Statement on Status of the Consolidated Audit Trail

In 2012, the SEC adopted Rule 613 of Regulation NMS requiring FINRA and the national securities exchanges (collectively, the “SROs”) to work together to develop and submit to the SEC a plan to create, implement, and maintain a consolidated audit trail (the “CAT”).  Put simply, 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 SROs (the “SRO CAT Plan”), the first phase of reporting to the CAT—covering SRO reporting—was required to begin on November 15, 2017.  In the Fall of 2017, the SROs requested that the SEC grant relief from this deadline.   

In November 2017, Chairman Jay Clayton issued a statement[1] on the status of the CAT.  In that statement, Chairman Clayton said that he would not support a request from the SROs to extend the deadlines for reporting data to the CAT.  Chairman 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.

This statement provides an update on the status of the CAT project.  

Background

Rule 613 was adopted on July 18, 2012 and provided for an April 29, 2013 deadline for submission of the SRO CAT Plan to the SEC.  The SROs submitted exemption requests to extend that deadline, which were granted, extending the deadline to December 6, 2013 and then again to September 30, 2014.  On September 30, 2014, the SROs submitted the SRO CAT Plan to the SEC, and thereafter submitted amendments on February 27, 2015, December 24, 2015, and February 8, 2016.  After public comment, in November 2016 the Commission approved the SRO CAT Plan. 

On January 17, 2017, the SROs selected Thesys Technologies LLC (“Thesys”) to build the CAT system, pending execution of a Plan Processor Agreement among Thesys and the SROs.  The Plan Processor Agreement was executed on April 6, 2017.[2]

Under the SRO CAT Plan, the first phase of reporting to the CAT—covering SROs—was required to begin on November 15, 2017.  The SRO CAT Plan also provides that the second phase of reporting to the CAT—covering industry members (other than small industry members)—is required to begin on November 15, 2018, and the third phase of reporting—covering small industry members—is required to begin on November 15, 2019.  

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.  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.  

Chairman Clayton released a statement noting that he was not in a position to approve the requested relief on the terms proposed, and he 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.  Chairman Clayton 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 has worked with, and expects to continue to work with, the SROs, Thesys and the industry.  Staff is particularly focused on the CAT being subject to robust cybersecurity controls.  As Chairman Clayton has emphasized, protection of the information submitted to the CAT is of paramount importance, and the SEC will not retrieve sensitive information from the CAT unless the SEC needs it and believes appropriate protections to safeguard it are in place.[3]

Status of the CAT and Certain Related Matters

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.  The SROs’ currently expected timetable for compliance with their obligations under the CAT Plan is discussed below.  

SRO Master Plan and Revised Time Table

The Division of Trading and Markets requested that the SROs create a detailed “Master Plan” that would, among other things, set forth a catalogue of material steps necessary to effectively implement the CAT, a revised timeline with detailed, objective and achievable milestones and clearly defined obligations for the SROs and Thesys, and a comprehensive description of the functionality that will be delivered on specific dates.  We received the Master Plan on May 25, 2018.  

The SROs’ Master Plan calls for “first phase” (SRO) reporting to commence on November 15, 2018 (compared to November 15, 2017 under the SRO CAT Plan), “second phase” (large broker-dealer) reporting[4] to commence on November 15, 2019 (compared to November 15, 2018 under the SRO CAT Plan), and all phases of small broker-dealer reporting to be complete by November 15, 2022 (compared to November 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 November 15, 2019.    

The Division is continuing to review the Master Plan.

The Division and other SEC staff will continue to monitor the development of cybersecurity controls for the CAT and work with the SROs, Thesys, and the industry regarding the security of CAT data.  

Second Phase (Broker-Dealer) Reporting Specifications

Among the significant components of the SRO CAT Plan that are covered by the Master Plan—but are not yet complete—are the CAT industry member reporting specifications.  Generally speaking, these industry specifications provide the technical guidelines for how industry member data is to be reported to the CAT.  These specifications, and their implementation, are prerequisites for the operation of phase two of the CAT—i.e., they are prerequisites for broker-dealer reporting to the CAT.  The Division has been informed by the SROs that the SROs and Thesys are working with the broker-dealer community to produce these reporting specifications.[5]     

Second Phase Compliance Dates for Broker-Dealers

The SROs’ Master Plan makes it clear that the CAT will not be ready to accept large broker-dealer data on the November 15, 2018 reporting date set forth in the SRO CAT Plan.  The SROs’ Master Plan contemplates the following schedule for large[6] broker-dealer reporting:

The Division recognizes that it is not practicable for industry members to report some or all of the contemplated industry data to the CAT unless and until the CAT has been sufficiently developed to receive that data.  The Division also recognizes that the industry member reporting specifications are a prerequisite for industry member reporting.  Accordingly, and subject to the ongoing good faith efforts and cooperation of industry members to facilitate the development of the CAT as promptly as practicable, the Division does not expect to make enforcement referrals concerning industry members for failure to report data to the CAT if the CAT is not sufficiently developed to receive that data.  In this regard, the Division expects the industry member community to work cooperatively and expeditiously with the SROs to develop effective technical specifications for reporting to the CAT and to otherwise make good faith efforts to implement the CAT as promptly as practicable.

November 2018 Expiration of Temporary Exemption for Large Trader Reporting and Delayed Implementation of the CAT

The Division also notes that the SROs’ Master Plan affects the temporary exemption that the Commission issued from the third phase of Exchange Act Rule 13h-1 (the “large trader rule”).  This temporary exemption is scheduled to expire on November 15, 2018[7] and covers all large trader transactions beyond those currently phased-in (proprietary transactions and those effected through sponsored access or direct market access arrangements).  

When the Commission issued this temporary exemption in October 2017, the Commission indicated that the exemption would help focus broker-dealer resources on implementing the CAT in the near term and allow the Commission to revisit the implementation of the third phase of the large trader rule as it evaluated developments during the exemption period, including progress in implementing the CAT.  In light of the delay in implementing the CAT, industry participants have raised the issue of whether a further extension of the temporary exemption from Phase Three of the large trader rule is necessary or appropriate.  

If you would like to inform the Division staff of your views regarding the large trader exemption please communicate with the staff through the following email address: TradingandMarkets@sec.govand insert “Large Trader Phase 3” in the subject line.