I do not think that it is an exaggeration to write that historically the public’s view of securities trade reporting has been a collective yawn. (In fact, that sentiment may also be true for industry participants – until, of course, it goes wrong.) This changed with a recent lawsuit filed in the U.S. District Court for the Western District of Texas in which some allege that the Securities and Exchange Commission’s Consolidated Audit Trail (CAT) is unconstitutional.
In short, the CAT is a database operated by a private entity, FINRA CAT, pursuant to SEC Rules. Broker-dealers are required to report details about the securities transactions they conduct and for whom they conduct them on a daily basis. The SEC has been phasing in the CAT reporting since 2020, starting with transaction data. This last phase to be implemented – in which broker-dealers must report details such as their clients’ names, full addresses, account types, financial advisor, etc. to what it known as the CAIS – has attracted considerable attention. The plaintiffs in the case above are one group. As seen during the 2024 FINRA Annual Conference, U.S. Representative French Hill and others is another. I am not a constitutional scholar and will not pretend to be one, so I will leave it to others more qualified than me to opine on the constitutionality of CAT. That said, I have a few thoughts.
This sort of customer data collection is not new.
Broker-dealers have been reporting customer data to the regulators through what is known as a “Blue Sheet” for decades. And do so currently. In this system, the regulator (SEC or FINRA) sends a request to a broker-dealer for information about those who traded in a particular security during a particular time period. The broker-dealer then responds. Regular CAIS reporting is intended to replace the on-demand Blue Sheet reporting.
This level of scrutiny of those participating in the securities industry is not new.
Registered representatives of broker-dealers and investment adviser representatives (IARs) have been reporting very personal details about their lives to the regulators via the Form U4 for decades as well. The regulators make some of this information available to the public through FINRA’s BrokerCheck or the SEC’s Investment Adviser Public Disclosure (IAPD). (Ask any representative that has been the subject of a complaint or a “dirty U5”.) The public knows more about these representatives than they do about their medical professionals, lawyers and other service professionals.
All of this seems very ironic in a time in which the SEC has just updated Regulation S-P to protect the privacy of customer information. Time will tell what will come of this.
Because broker-dealers, registered investment advisers and their associates want to spend their time serving their clients, not their regulators.
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