Citadel Securities and a financial-industry trade group won a suit challenging the funding for an SEC market-tracking database that was set to cost Wall Street billions of dollars in fees.
A federal appeals court in Atlanta on Friday invalidated the Securities and Exchange Commission’s funding plan for the so-called Consolidated Audit Trail as “arbitrary and capricious.” The court placed its decision on hold to give the SEC time to conduct an economic analysis and “reconsider the allocation of historical and prospective CAT costs.”
Citadel Securities and the American Securities Association claimed the allocations of costs for running the CAT were unfair and argued that the exchanges and bodies like the Financial Industry Regulatory Authority should pay more. The US Court of Appeals for the 11th Circuit found that, under the SEC’s plan, financial firms could be “on the hook” for the CAT’s entire cost, estimated at more than $250 million a year.
“We are pleased with the court’s decision and look forward to continuing our constructive engagement with the SEC on this important issue,” a Citadel Securities spokesperson said in a statement. An SEC spokesperson said the agency was reviewing the decision and would determine next steps as appropriate.
The ruling is a blow to a program that has long been controversial on Wall Street and among political conservatives. The database, one of the largest ever created, collects almost all US trading data, as many as 500 billion records a day, and gives the SEC a live window into activity across markets. It was first proposed in the wake of the 2010 “flash crash” as regulators sought to piece together the cause of the decline that briefly wiped almost $1 trillion off US stocks.
Supporters say the CAT gives the SEC greater ability to spot market anomalies and detect fraud. But critics claim the tool could be used to spy on the financial decisions of individual investors.
Citadel Securities raised such arguments in its suit, calling the CAT “Orwellian.” But the appeals court said it did not need to address those issues because it had decided the funding plan for CAT was illegal.
President Donald Trump’s return to the White House has elevated political critics of the CAT. SEC Chairman Paul Atkins said in a speech in May that he had asked his staff to conduct a comprehensive review of the CAT.
In their suit, Citadel Securities and the ASA said the SEC’s funding plan was flawed because it was based on older, lower cost projections. The court agreed, saying the SEC “unreasonably failed to reconcile that seven-year-old analysis with the increased CAT costs.”
Citadel Securities and the ASA’s legal challenge received support from the Securities Industry and Financial Markets Association, the Managed Funds Association, the Alternative Investment Management Association and other trade groups representing just about every major US bank, brokerage, hedge fund, private equity and asset management firm — everyone from Goldman Sachs Group Inc. to Robinhood Markets Inc.
Rival market maker Virtu Financial Inc. signed on separately in a show of unity against a common threat, and Congressional Republicans led by Senator Tom Cotton of Arkansas also filed a brief in support of the challenge.
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