My Crypto Lawyer Sec Speeches Cryptocurrency Statement on Consolidated Audit Trail Revised Funding Model

Sept. 6, 2023

Thank you, Chair Gensler. Thank you to the staff for the presentation. The Consolidated Audit Trail, also known as “CAT,” constitutes a comprehensive database that facilitates the tracking of trading activity in U.S. equity and options markets. This data can enable surveillance to identify misconduct, such as market manipulation and front running, and assist with analysis and reconstruction of broader market events if needed. In 2012, the Commission adopted a rule requiring SROs to submit a plan to create such a system[1] and approved a plan in 2016.[2]

The creation of CAT has been challenging and complex. I appreciate that the work completed to date that is attributable to the efforts of many dedicated individuals from private industry as well as from the Commission, FINRA, and the SROs. Nonetheless, there remain many challenges that need to be addressed before CAT can live up to its full promise such that the costs do not ultimately outweigh the benefits.

These include whether the Commission has appropriately addressed issues regarding personally-identifiable information and the protection of CAT from a cybersecurity perspective. Last month, the Commission adopted specific rules for cybersecurity risk management, strategy, governance, and incident disclosure for public companies.[3] Yet the Commission benchmarks its own cybersecurity efforts on CAT to none of those standards or the proposed cybersecurity requirements for brokers, dealers, investment advisers, and Regulation SCI entities.

Meanwhile, costs appear to be increasing precipitously. As one comment letter noted: “the CAT operating costs projected for 2023 are approximately 5.2 … times the cost projections in the [original] CAT NMS Plan. The annual increases in CAT operating costs during the past three years of 73.2%, 27.3% and 27.0%, respectively, are not sustainable over the long term.”[4]

Thus, pressing questions remain as to whether costs can be reduced through adjustments to certain reporting timelines or requirements without compromising regulatory objectives. Are there further ways of reducing costs, such as re-considering our requirements on information storage and speed of access?

Today’s action would implement a “Revised Funding Model,”[5] and address the important question as to “who will pay for all of this?” Let there be no mistake, much of the cost will be borne by investors in the capital markets; thus, ensuring that the regulatory benefits outweigh those costs is of vital importance.[6] Essentially, the Revised Funding Model would allocate in accordance with market transactions—or the equivalent thereto through what is referred to as the Executed Share Model—with 1/3 of the fee being paid by the pertinent SRO, 1/3 by the sell-side broker, and 1/3 by the buy-side broker.[7] Separately, there is also a component for addressing historical costs. While no funding mechanism perfectly aligns costs to whatever market activities generate those costs, the key issue here is whether this proposal sufficiently aligns incentives regarding decision-making that may impact these costs.

While the staff and relevant parties have worked hard to address this issue, I cannot support today’s proposal because important, over-arching issues on CAT have yet to be resolved, including the ballooning expenses for CAT. The critical commentary generated by market participants and concerned investors has been powerful and provides compelling evidence of the challenges that remain. The cumulative costs for CAT may soon be approaching a billion dollars. These are real costs–not theoretical–being incurred imminently.

I thank the staff in the Divisions of Trading and Markets and Economic and Risk Analysis as well as the Office of General Counsel for their continuing efforts. More generally, I want to thank the public for their feedback to the Commission since Rule 613 was first proposed on May 26, 2010.[8] We will need your continued focus and assistance to get this right.

[1] The Commission adopted Rule 613 of Regulation NMS under the Securities Exchange Act of 1934. See 17 CFR Parts 242.613; Release No. 34-67457; File No. S7-11-10, Consolidated Audit Trail, Final Rule (July 18, 2012).

[2] Securities Exchange Act Release No. 78318 (Nov. 15, 2016).

[3] See Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure, Release Nos. 33-11216; 34-97989; File No. S7-09-22, July 26, 2023.

[4] See comment letter by Financial Information Forum and Security Industry and Financial Market Association, File Number 4-698: Joint Industry Plan; Order Instituting Proceedings to Determine Whether to Approve or Disapprove an Amendment to the National Market System Plan Governing the Consolidated Audit Trail (June 16, 2023), at 2.

[6] Among other concerns, one objective should be to minimize any misalignment of incentives within the market that might result from the allocations inherent in any particular funding mechanism and allocation.

[8] Consolidated Audit Trail, Release No, 34-62174; File No.: S7-11-10, (May 26, 20120); 75 Fed. Reg. 32556 (June 8, 2010).

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