SIFMA Criticizes SEC Use of "Secret" CAT Data in Rulemakings
Commentary by Steven Lofchie
SIFMA executives asserted that the SEC's use of Consolidated Audit Trail ("CAT") data in major rulemakings is a largely "unnoticed" but "highly problematic" practice.
In a SIFMA blog, the authors explained that "the financial services industry remains deeply concerned over aspects of the [CAT], including the well-publicized concerns regarding privacy implications of the system and its funding model." They argued the SEC's reliance on this non-public data for major rulemakings raises several issues:
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Limited Public Access. The SIFMA executives said that the CAT collects extensive trade and personal identifying information ("PII") on all transactions, but the data is not accessible to the public. They said the SEC has delayed implementing rules to further restrict access, leaving thousands of employees across exchanges and self-regulatory organizations with access to this sensitive data.
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Use in Rulemaking. The SIFMA executives highlighted that the SEC uses CAT data in its rulemakings, including for conducting cost-benefit analyses. They argued that the public and stakeholders do not have access to anonymized versions of this data, making it impossible for them to verify or challenge the SEC's conclusions.
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Lack of Transparency. The SIFMA executives argued that using "secret data" for rulemaking is inconsistent with the SEC's obligations under the Administrative Procedure Act ("APA"), which requires that data used to support agency rulemakings be made public.
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FOIA Challenges. The SIFMA executives argued that, despite requests from SIFMA to access the data through the Freedom of Information Act ("FOIA"), the SEC has been slow to respond, placing the request in a "complex track" that could delay processing for years.
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Concerns Over Market Structure Proposals. The SIFMA executives said that the SEC uses CAT data to justify significant changes to US equity market structure, including four proposals issued in December 2022. (See previous coverage.) Without access to the underlying data, they said, stakeholders are unable to provide meaningful comments on these proposals.
The SIFMA executives said the SEC "must create a mechanism for the public to review and evaluate the data in a manner that not only protects the data but also allows for public review of it, consistent with good government and the APA." Without such a mechanism, they argued, the SEC's rulemaking process risks being challenged under the APA, and the public's ability to check SEC power "will be eviscerated."
Commentary
While the Supreme Court's overturning of Chevron was a significant step in rolling back the power of unelected regulators to adopt rules that stretch the plausible boundaries of statutory law, that rejection does not go far enough.
The SEC's use of data that is not available to the public is only one example of the SEC seeming to pay little deference to the requirements of the Administrative Procedure Act. Other examples include (i) the SEC allowing only the statutory minimum period even for major rule makings, and (ii) the SEC justifying its rule makings with cost-benefit analyses that are blatantly insufficient.
It is clear that our regulatory authorities do not suffer from excessive modesty as to the use of their power, even in the absence of a clear authorization from Congress. If the legislature is to rein in the regulators, it must impose stronger procedural barriers to this enthusiasm for rule making.