by adopting artificial intelligence and regulatory technology to develop more efficient reporting. This dovetails nicely with those companies that have existing investments in AI-powered technology while also benefiting their financial reporting processes.
Knowing how this act changes the playing field, companies should give thought to their financial reporting software. If they do not have software that aligns with the principles of the Financial Data Transparency Act of searchability, transparency, and standardization, now is the time to look for a more robust reporting software that supports these features.
DFIN supports the Financial Data Transparency Act for several key reasons. We believe that the Financial Data Transparency Act ultimately helps businesses and organizations operate more efficiently while remaining in compliance with regulations, and it helps keep governments and the public informed. While the new reporting requirements may take some getting used to, they should ultimately save time, increase accuracy and efficiency, and pave the way for greater automation of business processes in the future.