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SIFMA Successfully Resolves Landmark SEC Proceeding With National Securities Exchanges

Representing the U.S. broker-dealer industry and its industry organization, Securities Industry and Financial Markets Association (SIFMA), Paul, Weiss secured a highly favorable outcome in an unusual, high-stakes liability dispute with the national securities exchanges.

The dispute concerned data security and privacy liability related to the transmission of securities transaction data by SIFMA members as part of a massive data reporting effort mandated by the U.S. Securities and Exchange Commission following the “flash crash” of 2010. During the flash crash, the U.S. stock markets temporarily lost approximately $1 trillion in market value. In response, the SEC directed the securities exchanges and their associated self-regulatory organizations (SROs) to develop and implement a database, the Consolidated Audit Trail (CAT), so that regulators can efficiently and accurately track all U.S. trading activity for equities and listed options. The CAT system is likely to be the most extensive collection of order and trade data ever assembled and will include highly sensitive and proprietary information relating to securities broker-dealers and their customers. It therefore poses serious data security, privacy and proprietary trading concerns.

In its application to the SEC under Exchange Act Section 19(d) and motion for a stay on April 22, SIFMA demonstrated that the SROs improperly restricted SIFMA member access to the CAT system by requiring each reporting member to execute an agreement that waives SRO liability for a CAT data breach as a condition of submitting data to the CAT, thus imposing unfair risks and responsibilities on industry members. SIFMA also argued that the agreement was never filed by the SROs for notice and comment, as required by the Exchange Act, and was not properly approved by the SEC.

In a settlement, the SROs agreed to remove all the language from the agreement limiting SRO liability for a breach of the CAT database. They further agreed not to impose any limitation of liability language in the agreement without first proposing a rule and going through a formal public notice, comment and approval process with the SEC. “With today’s settlement we have accomplished all that we sought by filing the Section 19(d) application,” SIFMA president and CEO Kenneth Bentsen Jr. said in a statement.

The Paul, Weiss team includes litigation partners Lorin Reisner and Jeffrey Recher, and corporate partner David Huntington; and litigation counsel Adam Bernstein.

May 13, 2020

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