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Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Wednesday, July 11, 2012

SEC Votes to Require Market-Wide Consolidated Audit Trail

The SEC voted to require the national securities exchanges and the Financial Industry Regulatory Authority (FINRA) to establish a market-wide consolidated audit trail that will significantly enhance regulators’ ability to monitor and analyze trading activity.  The new rule adopted by the Commission requires the exchanges and FINRA to jointly submit a comprehensive plan detailing how they would develop, implement, and maintain a consolidated audit trail that must collect and accurately identify every order, cancellation, modification, and trade execution for all exchange-listed equities and equity options across all U.S. markets.  According to the SEC's release:

Currently, there is no single database of comprehensive and readily accessible data regarding orders and executions. Each SRO instead uses its own separate audit trail system to track information relating to orders in its respective markets. Existing audit trail requirements vary significantly among markets, which means that regulators must obtain and merge together large volumes of disparate data from different entities when analyzing market activity.

A consolidated audit trail will increase the data available to regulators investigating illegal activities such as insider trading and market manipulation, and it will significantly improve the ability to reconstruct broad-based market events in an accurate and timely manner. A consolidated audit trail also will significantly increase the ability of regulators to monitor overall market structure and assess how SEC rules are affecting the markets, and will reduce the regulatory data production burdens on SROs and broker-dealers by reducing the number of ad hoc requests from regulators presently.

The new rule becomes effective 60 days after its publication in the Federal Register. SROs are required to submit the NMS plan to the Commission within 270 days of the rule’s publication in the Federal Register. Once the Commission approves the NMS plan, the SROs are required to report the required data to the central repository within one year, and members of the SROs are required to report within two years. Certain small broker-dealers will have up to three years to report the data.

FINRA issued the following statement:

The SEC's adoption of a consolidated audit trail through the development of a National Market System (NMS) plan is an important step that will enhance regulators' ability to conduct surveillance of trading activity across multiple markets and perform market reconstruction and analysis.  FINRA looks forward to working with the other SROs to submit an NMS plan that will help close the regulatory data gaps that exist today. FINRA believes that comprehensive intermarket surveillance is essential to ensuring the overall integrity of the U.S. securities markets and maintaining the confidence of investors in those markets.

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