The American Securities Association (ASA) and Citadel Securities today filed a lawsuit against the US Securities and Exchange Commission (SEC) over its approval of plans to change the funding structure of the Consolidated Audit Trail (CAT), which are expected to impose additional costs on brokers and market participants. But why are the plans so unpopular?
“The American Securities Association and Citadel Securities have jointly petitioned the Eleventh Circuit to review the SEC’s implementation of the Consolidated Audit Trail, in response to widespread investor concerns about transparency, governance, costs, and data privacy. The SEC has overstepped its statutory authority and failed to address investor and industry concerns, leaving us no choice but to litigate,” they said in a joint statement.
ASA in particular has been a longstanding opponent of the CAT, and has issued numerous comments and proposals advocating its removal for the purposes of investor privacy.
“The CAT funding model is a prime example of an agency adopting a rule it couldn’t pay for and then illegally appropriating the funds of market participants to fund it. We strongly object to the SEC imposing a tax on American investors to fund the CAT. ASA also remains vehemently opposed to the CAT’s unconstitutional collection of investor’s personal and financial information and we urge every American to question this unprecedented intrusion into their private lives,” explained ASA president and CEO Chris Iacovella in September.
The history
The CAT was created through SEC Rule 613, which was adopted in 2012 to help regulators to accurately track securities data. SEC chair at the time, Mary Schapiro, noted: “A consolidated audit trail that accurately tracks orders throughout their lifecycle and identifies the broker-dealers handling them will provide FINRA, other self-regulatory organisations (SROs), and us with an unprecedented ability to effectively oversee the markets we regulate.”
In 2016, the SEC approved a proposed NMS plan from SROs to create the CAT, which included a funding model for how the costs of the CAT would be allocated amongst the SROs and their industry members.
That funding model is now set to change, with SEC chair Gary Gensler in September 2023 announcing approval of a new order that would update cost allocation, essentially enabling SROs to charge fees for use of the tape.
The change
“The amendments are the product of years of work by the SROs and are based upon significant engagement with market participants and the public. There have been multiple filings over the years, each put out for public comment. Today’s SRO-proposed amendments to the NMS plan have been modified from earlier filings based on that public engagement,” said Gensler on 6 September.
The amendments will change the 2016 CAT funding structure in two ways. First, the fees participants pay to fund CAT will be determined by executed shares. Previously, the funding amount was determined by different factors. Venues like exchanges and alternative trading systems paid according to their market share, and industry members like broker-dealers paid according to their message traffic.
Second, the fees will be divided evenly into thirds across three parties: the SROs, executing brokers representing buyers, and executing brokers representing sellers. Previously, allocation was not specified between venues and broker-dealers.
CAT LLC will adjust the applicable fee rate twice a year.
The concerns
“The CAT has been expensive, far more costly than anyone imagined it would be. CAT’s considerable costs need to be allocated and no allocation method is ideal,” said Commissioner Hester Peirce, who opposed the order, in September.
“My primary reason for not supporting today’s order adopting a funding model is that we fail to grapple with the need to establish a realistic constraint on CAT costs.”
The proposals have been deeply unpopular with some market participants. FINRA and the brokerage industry have raised vociferous objections to the proposed allocation of expenses: citing operational complexity, a significantly heavier burden to be borne by brokers, and the disparate effect on different firms within the brokerage industry.
“These concerns are understandable, but with a price tag of more than US$500m to date and billions to come, discontent would be inevitable under almost any method of allocation, as reaction to previous fee filing models has shown,” noted Peirce.
The action
The primary source of discontent, however, is that while broker-dealers and other parties have been able to have their say through participation in the CAT Advisory Committee and made comments during the Commission approval process, their ability to shape CAT, its budget, and its fee allocation is limited because they do not have a final vote and therefore can exert little control over CAT costs.
ASA and Citadel Securities would appear to have taken the lead in voicing these concerns and expressing their discontent. In addition to the latest lawsuit, Citadel Securities and ASA have also launched a petition for review of the CAT order.
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