SEC’s Proposal to Assume Control of Consolidated Audit Trail

The SEC’s Plans for the Consolidated Audit Trail

The U.S. Securities and Exchange Commission (SEC) has announced a significant initiative to take direct control of the Consolidated Audit Trail (CAT), a system crucial for monitoring trading activities across U.S. equity and options markets. This transition aims to amend the current funding model and could extend through late 2027.

Details of the SEC’s Proposal

In a letter dated August 10, SEC Chair Paul Atkins instructed agency staff to assess the process for taking over CAT, focusing on the resources needed for agency management of the system. The SEC is considering a proposal that could eliminate Rule 613, which was foundational for CAT’s establishment, while maintaining its existing infrastructure and reporting frameworks. Under the new model, stock exchanges, the Financial Industry Regulatory Authority (FINRA), and broker-dealers would be required to submit relevant CAT data directly to the SEC or a designated operator.

Funding and Management Changes

Atkins emphasized the need to rethink how CAT is funded and governed, proposing that expenses could potentially be covered by congressional appropriations or via transaction fees collected under Section 31 of the Securities Exchange Act. This would involve a detailed study of the personnel, technology, and internal resources necessary for the SEC to manage CAT effectively.

Current Issues with CAT Governance

Despite prior cost reductions achieved through regulatory amendments, Atkins acknowledged that the current governance structure creates ongoing challenges. CAT is presently managed under a joint plan with exchanges and FINRA, leading to persistent issues related to costs and oversight. The proposed shift aims to hold the SEC directly accountable for managing this critical market surveillance system.

Engagement with Market Participants

The SEC’s initiative follows a public feedback period on CAT, which garnered hundreds of comments regarding its management and funding. The commission is committed to engaging with market participants throughout the reform process, allowing for public commentary as proposals develop. However, any suggested repeal of Rule 613 and alterations in reporting requirements must undergo the federal rulemaking process prior to implementation.

Implications for Future Market Regulation

This proposal forms part of a broader review of U.S. securities market rules, including potential impacts on blockchain-based trading methods. The SEC has been proactive in reassessing existing regulations to enhance market functionality and reduce costs. Additionally, separate regulatory projects focusing on the regulation of digital assets and market structure are underway, demonstrating the SEC’s commitment to adapting its oversight in response to evolving market dynamics.

Atkins indicated that the SEC intends to keep the public informed through regular updates as staff work towards implementing these changes. The ultimate goal is to ensure a robust and effective market surveillance system that meets contemporary needs.