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Cady Bar the Door Insight & Commentary on SEC Enforcement Actions and Related Issues

Consolidated Audit Trail Will Revolutionize Insider Trading Enforcement

Posted in Insider Trading

Bluesheeting, for those who haven’t experienced it, is the archaic and cumbersome process by which SEC and FINRA staff collect equity stock trading information for particular issuers.  I’m not sure what word best describes the process.  It’s not exhausting, really, but it’s not a thrill ride, either.  As far as law enforcement goes, it’s much more Frank Wilson than Eliot Ness.

Enter the Consolidated Audit Trail, basically a continuous data stream that will allow SEC and FINRA staff to know what trades are being executed as they’re happening.  The prospect of it is quite remarkable.  From a law enforcement perspective, it will make the early stages of insider trading cases much easier and faster to investigate.  No Bluesheets.  No paper requests for account documents.  No delays because compliance staff are on vacation. 

It will not make the later stages any easier: one will still typically have to establish a breach of a fiduciary duty, a connection between the trader to the acquiring or target company, etc.  But the data stream will let SEC and FINRA staff sort through the initial slate of candidates for investigation very, very quickly.  It will also give the staff much better tools to make sense of trading messes like the May 6, 2010 flash crash that tore through the markets and caught regulators somewhat flatfooted.

There is some ongoing debate about whether the data stream needs to be truly “real time” or could be delayed by a day or so before it is fed to regulators.  My sense is that such a delay would not be terribly limiting.  The audit trail will be expensive, maybe $4 billion at first, with those costs to fall on the securities industry one way or another.  If a 24-hour delay significantly reduced those costs, it might be worth considering.  I suspect the enforcement staff won’t care and will appreciate the drastic improvement either way.  When the lawyers who conceived and proposed this idea first batted it around, they called it the “flying car.”  As in, we are doing securities enforcement in a horse-and-buggy age, and we need something better to get around in.  Implementation may be about two years away, but get ready for the flying car.

  • Fayelucy

    Hi David, what’s the current status of the consolidated audit trail. Are SEC actually building it now, or deciding how to? What are the timelines? Thanks!

  • http://www.secmiscellany.com/ David Smyth

    Fayelucy–It’s hard to know exactly how long the process will take. Rulemaking can take a long time, and can be delayed for unpredictable reasons. But the SEC won’t be building the consolidated audit trail itself. It has only proposed issuing a rule that would require national securities exchanges (like the NYSE) and self-regulatory organizations (like FINRA), to act jointly in developing one. In some months the SEC will issue more details about what the project should look like. But the responsibility and costs will fall on the exchanges, SROs, and their broker-dealer member institutions. There will be fighting about those costs, so I expect the whole thing to take at least two more years.