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Tuesday, June 11, 2019

Preparing for the Consolidated Audit Trail Program

Preparing for the Consolidated Audit Trail Program

On July 11, 2012, the U.S. Securities and Exchange Commission (the “Commission”) adopted Rule 613 under the Securities Exchange Act of 1934 (“Rule 613”) to create a comprehensive Consolidated Audit Trail (“CAT”) that would allow regulators to track all activity throughout the U.S. markets in National Market System (“NMS”) securities.  Among other things, Rule 613 requires self-regulatory organizations (“SROs”) to jointly submit a plan – called an NMS plan – to create, implement and maintain a consolidated audit trail.  Rule 613 specifies the type of data to be collected and when the data is to be reported to a central repository.

On May 21, 2019, the Financial Industry Regulatory Authority, Inc. (“FINRA”) issued Regulatory Notice 19-19 to remind all Industry Members (as defined below), regardless of size, that receive or originate orders in NMS stocks, OTC equity securities or listed options that they will be required to report to CAT.  Industry Members that must register for the CAT include any: (i) member of FINRA or a national securities exchange that handles orders or quotes in NMS stocks, OTC equity securities or exchange listed options; and (ii) third-party CAT reporting agent that is or will be authorized to submit data to the CAT on behalf of an Industry Member.

Due to the complexities and costs associated with implementing systems to address CAT’s operational and technical requirements, it is prudent for Industry Members to evaluate what infrastructure is needed amongst compliance, trade reporting, and data systems teams, as well as develop a timeline for the implementation of such systems to ensure compliance with the CAT program. Accordingly, understanding some key details of the plan is useful to prepare for the CAT reporting requirements.

Key Details

Industry Members conducting business in the US equity and options markets will be required to report order life cycles for equities and options markets on a daily basis, including orders, quotes, cancels, routes (including internal routes), and allocations.

Industry Members will have to provide internal identifiers for these records (e.g., order, customer IDs) to support CAT linkage processes. Unlike existing regulatory regimes, customer-identifying information must be included, which will require reporting firms to locate consistent, uniquely identifiable data for all customers.

The infrastructure required for compliance with CAT adds to the existing requirements such as Order Audit Trail System (“OATS”). While the intention of CAT is to supersede OATS, this is dependent on all firms reporting to CAT consistently. In the meantime, broker-dealers should anticipate reporting to both systems.

Timeline

Large Industry Members will be required to report to the CAT in April of 2020 and small Industry Members will begin reporting April of 2021. The small Industry Members are distinguished as holding less than $500,000 in total capital from the preceding fiscal year and not being affiliated with any larger organizations.

Need Assistance?

If your firm needs assistance with understanding the CAT program, its interpretation, and the impact the CAT program will have on your business, Lehman & Eilen LLP (“L&E”) can help!  L&E can help your firm design and revise your compliance and reporting programs to address CAT’s operational and technical requirements.  For more information, please contact Bob E. Lehman at blehman@lehmaneilen.com or James A. Harvey at jharvey@lehmaneilen.com.







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