CSG Law Alert: FINRA Issues Two CAT Reporting Cases in One Day
Late last year, FINRA’s CEO, Robert Cook, made some interesting comments about the Consolidated Audit Trail or “CAT.” Although Cook described the CAT rollout as a “success” overall, he acknowledged that there are “tons of problems that people raise with CAT” and even suggested that some paring back of CAT may be warranted, remarking that FINRA might one day conclude: “Maybe we went too far. Let’s go back and collect less data and really shrink the footprint of that.”1
While broker-dealers struggling to comply with CAT’s reporting requirements may appreciate Cook’s sentiments, FINRA’s enforcement department may not be so understanding. Indeed, last week, FINRA filed disciplinary actions against two broker-dealers, imposing $2.2 million in total fines, for their alleged violations of CAT’s reporting rules.
The Citadel Case
FINRA Rule 6830(a) requires each member firm to record and electronically report to the CAT Central Repository specific details for each order and each “reportable event.” In the Citadel case, FINRA found, among other things, that Citadel inaccurately reported data fields for approximately 42.2 billion equity and option order events. In the vast majority of these 42.2 billion events, Citadel’s alleged error was failing to report “0” in the “leaves quantity” field for fully canceled order events.
FINRA fined Citadel $1 million.
The IMC Financial Markets Case
In the IMC case, FINRA found, among other things, that IMC reported approximately 21.8 billion inaccurate equity and options orders events to CAT. According to FINRA, IMC’s most common error, constituting 7.5 billion events, was including an inaccurate time in force code of “GTX” to indicate “Good Till Crossing” instead of “IOC” for an “Immediate or Cancel” order. FINRA also charged IMC with failing to timely report 6.9 billion equity and option order events to CAT. And, in contrast to the Citadel Case, FINRA included a supervision charge against IMC, charging the firm with failing to have a supervisory system in place to review the accuracy of CAT data for a four-month period in 2020.
FINRA fined IMC $1.2 million.
FINRA Will Impose Significant Penalties for CAT Reporting Failures
While the fines against Citadel and IMC are notably lower than FINRA’s only other CAT reporting case—a $3.8 million fine against Instinet, LLC imposed in August 2023—they are still hefty. Indeed, FINRA fined Citadel $1 million despite acknowledging several factors that, ordinarily, would warrant a fine reduction. For example, FINRA acknowledged that:
- In preparation for CAT, Citadel developed a proprietary order and trade reporting system, a testing process, and related supervisory procedures—all designed to comply with the firm’s CAT reporting obligations.
- Citadel identified many of the reporting errors at issue through its supervisory reviews.
- By September 2022, Citadel had remediated the error types it had experienced and submitted corrections for 42.2 billion order events.
There is no indication in the Letter of Acceptance, Waiver, and Consent (AWC) that FINRA gave Citadel any “credit” for these mitigating factors or reduced the sanction it otherwise would have imposed. And the $1 million fine is a stark contrast to the sanctions FINRA has traditionally imposed in trade reporting cases. Indeed, it was not uncommon for FINRA fines against firms for trade reporting violations under FINRA’s legacy Order Audit Trail System (OATS) to be less than six figures—often, substantially less—even for systemic trade reporting violations.
Open Questions Remain Concerning FINRA’s Enforcement of the CAT Reporting Rules
FINRA’s charged cases have not addressed several open questions regarding FINRA’s enforcement of the CAT reporting rules. Perhaps most notably, FINRA Rule 6893(c) provides: “If an Industry Member reports data to the Central Repository with errors such that the error percentage exceeds the maximum Error Rate established by the Operating Committee pursuant to the CAT NMS Plan, then such Industry Member would not be in compliance with the Rule 6800 Series.” Thus, the Rule itself suggests that not every late or inaccurate order event constitutes a violation but only a pattern of such violations that exceeds a “maximum Error Rate” would put a firm out of compliance with the rules. But the recently issued AWCs fail to explain what the maximum error rate is, how it is calculated, and by how much the firms exceeded it.
Conclusion
Firms that took solace from Mr. Cook’s remarks about possibly paring back CAT’s reporting requirements should think again. FINRA’s recent enforcement actions are reminders that FINRA can and will bring disciplinary actions against firms that fail to comply with their CAT reporting obligations and the sanctions may be significant.
1 “FINRA’s Cook: ‘Mission Accomplished’ With CAT Database,” Think Advisor, October 12, 2023