Declawing the CAT: SEC Trims Back Audit Trail Obligations

The Securities and Exchange Commission (SEC) issued a conditional exemptive order that grants targeted relief from several requirements under the national market system plan governing the consolidated audit trail (CAT), SEC Rule 613 of Regulation NMS, and SEC Rule 17a-1 under the Securities Exchange Act of 1934, as amended. The relief reduces CAT’s overall operational complexity and costs while preserving its surveillance role. The order shows the SEC’s effort to recalibrate the CAT’s balance between transparency and efficiency.

• Adjustments to Lifecycle Linkages. The order introduces one of its most significant changes through new requirements for lifecycle linkages. Previously, the Financial Industry Regulatory Authority (FINRA) and the securities exchanges had to submit interim lifecycle linkages by T+1 at 9 p.m. and final linkages by T+5 at 8 a.m. Under the exemptive relief, FINRA and the securities exchanges must now provide only the final linkage report by T+5 at 8 a.m. However, regulators may still direct FINRA CAT to generate interim linkages if they need them before the T+5 deadline.
• Changes to Late Data Processing. The SEC also modified how the CAT handles late-reported data. The SEC ended the “Full Replay” process, which was formerly used to rebuild late records into complete order lifecycles. Instead, the “Enhanced Late to the Lifecycle” process will continue on a quarterly basis for trade dates within the past three years, but FINRA CAT will not have to reprocess older data. Regulators can still request a Full Replay for specific trade dates, which FINRA CAT must run for the prior week's data. FINRA and the securities exchanges must continue to notify users of any change to how late data is handled. 
• Modifications to Query Tools and Data Retention. The order also narrows certain obligations related to the online targeted query tools (OTQT). FINRA CAT no longer must maintain all OTQT functions, but it must keep core features such as monitoring, logging, and reporting for direct queries and bulk data extracts. The order provides a two-month transition period to prevent disruption before any decommissioned OTQT functionality takes effect.
• Data Storage and Retention. The SEC also approved new data retention standards. FINRA CAT may now delete data older than five years instead of six and move data older than three years into cold storage. It may delete interim operational data after fifteen days and purge options market quotes after one year.

Implications for Market Participants

The SEC’s exemptive order demonstrates a willingness to address persistent industry concerns about the CAT’s scope and cost.[1] The exemptive relief refines operational requirements to make the system more practical and manageable and marks another phase in the SEC’s ongoing supervision of the CAT.

Market participants should be prepared for further changes to CAT requirements. The SEC’s recent order explicitly notes that additional reforms remain necessary to respond to recent judicial and regulatory developments appropriately.

[1] For further discussion on these concerns, see these prior Katten Quick Reads posts here and here.