[ by Howard Haykin ] C-A-T-S.   CATS!  CATS!  CATS! *** The SEC carried out its threat promise and voted on Wednesday to adopt a rule that will serve as the foundation for a Consolidated Audit Trail System.  Chairman Mary Schapiro's advocacy for CATS was strong enough to counter dissenting votes from 2 Commissioners - Democrats Luis Aguilar and Elisse Walter.

[C-I Note: We are confident that the system will get implemented - money being no object - and so, our efforts to create an appropriate cheer will not have been in vain.  Many will recognize its similarity to the NY JETS cheer - sorry, Big Blue fans.  Readers are welcome to submit their selections - (C-I: Please, one entry per person.)]

The rule is intended to bolster the SEC's surveillance of the equities markets by establishing a central database for information on every trade order, execution and cancellation, bringing the SEC one step closer to finally having a consolidated audit trail to help it better police for market manipulation and insider trading, though the new database will not be operational in the near-term. The SEC voted 3-2, with commissioners dissenting amid concerns that the rule gives too much flexibility to exchanges and is overly weak. C-I's View of Steps or Phases That Will Go Into Building, Launching, and Certifying the System. Now, all that's left to do:

1. publish rule proposal for comments;
2. digest thousands on submissions;
3. amend rule for comments;
4. obtain bids for all phases of constructing the system, including design of technical design and building of the system;
5. get Congress to pay for all of this, including cost overruns;
6. build the system;
7. conduct initial system testing;  resolve bugs, inefficiencies, and potential security issues;
8. conduct final (beta) testing;
9. launch the system before the next generation of technology renders the system obsolete;
10. monitor system performance and maintain centralized data, ensuring adequacy of safeguards;
11. assess how good the system really is, by dealing with the next Market "Flash Crash" - to include investigating cause and effect, issuing a report on the findings, drawn conclusions and corrective or remedial action - all within two weeks.

• NOTE: It took the SEC months to gather and analyze all of the data;  fragmented nature of U.S. equities markets made it difficult for the SEC to piece together exactly what happened.

What Steps The Adopted Rule Anticipates. As drafted, the rule sets out the following scenario:

1. U.S. exchanges have 270 days to submit plans for establishing a consolidated audit trail.  The exchanges and FINRA, as well as their members, will be required to provide detailed information to the database.
2. Exchanges' plans must be approved by the SEC.
3. Parties will need to start reporting data within one year.
4. Once the database is established, the SEC will be able to detect suspicious market activity - e.g., insider trading or manipulation.

Differences Between Original 2010 Proposal & 2012 Final Rule. As expected, the final rule has been scaled back from the original 2010 proposal by removing a key provision that would have required the trade data to be submitted in real time.  Exchanges and broker-dealers balked at that provision, saying it would cost too much to implement, while not providing much benefit. Instead, trade data will have to be submitted by 8 a.m. the following morning (T+1).  The rule also requires the information to be tagged and stored in such a way that the SEC will be able to follow an order "through its entire life cycle."  Each broker-dealer and exchange will also be assigned a unique identifying number. The final rule gives more deference to exchanges than the original proposal, allowing them to determine the specifics of how market players report the data to the central repository.  The SEC further said it will give smaller broker-dealers up to 3 years, rather than the 2 previously proposed, to begin reporting the data. Now, just kick off your shoes, sit back and watch the process unfold. For further details, go to:   [Reuters, via CNBC, 7/11/12].