Broker-dealers are at a CAT crossroads. The industry just completed a drawn-out and highly complex implementation process, and it’s understandable that many compliance and regulatory operations teams want to breathe a well-deserved sigh of relief and devote efforts and resources elsewhere. But in reality, what might have seemed like a finish line is actually just the next, riskier chapter for CAT: regulatory oversight and enforcement.
That means these firms must prepare for CAT reporting to be a key aspect of ongoing FINRA examinations, oversight and enforcement. While firms may take comfort in receiving a 0% Compliance Error Rate from FINRA CAT, many have already learned the pitfalls of such complacency following exams and inquiries from FINRA Market Regulation, which is focused equally – if not more – on the accuracy and completeness of firms’ CAT reporting and related regulatory obligations (e.g., Rule 606 and TRF/ORF). As the industry awaits the outcome of open FINRA matters and pending disciplinary action, firms need only recall what transpired with CAT’s predecessor, OATS, to know that complacency is a recipe for enforcement action, monetary penalties and – new for CAT reporting – burdensome resubmission mandates.
FINRA Market Regulation has been transparent about regulatory expectations for CAT reporting, both in NTM 20-31 and Exam Priority Letters, which have highlighted the requirement for firms to perform ongoing “comparative reviews” and the expectation that firms submit corrections for “previously inaccurately reported data, including data that did not generate error feedback from CAT.” Failures to proactively implement robust comparative reviews and to self-identify and correct erroneous CAT reporting (even with 0% Compliance Error Rates) are expected to yield strong disciplinary action as regulators demand and enforce the integrity of the CAT repository.
Firms have also been caught off guard by FINRA Market Regulation’s increasingly effective and expansive monitoring and analytical capabilities for identifying potential CAT (or other) reporting errors. This has included comparing firms’ CAT reporting against their publicly available Rule 606(a) reports, as well as other advanced tactics that have put firms in a defensive and uncomfortable “reactive” position.
But how can firms efficiently, scalably and affordably guard against these outcomes and implement a proactive control framework? We have some thoughts to share.
A Proactive Solution
Broker-dealers can’t afford to wait for FINRA to identify CAT reporting errors and discrepancies. Instead, they must preempt issues by performing their own comparative reviews, ensuring that all data is complete and accurate. They must also proactively correct any inaccurate or incomplete reporting identified by such reviews. That means meticulously mapping source data to CAT reports and providing detailed explanations of how multiple layers of logic were applied to source data that can include order/trade blotters, FIX messages, customer/account reference data and more.
This can be a daunting process. The idea of doing it manually is usually a nonstarter – tracking every single relevant event and regularly mapping granular fields to source data is incredibly time-consuming and error-prone, not to mention subject to scrutiny by FINRA Market Regulation for not being “reasonably designed.” Chasing the platform vendors to address source data discrepancies quickly leads to frustration. For certain small firms with very limited business models, this approach might be workable, but for most broker-dealers – with lots of volume, diverse business models and potentially multiple OMS/EMS providers – the challenge quickly spirals out of control.
That’s where we come in. At n-Tier, we provide the only software platform that enables programmatic daily reviews and automated corrections of all CAT-reportable datasets. We combine that technological innovation with human expertise, helping clients manage and monitor the full reporting process, including any resubmissions that are needed.
Our reviews encompass all relevant data, providing daily reconciliation and validation of CAT reporting versus source data (and other reporting obligations), as well as replication of many FINRA Market Regulation tactics and analytics. From there, our clients’ operations and compliance teams can review our findings via our proprietary dashboard and address any breaks, such as configuration issues upstream. We also provide and maintain a detailed data map, demonstrating how each aspect of the ultimate submission is derived from the source data. It adds up to a seamless, intuitive process that accelerates timelines and eliminates discrepancies.
This approach offers benefits not just for CAT compliance, but for the new Customer and Account Information System (CAIS) requirements as well. Once FINRA CAT and the industry complete the implementation of CAIS, regulatory scrutiny, requirements and expectations will quickly follow. These are expected to largely mirror CAT, including comparative reviews and proactive correction of accepted CAIS data. This means the validation workload will only increase, strengthening the case for automation.
There’s virtually no end to the reporting efficiencies we can offer to our clients – and that reflects the reality that for broker-dealers, there’s no end to regulatory reporting. As stressful as CAT implementation might have been, now is not the time for firms to take their foot off the gas pedal. By getting out in front of potential issues, teams can avoid replicating reporting efforts and achieve CAT compliance both today and over the long term.