Brokers, Exchanges Say SEC Plan for Audit Trail Delays Too Rigid

The SEC needs a more flexible plan to make stock exchanges financially accountable for further delays with a massive market-surveillance database they’re constructing and managing, according to financial services industry members.

Exchanges would have to reduce fees they can collect from brokers reporting data to the Consolidated Audit Trail if they miss implementation deadlines under the Securities and Exchange Commission proposal. The plan from September could hurt efforts to create the database, also known as the CAT, exchanges and brokers said in comment letters filed by an Oct. 28 deadline for feedback.

The Securities Industry and Financial Markets Association and the CAT’s operating committee were among those that provided feedback. The New York Stock Exchange, Nasdaq, and other exchanges have representatives on the CAT panel. (Bloomberg Law parent Bloomberg LP is an associate member of SIFMA, which advocates for brokers.)

Delays have dogged the project since the SEC first proposed it in 2010 after that year’s Flash Crash, which roiled financial markets. Large brokers would need to start sending information to the CAT by April 2020, with full implementation of the system required by 2022, according to the agency’s latest plan.

The commission should examine the facts and circumstances behind any postponements before deciding the appropriate level of fees, Michael Simon, chairman of the CAT’s operating committee, said in a letter to the SEC. The agency also shouldn’t hold exchanges accountable for delays in completing tasks that are within the control of brokers, he said.

“Faced with financial penalties for missed deadlines, the Participants may not be able to fully address legitimate industry concerns or accommodate requests for delays with respect to future deadlines,” Simon said.

Broker Thoughts

Brokers are committed to getting the CAT ready on schedule, but setbacks still could happen, SIFMA said in a letter. T.R. Lazo, managing director and associate general counsel, and Ellen Greene, managing director of the financial services operations group, signed the letter for the organization.

The SEC should create a formal system for handling potential postponements, according to SIFMA. The exchanges could request an extension from the agency after they clear it among themselves through an official approval process, the association said.

“We hope this delay mechanism would never be triggered, but having a mechanism in place would serve the purpose of completing the CAT in a timely manner while taking into account the operational complexity of the CAT implementation process,” SIFMA said.

An SEC representative didn’t immediately respond to a request comment.

The agency has yet to announce when its commissioners may vote on whether to adopt the plan.