Federal court vacates funding plan for SEC’s massive market monitoring system
Judges for the 11th US Circuit Court of Appeals sided with trading giant Citadel Securities and the American Securities Association in a suit against the Securities and Exchange Commission.
A federal appeals court ruled Friday that a Securities and Exchange Commission order on how to pay for a giant market monitoring system known as the Consolidated Audit Trail was “arbitrary and capricious” and had to be set aside.
The ruling represents a victory for trading giant Citadel Securities and the American Securities Association — a trade group representing brokerage firms — which brought the challenge.
It was also another twist in the SEC’s 15-year saga to firmly establish an up-to-date market monitoring system to help regulators keep watch over today’s algorithmically enhanced, high-speed financial markets. (The impetus for the new system stemmed from the “Flash Crash” of May 2010, an out-of-the-blue, fleeting market plunge that left regulators baffled and unable to conclusively explain.)
Importantly, the 11th US Circuit Court of Appeals did not rule on the challengers’ argument that the establishment of the CAT, itself, was an unlawful overstepping of the SEC’s authority.
The opinion said such a finding was unnecessary as the court agreed with other arguments that the funding rule — which leaned heavily on brokerages like Citadel to foot the bill from the system — was established without explaining or justifying a change that would have allowed the entirety of the cost of the project to be shifted to broker dealers. (A previous funding plan suggested that the costs of the monitoring system would be shared by both self-regulatory organizations, like FINRA, and broker dealers.)
Though the decision was stayed for 60 days, meaning it won’t yet be enforced, it raises questions about how such a large market monitoring system will be funded: the CAT cost roughly $500 million to build, and is expected to cost about $200 million a year to run, if not more.
“The SEC should pay for it like other key regulatory tools,” said Tyler Gellasch, CEO of the Healthy Markets Association, a nonprofit focused on increasing transparency and reducing conflicts of interest in capital markets. “But that also means Congress needs to authorize the SEC to collect enough money for the CAT to actually work.”
For more on the CAT, check out this previous story.
