Speech by SEC Commissioner:
Opening Remarks Regarding Proposed Consolidated Audit Trail
Commissioner Elisse B. Walter
U.S. Securities and Exchange Commission
May 26, 2010
Thank you, Chairman Schapiro. I, too, would like to express my gratitude to our staff and, in particular, the individuals in the Office of Market Supervision from the Division of Trading and Markets, and the staffs from Enforcement, Risk Fin and OCIE for their excellent work in developing the proposal before us today. In working closely with the staff on the concept of a consolidated audit trail from its early stages, I have witnessed an impressive level of dedication and a true collaborative spirit among the Divisions and Offices. And, the regulatory partnership this proposal represents is a model for future work. We can't underestimate the significance of this proposal and I congratulate all of you.
I am delighted to support your recommendation.
Although the development of a consolidated audit trail is a major undertaking, it boils down to a simple issue: we really need to understand what is going on in the markets — and we currently don't have the full scope of information we need. As I have previously stated, well-regulated markets require that regulators have the tools and information they need to conduct surveillance as well as investigations of manipulative, abusive, or other illegal activity, and to better understand market participants. As we speak, financial markets and institutions are advancing rapidly and becoming more and more interconnected. Unfortunately, recent events have demonstrated that the regulatory landscape has simply not kept pace with market developments.
To do our job well, we must have access to detailed, accurate, and comprehensive data regarding market participants and trading activities. As has been noted, we recently proposed rules that would provide us with more information about large traders and their trading activities. That proposal represented a positive first step toward providing the Commission with more data and insight to allow it to better carry out its mission. However, a large trader reporting system alone does not provide a complete picture of the markets.
We must seek to further improve our access to information to effectively monitor the markets and detect and investigate illegal activity in a timely fashion. Valuable resources are wasted and time is lost when our staff is tasked with tracking down, sorting through, and aggregating disparate data from disparate sources. For the data to be relevant and meaningful, it must be comprehensive; for example, the identification of customers is critical. In addition, the data should be collected and categorized systematically and uniformly and be available promptly. The central repository that would be created under today's proposal would do just that. I believe that a consolidated audit trail, coupled with the information provided by a large trader reporting system, would substantially enhance our ability to regulate effectively and comprehensively.
More specifically, under the proposal, Commission staff would have more efficient and timely access to data about orders and transactions in all markets, for purposes of conducting risk assessments of referrals received, investigations, enforcement activities, and reconstructing market events, and other analysis. As stated in the release, the Commission believes that the proposed consolidated audit trail, if it had been adopted and implemented, would have significantly enhanced our ability to quickly reconstruct and analyze the severe market disruption that occurred on May 6, 2010. This proposal, if adopted, should similarly enhance the Commission's ability to respond to future severe market events.
At this stage in the rulemaking process, we eagerly await input from interested parties on all aspects of the proposal through our public comment process. In considering those comments, we need to avoid the temptation to be penny-wise and pound-foolish. We need to end up with the right information at the appropriate time, while at the same time being sensitive to costs. I will be particularly interested in reading the commenters' responses to questions we raised on two specific subjects.
First, I believe that an important means of preventing market manipulation, fraud, and other abuses effectively is cooperation among regulators. Particularly given the fragmented regulatory jurisdiction in our marketplace, information sharing among regulators would help the Commission and other regulators carry out their respective oversight of products and trading activity within their own jurisdictions. I am happy to see that the proposing release asks a number of important questions, such as whether it would be beneficial for the Commission to work with other regulators to collectively share information with respect to products and trading activities, whether such sharing would help the Commission better understand the impact of trading in other markets on trading activity and products within our jurisdiction, and whether and to what extent other regulators, such as the CFTC, should have access to the data.
Second, notwithstanding the importance of collecting fulsome audit trail data, including information to identify customers, registered reps, firms, and exchanges, we are keenly aware of the need to protect personal and proprietary information. While we believe there may be some value in making data available to third parties, such as for academic research, we take very seriously concerns regarding privacy and confidentiality. The release poses critical questions relating to these matters.
I urge interested parties to consider these questions carefully and provide meaningful responses so as to better inform the Commission and its staff once we do reach the adoption stage for this proposal.
Again, my gratitude goes to all of you involved in this proposing release.