The Eleventh Circuit vacated the SEC’s 2023 Funding Order for its Consolidated Audit Trail (the “CAT”) as arbitrary and capricious in violation of the Administrative Procedure Act. Am. Sec. Ass’n v. SEC, No. 23-13396 (11th Cir. July 25, 2025). The court remanded the matter to the SEC for further proceedings.
For over a decade, the SEC has endeavored to create a single comprehensive audit trail for broker-dealers. In 2012, the SEC adopted the CAT, issuing a rule requiring self-regulatory organizations (“SROs”) (including FINRA) to submit a national market system plan to create, implement, and maintain a consolidated order tracking system. The SROs filed that plan in 2015, which required SROs and broker-dealers to share the cost of the CAT. The SEC approved the plan the next year and estimated that it would cost between $37.5 million and $65 million to build the CAT. The SEC’s approval noted that the SROs and broker-dealers would share the cost. However, the costs far exceeded the SEC’s expectations. The costs of building the CAT exceeded $500 million and operating costs per year are nearly $200 million.
In 2023, the SEC approved the 2023 Funding Order, the fifth proposal submitted since the SEC approved the CAT plan. The 2023 Funding Order replaced the original funding plan with a new plan – this time, the plan gave SROs the ability to pass on 100% of the costs of building the CAT to broker-dealers. The 2023 Funding Order drew criticism from industry associations and broker-dealers.
In an opinion written by Judge Brasher and joined by Judges Jordan and Geraghty (sitting by designation), the Eleventh Circuit vacated the 2023 Funding Order. First, the court found that the 2023 Funding Order’s allocations of costs and its economic analysis are arbitrary and capricious and violate the Administrative Procedure Act. The court explained that the shift from a mandate that both SROs and broker-dealers fund the CAT to an allowance for SROs to pass through 100% of their costs constituted a major policy change that required the agency to show good reasons for the new policy. This shift removed any incentive for the SROs to keep CAT costs down, the court noted. The court held that the SEC’s allowing SROs to pass through 100% of costs to broker-dealers without considering the effects of that choice was unreasonable. The court also held that the SEC erred by failing to meaningfully update its 2016 economic analysis after costs skyrocketed. The court explained that agencies must consider material changes in circumstances and act reasonably when they discover new evidence or encounter new facts. The Eleventh Circuit declined to address a third argument – that the CAT itself is unlawful – because it vacated the order on the above administrative law grounds.