SEC Issues Another CAT Reprieve as Monday’s Milestone Passes Quietly

For the second time in a little more than a month, the US Securities and Exchange Commission (SEC) has granted the industry a reprieve for reporting into the Consolidated Audit Trail (CAT).

Late Monday, the SEC announced that it had “voted to issue two exemptive orders.” The first establishes a phased CAT reporting timeline for broker-dealers (see New Timeline BOX below). The second order will allow introducing brokers that meet certain requirements to follow the small broker-dealer reporting timeline.

April 20 was to be the production go-live date for large industry members and small OATS reporters. (OATS, the Order Audit Trail System, is the precursor to the CAT.) But as the Covid-19 outbreak rocked the market, the SEC released a no-action letter that would push the April reporting deadline back to May 20, 2020. With the new deadlines, self-regulatory organizations (SROs) would not enforce their CAT compliance rules “with regard to the CAT implementation deadlines against broker-dealers.”

On April 13, Consolidated Audit Trail, LLC, (CAT LLC) announced that the CAT was live for broker-dealer reporting for those who wanted a head start on the May deadline. Even though the CAT is now live—a major achievement considering how long it has taken to get off the ground and how many bumps in the road there have been—the SEC has decided to take additional actions to help industry participants during these turbulent times.

This isn’t exactly a surprise. As one source who has worked closely on the CAT put it back in March, there was “zero chance” that production would go back to normal by May 20, as the ripple effects of quarantine measures will be felt for months to come, at best.

The first SEC order “allows for a delayed start to CAT reporting conditioned upon compliance with certain other obligations. These obligations include milestones related to testing and releases of CAT functionality, as well as all other compliance dates for broker-dealer reporting to the CAT,” according to the statement.

The second order will allow brokers that meet the net capital requirements for small broker-dealers under Rule 0-10(c)(1) under the Securities Exchange Act of 1934, but that fail to qualify as small broker-dealers for the purposes of the CAT NMS Plan, to follow the CAT reporting timeline applicable to small broker-dealers.

Story continues after BOX

Quiet Start & Reporter Agreement Snags

The fact that the CAT is live at all is no small feat. It has been beset by delays and the ouster of the original plan processor, Thesys CAT. Today, the CAT testing and production environments are running in parallel, and firms that need to test can do so, while firms that Finra CAT—the new plan processor—has certified as production-ready can start reporting into the production environment.

Even before the Covid-19 pandemic, there were hurdles that still needed to be overcome before full participation could be reached. On December 16, WatersTechnology broke the news that as industry testing was set to begin, many large broker-dealers were refusing to sign the CAT reporter agreement, which reporting firms are required to sign to gain access to the testing environment. Speaking on behalf of members, the Securities Industry and Financial Markets Association (Sifma) said the agreement protects SROs—such as exchanges and Finra CAT—from liability and opens up sensitive data.

More than four months later, the document is still a sticking point for some, according to sources. Reporters who hadn’t signed the agreement were eventually allowed access to the test environment, but only with test data, and thus, cannot be certified in their ability to meet required error rates to report into the live production environment.

Executives at Broadridge Financial Solutions and FIS, which are two of the leading firms when it comes to outsourced and consulting solutions for CAT reporting, say some clients will not report to the CAT until issues with the reporter agreement are ironed out.

Nathan Call, head of regulatory technology solutions at FIS, says that while there are companies without a signed agreement, the bigger issues at hand are operational.

“I don’t know that it is just the agreement that is holding people up—it is, to be clear, a big concern—but we have customers who have complicated transactions, so we’re seeing a little more of other issues. Some clients have just had more difficulty getting everything in their systems lined up right. It’s a terribly complicated thing to do,” Call says.

David Campbell, vice president of strategy at Broadridge, adds that there are still issues when it comes to data analysis and the agreement.

“At the moment, data analysis is really going to depend more on the biggest players signing their agreements and starting to report because they have the majority of the activity,” he says. “If we hit May 20, and there hasn’t been something reported by big players, I think you’re going to see some pretty big gaps in the data.”

Meanwhile, as Monday came and went, it is unclear if any firms have reported into the CAT. Finra CAT declined to comment on the details of the live production. (This was prior to the SEC’s announcement.)

Last week, Campbell said that he expected clients who have smaller transaction volumes to begin reporting this month. But on Monday—also before the SEC’s announcement—he said that “clients decided to defer to May 20 at this time.” FIS’s Call was not available for comment in time for publication.

And for some, it doesn’t make sense to start reporting if you don’t have to, especially at the larger broker-dealers. While sources at vendors and Finra CAT have said that it will allow them to get ahead of the curve and be better prepared for when things go back to normal—and those are certainly valid opinions—there are a lot more pressing issues to address currently.

Notes one compliance officer at a broker-dealer, the bigger banks are spread too thin right now, while the smaller brokers are relying on vendors like FIS, Broadridge and SS&C, among others.

“I would think that firms who are using vendors for it would just let the vendor take the lead,” they say. “For the biggest banks, there’s no way their IT can support it right now and I’m hearing about development freezes everywhere.”