Mar. 11, 2025
Commissioners, Thank you for this opportunity to comment on the proposed Rule. The sentiments, opinions, and certainly any errors here are my own alone and do not represent the views of institutions, clients past or present, or others with whom I may be, or may have been, affiliated. We live in an age of increased sophistication among those who would violate, or plan to violate, or conspire to violate our market regulations. However, we also live in an age of increased bureaucracy and duplicative effort among those enforcing our market rules. In order to facilitate inter-agency cooperation as to the monitoring of market activity, and the bringing of civil enforcement actions or criminal prosecution of misbehavior, the proposed framework endeavors “to adopt by rule applicable data standards for certain collections of information that are regularly filed with or submitted to that Agency.” However, because “an implementing Agency will determine the applicability of the joint standards to the collections of information specified in the FDTA under its purview” I fear precisely the same incompatibilities in data format, jargon/definitions, and reporting structures will simply recur under this new guise. The more useful aspect of the Rule or Rules that would implement the Act is the Section 124(c)(1)(A) provision, which would finally unite entity identifiers, potentially without exposing sensitive identifiers not intended for this purpose, which would help prevent misidentification by regulators and may have small dividends to the privacy interests of entities. Using a common identifier schema also has other advantages beyond the enforcement of securities law, for instance in areas like tax and bankruptcy. I agree generally that ISO 4914 is a useful framework for the taxonomy of financial services products and that ISO 10962 provides an acceptable framework for instruments that may be inherently exotic, structured in multiple sleeves or layers, or unrecognized within the 4914 schema. To the extent the values of these assets are marked, they must be marked in a unit of account, and any ISO 4217 unit should be adequate. These could then be jurisdictionally attributed under ISO 3166. The problem of interagency cooperation with regard to markets regulation is not new, nor are problems of data aggregation or sharing between agencies. Indeed, in the nearly fifty years since Marine Bank, little has changed in the difficulty of interagency enforcement of even relatively straightforward matters; in that matter, the agencies did not face a data-sharing problem, they first had to agree what a security was, then what fraud was, then how those definitions related to the data and facts available. See Marine Bank v. Weaver, 455 U.S. 551 (1982) (case considering whether bank’s alleged fraud involved or did not involve instruments deemed “securities” in that word’s Howey Test meaning). When fundamental agreement in a relatively simple matter escapes our collective enforcers’ grasps so easily, it is no wonder that when reams of data are involved, things get substantially more complex. Shepherding the data is not my prime concern, I am in favor of doing that efficiently, responsibly, and consistently; the reasons to hold an opposing view are few. In another famous case, one I have tried to illuminate and impress upon the minds of students for years at our law school, the SEC enlists (as is often and properly the case) the help of the Federal Bureau of Investigation, the U.S. Attorney’s Office for the Southern District of New York, corporations and securities experts senior within the State of Delaware prosecutorial mechanism, and others. This type of cooperation is not unusual and has grown more common in recent years, from my wholly subjective vantage. But all the king’s horses and all the king’s men (and all the law school tuition involved) couldn’t put the description of this particular fraud back together again. Those investigating become so wrapped up in the “how” and “who” that they forget the “why.” In that matter, Santa Fe Industries, Justice White wisely points out that often the focus of the investigators is the choreography of the thing rather than the substance of the transaction or transfer: “It is difficult to imagine how a court could distinguish, for purposes of Rule 10b-5 fraud, between a majority stockholder's use of a short-form merger to eliminate the minority at an unfair price and the use of some other device, such as a long-form merger, tender offer, or liquidation, to achieve the same result[.]” White, J., at 478. See Santa Fe Industries, Inc. v. Green, 430 U.S. 462 (1977). I argue, admittedly on a tangent but I think one oriented at an important angle, that data sharing is a virtuous goal and a technologically achievable aim, but that it is almost meaninglessly, epsilonishly incremental when compared to other prerequisites needed for securities law (and market rules enforcement more generally) to be sung from a common hymnal. Since the very genesis of the 1934 Act’s much-debated Section 9 judges, law professors, corporate counsel, and legislators have agreed colloquially as to what is fraud, unfairness, impermissibly sharp dealing, or market manipulation, only to retreat to the more collected and rigorous task of having to think about these terms more precisely. Justice Powell reminded us in Ernst & Ernst that "[m]anipulation" is "virtually a term of art when used in connection with securities markets." Ernst & Ernst, 425 U.S. 185 at 199 (1976). We decided long ago that the fair, transparent, and well-lubricated markets we desire are regulated markets, though the degree of regulation is a matter on which political minds can and do differ. Market participants are inadequately sophisticated and inadequately informed, and so the 1934 Act seeks to “to substitute a philosophy of full disclosure for the philosophy of caveat emptor.” See Justice Goldberg’s opinion in SEC v. CGRB, 375 U.S. 180 at 186 (1963). And in most cases, in most transactions, on most days markets are open, this works. News flows freely, investors are informed, and assets are priced appropriately. Sometimes there is misbehavior among market actors and in some subset of those situations the misbehavior is noticed, investigated, and prosecuted. Everyone agrees that bad actors should be held to account. But the inadequacy of data-sharing among agencies as a salve for the range of ailments infecting today’s markets makes David’s sling look like a bazooka. 1 Samuel 17:1–58. Far more important, and outside the ambit of a Financial Data Transparency Act Joint Data Standards discussion, but also far more worthy of an expenditure of the Commissioners’ time, energy, and aggregate IQ points is the question of settling market misbehavior definitions so that those who are entrusted with the sword of justice are able to recognize the same behaviors as criminal. Financial regulation and financial crime is particularly fraught with misdefinition, ambiguity, and confusion; what other conclusion can one reach when one of the great firms is convicted of obstruction of justice related to financial crime only to have its conviction unanimously (let me say that again: unanimously) overturned in the venue of ultimate appeal. See generally Arthur Andersen v. United States, 544 U.S. 696 (2005) (vindicating top accounting firm on appeal but after firm’s reputation was erroneously publicly soiled and deemed so unsalvageable as to necessitate a rebranding to “Accenture,” by which it is known today). While shared data types, data sources, and data distribution systems are necessary for modern law enforcement of all kinds, including when investigating crimes having to do with regulated securities markets, rulemaking and debating of this sort is a liminal distraction from the real problem in cooperation between agencies and prosecutorial offices: nobody can agree, at the margin, what is impermissible, sanctionable, or criminal in the first place. The real data that need to be shared to prevent crime are the ex ante prosecutorial interpretations, not in SEC no-action letters or obscure narrow opinion pronouncements but in broad strokes, that would allow a market participant to choose a way forward. Most market participants are not henchmen and wrongdoers, most want to abide by the law, and many are legitimately and genuinely surprised when prosecuted for what they believed were permissible transactions or good-faith offerings. We all agree “how essential it is that the highest ethical standards prevail” in the securities markets that hold within them trillions of dollars of our nation’s wealth (and the wealth of our counterparties and allies around the world), but until we agree what those standards mean at a higher resolution and with durable definitions, we create unintended prosecutorial latitude created by vagueness of the offense itself (the ???????????? problem some will remember from the bad old days of the Soviet prosecution services). Quote from Justice Goldberg in Silver v. New York Stock Exchange, 373 US 341, 366 (1963). So, in closing, yes, let’s adopt some shared standards for how agencies, including enforcement agencies, hold and use data. But let’s not forget the purpose of all of this in the first place: “To achieve a high standard of business ethics in the securities industry.” And to do that we must not only share data among our prosecutors, administrators, and bureaucrats, but we must also share definitions, interpretations, and the design of market guardrails to a public thirsty for clarification and starving for consistency. Final quote from SEC v. CGRB, referenced supra, at page 186. Sincerely, Karl T. Muth, JD, MBA, MPhil, PhD Lecturer in Law, Pritzker School of Law, Northwestern University Lecturer in Economics, Organizational Behavior, Public Policy, and Statistics, Northwestern University Instructor in Strategy, Booth School of Business, The University of Chicago karl.muth@law.northwestern.edu