A U.S. federal appeals court on Friday overturned a 2023 Securities and Exchange Commission (SEC) regulation on funding the Consolidated Audit Trail (CAT), a comprehensive market surveillance system designed to monitor U.S. stock trading. The court ruled that the SEC failed to justify its decision to allow stock exchanges to pass the system’s costs to market participants, deeming the order “arbitrary and capricious.”
The unanimous decision by the 11th Circuit Court of Appeals marks another setback for SEC regulations implemented under the Biden administration, which have faced opposition from Wall Street firms and Republican lawmakers. The ruling benefits plaintiffs American Securities Association and Citadel Securities, who argued the funding plan amounted to an unfair burden on investors. ASA President Chris Iacovella said the decision “prevents a tax hike on every American investor.”
The SEC, led by Chairman Paul Atkins, stated it is reviewing next steps and had already initiated a review of CAT operations before the ruling. The CAT, mandated in 2012 following the 2010 “flash crash,” aims to provide regulators with real-time insight into trading activity to detect potential market manipulation.
The 2023 rule split CAT operating costs between buyers, sellers, and exchanges, allowing exchanges to recover hundreds of millions already spent. Industry groups criticized the approach, warning it could disproportionately impact investors. The court has remanded the rule to the SEC for reconsideration.
The CAT remains central to U.S. market oversight efforts but has faced repeated delays and cost disputes for over a decade. Friday’s ruling underscores the ongoing tension between regulators and industry over balancing market transparency with cost burdens on participants.