Securities Regulation Daily SEC adopts amendments to reduce likelihood of further delays in CAT NMS plan implementation
Monday, May 18, 2020

SEC adopts amendments to reduce likelihood of further delays in CAT NMS plan implementation

By John Filar Atwood

In a dissenting statement, Commissioner Peirce said the Commission should shelve the CAT plan rather than push for its quick completion.

The SEC voted to adopt amendments to the national market system plan governing the consolidated audit trail (CAT NMS plan) to require FINRA and the exchanges to complete an implementation plan for the CAT and to provide quarterly progress reports thereon. The amendments were passed despite the objection of Commissioner Hester Peirce who believes that the plan’s database of trading and personal information is a threat to investor privacy. Chairman Jay Clayton supported the amendments, saying that they will bring transparency and accountability to the CAT implementation process. (Amendments to the National Market System Plan Governing the Consolidated Audit Trail, Release No. 34-88890, May 15, 2020).

In a news release, the SEC said that the amendments are intended to decrease the likelihood of additional delays to CAT implementation by increasing operational transparency and by creating a process to hold the parties involved accountable. The amendments provide for full implementation of CAT NMS plan requirements by December 31, 2022.

Required approvals. In addition to requiring an implementation plan and quarterly progress reports, the amendments provide that each progress report must be approved by the operating committee established by the CAT NMS plan. If any document is approved without a unanimous vote of the operating committee, each participant whose operating committee member did not vote to approve the document must 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. Progress reports must also be submitted to the CEO, president, or an equivalent senior officer of each plan participant.

The amendments also establish target deadlines for four implementation milestones. If a participant does not meet the target deadlines, the amount of CAT funding that it can recover from industry members will be reduced by 25 percent at regular intervals. The four milestone dates are:

  • July 31, 2020 for initial industry member core equity and option reporting.
  • December 31, 2020 for full implementation of core equity reporting requirements.
  • December 31, 2021 for full availability and regulatory use of transactional database functionality.
  • December 31, 2022 for full implementation of CAT NMS plan requirements.

Peirce objections. Commissioner Peirce issued a dissenting statement in which she said the SEC should reconsider the entire CAT project given its threat to Americans’ liberty and privacy. In her view, the CAT amounts to a surveillance database that will house large amounts of personal and business confidential information accessible to thousands of people at the Commission and the SROs who will be able to monitor investors’ moves in real time.

Peirce noted that the CAT NMS plan was devised in response to the 2010 "flash crash" and the trouble that experts later had in analyzing the events of that day. An appropriate tool could have been designed, she noted, that relied on existing databases and trade-reporting processes to enable the reconstruction of trading patterns preceding significant market disruptions. Instead, the Commission ordered the SROs to create a database to collect and store every equity and option trade and quote, from every account at every broker, by every investor, she said.

Mitigating privacy risks. She commended Clayton, who inherited the CAT project, for trying to mitigate the risks the plan presents. In particular, she cited the March 2020 order that allows the CAT to use an ID number for each investor rather than personally identifiable information such as social security number, date of birth, names and addresses. The order should make personal investor information materially less susceptible to misappropriation and misuse by bad actors, she acknowledged. However, she still believes that the mere existence of the database creates a threat to investor privacy.

Peirce also questioned whether the CAT’s database will significantly advance the Commission’s mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The CAT may make it a little easier to investigate certain types of market misconduct, she noted, but is not likely to materially change the types or number of enforcement cases the Commission brings.

Even if the CAT would advance the Commission’s mission, it still imposes a non-quantifiable cost in terms of investors’ privacy, Peirce said. She believes that the SEC needs to take seriously the public’s interest in not having a single, comprehensive database that allows thousands of users to track every person’s activities in the securities markets.

Peirce argued that many Americans find it troubling to have their activities monitored by any organization, public or private, and this should especially be the case when the power of the state requires monitoring as a condition of engaging in political, economic, or other activity. If we do not like the government looking over our shoulders while we browse the internet, why should we feel differently about being watched by the government as we trade securities, she asked.

Trading as personal expression. Peirce addressed the counter-argument that one’s trading history is not protected expression, but is simply information about an economic transaction with no expressive value. She believes that economic transactions provide a view into a person’s thinking and values such as their beliefs about how safe the markets are, how a company or industry may perform in the future, or whether they agree with a company’s stance on social issues, among other things.

In her opinion, given the expressive value of financial transactions, untargeted surveillance of them raises significant civil liberty concerns. The SEC should recognize that a person’s trading activity merits watching only when there is a reason to suspect that he or she is violating the law, she said. Markets are powerful precisely because they draw upon the unique, personal knowledge and expertise of their participants, Peirce said, so in its desire for investigative efficiency, the SEC should not disregard investors’ liberty and privacy interests.

The Release is No. 34-88890

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