SEC Approves New Rule Requiring Consolidated Audit Trail
AT TODAY’S SEC OPEN MEETING, Commissioners approved plans to implement a consolidated audit trail by a vote of 3 to 2. The final rule requires national securities exchanges and national securities associations to submit a national market system (NMS) plan for a consolidated order tracking system that would collect and identify every order, cancellation, modification, and trade execution for all exchange-listed equities and equity options across all U.S. markets. The rule fact sheet can be found here.
Under the rule, the exchanges and the Financial Industry Regulatory Authority (FINRA) are required to develop a comprehensive plan that outlines how a consolidated audit trail would be implemented and maintained. Key provisions of the rule that remain substantially unchanged from previous proposals include: requiring exchanges, FINRA, and broker-dealers to provide detailed data to the central repository regarding quotes and orders; requiring reporting of proprietary broker-dealer quotes and customer orders; requiring unique, cross-market identifiers for each broker-dealer and national exchange; and requiring, at minimum, timestamps to be in milliseconds.
The most significant changes included in the final rule are: requiring reporting to the central repository be made by 8 a.m. EST the next trading day rather than requiring real-time reporting; self-regulatory organizations (SROs) and their members would not be mandated to report data in a uniform format but in a manner that will enable the central repository to make such information available to regulators in a uniform electronic format; and providing up to three years for small broker-dealers to come into compliance with the reporting requirements. In addition, the rule creates an advisory committee focused on the SROs’ operation of the central repository. The rule also outlines a detailed economic analysis plan where SROs would be required to: submit to the SEC information on the costs and market impacts of the plan, how data will be reported to repositories and when data would be made available to regulators under the plan, how input from interested parties was solicited and considered, as well as describe any reasonable alternatives and approaches.
The rule takes effect 60 days after its publication in the Federal Register. SROs will be required to submit the NMS plan to the SEC within 270 days of the date of publication of the rule in the Federal Register. Once the SEC approves the plan, SROs will be required to report the applicable data to the central repository within one year after the plan takes effect. SRO members will be required to report data to the repository within two years after the plan takes effect, with the exception of small broker-dealers, who will have an extra year to comply.
Commissioners Elisse Walter and Luis Aguilar voted against the proposal calling it a “step back” from the more prescriptive proposals. Walter said the rule “fails to implement any meaningful minimum requirements,” pointing out that the measure replaces the use of unique customer identifiers with a “less effective” identification of account holders. She also noted that the rule prohibits SROs from mandating the reporting of information before 8 a.m. the next trading day and voiced her request that the prohibition be removed. She said such limitations preclude SROs from taking advantage of current and potential technological advancements, including “drop copy” technology, that could provide more timely and complete information. Walter also criticized the multi-step approach to economic analysis, noting that any real analysis is deferred until after the plans are submitted to the SEC.
Aguilar added to Walter’s concerns and noted his disapproval of the requirement for all SROs to jointly file one plan with the SEC. He said this approach assumes “all SROs will have equal weight and negotiation power, which is just not realistic.” By allowing for competing plans, Aguilar said the SEC would be able to develop and consider “more innovative ways to establish a consolidated audit trail that collects timely and accurate data in a cost-effective manner.”
For a webcast of the meeting, please click here.
AT TODAY’S SEC OPEN MEETING, Commissioners approved plans to implement a consolidated audit trail by a vote of 3 to 2. The final rule requires national securities exchanges and national securities associations to submit a national market system (NMS) plan for a consolidated order tracking system that would collect and identify every order, cancellation, modification, and trade execution for all exchange-listed equities and equity options across all U.S. markets. The rule fact sheet can be found here.
Under the rule, the exchanges and the Financial Industry Regulatory Authority (FINRA) are required to develop a comprehensive plan that outlines how a consolidated audit trail would be implemented and maintained. Key provisions of the rule that remain substantially unchanged from previous proposals include: requiring exchanges, FINRA, and broker-dealers to provide detailed data to the central repository regarding quotes and orders; requiring reporting of proprietary broker-dealer quotes and customer orders; requiring unique, cross-market identifiers for each broker-dealer and national exchange; and requiring, at minimum, timestamps to be in milliseconds.
The most significant changes included in the final rule are: requiring reporting to the central repository be made by 8 a.m. EST the next trading day rather than requiring real-time reporting; self-regulatory organizations (SROs) and their members would not be mandated to report data in a uniform format but in a manner that will enable the central repository to make such information available to regulators in a uniform electronic format; and providing up to three years for small broker-dealers to come into compliance with the reporting requirements. In addition, the rule creates an advisory committee focused on the SROs’ operation of the central repository. The rule also outlines a detailed economic analysis plan where SROs would be required to: submit to the SEC information on the costs and market impacts of the plan, how data will be reported to repositories and when data would be made available to regulators under the plan, how input from interested parties was solicited and considered, as well as describe any reasonable alternatives and approaches.
The rule takes effect 60 days after its publication in the Federal Register. SROs will be required to submit the NMS plan to the SEC within 270 days of the date of publication of the rule in the Federal Register. Once the SEC approves the plan, SROs will be required to report the applicable data to the central repository within one year after the plan takes effect. SRO members will be required to report data to the repository within two years after the plan takes effect, with the exception of small broker-dealers, who will have an extra year to comply.
Commissioners Elisse Walter and Luis Aguilar voted against the proposal calling it a “step back” from the more prescriptive proposals. Walter said the rule “fails to implement any meaningful minimum requirements,” pointing out that the measure replaces the use of unique customer identifiers with a “less effective” identification of account holders. She also noted that the rule prohibits SROs from mandating the reporting of information before 8 a.m. the next trading day and voiced her request that the prohibition be removed. She said such limitations preclude SROs from taking advantage of current and potential technological advancements, including “drop copy” technology, that could provide more timely and complete information. Walter also criticized the multi-step approach to economic analysis, noting that any real analysis is deferred until after the plans are submitted to the SEC.
Aguilar added to Walter’s concerns and noted his disapproval of the requirement for all SROs to jointly file one plan with the SEC. He said this approach assumes “all SROs will have equal weight and negotiation power, which is just not realistic.” By allowing for competing plans, Aguilar said the SEC would be able to develop and consider “more innovative ways to establish a consolidated audit trail that collects timely and accurate data in a cost-effective manner.”
For a webcast of the meeting, please click here.