Industry associations have firmly opposed the policy change by the U.S. Securities and Exchange Commission (SEC) adopting an Executed Share Model governing the Consolidated Audit Trail (CAT).
On Wednesday, September 6, the SEC adopted a revised funding model, called the “Executed Share Model,” for the CAT and established a fee schedule for CAT fees for the self-regulatory organizations that are participants to the CAT NMS Plan in accordance with the Executed Share Model.
American Securities Association (ASA)’s President & CEO Chris Iacovella called it “neither equitable, nor reasonable”.
“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,” he said in a statement.
“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,” Iacovella added.
Kenneth E. Bentsen, Jr., President and CEO of SIFMA, agreed, saying that SIFMA finds the CAT funding model created and designed by the SROs to be “deeply flawed”.
In its June 2023 comment letter, SIFMA said that the funding model provides for inequitable allocation of CAT costs between industry member broker-dealers and the SROs.
“Taking into account industry member funding of FINRA, the model assigns over 80% of CAT costs to industry member broker-dealers,” said Bentsen.
“While industry members recognize and accept that they will be responsible for a portion of the costs of the CAT, this allocation of fees is unfair and does not meet the standards under the Securities Exchange Act of 1934 governing SRO fees,” he added.
According to Bentsen, this unfair allocation of CAT costs is especially problematic given that industry members have no role in the governance, oversight, or design of CAT and obtain no direct tangible benefits from its operation—“indeed, the industry has not even been permitted to obtain or review CAT data used in the context of SEC regulatory initiatives”.
“Second, as outlined in our May 2023 comment letter, we strongly disagree with the SROs determination of which industry member broker-dealer will be assessed CAT fees. We believe the most reasonable way to allocate CAT costs among industry members is to make the industry member that originated the ultimately executed order the one responsible for CAT fees,” he said.
“Third, as noted in our July 2023 comment letter, rising CAT costs, which currently have no legal limit or mechanism for control that is being implemented, need to be addressed,” he added.
According to the SEC Chair Gary Gensler, prior to CAT’s creation, regulators lacked a consolidated view of the material information of all orders in NMS securities to trace orders from originations, modifications, cancellations, routings, and executions.
He said the amendments modify the method by which allowable costs associated with building and operating the CAT are allocated.
The approved amendment establishes a framework that plan participants will use to recover the costs to create, develop, and maintain the CAT, including the method for allocating CAT costs among participants and the members of a national securities exchange or a member of a national securities association, according to the SEC.
SIFMA’s Bentsen commented that when fully implemented, the CAT will be the largest database of retail and institutional trading data ever created, and will also 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.
“The SEC has failed to implement the CAT data security rule for three years, which leaves customers’ personal information unprotected in the massive CAT database. That open-ended risk, along with the out-of-control costs, point again to the need to address fundamental issues with the CAT. The need to get this right is essential,” he said.
In its comment letter to the SEC dated April 11, 2023, FINRA said it continues to support the goal of adopting a transparent funding model that reasonably and fairly allocates CAT costs among participants and industry members based on objective criteria.
“Although the Fee Proposal claims otherwise, it does not meet these objectives because it fails to provide for reasonable fees that are equitably allocated and not unfairly discriminatory, nor does it reflect a reasonable approach to allocating costs amongst the Participants,” FINRA said.
