The Securities and Exchange Commission announced on Monday that it may take until November for initial phases of its ambitious, but often delayed Consolidated Audit Trail to begin initial operations.
In 2012, the SEC adopted Rule 613 of Regulation NMS requiring FINRA and the national securities exchanges to work together to develop and submit a plan to create, implement, and maintain a Consolidated Audit Trail (CAT). The CAT is intended to enable regulators to oversee the securities markets on a consolidated basis—and, in so doing, better protect these markets and investors.
Under the plan developed by the self-regulatory organizations (SROs), the first phase of reporting to the CAT—covering SRO reporting—was required to begin on Nov. 15, 2017. On Jan. 17, 2017, the SROs selected Thesys Technologies to build the CAT system. The Plan Processor Agreement was executed on April 6, 2017.
In the fall of 2017, the SROs requested that the SEC grant relief from this deadline. SEC Chairman Jay Clayton issued a statement saying that he would not support a request from the SROs to extend the deadlines for reporting data to the CAT. Clayton was unwilling to support such an extension request in the absence of a comprehensive and credible work plan with, among other components, verifiable milestones, as well as governance and security enhancements.
Brett Redfearn, director of the SEC Division of Trading and Markets, delivered an update on the project this week.
“Just before the November 2017 deadline for the first phase of reporting to the CAT, the SROs submitted to the Commission an exemption request letter, explaining that the CAT development and build had been delayed and requesting that the Commission issue exemptive relief to delay the first phase, the SRO reporting, by a year and other deadlines by a year or more,” he wrote. “This substantially delayed state of the development of the CAT had not been communicated to the SEC in a timely manner. The Commission did not issue the relief requested by the SROs.”
Clayton, he wrote, “urged the SROs to continue their efforts to work cooperatively with each other and to meet their responsibilities under the SRO CAT Plan as promptly as practicable.” He also instructed the SEC staff to make themselves available to the SROs as necessary or appropriate with a particular focus on ensuring that project management and governance deficiencies are addressed, including development of a credible and comprehensive work plan with, among other components, verifiable milestones.
Since that time, SEC staff has continued to engage with the SROs and industry members on the CAT. Among other things, the staff has encouraged the SROs to: centralize their decision making, enhance their focus on project management and accountability, and increase the CAT Plan Advisory Committee’s participation in the CAT development process.
SEC staff expects to continue to work with the SROs, Thesys, and the industry and is particularly focused on the CAT being subject to robust cyber-security controls.
To date, the SROs have not begun reporting required data to the CAT as required by the first phase of the SRO CAT Plan. There continue to be delays in the SROs’ development and build of the CAT and, recently, the SROs and Thesys have missed new, self-imposed deadlines.
SRO master plan and revised timetable
The Division of Trading and Markets requested that the SROs create a detailed “Master Plan” that would, among other things, catalogue material steps necessary to effectively implement the CAT and a revised timeline.
The SROs’ Master Plan calls for “first phase” (SRO) reporting to commence on Nov. 15, 2018.
“Second phase” (large broker-dealer) reporting is expected to commence on Nov. 15, 2019 (compared to Nov. 15, 2018 under the SRO CAT Plan), and all phases of small broker-dealer reporting to be complete by Nov. 15, 2022 (compared to Nov. 15, 2019 under the SRO CAT Plan)—but not all data and functionality required by the SRO CAT Plan will be available on those dates.
For example, only equities data—not options data—will be included in the large broker-dealer reporting that will commence on Nov.15, 2019.
The Division is continuing to review the Master Plan. Along with other SEC staff, it will continue to monitor the development of cyber-security controls for the CAT and work with the SROs, Thesys, and the industry regarding the security of CAT data.
More on the new timetable and obligations, can be found online.