The Eleventh Circuit Court will soon decide whether the Securities and Exchange Commission (SEC) acted arbitrarily and capriciously by proposing the first market-wide surveillance of investor exchanges. Known as the Consolidated Auditing Trail (CAT), the Court may render a decision sometime this month that will determine the fate of the SEC’s proposal in American Securities Association v. Securities and Exchange Commission (2024).
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The SEC’s CAT intends to collect detailed information on every order, cancellation, modification, and trade execution for all exchange-listed equities and options in the US capital markets. This includes consolidating the personal information of investors engaged in these transactions.
A total of 25 self-regulatory organizations (SRO) under the imposition of the Financial Industry Regulatory Authority were tasked by the SEC to gather and consolidate this information using the CAT system. Although CAT was originally slated to begin reporting financial data to the SEC on November 15th, 2017, there have since been several delays and extensions postponing the execution of the plan.
Today, the CAT system has yet to be fully implemented, mired by a host of issues that include ballooning costs, cybersecurity risks, and legal concerns over violations to personal privacy. SROs have also struggled to integrate CAT fees and monitoring requirements into their individual exchanges.
A big part of CAT’s implementation woes can be attributed to its swelling regulatory costs. SROs have scrambled to discover a cost-effective method for managing CAT over time. As SEC Commissioner Hester M. Peirce noted, CAT “has proved much harder and more expensive to implement than anyone anticipated.”
In another statement, Commissioner Mark T. Uyeda raises concerns over how the projected costs for using CAT have greatly surpassed expectations. Last year’s predicted operating costs eclipsed the original plan’s cost estimates five times over. The ascending costs for maintaining CAT have climbed from 27.0% in 2020, to 27.3% in 2021, to 73.2% in 2022—a very unsustainable trend for current registration fees to cover a plan as substantial as CAT.
The SEC initially estimated that CAT would have a one-time implementation cost of $2.4 billion and $1.7 billion in annual reports – which would be paid for primarily by the SROs, and, of course, the American taxpayer. The Commission unanimously approved the CAT NMS plan in 2016. Last year, the Commission approved a modified refunding model that only succeeds in shifting 2/3rds of the crippling cost burden on financial brokers, amounting to $140 million of CAT’s $200 million yearly budget.
Despite these ballooning costs and concerning figures, the SEC has decided to plow through with its initial plan to implement the CAT on May 31st, 2024 – which has been swiftly met by lawsuits and legal challenges, culminating in the Eleventh Circuit’s American Securities Association case.
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