After years of preparation, discussion and debate, the Consolidated Audit Trail (CAT) is fully live as of last fall. Broker-dealers have now had several months to integrate these reports into their compliance and supervisory programs, while the SEC, FINRA and other SROs have been working diligently to determine how to best make use of them.
Amid this progress, it’s tempting to assume that we’ve reached a kind of status quo – at last, after many hours spent hashing out specifics and adapting to new requirements, perhaps industry firms can finally breathe a sigh of relief and stop devoting so much attention to CAT compliance.
If only that were the case. While we’ve been talking about CAT for years, this regulation is still very much in its infancy – and that means regulatory enforcement and disciplinary actions are only just beginning to ramp up. Broker-dealers that become complacent will bear the consequences.
Regulators now have data of unprecedented depth and volume on all orders and trades in the US equity and options markets, and they’re eager to use it for any number of purposes – examining broker-dealers, recreating market conditions, performing timely surveillance and the like. Look no further than last month when the SEC and US Attorney for the SDNY jointly announced the breakup of a $47 million front-running scheme by a trader at an asset manager, marking the first major public SEC enforcement undertaken using CAT data.
As regulators increasingly leverage CAT for a variety of use cases, the accuracy and completeness of the reports will grow in importance. That means CAT reports will soon be subject to greater regulatory scrutiny and enforcement – and, by extension, that broker-dealer supervisory and compliance programs must prioritize data quality in CAT reporting like never before.
This dynamic reflects broader efforts among regulators to focus more on granular details and technical analysis. For example, FINRA examinations require firms to provide a full mapping of their CAT reports to underlying source data – and many end with disciplinary action for failing to implement programs that regularly reconcile and validate their CAT reporting versus underlying source data. Meanwhile, regulators now view CAT data as a “golden source,” using it as the bedrock for inquiries, exams and surveillance, but also to assess compliance with other reporting obligations. For example, as we anticipated, regulators are leveraging CAT data to assess a broker-dealer’s compliance with Rule 606 by checking if both datasets agree with whether a customer order was held or not held, directed or non-directed, etc. Make no mistake: if regulators need to intensify their enforcement in order to reach these goals, they will not hesitate to do so.
Where does that leave broker-dealers? For most small-to-midsize firms with overworked compliance teams, it’s an operational nightmare. Relying on garden-variety trading platform functionality is a recipe for disaster – reporting is often inadequate and prone to user error, leaving the firm vulnerable. The other option is to manually reconcile reporting data with source data, a highly inefficient process that strains resources and adds minimal value beyond checking the compliance box.
For broker-dealers facing this dilemma, it’s often a good idea to lean on third parties for support – and that’s where we come in. n-Tier’s CAT offering couples deep regulatory expertise with a unique software platform that gives clients everything they need to comprehensively meet obligations while minimizing both cost and risk. Whether it’s condensing data into an easily understandable summary or leveraging our battle-tested framework to continuously reconcile and validate every line of your data, regardless of its origin, we have the tools to help you navigate the forthcoming regulatory crackdown with efficiency and confidence.
As burdensome as new regulatory requirements can be – and regardless of how abstract the threat of enforcement might feel right now – it’s imperative for the industry to prioritize data quality in CAT reporting, starting today. A firm’s bottom line can be severely impacted by just one failed examination or regulatory inquiry. Broker-dealers cannot afford to become known as the bad example that spurred competitors to get serious about CAT compliance. Instead, they should prepare today for what we know is coming tomorrow.
Want to learn more about our CAT offering? Email sales@ntierfs.com today.