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SIFMA Highlights Concerns With The Proposed Plan For Developing A CAT System

Date 19/07/2016

SIFMA today submitted a comment letter to the Securities and Exchange Commission (SEC) on the National Market System (NMS) Plan for developing a Consolidated Audit Trail (CAT).  The NMS Plan for the CAT was developed by a group of self-regulatory organizations (SROs) – the securities exchanges and FINRA – and the SROs submitted the NMS Plan to the SEC pursuant to Rule 613 under the SEC’s Regulation NMS. 

SIFMA members have repeatedly supported the development of the CAT given its potential to enhance the quality and completeness of data provided to regulators and promote fair and equitable markets.  However, SIFMA’s comment letter raises substantial concerns with the CAT NMS Plan as it has been proposed, and we believe those issues must be resolved before the SEC approves the NMS Plan.  Most notably, the CAT Plan does not offer concrete steps for the elimination of existing systems that will be obviously duplicative of the CAT – such as FINRA’s OATS system – and instead would give the SROs several years to conduct an analysis before being required to eliminate redundant systems.  In addition, the CAT NMS Plan proposes to impose the vast majority of CAT-related costs to broker-dealers without providing any detailed analysis or justification.   

SIFMA has repeatedly called for a reform of the governance of NMS Plans to include voting representation by industry members.  The CAT Plan is a prime example of where that representation is needed.  The SROs developed the CAT NMS Plan largely without substantive input and meaningful collaboration from affected industry members, and as a result the proposed plan does not adequately address the policy issues that are critical for ensuring an effective and efficient CAT system.  SIFMA member firms have unique expertise that differs from, but strongly complements, the knowledge of the SROs. The CAT will benefit from a transparent governance structure that gives SRO members direct voting representation on the Operating Committee.  

“The development of the CAT presents a singular opportunity to build a state-of-the-art regulatory system that can enhance regulatory oversight while replacing older, redundant reporting requirements that cost billions to maintain.  As proposed, the CAT NMS Plan does not sufficiently accomplish these goals.  It is imperative that the SEC and SROs work closely with the broker-dealer community now as the CAT NMS Plan is still being developed to ensure a final CAT system that is both useful and efficient.  The significant issues we have identified with the CAT proposal show the need to include affected industry members as voting representatives in CAT governance and in all NMS Plans,” said Kenneth E. Bentsen, Jr., SIFMA president and CEO.  

Elimination of Duplicative Systems

SIFMA objects to the SROs’ proposal for a multi-year analysis of whether to eliminate duplicative systems.  We recommend specific steps the SEC and SROs should take to expeditiously eliminate redundant systems that would create duplicative costs and drain resources without provided an added benefit to the CAT. This includes setting appropriate timing for system eliminations and establishing effective error rate management targets.  SIFMA’s letter outlines a proposed framework with a specific focus on the elimination of systems such as OATS and EBS.   

Equitable Funding Model

SIFMA objects to the funding model proposed in the CAT NMS Plan, which would impose the vast majority of CAT-related costs on broker-dealers.  As the SEC evaluates the CAT funding structure proposed by the SROs, SIFMA urges the SEC to reconsider and call upon the SROs to address a threshold question at the outset: has there been sufficient justification offered in the CAT Plan to require broker-dealers to bear any of the financial burden of funding the CAT.  We urge the SEC to require the SROs – which include numerous for-profit market participants – to engage and make publicly available an independent audit and review of the SROs’ current regulatory revenues and how that money is allocated.  Moreover, any fees that the SROs do charge for the CAT should be determined by an independent third party because we believe the for-profit SROs have a conflict of interests to determine these fees without being affected by their own commercial interests.

Data Security

It is essential that the CAT have robust protections for the massive volume of sensitive transaction data and personally identifiable information (PII) it will track and store, which will include social security numbers for every person with a brokerage account. 

SIFMA’s letter highlights these and other issues that must be addressed to ensure an effective and efficient CAT system, including data usage, governance, operational considerations and the implementation timeline. The full comment letter is available here: http://www.sifma.org/issues/item.aspx?id=8589961531