In the News

House Financial Services Committee Pokes Holes in Controversial Consolidated Audit Trail

Financial Advisor IQ
9/25/19

SEC Commissioner Hester Peirce questioned Tuesday whether the watchdog should proceed with its planned Consolidated Audit Trail, despite Chairman Jay Clayton’s desire to avoid more delays.

The CAT is a single comprehensive database expected to store an unprecedented amount of sensitive trade data and personally identifiable information.

National securities exchanges, Finra, alternative trading systems and broker-dealer firms will be required to submit information on trading activities to the CAT daily.

The CAT is expected to take in 58 billion records daily — including customer information, orders, cancellations, modifications, executions and quotes for the equities and options markets — and maintain data for more than 100 million customer accounts.

“We already have a system where we can get data when we need it. I just don’t think we need it [the CAT] and it makes as an extremely attractive target,” Peirce, a Republican appointee, said Tuesday at an SEC oversight hearing by the U.S. House Committee on Financial Services.

Peirce was reacting to comments made by Rep. Barry Loudermilk, (R-GA 11th District) at the hearing.

Loudermilk said he is “gravely concerned” the CAT will make the U.S. financial system a “prime target” of hackers and other bad actors, and even nations that seek to harm the U.S.

“If you drop your guard for one second, a lot of people will be harmed. Just ask Equifax,” he said, referring to the data breach experienced by the consumer credit reporting agency that exposed the personal information of 147 million people.

SEC Chairman Jay Clayton defended the need for the CAT at the hearing.

Clayton acknowledged that some of the more detailed personally identifiable information can be done away with, but the SEC will still need information like “the year of birth” of the account holder to be able to effectively monitor the market on a daily basis.

“We’re trying to strike the right balance,” Clayton said.

“What we want to have is enough individual identifiers so we can figure out where the trade is coming from,” he added.

In an earlier announcement from the SEC, the personal information included an investor’s name, address, date of birth and Social Security Number or Individual Taxpayer Identification Number.

Clayton said he supports the ongoing efforts of SROs to address various personal information and data protection concerns. Suggestions have included the removal of Social Security Numbers, account numbers and dates of birth from the CAT.

Clayton noted at the hearing that the implementation of the CAT is “way behind where it’s supposed to be.”

Earlier this month, Clayton said he believes “the next six to twelve months will be critical for moving the CAT from concept to reality.”

At the start of the hearing, Peirce said the SEC should exercise regulatory humility, giving the CAT as one example.

“I just want to ask if it is right to collect all the purchase and sales records,” Peirce said.

Other House representatives chimed in with their concerns.

“Does government need to micromanage every trade every day?” asked Rep. French Hill (R-AR 2nd District). “I am not a fan of the CAT.”

The CAT was created in response to the flash crash of May 2010, which saw up to $1 trillion in the value of U.S. stocks erased in a matter of minutes before markets rebounded. It took five months before the SEC and the Commodity Futures Trading Commission completed a report on their investigation of the flash crash, which placed the blame on one trader in London.

The CAT is intended to give the SEC and SROs the ability to monitor, analyze and investigate trading activities in the equities and options markets on a consolidated basis with the end goal of better protecting investors.