Investment Operations

SIFMA COMMENTS ON CONSOLIDATED AUDIT TRAIL FUNDING MODEL

In a comment letter filed with the Securities and Exchange Commission (SEC), SIFMA said it disagrees with the proposed allocation of two-thirds of Consolidated Audit Trail (CAT) costs to industry members and instead suggests assigning half of CAT costs to industry members and half to the self-regulatory organization (SRO) participant exchanges as a more fair and reasonable allocation.  Further, SIFMA believes the SEC should not allow the SROs to significantly and materially amend the SROs’ current cost allocation proposal through a partial amendment for which the SEC has allotted a very brief 21-day comment period.

“Industry members recognize and accept that they will be responsible for a portion of the costs of the CAT,” said Ellen Greene, managing director, equity and options market structure, at SIFMA.  “However, we believe the SROs have not demonstrated that the proposed amendment meets the ‘fair and reasonable’ and other standards under the Securities Exchange Act of 1934 governing SRO fees. Equal sharing of CAT costs would be justifiable under the Exchange Act because it treats both participant exchanges and industry members the same from a cost allocation perspective based on their responsibility for generating CAT costs.”

On May 2022, the SROs issued a proposal to establish a revised funding model, known as the executed share model, for the CAT. In November 2022, the SEC published a proposal by the SROs to significantly and materially change the May funding proposal.  SIFMA believes the SROs should be required to withdraw the May proposal and file the new executed share model as a new amendment to the CAT NMS Plan, rather than making substantial changes through a partial amendment with a short comment period.

While SIFMA supports a number of changes made in the November submission, it believes that:

  • the participants’ decision to allocate two-thirds of CAT costs to industry members is unfair and unreasonable because the participants are equally responsible for the complexity of the trading activity in the equity and options markets;
  • the CAT continues to need an independent cost review mechanism to help ensure that the future CAT fees are fair and reasonable;
  • the proposed method for assessing historical CAT cost does not provide for the fair and reasonable allocation of CAT fees and should be modified; and
  • the lack of definition of which industry members are “executing brokers” in a transaction and the uncertainty of how fees would be assessed for transactions on an alternative trading system (ATS) makes it impossible for industry members to fully understand and meaningfully comment on this latest proposal.

SIFMA said it also continues to believe the SEC should focus on completing its August 2020 CAT data security proposal, which is on the SEC’s current reg flex agenda, to ensure investors’ data is fully protected in the CAT.

“When fully implemented, the CAT will be the largest database of retail and institutional trading data ever created.  It also will include personal information on every retail brokerage customer in America, as well as identifying information for every pension fund, mutual fund, and other institutional account in America,” said Greene.  “The need to get it right is essential.”