Broker-Dealer Alert: What The New CAT Violations Mean For You

On August 16, 2023, FINRA’s Enforcement Division made headlines by announcing an industry settlement for violations related to CAT reporting FINRA Rules 6830, 6893, 2010 as well as FINRA supervision Rule 3110.  Over time, errors added up to “tens of billions” of CAT events and resulted in censure, fines and a requirement to hire an Independent Consultant.

The Beginning of a New Trade Reporting Regulatory Era

Broadly, this event likely establishes the beginning of a multi-year regulatory trade reporting findings era related to National Market Securities (NMS). CAT and CAIS reporting data are the next big step towards monitoring client and industry member activity in NMS securities. History suggests that Order Audit Trail System (OATS) reporting had a 20+ year regulatory life span. CAT is essentially a supercharged version of OATS, and we expect the increase in analytical data within CAT to exponentially increase regulatory findings across the industry.

The chain of events reflected in this AWC is also likely to follow other firms and counterparties. The AWC states the firm “provides market access, trading support, and execution services to institutional customers. The firm has over 170 registered representatives and seven branch offices.”  Counterparties would have been aware of CAT reporting issues at Instinet due to missing reporting event or consistent linkage errors. Firms need to maintain effective governance and supervision over processes, and these firms will certainly need to evidence their review and due diligence efforts. 

During recent reviews, our clients have already noted a significant increase in the regulator’s ability to scrutinize security and sector analysis. Once full CAIS reporting compliance is established in May of 2024, it will only further solidify the comprehensive data that is driving surveillance across the industry and will likely be the basis for future regulatory findings.   

Proactive Steps Firms Can Take Now

1. Firms averaging higher errors than their peer group or the industry error rate should be prepared to evidence their internal supervision of CAT reporting. The AWC indicates that the matter originated from FINRA’s review of the firm’s CAT reporting compliance.  FINRA pays particular attention to CAT reporting by monitoring daily initial reporting error rates and through monthly compliance report cards.
2. Regardless of how they report to CAT, firms must create and maintain adequate supervisory systems and procedures designed to ensure reporting is timely, complete and accurate.
3. Firms must ensure the integrity of their books and records data, and must maintain adequate technical specifications to allow vendors to convert this information to a CAT-reportable format. This requires internal expertise to maintain the technical specifications and allow for due diligence to be performed on the CRA reporting.
4. Any firm using a CRA should review and enhance their procedures documenting how CRA supervision and due diligence will be accomplished. Details could include additional source file reviews, regular due diligence performed on third-party reporters, potential defect escalation processes, and data accuracy validations. Policies and procedures should also sufficiently monitor and validate their reporting volume. Key areas to focus include:
5. Appropriate controls are in place to timely identify and resolve errors. 
6. Tracking, monitoring, and reporting of performance is essential and must be supported by escalation policies to ensure senior management awareness. 
7. Experienced, knowledgeable staff must be well versed on firm policies and procedures, not only for trade reporting but for other functions impacting reporting accuracy, including onboarding, trade entry, and execution. Sufficient resources must also be provided to handle what are likely to be more frequent inquiries from regulators.
8. Ongoing testing and evaluation of trade reporting must be implemented to confirm processes and controls are working as intended. 
9. Effective change management practices must include steps to verify technology implementations and upgrades do not inadvertently impact trade reporting processes.

The cost of non-compliance can be quite substantial, so firms must be proactive, not simply reactive. Ensuring that your trade reporting, governance and supervision programs are robust is a necessary step to achieve compliance and protect your firm.

Oyster Consulting’s CAT and trade reporting experts use their deep regulatory experience to help firms meet their trade reporting obligations. Not all consulting firms and consultants are equal when it comes to regulatory reporting. Our CAT reporting experts provide valuable insights and guidance based on their experience working with other firms in similar situations.

Oyster Consulting’s proprietary Consolidated Audit Trail reporting software includes a CAIS module that can be utilized by firms who do not use the CAT Application for monitoring and evidencing their CAT reporting. Our software consolidates CAT reporting events, error analysis and validation data into a central program. The CAT Application then will identify errors, linkage and gaps between vendor data and CAT reported data.