Court strikes down SEC CAT funding plan, puts broker-dealer costs under fire

A federal appeals court has struck down the SEC’s funding plan for the Consolidated Audit Trail, raising tough questions about who should pay for Wall Street’s biggest surveillance system. 

The facts are straightforward. The Consolidated Audit Trail, or CAT, was created after the 2010 “Flash Crash” exposed the limits of regulators’ ability to track trades across the US stock market. The SEC responded by ordering all self-regulatory organizations - Nasdaq, FINRA, and other exchanges - to build a single electronic system that would capture every trade, every order, and every broker involved. The idea was to help regulators reconstruct market events and keep a closer eye on trading activity. 

When the SEC approved the CAT plan in 2016, it estimated the system would cost between $37.5 million and $65 million to build, with annual operating costs of $36.5 million to $55 million. The plan was for both the exchanges and their member broker-dealers to share these costs. But things didn’t go as planned. By the end of 2022, the cost to build the CAT had ballooned to $518 million - almost eight times the original estimate. By 2023, annual operating costs were approaching $200 million, nearly four times higher than what the SEC had projected. 

In September 2023, the SEC approved a new funding order that replaced the original model with what it called the Executed Share Model. This new approach allowed exchanges to pass all CAT costs on to their members, meaning broker-dealers could end up footing the entire bill. The American Securities Association, representing financial services firms, and Citadel Securities, a major broker-dealer, challenged the SEC’s move in the Eleventh Circuit Court of Appeals. 

Their argument was simple: the SEC’s decision was arbitrary and capricious. The challengers pointed out that the agency hadn’t updated its economic analysis to reflect the real, much higher costs of the CAT, and that letting exchanges shift all costs to broker-dealers contradicted the original plan for shared responsibility. 

On July 25, 2025, the Eleventh Circuit sided with the challengers. The court found that the SEC’s 2023 Funding Order was inconsistent with earlier rules and failed to explain why exchanges could now pass 100% of costs to broker-dealers. The judges also criticized the SEC for relying on outdated cost estimates from 2016, despite the CAT’s actual costs being much higher. The court said the agency’s refusal to update its analysis or consider the impact of the new funding structure was unreasonable. 

As a result, the court vacated the SEC’s 2023 Funding Order, stayed its decision for sixty days, and sent the matter back to the SEC for further review. 

For investment professionals, this ruling is a wake-up call. The CAT is a massive regulatory project, and how its costs are divided has real consequences for broker-dealers and the clients they serve. The court’s decision makes clear that regulators can’t just shift compliance costs without a solid, up-to-date justification. For compliance officers and advisors at large firms, it’s a reminder that transparency and accountability in regulatory costs aren’t just buzzwords - they’re essential, especially when the numbers run into the hundreds of millions. 

The SEC now has two months to figure out its next move. For now, the industry is left waiting, watching, and wondering how the costs of Wall Street’s surveillance will be shared going forward.