The SEC announced that it has granted exemptive relief to broker-dealers that establish a phased Consolidated Audit Trail (CAT) reporting timeline for broker-dealers and to permit introducing brokers that meet certain requirements to follow the small broker-dealer reporting timeline for the CAT. The two orders are the latest SEC actions seeking to address the hardships and complications posed by the COVID-19 pandemic on the Commission’s regulated entities.
CAT background. With the intent of modernizing the reporting infrastructure to oversee trading activity generated across numerous markets in the national market system (NMS), in 2016 the SEC approved the CAT NMS Plan that was submitted by the self-regulatory organizations pursuant to final rules adopted by the SEC in 2012. The CAT NMS Plan has since been plagued with missed deadlines, including the deadline for participants to begin recording and reporting data to the central repository by November 15, 2017. The SROs requested several deadline extensions, but this request was denied by Chairman Jay Clayton.
In September 2019, the Commission voted to propose amendments to the CAT NMS Plan designed to decrease the likelihood of additional delays to CAT implementation by increasing operational transparency and attaching financial accountability. The comment period closed on October 28, 2019. The Commission has recently issued relief from certain CAT obligations relating to the challenges posed by the coronavirus pandemic, including an order exempting the SROs from collecting or retaining certain retail customer data and a no-action letter stating that the Division of Trading and Markets would not recommend enforcement action against the Participants if they do not enforce the CAT implementation deadlines against Industry Members through May 20, 2020.
Latest COVID relief: broker dealers under the CAT. The SEC has now issued relief from certain CAT obligations for broker-dealers. The first order allows for a delayed start for broker-dealer reporting to the CAT, conditioned upon compliance with certain other obligations. The exemption is limited to the CAT NMS Plan provisions relating to Industry Member reporting of Industry Member data to the central repository. It is also conditioned upon the Participants complying with all other dates that are a part of the already published timeline of phased reporting, given that Industry Member reporting was required to begin over a year ago. This condition, according to the SEC, is appropriate because FINRA CAT (which was created after FINRA was selected as the new CAT NMS plan processor) has been clear that it will be prepared to accept data from any Industry Member that has completed onboarding and certification.
Some introducing brokers meet the net capital requirements for small broker-dealers under the Exchange Act, yet fail to qualify as a small broker-dealer under the CAT NMS Plan. In requesting the relief, the Participants noted that introducing brokers are excluded from the CAT definition of a small broker-dealer solely because of their introducing relationship with a clearing firm. The SEC’s second exemptive order addresses this incongruence by providing exemptive relief to those introducing brokers, permitting them to follow the CAT NMS timeline for small broker-dealers. The order notes that the relief affects only the time when certain introducing brokers must begin CAT reporting, but not the type or amount of information that they will be required to report.
The Commission’s press release outlined the adjusted deadlines for reporting to the CAT by broker-dealers:
- June 22, 2020: Initial equities reporting for large broker-dealers and small broker-dealers that currently report to FINRA's Order Audit Trail System (OATS);
- July 20, 2020: Initial options reporting for large broker-dealers;
- December 13, 2021: Full equities and options reporting for large and small broker-dealers; and
- July 11, 2022: Full customer and account reporting for large and small broker-dealers.