Wednesday, September 11, 2019

SEC proposes accountability requirements to speed CAT NMS Plan implementation

By Rodney F. Tonkovic, J.D.

The SEC has proposed amendments intended in part to facilitate the implementation of the national market system plan governing the Consolidated Audit Trail. Participating self-regulatory organizations would be required to file and publish complete implementation plans and progress reports. The proposed amendments also include financial accountability provisions establishing deadlines for four implementation milestones; if these deadlines are missed the amount of fee recovery available to the participants is reduced (Proposed Amendments to the National Market System Plan Governing the Consolidated Audit Trail, Release No. 34-86901, September 9, 2019).

The plan. On November 15, 2016, the SEC voted unanimously to approve a proposed national market system plan to create, implement, and maintain a consolidated audit trail that will allow regulators to track all activity throughout the U.S. markets in NMS securities. The plan was submitted by participating self-regulatory organizations in response to a requirement in Rule 613 of Regulation NMS.

Implementation status. Under the original deadlines in the CAT Plan, participants would begin recording and reporting data to the Central Repository by November 15, 2017. This and multiple other deadlines were not met, however, and the participants sought an extension, but the request was rejected by the Commission. According to a statement by Chairman Clayton on the CAT's status however, some progress has been made: the SROs began reporting certain data to the CAT; the SROs have published final specifications for the initial reporting of equities and options to facilitate broker-dealer reporting; and the SROs and the broker-dealer industry are working together to develop ways to conduct Large Trader Reporting.

"CAT needs to be implemented without further delays," said Chairman Jay Clayton. "The proposed amendments are designed to bring greater transparency and accountability to the implementation of the CAT." In the status report, Clayton also expressed his belief that "next six to twelve months will be critical for moving the CAT from concept to reality."

Proposed amendments. The proposed amendments are intended to ensure that the plan participants fulfill their obligations to deliver a functional CAT in a reasonable time frame, the proposal states. Participants would be required to develop a complete implementation plan (plus quarterly progress reports) with a detailed timeline and objective milestones. Each plan and progress report must be approved by the operating committee established by the CAT Plan and submitted to the participant's CEO, President, or equivalently situated senior officer. The formal and publicly-available progress reports are meant to increase accountability, and there would also be financial accountability if implementation milestone dates are not met.

Operational transparency. The CAT Plan does not currently have provisions requiring participants to provide public updates on implementation progress. To address this concern, the Commission proposes to amend Section 6.6 of the Plan by adding a new Section 6.6(c) requiring that:
  • Participants with the Commission, and make publicly available, a detailed implementation plan and ongoing quarterly progress reports. 
  • Each document must be submitted to the CEO, President, or an equivalently situated senior officer at each Participant and then approved by a supermajority vote of the Operating Committee. 
  • To the extent that any document is not approved by a unanimous vote of the Operating Committee, each Participant whose Operating Committee member did not vote to approve the document must separately file with the Commission, and make publicly available, a statement identifying itself and explaining why it did not vote to approve the document in question.
Financial accountability. To prevent additional delays, the Commission proposes to establish target deadlines for four critical implementation milestones. When the CAT Plan was approved, it provided for participants to recover implementation fees, costs, and expenses from their industry members. If participants miss the implementation milestones, the amount of CAT funding that they can recover from Industry Members will be reduced at regular intervals. The target dates and milestones, which are discussed in detail in the proposal are: 
  • April 30, 2020: Initial Industry Member Core Equity Reporting;
  • December 31, 2020: Full Implementation of Core Equity Reporting Requirements;
  • December 31, 2021: Full Availability and Regulatory Utilization of Transactional Database Functionality; and
  • December 31, 2022: Full Implementation of CAT NMS Plan Requirements. 
Comments should be received within 45 days following publication of this proposal in the Federal Register.

The release is No. 34-86901.