Proposed Amendments to the National Market System Plan Governing the Consolidated Audit Trail, 48458-48494 [2019-19852]
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Federal Register / Vol. 84, No. 178 / Friday, September 13, 2019 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–86901; File No. S7–13–19]
RIN 3235–AM60
Proposed Amendments to the National
Market System Plan Governing the
Consolidated Audit Trail
Securities and Exchange
Commission.
ACTION: Proposed amendments to
national market system plan.
AGENCY:
The Securities and Exchange
Commission (‘‘Commission’’ or ‘‘SEC’’)
is proposing amendments to the
National Market System Plan Governing
the Consolidated Audit Trail (‘‘CAT
NMS Plan’’). The proposed amendments
impose public transparency
requirements on the self-regulatory
organizations that are participants to the
CAT NMS Plan (each, a ‘‘Participant’’
and collectively, the ‘‘Participants’’).
The Participants would be required to
file with the Commission and publish a
complete implementation plan for the
Consolidated Audit Trail (‘‘CAT’’) and
quarterly progress reports, each of
which must be approved by a
supermajority vote of the Operating
Committee of CAT NMS, LLC. The
proposed amendments also establish
financial accountability provisions.
DATES: Comments should be received on
or before October 28, 2019.
ADDRESSES: Comments may be
submitted by any of the following
methods:
SUMMARY:
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Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/proposed.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File No. S7–13–
19 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File No.
S7–13–19. This file number should be
included on the subject line if email is
used. To help us process and review
your comments more efficiently, please
use only one method. The Commission
will post all comments on the
Commission’s internet website (https://
www.sec.gov/rules/proposed.shtml).
Comments are also available for website
viewing and printing in the
Commission’s Public Reference Room,
100 F Street NE, Washington, DC 20549
on official business days between the
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hours of 10:00 a.m. and 3:00 p.m. All
comments received will be posted
without change. Persons submitting
comments are cautioned that the
Commission does not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly.
Studies, memoranda, or other
substantive items may be added by the
Commission or staff to the comment file
during this rulemaking. A notification of
the inclusion in the comment file of any
such materials will be made available
on the Commission’s website. To ensure
direct electronic receipt of such
notifications, sign up through the ‘‘Stay
Connected’’ option at www.sec.gov to
receive notifications by email.
FOR FURTHER INFORMATION CONTACT:
Erika Berg, Special Counsel, at (202)
551–5925; Leigh Duffy, Special Counsel,
at (202) 551–5928; or Susan Poklemba,
Attorney-Advisor, at (202) 551–3360,
Division of Trading and Markets,
Securities and Exchange Commission,
100 F Street NE, Washington, DC
20549–7010.
SUPPLEMENTARY INFORMATION: The
Commission is proposing amendments
to the CAT NMS Plan.1
Table of Contents
I. Background
II. Description of Proposed Amendments
A. Amendments To Increase Operational
Transparency
B. Financial Accountability Amendments
for Implementation of the CAT
1. Financial Accountability Milestones and
Target Deadlines
2. Collection of Post Amendment Industry
Member Fees
3. Identification of Post-Amendment
Expenses in Submissions to the
Commission
III. Paperwork Reduction Act
A. Summary of Collection of Information
1. Implementation Plan
2. Quarterly Progress Reports
B. Proposed Use of Information
1. Implementation Plan
2. Quarterly Progress Reports
C. Respondents
D. Total Initial and Annual Reporting and
Recordkeeping Burdens
1. Implementation Plan
2. Quarterly Progress Reports
E. Collection of Information is Mandatory
F. Confidentiality of Responses to
Collection of Information
G. Retention Period for Recordkeeping
Requirements
H. Request for Comments
IV. Economic Analysis
A. Baseline
1. Transparency of CAT Implementation
Status
1 See Securities Exchange Act Release No. 78318
(November 15, 2016), 81 FR 84696 (November 23,
2016), at 84943.
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2. Status of Implementation
B. Benefits
C. Costs
D. Impact on Efficiency, Competition, and
Capital Formation
1. Efficiency
2. Competition
3. Capital Formation
E. Alternatives
1. Fixed versus Relative Financial
Accountability Milestone Dates
2. Different Timelines for Onset of RFRRs
3. Alternate Magnitudes of RFRRs
F. Request for Comment on the Economic
Analysis
V. Consideration of Impact on the Economy
VI. Regulatory Flexibility Act Certification
VII. Statutory Authority and Text of the
Proposed Amendments to the CAT NMS
Plan
I. Background
In July 2012, the Commission adopted
Rule 613 of Regulation NMS, which
requires the national securities
exchanges and national securities
associations (‘‘self-regulatory
organizations’’) to jointly develop and
submit to the Commission a national
market system plan to create, implement
and maintain a consolidated audit trail
(‘‘CAT’’).2 Back then, and even today,
trading data was and is inconsistent
across the self-regulatory organizations
and certain market activity is difficult to
compile because it is not aggregated in
one, directly accessible consolidated
audit trail system. The goal of Rule 613
was to create a system that provides
regulators with more timely access to a
sufficiently comprehensive set of
trading data, enabling regulators to more
efficiently and effectively reconstruct
market events, monitor market behavior,
and identify and investigate
misconduct. Rule 613 thus aims to
modernize a reporting infrastructure to
oversee the trading activity generated
across numerous markets in today’s
national market system.
On November 15, 2016, the
Commission approved the national
market system plan required by Rule
613 (‘‘CAT NMS Plan’’ or ‘‘Plan’’) that
was submitted by the self-regulatory
organizations (the ‘‘Participants’’).3 In
2 See Securities Exchange Act Release No. 67457
(July 18, 2012), 77 FR 45722 (August 1, 2012)
(‘‘Rule 613 Adopting Release’’).
3 The National Market System Plan Governing the
Consolidated Audit Trail was filed with the
Commission by the Participants who include BATS
Exchange, Inc. (n/k/a Cboe BZX Exchange, Inc.),
BATS–Y Exchange, Inc. (n/k/a Cboe BYX Exchange,
Inc.), BOX Options Exchange LLC, C2 Options
Exchange, Incorporated (n/k/a Cboe C2 Exchange,
Inc.), Chicago Board Options Exchange,
Incorporated (n/k/a Cboe Exchange, Inc.), Chicago
Stock Exchange, Inc. (n/k/a NYSE Chicago, Inc.),
EDGA Exchange, Inc. (n/k/a Cboe EDGA Exchange,
Inc.), EDGX Exchange, Inc. (n/k/a Cboe EDGX
Exchange, Inc.), Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’), International Securities
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the CAT NMS Plan,4 the Participants
described the numerous elements they
proposed to include in the CAT,
including (1) requirements for the plan
processor responsible for building,
operating and maintaining the Central
Repository (‘‘Plan Processor’’),5 (2)
requirements for the creation and
functioning of the Central Repository,
(3) requirements applicable to the
reporting of CAT Data 6 by Participants
and their members (‘‘Industry
Members’’),7 (4) requirements relating to
the security and confidentiality of CAT
Data, (5) governance principles for CAT
NMS LLC (‘‘Company’’),8 and (6)
provisions for the establishment of
Exchange, LLC (n/k/a NASDAQ ISE, LLC), ISE
Gemini, LLC (n/k/a NASDAQ GEMX, LLC), Miami
International Securities Exchange LLC, NASDAQ
OMX BX, Inc. (n/k/a NASDAQ BX, Inc.), NASDAQ
OMX PHLX LLC (n/k/a NASDAQ PHLX LLC), The
NASDAQ Stock Market LLC, National Stock
Exchange, Inc. (n/k/a NYSE National, Inc.), New
York Stock Exchange LLC, NYSE MKT LLC, and
NYSE Arca, Inc.
4 See Securities Exchange Act Release No. 78318
(November 15, 2016), 81 FR 84696, (November 23,
2016) (‘‘CAT NMS Plan Approval Order’’). The CAT
NMS Plan is Exhibit A to the CAT NMS Plan
Approval Order. See CAT NMS Plan Approval
Order, at 84943–85034. In approving the CAT NMS
Plan, the Commission added ISE Mercury, LLC (n/
k/a Nasdaq MRX, LLC) and Investors Exchange LLC
as Participants to the CAT NMS Plan. See id. at
84728. On January 30, 2017 and March 1, 2019, the
Commission noticed for immediate effectiveness
amendments to the Plan to add MIAX Pearl, LLC
and MIAX Emerald, LLC, respectively, as
Participants. See Securities Exchange Act Release
Nos. 79898 (January 30, 2017), 82 FR 9250
(February 3, 2017), and 85230 (March 1, 2019), 84
FR 8356 (March 7, 2019). Unless otherwise noted,
capitalized terms are used as defined in Rule 613,
in the CAT NMS Plan, or in this release.
5 The Central Repository is the repository
responsible for the receipt, consolidation, and
retention of all information reported to the CAT.
See CAT NMS Plan, supra note 4, at Section 1.1.
6 ‘‘CAT Data’’ is defined in the CAT NMS Plan as
‘‘data derived from Participant Data, Industry
Member Data, SIP Data, and such other data as the
Operating Committee [of the Company] may
designate as ‘CAT Data’ from time to time.’’ See id.
The Operating Committee is the governing body of
the Company. See id.
7 ‘‘Industry Member’’ is defined in the CAT NMS
Plan as ‘‘a member of a national securities exchange
or a member of a national securities association.’’
See id.
8 The CAT NMS Plan is the limited liability
company agreement of the Company, a jointly
owned limited liability company formed under
Delaware state law, through which the Participants
conduct the activities of the CAT. Each Participant
is a member of the Company and jointly owns the
Company on an equal basis. The Participants
submitted to the Commission a proposed
amendment to the CAT NMS Plan on August 29,
2019, which they designated as effective on filing.
With the proposed amendment, the limited liability
company agreement of a new limited liability
company named Consolidated Audit Trail, LLC
would serve as the CAT NMS Plan, replacing in its
entirety the CAT NMS Plan. See Notice of Filing of
Amendment to the National Market System
Governing the Consolidated Audit Trail, available
at https://catnmsplan.com/wp-content/uploads/
2019/09/CAT-2.0-Plan-Amendment(as-filed-withSEC-8.29.19)_(175663431)_(1).pdf.
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funding to pay for the operation of the
CAT, including the establishment of
fees that the Participants and Industry
Members will pay.9
The Participants also set forth, in the
CAT NMS Plan, deadlines related to the
implementation of the CAT, including
(1) the requirement that the Participants
select a Plan Processor within two
months following approval of the CAT
NMS Plan,10 (2) the requirement that the
Participants begin recording and
reporting data to the Central Repository
by November 15, 2017,11 and (3) the
requirement that each Participant
require Industry Members and Small
Industry Members 12 to begin reporting
information to the Central Repository by
November 15, 2018,13 and November
15, 2019, respectively.14
On January 18, 2017, the Participants
filed with the Commission notice of
their selection of the Plan Processor.15
On January 17, 2017, the Participants
selected Thesys Technologies LLC to
build the CAT system, pending
execution of a Plan Processor
Agreement between Thesys
Technologies LLC and the
Participants.16 The Plan Processor
Agreement was executed on April 6,
2017, after which Thesys CAT LLC
(‘‘Thesys CAT’’), a wholly owned
9 See CAT NMS Plan, supra note 4, at Section
11.1. The CAT NMS Plan notes that the Participants
shall file with the Commission under Section 19(b)
of the Act any such fees on Industry Members that
the Operating Committee of the Company approves.
See id. at Section 11.1(b).
10 17 CFR 242.613(a)(3)(i). See also CAT NMS
Plan, supra note 4, at Section 6.1(a). Two months
following approval of the CAT NMS Plan was
January 15, 2017 (a Sunday).
11 See CAT NMS Plan, supra note 4, at Section
6.7(a)(iii).
12 The CAT NMS Plan defines Small Industry
Member as ‘‘an Industry Member that qualifies as
a small broker-dealer as defined in SEC Rule 613.’’
See id. at Section 1.1. Rule 613(a)(3)(vi) uses the
definition of small broker-dealer as defined in Rule
0–10(c), which defines such a broker-dealer as (1)
having had total capital (net worth plus
subordinated liabilities) of less than $500,000 on
the date in the prior fiscal year as of which its
audited financial statements were prepared
pursuant to Rule 17a–5(d) or, if not required to file
such statements, a broker or dealer that had total
capital (net worth plus subordinated liabilities) of
less than $500,000 on the last business day of the
preceding fiscal year (or in the time that it has been
in business, if shorter); and (2) is not affiliated with
any person (other than a natural person) that is not
a small business or small organization as defined
in Rule 0–10. See Rule 613 Adopting Release, supra
note 2, at 45804; 17 CFR 242.613(a)(3)(vi); 17 CFR
240.0–10(c).
13 See CAT NMS Plan, supra note 4, at Section
6.7(a)(v).
14 See id. at Section 6.7(a)(vi).
15 See Letter from Participants to Brent J. Fields,
Secretary, Commission, dated January 18, 2017,
available at https://www.sec.gov/divisions/
marketreg/rule613-info-notice-of-plan-processorselection.pdf.
16 Id.
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subsidiary of Thesys Technologies LLC,
became the Plan Processor for the CAT.
The next critical deadline required by
the CAT NMS Plan was for the
Participants to begin recording and
reporting data to the Central Repository
by November 15, 2017.17 The
Participants, however, did not begin
reporting data by that deadline. On
November 13, 2017, two days before the
deadline for Participant reporting, and
having previously provided assurances
as late as the summer of 2017 that initial
data reporting would commence on
schedule and in accordance with the
CAT NMS Plan, the Participants filed a
request for exemptive relief in which
they sought, among other things, to
delay the deadline by which they must
report to the CAT for one year, and to
extend the deadlines by which Industry
Members and Small Industry Members
must report by 17 months.18 The
Commission did not grant this request.19
SEC Chairman Clayton instead issued a
statement on November 14, 2017 noting
that he would not support extensions of
the CAT deadlines on the terms
proposed by the Participants.20
Chairman Clayton stated the importance
of the CAT in enhancing the protection
of investors and the markets by
providing regulators with consolidated
oversight of the securities markets.
Chairman Clayton also instructed
Commission staff to engage with the
Participants as necessary and
appropriate.21
Since then, Commission staff has
engaged with the Participants with a
focus on trying to ensure that project
management, resource, and governance
deficiencies are addressed, including
development of a credible and
comprehensive work plan with
verifiable milestones.22 Among other
things, Commission staff has
encouraged the Participants to enhance
their focus on project management and
accountability.23 As sophisticated
market participants with vast
experience related to various data
systems and data management
protocols, the Participants are capable of
17 See
supra note 11.
Letter from the Participants to Brent J.
Fields, Secretary, Commission, dated November 13,
2017 (‘‘November 2017 Exemption Request’’).
19 See Statement on Status of the Consolidated
Audit Trail (November 14, 2017), available at
https://www.sec.gov/news/public-statement/
statement-status-consolidated-audit-trail-chairmanjay-clayton.
20 Id.
21 Id.
22 See Statement on Status of the Consolidated
Audit Trail (August 27, 2018), available at https://
www.sec.gov/news/public-statement/tm-statusconsolidated-audit-trail.
23 Id.
18 See
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managing—and uniquely situated to
manage—the implementation of the
CAT.
On May 1, 2018, the SEC’s Division of
Trading and Markets (‘‘Division’’) sent a
letter to the Participants expressing
concern about the lack of progress on
CAT implementation. The Division
called on senior personnel at each
Participant to focus on completing the
CAT as soon as practicable with all of
the functionality required by the CAT
NMS Plan. The Division also requested
a master plan (‘‘Master Plan’’) for
completing the CAT,24 including a
timeline with development and
completion milestones.25 The Division
requested that the Master Plan detail all
material steps to fully implement both
Participant and Industry Member
reporting, and describe how the
Participants will better manage the Plan
Processor’s performance. The
Participants submitted the requested
Master Plan on May 25, 2018. The
Master Plan stated that Participant
reporting would begin on November 15,
2018, one year past the deadline in the
CAT NMS Plan.26
On November 15, 2018, the
Participants began reporting quote,
order, trade and other transaction data
to the Central Repository; however, as
the Participants acknowledge, the CAT
system did not include all of the
functionality required by the CAT NMS
Plan, such as linkages between reported
events and regulators’ query
functionality.27 On November 16, 2018,
the Participants stated that Thesys CAT
would complete all of the required
functionality by March 31, 2019.28 But
on February 1, 2019, the Company
announced that it would be
transitioning from Thesys CAT to a new
24 The Division of Trading and Markets also
requested that the Participants streamline their
decision-making and governance processes to
ensure more timely implementation. See Letter
from Brett Redfearn, Director, Division of Trading
and Markets, Commission, to Michael J. Simon,
Chair, CAT NMS Plan Operating Committee, dated
May 1, 2018. See also note 22.
25 The Master Plan projects Industry Member
reporting will commence in phases, with equities
reporting beginning in November 2019 and simple
options reporting beginning in May 2020, with final
implementation of the CAT through Small Industry
Member reporting occurring by November 2022. See
Industry Update on the Consolidated Audit Trail
(June 28, 2018), at 4, available at https://
www.catnmsplan.com/wp-content/uploads/2018/
06/CAT-Industry-Webcast-6.28.18.pdf.
26 See supra note 22.
27 See CAT NMS Announces Initiation of
Reporting to the Consolidated Audit Trail
(November 16, 2018), available at https://
www.catnmsplan.com/wp-content/uploads/2018/
11/Press-Release-CAT-Launch-final.pdf.
28 Id.
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Plan Processor,29 and on February 26,
2019, the Operating Committee voted to
select FINRA as the successor Plan
Processor to Thesys CAT.30 As a result
of this and various other factors, the
functionality the Participants
represented Thesys CAT would
complete by March 31, 2019 was not
delivered.
The Participants are responsible for
their selection of a Plan Processor, for
the management of the Plan Processor,
and for compliance with the CAT NMS
Plan. The Participants and the Plan
Processor failed to comply with the
following deadlines in the CAT NMS
Plan and missed the following
milestone completion dates:
• The November 15, 2017 milestone
completion date for the Plan Processor
publishing final technical specifications
for the submission of order data for
Industry Members; 31
• the May 15, 2018 milestone
completion date for the Plan Processor
publishing technical specifications for
Industry Member submission of
customer data; 32
• the May 15, 2018 milestone
completion date for the Plan Processor
making the testing environment
available on a voluntary basis and
beginning connectivity testing and
accepting order data from Industry
Members for testing purposes; 33
• the August 15, 2018 milestone
completion date for Industry Member
order submission testing; 34
• the October 15, 2018 milestone
completion date for Industry Member
reporting of customer information to the
Central Repository; 35 and
• the November 15, 2018 deadline for
full Industry Member reporting.36
In light of these missed deadlines and
milestone completion dates, Chairman
Clayton determined that it was
necessary to dedicate additional
oversight resources to this project.
Accordingly, Chairman Clayton
appointed a staff person to coordinate
29 See News, available at https://
www.catnmsplan.com/news-page/
(February 1, 2019).
30 See Letter from Michael J. Simon, Chair, CAT
NMS, LLC Operating Committee, to Brent J. Fields,
Secretary, Commission, dated April 9, 2019,
available at https://www.sec.gov/divisions/
marketreg/rule613-info-notice-of-plan-processorselection-040919.pdf.
31 See CAT NMS Plan, supra note 4, at Appendix
C, Section C.10(b).
32 See id. at Appendix C, Section C.10(a).
33 See id. at Appendix C, Section C.10(b).
34 See id. at Appendix C, Section C.10(a); id. at
Appendix C, Section C.10(b).
35 See id. at Appendix C, Section C.10(a).
36 See id. at Section 6.4; Section 6.7(a)(v).
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the Commission’s efforts to monitor the
Participants’ development of the CAT.37
The Commission is concerned by the
continued potential for delays to the
implementation of the CAT. In an April
3, 2019 Industry Update presentation,
the Operating Committee presented a
revised implementation timeline for
Industry Member reporting with
deadlines that extend even further
beyond those previously shared with
Industry Members.38 The revised
deadline for Industry Member reporting
of all transaction data to the CAT is
December 2021, with the exception of
customer and account information
which the Participants will require the
reporting of by July 2022.39 These
deadlines further extend the initially
established November 15, 2018 Industry
Member reporting deadline in the CAT
NMS Plan,40 the phased deadlines for
Industry Member reporting in the
Master Plan, and the April 13, 2020 and
the April 20, 2021 deadlines for
Industry Member and Small Industry
Member reporting proposed in the
November 2017 Exemptive Request. The
Commission has not approved these
implementation deadlines.
The Commission preliminarily
believes that amendments to the CAT
NMS Plan are appropriate and necessary
to help ensure the Participants’
fulfillment of their obligations to deliver
a functional CAT in a reasonable time
frame. While the Commission believes
that the Commission staff’s continued
engagement with the Participants is
important to the effort to deliver a
functional CAT, the Commission also
preliminarily believes that increased
transparency through formalized and
public documentation of the
Participants’ implementation progress
will increase the Participants’
accountability for the efficient
completion of CAT. The Commission
also preliminarily believes that
modifying the CAT NMS Plan to require
37 See SEC Names Manisha Kimmel as Senior
Policy Advisor to the Chairman on the Consolidated
Audit Trail (January 29, 2019), available at https://
www.sec.gov/news/press-release/2019-5.
38 See Consolidated Audit Trail: CAT Reporting
Technical Specifications for Industry Members
Draft 2 Version 1.1 Key Changes (April 3, 2019),
available at https://www.catnmsplan.com/wpcontent/uploads/2019/04/CAT_Industry_Call_
04032019_Presentation.pdf. See also CAT
Reporting Timelines, available at https://
www.catnmsplan.com/timelines/. The Commission
notes that it has not approved these dates.
39 See Consolidated Audit Trail: CAT Reporting
Technical Specifications for Industry Members
Draft 2 Version 1.1 Key Changes (April 3, 2019),
available at https://www.catnmsplan.com/wpcontent/uploads/2019/04/CAT_Industry_Call_
04032019_Presentation.pdf, at 3, 4.
40 See CAT NMS Plan, supra note 4, at Section
6.7(a)(v).
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additional financial accountability to
meet implementation deadlines is
appropriate to achieve the CAT’s timely
completion.
The Commission therefore proposes
to amend the CAT NMS Plan to require
the Participants to develop a complete
implementation plan containing a
detailed timeline with objective
milestones to achieve full CAT
implementation (the ‘‘Implementation
Plan’’). This Implementation Plan
would be filed with the Commission
and made publicly available after
approval by a Supermajority Vote 41 of
the Operating Committee. The
Implementation Plan must be submitted
by the Operating Committee to the Chief
Executive Officer (‘‘CEO’’), President, or
an equivalently situated senior officer of
each Participant, prior to being voted on
by the Operating Committee.
Additionally, to further improve
implementation transparency, the
Commission proposes requiring the
Participants to provide the Commission
and the public with quarterly progress
reports (‘‘Quarterly Progress Reports’’ or
‘‘Reports’’) approved by at least a
Supermajority Vote of the Operating
Committee.42 The Quarterly Progress
Reports must also be submitted by the
Operating Committee to the CEO,
President, or an equivalently situated
senior officer of each Participant, prior
to being voted on by the Operating
Committee. The proposed amendments
also include provisions regarding
financial accountability to facilitate
implementation of the CAT in an
expeditious and efficient manner.
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II. Description of Proposed
Amendments
In order to address shortcomings in
the completeness, accuracy,
accessibility, and timeliness of existing
audit trail systems, the Commission
adopted Rule 613 in 2012 to direct the
41 Section 1.1 of the CAT NMS Plan defines a
‘‘Supermajority Vote’’ as an ‘‘affirmative vote of at
least two-thirds of all of the members of the
Operating Committee or any Subcommittee, as
applicable, authorized to cast a vote with respect to
a matter presented for a vote (whether or not such
a member is present at any meeting at which a vote
is taken) by the Operating Committee or any
Subcommittee, as applicable (excluding, for the
avoidance of doubt, any member of the Operating
Committee or any Subcommittee, as applicable, that
is recused or subject to a vote to recuse from such
matter pursuant to Section 4.3(d)); provided that if
two-thirds of all such members authorized to cast
a vote is not a whole number then that number shall
be rounded up to the nearest whole number.’’
42 The Commission does not believe, on a
preliminary basis, that the requirements of the
Implementation Plan or the Quarterly Progress
Reports, discussed below in Part II.A., require the
Participants to disclose any confidential or sensitive
information related to the security of the CAT, the
security of CAT Data, or the operation of the CAT.
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Participants to create and file the CAT
NMS Plan.43 The CAT was intended not
only to replace an existing regulatory
data infrastructure that was ‘‘outdated
and inadequate to effectively oversee a
complex, dispersed, and highly
automated national market system,’’ 44
but also to provide benefits to market
participants in the form of improved
market surveillance and related
analyses.45 Today, almost seven years
after the adoption of Rule 613, the need
for a better audit trail system is no less
pressing. Yet, as described above,46 the
Participants’ progress towards
implementing the CAT has suffered
multiple setbacks, and the Participants
have repeatedly missed relevant
deadlines.47 These delays to CAT
implementation have left the
Commission and the Participants
without access to a comprehensive
database to help facilitate analyses of
market events and other matters.
Moreover, the repeated delays in CAT
implementation have resulted in
uncertainty for Industry Members and
other market participants.48
A. Amendments To Increase
Operational Transparency
Public disclosure of information about
CAT implementation would furnish a
better understanding of progress on the
CAT to market participants and
members of the investing public, all of
whom stand to benefit from the
improved efficiencies and regulatory
capabilities of the CAT. Moreover, CAT
implementation also affects Industry
Members, who are required to report
data to the CAT and are therefore keenly
interested in the details and timing of
CAT implementation. Currently, the
CAT NMS Plan does not contain
disclosure provisions that require the
Participants to provide public updates
on implementation progress and
developments.
To address concerns about
insufficient transparency and
accountability regarding the CAT’s
implementation, the Commission
43 See
supra note 2.
at 45723.
45 Id. at 45730–33.
46 See Part I supra.
47 See, e.g., Industry Update on the Consolidated
Audit Trail 9/7/2017 (August 25, 2017), available at
https://catnmsplan.com/news-page/industryupdate-on-the-consolidated-audit-trail/
(stating that ‘‘the implementation timelines for
establishing the CAT are in effect’’); Industry
Update on the Consolidated Audit Trail (September
7, 2017), available at https://catnmsplan.com/wpcontent/uploads/2017/09/Industry-Update-on-theConsolidated-Audit-Trail-090817.pdf (indicating
that the Participants were implementing the CAT
according to the timeline set forth in the CAT NMS
Plan).
48 See, e.g., Part IV.A.2.
44 Id.
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proposes to amend Section 6.6 of the
CAT NMS Plan. Specifically, the
Commission proposes to amend the
CAT NMS Plan by adding a new Section
6.6(c) to require the Participants to file
with the Commission and publish on
their own websites (or, if the
Participants wish to publish
collectively, on the CAT NMS Plan
website) the Implementation Plan
setting forth how and when the
Participants will achieve full CAT
implementation, including the
Participants’ timeline for achieving both
(1) the objective milestones that are set
forth in Section C.10 of Appendix C of
the CAT NMS Plan to assess the
progress of CAT implementation 49
(‘‘Objective Milestones’’) and (2) the
CAT implementation milestones
associated with the proposed financial
accountability provisions discussed
below (‘‘Financial Accountability
Milestones’’) 50 (collectively, the
‘‘Implementation Milestones’’).51
If the Participants decide to complete
any of the Implementation Milestones
by releasing functionality in a phased
approach, the proposed rule would
require the Implementation Plan to also
describe each phased release necessary
to achieve the completion of the
relevant Implementation Milestone and
to provide completion dates for each
such release.52 The proposed rule also
requires the Participants to include the
completion date and a description of the
status for each Implementation
Milestone identified in the
Implementation Plan, which, for
example, could include discussion
about the extent to which an
49 See CAT NMS Plan, supra note 4, at Appendix
C Section C.10.
50 The Financial Accountability Milestones, and
their relation to proposed financial accountability
provisions, are described in more detail in Part II.B.
infra.
51 The Participants would be free to include, as
may be appropriate, additional Implementation
Milestones not otherwise required by the proposed
plan amendment. For example, the Participants
may choose to add Implementation Milestones
regarding system security or external testing with
CAT Reporters.
52 For example, the CAT NMS Plan identifies
‘‘Industry Members (other than Small Industry
Members) begin reporting customer/institutional/
firm account information to the Central Repository
for processing’’ as one of the Objective Milestones.
See CAT NMS Plan, supra note 4, at Appendix C,
Section 10. Recent timelines published by the
Participants indicate, however, that the Participants
have decided to complete this milestone by
releasing functionality in a phased approach—first
implementing Industry Member reporting for
equities transactions and then implementing
Industry Member reporting for options in a separate
phase. See, e.g., CAT Reporting Timelines, available
at https://catnmsplan.com/timelines/. The
proposed amendment would therefore require the
Implementation Plan to provide completion dates
for each of these phases.
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Implementation Milestone has been
successfully completed. The
Implementation Plan would be required
to be filed with the Commission and
published on each Participant website
or the CAT NMS Plan website no later
than 30 calendar days following the
effective date of this amendment.
The Commission preliminarily
believes that requiring the proposed
Implementation Plan is appropriate to
facilitate public transparency of the
CAT’s development. The Commission
believes 30 calendar days is a sufficient
amount of time to create the
Implementation Plan because the
Participants have previously engaged in
the exercise of considering and
developing timelines and milestones for
implementation purposes when
developing the Master Plan, and many
of the Participants are active in data
systems development and operation.
The Commission further believes that
requiring this added transparency will
aid the public in more easily monitoring
the status of the implementation of the
CAT. The CAT NMS Plan currently
requires the Chief Compliance Officer of
the Company to appropriately document
objective milestones to the Commission.
The Commission understands from the
Participants’ status update calls and
discussions that the Participants are
already engaged in documenting their
progress toward CAT implementation
for the Objective Milestones.53
Therefore, the proposed amendment is
requiring the incremental step that the
information related to this
documentation be made public via the
Implementation Plan. The Commission
does not expect that this incremental
step would be unduly burdensome. The
proposed amendment also requires the
Participants to provide information
regarding progress toward and
completion of the Financial
Accountability Milestones. Requiring
the Participants to disclose their
progress toward and completion of
Financial Accountability Milestones
will provide information not contained
in the Objective Milestones regarding
the development and availability of
critical regulatory tools. The
Commission believes that it is important
to provide this information in a
comprehensive timeline. Information
related to the production of critical
regulatory tools is also of interest to
market participants, who will benefit
from the increased regulatory
capabilities of the CAT.54
53 See also CAT NMS Plan, supra note 4, at
Section 6.7(b).
54 Moreover, inclusion of the Financial
Accountability Milestones in the Implementation
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Moreover, the Commission
preliminarily believes it is appropriate
to require the Participants to disclose
whether they intend to complete any of
the Implementation Milestones in
phases and any related completion
dates, because recent timelines
published by the Participants indicate
that the Participants intend to release
certain functionality in phases. For
example, while the CAT NMS Plan
identifies only one implementation date
for Industry Member reporting, the
Participants have indicated that
Industry Member reporting will be
implemented in several phases that each
have a different implementation
deadline.55 The Implementation Plan
should reflect the current, phased
approach to CAT implementation for
this milestone, not the approach to CAT
implementation that was contemplated
at the time the CAT NMS Plan was
approved. By requiring phasing to be
addressed, the Implementation Plan will
both furnish a common understanding
of the status of CAT implementation at
the time the Implementation Plan is
made public, as well as indicate how
completing the Implementation
Milestones will lead to the achievement
of full CAT implementation.
The Commission also believes that, to
the extent the Participants meet the
dates specified in the timeline, the
publication of such timeline will reduce
uncertainty as to the expected
implementation timeline for Industry
Members, which would aid Industry
Members in staging their resources and
otherwise managing implementation
planning, which should reduce the risk
of additional delays. The Commission
further believes that the Implementation
Plan’s timeline, paired with
Implementation Milestones, will serve
to clarify what level of CAT system
functionality will be delivered on a
given date. Finally, the Commission
anticipates that requiring the
Participants to disclose their deadlines
and the status of Implementation
Milestones to the public through the
Implementation Plan will provide
accountability both to the Commission
and to Industry Members regarding the
Participants’ progress toward CAT
implementation.
The Commission also proposes to
amend the CAT NMS Plan to add
proposed Section 6.6(c)(ii) to require
Participants to file with the Commission
and publish on each Participant
Plan will provide the Commission and the public
with more information regarding the
implementation deadlines. See Part II.B. infra for
additional discussion of the financial accountability
provisions.
55 See note 52 supra.
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website, or collectively on the CAT
NMS Plan website, complete Quarterly
Progress Reports. These Reports would
be filed and made public no later than
fifteen business days following the end
of each calendar quarter (e.g., by April
21, 2020; July 22, 2020; October 22,
2020; or January 25, 2021) and would
describe in detail the progress made by
the Participants during the prior
calendar quarter toward achieving each
of the Implementation Milestones set
forth in the Implementation Plan.56 The
initial Report to be filed by the
Participants would be filed and made
public no later than fifteen business
days following the end of the calendar
quarter in which the Implementation
Plan was filed and made public.57 The
Reports would divide the
Implementation Milestones into the
following three categories: (1)
Implementation Milestones that have
been completed, (2) Implementation
Milestones that are still in progress and
(3) Implementation Milestones that have
not yet been initiated.
For each Implementation Milestone
completed by the end of a given
calendar quarter, the Report would
include the following: (1) The
completion date provided in the
Implementation Plan, (2) the date on
which the Implementation Milestone
was actually completed, and (3) a
description of any variance from the
Implementation Plan.58
For each Implementation Milestone in
progress at the end of a given calendar
quarter, the Report would include the
following: (1) The completion date
provided in the Implementation Plan,
(2) the currently targeted completion
date, and (3) a description of (a) the
current status of the Implementation
Milestone, (b) any difference between
the Implementation Plan completion
date and the currently targeted
completion date, including the basis for
56 If, subsequent to the publication of the
Implementation Plan, the Participants decide to
complete any of the Implementation Milestones by
releasing functionality in a phased approach, the
proposed amendment requires the Participants to
reflect this change in the Quarterly Progress Reports
by describing the phases necessary to achieve the
completion of the relevant milestones and
providing specified information on the progress
made for each release.
57 For example, if the Participants filed and made
public the Implementation Plan on March 18, 2020
the initial Report would have to be filed no later
than April 21, 2020.
58 For example, a description of any variance from
the Implementation Plan could explain why the
completion of a given Implementation Milestone
was delayed from the date set forth in the
Implementation Plan or, if the Implementation
Milestone was broken out into multiple phases, the
extent to which the completed Implementation
Milestone satisfied the functionality required by the
Implementation Plan for that milestone.
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making the adjustment and the impact
of this adjustment on any other
Implementation Milestone, and (c) any
other factual indicators that demonstrate
the current level of completion with
respect to the Implementation
Milestone.59 Factual indicators could
include any data relevant to the
Objective Milestone (e.g., (1) for
milestones related to the publication of
documentation: The current version of
the documentation under development
or published; the number of and
explanation for any open issues not yet
resolved; (2) for milestones related to
connectivity and acceptance testing:
The status of the publication of test
plans; statistics on the amount of
expected or actual activity in the test
environment (e.g., number of testers,
number of reportable events, error rates/
trends observed), the number of Plan
Processor functional requirements 60 for
which defects were found categorized
by criticality; progress remediating
defects; (3) for milestones related to
reporting: Development progress as
defined by the number of functional
requirements not yet started, in
progress, or complete; the number and
percentage of functional requirements
for which internal testing is in progress
and the related pass/fail percentages of
associated test cases; the number and
percentage of functional requirements
that have completed internal testing
with all defects remediated; the number
of Plan requirements met or
59 For example, if an Implementation Milestone is
the publication of Industry Member technical
specifications, a description of the status could
state: That the Plan Processor produced a draft that
was circulated to Industry Members on [insert date];
that the Participants are reviewing feedback and
expect to issue final technical specifications by
[insert date]; and that the draft is complete except
for a [specified topic], because of a [specified
reason]. As an example of a description identifying
any difference between the Implementation Plan
completion date and the current targeted
completion date, including the basis for making the
adjustment and the impact of this adjustment on
any other Implementation Milestone, the
Participants could state: That the Implementation
Plan completion date was [insert date], but the
Participants are revising such date to [insert new
targeted completion date], because [insert topic]
proved to be more complicated than anticipated
due to [insert reason]. The description could
continue to state that the Participants believe the
new targeted completion date is appropriate
because, for example, they have designed a new
approach to deliver the required functionality to
address the issue in the technical specifications that
is currently under development as of [insert date].
60 Appendix D outlines minimum functional and
technical requirements established by the
Participants of the CAT NMS Plan for the Plan
Processor. See CAT NMS Plan, supra note 4,
Appendix D–1. Examples of such functional
requirements for the CAT system include the ability
to provide feedback on the reasons for errors in data
submissions, and the ingestion of data submitted to
the Central Repository by Industry Members. See id.
at Appendix D, Sections 7.4, 7.5.
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outstanding; a list of Plan requirements
met or outstanding).
For each Implementation Milestone
that has not yet been initiated by the
end of a given calendar quarter, the
Report would include the following: (1)
The completion date provided in the
Implementation Plan, (2) the currently
targeted completion date, and (3) a
description of (a) the current status of
the Implementation Milestone, and (b)
any difference between the
Implementation Plan completion date
and the currently targeted completion
date, including the basis for making the
adjustment and the impact of this
adjustment on any other
Implementation Milestone.
The Commission preliminarily
believes that the Quarterly Progress
Reports will facilitate transparency by
ensuring that current and
comprehensive information about the
CAT’s state of development is regularly
communicated to the Commission,
Industry Members, and the public at
large.61 Moreover, the Commission
preliminarily believes that the
requirements set forth for the proposed
Quarterly Progress Reports are
appropriate. Because the Participants
should already be actively monitoring
their progress on the implementation of
the CAT, the Commission believes 15
business days is a reasonable amount of
time in which to prepare Reports based
on the information the Participants have
already gathered.62
The Participants are required to
provide both the Implementation Plan
completion date and the actual or
currently targeted completion date for
each Implementation Milestone so that
the original completion date will serve
as a baseline against which to measure
progress if there is a difference between
the two dates, as supplemented by the
information provided in the
commentary. The Commission
preliminarily believes that progress can
be effectively evaluated based upon
whether the Implementation Plan
completion dates are being met.
The Commission also preliminarily
believes that information provided in
the required descriptions for the
Implementation Milestones will yield
61 For example, the Commission expects that the
Quarterly Progress Reports will provide the
Commission and the public with more granular and
up-to-date information regarding the likelihood that
the Participants will meet the target deadlines
associated with the Financial Accountability
Milestones and/or the likelihood that the
Participants will be permitted to recover related
fees, costs, or expenses from Industry Members. The
Financial Accountability Milestones, and their
related financial accountability provisions, are
discussed in Part II.B. infra.
62 See, e.g., note 53 supra.
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valuable insights into the progress of
CAT implementation, for example by
providing an early indication of the
potential for delays. The Commission
also preliminarily believes that
requiring the disclosure of the
information provided in the
descriptions would encourage the
Participants to consider whether
resources need to be realigned, so that
adjustments can be made to the
implementation process. In regard to the
Implementation Milestones completed
by the end of a given calendar quarter,
the proposed amendments would
require the Participants to describe any
variance from the Implementation Plan.
The Commission preliminarily believes
that such information could reflect
whether the Participants have only
partially achieved the functionality
required by certain Implementation
Milestones. In regard to the
Implementation Milestones in progress
at the end of a given calendar quarter,
the proposed amendments would
require the Participants to describe the
status of the Implementation Milestone,
any difference between the completion
dates provided, including the basis for
making the adjustment and the impact
such adjustment might have on any
other Implementation Milestone, and
other factual indicators that demonstrate
the current level of completion with
respect to the milestone. The
Commission preliminarily believes that
such information could reveal if there is
an increasingly negative variance
between the Implementation Plan
completion date and the targeted
completion date, as well as the cause for
such variance. The required information
could also provide an indication of
whether corrections are needed to get
the implementation process back on
track and whether the currently targeted
completion dates provided in a Report
are realistic. In regard to the
Implementation Milestones that have
not yet been initiated by the end of a
given calendar quarter, the proposed
amendments would require the
Participants to describe the current
status for the Implementation Milestone
and any difference between the
completion dates provided, including
the basis for making the adjustment.
The Commission expects that
quarterly communication of this
information will aid Industry Members
by providing more information on the
timing of their CAT reporting
obligations, which, correspondingly,
should aid them in efficiently
developing and implementing their
regulatory data collection systems and
allow them to make their own
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adjustments as needed. In addition, the
Commission anticipates that the
Quarterly Progress Reports will aid the
Commission, Industry Members and
others in monitoring and better
understanding the progress of CAT
implementation.
The Commission also proposes to
amend the CAT NMS Plan to add
proposed Section 6.6(c)(iii) to require
that the Implementation Plan and each
Quarterly Progress Report be approved
by at least a Supermajority Vote of the
Operating Committee before such
documents are filed with the
Commission or made publicly available
on each of the Participant websites or
collectively on the CAT NMS Plan
website. However, if the
Implementation Plan or any Quarterly
Progress Report is approved only by a
Supermajority Vote of the Operating
Committee, and not by a unanimous
vote of the Operating Committee
(including, for the avoidance of doubt,
all members of the Operating
Committee, whether or not present and
whether or not recused), proposed
Section 6.6(c)(iii) would require each
Participant whose Operating Committee
member did not vote to approve the
Implementation Plan or Quarterly
Progress Report separately file with the
Commission and make publicly
available on each of the Participant
websites, or collectively on the CAT
NMS Plan website, a statement
identifying itself and explaining why
the member did not vote to approve the
Implementation Plan or Quarterly
Progress Report. Prior to the Operating
Committee’s vote, the Implementation
Plan and Quarterly Progress Reports
shall also be submitted by the Operating
Committee to the CEO, President, or an
equivalently situated senior officer (or,
‘‘senior management’’) of each
Participant.63
The Commission preliminarily
believes that the Operating Committee
should vote on the Implementation Plan
and each Quarterly Report because the
Operating Committee, as the manager of
the Company, already votes on all
actions for which a vote is required
under the CAT NMS Plan.64 The
Commission further preliminarily
believes that specifically requiring the
63 In addition to the senior management
personnel who will receive the Implementation
Plan and Quarterly Progress Reports under the
proposed amendment, each Participant has a voting
member (and an alternate voting member)
representing it on the Operating Committee who
will receive these documents. One individual may
serve as the voting member of the Operating
Committee for multiple affiliated Participants. See
CAT NMS Plan, supra note 4, at Section 4.2(a).
64 See CAT NMS Plan, supra note 4, at Sections
4.1 and 4.3.
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approval of the Operating Committee by
at least a Supermajority Vote will lend
credibility to the timelines presented by
Participants in the Implementation Plan
and Reports, which may otherwise be
lacking given that the timelines for
Industry Member CAT implementation
have been revised multiple times.65 In
addition, the requirement that the
Implementation Plan and Quarterly
Progress Reports be submitted to the
CEO, President, or an equivalently
situated senior officer of each
Participant, prior to the Operating
Committee’s vote, is intended to
promote senior management attention
and promote accountability with respect
to CAT implementation.
If the Operating Committee does not
unanimously vote to approve the
Implementation Plan or any Quarterly
Progress Report, the proposed
amendments require each Participant
whose Operating Committee member
did not vote to approve the
Implementation Plan or Quarterly
Progress Report to separately file with
the Commission and make publicly
available on each of the Participant
websites, or collectively on the CAT
NMS Plan website, a statement
identifying itself and explaining why
the member did not vote to approve the
Implementation Plan or Quarterly
Progress Report. The Commission
preliminarily believes that the
requirement may aid the Commission
and the public to better monitor the
progress of CAT implementation,
because such an explanation may reveal
critical information regarding whether
currently targeted completion dates are
realistic, whether milestones are being
or have been completed in accordance
with the requirements of the CAT NMS
Plan, and/or whether potential risks or
delays may impede the progress of CAT
implementation.
The Commission requests comment
on the amendments to increase
operational transparency. Specifically,
the Commission solicits comment on
the following:
1. Are the Implementation Plan and
the Quarterly Progress Report effective
mechanisms for providing the
Commission and Industry Members
with transparency into CAT
implementation? Why or why not?
2. Are the details and requirements of
the Implementation Plan appropriate
and reasonable? Why or why not?
Would additional details or
requirements for the Implementation
Plan be beneficial?
3. The proposed amendment requires
the Participants to file and publish the
65 See
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Implementation Plan within 30 calendar
days following the effective date of
proposed Section 6.6(c). Is 30 calendar
days a reasonable period of time in
which to file and publish such a
document? Why or why not? Does this
timeline give the Operating Committee
a sufficient amount of time to approve
the Implementation Plan? Why or why
not? Would a longer or shorter period of
time, such as 45 calendar days or 15
calendar days, be more appropriate?
4. The proposed Amendment requires
the Participants to file and publish a
Quarterly Progress Report each calendar
quarter on each Participant website or
collectively on the CAT NMS Plan
website. Is a quarterly interval the right
interval? Would a longer or shorter
interval be more effective?
5. The proposed amendment requires
the Participants to file and publish the
Quarterly Progress Report no later than
fifteen business days following the end
of each calendar quarter. Is fifteen
business days a reasonable period of
time in which to file and publish such
a report? Why or why not? Does this
timeline give the Operating Committee
a sufficient amount of time to approve
the Quarterly Progress Reports? Why or
why not? Would a longer or shorter
period of time, such as thirty business
days or five business days, be more
appropriate?
6. The proposed amendment
establishes the deadline for filing and
publishing the Quarterly Progress
Report on the basis of business days.
Are business days an appropriate
measure by which to establish this
deadline? Or would calendar days be
more appropriate? Why or why not?
7. Are the details and requirements of
the Quarterly Progress Report
appropriate and reasonable? Why or
why not? Would additional details or
requirements for the report be
beneficial? For example, should the
Quarterly Progress Reports include
financial information detailing the fees,
costs, and expenses that the Participants
have incurred to build and implement
the CAT? If so, should these fees, costs,
and expenses be clearly tied to the
relevant Financial Accountability
Milestone? Why or why not?
8. The proposed amendment requires
the Operating Committee to approve the
Implementation Plan and each
Quarterly Progress Report by at least a
Supermajority Vote. Is it appropriate to
require a Supermajority Vote, or should
the Commission require a majority vote
or a unanimous vote of the Operating
Committee? Why or why not? Is it
appropriate to require that the Operating
Committee vote on this matter? Why or
why not? If this matter should be
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delegated to a Subcommittee, please
explain which Subcommittee should
vote to approve the Implementation
Plan and Quarterly Progress Report and
why.
9. If the Implementation Plan or any
Quarterly Progress Report is not
approved by a unanimous vote of the
Operating Committee, the proposed
amendment requires each Participant
whose Operating Committee member
did not vote to approve the
Implementation Plan or Quarterly
Progress Report separately file with the
Commission and make publicly
available on each of the Participant
websites, or collectively on the CAT
NMS Plan website, a statement
identifying itself and explaining why
the member did not vote to approve the
Implementation Plan or Quarterly
Progress Report. Is this an appropriate
requirement? Why or why not? Should
the Commission require the
Implementation Plan or the Quarterly
Progress Reports, or the members who
did not vote to approve the
Implementation Plan or a Quarterly
Report, as the case may be, to provide
any additional information? If so, what
information should be provided, and
why?
10. The proposed amendment
requires that the Implementation Plan
and each Quarterly Progress Report be
submitted to the CEO, President, or an
equivalently situated senior officer of
each Participant, prior to being voted on
by the Operating Committee. Is this an
appropriate requirement to promote
senior management attention and
promote accountability with respect to
CAT implementation? Why or why not?
Should the Commission specify when
the Implementation Plan and Quarterly
Progress Reports should be submitted to
the CEO, President, or equivalently
situated senior officer of each
Participant? If so, how many days prior
to the Operating Committee vote should
the Implementation Plan and Quarterly
Progress Reports be submitted to senior
management? To the extent that the
Commission implements such a
requirement, would the deadlines set
forth in the proposed amendment for
the submission of the Implementation
Plan and Quarterly Progress Reports to
the Commission need to be adjusted?
Why or why not? By how many days
should they be adjusted? Please explain
your responses.
11. Please identify any alternative
means to promote senior management
attention and promote accountability
with respect to CAT implementation.
For example, should the Commission
require the senior management of each
Participant (e.g., the CEO, President, or
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an equivalently situated senior officer)
to certify that the contents of the
Implementation Plan and each
Quarterly Progress Report are accurate
and complete in all material respects?
What should qualify as material?
Should the certification be made to the
best of an officer’s knowledge and
reasonable belief after reasonable
investigation? Is the CEO or President
the appropriate person to make the
certification? If not, please explain why.
If the CEO or President is not the
appropriate person, which equivalently
situated senior officer would be
appropriate? Would additional details
or requirements for such certifications
be beneficial? If so, what are those
details or requirements? Please explain
your responses.
12. Are there other factors that impact
the ability of the Participants to
implement the CAT NMS Plan that
would not be addressed by further
disclosure that the Commission should
address?
B. Financial Accountability
Amendments for Implementation of the
CAT
As discussed above, there have been
multiple delays in CAT implementation
since the adoption of Rule 613. To
prevent additional delays, the
Commission proposes to amend the
CAT NMS Plan to include financial
accountability provisions that are
designed to align financial
accountability with regulatory
obligations and contribute to an
expeditious implementation of the CAT.
Currently, Section 11.1 of the CAT
NMS Plan contemplates that the
Operating Committee will establish, and
the Participants will implement, fees for
Participants and Industry Members to
recover the costs and expenses incurred
by the Participants in connection with
the development, implementation, and
operation of the CAT.66 Proposals for
any such fees must be filed with the
Commission pursuant to Section 19(b)
of the Exchange Act and are subject to
Commission review for consistency
with the Exchange Act and Article XI of
the CAT NMS Plan.67 Specifically, each
Participant must demonstrate, under
Sections 6(b)(4) and 15A(b)(5) of the
Exchange Act, that such fee filings
provide for the equitable allocation of
reasonable dues, fees, and other charges
66 See, e.g., CAT NMS Plan, supra note 4, at
Section 11.1(c).
67 Section 19(b) of the Exchange Act requires the
Participants to submit proposed rule changes to the
Commission. 15 U.S.C. 78s(b); see also CAT NMS
Plan, supra note 4, at Section 11.1(b) (noting that
the Participants must file proposed fees for Industry
Members with the Commission).
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among its members and other persons
using its facilities.68 The proposed
amendment would not alter this basic
structure, but would add a new Section
11.6 to govern the recovery of any fees,
costs, and expenses (including legal and
consulting fees, costs, and expenses)
incurred 69 by or for the Company in
connection with the development,
implementation, and operation of the
CAT,70 from the effective date of this
amendment, if adopted by the
Commission, until such time that the
Participants have completed Full
Implementation of CAT NMS Plan
Requirements 71 (collectively, the ‘‘PostAmendment Expenses’’).
Proposed Section 11.6 would apply
new conditions to the collection of any
fees established by the Operating
Committee, or implemented by the
Participants, to recover a portion of
Post-Amendment Expenses from
Industry Members (‘‘Post-Amendment
Industry Member Fees’’). Specifically,
proposed Section 11.6 would require
the Participants to meet four critical
CAT implementation milestones—the
Financial Accountability Milestones—
by certain dates in order to collect the
full amount of any related PostAmendment Industry Member Fees
68 See 15 U.S.C. 78f(b)(4) (applicable to the
national securities exchanges); 15 U.S.C. 78o–
3(b)(5) (applicable to FINRA, a national securities
association).
69 For the purposes of proposed Section 11.6,
determination of when a fee, cost, or expense is
considered ‘‘incurred’’ shall be based on Generally
Accepted Accounting Principles (‘‘GAAP’’), as
those principles must also be applied to all
accounting or financial statements prepared by the
Operating Committee under Section 9.2 of the CAT
NMS Plan. See note 4 supra. For example, a fee,
cost, or expense related to a good or service would
generally be considered incurred upon acquisition
of the good or service in accordance with GAAP.
70 See, CAT NMS Plan, supra note 4, at Section
11.1(b)–(c), Section 11.2(a)–(b), and Section 11.3(c)
(relating to the funding of the development,
implementation and operating costs of the
Company).
71 As part of the proposed amendment, Section
1.1 of the CAT NMS Plan will be amended to
include a definition of ‘‘Full Implementation of
CAT NMS Plan Requirements.’’ This term will
mean ‘‘the point at which: (a) The Participants have
satisfied all of their obligations to build and
implement the CAT, such that all CAT system
functionality required by Rule 613 and the CAT
NMS Plan has been developed, successfully tested,
and fully implemented with the initial Error Rates
specified by Section 6.5(d)(i) of the CAT NMS Plan,
including, but not limited to, functionality that
efficiently permits the Participants and the
Commission to access all CAT Data required to be
stored in the Central Repository pursuant to Section
6.5(a) of the CAT NMS Plan and to analyze the full
lifecycle of an order, from order origination through
order execution or order cancellation, across the
national market system. This Financial
Accountability Milestone shall be considered
complete as of the date identified in a Quarterly
Progress Report meeting the requirements of
Section 6.6(c).’’ This definition is discussed further
below. See Part II.B.1.d. infra.
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established by the Operating Committee
or implemented by the Participants. If
the Participants fail to meet the target
deadlines set forth in proposed Section
11.6, they would only be entitled to
collect a portion of the amount of the
relevant Post-Amendment Industry
Member Fees, as determined by the
amount of time by which the
Participants have missed the target
deadlines.
The Commission preliminarily
believes applying these new conditions
to the Post-Amendment Industry
Member Fees is appropriate. At the time
the Commission approved the CAT
NMS Plan, the Commission believed it
was reasonable, in accordance with
Section 6(b)(4) of the Exchange Act,72
for the Participants to recover a portion
of the fees, costs, and expenses
associated with the development and
implementation of the CAT from
Industry Members.73 This belief,
however, was based on the
Commission’s expectation that the
Participants would be complying with
the CAT NMS Plan, which required the
implementation of certain CAT
functionality by the dates set forth in
the CAT NMS Plan. As noted above, the
Participants have missed multiple dates
codified in the CAT NMS Plan.74
Accordingly, the regulatory aims of the
CAT NMS Plan have yet to be achieved.
Accordingly, the Commission is
proposing financial accountability rules
that address the Commission’s view of
what it would consider to be
‘‘reasonable fees’’ and a reasonable
exercise of the Participants’ funding
authority under the CAT NMS Plan in
the context of CAT implementation
going forward.
The specific terms of the proposed
amendment are discussed in more detail
below.
1. Financial Accountability Milestones
and Target Deadlines
Proposed Section 11.6 identifies four
critical CAT implementation
milestones: (1) Initial Industry Member
Core Equity Reporting, (2) Full
Implementation of Core Equity
Reporting Requirements, (3) Full
Availability and Regulatory Utilization
of Transactional Database Functionality,
and (4) Full Implementation of CAT
NMS Plan Requirements (collectively,
the ‘‘Financial Accountability
72 15 U.S.C. 78f(b)(4) (requiring the rules of a
national securities exchange to provide for
‘‘equitable allocation of reasonable dues, fees, and
other charges among its members and issuers and
other persons using its facilities’’).
73 See, e.g., CAT NMS Plan Approval Order,
supra note 4, at 84794.
74 See Part I supra.
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Milestones’’ 75). For each Financial
Accountability Milestone, the
Commission has also identified a target
deadline for completion.
a. Initial Industry Member Core Equity
Reporting
The Commission proposes to amend
Section 1.1 of the CAT NMS Plan to
define ‘‘Initial Industry Member Core
Equity Reporting’’ as the point at which
Industry Members (excluding Small
Industry Members 76 that are do not
report to the Order Audit Trail System
(‘‘OATS’’)) have begun to report equities
transaction data, excluding Customer
Account Information, Customer-ID, and
Customer Identifying Information,77 to
the CAT.78 This Financial
Accountability Milestone shall be
considered complete as of the date
identified in a published Quarterly
Progress Report meeting the
requirements of proposed Section
6.6(c).79 The Commission also proposes
to add Section 11.6(a)(i)(A) to provide
that the Participants will be entitled to
collect the full amount of any PostAmendment Industry Member Fees
established or implemented to recover
75 This
term is defined at proposed Section 1.1.
defined by Section 1.1 of the CAT NMS
Plan, and for the purposes of this proposing release,
‘‘Small Industry Member’’ an Industry Member that
qualifies as a small broker-dealer as defined in SEC
Rule 613. See also 17 CFR 242.613(a)(3)(vi)
(defining small broker-dealers by reference to 17
CFR 240.0–10(c), which defines a small broker
dealer as one with ‘‘total capital . . . of less than
$500,000 on the date in the prior fiscal year as of
which its audited financial statements were
prepared or, if not required to file such statements,
a broker or dealer that had total capital . . . of less
than $500,000 on the last business day of the
preceding fiscal year’’ and one that is ‘‘not affiliated
with any person . . . that is not a small business
or small organization’’).
77 Customer Account Information, Customer-ID,
and Customer Identifying Information are defined
terms in Section 1.1 of the CAT NMS Plan and are
the same definitions in the context of this proposing
release.
78 The Commission notes that the equities
transaction data required at this stage is consistent
with the functionality that the Participants
currently plan to implement at ‘‘Phase 2a’’ in the
latest draft of the Technical Specifications. See CAT
Reporting Technical Specifications for Industry
Members, Version 2.2 (June 24, 2019), at vii,
available at https://www.catnmsplan.com/wpcontent/uploads/2019/06/Industry-Member-TechSpecs-v2.2-Clean.pdf.
79 The target deadline for Initial Industry Member
Core Equity Reporting falls on April 30, 2020—
between scheduled Quarterly Progress Reports. If
the Participants wait to submit the Quarterly
Progress Report to the Commission, it may delay
their ability to begin recovering any PostAmendment Industry Member Fees to which they
may be entitled. Accordingly, the Commission
notes that the Participants may file an interim
Quarterly Progress Report, if they so choose, on the
day they achieve this Financial Accountability
Milestone (or any other Financial Accountability
Milestone) in order to expedite their recovery of
Post-Amendment Industry Member Fees.
76 As
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Post-Amendment Expenses incurred
from the date of this amendment’s
adoption by the Commission80 to the
date of Initial Industry Member Core
Equity Reporting (‘‘Period 1’’), so long
as such date is no later than April 30,
2020.81
The Commission preliminarily
believes that Initial Industry Member
Core Equity Reporting is an appropriate
Financial Accountability Milestone,
because this milestone requires the
Participants to develop, test, and
implement essential infrastructure
needed to support Industry Member
reporting—one of the major goals
identified by the CAT NMS Plan.82
Before Industry Members may begin
reporting any equities transaction data
to the CAT, the Participants must
develop, and Industry Members must
thoroughly test, file submission tools,
data integrity controls, and various
security measures to ensure that the
CAT can safely receive and process this
data, as well as identify data that may
not be accurate. These are core
operations that are fundamental to the
success of the CAT. By requiring
Industry Members—excluding Small
Industry Members that are not OATS
reporters 83—to begin reporting the first
phase of equities transaction data to the
CAT, the Participants will demonstrate
that they have made significant progress
towards implementing foundational
CAT functionality.
Furthermore, the Commission
preliminarily believes that it is
appropriate to require the Participants
to achieve Initial Industry Member Core
Equity Reporting by April 30, 2020 in
order to recover the full amount of any
related Post-Amendment Industry
80 The proposed amendment will not affect the
Participants’ ability to collect CAT-related fees,
costs, or expenses incurred up to the date that
proposed Section 11.6 is adopted. See proposed
Section 11.6.
81 See proposed Section 11.6(a)(i)(A). To the
extent that the Initial Industry Member Core Equity
Reporting milestone is achieved at some later date,
the Participants will only be entitled to collect a
portion of the amount of the Post-Amendment
Industry Member Fees established or implemented
for Period 1. See proposed Section 11.6(a)(ii); see
also Part II.B.2. infra for additional discussion
regarding the conditions attached to PostAmendment Industry Member Fee collection.
82 See CAT NMS Plan, supra note 4, at Section
6.7(a)(v).
83 The Commission preliminarily believes that it
is appropriate to exclude Small Industry Members
that do not report to OATS from this Financial
Accountability Milestone in order to mirror the
timelines projected by the Participants. See, e.g.,
Industry Update on CAT Reporting Technical
Specifications for Industry Members (April 3, 2019),
available at https://www.catnmsplan.com/wpcontent/uploads/2019/04/CAT_Industry_Call_
04032019_Presentation.pdf; see also CAT Reporting
Timelines, available at https://
www.catnmsplan.com/timelines/.
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Member Fees, because the Participants
have indicated that they plan to
implement basic equities transaction
reporting for Industry Members
(excluding Small Industry Members that
are not OATS reporters) by that date.
Recent timelines published by the
Participants indicate that the production
environment for Industry Member
equities reporting will go live in April
2020.84 Based on this representation, the
Commission preliminarily believes the
proposed deadline of April 30, 2020 for
Initial Industry Member Core Equity
Reporting is both reasonable and
feasible.
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b. Full Implementation of Core Equity
Reporting Requirements
The Commission proposes to amend
Section 1.1 of the CAT NMS Plan to
define ‘‘Full Implementation of Core
Equity Reporting Requirements’’ as the
point at which: (a) Industry Member
reporting (excluding reporting by Small
Industry Members that are not OATS
reporters) for equities transactions,
excluding Customer Account
Information, Customer-ID, and
Customer Identifying Information,85 is
developed, tested, and fully
implemented at a 5% Error Rate 86 or
less and with sufficient intra-firm
linkage, inter-firm linkage, national
securities exchange linkage, and trade
reporting facilities linkage to permit the
Participants and the Commission to
analyze the full lifecycle of an order
across the national market system,
excluding linkage of representative
orders, from order origination through
order execution or order cancellation; 87
84 See, e.g., id. The Participants have also released
finalized technical specifications for Industry
Member reporting, as well as a symbol list
providing the scope of securities for which Industry
Member reporting will be required, which the
Commission believes are critical steps towards
achieving Initial Industry Member Core Equity
Reporting by April 30, 2020. With this information,
the Industry Members should be able to make
meaningful progress towards developing the
internal infrastructure needed to report to the CAT.
See note 78 supra. See also, e.g., Industry Update
on the Consolidated Audit Trail (February 20,
2019), available at https://www.catnmsplan.com/
wp-content/uploads/2019/02/CAT_Industry_
Webcast_02.20.2019_vF.pdf (stating that there will
be no material design changes to the technical
specifications for Industry Member reporting and
instructing Industry Members to continue as
planned with development efforts); CAT Reportable
Equity Securities Symbol Master, available at
https://www.catnmsplan.com/symbol-master/
index.html.
85 See note 77 supra.
86 ‘‘Error Rate’’ is a term defined in Section 1.1
of the CAT NMS Plan to mean ‘‘the percentage of
reportable events collected by the central repository
in which the data reported does not fully and
accurately reflect the order even that occurred in
the market.’’ See also 17 CFR 242.613(j)(6).
87 The equities transaction data required at this
stage is consistent with the functionality that the
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and (b) the query tool functionality
required by Section 6.10(c)(i)(A) and
Appendix D, Sections 8.1.1–8.1.3 and
Section 8.2.1 of the CAT NMS Plan
incorporates the Industry Member
equity transaction data described in
condition (a) and is available to the
Participants and to the Commission.
This Financial Accountability Milestone
shall be considered complete as of the
date identified in a Quarterly Progress
Report meeting the requirements of
Section 6.6(c).88 The Commission also
proposes to add Section 11.6(a)(i)(B) to
provide that the Participants will be
entitled to collect the full amount of any
Post-Amendment Industry Member Fees
established or implemented to recover
Post-Amendment Expenses incurred
from the date immediately following the
achievement of Initial Industry Member
Core Equity Reporting to the date of Full
Implementation of Core Equity
Reporting Requirements (‘‘Period 2’’), so
long as such date is no later than
December 31, 2020.89
The Commission preliminarily
believes that Full Implementation of
Core Equity Reporting Requirements is
an appropriate Financial Accountability
Milestone, because this milestone
requires the Participants to show that
they have taken significant steps
towards achieving one of the primary
goals identified in the CAT NMS Plan—
Industry Member reporting.90 Whereas
the previous Financial Accountability
Milestone only required that the
Participants sufficiently develop and
test the CAT so as to allow Industry
Members (excluding Small Industry
Members that are not OATS reporters)
to begin reporting equities transaction
data, this Financial Accountability
Milestone requires Participants to have
fully implemented the first phase of
equities transaction reporting for
Industry Members (excluding Small
Industry Members that are not OATS
reporters) at an Error Rate that is
consistent with the initial Error Rate
threshold set forth in the CAT NMS
Plan.91 Equities transaction data
Participants currently plan to implement at ‘‘Phase
2a’’ in the latest draft of the Technical
Specifications. See note 78 supra.
88 See also note 79 supra.
89 See proposed Section 11.6(a)(i)(B). To the
extent that the Full Implementation of Core Equity
Reporting Requirements milestone is achieved at
some later date, the Participants will only be
entitled to collect a portion of the amount of the
Post-Amendment Industry Member Fees established
or implemented for Period 2. See proposed Section
11.6(a)(iii); see also Part II.B.2. infra for additional
discussion regarding the conditions attached to
Post-Amendment Industry Member Fee collection.
90 See CAT NMS Plan, supra note 4, at Section
6.7(a)(v).
91 See, e.g., CAT NMS Plan, supra note 4, at
Section 6.5(d)(i) of the CAT NMS Plan (specifying
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produced by the CAT at this stage must
also be sufficiently interlinked so as to
permit full analysis of an order’s
lifecycle across the national market,
excluding full linkage of representative
orders.92 These requirements are
designed to ensure that the Participants
have developed, tested, and
implemented an audit trail system that
produces meaningful and accurate
equities transaction data, including data
that can be used to evaluate the full
lifecycle of an equities order.93 The
achievement of such benchmarks would
demonstrate that the Participants have
made significant progress towards full
implementation of Industry Member
reporting.94
The second prong of this Financial
Accountability Milestone requires that
the equities transaction data collected
by the CAT at this stage be made
available to regulators through two basic
query tools required by the CAT NMS
Plan—a targeted query tool that will
enable regulators to retrieve data via an
online query screen with a variety of
predefined selection criteria, and a userdefined direct query tool that will
provide regulators with the ability to
query data using all available attributes
and data sources.95 These query tools
that the ‘‘initial maximum Error Rate shall be set
to 5%’’).
92 Although full linkage of representative orders
is not required by this milestone, the technical
specifications provided to Industry Members
indicate that, by April 2020, linkage ‘‘between the
representative street side order and the order being
represented when the representative order was
originated specifically to represent a single order
. . . and there is: (1) an existing direct electronic
link in the firm’s system between the order being
represented and the representative order, and (2)
any resulting executions are immediately and
automatically applied to the represented order in
the firm’s system[.]’’ See CAT Reporting Technical
Specifications for Industry Members, Version 2.2
(June 24, 2019), available at https://
www.catnmsplan.com/wp-content/uploads/2019/
06/Industry-Member-Tech-Specs-v2.2-Clean.pdf.
93 See, e.g., id. at 6, 154 (setting forth
specifications for a firm-designated ID and
representative order flag, which are examples of
two fields not available through OATS).
94 The Commission preliminarily believes that it
is appropriate to exclude Small Industry Members
that do not report to OATS from this Financial
Accountability Milestone, in order to mirror the
timelines projected by the Participants. See, e.g.,
Industry Update on CAT Reporting Technical
Specifications for Industry Members (April 3, 2019),
available at https://www.catnmsplan.com/wpcontent/uploads/2019/04/CAT_Industry_Call_
04032019_Presentation.pdf; see also CAT Reporting
Timelines, available at https://
www.catnmsplan.com/timelines/.
95 See, e.g., CAT NMS Plan, supra note 4, at
Section 6.10(c)(i)(A)–(B); see id. at Appendix D,
Sections 8.1.1–8.1.3, and Section 8.2.1. Section
6.10(c)(i)(A) of the CAT NMS Plan requires the Plan
Processor to ‘‘provide Participants and the SEC with
access to all CAT Data stored in the Central
Repository’’ via an ‘‘online targeted query tool.’’
Appendix D, Section 8.1.1–8.1.3 of the CAT NMS
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should enable regulators to access and
use the provided data to perform
essential analyses of the equities
markets, including equity market
reconstruction, and to pursue datadriven policy-making. By requiring the
Participants to develop these tools and
make them available to the Commission
and other regulators at this stage, the
second prong of this Financial
Accountability Milestone is designed to
ensure that the CAT is built in a manner
that will allow regulators to access CAT
Data in order to realize the regulatory
benefits associated with the CAT.
The Commission preliminarily
believes that it is appropriate to require
the Participants to achieve Full
Implementation of Core Equity
Reporting Requirements by December
31, 2020 in order to receive the full
amount of any related Post-Amendment
Industry Member Fees. This deadline is
consistent with the Participants’ most
recent projections—for example, the
most recent timelines published by the
Participants indicate that the
Participants intend to substantially
complete implementation of equities
reporting for Industry Member
(excluding Small Industry Members that
do not report to OATS) by October
2020,96 and the Commission
understands that the relevant query tool
functionality should go live into
production on a timeline that is
generally consistent with the proposed
deadline of December 31, 2020.
Accordingly, the Commission
preliminarily believes the target
deadline of December 31, 2020 for Full
Implementation of Core Equity
Reporting Requirements is both
reasonable and feasible.
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c. Full Availability and Regulatory
Utilization of Transactional Database
Functionality
The Commission proposes to amend
Section 1.1 of the CAT NMS Plan to
define ‘‘Full Availability and Regulatory
Utilization of Transactional Database
Functionality’’ as the point at which: (a)
reporting to the Order Audit Trail
System (‘‘OATS’’) is no longer required
for new orders; (b) Industry Member
Plan describes the required functionality associated
with this regulatory tool. Appendix D, Section 8.2.1
describes the required functionality associated with
a user-defined direct query tool that will ‘‘deliver
large sets of data that can then be used in internal
surveillance or market analysis applications.’’ See
id. at Sections 8.2. This tool is also described at
Section 6.10(c)(i)(B) of the CAT NMS Plan.
96 See, e.g., Industry Update on CAT Reporting
Technical Specifications for Industry Members
(April 3, 2019), available at https://
www.catnmsplan.com/wp-content/uploads/2019/
04/CAT_Industry_Call_04032019_Presentation.pdf;
see also CAT Reporting Timelines, available at
https://www.catnmsplan.com/timelines/.
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reporting for equities transactions,
simple electronic options transactions,
manual options transactions, and
complex options transactions, including
Allocation Reports,97 but excluding
Customer Account Information,
Customer-ID, and Customer Identifying
Information, is developed, tested, and
fully implemented; (c) representative
order linkages, as well as intra-firm
linkages, inter-firm linkages, national
securities exchange linkages, and trade
reporting facilities linkages, are
developed, tested, and fully
implemented in a manner that permits
the Participants and the Commission to
analyze the full lifecycle of an order
across the national market system, from
order origination through order
execution or order cancellation,
including any related allocation
information provided in an Allocation
Report; 98 (d) CAT Error Rates satisfy the
threshold specified by Section 6.5(d)(i);
(e) the query tool functionality required
by Section 6.10(c)(i)(A) and Appendix
D, Sections 8.1.1–8.1.3, Section 8.2.1,
and Section 8.5 incorporates the data
described in conditions (b) and (c) and
is available to the Participants and to
the Commission; and (f) the
requirements of Section 6.10(a) are met.
This Financial Accountability Milestone
shall be considered complete as of the
date identified in a Quarterly Progress
Report published meeting the
requirements of Section 6.6(c).99
The Commission also proposes
Section 11.6(a)(i)(C) to provide that the
Participants will be entitled to collect
the full amount of any Post-Amendment
Industry Member Fees established or
implemented to recover PostAmendment Expenses incurred from the
date immediately following the
achievement of Full Implementation of
Core Equity Reporting Requirements to
the date of Full Availability and
Regulatory Utilization of Transactional
Database Functionality (‘‘Period 3’’), so
long as such date is no later than
December 31, 2021.100
97 ‘‘Allocation Report’’ is defined term in Section
1.1 of the CAT NMS Plan and carries the same
meaning in the context of this proposing release.
98 The allocation information provided in an
Allocation Report will be linked to person(s) having
the authority to trade on behalf of the account using
Firm Designated ID—a unique identifier for each
trading account designated by Industry Members for
purposes of providing data to the Central
Repository, where each such identifier is unique
among all identifiers from any given Industry
Member for each business date. See CAT NMS Plan,
supra note 4, at Section 1.1. Allocations are not
required to be directly linked to orders or
executions. See id.
99 See also note 79 supra.
100 See proposed Section 11.6(a)(i)(C). To the
extent that Full Availability and Regulatory
Utilization of Transactional Database Functionality
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The Commission preliminarily
believes that Full Availability and
Regulatory Utilization of Transactional
Database Functionality is an appropriate
Financial Accountability Milestone,
because this milestone will require the
Participants to demonstrate substantial
completion of CAT implementation.
Whereas the previous Financial
Accountability Milestone focused only
on the implementation of basic equities
transaction reporting for Industry
Members (excluding Small Industry
Members that are not OATS reporters),
this Financial Accountability Milestone
requires the Participants to have fully
implemented the first phase of reporting
for equities, simple options, manual
options, and complex options. This
Financial Accountability Milestone also
requires the Participants to implement
representative order linkages, in
addition to intra-firm linkages, interfirm linkages, national securities
exchange linkages, and trade reporting
linkages, including any related
allocation information included in an
Allocation Report. Therefore, at this
stage, the CAT should contain sufficient
equities and options transactional data
and order linkages to enable regulators
to analyze the full lifecycle of an order,
from order origination through order
execution or order cancellation,
including any related allocation
information provided in an Allocation
Report, as well as conduct other
sophisticated analyses of the markets.
For instance, the CAT should give
regulators access to an options audit
trail system that, for the first time,
makes possible options market
reconstruction and cross-market
analyses across full order lifecycles.101
Full Availability and Regulatory
Utilization of Transactional Database
Functionality further requires that core
elements of the CAT are reasonably
accurate, reliable, and accessible to
regulators. For instance, this Financial
Accountability Milestone requires that
CAT Error Rates satisfy the 5% initial
maximum Error Rate set forth in Section
is achieved at some later date, the Participants will
only be entitled to collect a portion of the amount
of the Post-Amendment Industry Member Fees
established or implemented for Period 3. See
proposed Section 11.6(a)(iii); see also Part II.B.2.
infra for additional discussion regarding the
conditions attached to Post-Amendment Industry
Member Fee collection.
101 Although the Consolidated Options Audit
Trail System (‘‘COATS’’) provides an audit trail for
options, CAT will contain broker-dealer data and
order data not currently available through COATS,
enabling regulators to perform more sophisticated
analyses on options data. Moreover, CAT will
contain equities data as well as options data, which
will enable regulators to conduct cross-market
analyses and surveillances.
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6.5(d)(i) of the CAT NMS Plan.102 The
Commission preliminarily believes this
is appropriate because the Participants
have, in the past, expressed the belief
that an initial Error Rate of 5% ‘‘strikes
the balance of making allowances for
adapting to a new reporting regime
while ensuring that the data provided to
regulators will be capable of being used
to conduct surveillance and market
reconstruction.’’ 103 This Financial
Accountability Milestone also requires
that certain regulatory tools incorporate
Industry Member data, are available to
regulators, and have been implemented
pursuant to the provisions of the CAT
NMS Plan, including not only the
online targeted query tool and the userdefined direct query tool discussed
above,104 but also surveillance systems
reasonably designed to make use of CAT
data.105 Moreover, achievement of Full
Availability and Regulatory Utilization
of Transactional Database Functionality
requires the Participants to demonstrate,
through retirement of the existing OATS
system,106 that the CAT is sufficiently
accurate, reliable, and accessible to
regulators to be adopted as the audit
trail system for equities transactions.
The Commission believes that all of
these requirements should ensure that
regulators are able to use and rely on the
CAT at this stage to conduct the kind of
improved market surveillance that the
Commission envisioned when it
adopted Rule 613.107
102 See proposed Section 1.1, ‘‘Full Availability
and Regulatory Utilization of Transactional
Database Functionality,’’ at (b). See also CAT NMS
Plan, supra note 4, at Section 6.5(d)(i).
103 See CAT NMS Plan Approval Order, supra
note 4, at 84717.
104 See Section II.B.1.b. supra.
105 Full Availability and Regulatory Utilization of
Transactional Database Functionality requires that
the requirements of Appendix D, Section 8.1.1–
8.1.3, Section 8.2.1, and Section 8.5 of the CAT
NMS Plan, which describe the performance
requirements and service level agreements for
necessary regulatory tools, have been met for any
data contained in the CAT. The ‘‘surveillance
systems’’ required by Section 6.10(a) and the query
tool functionality required by Section 6.10(c)(i)(A)
of the CAT NMS Plan must also be implemented.
See proposed Section 1.1, ‘‘Full Availability and
Regulatory Utilization of Transaction Database
Functionality,’’ at (e)–(f).
106 To achieve this Financial Accountability
Milestone, OATS reporting must no longer be
required for new orders. This prong can only be
accomplished by retiring OATS. Although FINRA is
the only Participant in direct control of OATS
retirement, the Commission still believes it is
appropriate to apply this milestone to all
Participants. All of the Participants are jointly
responsible for creating a CAT that is capable of
replacing OATS. All Participants are regulators that
will benefit from the full implementation of the
CAT. See, e.g., CAT NMS Plan, supra note 4, at
Appendix C, Section C.9. (discussing retirement of
OATS).
107 See Rule 613 Adopting Release, supra note 2,
at 45788.
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The Commission preliminarily
believes that it is appropriate to require
the Participants to achieve Full
Availability and Regulatory Utilization
of Transactional Database Functionality
by December 31, 2021 in order to
recover the full amount of any related
Post-Amendment Industry Member
Fees. This deadline is consistent with
the Participants’ most recent projections
for completion of Industry Member
reporting, representative order linkages,
and the development of regulatory
query tools for options and equities. The
most recent timelines issued by the
Participants suggest that Industry
Member reporting and representative
order linkages will be implemented by
December 2021,108 and the Commission
further understands that the online
targeted query tool and user-directed
direct query tool for both options and
equities should go live into production
on a timeline that is generally consistent
with the proposed deadline of December
31, 2021. Therefore, the Commission’s
proposed deadline of December 31,
2021 is consistent with the Participants’
timeline for these items.
Moreover, so long as the Participants
diligently work towards building the
CAT according to the requirements of
the CAT NMS Plan, the Commission
preliminarily believes that the
Participants should reasonably be able
to demonstrate, by December 31, 2021,
both that the CAT is fully and
effectively functional for equities data
such that the CAT is capable of
replacing OATS such that reporting to
OATS will no longer be required for
new orders. The Participants’ timelines
indicate that, by December 31, 2021,
Industry Members and Small Industry
Members that report to OATS will have
been reporting equities transaction data
to CAT for approximately 20 months,109
which should give the Participants and
other CAT Reporters a reasonable
opportunity to address or correct any
material data quality issues. The
Commission further notes that the
conditions of Full Availability and
Regulatory Utilization of Transactional
Database Functionality are designed to
ensure that regulators are able to
perform at least their normal range of
regulatory tasks using CAT Data instead
of OATS data. The Commission
108 See,
e.g., note 96 supra.
supra note 96 and associated text. The
Participants do not currently intend to implement
transaction reporting for Small Industry Members
that do not report to OATS until December 2021.
However, because these Industry Members do not
report to OATS, the Commission preliminarily
believes that this should not impact the ability of
the Participants to retire OATS by the target
deadline of December 31, 2021.
109 See
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48469
therefore preliminarily believes that it is
reasonable and feasible to establish
December 31, 2021 as the deadline for
this Financial Accountability
Milestone.110
With respect to the additional
requirements designed to ensure that
the CAT Data provided by Industry
Members will be reasonably accurate,
reliable, and accessible to regulators, the
Commission also preliminarily believes
that the Participants should be able to
meet these requirements by December
31, 2021. For example, proposed
Section 11.6(a)(i)(C) and proposed
Section 1.1 would provide the
Participants with approximately two
years from the date of this amendment’s
adoption to develop, test, and
implement the surveillance systems
required by Section 6.10(a) of the CAT
NMS Plan,111 whereas the CAT NMS
Plan indicates that a shorter span of
fourteen months would be a sufficient
period of time to accomplish that
task.112 The Commission therefore
preliminarily believes the target
deadline of December 31, 2021 for Full
Availability and Regulatory Utilization
of Transactional Database Functionality
is both reasonable and feasible.
d. Full Implementation of CAT NMS
Plan Requirements
The Commission proposes to amend
Section 1.1 of the CAT NMS Plan to
define ‘‘Full Implementation of CAT
NMS Plan Requirements’’ as the point at
which the Participants have satisfied all
of their obligations to build and
implement the CAT, such that all CAT
system functionality required by Rule
613 and the CAT NMS Plan has been
developed, successfully tested, and fully
implemented at the initial Error Rates
specified by Section 6.5(d)(i) of the CAT
NMS Plan or less, including
functionality that efficiently permits the
Participants and the Commission to
access all CAT Data required to be
stored in the Central Repository
pursuant to Section 6.5(a) of the CAT
NMS Plan, including Customer Account
110 The Commission also believes that tying full
recovery of CAT-related expenses to this Financial
Accountability Milestone will increase the
likelihood that OATS will be retired by the
proposed date, thereby reducing uncertainty
amongst Industry Members and, potentially,
compressing the period of duplicative reporting to
which Industry Members might otherwise be
subjected.
111 Section 6.10(a) of the CAT NMS Plan requires
the Participants to use the tools described in
Appendix D to ‘‘develop and implement a
surveillance system, or enhance existing
surveillance systems, reasonably designed to make
use of the consolidated information contained in
the Central Repository.’’ See note 4 supra.
112 See CAT NMS Plan, supra note 4, at Section
6.7(a)(iv); see also id. at Section 6.10(a).
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Information, Customer-ID, Customer
Identifying Information, and Allocation
Reports, and to analyze the full lifecycle
of an order across the national market
system, from order origination through
order execution or order cancellation,
including any related allocation
information provided in an Allocation
Report.113 This Financial Accountability
Milestone shall be considered complete
as of the date identified in a Quarterly
Progress Report meeting the
requirements of Section 6.6(c).114 The
Commission also proposes to add
Section 11.6(a)(i)(D) to provide that the
Participants will be entitled to collect
the full amount of any Post-Amendment
Industry Member Fees established or
implemented to recover PostAmendment Expenses incurred from the
date immediately following the
achievement of Full Availability and
Regulatory Utilization of Transactional
Database Functionality to the date of
Full Implementation of CAT NMS Plan
Requirements (‘‘Period 4’’), so long as
such date is no later than December 30,
2022.115
The Commission preliminarily
believes that Full Implementation of
CAT NMS Plan Requirements is
appropriate as the final Financial
Accountability Milestone.116 This
Financial Accountability Milestone will
require the Participants to show that
they have satisfied all of their
obligations to build and implement the
CAT system functionality required by
Rule 613, including functionality that
would allow the Participants and the
Commission to efficiently access all
transactional data and, for the first time,
customer information stored in the
Central Repository. Whereas the
previous Financial Accountability
Milestones do not require the
Participants to provide customer
information like Customer Account
Information, Customer-ID, and
Customer Identifying Information, the
Participants must have developed,
tested, and implemented reporting
functionality for these elements to
satisfy the parameters of Full
113 See
notes 97–98 supra.
also note 79 supra.
115 See proposed Section 11.6(a)(i)(D). To the
extent that Full CAT NMS Plan Requirements is
achieved at some later date, the Participants will
only be entitled to collect a portion of the amount
of the Post-Amendment Industry Member Fees
established or implemented for Period 4. See
proposed Section 11.6(a)(iii); see also Part II.B.2.
infra for additional discussion regarding the
conditions attached to Post-Amendment Industry
Member Fee collection.
116 Because the provisions of proposed Section
11.6 are meant to incentivize full CAT
implementation, under the proposal, these
provisions will not apply once Full Implementation
of CAT NMS Plan Requirements is achieved.
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114 See
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Implementation of CAT NMS Plan
Requirements.
The creation of a unique Customer-ID
under the CAT NMS Plan, is critical to
achieving the full regulatory benefit of
the CAT.117 In the Commission’s
experience, it is now common for
individuals and entities to trade through
multiple broker-dealer accounts and for
individuals engaged in wrongdoing to
execute trades through multiple brokerdealers. A Customer-ID will be the key
that ties all of the trading by one
Customer together and as such, will
facilitate the ability of regulators to
identify all the orders and actions
attributable to a specific Customer
regardless of where that Customer
routes orders or executes trades—a
linkage which does not exist now.
Moreover, currently available audit
trail data does not directly identify the
customer associated with trading
activity, so regulators conducting
market surveillance must undertake
multiple steps to request additional
information after identifying suspect
trades in order to link those trades with
specific individuals. The inclusion of
Customer-IDs in the CAT, at Full
Implementation of CAT NMS Plan
Requirements, would therefore
significantly improve the capabilities of
regulators because the CAT will be able
to connect suspicious trading activity
directly to a particular Customer
through the Customer-ID. In addition,
the Customer-ID will also enable a
regulator to surveil the trading activity
of market participants in both equity
and options markets by Customer-ID,
and thus a Customer-ID will improve
regulators’ efficiency in conducting
cross-market and cross-product
surveillance, which could in turn
reduce violative behavior and protect
investors from harm.
Accordingly, the Commission believes
that it is important to require the
Participants to demonstrate that the
Participants have developed, tested, and
fully implemented functionality that
efficiently permits the Commission and
other regulators to access Customer-IDs,
along with other Customer and Account
information.
In addition to providing this integral
customer information, achievement of
Full Implementation of CAT NMS
Requirements would also mean that the
Participants have created an audit trail
system that provides reasonably
accurate, reliable and useful
information. Full Implementation of
CAT NMS Requirements mandates that
the CAT produce data at the initial Error
117 See, e.g., Rule 613 Adopting Release, supra
note 2, at 45756.
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Rate specified by the CAT NMS Plan,118
as well as functionality that would
efficiently permit the Participants and
the Commission to analyze the full
lifecycle of an order, including any
subsequent allocation, across the
national market system. These
requirements are designed to help
facilitate the implementation of the CAT
functions in a manner that enables the
Commission and other regulators to
conduct the improved market
surveillance envisioned by the
Commission when it adopted Rule
613—the ultimate goal of this project.
Furthermore, the Commission
preliminarily believes that it is
appropriate to require the Participants
to achieve Full Implementation of CAT
NMS Plan Requirements by December
30, 2022 in order to recover the full
amount of any Post-Amendment
Industry Member Fees. This deadline is
consistent with the Participants’ most
recent projections, which indicate that
the Participants intend to achieve full
CAT implementation by July 2022.119 In
fact, the Commission’s target deadline of
December 30, 2022 gives the
Participants an additional five months
to achieve Full Implementation of CAT
NMS Plan Requirements. Accordingly,
the Commission preliminarily believes
that the proposed target deadline of
December 30, 2022 for Full
Implementation of CAT NMS Plan
Requirements is both reasonable and
feasible.
2. Collection of Post Amendment
Industry Member Fees
As noted above, the Commission is
proposing that the Participants will be
entitled to collect the full amount 120 of
any Post-Amendment Industry Member
Fees related to the achievement of the
Financial Accountability Milestones
described above so long as they meet
specified dates, which dates are
consistent with the timelines most
recently published by the
Participants.121 If the Participants do
118 See CAT NMS Plan, supra note 4, at Section
6.5(d)(i). See also note 103 supra.
119 See, e.g., note 96 supra.
120 ‘‘Full amount’’ in this context does not mean
that the Participants may collect all of their PostAmendment Expenses from Industry Members.
Rather, pursuant to the provisions of Article XI of
the CAT NMS Plan, the Participants may recover an
appropriate portion of these fees from Industry
Members. Specifically, to recover any PostAmendment Expenses from Industry Members, the
Participants must file with the Commission
proposed rule changes under Section 19(b) of the
Act, setting for their proposed allocation and
justifying why the proposed allocation is consistent
with the Act. The Commission would then review
the proposed rule changes for consistency with the
Exchange Act and the CAT NMS Plan.
121 See proposed Section 11.6(a)(i).
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not meet the specified date for the
achievement of Initial Industry Member
Core Equity Reporting, proposed
Section 11.6(a)(ii) will provide that the
Participants’ recovery of PostAmendment Industry Member Fees will
be reduced according to the following
schedule:
• By 25% if the Participants miss the
deadline set forth in proposed Section
11.6(a)(i)(A) by less than 60 days;
• By 50% if the Participants miss the
deadline set forth in proposed Section
11.6(a)(i)(A) by 60 days or more, but less
than 120 days;
• By 75% if the Participants miss the
deadline set forth in proposed Section
11.6(a)(i)(A) by 120 days or more, but
less than 180 days;
• By 100% if the Participants miss
the deadline set forth in proposed
Section 11.6(a)(i)(A) by 180 days or
more.
If the Participants do not meet the
specified dates for the achievement of
Full Implementation of Core Equity
Reporting Requirements, Full
Availability and Regulatory Utilization
of Transactional Database Functionality,
or Full Implementation of CAT NMS
Plan Requirements, proposed Section
11.6(a)(iii) will provide that the
Participants’ recovery of PostAmendment Industry Member Fees will
be reduced according to the following
schedule:
• By 25% if the Participants miss the
deadline set forth in proposed Section
11.6(a)(i) by less than 90 days;
• By 50% if the Participants miss the
deadline set forth in proposed Section
11.6(a)(i) by 90 days or more, but less
than 180 days;
• By 75% if the Participants miss the
deadline set forth in proposed Section
11.6(a)(i) by 180 days or more, but less
than 270 days; and
• By 100% if the Participants miss
the deadline set forth in proposed
Section 11.6(a)(i) by 270 days or more.
Proposed Section 11.6(a)(iv) provides
that the Participants will only be
entitled to collect Post-Amendment
Industry Member Fees for Period 1,
Period 2, Period 3, or Period 4 at the end
of each respective Period.
The Commission preliminarily
believes these conditions on CAT
funding are appropriate. It has been
almost three years since the
Commission approved the CAT NMS
Plan, but insufficient progress has been
made towards the implementation of
CAT, and the Participants have
repeatedly missed deadlines set forth by
the CAT NMS Plan. The Commission
preliminarily believes that the proposed
rules will provide accountability to
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facilitate implementation of the CAT in
an expeditious and efficient manner,
and according to a schedule that is
consistent with the most recent
timelines published by the
Participants.122
As explained above, the Commission
has identified four meaningful Financial
Accountability Milestones and paired
those Financial Accountability
Milestones with reasonable and feasible
target deadlines set approximately eight
months to one year apart. The
Participants will be able to recover the
full amount of any Post-Amendment
Industry Member Fees if the
Participants achieve the Financial
Accountability Milestones identified in
the proposed rule amendment by the
specified dates. However, the
Commission preliminarily believes that
it is appropriate to impose financial
accountability on the Participants by
incrementally reducing the amount of
CAT funding that Participants may
recover from Industry Members,
according to the schedules set forth
above.
Fee recovery for most of the Financial
Accountability Milestones—Full
Implementation of Core Equity
Reporting Requirements, Full
Availability and Regulatory Utilization
of Transactional Database Functionality,
and Full Implementation of CAT NMS
Plan Requirements—will be governed
by a fee schedule that gradually reduces
the amount of recovery that the
Participants are entitled to by 25% for
each quarter by which the Participants
miss the target deadline. The
Commission preliminarily believes this
structure will appropriately balance the
need to keep Participants on a firm
implementation schedule with the need
to incentivize the Participants to
continue their progress towards
implementation even if the target
deadlines identified in the proposed
amendment are missed. As discussed
above,123 the Commission believes that
the target deadlines identified for these
three milestones are reasonable and
feasible, because these deadlines are
consistent with recent timelines
provided by the Participants. The
Commission therefore does not believe
that it is necessary to allow for a grace
period before reducing the Participants’
recovery. However, by providing a full
quarter before each subsequent, and
additional, reduction to fee recovery,
the proposed schedule gives the
Participants an ample amount of time to
achieve each milestone before further
48471
reductions are imposed. Moreover, the
Commission believes that the proposed
amount of the reduction—25% per
quarter—is appropriate, because it is
sufficiently large to incentivize prompt
implementation, but not so large as to be
unnecessarily punitive.
A slightly different schedule is
proposed for Initial Industry Member
Core Equity Reporting. For that
milestone, the proposal would reduce
the initial recovery by 25% if the
Participants miss the proposed deadline
by less than 60 days and by an
additional 25% for every additional 60
days by which the Participants miss the
proposed deadline. While the
Commission is imposing the same 25%
fee reduction in this instance, the
proposed fee recovery schedule for
Initial Industry Member Core Equity
Reporting is tighter than the schedule
for the other three Financial
Accountability Milestones. The
Commission preliminarily believes that
this is an appropriate schedule because
this Financial Accountability Milestone
should be the easiest for the Participants
to achieve. Industry Members have
developed relevant experience in
reporting equities transaction data to
OATS, and the Participants have made
significant progress towards
development of the necessary technical
specifications, suggesting that the
Participants remain on track with their
own projections. In addition, the
Commission believes it is critically
important that the Participants remain
on schedule to achieve the first
Financial Accountability Milestone, in
order to minimize the possibility that
the deadlines for subsequent Financial
Accountability Milestones will be
missed.124 For those reasons, the
Commission believes the fee recovery
schedule for Initial Industry Member
Core Equity Reporting is appropriate.
The Commission preliminarily
believes that the incremental approach
followed by both fee recovery
schedules, which provide the
Participants with a considerable amount
of recovery unless the Participants miss
the target deadline by a considerable
amount of time, will also promote
implementation of the CAT in
accordance with the deadlines outlined
by this proposed amendment. The
sooner the Participants achieve each
Financial Accountability Milestone, the
sooner the Participants will be able to
begin recovering any related PostAmendment Industry Member Fees.125
124 See,
122 See
Part II.B.1. for more discussion of the
deadlines established by the proposed amendments.
123 See Part II.B.1.b.–d. supra.
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e.g., Part IV.E.1.
e.g., proposed Section 11.6(a)(iv)
(providing that the Participants may only collect
125 See,
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Moreover, so long as the Participants
complete each particular Financial
Accountability Milestone substantially
before the target deadline for the next
Financial Accountability Milestone
arrives, the Participants should be able
to recover a portion of their fees, costs,
and expenses from Industry Members,
subject to the Exchange Act and the
provisions of the CAT NMS Plan.
Although failing to meet one target
deadline might make it more difficult to
comply with the next target deadline,
the proposed amendment does not
preclude the possibility that the
Participants may be entitled to some
measure of recovery going forward.126
The Commission preliminarily believes
that the Participants will continue to
make progress towards full CAT
implementation even if one target
deadline is missed because they still
will have the opportunity to recover
fees, costs, and expenses from Industry
Members, albeit a smaller portion of
those fees, costs, and expenses.127
As noted above, the Commission must
review fee filings submitted by the
Participants pursuant to Section 19(b) of
the Exchange Act to implement fees to
recover the costs and expenses incurred
by the Participants in connection with
the development, implementation, and
operation of the CAT.128 These filings
must specify the percentage of the costs
and expenses that will be allocated to
the Participants on the one hand and the
Industry Members on the other hand, as
well as explain how costs and expenses
will be allocated within each group.
Each Participant must also demonstrate,
relevant Post-Amendment Industry Member Fees at
the end of Period 1, 2, 3 and/or 4).
126 For example, suppose the Participants missed
the deadline for Initial Industry Member Core
Equity Reporting by 180 days or more and were
therefore not entitled to any recovery for Period 1.
In this scenario, the Participants might still be able
to meet the deadline for the next Financial
Accountability Milestone, Full Implementation of
Core Equity Reporting Requirements, or achieve
that Financial Accountability Milestone within 270
days of the proposed deadline, thus entitling them
to partial recovery under the proposed amendment.
As another example, suppose the Participants did
not achieve Full Implementation of Core Equity
Reporting Requirements until January 1, 2021, but
were able to meet the target deadline for the next
Financial Accountability Milestone—Full
Availability and Regulatory Utilization of
Transactional Database Functionality. Because the
Participants did not achieve Full Implementation of
Core Equity Reporting Requirements on schedule,
but were less than 90 days late, the Participants
would be entitled to collect 75% of the PostAmendment Industry Member Fees established for
Period 2 upon achievement of Full Implementation
of Core Equity Reporting Requirements and the full
amount of Post-Amendment Industry Member Fees
for Period 3 upon achievement of Full Availability
and Regulatory Utilization of Transactional
Database Functionality.
127 See, e.g., note 191 infra.
128 See notes 66–68 supra.
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under Sections 6(b)(4) and 15A(b)(5),
that such fee filings provide for the
equitable allocation of reasonable dues,
fees, and other charges among its
members and other persons using its
facilities.129 In light of the continued
delays to CAT implementation, the
Commission preliminarily believes that
it is appropriate, at this time, to set forth
the circumstances under which the full
recovery of fees, costs, and expenses
from Industry Members would not be
reasonable under Sections 6(b)(4) or
15A(b)(5) of the Exchange Act or
reasonably related to the Participants’
self-regulatory obligations under the
CAT NMS Plan.130 The Commission
preliminarily believes that it would not
be a reasonable exercise of the
Participants’ funding authority under
the CAT NMS Plan to fully recover fees,
costs, and expenses from Industry
Members if the Participants miss the
target deadlines specified in the
proposed amendment, because any
delays by the Participants could
increase uncertainty for and,
potentially, impose additional costs on
Industry Members.131 In addition, the
proposed amendments will increase
transparency for Industry Members by
setting forth the circumstances under
which the full recovery of fees, costs,
and expenses from Industry Members
would not be reasonable.
3. Identification of Post-Amendment
Expenses in Submissions to the
Commission
Under proposed Section 11.6(b), all
CAT NMS Plan amendments submitted
by the Operating Committee to the
Commission pursuant to Rule
608(b)(3)(i),132 and all filings submitted
by the Participants to the Commission
under Section 19(b) of the Exchange
Act,133 to establish or implement PostAmendment Industry Member Fees
pursuant to Article XI of the CAT NMS
Plan, must clearly indicate whether
such fees are related to PostAmendment Expenses incurred during
Period 1, Period 2, Period 3, or Period
4. Requiring the Participants to specify
whether any proposed fees are related to
Post-Amendment Expenses, and the
Period to which they are related, will
help the Commission to determine
whether it must consider the provisions
of proposed Section 11.6 in evaluating
the proposed fees.
The Commission requests comment
on these proposed financial
129 See
note 68 supra.
notes 72–73 and associated text supra.
131 See, e.g., Section IV.B. infra.
132 17 CFR 242.608(b)(3)(i).
133 15 U.S.C. 78s(b).
130 See
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accountability provisions. To the extent
possible, please provide specific data,
analyses, or studies for support. The
Commission particularly solicits
comment on the following issues:
13. Is it appropriate for the
Commission to apply the financial
accountability provisions of proposed
Section 11.6 to Post-Amendment
Expenses? Why or why not? Should the
financial accountability provisions of
proposed Section 11.6 be applied to
fees, costs, or expenses incurred by the
Company in connection with the
development, implementation, and
operation of the CAT, or to some other
set of fees, costs, or expenses? Why or
why not? Would it be appropriate to
limit Section 11.6 to apply only to fees,
costs, or expenses incurred by the
Company in connection with the
development or implementation of the
CAT? Why or why not? Should the
Commission further define what it
means to ‘‘incur’’ an expense? If so,
how? Can the current definition of
‘‘incurred’’ in the proposing release be
used to avoid the application of
proposed Section 11.6? If so, please
explain and describe how the
Commission should address this.
14. Is it appropriate for the
Commission to tie CAT funding to the
achievement of Financial
Accountability Milestones? Why or why
not? Please explain your response.
15. With respect to Period 1:
a. Is the proposed Financial
Accountability Milestone of Initial
Industry Member Core Equity Reporting
appropriate? Why or why not? What
other milestone should be used to end
Period 1? Why?
b. Is the definition of Initial Industry
Member Core Equity Reporting
appropriate? Why or why not? Please
explain your response.
i. Should the definition of Initial
Industry Member Core Equity Reporting
be amended to include additional types
of reporting or data? Should it be
amended to remove some of the
reporting or data requirements currently
identified? Why or why not? Please
explain your response.
ii. If the definition is amended,
should the target deadline for Period 1
be amended? Why or why not? Please
explain your response.
c. Is the target deadline of April 30,
2020 appropriate? Why or why not?
What alternative deadline would be
more appropriate? Why? Please explain
your response.
16. With respect to Period 2:
a. Is the proposed Financial
Accountability Milestone of Full
Implementation of Core Equity
Reporting Requirements appropriate?
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Why or why not? What other milestone
should be used to end Period 2? Why?
Please explain your response.
b. Is the definition of Full
Implementation of Core Equity
Reporting Requirements appropriate?
Why or why not? Please explain your
response.
i. Should the definition of Full
Implementation of Core Equity
Reporting Requirements be amended to
include other kinds of Industry Member
reporting or linkages? If so, which
additional kinds of Industry Member
reporting or linkages should be included
and why? Please explain your response.
ii. Should the definition of Full
Implementation of Core Equity
Reporting Requirements be amended to
reduce or strike the reporting linkages
requirement? If reduced, how should
the requirements be reduced? Why?
Please explain your response.
iii. Should the definition of Full
Implementation of Core Equity
Reporting Requirements be amended to
require a less stringent Error Rate? If so,
what should the Error Rate be and why?
Please explain your response.
iv. Should the definition of Full
Implementation of Core Equity
Reporting Requirements amend the
requirement that the query tool
functionality required by Section
6.10(c)(i)(A) and Appendix D, Sections
8.1.1–8.1.3 and Section 8.2.1
incorporates Industry Member equities
data or the requirement that the query
tool functionality is available to the
Participants and the Commission? How
should the requirement be amended?
Why? Please explain your response.
v. If the definition is amended, should
the target deadline for Period 2 be
amended? Why or why not? Please
explain your response.
c. Is the start date for Period 2
appropriate? Why or why not? Please
explain your response.
d. Is the target deadline of December
31, 2020 appropriate? Why or why not?
What alternative deadline would be
more appropriate? Why? Please explain
your response.
17. With respect to Period 3:
a. Is the proposed Financial
Accountability Milestone of Full
Availability and Regulatory Utilization
of Transactional Database Functionality
appropriate? Why or why not? What
other milestone should be used to end
Period 3? Why? Please explain your
response.
b. Is the definition of Full Availability
and Regulatory Utilization of
Transactional Database Functionality
appropriate? Why or why not? Please
explain your response.
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i. Should the definition of Full
Availability and Regulatory Utilization
of Transactional Database Functionality
be amended to require that the
Commission must have approved a
filing from FINRA to retire OATS, as
well as any filings from the Participants
to remove OATS-related provisions
from their rules, or to remove the
requirement that OATS reporting is no
longer required for new orders? Why or
why not? Please explain your response.
ii. Should the definition of Full
Implementation of Core Equity
Reporting Requirements be amended to
include other kinds of Industry Member
reporting or linkages? If so, which
additional kinds of Industry Member
reporting or linkages should be included
and why? Please explain your response.
iii. Should the definition of Full
Availability and Regulatory Utilization
of Transactional Database Functionality
be amended to require a less stringent
Error Rate? If so, what should the Error
Rate be and why? Please explain your
response. Should the Commission
require the Participants to demonstrate
that Error Rates are stable? If so, how
would Participants do that? If the
Participants are in compliance with
Appendix C, Section 3 of the CAT NMS
Plan, would that sufficient? How long
should the Error Rate remain below the
specified threshold in order to be
considered ‘‘stable’’?
iv. Should the Commission amend the
requirement that the query tool
functionality required by Section
6.10(c)(i)(A) and Appendix D, Sections
8.1.1–8.1.3, Section 8.2.1, and Section
8.5 incorporates the data required by
conditions (b) and (c) or the requirement
that the query tool functionality is
available to the Participants and the
Commission? How should the
requirement be amended? Why? Please
explain your response.
v. Should the Commission amend the
requirement that the requirements of
Section 6.10(a) are met? How should the
requirement be amended? Why? Please
explain your response.
vi. If the definition is amended,
should the target deadline for Period 3
be amended? Why or why not? Please
explain your response.
c. Is the start date for Period 3
appropriate? Why or why not? Please
explain your response.
d. Is the target deadline of December
31, 2020 appropriate? Why or why not?
What alternative deadline would be
more appropriate? Why? Please explain
your response.
e. Are there any conditions that the
Commission should consider in
evaluating whether OATS can be
retired? Please explain your response.
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18. With respect to Period 4:
a. Is the proposed Financial
Accountability Milestone of Full
Implementation of CAT NMS Plan
Requirements appropriate? Why or why
not? What other milestone should be
used to end Period 4? Why? Please
explain your response.
b. Is the definition of Full
Implementation of CAT NMS Plan
Requirements appropriate? Why or why
not? Please explain your response.
i. Is additional detail needed to
describe the obligations of the
Participants under Rule 613 and the
CAT NMS Plan? If so, why, and what
language would sufficiently describe
these obligations? Please explain your
response.
ii. If the definition is amended,
should the target deadline for Period 4
be amended? Why or why not? Please
explain your response.
c. Is the start date for Period 4
appropriate? Why or why not? Please
explain your response.
d. Is the target deadline of December
30, 2022 appropriate? Why or why not?
What alternative deadline would be
more appropriate? Why? Please explain
your response.
19. Are the selected Financial
Accountability Milestones appropriate?
If not, what other Financial
Accountability Milestones should be
included?
20. Is it appropriate for the
Commission to permit the Participants
to submit updated, interim or
addendum Quarterly Progress Reports
for completed Financial Accountability
Milestones? Why or why not? What
information should be required in these
interim or addendum Quarterly Progress
Reports so that the Commission can rely
on such reports? Should the Participants
only be able to submit interim or
addendum Quarterly Progress Reports
in connection with certain Financial
Accountability Milestones? If so, which
ones? Please explain your response.
21. Is it appropriate to end the
application of proposed Section 11.6
once Full Implementation of CAT NMS
Requirements has been achieved? Why
or why not? Please explain your
response.
22. Should the Commission establish
more than 4 Periods and/or use more
than 4 Financial Accountability
Milestones? If so, how many Periods
should the Commission establish? What
should the other Financial
Accountability Milestones be? Why?
Please explain your response.
23. Should the Commission establish
fewer than 4 Periods and/or use fewer
Financial Accountability Milestones? If
so, how many Periods should the
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Commission establish? What milestones
should be removed, or how should the
existing milestones be edited? Please
explain your response.
24. Is it appropriate for the
Commission to incrementally reduce the
amount of Post-Amendment Industry
Member Fees that the Participants may
recover if they miss the target deadlines
specified in Period 1, Period 2, Period
3, or Period 4? Why or why not? Would
a different percentage of recovery be
more appropriate if target deadlines are
missed? If so, what percentage and on
what schedule? Why? Is it appropriate
for the Commission to use different
recovery schedules for Period 1 and for
Periods 2–4? Why or why not? Should
a different recovery schedule be used for
Period 1? If so, how should the recovery
schedule be amended? Why? Please
explain your response.
25. Is it appropriate that the
Participants may only collect PostAmendment Industry Member Fees at
the end of Period 1, Period 2, Period 3,
or Period 4? Why or why not? If not, at
what other point(s) should the
Participants be able to collect these fees,
and how would the Commission
determine whether and how the
provisions of Section 11.6 apply? Please
explain your response.
26. Do commenters believe that the
proposed incentives will motivate the
Participants to implement the CAT in an
expeditious and efficient manner? Why
or why not? Would an alternative
methodology be more effective? If so,
please describe this methodology and
explain why it would be more effective.
27. Is it appropriate for the
Commission to require the Operating
Committee or the Participants to clearly
label any CAT NMS Plan amendments
or fee filings submitted to establish or
implement Post-Amendment Industry
Member Fees to indicate whether such
fees are related to Post-Amendment
Expenses incurred during Period 1,
Period 2, Period 3, or Period 4? Why or
why not? If not, how would the
Commission determine whether and
how the provisions of Section 11.6
apply? Please explain your response.
28. Should the Commission require
the Participants to provide an
independent audit of the fees, costs, and
expenses incurred from the effective
date of this proposed amendment? Why
or why not?
III. Paperwork Reduction Act
Certain provisions of the proposed
rule contain ‘‘collection of information
requirements’’ within the meaning of
the Paperwork Reduction Act of 1995
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(‘‘PRA’’).134 The Commission is
submitting these collections of
information to the Office of
Management and Budget (‘‘OMB’’) for
review in accordance with 44 U.S.C.
3507(d) and 5 CFR 1320.11.135 An
agency may not conduct or sponsor, and
a person is not required to respond to,
a collection of information unless the
agency displays a currently valid
control number.136 The title of the new
collection of information is ‘‘CAT NMS
Plan Reports.’’
A. Summary of Collection of
Information
The proposed amendment would
require two new categories of
information collection: (1) The
Implementation Plan and (2) the
Quarterly Progress Reports.137 These
categories are described more fully
below.
1. Implementation Plan
Proposed Section 6.6(c)(i) would
require the Participants, within 30
calendar days following the effective
date of this amendment, to file with the
Commission and make publicly
available on a website a complete
Implementation Plan that includes the
Participants’ timeline for achieving
Implementation Milestones setting forth
how and when the Participants will
facilitate the achievement of Full
Implementation of CAT NMS Plan
Requirements. Under proposed Section
6.6(c)(iii), the Operating Committee
shall be required to submit the
Implementation Plan to the CEO,
President, or an equivalently situated
senior officer of each Participant. A
Supermajority Vote of the Operating
Committee shall then be required to
approve the Implementation Report.
However, if the Implementation Plan is
134 44
U.S.C. 3501 et seq.
U.S.C. 3507; 5 CFR 1320.11.
136 5 CFR 1320.11(l).
137 The proposed amendment also requires the
Participants to include certain information in
certain CAT NMS Plan amendments submitted by
the Operating Committee to the Commission
pursuant to Rule 608(b)(3) and all filings submitted
by the Participants to the Commission under
Section 19(b) of the Exchange Act to establish or
implement Post-Amendment Industry Member
Fees. However, the Commission does not expect the
baseline number of CAT NMS Plan amendments or
Section 19(b) filings, or the burdens associated with
these submissions, to increase as a result of the
proposed amendment. The Commission therefore
believes that these burdens are already accounted
for in the Paperwork Reduction Act Information
Collection submissions for Form 19b–4 and Rule
11Aa3–2. See OMB Control No. 3235–0045 (Aug.
19, 2016), 81 FR 57946 (Aug. 24, 2016) (Request to
OMB for Extension of Rule 19b–4 and Form 19b–
4 PRA); OMB Control No. 3235–0500 (December 22,
2004), 70 FR 929 (January 5, 2005) (Proposed
Collection for Rule 11Aa3–2 and Request for
Comment).
135 44
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approved only by a Supermajority Vote
of the Operating Committee, and not by
a unanimous vote of the Operating
Committee, each Participant whose
Operating Committee member did not
vote to approve the Implementation
Plan shall separately file with the
Commission and make publicly
available on a website a statement
identifying itself and explaining why
the member did not vote to approve the
Implementation Plan.
2. Quarterly Progress Reports
Proposed Section 6.6(c)(ii) would
further require the Participants, within
15 business days after the end of each
calendar quarter, to file with the
Commission and make publicly
available on a website a complete
Report that provides a detailed
description of the progress made by the
Participants towards each of the
Implementation Milestones. The
Participants must provide specified
information regarding Implementation
Milestones that have been completed,
Implementation Milestones that are in
progress, and Implementation
Milestones that have not yet been
initiated, such as updated information
on currently targeted completion dates
and descriptions of the current status of
the Implementation Milestone, any
adjustments to the targeted completion
date, and supporting information
demonstrating the current level of
completion. Under proposed Section
6.6(c)(iii), the Operating Committee
shall be required to submit each
Quarterly Progress Report to the CEO,
President, or an equivalently situated
senior officer of each Participant. A
Supermajority Vote of the Operating
Committee shall be required to approve
each Quarterly Progress Report.
However, if a Quarterly Progress Report
is approved only by a Supermajority
Vote of the Operating Committee, and
not by a unanimous vote of the
Operating Committee, each Participant
whose Operating Committee member
did not vote to approve that Quarterly
Progress Report shall separately file
with the Commission and make publicly
available on a website a statement
identifying itself and explaining why
the member did not vote to approve the
Report.
B. Proposed Use of Information
1. Implementation Plan
The Commission believes that the
publication of the proposed
Implementation Plan will make
available critical information to the
Commission, other regulators, and
market participants regarding the
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intended goals and deadlines of the
Participants. Access to this information
will help the Commission and market
participants to monitor the progress of
CAT implementation, thereby reducing
uncertainty surrounding this process.
The Commission also anticipates that
requiring the Participants to make
public target dates submitted to senior
management of each Participant and
approved by a Supermajority Vote of the
Operating Committee in the
Implementation Plan will increase the
Participants’ accountability to their
intended timeline. In addition, the
Commission believes that requiring any
Participants whose Operating
Committee members do not vote to
approve the Implementation Plan to
disclose the basis for that decision may
aid the Commission and the public to
better monitor the progress of CAT
implementation, because such an
explanation may reveal critical
information regarding whether currently
targeted completion dates are realistic,
whether milestones are being or have
been completed in accordance with the
requirements of the CAT NMS Plan,
and/or whether potential risks or delays
may impede the progress of CAT
implementation.
2. Quarterly Progress Reports
The Commission believes that the
publication of the proposed Quarterly
Progress Reports will make available
critical information to the Commission,
other regulators, and market
participants regarding the intended
goals and deadlines of the Participants.
Access to this information will help the
Commission and market participants to
monitor the progress of CAT
implementation. The Commission also
anticipates that requiring the
Participants to make public their
accomplishments in the Quarterly
Progress Reports will keep the
Participants accountable to their
intended timeline. Finally, the
Commission expects that the provision
of updated quarterly information in a
Report, submitted to senior management
Implementation Plan ................................................................................................................
Quarterly Progress Reports .....................................................................................................
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1. Implementation Plan
The Commission preliminarily
believes that each Participant will incur,
on average, a one-time burden of
approximately 57.2 hours to confer with
other Participants, to draft an
Implementation Plan, and to vote as to
whether to approve the Implementation
Plan, as required by proposed Section
6.6(c)(iii). In the CAT NMS Plan
Approval Order, the Commission noted
that the Participants had estimated that
approximately 20 full-time employees
took approximately 30 months to
develop the CAT NMS Plan, including
‘‘staff time contributed by each
Participant to, among other things,
determine the technological
requirements for the Central Repository,
develop the RFP, evaluate Bids
received, design and collect the data
necessary to evaluate costs and other
economic impacts, meet with Industry
Members to solicit feedback, and
complete the CAT NMS Plan submitted
to the Commission for
consideration.’’ 138 The Commission
then used this information to estimate
that the development of the CAT NMS
138 See CAT NMS Plan Approval Order, supra
note 4, at n.3285.
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of each Participant and approved by a
Supermajority Vote of the Operating
Committee, regarding the Participants’
progress towards CAT implementation,
as well as any explanatory statements by
Participants whose Operating
Committee members do not vote to
approve the Report, may reduce
uncertainty regarding CAT’s
implementation deadlines and flag any
concerns regarding the implementation
process for the Commission and market
participants.
C. Respondents
The respondents to all collections of
information would be the Participants.
D. Total Initial and Annual Reporting
and Recordkeeping Burdens
The estimated burdens associated
with the proposed amendments are
described fully below, but the below
table briefly summarizes the relevant
burdens set forth in this Proposing
Release.
Annual ongoing burden
per participant
(burden hours/external
costs)
Category
Plan would require, in aggregate, 14,407
burden hours for 12 months.139
This estimate, based on information
provided by the Participants about the
burdens they actually incurred in
developing a related project, reflects the
best data available to the Commission in
estimating the number of initial burden
hours required to develop the
Implementation Plan. The Commission
notes that developing the CAT NMS
Plan was a far more complex project
than the development of the
Implementation Plan and that the
burdens incurred in developing the CAT
NMS Plan may be different in nature
than the costs that the Participants
would incur in developing the
Implementation Plan. In this instance,
for example, the Participants will only
have 30 calendar days from the effective
date of this amendment to prepare the
Implementation Plan, and the
Participants have already created a
Master Plan that contains much of the
information required by proposed
Section 6.6(c)(i). In addition, the
Commission believes that the
Participants should already have
gathered much of the information
139 See
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N/A
307.2/$34,782.60
One-time burden
per participant
(burden hours/external
costs)
76.8/$8,695.65
N/A
needed to create the Implementation
Plan.140 For these reasons, the
Commission preliminarily believes that
the estimated burden for preparing the
Implementation Plan should be onetwelfth the amount of the burden
estimated for the development of the
CAT NMS Plan,141 or, on average, 52.2
initial, one-time burden hours for each
Participant.142
In addition, the Commission estimates
that it will take each Participant
approximately 10 hours, on average, for
140 See,
e.g., note 53 supra.
the proposed amendment gives the
Participants approximately one month to prepare
and publish the Implementation Plan, the
Commission has preliminarily used an estimate that
mirrors the one-month burden that was incurred by
the Participants in developing the CAT NMS Plan.
142 14,407 CAT NMS Plan burden hours / 12
months = 1,200.6 burden hours for all Participants.
1,200.6 aggregate burden hours / 23 Participants =
52.2 burden hours per Participant for the
Implementation Plan. The Commission
preliminarily estimates that each Participant will
spend, on average, 52.2 internal burden hours =
(Attorney at 7 hours) + (Systems Analyst at 22.6
hours) + (Compliance Manager at 22.6 hours). As
discussed further in Section IV.C., all estimates in
this section represent an average; the Commission
expects that some Participants may incur greater
costs and some lesser costs due to variances in
economies of scale for Participants who share a
common corporate parent. See note 217 infra.
141 Because
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its member of the Operating Committee
to ensure that the Operating Committee
submits the Implementation Plan to the
CEO, President, or equivalently situated
senior officer of each Participant, for
each Participant to review the
information contained in the
Implementation Plan and for senior
management consultations as needed,
and to vote on approving the
Implementation Plan.143 The
Commission expects each member of
the Operating Committee to be familiar
with the process of CAT
implementation, which should ease the
task of determining whether to vote in
favor of the Implementation Plan.
Accordingly, the Commission estimates
that each Participant will incur, on
average, a one-time burden of 62.2 hours
to prepare the Implementation Plan and
to vote as to whether to approve it,144
for a one-time aggregate burden of
approximately 1,430.6 hours.145
If the Implementation Plan is
approved only by a Supermajority Vote,
and not by a unanimous vote, the
proposed amendments require each
Participant whose Operating Committee
member did not vote to approve the
Implementation Plan to separately file
with the Commission and make
available on a public website an
explanatory statement identifying itself
and explaining why it did not vote to
approve the Implementation Plan.146
Because there are currently 23
Participants, an Implementation Plan
would need to be approved by at least
16 members of the Operating Committee
to satisfy the Supermajority Vote
provisions of the CAT NMS Plan.147 At
143 For the purposes of the Paperwork Reduction
Act, the Commission is assuming that the member
of the Operating Committee is a Chief Regulatory
Officer or a Chief Compliance Officer and will
spend 5 hours on these tasks. However, the
Commission notes that this task could be performed
by any person designated by the Participant to serve
as its representative on the Operating Committee.
See Section 4.2(a) of the CAT NMS Plan. In
addition, the Commission estimates that senior
management who receive the Implementation Plan
from the Operating Committee will spend 5 hours
in consultations, including with their member of
the Operating Committee regarding the
Implementation Plan. Because one individual may
serve as the representative for multiple affiliated
Participants, the Commission expects that some
Participants may incur greater costs and some lesser
costs due to variances in economies of scale for
Participants who share a common corporate parent.
144 52.2 burden hours + 10 burden hours = 62.2
burden hours.
145 62.2 burden hours × 23 Participants = 1,430.6
burden hours.
146 For the purposes of the Paperwork Reduction
Act, the Commission is assuming that this task will
be performed by a Chief Regulatory Officer or a
Chief Compliance Officer. See note 143 supra.
147 23 Participants × 2⁄3 Participants = 15.33
Participants. Section 1.1 of the CAT NMS Plan
indicates that, ‘‘if two-thirds of all . . . members
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maximum, then, only seven Participants
would file an explanatory statement in
connection with an Implementation
Plan approved only by Supermajority
Vote.148 The Commission preliminarily
estimates that each of the seven
Participants submitting an explanatory
statement will incur, on average, an
initial, one-time burden of 15 hours to
draft such statement.149 When this
aggregate burden is averaged across all
Participants, it amounts to
approximately 4.6 hours per Participant
or 105 hours in aggregate.150
Finally, the Commission estimates
that each Participant will incur, on
average, a one-time burden of
approximately 10 hours to ensure that
the Implementation Plan, and any
explanatory statement (if applicable), is
filed with the Commission and made
publicly available on a website.151 The
Commission therefore estimates an
aggregate burden of approximately 230
hours for the Participants to publicly
post and submit to the Commission the
Implementation Plan.152
In total, therefore, the Commission
estimates that each Participant will
incur, on average, a one-time burden of
approximately 76.8 hours 153 and
approximately 1,766.4 hours in
aggregate to comply with the provisions
of the proposed amendments that relate
to the Implementation Plan.154
The Commission further estimates
that each Participant will expend
approximately $8,695.65, on average, in
external public relations, legal, and
consulting costs related to the
development of the Implementation
Plan. In the CAT NMS Plan Approval
Order, the Commission estimated, based
on information provided by the
Participants, that the Participants had
collectively spent approximately
$2,400,000 in preparation of the CAT
NMS Plan on external public relations,
authorized to cast a vote is not a whole number
then that number shall be rounded up to the nearest
whole number.’’
148 23 Participants¥16 Participants = 7
Participants.
149 The Commission bases this estimate on a fulltime Compliance Manager and the Chief Regulatory
Officer or Chief Compliance Officer each spending
7.5 hours to prepare the explanatory statement.
150 7 Participants * 15 burden hours = 105 burden
hours in aggregate. 105 burden hours / 23
Participants = 4.6 burden hours.
151 The Commission bases this estimate on a fulltime Compliance Manager and Programmer Analyst
each spending approximately 5 hours, for a
combined total of approximately 10 hours, to
prepare and publicly post the relevant documents.
152 10 burden hours per Participant × 23
Participants = 230 burden hours.
153 52.2 hours + 10 hours + 4.6 hours + 10 hours
= 76.8 burden hours.
154 76.8 hours × 23 Participants = 1,766.4 burden
hours. See Section IV.C. infra for a dollar cost
estimate of this burden.
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legal, and consulting costs.155 The
Commission preliminarily believes that
the estimated burden for the
Implementation Plan should be onetwelfth the amount estimated for the
development of the CAT NMS Plan,
because the Participants will only have
30 calendar days from the effective date
of this amendment to prepare the
Implementation Plan and because
preparation of the Implementation Plan
is a much less complex project.
Accordingly, the Commission estimates
that the Participants will expend
approximately $200,000 in aggregate,
and $8,695.65 per Participant, in
external public relations, legal, and
consulting costs related to the
preparation of the Implementation
Plan.156
2. Quarterly Progress Reports
The Commission preliminarily
believes that each Participant will incur,
on average, an ongoing quarterly burden
of approximately 62.2 hours to confer
with other Participants, to draft a
Quarterly Progress Report, to ensure that
the Operating Committee submits each
Quarterly Progress Report to the CEO,
President, or equivalently situated
senior officer of each Participant, and to
vote as to whether to approve each
Quarterly Progress Report, as required
by proposed Section 6.6(c)(iii).157 This
estimate is approximately the same as
the burden related to the development
and approval of the Implementation
Plan, because the Quarterly Progress
Reports require the Participants to
prepare a detailed description
explaining, quantifying, and voting to
approve the description of their progress
towards the Implementation Milestones
laid out in the Implementation Plan,
including the impact that any such
progress might have on the target
completion dates for Implementation
Milestones that have not yet been
achieved. The Commission believes this
estimate is appropriate because the
Participants are likely already tracking
some of the information required to be
included in the Quarterly Progress
Reports.158 Accordingly, the
Commission estimates, on average, an
155 See CAT NMS Plan Approval Order, at n.3287,
supra note 4.
156 $2,400,000 CAT NMS Plan costs / 12 months
= $200,000 for all Participants. $200,000 / 23
Participants = $8,695.65 per Participant for the
Implementation Plan.
157 As discussed further in Section IV.C., all
estimates in this section represent an average; the
Commission expects that some exchanges may
incur greater costs and some lesser costs due to
variances in economies of scale for Participants
who share a common corporate parent. See note 217
infra.
158 See, e.g., note 53 supra.
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ongoing quarterly burden of
approximately 62.2 hours for each
Participant,159 an ongoing annual
burden of approximately 248.8 hours for
each Participant,160 and an aggregate
annual burden of approximately 5,722.4
hours.161
If any Quarterly Progress Report is
approved only by a Supermajority Vote,
and not by a unanimous vote, the
proposed amendments require each
Participant whose Operating Committee
member did not vote to approve that
Quarterly Progress Report to separately
file with the Commission and make
available on a public website an
explanatory statement identifying itself
and explaining why it did not vote to
approve the Report.162 Because there are
currently 23 Participants, each
Quarterly Progress Report would need
to be approved by at least 16 members
of the Operating Committee to satisfy
the Supermajority Vote provisions of the
CAT NMS Plan.163 At maximum, then,
only seven Participants would file an
explanatory statement in connection
with a Quarterly Progress Report
approved only by Supermajority
Vote.164 The Commission preliminarily
estimates that each of the seven
Participants submitting an explanatory
statement will incur, on average, an
159 The Commission preliminarily estimates that
each Participant will spend, on average, 52.2
internal burden hours to confer with other
Participants and to compile the Quarterly Progress
Report = (Attorney at 7 hours) + (Systems Analyst
at 22.6 hours) + (Compliance Manager at 22.6
hours). In addition the Commission preliminarily
estimates, for the purposes of the Paperwork
Reduction Act, that the chief Compliance Officer or
Chief Regulatory Officer of each Participant will
spend 5 hours, on average, to submit the Quarterly
Progress Report to the CEO, President, or
equivalently situated senior officer of each
Participant, to review the information contained in
each Quarterly Progress Report and for senior
management consultations as needed, and to vote
on approving the Quarterly Progress Report. In
addition, the Commission estimates that the CEO,
President, or equivalently situated senior officer of
each Participant will spend 5 hours in
consultations, including with their member of the
Operating Committee regarding each Quarterly
Progress Report. 52.2 hours + 5 hours + 5 hours =
62.2 hours. Because one individual may serve as the
representative for multiple affiliated Participants,
the Commission expects that some Participants may
incur greater costs and some lesser costs due to
variances in economies of scale for Participants
who share a common corporate parent.
160 62.2 burden hours per Participant per
Quarterly Progress Report * 4 Quarterly Progress
Reports = 248.8 annual burden hours per
Participant for the Quarterly Progress Reports.
161 248.8 annual burden hours per Participant *
23 Participants = 5,722.4 aggregate annual burden
hours.
162 For the purposes of the Paperwork Reduction
Act, the Commission is assuming that this task will
be performed by a Chief Regulatory Officer or a
Chief Compliance Officer. See note 143 supra.
163 See note 147 supra.
164 See note 148 supra.
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ongoing burden of 15 hours to draft
such statement.165 When this aggregate
burden is averaged across all
Participants, it amounts to an ongoing
quarterly burden of approximately 4.6
hours per Participant,166 an ongoing
annual burden of approximately 18.3
hours per Participant,167 and an
aggregate annual burden of
approximately 420 hours.168
Additionally, the Commission
estimates that each Participant will
incur an ongoing quarterly burden, on
average, of approximately 10 hours to
ensure that each Quarterly Progress
Report, and any explanatory statement
(if applicable), is filed with the
Commission and made publicly
available on a website.169 The
Commission therefore estimates an
annual burden, on average, of
approximately 40 hours for each
Participant,170 and an aggregate annual
burden of 920 hours for all
Participants,171 to publicly post and
submit to the Commission the Reports.
In total, therefore, the Commission
estimates that each Participant will
incur, on average, an ongoing burden of
approximately 76.8 hours per Quarterly
Progress Report,172 for an annual
average estimated burden of 307.2
hours 173 and approximately 7,065.6
hours in aggregate.174
Similarly, the Commission estimates
that each Participant will expend, on an
ongoing basis, approximately the same
amount of external public relations,
legal, and consulting costs associated
with the Implementation Plan on each
Quarterly Progress Report. Accordingly,
the Commission estimates, on average,
an ongoing quarterly cost of
approximately $8,695.65 for each
Participant, an ongoing annual cost of
165 See
note 149 supra.
Participants * 15 burden hours = 105 burden
hours in aggregate. 105 burden hours / 23
Participants = 4.6 burden hours.
167 4.6 burden hours × 4 Quarterly Progress
Reports = 18.3 burden hours.
168 18.3 annual burden hours × 23 Participants =
420 burden hours.
169 The Commission bases this estimate on a fulltime Compliance Manager and Programmer Analyst
each spending approximately 5 hours, for a
combined total of approximately 10 hours, to
prepare and publicly post the relevant documents.
170 10 burden hours per Quarterly Progress Report
× 4 quarters = 40 annual burden hours per
Participant.
171 40 annual burden hours per Participant × 23
Participants = 920 aggregate annual burden.
172 62.2 hours + 4.6 hours + 10 hours = 76.8
burden hours.
173 76.8 hours × 4 Quarterly Progress Report =
307.2 hours.
174 307.2 hours × 23 Participants = 7,065.6 burden
hours. See Section IV.C. infra for a dollar cost
estimate of this burden.
166 7
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48477
$34,782.60 for each Participant,175 and
an aggregate annual cost of
approximately $799,999.80.176 The
Commission notes that a portion of
these costs may be recoverable from
Industry Members, if consistent with the
Exchange Act and the CAT NMS
Plan.177
E. Collection of Information Is
Mandatory
Each collection of information
discussed above would be a mandatory
collection of information.
F. Confidentiality of Responses to
Collection of Information
Neither the Implementation Plan nor
the Quarterly Progress Reports would be
confidential. Rather, each would be
publicly posted by the Participants on a
website.
G. Retention Period for Recordkeeping
Requirements
National securities exchanges and
national securities associations are
required to retain records and
information pursuant to Rule 17a–1
under the Exchange Act.178
H. Request for Comments
Pursuant to 44 U.S.C. 3506(c)(2)(B),
the Commission solicits comments to:
29. Evaluate whether the proposed
collections of information are necessary
for the proper performance of the
functions of the agency, including
whether the information shall have
practical utility;
30. Evaluate the accuracy of our
estimates of the burden of the proposed
collection of information;
31. Determine whether there are ways
to enhance the quality, utility, and
clarity of the information to be
collected; and
32. Evaluate whether there are ways
to minimize the burden of collection of
information on those who are to
respond, including through the use of
automated collection techniques or
other forms of information technology.
Persons submitting comments on the
collection of information requirements
should direct them to the Office of
Management and Budget, Attention:
Desk Officer for the Securities and
Exchange Commission, Office of
Information and Regulatory Affairs,
Washington, DC 20503, and should also
175 $8,695.65 per Participant per Quarterly
Progress Report * 4 Quarterly Progress Reports =
$34,782.60 per Participant per year for the
Quarterly Progress Reports.
176 $34,782.60 per Participant * 23 Participants =
$799,999.80 aggregate annual cost.
177 See, e.g., Article XI of the CAT NMS Plan.
178 17 CFR 240.17a–1.
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send a copy of their comments to
Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090, with
reference to File Number 4–698.
Requests for materials submitted to
OMB by the Commission with regard to
this collection of information should be
in writing, with reference to File
Number 4–698 and be submitted to the
Securities and Exchange Commission,
Office of FOIA/PA Services, 100 F Street
NE, Washington, DC 20549–2736. As
OMB is required to make a decision
concerning the collection of information
between 30 and 60 days after
publication, a comment to OMB is best
assured of having its full effect if OMB
receives it within 30 days of
publication.
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IV. Economic Analysis
Section 3(f) of the Exchange Act
requires the Commission, whenever it
engages in rulemaking and is required to
consider or determine whether an action
is necessary or appropriate in the public
interest, to consider, in addition to the
protection of investors, whether the
action would promote efficiency,
competition, and capital formation.179
In addition, Section 23(a)(2) of the
Exchange Act requires the Commission,
when making rules under the Exchange
Act, to consider the impact such rules
would have on competition.180
Exchange Act Section 23(a)(2) prohibits
the Commission from adopting any rule
that would impose a burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Exchange Act. The
discussion below addresses the likely
economic effects of the proposed rule,
including the likely effect of the
proposed rule on efficiency,
competition, and capital formation.
As discussed above, since the
adoption of Rule 613 in 2012, CAT
implementation has experienced
recurrent delays.181 These
implementation delays postpone the
benefits of the CAT NMS Plan to
investors 182 and may result in
additional costs to Industry Members.183
In the Notice, the Commission
discussed how the governance structure
of the CAT NMS Plan could affect the
costs and benefits of the CAT NMS Plan
and noted that the Commission retains
the ability to modify the CAT NMS
179 15
U.S.C. 78c(f).
U.S.C. 78w(a)(2).
181 See Part I supra.
182 See CAT NMS Plan Approval Order, supra
note 4, at Section V.E.
183 See Part IV.A. infra.
180 15
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Plan.184 The CAT NMS Plan does not
require the Participants to provide
transparency to industry or investors
regarding implementation, nor does it
create financial accountability for the
Participants to complete the
implementation process. The
Commission preliminarily believes that
modifying the CAT NMS Plan to require
operational transparency and provide
financial accountability for meeting
implementation milestones will impose
more structure on the process and is
appropriate to achieve timely
completion of the CAT. The proposed
amendments would: (1) Provide more
accountability and transparency by
requiring the Operating Committee to
approve by Supermajority Vote and file
with the Commission and publish on a
public website certain information,
including the Implementation Plan as
well as quarterly reports detailing
progress made toward achieving the
Implementation Milestones set forth in
the Implementation Plan and (2)
introduce financial accountability to the
CAT NMS Plan by requiring the
Participants to meet four critical CAT
implementation milestones—the
Financial Accountability Milestones—
by certain dates in order to collect the
full amount of any related PostAmendment Industry Member Fees
established by the Operating Committee
or implemented by the Participants.185
The proposed amendments would
increase operational transparency by
requiring Participants to publish a
complete CAT implementation plan,
and publish a complete progress report
quarterly.186 Further, the proposed
amendments require approval by a
Supermajority Vote of the Operating
Committee for both the implementation
plan and the quarterly progress
reports.187 These operational
transparency provisions of the proposed
amendments should provide Industry
Members with more certainty
surrounding the implementation
timeline of CAT, reducing associated
and unnecessary implementation
costs.188
The proposed amendments also
establish Financial Accountability
Milestones and Reduced Fee Recovery
Rates (‘‘RFRRs’’) that take effect and
184 See Securities Exchange Act Release No.
77724 (April 27, 2016), 81 FR 30614 (May 17, 2016)
(File No. 4–698) (‘‘Notice’’), at Section IV.E.3.d.1.
185 See Part II supra.
186 See Part II.A. supra.
187 See Part IV.B, infra for further discussion of
this approval requirement.
188 The Commission preliminarily believes that
uncertainty in the CAT NMS Plan implementation
timeline may potentially increase Industry Member
implementation costs. See Part IV.B, infra for
further discussion.
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increase in magnitude in response to
delays in meeting certain Financial
Accountability Milestones.189 Thus, the
proposed amendments would shift some
costs from Industry Members to
Participants if the Participants fail to
meet certain Financial Accountability
Milestones.190 The Commission
preliminarily believes this cost shifting
would offset any Industry Member costs
imposed by delays in implementation.
The Commission further believes that
the RFRRs incentivize the Participants
to implement the CAT NMS Plan
expeditiously and efficiently, which
would result in investors realizing the
benefits of the CAT NMS Plan sooner.
If the Participants miss the deadline for
Initial Industry Member Core Equity
Reporting by more than 180 days, or the
deadlines for the other three Financial
Accountability Milestones by more than
270 days, the structure of the RFRRs
would not allow them to recover
expenses incurred during the Period.
The Commission acknowledges that
after 270 days or 180 days, as
applicable, the amendments would no
longer directly incentivize the
Participants, because the 0% recovery
rate cannot be further reduced by
continued delays. However, the
Participants would continue to incur
and be solely responsible for the
operating costs of the Central
Repository, and could not share any
ongoing operational costs incurred
during the Period with Industry
Members.191 Participants would only be
189 The Plan allows Participants to recover a
percentage of certain CAT costs from Industry
Members. The Plan anticipates that the Participants
will submit a fee filing that establishes what
percentage of CAT expenses will be passed on to
Industry Members, and how CAT expenses will be
shared among Participants and among Industry
Members. Because no CAT fee filing has been
approved, the proportion of CAT costs that will be
borne by Industry Members is unknown. The
magnitude of the incentives from RFRRs ultimately
depends on the proportion of fees that Participants
are permitted to recover from Industry Members.
In the event that RFRRs are triggered, the
Commission proposes to reduce the amount of fees
that the Participants are allowed to recover from
Industry Members according to the fee schedule
described in Part II.B.2. supra.
190 Although some Industry Members provide
advice to the Participants through the actions of the
CAT Advisory Committee, they do not have votes
on the CAT Operating Committee and thus cannot
initiate or control actions taken by the Operating
Committee that might facilitate expeditious and
efficient implementation of the Plan. Furthermore,
in later stages of CAT implementation, in the event
that Industry Members’ actions might delay
implementation of the Plan, the Participants have
regulatory authority over Industry Members and can
use that authority to address failures by Industry
Members to comply with reporting requirements
under the Plan.
191 The Participants’ Central Repository costs
consist of both implementation costs and operating
costs, as discussed below; see note 227 infra. If
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allowed to partially recover from
Industry Members those expenses
incurred after the Period ended, which
could only be achieved by meeting the
applicable Financial Accountability
Milestones. Furthermore, to the extent
that Financial Accountability
Milestones are inherently sequential,
Participants would continue to be
incentivized to complete the current
Period by achieving the Financial
Accountability Milestones to avoid
triggering RFRRs in the subsequent
Period. Consequently, although
incentives would be diminished, the
Participants would continue to be
incentivized to complete the Period by
meeting the Financial Accountability
Milestones.
Wherever possible, the Commission
has quantified the likely economic
effects of the amendments, including
the direct costs to the Participants.
However, some of the costs, benefits,
and other economic effects we discuss
are inherently difficult to quantify,
including the benefits of accelerating
the realization of the improvements to
investor protection that are expected to
result from the implementation of the
CAT, the benefits of transparency to
industry members and the public, and
the potential impact on competition
among exchanges. Additionally, the
Commission preliminarily believes costs
caused by uncertainty in the timeline
for CAT implementation and retirement
of duplicative reporting systems may
vary significantly across Industry
Members because of the diversity of
their approaches to regulatory data
reporting. Therefore, much of our
discussion is qualitative in nature. Our
inability to quantify certain costs,
benefits, and effects does not imply that
such costs, benefits, or effects are less
significant. We request that commenters
provide relevant data and information to
assist us in analyzing the economic
consequences of the proposed
amendments.
Participants missed a Financial Accountability
Milestone by 270 days and triggered a 0% RFRR,
none of the expenses the Participants incurred
during the Period could be recovered from Industry
Members. However, the Participants would
continue to incur operating costs for the Central
Repository, and the magnitude of those operating
costs during the period would be a function of the
duration of the Period. To minimize the financial
impact of the RFRRs, the Participants would
continue to be incentivized to meet the Financial
Accountability Milestones and end the Period, so
that they would no longer be solely responsible for
the operating costs of the Central Repository and
could again, potentially, resume sharing these costs
with Industry Members.
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A. Baseline
1. Transparency of CAT Implementation
Status
Industry Members obtain information
about the implementation status of the
CAT NMS Plan through several
mechanisms.192 These include
information gleaned from participation
in the CAT Advisory Committee;
information provided on websites
operated by the CAT Operating
Committee; presentations to industry
sponsored by the CAT Operating
Committee; and information presented
at meetings of the Industry Technical
Specifications Working Group.
A few representatives of Industry
Members are privy to information
through their participation on the CAT
Advisory Committee, but this
information is not widely available to
industry. These advisory committee
members ‘‘have the right to attend
meetings of the Operating Committee or
any Subcommittee, to receive
information concerning the operation of
the Central Repository,’’ subject to
certain limitations outlined in the CAT
NMS Plan.193 Further, ‘‘Members of the
Advisory Committee shall receive the
same information concerning the
operation of the Central Repository as
the Operating Committee; provided,
however, that the Operating Committee
may withhold information it reasonably
determines requires confidential
treatment. Any information received by
members of the Advisory Committee in
furtherance of the performance of their
functions pursuant to this Agreement
shall remain confidential unless
otherwise specified by the Operating
Committee.’’ 194 The Commission
preliminarily believes that Industry
Members of the CAT Advisory
Committee may be provided with
significant information regarding the
status of implementation, but given the
confidential treatment required by the
CAT NMS Plan, the Industry Members
on the Advisory Committee are not free
to share it with other Industry Members.
Consequently, the Commission
preliminarily believes that most
Industry Members obtain little
information about CAT implementation
through this mechanism.
192 The Plan requires that the Chief Compliance
Officer shall appropriately document objective
milestones to assess progress toward the
implementation of the Plan, but has no requirement
that this information be disseminated to industry or
the Commission. See CAT NMS Plan, supra note 4,
at Section 6.7(b).
193 See CAT NMS Plan, supra note 4, at Section
4.13.
194 See CAT NMS Plan Approval Order, supra
note 4, at Section VI.D.1.a, note 3243.
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48479
In addition, the Operating Committee
provides a website with information on
the CAT NMS Plan, but there is no
requirement in the CAT NMS Plan to
keep it current.195 The website provides
access to the current CAT NMS Plan,
current technical specifications, an
archive of information presented at past
industry events, and other information
about the CAT of interest to industry.
Furthermore, the Operating
Committee provides occasional updates
to industry on the state of
implementation. These updates are
documented on the CAT NMS Plan
website. These updates include the
April 3, 2019, Industry Outreach
presentation in which the Operating
Committee presented a revised
implementation timeline for Industry
Member reporting with deadlines that
extend even further beyond those in the
CAT NMS Plan.196 Subsequent to this
presentation, the CAT NMS Plan
website added a ‘‘Timeline’’ section.
The CAT NMS Plan, however, has no
requirement that this be updated.
Another source of information about
CAT implementation available to the
industry is the Industry Technical
Specifications Working Group. This
working group, which makes
recommendations on Industry Memberspecific implementation issues, is
comprised of members of the Advisory
Committee and additional industry
organization representatives, with
subject matter experts from the industry
invited to lead or facilitate discussion of
a particular issue. This working group is
not bound by confidentiality
agreements, so some information
discussed in the working group is
shared with members of the industry,
primarily through outreach efforts by
industry associations.
2. Status of Implementation
As discussed previously, there have
been repeated delays to implementation
and it remains uncertain when CAT will
be fully implemented.197 Although the
Participants have not yet published a
timeline detailing when full
functionality of Participant reporting
would be completed by the new plan
processor, in a April 2019 Industry
Outreach presentation, the Operating
Committee presented a revised
implementation timeline for Industry
Member reporting with deadlines that
extend even further beyond those in the
CAT NMS Plan. The revised deadline
195 See https://www.catnmsplan.com/.
The public can also glean information about Plan
implementation from this website.
196 See note 47 supra.
197 See Part I supra for a detailed discussion of
Plan implementation status.
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for Industry Member reporting to the
CAT would require the reporting by
Industry Members of equities data by
April 2020 and simple options data by
May 2020.198 These delays to
implementation of the CAT NMS Plan
delay the time at which investors will
realize the significant benefits of the
CAT contemplated in the CAT NMS
Plan Approval Order.199 Specifically,
delays in the implementation of the
CAT have delayed improvements in
regulatory activities such as market
analysis and reconstruction,
surveillance, and investigations, leading
to delays in increased investor
protection.200
In addition, the Commission
preliminarily believes that the multiple
missed deadlines in the CAT NMS Plan
has led to uncertainty for Industry
Members surrounding the timeline of
CAT implementation.201 In the CAT
NMS Plan Approval Order, the
Commission discussed the complexities
of, and diversity of approaches to,
Industry Member regulatory data
reporting,202 and the costs that Industry
Members face in implementing CAT
reporting.203 The Commission
understands that for many Industry
Members, significant changes to
regulatory data reporting systems
require planning for the allocation of
financial, technological, and human
resources. The Commission lacks
specific information on the status of
Industry Member CAT reporting
implementation efforts, but recognizes
the possibility that some Industry
Members, particularly those that selfreport regulatory data, may already be
incurring costs due to this uncertainty,
as discussed further below.204
198 See
note 47 supra.
CAT NMS Plan Approval Order, supra
note 4, at Section V.E.
200 See id. The Approval Order noted that, by
providing regulators with more complete, accurate,
accessible, and timely trade and order data, the
CAT would improve regulatory activities such as
market analysis and reconstruction, surveillance,
and investigations, leading to increased investor
protection.
201 As discussed in the CAT NMS Plan Approval
Order, many Industry Members rely on service
bureaus to report their regulatory data. These
service bureaus face the same uncertainty that is
described here for Industry Members. Some but not
all service bureaus are Industry Members. See CAT
NMS Plan Approval Order, supra note 4, at Section
V.F.1.c.(2).
202 See id.
203 See id. at Section V.F.2.
204 In the case of the majority of Industry
Members that rely on service providers for their
regulatory data reporting, those service providers
face significant CAT implementation costs and
similar uncertainty as large self-reporting Industry
Members, and any additional costs the service
providers face in implementing CAT reporting due
to this uncertainty are likely to be passed on to their
Industry Member customers.
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199 See
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Therefore, the Commission recognizes
that it is possible that Industry Members
may be incurring additional costs,
beyond those anticipated due to the
delay.205 Finally, the Commission
believes that any Industry Members that
have begun implementation activities
are likely incurring costs for tracking
and planning for CAT implementation
and notes that the length of the
implementation period has extended
longer than anticipated. This may
increase costs to Industry Members.
B. Benefits
The Commission preliminarily
believes the proposed amendments offer
two primary benefits. First, because the
amendments include financial
accountability provisions that may
cause the CAT to be implemented more
expeditiously and efficiently, investors
could realize the benefits of the CAT
sooner than they would be realized
without the proposed amendments.
Second, the Commission preliminarily
believes that Industry Members would
have more certainty surrounding the
implementation timeline of CAT, and
the timeline for retirement of OATS,206
reducing possible associated and
unnecessary implementation and
maintenance costs.207
The amendment’s financial
accountability provisions may cause the
CAT to be implemented more
expeditiously and efficiently, which
could allow investors to realize the
benefits of the CAT sooner than they
would be realized without the proposed
amendments. While the Commission
continues to believe that
implementation of CAT will allow the
Participants to improve their regulatory
activities to the benefit of investors,208
the Commission also notes that
implementation of the proposed
205 See
Part IV.B, infra.
Commission continues to believe that the
period of duplicative reporting of OATS data will
be less than 2–2.5 years, but recognizes that the
multiple delays in CAT implementation has
increased uncertainty about when the duplicative
reporting period will commence and end. Neither
the Plan nor the Participants’ industry outreach
materials currently offer guidance to Industry
Members on when duplicative reporting systems
are likely to be retired. Consequently, Industry
Members cannot reasonably estimate the expected
duration of the period of duplicative reporting, or
when it might begin and/or end. In the CAT
Approval Order, duplicative reporting was
anticipated to cost Industry Members up to $1.4
billion annually between the time when Industry
Members begin to report data to the CAT and when
duplicative regulatory data reporting systems are
retired. See CAT NMS Plan Approval Order, supra
note 4, at Section V.F.2.b.
207 See Part IV.D.1. infra for discussion of impacts
on efficiency of Industry Member CAT
implementation.
208 See CAT NMS Plan Approval Order, supra
note 4, at Section V.E.2.
206 The
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amendments may accelerate the
Participants’ realization of costs relative
to the current state of development.
These include costs to build and operate
the Central Repository, report
Participant data to CAT, and to update
their regulatory surveillance to take
advantage of data available in the
Central Repository.209 Consequently, the
Commission preliminarily believes that
the Participants may have a financial
disincentive to implement CAT
expeditiously and efficiently because
delays in CAT implementation delay
realization of some of these costs, such
as costs to update their regulatory
surveillance. By amending the CAT
NMS Plan to provide RFRRs to
encourage implementation, the
Commission preliminarily believes the
Participants will be more likely to
implement CAT expeditiously and
efficiently to the benefit of investors.210
As discussed in more detail in the
CAT NMS Plan Approval Order, by
providing regulators with more
complete, accurate, accessible, and
timely trade and order data, the CAT is
expected to improve regulatory
activities such as market analysis and
reconstruction, surveillance, and
investigations, leading to increased
investor protection.211 If the
Participants complete the
implementation of the CAT more
expeditiously and efficiently as a result
of the proposed amendments, these
benefits will be realized more quickly.
The Commission preliminarily
believes that the proposed amendments
should provide Industry Members with
more certainty surrounding the
implementation timeline of CAT and
the retirement schedule for OATS,
which should help reduce any
unnecessary implementation and
maintenance costs associated with this
uncertainty.212 As discussed previously,
the Commission recognizes that there is
significant uncertainty regarding the
CAT implementation timeline. Further,
based on discussions with Industry
Members and staff expertise, the
Commission preliminarily believes that
this uncertainty may be causing
Industry Members to incur costs they
would not have incurred had the CAT
been completed on its original
209 See CAT NMS Plan Approval Order, supra
note 4, at Section V.F.
210 Missing Financial Accountability Milestones
will result in Participants not being able to recoup
certain costs from Industry Members. This will
increase the costs for which Participants will
ultimately be responsible, with those costs
increasing as implementation delays persist.
211 Id. at Section V.E.
212 See Part IV.A.2. supra for discussion of
uncertainty surrounding CAT implementation
timing.
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schedule.213 As noted above, for many
Industry Members, significant changes
to regulatory data reporting systems
require planning for the allocation of
financial, technological, and human
resources, and the Commission
preliminarily believes that uncertainty
surrounding CAT implementation
timelines may be hampering Industry
Members’ ability to efficiently perform
that planning. The amendments may
result in the Participants implementing
CAT more expeditiously and efficiently
and should reduce uncertainty because
Industry Members will be aware of the
financial accountability measures that
Participants face if Financial
Accountability Milestones are missed,
and are likely to assume that the
Participants will be incentivized to meet
those milestones. Further, information
in the Implementation Plan and
Quarterly Progress Reports, and the
associated requirement for approval by
a Supermajority Vote of the Operating
Committee, combined with any
statement identifying Participants that
did not vote to approve and explaining
why the member did not vote to
approve, would provide Industry
Members with more complete and
possibly more reliable information on
implementation requirements and
timing. This may allow them to
implement CAT reporting more
efficiently, particularly if the content of
the disclosures provides sufficient
information to provide greater certainty
on implementation progress. However,
the Commission preliminarily believes
this benefit may be limited somewhat by
the fact that Participants may be
incentivized not to vote against
approval of the Implementation Plan or
Quarterly Progress Reports because
doing so would cause them to incur
costs associated with preparing, filing
with the Commission and publishing an
explanatory statement of their Operating
Committee Member’s vote.
Consequently, in the event that a
Participant is inclined to vote against
approval of the Implementation Plan or
a Quarterly Progress Report, in the
absence of enough votes to prevent
approval, the Participant may be
incentivized to vote to approve the
Implementation Plan or Quarterly
Progress Report and thus not provide an
explanatory statement that might
213 In the course of reviewing the CAT NMS Plan
and preparing the Notice, Commission staff
gathered information in conversations with
Industry Members on how Industry Members
implement changes in regulatory data reporting
requirements and what factors drive Industry
Member costs when those requirements change. See
Notice, supra Note 184, at n880.
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contain information useful to Industry
Members.
Based on staff expertise and
discussions with Industry Members,214
the Commission preliminarily believes
that potential reductions in cost due to
uncertainty could be attributed to a
number of factors. Less uncertainty
about the CAT implementation timeline
may allow Industry Members and
service bureaus to make efficient
decisions regarding when to commence
implementation activities and how to
implement in the most cost-efficient
manner. More certainty may allow
Industry Members to negotiate more
favorable contracts with vendors
because they will have more certainty
about date ranges when vendor services
would be required for CAT reporting
implementation activities. Furthermore,
as discussed in the CAT NMS Plan
Approval Order, maintaining legacy
data reporting systems like those used to
report OATS is likely to entail
allocation of technological and human
resources. If Industry Members have
more certainty regarding how long these
resources are required, they may make
more cost-efficient decisions regarding
maintaining or replacing hardware and
software used to report legacy regulatory
data. Finally, the uncertainty
surrounding the timeline of CAT
implementation may impose significant
opportunity costs on Industry Members.
Because changes to regulatory data
reporting systems can be significant IT
projects for Industry Members, Industry
Members may defer other large projects
that might require an overlapping set of
resources until the operational and
financial requirements and timing for
CAT implementation are better known.
Decreasing uncertainty may allow
Industry Members to better plan for and
proceed with other projects that may
have been deferred due to uncertainty in
the CAT implementation timeline.
The Commission recognizes that if the
Participants continue to miss deadlines
under the amendments, it would result
in more uncertainty for Industry
Members with respect to whether and
when the Participants are capable of
achieving CAT implementation,
particularly if the Participants are
unable to make progress with the
financial accountability measures. The
Commission preliminarily believes this
uncertainty is mitigated by the
increased transparency afforded by the
Quarterly Progress Reports, which
should allow Industry Members to see
progress toward meeting
Implementation Milestones.
214 See
PO 00000
Finally, the requirement that the
Implementation Plan and Quarterly
Progress Reports be submitted to the
CEO, President, or an equivalently
situated senior officer of each
Participant prior to the Operating
Committee approval vote, is intended to
promote senior management attention
and promote accountability with respect
to CAT implementation. The
Commission preliminarily believes that
this requirement may thereby facilitate
the expeditious and efficient
implementation of CAT.
C. Costs
The Commission preliminarily
believes the proposed amendments are
likely to have both direct and indirect
costs, detailed below. The Commission
preliminarily estimates that the direct
costs to the Participants from the
proposed amendments include up to
approximately $3.7 MM in ongoing
annual costs and total one-time costs of
up to approximately $932,000.215 If the
RFRRs are triggered, during a one-year
period during implementation, up to
$120MM in costs of CAT
implementation and operation could be
shifted from Industry Members to
Participants, but this would not change
total costs to industry as a whole from
the CAT NMS Plan. The Commission
expects, however, that the proposed
amendments would have additional
indirect costs. These consist of
potentially accelerated implementation
costs to Participants, Industry Members,
and Service Bureaus; possible costs
related to the potential for inefficient
acceleration of the implementation of
the CAT; and costs related to the
possible market exit of exchanges if the
RFRRs in the amendments are triggered.
These costs are likely to be passed on
to investors.
For purposes of the PRA,216 the
Commission preliminarily estimates
that the direct costs to Participants from
the proposed amendments 217 include
215 These maximum totals assume that upon each
approval vote, seven Participants incur costs to
prepare and publish statements explaining why
they did not vote to approve the document in
question. These costs are discussed further below.
216 Direct costs cited in this paragraph are
quantified from estimates in the PRA. See Part III
supra. Discussion of other direct costs follows
discussion of costs from the PRA.
217 The PRA estimates cost represent an average;
the Commission expects that some Participants will
incur greater costs, some lesser. In calculating the
costs to prepare, review, and vote on the
Implementation Plan and Quarterly Progress
Reports on a per Participant basis, the Commission
recognizes that its estimates per Participant may be
overstated to the extent that there are economies of
scale for Participants who share a common
corporate parent. Specifically, the voting
Notice, supra Note 184, at n880.
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up to approximately $3.7MM 218 in
annual costs and total one-time costs of
up to approximately $932,000.219 The
ongoing annual costs per Participant are
comprised of approximate labor costs of
up to $145,000 220 and external
representative for one Participant may serve as the
voting representative on the Operating Committee
for multiple affiliated Participants under Section
4.2(a) of the CAT NMS Plan. Once this
representative conducts the necessary background
work to vote on the Implementation Plan or a
Quarterly Progress Report, and, if applicable, for the
Participant to prepare an explanation of why this
representative did not vote to approve the
Implementation Plan or Quarterly Progress Report,
the representative would not need to duplicate all
of his or her efforts for another Participant. Thus,
the Commission believes that its estimates may be
overstated for some Participants in the sense that
one representative reviewing and voting on the
Implementation Plan or Quarterly Progress Reports
might not require 5 hours for each exchange for
which he or she is performing this task. On the
other hand, the Commission believes that its
estimates for Participants who are not affiliated
with other Participants might be understated for
some Participants because they are unable to benefit
from economies of scale. Representatives for
unaffiliated exchanges may require more than 5
hours to perform this same task. The Commission
preliminarily believes that 5 hours is a reasonable
estimate of average representative time required.
218 Assuming that each Supermajority Vote has
the minimum of 16 Participants voting to approve
each Quarterly Progress Report, total annual
ongoing maximum cost is (23 Participants ×
$119,471 per Participant + 28 explanatory
statements × $6,472.50 per statement = $2,747,838)
in labor costs plus (23 Participants × $34,800 =
$800,400) in external consulting costs = $3,729,468
in total costs. See Note 220, infra.
219 Assuming that each Supermajority Vote has
the minimum of 16 Participants voting to approve
the Implementation Plan, total one-time maximum
cost is (23 Participants × $29,868 per Participant =
$686,959) in labor costs plus (23 Participants ×
$8,700 = $200,100) in external consulting costs =
$932,367 in total costs. See Note 223, infra.
220 See Part III.D. supra. Annual labor costs per
Participant assume preparation, approval through
Supermajority Vote of the Operating Committee,
and publication of four Quarterly Progress Reports
and any accompanying statements explaining why
a Participant did not vote to approve the Quarterly
Progress Report. Preparation of each Quarterly
Progress Report requires 7 hours of Attorney labor
at $427 per hour; 22.6 hours of Systems Analyst
labor at $270 per hour; 22.6 hours of Compliance
Manager labor at $318 per hour. 4 × [($427 × 7) +
($270 × 22.6) + ($318 × 22.6)] = $65,111. Time for
the Participant’s Operating Committee Member to
prepare for and vote on the Quarterly Progress
Reports is assumed to be 5 hours at a rate of $545
per hour. 4 × ($545 × 5) = $10,900, using the hourly
rate for a Chief Compliance Officer. Publication and
filing of the Quarterly Progress Reports and any
explanatory statements of the Operating Committee
Member’s vote is assumed to require 5 hours of
Compliance Manager labor at $318 per hour and 5
hours of Programmer/Analyst labor at $220 per
hour. 4 × ($318 × 5) + ($220 × 5) = $10,760. The
Quarterly Progress Report shall be submitted to the
President, CEO or equivalently situated senior
officer of each Participant prior to the approval vote
of the Operating Committee, and any subsequent
consultation, including with their Operating
Committee member, is assumed to require five
hours of labor at $1,635 per hour. 4 × ($1,635 × 5)
= $32,700. See Note 225 infra, for discussion of this
hourly rate. Total annual costs for each Participant
are thus $65,111 + $10,900 + $10,760 + $32,700 =
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consulting costs of $35,000 221 to
prepare, approve through Supermajority
Vote of the Operating Committee,
publish, and when applicable, for each
Participant whose Operating Committee
member did not vote to approve the
Implementation Plan to separately file
with the Commission and make
available on a public website an
explanatory statement identifying itself
and explaining why it did not vote to
approve the Quarterly Progress
Report.222 The one-time costs per
Participant include up to $36,000 223 in
$119,471. If a Participant is required to prepare a
statement explaining why it did not vote to approve
a Quarterly Progress Report, preparation requires
7.5 hours of Compliance Manager Labor at $318 per
hour and 7.5 hours of Chief Compliance Officer
labor at $545 per hour. ($318 × 7.5) + ($545 × 7.5)
= $6472.5. For each Quarterly Progress Report, 23
Participants will incur costs to prepare the report,
but no more than 7 will incur costs to prepare
statements explaining why they did not vote to
approve the Quarterly Progress Report. See Part
III.D.2, supra. Consequently, there may be up to 28
such quarterly statements (4 × 7) required annually.
Thus, Quarterly Progress Report preparation,
depending on the number of explanatory statements
required, would have an annual aggregate
maximum labor cost of (23 × $119,471) + (28 ×
$6472.5) = $3,729,468 with a per Participant
average labor cost of $3,729,468 ÷ 23 = $127,351.
Hourly rates are based on hourly rates for
Attorneys, Systems Analysts, and Compliance
Managers from SIFMA’s Management &
Professional Earnings in the Securities Industry
2013, modified by Commission staff to account for
an 1800-hour work-year and inflation, and
multiplied by 5.35 to account for bonuses, firm size,
employee benefits, and overhead. Salary
information for voting representatives uses the
Chief Compliance Officer rate of from SIFMA’s
Management & Professional Earnings in the
Securities Industry 2013, modified as above to $545
per hour.
221 See Part III.D. supra. External consulting costs
assume four Quarterly Progress Reports. 4 × $8,696
= $34,784.
222 These annual costs would be incurred until
completion of the CAT Implementation Plan. See
Part III.D.2. supra.
223 See Part III.D.2. supra. Preparation and
approval through Supermajority Vote of the
Operating Committee of the Implementation Plan
requires 7 hours of Attorney labor at $427 per hour;
22.6 hours of Systems Analyst labor at $270 per
hour; 22.6 hours of Compliance Manager labor at
$318 per hour. ($427 × 7) + ($270 × 22.6) + ($318
× 22.6) = $16,278. Time for the Participant’s
Operating Committee Member to prepare for and
vote on the Implementation plan is assumed to be
5 hours at a rate of $545 per hour. ($545 × 5) =
$2,725, using the hourly rate for a Chief Compliance
Officer. Publication and filing of the
Implementation Plan and any explanatory
statement of the Operating Committee Member’s
vote is assumed to require 5 hours of Compliance
Manager labor at $318 per hour and 5 hours of
Programmer/Analyst labor at $220 per hour. ($318
× 5) + ($220 × 5) = $2,690. The Implementation Plan
shall be submitted to the President, CEO or
equivalently situated senior officer of each
Participant prior to the approval vote of the
Operating Committee, and any subsequent
consultation, including with their Operating
Committee Member, is assumed to require five
hours of labor at $1,635 per hour. ($1,635 × 5) =
$8,175. See Note 225, infra, for discussion of this
hourly rate. Total one time labor costs are $16,278
PO 00000
Frm 00026
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labor costs and $8,700 224 in external
consulting costs to prepare, approve
through Supermajority Vote of the
Operating Committee, publish, and
when applicable, for each Participant
whose Operating Committee member
did not vote to approve the
Implementation Plan to separately file
with the Commission and make
available on a public website an
explanatory statement identifying itself
and explaining why it did not vote to
approve the Implementation Plan.
The Proposed Amendments require
that both the Implementation Plan and
Quarterly Progress Reports be submitted
to the President, CEO or equivalently
situated senior officer of each
Participant prior to the approval vote by
the Operating Committee. In connection
with this requirement, the Commission
preliminarily estimates that each SRO
will incur one-time consultation costs of
$8,200 for the Implementation Plan, and
ongoing annual costs of $33,000 for
Quarterly Progress Reports until such
time as CAT is fully implemented.225
If the RFRRs are triggered, during a
one-year period during implementation,
up to $120MM in costs of CAT
implementation and operation could be
shifted from Industry Members to
Participants, but this would not change
total costs to industry as a whole from
the CAT NMS Plan.226 In the absence of
+ $2,725 + $2,690 + $8,175 = $29,868. If an
explanatory statement of the Operating Committee
Member’s vote needs to be prepared, this would
require 7.5 hours of labor by a Compliance Manager
at $318 per hour and 7.5 hours of labor by the Chief
Compliance Officer at $545 per hour. ($318 × 7.5)
+ ($545 × 7.5) = $6,473. Thus, Implementation Plan
preparation, depending on the number of
explanatory statements required, would have an
annual aggregate maximum labor cost of (23 ×
$29,868) + (7 × $6472.5) = $732,267 with a per
Participant average labor cost of $732,267 ÷ 23 =
$31,838. Aggregate totals assume 23 Participants
and 7 explanatory statements.
224 See Part III.D.2. supra.
225 The Commission estimates that the President,
CEO or equivalently situated senior officer of each
Participant will spend approximately five hours in
consultations, including with the Participant’s
Operating Committee member, and estimates this
will cause each Participant to incur labor costs of
(5 × $1635) = $8,175 for the Implementation Plan
and (4 × $8,175) = $32,700 annually for Quarterly
Progress Reports. Hourly rates are based on hourly
rates for Chief Compliance Officers from SIFMA’s
Management & Professional Earnings in the
Securities Industry 2013, modified by Commission
staff to account for an 1,800-hour work-year and
inflation, and multiplied by 5.35 to account for
bonuses, firm size, employee benefits and overhead.
Salary information for CEO/presidents of exchanges
are not generally publically available as they might
be for CEO/presidents of exchange holding groups.
The Commission estimates an hourly rate for the
President, CEO or equivalently situated senior
officer of an exchange by using the hourly rate for
a Chief Compliance Officer of $545 and multiplying
by 3 to account for the expected salary differential.
226 The Commission estimates a maximum cost
during a Period of up to one year by making certain
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an approved fee filing, the Commission
is unable to precisely estimate the
magnitude of the costs associated with
RFRRs that individual Participants
would incur under such a scenario;
however, the Commission believes
RFRR costs during any one-year period
for individual Participants are unlikely
to exceed $46.4MM for the largest
Participant and $0.4MM for the smallest
Participant, and are likely to be
significantly lower than these
maximums.227 If RFRRs are triggered,
there would be a reduction in exchange
profitability and there might be
transitory effects on exchange capital
formation because the exchanges would
face additional costs and may not be
able to invest in projects or return
profits to shareholders as they would
have otherwise.228 In the case of FINRA,
which is organized as a nonprofit
member organization, costs from RFRRs
could not be passed to FINRA’s Industry
assumptions. First, in the CAT NMS Plan Approval
Order, the Commission estimated maximum
implementation costs and annual operating costs
for the Central Repository of $65MM and $55MM
respectively; see CAT NMS Plan Approval Order,
supra note 4, at Section V.F.1.a. If the Participants
were allowed to recover 100% of those costs from
Industry Members, if milestones under these
amendments were achieved, and if all
implementation costs were incurred during a single
Period, Central Repository costs for a Period of up
to one year would likely be no higher than $65MM
+ 55MM = $120MM. In such a scenario,
Participants could incur maximum RFRR costs
during a single year of $120MM if they missed the
Financial Accountability Milestone by more than
270 days. Because the first Period’s duration is less
than one year, its maximum would be lower
because a full year’s operating costs for the Central
Repository would not be incurred.
227 Assuming equity exchanges bore 100% of
Participant fees and using widely reported equity
trading volume for February 2019, and assuming
fees were allocated by market share of equity
trading volume, the largest equity venue would
incur 38.7% × $120MM = $46.4MM and the
smallest equity venue would incur 0.3% × $120MM
= $0.4MM in RFRR costs. For an example of widely
reported equity trading volume, see the CBOE’s
compilation of equity trading volume at https://
markets.cboe.com/us/equities/market_statistics/
historical_market_volume/. The actual RFRR costs
would likely be significantly lower than these
maximums. For example, it is unlikely that 100%
of implementation costs that presumably cover
expenses from pre-implementation through the
entire implementation period would be incurred in
a single year, and the Commission preliminarily
believes that some of these costs have already been
incurred. This is a maximum single one-year RFRR
cost because the estimated Central Repository
operating cost is an annual figure. During a one-year
implementation Period, the Commission assumes
the Central Repository would incur one year of
operating costs. However, when a Financial
Accountability Milestone is missed, the Period may
exceed one year in duration and additional
operating costs would be incurred. Consequently,
the implementation Period RFRR cost incurred by
the Participants would be a function of the length
of the delay and the actual operating costs incurred
by the Plan Processor during that implementation
Period.
228 See Part IV.D.3. infra.
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Members.229 This may affect FINRA’s
ability to invest in other projects that
could promote investor protection.
The Commission preliminarily
believes that the proposed amendments
are likely to have indirect costs to some
Participants, Industry Members, and
service bureaus due to acceleration of
CAT implementation costs relative to
the current delayed timeline. In the CAT
NMS Plan Approval Order, the
Commission estimated CAT
implementation costs for Participants,
Industry Members, and service bureaus
that provide certain order handling,
connectivity, and clearing services to
Industry Members.230 These three
groups may have indirectly benefited
from implementation delays as
implementation costs were deferred,
while the benefits to investors
anticipated by the CAT NMS Plan
Approval Order have likewise been
deferred. To the extent that the
proposed amendments reduce those
delays, the unintended cost deferral to
these groups will be ended.
The Commission preliminarily
believes that the amendments could
result in an inefficiently accelerated
implementation of the CAT, which
could potentially increase overall CAT
implementation costs to Participants,
Industry Members, and ultimately to
investors.231 Because the Participants
would have financial accountability for
meeting the Financial Accountability
Milestones, the Participants might
choose to incur additional and
inefficient costs to avoid missing
deadlines because the magnitude of the
additional costs incurred to meet the
Financial Accountability Milestone
dates may be less than the magnitude of
the reduction in expenses the
Participants could recover due to the
RFRRs outlined in these
amendments.232 If the Participants do
229 All of FINRA’s members are Industry
Members, while most but not all Industry Members
are FINRA members.
230 See CAT NMS Plan Approval Order, supra
note 4, at Section V.F.1.
231 See CAT NMS Plan Approval Order, supra
note 4, at Section V.F.2.a.
232 For example, Participants might incur $50MM
in additional costs to avoid missing a Financial
Accountability Milestone date by a week and
incurring resultant RFRR costs of $30MM. Because
the $50MM cost would be partially funded by
Industry Members, incurring this expense might be
financially rational for the Participants. Such an
acceleration may be inefficient in the sense that
accelerating implementation by one week might not
provide benefits to industry and investors that
warrant an additional $50MM in investment in the
CAT. Inefficient acceleration might also result in
missed opportunities for value-added features of
CAT. For example, inefficient acceleration of
implementation might cause the Participants to
delay implementing an effective Help Desk, or to
defer improvements to the reporters’ portal.
PO 00000
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48483
not exceed Financial Accountability
Milestone dates by more than 180 or 270
days, as applicable, Industry Members
would share in funding some of those
additional costs.233 Because the
proposed amendments have provisions
that improve transparency, these effects
could be magnified to the extent that the
Participants seek to avoid missing
Implementation Milestones required in
the amendments. Furthermore,
accelerated implementation might result
in inefficient implementation decisions.
For example, Participants could deliver
less help desk functionality, reporter
portal features, or infrastructure design
so that they can avoid missing a
Financial Accountability Milestone
deadline. While these reductions in
functionality might still meet the
requirements of the CAT NMS Plan,
they might make the CAT less effective
or efficient for reporters and users of
CAT data than it would have been with
greater functionality. The costs of such
reductions in functionality may accrue
primarily to Industry Members or users
of CAT data.
The Commission preliminarily
believes that the likelihood of an
inefficiently accelerated CAT
implementation is low for two reasons.
First, the deadlines for Financial
Accountability Milestones are aligned
with the most recent timelines
published by Participants. Therefore the
Commission preliminarily believes that
the dates are feasible and thus are
unlikely to pressure the Participants to
inefficiently accelerate CAT
implementation to avoid triggering
RFRRs. Second, the financial
accountability measures in the proposed
amendments are designed in a manner
that should mitigate this risk because
RFRRs continue to increase as delays
persist, until the fee recovery rate
becomes zero. Specifically, the costs
associated with missing a deadline for a
Financial Accountability Milestone by a
short period (for example, less than 90
days) would be less than the costs
associated with missing a deadline for a
Financial Accountability Milestone by a
longer period (for example, more than
90 days). Consequently, Participants
may be less likely to inefficiently
accelerate implementation to avoid
RFRRs because the RFRRs reduce rather
than eliminate the Participants’ ability
to recoup costs from Industry Members
233 The CAT NMS Plan Approval Order
contemplated a fee structure in which costs of
developing, implementing, and operating the
Central Repository would be shared between
Participants and Industry Members. See CAT NMS
Plan Approval Order, supra note 4, at Section
IV.F.1.
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for delays of less than 270 (or in the case
of Period 1,180) days.
The Commission also notes that
additional indirect costs may accrue to
market participants due to exchanges
leaving the market for trading services,
which could result from the impact of
the amendments on competition, as
discussed further below.234 Market
participants face certain fixed costs in
establishing connectivity to exchanges
and adapting their trading strategies for
changes in available trading venues.
Consequently, competitor exits from the
market for exchange services may be
costly to other market participants who
must update trading strategies to reflect
what trading venues are available. The
Commission believes it is unlikely that
such costs will accrue because the
failure of exchanges due to the financial
accountability provisions in the
proposed amendments is unlikely. The
Commission preliminarily believes that
exchanges that might require additional
capital to meet their financial
obligations under the CAT NMS Plan
could acquire it through financial
markets because exchanges are generally
profitable and investors in exchanges
are likely to view costs from RFRRs as
one-time events that do not affect longterm exchange profitability. Also, in
many cases, exchanges are part of a
larger exchange group that could
provide additional capital if needed.235
Finally, while triggering the RFRRs in
these amendments would cause
Participants to accrue additional costs
because they could not recover these
costs from Industry Members, there
would be a corresponding financial
benefit to Industry Members because
they would not have to pay those costs.
Consequently, the cost transfers from
the RFRRs in the proposed amendments
do not impose a net cost on industry as
a whole. The Participants could attempt
to shift the costs to Industry Members
through changes to their broader fee
structures. However, changes to the
Participants’ fees would need to be filed
with the Commission.
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D. Impact on Efficiency, Competition,
and Capital Formation
1. Efficiency
The Commission preliminarily
believes that the proposed amendments
will have an effect on efficiency. In
general, the Commission preliminarily
believes that the proposed amendments
will improve the efficiency of Plan
implementation activities by Industry
234 See
Part IV.D.2. infra.
Part IV.D.2. infra for a more in depth
discussion of the competitive effects of the
proposed amendments.
235 See
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Members. However, the Commission
preliminarily believes that the financial
accountability provisions could also
potentially reduce the efficiency of Plan
implementation by the Participants by
incentivizing them to delay certain
later-period implementation activities if
Participants believe there is a significant
risk of missing a Financial
Accountability Milestone date in an
earlier period.
The Commission preliminarily
believes that the proposed amendments
will improve the efficiency of Industry
Member implementation of CAT
reporting. As discussed previously,
uncertainty and delays in CAT
implementation and OATS retirement
could have costs for broker-dealers.236
The financial accountability and public
disclosures required by the proposed
amendments should provide more
certainty to Industry Members regarding
when they will be required to begin
reporting data to CAT and when they
will be able to retire duplicative
reporting systems. This should aid
Industry Members in efficiently
developing and implementing their CAT
data reporting systems, planning the
maintenance and eventual retirement of
duplicative systems, and allowing them
to make adjustments to those plans as
needed.
However, the Commission
preliminarily believes that the financial
accountability provisions could
incentivize Participants to inefficiently
delay certain later-period
implementation activities if Participants
believe there is a significant risk of
missing a Financial Accountability
Milestone date in an earlier Period. To
illustrate, during Period 1, in the
absence of the proposed amendments, it
may be efficient for Participants to
invest in activities that enable meeting
Financial Accountability Milestones in
Periods 2, 3, and 4. If, however,
Participants believe that they likely will
not meet the Period 1 Financial
Accountability Milestone and will thus
likely trigger an RFRR during Period 1,
Participants may defer investing in
Period 2, 3, and 4 activities during
Period 1 because investments that
enable meeting later Period Financial
Accountability Milestones would be
subject to a Period 1 RFRR because the
expenses were incurred during Period 1.
Furthermore, some Participants might
delay financial investment in some
implementation activities if additional
costs from triggering RFRRs provoke
financial distress. The Commission
preliminarily believes this outcome is
unlikely because the Commission
236 See
PO 00000
Part IV.A.1. supra.
Frm 00028
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preliminarily believes that exchanges
that might require additional capital to
meet their financial obligations under
the CAT NMS Plan could acquire it
through financial markets. Exchanges
are generally profitable, and investors in
exchanges are likely to view costs from
RFRRs as one-time events that do not
affect long-term exchange
profitability.237 The Commission
preliminarily believes that the structure
of the financial accountability
provisions may attenuate the risk of
inefficient delay of financial investment
in later Period Financial Accountability
Milestones to some degree because
delaying such investment is likely to
increase the risk of triggering an RFRR
in a later Period. This would make it
relatively more costly to delay later
Period implementation investments
when facing potential RFRRs for those
periods.
2. Competition
a. Competitive Baseline
The Commission described the
structure of the market for trading in
NMS securities, as of that time, in the
Notice and the CAT NMS Plan Approval
Order.238 While the Commission’s
analysis of the state of competition in
the Notice is fundamentally unchanged,
the market for trading services in
options and equities currently consists
of 23 national securities exchanges, all
but one of which are Plan
Participants,239 as well as off-exchange
trading venues, including broker-dealer
internalizers, and 31 ATSs,240 which are
not Plan Participants. The exchanges are
currently controlled by 7 separate
entities; three of these operate a single
exchange.241
b. Competitive Effects
The Commission preliminarily
believes that the proposed amendments
might have competitive effects on the
237 See
Part IV.C.4. infra.
CAT NMS Plan Approval Order, supra
note 4, at Section V.G.1.
239 LTSE is not yet a Participant to the CAT NMS
Plan.
240 As of 8/26/19 there are 31 NMS Stock ATSs
operating pursuant to an initial Form ATS–N. A list
of NMS Stock ATSs, including access to initial
Form ATS–N filings that are effective, can be found
on the Commission website at https://www.sec.gov/
divisions/marketreg/form-ats-n-filings.htm.
241 Cboe Global Markets, Inc. controls BYX, BZX,
C2, EDGA, EDGX, and CBOE; Miami Internal
Holdings, Inc. controls Miami International, MIAX
Emerald, and MIAX PEARL; NASDAQ, Inc. controls
BX, GEMX, ISE, MRX, PHLX, and Nasdaq;
Intercontinental Exchange, Inc. controls NYSE,
Arca, American, Chicago, and National. The three
entities that control a single-exchange are IEX
Group which controls IEX, a consortium of brokerdealers which controls BOX, and Long Term Stock
Exchange, Inc. which controls LTSE.
238 See
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market for NMS security trading
services and the market for equity
listings. In the case that RFRRs are
triggered, one or more exchanges might
exit these markets, although the
Commission preliminarily believes this
is unlikely.242 The Commission
preliminarily believes that triggering an
RFRR could also temporarily affect
competition between exchanges and
ATSs and broker-dealer internalizers,
but does not believe the effects will be
significant.
The Commission preliminarily
believes that is it unlikely that
exchanges that are part of an exchange
group would exit the market for NMS
security trading services or equity
listings if the RFRRs in the proposed
amendments are triggered because the
larger exchange group could provide
additional capital to an exchange that
would otherwise exit the market. Such
costs are one-time events and are
unlikely to change an exchange
operator’s assessment of the long-term
economics of operating the exchange.243
However, for smaller exchanges that
are not part of a larger exchange family
that could provide additional capital,
the Commission recognizes that it is
242 A potential entrant to the market might be
marginally more likely to delay entry due to the
proposed amendments, but given that a new
entrant’s fee burden would be a function of its
market share, presumably a new entrant would
begin with a relatively low market share. The
Commission, therefore, does not preliminarily
believe that an entity considering forming an
exchange would decline to do so because of
additional uncertainty about CAT NMS Plan
financial responsibilities. Consequently, the
Commission preliminarily believes that the
proposed amendments are unlikely to have effects
on innovation by new entrants.
243 The Commission preliminarily believes that
the license to operate an exchange is a valuable
asset even when the extant exchange has low
volume because exchange families and new
entrants sometimes acquire both high and low
volume exchanges. See, e.g., https://ir.theice.com/
press/press-releases/all-categories/2018/07-182018-133237540 and https://cdn.batstrading.com/
resources/press_releases/CBOE-HoldingsAnnounces-Close-of-Acquisition-of-Bats-GlobalMarkets-FINAL-3-1-17.pdf. As long as the RFRRrelated costs incurred by an exchange are less than
the cost of registering and implementing a new
exchange from scratch, exchange families with
adequate financial resources are likely to invest
additional capital in an exchange that would
otherwise fail due to the RFRRs.
The Commission recognizes that under the
proposed amendments, exchanges do not incur
RFRR costs in isolation; if one exchange incurs
RFRR costs, all exchanges incur RFRR costs.
Consequently, an exchange family might need to
further capitalize multiple exchanges. The
Commission believes failure of entire exchange
groups is unlikely because the Commission
preliminarily believes that exchange groups that
might require additional capital to meet their
financial obligations under the Plan could acquire
it through financial markets because exchanges are
generally profitable and investors in exchanges are
likely to view costs from RFRRs as one-time events
that do not affect long-term exchange profitability.
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possible that such exchanges could be
forced to exit the market, although the
Commission believes this is unlikely to
occur. Specifically, the Commission
believes it is unlikely that exchanges
would be forced to leave the market
because the Commission preliminarily
believes that exchanges that required
additional capital to meet their financial
obligations under the CAT NMS Plan
would be able to secure it through
financial markets.
Even if an exchange were to exit, the
Commission does not believe this would
significantly impact competition in the
market for exchange trading services or
the market for equity listings because
these markets are served by multiple
competitors. Consequently, demand for
these services in the event of the exit of
a competitor is likely to be swiftly met
by existing competitors. The
Commission recognizes that small
exchanges may have unique business
models that are not currently offered by
competitors to these independent
exchanges, but the Commission
preliminarily believes a competitor
could create similar business models if
demand were adequate, and if they did
not do so, it seems likely new entrants
would do so if the exiting exchange
were otherwise profitable.
If the RFRRs are triggered, the
Commission preliminarily believes that
it could temporarily affect competition
between exchanges and ATSs and
broker-dealer internalizers. However,
the Commission preliminarily believes
that these effects would not be
significant. As discussed previously, in
the event RFRRs are triggered, up to
$120MM in costs could be shifted from
Industry Members to Participants in a
one-year Period.244 This increase in
costs to Participants could have
transient negative effects on
Participants’ ability to invest in their
exchanges.245 The corresponding cost
savings to Industry Members could have
transient positive effects on Industry
Members’ abilities to invest in their
ATSs or internalization operations,
which could include temporarily
reducing fees in order to attract order
flow. Although this may temporarily
provide ATSs and broker-dealer
internalizers with a competitive
advantage over exchanges in attracting
order flow, the Commission
preliminarily believes that these effects
will not be significant because brokerdealers make strategic decisions to
expose orders on exchanges or route
orders to ATSs or internalizers based on
other factors, such as order
244 See
245 See
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Part IV.D.3. infra.
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characteristics and temporary market
conditions, that will not be impacted by
the proposed amendments.
3. Capital Formation
The Commission preliminarily
believes the amendments will have
negligible mixed effects on capital
formation. The Commission
preliminarily believes that it is possible
the amendments’ improvements to
investor protections may allow
improvements to capital formation
anticipated in the CAT NMS Plan
Approval Order to be realized sooner
than they would be in the absence of the
proposed amendments. As discussed
previously, delays in implementation of
the CAT NMS Plan have delayed
investors’ realization of improvements
to investor protection anticipated in the
CAT NMS Plan Approval Order. By
incentivizing the Participants to
implement the CAT NMS Plan
expeditiously, the amendments may
permit investors to realize these benefits
sooner than they would otherwise.
These improvements to investor
protections may improve capital
formation.246 However, some costs of
the amendments—particularly the direct
costs—are likely to be passed on to
investors.247 Because these are not
ongoing costs, the Commission
preliminarily believes any negative
effects on capital formation will be
transitory. If RFRRs are triggered, the
exchanges could face significant costs
associated with expenses that could not
be shared with Industry Members.
These additional costs to Participants
would be offset by savings by Industry
Members. The Commission
preliminarily believes these transfers
between Participants and Industry
Members are unlikely to affect capital
formation because while the costs to
Participants might be passed on to
investors through relatively higher
prices to transact on exchanges for
broker-dealers that would then pass
these costs on to their customers, the
savings to Industry Members might be
passed on by broker-dealers to their
customers as well, so the net impact to
investors should be negligible.
If RFRRs are triggered, exchanges
could experience short-term, transitory
negative effects on exchange capital
formation because the exchanges would
246 See CAT NMS Plan Approval Order, supra
note 4, at Section V.G.1.
247 Costs associated with triggering RFRRs would
not increase the cost of the CAT, but rather
constitute a transfer between Participants and
Industry Members. The Commission preliminarily
believes these costs are unlikely to be directly
transferred to investors, but notes competitive
effects of these transfers in Part IV.D.2. supra.
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face additional costs and may not be
able to invest in projects or return
profits to shareholders that they would
otherwise. However, the Commission
preliminarily believes costs from RFRRs
would be viewed as transitory by
investors because they would end with
full CAT implementation.
Consequently, the Commission
preliminarily believes that the
amendments would not permanently
affect investors’ assessment of expected
profitability for exchanges, and thus
would not reduce this capital formation
long-term.
E. Alternatives
1. Fixed versus Relative Financial
Accountability Milestone Dates
The Commission considered an
alternative approach that would use
relative Financial Accountability
Milestone dates in a scenario when a
Financial Accountability Milestone was
not met on schedule. Under the
proposed amendments, Financial
Accountability Milestone dates are fixed
calendar dates. Under this alternative
approach, the duration of the time
period between two Financial
Accountability Milestone dates would
be static but the Financial
Accountability Milestone dates would
be relative. Thus, if a Financial
Accountability Milestone were not
achieved on schedule, the next
Financial Accountability Milestone date
would be delayed such that the duration
of Periods between Financial
Accountability Milestone dates was
unchanged.248 For example, if
sequential Financial Accountability
Milestone dates are April 30, 2020 and
December 31, 2020, achieving the first
Financial Accountability Milestone on
May 31, 2020 would automatically reset
the next Financial Accountability
Milestone date to January 31, 2021,
leaving the duration of the period
between the two dates unchanged.
The primary economic impact of this
approach relative to the proposal is that
it avoids a risk inherent in the fixed
Financial Accountability Milestone date
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248 The
alternative could be structured such that
upon the end of a Period, the next Financial
Accountability Milestone date would become the
later of the Financial Accountability Milestone date
in the amendments or the relative date from this
alternative approach. This approach would prevent
the subsequent relative Financial Accountability
Milestone date from becoming earlier in the event
that the Participants achieve a Financial
Accountability Milestone ahead of schedule. This
would avoid the problem of incentivizing the
Participants to delay Financial Accountability
Milestone achievement to avoid accelerating
Financial Accountability Milestone dates, and
would mitigate any risk Industry Members would
have from accelerating Financial Accountability
Milestone dates.
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approach of the proposal. Under the
fixed Financial Accountability
Milestone date approach, if the
Participants encounter a delay early in
the implementation process that causes
them to miss a Financial Accountability
Milestone date by a significant margin,
it may become more difficult for them
to meet future Financial Accountability
Milestone dates. Under such a scenario,
the proposed amendments may lose
some of their incentive value because
the Participants may not be able to
avoid triggering at least some of the
RFRRs after missing an early Financial
Accountability Milestone date. Under
the alternative approach with relative
Financial Accountability Milestone
dates, if the Participants miss a deadline
early in the implementation timeline
and trigger the RFRRs, they would not
necessarily find later deadlines so
difficult to meet that they lose their
economic incentive to meet the later
Financial Accountability Milestone
dates.
This alternative approach has two
significant costs relative to the proposed
amendments. First, in a case where a
significant delay arises in an early
implementation Period such that
financial RFRRs are triggered during
that Period, the Participants may be
incentivized to delay meeting the
Period-ending requirement in order to
give themselves more time to achieve
later-Period Financial Accountability
Milestones in order to decrease their
risk of triggering RFRRs in later Periods.
Such a scenario could significantly
delay the retirement of OATS, which
would be costly to Industry Members if
it extended their period of duplicative
reporting.249 Under both the proposed
amendments and in this alternative, the
structure of the financial accountability
provisions might mitigate but not
eliminate this risk because RFRRs
increase over time; consequently, if a
Financial Accountability Milestone is
missed and an RFRR is triggered,
Participants should remain incentivized
to implement in an expeditious manner
to avoid triggering a higher RFRR during
the same Period of implementation.
However, under the alternative
approach, the Financial Accountability
Milestone date for OATS retirement
could be pushed back due to missing an
earlier Financial Accountability
Milestone, which could necessitate a
longer period of costly duplicative
reporting for Industry Members.
The second likely additional cost
relative to the proposal is that the
alternative approach would make the
ultimate CAT implementation timeline
less certain than in the proposal,
because delays in early Periods would
push back implementation dates for
later Periods of implementation.
However, under the proposed approach,
missing an early-Period Financial
Accountability Milestone could also
result in delays in meeting later
Financial Accountability Milestones,
and because the potential length of
future delays would not be defined by
the structure of the proposed
amendments, they would be less
transparent to Industry Members.
However, under the proposed
amendments, realized delays would be
documented in Quarterly Progress
Reports and thus should aid Industry
Members in updating expectations on
implementation timelines.
2. Different Timelines for Onset of
RFRRs
The Commission considered
alternative approaches with different
Financial Accountability Milestone
dates. These approaches would have
certain additional benefits and costs as
compared to the proposal. For example,
earlier Financial Accountability
Milestones might accelerate the time at
which investors realize the benefits of
the CAT, but would increase the
likelihood that the implementation of
CAT would be accelerated to a degree
that is inefficient.250 Alternatively,
delaying Financial Accountability
Milestone dates would increase the time
that investors do not realize the benefits
of CAT and that Industry Members
experience uncertainty that increases
their implementation costs, but might
avoid the risk of inefficiently
accelerating the implementation of
CAT.251 The Commission further notes
that alternative milestone dates that are
not generally aligned with dates
published by or discussed with the
Participants are less likely to reflect
realistic expectations for the
Participants in implementing the
CAT.252
3. Alternate Magnitudes of RFRRs
The Commission considered
alternative approaches with different
levels of RFRRs. Under the proposed
amendments, for each period of up to 90
days by which the Participants miss
Financial Accountability Milestone
dates, they would trigger RFRRs such
that they would be allowed to recover
25% less of the CAT costs they would
otherwise recover from Industry
250 See
249 See
CAT NMS Plan Approval Order, supra
note 4, at Section V.F.2.b.
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Note 232, supra.
Part IV.C. supra.
252 See Part II.B.1. supra.
251 See
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Members. Alternative approaches could
have higher or lower marginal RFRRs.
The Commission preliminarily
believes that alternative approaches
with higher marginal RFRRs (allowing
the Participants to recover a lower share
of CAT costs from Industry Members
when RFRRs are triggered) would
potentially further incentivize the
Participants to meet Financial
Accountability Milestone deadlines, but
would also increase the risk of
inefficient acceleration of CAT
implementation.253
The Commission preliminarily
believes that alternative approaches
with lower RFRRs (allowing the
Participants to recover a higher share of
CAT costs from Industry Members when
RFRRs are triggered) would decrease the
incentives Participants have to meet
Financial Accountability Milestone
deadlines, but would reduce the risk of
inefficient acceleration of CAT
implementation.
F. Request for Comment on the
Economic Analysis
The Commission is sensitive to the
potential economic effects, including
the costs and benefits, of the proposed
amendments to the CAT NMS Plan. The
Commission has identified above
certain costs and benefits associated
with the proposal and requests
comment on all aspects of its
preliminary economic analysis. The
Commission encourages commenters to
identify, discuss, analyze, and supply
relevant data, information, or statistics
regarding any such costs or benefits. In
particular, the Commission seeks
comment on the following:
33. Do you believe the Commission’s
analysis of the potential effects of the
proposed amendments to the CAT NMS
Plan is reasonable? Why or why not?
Please explain in detail.
34. Do you believe the Commission’s
description of the state of
implementation of the CAT NMS Plan is
accurate? Why or why not? Please
explain in detail.
35. Do you believe that the multiple
delays in implementation of the CAT
NMS Plan has led to uncertainty
surrounding CAT implementation that
may be causing Industry Members to
incur costs they would not have
incurred had the CAT been completed
on its original schedule? Why or why
not? Please explain in detail.
36. The structure of the RFRRs
provides that after missing a Financial
Accountability Milestone by 270 days
(or 180 days as applicable), Participants
would not be allowed to recover any
253 See
Note 233, supra.
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implementation costs for the delayed
implementation Period. For the
remainder of the implementation
Period, Participants would continue to
incur expenses associated with the Plan
Processor’s operation of the Central
Repository, and would not be able to
share those expenses with Industry
Members. Do you believe the
Participants’ inability to share those
expenses with Industry Members will
continue to incentivize the Participants
to proceed with Plan implementation?
Why or why not? Please explain in
detail.
37. Do you agree with the
Commission’s assessment of the
transparency of Plan implementation?
Why or why not? Please explain in
detail.
38. Do you agree with the
Commission’s assessment of the status
of Plan implementation? Why or why
not? Please explain in detail.
39. The Commission requests that
commenters provide relevant data and
information to assist us in analyzing the
economic consequences of the proposed
amendments. In particular, the
Commission requests data and
information regarding the costs incurred
by Industry Members because of
uncertainty surrounding CAT
implementation.
40. Do you agree with the
Commission’s assessment of the benefits
of the proposed amendments? Why or
why not? Please explain in detail.
41. Do you believe that the proposed
amendments increase the likelihood
that OATS will be retired by December
31, 2021? Do you believe that the
amendments are likely to compress the
period of duplicative reporting by
Industry Members? Why or why not?
Please explain in detail.
42. Do you believe the proposed
amendments will decrease uncertainty
for Industry Members regarding the
timing and requirements of Plan
implementation? Why or why not?
Please explain in detail.
43. Do you believe this reduction in
uncertainty will reduce costs of Plan
Implementation by Industry Members?
Why or why not? Please explain in
detail.
44. Do the Participants have economic
disincentives to Plan implementation
that the Commission has not
recognized? What are they? Please
describe in detail.
45. Are there other economic
incentives the Commission could
propose to incentivize the Participants
to implement the CAT NMS Plan
expeditiously and efficiently? Please
describe them in detail.
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48487
46. Do you agree with the
Commission’s analysis of the direct
costs of the proposed amendments?
Why or why not?
47. Do commenters agree that
Participants’ costs related to approval of
the Implementation Plan and Quarterly
Progress Reports are likely to have
economies of scale, whereby the
representatives of Participants that are
members of exchange groups may spend
less time per exchange on this task,
while representatives of Participants
that are not part of an exchange group
may require more time to review and
vote on the Implementation Plan and/or
Quarterly Progress Reports, and prepare
and publish on each of the Participant
websites or collectively on the CAT
NMS Plan website any statements
identifying Participants that did not
vote to approve and explaining why?
Why or why not?
48. Do commenters agree with the
Commission’s estimate for hourly costs
for Operating Committee members
performing activities necessary for
approval by a Supermajority Vote under
the amendments? If not, please provide
alternate estimates if possible.
49. Do commenters agree with the
Commission’s estimate for hourly costs
associated with the President, CEO or
equivalently situated senior officer of
each Participant? If not, please provide
alternative estimates of the hourly costs
for the President, CEO or equivalently
situated senior officer of each
Participant to consult as needed with
the Participant’s Operating Committee
member.
50. Please provide estimates of the
time required for a Participant and
publish a statement identifying itself
and explaining why it did not vote to
approve the Implementation Plan or
Quarterly Report. Also, please identify
who (i.e. General Counsel, Chief
Compliance Officer or other executive)
would be involved in preparing such a
statement.
51. Please comment on the
Commission’s estimate of the maximum
cost of RFRRs to the Participants. Are
there alternative methodologies to
estimate these costs? Please describe
and provide detailed analysis if
possible.
52. Do you agree with the
Commission’s analysis of the indirect
costs of the proposed amendments?
Why or why not?
53. Are the proposed amendments
likely to cause an inefficient
acceleration as described above of Plan
implementation as described above?
Why or why not?
54. Do you believe the proposed
amendments are likely to improve the
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efficiency of Plan implementation? Why
or why not?
55. Do you believe the proposed
amendments’ incentive structure could
potentially reduce the efficiency of Plan
implementation by incentivizing
Participants to delay certain later-Period
implementation activities if Participants
believe there is a significant risk of
missing a Financial Accountability
Milestone date in an earlier Period?
Why or why not? Please describe how
in detail.
56. The Commission requests
comment on all aspects of this analysis
and, in particular, on whether the
Proposed Amendments would place a
burden on competition not necessary or
appropriate in furtherance of the
purposes of the Exchange Act, as well
as the effect of the proposal on
efficiency, competition, and capital
formation.
57. Do you agree with the
Commission’s assessment of the current
state of competition in the market for
trading services? Why or why not?
58. Do you agree with the
Commission’s assessment of the current
state of competition in the market for
NMS stock listings? Why or why not?
59. Do you believe that in the event
that RFRRs are triggered, one or more
exchanges might exit the market for
trading services? Please explain in
detail.
60. If one or more exchanges were to
exit the market for trading services,
would competition in this market
suffer? Why or why not? Are there
exchanges that might leave this market
that have business models that could
not be copied by an existing competitor
or new entrant? Would such business
models be likely to be copied by an
existing competitor or new entrant?
Why or why not? Please explain in
detail.
61. Do you believe that some
Participants might be motivated to
trigger RFRRs to financially distress
competitors? Why or why not? Please
explain in detail.
62. Do you believe the proposed
amendments will have effects on capital
formation that the Commission has not
recognized? Please explain in detail.
63. Do you agree that the proposed
amendments may improve capital
formation by accelerating the investor
protection benefits anticipated by the
CAT Approval Order? Why or why not?
64. Would an alternative approach
that used relative Financial
Accountability Milestone dates rather
than fixed Financial Accountability
Milestone dates better incentivize the
Participants to implement the CAT NMS
Plan expeditiously and efficiently? Why
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or why not? Would such an approach
have benefits or costs that the
Commission has not recognized? Please
explain in detail.
65. Are there alternative Financial
Accountability Milestone dates that the
Commission should use? What
economic benefits and costs would
those alternative dates have? Please
describe in detail.
66. The Commission requests
comment on alternative incentive
structures. Is the proposed schedule for
reducing the fee recovery levels by 25%
for each period of up to 90 days that the
Participants miss implementation
Financial Accountability Milestone
dates adequate to incentivize the
Participants to implement CAT
expeditiously and efficiently? Is there
some other RFRR level that is more
appropriate? Should the time period
between reductions in RFRR levels be
shorter or longer than 90 days? Please
explain.
Section 605(b) of the RFA states that
this requirement shall not apply ‘‘to any
proposed or final rule if the head of the
agency certifies that the rule will not, if
promulgated, have a significant
economic impact on a substantial
number of small entities.’’ 259
The proposed rule amendments
would only impose requirements on
national securities exchanges registered
with the Commission under Section 6 of
the Exchange Act and FINRA. With
respect to the national securities
exchanges, the Commission’s definition
of a small entity is an exchange that has
been exempt from the reporting
requirements of Rule 601 of Regulation
NMS, and is not affiliated with any
person (other than a natural person) that
is not a small business or small
organization.260 None of the national
securities exchanges registered under
Section 6 of the Exchange Act that
would be subject to the proposed rule
are ‘‘small entities’’ for purposes of the
V. Consideration of Impact on the
RFA. In addition, FINRA is not a ‘‘small
Economy
entity.’’ 261 For these reasons, the
proposed
rule will not apply to any
For purposes of the Small Business
Regulatory Enforcement Fairness Act of ‘‘small entities.’’ Therefore, for the
purposes of the RFA, the Commission
1996 (‘‘SBREFA’’),254 the Commission
requests comment on the potential effect certifies that the proposed rule would
not have a significant economic impact
of this proposal on the United States
on a substantial number of small
economy on an annual basis. The
entities.
Commission also requests comment on
The Commission requests comment
any potential increases in costs or prices
regarding this certification. In
for consumers or individual industries,
and any potential effect on competition, particular, the Commission solicits
investment, or innovation. Commenters comment on the following:
are requested to provide empirical data
67. Do commenters agree with the
and other factual support for their
Commission’s certification that the
views, to the extent possible.
proposed rule would not have a
significant economic impact on a
VI. Regulatory Flexibility Act
substantial number of small entities? If
Certification
not, please describe the nature of any
The Regulatory Flexibility Act
impact on small entities and provide
(‘‘RFA’’) 255 requires Federal agencies, in empirical data to illustrate the extent of
promulgating rules, to consider the
the impact.
impact of those rules on small entities.
256
VII. Statutory Authority and Text of the
Section 603(a)
of the Administrative
Proposed Amendments to the CAT NMS
Procedure Act,257 as amended by the
RFA, generally requires the Commission Plan
to undertake a regulatory flexibility
Pursuant to the Exchange Act and,
analysis of all proposed rules, or
particularly, Sections 2, 3(b), 5, 6, 11A,
proposed rule amendments, to
15, 15A, 17(a) and (b), 19, and 23(a)
determine the impact of such
thereof, 15 U.S.C. 78b, 78c(b), 78e, 78f,
rulemaking on ‘‘small entities.’’ 258
78k–1, 78o, 78o–3, 78q(a) and (b), 78s,
78w(a), and pursuant to Rule 608(a)(2)
254 Public Law 104–121, Title II, 110 Stat. 857
and (b)(2),262 the Commission proposes
(1996) (codified in various sections of 5 U.S.C., 15
U.S.C. and as a note to 5 U.S.C. 601).
255 5 U.S.C. 601 et seq.
256 5 U.S.C. 603(a).
257 5 U.S.C. 551 et seq.
258 The Commission has adopted definitions for
the term ‘‘small entity’’ for purposes of Commission
rulemaking in accordance with the RFA. Those
definitions, as relevant to this proposed rulemaking,
are set forth in 17 CFR 240.0–10. See Securities
Exchange Act Release No. 18451 (January 28, 1982),
47 FR 5215 (February 4, 1982) (File No. AS–305).
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259 5
U.S.C. 605(b).
17 CFR 240.0–10(e).
261 See 13 CFR 121.201
262 17 CFR 242.608(a)(2) and (b)(2). These
provisions enable the Commission to propose
amendments to any effective NMS Plan by
‘‘publishing the text thereof, together with a
statement of the purpose of such amendment,’’ and
providing ‘‘interested persons an opportunity to
submit written comments.’’
260 See
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to amend the CAT NMS Plan in the
manner set forth below.
48489
Additions are underlined; deletions
are [bracketed].
*
*
*
*
*
BILLING CODE 8011–01–P
ARTICLE I
DEFINITIONS
Section 1.1
Definitions. As used throughout this Agreement (including, for the avoidance of
doubt, the Exhibits, Appendices, Attachments, Recitals and Schedules identified in this
Agreement):
*
*
*
*
*
"Financial Accountability Milestone" means, as the case may be, Initial Industry Member
Core Equity Reporting, Full Implementation of Core Equity Reporting, Full Availability and
Regulatory Utilization of Transactional Database Functionality, and Full Implementation of CAT
NMS Plan Requirements.
*
*
*
*
*
"Full Implementation of CAT NMS Plan Requirements" means the point at which the
Participants have satisfied all of their obligations to build and implement the CAT, such that all
CAT system functionality required by Rule 613 and the CAT NMS Plan has been developed,
successfully tested, and fully implemented at the initial Error Rates specified by Section 6.5(d)(i)
or less, including functionality that efficiently permits the Participants and the Commission to
access all CAT Data required to be stored in the Central Repository pursuant to Section 6.5(a),
including Customer Account Information, Customer-ID, Customer Identifying Information, and
Allocation Reports, and to analyze the fulllifecycle of an order across the national market
system, from order origination through order execution or order cancellation, including any
related allocation information provided in an Allocation Report. This Financial Accountability
Milestone shall be considered complete as of the date identified in a Quarterly Progress Report
meeting the requirements of Section 6.6(c).
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"Full Avail ability and Regulatory Utilization of Transactional Database Functionality"
means the point at which: (a) reporting to the Order Audit Trail System is no longer required for
new orders: (b) Industry Member reporting for equities transactions, simple electronic options
transactions, manual options transactions, and complex options transactions, including
Allocation Reports, but excluding Customer Account Information, Customer-ill, and Customer
Identifying Information, is developed, tested, and implemented: (c) representative order linkages,
as well as intra-firm linkages, inter-firm linkages, national securities exchange linkages, and
trade reporting facilities linkages, are developed, tested, and implemented in a manner that
permits the Participants and the Commission to analyze the fulllifecycle of an order across the
national market system, from order origination through order execution or order cancellation,
including any related allocation information provided in an Allocation Report: (d) CAT Error
Rates satisfy the threshold specified by Section 6.5(d)(i); (e) the query tool functionality required
by Section 6.10(c)(i)(A) and Appendix D, Sections 8.1.1-8.1.3, Section 8.2.1, and Section 8.5
incorporates the data described in conditions (b) and (c) and is available to the Participants and to
the Commission: and (f) the requirements of Section 6.1 O(a) are met. This Financial
Accountability Milestone shall be considered complete as of the date identified in a Quarterly
Progress Report meeting the requirements of Section 6.6(c).
48490
Federal Register / Vol. 84, No. 178 / Friday, September 13, 2019 / Notices
"Full Implementation of Core Equity Reporting Requirements" means the point at which:
(a) Industry Member reporting (excluding reporting by Small Industry Members that are not
OATS reporters) for equities transactions, excluding Customer Account Information, CustomerID, and Customer Identifying Information, is developed, tested, and implemented at a 5% Error
Rate or less and with sufficient intra-firm linkage, inter-firm linkage, national securities
exchange linkage, and trade reporting facilities linkage to permit the Participants and the
Commission to analyze the fulllifecycle of an order across the national market system,
excluding linkage of representative orders, from order origination through order execution or
order cancellation; and (b) the query tool functionality required by Section 6.10(c)(i)(A) and
Appendix D, Sections 8.1.1-8.1.3 and Section 8.2.1 incorporates the Industry Member equities
transaction data described in condition (a) and is available to the Participants and to the
Commission. This Financial Accountability Milestone shall be considered complete as of the
date identified in a Quarterly Progress Report meeting the requirements of Section 6.6(c).
*
*
*
*
*
"Initial Industry Member Core Equity Reporting" means the point at which Industry
Members (excluding Small Industry Members that are not OATS reporters) have begun to report
equities transaction data, excluding Customer Account Information, Customer-ID, and Customer
Identifying Information, to the CAT. This Financial Accountability Milestone shall be
considered complete as of the date identified in a Quarterly Progress Report meeting the
requirements of Section 6.6(c).
*
*
*
*
*
ARTICLE VI
FUNCTIONS AND ACTIVITIES OF CAT SYSTEM
Section 6.1.- Section 6.5. No change.
Section 6.6.
Written Assessments, Audits and Reports.
*
(c)
*
*
*
*
Implementation Plan and Quarterly Progress Reports.
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(i)
Within 30 calendar days following the effective date of this provision, the
Participants shall file with the Commission and make publicly available on each of the
Participant websites, or collectively on the CAT NMS Plan website, a complete CAT
implementation plan that includes the Participants' timeline for achieving the objective
milestones setting forth how and when the Participants will facilitate the achievement of Full
Implementation of CAT NMS Plan Requirements (the "Implementation Plan"). The
Implementation Plan shall include:
Federal Register / Vol. 84, No. 178 / Friday, September 13, 2019 / Notices
48491
(A)
For each of the objective milestones set forth in Section C.10 of
Appendix C of this Agreement to assess progress toward implementation of the
CAT, the completion date and a description of the status; and
For each of the Financial Accountability Milestones, the
(B)
completion date and a description of the status.
If the Participants decide to complete any of the milestones identified in the Implementation Plan
by releasing functionality in a phased approach, the Implementation Plan shall describe each
phased release necessary to achieve the completion of the relevant milestone and provide
completion dates for each such release identified.
(ii)
Within 15 business days after the end of each calendar quarter,
Participants shall file with the Commission and make publicly available on each of the
Participant websites, or collectively on the CAT NMS Plan website, a complete report that
provides a detailed description of the progress made by the Participants during that calendar
quarter toward achieving each of the milestones set forth in the Implementation Plan (the
"Quarterly Progress Report"). If, subsequent to the publication of the Implementation Plan, the
Participants decide to complete any of the milestones set forth therein by releasing functionality
in a phased approach, each Quarterly Progress Report shall reflect this change by describing the
phases necessary to achieve the completion of the relevant milestone and providing the
information specified below for each phase. The first of such reports shall be filed and made
publicly available within 15 business days after the end of the calendar quarter in which the
Implementation Plan was filed and made publicly available.
(A)
For each milestone completed by the end of a given calendar
quarter, the report shall include the following: (1) the CAT implementation plan
completion date, (2) the date on which the milestone was completed, and (3) a
description of any variance from the Implementation Plan.
(C)
For each milestone that has not yet been initiated by the end of a
given calendar quarter, the report shall include the following: (1) the CAT
implementation plan completion date, (2) the currently targeted completion date,
and (3) a description of:
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(B)
For each milestone in progress at the end of a given calendar
quarter, the report shall include the following: (1) the CAT implementation plan
completion date, (2) the currently targeted completion date, and (3) a description
of:
(a)
the current status of the milestone;
(b)
any difference between the CAT implementation plan
completion date and the currently targeted completion date, including the
basis for making the adjustment and the impact of this adjustment on any
other milestone; and
(c)
any other factual indicators that demonstrate the current
level of completion with respect to the milestone.
48492
Federal Register / Vol. 84, No. 178 / Friday, September 13, 2019 / Notices
(a)
the current status of the milestone; and
(b)
any difference between the Implementation Plan
completion date and the currently targeted completion date, including the
basis for making the adjustment and the impact of this adjustment on any
other milestone.
(iii)
The Implementation Plan and each Quarterly Progress Report shall be
approved by at least a Supermajority Vote of the Operating Committee before such documents
are filed with the Commission or made publicly available on each of the Participant web sites or
collectively on the CAT NMS Plan website. However, if the Implementation Plan or any
Quarterly Progress Report is approved only by a Supermajority Vote of the Operating
Committee, and not by a unanimous vote of the Operating Committee (including, for the
avoidance of doubt, all members of the Operating Committee, whether or not present and
whether or not recused), each Participant whose Operating Committee member did not vote to
approve the Implementation Plan or Quarterly Progress Report shall separately file with the
Commission and make publicly available on each of the Participant web sites, or collectively on
the CAT NMS Plan website, a statement identifying itself and explaining why the member did
not vote to approve the Implementation Plan or Quarterly Progress Report. The Operating
Committee shall submit the Implementation Plan and Quarterly Progress Reports to the Chief
Executive Officer, President, or an equivalently situated senior officer of each Participant, prior
to being voted on by the Operating Committee.
*
*
*
*
*
ARTICLE XI
FUNDING OF THE COMPANY
Section 11.1.- Section 11.5. No change.
Section 11.6. Funding Incentives for Post-Amendment Expenses. Notwithstanding the
foregoing provisions, this Section shall apply with respect to all fees, costs, and expenses
(including legal and consulting fees, costs, and expenses) incurred by or for the Company in
connection with the development, implementation, and operation of the CAT from the effective
date of this Section until such time as Full Implementation of CAT NMS Plan Requirements has
been achieved ("Post-Amendment Expenses").
(a)
The following conditions shall apply to the collection of any fees established by
the Operating Committee or implemented by the Participants to recover a portion of PostAmendment Expenses from Industry Members ("Post-Amendment Industry Member Fees").
The Participants will be entitled to collect the full amount of:
(A) Any Post-Amendment Industry Member Fees established or
implemented to recover Post-Amendment Expenses incurred from the effective date of this
Section to the date oflnitial Industry Member Core Equity Reporting ("Period 1"), so long as
such date is no later than April 30, 2020;
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(i)
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48493
(B)
Any Post-Amendment Industry Member Fees established or
implemented to recover the Post-Amendment Expenses incurred from the date immediately
following the achievement of Initial Industry Member Core Equity Reporting to the date of Full
Implementation of Core Equity Reporting Requirements ("Period 2"), so long as such date is no
later than December 31, 2020;
(C)
Any Post-Amendment Industry Member Fees established or
implemented to recover the Post-Amendment Expenses incurred from the date immediately
following the achievement ofFull Implementation of Core Equity Reporting Requirements to the
date of Full Availability and Regulatory Utilization of Transactional Database Functionality
("Period 3"), so long as such date is no later than December 31, 2021; and
(D)
Any Post-Amendment Industry Member Fees established or
implemented to recover the Post-Amendment Expenses incurred from the date immediately
following the achievement of Full Availability and Regulatory Utilization of Transactional
Database Functionality to the date ofFull Implementation of CAT NMS Plan Requirements
("Period 4"), so long as such date is no later than December 30, 2022.
(ii)
The amount of Post-Amendment Industry Member Fees that the
Participants are entitled to collect for Period 1will be reduced according to the following
schedule if the Participants miss the deadline set forth for that Period:
(A)
By 25% if the Participants miss the deadline set forth in Section
11.6(a)(i)(A) by less than 60 days;
(B)
By 50% if the Participants miss the deadline set forth in Section
11.6(a)(i)(A) by 60 days or more, but less than 120 days;
(C)
By 75% if the Participants miss the deadline set forth in Section
11.6(a)(i)(A) by 120 days or more, but less than 180 days; and
(D)
By 100% if the Participants miss the deadline set forth in Section
11.6(a)(i) by 180 days or more.
(iii)
The amount of Post-Amendment Industry Member Fees that the
Participants are entitled to collect for each Period will be reduced according to the following
schedule if the Participants miss the deadline set forth for that Period:
(B)
By 50% if the Participants miss the deadline set forth in Section
11. 6(a)(i) by 90 days or more, but less than 180 days;
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(A)
By 25% if the Participants miss the deadline set forth in Section
11. 6(a)(i) by less than 90 days;
48494
Federal Register / Vol. 84, No. 178 / Friday, September 13, 2019 / Notices
By the Commission.
Dated: September 9, 2019.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2019–19852 Filed 9–12–19; 8:45 am]
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BILLING CODE 8011–01–C
]]>Agencies
[Federal Register Volume 84, Number 178 (Friday, September 13, 2019)]
[Notices]
[Pages 48458-48494]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-19852]
[[Page 48457]]
Vol. 84
Friday,
No. 178
September 13, 2019
Part III
Securities and Exchange Commission
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Proposed Amendments to the National Market System Plan Governing the
Consolidated Audit Trail; Notice
Federal Register / Vol. 84 , No. 178 / Friday, September 13, 2019 /
Notices
[[Page 48458]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86901; File No. S7-13-19]
RIN 3235-AM60
Proposed Amendments to the National Market System Plan Governing
the Consolidated Audit Trail
AGENCY: Securities and Exchange Commission.
ACTION: Proposed amendments to national market system plan.
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SUMMARY: The Securities and Exchange Commission (``Commission'' or
``SEC'') is proposing amendments to the National Market System Plan
Governing the Consolidated Audit Trail (``CAT NMS Plan''). The proposed
amendments impose public transparency requirements on the self-
regulatory organizations that are participants to the CAT NMS Plan
(each, a ``Participant'' and collectively, the ``Participants''). The
Participants would be required to file with the Commission and publish
a complete implementation plan for the Consolidated Audit Trail
(``CAT'') and quarterly progress reports, each of which must be
approved by a supermajority vote of the Operating Committee of CAT NMS,
LLC. The proposed amendments also establish financial accountability
provisions.
DATES: Comments should be received on or before October 28, 2019.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/proposed.shtml); or
Send an email to [email protected]. Please include
File No. S7-13-19 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File No. S7-13-19. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
internet website (https://www.sec.gov/rules/proposed.shtml). Comments
are also available for website viewing and printing in the Commission's
Public Reference Room, 100 F Street NE, Washington, DC 20549 on
official business days between the hours of 10:00 a.m. and 3:00 p.m.
All comments received will be posted without change. Persons submitting
comments are cautioned that the Commission does not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Erika Berg, Special Counsel, at (202)
551-5925; Leigh Duffy, Special Counsel, at (202) 551-5928; or Susan
Poklemba, Attorney-Advisor, at (202) 551-3360, Division of Trading and
Markets, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-7010.
SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to
the CAT NMS Plan.\1\
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\1\ See Securities Exchange Act Release No. 78318 (November 15,
2016), 81 FR 84696 (November 23, 2016), at 84943.
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Table of Contents
I. Background
II. Description of Proposed Amendments
A. Amendments To Increase Operational Transparency
B. Financial Accountability Amendments for Implementation of the
CAT
1. Financial Accountability Milestones and Target Deadlines
2. Collection of Post Amendment Industry Member Fees
3. Identification of Post-Amendment Expenses in Submissions to
the Commission
III. Paperwork Reduction Act
A. Summary of Collection of Information
1. Implementation Plan
2. Quarterly Progress Reports
B. Proposed Use of Information
1. Implementation Plan
2. Quarterly Progress Reports
C. Respondents
D. Total Initial and Annual Reporting and Recordkeeping Burdens
1. Implementation Plan
2. Quarterly Progress Reports
E. Collection of Information is Mandatory
F. Confidentiality of Responses to Collection of Information
G. Retention Period for Recordkeeping Requirements
H. Request for Comments
IV. Economic Analysis
A. Baseline
1. Transparency of CAT Implementation Status
2. Status of Implementation
B. Benefits
C. Costs
D. Impact on Efficiency, Competition, and Capital Formation
1. Efficiency
2. Competition
3. Capital Formation
E. Alternatives
1. Fixed versus Relative Financial Accountability Milestone
Dates
2. Different Timelines for Onset of RFRRs
3. Alternate Magnitudes of RFRRs
F. Request for Comment on the Economic Analysis
V. Consideration of Impact on the Economy
VI. Regulatory Flexibility Act Certification
VII. Statutory Authority and Text of the Proposed Amendments to the
CAT NMS Plan
I. Background
In July 2012, the Commission adopted Rule 613 of Regulation NMS,
which requires the national securities exchanges and national
securities associations (``self-regulatory organizations'') to jointly
develop and submit to the Commission a national market system plan to
create, implement and maintain a consolidated audit trail (``CAT'').\2\
Back then, and even today, trading data was and is inconsistent across
the self-regulatory organizations and certain market activity is
difficult to compile because it is not aggregated in one, directly
accessible consolidated audit trail system. The goal of Rule 613 was to
create a system that provides regulators with more timely access to a
sufficiently comprehensive set of trading data, enabling regulators to
more efficiently and effectively reconstruct market events, monitor
market behavior, and identify and investigate misconduct. Rule 613 thus
aims to modernize a reporting infrastructure to oversee the trading
activity generated across numerous markets in today's national market
system.
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\2\ See Securities Exchange Act Release No. 67457 (July 18,
2012), 77 FR 45722 (August 1, 2012) (``Rule 613 Adopting Release'').
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On November 15, 2016, the Commission approved the national market
system plan required by Rule 613 (``CAT NMS Plan'' or ``Plan'') that
was submitted by the self-regulatory organizations (the
``Participants'').\3\ In
[[Page 48459]]
the CAT NMS Plan,\4\ the Participants described the numerous elements
they proposed to include in the CAT, including (1) requirements for the
plan processor responsible for building, operating and maintaining the
Central Repository (``Plan Processor''),\5\ (2) requirements for the
creation and functioning of the Central Repository, (3) requirements
applicable to the reporting of CAT Data \6\ by Participants and their
members (``Industry Members''),\7\ (4) requirements relating to the
security and confidentiality of CAT Data, (5) governance principles for
CAT NMS LLC (``Company''),\8\ and (6) provisions for the establishment
of funding to pay for the operation of the CAT, including the
establishment of fees that the Participants and Industry Members will
pay.\9\
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\3\ The National Market System Plan Governing the Consolidated
Audit Trail was filed with the Commission by the Participants who
include BATS Exchange, Inc. (n/k/a Cboe BZX Exchange, Inc.), BATS-Y
Exchange, Inc. (n/k/a Cboe BYX Exchange, Inc.), BOX Options Exchange
LLC, C2 Options Exchange, Incorporated (n/k/a Cboe C2 Exchange,
Inc.), Chicago Board Options Exchange, Incorporated (n/k/a Cboe
Exchange, Inc.), Chicago Stock Exchange, Inc. (n/k/a NYSE Chicago,
Inc.), EDGA Exchange, Inc. (n/k/a Cboe EDGA Exchange, Inc.), EDGX
Exchange, Inc. (n/k/a Cboe EDGX Exchange, Inc.), Financial Industry
Regulatory Authority, Inc. (``FINRA''), International Securities
Exchange, LLC (n/k/a NASDAQ ISE, LLC), ISE Gemini, LLC (n/k/a NASDAQ
GEMX, LLC), Miami International Securities Exchange LLC, NASDAQ OMX
BX, Inc. (n/k/a NASDAQ BX, Inc.), NASDAQ OMX PHLX LLC (n/k/a NASDAQ
PHLX LLC), The NASDAQ Stock Market LLC, National Stock Exchange,
Inc. (n/k/a NYSE National, Inc.), New York Stock Exchange LLC, NYSE
MKT LLC, and NYSE Arca, Inc.
\4\ See Securities Exchange Act Release No. 78318 (November 15,
2016), 81 FR 84696, (November 23, 2016) (``CAT NMS Plan Approval
Order''). The CAT NMS Plan is Exhibit A to the CAT NMS Plan Approval
Order. See CAT NMS Plan Approval Order, at 84943-85034. In approving
the CAT NMS Plan, the Commission added ISE Mercury, LLC (n/k/a
Nasdaq MRX, LLC) and Investors Exchange LLC as Participants to the
CAT NMS Plan. See id. at 84728. On January 30, 2017 and March 1,
2019, the Commission noticed for immediate effectiveness amendments
to the Plan to add MIAX Pearl, LLC and MIAX Emerald, LLC,
respectively, as Participants. See Securities Exchange Act Release
Nos. 79898 (January 30, 2017), 82 FR 9250 (February 3, 2017), and
85230 (March 1, 2019), 84 FR 8356 (March 7, 2019). Unless otherwise
noted, capitalized terms are used as defined in Rule 613, in the CAT
NMS Plan, or in this release.
\5\ The Central Repository is the repository responsible for the
receipt, consolidation, and retention of all information reported to
the CAT. See CAT NMS Plan, supra note 4, at Section 1.1.
\6\ ``CAT Data'' is defined in the CAT NMS Plan as ``data
derived from Participant Data, Industry Member Data, SIP Data, and
such other data as the Operating Committee [of the Company] may
designate as `CAT Data' from time to time.'' See id. The Operating
Committee is the governing body of the Company. See id.
\7\ ``Industry Member'' is defined in the CAT NMS Plan as ``a
member of a national securities exchange or a member of a national
securities association.'' See id.
\8\ The CAT NMS Plan is the limited liability company agreement
of the Company, a jointly owned limited liability company formed
under Delaware state law, through which the Participants conduct the
activities of the CAT. Each Participant is a member of the Company
and jointly owns the Company on an equal basis. The Participants
submitted to the Commission a proposed amendment to the CAT NMS Plan
on August 29, 2019, which they designated as effective on filing.
With the proposed amendment, the limited liability company agreement
of a new limited liability company named Consolidated Audit Trail,
LLC would serve as the CAT NMS Plan, replacing in its entirety the
CAT NMS Plan. See Notice of Filing of Amendment to the National
Market System Governing the Consolidated Audit Trail, available at
https://catnmsplan.com/wp-content/uploads/2019/09/CAT-2.0-Plan-Amendment(as-filed-with-SEC-8.29.19)_(175663431)_(1).pdf.
\9\ See CAT NMS Plan, supra note 4, at Section 11.1. The CAT NMS
Plan notes that the Participants shall file with the Commission
under Section 19(b) of the Act any such fees on Industry Members
that the Operating Committee of the Company approves. See id. at
Section 11.1(b).
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The Participants also set forth, in the CAT NMS Plan, deadlines
related to the implementation of the CAT, including (1) the requirement
that the Participants select a Plan Processor within two months
following approval of the CAT NMS Plan,\10\ (2) the requirement that
the Participants begin recording and reporting data to the Central
Repository by November 15, 2017,\11\ and (3) the requirement that each
Participant require Industry Members and Small Industry Members \12\ to
begin reporting information to the Central Repository by November 15,
2018,\13\ and November 15, 2019, respectively.\14\
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\10\ 17 CFR 242.613(a)(3)(i). See also CAT NMS Plan, supra note
4, at Section 6.1(a). Two months following approval of the CAT NMS
Plan was January 15, 2017 (a Sunday).
\11\ See CAT NMS Plan, supra note 4, at Section 6.7(a)(iii).
\12\ The CAT NMS Plan defines Small Industry Member as ``an
Industry Member that qualifies as a small broker-dealer as defined
in SEC Rule 613.'' See id. at Section 1.1. Rule 613(a)(3)(vi) uses
the definition of small broker-dealer as defined in Rule 0-10(c),
which defines such a broker-dealer as (1) having had total capital
(net worth plus subordinated liabilities) of less than $500,000 on
the date in the prior fiscal year as of which its audited financial
statements were prepared pursuant to Rule 17a-5(d) or, if not
required to file such statements, a broker or dealer that had total
capital (net worth plus subordinated liabilities) of less than
$500,000 on the last business day of the preceding fiscal year (or
in the time that it has been in business, if shorter); and (2) is
not affiliated with any person (other than a natural person) that is
not a small business or small organization as defined in Rule 0-10.
See Rule 613 Adopting Release, supra note 2, at 45804; 17 CFR
242.613(a)(3)(vi); 17 CFR 240.0-10(c).
\13\ See CAT NMS Plan, supra note 4, at Section 6.7(a)(v).
\14\ See id. at Section 6.7(a)(vi).
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On January 18, 2017, the Participants filed with the Commission
notice of their selection of the Plan Processor.\15\ On January 17,
2017, the Participants selected Thesys Technologies LLC to build the
CAT system, pending execution of a Plan Processor Agreement between
Thesys Technologies LLC and the Participants.\16\ The Plan Processor
Agreement was executed on April 6, 2017, after which Thesys CAT LLC
(``Thesys CAT''), a wholly owned subsidiary of Thesys Technologies LLC,
became the Plan Processor for the CAT.
---------------------------------------------------------------------------
\15\ See Letter from Participants to Brent J. Fields, Secretary,
Commission, dated January 18, 2017, available at https://www.sec.gov/divisions/marketreg/rule613-info-notice-of-plan-processor-selection.pdf.
\16\ Id.
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The next critical deadline required by the CAT NMS Plan was for the
Participants to begin recording and reporting data to the Central
Repository by November 15, 2017.\17\ The Participants, however, did not
begin reporting data by that deadline. On November 13, 2017, two days
before the deadline for Participant reporting, and having previously
provided assurances as late as the summer of 2017 that initial data
reporting would commence on schedule and in accordance with the CAT NMS
Plan, the Participants filed a request for exemptive relief in which
they sought, among other things, to delay the deadline by which they
must report to the CAT for one year, and to extend the deadlines by
which Industry Members and Small Industry Members must report by 17
months.\18\ The Commission did not grant this request.\19\ SEC Chairman
Clayton instead issued a statement on November 14, 2017 noting that he
would not support extensions of the CAT deadlines on the terms proposed
by the Participants.\20\ Chairman Clayton stated the importance of the
CAT in enhancing the protection of investors and the markets by
providing regulators with consolidated oversight of the securities
markets. Chairman Clayton also instructed Commission staff to engage
with the Participants as necessary and appropriate.\21\
---------------------------------------------------------------------------
\17\ See supra note 11.
\18\ See Letter from the Participants to Brent J. Fields,
Secretary, Commission, dated November 13, 2017 (``November 2017
Exemption Request'').
\19\ See Statement on Status of the Consolidated Audit Trail
(November 14, 2017), available at https://www.sec.gov/news/public-statement/statement-status-consolidated-audit-trail-chairman-jay-clayton.
\20\ Id.
\21\ Id.
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Since then, Commission staff has engaged with the Participants with
a focus on trying to ensure that project management, resource, and
governance deficiencies are addressed, including development of a
credible and comprehensive work plan with verifiable milestones.\22\
Among other things, Commission staff has encouraged the Participants to
enhance their focus on project management and accountability.\23\ As
sophisticated market participants with vast experience related to
various data systems and data management protocols, the Participants
are capable of
[[Page 48460]]
managing--and uniquely situated to manage--the implementation of the
CAT.
---------------------------------------------------------------------------
\22\ See Statement on Status of the Consolidated Audit Trail
(August 27, 2018), available at https://www.sec.gov/news/public-statement/tm-status-consolidated-audit-trail.
\23\ Id.
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On May 1, 2018, the SEC's Division of Trading and Markets
(``Division'') sent a letter to the Participants expressing concern
about the lack of progress on CAT implementation. The Division called
on senior personnel at each Participant to focus on completing the CAT
as soon as practicable with all of the functionality required by the
CAT NMS Plan. The Division also requested a master plan (``Master
Plan'') for completing the CAT,\24\ including a timeline with
development and completion milestones.\25\ The Division requested that
the Master Plan detail all material steps to fully implement both
Participant and Industry Member reporting, and describe how the
Participants will better manage the Plan Processor's performance. The
Participants submitted the requested Master Plan on May 25, 2018. The
Master Plan stated that Participant reporting would begin on November
15, 2018, one year past the deadline in the CAT NMS Plan.\26\
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\24\ The Division of Trading and Markets also requested that the
Participants streamline their decision-making and governance
processes to ensure more timely implementation. See Letter from
Brett Redfearn, Director, Division of Trading and Markets,
Commission, to Michael J. Simon, Chair, CAT NMS Plan Operating
Committee, dated May 1, 2018. See also note 22.
\25\ The Master Plan projects Industry Member reporting will
commence in phases, with equities reporting beginning in November
2019 and simple options reporting beginning in May 2020, with final
implementation of the CAT through Small Industry Member reporting
occurring by November 2022. See Industry Update on the Consolidated
Audit Trail (June 28, 2018), at 4, available at https://www.catnmsplan.com/wp-content/uploads/2018/06/CAT-Industry-Webcast-6.28.18.pdf.
\26\ See supra note 22.
---------------------------------------------------------------------------
On November 15, 2018, the Participants began reporting quote,
order, trade and other transaction data to the Central Repository;
however, as the Participants acknowledge, the CAT system did not
include all of the functionality required by the CAT NMS Plan, such as
linkages between reported events and regulators' query
functionality.\27\ On November 16, 2018, the Participants stated that
Thesys CAT would complete all of the required functionality by March
31, 2019.\28\ But on February 1, 2019, the Company announced that it
would be transitioning from Thesys CAT to a new Plan Processor,\29\ and
on February 26, 2019, the Operating Committee voted to select FINRA as
the successor Plan Processor to Thesys CAT.\30\ As a result of this and
various other factors, the functionality the Participants represented
Thesys CAT would complete by March 31, 2019 was not delivered.
---------------------------------------------------------------------------
\27\ See CAT NMS Announces Initiation of Reporting to the
Consolidated Audit Trail (November 16, 2018), available at https://www.catnmsplan.com/wp-content/uploads/2018/11/Press-Release-CAT-Launch-final.pdf.
\28\ Id.
\29\ See News, available at https://www.catnmsplan.com/news-page/ (February 1, 2019).
\30\ See Letter from Michael J. Simon, Chair, CAT NMS, LLC
Operating Committee, to Brent J. Fields, Secretary, Commission,
dated April 9, 2019, available at https://www.sec.gov/divisions/marketreg/rule613-info-notice-of-plan-processor-selection-040919.pdf.
---------------------------------------------------------------------------
The Participants are responsible for their selection of a Plan
Processor, for the management of the Plan Processor, and for compliance
with the CAT NMS Plan. The Participants and the Plan Processor failed
to comply with the following deadlines in the CAT NMS Plan and missed
the following milestone completion dates:
The November 15, 2017 milestone completion date for the
Plan Processor publishing final technical specifications for the
submission of order data for Industry Members; \31\
---------------------------------------------------------------------------
\31\ See CAT NMS Plan, supra note 4, at Appendix C, Section
C.10(b).
---------------------------------------------------------------------------
the May 15, 2018 milestone completion date for the Plan
Processor publishing technical specifications for Industry Member
submission of customer data; \32\
---------------------------------------------------------------------------
\32\ See id. at Appendix C, Section C.10(a).
---------------------------------------------------------------------------
the May 15, 2018 milestone completion date for the Plan
Processor making the testing environment available on a voluntary basis
and beginning connectivity testing and accepting order data from
Industry Members for testing purposes; \33\
---------------------------------------------------------------------------
\33\ See id. at Appendix C, Section C.10(b).
---------------------------------------------------------------------------
the August 15, 2018 milestone completion date for Industry
Member order submission testing; \34\
---------------------------------------------------------------------------
\34\ See id. at Appendix C, Section C.10(a); id. at Appendix C,
Section C.10(b).
---------------------------------------------------------------------------
the October 15, 2018 milestone completion date for
Industry Member reporting of customer information to the Central
Repository; \35\ and
---------------------------------------------------------------------------
\35\ See id. at Appendix C, Section C.10(a).
---------------------------------------------------------------------------
the November 15, 2018 deadline for full Industry Member
reporting.\36\
---------------------------------------------------------------------------
\36\ See id. at Section 6.4; Section 6.7(a)(v).
---------------------------------------------------------------------------
In light of these missed deadlines and milestone completion dates,
Chairman Clayton determined that it was necessary to dedicate
additional oversight resources to this project. Accordingly, Chairman
Clayton appointed a staff person to coordinate the Commission's efforts
to monitor the Participants' development of the CAT.\37\
---------------------------------------------------------------------------
\37\ See SEC Names Manisha Kimmel as Senior Policy Advisor to
the Chairman on the Consolidated Audit Trail (January 29, 2019),
available at https://www.sec.gov/news/press-release/2019-5.
---------------------------------------------------------------------------
The Commission is concerned by the continued potential for delays
to the implementation of the CAT. In an April 3, 2019 Industry Update
presentation, the Operating Committee presented a revised
implementation timeline for Industry Member reporting with deadlines
that extend even further beyond those previously shared with Industry
Members.\38\ The revised deadline for Industry Member reporting of all
transaction data to the CAT is December 2021, with the exception of
customer and account information which the Participants will require
the reporting of by July 2022.\39\ These deadlines further extend the
initially established November 15, 2018 Industry Member reporting
deadline in the CAT NMS Plan,\40\ the phased deadlines for Industry
Member reporting in the Master Plan, and the April 13, 2020 and the
April 20, 2021 deadlines for Industry Member and Small Industry Member
reporting proposed in the November 2017 Exemptive Request. The
Commission has not approved these implementation deadlines.
---------------------------------------------------------------------------
\38\ See Consolidated Audit Trail: CAT Reporting Technical
Specifications for Industry Members Draft 2 Version 1.1 Key Changes
(April 3, 2019), available at https://www.catnmsplan.com/wp-content/uploads/2019/04/CAT_Industry_Call_04032019_Presentation.pdf. See
also CAT Reporting Timelines, available at https://www.catnmsplan.com/timelines/. The Commission notes that it has not
approved these dates.
\39\ See Consolidated Audit Trail: CAT Reporting Technical
Specifications for Industry Members Draft 2 Version 1.1 Key Changes
(April 3, 2019), available at https://www.catnmsplan.com/wp-content/uploads/2019/04/CAT_Industry_Call_04032019_Presentation.pdf, at 3,
4.
\40\ See CAT NMS Plan, supra note 4, at Section 6.7(a)(v).
---------------------------------------------------------------------------
The Commission preliminarily believes that amendments to the CAT
NMS Plan are appropriate and necessary to help ensure the Participants'
fulfillment of their obligations to deliver a functional CAT in a
reasonable time frame. While the Commission believes that the
Commission staff's continued engagement with the Participants is
important to the effort to deliver a functional CAT, the Commission
also preliminarily believes that increased transparency through
formalized and public documentation of the Participants' implementation
progress will increase the Participants' accountability for the
efficient completion of CAT. The Commission also preliminarily believes
that modifying the CAT NMS Plan to require
[[Page 48461]]
additional financial accountability to meet implementation deadlines is
appropriate to achieve the CAT's timely completion.
The Commission therefore proposes to amend the CAT NMS Plan to
require the Participants to develop a complete implementation plan
containing a detailed timeline with objective milestones to achieve
full CAT implementation (the ``Implementation Plan''). This
Implementation Plan would be filed with the Commission and made
publicly available after approval by a Supermajority Vote \41\ of the
Operating Committee. The Implementation Plan must be submitted by the
Operating Committee to the Chief Executive Officer (``CEO''),
President, or an equivalently situated senior officer of each
Participant, prior to being voted on by the Operating Committee.
Additionally, to further improve implementation transparency, the
Commission proposes requiring the Participants to provide the
Commission and the public with quarterly progress reports (``Quarterly
Progress Reports'' or ``Reports'') approved by at least a Supermajority
Vote of the Operating Committee.\42\ The Quarterly Progress Reports
must also be submitted by the Operating Committee to the CEO,
President, or an equivalently situated senior officer of each
Participant, prior to being voted on by the Operating Committee. The
proposed amendments also include provisions regarding financial
accountability to facilitate implementation of the CAT in an
expeditious and efficient manner.
---------------------------------------------------------------------------
\41\ Section 1.1 of the CAT NMS Plan defines a ``Supermajority
Vote'' as an ``affirmative vote of at least two-thirds of all of the
members of the Operating Committee or any Subcommittee, as
applicable, authorized to cast a vote with respect to a matter
presented for a vote (whether or not such a member is present at any
meeting at which a vote is taken) by the Operating Committee or any
Subcommittee, as applicable (excluding, for the avoidance of doubt,
any member of the Operating Committee or any Subcommittee, as
applicable, that is recused or subject to a vote to recuse from such
matter pursuant to Section 4.3(d)); provided that if two-thirds of
all such members authorized to cast a vote is not a whole number
then that number shall be rounded up to the nearest whole number.''
\42\ The Commission does not believe, on a preliminary basis,
that the requirements of the Implementation Plan or the Quarterly
Progress Reports, discussed below in Part II.A., require the
Participants to disclose any confidential or sensitive information
related to the security of the CAT, the security of CAT Data, or the
operation of the CAT.
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II. Description of Proposed Amendments
In order to address shortcomings in the completeness, accuracy,
accessibility, and timeliness of existing audit trail systems, the
Commission adopted Rule 613 in 2012 to direct the Participants to
create and file the CAT NMS Plan.\43\ The CAT was intended not only to
replace an existing regulatory data infrastructure that was ``outdated
and inadequate to effectively oversee a complex, dispersed, and highly
automated national market system,'' \44\ but also to provide benefits
to market participants in the form of improved market surveillance and
related analyses.\45\ Today, almost seven years after the adoption of
Rule 613, the need for a better audit trail system is no less pressing.
Yet, as described above,\46\ the Participants' progress towards
implementing the CAT has suffered multiple setbacks, and the
Participants have repeatedly missed relevant deadlines.\47\ These
delays to CAT implementation have left the Commission and the
Participants without access to a comprehensive database to help
facilitate analyses of market events and other matters. Moreover, the
repeated delays in CAT implementation have resulted in uncertainty for
Industry Members and other market participants.\48\
---------------------------------------------------------------------------
\43\ See supra note 2.
\44\ Id. at 45723.
\45\ Id. at 45730-33.
\46\ See Part I supra.
\47\ See, e.g., Industry Update on the Consolidated Audit Trail
9/7/2017 (August 25, 2017), available at https://catnmsplan.com/news-page/industry-update-on-the-consolidated-audit-trail/
(stating that ``the implementation timelines for establishing the
CAT are in effect''); Industry Update on the Consolidated Audit
Trail (September 7, 2017), available at https://catnmsplan.com/wp-content/uploads/2017/09/Industry-Update-on-the-Consolidated-Audit-Trail-090817.pdf (indicating that the Participants were implementing
the CAT according to the timeline set forth in the CAT NMS Plan).
\48\ See, e.g., Part IV.A.2.
---------------------------------------------------------------------------
A. Amendments To Increase Operational Transparency
Public disclosure of information about CAT implementation would
furnish a better understanding of progress on the CAT to market
participants and members of the investing public, all of whom stand to
benefit from the improved efficiencies and regulatory capabilities of
the CAT. Moreover, CAT implementation also affects Industry Members,
who are required to report data to the CAT and are therefore keenly
interested in the details and timing of CAT implementation. Currently,
the CAT NMS Plan does not contain disclosure provisions that require
the Participants to provide public updates on implementation progress
and developments.
To address concerns about insufficient transparency and
accountability regarding the CAT's implementation, the Commission
proposes to amend Section 6.6 of the CAT NMS Plan. Specifically, the
Commission proposes to amend the CAT NMS Plan by adding a new Section
6.6(c) to require the Participants to file with the Commission and
publish on their own websites (or, if the Participants wish to publish
collectively, on the CAT NMS Plan website) the Implementation Plan
setting forth how and when the Participants will achieve full CAT
implementation, including the Participants' timeline for achieving both
(1) the objective milestones that are set forth in Section C.10 of
Appendix C of the CAT NMS Plan to assess the progress of CAT
implementation \49\ (``Objective Milestones'') and (2) the CAT
implementation milestones associated with the proposed financial
accountability provisions discussed below (``Financial Accountability
Milestones'') \50\ (collectively, the ``Implementation
Milestones'').\51\
---------------------------------------------------------------------------
\49\ See CAT NMS Plan, supra note 4, at Appendix C Section C.10.
\50\ The Financial Accountability Milestones, and their relation
to proposed financial accountability provisions, are described in
more detail in Part II.B. infra.
\51\ The Participants would be free to include, as may be
appropriate, additional Implementation Milestones not otherwise
required by the proposed plan amendment. For example, the
Participants may choose to add Implementation Milestones regarding
system security or external testing with CAT Reporters.
---------------------------------------------------------------------------
If the Participants decide to complete any of the Implementation
Milestones by releasing functionality in a phased approach, the
proposed rule would require the Implementation Plan to also describe
each phased release necessary to achieve the completion of the relevant
Implementation Milestone and to provide completion dates for each such
release.\52\ The proposed rule also requires the Participants to
include the completion date and a description of the status for each
Implementation Milestone identified in the Implementation Plan, which,
for example, could include discussion about the extent to which an
[[Page 48462]]
Implementation Milestone has been successfully completed. The
Implementation Plan would be required to be filed with the Commission
and published on each Participant website or the CAT NMS Plan website
no later than 30 calendar days following the effective date of this
amendment.
---------------------------------------------------------------------------
\52\ For example, the CAT NMS Plan identifies ``Industry Members
(other than Small Industry Members) begin reporting customer/
institutional/firm account information to the Central Repository for
processing'' as one of the Objective Milestones. See CAT NMS Plan,
supra note 4, at Appendix C, Section 10. Recent timelines published
by the Participants indicate, however, that the Participants have
decided to complete this milestone by releasing functionality in a
phased approach--first implementing Industry Member reporting for
equities transactions and then implementing Industry Member
reporting for options in a separate phase. See, e.g., CAT Reporting
Timelines, available at https://catnmsplan.com/timelines/. The
proposed amendment would therefore require the Implementation Plan
to provide completion dates for each of these phases.
---------------------------------------------------------------------------
The Commission preliminarily believes that requiring the proposed
Implementation Plan is appropriate to facilitate public transparency of
the CAT's development. The Commission believes 30 calendar days is a
sufficient amount of time to create the Implementation Plan because the
Participants have previously engaged in the exercise of considering and
developing timelines and milestones for implementation purposes when
developing the Master Plan, and many of the Participants are active in
data systems development and operation.
The Commission further believes that requiring this added
transparency will aid the public in more easily monitoring the status
of the implementation of the CAT. The CAT NMS Plan currently requires
the Chief Compliance Officer of the Company to appropriately document
objective milestones to the Commission. The Commission understands from
the Participants' status update calls and discussions that the
Participants are already engaged in documenting their progress toward
CAT implementation for the Objective Milestones.\53\ Therefore, the
proposed amendment is requiring the incremental step that the
information related to this documentation be made public via the
Implementation Plan. The Commission does not expect that this
incremental step would be unduly burdensome. The proposed amendment
also requires the Participants to provide information regarding
progress toward and completion of the Financial Accountability
Milestones. Requiring the Participants to disclose their progress
toward and completion of Financial Accountability Milestones will
provide information not contained in the Objective Milestones regarding
the development and availability of critical regulatory tools. The
Commission believes that it is important to provide this information in
a comprehensive timeline. Information related to the production of
critical regulatory tools is also of interest to market participants,
who will benefit from the increased regulatory capabilities of the
CAT.\54\
---------------------------------------------------------------------------
\53\ See also CAT NMS Plan, supra note 4, at Section 6.7(b).
\54\ Moreover, inclusion of the Financial Accountability
Milestones in the Implementation Plan will provide the Commission
and the public with more information regarding the implementation
deadlines. See Part II.B. infra for additional discussion of the
financial accountability provisions.
---------------------------------------------------------------------------
Moreover, the Commission preliminarily believes it is appropriate
to require the Participants to disclose whether they intend to complete
any of the Implementation Milestones in phases and any related
completion dates, because recent timelines published by the
Participants indicate that the Participants intend to release certain
functionality in phases. For example, while the CAT NMS Plan identifies
only one implementation date for Industry Member reporting, the
Participants have indicated that Industry Member reporting will be
implemented in several phases that each have a different implementation
deadline.\55\ The Implementation Plan should reflect the current,
phased approach to CAT implementation for this milestone, not the
approach to CAT implementation that was contemplated at the time the
CAT NMS Plan was approved. By requiring phasing to be addressed, the
Implementation Plan will both furnish a common understanding of the
status of CAT implementation at the time the Implementation Plan is
made public, as well as indicate how completing the Implementation
Milestones will lead to the achievement of full CAT implementation.
---------------------------------------------------------------------------
\55\ See note 52 supra.
---------------------------------------------------------------------------
The Commission also believes that, to the extent the Participants
meet the dates specified in the timeline, the publication of such
timeline will reduce uncertainty as to the expected implementation
timeline for Industry Members, which would aid Industry Members in
staging their resources and otherwise managing implementation planning,
which should reduce the risk of additional delays. The Commission
further believes that the Implementation Plan's timeline, paired with
Implementation Milestones, will serve to clarify what level of CAT
system functionality will be delivered on a given date. Finally, the
Commission anticipates that requiring the Participants to disclose
their deadlines and the status of Implementation Milestones to the
public through the Implementation Plan will provide accountability both
to the Commission and to Industry Members regarding the Participants'
progress toward CAT implementation.
The Commission also proposes to amend the CAT NMS Plan to add
proposed Section 6.6(c)(ii) to require Participants to file with the
Commission and publish on each Participant website, or collectively on
the CAT NMS Plan website, complete Quarterly Progress Reports. These
Reports would be filed and made public no later than fifteen business
days following the end of each calendar quarter (e.g., by April 21,
2020; July 22, 2020; October 22, 2020; or January 25, 2021) and would
describe in detail the progress made by the Participants during the
prior calendar quarter toward achieving each of the Implementation
Milestones set forth in the Implementation Plan.\56\ The initial Report
to be filed by the Participants would be filed and made public no later
than fifteen business days following the end of the calendar quarter in
which the Implementation Plan was filed and made public.\57\ The
Reports would divide the Implementation Milestones into the following
three categories: (1) Implementation Milestones that have been
completed, (2) Implementation Milestones that are still in progress and
(3) Implementation Milestones that have not yet been initiated.
---------------------------------------------------------------------------
\56\ If, subsequent to the publication of the Implementation
Plan, the Participants decide to complete any of the Implementation
Milestones by releasing functionality in a phased approach, the
proposed amendment requires the Participants to reflect this change
in the Quarterly Progress Reports by describing the phases necessary
to achieve the completion of the relevant milestones and providing
specified information on the progress made for each release.
\57\ For example, if the Participants filed and made public the
Implementation Plan on March 18, 2020 the initial Report would have
to be filed no later than April 21, 2020.
---------------------------------------------------------------------------
For each Implementation Milestone completed by the end of a given
calendar quarter, the Report would include the following: (1) The
completion date provided in the Implementation Plan, (2) the date on
which the Implementation Milestone was actually completed, and (3) a
description of any variance from the Implementation Plan.\58\
---------------------------------------------------------------------------
\58\ For example, a description of any variance from the
Implementation Plan could explain why the completion of a given
Implementation Milestone was delayed from the date set forth in the
Implementation Plan or, if the Implementation Milestone was broken
out into multiple phases, the extent to which the completed
Implementation Milestone satisfied the functionality required by the
Implementation Plan for that milestone.
---------------------------------------------------------------------------
For each Implementation Milestone in progress at the end of a given
calendar quarter, the Report would include the following: (1) The
completion date provided in the Implementation Plan, (2) the currently
targeted completion date, and (3) a description of (a) the current
status of the Implementation Milestone, (b) any difference between the
Implementation Plan completion date and the currently targeted
completion date, including the basis for
[[Page 48463]]
making the adjustment and the impact of this adjustment on any other
Implementation Milestone, and (c) any other factual indicators that
demonstrate the current level of completion with respect to the
Implementation Milestone.\59\ Factual indicators could include any data
relevant to the Objective Milestone (e.g., (1) for milestones related
to the publication of documentation: The current version of the
documentation under development or published; the number of and
explanation for any open issues not yet resolved; (2) for milestones
related to connectivity and acceptance testing: The status of the
publication of test plans; statistics on the amount of expected or
actual activity in the test environment (e.g., number of testers,
number of reportable events, error rates/trends observed), the number
of Plan Processor functional requirements \60\ for which defects were
found categorized by criticality; progress remediating defects; (3) for
milestones related to reporting: Development progress as defined by the
number of functional requirements not yet started, in progress, or
complete; the number and percentage of functional requirements for
which internal testing is in progress and the related pass/fail
percentages of associated test cases; the number and percentage of
functional requirements that have completed internal testing with all
defects remediated; the number of Plan requirements met or outstanding;
a list of Plan requirements met or outstanding).
---------------------------------------------------------------------------
\59\ For example, if an Implementation Milestone is the
publication of Industry Member technical specifications, a
description of the status could state: That the Plan Processor
produced a draft that was circulated to Industry Members on [insert
date]; that the Participants are reviewing feedback and expect to
issue final technical specifications by [insert date]; and that the
draft is complete except for a [specified topic], because of a
[specified reason]. As an example of a description identifying any
difference between the Implementation Plan completion date and the
current targeted completion date, including the basis for making the
adjustment and the impact of this adjustment on any other
Implementation Milestone, the Participants could state: That the
Implementation Plan completion date was [insert date], but the
Participants are revising such date to [insert new targeted
completion date], because [insert topic] proved to be more
complicated than anticipated due to [insert reason]. The description
could continue to state that the Participants believe the new
targeted completion date is appropriate because, for example, they
have designed a new approach to deliver the required functionality
to address the issue in the technical specifications that is
currently under development as of [insert date].
\60\ Appendix D outlines minimum functional and technical
requirements established by the Participants of the CAT NMS Plan for
the Plan Processor. See CAT NMS Plan, supra note 4, Appendix D-1.
Examples of such functional requirements for the CAT system include
the ability to provide feedback on the reasons for errors in data
submissions, and the ingestion of data submitted to the Central
Repository by Industry Members. See id. at Appendix D, Sections 7.4,
7.5.
---------------------------------------------------------------------------
For each Implementation Milestone that has not yet been initiated
by the end of a given calendar quarter, the Report would include the
following: (1) The completion date provided in the Implementation Plan,
(2) the currently targeted completion date, and (3) a description of
(a) the current status of the Implementation Milestone, and (b) any
difference between the Implementation Plan completion date and the
currently targeted completion date, including the basis for making the
adjustment and the impact of this adjustment on any other
Implementation Milestone.
The Commission preliminarily believes that the Quarterly Progress
Reports will facilitate transparency by ensuring that current and
comprehensive information about the CAT's state of development is
regularly communicated to the Commission, Industry Members, and the
public at large.\61\ Moreover, the Commission preliminarily believes
that the requirements set forth for the proposed Quarterly Progress
Reports are appropriate. Because the Participants should already be
actively monitoring their progress on the implementation of the CAT,
the Commission believes 15 business days is a reasonable amount of time
in which to prepare Reports based on the information the Participants
have already gathered.\62\
---------------------------------------------------------------------------
\61\ For example, the Commission expects that the Quarterly
Progress Reports will provide the Commission and the public with
more granular and up-to-date information regarding the likelihood
that the Participants will meet the target deadlines associated with
the Financial Accountability Milestones and/or the likelihood that
the Participants will be permitted to recover related fees, costs,
or expenses from Industry Members. The Financial Accountability
Milestones, and their related financial accountability provisions,
are discussed in Part II.B. infra.
\62\ See, e.g., note 53 supra.
---------------------------------------------------------------------------
The Participants are required to provide both the Implementation
Plan completion date and the actual or currently targeted completion
date for each Implementation Milestone so that the original completion
date will serve as a baseline against which to measure progress if
there is a difference between the two dates, as supplemented by the
information provided in the commentary. The Commission preliminarily
believes that progress can be effectively evaluated based upon whether
the Implementation Plan completion dates are being met.
The Commission also preliminarily believes that information
provided in the required descriptions for the Implementation Milestones
will yield valuable insights into the progress of CAT implementation,
for example by providing an early indication of the potential for
delays. The Commission also preliminarily believes that requiring the
disclosure of the information provided in the descriptions would
encourage the Participants to consider whether resources need to be
realigned, so that adjustments can be made to the implementation
process. In regard to the Implementation Milestones completed by the
end of a given calendar quarter, the proposed amendments would require
the Participants to describe any variance from the Implementation Plan.
The Commission preliminarily believes that such information could
reflect whether the Participants have only partially achieved the
functionality required by certain Implementation Milestones. In regard
to the Implementation Milestones in progress at the end of a given
calendar quarter, the proposed amendments would require the
Participants to describe the status of the Implementation Milestone,
any difference between the completion dates provided, including the
basis for making the adjustment and the impact such adjustment might
have on any other Implementation Milestone, and other factual
indicators that demonstrate the current level of completion with
respect to the milestone. The Commission preliminarily believes that
such information could reveal if there is an increasingly negative
variance between the Implementation Plan completion date and the
targeted completion date, as well as the cause for such variance. The
required information could also provide an indication of whether
corrections are needed to get the implementation process back on track
and whether the currently targeted completion dates provided in a
Report are realistic. In regard to the Implementation Milestones that
have not yet been initiated by the end of a given calendar quarter, the
proposed amendments would require the Participants to describe the
current status for the Implementation Milestone and any difference
between the completion dates provided, including the basis for making
the adjustment.
The Commission expects that quarterly communication of this
information will aid Industry Members by providing more information on
the timing of their CAT reporting obligations, which, correspondingly,
should aid them in efficiently developing and implementing their
regulatory data collection systems and allow them to make their own
[[Page 48464]]
adjustments as needed. In addition, the Commission anticipates that the
Quarterly Progress Reports will aid the Commission, Industry Members
and others in monitoring and better understanding the progress of CAT
implementation.
The Commission also proposes to amend the CAT NMS Plan to add
proposed Section 6.6(c)(iii) to require that the Implementation Plan
and each Quarterly Progress Report be approved by at least a
Supermajority Vote of the Operating Committee before such documents are
filed with the Commission or made publicly available on each of the
Participant websites or collectively on the CAT NMS Plan website.
However, if the Implementation Plan or any Quarterly Progress Report is
approved only by a Supermajority Vote of the Operating Committee, and
not by a unanimous vote of the Operating Committee (including, for the
avoidance of doubt, all members of the Operating Committee, whether or
not present and whether or not recused), proposed Section 6.6(c)(iii)
would require each Participant whose Operating Committee member did not
vote to approve the Implementation Plan or Quarterly Progress Report
separately file with the Commission and make publicly available on each
of the Participant websites, or collectively on the CAT NMS Plan
website, a statement identifying itself and explaining why the member
did not vote to approve the Implementation Plan or Quarterly Progress
Report. Prior to the Operating Committee's vote, the Implementation
Plan and Quarterly Progress Reports shall also be submitted by the
Operating Committee to the CEO, President, or an equivalently situated
senior officer (or, ``senior management'') of each Participant.\63\
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\63\ In addition to the senior management personnel who will
receive the Implementation Plan and Quarterly Progress Reports under
the proposed amendment, each Participant has a voting member (and an
alternate voting member) representing it on the Operating Committee
who will receive these documents. One individual may serve as the
voting member of the Operating Committee for multiple affiliated
Participants. See CAT NMS Plan, supra note 4, at Section 4.2(a).
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The Commission preliminarily believes that the Operating Committee
should vote on the Implementation Plan and each Quarterly Report
because the Operating Committee, as the manager of the Company, already
votes on all actions for which a vote is required under the CAT NMS
Plan.\64\ The Commission further preliminarily believes that
specifically requiring the approval of the Operating Committee by at
least a Supermajority Vote will lend credibility to the timelines
presented by Participants in the Implementation Plan and Reports, which
may otherwise be lacking given that the timelines for Industry Member
CAT implementation have been revised multiple times.\65\ In addition,
the requirement that the Implementation Plan and Quarterly Progress
Reports be submitted to the CEO, President, or an equivalently situated
senior officer of each Participant, prior to the Operating Committee's
vote, is intended to promote senior management attention and promote
accountability with respect to CAT implementation.
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\64\ See CAT NMS Plan, supra note 4, at Sections 4.1 and 4.3.
\65\ See Part I supra.
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If the Operating Committee does not unanimously vote to approve the
Implementation Plan or any Quarterly Progress Report, the proposed
amendments require each Participant whose Operating Committee member
did not vote to approve the Implementation Plan or Quarterly Progress
Report to separately file with the Commission and make publicly
available on each of the Participant websites, or collectively on the
CAT NMS Plan website, a statement identifying itself and explaining why
the member did not vote to approve the Implementation Plan or Quarterly
Progress Report. The Commission preliminarily believes that the
requirement may aid the Commission and the public to better monitor the
progress of CAT implementation, because such an explanation may reveal
critical information regarding whether currently targeted completion
dates are realistic, whether milestones are being or have been
completed in accordance with the requirements of the CAT NMS Plan, and/
or whether potential risks or delays may impede the progress of CAT
implementation.
The Commission requests comment on the amendments to increase
operational transparency. Specifically, the Commission solicits comment
on the following:
1. Are the Implementation Plan and the Quarterly Progress Report
effective mechanisms for providing the Commission and Industry Members
with transparency into CAT implementation? Why or why not?
2. Are the details and requirements of the Implementation Plan
appropriate and reasonable? Why or why not? Would additional details or
requirements for the Implementation Plan be beneficial?
3. The proposed amendment requires the Participants to file and
publish the Implementation Plan within 30 calendar days following the
effective date of proposed Section 6.6(c). Is 30 calendar days a
reasonable period of time in which to file and publish such a document?
Why or why not? Does this timeline give the Operating Committee a
sufficient amount of time to approve the Implementation Plan? Why or
why not? Would a longer or shorter period of time, such as 45 calendar
days or 15 calendar days, be more appropriate?
4. The proposed Amendment requires the Participants to file and
publish a Quarterly Progress Report each calendar quarter on each
Participant website or collectively on the CAT NMS Plan website. Is a
quarterly interval the right interval? Would a longer or shorter
interval be more effective?
5. The proposed amendment requires the Participants to file and
publish the Quarterly Progress Report no later than fifteen business
days following the end of each calendar quarter. Is fifteen business
days a reasonable period of time in which to file and publish such a
report? Why or why not? Does this timeline give the Operating Committee
a sufficient amount of time to approve the Quarterly Progress Reports?
Why or why not? Would a longer or shorter period of time, such as
thirty business days or five business days, be more appropriate?
6. The proposed amendment establishes the deadline for filing and
publishing the Quarterly Progress Report on the basis of business days.
Are business days an appropriate measure by which to establish this
deadline? Or would calendar days be more appropriate? Why or why not?
7. Are the details and requirements of the Quarterly Progress
Report appropriate and reasonable? Why or why not? Would additional
details or requirements for the report be beneficial? For example,
should the Quarterly Progress Reports include financial information
detailing the fees, costs, and expenses that the Participants have
incurred to build and implement the CAT? If so, should these fees,
costs, and expenses be clearly tied to the relevant Financial
Accountability Milestone? Why or why not?
8. The proposed amendment requires the Operating Committee to
approve the Implementation Plan and each Quarterly Progress Report by
at least a Supermajority Vote. Is it appropriate to require a
Supermajority Vote, or should the Commission require a majority vote or
a unanimous vote of the Operating Committee? Why or why not? Is it
appropriate to require that the Operating Committee vote on this
matter? Why or why not? If this matter should be
[[Page 48465]]
delegated to a Subcommittee, please explain which Subcommittee should
vote to approve the Implementation Plan and Quarterly Progress Report
and why.
9. If the Implementation Plan or any Quarterly Progress Report is
not approved by a unanimous vote of the Operating Committee, the
proposed amendment requires each Participant whose Operating Committee
member did not vote to approve the Implementation Plan or Quarterly
Progress Report separately file with the Commission and make publicly
available on each of the Participant websites, or collectively on the
CAT NMS Plan website, a statement identifying itself and explaining why
the member did not vote to approve the Implementation Plan or Quarterly
Progress Report. Is this an appropriate requirement? Why or why not?
Should the Commission require the Implementation Plan or the Quarterly
Progress Reports, or the members who did not vote to approve the
Implementation Plan or a Quarterly Report, as the case may be, to
provide any additional information? If so, what information should be
provided, and why?
10. The proposed amendment requires that the Implementation Plan
and each Quarterly Progress Report be submitted to the CEO, President,
or an equivalently situated senior officer of each Participant, prior
to being voted on by the Operating Committee. Is this an appropriate
requirement to promote senior management attention and promote
accountability with respect to CAT implementation? Why or why not?
Should the Commission specify when the Implementation Plan and
Quarterly Progress Reports should be submitted to the CEO, President,
or equivalently situated senior officer of each Participant? If so, how
many days prior to the Operating Committee vote should the
Implementation Plan and Quarterly Progress Reports be submitted to
senior management? To the extent that the Commission implements such a
requirement, would the deadlines set forth in the proposed amendment
for the submission of the Implementation Plan and Quarterly Progress
Reports to the Commission need to be adjusted? Why or why not? By how
many days should they be adjusted? Please explain your responses.
11. Please identify any alternative means to promote senior
management attention and promote accountability with respect to CAT
implementation. For example, should the Commission require the senior
management of each Participant (e.g., the CEO, President, or an
equivalently situated senior officer) to certify that the contents of
the Implementation Plan and each Quarterly Progress Report are accurate
and complete in all material respects? What should qualify as material?
Should the certification be made to the best of an officer's knowledge
and reasonable belief after reasonable investigation? Is the CEO or
President the appropriate person to make the certification? If not,
please explain why. If the CEO or President is not the appropriate
person, which equivalently situated senior officer would be
appropriate? Would additional details or requirements for such
certifications be beneficial? If so, what are those details or
requirements? Please explain your responses.
12. Are there other factors that impact the ability of the
Participants to implement the CAT NMS Plan that would not be addressed
by further disclosure that the Commission should address?
B. Financial Accountability Amendments for Implementation of the CAT
As discussed above, there have been multiple delays in CAT
implementation since the adoption of Rule 613. To prevent additional
delays, the Commission proposes to amend the CAT NMS Plan to include
financial accountability provisions that are designed to align
financial accountability with regulatory obligations and contribute to
an expeditious implementation of the CAT.
Currently, Section 11.1 of the CAT NMS Plan contemplates that the
Operating Committee will establish, and the Participants will
implement, fees for Participants and Industry Members to recover the
costs and expenses incurred by the Participants in connection with the
development, implementation, and operation of the CAT.\66\ Proposals
for any such fees must be filed with the Commission pursuant to Section
19(b) of the Exchange Act and are subject to Commission review for
consistency with the Exchange Act and Article XI of the CAT NMS
Plan.\67\ Specifically, each Participant must demonstrate, under
Sections 6(b)(4) and 15A(b)(5) of the Exchange Act, that such fee
filings provide for the equitable allocation of reasonable dues, fees,
and other charges among its members and other persons using its
facilities.\68\ The proposed amendment would not alter this basic
structure, but would add a new Section 11.6 to govern the recovery of
any fees, costs, and expenses (including legal and consulting fees,
costs, and expenses) incurred \69\ by or for the Company in connection
with the development, implementation, and operation of the CAT,\70\
from the effective date of this amendment, if adopted by the
Commission, until such time that the Participants have completed Full
Implementation of CAT NMS Plan Requirements \71\ (collectively, the
``Post-Amendment Expenses'').
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\66\ See, e.g., CAT NMS Plan, supra note 4, at Section 11.1(c).
\67\ Section 19(b) of the Exchange Act requires the Participants
to submit proposed rule changes to the Commission. 15 U.S.C. 78s(b);
see also CAT NMS Plan, supra note 4, at Section 11.1(b) (noting that
the Participants must file proposed fees for Industry Members with
the Commission).
\68\ See 15 U.S.C. 78f(b)(4) (applicable to the national
securities exchanges); 15 U.S.C. 78o-3(b)(5) (applicable to FINRA, a
national securities association).
\69\ For the purposes of proposed Section 11.6, determination of
when a fee, cost, or expense is considered ``incurred'' shall be
based on Generally Accepted Accounting Principles (``GAAP''), as
those principles must also be applied to all accounting or financial
statements prepared by the Operating Committee under Section 9.2 of
the CAT NMS Plan. See note 4 supra. For example, a fee, cost, or
expense related to a good or service would generally be considered
incurred upon acquisition of the good or service in accordance with
GAAP.
\70\ See, CAT NMS Plan, supra note 4, at Section 11.1(b)-(c),
Section 11.2(a)-(b), and Section 11.3(c) (relating to the funding of
the development, implementation and operating costs of the Company).
\71\ As part of the proposed amendment, Section 1.1 of the CAT
NMS Plan will be amended to include a definition of ``Full
Implementation of CAT NMS Plan Requirements.'' This term will mean
``the point at which: (a) The Participants have satisfied all of
their obligations to build and implement the CAT, such that all CAT
system functionality required by Rule 613 and the CAT NMS Plan has
been developed, successfully tested, and fully implemented with the
initial Error Rates specified by Section 6.5(d)(i) of the CAT NMS
Plan, including, but not limited to, functionality that efficiently
permits the Participants and the Commission to access all CAT Data
required to be stored in the Central Repository pursuant to Section
6.5(a) of the CAT NMS Plan and to analyze the full lifecycle of an
order, from order origination through order execution or order
cancellation, across the national market system. This Financial
Accountability Milestone shall be considered complete as of the date
identified in a Quarterly Progress Report meeting the requirements
of Section 6.6(c).'' This definition is discussed further below. See
Part II.B.1.d. infra.
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Proposed Section 11.6 would apply new conditions to the collection
of any fees established by the Operating Committee, or implemented by
the Participants, to recover a portion of Post-Amendment Expenses from
Industry Members (``Post-Amendment Industry Member Fees'').
Specifically, proposed Section 11.6 would require the Participants to
meet four critical CAT implementation milestones--the Financial
Accountability Milestones--by certain dates in order to collect the
full amount of any related Post-Amendment Industry Member Fees
[[Page 48466]]
established by the Operating Committee or implemented by the
Participants. If the Participants fail to meet the target deadlines set
forth in proposed Section 11.6, they would only be entitled to collect
a portion of the amount of the relevant Post-Amendment Industry Member
Fees, as determined by the amount of time by which the Participants
have missed the target deadlines.
The Commission preliminarily believes applying these new conditions
to the Post-Amendment Industry Member Fees is appropriate. At the time
the Commission approved the CAT NMS Plan, the Commission believed it
was reasonable, in accordance with Section 6(b)(4) of the Exchange
Act,\72\ for the Participants to recover a portion of the fees, costs,
and expenses associated with the development and implementation of the
CAT from Industry Members.\73\ This belief, however, was based on the
Commission's expectation that the Participants would be complying with
the CAT NMS Plan, which required the implementation of certain CAT
functionality by the dates set forth in the CAT NMS Plan. As noted
above, the Participants have missed multiple dates codified in the CAT
NMS Plan.\74\ Accordingly, the regulatory aims of the CAT NMS Plan have
yet to be achieved. Accordingly, the Commission is proposing financial
accountability rules that address the Commission's view of what it
would consider to be ``reasonable fees'' and a reasonable exercise of
the Participants' funding authority under the CAT NMS Plan in the
context of CAT implementation going forward.
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\72\ 15 U.S.C. 78f(b)(4) (requiring the rules of a national
securities exchange to provide for ``equitable allocation of
reasonable dues, fees, and other charges among its members and
issuers and other persons using its facilities'').
\73\ See, e.g., CAT NMS Plan Approval Order, supra note 4, at
84794.
\74\ See Part I supra.
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The specific terms of the proposed amendment are discussed in more
detail below.
1. Financial Accountability Milestones and Target Deadlines
Proposed Section 11.6 identifies four critical CAT implementation
milestones: (1) Initial Industry Member Core Equity Reporting, (2) Full
Implementation of Core Equity Reporting Requirements, (3) Full
Availability and Regulatory Utilization of Transactional Database
Functionality, and (4) Full Implementation of CAT NMS Plan Requirements
(collectively, the ``Financial Accountability Milestones'' \75\). For
each Financial Accountability Milestone, the Commission has also
identified a target deadline for completion.
---------------------------------------------------------------------------
\75\ This term is defined at proposed Section 1.1.
---------------------------------------------------------------------------
a. Initial Industry Member Core Equity Reporting
The Commission proposes to amend Section 1.1 of the CAT NMS Plan to
define ``Initial Industry Member Core Equity Reporting'' as the point
at which Industry Members (excluding Small Industry Members \76\ that
are do not report to the Order Audit Trail System (``OATS'')) have
begun to report equities transaction data, excluding Customer Account
Information, Customer-ID, and Customer Identifying Information,\77\ to
the CAT.\78\ This Financial Accountability Milestone shall be
considered complete as of the date identified in a published Quarterly
Progress Report meeting the requirements of proposed Section
6.6(c).\79\ The Commission also proposes to add Section 11.6(a)(i)(A)
to provide that the Participants will be entitled to collect the full
amount of any Post-Amendment Industry Member Fees established or
implemented to recover Post-Amendment Expenses incurred from the date
of this amendment's adoption by the Commission\80\ to the date of
Initial Industry Member Core Equity Reporting (``Period 1''), so long
as such date is no later than April 30, 2020.\81\
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\76\ As defined by Section 1.1 of the CAT NMS Plan, and for the
purposes of this proposing release, ``Small Industry Member'' an
Industry Member that qualifies as a small broker-dealer as defined
in SEC Rule 613. See also 17 CFR 242.613(a)(3)(vi) (defining small
broker-dealers by reference to 17 CFR 240.0-10(c), which defines a
small broker dealer as one with ``total capital . . . of less than
$500,000 on the date in the prior fiscal year as of which its
audited financial statements were prepared or, if not required to
file such statements, a broker or dealer that had total capital . .
. of less than $500,000 on the last business day of the preceding
fiscal year'' and one that is ``not affiliated with any person . . .
that is not a small business or small organization'').
\77\ Customer Account Information, Customer-ID, and Customer
Identifying Information are defined terms in Section 1.1 of the CAT
NMS Plan and are the same definitions in the context of this
proposing release.
\78\ The Commission notes that the equities transaction data
required at this stage is consistent with the functionality that the
Participants currently plan to implement at ``Phase 2a'' in the
latest draft of the Technical Specifications. See CAT Reporting
Technical Specifications for Industry Members, Version 2.2 (June 24,
2019), at vii, available at https://www.catnmsplan.com/wp-content/uploads/2019/06/Industry-Member-Tech-Specs-v2.2-Clean.pdf.
\79\ The target deadline for Initial Industry Member Core Equity
Reporting falls on April 30, 2020--between scheduled Quarterly
Progress Reports. If the Participants wait to submit the Quarterly
Progress Report to the Commission, it may delay their ability to
begin recovering any Post-Amendment Industry Member Fees to which
they may be entitled. Accordingly, the Commission notes that the
Participants may file an interim Quarterly Progress Report, if they
so choose, on the day they achieve this Financial Accountability
Milestone (or any other Financial Accountability Milestone) in order
to expedite their recovery of Post-Amendment Industry Member Fees.
\80\ The proposed amendment will not affect the Participants'
ability to collect CAT-related fees, costs, or expenses incurred up
to the date that proposed Section 11.6 is adopted. See proposed
Section 11.6.
\81\ See proposed Section 11.6(a)(i)(A). To the extent that the
Initial Industry Member Core Equity Reporting milestone is achieved
at some later date, the Participants will only be entitled to
collect a portion of the amount of the Post-Amendment Industry
Member Fees established or implemented for Period 1. See proposed
Section 11.6(a)(ii); see also Part II.B.2. infra for additional
discussion regarding the conditions attached to Post-Amendment
Industry Member Fee collection.
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The Commission preliminarily believes that Initial Industry Member
Core Equity Reporting is an appropriate Financial Accountability
Milestone, because this milestone requires the Participants to develop,
test, and implement essential infrastructure needed to support Industry
Member reporting--one of the major goals identified by the CAT NMS
Plan.\82\ Before Industry Members may begin reporting any equities
transaction data to the CAT, the Participants must develop, and
Industry Members must thoroughly test, file submission tools, data
integrity controls, and various security measures to ensure that the
CAT can safely receive and process this data, as well as identify data
that may not be accurate. These are core operations that are
fundamental to the success of the CAT. By requiring Industry Members--
excluding Small Industry Members that are not OATS reporters \83\--to
begin reporting the first phase of equities transaction data to the
CAT, the Participants will demonstrate that they have made significant
progress towards implementing foundational CAT functionality.
---------------------------------------------------------------------------
\82\ See CAT NMS Plan, supra note 4, at Section 6.7(a)(v).
\83\ The Commission preliminarily believes that it is
appropriate to exclude Small Industry Members that do not report to
OATS from this Financial Accountability Milestone in order to mirror
the timelines projected by the Participants. See, e.g., Industry
Update on CAT Reporting Technical Specifications for Industry
Members (April 3, 2019), available at https://www.catnmsplan.com/wp-content/uploads/2019/04/CAT_Industry_Call_04032019_Presentation.pdf;
see also CAT Reporting Timelines, available at https://www.catnmsplan.com/timelines/.
---------------------------------------------------------------------------
Furthermore, the Commission preliminarily believes that it is
appropriate to require the Participants to achieve Initial Industry
Member Core Equity Reporting by April 30, 2020 in order to recover the
full amount of any related Post-Amendment Industry
[[Page 48467]]
Member Fees, because the Participants have indicated that they plan to
implement basic equities transaction reporting for Industry Members
(excluding Small Industry Members that are not OATS reporters) by that
date. Recent timelines published by the Participants indicate that the
production environment for Industry Member equities reporting will go
live in April 2020.\84\ Based on this representation, the Commission
preliminarily believes the proposed deadline of April 30, 2020 for
Initial Industry Member Core Equity Reporting is both reasonable and
feasible.
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\84\ See, e.g., id. The Participants have also released
finalized technical specifications for Industry Member reporting, as
well as a symbol list providing the scope of securities for which
Industry Member reporting will be required, which the Commission
believes are critical steps towards achieving Initial Industry
Member Core Equity Reporting by April 30, 2020. With this
information, the Industry Members should be able to make meaningful
progress towards developing the internal infrastructure needed to
report to the CAT. See note 78 supra. See also, e.g., Industry
Update on the Consolidated Audit Trail (February 20, 2019),
available at https://www.catnmsplan.com/wp-content/uploads/2019/02/CAT_Industry_Webcast_02.20.2019_vF.pdf (stating that there will be
no material design changes to the technical specifications for
Industry Member reporting and instructing Industry Members to
continue as planned with development efforts); CAT Reportable Equity
Securities Symbol Master, available at https://www.catnmsplan.com/symbol-master/.
---------------------------------------------------------------------------
b. Full Implementation of Core Equity Reporting Requirements
The Commission proposes to amend Section 1.1 of the CAT NMS Plan to
define ``Full Implementation of Core Equity Reporting Requirements'' as
the point at which: (a) Industry Member reporting (excluding reporting
by Small Industry Members that are not OATS reporters) for equities
transactions, excluding Customer Account Information, Customer-ID, and
Customer Identifying Information,\85\ is developed, tested, and fully
implemented at a 5% Error Rate \86\ or less and with sufficient intra-
firm linkage, inter-firm linkage, national securities exchange linkage,
and trade reporting facilities linkage to permit the Participants and
the Commission to analyze the full lifecycle of an order across the
national market system, excluding linkage of representative orders,
from order origination through order execution or order cancellation;
\87\ and (b) the query tool functionality required by Section
6.10(c)(i)(A) and Appendix D, Sections 8.1.1-8.1.3 and Section 8.2.1 of
the CAT NMS Plan incorporates the Industry Member equity transaction
data described in condition (a) and is available to the Participants
and to the Commission. This Financial Accountability Milestone shall be
considered complete as of the date identified in a Quarterly Progress
Report meeting the requirements of Section 6.6(c).\88\ The Commission
also proposes to add Section 11.6(a)(i)(B) to provide that the
Participants will be entitled to collect the full amount of any Post-
Amendment Industry Member Fees established or implemented to recover
Post-Amendment Expenses incurred from the date immediately following
the achievement of Initial Industry Member Core Equity Reporting to the
date of Full Implementation of Core Equity Reporting Requirements
(``Period 2''), so long as such date is no later than December 31,
2020.\89\
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\85\ See note 77 supra.
\86\ ``Error Rate'' is a term defined in Section 1.1 of the CAT
NMS Plan to mean ``the percentage of reportable events collected by
the central repository in which the data reported does not fully and
accurately reflect the order even that occurred in the market.'' See
also 17 CFR 242.613(j)(6).
\87\ The equities transaction data required at this stage is
consistent with the functionality that the Participants currently
plan to implement at ``Phase 2a'' in the latest draft of the
Technical Specifications. See note 78 supra.
\88\ See also note 79 supra.
\89\ See proposed Section 11.6(a)(i)(B). To the extent that the
Full Implementation of Core Equity Reporting Requirements milestone
is achieved at some later date, the Participants will only be
entitled to collect a portion of the amount of the Post-Amendment
Industry Member Fees established or implemented for Period 2. See
proposed Section 11.6(a)(iii); see also Part II.B.2. infra for
additional discussion regarding the conditions attached to Post-
Amendment Industry Member Fee collection.
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The Commission preliminarily believes that Full Implementation of
Core Equity Reporting Requirements is an appropriate Financial
Accountability Milestone, because this milestone requires the
Participants to show that they have taken significant steps towards
achieving one of the primary goals identified in the CAT NMS Plan--
Industry Member reporting.\90\ Whereas the previous Financial
Accountability Milestone only required that the Participants
sufficiently develop and test the CAT so as to allow Industry Members
(excluding Small Industry Members that are not OATS reporters) to begin
reporting equities transaction data, this Financial Accountability
Milestone requires Participants to have fully implemented the first
phase of equities transaction reporting for Industry Members (excluding
Small Industry Members that are not OATS reporters) at an Error Rate
that is consistent with the initial Error Rate threshold set forth in
the CAT NMS Plan.\91\ Equities transaction data produced by the CAT at
this stage must also be sufficiently interlinked so as to permit full
analysis of an order's lifecycle across the national market, excluding
full linkage of representative orders.\92\ These requirements are
designed to ensure that the Participants have developed, tested, and
implemented an audit trail system that produces meaningful and accurate
equities transaction data, including data that can be used to evaluate
the full lifecycle of an equities order.\93\ The achievement of such
benchmarks would demonstrate that the Participants have made
significant progress towards full implementation of Industry Member
reporting.\94\
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\90\ See CAT NMS Plan, supra note 4, at Section 6.7(a)(v).
\91\ See, e.g., CAT NMS Plan, supra note 4, at Section 6.5(d)(i)
of the CAT NMS Plan (specifying that the ``initial maximum Error
Rate shall be set to 5%'').
\92\ Although full linkage of representative orders is not
required by this milestone, the technical specifications provided to
Industry Members indicate that, by April 2020, linkage ``between the
representative street side order and the order being represented
when the representative order was originated specifically to
represent a single order . . . and there is: (1) an existing direct
electronic link in the firm's system between the order being
represented and the representative order, and (2) any resulting
executions are immediately and automatically applied to the
represented order in the firm's system[.]'' See CAT Reporting
Technical Specifications for Industry Members, Version 2.2 (June 24,
2019), available at https://www.catnmsplan.com/wp-content/uploads/2019/06/Industry-Member-Tech-Specs-v2.2-Clean.pdf.
\93\ See, e.g., id. at 6, 154 (setting forth specifications for
a firm-designated ID and representative order flag, which are
examples of two fields not available through OATS).
\94\ The Commission preliminarily believes that it is
appropriate to exclude Small Industry Members that do not report to
OATS from this Financial Accountability Milestone, in order to
mirror the timelines projected by the Participants. See, e.g.,
Industry Update on CAT Reporting Technical Specifications for
Industry Members (April 3, 2019), available at https://www.catnmsplan.com/wp-content/uploads/2019/04/CAT_Industry_Call_04032019_Presentation.pdf; see also CAT Reporting
Timelines, available at https://www.catnmsplan.com/timelines/.
---------------------------------------------------------------------------
The second prong of this Financial Accountability Milestone
requires that the equities transaction data collected by the CAT at
this stage be made available to regulators through two basic query
tools required by the CAT NMS Plan--a targeted query tool that will
enable regulators to retrieve data via an online query screen with a
variety of predefined selection criteria, and a user-defined direct
query tool that will provide regulators with the ability to query data
using all available attributes and data sources.\95\ These query tools
[[Page 48468]]
should enable regulators to access and use the provided data to perform
essential analyses of the equities markets, including equity market
reconstruction, and to pursue data-driven policy-making. By requiring
the Participants to develop these tools and make them available to the
Commission and other regulators at this stage, the second prong of this
Financial Accountability Milestone is designed to ensure that the CAT
is built in a manner that will allow regulators to access CAT Data in
order to realize the regulatory benefits associated with the CAT.
---------------------------------------------------------------------------
\95\ See, e.g., CAT NMS Plan, supra note 4, at Section
6.10(c)(i)(A)-(B); see id. at Appendix D, Sections 8.1.1-8.1.3, and
Section 8.2.1. Section 6.10(c)(i)(A) of the CAT NMS Plan requires
the Plan Processor to ``provide Participants and the SEC with access
to all CAT Data stored in the Central Repository'' via an ``online
targeted query tool.'' Appendix D, Section 8.1.1-8.1.3 of the CAT
NMS Plan describes the required functionality associated with this
regulatory tool. Appendix D, Section 8.2.1 describes the required
functionality associated with a user-defined direct query tool that
will ``deliver large sets of data that can then be used in internal
surveillance or market analysis applications.'' See id. at Sections
8.2. This tool is also described at Section 6.10(c)(i)(B) of the CAT
NMS Plan.
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The Commission preliminarily believes that it is appropriate to
require the Participants to achieve Full Implementation of Core Equity
Reporting Requirements by December 31, 2020 in order to receive the
full amount of any related Post-Amendment Industry Member Fees. This
deadline is consistent with the Participants' most recent projections--
for example, the most recent timelines published by the Participants
indicate that the Participants intend to substantially complete
implementation of equities reporting for Industry Member (excluding
Small Industry Members that do not report to OATS) by October 2020,\96\
and the Commission understands that the relevant query tool
functionality should go live into production on a timeline that is
generally consistent with the proposed deadline of December 31, 2020.
Accordingly, the Commission preliminarily believes the target deadline
of December 31, 2020 for Full Implementation of Core Equity Reporting
Requirements is both reasonable and feasible.
---------------------------------------------------------------------------
\96\ See, e.g., Industry Update on CAT Reporting Technical
Specifications for Industry Members (April 3, 2019), available at
https://www.catnmsplan.com/wp-content/uploads/2019/04/CAT_Industry_Call_04032019_Presentation.pdf; see also CAT Reporting
Timelines, available at https://www.catnmsplan.com/timelines/.
---------------------------------------------------------------------------
c. Full Availability and Regulatory Utilization of Transactional
Database Functionality
The Commission proposes to amend Section 1.1 of the CAT NMS Plan to
define ``Full Availability and Regulatory Utilization of Transactional
Database Functionality'' as the point at which: (a) reporting to the
Order Audit Trail System (``OATS'') is no longer required for new
orders; (b) Industry Member reporting for equities transactions, simple
electronic options transactions, manual options transactions, and
complex options transactions, including Allocation Reports,\97\ but
excluding Customer Account Information, Customer-ID, and Customer
Identifying Information, is developed, tested, and fully implemented;
(c) representative order linkages, as well as intra-firm linkages,
inter-firm linkages, national securities exchange linkages, and trade
reporting facilities linkages, are developed, tested, and fully
implemented in a manner that permits the Participants and the
Commission to analyze the full lifecycle of an order across the
national market system, from order origination through order execution
or order cancellation, including any related allocation information
provided in an Allocation Report; \98\ (d) CAT Error Rates satisfy the
threshold specified by Section 6.5(d)(i); (e) the query tool
functionality required by Section 6.10(c)(i)(A) and Appendix D,
Sections 8.1.1-8.1.3, Section 8.2.1, and Section 8.5 incorporates the
data described in conditions (b) and (c) and is available to the
Participants and to the Commission; and (f) the requirements of Section
6.10(a) are met. This Financial Accountability Milestone shall be
considered complete as of the date identified in a Quarterly Progress
Report published meeting the requirements of Section 6.6(c).\99\
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\97\ ``Allocation Report'' is defined term in Section 1.1 of the
CAT NMS Plan and carries the same meaning in the context of this
proposing release.
\98\ The allocation information provided in an Allocation Report
will be linked to person(s) having the authority to trade on behalf
of the account using Firm Designated ID--a unique identifier for
each trading account designated by Industry Members for purposes of
providing data to the Central Repository, where each such identifier
is unique among all identifiers from any given Industry Member for
each business date. See CAT NMS Plan, supra note 4, at Section 1.1.
Allocations are not required to be directly linked to orders or
executions. See id.
\99\ See also note 79 supra.
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The Commission also proposes Section 11.6(a)(i)(C) to provide that
the Participants will be entitled to collect the full amount of any
Post-Amendment Industry Member Fees established or implemented to
recover Post-Amendment Expenses incurred from the date immediately
following the achievement of Full Implementation of Core Equity
Reporting Requirements to the date of Full Availability and Regulatory
Utilization of Transactional Database Functionality (``Period 3''), so
long as such date is no later than December 31, 2021.\100\
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\100\ See proposed Section 11.6(a)(i)(C). To the extent that
Full Availability and Regulatory Utilization of Transactional
Database Functionality is achieved at some later date, the
Participants will only be entitled to collect a portion of the
amount of the Post-Amendment Industry Member Fees established or
implemented for Period 3. See proposed Section 11.6(a)(iii); see
also Part II.B.2. infra for additional discussion regarding the
conditions attached to Post-Amendment Industry Member Fee
collection.
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The Commission preliminarily believes that Full Availability and
Regulatory Utilization of Transactional Database Functionality is an
appropriate Financial Accountability Milestone, because this milestone
will require the Participants to demonstrate substantial completion of
CAT implementation. Whereas the previous Financial Accountability
Milestone focused only on the implementation of basic equities
transaction reporting for Industry Members (excluding Small Industry
Members that are not OATS reporters), this Financial Accountability
Milestone requires the Participants to have fully implemented the first
phase of reporting for equities, simple options, manual options, and
complex options. This Financial Accountability Milestone also requires
the Participants to implement representative order linkages, in
addition to intra-firm linkages, inter-firm linkages, national
securities exchange linkages, and trade reporting linkages, including
any related allocation information included in an Allocation Report.
Therefore, at this stage, the CAT should contain sufficient equities
and options transactional data and order linkages to enable regulators
to analyze the full lifecycle of an order, from order origination
through order execution or order cancellation, including any related
allocation information provided in an Allocation Report, as well as
conduct other sophisticated analyses of the markets. For instance, the
CAT should give regulators access to an options audit trail system
that, for the first time, makes possible options market reconstruction
and cross-market analyses across full order lifecycles.\101\
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\101\ Although the Consolidated Options Audit Trail System
(``COATS'') provides an audit trail for options, CAT will contain
broker-dealer data and order data not currently available through
COATS, enabling regulators to perform more sophisticated analyses on
options data. Moreover, CAT will contain equities data as well as
options data, which will enable regulators to conduct cross-market
analyses and surveillances.
---------------------------------------------------------------------------
Full Availability and Regulatory Utilization of Transactional
Database Functionality further requires that core elements of the CAT
are reasonably accurate, reliable, and accessible to regulators. For
instance, this Financial Accountability Milestone requires that CAT
Error Rates satisfy the 5% initial maximum Error Rate set forth in
Section
[[Page 48469]]
6.5(d)(i) of the CAT NMS Plan.\102\ The Commission preliminarily
believes this is appropriate because the Participants have, in the
past, expressed the belief that an initial Error Rate of 5% ``strikes
the balance of making allowances for adapting to a new reporting regime
while ensuring that the data provided to regulators will be capable of
being used to conduct surveillance and market reconstruction.'' \103\
This Financial Accountability Milestone also requires that certain
regulatory tools incorporate Industry Member data, are available to
regulators, and have been implemented pursuant to the provisions of the
CAT NMS Plan, including not only the online targeted query tool and the
user-defined direct query tool discussed above,\104\ but also
surveillance systems reasonably designed to make use of CAT data.\105\
Moreover, achievement of Full Availability and Regulatory Utilization
of Transactional Database Functionality requires the Participants to
demonstrate, through retirement of the existing OATS system,\106\ that
the CAT is sufficiently accurate, reliable, and accessible to
regulators to be adopted as the audit trail system for equities
transactions. The Commission believes that all of these requirements
should ensure that regulators are able to use and rely on the CAT at
this stage to conduct the kind of improved market surveillance that the
Commission envisioned when it adopted Rule 613.\107\
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\102\ See proposed Section 1.1, ``Full Availability and
Regulatory Utilization of Transactional Database Functionality,'' at
(b). See also CAT NMS Plan, supra note 4, at Section 6.5(d)(i).
\103\ See CAT NMS Plan Approval Order, supra note 4, at 84717.
\104\ See Section II.B.1.b. supra.
\105\ Full Availability and Regulatory Utilization of
Transactional Database Functionality requires that the requirements
of Appendix D, Section 8.1.1-8.1.3, Section 8.2.1, and Section 8.5
of the CAT NMS Plan, which describe the performance requirements and
service level agreements for necessary regulatory tools, have been
met for any data contained in the CAT. The ``surveillance systems''
required by Section 6.10(a) and the query tool functionality
required by Section 6.10(c)(i)(A) of the CAT NMS Plan must also be
implemented. See proposed Section 1.1, ``Full Availability and
Regulatory Utilization of Transaction Database Functionality,'' at
(e)-(f).
\106\ To achieve this Financial Accountability Milestone, OATS
reporting must no longer be required for new orders. This prong can
only be accomplished by retiring OATS. Although FINRA is the only
Participant in direct control of OATS retirement, the Commission
still believes it is appropriate to apply this milestone to all
Participants. All of the Participants are jointly responsible for
creating a CAT that is capable of replacing OATS. All Participants
are regulators that will benefit from the full implementation of the
CAT. See, e.g., CAT NMS Plan, supra note 4, at Appendix C, Section
C.9. (discussing retirement of OATS).
\107\ See Rule 613 Adopting Release, supra note 2, at 45788.
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The Commission preliminarily believes that it is appropriate to
require the Participants to achieve Full Availability and Regulatory
Utilization of Transactional Database Functionality by December 31,
2021 in order to recover the full amount of any related Post-Amendment
Industry Member Fees. This deadline is consistent with the
Participants' most recent projections for completion of Industry Member
reporting, representative order linkages, and the development of
regulatory query tools for options and equities. The most recent
timelines issued by the Participants suggest that Industry Member
reporting and representative order linkages will be implemented by
December 2021,\108\ and the Commission further understands that the
online targeted query tool and user-directed direct query tool for both
options and equities should go live into production on a timeline that
is generally consistent with the proposed deadline of December 31,
2021. Therefore, the Commission's proposed deadline of December 31,
2021 is consistent with the Participants' timeline for these items.
---------------------------------------------------------------------------
\108\ See, e.g., note 96 supra.
---------------------------------------------------------------------------
Moreover, so long as the Participants diligently work towards
building the CAT according to the requirements of the CAT NMS Plan, the
Commission preliminarily believes that the Participants should
reasonably be able to demonstrate, by December 31, 2021, both that the
CAT is fully and effectively functional for equities data such that the
CAT is capable of replacing OATS such that reporting to OATS will no
longer be required for new orders. The Participants' timelines indicate
that, by December 31, 2021, Industry Members and Small Industry Members
that report to OATS will have been reporting equities transaction data
to CAT for approximately 20 months,\109\ which should give the
Participants and other CAT Reporters a reasonable opportunity to
address or correct any material data quality issues. The Commission
further notes that the conditions of Full Availability and Regulatory
Utilization of Transactional Database Functionality are designed to
ensure that regulators are able to perform at least their normal range
of regulatory tasks using CAT Data instead of OATS data. The Commission
therefore preliminarily believes that it is reasonable and feasible to
establish December 31, 2021 as the deadline for this Financial
Accountability Milestone.\110\
---------------------------------------------------------------------------
\109\ See supra note 96 and associated text. The Participants do
not currently intend to implement transaction reporting for Small
Industry Members that do not report to OATS until December 2021.
However, because these Industry Members do not report to OATS, the
Commission preliminarily believes that this should not impact the
ability of the Participants to retire OATS by the target deadline of
December 31, 2021.
\110\ The Commission also believes that tying full recovery of
CAT-related expenses to this Financial Accountability Milestone will
increase the likelihood that OATS will be retired by the proposed
date, thereby reducing uncertainty amongst Industry Members and,
potentially, compressing the period of duplicative reporting to
which Industry Members might otherwise be subjected.
---------------------------------------------------------------------------
With respect to the additional requirements designed to ensure that
the CAT Data provided by Industry Members will be reasonably accurate,
reliable, and accessible to regulators, the Commission also
preliminarily believes that the Participants should be able to meet
these requirements by December 31, 2021. For example, proposed Section
11.6(a)(i)(C) and proposed Section 1.1 would provide the Participants
with approximately two years from the date of this amendment's adoption
to develop, test, and implement the surveillance systems required by
Section 6.10(a) of the CAT NMS Plan,\111\ whereas the CAT NMS Plan
indicates that a shorter span of fourteen months would be a sufficient
period of time to accomplish that task.\112\ The Commission therefore
preliminarily believes the target deadline of December 31, 2021 for
Full Availability and Regulatory Utilization of Transactional Database
Functionality is both reasonable and feasible.
---------------------------------------------------------------------------
\111\ Section 6.10(a) of the CAT NMS Plan requires the
Participants to use the tools described in Appendix D to ``develop
and implement a surveillance system, or enhance existing
surveillance systems, reasonably designed to make use of the
consolidated information contained in the Central Repository.'' See
note 4 supra.
\112\ See CAT NMS Plan, supra note 4, at Section 6.7(a)(iv); see
also id. at Section 6.10(a).
---------------------------------------------------------------------------
d. Full Implementation of CAT NMS Plan Requirements
The Commission proposes to amend Section 1.1 of the CAT NMS Plan to
define ``Full Implementation of CAT NMS Plan Requirements'' as the
point at which the Participants have satisfied all of their obligations
to build and implement the CAT, such that all CAT system functionality
required by Rule 613 and the CAT NMS Plan has been developed,
successfully tested, and fully implemented at the initial Error Rates
specified by Section 6.5(d)(i) of the CAT NMS Plan or less, including
functionality that efficiently permits the Participants and the
Commission to access all CAT Data required to be stored in the Central
Repository pursuant to Section 6.5(a) of the CAT NMS Plan, including
Customer Account
[[Page 48470]]
Information, Customer-ID, Customer Identifying Information, and
Allocation Reports, and to analyze the full lifecycle of an order
across the national market system, from order origination through order
execution or order cancellation, including any related allocation
information provided in an Allocation Report.\113\ This Financial
Accountability Milestone shall be considered complete as of the date
identified in a Quarterly Progress Report meeting the requirements of
Section 6.6(c).\114\ The Commission also proposes to add Section
11.6(a)(i)(D) to provide that the Participants will be entitled to
collect the full amount of any Post-Amendment Industry Member Fees
established or implemented to recover Post-Amendment Expenses incurred
from the date immediately following the achievement of Full
Availability and Regulatory Utilization of Transactional Database
Functionality to the date of Full Implementation of CAT NMS Plan
Requirements (``Period 4''), so long as such date is no later than
December 30, 2022.\115\
---------------------------------------------------------------------------
\113\ See notes 97-98 supra.
\114\ See also note 79 supra.
\115\ See proposed Section 11.6(a)(i)(D). To the extent that
Full CAT NMS Plan Requirements is achieved at some later date, the
Participants will only be entitled to collect a portion of the
amount of the Post-Amendment Industry Member Fees established or
implemented for Period 4. See proposed Section 11.6(a)(iii); see
also Part II.B.2. infra for additional discussion regarding the
conditions attached to Post-Amendment Industry Member Fee
collection.
---------------------------------------------------------------------------
The Commission preliminarily believes that Full Implementation of
CAT NMS Plan Requirements is appropriate as the final Financial
Accountability Milestone.\116\ This Financial Accountability Milestone
will require the Participants to show that they have satisfied all of
their obligations to build and implement the CAT system functionality
required by Rule 613, including functionality that would allow the
Participants and the Commission to efficiently access all transactional
data and, for the first time, customer information stored in the
Central Repository. Whereas the previous Financial Accountability
Milestones do not require the Participants to provide customer
information like Customer Account Information, Customer-ID, and
Customer Identifying Information, the Participants must have developed,
tested, and implemented reporting functionality for these elements to
satisfy the parameters of Full Implementation of CAT NMS Plan
Requirements.
---------------------------------------------------------------------------
\116\ Because the provisions of proposed Section 11.6 are meant
to incentivize full CAT implementation, under the proposal, these
provisions will not apply once Full Implementation of CAT NMS Plan
Requirements is achieved.
---------------------------------------------------------------------------
The creation of a unique Customer-ID under the CAT NMS Plan, is
critical to achieving the full regulatory benefit of the CAT.\117\ In
the Commission's experience, it is now common for individuals and
entities to trade through multiple broker-dealer accounts and for
individuals engaged in wrongdoing to execute trades through multiple
broker-dealers. A Customer-ID will be the key that ties all of the
trading by one Customer together and as such, will facilitate the
ability of regulators to identify all the orders and actions
attributable to a specific Customer regardless of where that Customer
routes orders or executes trades--a linkage which does not exist now.
---------------------------------------------------------------------------
\117\ See, e.g., Rule 613 Adopting Release, supra note 2, at
45756.
---------------------------------------------------------------------------
Moreover, currently available audit trail data does not directly
identify the customer associated with trading activity, so regulators
conducting market surveillance must undertake multiple steps to request
additional information after identifying suspect trades in order to
link those trades with specific individuals. The inclusion of Customer-
IDs in the CAT, at Full Implementation of CAT NMS Plan Requirements,
would therefore significantly improve the capabilities of regulators
because the CAT will be able to connect suspicious trading activity
directly to a particular Customer through the Customer-ID. In addition,
the Customer-ID will also enable a regulator to surveil the trading
activity of market participants in both equity and options markets by
Customer-ID, and thus a Customer-ID will improve regulators' efficiency
in conducting cross-market and cross-product surveillance, which could
in turn reduce violative behavior and protect investors from harm.
Accordingly, the Commission believes that it is important to
require the Participants to demonstrate that the Participants have
developed, tested, and fully implemented functionality that efficiently
permits the Commission and other regulators to access Customer-IDs,
along with other Customer and Account information.
In addition to providing this integral customer information,
achievement of Full Implementation of CAT NMS Requirements would also
mean that the Participants have created an audit trail system that
provides reasonably accurate, reliable and useful information. Full
Implementation of CAT NMS Requirements mandates that the CAT produce
data at the initial Error Rate specified by the CAT NMS Plan,\118\ as
well as functionality that would efficiently permit the Participants
and the Commission to analyze the full lifecycle of an order, including
any subsequent allocation, across the national market system. These
requirements are designed to help facilitate the implementation of the
CAT functions in a manner that enables the Commission and other
regulators to conduct the improved market surveillance envisioned by
the Commission when it adopted Rule 613--the ultimate goal of this
project.
---------------------------------------------------------------------------
\118\ See CAT NMS Plan, supra note 4, at Section 6.5(d)(i). See
also note 103 supra.
---------------------------------------------------------------------------
Furthermore, the Commission preliminarily believes that it is
appropriate to require the Participants to achieve Full Implementation
of CAT NMS Plan Requirements by December 30, 2022 in order to recover
the full amount of any Post-Amendment Industry Member Fees. This
deadline is consistent with the Participants' most recent projections,
which indicate that the Participants intend to achieve full CAT
implementation by July 2022.\119\ In fact, the Commission's target
deadline of December 30, 2022 gives the Participants an additional five
months to achieve Full Implementation of CAT NMS Plan Requirements.
Accordingly, the Commission preliminarily believes that the proposed
target deadline of December 30, 2022 for Full Implementation of CAT NMS
Plan Requirements is both reasonable and feasible.
---------------------------------------------------------------------------
\119\ See, e.g., note 96 supra.
---------------------------------------------------------------------------
2. Collection of Post Amendment Industry Member Fees
As noted above, the Commission is proposing that the Participants
will be entitled to collect the full amount \120\ of any Post-Amendment
Industry Member Fees related to the achievement of the Financial
Accountability Milestones described above so long as they meet
specified dates, which dates are consistent with the timelines most
recently published by the Participants.\121\ If the Participants do
[[Page 48471]]
not meet the specified date for the achievement of Initial Industry
Member Core Equity Reporting, proposed Section 11.6(a)(ii) will provide
that the Participants' recovery of Post-Amendment Industry Member Fees
will be reduced according to the following schedule:
---------------------------------------------------------------------------
\120\ ``Full amount'' in this context does not mean that the
Participants may collect all of their Post-Amendment Expenses from
Industry Members. Rather, pursuant to the provisions of Article XI
of the CAT NMS Plan, the Participants may recover an appropriate
portion of these fees from Industry Members. Specifically, to
recover any Post-Amendment Expenses from Industry Members, the
Participants must file with the Commission proposed rule changes
under Section 19(b) of the Act, setting for their proposed
allocation and justifying why the proposed allocation is consistent
with the Act. The Commission would then review the proposed rule
changes for consistency with the Exchange Act and the CAT NMS Plan.
\121\ See proposed Section 11.6(a)(i).
---------------------------------------------------------------------------
By 25% if the Participants miss the deadline set forth in
proposed Section 11.6(a)(i)(A) by less than 60 days;
By 50% if the Participants miss the deadline set forth in
proposed Section 11.6(a)(i)(A) by 60 days or more, but less than 120
days;
By 75% if the Participants miss the deadline set forth in
proposed Section 11.6(a)(i)(A) by 120 days or more, but less than 180
days;
By 100% if the Participants miss the deadline set forth in
proposed Section 11.6(a)(i)(A) by 180 days or more.
If the Participants do not meet the specified dates for the
achievement of Full Implementation of Core Equity Reporting
Requirements, Full Availability and Regulatory Utilization of
Transactional Database Functionality, or Full Implementation of CAT NMS
Plan Requirements, proposed Section 11.6(a)(iii) will provide that the
Participants' recovery of Post-Amendment Industry Member Fees will be
reduced according to the following schedule:
By 25% if the Participants miss the deadline set forth in
proposed Section 11.6(a)(i) by less than 90 days;
By 50% if the Participants miss the deadline set forth in
proposed Section 11.6(a)(i) by 90 days or more, but less than 180 days;
By 75% if the Participants miss the deadline set forth in
proposed Section 11.6(a)(i) by 180 days or more, but less than 270
days; and
By 100% if the Participants miss the deadline set forth in
proposed Section 11.6(a)(i) by 270 days or more.
Proposed Section 11.6(a)(iv) provides that the Participants will only
be entitled to collect Post-Amendment Industry Member Fees for Period
1, Period 2, Period 3, or Period 4 at the end of each respective
Period.
The Commission preliminarily believes these conditions on CAT
funding are appropriate. It has been almost three years since the
Commission approved the CAT NMS Plan, but insufficient progress has
been made towards the implementation of CAT, and the Participants have
repeatedly missed deadlines set forth by the CAT NMS Plan. The
Commission preliminarily believes that the proposed rules will provide
accountability to facilitate implementation of the CAT in an
expeditious and efficient manner, and according to a schedule that is
consistent with the most recent timelines published by the
Participants.\122\
---------------------------------------------------------------------------
\122\ See Part II.B.1. for more discussion of the deadlines
established by the proposed amendments.
---------------------------------------------------------------------------
As explained above, the Commission has identified four meaningful
Financial Accountability Milestones and paired those Financial
Accountability Milestones with reasonable and feasible target deadlines
set approximately eight months to one year apart. The Participants will
be able to recover the full amount of any Post-Amendment Industry
Member Fees if the Participants achieve the Financial Accountability
Milestones identified in the proposed rule amendment by the specified
dates. However, the Commission preliminarily believes that it is
appropriate to impose financial accountability on the Participants by
incrementally reducing the amount of CAT funding that Participants may
recover from Industry Members, according to the schedules set forth
above.
Fee recovery for most of the Financial Accountability Milestones--
Full Implementation of Core Equity Reporting Requirements, Full
Availability and Regulatory Utilization of Transactional Database
Functionality, and Full Implementation of CAT NMS Plan Requirements--
will be governed by a fee schedule that gradually reduces the amount of
recovery that the Participants are entitled to by 25% for each quarter
by which the Participants miss the target deadline. The Commission
preliminarily believes this structure will appropriately balance the
need to keep Participants on a firm implementation schedule with the
need to incentivize the Participants to continue their progress towards
implementation even if the target deadlines identified in the proposed
amendment are missed. As discussed above,\123\ the Commission believes
that the target deadlines identified for these three milestones are
reasonable and feasible, because these deadlines are consistent with
recent timelines provided by the Participants. The Commission therefore
does not believe that it is necessary to allow for a grace period
before reducing the Participants' recovery. However, by providing a
full quarter before each subsequent, and additional, reduction to fee
recovery, the proposed schedule gives the Participants an ample amount
of time to achieve each milestone before further reductions are
imposed. Moreover, the Commission believes that the proposed amount of
the reduction--25% per quarter--is appropriate, because it is
sufficiently large to incentivize prompt implementation, but not so
large as to be unnecessarily punitive.
---------------------------------------------------------------------------
\123\ See Part II.B.1.b.-d. supra.
---------------------------------------------------------------------------
A slightly different schedule is proposed for Initial Industry
Member Core Equity Reporting. For that milestone, the proposal would
reduce the initial recovery by 25% if the Participants miss the
proposed deadline by less than 60 days and by an additional 25% for
every additional 60 days by which the Participants miss the proposed
deadline. While the Commission is imposing the same 25% fee reduction
in this instance, the proposed fee recovery schedule for Initial
Industry Member Core Equity Reporting is tighter than the schedule for
the other three Financial Accountability Milestones. The Commission
preliminarily believes that this is an appropriate schedule because
this Financial Accountability Milestone should be the easiest for the
Participants to achieve. Industry Members have developed relevant
experience in reporting equities transaction data to OATS, and the
Participants have made significant progress towards development of the
necessary technical specifications, suggesting that the Participants
remain on track with their own projections. In addition, the Commission
believes it is critically important that the Participants remain on
schedule to achieve the first Financial Accountability Milestone, in
order to minimize the possibility that the deadlines for subsequent
Financial Accountability Milestones will be missed.\124\ For those
reasons, the Commission believes the fee recovery schedule for Initial
Industry Member Core Equity Reporting is appropriate.
---------------------------------------------------------------------------
\124\ See, e.g., Part IV.E.1.
---------------------------------------------------------------------------
The Commission preliminarily believes that the incremental approach
followed by both fee recovery schedules, which provide the Participants
with a considerable amount of recovery unless the Participants miss the
target deadline by a considerable amount of time, will also promote
implementation of the CAT in accordance with the deadlines outlined by
this proposed amendment. The sooner the Participants achieve each
Financial Accountability Milestone, the sooner the Participants will be
able to begin recovering any related Post-Amendment Industry Member
Fees.\125\
[[Page 48472]]
Moreover, so long as the Participants complete each particular
Financial Accountability Milestone substantially before the target
deadline for the next Financial Accountability Milestone arrives, the
Participants should be able to recover a portion of their fees, costs,
and expenses from Industry Members, subject to the Exchange Act and the
provisions of the CAT NMS Plan. Although failing to meet one target
deadline might make it more difficult to comply with the next target
deadline, the proposed amendment does not preclude the possibility that
the Participants may be entitled to some measure of recovery going
forward.\126\ The Commission preliminarily believes that the
Participants will continue to make progress towards full CAT
implementation even if one target deadline is missed because they still
will have the opportunity to recover fees, costs, and expenses from
Industry Members, albeit a smaller portion of those fees, costs, and
expenses.\127\
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\125\ See, e.g., proposed Section 11.6(a)(iv) (providing that
the Participants may only collect relevant Post-Amendment Industry
Member Fees at the end of Period 1, 2, 3 and/or 4).
\126\ For example, suppose the Participants missed the deadline
for Initial Industry Member Core Equity Reporting by 180 days or
more and were therefore not entitled to any recovery for Period 1.
In this scenario, the Participants might still be able to meet the
deadline for the next Financial Accountability Milestone, Full
Implementation of Core Equity Reporting Requirements, or achieve
that Financial Accountability Milestone within 270 days of the
proposed deadline, thus entitling them to partial recovery under the
proposed amendment. As another example, suppose the Participants did
not achieve Full Implementation of Core Equity Reporting
Requirements until January 1, 2021, but were able to meet the target
deadline for the next Financial Accountability Milestone--Full
Availability and Regulatory Utilization of Transactional Database
Functionality. Because the Participants did not achieve Full
Implementation of Core Equity Reporting Requirements on schedule,
but were less than 90 days late, the Participants would be entitled
to collect 75% of the Post-Amendment Industry Member Fees
established for Period 2 upon achievement of Full Implementation of
Core Equity Reporting Requirements and the full amount of Post-
Amendment Industry Member Fees for Period 3 upon achievement of Full
Availability and Regulatory Utilization of Transactional Database
Functionality.
\127\ See, e.g., note 191 infra.
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As noted above, the Commission must review fee filings submitted by
the Participants pursuant to Section 19(b) of the Exchange Act to
implement fees to recover the costs and expenses incurred by the
Participants in connection with the development, implementation, and
operation of the CAT.\128\ These filings must specify the percentage of
the costs and expenses that will be allocated to the Participants on
the one hand and the Industry Members on the other hand, as well as
explain how costs and expenses will be allocated within each group.
Each Participant must also demonstrate, under Sections 6(b)(4) and
15A(b)(5), that such fee filings provide for the equitable allocation
of reasonable dues, fees, and other charges among its members and other
persons using its facilities.\129\ In light of the continued delays to
CAT implementation, the Commission preliminarily believes that it is
appropriate, at this time, to set forth the circumstances under which
the full recovery of fees, costs, and expenses from Industry Members
would not be reasonable under Sections 6(b)(4) or 15A(b)(5) of the
Exchange Act or reasonably related to the Participants' self-regulatory
obligations under the CAT NMS Plan.\130\ The Commission preliminarily
believes that it would not be a reasonable exercise of the
Participants' funding authority under the CAT NMS Plan to fully recover
fees, costs, and expenses from Industry Members if the Participants
miss the target deadlines specified in the proposed amendment, because
any delays by the Participants could increase uncertainty for and,
potentially, impose additional costs on Industry Members.\131\ In
addition, the proposed amendments will increase transparency for
Industry Members by setting forth the circumstances under which the
full recovery of fees, costs, and expenses from Industry Members would
not be reasonable.
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\128\ See notes 66-68 supra.
\129\ See note 68 supra.
\130\ See notes 72-73 and associated text supra.
\131\ See, e.g., Section IV.B. infra.
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3. Identification of Post-Amendment Expenses in Submissions to the
Commission
Under proposed Section 11.6(b), all CAT NMS Plan amendments
submitted by the Operating Committee to the Commission pursuant to Rule
608(b)(3)(i),\132\ and all filings submitted by the Participants to the
Commission under Section 19(b) of the Exchange Act,\133\ to establish
or implement Post-Amendment Industry Member Fees pursuant to Article XI
of the CAT NMS Plan, must clearly indicate whether such fees are
related to Post-Amendment Expenses incurred during Period 1, Period 2,
Period 3, or Period 4. Requiring the Participants to specify whether
any proposed fees are related to Post-Amendment Expenses, and the
Period to which they are related, will help the Commission to determine
whether it must consider the provisions of proposed Section 11.6 in
evaluating the proposed fees.
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\132\ 17 CFR 242.608(b)(3)(i).
\133\ 15 U.S.C. 78s(b).
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The Commission requests comment on these proposed financial
accountability provisions. To the extent possible, please provide
specific data, analyses, or studies for support. The Commission
particularly solicits comment on the following issues:
13. Is it appropriate for the Commission to apply the financial
accountability provisions of proposed Section 11.6 to Post-Amendment
Expenses? Why or why not? Should the financial accountability
provisions of proposed Section 11.6 be applied to fees, costs, or
expenses incurred by the Company in connection with the development,
implementation, and operation of the CAT, or to some other set of fees,
costs, or expenses? Why or why not? Would it be appropriate to limit
Section 11.6 to apply only to fees, costs, or expenses incurred by the
Company in connection with the development or implementation of the
CAT? Why or why not? Should the Commission further define what it means
to ``incur'' an expense? If so, how? Can the current definition of
``incurred'' in the proposing release be used to avoid the application
of proposed Section 11.6? If so, please explain and describe how the
Commission should address this.
14. Is it appropriate for the Commission to tie CAT funding to the
achievement of Financial Accountability Milestones? Why or why not?
Please explain your response.
15. With respect to Period 1:
a. Is the proposed Financial Accountability Milestone of Initial
Industry Member Core Equity Reporting appropriate? Why or why not? What
other milestone should be used to end Period 1? Why?
b. Is the definition of Initial Industry Member Core Equity
Reporting appropriate? Why or why not? Please explain your response.
i. Should the definition of Initial Industry Member Core Equity
Reporting be amended to include additional types of reporting or data?
Should it be amended to remove some of the reporting or data
requirements currently identified? Why or why not? Please explain your
response.
ii. If the definition is amended, should the target deadline for
Period 1 be amended? Why or why not? Please explain your response.
c. Is the target deadline of April 30, 2020 appropriate? Why or why
not? What alternative deadline would be more appropriate? Why? Please
explain your response.
16. With respect to Period 2:
a. Is the proposed Financial Accountability Milestone of Full
Implementation of Core Equity Reporting Requirements appropriate?
[[Page 48473]]
Why or why not? What other milestone should be used to end Period 2?
Why? Please explain your response.
b. Is the definition of Full Implementation of Core Equity
Reporting Requirements appropriate? Why or why not? Please explain your
response.
i. Should the definition of Full Implementation of Core Equity
Reporting Requirements be amended to include other kinds of Industry
Member reporting or linkages? If so, which additional kinds of Industry
Member reporting or linkages should be included and why? Please explain
your response.
ii. Should the definition of Full Implementation of Core Equity
Reporting Requirements be amended to reduce or strike the reporting
linkages requirement? If reduced, how should the requirements be
reduced? Why? Please explain your response.
iii. Should the definition of Full Implementation of Core Equity
Reporting Requirements be amended to require a less stringent Error
Rate? If so, what should the Error Rate be and why? Please explain your
response.
iv. Should the definition of Full Implementation of Core Equity
Reporting Requirements amend the requirement that the query tool
functionality required by Section 6.10(c)(i)(A) and Appendix D,
Sections 8.1.1-8.1.3 and Section 8.2.1 incorporates Industry Member
equities data or the requirement that the query tool functionality is
available to the Participants and the Commission? How should the
requirement be amended? Why? Please explain your response.
v. If the definition is amended, should the target deadline for
Period 2 be amended? Why or why not? Please explain your response.
c. Is the start date for Period 2 appropriate? Why or why not?
Please explain your response.
d. Is the target deadline of December 31, 2020 appropriate? Why or
why not? What alternative deadline would be more appropriate? Why?
Please explain your response.
17. With respect to Period 3:
a. Is the proposed Financial Accountability Milestone of Full
Availability and Regulatory Utilization of Transactional Database
Functionality appropriate? Why or why not? What other milestone should
be used to end Period 3? Why? Please explain your response.
b. Is the definition of Full Availability and Regulatory
Utilization of Transactional Database Functionality appropriate? Why or
why not? Please explain your response.
i. Should the definition of Full Availability and Regulatory
Utilization of Transactional Database Functionality be amended to
require that the Commission must have approved a filing from FINRA to
retire OATS, as well as any filings from the Participants to remove
OATS-related provisions from their rules, or to remove the requirement
that OATS reporting is no longer required for new orders? Why or why
not? Please explain your response.
ii. Should the definition of Full Implementation of Core Equity
Reporting Requirements be amended to include other kinds of Industry
Member reporting or linkages? If so, which additional kinds of Industry
Member reporting or linkages should be included and why? Please explain
your response.
iii. Should the definition of Full Availability and Regulatory
Utilization of Transactional Database Functionality be amended to
require a less stringent Error Rate? If so, what should the Error Rate
be and why? Please explain your response. Should the Commission require
the Participants to demonstrate that Error Rates are stable? If so, how
would Participants do that? If the Participants are in compliance with
Appendix C, Section 3 of the CAT NMS Plan, would that sufficient? How
long should the Error Rate remain below the specified threshold in
order to be considered ``stable''?
iv. Should the Commission amend the requirement that the query tool
functionality required by Section 6.10(c)(i)(A) and Appendix D,
Sections 8.1.1-8.1.3, Section 8.2.1, and Section 8.5 incorporates the
data required by conditions (b) and (c) or the requirement that the
query tool functionality is available to the Participants and the
Commission? How should the requirement be amended? Why? Please explain
your response.
v. Should the Commission amend the requirement that the
requirements of Section 6.10(a) are met? How should the requirement be
amended? Why? Please explain your response.
vi. If the definition is amended, should the target deadline for
Period 3 be amended? Why or why not? Please explain your response.
c. Is the start date for Period 3 appropriate? Why or why not?
Please explain your response.
d. Is the target deadline of December 31, 2020 appropriate? Why or
why not? What alternative deadline would be more appropriate? Why?
Please explain your response.
e. Are there any conditions that the Commission should consider in
evaluating whether OATS can be retired? Please explain your response.
18. With respect to Period 4:
a. Is the proposed Financial Accountability Milestone of Full
Implementation of CAT NMS Plan Requirements appropriate? Why or why
not? What other milestone should be used to end Period 4? Why? Please
explain your response.
b. Is the definition of Full Implementation of CAT NMS Plan
Requirements appropriate? Why or why not? Please explain your response.
i. Is additional detail needed to describe the obligations of the
Participants under Rule 613 and the CAT NMS Plan? If so, why, and what
language would sufficiently describe these obligations? Please explain
your response.
ii. If the definition is amended, should the target deadline for
Period 4 be amended? Why or why not? Please explain your response.
c. Is the start date for Period 4 appropriate? Why or why not?
Please explain your response.
d. Is the target deadline of December 30, 2022 appropriate? Why or
why not? What alternative deadline would be more appropriate? Why?
Please explain your response.
19. Are the selected Financial Accountability Milestones
appropriate? If not, what other Financial Accountability Milestones
should be included?
20. Is it appropriate for the Commission to permit the Participants
to submit updated, interim or addendum Quarterly Progress Reports for
completed Financial Accountability Milestones? Why or why not? What
information should be required in these interim or addendum Quarterly
Progress Reports so that the Commission can rely on such reports?
Should the Participants only be able to submit interim or addendum
Quarterly Progress Reports in connection with certain Financial
Accountability Milestones? If so, which ones? Please explain your
response.
21. Is it appropriate to end the application of proposed Section
11.6 once Full Implementation of CAT NMS Requirements has been
achieved? Why or why not? Please explain your response.
22. Should the Commission establish more than 4 Periods and/or use
more than 4 Financial Accountability Milestones? If so, how many
Periods should the Commission establish? What should the other
Financial Accountability Milestones be? Why? Please explain your
response.
23. Should the Commission establish fewer than 4 Periods and/or use
fewer Financial Accountability Milestones? If so, how many Periods
should the
[[Page 48474]]
Commission establish? What milestones should be removed, or how should
the existing milestones be edited? Please explain your response.
24. Is it appropriate for the Commission to incrementally reduce
the amount of Post-Amendment Industry Member Fees that the Participants
may recover if they miss the target deadlines specified in Period 1,
Period 2, Period 3, or Period 4? Why or why not? Would a different
percentage of recovery be more appropriate if target deadlines are
missed? If so, what percentage and on what schedule? Why? Is it
appropriate for the Commission to use different recovery schedules for
Period 1 and for Periods 2-4? Why or why not? Should a different
recovery schedule be used for Period 1? If so, how should the recovery
schedule be amended? Why? Please explain your response.
25. Is it appropriate that the Participants may only collect Post-
Amendment Industry Member Fees at the end of Period 1, Period 2, Period
3, or Period 4? Why or why not? If not, at what other point(s) should
the Participants be able to collect these fees, and how would the
Commission determine whether and how the provisions of Section 11.6
apply? Please explain your response.
26. Do commenters believe that the proposed incentives will
motivate the Participants to implement the CAT in an expeditious and
efficient manner? Why or why not? Would an alternative methodology be
more effective? If so, please describe this methodology and explain why
it would be more effective.
27. Is it appropriate for the Commission to require the Operating
Committee or the Participants to clearly label any CAT NMS Plan
amendments or fee filings submitted to establish or implement Post-
Amendment Industry Member Fees to indicate whether such fees are
related to Post-Amendment Expenses incurred during Period 1, Period 2,
Period 3, or Period 4? Why or why not? If not, how would the Commission
determine whether and how the provisions of Section 11.6 apply? Please
explain your response.
28. Should the Commission require the Participants to provide an
independent audit of the fees, costs, and expenses incurred from the
effective date of this proposed amendment? Why or why not?
III. Paperwork Reduction Act
Certain provisions of the proposed rule contain ``collection of
information requirements'' within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\134\ The Commission is submitting
these collections of information to the Office of Management and Budget
(``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 CFR
1320.11.\135\ An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless the agency
displays a currently valid control number.\136\ The title of the new
collection of information is ``CAT NMS Plan Reports.''
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\134\ 44 U.S.C. 3501 et seq.
\135\ 44 U.S.C. 3507; 5 CFR 1320.11.
\136\ 5 CFR 1320.11(l).
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A. Summary of Collection of Information
The proposed amendment would require two new categories of
information collection: (1) The Implementation Plan and (2) the
Quarterly Progress Reports.\137\ These categories are described more
fully below.
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\137\ The proposed amendment also requires the Participants to
include certain information in certain CAT NMS Plan amendments
submitted by the Operating Committee to the Commission pursuant to
Rule 608(b)(3) and all filings submitted by the Participants to the
Commission under Section 19(b) of the Exchange Act to establish or
implement Post-Amendment Industry Member Fees. However, the
Commission does not expect the baseline number of CAT NMS Plan
amendments or Section 19(b) filings, or the burdens associated with
these submissions, to increase as a result of the proposed
amendment. The Commission therefore believes that these burdens are
already accounted for in the Paperwork Reduction Act Information
Collection submissions for Form 19b-4 and Rule 11Aa3-2. See OMB
Control No. 3235-0045 (Aug. 19, 2016), 81 FR 57946 (Aug. 24, 2016)
(Request to OMB for Extension of Rule 19b-4 and Form 19b-4 PRA); OMB
Control No. 3235-0500 (December 22, 2004), 70 FR 929 (January 5,
2005) (Proposed Collection for Rule 11Aa3-2 and Request for
Comment).
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1. Implementation Plan
Proposed Section 6.6(c)(i) would require the Participants, within
30 calendar days following the effective date of this amendment, to
file with the Commission and make publicly available on a website a
complete Implementation Plan that includes the Participants' timeline
for achieving Implementation Milestones setting forth how and when the
Participants will facilitate the achievement of Full Implementation of
CAT NMS Plan Requirements. Under proposed Section 6.6(c)(iii), the
Operating Committee shall be required to submit the Implementation Plan
to the CEO, President, or an equivalently situated senior officer of
each Participant. A Supermajority Vote of the Operating Committee shall
then be required to approve the Implementation Report. However, if the
Implementation Plan is approved only by a Supermajority Vote of the
Operating Committee, and not by a unanimous vote of the Operating
Committee, each Participant whose Operating Committee member did not
vote to approve the Implementation Plan shall separately file with the
Commission and make publicly available on a website a statement
identifying itself and explaining why the member did not vote to
approve the Implementation Plan.
2. Quarterly Progress Reports
Proposed Section 6.6(c)(ii) would further require the Participants,
within 15 business days after the end of each calendar quarter, to file
with the Commission and make publicly available on a website a complete
Report that provides a detailed description of the progress made by the
Participants towards each of the Implementation Milestones. The
Participants must provide specified information regarding
Implementation Milestones that have been completed, Implementation
Milestones that are in progress, and Implementation Milestones that
have not yet been initiated, such as updated information on currently
targeted completion dates and descriptions of the current status of the
Implementation Milestone, any adjustments to the targeted completion
date, and supporting information demonstrating the current level of
completion. Under proposed Section 6.6(c)(iii), the Operating Committee
shall be required to submit each Quarterly Progress Report to the CEO,
President, or an equivalently situated senior officer of each
Participant. A Supermajority Vote of the Operating Committee shall be
required to approve each Quarterly Progress Report. However, if a
Quarterly Progress Report is approved only by a Supermajority Vote of
the Operating Committee, and not by a unanimous vote of the Operating
Committee, each Participant whose Operating Committee member did not
vote to approve that Quarterly Progress Report shall separately file
with the Commission and make publicly available on a website a
statement identifying itself and explaining why the member did not vote
to approve the Report.
B. Proposed Use of Information
1. Implementation Plan
The Commission believes that the publication of the proposed
Implementation Plan will make available critical information to the
Commission, other regulators, and market participants regarding the
[[Page 48475]]
intended goals and deadlines of the Participants. Access to this
information will help the Commission and market participants to monitor
the progress of CAT implementation, thereby reducing uncertainty
surrounding this process. The Commission also anticipates that
requiring the Participants to make public target dates submitted to
senior management of each Participant and approved by a Supermajority
Vote of the Operating Committee in the Implementation Plan will
increase the Participants' accountability to their intended timeline.
In addition, the Commission believes that requiring any Participants
whose Operating Committee members do not vote to approve the
Implementation Plan to disclose the basis for that decision may aid the
Commission and the public to better monitor the progress of CAT
implementation, because such an explanation may reveal critical
information regarding whether currently targeted completion dates are
realistic, whether milestones are being or have been completed in
accordance with the requirements of the CAT NMS Plan, and/or whether
potential risks or delays may impede the progress of CAT
implementation.
2. Quarterly Progress Reports
The Commission believes that the publication of the proposed
Quarterly Progress Reports will make available critical information to
the Commission, other regulators, and market participants regarding the
intended goals and deadlines of the Participants. Access to this
information will help the Commission and market participants to monitor
the progress of CAT implementation. The Commission also anticipates
that requiring the Participants to make public their accomplishments in
the Quarterly Progress Reports will keep the Participants accountable
to their intended timeline. Finally, the Commission expects that the
provision of updated quarterly information in a Report, submitted to
senior management of each Participant and approved by a Supermajority
Vote of the Operating Committee, regarding the Participants' progress
towards CAT implementation, as well as any explanatory statements by
Participants whose Operating Committee members do not vote to approve
the Report, may reduce uncertainty regarding CAT's implementation
deadlines and flag any concerns regarding the implementation process
for the Commission and market participants.
C. Respondents
The respondents to all collections of information would be the
Participants.
D. Total Initial and Annual Reporting and Recordkeeping Burdens
The estimated burdens associated with the proposed amendments are
described fully below, but the below table briefly summarizes the
relevant burdens set forth in this Proposing Release.
----------------------------------------------------------------------------------------------------------------
Annual ongoing burden One-time burden per
Category per participant (burden participant (burden
hours/external costs) hours/external costs)
----------------------------------------------------------------------------------------------------------------
Implementation Plan........................................... N/A 76.8/$8,695.65
Quarterly Progress Reports.................................... 307.2/$34,782.60 N/A
----------------------------------------------------------------------------------------------------------------
1. Implementation Plan
The Commission preliminarily believes that each Participant will
incur, on average, a one-time burden of approximately 57.2 hours to
confer with other Participants, to draft an Implementation Plan, and to
vote as to whether to approve the Implementation Plan, as required by
proposed Section 6.6(c)(iii). In the CAT NMS Plan Approval Order, the
Commission noted that the Participants had estimated that approximately
20 full-time employees took approximately 30 months to develop the CAT
NMS Plan, including ``staff time contributed by each Participant to,
among other things, determine the technological requirements for the
Central Repository, develop the RFP, evaluate Bids received, design and
collect the data necessary to evaluate costs and other economic
impacts, meet with Industry Members to solicit feedback, and complete
the CAT NMS Plan submitted to the Commission for consideration.'' \138\
The Commission then used this information to estimate that the
development of the CAT NMS Plan would require, in aggregate, 14,407
burden hours for 12 months.\139\
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\138\ See CAT NMS Plan Approval Order, supra note 4, at n.3285.
\139\ See id.
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This estimate, based on information provided by the Participants
about the burdens they actually incurred in developing a related
project, reflects the best data available to the Commission in
estimating the number of initial burden hours required to develop the
Implementation Plan. The Commission notes that developing the CAT NMS
Plan was a far more complex project than the development of the
Implementation Plan and that the burdens incurred in developing the CAT
NMS Plan may be different in nature than the costs that the
Participants would incur in developing the Implementation Plan. In this
instance, for example, the Participants will only have 30 calendar days
from the effective date of this amendment to prepare the Implementation
Plan, and the Participants have already created a Master Plan that
contains much of the information required by proposed Section
6.6(c)(i). In addition, the Commission believes that the Participants
should already have gathered much of the information needed to create
the Implementation Plan.\140\ For these reasons, the Commission
preliminarily believes that the estimated burden for preparing the
Implementation Plan should be one-twelfth the amount of the burden
estimated for the development of the CAT NMS Plan,\141\ or, on average,
52.2 initial, one-time burden hours for each Participant.\142\
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\140\ See, e.g., note 53 supra.
\141\ Because the proposed amendment gives the Participants
approximately one month to prepare and publish the Implementation
Plan, the Commission has preliminarily used an estimate that mirrors
the one-month burden that was incurred by the Participants in
developing the CAT NMS Plan.
\142\ 14,407 CAT NMS Plan burden hours / 12 months = 1,200.6
burden hours for all Participants. 1,200.6 aggregate burden hours /
23 Participants = 52.2 burden hours per Participant for the
Implementation Plan. The Commission preliminarily estimates that
each Participant will spend, on average, 52.2 internal burden hours
= (Attorney at 7 hours) + (Systems Analyst at 22.6 hours) +
(Compliance Manager at 22.6 hours). As discussed further in Section
IV.C., all estimates in this section represent an average; the
Commission expects that some Participants may incur greater costs
and some lesser costs due to variances in economies of scale for
Participants who share a common corporate parent. See note 217
infra.
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In addition, the Commission estimates that it will take each
Participant approximately 10 hours, on average, for
[[Page 48476]]
its member of the Operating Committee to ensure that the Operating
Committee submits the Implementation Plan to the CEO, President, or
equivalently situated senior officer of each Participant, for each
Participant to review the information contained in the Implementation
Plan and for senior management consultations as needed, and to vote on
approving the Implementation Plan.\143\ The Commission expects each
member of the Operating Committee to be familiar with the process of
CAT implementation, which should ease the task of determining whether
to vote in favor of the Implementation Plan. Accordingly, the
Commission estimates that each Participant will incur, on average, a
one-time burden of 62.2 hours to prepare the Implementation Plan and to
vote as to whether to approve it,\144\ for a one-time aggregate burden
of approximately 1,430.6 hours.\145\
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\143\ For the purposes of the Paperwork Reduction Act, the
Commission is assuming that the member of the Operating Committee is
a Chief Regulatory Officer or a Chief Compliance Officer and will
spend 5 hours on these tasks. However, the Commission notes that
this task could be performed by any person designated by the
Participant to serve as its representative on the Operating
Committee. See Section 4.2(a) of the CAT NMS Plan. In addition, the
Commission estimates that senior management who receive the
Implementation Plan from the Operating Committee will spend 5 hours
in consultations, including with their member of the Operating
Committee regarding the Implementation Plan. Because one individual
may serve as the representative for multiple affiliated
Participants, the Commission expects that some Participants may
incur greater costs and some lesser costs due to variances in
economies of scale for Participants who share a common corporate
parent.
\144\ 52.2 burden hours + 10 burden hours = 62.2 burden hours.
\145\ 62.2 burden hours x 23 Participants = 1,430.6 burden
hours.
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If the Implementation Plan is approved only by a Supermajority
Vote, and not by a unanimous vote, the proposed amendments require each
Participant whose Operating Committee member did not vote to approve
the Implementation Plan to separately file with the Commission and make
available on a public website an explanatory statement identifying
itself and explaining why it did not vote to approve the Implementation
Plan.\146\ Because there are currently 23 Participants, an
Implementation Plan would need to be approved by at least 16 members of
the Operating Committee to satisfy the Supermajority Vote provisions of
the CAT NMS Plan.\147\ At maximum, then, only seven Participants would
file an explanatory statement in connection with an Implementation Plan
approved only by Supermajority Vote.\148\ The Commission preliminarily
estimates that each of the seven Participants submitting an explanatory
statement will incur, on average, an initial, one-time burden of 15
hours to draft such statement.\149\ When this aggregate burden is
averaged across all Participants, it amounts to approximately 4.6 hours
per Participant or 105 hours in aggregate.\150\
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\146\ For the purposes of the Paperwork Reduction Act, the
Commission is assuming that this task will be performed by a Chief
Regulatory Officer or a Chief Compliance Officer. See note 143
supra.
\147\ 23 Participants x \2/3\ Participants = 15.33 Participants.
Section 1.1 of the CAT NMS Plan indicates that, ``if two-thirds of
all . . . members authorized to cast a vote is not a whole number
then that number shall be rounded up to the nearest whole number.''
\148\ 23 Participants-16 Participants = 7 Participants.
\149\ The Commission bases this estimate on a full-time
Compliance Manager and the Chief Regulatory Officer or Chief
Compliance Officer each spending 7.5 hours to prepare the
explanatory statement.
\150\ 7 Participants * 15 burden hours = 105 burden hours in
aggregate. 105 burden hours / 23 Participants = 4.6 burden hours.
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Finally, the Commission estimates that each Participant will incur,
on average, a one-time burden of approximately 10 hours to ensure that
the Implementation Plan, and any explanatory statement (if applicable),
is filed with the Commission and made publicly available on a
website.\151\ The Commission therefore estimates an aggregate burden of
approximately 230 hours for the Participants to publicly post and
submit to the Commission the Implementation Plan.\152\
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\151\ The Commission bases this estimate on a full-time
Compliance Manager and Programmer Analyst each spending
approximately 5 hours, for a combined total of approximately 10
hours, to prepare and publicly post the relevant documents.
\152\ 10 burden hours per Participant x 23 Participants = 230
burden hours.
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In total, therefore, the Commission estimates that each Participant
will incur, on average, a one-time burden of approximately 76.8 hours
\153\ and approximately 1,766.4 hours in aggregate to comply with the
provisions of the proposed amendments that relate to the Implementation
Plan.\154\
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\153\ 52.2 hours + 10 hours + 4.6 hours + 10 hours = 76.8 burden
hours.
\154\ 76.8 hours x 23 Participants = 1,766.4 burden hours. See
Section IV.C. infra for a dollar cost estimate of this burden.
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The Commission further estimates that each Participant will expend
approximately $8,695.65, on average, in external public relations,
legal, and consulting costs related to the development of the
Implementation Plan. In the CAT NMS Plan Approval Order, the Commission
estimated, based on information provided by the Participants, that the
Participants had collectively spent approximately $2,400,000 in
preparation of the CAT NMS Plan on external public relations, legal,
and consulting costs.\155\ The Commission preliminarily believes that
the estimated burden for the Implementation Plan should be one-twelfth
the amount estimated for the development of the CAT NMS Plan, because
the Participants will only have 30 calendar days from the effective
date of this amendment to prepare the Implementation Plan and because
preparation of the Implementation Plan is a much less complex project.
Accordingly, the Commission estimates that the Participants will expend
approximately $200,000 in aggregate, and $8,695.65 per Participant, in
external public relations, legal, and consulting costs related to the
preparation of the Implementation Plan.\156\
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\155\ See CAT NMS Plan Approval Order, at n.3287, supra note 4.
\156\ $2,400,000 CAT NMS Plan costs / 12 months = $200,000 for
all Participants. $200,000 / 23 Participants = $8,695.65 per
Participant for the Implementation Plan.
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2. Quarterly Progress Reports
The Commission preliminarily believes that each Participant will
incur, on average, an ongoing quarterly burden of approximately 62.2
hours to confer with other Participants, to draft a Quarterly Progress
Report, to ensure that the Operating Committee submits each Quarterly
Progress Report to the CEO, President, or equivalently situated senior
officer of each Participant, and to vote as to whether to approve each
Quarterly Progress Report, as required by proposed Section
6.6(c)(iii).\157\ This estimate is approximately the same as the burden
related to the development and approval of the Implementation Plan,
because the Quarterly Progress Reports require the Participants to
prepare a detailed description explaining, quantifying, and voting to
approve the description of their progress towards the Implementation
Milestones laid out in the Implementation Plan, including the impact
that any such progress might have on the target completion dates for
Implementation Milestones that have not yet been achieved. The
Commission believes this estimate is appropriate because the
Participants are likely already tracking some of the information
required to be included in the Quarterly Progress Reports.\158\
Accordingly, the Commission estimates, on average, an
[[Page 48477]]
ongoing quarterly burden of approximately 62.2 hours for each
Participant,\159\ an ongoing annual burden of approximately 248.8 hours
for each Participant,\160\ and an aggregate annual burden of
approximately 5,722.4 hours.\161\
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\157\ As discussed further in Section IV.C., all estimates in
this section represent an average; the Commission expects that some
exchanges may incur greater costs and some lesser costs due to
variances in economies of scale for Participants who share a common
corporate parent. See note 217 infra.
\158\ See, e.g., note 53 supra.
\159\ The Commission preliminarily estimates that each
Participant will spend, on average, 52.2 internal burden hours to
confer with other Participants and to compile the Quarterly Progress
Report = (Attorney at 7 hours) + (Systems Analyst at 22.6 hours) +
(Compliance Manager at 22.6 hours). In addition the Commission
preliminarily estimates, for the purposes of the Paperwork Reduction
Act, that the chief Compliance Officer or Chief Regulatory Officer
of each Participant will spend 5 hours, on average, to submit the
Quarterly Progress Report to the CEO, President, or equivalently
situated senior officer of each Participant, to review the
information contained in each Quarterly Progress Report and for
senior management consultations as needed, and to vote on approving
the Quarterly Progress Report. In addition, the Commission estimates
that the CEO, President, or equivalently situated senior officer of
each Participant will spend 5 hours in consultations, including with
their member of the Operating Committee regarding each Quarterly
Progress Report. 52.2 hours + 5 hours + 5 hours = 62.2 hours.
Because one individual may serve as the representative for multiple
affiliated Participants, the Commission expects that some
Participants may incur greater costs and some lesser costs due to
variances in economies of scale for Participants who share a common
corporate parent.
\160\ 62.2 burden hours per Participant per Quarterly Progress
Report * 4 Quarterly Progress Reports = 248.8 annual burden hours
per Participant for the Quarterly Progress Reports.
\161\ 248.8 annual burden hours per Participant * 23
Participants = 5,722.4 aggregate annual burden hours.
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If any Quarterly Progress Report is approved only by a
Supermajority Vote, and not by a unanimous vote, the proposed
amendments require each Participant whose Operating Committee member
did not vote to approve that Quarterly Progress Report to separately
file with the Commission and make available on a public website an
explanatory statement identifying itself and explaining why it did not
vote to approve the Report.\162\ Because there are currently 23
Participants, each Quarterly Progress Report would need to be approved
by at least 16 members of the Operating Committee to satisfy the
Supermajority Vote provisions of the CAT NMS Plan.\163\ At maximum,
then, only seven Participants would file an explanatory statement in
connection with a Quarterly Progress Report approved only by
Supermajority Vote.\164\ The Commission preliminarily estimates that
each of the seven Participants submitting an explanatory statement will
incur, on average, an ongoing burden of 15 hours to draft such
statement.\165\ When this aggregate burden is averaged across all
Participants, it amounts to an ongoing quarterly burden of
approximately 4.6 hours per Participant,\166\ an ongoing annual burden
of approximately 18.3 hours per Participant,\167\ and an aggregate
annual burden of approximately 420 hours.\168\
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\162\ For the purposes of the Paperwork Reduction Act, the
Commission is assuming that this task will be performed by a Chief
Regulatory Officer or a Chief Compliance Officer. See note 143
supra.
\163\ See note 147 supra.
\164\ See note 148 supra.
\165\ See note 149 supra.
\166\ 7 Participants * 15 burden hours = 105 burden hours in
aggregate. 105 burden hours / 23 Participants = 4.6 burden hours.
\167\ 4.6 burden hours x 4 Quarterly Progress Reports = 18.3
burden hours.
\168\ 18.3 annual burden hours x 23 Participants = 420 burden
hours.
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Additionally, the Commission estimates that each Participant will
incur an ongoing quarterly burden, on average, of approximately 10
hours to ensure that each Quarterly Progress Report, and any
explanatory statement (if applicable), is filed with the Commission and
made publicly available on a website.\169\ The Commission therefore
estimates an annual burden, on average, of approximately 40 hours for
each Participant,\170\ and an aggregate annual burden of 920 hours for
all Participants,\171\ to publicly post and submit to the Commission
the Reports.
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\169\ The Commission bases this estimate on a full-time
Compliance Manager and Programmer Analyst each spending
approximately 5 hours, for a combined total of approximately 10
hours, to prepare and publicly post the relevant documents.
\170\ 10 burden hours per Quarterly Progress Report x 4 quarters
= 40 annual burden hours per Participant.
\171\ 40 annual burden hours per Participant x 23 Participants =
920 aggregate annual burden.
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In total, therefore, the Commission estimates that each Participant
will incur, on average, an ongoing burden of approximately 76.8 hours
per Quarterly Progress Report,\172\ for an annual average estimated
burden of 307.2 hours \173\ and approximately 7,065.6 hours in
aggregate.\174\
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\172\ 62.2 hours + 4.6 hours + 10 hours = 76.8 burden hours.
\173\ 76.8 hours x 4 Quarterly Progress Report = 307.2 hours.
\174\ 307.2 hours x 23 Participants = 7,065.6 burden hours. See
Section IV.C. infra for a dollar cost estimate of this burden.
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Similarly, the Commission estimates that each Participant will
expend, on an ongoing basis, approximately the same amount of external
public relations, legal, and consulting costs associated with the
Implementation Plan on each Quarterly Progress Report. Accordingly, the
Commission estimates, on average, an ongoing quarterly cost of
approximately $8,695.65 for each Participant, an ongoing annual cost of
$34,782.60 for each Participant,\175\ and an aggregate annual cost of
approximately $799,999.80.\176\ The Commission notes that a portion of
these costs may be recoverable from Industry Members, if consistent
with the Exchange Act and the CAT NMS Plan.\177\
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\175\ $8,695.65 per Participant per Quarterly Progress Report *
4 Quarterly Progress Reports = $34,782.60 per Participant per year
for the Quarterly Progress Reports.
\176\ $34,782.60 per Participant * 23 Participants = $799,999.80
aggregate annual cost.
\177\ See, e.g., Article XI of the CAT NMS Plan.
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E. Collection of Information Is Mandatory
Each collection of information discussed above would be a mandatory
collection of information.
F. Confidentiality of Responses to Collection of Information
Neither the Implementation Plan nor the Quarterly Progress Reports
would be confidential. Rather, each would be publicly posted by the
Participants on a website.
G. Retention Period for Recordkeeping Requirements
National securities exchanges and national securities associations
are required to retain records and information pursuant to Rule 17a-1
under the Exchange Act.\178\
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\178\ 17 CFR 240.17a-1.
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H. Request for Comments
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comments to:
29. Evaluate whether the proposed collections of information are
necessary for the proper performance of the functions of the agency,
including whether the information shall have practical utility;
30. Evaluate the accuracy of our estimates of the burden of the
proposed collection of information;
31. Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected; and
32. Evaluate whether there are ways to minimize the burden of
collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology.
Persons submitting comments on the collection of information
requirements should direct them to the Office of Management and Budget,
Attention: Desk Officer for the Securities and Exchange Commission,
Office of Information and Regulatory Affairs, Washington, DC 20503, and
should also
[[Page 48478]]
send a copy of their comments to Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090, with reference
to File Number 4-698. Requests for materials submitted to OMB by the
Commission with regard to this collection of information should be in
writing, with reference to File Number 4-698 and be submitted to the
Securities and Exchange Commission, Office of FOIA/PA Services, 100 F
Street NE, Washington, DC 20549-2736. As OMB is required to make a
decision concerning the collection of information between 30 and 60
days after publication, a comment to OMB is best assured of having its
full effect if OMB receives it within 30 days of publication.
IV. Economic Analysis
Section 3(f) of the Exchange Act requires the Commission, whenever
it engages in rulemaking and is required to consider or determine
whether an action is necessary or appropriate in the public interest,
to consider, in addition to the protection of investors, whether the
action would promote efficiency, competition, and capital
formation.\179\ In addition, Section 23(a)(2) of the Exchange Act
requires the Commission, when making rules under the Exchange Act, to
consider the impact such rules would have on competition.\180\ Exchange
Act Section 23(a)(2) prohibits the Commission from adopting any rule
that would impose a burden on competition not necessary or appropriate
in furtherance of the purposes of the Exchange Act. The discussion
below addresses the likely economic effects of the proposed rule,
including the likely effect of the proposed rule on efficiency,
competition, and capital formation.
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\179\ 15 U.S.C. 78c(f).
\180\ 15 U.S.C. 78w(a)(2).
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As discussed above, since the adoption of Rule 613 in 2012, CAT
implementation has experienced recurrent delays.\181\ These
implementation delays postpone the benefits of the CAT NMS Plan to
investors \182\ and may result in additional costs to Industry
Members.\183\ In the Notice, the Commission discussed how the
governance structure of the CAT NMS Plan could affect the costs and
benefits of the CAT NMS Plan and noted that the Commission retains the
ability to modify the CAT NMS Plan.\184\ The CAT NMS Plan does not
require the Participants to provide transparency to industry or
investors regarding implementation, nor does it create financial
accountability for the Participants to complete the implementation
process. The Commission preliminarily believes that modifying the CAT
NMS Plan to require operational transparency and provide financial
accountability for meeting implementation milestones will impose more
structure on the process and is appropriate to achieve timely
completion of the CAT. The proposed amendments would: (1) Provide more
accountability and transparency by requiring the Operating Committee to
approve by Supermajority Vote and file with the Commission and publish
on a public website certain information, including the Implementation
Plan as well as quarterly reports detailing progress made toward
achieving the Implementation Milestones set forth in the Implementation
Plan and (2) introduce financial accountability to the CAT NMS Plan by
requiring the Participants to meet four critical CAT implementation
milestones--the Financial Accountability Milestones--by certain dates
in order to collect the full amount of any related Post-Amendment
Industry Member Fees established by the Operating Committee or
implemented by the Participants.\185\
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\181\ See Part I supra.
\182\ See CAT NMS Plan Approval Order, supra note 4, at Section
V.E.
\183\ See Part IV.A. infra.
\184\ See Securities Exchange Act Release No. 77724 (April 27,
2016), 81 FR 30614 (May 17, 2016) (File No. 4-698) (``Notice''), at
Section IV.E.3.d.1.
\185\ See Part II supra.
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The proposed amendments would increase operational transparency by
requiring Participants to publish a complete CAT implementation plan,
and publish a complete progress report quarterly.\186\ Further, the
proposed amendments require approval by a Supermajority Vote of the
Operating Committee for both the implementation plan and the quarterly
progress reports.\187\ These operational transparency provisions of the
proposed amendments should provide Industry Members with more certainty
surrounding the implementation timeline of CAT, reducing associated and
unnecessary implementation costs.\188\
---------------------------------------------------------------------------
\186\ See Part II.A. supra.
\187\ See Part IV.B, infra for further discussion of this
approval requirement.
\188\ The Commission preliminarily believes that uncertainty in
the CAT NMS Plan implementation timeline may potentially increase
Industry Member implementation costs. See Part IV.B, infra for
further discussion.
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The proposed amendments also establish Financial Accountability
Milestones and Reduced Fee Recovery Rates (``RFRRs'') that take effect
and increase in magnitude in response to delays in meeting certain
Financial Accountability Milestones.\189\ Thus, the proposed amendments
would shift some costs from Industry Members to Participants if the
Participants fail to meet certain Financial Accountability
Milestones.\190\ The Commission preliminarily believes this cost
shifting would offset any Industry Member costs imposed by delays in
implementation. The Commission further believes that the RFRRs
incentivize the Participants to implement the CAT NMS Plan
expeditiously and efficiently, which would result in investors
realizing the benefits of the CAT NMS Plan sooner. If the Participants
miss the deadline for Initial Industry Member Core Equity Reporting by
more than 180 days, or the deadlines for the other three Financial
Accountability Milestones by more than 270 days, the structure of the
RFRRs would not allow them to recover expenses incurred during the
Period. The Commission acknowledges that after 270 days or 180 days, as
applicable, the amendments would no longer directly incentivize the
Participants, because the 0% recovery rate cannot be further reduced by
continued delays. However, the Participants would continue to incur and
be solely responsible for the operating costs of the Central
Repository, and could not share any ongoing operational costs incurred
during the Period with Industry Members.\191\ Participants would only
be
[[Page 48479]]
allowed to partially recover from Industry Members those expenses
incurred after the Period ended, which could only be achieved by
meeting the applicable Financial Accountability Milestones.
Furthermore, to the extent that Financial Accountability Milestones are
inherently sequential, Participants would continue to be incentivized
to complete the current Period by achieving the Financial
Accountability Milestones to avoid triggering RFRRs in the subsequent
Period. Consequently, although incentives would be diminished, the
Participants would continue to be incentivized to complete the Period
by meeting the Financial Accountability Milestones.
---------------------------------------------------------------------------
\189\ The Plan allows Participants to recover a percentage of
certain CAT costs from Industry Members. The Plan anticipates that
the Participants will submit a fee filing that establishes what
percentage of CAT expenses will be passed on to Industry Members,
and how CAT expenses will be shared among Participants and among
Industry Members. Because no CAT fee filing has been approved, the
proportion of CAT costs that will be borne by Industry Members is
unknown. The magnitude of the incentives from RFRRs ultimately
depends on the proportion of fees that Participants are permitted to
recover from Industry Members.
In the event that RFRRs are triggered, the Commission proposes
to reduce the amount of fees that the Participants are allowed to
recover from Industry Members according to the fee schedule
described in Part II.B.2. supra.
\190\ Although some Industry Members provide advice to the
Participants through the actions of the CAT Advisory Committee, they
do not have votes on the CAT Operating Committee and thus cannot
initiate or control actions taken by the Operating Committee that
might facilitate expeditious and efficient implementation of the
Plan. Furthermore, in later stages of CAT implementation, in the
event that Industry Members' actions might delay implementation of
the Plan, the Participants have regulatory authority over Industry
Members and can use that authority to address failures by Industry
Members to comply with reporting requirements under the Plan.
\191\ The Participants' Central Repository costs consist of both
implementation costs and operating costs, as discussed below; see
note 227 infra. If Participants missed a Financial Accountability
Milestone by 270 days and triggered a 0% RFRR, none of the expenses
the Participants incurred during the Period could be recovered from
Industry Members. However, the Participants would continue to incur
operating costs for the Central Repository, and the magnitude of
those operating costs during the period would be a function of the
duration of the Period. To minimize the financial impact of the
RFRRs, the Participants would continue to be incentivized to meet
the Financial Accountability Milestones and end the Period, so that
they would no longer be solely responsible for the operating costs
of the Central Repository and could again, potentially, resume
sharing these costs with Industry Members.
---------------------------------------------------------------------------
Wherever possible, the Commission has quantified the likely
economic effects of the amendments, including the direct costs to the
Participants. However, some of the costs, benefits, and other economic
effects we discuss are inherently difficult to quantify, including the
benefits of accelerating the realization of the improvements to
investor protection that are expected to result from the implementation
of the CAT, the benefits of transparency to industry members and the
public, and the potential impact on competition among exchanges.
Additionally, the Commission preliminarily believes costs caused by
uncertainty in the timeline for CAT implementation and retirement of
duplicative reporting systems may vary significantly across Industry
Members because of the diversity of their approaches to regulatory data
reporting. Therefore, much of our discussion is qualitative in nature.
Our inability to quantify certain costs, benefits, and effects does not
imply that such costs, benefits, or effects are less significant. We
request that commenters provide relevant data and information to assist
us in analyzing the economic consequences of the proposed amendments.
A. Baseline
1. Transparency of CAT Implementation Status
Industry Members obtain information about the implementation status
of the CAT NMS Plan through several mechanisms.\192\ These include
information gleaned from participation in the CAT Advisory Committee;
information provided on websites operated by the CAT Operating
Committee; presentations to industry sponsored by the CAT Operating
Committee; and information presented at meetings of the Industry
Technical Specifications Working Group.
---------------------------------------------------------------------------
\192\ The Plan requires that the Chief Compliance Officer shall
appropriately document objective milestones to assess progress
toward the implementation of the Plan, but has no requirement that
this information be disseminated to industry or the Commission. See
CAT NMS Plan, supra note 4, at Section 6.7(b).
---------------------------------------------------------------------------
A few representatives of Industry Members are privy to information
through their participation on the CAT Advisory Committee, but this
information is not widely available to industry. These advisory
committee members ``have the right to attend meetings of the Operating
Committee or any Subcommittee, to receive information concerning the
operation of the Central Repository,'' subject to certain limitations
outlined in the CAT NMS Plan.\193\ Further, ``Members of the Advisory
Committee shall receive the same information concerning the operation
of the Central Repository as the Operating Committee; provided,
however, that the Operating Committee may withhold information it
reasonably determines requires confidential treatment. Any information
received by members of the Advisory Committee in furtherance of the
performance of their functions pursuant to this Agreement shall remain
confidential unless otherwise specified by the Operating Committee.''
\194\ The Commission preliminarily believes that Industry Members of
the CAT Advisory Committee may be provided with significant information
regarding the status of implementation, but given the confidential
treatment required by the CAT NMS Plan, the Industry Members on the
Advisory Committee are not free to share it with other Industry
Members. Consequently, the Commission preliminarily believes that most
Industry Members obtain little information about CAT implementation
through this mechanism.
---------------------------------------------------------------------------
\193\ See CAT NMS Plan, supra note 4, at Section 4.13.
\194\ See CAT NMS Plan Approval Order, supra note 4, at Section
VI.D.1.a, note 3243.
---------------------------------------------------------------------------
In addition, the Operating Committee provides a website with
information on the CAT NMS Plan, but there is no requirement in the CAT
NMS Plan to keep it current.\195\ The website provides access to the
current CAT NMS Plan, current technical specifications, an archive of
information presented at past industry events, and other information
about the CAT of interest to industry.
---------------------------------------------------------------------------
\195\ See https://www.catnmsplan.com/. The public can
also glean information about Plan implementation from this website.
---------------------------------------------------------------------------
Furthermore, the Operating Committee provides occasional updates to
industry on the state of implementation. These updates are documented
on the CAT NMS Plan website. These updates include the April 3, 2019,
Industry Outreach presentation in which the Operating Committee
presented a revised implementation timeline for Industry Member
reporting with deadlines that extend even further beyond those in the
CAT NMS Plan.\196\ Subsequent to this presentation, the CAT NMS Plan
website added a ``Timeline'' section. The CAT NMS Plan, however, has no
requirement that this be updated.
---------------------------------------------------------------------------
\196\ See note 47 supra.
---------------------------------------------------------------------------
Another source of information about CAT implementation available to
the industry is the Industry Technical Specifications Working Group.
This working group, which makes recommendations on Industry Member-
specific implementation issues, is comprised of members of the Advisory
Committee and additional industry organization representatives, with
subject matter experts from the industry invited to lead or facilitate
discussion of a particular issue. This working group is not bound by
confidentiality agreements, so some information discussed in the
working group is shared with members of the industry, primarily through
outreach efforts by industry associations.
2. Status of Implementation
As discussed previously, there have been repeated delays to
implementation and it remains uncertain when CAT will be fully
implemented.\197\ Although the Participants have not yet published a
timeline detailing when full functionality of Participant reporting
would be completed by the new plan processor, in a April 2019 Industry
Outreach presentation, the Operating Committee presented a revised
implementation timeline for Industry Member reporting with deadlines
that extend even further beyond those in the CAT NMS Plan. The revised
deadline
[[Page 48480]]
for Industry Member reporting to the CAT would require the reporting by
Industry Members of equities data by April 2020 and simple options data
by May 2020.\198\ These delays to implementation of the CAT NMS Plan
delay the time at which investors will realize the significant benefits
of the CAT contemplated in the CAT NMS Plan Approval Order.\199\
Specifically, delays in the implementation of the CAT have delayed
improvements in regulatory activities such as market analysis and
reconstruction, surveillance, and investigations, leading to delays in
increased investor protection.\200\
---------------------------------------------------------------------------
\197\ See Part I supra for a detailed discussion of Plan
implementation status.
\198\ See note 47 supra.
\199\ See CAT NMS Plan Approval Order, supra note 4, at Section
V.E.
\200\ See id. The Approval Order noted that, by providing
regulators with more complete, accurate, accessible, and timely
trade and order data, the CAT would improve regulatory activities
such as market analysis and reconstruction, surveillance, and
investigations, leading to increased investor protection.
---------------------------------------------------------------------------
In addition, the Commission preliminarily believes that the
multiple missed deadlines in the CAT NMS Plan has led to uncertainty
for Industry Members surrounding the timeline of CAT
implementation.\201\ In the CAT NMS Plan Approval Order, the Commission
discussed the complexities of, and diversity of approaches to, Industry
Member regulatory data reporting,\202\ and the costs that Industry
Members face in implementing CAT reporting.\203\ The Commission
understands that for many Industry Members, significant changes to
regulatory data reporting systems require planning for the allocation
of financial, technological, and human resources. The Commission lacks
specific information on the status of Industry Member CAT reporting
implementation efforts, but recognizes the possibility that some
Industry Members, particularly those that self-report regulatory data,
may already be incurring costs due to this uncertainty, as discussed
further below.\204\ Therefore, the Commission recognizes that it is
possible that Industry Members may be incurring additional costs,
beyond those anticipated due to the delay.\205\ Finally, the Commission
believes that any Industry Members that have begun implementation
activities are likely incurring costs for tracking and planning for CAT
implementation and notes that the length of the implementation period
has extended longer than anticipated. This may increase costs to
Industry Members.
---------------------------------------------------------------------------
\201\ As discussed in the CAT NMS Plan Approval Order, many
Industry Members rely on service bureaus to report their regulatory
data. These service bureaus face the same uncertainty that is
described here for Industry Members. Some but not all service
bureaus are Industry Members. See CAT NMS Plan Approval Order, supra
note 4, at Section V.F.1.c.(2).
\202\ See id.
\203\ See id. at Section V.F.2.
\204\ In the case of the majority of Industry Members that rely
on service providers for their regulatory data reporting, those
service providers face significant CAT implementation costs and
similar uncertainty as large self-reporting Industry Members, and
any additional costs the service providers face in implementing CAT
reporting due to this uncertainty are likely to be passed on to
their Industry Member customers.
\205\ See Part IV.B, infra.
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B. Benefits
The Commission preliminarily believes the proposed amendments offer
two primary benefits. First, because the amendments include financial
accountability provisions that may cause the CAT to be implemented more
expeditiously and efficiently, investors could realize the benefits of
the CAT sooner than they would be realized without the proposed
amendments. Second, the Commission preliminarily believes that Industry
Members would have more certainty surrounding the implementation
timeline of CAT, and the timeline for retirement of OATS,\206\ reducing
possible associated and unnecessary implementation and maintenance
costs.\207\
---------------------------------------------------------------------------
\206\ The Commission continues to believe that the period of
duplicative reporting of OATS data will be less than 2-2.5 years,
but recognizes that the multiple delays in CAT implementation has
increased uncertainty about when the duplicative reporting period
will commence and end. Neither the Plan nor the Participants'
industry outreach materials currently offer guidance to Industry
Members on when duplicative reporting systems are likely to be
retired. Consequently, Industry Members cannot reasonably estimate
the expected duration of the period of duplicative reporting, or
when it might begin and/or end. In the CAT Approval Order,
duplicative reporting was anticipated to cost Industry Members up to
$1.4 billion annually between the time when Industry Members begin
to report data to the CAT and when duplicative regulatory data
reporting systems are retired. See CAT NMS Plan Approval Order,
supra note 4, at Section V.F.2.b.
\207\ See Part IV.D.1. infra for discussion of impacts on
efficiency of Industry Member CAT implementation.
---------------------------------------------------------------------------
The amendment's financial accountability provisions may cause the
CAT to be implemented more expeditiously and efficiently, which could
allow investors to realize the benefits of the CAT sooner than they
would be realized without the proposed amendments. While the Commission
continues to believe that implementation of CAT will allow the
Participants to improve their regulatory activities to the benefit of
investors,\208\ the Commission also notes that implementation of the
proposed amendments may accelerate the Participants' realization of
costs relative to the current state of development. These include costs
to build and operate the Central Repository, report Participant data to
CAT, and to update their regulatory surveillance to take advantage of
data available in the Central Repository.\209\ Consequently, the
Commission preliminarily believes that the Participants may have a
financial disincentive to implement CAT expeditiously and efficiently
because delays in CAT implementation delay realization of some of these
costs, such as costs to update their regulatory surveillance. By
amending the CAT NMS Plan to provide RFRRs to encourage implementation,
the Commission preliminarily believes the Participants will be more
likely to implement CAT expeditiously and efficiently to the benefit of
investors.\210\
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\208\ See CAT NMS Plan Approval Order, supra note 4, at Section
V.E.2.
\209\ See CAT NMS Plan Approval Order, supra note 4, at Section
V.F.
\210\ Missing Financial Accountability Milestones will result in
Participants not being able to recoup certain costs from Industry
Members. This will increase the costs for which Participants will
ultimately be responsible, with those costs increasing as
implementation delays persist.
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As discussed in more detail in the CAT NMS Plan Approval Order, by
providing regulators with more complete, accurate, accessible, and
timely trade and order data, the CAT is expected to improve regulatory
activities such as market analysis and reconstruction, surveillance,
and investigations, leading to increased investor protection.\211\ If
the Participants complete the implementation of the CAT more
expeditiously and efficiently as a result of the proposed amendments,
these benefits will be realized more quickly.
---------------------------------------------------------------------------
\211\ Id. at Section V.E.
---------------------------------------------------------------------------
The Commission preliminarily believes that the proposed amendments
should provide Industry Members with more certainty surrounding the
implementation timeline of CAT and the retirement schedule for OATS,
which should help reduce any unnecessary implementation and maintenance
costs associated with this uncertainty.\212\ As discussed previously,
the Commission recognizes that there is significant uncertainty
regarding the CAT implementation timeline. Further, based on
discussions with Industry Members and staff expertise, the Commission
preliminarily believes that this uncertainty may be causing Industry
Members to incur costs they would not have incurred had the CAT been
completed on its original
[[Page 48481]]
schedule.\213\ As noted above, for many Industry Members, significant
changes to regulatory data reporting systems require planning for the
allocation of financial, technological, and human resources, and the
Commission preliminarily believes that uncertainty surrounding CAT
implementation timelines may be hampering Industry Members' ability to
efficiently perform that planning. The amendments may result in the
Participants implementing CAT more expeditiously and efficiently and
should reduce uncertainty because Industry Members will be aware of the
financial accountability measures that Participants face if Financial
Accountability Milestones are missed, and are likely to assume that the
Participants will be incentivized to meet those milestones. Further,
information in the Implementation Plan and Quarterly Progress Reports,
and the associated requirement for approval by a Supermajority Vote of
the Operating Committee, combined with any statement identifying
Participants that did not vote to approve and explaining why the member
did not vote to approve, would provide Industry Members with more
complete and possibly more reliable information on implementation
requirements and timing. This may allow them to implement CAT reporting
more efficiently, particularly if the content of the disclosures
provides sufficient information to provide greater certainty on
implementation progress. However, the Commission preliminarily believes
this benefit may be limited somewhat by the fact that Participants may
be incentivized not to vote against approval of the Implementation Plan
or Quarterly Progress Reports because doing so would cause them to
incur costs associated with preparing, filing with the Commission and
publishing an explanatory statement of their Operating Committee
Member's vote. Consequently, in the event that a Participant is
inclined to vote against approval of the Implementation Plan or a
Quarterly Progress Report, in the absence of enough votes to prevent
approval, the Participant may be incentivized to vote to approve the
Implementation Plan or Quarterly Progress Report and thus not provide
an explanatory statement that might contain information useful to
Industry Members.
---------------------------------------------------------------------------
\212\ See Part IV.A.2. supra for discussion of uncertainty
surrounding CAT implementation timing.
\213\ In the course of reviewing the CAT NMS Plan and preparing
the Notice, Commission staff gathered information in conversations
with Industry Members on how Industry Members implement changes in
regulatory data reporting requirements and what factors drive
Industry Member costs when those requirements change. See Notice,
supra Note 184, at n880.
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Based on staff expertise and discussions with Industry
Members,\214\ the Commission preliminarily believes that potential
reductions in cost due to uncertainty could be attributed to a number
of factors. Less uncertainty about the CAT implementation timeline may
allow Industry Members and service bureaus to make efficient decisions
regarding when to commence implementation activities and how to
implement in the most cost-efficient manner. More certainty may allow
Industry Members to negotiate more favorable contracts with vendors
because they will have more certainty about date ranges when vendor
services would be required for CAT reporting implementation activities.
Furthermore, as discussed in the CAT NMS Plan Approval Order,
maintaining legacy data reporting systems like those used to report
OATS is likely to entail allocation of technological and human
resources. If Industry Members have more certainty regarding how long
these resources are required, they may make more cost-efficient
decisions regarding maintaining or replacing hardware and software used
to report legacy regulatory data. Finally, the uncertainty surrounding
the timeline of CAT implementation may impose significant opportunity
costs on Industry Members. Because changes to regulatory data reporting
systems can be significant IT projects for Industry Members, Industry
Members may defer other large projects that might require an
overlapping set of resources until the operational and financial
requirements and timing for CAT implementation are better known.
Decreasing uncertainty may allow Industry Members to better plan for
and proceed with other projects that may have been deferred due to
uncertainty in the CAT implementation timeline.
---------------------------------------------------------------------------
\214\ See Notice, supra Note 184, at n880.
---------------------------------------------------------------------------
The Commission recognizes that if the Participants continue to miss
deadlines under the amendments, it would result in more uncertainty for
Industry Members with respect to whether and when the Participants are
capable of achieving CAT implementation, particularly if the
Participants are unable to make progress with the financial
accountability measures. The Commission preliminarily believes this
uncertainty is mitigated by the increased transparency afforded by the
Quarterly Progress Reports, which should allow Industry Members to see
progress toward meeting Implementation Milestones.
Finally, the requirement that the Implementation Plan and Quarterly
Progress Reports be submitted to the CEO, President, or an equivalently
situated senior officer of each Participant prior to the Operating
Committee approval vote, is intended to promote senior management
attention and promote accountability with respect to CAT
implementation. The Commission preliminarily believes that this
requirement may thereby facilitate the expeditious and efficient
implementation of CAT.
C. Costs
The Commission preliminarily believes the proposed amendments are
likely to have both direct and indirect costs, detailed below. The
Commission preliminarily estimates that the direct costs to the
Participants from the proposed amendments include up to approximately
$3.7 MM in ongoing annual costs and total one-time costs of up to
approximately $932,000.\215\ If the RFRRs are triggered, during a one-
year period during implementation, up to $120MM in costs of CAT
implementation and operation could be shifted from Industry Members to
Participants, but this would not change total costs to industry as a
whole from the CAT NMS Plan. The Commission expects, however, that the
proposed amendments would have additional indirect costs. These consist
of potentially accelerated implementation costs to Participants,
Industry Members, and Service Bureaus; possible costs related to the
potential for inefficient acceleration of the implementation of the
CAT; and costs related to the possible market exit of exchanges if the
RFRRs in the amendments are triggered. These costs are likely to be
passed on to investors.
---------------------------------------------------------------------------
\215\ These maximum totals assume that upon each approval vote,
seven Participants incur costs to prepare and publish statements
explaining why they did not vote to approve the document in
question. These costs are discussed further below.
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For purposes of the PRA,\216\ the Commission preliminarily
estimates that the direct costs to Participants from the proposed
amendments \217\ include
[[Page 48482]]
up to approximately $3.7MM \218\ in annual costs and total one-time
costs of up to approximately $932,000.\219\ The ongoing annual costs
per Participant are comprised of approximate labor costs of up to
$145,000 \220\ and external consulting costs of $35,000 \221\ to
prepare, approve through Supermajority Vote of the Operating Committee,
publish, and when applicable, for each Participant whose Operating
Committee member did not vote to approve the Implementation Plan to
separately file with the Commission and make available on a public
website an explanatory statement identifying itself and explaining why
it did not vote to approve the Quarterly Progress Report.\222\ The one-
time costs per Participant include up to $36,000 \223\ in labor costs
and $8,700 \224\ in external consulting costs to prepare, approve
through Supermajority Vote of the Operating Committee, publish, and
when applicable, for each Participant whose Operating Committee member
did not vote to approve the Implementation Plan to separately file with
the Commission and make available on a public website an explanatory
statement identifying itself and explaining why it did not vote to
approve the Implementation Plan.
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\216\ Direct costs cited in this paragraph are quantified from
estimates in the PRA. See Part III supra. Discussion of other direct
costs follows discussion of costs from the PRA.
\217\ The PRA estimates cost represent an average; the
Commission expects that some Participants will incur greater costs,
some lesser. In calculating the costs to prepare, review, and vote
on the Implementation Plan and Quarterly Progress Reports on a per
Participant basis, the Commission recognizes that its estimates per
Participant may be overstated to the extent that there are economies
of scale for Participants who share a common corporate parent.
Specifically, the voting representative for one Participant may
serve as the voting representative on the Operating Committee for
multiple affiliated Participants under Section 4.2(a) of the CAT NMS
Plan. Once this representative conducts the necessary background
work to vote on the Implementation Plan or a Quarterly Progress
Report, and, if applicable, for the Participant to prepare an
explanation of why this representative did not vote to approve the
Implementation Plan or Quarterly Progress Report, the representative
would not need to duplicate all of his or her efforts for another
Participant. Thus, the Commission believes that its estimates may be
overstated for some Participants in the sense that one
representative reviewing and voting on the Implementation Plan or
Quarterly Progress Reports might not require 5 hours for each
exchange for which he or she is performing this task. On the other
hand, the Commission believes that its estimates for Participants
who are not affiliated with other Participants might be understated
for some Participants because they are unable to benefit from
economies of scale. Representatives for unaffiliated exchanges may
require more than 5 hours to perform this same task. The Commission
preliminarily believes that 5 hours is a reasonable estimate of
average representative time required.
\218\ Assuming that each Supermajority Vote has the minimum of
16 Participants voting to approve each Quarterly Progress Report,
total annual ongoing maximum cost is (23 Participants x $119,471 per
Participant + 28 explanatory statements x $6,472.50 per statement =
$2,747,838) in labor costs plus (23 Participants x $34,800 =
$800,400) in external consulting costs = $3,729,468 in total costs.
See Note 220, infra.
\219\ Assuming that each Supermajority Vote has the minimum of
16 Participants voting to approve the Implementation Plan, total
one-time maximum cost is (23 Participants x $29,868 per Participant
= $686,959) in labor costs plus (23 Participants x $8,700 =
$200,100) in external consulting costs = $932,367 in total costs.
See Note 223, infra.
\220\ See Part III.D. supra. Annual labor costs per Participant
assume preparation, approval through Supermajority Vote of the
Operating Committee, and publication of four Quarterly Progress
Reports and any accompanying statements explaining why a Participant
did not vote to approve the Quarterly Progress Report. Preparation
of each Quarterly Progress Report requires 7 hours of Attorney labor
at $427 per hour; 22.6 hours of Systems Analyst labor at $270 per
hour; 22.6 hours of Compliance Manager labor at $318 per hour. 4 x
[($427 x 7) + ($270 x 22.6) + ($318 x 22.6)] = $65,111. Time for the
Participant's Operating Committee Member to prepare for and vote on
the Quarterly Progress Reports is assumed to be 5 hours at a rate of
$545 per hour. 4 x ($545 x 5) = $10,900, using the hourly rate for a
Chief Compliance Officer. Publication and filing of the Quarterly
Progress Reports and any explanatory statements of the Operating
Committee Member's vote is assumed to require 5 hours of Compliance
Manager labor at $318 per hour and 5 hours of Programmer/Analyst
labor at $220 per hour. 4 x ($318 x 5) + ($220 x 5) = $10,760. The
Quarterly Progress Report shall be submitted to the President, CEO
or equivalently situated senior officer of each Participant prior to
the approval vote of the Operating Committee, and any subsequent
consultation, including with their Operating Committee member, is
assumed to require five hours of labor at $1,635 per hour. 4 x
($1,635 x 5) = $32,700. See Note 225 infra, for discussion of this
hourly rate. Total annual costs for each Participant are thus
$65,111 + $10,900 + $10,760 + $32,700 = $119,471. If a Participant
is required to prepare a statement explaining why it did not vote to
approve a Quarterly Progress Report, preparation requires 7.5 hours
of Compliance Manager Labor at $318 per hour and 7.5 hours of Chief
Compliance Officer labor at $545 per hour. ($318 x 7.5) + ($545 x
7.5) = $6472.5. For each Quarterly Progress Report, 23 Participants
will incur costs to prepare the report, but no more than 7 will
incur costs to prepare statements explaining why they did not vote
to approve the Quarterly Progress Report. See Part III.D.2, supra.
Consequently, there may be up to 28 such quarterly statements (4 x
7) required annually. Thus, Quarterly Progress Report preparation,
depending on the number of explanatory statements required, would
have an annual aggregate maximum labor cost of (23 x $119,471) + (28
x $6472.5) = $3,729,468 with a per Participant average labor cost of
$3,729,468 / 23 = $127,351. Hourly rates are based on hourly rates
for Attorneys, Systems Analysts, and Compliance Managers from
SIFMA's Management & Professional Earnings in the Securities
Industry 2013, modified by Commission staff to account for an 1800-
hour work-year and inflation, and multiplied by 5.35 to account for
bonuses, firm size, employee benefits, and overhead. Salary
information for voting representatives uses the Chief Compliance
Officer rate of from SIFMA's Management & Professional Earnings in
the Securities Industry 2013, modified as above to $545 per hour.
\221\ See Part III.D. supra. External consulting costs assume
four Quarterly Progress Reports. 4 x $8,696 = $34,784.
\222\ These annual costs would be incurred until completion of
the CAT Implementation Plan. See Part III.D.2. supra.
\223\ See Part III.D.2. supra. Preparation and approval through
Supermajority Vote of the Operating Committee of the Implementation
Plan requires 7 hours of Attorney labor at $427 per hour; 22.6 hours
of Systems Analyst labor at $270 per hour; 22.6 hours of Compliance
Manager labor at $318 per hour. ($427 x 7) + ($270 x 22.6) + ($318 x
22.6) = $16,278. Time for the Participant's Operating Committee
Member to prepare for and vote on the Implementation plan is assumed
to be 5 hours at a rate of $545 per hour. ($545 x 5) = $2,725, using
the hourly rate for a Chief Compliance Officer. Publication and
filing of the Implementation Plan and any explanatory statement of
the Operating Committee Member's vote is assumed to require 5 hours
of Compliance Manager labor at $318 per hour and 5 hours of
Programmer/Analyst labor at $220 per hour. ($318 x 5) + ($220 x 5) =
$2,690. The Implementation Plan shall be submitted to the President,
CEO or equivalently situated senior officer of each Participant
prior to the approval vote of the Operating Committee, and any
subsequent consultation, including with their Operating Committee
Member, is assumed to require five hours of labor at $1,635 per
hour. ($1,635 x 5) = $8,175. See Note 225, infra, for discussion of
this hourly rate. Total one time labor costs are $16,278 + $2,725 +
$2,690 + $8,175 = $29,868. If an explanatory statement of the
Operating Committee Member's vote needs to be prepared, this would
require 7.5 hours of labor by a Compliance Manager at $318 per hour
and 7.5 hours of labor by the Chief Compliance Officer at $545 per
hour. ($318 x 7.5) + ($545 x 7.5) = $6,473. Thus, Implementation
Plan preparation, depending on the number of explanatory statements
required, would have an annual aggregate maximum labor cost of (23 x
$29,868) + (7 x $6472.5) = $732,267 with a per Participant average
labor cost of $732,267 / 23 = $31,838. Aggregate totals assume 23
Participants and 7 explanatory statements.
\224\ See Part III.D.2. supra.
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The Proposed Amendments require that both the Implementation Plan
and Quarterly Progress Reports be submitted to the President, CEO or
equivalently situated senior officer of each Participant prior to the
approval vote by the Operating Committee. In connection with this
requirement, the Commission preliminarily estimates that each SRO will
incur one-time consultation costs of $8,200 for the Implementation
Plan, and ongoing annual costs of $33,000 for Quarterly Progress
Reports until such time as CAT is fully implemented.\225\
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\225\ The Commission estimates that the President, CEO or
equivalently situated senior officer of each Participant will spend
approximately five hours in consultations, including with the
Participant's Operating Committee member, and estimates this will
cause each Participant to incur labor costs of (5 x $1635) = $8,175
for the Implementation Plan and (4 x $8,175) = $32,700 annually for
Quarterly Progress Reports. Hourly rates are based on hourly rates
for Chief Compliance Officers from SIFMA's Management & Professional
Earnings in the Securities Industry 2013, modified by Commission
staff to account for an 1,800-hour work-year and inflation, and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead. Salary information for CEO/presidents of
exchanges are not generally publically available as they might be
for CEO/presidents of exchange holding groups. The Commission
estimates an hourly rate for the President, CEO or equivalently
situated senior officer of an exchange by using the hourly rate for
a Chief Compliance Officer of $545 and multiplying by 3 to account
for the expected salary differential.
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If the RFRRs are triggered, during a one-year period during
implementation, up to $120MM in costs of CAT implementation and
operation could be shifted from Industry Members to Participants, but
this would not change total costs to industry as a whole from the CAT
NMS Plan.\226\ In the absence of
[[Page 48483]]
an approved fee filing, the Commission is unable to precisely estimate
the magnitude of the costs associated with RFRRs that individual
Participants would incur under such a scenario; however, the Commission
believes RFRR costs during any one-year period for individual
Participants are unlikely to exceed $46.4MM for the largest Participant
and $0.4MM for the smallest Participant, and are likely to be
significantly lower than these maximums.\227\ If RFRRs are triggered,
there would be a reduction in exchange profitability and there might be
transitory effects on exchange capital formation because the exchanges
would face additional costs and may not be able to invest in projects
or return profits to shareholders as they would have otherwise.\228\ In
the case of FINRA, which is organized as a nonprofit member
organization, costs from RFRRs could not be passed to FINRA's Industry
Members.\229\ This may affect FINRA's ability to invest in other
projects that could promote investor protection.
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\226\ The Commission estimates a maximum cost during a Period of
up to one year by making certain assumptions. First, in the CAT NMS
Plan Approval Order, the Commission estimated maximum implementation
costs and annual operating costs for the Central Repository of $65MM
and $55MM respectively; see CAT NMS Plan Approval Order, supra note
4, at Section V.F.1.a. If the Participants were allowed to recover
100% of those costs from Industry Members, if milestones under these
amendments were achieved, and if all implementation costs were
incurred during a single Period, Central Repository costs for a
Period of up to one year would likely be no higher than $65MM + 55MM
= $120MM. In such a scenario, Participants could incur maximum RFRR
costs during a single year of $120MM if they missed the Financial
Accountability Milestone by more than 270 days. Because the first
Period's duration is less than one year, its maximum would be lower
because a full year's operating costs for the Central Repository
would not be incurred.
\227\ Assuming equity exchanges bore 100% of Participant fees
and using widely reported equity trading volume for February 2019,
and assuming fees were allocated by market share of equity trading
volume, the largest equity venue would incur 38.7% x $120MM =
$46.4MM and the smallest equity venue would incur 0.3% x $120MM =
$0.4MM in RFRR costs. For an example of widely reported equity
trading volume, see the CBOE's compilation of equity trading volume
at https://markets.cboe.com/us/equities/market_statistics/historical_market_volume/. The actual RFRR costs would likely be
significantly lower than these maximums. For example, it is unlikely
that 100% of implementation costs that presumably cover expenses
from pre-implementation through the entire implementation period
would be incurred in a single year, and the Commission preliminarily
believes that some of these costs have already been incurred. This
is a maximum single one-year RFRR cost because the estimated Central
Repository operating cost is an annual figure. During a one-year
implementation Period, the Commission assumes the Central Repository
would incur one year of operating costs. However, when a Financial
Accountability Milestone is missed, the Period may exceed one year
in duration and additional operating costs would be incurred.
Consequently, the implementation Period RFRR cost incurred by the
Participants would be a function of the length of the delay and the
actual operating costs incurred by the Plan Processor during that
implementation Period.
\228\ See Part IV.D.3. infra.
\229\ All of FINRA's members are Industry Members, while most
but not all Industry Members are FINRA members.
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The Commission preliminarily believes that the proposed amendments
are likely to have indirect costs to some Participants, Industry
Members, and service bureaus due to acceleration of CAT implementation
costs relative to the current delayed timeline. In the CAT NMS Plan
Approval Order, the Commission estimated CAT implementation costs for
Participants, Industry Members, and service bureaus that provide
certain order handling, connectivity, and clearing services to Industry
Members.\230\ These three groups may have indirectly benefited from
implementation delays as implementation costs were deferred, while the
benefits to investors anticipated by the CAT NMS Plan Approval Order
have likewise been deferred. To the extent that the proposed amendments
reduce those delays, the unintended cost deferral to these groups will
be ended.
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\230\ See CAT NMS Plan Approval Order, supra note 4, at Section
V.F.1.
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The Commission preliminarily believes that the amendments could
result in an inefficiently accelerated implementation of the CAT, which
could potentially increase overall CAT implementation costs to
Participants, Industry Members, and ultimately to investors.\231\
Because the Participants would have financial accountability for
meeting the Financial Accountability Milestones, the Participants might
choose to incur additional and inefficient costs to avoid missing
deadlines because the magnitude of the additional costs incurred to
meet the Financial Accountability Milestone dates may be less than the
magnitude of the reduction in expenses the Participants could recover
due to the RFRRs outlined in these amendments.\232\ If the Participants
do not exceed Financial Accountability Milestone dates by more than 180
or 270 days, as applicable, Industry Members would share in funding
some of those additional costs.\233\ Because the proposed amendments
have provisions that improve transparency, these effects could be
magnified to the extent that the Participants seek to avoid missing
Implementation Milestones required in the amendments. Furthermore,
accelerated implementation might result in inefficient implementation
decisions. For example, Participants could deliver less help desk
functionality, reporter portal features, or infrastructure design so
that they can avoid missing a Financial Accountability Milestone
deadline. While these reductions in functionality might still meet the
requirements of the CAT NMS Plan, they might make the CAT less
effective or efficient for reporters and users of CAT data than it
would have been with greater functionality. The costs of such
reductions in functionality may accrue primarily to Industry Members or
users of CAT data.
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\231\ See CAT NMS Plan Approval Order, supra note 4, at Section
V.F.2.a.
\232\ For example, Participants might incur $50MM in additional
costs to avoid missing a Financial Accountability Milestone date by
a week and incurring resultant RFRR costs of $30MM. Because the
$50MM cost would be partially funded by Industry Members, incurring
this expense might be financially rational for the Participants.
Such an acceleration may be inefficient in the sense that
accelerating implementation by one week might not provide benefits
to industry and investors that warrant an additional $50MM in
investment in the CAT. Inefficient acceleration might also result in
missed opportunities for value-added features of CAT. For example,
inefficient acceleration of implementation might cause the
Participants to delay implementing an effective Help Desk, or to
defer improvements to the reporters' portal.
\233\ The CAT NMS Plan Approval Order contemplated a fee
structure in which costs of developing, implementing, and operating
the Central Repository would be shared between Participants and
Industry Members. See CAT NMS Plan Approval Order, supra note 4, at
Section IV.F.1.
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The Commission preliminarily believes that the likelihood of an
inefficiently accelerated CAT implementation is low for two reasons.
First, the deadlines for Financial Accountability Milestones are
aligned with the most recent timelines published by Participants.
Therefore the Commission preliminarily believes that the dates are
feasible and thus are unlikely to pressure the Participants to
inefficiently accelerate CAT implementation to avoid triggering RFRRs.
Second, the financial accountability measures in the proposed
amendments are designed in a manner that should mitigate this risk
because RFRRs continue to increase as delays persist, until the fee
recovery rate becomes zero. Specifically, the costs associated with
missing a deadline for a Financial Accountability Milestone by a short
period (for example, less than 90 days) would be less than the costs
associated with missing a deadline for a Financial Accountability
Milestone by a longer period (for example, more than 90 days).
Consequently, Participants may be less likely to inefficiently
accelerate implementation to avoid RFRRs because the RFRRs reduce
rather than eliminate the Participants' ability to recoup costs from
Industry Members
[[Page 48484]]
for delays of less than 270 (or in the case of Period 1,180) days.
The Commission also notes that additional indirect costs may accrue
to market participants due to exchanges leaving the market for trading
services, which could result from the impact of the amendments on
competition, as discussed further below.\234\ Market participants face
certain fixed costs in establishing connectivity to exchanges and
adapting their trading strategies for changes in available trading
venues. Consequently, competitor exits from the market for exchange
services may be costly to other market participants who must update
trading strategies to reflect what trading venues are available. The
Commission believes it is unlikely that such costs will accrue because
the failure of exchanges due to the financial accountability provisions
in the proposed amendments is unlikely. The Commission preliminarily
believes that exchanges that might require additional capital to meet
their financial obligations under the CAT NMS Plan could acquire it
through financial markets because exchanges are generally profitable
and investors in exchanges are likely to view costs from RFRRs as one-
time events that do not affect long-term exchange profitability. Also,
in many cases, exchanges are part of a larger exchange group that could
provide additional capital if needed.\235\
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\234\ See Part IV.D.2. infra.
\235\ See Part IV.D.2. infra for a more in depth discussion of
the competitive effects of the proposed amendments.
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Finally, while triggering the RFRRs in these amendments would cause
Participants to accrue additional costs because they could not recover
these costs from Industry Members, there would be a corresponding
financial benefit to Industry Members because they would not have to
pay those costs. Consequently, the cost transfers from the RFRRs in the
proposed amendments do not impose a net cost on industry as a whole.
The Participants could attempt to shift the costs to Industry Members
through changes to their broader fee structures. However, changes to
the Participants' fees would need to be filed with the Commission.
D. Impact on Efficiency, Competition, and Capital Formation
1. Efficiency
The Commission preliminarily believes that the proposed amendments
will have an effect on efficiency. In general, the Commission
preliminarily believes that the proposed amendments will improve the
efficiency of Plan implementation activities by Industry Members.
However, the Commission preliminarily believes that the financial
accountability provisions could also potentially reduce the efficiency
of Plan implementation by the Participants by incentivizing them to
delay certain later-period implementation activities if Participants
believe there is a significant risk of missing a Financial
Accountability Milestone date in an earlier period.
The Commission preliminarily believes that the proposed amendments
will improve the efficiency of Industry Member implementation of CAT
reporting. As discussed previously, uncertainty and delays in CAT
implementation and OATS retirement could have costs for broker-
dealers.\236\ The financial accountability and public disclosures
required by the proposed amendments should provide more certainty to
Industry Members regarding when they will be required to begin
reporting data to CAT and when they will be able to retire duplicative
reporting systems. This should aid Industry Members in efficiently
developing and implementing their CAT data reporting systems, planning
the maintenance and eventual retirement of duplicative systems, and
allowing them to make adjustments to those plans as needed.
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\236\ See Part IV.A.1. supra.
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However, the Commission preliminarily believes that the financial
accountability provisions could incentivize Participants to
inefficiently delay certain later-period implementation activities if
Participants believe there is a significant risk of missing a Financial
Accountability Milestone date in an earlier Period. To illustrate,
during Period 1, in the absence of the proposed amendments, it may be
efficient for Participants to invest in activities that enable meeting
Financial Accountability Milestones in Periods 2, 3, and 4. If,
however, Participants believe that they likely will not meet the Period
1 Financial Accountability Milestone and will thus likely trigger an
RFRR during Period 1, Participants may defer investing in Period 2, 3,
and 4 activities during Period 1 because investments that enable
meeting later Period Financial Accountability Milestones would be
subject to a Period 1 RFRR because the expenses were incurred during
Period 1. Furthermore, some Participants might delay financial
investment in some implementation activities if additional costs from
triggering RFRRs provoke financial distress. The Commission
preliminarily believes this outcome is unlikely because the Commission
preliminarily believes that exchanges that might require additional
capital to meet their financial obligations under the CAT NMS Plan
could acquire it through financial markets. Exchanges are generally
profitable, and investors in exchanges are likely to view costs from
RFRRs as one-time events that do not affect long-term exchange
profitability.\237\ The Commission preliminarily believes that the
structure of the financial accountability provisions may attenuate the
risk of inefficient delay of financial investment in later Period
Financial Accountability Milestones to some degree because delaying
such investment is likely to increase the risk of triggering an RFRR in
a later Period. This would make it relatively more costly to delay
later Period implementation investments when facing potential RFRRs for
those periods.
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\237\ See Part IV.C.4. infra.
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2. Competition
a. Competitive Baseline
The Commission described the structure of the market for trading in
NMS securities, as of that time, in the Notice and the CAT NMS Plan
Approval Order.\238\ While the Commission's analysis of the state of
competition in the Notice is fundamentally unchanged, the market for
trading services in options and equities currently consists of 23
national securities exchanges, all but one of which are Plan
Participants,\239\ as well as off-exchange trading venues, including
broker-dealer internalizers, and 31 ATSs,\240\ which are not Plan
Participants. The exchanges are currently controlled by 7 separate
entities; three of these operate a single exchange.\241\
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\238\ See CAT NMS Plan Approval Order, supra note 4, at Section
V.G.1.
\239\ LTSE is not yet a Participant to the CAT NMS Plan.
\240\ As of 8/26/19 there are 31 NMS Stock ATSs operating
pursuant to an initial Form ATS-N. A list of NMS Stock ATSs,
including access to initial Form ATS-N filings that are effective,
can be found on the Commission website at https://www.sec.gov/divisions/marketreg/form-ats-n-filings.htm.
\241\ Cboe Global Markets, Inc. controls BYX, BZX, C2, EDGA,
EDGX, and CBOE; Miami Internal Holdings, Inc. controls Miami
International, MIAX Emerald, and MIAX PEARL; NASDAQ, Inc. controls
BX, GEMX, ISE, MRX, PHLX, and Nasdaq; Intercontinental Exchange,
Inc. controls NYSE, Arca, American, Chicago, and National. The three
entities that control a single-exchange are IEX Group which controls
IEX, a consortium of broker-dealers which controls BOX, and Long
Term Stock Exchange, Inc. which controls LTSE.
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b. Competitive Effects
The Commission preliminarily believes that the proposed amendments
might have competitive effects on the
[[Page 48485]]
market for NMS security trading services and the market for equity
listings. In the case that RFRRs are triggered, one or more exchanges
might exit these markets, although the Commission preliminarily
believes this is unlikely.\242\ The Commission preliminarily believes
that triggering an RFRR could also temporarily affect competition
between exchanges and ATSs and broker-dealer internalizers, but does
not believe the effects will be significant.
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\242\ A potential entrant to the market might be marginally more
likely to delay entry due to the proposed amendments, but given that
a new entrant's fee burden would be a function of its market share,
presumably a new entrant would begin with a relatively low market
share. The Commission, therefore, does not preliminarily believe
that an entity considering forming an exchange would decline to do
so because of additional uncertainty about CAT NMS Plan financial
responsibilities. Consequently, the Commission preliminarily
believes that the proposed amendments are unlikely to have effects
on innovation by new entrants.
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The Commission preliminarily believes that is it unlikely that
exchanges that are part of an exchange group would exit the market for
NMS security trading services or equity listings if the RFRRs in the
proposed amendments are triggered because the larger exchange group
could provide additional capital to an exchange that would otherwise
exit the market. Such costs are one-time events and are unlikely to
change an exchange operator's assessment of the long-term economics of
operating the exchange.\243\
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\243\ The Commission preliminarily believes that the license to
operate an exchange is a valuable asset even when the extant
exchange has low volume because exchange families and new entrants
sometimes acquire both high and low volume exchanges. See, e.g.,
https://ir.theice.com/press/press-releases/all-categories/2018/07-18-2018-133237540 and https://cdn.batstrading.com/resources/press_releases/CBOE-Holdings-Announces-Close-of-Acquisition-of-Bats-Global-Markets-FINAL-3-1-17.pdf. As long as the RFRR-related costs
incurred by an exchange are less than the cost of registering and
implementing a new exchange from scratch, exchange families with
adequate financial resources are likely to invest additional capital
in an exchange that would otherwise fail due to the RFRRs.
The Commission recognizes that under the proposed amendments,
exchanges do not incur RFRR costs in isolation; if one exchange
incurs RFRR costs, all exchanges incur RFRR costs. Consequently, an
exchange family might need to further capitalize multiple exchanges.
The Commission believes failure of entire exchange groups is
unlikely because the Commission preliminarily believes that exchange
groups that might require additional capital to meet their financial
obligations under the Plan could acquire it through financial
markets because exchanges are generally profitable and investors in
exchanges are likely to view costs from RFRRs as one-time events
that do not affect long-term exchange profitability.
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However, for smaller exchanges that are not part of a larger
exchange family that could provide additional capital, the Commission
recognizes that it is possible that such exchanges could be forced to
exit the market, although the Commission believes this is unlikely to
occur. Specifically, the Commission believes it is unlikely that
exchanges would be forced to leave the market because the Commission
preliminarily believes that exchanges that required additional capital
to meet their financial obligations under the CAT NMS Plan would be
able to secure it through financial markets.
Even if an exchange were to exit, the Commission does not believe
this would significantly impact competition in the market for exchange
trading services or the market for equity listings because these
markets are served by multiple competitors. Consequently, demand for
these services in the event of the exit of a competitor is likely to be
swiftly met by existing competitors. The Commission recognizes that
small exchanges may have unique business models that are not currently
offered by competitors to these independent exchanges, but the
Commission preliminarily believes a competitor could create similar
business models if demand were adequate, and if they did not do so, it
seems likely new entrants would do so if the exiting exchange were
otherwise profitable.
If the RFRRs are triggered, the Commission preliminarily believes
that it could temporarily affect competition between exchanges and ATSs
and broker-dealer internalizers. However, the Commission preliminarily
believes that these effects would not be significant. As discussed
previously, in the event RFRRs are triggered, up to $120MM in costs
could be shifted from Industry Members to Participants in a one-year
Period.\244\ This increase in costs to Participants could have
transient negative effects on Participants' ability to invest in their
exchanges.\245\ The corresponding cost savings to Industry Members
could have transient positive effects on Industry Members' abilities to
invest in their ATSs or internalization operations, which could include
temporarily reducing fees in order to attract order flow. Although this
may temporarily provide ATSs and broker-dealer internalizers with a
competitive advantage over exchanges in attracting order flow, the
Commission preliminarily believes that these effects will not be
significant because broker-dealers make strategic decisions to expose
orders on exchanges or route orders to ATSs or internalizers based on
other factors, such as order characteristics and temporary market
conditions, that will not be impacted by the proposed amendments.
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\244\ See Part IV.C. supra.
\245\ See Part IV.D.3. infra.
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3. Capital Formation
The Commission preliminarily believes the amendments will have
negligible mixed effects on capital formation. The Commission
preliminarily believes that it is possible the amendments' improvements
to investor protections may allow improvements to capital formation
anticipated in the CAT NMS Plan Approval Order to be realized sooner
than they would be in the absence of the proposed amendments. As
discussed previously, delays in implementation of the CAT NMS Plan have
delayed investors' realization of improvements to investor protection
anticipated in the CAT NMS Plan Approval Order. By incentivizing the
Participants to implement the CAT NMS Plan expeditiously, the
amendments may permit investors to realize these benefits sooner than
they would otherwise. These improvements to investor protections may
improve capital formation.\246\ However, some costs of the amendments--
particularly the direct costs--are likely to be passed on to
investors.\247\ Because these are not ongoing costs, the Commission
preliminarily believes any negative effects on capital formation will
be transitory. If RFRRs are triggered, the exchanges could face
significant costs associated with expenses that could not be shared
with Industry Members. These additional costs to Participants would be
offset by savings by Industry Members. The Commission preliminarily
believes these transfers between Participants and Industry Members are
unlikely to affect capital formation because while the costs to
Participants might be passed on to investors through relatively higher
prices to transact on exchanges for broker-dealers that would then pass
these costs on to their customers, the savings to Industry Members
might be passed on by broker-dealers to their customers as well, so the
net impact to investors should be negligible.
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\246\ See CAT NMS Plan Approval Order, supra note 4, at Section
V.G.1.
\247\ Costs associated with triggering RFRRs would not increase
the cost of the CAT, but rather constitute a transfer between
Participants and Industry Members. The Commission preliminarily
believes these costs are unlikely to be directly transferred to
investors, but notes competitive effects of these transfers in Part
IV.D.2. supra.
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If RFRRs are triggered, exchanges could experience short-term,
transitory negative effects on exchange capital formation because the
exchanges would
[[Page 48486]]
face additional costs and may not be able to invest in projects or
return profits to shareholders that they would otherwise. However, the
Commission preliminarily believes costs from RFRRs would be viewed as
transitory by investors because they would end with full CAT
implementation. Consequently, the Commission preliminarily believes
that the amendments would not permanently affect investors' assessment
of expected profitability for exchanges, and thus would not reduce this
capital formation long-term.
E. Alternatives
1. Fixed versus Relative Financial Accountability Milestone Dates
The Commission considered an alternative approach that would use
relative Financial Accountability Milestone dates in a scenario when a
Financial Accountability Milestone was not met on schedule. Under the
proposed amendments, Financial Accountability Milestone dates are fixed
calendar dates. Under this alternative approach, the duration of the
time period between two Financial Accountability Milestone dates would
be static but the Financial Accountability Milestone dates would be
relative. Thus, if a Financial Accountability Milestone were not
achieved on schedule, the next Financial Accountability Milestone date
would be delayed such that the duration of Periods between Financial
Accountability Milestone dates was unchanged.\248\ For example, if
sequential Financial Accountability Milestone dates are April 30, 2020
and December 31, 2020, achieving the first Financial Accountability
Milestone on May 31, 2020 would automatically reset the next Financial
Accountability Milestone date to January 31, 2021, leaving the duration
of the period between the two dates unchanged.
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\248\ The alternative could be structured such that upon the end
of a Period, the next Financial Accountability Milestone date would
become the later of the Financial Accountability Milestone date in
the amendments or the relative date from this alternative approach.
This approach would prevent the subsequent relative Financial
Accountability Milestone date from becoming earlier in the event
that the Participants achieve a Financial Accountability Milestone
ahead of schedule. This would avoid the problem of incentivizing the
Participants to delay Financial Accountability Milestone achievement
to avoid accelerating Financial Accountability Milestone dates, and
would mitigate any risk Industry Members would have from
accelerating Financial Accountability Milestone dates.
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The primary economic impact of this approach relative to the
proposal is that it avoids a risk inherent in the fixed Financial
Accountability Milestone date approach of the proposal. Under the fixed
Financial Accountability Milestone date approach, if the Participants
encounter a delay early in the implementation process that causes them
to miss a Financial Accountability Milestone date by a significant
margin, it may become more difficult for them to meet future Financial
Accountability Milestone dates. Under such a scenario, the proposed
amendments may lose some of their incentive value because the
Participants may not be able to avoid triggering at least some of the
RFRRs after missing an early Financial Accountability Milestone date.
Under the alternative approach with relative Financial Accountability
Milestone dates, if the Participants miss a deadline early in the
implementation timeline and trigger the RFRRs, they would not
necessarily find later deadlines so difficult to meet that they lose
their economic incentive to meet the later Financial Accountability
Milestone dates.
This alternative approach has two significant costs relative to the
proposed amendments. First, in a case where a significant delay arises
in an early implementation Period such that financial RFRRs are
triggered during that Period, the Participants may be incentivized to
delay meeting the Period-ending requirement in order to give themselves
more time to achieve later-Period Financial Accountability Milestones
in order to decrease their risk of triggering RFRRs in later Periods.
Such a scenario could significantly delay the retirement of OATS, which
would be costly to Industry Members if it extended their period of
duplicative reporting.\249\ Under both the proposed amendments and in
this alternative, the structure of the financial accountability
provisions might mitigate but not eliminate this risk because RFRRs
increase over time; consequently, if a Financial Accountability
Milestone is missed and an RFRR is triggered, Participants should
remain incentivized to implement in an expeditious manner to avoid
triggering a higher RFRR during the same Period of implementation.
However, under the alternative approach, the Financial Accountability
Milestone date for OATS retirement could be pushed back due to missing
an earlier Financial Accountability Milestone, which could necessitate
a longer period of costly duplicative reporting for Industry Members.
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\249\ See CAT NMS Plan Approval Order, supra note 4, at Section
V.F.2.b.
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The second likely additional cost relative to the proposal is that
the alternative approach would make the ultimate CAT implementation
timeline less certain than in the proposal, because delays in early
Periods would push back implementation dates for later Periods of
implementation. However, under the proposed approach, missing an early-
Period Financial Accountability Milestone could also result in delays
in meeting later Financial Accountability Milestones, and because the
potential length of future delays would not be defined by the structure
of the proposed amendments, they would be less transparent to Industry
Members. However, under the proposed amendments, realized delays would
be documented in Quarterly Progress Reports and thus should aid
Industry Members in updating expectations on implementation timelines.
2. Different Timelines for Onset of RFRRs
The Commission considered alternative approaches with different
Financial Accountability Milestone dates. These approaches would have
certain additional benefits and costs as compared to the proposal. For
example, earlier Financial Accountability Milestones might accelerate
the time at which investors realize the benefits of the CAT, but would
increase the likelihood that the implementation of CAT would be
accelerated to a degree that is inefficient.\250\ Alternatively,
delaying Financial Accountability Milestone dates would increase the
time that investors do not realize the benefits of CAT and that
Industry Members experience uncertainty that increases their
implementation costs, but might avoid the risk of inefficiently
accelerating the implementation of CAT.\251\ The Commission further
notes that alternative milestone dates that are not generally aligned
with dates published by or discussed with the Participants are less
likely to reflect realistic expectations for the Participants in
implementing the CAT.\252\
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\250\ See Note 232, supra.
\251\ See Part IV.C. supra.
\252\ See Part II.B.1. supra.
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3. Alternate Magnitudes of RFRRs
The Commission considered alternative approaches with different
levels of RFRRs. Under the proposed amendments, for each period of up
to 90 days by which the Participants miss Financial Accountability
Milestone dates, they would trigger RFRRs such that they would be
allowed to recover 25% less of the CAT costs they would otherwise
recover from Industry
[[Page 48487]]
Members. Alternative approaches could have higher or lower marginal
RFRRs.
The Commission preliminarily believes that alternative approaches
with higher marginal RFRRs (allowing the Participants to recover a
lower share of CAT costs from Industry Members when RFRRs are
triggered) would potentially further incentivize the Participants to
meet Financial Accountability Milestone deadlines, but would also
increase the risk of inefficient acceleration of CAT
implementation.\253\
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\253\ See Note 233, supra.
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The Commission preliminarily believes that alternative approaches
with lower RFRRs (allowing the Participants to recover a higher share
of CAT costs from Industry Members when RFRRs are triggered) would
decrease the incentives Participants have to meet Financial
Accountability Milestone deadlines, but would reduce the risk of
inefficient acceleration of CAT implementation.
F. Request for Comment on the Economic Analysis
The Commission is sensitive to the potential economic effects,
including the costs and benefits, of the proposed amendments to the CAT
NMS Plan. The Commission has identified above certain costs and
benefits associated with the proposal and requests comment on all
aspects of its preliminary economic analysis. The Commission encourages
commenters to identify, discuss, analyze, and supply relevant data,
information, or statistics regarding any such costs or benefits. In
particular, the Commission seeks comment on the following:
33. Do you believe the Commission's analysis of the potential
effects of the proposed amendments to the CAT NMS Plan is reasonable?
Why or why not? Please explain in detail.
34. Do you believe the Commission's description of the state of
implementation of the CAT NMS Plan is accurate? Why or why not? Please
explain in detail.
35. Do you believe that the multiple delays in implementation of
the CAT NMS Plan has led to uncertainty surrounding CAT implementation
that may be causing Industry Members to incur costs they would not have
incurred had the CAT been completed on its original schedule? Why or
why not? Please explain in detail.
36. The structure of the RFRRs provides that after missing a
Financial Accountability Milestone by 270 days (or 180 days as
applicable), Participants would not be allowed to recover any
implementation costs for the delayed implementation Period. For the
remainder of the implementation Period, Participants would continue to
incur expenses associated with the Plan Processor's operation of the
Central Repository, and would not be able to share those expenses with
Industry Members. Do you believe the Participants' inability to share
those expenses with Industry Members will continue to incentivize the
Participants to proceed with Plan implementation? Why or why not?
Please explain in detail.
37. Do you agree with the Commission's assessment of the
transparency of Plan implementation? Why or why not? Please explain in
detail.
38. Do you agree with the Commission's assessment of the status of
Plan implementation? Why or why not? Please explain in detail.
39. The Commission requests that commenters provide relevant data
and information to assist us in analyzing the economic consequences of
the proposed amendments. In particular, the Commission requests data
and information regarding the costs incurred by Industry Members
because of uncertainty surrounding CAT implementation.
40. Do you agree with the Commission's assessment of the benefits
of the proposed amendments? Why or why not? Please explain in detail.
41. Do you believe that the proposed amendments increase the
likelihood that OATS will be retired by December 31, 2021? Do you
believe that the amendments are likely to compress the period of
duplicative reporting by Industry Members? Why or why not? Please
explain in detail.
42. Do you believe the proposed amendments will decrease
uncertainty for Industry Members regarding the timing and requirements
of Plan implementation? Why or why not? Please explain in detail.
43. Do you believe this reduction in uncertainty will reduce costs
of Plan Implementation by Industry Members? Why or why not? Please
explain in detail.
44. Do the Participants have economic disincentives to Plan
implementation that the Commission has not recognized? What are they?
Please describe in detail.
45. Are there other economic incentives the Commission could
propose to incentivize the Participants to implement the CAT NMS Plan
expeditiously and efficiently? Please describe them in detail.
46. Do you agree with the Commission's analysis of the direct costs
of the proposed amendments? Why or why not?
47. Do commenters agree that Participants' costs related to
approval of the Implementation Plan and Quarterly Progress Reports are
likely to have economies of scale, whereby the representatives of
Participants that are members of exchange groups may spend less time
per exchange on this task, while representatives of Participants that
are not part of an exchange group may require more time to review and
vote on the Implementation Plan and/or Quarterly Progress Reports, and
prepare and publish on each of the Participant websites or collectively
on the CAT NMS Plan website any statements identifying Participants
that did not vote to approve and explaining why? Why or why not?
48. Do commenters agree with the Commission's estimate for hourly
costs for Operating Committee members performing activities necessary
for approval by a Supermajority Vote under the amendments? If not,
please provide alternate estimates if possible.
49. Do commenters agree with the Commission's estimate for hourly
costs associated with the President, CEO or equivalently situated
senior officer of each Participant? If not, please provide alternative
estimates of the hourly costs for the President, CEO or equivalently
situated senior officer of each Participant to consult as needed with
the Participant's Operating Committee member.
50. Please provide estimates of the time required for a Participant
and publish a statement identifying itself and explaining why it did
not vote to approve the Implementation Plan or Quarterly Report. Also,
please identify who (i.e. General Counsel, Chief Compliance Officer or
other executive) would be involved in preparing such a statement.
51. Please comment on the Commission's estimate of the maximum cost
of RFRRs to the Participants. Are there alternative methodologies to
estimate these costs? Please describe and provide detailed analysis if
possible.
52. Do you agree with the Commission's analysis of the indirect
costs of the proposed amendments? Why or why not?
53. Are the proposed amendments likely to cause an inefficient
acceleration as described above of Plan implementation as described
above? Why or why not?
54. Do you believe the proposed amendments are likely to improve
the
[[Page 48488]]
efficiency of Plan implementation? Why or why not?
55. Do you believe the proposed amendments' incentive structure
could potentially reduce the efficiency of Plan implementation by
incentivizing Participants to delay certain later-Period implementation
activities if Participants believe there is a significant risk of
missing a Financial Accountability Milestone date in an earlier Period?
Why or why not? Please describe how in detail.
56. The Commission requests comment on all aspects of this analysis
and, in particular, on whether the Proposed Amendments would place a
burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act, as well as the effect of the proposal
on efficiency, competition, and capital formation.
57. Do you agree with the Commission's assessment of the current
state of competition in the market for trading services? Why or why
not?
58. Do you agree with the Commission's assessment of the current
state of competition in the market for NMS stock listings? Why or why
not?
59. Do you believe that in the event that RFRRs are triggered, one
or more exchanges might exit the market for trading services? Please
explain in detail.
60. If one or more exchanges were to exit the market for trading
services, would competition in this market suffer? Why or why not? Are
there exchanges that might leave this market that have business models
that could not be copied by an existing competitor or new entrant?
Would such business models be likely to be copied by an existing
competitor or new entrant? Why or why not? Please explain in detail.
61. Do you believe that some Participants might be motivated to
trigger RFRRs to financially distress competitors? Why or why not?
Please explain in detail.
62. Do you believe the proposed amendments will have effects on
capital formation that the Commission has not recognized? Please
explain in detail.
63. Do you agree that the proposed amendments may improve capital
formation by accelerating the investor protection benefits anticipated
by the CAT Approval Order? Why or why not?
64. Would an alternative approach that used relative Financial
Accountability Milestone dates rather than fixed Financial
Accountability Milestone dates better incentivize the Participants to
implement the CAT NMS Plan expeditiously and efficiently? Why or why
not? Would such an approach have benefits or costs that the Commission
has not recognized? Please explain in detail.
65. Are there alternative Financial Accountability Milestone dates
that the Commission should use? What economic benefits and costs would
those alternative dates have? Please describe in detail.
66. The Commission requests comment on alternative incentive
structures. Is the proposed schedule for reducing the fee recovery
levels by 25% for each period of up to 90 days that the Participants
miss implementation Financial Accountability Milestone dates adequate
to incentivize the Participants to implement CAT expeditiously and
efficiently? Is there some other RFRR level that is more appropriate?
Should the time period between reductions in RFRR levels be shorter or
longer than 90 days? Please explain.
V. Consideration of Impact on the Economy
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA''),\254\ the Commission requests comment on the
potential effect of this proposal on the United States economy on an
annual basis. The Commission also requests comment on any potential
increases in costs or prices for consumers or individual industries,
and any potential effect on competition, investment, or innovation.
Commenters are requested to provide empirical data and other factual
support for their views, to the extent possible.
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\254\ Public Law 104-121, Title II, 110 Stat. 857 (1996)
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note
to 5 U.S.C. 601).
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VI. Regulatory Flexibility Act Certification
The Regulatory Flexibility Act (``RFA'') \255\ requires Federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities. Section 603(a) \256\ of the Administrative Procedure
Act,\257\ as amended by the RFA, generally requires the Commission to
undertake a regulatory flexibility analysis of all proposed rules, or
proposed rule amendments, to determine the impact of such rulemaking on
``small entities.'' \258\ Section 605(b) of the RFA states that this
requirement shall not apply ``to any proposed or final rule if the head
of the agency certifies that the rule will not, if promulgated, have a
significant economic impact on a substantial number of small
entities.'' \259\
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\255\ 5 U.S.C. 601 et seq.
\256\ 5 U.S.C. 603(a).
\257\ 5 U.S.C. 551 et seq.
\258\ The Commission has adopted definitions for the term
``small entity'' for purposes of Commission rulemaking in accordance
with the RFA. Those definitions, as relevant to this proposed
rulemaking, are set forth in 17 CFR 240.0-10. See Securities
Exchange Act Release No. 18451 (January 28, 1982), 47 FR 5215
(February 4, 1982) (File No. AS-305).
\259\ 5 U.S.C. 605(b).
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The proposed rule amendments would only impose requirements on
national securities exchanges registered with the Commission under
Section 6 of the Exchange Act and FINRA. With respect to the national
securities exchanges, the Commission's definition of a small entity is
an exchange that has been exempt from the reporting requirements of
Rule 601 of Regulation NMS, and is not affiliated with any person
(other than a natural person) that is not a small business or small
organization.\260\ None of the national securities exchanges registered
under Section 6 of the Exchange Act that would be subject to the
proposed rule are ``small entities'' for purposes of the RFA. In
addition, FINRA is not a ``small entity.'' \261\ For these reasons, the
proposed rule will not apply to any ``small entities.'' Therefore, for
the purposes of the RFA, the Commission certifies that the proposed
rule would not have a significant economic impact on a substantial
number of small entities.
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\260\ See 17 CFR 240.0-10(e).
\261\ See 13 CFR 121.201
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The Commission requests comment regarding this certification. In
particular, the Commission solicits comment on the following:
67. Do commenters agree with the Commission's certification that
the proposed rule would not have a significant economic impact on a
substantial number of small entities? If not, please describe the
nature of any impact on small entities and provide empirical data to
illustrate the extent of the impact.
VII. Statutory Authority and Text of the Proposed Amendments to the CAT
NMS Plan
Pursuant to the Exchange Act and, particularly, Sections 2, 3(b),
5, 6, 11A, 15, 15A, 17(a) and (b), 19, and 23(a) thereof, 15 U.S.C.
78b, 78c(b), 78e, 78f, 78k-1, 78o, 78o-3, 78q(a) and (b), 78s, 78w(a),
and pursuant to Rule 608(a)(2) and (b)(2),\262\ the Commission proposes
[[Page 48489]]
to amend the CAT NMS Plan in the manner set forth below.
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\262\ 17 CFR 242.608(a)(2) and (b)(2). These provisions enable
the Commission to propose amendments to any effective NMS Plan by
``publishing the text thereof, together with a statement of the
purpose of such amendment,'' and providing ``interested persons an
opportunity to submit written comments.''
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Additions are underlined; deletions are [bracketed].
* * * * *
BILLING CODE 8011-01-P
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By the Commission.
Dated: September 9, 2019.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2019-19852 Filed 9-12-19; 8:45 am]
BILLING CODE 8011-01-C
