Consolidated Audit Trail: Focus on Effective Implementation Puts CAT on Track

At a recent speech, I highlighted principles that have guided our work over my tenure, including that effective rulemaking does not end with adoption.[1] I also mentioned a turn of phrase I have taken to using when I think about the women and men of the SEC: “Personnel is productivity.” As we look at the progress made with the Consolidated Audit Trail (CAT) in the last two years, we see the impact of effective implementation practices, including having talented, dedicated personnel focused on setting and achieving well-articulated implementation details and milestones through engagement with internal and external stakeholders. Most importantly, as a result, the CAT has moved from concept to reality.

Well-Articulated Implementation Details

The CAT’s principal purpose is to enhance regulatory oversight of our securities markets. Our equities and options markets operate through multiple exchanges and other trading venues, and the CAT is designed to facilitate cross-market oversight and analysis, thereby improving market integrity and investor protection. The CAT’s purpose has been clear for many years, but implementation was challenged by many factors, including sufficiency of resources and communications. 

We restructured our approach to CAT implementation at the end of 2017.[2] However, by the beginning of 2019, progress remained slow. That changed in the second quarter of 2019, when process improvements — many of which were driven by broad and detail-oriented engagement with stakeholders — became apparent. For example, the self-regulatory organizations (SROs) selected FINRA to be the Processor and issued comprehensive specifications and scenario documents regarding broker-dealer reporting.[3] These actions were followed by the Commission’s April 2020 exemptive order, which allowed for the phased implementation of broker-dealer reporting.[4] This order also addressed the impact of COVID-19 on implementation efforts. Additionally, the Commission’s financial accountability amendment establishes four key milestones focused on CAT reporting and regulator functionality.[5]

I commend the industry and the SROs for initiating CAT reporting and achieving low error rates.

Engagement with Stakeholders

CAT is a complex project involving many stakeholders – the SROs, FINRA CAT, the SEC, broker-dealers, institutions and the investing public. Successful implementation of these types of multi-party data projects requires constant communication of status, issues, successes and challenges. I look forward to continued public transparency with respect to the CAT implementation process in the form of the quarterly progress reports required by the financial accountability amendment that include factual indicators highlighting progress. Additionally, the SROs and FINRA CAT are engaged in extensive industry outreach hosting frequent calls where they share error rates, known issues and guidance.[6] Industry engagement with respect to open implementation issues has been active and effective with feedback incorporated into implementation documentation on a regular basis.

Beyond stakeholder engagement on CAT functionality, we have also seen a robust set of comments on the Commission’s CAT Data Security proposal.[7] We appreciate commenters’ thoughtful feedback on how CAT data security may be further enhanced. Additionally, staff of the Division of Trading and Markets recently issued a staff paper on cross-market regulatory coordination.[8] I believe continued public engagement on this topic is important, including with respect to surveillance, examinations, investigations, and enforcement, in light of the implementation of CAT. Security considerations are ever-changing, and I encourage stakeholders and the public more generally to continue to communicate their concerns and ideas for improvement to the SEC, the SROs and FINRA CAT.

Focused Leadership Driving Issues to Resolution

It goes without saying that clear roles and responsibilities with associated accountability are essential to a project’s success. Here at the SEC, Manisha Kimmel’s focus has been on driving CAT forward by identifying proactively and resolving promptly both broad and granular issues that require Commission action.[9] In addition to rulemaking on CAT, the Commission has provided exemptive relief for certain compliance issues, including compliance timelines. Testing for broker-dealer CAT reporting began in 2019 with the start of equity reporting in June and options reporting in July. On October 26, “Phase 2a” focused on core equity reporting was fully rolled out with all linkages in production.  

Turning back to the phrase “personnel is productivity,” I would like to thank Manisha for managing this project within the Commission. Manisha’s leadership has saved time (many months if not years), money (CAT specifications are better aligned with common practices and capabilities) and, most importantly, improved functionality and security. I would also like to recognize the contributions of cross-divisional SEC staff, the SROs’ CAT Leadership Team and the strong leadership from FINRA CAT in advancing this project further in recent years.

Looking Forward

Broker-dealers, exchanges and FINRA are all now reporting data to the CAT inclusive of options and equity order events. While CAT has been firmly established as an operational regulatory reporting system, 2021 will be another important year of milestones for CAT, with transaction reporting, associated regulator functionality and enhanced data security all scheduled for completion. I am encouraged by the developments that have taken place during the last several years and look forward to the continued success of the project.