SEC MANDATES CONSOLIDATED AUDIT TRAIL

SEC MANDATES CONSOLIDATED AUDIT TRAIL

On July 11, 2012, the SEC voted to require FINRA and the national securities exchanges to create a National Market System (NMS) plan which will implement a market wide consolidated audit trail. There is currently no single database of orders and executions. Instead, each SRO uses its own audit trail to track order information and the audit trail requirements for the various SROs vary significantly between markets. This makes it more difficult for regulators to gather the large volumes of information to analyze market activity.

FINRA and the securities exchanges are now required to submit a comprehensive plan explaining how they believe the SEC should develop, implement and maintain a consolidated audit trail which will gather and identify every order, cancellation, modification and trade execution for all listed equities and options across all U.S. markets. The new rule issued by the SEC has stated the NMS plan should do the following, among other things:

• Require each FINRA member to provide detailed trade information to a newly created central depository regarding each quote and order in an NMS security.
• Require data to be reported to the central depository by 8 a.m. Eastern Time the following trading day.
• Require each broker dealer to be assigned a unique, cross-market identifier to be reported to the central depository along with every reportable event.
• Require any customer adviser with trading discretion over an account to be assigned an identifier to be reported to the depository for every order originated.

Once implemented, it is believed this new consolidated audit trail will enhance the data accessible by regulators surveying trading activity across markets or investigating illegal activities. A consolidated audit trail will likely cut down on the regulatory data production burden on broker-dealers. However, time will tell whether the new rule will make it easier for broker-dealers.