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What is CAT?

Originating with Rule 613, CAT is a comprehensive Consolidated Audit Trail that will allow regulators to efficiently and accurately track all activity throughout the U.S. markets in National Market System (NMS) securities. Among other things, the rule requires the self-regulatory organizations to create, implement and maintain a consolidated audit trail. The rule specifies the type of data to be collected and when the data is to be reported to a central repository.

CAT was originally proposed on May 26, 2010 and FINRA was selected as the Processor for CAT on February 26, 2019. While initially implementation was planned soon after that assignment, there was a delay in 2020 due to COVID.

What Does the Finalized Rule Language entail?

This final rule was published in 2012 and goes into detail of the expectation of the system's function, even if the details for who would organize that reporting were not yet determined. From 2019's assignment to the SRO FINRA, standards were developed around what items should be reported where and when, and a long list of questions and obligations was drafted to encourage best practices for participants.

Through FINRA, CAT NMS announced updated Customer and Account Information System (CAIS) reporting deadlines of: May 24, 2024 for Interim Reporting Obligation 4; and May 31, 2024 for Full CAIS Compliance. 

For a full timeline of CAT implementations, adjustments, updates and addendums over the last decade there is a terrific timeline on their native website. Additionally, audio recordings of key checkpoints and updates are also available on the main website and available to sort through from this page.

Legal Pushback

There are currently two legal cases which have been opened against the SEC concerning the implementation of the consolidated audit trail. Both of these cases provide a similar rational for why the CAT needs further examination before being pushed forward in the markets: 

"Like thousands of other Americans, Erik Davidson, John Restivo, and the National Center for Public Policy Research naturally expected their government to respect their constitutional rights. Running roughshod over that sacred trust, SEC’s CAT system has seized their data, taking this property without due process of law in violation of Article I of the Constitution, the Fourth and Fifth Amendments, and the First Amendment freedom of association and expression. This ultra vires action also violates the Administrative Procedure Act. The CAT database would reportedly be the largest securities database ever created, and the most massive government database of any kind outside the NSA, putting every American’s financial data and security at grave and needless risk from cybersecurity breaches."

"Without any statutory authority to set up such a program, SEC is forcing brokers, exchanges, clearing agencies and alternative trading systems to capture and send detailed information on every investor’s U.S. market trades to a centralized database, which SEC, self-regulatory organizations and outside contractors could access forever."

"SEC’s CAT system seizes Americans investors’ financial data without due process of law, violating their Fourth [and Fifth] Amendment rights by mandating these searches and seizures of financial records without following any constitutionally sufficient procedures, or even having a suspicion that any particular investor broke the law. SEC’s actions also violate the investors’ First Amendment freedoms of association and expression, prying into each investment decision they make as well as turning over their proprietary and private investment preferences and strategy to the government."

Coverage from Harvard Law

Harvard Law developed an excellent overview of the CAT system as proposed in 2016. While this was before FINRA was assigned to oversee the project, it is still a great overview and worth checking out for a succinct understanding.

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