The SEC solicited comment on a proposed national market system plan that would create a single, comprehensive database of all trading activity in the U.S. equity and options markets (the "consolidated audit trail" or "CAT" plan). The request for comment was published in the Federal Register.

The proposed CAT plan was submitted jointly to the SEC by FINRA and the national securities exchanges (the "SROs"). The plan is intended to improve regulators' ability to perform market research and monitoring, effect event reconstruction, and identify and investigate market misconduct.

Highlights from the proposed CAT plan include the following:

Plan Processor and Central Repository. Under the CAT plan, a plan processor would build a central repository for receiving, consolidating, and retaining reported trade and order data. The plan processor would, among other things, be responsible for (i) operating, maintaining, and upgrading the central repository, (ii) ensuring the security and confidentiality of all data reported to the central repository, and (iii) publishing technical specifications for the submission of data to the central repository.

Data Recording and Reporting. The SROs and broker-dealers would be required to submit certain specific order information to the central repository that includes (i) a unique identifier provided by the broker-dealer for the customer submitting the order, (ii) an identifier provided by the applicable SRO for the broker-dealer receiving, originating, routing, or executing the order, (iii) the date and time of the order, and (iv) the material terms of the order (e.g., symbol, size and price). The proposed CAT plan would require that order information be reported to the central repository by 8:00 a.m. on the day following the event, and that such data be time-stamped in increments as granular as those that are utilized by the SROs and broker-dealers, subject to a minimum increment of one millisecond (except for manual order events that are subject to a minimum increment of one second). This CAT plan would set an initial maximum error rate of five percent for data reported to the central repository, with the intent of establishing a phased approach, eventually lowering the maximum error rate to one percent for data.

Governance. The activities outlined in the CAT plan would be conducted through a Delaware limited liability company jointly owned by the SROs. The company would be managed by an operating committee composed of representatives from all of the SROs, each of whom would be afforded a single vote. The proposed CAT plan also calls for the separate formation of an advisory committee that includes broker-dealers of various sizes and specialties, as well as investors, all of whom would provide input to the operating committee.

Regulatory Access and Use. The proposed CAT plan is structured to allow SROs and the SEC to access the data contained in the central repository for regulatory and oversight purposes. Access points would provide the data in forms that would allow all regulators to perform complex queries pertaining to tasks such as reconstruction of market events and determining status of order books at various time intervals.

Data Security and Confidentiality. The proposed CAT plan would establish data security requirements for the central repository with regard to (i) connectivity and data transfer, (ii) encryption, (iii) storage, (iv) access, (v) breach management, and (vi) personally identifiable information.

Comments on the proposed CAT plan must be submitted by July 18, 2016.

Commentary

The governing structure of the CAT plan processor will provoke controversy. Notably, under the proposed CAT plan, the plan processor would be governed exclusively by representatives of the SROs. Meanwhile, the broker-dealers who (i) represent the SROs competition for order flow, and (ii) are expected to bear the primary component of the CAT's estimated annual costs ($1.5 billion out of a total $1.7 billion) will be limited to representation on an "advisory committee" with no voting power.

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