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From Securities Regulation Daily, November 15, 2017

CAT reporting begins as SEC turns away last-minute request for delay

By John Filar Atwood

The first phase of reporting under the consolidated audit trail (CAT) began today following a last-minute attempt by the national securities exchanges and FINRA (collectively, SROs) to push back the CAT requirements by at least a year. The Commission denied the SROs’ delay request, with SEC Chair Jay Clayton stating that he could not support the requested relief under the terms proposed.

A flurry of eleventh-hour activity appeared to put the November 15 launch date in some jeopardy. In addition to the SRO exemption request, the House on Tuesday passed the Market Data Protection Act, which would delay the CAT from accepting market data until the security of that information could be guaranteed. In the end, however, the CAT implementation date arrived without the SEC or Congress standing in the way.

Cybersecurity. Clayton addressed cybersecurity concerns in his statement on the CAT, saying that he has informed the SROs that protection of the information submitted to the CAT is critical, and that he is willing to discuss any suggestions for addressing cybersecurity issues in the CAT system. He also reiterated that the Commission will not pull sensitive information from the CAT unless the agency believes proper protections are in place.

Clayton noted that the SEC staff is conducting an evaluation of the need for personally identifiable information (PII) in the CAT. In his view, even after CAT reporting is underway it is important that the Commission, the SROs, and the plan processor continuously evaluate the approach to the collection, retention, and protection of PII and other sensitive data.

Exemption request. In their exemption request, the SROs proposed new compliance dates for different elements of CAT reporting that were at least one year away. They argued that the revised deadlines would provide sufficient time to perform all development, interpretive, drafting, and testing needed to implement the CAT.

The SROs’ concerns centered on the protection of data submitted to the new system. They proposed to begin reporting production data to the testing environment as soon as a fully secure testing environment with production level security has been established, which they expected to occur in July 2018. They noted that in determining the revised deadlines, they relied heavily on information from the plan processor, who supported the new compliance dates.

Despite the SEC’s denial of the request, Clayton acknowledged that the SROs’ increased engagement with the SEC recently has been constructive. He promised to continue to work with the SROs on CAT issues, and urged the SROs to continue to work together to meet their responsibilities as soon as practicable.

Broker-dealer exemption. The denial of the SROs’ request comes a week after the Commission granted a temporary exemption until November 15, 2018 to certain broker-dealers from reporting requirements of 1934 Act Rule 13h-1. That exemption, which applies to Rule 13h-1 reporting obligations that have not already been implemented, was intended to give broker-dealers time to focus their attention and resources on implementing the CAT, according to the SEC.

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