Key Takeaways
- • The Managed Funds Association (MFA) submitted a formal comment letter to the SEC recommending the Commission assume full financial responsibility for the Consolidated Audit Trail (CAT) rather than continuing to shift costs to broker-dealers and investors.
- • CAT funding costs have grown significantly beyond initial projections, with broker-dealers absorbing the majority of expenses that are ultimately passed through to investors as higher trading costs and reduced market efficiency.
- • MFA argues the current cost-allocation model creates misaligned incentives—the SEC controls and relies on the system but bears no financial responsibility for cost discipline, while broker-dealers and investors fund a system they did not design and cannot control.
- • Moving CAT funding to SEC appropriations would align financial responsibility with operational control, theoretically incentivizing cost containment and supporting U.S. market competitiveness relative to international exchanges.
- • Jennifer Han, MFA Chief Legal Officer, emphasized that the current structure raises trading costs for institutional investors including pension funds, foundations, and endowments, ultimately harming portfolio performance and market efficiency.
Summary
The Managed Funds Association has formally urged the Securities and Exchange Commission to overhaul the funding structure of the Consolidated Audit Trail, arguing that the current model imposes unnecessary costs on market participants and weakens U.S. capital market competitiveness. In a comment letter responding to the SEC's review of CAT financing, MFA recommended that the Commission assume full financial responsibility for the system through its own appropriations rather than continuing to pass expenses to broker-dealers and the investors they serve.
The CAT, a comprehensive regulatory system designed to track orders and trades across U.S. markets, has experienced cost inflation well beyond its original projections. Under the existing funding arrangement, broker-dealers bear the primary financial burden for operating and maintaining the system, costs that are inevitably transferred to end investors through wider bid-ask spreads, elevated trading fees, and operational friction. This cost cascade affects institutional investors extensively—including public pension funds, charitable endowments, and foundations—directly impacting their net returns and ability to meet long-term funding obligations.
MFA's position centers on an economic misalignment between cost responsibility and operational control. According to Jennifer Han, MFA Chief Legal Officer, "Broker-dealers and investors are footing the bill for a regulatory system they do not use, did not design, and cannot control." The association contends that because the SEC designs, operates, and controls CAT, the Commission should bear the corresponding financial responsibility. Under the current structure, the SEC has minimal incentive to enforce cost discipline on a system funded by third parties, creating a moral hazard problem that drives unnecessary expense growth.
The alternative proposed by MFA—funding CAT through SEC appropriations—would align financial incentives with operational accountability. If the Commission were directly responsible for CAT's budget, it would face natural pressure to optimize costs and efficiency. This structural change could meaningfully reduce trading costs for institutional investors while simultaneously enhancing the competitiveness of U.S. capital markets relative to international trading venues. MFA's comment letter represents a significant industry pushback against a funding model it views as fundamentally flawed for both market participants and broader market health.
The CAT, a comprehensive regulatory system designed to track orders and trades across U.S. markets, has experienced cost inflation well beyond its original projections. Under the existing funding arrangement, broker-dealers bear the primary financial burden for operating and maintaining the system, costs that are inevitably transferred to end investors through wider bid-ask spreads, elevated trading fees, and operational friction. This cost cascade affects institutional investors extensively—including public pension funds, charitable endowments, and foundations—directly impacting their net returns and ability to meet long-term funding obligations.
MFA's position centers on an economic misalignment between cost responsibility and operational control. According to Jennifer Han, MFA Chief Legal Officer, "Broker-dealers and investors are footing the bill for a regulatory system they do not use, did not design, and cannot control." The association contends that because the SEC designs, operates, and controls CAT, the Commission should bear the corresponding financial responsibility. Under the current structure, the SEC has minimal incentive to enforce cost discipline on a system funded by third parties, creating a moral hazard problem that drives unnecessary expense growth.
The alternative proposed by MFA—funding CAT through SEC appropriations—would align financial incentives with operational accountability. If the Commission were directly responsible for CAT's budget, it would face natural pressure to optimize costs and efficiency. This structural change could meaningfully reduce trading costs for institutional investors while simultaneously enhancing the competitiveness of U.S. capital markets relative to international trading venues. MFA's comment letter represents a significant industry pushback against a funding model it views as fundamentally flawed for both market participants and broader market health.
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