Eleventh Circuit Ruling Puts SEC’s CAT Funding Model in Question

Eleventh Circuit Vacates SEC’s CAT Funding Order

On July 25, 2025, the Eleventh Circuit issued a published opinion in American Securities Association & Citadel Securities, LLC v. U.S. Securities and Exchange Commission (No. 23-13396), vacating the SEC’s 2023 CAT (Consolidated Audit Trail) Funding Order as arbitrary and capricious under the Administrative Procedure Act. The court stayed the vacatur for 60 days after the mandate and remanded the matter to the SEC for further action.

Key Findings from the Eleventh Circuit Ruling

SEC didn’t adequately justify allowing SROs to pass 100% of CAT costs to broker-dealers, departing from earlier funding principles.

SEC failed to update its economic analysis to reflect actual CAT costs, which had increased dramatically since 2016.

What it Means for the Industry

Potential Shifts in Cost Allocation

This ruling signals a potential shift in how CAT costs are allocated and could have significant operational and financial implications for broker-dealers. By questioning both the SEC’s cost-justification and its departure from established funding principles, the court has opened the door to possible changes in future funding structures.

Regulatory Reassessment Ahead

Industry participants should be prepared for renewed regulatory debate, potential adjustments to cost-sharing models, and closer scrutiny of how CAT expenses are analyzed and disclosed.

Key Implications of the Court’s Decision

Temporary Relief for Broker-Dealers and Investors

The Eleventh Circuit vacated the SEC’s 2023 CAT funding order—making it temporarily invalid—but stayed that vacatur for 60 days, giving the SEC time to properly reassess its approach.

No Immediate Fee Changes

For now, the current funding structure remains in place temporarily. This means broker‑dealers likely won’t see sudden shifts in their CAT-related costs—at least during the 60‑day window.

SEC Must Revisit Economic Analysis

The court emphasized that the SEC failed to update its cost projections—despite actual build-out costs exceeding estimates by roughly 8x, and annual operations approaching $200 million.

• Build-out cost: The CAT was originally projected in 2016 to cost about $50 million to build. By the time of the 2023 funding order, actual build-out costs had risen to roughly $500 million — about 8× higher than the initial estimate.
• Annual operating cost: The CAT’s ongoing annual operations are now about $200 million per year.

The SEC is also now required to develop a fresh, reasoned economic analysis that reflects current realities.

Original Funding Principles Must Be Respected

The court criticized the 2023 rule’s sudden shift—allowing self-regulatory organizations (SROs) to impose 100% of CAT costs on broker‑dealers, removing their incentive to control costs. That departure from the original shared-cost model lacked justification.

Could FINRA Use Enforcement Fines to Fund CAT?

As a SRO under the Securities Exchange Act of 1934, FINRA is allowed to fund its operations through member assessments, fees, and regulatory fines.

Why Fines Won’t Fully Offset CAT Costs

FINRA’s Board policy states that fine revenue is not used for general operating expenses but is allocated to projects that promote investor protection and market integrity. Examples include technology upgrades, investor education, and regulatory initiatives.

Annual CAT operating costs are now around $200 million. FINRA fine revenue in recent years has fluctuated from ~$50–100 million. Even if FINRA devoted all fines to CAT, it would not cover the total bill, and FINRA doesn’t control the exchanges’ share.

This will not help other SROs (Plan participants) currently funding CAT operations (Nasdaq, CBOE, NYSE, etc.).

Why a Strong CAT Surveillance Program Matters Now

Exchange Act Rule 613 and CAT NMS Plan Obligations

The CAT requires broker-dealers (“Industry Members”) to submit granular trade and order lifecycle data covering equities and options on a T+1 basis. A strong surveillance program ensures these submissions are complete, accurate, and timely, satisfying both the CAT NMS Plan and applicable SRO rules.

Error Rate Limits & Correction Obligations

FINRA and other SROs monitor CAT data quality through error-rate thresholds. Chronic failures or uncorrected errors can trigger regulatory inquiries, enforcement actions, or fines.

Supervisory Requirements

FINRA Rule 3110 (Supervision) and Rule 3120 (Supervisory Control System) require that firms maintain written supervisory procedures (WSPs) and periodic testing for compliance with CAT reporting rules. A strong surveillance program is critical to meeting these supervisory standards.

FINRA Notice to Members 20-31 further emphasizes that firm must:

• Designate responsible personnel (by name or title) for reviewing CAT submissions
• Define exactly what reviews will be conducted, how often, and how the reviews will be evidenced
• Incorporate daily reviews of the CAT Reporter Portal, ensuring timely, complete, and accurate data submission
• Address clock synchronization, including how clocks are synced, who is responsible, how this is documented, and how to self-report deviations

Key Components of a Robust CAT Surveillance Program

• Automated Reconciliation: Match CAT submissions to internal records to detect missing/incorrect events.

• Exception Management: Workflow for investigating and resolving rejected or late submissions.

• Error Rate Monitoring: Track error percentages daily; remediate trends before threshold breaches.

• Change Management Controls: Ensure OMS/EMS or vendor changes are tested for CAT compliance before production.

• Periodic Reviews and Testing: Validate system logic against current CAT Technical Specifications and Plan amendments.

• Governance and Documentation: Maintain WSPs, escalation procedures, and evidence of review for exam readiness.

Technology Plus Expertise for CAT Compliance

Oyster Consulting provides a CAT software application that can consolidate all of your CAT Reporting Agents’ activity into a centralized database that allows for reconciliation, exception management, error rate monitoring, and surveillance. The Oyster Solutions CAT tool can ingest your OMS and back-office source data to do end-to-end report validation.

Oyster also provides industry experts with practical CAT knowledge to train and support your existing teams. Our consultants can periodically test and validate your processes and reporting, and delivering customized guidance and strategic insight to ensure your compliance program is both effective and sustainable.