Joint Industry Plan; Order Instituting Proceedings To Determine Whether To Approve or Disapprove an Amendment to the National Market System Plan Governing the Consolidated Audit Trail, 40114-40134 [2021-15810]

Download as PDF 40114 Federal Register / Vol. 86, No. 140 / Monday, July 26, 2021 / Notices communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be 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. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–NYSEArca–2021–63, and should be submitted on or before August 16, 2021. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.37 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2021–15832 Filed 7–23–21; 8:45 am] U.S.C. 552b(c)(3), (5), (6), (7), (8), 9(B) and (10) and 17 CFR 200.402(a)(3), (a)(5), (a)(6), (a)(7), (a)(8), (a)(9)(ii) and (a)(10), permit consideration of the scheduled matters at the closed meeting. The subject matter of the closed meeting will consist of the following topics: Institution and settlement of injunctive actions; Institution and settlement of administrative proceedings; Resolution of litigation claims; and Other matters relating to examinations and enforcement proceedings. At times, changes in Commission priorities require alterations in the scheduling of meeting agenda items that may consist of adjudicatory, examination, litigation, or regulatory matters. CONTACT PERSON FOR MORE INFORMATION: For further information; please contact Vanessa A. Countryman from the Office of the Secretary at (202) 551–5400. Dated: July 22, 2021. Vanessa A. Countryman, Secretary. [FR Doc. 2021–15936 Filed 7–22–21; 11:15 am] BILLING CODE 8011–01–P BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION SECURITIES AND EXCHANGE COMMISSION Sunshine Act Meetings Sunshine Act Meeting; Cancellation TIME AND DATE: 2:00 p.m. on Thursday, July 29, 2021. The meeting will be held via remote means and/or at the Commission’s headquarters, 100 F Street NE, Washington, DC 20549. STATUS: This meeting will be closed to the public. MATTERS TO BE CONSIDERED: Commissioners, Counsel to the Commissioners, the Secretary to the Commission, and recording secretaries will attend the closed meeting. Certain staff members who have an interest in the matters also may be present. In the event that the time, date, or location of this meeting changes, an announcement of the change, along with the new time, date, and/or place of the meeting will be posted on the Commission’s website at https:// www.sec.gov. The General Counsel of the Commission, or his designee, has certified that, in his opinion, one or more of the exemptions set forth in 5 jbell on DSKJLSW7X2PROD with NOTICES PLACE: 37 17 FEDERAL REGISTER CITATION OF PREVIOUS ANNOUNCEMENT: 86 FR 38391, July 20, 2021. PREVIOUSLY ANNOUNCED TIME AND DATE OF THE MEETING: Thursday, July 22, 2021 at 2:00 p.m. The Closed Meeting scheduled for Thursday, July 22, 2021 at 2:00 p.m., has been cancelled. CHANGES IN THE MEETING: CONTACT PERSON FOR MORE INFORMATION: For further information; please contact Vanessa A. Countryman from the Office of the Secretary at (202) 551–5400. Dated: July 21, 2021. Vanessa A. Countryman, Secretary. [FR Doc. 2021–15907 Filed 7–22–21; 11:15 am] BILLING CODE 8011–01–P CFR 200.30–3(a)(12). VerDate Sep<11>2014 17:10 Jul 23, 2021 Jkt 253001 PO 00000 Frm 00125 Fmt 4703 Sfmt 4703 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–92451; File No. 4–698] Joint Industry Plan; Order Instituting Proceedings To Determine Whether To Approve or Disapprove an Amendment to the National Market System Plan Governing the Consolidated Audit Trail July 20, 2021. I. Introduction On March 31, 2021, the Operating Committee for Consolidated Audit Trail, LLC (‘‘CAT LLC’’ or the ‘‘Company’’), on behalf of the following parties to the National Market System Plan Governing the Consolidated Audit Trail (the ‘‘CAT NMS Plan’’ or ‘‘Plan’’): 1 BOX Exchange LLC; Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., Cboe C2 Exchange, Inc., Cboe Exchange, Inc., Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’), Investors Exchange LLC, Long-Term Stock Exchange, Inc., Miami International Securities Exchange LLC, MEMX, LLC, MIAX Emerald, LLC, MIAX PEARL, LLC, Nasdaq BX, Inc., Nasdaq GEMX, LLC, Nasdaq ISE, LLC, Nasdaq MRX, LLC, Nasdaq PHLX LLC, The NASDAQ Stock Market LLC, New York Stock Exchange LLC, NYSE American LLC, NYSE Arca, Inc., NYSE Chicago, Inc., and NYSE National, Inc. (collectively, the ‘‘Participants,’’ ‘‘selfregulatory organizations,’’ or ‘‘SROs’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) pursuant to Section 11A(a)(3) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’),2 and Rule 608 thereunder,3 a proposed amendment (‘‘Proposed Amendment’’) to the CAT NMS Plan to implement a revised funding model (‘‘Proposed Funding Model’’) for the consolidated audit trail (‘‘CAT’’) and to establish a fee schedule for Participant CAT fees in accordance with the Proposed Funding Model (‘‘Participant Fee Schedule’’). The Proposed Amendment was published for comment in the Federal Register on April 21, 2021.4 1 The CAT NMS Plan is a national market system plan approved by the Commission pursuant to Section 11A of the Exchange Act and the rules and regulations thereunder. See Securities Exchange Act Release No. 79318 (November 15, 2016), 81 FR 84696 (November 23, 2016). 2 15 U.S.C. 78k–1(a)(3). 3 17 CFR 242.608. 4 See Notice of Filing of Amendment to the National Market System Plan Governing the Consolidated Audit Trail, Release No. 91555 (April 14, 2021), 86 FR 21050 (‘‘Notice’’). Comments received in response to the Notice can be found on E:\FR\FM\26JYN1.SGM 26JYN1 Federal Register / Vol. 86, No. 140 / Monday, July 26, 2021 / Notices This order institutes proceedings, under Rule 608(b)(2)(i) of Regulation NMS,5 to determine whether to disapprove the Proposed Amendment or to approve the Proposed Amendment with any changes or subject to any conditions the Commission deems necessary or appropriate after considering public comment. II. Background jbell on DSKJLSW7X2PROD with NOTICES On July 11, 2012, the Commission adopted Rule 613 of Regulation NMS, which required the SROs to submit a national market system (‘‘NMS’’) plan to create, implement and maintain a consolidated audit trail that would capture customer and order event information for orders in NMS securities.6 On November 15, 2016, the Commission approved the CAT NMS Plan.7 Under the CAT NMS Plan, the Operating Committee of the Company, of which each Participant is a member, has the discretion (subject to the funding principles set forth in the Plan) to establish funding for the Company to operate the CAT, including establishing fees to be paid by the Participants and Industry Members.8 The Plan specified that, in establishing the funding of the Company, the Operating Committee shall establish ‘‘a tiered fee structure in which the fees charged to: (1) CAT Reporters 9 that are Execution Venues,10 including ATSs,11 are based upon the level of market share; (2) Industry Members’ non-ATS activities are based upon message traffic; and (3) the CAT Reporters with the most CAT-related activity (measured by market share and/ or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venues the Commission’s website at https://www.sec.gov/ comments/4-698/4-698-a.htm. 5 17 CFR 242.608(b)(2)(i). 6 17 CFR 242.613. 7 See supra note 1. 8 The CAT NMS Plan defines ‘‘Industry Member’’ as ‘‘a member of a national securities exchange or a member of a national securities association.’’ See CAT NMS Plan, supra note 1, at Section 1.1. See also id. at Section 11.1(b). 9 The CAT NMS Plan defines ‘‘CAT Reporter’’ as ‘‘each national securities exchange, national securities association and Industry Member that is required to record and report information to the Central Repository pursuant to SEC Rule 613(c).’’ Id. at Section 1.1. 10 The CAT NMS Plan defines ‘‘Execution Venue’’ as ‘‘a Participant or an alternative trading system (‘ATS’) (as defined in Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of Regulation ATS (excluding any such ATS that does not execute orders).’’ Id. 11 Id. VerDate Sep<11>2014 17:10 Jul 23, 2021 Jkt 253001 and/or Industry Members).’’ 12 Under the Plan, such fees are to be implemented in accordance with various funding principles, including an ‘‘allocation of the Company’s related costs among Participants and Industry Members that is consistent with the Exchange Act taking into account . . . distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company resources and operations’’ and the ‘‘avoid[ance of] any disincentives such as placing an inappropriate burden on competition and reduction in market quality.’’ 13 On May 15, 2020, the Commission adopted amendments to the CAT NMS Plan designed to increase the Participants’ financial accountability for the timely completion of the CAT (‘‘Financial Accountability Amendments’’).14 The Financial Accountability Amendments added Section 11.6 to the CAT NMS Plan to govern the recovery from Industry Members of any 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 June 22, 2020 until such time that the Participants have completed Full Implementation of CAT NMS Plan Requirements 15 (‘‘Post-Amendment Expenses’’). Section 11.6 establishes target deadlines for four critical implementation milestones (Periods 1, 2, 3 and 4) 16 and reduces the amount of fee recovery available to the 12 Id. at Section 11.2(c). See Article XI of the CAT NMS Plan for additional detail. 13 See CAT NMS Plan, supra note 1, at Section 11.2(b) and (e). 14 See Securities Exchange Act Release No. 88890, 85 FR 31322 (May 22, 2020). 15 ‘‘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 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. 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).’’ See CAT NMS Plan, supra note 1, at Section 1.1. 16 Id. at Section 11.6(a)(i). PO 00000 Frm 00126 Fmt 4703 Sfmt 4703 40115 Participants if these deadlines are missed.17 On April 21, 2021, the Nasdaq and Cboe Participants 18 filed proposed rule changes to adopt a fee schedule to establish CAT fees applicable to their Industry Members 19 in accordance with the Proposed Funding Model (the ‘‘Industry Member Fee Filings’’). In the Industry Member Fee Filings, the Nasdaq and Cboe Participants stated that the fee schedule provisions will become operative upon the Commission’s approval of the Proposed Amendment. On June 17, 2021, the Commission temporarily suspended the Nasdaq and Cboe Participants’ Industry Member Fee Filings and instituted proceedings to determine whether those filings should be approved or disapproved.20 III. Summary of Proposal Under the Proposed Amendment, the Operating Committee proposes to revise certain aspects of the funding model set forth in Article XI of the CAT NMS Plan (the ‘‘Original Funding Model’’). The Original Funding Model uses a bifurcated funding approach in which costs associated with building and operating the CAT would be borne by (1) Industry Members (other than ATSs that execute transactions in Eligible Securities 21 (‘‘Execution Venue ATSs’’)) through fixed tiered fees based on message traffic for Eligible Securities, and (2) Participants and Industry 17 Id. at Section 11.6(a)(ii) and (iii). BYX Exchange, Inc. (‘‘CboeBYX’’), Cboe BZX Exchange, Inc. (‘‘CboeBZX’’), Cboe C2 Exchange, Inc. (‘‘C2’’), Cboe EDGA Exchange, Inc. (‘‘Cboe EDGA’’), Cboe EDGX Exchange, Inc. (‘‘Cboe EDGX’’), Cboe Exchange, Inc. (‘‘Cboe’’), NASDAQ BX, Inc. (‘‘BX’’), Nasdaq GEMX, LLC (‘‘GEMX’’), Nasdaq ISE, LLC (‘‘ISE’’), Nasdaq MRX, LLC (‘‘MRX’’), NASDAQ PHLX LLC (‘‘Phlx’’), The NASDAQ Stock Market LLC (‘‘Nasdaq’’) (collectively, the ‘‘Nasdaq and Cboe Participants’’). 19 See Securities Exchange Act Release Nos. 91750 (May 4, 2021), 86 FR 25045 (May 10, 2021) (SR–BX–2021–018) (‘‘Proposed Fee Filing Notice’’); 91751 (May 4, 2021), 86 FR 24941 (May 10, 2021) (SR–PHLX–2021–25); 91752 (May 4, 2021), 86 FR 24921 (May 10, 2021) (SR–NASDAQ–2021–029); 91753 (May 4, 2021), 86 FR 24994 (May 10, 2021) (SR–MRX–2021–05); 91755 (May 4, 2021), 86 FR 25035 (May 10, 2021) (SR–ISE–2021–08); 91756 (May 4, 2021), 86 FR 24979 (May 10, 2021) (SR– GEMX–2021–03); 91757 (May 4, 2021), 86 FR 24911 (May 10, 2021) (SR–C2–2021–008); 91758 (May 4, 2021), 86 FR 25004 (May 10, 2021) (SR–CboeEDGX– 2021–024); 91759 (May 4, 2021), 86 FR 24956 (May 10, 2021) (SR–CboeEDGA–2021–010); 91760 (May 4, 2021), 86 FR 24966 (May 10, 2021) (SR–CBOE– 2021–030); 91761 (May 4, 2021), 86 FR 25016 (May 10, 2021) (SR–CboeBYX–2021–011); and 91762 (May 4, 2021), 86 FR 24931 (May 10, 2021) (SR– CboeBZX–2021–034). 20 See Securities Exchange Act Release No. 92207 (June 17, 2021), 86 FR 33448 (June 24, 2021). 21 The CAT NMS Plan defines ‘‘Eligible Securities’’ as including NMS securities and OTC Equity Securities.’’ See CAT NMS Plan, supra note 1, at Section 1.1. 18 Cboe E:\FR\FM\26JYN1.SGM 26JYN1 40116 Federal Register / Vol. 86, No. 140 / Monday, July 26, 2021 / Notices Members that are Execution Venue ATSs for Eligible Securities through fixed tiered fees based on market share. The Operating Committee proposes to amend the CAT NMS Plan to adopt the Proposed Funding Model. The Proposed Funding Model would continue to require many of the same elements as the Original Funding Model, including the bifurcated funding approach, and the use of market share and message traffic.22 The Proposed Funding Model, however, would revise the Original Funding Model in certain ways, including (1) dividing the CAT costs between Participants and Industry Members, rather than between Execution Venues and Industry Members (other than Execution Venue ATSs); (2) removing share volume in OTC Equity Securities from the calculation of market share for national securities associations; (3) eliminating the use of tiers in calculating CAT fees for Participants and Industry Members; (4) removing from the CAT NMS Plan funding principles the requirement that the fees charged to CAT Reporters with the most CAT-related activity be generally comparable; (5) eliminating references to fixed fees for Participants and Industry Members; (6) adopting certain minimum and maximum CAT fees for Industry Members and Participants; and (7) imposing certain discounts for market making activity when calculating Industry Member CAT fees. The Operating Committee also proposes to adopt a fee schedule to establish the CAT fees applicable to Participants based on the Proposed Funding Model. The Participant Fee Schedule would establish the allocation percentages and other variables for calculating the CAT fees under the Proposed Funding Model. A. Proposed Funding Model jbell on DSKJLSW7X2PROD with NOTICES 1. Categorization of Alternative Trading Systems The Original Funding Model employs a bifurcated approach in which costs associated with building and operating 22 In the description of the Proposed Amendment, the Operating Committee states that message traffic will be calculated based on Industry Members’ Reportable Events reported to the CAT, as defined in the CAT Reporting Technical Specifications for Industry Members (‘‘IM Reporting Tech Specs’’), and that Reporting Events in the current IM Reporting Tech Specs that will be counted as message traffic include the New Order Event, the Order Route Event and Trade Event, but will not include reporting activity related to Customer information as established in the CAT Reporting Customer and Account Technical Specifications for Industry Members. The Operating Committee notes that the Reportable Events may vary if the IM Reporting Tech Specs are amended. See Notice, supra note 4, at 21056–21057. VerDate Sep<11>2014 17:10 Jul 23, 2021 Jkt 253001 the CAT would be borne by (1) Participants and Industry Members that are Execution Venue ATSs for Eligible Securities through fees based on market share, and (2) Industry Members (other than Execution Venue ATSs) through fees based on message traffic. Under the Proposed Funding Model, the concept of an Execution Venue would be eliminated, and CAT costs would be divided between Participants as a group and Industry Members as a group; Execution Venue ATSs would be treated like other Industry Members, instead of like Participants.23 The Operating Committee explains that this would simplify the Proposed Funding Model by requiring all Industry Members (instead of Industry Members other than Execution Venue ATSs) to pay fees based on message traffic and would address any concerns that treating Execution Venue ATSs as Participants would create a barrier to entry for smaller ATSs.24 Accordingly, under the Proposed Amendment, the Operating Committee proposes to delete the definition of the term ‘‘Execution Venue’’ and related provisions from the CAT NMS Plan.25 2. Treatment of OTC Equity Securities The Original Funding Model includes reported share volume in OTC Equity Securities in the calculation of market share for national securities associations.26 The Operating Committee proposes to delete references to OTC Equity Securities from Section 11.3(a)(i) of the CAT NMS Plan. Accordingly, under the Proposed Funding Model, the calculation of market share for national securities associations would be based solely on the share volume of trades reported in NMS Stocks.27 The Operating Committee explains that the inclusion of OTC Equity Securities share volume in the calculation of market share would likely subject FINRA to higher fees since FINRA would be assessed CAT fees based on market share calculated by share volume, noting that many OTC Equity Securities are priced below one dollar and transactions in such OTC Equity Securities tend to involve larger quantities of shares than transactions in NMS Stocks.28 3. No Tiered Fees PO 00000 at 21053. 25 Id. at 21061. 27 Id. 28 See Notice, supra note 4, at 21061. Frm 00127 Fmt 4703 Section 11.2(c) of the CAT NMS Plan requires the Operating Committee to establish a fee structure in which the fees charged to CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable. Section 11.2(c) explains that for comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters. The Operating Committee proposes to remove this requirement from Section 11.2(c) of the Plan. According to the Operating Committee, the comparability provision was used to determine tiers under the Original Funding Model; however, since the Operating Committee proposes to remove fee tiering from the Proposed Funding Model,36 they believe this provision is no longer relevant.37 5. No Fixed Fees The Operating Committee proposes to amend Sections 11.3(a) and (b) of the Plan to eliminate references to ‘‘fixed fees’’ to be paid by Industry Members and Participants from the CAT NMS Plan.38 Accordingly, under the Proposed Funding Model, the CAT fees to be paid by Industry Members would 29 Id. at 21055, 21060. 30 Id. 32 See infra Section III.A.7. infra Section III.A.6.a. 33 Id. 34 See Notice, supra note 4, at 21055, 21060. at 21056. The Operating Committee notes that it is eliminating tiered fees for Participants for the same reasons it provided with regard to eliminating tiered fees for Industry Members. Id. 36 See supra Section III.A.3. 37 See Notice, supra note 4, at 21056. 38 Id. at 21059, 21062. 35 Id. 24 Id. 26 Id. 4. Elimination of Fee Comparability Requirement From the CAT NMS Plan Funding Principles 31 See The Original Funding Model requires the use of tiered fees for Industry 23 Id. Members and Participants.29 The Operating Committee proposes to amend Sections 11.1(d), 11.2(c), 11.3(a) and 11.3(b) of the CAT NMS Plan to eliminate the concept of tiered fees from the CAT NMS Plan.30 Accordingly, under the Proposed Funding Model, each Industry Member would pay a fee based on its percentage of total Industry Member message traffic (subject to proposed market maker message traffic discounts,31 a minimum fee 32 and a maximum fee 33), and each Participant would pay a fee based on market share.34 The Operating Committee believes that tiered fees require continued reassessment of changes in message traffic, and that these assessments would be subjective and overly complex.35 Sfmt 4703 E:\FR\FM\26JYN1.SGM 26JYN1 Federal Register / Vol. 86, No. 140 / Monday, July 26, 2021 / Notices vary in accordance with their message traffic and the CAT fees to be paid by the Participants would vary in accordance with their market share.39 6. Minimum and Maximum Fees a. Minimum and Maximum Industry Member CAT Fees The Operating Committee proposes to amend Section 11.3(b) of the CAT NMS Plan to provide that each Industry Member would be subject to a base minimum Industry Member CAT fee (‘‘Minimum Industry Member CAT Fee’’) and a maximum Industry Member CAT fee (‘‘Maximum Industry Member CAT Fee’’).40 In the Participants’ description of the Proposed Amendment, the Operating Committee states that the Minimum Industry Member CAT Fee would be $125 per quarter for an Industry Member whose CAT fee would be less than $125 per quarter, even if it has not yet begun to report to the CAT.41 If any Industry Member is required to pay the Minimum Industry Member CAT Fee, the total additional amount paid by all such Industry Members over the amount they otherwise would have paid as a result of their message traffic calculation would be discounted from all Industry Members other than those that were subject to a Minimum Industry Member CAT Fee in accordance with their message traffic percentage (‘‘Minimum Industry Member CAT Fee ReAllocation’’).42 The Operating Committee explains that the Minimum Industry CAT Fee is intended to ensure that all Industry Members meaningfully contribute to the funding of the CAT.43 The Operating Committee also states that the Maximum Industry Member CAT Fee would be the fee calculated based on 8% of the total message traffic for Industry Members.44 If an Industry Member’s fee is subject to the Maximum Industry Member CAT Fee, any excess amount which the Industry Member would have paid as a fee above such Maximum Industry Member CAT Fee will be re-allocated among all Industry Members (including any Industry Members subject to the Maximum Industry Member CAT Fee and any Industry Members subject to the Minimum Industry Member CAT Fee) in accordance with their percentage of jbell on DSKJLSW7X2PROD with NOTICES b. Minimum Participant Fee The Operating Committee proposes to amend Section 11.3(a) of the CAT NMS Plan to impose a minimum fee to be payable by each Participant (‘‘Minimum Participant Fee’’) in addition to fees based on market share. The Operating Committee explains that this fee would ‘‘ensure that all Participants provide a meaningful contribution to the funding of the CAT’’ 47 and facilitate billing and other administrative functions.48 c. Maximum Equities Participant Fee The Operating Committee proposes to amend Section 11.3(a)(i) of the CAT NMS Plan to provide that any Participant that is a national securities association shall pay a maximum fee established by the Operating Committee (‘‘Maximum Equities Participant Fee’’) instead of the higher fee calculated based on such Participant’s market share. If a Participant’s fee is limited to such maximum fee, any excess amount which the Participant otherwise would have paid as a fee above such maximum amount will be re-allocated among all Equities Participants, including any Equities Participants that are subject to the maximum fee, in accordance with their market share.49 The Operating Committee explains that FINRA could have a significant allocation of the CAT fees due to the large volume of NMS Stock activity subject to trade reporting on FINRA facilities, so the Maximum Equities Participant Fee would cap the costs allocated to FINRA. In addition, the Operating Committee states that, as one of the largest regulatory users of CAT, FINRA should pay a proportionate percentage of the CAT fees commensurate with its market share, and that market share is a ‘‘fair and reasonable basis for assessing regulatory usage, expense and burden among the Participants.’’ 50 7. Market Maker Discounts The Operating Committee proposes to amend Section 11.3(b) of the CAT NMS 39 Id. 40 Id. total message traffic (‘‘Maximum Industry Member CAT Fee ReAllocation’’).45 The Operating Committee explains that the Maximum Industry Member CAT Fee is intended to act as a cap on fees for certain Industry Members that, based on message traffic alone, may be subject to ‘‘a significant allocation of Total CAT Costs.’’ 46 at 21058. 41 Id. 42 Options Market Makers and Equity Market Makers would be required to pay the Minimum Industry Member CAT Fee if their quarterly CAT fee calculated with the market maker discounts is less than $125 per quarter. Id. at 21058, n.56. 43 See Notice, supra note 4, at 21058–59. 44 Id. at 21059. VerDate Sep<11>2014 17:10 Jul 23, 2021 Jkt 253001 PO 00000 45 Id. 46 Id. 47 Id. at 21060. at 21059. 49 See Notice, supra note 4, at 21061. 50 Id. at 21062. 48 Id. Frm 00128 Fmt 4703 Sfmt 4703 40117 Plan to add market maker message traffic discounts to the Proposed Funding Model. Under the Original Funding Model, there is no distinction between the treatment of message traffic for market maker Industry Members and message traffic for non-market maker Industry Members for purposes of calculating Industry Member CAT fees. The Operating Committee explains that the proposed discounts are intended to address concerns raised previously that treating market maker message traffic the same as other message traffic for purposes of calculating Industry Member CAT fees would disproportionately impact market makers because of their continuous quoting obligations and result in an undue or inappropriate burden on competition or a reduction in liquidity and market quality.51 The Operating Committee believes that the proposed discounts would lower CAT fees for market makers and encourage their provision of liquidity to the market.52 In the Participants’ description of the Proposed Amendment, the Operating Committee states that Options Market Maker message traffic would be discounted based on the trade-to-quote ratio for options when calculating the message traffic of an Industry Member that is an Options Market Maker,53 and that the trade-to-quote ratio for the Options Market Maker discount would be calculated each quarter based on the prior quarter’s CAT Data.54 The proposed discount would be calculated by dividing the adjusted trade count 55 by the total number of quotes received by the securities information processors (‘‘SIP’’) from an exchange.56 Each 51 Id. at 21057. See also Securities Exchange Act Release No. 81067 (June 30, 2017), 82 FR 31656 (July 7, 2017) (‘‘Suspension of and Order Instituting Proceedings to Determine Whether to Approve or Disapprove Proposed Rule Changes to Establish Fees for Industry Members to Fund the Consolidated Audit Trail’’). 52 See Notice, supra note 4, at 21057. 53 Id. at 21058. The CAT NMS Plan defines ‘‘Options Market Maker’’ as ‘‘a broker-dealer registered with an exchange for the purpose of making markets in options contracts traded on the exchange.’’ See CAT NMS Plan, supra note 1, at Section 1.1. 54 The CAT NMS Plan defines ‘‘CAT Data’’ as ‘‘data derived from Participant Data, Industry Member Data, SIP Data, and such other data as the Operating Committee may designate as ‘CAT Data’ from time to time.’’ Id. 55 The Proposed Amendment describes the adjusted trade count as ‘‘the total number of trades for the quarter minus the total number of trade busts.’’ See Notice, supra note 4, at 21058. 56 For each Options Market Maker, the discount would apply to ‘‘(1) all message traffic reported to the CAT by the Options Market Maker related to an order originated by a market maker in its market making account for a security in which it is registered . . . and (2) all message traffic for which E:\FR\FM\26JYN1.SGM Continued 26JYN1 40118 Federal Register / Vol. 86, No. 140 / Monday, July 26, 2021 / Notices Options Market Maker’s CAT fee would be calculated by multiplying its discounted percentage of total Industry Member message traffic during the relevant time period by the Industry Member Allocation,57 subject to the Minimum Industry Member CAT Fee and the Maximum Industry Member CAT Fee.58 Under the Proposed Funding Model, when calculating the message traffic of an Industry Member that is an equity market maker in NMS Stocks (‘‘Equity Market Maker’’), its discounted market making message traffic count would be calculated by multiplying its market making message traffic in NMS Stocks by the NMS Stock trade-to-quote ratio.59 In the Participants’ description of the Proposed Amendment, the Operating Committee states that the trade-to-quote ratio would be calculated each quarter based on the prior quarter’s CAT Data.60 The proposed discount would be calculated by dividing the adjusted trade count by the total number of quotes received by the SIP from an exchange. The Equity Market Maker’s CAT fee would be calculated by multiplying its discounted percentage of total Industry Member message traffic during the relevant time period by the Industry Member Allocation,61 subject to the Minimum Industry Member CAT Fee and the Maximum Industry Member CAT Fee.62 The discounted message traffic of Options Market Makers and Equity Market Makers would be counted as part of total Industry Member message traffic.63 B. Participant Fee Schedule 1. Total CAT Costs Under the Proposed Funding Model, the CAT fees for the relevant period would be designed to cover the total CAT costs associated with developing, implementing and operating the CAT for the relevant period (‘‘Total CAT Costs’’).64 In the proposed Participant Fee Schedule, the Operating Committee proposes to define Total CAT Costs as ‘‘the total budgeted costs for the CAT for the relevant year.’’ In addition: jbell on DSKJLSW7X2PROD with NOTICES The total budgeted costs for the CAT for the relevant year shall be the total CAT costs set forth in the annual operating budget a ‘quote sent time’ is reported by an Options Exchange on behalf of the given Options Market Maker.’’ Id. 57 See infra Section III.B.2. 58 See Notice, supra note 4, at 21058. 59 Id. 60 Id. 61 See infra Section III.B.2. 62 See Notice, supra note 4, at 21058. 63 Id. 64 Id. at 21050. VerDate Sep<11>2014 17:10 Jul 23, 2021 Jkt 253001 approved by the Operating Committee pursuant to Section 11.1(a) of the CAT NMS Plan. The total budgeted costs for the CAT for the relevant year may be adjusted on a quarterly basis as the Operating Committee reasonably deems appropriate for the prudent operation of the Company. To the extent that the Operating Committee adjusts the total budgeted costs for the CAT for the relevant year during its quarterly budget review, the adjusted budgeted costs for the CAT will be used in calculating the remaining CAT fees for that year.65 The Operating Committee explains that using Total CAT Costs budgeted for the year, rather than already incurred CAT costs, would allow the Company to collect fees before bills become payable.66 The Operating Committee notes that, pursuant to Section 11.1(c) of the CAT NMS Plan, any surpluses collected will be treated as an operational reserve to offset future fees and will not be distributed to the Participants as profits.67 2. 75%–25% Allocation Between Industry Members and Participants The Proposed Funding Model contemplates allocating CAT costs between Participants and Industry Members to permit the calculation of CAT fees based on market share for Participants and based on message traffic for Industry Members.68 The Operating Committee proposes to implement this allocation through a 75%–25% allocation between Industry Members and Participants.69 The Participant CAT fees that are a part of the proposed Participant Fee Schedule—Appendix B to the Proposed Amendment—would apply this allocation to Participants. Participants would file proposed rule changes to apply this allocation to Industry Members.70 In calculating CAT fees for the relevant period under the Proposed Funding Model, Industry Members as a group would pay 75% of the Total CAT Costs for the relevant period (‘‘Industry Member Allocation’’) 71 and Participants 65 Id. 66 Id. at 21074. at 21063. 67 Id. 68 In the Original Funding Model, costs were allocated between Execution Venues and certain Industry Members, whereas the Proposed Funding Model proposes to allocate costs between Participants and Industry Members. 69 See Notice, supra note 4, at 21054. 70 As of the date of this Order, only the Nasdaq and Cboe Participants have filed proposed rule changes. See supra note 19. 71 The proposed Participant Fee Schedule states ‘‘[t]he Industry Member Allocation for each quarter shall be 75% of 1/4th of the Total CAT Costs for the relevant year.’’ See Notice, supra note 4, at 21055. Under the Proposed Funding Model, each Industry Member would pay a CAT fee calculated by multiplying its message traffic percentage of total Industry Member message traffic per quarter by the PO 00000 Frm 00129 Fmt 4703 Sfmt 4703 as a group would pay 25% of the Total CAT Costs for the relevant period (‘‘Participant Allocation’’).72 In proposing a 75%–25% allocation between Industry Members and Participants, the Operating Committee states that it considered a variety of different potential allocations between Industry Members and Participants.73 For example, the Operating Committee states that it considered alternatives in which Participants paid larger contributions than 25% of the total CAT costs (e.g., a 50%–50% allocation between Industry Members and Participants) and alternatives in which Participants paid smaller contributions than 25% of the total CAT costs.74 In the scenario where the Participants paid larger contributions than the 25% allocation, the Operating Committee believed that this was not fair or equitable to the Participants.75 The Operating Committee came to this conclusion by assessing the number of Industry Members compared to Participants, noting that ‘‘there are only 25 Participants and approximately 1,237 Industry Members, as of December 2020’’, and analyzing the total revenue, noting that ‘‘Participants only represented approximately 4% of the total CAT Reporter revenue; Industry Members represented 96% of the total CAT Reporter revenue.’’ 76 Thus, the Operating Committee determined that allocating more than 25% of the total CAT costs to the Participants was not fair and equitable. Similarly, the Operating Committee did not believe that the revenue based allocation approach would be fair to the Industry Members because it would impose such a significant percentage (96%) of CAT costs on Industry Members.77 Additionally, the Operating Committee determined that there would be practical difficulties in assessing the appropriate revenue figures for all CAT Industry Member Allocation, subject to the market maker discounts for message traffic, as applicable, as well as the Minimum Industry Member CAT Fee and the Maximum Industry Member CAT Fee. Id. 72 Id. at 21054. The proposed Participant Fee Schedule states ‘‘[t]he Participant Allocation for each quarter shall be 25% of 1/4th of the Total CAT Costs for the relevant year.’’ Id. at 21055. 73 Id. at 21054. 74 Id. 75 See Notice, supra note 4, at 21055. 76 Industry Member revenue was calculated based on the total revenue reported in the Industry Member’s FOCUS reports. Participant revenue was calculated based on revenue information provided in Form 1 amendments and/or publicly reported figures. Participants are not required to file uniform FOCUS-type reports regarding revenue like Industry Members. Accordingly, the revenue calculation for Participants is not as straightforward as for Industry Members. Id. at 21055, n.31. 77 Id. at 21055. E:\FR\FM\26JYN1.SGM 26JYN1 Federal Register / Vol. 86, No. 140 / Monday, July 26, 2021 / Notices Reporters. Based upon its analysis, the Operating Committee decided that alternative approaches based upon revenue were not appropriate and could potentially have unfair impacts on both the Industry Members and the Participants.78 Ultimately, the Operating Committee believes that the 75%–25% allocation will create a more equitable fee split because the Industry Members with the most message traffic and the Participant complexes with the most market share would pay comparable CAT fees.79 The Operating Committee analyzed data from the fourth quarter of 2020, and determined that the three Industry Members with the most message traffic and the Participant complexes with the highest CAT fees would pay annual CAT fees in a similar range of five to six million dollars.80 3. Participant CAT Fees As described above, the Proposed Funding Model provides that the Operating Committee shall establish a minimum fee to be payable by each Participant in addition to a fee based on market share. In the proposed Participant Fee Schedule, the Operating Committee establishes 0.75% of the Participant Allocation as the Minimum Participant Fee 81 regardless of market share.82 The total Minimum Participant Fees to be paid by each Participant would be subtracted from the Participant Allocation to determine the ‘‘Adjusted Participant Allocation.’’ 83 The proposed Participant Fee Schedule provides that the Equities Participant Allocation would be 60% of the Adjusted Participant Allocation and the Options Participant Allocation would be 40% of the Adjusted Participant Allocation.84 The Operating Committee explained that this allocation was determined through negotiations among the Participants.85 Each Participant would pay a quarterly Participant CAT fee to recover the costs of the CAT going forward. For Equities Participants, the quarterly Participant CAT Fee would be calculated by multiplying the Equities Participant Allocation by each Equities Participant’s percentage of total market share of NMS Stocks for all Equities Participants for the prior quarter, subject 78 Id. 79 Id. jbell on DSKJLSW7X2PROD with NOTICES 80 Id. 81 See Notice, supra note 4, at 21060. to the Maximum Equities Participant Fee (if applicable), and in addition to the Minimum Participant Fee.86 For Options Participants, the quarterly Participant CAT fee would be calculated by multiplying the Options Participant Allocation by each Options Participant’s percentage of total market share in Listed Options for the prior quarter, in addition to the Minimum Participant Fee.87 The quarterly Participant CAT fee would be a quarterly CAT fee based on market share from the prior quarter and the allocation of Total CAT Costs under the Proposed Funding Model for the relevant year.88 The Operating Committee proposes a fee schedule to implement the quarterly Participant CAT fee whereby each Participant would be assessed a CAT fee, on a quarterly basis, that is 25% of 1/4th of the total budgeted annual CAT costs for the relevant year, using CAT Data to calculate market share from the prior quarter of the relevant year.89 Under the Proposed Funding Model, FINRA, as a national securities association, would be subject to the Maximum Equities Participant Fee as set by the Operating Committee. The Operating Committee proposes to establish in the Participant Fee Schedule a Maximum Equities Participant Fee equal to the greater of (x) 20% of the Equities Participant Allocation or (y) the highest CAT fee required to be paid by any other Equities Participant plus 5% of such highest CAT fee.90 Accordingly, as discussed above, FINRA would pay its quarterly Participant CAT fee based on its market share in NMS Stocks, subject to the Maximum Equities Participant Fee. 4. Collection of Fees The Participants’ description of the Proposed Amendment states that the Operating Committee proposes to establish a system for the collection of CAT fees pursuant to Section 11.4 of the CAT NMS Plan. The Company will provide each Participant with an invoice setting forth the quarterly Participant CAT fee for each payment period. Each Participant will pay its CAT fees to the Company via the centralized system for the collection of CAT fees.91 82 Id. 86 See 83 Id. 84 Id. at 21061. A Participant with both options and equities market share would be treated as both an Options Participant and an Equities Participant. Id. 85 Id. VerDate Sep<11>2014 17:10 Jul 23, 2021 Jkt 253001 PO 00000 Notice, supra note 4, at 21061. at 21062. 88 Id. at 21062, 21063. 89 Id. at 21063–21064. 90 Id. at 21061. 91 Id. at 21068. 87 Id. Frm 00130 Fmt 4703 Sfmt 4703 40119 IV. Summary of Comments The Commission received 19 comment letters on the Proposed Amendment.92 15 comment letters 92 See Letters to Vanessa Countryman, Secretary, Commission from Doug Patterson, Chief Compliance Officer, Cutler Group, LP, dated June 1, 2021, available at https://www.sec.gov/ comments/4-698/4698-8855258-238423.pdf (‘‘Cutler Letter’’); Kelvin To, Founder and President, Data Boiler Technologies, LLC, dated May 3, 2021, available at https://www.sec.gov/comments/4-698/ 4698-8749987-237362.pdf (‘‘Data Boiler Letter’’); Joanna Mallers, Secretary, FIA Principal Traders Group, dated May 7, 2021, available at https:// www.sec.gov/comments/4-698/4698-8776522237685.pdf (‘‘FIA PTG May 7th Letter’’); Joanna Mallers, Secretary, FIA Principal Traders Group, dated May 12, 2021, available at https:// www.sec.gov/comments/4-698/4698-8793902237843.pdf (‘‘FIA PTG May 12th Letter’’); Matthew Price, Chief Operations Officer, Fidelity Capital Markets, dated May 12, 2021, available at https:// www.sec.gov/comments/4-698/4698-8791746237802.pdf (‘‘Fidelity Letter’’); Howard Meyerson, Managing Director, Financial Information Forum, dated April 29, 2021, available at https:// www.sec.gov/comments/4-698/4698-8736502237163.pdf (‘‘FIF April 29th Letter’’); Howard Meyerson, Managing Director, Financial Information Forum, dated May 21, 2021, available at https://www.sec.gov/comments/4-698/46988843662-238307.pdf (‘‘FIF May 21st Letter’’); Marcia E. Asquith, Executive Vice President, Board and External Relations, Financial Industry Regulatory Authority, Inc., dated May 12, 2021, available at https://www.sec.gov/comments/4-698/ 4698-8793900-237824.pdf (‘‘FINRA Letter’’); Andrew Stevens, General Counsel, IMC, dated May 20, 2021, available at https://www.sec.gov/ comments/4-698/4698-8819440-238105.pdf (‘‘IMC Letter’’); Michael Lewin, Chief Executive Officer, Istra LLC, dated May 27, 2021, available at https:// www.sec.gov/comments/4-698/4698-8847370238329.pdf (‘‘Istra Letter’’); Gary Goldsholle, Chief Regulatory Officer and General Counsel, Long-Term Stock Exchange, Inc., dated May 19, 2021, available at https://www.sec.gov/comments/4-698/46988815749-238025.pdf (‘‘LTSE Letter’’); Kirsten Wegner, Chief Executive Officer, Modern Markets Initiative, dated May 6, 2021, available at https:// www.sec.gov/comments/4-698/4698-8771339237583.pdf (‘‘MMI Letter’’); Michael Blaugrund, Chief Operating Officer, NYSE Inc., dated May 10 2021, available at https://www.sec.gov/comments/ 4-698/4698-8779961-237701.pdf (‘‘NYSE Letter’’); William Bartlett, Chief Executive Officer, Parallax Volatility Advisers, L.P., dated June 28, 2021, available at https://www.sec.gov/comments/4-698/ 4698-9006549-246006.pdf (‘‘Parallax Letter’’); Ellen Greene, Managing Director, Equity and Options Market Structure, Securities Industry and Financial Markets Association, dated May 12, 2021, available at https://www.sec.gov/comments/4-698/46988790951-237769.pdf (‘‘SIFMA Letter’’); James Toes, President and Chief Executive Officer, and Andrew D’Amore, Chairman of the Board, Security Traders Association, dated June 11, 2021, available at https://www.sec.gov/comments/4-698/46988905922-244113.pdf (‘‘STA Letter’’); Gunjan Chauhan, Senior Managing Director, Global Head of SPDR Capital Markets, State Street Global Advisors, dated May 12, 2021, available at https:// www.sec.gov/comments/4-698/4698-8793896237842.pdf (‘‘SSGA Letter’’); Kevin Donohue, General Counsel, Tower Research Capital LLC, dated May 12, 2021, available at https:// www.sec.gov/comments/4-698/4698-8793895237841.pdf (‘‘Tower Letter’’); and Thomas M. Merritt, Deputy General Counsel, dated May 12, 2021, available at https://www.sec.gov/comments/ 4-698/4698-8790127-237768.pdf (‘‘Virtu Letter’’). E:\FR\FM\26JYN1.SGM 26JYN1 40120 Federal Register / Vol. 86, No. 140 / Monday, July 26, 2021 / Notices object to the Proposed Amendment 93 and one comment letter supports the Proposed Amendment.94 In addition, the Commission received two comment letters requesting data from the Operating Committee,95 one comment letter requesting data from the Company,96 and one comment letter from the Operating Committee providing additional details on an illustrative example in Exhibit B to the Proposed Amendment,97 and two response letters from the Operating Committee.98 jbell on DSKJLSW7X2PROD with NOTICES Scope of Costs To Be Recovered From Industry Members Several commenters question the scope of the CAT costs proposed to be recovered from Industry Members.99 Two commenters state that Industry Members should only be responsible for the direct costs to build and operate the CAT, not the Participants’ costs of doing business as SROs, such as insurance and consulting costs.100 One commenter states that the Exchange Act and Rule 613 do not even require the CAT NMS Plan to impose fees on Industry Members,101 and that the Participants have failed to justify an ‘‘additive CAT fee,’’ 102 and notes the Participants were 93 See Data Boiler Letter; Fidelity Letter; FIA PTG May 12th Letter; FINRA Letter; IMC Letter; Istra Letter; LTSE Letter; MMI Letter; NYSE Letter; SIFMA Letter; SSGA Letter; STA Letter; Tower Letter; and Virtu Letter. 94 See Cutler Letter (stating ‘‘[h]aving reviewed the Proposal, and having compared it to the previous CAT funding model, we see the Amendment as a vast improvement that is more fair and equitable to both Market Participants and Industry Members. We would urge that the Commission approve this amendment.’’). Id. at 1. 95 See FIF April 29th Letter; FIF May 21st Letter. 96 See FIA PTG May 7th Letter. 97 See Letter to Vanessa Countryman, Secretary, Commission from Michael Simon, CAT NMS Plan Operating Committee Chair, dated May 5, 2021, available at https://www.sec.gov/comments/4-698/ 4698-8760381-237447.pdf (‘‘CAT Operating Committee May 5th Letter’’). 98 See Letters to Vanessa Countryman, Secretary, Commission from Michael Simon, CAT NMS Plan Operating Committee Chair, dated July 14, 2021, available at https://www.sec.gov/comments/4-698/ 4698-9061305-246406.pdf (‘‘CAT Operating Committee July 14th Letter I’’); from Michael Simon, CAT NMS Plan Operating Committee Chair, dated July 14, 2021, available at https:// www.sec.gov/comments/4-698/4698-9061306246406.pdf (‘‘CAT Operating Committee July 14th Letter II’’). CAT Operating Committee July 14th Letter II states, ‘‘these responses represent the consensus of the Participants, but that all Participants may not fully agree with each response set forth in this letter.’’ CAT Operating Committee July 14th Letter II at 1–2. 99 See SIFMA Letter at 4; Virtu Letter at 5–6; FIA PTG May 12th Letter at 5; Data Boiler Letter at 8; Tower Letter at 3. 100 See SIFMA Letter at 4; FIA PTG May 12th Letter at 5. 101 See Virtu Letter at 2. 102 Id. at 3. VerDate Sep<11>2014 17:10 Jul 23, 2021 Jkt 253001 exclusively responsible for developing the CAT and for making decisions about the implementation costs for the CAT.103 Another commenter asks for justification for why Industry Members should bear the costs of the CAT build when they had no involvement in the process.104 In response to comments objecting to the imposition of CAT costs on Industry Members,105 the Operating Committee states that Industry Members should be required to pay CAT costs in accordance with Rule 613 and the CAT NMS Plan.106 The Operating Committee adds that, because all market participants would benefit from the enhanced regulatory oversight provided by the CAT, Industry Members and Participants should both contribute to covering its costs.107 Six commenters object to the proposed imposition of historical costs on Industry Members.108 Several commenters note that Industry Members had no input into or control over the decisions resulting in the historical costs, including the selection of Thesys Technologies, LLC as the initial plan processor,109 and the subsequent transition to FINRA as the plan processor.110 One commenter states, ‘‘the Participants must meet a high bar for the Commission to alter course and support any proposed rule changes that require non-Participants to pay the Thesys costs.’’ 111 One commenter questions the rationale for requiring Industry Members to pay 75% of the cost of the transition to FINRA, explaining that FINRA is completely funded by the industry.112 Two commenters object to requiring Industry Members to pay the legal and consulting fees incurred by Participants prior to the at 2. MMI Letter at 3. Similarly, this commenter also requests the rationale for why ‘‘a small number of brokers should pay the vast majority of the nowinflated cost without having any insight or authority into the methodology and rationale for the cost?’’ Id. at 2. The Operating Committee responds that its proposed Maximum Industry Member CAT Fee would institute a cap on fees to fairly allocate costs to Industry Members to avoid certain Industry Members paying a significant allocation of Total CAT Costs. See CAT Operating Committee July 14th Letter II at 6–7. 105 See Virtu Letter at 2–3; MMI Letter at 3. 106 See CAT Operating Committee July 14th Letter II at 4–5. 107 Id. at 5–6. 108 See SIFMA Letter at 6; Virtu Letter at 5–6; Data Boiler Letter at 8; Istra Letter at 2–3; Tower Letter at 3; Fidelity Letter at 3, 5; MMI Letter at 3; Parallax Letter at 1. 109 See SIFMA Letter at 6; Virtu Letter at 5–6; Fidelity Letter at 3, 5; Tower Letter at 3; MMI Letter at 3. 110 See Virtu Letter at 6. 111 See Parallax Letter at 1. 112 See Virtu Letter at 6. PO 00000 103 Id. 104 See Frm 00131 Fmt 4703 Sfmt 4703 approval of the CAT NMS Plan.113 Two commenters criticize the Proposed Amendment for requiring new Industry Members to pay CAT fees to recover historical costs, while exempting new Participants from such a requirement.114 In response to comments questioning the scope of the costs to be recovered from Industry Members,115 the Operating Committee states that the recovery from Industry Members of the historical costs, Thesys-related costs and third-party expenses (including legal, consulting and audit expenses) is consistent with the CAT NMS Plan and the Exchange Act.116 The Operating Committee states that, when approving the CAT NMS Plan, the Commission noted that the Exchange Act permits the Participants to charge their members fees to fund their self-regulatory obligations and that the Plan funding model was designed to impose fees reasonably related to the Participants’ self-regulatory obligations since the fees would be directly associated with the costs to build and maintain the CAT.117 Additionally, the Operating Committee states that the Commission considered that the Participants could recover the costs of creating and funding the CAT central repository in the adopting release for Rule 613.118 The Operating Committee explains that these costs are critical to the creation, implementation and maintenance of the Plan and therefore should be within the scope of CAT fees.119 Lack of Industry Member Input Several commenters express concern that the proposal was developed without the involvement of Industry Members.120 One commenter states that it is ‘‘incredulous of the process used to construct a proposed allocation model in which Industry Members are allocated 75% of the expenses yet had no meaningful input into the model’s development.’’ 121 Another commenter opines that Industry Members are being required to shoulder most of the costs of the CAT without having had any insight 113 See Tower Letter at 3; SIFMA Letter at 6. Virtu Letter at 6; SIFMA Letter at 6–7. 115 See Data Boiler Letter at 8; FIA PTG May 12th Letter at 2; Fidelity Letter at 3, 5; Istra Letter at 2– 3; MMI Letter at 3; SIFMA Letter at 6; Tower Letter at 3; Virtu Letter at 5–6. 116 See CAT Operating Committee July 14th Letter I at 5. 117 Id. at 5. 118 Id. at 5–6. 119 Id. at 6. 120 See SIFMA Letter at 2; STA Letter at 2–3; Data Boiler Letter at 8; FIA PTG May 12th Letter at 2–3; IMC Letter at 2–3; Fidelity Letter at 2–3, 4; Tower Letter at 7; MMI Letter at 2, 3, 4. 121 See FIA PTG May 12th Letter at 3. 114 See E:\FR\FM\26JYN1.SGM 26JYN1 Federal Register / Vol. 86, No. 140 / Monday, July 26, 2021 / Notices into the costs.122 Two commenters note the lack of representation of Industry Members on the Operating Committee.123 One commenter believes that the technical expertise of the industry should be involved in the development of a new cost allocation proposal that contains ‘‘a full explanation of the proposed operating costs and . . . an appropriately detailed public disclosure of the operating budget.’’ 124 Another commenter suggests that the Commission ask the Participants to engage with the industry ‘‘to establish a workable allocation methodology that is simple, predictable and aligns responsibility for funding regulatory infrastructure with receiving economic benefits of the marketplace.’’ 125 In response to comments noting a lack of industry participation in the development of the Proposed Funding Model,126 the Operating Committee explains that the CAT Advisory Committee and the public notice and comment processes afforded by Rule 608 of Regulation NMS 127 and Section 19 of the Exchange Act 128 have provided Industry Members and other market participants the opportunity to express their views on the funding model.129 With respect to the comments expressing concern over a lack of Industry Member representation on the Operating Committee, the Operating Committee states that Industry Members can provide meaningful input on CAT matters through the current governance structure without compromising Commission and SRO oversight of Industry Members.130 Participant Conflicts of Interest Six commenters believe that the Participants have conflicts of interest that are reflected in the cost allocation proposed for the Participants and Industry Members.131 Two commenters 122 See MMI Letter at 2, 3. Tower Letter at 7; Data Boiler Letter at 6. See also Parallax Letter at 2 (suggesting the admission of Industry Members and independent parties as members of the Operating Committee, along with full internal disclosure of costs, would benefit the operation of the CAT NMS Plan). 124 See Tower Letter at 7. 125 See NYSE Letter at 5. See also SIFMA Letter at 2 (agreeing with this statement). 126 See FIA PTG May 12th Letter at 2–3; Fidelity Letter at 2–4; IMC Letter at 2; SIFMA Letter at 2; STA Letter at 2–3; Tower Letter at 7. 127 17 CFR 242.608. 128 15 U.S.C. 78s. 129 See CAT Operating Committee July 14th Letter I at 7–8. 130 Id. at 8. 131 See SIFMA Letter at 2; Virtu Letter at 2, 6; FIA PTG May 12th Letter at 2, 3, 4; Tower Letter at 1, 5, 7; Istra Letter at 2; MMI Letter at 4. See also Parallax Letter at 3–4 (stating that the proposed believe that the Participants are attempting to further their commercial interests through the proposal at the expense of their Industry Member competitors.132 One commenter believes that the Participants are conflicted when determining how much of their own costs they should pay and suggests greater transparency to expose any Participant conflicts.133 Another commenter states, ‘‘[t]o permit for-profit exchanges to allocate 75% of the costs of the CAT to Industry Members furthers the Participants’ commercial interests at the expense of the Industry Members, who have no choice but to pay such fees or else be subject to regulatory actions by the Participants.’’ 134 This commenter suggests that the Commission require the Participants to resubmit a proposal with a transparent analysis and requests that Industry Members be permitted adequate representation on the Operating Committee.135 In response to the comments regarding potential conflicts of interests behind the proposed cost allocation for Participants and Industry Members,136 the Operating Committee states that it disagrees with the comments and notes that the CAT NMS Plan contains measures to protect against potential conflicts of interest related to CAT fees, ‘‘including the fee filing requirements under the Exchange Act and operating the CAT on a break-even basis.’’ 137 Lack of Transparency Several commenters express concern that the Proposed Funding Model lacks sufficient transparency into the operating budget as well as the costs proposed to be recovered by the CAT fees.138 One commenter believes the lack of cost data would make it impossible for the Commission and Industry Members to determine whether the CAT is operating efficiently.139 The commenter adds that detailed cost information would be useful for jbell on DSKJLSW7X2PROD with NOTICES 123 See VerDate Sep<11>2014 17:10 Jul 23, 2021 Jkt 253001 market maker discounts benefit the Participants who have set the standards for market-making activity, including activity resulting in message traffic with low order to trade ratios). 132 See SIFMA Letter at 2; Virtu Letter at 2. 133 See FIA PTG May 12th Letter at 3. 134 See Tower Letter at 5. 135 See Tower Letter at 5. 136 See Data Boiler Letter at 6, 7; FIA PTG May 12th letter at 2, 3; MMI Letter at 4; Parallax Letter at 3–4; Tower Letter at 1, 5, 7. 137 See CAT Operating Committee July 14th Letter I at 8. 138 See SIFMA Letter at 4–5; Virtu Letter at 4–5; SSGA Letter at 1–2; Fidelity Letter at 2, 4–5; NYSE Letter at 2; STA Letter at 1, 3–4; Tower Letter at 2, 5, 7; MMI Letter at 2, 3–4; FIA PTG May 12th Letter at 2, 5; IMC Letter at 1, 2; Istra Letter at 1, 2; Parallax Letter at 1–2, 5. 139 See SIFMA Letter at 5. PO 00000 Frm 00132 Fmt 4703 Sfmt 4703 40121 Industry Members to evaluate whether certain of their activities are causing the CAT to incur higher operating costs, and consequently causing increases in their own CAT fees.140 This commenter added that it is impossible to evaluate whether the Proposed Funding Model is consistent with the Exchange Act due to lack of information; in particular, details concerning sources of the costs and the operating budget.141 Similarly, another commenter suggests the provision of non-proprietary cost information to allow meaningful input from Industry Members.142 Another commenter believes that it ‘‘feels like we are being asked to hand over [a] blank check with the amount to be filled in later.’’ 143 One commenter states, ‘‘the Amendment is virtually silent on the use of funds and offers no budget for the CAT’s ongoing operation.’’ 144 Commenters request detailed information on the historical costs and the operating budget.145 One commenter recommends that the Proposed Amendment disclose its costs and technical requirements, and detail the historical costs and projected annual budget for the Plan operating expenses, professional services expenses, and plan processor expenses.146 The commenter recommends that the Participants make the annual budget public in the future.147 Another commenter states that the Proposed Amendment lacks an explanation for the 2021 estimated cost of $133 million, including the scale of CAT processing, number of reported transactions, data storage sizes and processing performed.148 The commenter states that an operating budget is necessary to determine how much of CAT costs is variable based on message traffic.149 The commenter recommends that the Operating Committee propose a new cost allocation plan that includes a full accounting of the historical costs and justification for charging these costs to Industry Members.150 The commenter also recommends that the new proposal explain its proposed operating costs and 140 Id. at 5. at 4. 142 See STA Letter at 3. 143 See Virtu Letter at 4. 144 See NYSE Letter at 2. 145 Id. at 2; Tower Letter at 2, 7; Istra Letter at 2; Fidelity Letter at 5; MMI Letter at 2–3, 4; FIA PTG May 12th Letter at 5; Parallax Letter at 1–2, 5. 146 See NYSE Letter at 2. 147 Id. at 2. 148 See Tower Letter at 2. 149 Id. at 2. 150 Id. at 7. 141 Id. E:\FR\FM\26JYN1.SGM 26JYN1 40122 Federal Register / Vol. 86, No. 140 / Monday, July 26, 2021 / Notices publicly disclose its operating budget.151 Another commenter notes that the Proposed Amendment lacks detail on the historical CAT assessment costs and requests the Participants to provide the opportunity to review the costs incurred before the CAT NMS Plan was approved, noting that Industry Members should be permitted ‘‘to refute the validity of any cost and its allocation to Industry Members.’’ 152 Another commenter states that the Proposed Amendment provides no transparency into historical and annual costs.153 One commenter requests the Commission to require the Participants to provide a cost-sharing structure with greater transparency, including a full accounting of historical costs and a detailed public explanation of the proposed operating costs.154 The commenter urges greater transparency in the operating budget, the cost allocation model, and on variable costs, such as messaging costs, and fixed costs, such as payroll costs.155 Commenters also request a breakdown of the estimated CAT costs and operating budget.156 Two commenters request a copy of the 2021 operating budget with quarterly updates including actual and revised projections.157 One of the commenters also requests data to permit each Industry Member to calculate its fees, including the data used by the Operating Committee to calculate the estimates in Exhibit B to the Proposed Amendment.158 In a response, the Operating Committee provides the following data: (1) The budgeted Total CAT Costs for 2021; (2) total Industry Member message traffic counts, including the total message counts for Options Market Makers and Equity Market Makers, used in the proposal’s Exhibit B; (3) unrounded trade-to-quote ratios for Listed Options and NMS Stocks; and (4) the method used to calculate an Industry Member’s quarterly CAT fees.159 The Operating 151 Id. at 7. Fidelity Letter at 5. 153 See FIA PTG May 12th Letter at 5. 154 See MMI Letter at 2–3. 155 Id. at 4. 156 See SSGA Letter at 2; Fidelity Letter at 5; FIF April 29th Letter at 1, 2; FIA PTG May 7th Letter at 2. 157 See FIF April 29th Letter at 1; FIA PTG May 7th Letter at 2; FIA PTG May 12th Letter at 2. 158 See FIF April 29th Letter at 2. This commenter also requests that the Operating Committee publicly provide the options and equity trade-to-quote ratios used in the Proposed Amendment’s Exhibit B and the aggregate number of reportable events of each type that are counted toward the total number of reportable events. Id. 159 See CAT Operating Committee May 5th Letter. This response was also noted by the Operating jbell on DSKJLSW7X2PROD with NOTICES 152 See VerDate Sep<11>2014 17:10 Jul 23, 2021 Jkt 253001 Committee states that Industry Members can contact FINRA CAT to learn which of the anonymized Industry Member information in Exhibit B represents its traffic, as well as its total message traffic count and percentage or number of its reported events that were treated as events of Options Market Makers or Equity Market Makers.160 The Operating Committee also agrees to provide information to permit an Industry Member to calculate its actual CAT fees on an ongoing basis.161 Subsequently, the first commenter requests further information to understand the impact of the funding proposal and help each Industry Member reconcile the data it received from the Operating Committee and its internal records.162 The second commenter finds the response from the Operating Committee insufficient and requests a copy of the 2021 operating budget and any quarterly updates and projected costs, a breakdown of fixed and variable expenses, and provision to Industry Members of data used to support the selected funding model and the funding models that were rejected.163 Several commenters believe the lack of transparency prevents Industry Members from estimating their costs and fees.164 One commenter believes that the Proposed Amendment lacks information needed by Industry Members to calculate their fees as well as to analyze the fairness and accuracy of the funding model.165 The commenter notes that 75 of 1,237 Industry Members would be allocated 99% of Industry Member fees, and that the Proposed Amendment claims that this is fair without factual support.166 One commenter acknowledges the data subsequently provided in the response from the Operating Committee 167 and suggests that the Participants regularly provide updated message traffic data to Industry Members to allow them to estimate their CAT fees.168 Another commenter opines that the supplementary message traffic data and the 2021 budget information provided by the Operating Committee is insufficient to allow Industry Members Committee in a response to comments. See CAT Operating Committee July 14th Letter II at 16. 160 See CAT Operating Committee May 5th Letter at 2. 161 Id. at 2, n.8. 162 See FIF May 21st Letter at 2–3. 163 See FIA PTG May 12th Letter at 2. 164 See Tower Letter at 3; SIFMA Letter at 5, 9; Virtu Letter at 4. 165 See Tower Letter at 3. 166 Id. 167 See CAT Operating Committee May 5th Letter. 168 See SIFMA Letter at 5. PO 00000 Frm 00133 Fmt 4703 Sfmt 4703 to project their CAT fees.169 One commenter suggests that cost recovery should have ‘‘transparent inputs’’ that would permit Industry Members to predict their costs and understand the costs of their actions.170 In response to comments requesting additional transparency into CAT costs,171 the Operating Committee states that it has made publicly available substantial annual cost data by providing, upon request, its audited financial statements from the inception of Consolidated Audit Trail LLC and CAT NMS, LLC through 2020, as required by Section 9.2(a) of the CAT NMS Plan.172 The Operating Committee explains that the audited financial statements contain the following cost categories: ‘‘technology costs, legal, amortization of developed technology, consulting, insurance, professional and administration, and public relations.’’ 173 The Operating Committee also states that the Proposed Funding Model would provide additional cost transparency through the provision of the operating budget at the start of each year, as well as the budgeted Total CAT Costs to be used in calculating the quarterly CAT fees, and any quarterly budget adjustments.174 The Operating Committee adds that it proposes to provide additional cost information to the industry through webinars, among other methods,175 and notes the costrelated information it provided in its May 5th letter.176 Several commenters believe the Proposed Amendment does not properly explain increases in historical and annual costs in excess of prior estimates.177 One commenter states, ‘‘[t]here may well be appropriate—or at least understandable—reasoning for historical and ongoing costs to greatly exceed expectations, and that is for the Participants to explain and the Commission to review as part of its oversight of the SROs.’’ 178 Two commenters ask if any corresponding benefits accompany the increased cost 169 See Virtu Letter at 4. Istra Letter at 2–3. 171 See FIA PTG May 12th Letter at 2, 5; Fidelity Letter at 3, 5; Istra Letter at 2; MMI Letter at 3, 4; NYSE Letter at 2; Parallax Letter at 1–2; SIFMA Letter at 4; STA Letter at 3; SSGA Letter at 1–2; Tower Letter at 2, 4, 7; Virtu Letter at 4. 172 See CAT Operating Committee July 14th Letter I at 4. 173 Id. 174 Id. 175 Id. 176 Id. at 3–4. See also CAT Operating Committee May 5th Letter. 177 See FIA PTG May 12th Letter at 4–5; SSGA Letter at 1–2; Istra Letter at 2; MMI Letter at 1–2, 3–4; Tower Letter at 1, 2–4; Parallax Letter at 2. 178 See Parallax Letter at 2. 170 See E:\FR\FM\26JYN1.SGM 26JYN1 Federal Register / Vol. 86, No. 140 / Monday, July 26, 2021 / Notices estimates.179 One commenter expresses concern that the Participants have no accountability for the costs of the project.180 Another commenter requests assurances that the CAT will not become an ‘‘ever-growing expense’’ for the industry and investors.181 Another commenter, a proprietary trading firm, states that it ‘‘captures real time market data feeds from over 100 venues around the world, in a variety of different products . . . The processing of this historical market data might reasonably be compared to the kind of processing that the CAT is expected to do . . . While we do not claim that this is a perfect comparison, we do posit that the cost to build and maintain the CAT should be reasonably comparable.’’ 182 The commenter states that its annual cost for this platform is ten times less than the cost provided in the Proposed Amendment.183 In response to comments questioning the increases in CAT costs from prior estimates,184 the Operating Committee explains that data processing and storage costs are the primary CAT cost drivers and that these costs have increased significantly each year.185 First, the Operating Committee states that these costs are directly related to data volumes reported to the CAT and that the markets have experienced record high volumes, noting that in 2019 and 2021, data volumes were five times greater than estimated.186 To address the increased volume, the CAT’s storage and computing needs have accordingly increased.187 Second, the Operating Committee explains that the phased introduction of CAT reporting and functionality results in ‘‘a substantial increase in message traffic, processing complexity and storage requirements.’’ 188 Third, the Operating Committee states that the processing and storage of the many complex reporting scenarios relating to Industry Member market activity require complicated algorithms that result in ‘‘significant data processing and storage costs.’’ 189 Finally, the Operating Committee notes that the combination of record CAT Data volumes with the 179 See MMI Letter at 2; SSGA Letter at 2. FIA PTG May 12th Letter at 5. 181 See SSGA Letter at 2. 182 See Tower Letter at 4. 183 Id. 184 See FIA PTG May 12th Letter at 4–5; Istra Letter at 2; MMI Letter at 1–2, 4; Parallax Letter at 1–2; SSGA Letter at 1–2; Tower Letter at 1–4. 185 See CAT Operating Committee July 14th Letter I at 2. 186 Id. 187 Id. 188 Id. at 3. 189 Id. jbell on DSKJLSW7X2PROD with NOTICES 180 See VerDate Sep<11>2014 17:10 Jul 23, 2021 Jkt 253001 stringent performance timelines and operational requirements applicable to the processing of CAT Data do not allow much flexibility for cost reductions.190 Some commenters believe that the Proposed Funding Model lacks the transparency needed to incentivize the Participants to manage CAT costs efficiently.191 One commenter states the lack of transparency precludes the Operating Committee’s accountability and suggests a full audit of the CAT’s historical costs, ongoing budget and a comparison to its estimated benefits.192 Another commenter believes that allowing Industry Members greater visibility into CAT’s expenses would increase the Participants’ accountability to manage costs.193 In response to comments urging more transparency to ensure the Participants manage CAT Costs efficiently,194 the Operating Committee states that it ‘‘has a strong focus on cost management and is significantly incented to keep costs at an appropriate level.’’ 195 The Operating Committee notes that it actively pursues cost saving measures and has a Cost Management Working Group to address cost management needs.196 Additionally, the Operating Committee states that the plan processor regularly reviews options to lower compute and storage needs and works with CAT technology providers to provide services in a cost-effective manner.197 Finally, one commenter states that the Proposed Amendment needs to explain what would happen if actual CAT operating costs exceed the budget and what would happen if the CAT becomes over-budget. The commenter believes that a revised amendment should provide further details on the CAT budget and potential budget surpluses.198 In response to the comment,199 the Operating Committee explains that it would address budget shortfalls or excess fees through updates to the budgets and operational reserves.200 The Operating Committee states that to recover the costs of CAT on an ongoing basis, it will use the costs in the annual operating budget as the Total CAT Costs to be used to calculate CAT fees, and that these budgeted costs may be adjusted on a quarterly basis to address any changes to the budget.201 The Operating Committee states that if CAT fees exceed the CAT costs, despite quarterly budget adjustments, any surplus would be treated as an operational reserve to offset fees in future payments, in accordance with Section 11.1(c) of the CAT NMS Plan.202 If CAT fees are less than CAT costs, the Operating Committee states that it ‘‘may address the shortfall by using the operational reserve, including the amount of the shortfall in future fees and/or seeking to recover the costs via other measures in accordance with the Exchange Act.’’ 203 Allocation of Costs Between Industry Members and Participants Many commenters raise concerns about the proposed allocation of costs between Industry Members and Participants.204 Several commenters argue that the allocation lacks justification for the decision to recover 75% of Total CAT Costs from Industry Members and 25% from Participants.205 Two commenters believe the allocation to Industry Members is ‘‘arbitrary and unsupportable’’ under the Exchange Act.206 One commenter challenges the Participants’ justification for the allocation—that there are more Industry Members than Participants and Industry Members receive much more revenue than Participants—as not providing a rational basis on which to claim that the Proposed Amendment provides for a fair allocation of reasonable fees and does not impose an undue burden on competition.207 Another commenter states, ‘‘[i]t is unclear from the proposal why the ability to pay is a corollary to CAT costs and an appropriate factor in justifying the split.’’ 208 One commenter states that costs are not deemed reasonable because a party can afford the costs, because the costs are not large enough to be material, or because the costs can be shared among thousands of 201 Id. 190 Id. 191 See SIFMA Letter at 5; Fidelity Letter at 3, 5; Tower Letter at 2; FIA PTG May 12th Letter at 5. 192 See Istra Letter at 1. 193 See Fidelity Letter at 5. 194 See FIA PTG May 12th Letter at 5; Fidelity Letter at 3; Tower Letter at 2, 7. 195 See CAT Operating Committee July 14th Letter I at 4–5. 196 Id. at 5. 197 Id. 198 See Fidelity Letter at 3, 5. 199 Id. at 5. 200 See CAT Operating Committee July 14th Letter I at 6. PO 00000 Frm 00134 Fmt 4703 Sfmt 4703 40123 202 Id. at 6–7. at 7. 203 Id. 204 See Fidelity Letter at 2–4; NYSE Letter at 1– 2; Tower Letter at 4–5; MMI Letter at 4–5; Istra Letter at 3; SIFMA Letter at 5–8; Virtu Letter at 3– 6; Data Boiler Letter at 7; FIA PTG May 12th Letter at 3, 4; FINRA Letter at 3, 4–5; Parallax Letter at 2–3. 205 See Fidelity Letter at 3–4; NYSE Letter at 1– 2; Tower Letter at 4–5; MMI Letter at 4–5; Istra Letter at 3; Virtu Letter at 3–4; SIFMA Letter at 5– 6. 206 See SIFMA Letter at 5–6; Virtu Letter at 3. 207 See SIFMA Letter at 5–6. 208 See Fidelity Letter at 4. E:\FR\FM\26JYN1.SGM 26JYN1 40124 Federal Register / Vol. 86, No. 140 / Monday, July 26, 2021 / Notices Industry Members.209 Another commenter believes that the cost allocation should have focused on what market participants should pay based on costs and benefits, rather than ability to pay based on aggregate revenues.210 One commenter believes the cost allocation is inequitable and an undue burden on Industry Members.211 The commenter believes that CAT fees should only be imposed on beneficiaries of CAT services,212 allocated in proportion to benefit received.213 The commenter believes that market participants that pose higher risks and potential conflicts of interest should pay higher fees than other market participants.214 One commenter approves the proposed elimination of tiering, but expresses concern at the allocation, stating that allocating set percentages of total costs to one group over another is the wrong approach.215 The commenter criticizes the Proposed Amendment for basing the allocation on ensuring that the highest paying Industry Members pay the same as the highest paying Participants.216 Additionally, this commenter believes that Participants would have no incentive to manage costs if they are only responsible for 25% of Total CAT Costs.217 For the same reason, another commenter believes there is little incentive for Participants to justify their historical costs or manage a reasonable and efficient operating budget.218 The commenter believes the cost allocation methodology differences between the Industry Members and the Participants warrants further discussion and transparency.219 One commenter notes that the Proposed Funding Model does not explain how the 75% allocation to Industry Members relates to overall CAT costs resulting from Industry Member reporting and therefore may not be supported by Section 11.2(a) and Section 11.2(b) of the CAT NMS Plan.220 209 See Parallax Letter at 2. Virtu Letter at 3–4. 211 See Data Boiler Letter at 6, 7. 212 Id. at 6. 213 Id. at 7. 214 Id. at 8. 215 See FIA PTG May 12th Letter at 4. The Operating Committee acknowledges the commenter’s support of the elimination of tiering. See CAT Operating Committee July 14th Letter II at 8, 13. 216 See FIA PTG May 12th Letter at 4. 217 Id. 218 See MMI Letter at 4–5. 219 Id. at 5. 220 See FINRA Letter at 5. Section 11.2(a) of the CAT NMS Plan requires the Operating Committee, in establishing the funding of the Company, to create transparent, predictable revenue streams for jbell on DSKJLSW7X2PROD with NOTICES 210 See VerDate Sep<11>2014 17:10 Jul 23, 2021 Jkt 253001 Another commenter suggests a 50%– 50% cost allocation between Industry Members and Participants and argues that any allocation should be transparent and predictable and supported by evidence.221 The commenter suggests that Industry Member costs be allocated based on the value any Industry Member receives from the market.222 One commenter believes the proposal lacks information for commenters to understand how CAT costs are allocated across asset classes.223 The commenter suggests the creation of a predictable cost allocation methodology reached through engagement with Industry Members that aligns costs with the receipt of benefits from the market.224 One commenter believes the proposed allocation is arbitrary because the Participants override the allocation with adjusted allocations, such as the proposed market maker discounts, the Minimum Industry Member CAT Fee and the Maximum Industry Member CAT Fee, and the treatment of OTC Equity Security share volume.225 The commenter believes the Proposed Funding Model would shift the regulatory cost of overseeing one Industry Member to another Industry Member, with the potential effect of retail investors who transact with small Industry Members indirectly subsidizing sophisticated investors who transact with large market-makers.226 The commenter states, ‘‘the Operating Committee has not provided a sufficient regulatory case for a proposed funding model which imposes different costs for the same CAT reportable events.’’ 227 Several commenters believe the proposed cost allocation between Industry Members and Participants ignores the time investment and costs already incurred by Industry Members to report to the CAT.228 One commenter the Company that are aligned with the anticipated costs to build, operate and administer the CAT and the other costs of the Company. Section 11.2(b) requires the Operating Committee to establish an allocation of the Company’s related costs among Participants and Industry Members that is consistent with the Exchange Act, taking into account the timeline for implementation of the CAT and distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon Company resources and operations. 221 See Istra Letter at 5–6. 222 Id. 223 See NYSE Letter at 4. 224 Id. at 5. 225 See Parallax Letter at 3. 226 Id. 227 Id. 228 See SIFMA Letter at 7–8; FIA PTG May 12th Letter at 5; Tower Letter at 4–5. See also Fidelity Letter at 2 (stating that Industry Members have spent much time and money on building systems PO 00000 Frm 00135 Fmt 4703 Sfmt 4703 notes that Industry Members have had to develop internal systems for CAT reporting and that Industry Members have provided critical assistance to the Participants in developing Industry Member CAT Technical Specifications.229 The commenter opines that an analysis of the costs incurred by Industry Members for internal compliance would demonstrate that the Industry Allocation is not an equitable allocation of reasonable fees.230 Another commenter notes that the Proposed Amendment does not mention the substantial time and cost invested by Industry Members into refining reporting specifications and building CAT reporting platforms,231 and one other commenter believes that the Proposed Amendment ignores the substantial costs that Industry Members have incurred associated with the development, testing and implementation of the CAT.232 One commenter states that the Proposed Funding Model treats affiliated Participants differently than affiliated Industry Members without explaining how this inconsistency is consistent with the Exchange Act.233 The commenter explains that affiliated Participants would be charged based on aggregate market share as a single complex, while affiliated Industry Members would be charged individually based on individual message traffic. The commenter states, ‘‘[t]his methodology seems to be rooted in the Participants’ view that it provides for a fair allocation of fees under the proposal because it results in the largest Participant complexes being charged approximately the same level of fees as the largest Industry Members.’’ The commenter notes that the result is not a fair allocation of reasonable fees as the largest Industry Members have multiple affiliates that, if viewed as a single aggregated complex like affiliated Participants, would pay greater CAT fees than the largest Participant complexes.234 One commenter questions why equities and options message traffic is combined for Industry Member cost allocation purposes, unlike the Participant Allocation where 60% of the Total CAT Costs would be allocated to to comply with CAT requirements but will not be reimbursed for these costs). 229 See SIFMA Letter at 7–8. See also STA Letter at 3 (describing collaborative efforts by Industry Members and Participants to develop technical specifications). 230 See SIFMA Letter at 7–8. 231 See Tower Letter at 4–5. 232 See FIA PTG May 12th Letter at 5. 233 See SIFMA Letter at 8. 234 Id. E:\FR\FM\26JYN1.SGM 26JYN1 Federal Register / Vol. 86, No. 140 / Monday, July 26, 2021 / Notices Equities Participants and 40% would be allocated to Options Participants.235 The commenter states, ‘‘[i]f message traffic is indeed the major driver of CAT costs, then it stands to reason that at least 40% of the Industry Member costs be allocated to options (as in the Participants’ allocation framework), if not significantly more.’’ 236 Four commenters note that, under the proposed allocation, Industry Members must not only cover their allocation of the Total CAT Costs, but they must also fund FINRA, which would owe its own share of Participant CAT fees.237 One commenter believes that, including FINRA’s allocation, the Industry Member Allocation would exceed 80%.238 The commenter notes that the Proposed Amendment does not explain why FINRA should be treated the same way as exchanges for allocation purposes when Industry Members pay FINRA’s operation costs through regulatory fees and fines.239 Another commenter believes that FINRA will raise its fees to help pay for its own Participant Allocation, further increasing the cost to be borne by Industry Members.240 This commenter suggests that the Participants should submit a new proposal with a cost methodology supported by data that Industry Members can evaluate.241 FINRA itself comments, ‘‘[o]ne effect of adopting these unsupported allocation criteria would be an unjustified increase in FINRA’s fee assessments . . .’’ 242 FINRA also states that because it relies on regulatory fees from members, the Proposed Funding Model would reallocate FINRA’s costs to Industry Members in addition to the CAT fees to be borne by Industry Members.243 In response to comments questioning the justification for the proposed 75%– 25% allocation,244 the Operating Committee states that this allocation ‘‘continues to be an equitable allocation of reasonable CAT fees between Industry Members and Participants that balances the costs paid by each CAT Reporter and the regulatory benefits 235 See Istra Letter at 3–4. at 4. 237 See Virtu Letter at 4, 6; Fidelity Letter at 4; SIFMA Letter at 7; Tower Letter at 5. 238 See SIFMA Letter at 7. 239 Id. 240 See Fidelity Letter at 4. 241 Id. 242 See FINRA Letter at 9. 243 Id. 244 See Data Boiler Letter at 7; FIA PTG May 12th Letter at 4; Fidelity Letter at 2–4; FINRA Letter at 5; Istra Letter at 3; MMI Letter at 4; NYSE Letter at 2; Parallax Letter at 2; SIFMA Letter at 5–8; STA Letter at 4; Tower Letter at 4; Virtu Letter at 3–4. jbell on DSKJLSW7X2PROD with NOTICES 236 Id. VerDate Sep<11>2014 17:10 Jul 23, 2021 Jkt 253001 each receives.’’ 245 The Operating Committee reiterates the arguments it made in support of the allocation from the Proposed Amendment.246 Several commenters state that the Proposed Amendment does not consider whether regulatory fees and fines paid by Industry Members could offset the costs of CAT.247 One commenter asserts that the Proposed Funding Model did not consider using exchange regulatory revenues or profits as sources of funding and did not explain why fines paid by Industry Members for CAT reporting violations could not offset the costs of operating the CAT.248 In addition, the commenter states that the Proposed Funding Model did not analyze whether FINRA’s Trading Activity Fee (‘‘TAF’’) could offset the costs of CAT when OATS is retired, or whether FINRA could reduce the TAF rate.249 The commenter said that inclusion of this analysis would reveal that the Industry Allocation is not an equitable allocation of reasonable fees.250 Another commenter argues that Industry Members pay membership fees, registration and licensing fees, and regulatory fees to Participants, yet the Proposed Funding Model did not address how these fees are allocated and why Industry Members must be responsible for a new funding requirement.251 One commenter believes that revenues from fines should be allocated to the Company’s operating reserve in order to decrease CAT costs.252 In response to comments suggesting that regulatory fines and cost savings due to the retirement of OATS should be used to decrease CAT costs,253 the Operating Committee states that it will not reduce CAT fees based on the ancillary effects of the CAT.254 The 245 See CAT Operating Committee July 14th Letter II at 2. 246 Id. at 2–4; Notice, supra note 4 at 21054– 21055. 247 See Tower Letter at 5; SIFMA Letter at 7; Virtu Letter at 3; FIA PTG May 12th Letter at 5; Parallax Letter at 4. See also Data Boiler Letter at 7 (suggesting that fines and settlements should fund the CAT). 248 See SIFMA Letter at 7. See also MMI Letter at 5–6 (stating that information is needed concerning any potential cost-savings to FINRA from OATS retirement that could offset the cost of running the CAT, as well as a proposed TAF increase in 2022); Virtu Letter at 4 (stating that the Proposed Amendment should have analyzed whether FINRA’s TAF could offset CAT costs after OATS has been retired). 249 See SIFMA Letter at 7. 250 Id. 251 See Virtu Letter at 3. 252 See FIA PTG May 12th Letter at 5. 253 Id.; MMI Letter at 5–6; SIFMA Letter at 7; Tower Letter at 5; Virtu Letter at 4. 254 See CAT Operating Committee July 14th Letter I at 6. PO 00000 Frm 00136 Fmt 4703 Sfmt 4703 40125 Operating Committee explains that the proposed CAT fees account for the costs to create, implement and maintain the CAT, not other aspects of the Participants’ regulatory operations.255 Finally, one commenter argues that the elimination of comparability as a funding principle removes support for the proposed cost allocation.256 The commenter explains that comparability was key to the decision to propose the 75%–25% allocation to Industry Members and Participants when the Participants previously proposed CAT fees in 2017.257 The commenter explains that the Participants removed comparability from the funding model because the Proposed Funding Model no longer assesses fees through tiers.258 The commenter states, ‘‘if the principle driving the change to a no-tier approach is to assess fees more transparently on CAT Reporters in direct relation to the costs that each creates for the CAT with its reporting activity, the Proposed Funding Model fails to apply this principle consistently.’’ 259 The commenter adds that the Proposed Amendment does not discuss the impact of the removal of the tiers and the comparability principle on the funding model.260 In response to the comment,261 the Operating Committee explains that the comparability provision was used to determine fee tiers. Since a tiered fee 255 Id. 256 See FINRA Letter at 2–4. May 9, 2017, the Operating Committee for the Company filed proposed Amendment No. 2 to the CAT NMS Plan to establish the CAT fees to be paid by the Participants. See Letter from Michael Simon, CAT NMS Plan Operating Committee Chair, to Brent J. Fields, Secretary, Commission, dated May 9, 2017. See also Securities Exchange Act Release No. 80930 (June 14, 2017), 82 FR 28180 (June 20, 2017). The Commission issued an order of summary abrogation of Amendment No. 2 on July 21, 2017. See Securities Exchange Act Release No. 81189 (July 21, 2017), 82 FR 35005 (July 27, 2017). The Participants subsequently filed proposed Amendment No. 3 to the CAT NMS Plan on October 30, 2017 to establish the Participant CAT fees. See Letter from Michael Simon, CAT NMS Plan Operating Committee Chair, to Brent J. Fields, Secretary, Commission, dated October 30, 2017. On December 11, 2017, the Operating Committee filed proposed Amendment No. 4 to the CAT NMS Plan, which replaced and superseded Amendment No. 3 in its entirety. See Letter from Michael Simon, CAT NMS Plan Operating Committee Chair, to Brent J. Fields, Secretary, Commission, dated December 11, 2017. See also Securities Exchange Act Release No. 82451 (January 5, 2018), 83 FR 1399 (January 11, 2018). The Participants withdrew Amendment No. 4 to the CAT NMS Plan on January 11, 2018. See Letter from Michael Simon, CAT NMS Plan Operating Committee Chair, to Brent J. Fields, Secretary, Commission, dated January 10, 2018. See also Securities Exchange Act Release No. 82892 (March 16, 2018), 83 FR 12633 (March 22, 2018). 258 See FINRA Letter at 4. 259 Id. 260 Id. at 7, n.17. 261 Id. at 2–4. 257 On E:\FR\FM\26JYN1.SGM 26JYN1 40126 Federal Register / Vol. 86, No. 140 / Monday, July 26, 2021 / Notices structure would not be used under the Proposed Funding Model, the Operating Committee believes it is appropriate to delete the comparability provision as it is no longer relevant.262 jbell on DSKJLSW7X2PROD with NOTICES Allocation of Costs Between Equities and Options Participants Two commenters argue that the Proposed Amendment failed to justify the proposed 60%–40% allocation of costs between Equities and Options Participants.263 Both commenters believe the Proposed Amendment lacks justification to support the allocation.264 One commenter notes that the Participants previously stated that message traffic is a key cost driver of the CAT.265 The commenter attests that the Proposed Funding Model would assess Options Participants, which generate significantly more message traffic than Equities Participants, a lesser amount of the total CAT costs than Equities Participants.266 This commenter believes the result is inconsistent with the CAT’s cost alignment principles 267 and that the Operating Committee does not explain how the result is consistent with the funding principles or the Exchange Act.268 The other commenter believes the allocation is arbitrary and unfairly discriminatory.269 The commenter opines that the explanation provided by the Participants—that the allocation was ‘‘subject to negotiations among the Participants’’—is not a basis for approval under the Exchange Act, and notes that the majority of votes on the Operating Committee are held by Participants that operate options exchanges.270 In response to the comments,271 the Operating Committee states that the proposed 60%–40% allocation of costs between Equities Participants and Options Participants is an appropriate allocation that is consistent with the CAT NMS Plan, which contemplates allocating Participant CAT fees based on activity in options and equities, and explains that the allocation was the 262 See CAT Operating Committee July 14th Letter II at 4. 263 See LTSE Letter at 5; FINRA Letter at 6. See also NYSE Letter at 2 (describing the proposed allocation as part of ‘‘an incomprehensible, distorted program’’); MMI Letter at 5 (requesting further transparency and discussion on cost allocation methodology differences between Participants and Industry Members). 264 See LTSE Letter at 5; FINRA Letter at 6. 265 See FINRA Letter at 6. 266 Id. 267 See Section 11.2(a) and Section 11.2(b) of the CAT NMS Plan. 268 See FINRA Letter at 6. 269 See LTSE Letter at 5. 270 Id. 271 See FINRA Letter at 6; LTSE Letter at 5; MMI Letter at 5; NYSE Letter at 2. VerDate Sep<11>2014 17:10 Jul 23, 2021 Jkt 253001 subject of negotiations among the Participants.272 Use of Message Traffic for Industry Members Several commenters object to the use of message traffic as the basis of Industry Member CAT fees.273 One commenter believes that message traffic is not an appropriate measure for allocating fees to Industry Members.274 The commenter notes that the Participants ‘‘control how message traffic is defined, how message traffic is processed, and whether steps can be taken to reduce message traffic.’’ 275 The commenter argues that charging only Industry Members based on message traffic is not a fair allocation of reasonable fees because it creates no incentive for the Participants to control CAT message traffic and CAT costs.276 The commenter believes the proliferation of exchanges has resulted in higher CAT message traffic, and thus higher costs, but notes that this is not analyzed in the funding model.277 Another commenter suggests that additional data is needed to support the apportionment of CAT costs according to message count.278 One commenter notes that the elimination of comparability as a funding principle removes support for the proposed requirement to base Industry Members CAT fees on message traffic and Participant CAT fees on market share.279 The commenter explains that comparability was key to the decision to propose message traffic as the basis of Industry Member CAT fees and market share as the basis of Execution Venue CAT fees when the Participants previously proposed CAT fees in 2017.280 Two commenters believe that the Proposed Funding Model needs to examine the impact of options quoting activity on CAT.281 One commenter states that Options Market Maker 272 See CAT Operating Committee July 14th Letter II at 13–14. 273 See SIFMA Letter at 8–10; Istra Letter at 3, 5; Virtu Letter at 5; SSGA Letter at 2; Data Boiler Letter at 7. See also NYSE Letter at 1, 3 (recommending a cost allocation framework based on executed share volume) and STA Letter at 4 (agreeing with the suggestion to use executed share volume); Fidelity Letter at 4 (stating that the Proposed Amendment has not explained why Industry Members must pay CAT fees based on message traffic while Participants will pay based on market share). 274 See SIFMA Letter at 8–9. 275 Id. at 9. 276 Id. 277 Id. 278 See MMI Letter at 4. 279 See FINRA Letter at 3–4. 280 See supra note 257. 281 See Istra Letter at 2; SIFMA Letter at 9. PO 00000 Frm 00137 Fmt 4703 Sfmt 4703 quoting comprises the ‘‘vast majority’’ of CAT messaging and that the design of the CAT should be reevaluated in case CAT is being ‘‘weighed down by options activity with little impact on market quality and traded volume.’’ 282 The other commenter states that the Proposed Funding Model lacks an analysis of the message traffic and costs generated by Options Market Makers that are required by SRO rules to provide quotes in over a million options series, even those that do not trade.283 In response to comments questioning the use of message traffic as a basis of Industry Member CAT fees,284 the Operating Committee states that ‘‘the use of message traffic for allocating CAT costs among Industry Members is consistent with the CAT NMS Plan as approved by the Commission, and the proposal did not seek to change the use of message traffic for this purpose in the Proposed Funding Model.’’ 285 The Operating Committee notes that it explored allocating the Industry Member Allocation based on revenue related to activities in Eligible Securities, but decided it would be difficult to determine the types of Industry Member revenue to include in the calculation of a CAT fee using this approach.286 One commenter suggests that the Reportable Events that will constitute message traffic be defined in the CAT NMS Plan, rather than in the IM Reporting Tech Specs, so that any changes to the Reportable Events that would be defined as message traffic would be subject to the notice and comment process.287 In response to the comment,288 the Operating Committee states that ‘‘delineating the method for reporting Reportable Events used in the message traffic count in the Technical Specifications, rather than the CAT NMS Plan, is appropriate because the technical approach to reporting specific Reportable Events may vary over time.’’ 289 Commenters also believe that the use of message traffic as a basis of Industry Member CAT fees could affect market participant behavior with harmful consequences to the markets.290 Two 282 See Istra Letter at 2. SIFMA Letter at 9. 284 See Istra Letter at 4–5; MMI Letter at 4; SIFMA Letter at 8–9. 285 See CAT Operating Committee July 14th Letter II at 6. 286 Id. 287 See Fidelity Letter at 2, 3. 288 Id. 289 See CAT Operating Committee July 14th Letter II at 6. 290 See SIFMA Letter at 9; Virtu Letter at 5; Istra Letter at 5; SSGA Letter at 2. 283 See E:\FR\FM\26JYN1.SGM 26JYN1 Federal Register / Vol. 86, No. 140 / Monday, July 26, 2021 / Notices commenters believe the Participants have not analyzed the impact of the proposed approach on the markets.291 One commenter states that the Proposed Funding Model does not address whether market makers would reduce their quoting activity in order to reduce their CAT fees, even with the proposed market maker discounts.292 The other commenter believes that such a reduction in message traffic could impact liquidity.293 One commenter believes that using message traffic as the basis of Industry Member CAT fees will hurt the provision of liquidity and harm market quality.294 The commenter explains, ‘‘[a] message that becomes displayed on an exchange has obvious value to the entire market and not only to the broker (or its customer) providing that liquidity. Taxing the message will naturally discourage its provision.’’ 295 The commenter emphasizes the benefits of displayed quoting on the markets and the negative consequences of the potential reduction in this activity that could result from the proposed approach.296 One commenter discusses the potential negative impact on ETFs caused by the use of message traffic as the basis for Industry Member CAT fees.297 The commenter believes that the proposed approach would result in a reduction in quoting to minimize CAT fees.298 The commenter states that ETF market making activity is messageintensive and any changes in behavior caused by the proposed approach could ‘‘interfere with the arbitrage mechanism and negate the work by Industry Members and exchanges to promote tighter bid-ask spreads, deeper markets and greater participation among liquidity providers.’’ 299 In response to comments questioning the effects of the use of message traffic to calculate fees on the markets,300 the Operating Committee states that its proposed market maker discounts and the proposed Maximum Industry Member CAT Fee are designed to address potential disincentives. Additionally, the Operating Committee states that the market maker discounts ‘‘recognize the value of the market 291 See SIFMA Letter at 9; Virtu Letter at 5. SIFMA Letter at 9. 293 See Virtu Letter at 5. 294 See Istra Letter at 5. 295 Id. 296 Id. 297 See SSGA Letter at 2. 298 Id. 299 Id. 300 See Istra Letter at –5; MMI Letter at 4; SIFMA Letter at 9; SSGA Letter at 2; Tower Letter at 1; Virtu Letter at 5. jbell on DSKJLSW7X2PROD with NOTICES 292 See VerDate Sep<11>2014 17:10 Jul 23, 2021 Jkt 253001 making activity to the market as a whole.’’ 301 Use of Market Share for Participants Several commenters believe that Participants should be assessed fees based on message traffic rather than market share.302 The commenters note that the primary driver of CAT costs is the processing and storage of message traffic; therefore, Participants should be assessed CAT fees based on message traffic.303 One commenter believes that using market share to determine Participant CAT fees ‘‘gives a free pass to Plan Participants who generate high levels of message traffic but have very little market share.’’ 304 This commenter believes that using message traffic as the basis of Industry Member CAT fees and market share as the basis of Participant CAT fees is inherently discriminatory, maximizes Industry Member costs and minimizes Participant costs, and appears to result from Participant conflicts of interest and a lack of industry input until the funding model.305 Another commenter believes that using message traffic as the basis of Industry Member CAT fees and market share as the basis of Participant CAT fees is discriminatory and unsupportable.306 One commenter believes the Proposed Amendment fails to explain why Industry Members will be assessed fees based on message traffic while Participants will be assessed fees based on market share.307 Two commenters believe that the Participants will have no incentives to limit message traffic to lower costs if they are not being charged CAT fees based on message traffic.308 301 See CAT Operating Committee July 14th Letter II at 7. 302 See FIA PTG May 12th Letter at 3; LTSE Letter at 2–3; FINRA Letter at 6–7, 9. 303 See FIA PTG May 12th Letter at 3; LTSE Letter at 2; FINRA Letter at 6–7, 9. 304 See FIA PTG May 12th Letter at 3. See also SIFMA Letter at 9 (stating that message traffic is a key driver of CAT costs and that the Participants generate a significant amount of message traffic, yet the Participants propose to base their own CAT fees on market share). See also Parallax Letter at 3 (recommending an analysis of the amount of message traffic that is driven by the Participants, such as market maker quoting). 305 See FIA PTG May 12th Letter at 3. 306 See IMC Letter at 2. 307 See Fidelity Letter at 4. See also LTSE Letter at 2–3 (stating that the Participants have provided no metrics to support their rationale that message traffic is not an appropriate basis for Participant CAT fees because their message traffic is derivative of quotes and orders received from Industry Members that the Participants are required to display) and NYSE Letter at 2 (stating that the Proposed Amendment does not justify why some costs should be split by message traffic and other costs should be split by market share). 308 See Virtu Letter at 5; LTSE Letter at 3. PO 00000 Frm 00138 Fmt 4703 Sfmt 4703 40127 Another commenter, FINRA, believes that requiring market share to be the basis of Participant costs is inconsistent with CAT cost alignment principles 309 because message traffic is the key driver of costs, not market share.310 The commenter notes that if the Participants believe FINRA’s CAT fee would be too low based on its message traffic, FINRA would consider paying a more appropriate amount or an allocation based on a combination of message traffic and market share.311 This commenter also objects to the use of market share in determining its CAT fees.312 The commenter states that it would be responsible for 20% of the Equities Participant Allocation even though it generates less than 1% of equities message traffic reported to the CAT.313 The commenter explains that its market share would be based on trade reporting volume reported through its facilities, which is also reported by Industry Members.314 The commenter asks how this is consistent with the Operating Committee’s rationale for the use of market share to determine Participant CAT fees—that message traffic is not an appropriate basis for Participants because their message traffic is derivative of Industry Member reporting activity.315 In addition, the commenter states that the Operating Committee justifies the use of market share for Participants because their business models are focused on executions; however, the commenter notes that ‘‘given FINRA’s unique role, trade volume is reported through FINRA for regulatory purposes, not to serve FINRA’s business purposes.’’ 316 The commenter adds that the Operating Committee justifies the use of market share as a basis for FINRA’s CAT fees as FINRA would be one of the largest regulatory users of the CAT.317 The commenter asks ‘‘why regulatory usage is offered only to justify FINRA’s allocation of the proposed fee that is based on unrelated criteria (market share), particularly when all Participants may use CAT data for regulatory purposes.’’ 318 The commenter argues that the Operating Committee has not analyzed the costs of regulatory usage, and states that if a 309 See supra note 267. FINRA Letter at 6. 311 Id. at 9. 312 Id. at 7–9. 313 Id. at 8. 314 Id. at 7. 315 Id. at 7. 316 See FINRA Letter at 7–8. 317 Id. at 8. 318 Id. 310 See E:\FR\FM\26JYN1.SGM 26JYN1 40128 Federal Register / Vol. 86, No. 140 / Monday, July 26, 2021 / Notices regulatory usage fee is appropriate, it should apply to all Participants.319 In response to comments questioning the use of market share to calculate Participant fees,320 the Operating Committee states that the CAT NMS Plan contemplates that Participants pay a CAT fee that is based on market share. After considering alternatives to the use of market share, the Operating Committee concluded that market share would equitably allocate CAT fees among Participants. The Operating Committee reiterates arguments it made in support of the use of market share in the Proposed Amendment.321 Maximum Equities Participant Fee Two commenters object to the Maximum Equities Participant Fee because they believe that the sole Participant subject to the fee—FINRA— would be unfairly afforded preferential treatment.322 One commenter believes that FINRA should receive a higher portion of CAT costs than Participants that lack a surveillance business because FINRA can capitalize off of the predecessor plan processor’s development work and its technology will benefit from CAT.323 The commenter believes that FINRA should not be permitted re-allocation of its CAT fee under the Maximum Equities Participant Fee.324 The commenter also states, ‘‘[a]lthough we acknowledge that the nature of OTC trading in penny level may inherently be different from the proposed message traffic measurement use in Equity/Listed Option Group Split, similar arguments may apply to thinly traded securities, ESG stocks, etc., which SEC rule should avoid ‘craftout.’’’ 325 In response to the comment noting the nature of trading in OTC Equity Securities,326 the Operating Committee states that it proposes to exclude OTC Equity Securities share volume from the calculation of market share for national securities exchanges. The Operating Committee reiterates the arguments it made in support of the proposed exclusion of OTC Equity Securities jbell on DSKJLSW7X2PROD with NOTICES 319 Id. at 8–9. 320 See FIA PTG May 12th Letter at 3; Fidelity Letter at 4; FINRA Letter at 6–7; IMC Letter at 2; LTSE Letter at 2–3; MMI Letter at 5; NYSE Letter at 2; SIFMA Letter at 8–9. 321 See CAT Operating Committee July 14th Letter II at 12–13; Notice, supra note 4, at 21060. 322 See Data Boiler Letter at 8–9; LTSE Letter at 5. See also NYSE Letter at 2 (noting the added complexity of the ‘‘bespoke fee structure for FINRA’’). 323 See Data Boiler Letter at 8–9. 324 Id. at 9. 325 Id. at 8. 326 Id. VerDate Sep<11>2014 17:10 Jul 23, 2021 Jkt 253001 share volume in the Proposed Amendment.327 The other commenter believes that the Maximum Equities Participant Fee market share caps and re-allocation are arbitrary and unfairly discriminatory.328 The commenter believes that the proposal lacks justification for requiring other Equities Participants to be allocated FINRA’s market share when FINRA’s activity does not occur on their markets.329 The commenter notes, ‘‘[t]he stated rationale that this is necessary for the FINRA fees to be ‘fair and reasonable’ is subjective, unsupported by any data, and further highlights the shortcomings of a fee model based on market share.’’ 330 One commenter, FINRA, also objects to the Maximum Equities Participant Fee because it is based on the use of market share for calculating FINRA’s CAT fees, which FINRA believes is inconsistent with the funding principles of the CAT NMS Plan and ill-suited to FINRA’s unique model.331 In response to comments received on the Maximum Equities Participant Fee,332 the Operating Committee reiterates the arguments it made in support of the proposed Maximum Equities Participant Fee in the Proposed Amendment.333 options and equities exchange would be assessed only one Minimum Participant Fee.338 In response to the comments on the Minimum Participant Fee,339 the Operating Committee reiterates the arguments it made in support of the proposed Minimum Participant Fee in the Proposed Amendment.340 Maximum Industry Member CAT Fee Several commenters express concern about the Maximum Industry Member CAT Fee.341 One commenter believes the Maximum Industry Member CAT Fee ‘‘exacerbates inequalities’’ 342 and believes that small firms should not be responsible for subsidizing the CAT fees for the top 36 firms that generate the vast majority of message traffic.343 Similarly, another commenter believes that a lack of transparency into the reallocation of CAT fees for Industry Members in excess of the Maximum Industry Member CAT Fee adds complexity and makes it difficult for Industry Members to calculate their costs under the Proposed Funding Model.344 This commenter also believes the cap of 8% of total Industry Member CAT message traffic is arbitrary.345 Another commenter objects to the 8% cap, explaining that the proposal has not fully justified the cap, and that it Minimum Participant Fee provides large brokers an unfair One commenter objects to the advantage by requiring other Industry proposed Minimum Participant Fee as Members, including their direct inconsistent with the notion that market competitors, to pay the large brokers’ reshare is a fair method of allocation,334 allocation of fees in excess of the and as arbitrary and unfairly Maximum Industry Member CAT discriminatory.335 The commenter states Fee.346 Finally, one commenter believes that this fee would be paid by every the Proposed Funding Model Participant, regardless of its market insufficiently analyzes the ‘‘crossshare, and notes that this fee can subsidization that results from the significantly increase even if a proposed minimum and maximum Participant itself is not creating Industry Member fees’’ nor does it increased costs to the CAT.336 The explain the reasoning behind the commenter questions why some creation of the Maximum Industry Participants would incur a higher Member CAT Fee.347 Minimum Participant Fee when only In response to comments on the certain Participants engage in activity Maximum Industry Member CAT that results in increased CAT message Fee,348 the Operating Committee traffic.337 The commenter also notes that reiterates the arguments it made in support of the proposed Maximum a Participant that operates both an 327 See CAT Operating Committee July 14th Letter II at 14; Notice, supra note 4, at 21061. 328 See LTSE Letter at 5. 329 Id. 330 Id. 331 See supra text accompanying notes 312–319. 332 See Data Boiler Letter at 9; FINRA Letter at 7– 9; LTSE Letter at 5; NYSE Letter at 2. 333 See CAT Operating Committee July 14th Letter II at 15; Notice, supra note 4, at 21062. 334 See LTSE Letter at 4. 335 See LTSE Letter at 4. See also NYSE Letter at 2 (noting the added complexity of the Minimum Participant Fee). 336 See LTSE Letter at 4. 337 Id. at 4–5. PO 00000 Frm 00139 Fmt 4703 Sfmt 4703 338 Id. at 4, n.9. at 4–5; NYSE Letter at 2. 340 See CAT Operating Committee July 14th Letter II at 15; Notice, supra note 4, at 21060. 341 See Data Boiler Letter at 7–8; Tower Letter at 6; FINRA Letter at 5–6; MMI Letter at 5; SIFMA Letter at 9. 342 See Data Boiler Letter at 7. 343 Id. 344 See SIFMA Letter at 9. 345 Id. 346 See Tower Letter at 6. 347 See FINRA Letter at 5. 348 See Data Boiler Letter at 7–8; FINRA Letter at 5–6; MMI Letter at 5; SIFMA Letter at 9; Tower Letter at 6. 339 Id. E:\FR\FM\26JYN1.SGM 26JYN1 Federal Register / Vol. 86, No. 140 / Monday, July 26, 2021 / Notices Industry CAT Fee in the Proposed Amendment.349 Minimum Industry Member CAT Fee Two commenters object to the Minimum Industry Member CAT Fee.350 One of the commenters believes the Minimum Industry Member CAT Fee poses an undue burden on Industry Members and, by charging a ‘‘de minimis fee,’’ is inconsistent with Section 11.2(d), which requires the Operating Committee to provide for ease of billing and other administrative functions.351 The other commenter believes the proposal lacks justification for the Minimum Industry CAT Fee, explaining that the fee could increase for firms with little message traffic due to the redistribution of CAT fees in excess of the Maximum Industry Member CAT Fee.352 The commenter states this result was not discussed in the Proposed Funding Model nor was there a discussion of how the result is consistent with the CAT funding principles.353 In response to the comments,354 the Operating Committee reiterates the arguments it made in support of the proposed Minimum Industry Member CAT Fee in the Proposed Amendment.355 Market Maker Discounts jbell on DSKJLSW7X2PROD with NOTICES Five commenters object to the proposed market maker discounts.356 One commenter objects to the market maker discounts due to what it deems the improper discounting of Equity Market Maker message traffic and the preferential treatment of Options Market Makers at the expense of equities Industry Members.357 The commenter criticizes the trade-to-quote ratio that is the basis of the proposed market maker discounts, explaining that it ‘‘ignores the realities of the market.’’ 358 The commenter suggests only including trades executed on-exchange and not off-exchange in the ratio.359 349 See CAT Operating Committee July 14th Letter II at 12; Notice, supra note 4, at 21059. 350 See Data Boiler Letter at 7; FINRA Letter at 5– 6. 351 See Data Boiler Letter at 7. 352 See FINRA Letter at 5–6. 353 See FINRA Letter at 5–6. 354 See Data Boiler Letter at 7; FINRA Letter at 5– 6. 355 See CAT Operating Committee July 14th Letter II at 7; Notice, supra note 4, at 21058–21059. 356 See Data Boiler Letter at 7, 8, 9; SIFMA Letter at 9; Tower Letter at 5–6; Istra Letter at 3–5; Parallax Letter at 3. 357 See Istra Letter at 3–5. 358 Id. at 4–5. See also Parallax Letter at 3 (stating that the trade-to-quote ratio needs further analysis). 359 See Istra Letter at 4. VerDate Sep<11>2014 17:10 Jul 23, 2021 Jkt 253001 Additionally, the commenter objects to the use of the SIP best bid and offer information in deriving the trade-toquote ratio, explaining that this method undercounts the ‘‘activity and value contribution of equities market makers and further underestimates any market maker discount.’’ 360 The commenter also argues that, after the Options Market Maker discount, equities Industry Members would be required to pay 95% of the CAT cost when only responsible for 12% of the message traffic, a ‘‘grossly unfair crosssubsidy.’’ 361 The commenter states that at least 40% of Industry Member costs should be borne by options Industry Members if message traffic is the key driver of CAT costs.362 Another commenter states that the ‘‘massive discounts’’ demonstrate that the Participants ‘‘have not found a way to perform the core functions needed for market surveillance, without the cost of it putting at risk an entire segment of the industry.’’ 363 Similarly, another commenter states that 89% of all Industry Member CAT Reportable Events comes from Options Market Makers, but the proposed Options Market Maker discount reduces 99% of the billable events for Options Market Makers, with the result being 94% of Industry Members’ share allocated to equities non-market makers.364 The commenter urges the Participants to justify this shift of costs to Industry Members that are not Options Market Makers and notes that the Proposed Amendment has not analyzed the effects of the discounts or has demonstrated that the discounts will be effective.365 The commenter states that the Proposed Amendment is lacking in several other areas with respect to these discounts; there is no discussion of: (1) How the proposed market maker discount provides a pricing advantage to market makers that is unavailable to other market participants; (2) how the trade-to-quote ratio is the correct metric to use for determining the market maker discounts; (3) how the discount incentivizes market makers to quote at 5. 361 Id. at 4. 362 Id. 363 See Parallax Letter at 3. This commenter also suggests that there should be a process to confirm that Industry Members accurately identify themselves as market makers to receive the proposed market maker discounts, and penalties for those who wrongfully identify themselves or their activities to receive a discount. Id. 364 See Tower Letter at 6. 365 Id. at 5–6. See also Parallax Letter at 4 (stating that it is important to understand the extent to which Industry Members would benefit from the discounts). PO 00000 360 Id. Frm 00140 Fmt 4703 Sfmt 4703 40129 more without trading more; (4) how/ whether the discount calculation will change if the trade-to-quote ratio significantly changes; and (5) any impacts on liquidity and market participant behavior.366 The commenter also believes the Proposed Amendment lacks a discussion of its potential impact on business lines across the industry, such as, for example, its effect on ATSs, which would not be considered market makers and thus could incur high costs.367 The commenter attests that the Proposed Amendment lacks the information necessary to assess the effect of the proposed market maker discounts, such as the number of transactions resulting from market makers and how market-makers transactions should be discounted from the total number of transactions using the trade-to-quote ratio.368 In response to the comment on the proposal’s potential effects on business lines across the industry,369 the Operating Committee states that it sought to limit any negative effects on certain CAT Reporters resulting from the use of message traffic to calculate fees, such as through the proposed market maker discounts and the proposed Maximum Industry Member CAT Fee.370 One commenter opposes any market maker discounts, but notes that smaller market makers that do not pay or receive rebates deserve subsidies to encourage their participation.371 Another commenter believes the impact of market maker discounts, as well as the Maximum Industry Member CAT Fee, adds complexity and makes it difficult for Industry Members to calculate their costs.372 In response to comments on the market maker discounts,373 the Operating Committee reiterates its rationale for proposing the discounts from the Proposed Amendment.374 Two commenters endorse the proposed market maker discounts.375 One commenter believes any funding plan should include these discounts and that additional product-specific 366 See Tower Letter at 5. at 6. 368 Id. at 3. 369 Id. at 6. 370 See CAT Operating Committee July 14th Letter II at 7. 371 See Data Boiler Letter at 9. 372 See SIFMA Letter at 9. 373 See FIA PTG May 12th Letter at 4; IMC Letter at 2; Data Boiler Letter at 7; SIFMA Letter at 9; Istra Letter at 2–4; Parallax Letter at 3; Tower Letter at 5–6. 374 See CAT Operating Committee July 14th Letter II at 9; Notice, supra note 4, at 21057–21058. 375 See IMC Letter at 2; FIA PTG May 12th Letter at 4. 367 Id. E:\FR\FM\26JYN1.SGM 26JYN1 40130 Federal Register / Vol. 86, No. 140 / Monday, July 26, 2021 / Notices discounts should be considered.376 Another commenter believes the discounts prevent market makers from incurring ‘‘a disproportionate percentage of CAT costs, which could impact their provision of liquidity.’’ 377 One commenter requests clarification on the proposed market maker discounts, specifying ‘‘cost allocation data and projections on market maker vs. non-market maker liquidity providers.’’ 378 The commenter also asks for further transparency and discussion on the application of the discounts on Industry Members with the most message traffic, at the expense of other Industry Members.379 Proposed Alternative Funding Models Several commenters suggest alternatives to the Proposed Funding Model.380 One commenter believes that fines and settlements should fund the CAT and that market participants that pose higher risks should pay higher CAT fees due to regulators’ ‘‘extra efforts in deciphering their complex business activities.’’ 381 The commenter also suggests the Suspicious Activity Report (‘‘SAR’’) 382 as a basis for determining Industry Member CAT fees, stating that Industry Members that underreport on the SAR should have increased fines.383 The commenter believes that dark pools should pay higher CAT fees than SROs because they pose higher potential risks due to lack of transparency and ‘‘vulnerability to conflicts of interest,’’ 384 and also notes that internalizers or market makers may pose more of a risk than dark pools due to greater vulnerability to conflicts of interest.385 Other commenters recommend a funding model administered similar to the Commission’s Section 31 fees.386 376 See IMC Letter at 2. FIA PTG May 12th Letter at 4. 378 See MMI Letter at 5. 379 Id. 380 See NYSE Letter at 2–5; Data Boiler Letter at 7–8; STA Letter at 4; FIA PTG May 12th Letter at 4; Istra Letter at 5–6; IMC Letter at 3; MMI Letter at 5. 381 See Data Boiler Letter at 8. 382 12 CFR 21.11. 383 See Data Boiler Letter at 7–8. 384 Id. 385 Id. In response to this comment, the Operating Committee states that the Proposed Funding Model would treat ATSs as Industry Members, requiring all Industry Members to pay a fee based on message traffic rather than requiring some ATSs to pay a fee based on market share and some ATSs to pay a fee based on message traffic, and would also address concerns that treating Execution Venue ATSs as Participants could create a barrier to entry for smaller ATSs. See CAT Operating Committee July 14th Letter II at 7–8. 386 See MMI Letter at 5; Istra Letter at 5–6; FIA PTG May 12th Letter at 4; IMC Letter at 2–3; STA Letter at 4; NYSE Letter at 2–5. jbell on DSKJLSW7X2PROD with NOTICES 377 See VerDate Sep<11>2014 17:10 Jul 23, 2021 Jkt 253001 Two commenters explain that the Participants could be assigned all of the CAT costs and then they would decide how to reallocate those costs to their market participants, like Section 31 fees.387 One of the commenters believes that this method would incentivize Participants into better managing CAT costs and possibly incentivize them into competing over how to allocate costs their market participants.388 Another commenter also suggests that the Commission could instead increase the rate of Section 31 fees to fund the CAT.389 One commenter believes that a 50%– 50% cost allocation among Industry Members and Participants would be preferable to the proposed 75%–25% cost allocation,390 but notes a simpler and direct way of allocating costs through derived value, which the commenter believes would not deter the provision of liquidity.391 The commenter suggests using a methodology similar to the Section 31 fee or the Section 31 fee methodology itself.392 Another commenter, a national securities exchange, provides a detailed alternative funding model administered similarly to Section 31 fees.393 According to the alternative model, CAT costs would be allocated based on executed share volume, which is already tracked by market participants.394 A per share or per contract fee would be calculated by dividing the annual budget cost base by projected total industry volume.395 Onethird of the fee would be allocated to the purchasing broker-dealer, one-third to the selling broker-dealer, and one-third to the exchange or trade reporting facility reporting the transaction.396 The commenter believes that this allocation would align funding responsibility with the receipt of economic benefits from the marketplace and would result in transparent and predicable CAT funding costs.397 The commenter notes that OTC equities would be treated differently due to their significantly higher share volumes, and suggests that they receive a small portion of the CAT budget that would be allocated among the buyer, seller and the Over-the-Counter 387 See MMI Letter at 5; FIA PTG May 12th Letter at 4. PO 00000 388 See FIA PTG May 12th Letter at 4. MMI Letter at 5. 390 See Istra Letter at 5. 391 Id. at 5–6. 392 Id. 393 See NYSE Letter at 2–5. 394 Id. at 3. 395 Id. 396 Id. 397 Id. Reporting Facility on a per share basis.398 The commenter believes that requiring all parties active in each transaction to evenly fund the CAT would allocate costs transparently, and that billing in accordance with Section 31 fee billing processes would be ‘‘an efficient method to administer funding program and provide clarity to market participants of their trading expenses.’’ 399 Two commenters believe the national securities exchange’s suggested alternative funding model deserves review.400 Both commenters support the alternative’s suggestion to base funding on executed volume rather than message traffic via a structure administered like Section 31 fees volume rather than message traffic.401 However, one commenter expresses concern about the alternative’s suggested allocation of the per share cost, explaining that FINRA’s costs would be passed to Industry Members through the TAF.402 Additionally, one commenter warns that this alternative, and the suggestions to use Section 31 fees as a model, could result in costs assessed against investors and urges the Commission to consider the possibility of increased costs and whether investors should be responsible for these costs.403 V. Proceedings To Determine Whether To Approve or Disapprove the Proposed Amendment The Commission is instituting proceedings pursuant to Rule 608(b)(2)(i) of Regulation NMS,404 and Rules 700 and 701 of the Commission’s Rules of Practice,405 to determine whether to disapprove the Proposed Amendment or to approve the Proposed Amendment with any changes or subject to any conditions the Commission deems necessary or appropriate after considering public comment. Institution of proceedings does not indicate that the Commission has reached any conclusions with respect to any of the issues involved. Rather, the Commission seeks and encourages interested persons to provide additional comment on the Proposed Amendment to inform the Commission’s analysis. Rule 608(b)(2) of Regulation NMS provides that the Commission ‘‘shall approve a national market system plan or proposed amendment to an effective 389 See Frm 00141 Fmt 4703 Sfmt 4703 398 Id. 399 See NYSE Letter at 5. IMC Letter at 3; STA Letter at 4. 401 See IMC Letter at 2–3; STA Letter at 4. 402 See STA Letter at 4. 403 See Parallax Letter at 4–5. 404 17 CFR 242.608. 405 17 CFR 201.700; 17 CFR 201.701. 400 See E:\FR\FM\26JYN1.SGM 26JYN1 Federal Register / Vol. 86, No. 140 / Monday, July 26, 2021 / Notices national market system plan, with such changes or subject to such conditions as the Commission may deem necessary or appropriate, if it finds that such plan or amendment is necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanisms of, a national market system, or otherwise in furtherance of the purposes of the Exchange Act.’’ 406 Rule 608(b)(2) further provides that the Commission shall disapprove a national market system plan or proposed amendment if it does not make such a finding.407 In the Notice, the Commission sought comment on the Proposed Amendment, including whether the Proposed Amendment is consistent with the Exchange Act.408 In this order, pursuant to Rule 608(b)(2)(i) of Regulation NMS,409 the Commission is providing notice of the grounds for disapproval under consideration: • Whether, consistent with Rule 608 of Regulation NMS, the Participants have demonstrated how the Proposed Amendment is necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanisms of, a national market system, or otherwise in furtherance of the purposes of the Exchange Act; 410 • Whether the Participants have demonstrated how the Proposed Amendment is consistent with Section 6(b)(4) 411 and Section 15A(b)(5),412 of the Exchange Act, which require that the rules of a national securities exchange ‘‘provide for the equitable allocation of reasonable dues, fees, and other charges among its members and issuers and other persons using its facilities’’ and that the rules of a national securities association ‘‘provide for the equitable allocation of reasonable dues, fees, and other charges among members and issuers and other persons using any facility or system which the association operates or controls;’’ • Whether the Participants have demonstrated how the Proposed Amendment is consistent with Section 6(b)(5) 413 and Section 15A(b)(6),414 of the Exchange Act, which require that the rules of a national securities exchange or national securities jbell on DSKJLSW7X2PROD with NOTICES 406 17 CFR 242.608(b)(2). association ‘‘promote just and equitable principles of trade . . . protect investors and the public interest; and [to be] not designed to permit unfair discrimination between customers, issuers, brokers, or dealers;’’ • Whether the Participants have demonstrated how the Proposed Amendment is consistent with Section 6(b)(8) 415 and Section 15A(b)(9) 416 of the Exchange Act, which require that the rules of a national securities exchange or national securities association ‘‘do not impose any burden on competition not necessary or appropriate in furtherance of the purposes of [the Exchange Act];’’ • Whether the Participants have demonstrated how the Proposed Amendment is consistent with the funding principles of the CAT NMS Plan, which state that the Operating Committee shall seek, among other things, ‘‘to create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate and administer the CAT and the other costs of the Company,’’ 417 ‘‘to establish an allocation of the Company’s related costs among Participants and Industry Members that is consistent with the Exchange Act taking into account . . . distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company resources and operations,’’ 418 ‘‘to provide for ease of billing and other administrative functions,’’ 419 and ‘‘to avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality;’’ 420 • Whether, and if so how, the Proposed Amendment would affect efficiency, competition or capital formation; and • Whether modifications to the Proposed Amendment, or conditions to its approval, would be necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanisms of, a national market system, or otherwise in furtherance of the purposes of the Exchange Act.421 As discussed in Section IV., above, the Participants made various arguments in support of the Proposed Amendment and the Commission 407 Id. 415 15 U.S.C. 78f(b)(8). 416 15 U.S.C. 78o–3(b)(9). 417 Section 11.2(a) of the CAT NMS Plan. 418 Section 11.2(b) of the CAT NMS Plan. 419 Section 11.2(d) of the CAT NMS Plan. 420 Section 11.2(e) of the CAT NMS Plan. 421 17 CFR 242.608(b)(2). 408 See Notice, supra note 4. 409 17 CFR 242.608(b)(2)(i). 410 17 CFR 242.608(b)(2). 411 15 U.S.C. 78f(b)(4). 412 15 U.S.C. 78o–3(b)(5). 413 15 U.S.C. 78f(b)(5). 414 15 U.S.C. 78o–3(b)(6). VerDate Sep<11>2014 17:10 Jul 23, 2021 Jkt 253001 PO 00000 Frm 00142 Fmt 4703 Sfmt 4703 40131 received comment letters that expressed concerns about the Proposed Amendment, including that the Participants did not provide sufficient information to establish that the Proposed Amendment is consistent with the Exchange Act and the rules thereunder. Under the Commission’s Rules of Practice, the ‘‘burden to demonstrate that a NMS plan filing is consistent with the Exchange Act and the rules and regulations issued thereunder . . . is on the plan participants that filed the NMS plan filing.’’ 422 The description of the NMS plan filing, its purpose and operation, its effect, and a legal analysis of its consistency with applicable requirements must all be sufficiently detailed and specific to support an affirmative Commission finding.423 Any failure of the plan participants that filed the NMS plan filing to provide such detail and specificity may result in the Commission not having a sufficient basis to make an affirmative finding that the NMS plan filing is consistent with the Exchange Act and the applicable rules and regulations thereunder.424 VI. Commission’s Solicitation of Comments The Commission requests that interested persons provide written submissions of their views, data, and arguments with respect to the issues identified above, as well as any other concerns they may have with the Proposed Amendment. In particular, the Commission invites the written views of interested persons concerning whether the Proposed Amendment is consistent with Section 11A or any other provision of the Exchange Act, or the rules and regulations thereunder. Although there do not appear to be any issues relevant to approval or disapproval that would be facilitated by an oral presentation of views, data, and arguments, the Commission will consider, pursuant to Rule 608(b)(2)(i) of Regulation NMS,425 any request for an opportunity to make an oral presentation.426 The Commission asks that commenters address the sufficiency and merit of the Participants’ statements in support of the Proposed Amendment,427 in addition to any other comments they 422 17 CFR 201.701(b)(3)(ii). 423 Id. 424 Id. 425 17 CFR 242.608(b)(2)(i). 700(c)(ii) of the Commission’s Rules of Practice provides that ‘‘[t]he Commission, in its sole discretion, may determine whether any issues relevant to approval or disapproval would be facilitated by the opportunity for an oral presentation of views.’’ 17 CFR 201.700(c)(ii). 427 See Notice, supra note 4. 426 Rule E:\FR\FM\26JYN1.SGM 26JYN1 40132 Federal Register / Vol. 86, No. 140 / Monday, July 26, 2021 / Notices jbell on DSKJLSW7X2PROD with NOTICES may wish to submit about the proposed rule changes. In particular, the Commission seeks comment on the following: A. Requests for Comment on the Proposed Funding Model 1. Commenters’ views on the proposed inclusion of ATSs as Industry Members for purposes of allocating CAT costs; 2. Commenters’ views on the exclusion of reported OTC Equity Securities share volume from the calculation of market share for national securities associations; 3. Commenters’ views on the proposed elimination of tiered fees in favor of CAT fees that may vary based on message traffic or market share, as applicable; 4. Commenters’ views on the proposed elimination from Section 11.2(c) of the CAT NMS Plan of the requirement that the fees charged to CAT Reporters with the most CATrelated activity be generally comparable; 5. Commenters’ views on the proposed Minimum Industry Member CAT Fee and the requirement that all Industry Members pay such fee, even if they have not yet started reporting to the CAT, and any views on whether the Proposed Funding Model has provided sufficient information on the operation of the fee and on whether the Proposed Funding Model has sufficiently explained the operation of the Minimum Industry Member CAT Fee Re-Allocation; 6. Commenters’ views on the proposed Maximum Industry Member CAT Fee; any views on whether the Proposed Amendment contains sufficient justification for the 8% cap chosen for the fee; and any views on whether a maximum fee is consistent with the funding principles expressed in the CAT NMS Plan that states that the Operating Committee shall seek, among other things, ‘‘to create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate and administer the CAT and the other costs of the Company,’’ 428 ‘‘to establish an allocation of the Company’s related costs among Participants and Industry Members that is consistent with the Exchange Act taking into account . . . distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company resources and operations,’’ 429 and ‘‘to avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality;’’ 430 7. Commenters’ views on why Industry Member CAT fees should be capped; views on how such a cap would benefit or harm efficiency, competition, and capital formation; and any views on whether there are other benefits or costs of adopting such an approach; 8. Commenters’ views on the proposed Minimum Participant Fee and the Maximum Equities Participant Fee, including views on the calculation of the proposed fees and any views on whether the proposed fees raise any competitive issues among the Participants; and any views on whether the proposed fees are consistent with the funding principles expressed in the CAT NMS Plan, which state that the Operating Committee shall seek, among other things, ‘‘to create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate and administer the CAT and the other costs of the Company;’’ 431 ‘‘to establish an allocation of the Company’s related costs among Participants and Industry Members that is consistent with the Exchange Act taking into account . . . distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company resources and operations;’’ 432 and ‘‘to avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality;’’ 433 9. Commenters’ views on whether FINRA’s CAT fee should be capped; any views on how such a cap benefits or harms efficiency, competition, and capital formation; and any views on whether there are other benefits or costs of adopting such an approach; 10. Commenters’ views on why Participants should be charged the Minimum Participant Fee; views on how such a minimum would benefit or harm efficiency, competition, and capital formation; and any views on whether there are other benefits or costs of adopting such an approach; 11. Commenters’ views on the proposed market maker discounts, any views on the potential impact of the discounts on market participant behavior, including the provision of liquidity; and any views on whether the proposed market maker discounts are consistent with the funding principles expressed in the CAT NMS Plan, which state that the Operating Committee shall 430 Section 11.2(e) of the CAT NMS Plan. 11.2(a) of the CAT NMS Plan. 432 Section 11.2(b) of the CAT NMS Plan. 433 Section 11.2(e) of the CAT NMS Plan. 431 Section 428 Section 429 Section 11.2(a) of the CAT NMS Plan. 11.2(b) of the CAT NMS Plan. VerDate Sep<11>2014 17:10 Jul 23, 2021 Jkt 253001 PO 00000 Frm 00143 Fmt 4703 Sfmt 4703 seek, among other things, ‘‘to create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate and administer the CAT and the other costs of the Company,’’ 434 ‘‘to establish an allocation of the Company’s related costs among Participants and Industry Members that is consistent with the Exchange Act taking into account . . . distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company resources and operations,’’ 435 and ‘‘to avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality;’’ 436 12. Commenters’ views on how market-making activity should be defined for purposes of the proposed market maker discounts; views on whether there is activity included in the definition of market making that should not be included for purposes of allocation of CAT fees; and any views on whether such a discount should apply to market-making activities in all types of securities without regard to security characteristics; 13. Commenters’ views on whether other Industry Members (including those that do not transact in options) would subsidize the activity of Options Market Makers under the proposal; any views on whether Section 6.4(d)(iii) 437 of the CAT NMS Plan effectively reduces the message traffic of Options Market Makers relative to what it would be otherwise, and thus ultimately reduce the CAT fees they would be assigned under the Participants’ proposal; views on how this subsidization would benefit or harm efficiency, competition, and capital formation; views on whether there are other benefits or costs of adopting such an approach; views (in detail) on whether there is an alternative approach 434 Section 11.2(a) of the CAT NMS Plan. 11.2(b) of the CAT NMS Plan. 436 Section 11.2(e) of the CAT NMS Plan. 437 Section 6.4(d)(iii) of the CAT NMS Plan states, ‘‘With respect to the reporting obligations of an Options Market Maker with regard to its quotes in Listed Options, Reportable Events required pursuant to Section 6.3(d)(ii) and (iv) shall be reported to the Central Repository by an Options Exchange in lieu of the reporting of such information by the Options Market Maker. Each Participant that is an Options Exchange shall, through its Compliance Rule, require its Industry Members that are Options Market Makers to report to the Options Exchange the time at which a quote in a Listed Option is sent to the Options Exchange (and, if applicable, any subsequent quote modifications and/or cancellation time when such modification or cancellation is originated by the Options Market Maker). Such time information also shall be reported to the Central Repository by the Options Exchange in lieu of reporting by the Options Market Maker.’’ 435 Section E:\FR\FM\26JYN1.SGM 26JYN1 Federal Register / Vol. 86, No. 140 / Monday, July 26, 2021 / Notices that would be more beneficial to efficiency, competition, or capital formation; and any views on whether the discount to fees allocated to Industry Members for market making activity described in the Participants’ proposal provide a similar magnitude of benefit to Equity Market Makers; jbell on DSKJLSW7X2PROD with NOTICES B. Requests for Comment on the Proposed Fee Schedule 1. Commenters’ views on the determination to allocate 75% of the Total CAT Costs to Industry Members and 25% of the Total CAT Costs to Participants; and any views on whether this proposed allocation is consistent with the funding principles expressed in the CAT NMS Plan, which state that the Operating Committee shall seek, among other things, ‘‘to establish an allocation of the Company’s related costs among Participants and Industry Members that is consistent with the Exchange Act taking into account . . . distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company resources and operations,’’ 438 and ‘‘to avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality;’’ 439 2. Commenters’ views on the rationale provided that the proposed 75%–25% allocation ensures that Industry Members with the most message traffic pay comparable fees to Participant complexes with the most market share, considering the proposed deletion from Section 11.2(c) of the CAT NMS Plan of the requirement that the fees charged to CAT Reporters with the most CATrelated activity be generally comparable; 3. Commenters’ views on whether allocating Participant fees by market share while allocating Industry Member fees by message traffic, when combined with the proposed 75%–25% split between Participants and Industry Member aggregate fees, introduces frictions (such as effectively double counting the message traffic sent and received by Industry Members, into the CAT fee model due to FINRA’s allocation of fees from trade volume reported to trade reporting facilities); views on how frictions would result; any views on how this would benefit or harm efficiency, competition, and capital formation; any views on whether there are other benefits or costs of adopting such an approach; and any views on whether capping FINRA’s contribution to CAT fees as described in 438 Section 439 Section the Participants’ proposal mitigate any benefits or costs and to what extent; 4. Commenters’ views on potential alternative allocations of Total CAT Costs to Industry Members and Participants, including the allocations considered, but rejected, by the Participants, and the alternative allocations suggested by commenters as discussed in this order; 5. Commenters’ views on how fees would be passed on to Industry Members and investors if all CAT costs were allocated to Participants; views on how this outcome would be different than under the Participants’ proposal; views on whether such an approach would benefit or harm efficiency, competition, and capital formation; and any views on whether there are other benefits or costs of adopting such an approach; 6. Commenters’ views on whether Industry Members have sufficient information to estimate and budget for their expected allocation of CAT fees each quarter; if not, any views on what additional information would Industry Members need to develop an estimate of these fees; 7. Commenters’ views on whether a Section 31 fee-like cost allocation framework (i.e., a transaction-based fee framework) would benefit or harm efficiency, competition, and capital formation, and any views on whether there are other benefits or costs of adopting such an approach; 8. Commenters’ views on the calculation of the Participant Allocation and the Adjusted Participant Allocation; 9. Commenters’ views on the determination to allocate 60% of the Adjusted Participant Allocation to Equities Participants and 40% to Options Participants, including views on whether the proposed allocation is consistent with the funding principles expressed in the CAT NMS Plan that state that the Operating Committee shall seek, among other things, ‘‘to establish an allocation of the Company’s related costs among Participants and Industry Members that is consistent with the Exchange Act taking into account . . . distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company resources and operations,’’ 440 and ‘‘to avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality;’’ 441 10. Commenters’ views on an alternative approach that would split costs between Participants and Industry 11.2(b) of the CAT NMS Plan. 11.2(e) of the CAT NMS Plan. VerDate Sep<11>2014 17:10 Jul 23, 2021 Jkt 253001 440 Section 441 Section PO 00000 11.2(b) of the CAT NMS Plan. 11.2(e) of the CAT NMS Plan. Frm 00144 Fmt 4703 Sfmt 4703 40133 Members by proportion of aggregate message traffic, then allocate the Participants’ portion of fees across Participants by market share, with or without the proposed 60%–40% split between Equities and Options Participants; any views on whether this would benefit or harm efficiency, competition and capital formation when compared to the Participants’ proposal; and any views on whether there are other benefits or costs of adopting such an approach; 11. Commenters’ views on whether elements of the Participants’ proposal entail cross-subsidization of activities (for example: Allocating 60% of Participants’ fees to Equities Participants and 40% to Options Participants is unlikely to reflect these groups’ relative message traffic; and discounting fees associated with message traffic for market-making activities based on quote/trade ratios reduces fees paid by Industry Members who are market makers); any views on how these cross-subsidizations benefit or harm efficiency, competition, and capital formation; and any views on whether there are other benefits or costs of adopting such an approach; 12. Commenters’ views on whether the lack of Industry Member participation on the Operating Committee prevents the Participants from arriving at an equitable allocation of CAT fees between Participants and Industry Members, and across members of those groups; 13. Commenters’ views on how any inherent conflicts of interest may be addressed in the proposal; 14. Commenters’ views on how allowing the Operating Committee to determine by vote how Participant fees are allocated across Participants would benefit or harm efficiency, competition, and capital formation, assuming that some proportion of CAT fees are to be allocated to Participants as a group; and any views on whether there are other benefits or costs of adopting such an approach; 15. Commenters’ views on the proposed quarterly Participant CAT fee, including views on its calculation; any views on whether the proposed fee raises any competitive issues; and any views on whether the proposed fee is consistent with the funding principles expressed in the CAT NMS Plan, which state that the Operating Committee shall seek, among other things, ‘‘to create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate and administer the CAT and the other E:\FR\FM\26JYN1.SGM 26JYN1 40134 Federal Register / Vol. 86, No. 140 / Monday, July 26, 2021 / Notices costs of the Company;’’ 442 ‘‘to establish an allocation of the Company’s related costs among Participants and Industry Members that is consistent with the Exchange Act taking into account . . . distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company resources and operations;’’ 443 and ‘‘to avoid any disincentives such as placing an inappropriate burden on competition and a reduction in market quality;’’ 444 and 16. Commenters’ views on the decision to use total budgeted costs for the CAT for the relevant year as the Total CAT Costs for calculating fees for Participants and Industry Members, rather than costs already incurred; views on the statement that the total budgeted costs for the CAT may be adjusted on a quarterly basis by the Operating Committee; and views on the treatment of any surpluses. The Commission also requests that commenters provide analysis to support their views, if possible. Interested persons are invited to submit written data, views, and arguments regarding whether the proposals should be approved or disapproved by August 16, 2021. Any person who wishes to file a rebuttal to any other person’s submission must file that rebuttal by August 30, 2021. Comments may be submitted by any of the following methods: jbell on DSKJLSW7X2PROD with NOTICES Electronic Comments • Use the Commission’s internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number 4–698 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 Number 4–698. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (http://www.sec.gov/rules/ sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the 442 Section 11.2(a) of the CAT NMS Plan. 11.2(b) of the CAT NMS Plan. 444 Section 11.2(e) of the CAT NMS Plan. Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be 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. Copies of the filing also will be available for inspection and copying at the Participants’ principal offices. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number 4–698 and should be submitted on or before August 16, 2021. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.445 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2021–15810 Filed 7–23–21; 8:45 am] BILLING CODE 8011–01–P SMALL BUSINESS ADMINISTRATION [Disaster Declaration #17041 and #17042; Georgia Disaster Number GA–00124] Administrative Declaration of a Disaster for the State of Georgia U.S. Small Business Administration. ACTION: Notice. AGENCY: This is a notice of an Administrative declaration of a disaster for the State of Georgia dated 07/20/2021. Incident: Severe Storms and Tornadoes. Incident Period: 03/25/2021 through 03/26/2021. DATES: Issued on 07/20/2021. Physical Loan Application Deadline Date: 09/20/2021. Economic Injury (EIDL) Loan Application Deadline Date: 04/20/2022. ADDRESSES: Submit completed loan applications to: U.S. Small Business Administration, Processing and Disbursement Center, 14925 Kingsport Road, Fort Worth, TX 76155. FOR FURTHER INFORMATION CONTACT: A. Escobar, Office of Disaster Assistance, SUMMARY: 443 Section VerDate Sep<11>2014 17:10 Jul 23, 2021 Jkt 253001 445 17 PO 00000 CFR 200.30–3(a)(85). Frm 00145 Fmt 4703 Sfmt 4703 U.S. Small Business Administration, 409 3rd Street SW, Suite 6050, Washington, DC 20416, (202) 205–6734. SUPPLEMENTARY INFORMATION: Notice is hereby given that as a result of the Administrator’s disaster declaration, applications for disaster loans may be filed at the address listed above or other locally announced locations. The following areas have been determined to be adversely affected by the disaster: Primary Counties: Coweta. Contiguous Counties: Georgia: Carroll, Fayette, Fulton, Heard, Meriwether, Spalding, Troup. The Interest Rates are: Percent For Physical Damage: Homeowners with Credit Available Elsewhere ...................... Homeowners without Credit Available Elsewhere .............. Businesses with Credit Available Elsewhere ...................... Businesses without Credit Available Elsewhere .............. Non-Profit Organizations with Credit Available Elsewhere ... Non-Profit Organizations without Credit Available Elsewhere ..................................... For Economic Injury: Businesses & Small Agricultural Cooperatives without Credit Available Elsewhere .............. Non-Profit Organizations without Credit Available Elsewhere ..................................... 2.500 1.250 6.000 3.000 2.000 2.000 3.000 2.000 The number assigned to this disaster for physical damage is 17041 C and for economic injury is 17042 0. The State which received an EIDL Declaration # is Georgia. (Catalog of Federal Domestic Assistance Number 59008) Isabella Guzman, Administrator. [FR Doc. 2021–15829 Filed 7–23–21; 8:45 am] BILLING CODE 8026–03–P DEPARTMENT OF TRANSPORTATION Federal Aviation Administration [Summary Notice No. 2021–2074] Petition for Exemption; Summary of Petition Received; Joshua Aaron Alameda Federal Aviation Administration (FAA), Department of Transportation (DOT). ACTION: Notice. AGENCY: E:\FR\FM\26JYN1.SGM 26JYN1

Agencies

[Federal Register Volume 86, Number 140 (Monday, July 26, 2021)]
[Notices]
[Pages 40114-40134]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-15810]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92451; File No. 4-698]


Joint Industry Plan; Order Instituting Proceedings To Determine 
Whether To Approve or Disapprove an Amendment to the National Market 
System Plan Governing the Consolidated Audit Trail

July 20, 2021.

I. Introduction

    On March 31, 2021, the Operating Committee for Consolidated Audit 
Trail, LLC (``CAT LLC'' or the ``Company''), on behalf of the following 
parties to the National Market System Plan Governing the Consolidated 
Audit Trail (the ``CAT NMS Plan'' or ``Plan''): \1\ BOX Exchange LLC; 
Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, 
Inc., Cboe EDGX Exchange, Inc., Cboe C2 Exchange, Inc., Cboe Exchange, 
Inc., Financial Industry Regulatory Authority, Inc. (``FINRA''), 
Investors Exchange LLC, Long-Term Stock Exchange, Inc., Miami 
International Securities Exchange LLC, MEMX, LLC, MIAX Emerald, LLC, 
MIAX PEARL, LLC, Nasdaq BX, Inc., Nasdaq GEMX, LLC, Nasdaq ISE, LLC, 
Nasdaq MRX, LLC, Nasdaq PHLX LLC, The NASDAQ Stock Market LLC, New York 
Stock Exchange LLC, NYSE American LLC, NYSE Arca, Inc., NYSE Chicago, 
Inc., and NYSE National, Inc. (collectively, the ``Participants,'' 
``self-regulatory organizations,'' or ``SROs'') filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') pursuant 
to Section 11A(a)(3) of the Securities Exchange Act of 1934 (``Exchange 
Act''),\2\ and Rule 608 thereunder,\3\ a proposed amendment (``Proposed 
Amendment'') to the CAT NMS Plan to implement a revised funding model 
(``Proposed Funding Model'') for the consolidated audit trail (``CAT'') 
and to establish a fee schedule for Participant CAT fees in accordance 
with the Proposed Funding Model (``Participant Fee Schedule''). The 
Proposed Amendment was published for comment in the Federal Register on 
April 21, 2021.\4\
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    \1\ The CAT NMS Plan is a national market system plan approved 
by the Commission pursuant to Section 11A of the Exchange Act and 
the rules and regulations thereunder. See Securities Exchange Act 
Release No. 79318 (November 15, 2016), 81 FR 84696 (November 23, 
2016).
    \2\ 15 U.S.C. 78k-1(a)(3).
    \3\ 17 CFR 242.608.
    \4\ See Notice of Filing of Amendment to the National Market 
System Plan Governing the Consolidated Audit Trail, Release No. 
91555 (April 14, 2021), 86 FR 21050 (``Notice''). Comments received 
in response to the Notice can be found on the Commission's website 
at https://www.sec.gov/comments/4-698/4-698-a.htm.

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[[Page 40115]]

    This order institutes proceedings, under Rule 608(b)(2)(i) of 
Regulation NMS,\5\ to determine whether to disapprove the Proposed 
Amendment or to approve the Proposed Amendment with any changes or 
subject to any conditions the Commission deems necessary or appropriate 
after considering public comment.
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    \5\ 17 CFR 242.608(b)(2)(i).
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II. Background

    On July 11, 2012, the Commission adopted Rule 613 of Regulation 
NMS, which required the SROs to submit a national market system 
(``NMS'') plan to create, implement and maintain a consolidated audit 
trail that would capture customer and order event information for 
orders in NMS securities.\6\ On November 15, 2016, the Commission 
approved the CAT NMS Plan.\7\ Under the CAT NMS Plan, the Operating 
Committee of the Company, of which each Participant is a member, has 
the discretion (subject to the funding principles set forth in the 
Plan) to establish funding for the Company to operate the CAT, 
including establishing fees to be paid by the Participants and Industry 
Members.\8\
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    \6\ 17 CFR 242.613.
    \7\ See supra note 1.
    \8\ The CAT NMS Plan defines ``Industry Member'' as ``a member 
of a national securities exchange or a member of a national 
securities association.'' See CAT NMS Plan, supra note 1, at Section 
1.1. See also id. at Section 11.1(b).
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    The Plan specified that, in establishing the funding of the 
Company, the Operating Committee shall establish ``a tiered fee 
structure in which the fees charged to: (1) CAT Reporters \9\ that are 
Execution Venues,\10\ including ATSs,\11\ are based upon the level of 
market share; (2) Industry Members' non-ATS activities are based upon 
message traffic; and (3) the CAT Reporters with the most CAT-related 
activity (measured by market share and/or message traffic, as 
applicable) are generally comparable (where, for these comparability 
purposes, the tiered fee structure takes into consideration 
affiliations between or among CAT Reporters, whether Execution Venues 
and/or Industry Members).'' \12\ Under the Plan, such fees are to be 
implemented in accordance with various funding principles, including an 
``allocation of the Company's related costs among Participants and 
Industry Members that is consistent with the Exchange Act taking into 
account . . . distinctions in the securities trading operations of 
Participants and Industry Members and their relative impact upon the 
Company resources and operations'' and the ``avoid[ance of] any 
disincentives such as placing an inappropriate burden on competition 
and reduction in market quality.'' \13\
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    \9\ The CAT NMS Plan defines ``CAT Reporter'' as ``each national 
securities exchange, national securities association and Industry 
Member that is required to record and report information to the 
Central Repository pursuant to SEC Rule 613(c).'' Id. at Section 
1.1.
    \10\ The CAT NMS Plan defines ``Execution Venue'' as ``a 
Participant or an alternative trading system (`ATS') (as defined in 
Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of 
Regulation ATS (excluding any such ATS that does not execute 
orders).'' Id.
    \11\ Id.
    \12\ Id. at Section 11.2(c). See Article XI of the CAT NMS Plan 
for additional detail.
    \13\ See CAT NMS Plan, supra note 1, at Section 11.2(b) and (e).
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    On May 15, 2020, the Commission adopted amendments to the CAT NMS 
Plan designed to increase the Participants' financial accountability 
for the timely completion of the CAT (``Financial Accountability 
Amendments'').\14\ The Financial Accountability Amendments added 
Section 11.6 to the CAT NMS Plan to govern the recovery from Industry 
Members of any 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 June 22, 2020 until such time that the Participants have 
completed Full Implementation of CAT NMS Plan Requirements \15\ 
(``Post-Amendment Expenses''). Section 11.6 establishes target 
deadlines for four critical implementation milestones (Periods 1, 2, 3 
and 4) \16\ and reduces the amount of fee recovery available to the 
Participants if these deadlines are missed.\17\
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    \14\ See Securities Exchange Act Release No. 88890, 85 FR 31322 
(May 22, 2020).
    \15\ ``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 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. 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).'' See CAT NMS Plan, supra note 1, at 
Section 1.1.
    \16\ Id. at Section 11.6(a)(i).
    \17\ Id. at Section 11.6(a)(ii) and (iii).
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    On April 21, 2021, the Nasdaq and Cboe Participants \18\ filed 
proposed rule changes to adopt a fee schedule to establish CAT fees 
applicable to their Industry Members \19\ in accordance with the 
Proposed Funding Model (the ``Industry Member Fee Filings''). In the 
Industry Member Fee Filings, the Nasdaq and Cboe Participants stated 
that the fee schedule provisions will become operative upon the 
Commission's approval of the Proposed Amendment. On June 17, 2021, the 
Commission temporarily suspended the Nasdaq and Cboe Participants' 
Industry Member Fee Filings and instituted proceedings to determine 
whether those filings should be approved or disapproved.\20\
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    \18\ Cboe BYX Exchange, Inc. (``CboeBYX''), Cboe BZX Exchange, 
Inc. (``CboeBZX''), Cboe C2 Exchange, Inc. (``C2''), Cboe EDGA 
Exchange, Inc. (``Cboe EDGA''), Cboe EDGX Exchange, Inc. (``Cboe 
EDGX''), Cboe Exchange, Inc. (``Cboe''), NASDAQ BX, Inc. (``BX''), 
Nasdaq GEMX, LLC (``GEMX''), Nasdaq ISE, LLC (``ISE''), Nasdaq MRX, 
LLC (``MRX''), NASDAQ PHLX LLC (``Phlx''), The NASDAQ Stock Market 
LLC (``Nasdaq'') (collectively, the ``Nasdaq and Cboe 
Participants'').
    \19\ See Securities Exchange Act Release Nos. 91750 (May 4, 
2021), 86 FR 25045 (May 10, 2021) (SR-BX-2021-018) (``Proposed Fee 
Filing Notice''); 91751 (May 4, 2021), 86 FR 24941 (May 10, 2021) 
(SR-PHLX-2021-25); 91752 (May 4, 2021), 86 FR 24921 (May 10, 2021) 
(SR-NASDAQ-2021-029); 91753 (May 4, 2021), 86 FR 24994 (May 10, 
2021) (SR-MRX-2021-05); 91755 (May 4, 2021), 86 FR 25035 (May 10, 
2021) (SR-ISE-2021-08); 91756 (May 4, 2021), 86 FR 24979 (May 10, 
2021) (SR-GEMX-2021-03); 91757 (May 4, 2021), 86 FR 24911 (May 10, 
2021) (SR-C2-2021-008); 91758 (May 4, 2021), 86 FR 25004 (May 10, 
2021) (SR-CboeEDGX-2021-024); 91759 (May 4, 2021), 86 FR 24956 (May 
10, 2021) (SR-CboeEDGA-2021-010); 91760 (May 4, 2021), 86 FR 24966 
(May 10, 2021) (SR-CBOE-2021-030); 91761 (May 4, 2021), 86 FR 25016 
(May 10, 2021) (SR-CboeBYX-2021-011); and 91762 (May 4, 2021), 86 FR 
24931 (May 10, 2021) (SR-CboeBZX-2021-034).
    \20\ See Securities Exchange Act Release No. 92207 (June 17, 
2021), 86 FR 33448 (June 24, 2021).
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III. Summary of Proposal

    Under the Proposed Amendment, the Operating Committee proposes to 
revise certain aspects of the funding model set forth in Article XI of 
the CAT NMS Plan (the ``Original Funding Model''). The Original Funding 
Model uses a bifurcated funding approach in which costs associated with 
building and operating the CAT would be borne by (1) Industry Members 
(other than ATSs that execute transactions in Eligible Securities \21\ 
(``Execution Venue ATSs'')) through fixed tiered fees based on message 
traffic for Eligible Securities, and (2) Participants and Industry

[[Page 40116]]

Members that are Execution Venue ATSs for Eligible Securities through 
fixed tiered fees based on market share. The Operating Committee 
proposes to amend the CAT NMS Plan to adopt the Proposed Funding Model. 
The Proposed Funding Model would continue to require many of the same 
elements as the Original Funding Model, including the bifurcated 
funding approach, and the use of market share and message traffic.\22\ 
The Proposed Funding Model, however, would revise the Original Funding 
Model in certain ways, including (1) dividing the CAT costs between 
Participants and Industry Members, rather than between Execution Venues 
and Industry Members (other than Execution Venue ATSs); (2) removing 
share volume in OTC Equity Securities from the calculation of market 
share for national securities associations; (3) eliminating the use of 
tiers in calculating CAT fees for Participants and Industry Members; 
(4) removing from the CAT NMS Plan funding principles the requirement 
that the fees charged to CAT Reporters with the most CAT-related 
activity be generally comparable; (5) eliminating references to fixed 
fees for Participants and Industry Members; (6) adopting certain 
minimum and maximum CAT fees for Industry Members and Participants; and 
(7) imposing certain discounts for market making activity when 
calculating Industry Member CAT fees.
---------------------------------------------------------------------------

    \21\ The CAT NMS Plan defines ``Eligible Securities'' as 
including NMS securities and OTC Equity Securities.'' See CAT NMS 
Plan, supra note 1, at Section 1.1.
    \22\ In the description of the Proposed Amendment, the Operating 
Committee states that message traffic will be calculated based on 
Industry Members' Reportable Events reported to the CAT, as defined 
in the CAT Reporting Technical Specifications for Industry Members 
(``IM Reporting Tech Specs''), and that Reporting Events in the 
current IM Reporting Tech Specs that will be counted as message 
traffic include the New Order Event, the Order Route Event and Trade 
Event, but will not include reporting activity related to Customer 
information as established in the CAT Reporting Customer and Account 
Technical Specifications for Industry Members. The Operating 
Committee notes that the Reportable Events may vary if the IM 
Reporting Tech Specs are amended. See Notice, supra note 4, at 
21056-21057.
---------------------------------------------------------------------------

    The Operating Committee also proposes to adopt a fee schedule to 
establish the CAT fees applicable to Participants based on the Proposed 
Funding Model. The Participant Fee Schedule would establish the 
allocation percentages and other variables for calculating the CAT fees 
under the Proposed Funding Model.

A. Proposed Funding Model

1. Categorization of Alternative Trading Systems
    The Original Funding Model employs a bifurcated approach in which 
costs associated with building and operating the CAT would be borne by 
(1) Participants and Industry Members that are Execution Venue ATSs for 
Eligible Securities through fees based on market share, and (2) 
Industry Members (other than Execution Venue ATSs) through fees based 
on message traffic. Under the Proposed Funding Model, the concept of an 
Execution Venue would be eliminated, and CAT costs would be divided 
between Participants as a group and Industry Members as a group; 
Execution Venue ATSs would be treated like other Industry Members, 
instead of like Participants.\23\ The Operating Committee explains that 
this would simplify the Proposed Funding Model by requiring all 
Industry Members (instead of Industry Members other than Execution 
Venue ATSs) to pay fees based on message traffic and would address any 
concerns that treating Execution Venue ATSs as Participants would 
create a barrier to entry for smaller ATSs.\24\ Accordingly, under the 
Proposed Amendment, the Operating Committee proposes to delete the 
definition of the term ``Execution Venue'' and related provisions from 
the CAT NMS Plan.\25\
---------------------------------------------------------------------------

    \23\ Id. at 21053.
    \24\ Id.
    \25\ Id.
---------------------------------------------------------------------------

2. Treatment of OTC Equity Securities
    The Original Funding Model includes reported share volume in OTC 
Equity Securities in the calculation of market share for national 
securities associations.\26\ The Operating Committee proposes to delete 
references to OTC Equity Securities from Section 11.3(a)(i) of the CAT 
NMS Plan. Accordingly, under the Proposed Funding Model, the 
calculation of market share for national securities associations would 
be based solely on the share volume of trades reported in NMS 
Stocks.\27\ The Operating Committee explains that the inclusion of OTC 
Equity Securities share volume in the calculation of market share would 
likely subject FINRA to higher fees since FINRA would be assessed CAT 
fees based on market share calculated by share volume, noting that many 
OTC Equity Securities are priced below one dollar and transactions in 
such OTC Equity Securities tend to involve larger quantities of shares 
than transactions in NMS Stocks.\28\
---------------------------------------------------------------------------

    \26\ Id. at 21061.
    \27\ Id.
    \28\ See Notice, supra note 4, at 21061.
---------------------------------------------------------------------------

3. No Tiered Fees
    The Original Funding Model requires the use of tiered fees for 
Industry Members and Participants.\29\ The Operating Committee proposes 
to amend Sections 11.1(d), 11.2(c), 11.3(a) and 11.3(b) of the CAT NMS 
Plan to eliminate the concept of tiered fees from the CAT NMS Plan.\30\ 
Accordingly, under the Proposed Funding Model, each Industry Member 
would pay a fee based on its percentage of total Industry Member 
message traffic (subject to proposed market maker message traffic 
discounts,\31\ a minimum fee \32\ and a maximum fee \33\), and each 
Participant would pay a fee based on market share.\34\ The Operating 
Committee believes that tiered fees require continued reassessment of 
changes in message traffic, and that these assessments would be 
subjective and overly complex.\35\
---------------------------------------------------------------------------

    \29\ Id. at 21055, 21060.
    \30\ Id.
    \31\ See infra Section III.A.7.
    \32\ See infra Section III.A.6.a.
    \33\ Id.
    \34\ See Notice, supra note 4, at 21055, 21060.
    \35\ Id. at 21056. The Operating Committee notes that it is 
eliminating tiered fees for Participants for the same reasons it 
provided with regard to eliminating tiered fees for Industry 
Members. Id.
---------------------------------------------------------------------------

4. Elimination of Fee Comparability Requirement From the CAT NMS Plan 
Funding Principles
    Section 11.2(c) of the CAT NMS Plan requires the Operating 
Committee to establish a fee structure in which the fees charged to CAT 
Reporters with the most CAT-related activity (measured by market share 
and/or message traffic, as applicable) are generally comparable. 
Section 11.2(c) explains that for comparability purposes, the tiered 
fee structure takes into consideration affiliations between or among 
CAT Reporters. The Operating Committee proposes to remove this 
requirement from Section 11.2(c) of the Plan. According to the 
Operating Committee, the comparability provision was used to determine 
tiers under the Original Funding Model; however, since the Operating 
Committee proposes to remove fee tiering from the Proposed Funding 
Model,\36\ they believe this provision is no longer relevant.\37\
---------------------------------------------------------------------------

    \36\ See supra Section III.A.3.
    \37\ See Notice, supra note 4, at 21056.
---------------------------------------------------------------------------

5. No Fixed Fees
    The Operating Committee proposes to amend Sections 11.3(a) and (b) 
of the Plan to eliminate references to ``fixed fees'' to be paid by 
Industry Members and Participants from the CAT NMS Plan.\38\ 
Accordingly, under the Proposed Funding Model, the CAT fees to be paid 
by Industry Members would

[[Page 40117]]

vary in accordance with their message traffic and the CAT fees to be 
paid by the Participants would vary in accordance with their market 
share.\39\
---------------------------------------------------------------------------

    \38\ Id. at 21059, 21062.
    \39\ Id.
---------------------------------------------------------------------------

6. Minimum and Maximum Fees
a. Minimum and Maximum Industry Member CAT Fees
    The Operating Committee proposes to amend Section 11.3(b) of the 
CAT NMS Plan to provide that each Industry Member would be subject to a 
base minimum Industry Member CAT fee (``Minimum Industry Member CAT 
Fee'') and a maximum Industry Member CAT fee (``Maximum Industry Member 
CAT Fee'').\40\ In the Participants' description of the Proposed 
Amendment, the Operating Committee states that the Minimum Industry 
Member CAT Fee would be $125 per quarter for an Industry Member whose 
CAT fee would be less than $125 per quarter, even if it has not yet 
begun to report to the CAT.\41\ If any Industry Member is required to 
pay the Minimum Industry Member CAT Fee, the total additional amount 
paid by all such Industry Members over the amount they otherwise would 
have paid as a result of their message traffic calculation would be 
discounted from all Industry Members other than those that were subject 
to a Minimum Industry Member CAT Fee in accordance with their message 
traffic percentage (``Minimum Industry Member CAT Fee Re-
Allocation'').\42\ The Operating Committee explains that the Minimum 
Industry CAT Fee is intended to ensure that all Industry Members 
meaningfully contribute to the funding of the CAT.\43\
---------------------------------------------------------------------------

    \40\ Id. at 21058.
    \41\ Id.
    \42\ Options Market Makers and Equity Market Makers would be 
required to pay the Minimum Industry Member CAT Fee if their 
quarterly CAT fee calculated with the market maker discounts is less 
than $125 per quarter. Id. at 21058, n.56.
    \43\ See Notice, supra note 4, at 21058-59.
---------------------------------------------------------------------------

    The Operating Committee also states that the Maximum Industry 
Member CAT Fee would be the fee calculated based on 8% of the total 
message traffic for Industry Members.\44\ If an Industry Member's fee 
is subject to the Maximum Industry Member CAT Fee, any excess amount 
which the Industry Member would have paid as a fee above such Maximum 
Industry Member CAT Fee will be re-allocated among all Industry Members 
(including any Industry Members subject to the Maximum Industry Member 
CAT Fee and any Industry Members subject to the Minimum Industry Member 
CAT Fee) in accordance with their percentage of total message traffic 
(``Maximum Industry Member CAT Fee Re-Allocation'').\45\ The Operating 
Committee explains that the Maximum Industry Member CAT Fee is intended 
to act as a cap on fees for certain Industry Members that, based on 
message traffic alone, may be subject to ``a significant allocation of 
Total CAT Costs.'' \46\
---------------------------------------------------------------------------

    \44\ Id. at 21059.
    \45\ Id.
    \46\ Id.
---------------------------------------------------------------------------

b. Minimum Participant Fee
    The Operating Committee proposes to amend Section 11.3(a) of the 
CAT NMS Plan to impose a minimum fee to be payable by each Participant 
(``Minimum Participant Fee'') in addition to fees based on market 
share. The Operating Committee explains that this fee would ``ensure 
that all Participants provide a meaningful contribution to the funding 
of the CAT'' \47\ and facilitate billing and other administrative 
functions.\48\
---------------------------------------------------------------------------

    \47\ Id. at 21060.
    \48\ Id. at 21059.
---------------------------------------------------------------------------

c. Maximum Equities Participant Fee
    The Operating Committee proposes to amend Section 11.3(a)(i) of the 
CAT NMS Plan to provide that any Participant that is a national 
securities association shall pay a maximum fee established by the 
Operating Committee (``Maximum Equities Participant Fee'') instead of 
the higher fee calculated based on such Participant's market share. If 
a Participant's fee is limited to such maximum fee, any excess amount 
which the Participant otherwise would have paid as a fee above such 
maximum amount will be re-allocated among all Equities Participants, 
including any Equities Participants that are subject to the maximum 
fee, in accordance with their market share.\49\ The Operating Committee 
explains that FINRA could have a significant allocation of the CAT fees 
due to the large volume of NMS Stock activity subject to trade 
reporting on FINRA facilities, so the Maximum Equities Participant Fee 
would cap the costs allocated to FINRA. In addition, the Operating 
Committee states that, as one of the largest regulatory users of CAT, 
FINRA should pay a proportionate percentage of the CAT fees 
commensurate with its market share, and that market share is a ``fair 
and reasonable basis for assessing regulatory usage, expense and burden 
among the Participants.'' \50\
---------------------------------------------------------------------------

    \49\ See Notice, supra note 4, at 21061.
    \50\ Id. at 21062.
---------------------------------------------------------------------------

7. Market Maker Discounts
    The Operating Committee proposes to amend Section 11.3(b) of the 
CAT NMS Plan to add market maker message traffic discounts to the 
Proposed Funding Model. Under the Original Funding Model, there is no 
distinction between the treatment of message traffic for market maker 
Industry Members and message traffic for non-market maker Industry 
Members for purposes of calculating Industry Member CAT fees. The 
Operating Committee explains that the proposed discounts are intended 
to address concerns raised previously that treating market maker 
message traffic the same as other message traffic for purposes of 
calculating Industry Member CAT fees would disproportionately impact 
market makers because of their continuous quoting obligations and 
result in an undue or inappropriate burden on competition or a 
reduction in liquidity and market quality.\51\ The Operating Committee 
believes that the proposed discounts would lower CAT fees for market 
makers and encourage their provision of liquidity to the market.\52\
---------------------------------------------------------------------------

    \51\ Id. at 21057. See also Securities Exchange Act Release No. 
81067 (June 30, 2017), 82 FR 31656 (July 7, 2017) (``Suspension of 
and Order Instituting Proceedings to Determine Whether to Approve or 
Disapprove Proposed Rule Changes to Establish Fees for Industry 
Members to Fund the Consolidated Audit Trail'').
    \52\ See Notice, supra note 4, at 21057.
---------------------------------------------------------------------------

    In the Participants' description of the Proposed Amendment, the 
Operating Committee states that Options Market Maker message traffic 
would be discounted based on the trade-to-quote ratio for options when 
calculating the message traffic of an Industry Member that is an 
Options Market Maker,\53\ and that the trade-to-quote ratio for the 
Options Market Maker discount would be calculated each quarter based on 
the prior quarter's CAT Data.\54\ The proposed discount would be 
calculated by dividing the adjusted trade count \55\ by the total 
number of quotes received by the securities information processors 
(``SIP'') from an exchange.\56\ Each

[[Page 40118]]

Options Market Maker's CAT fee would be calculated by multiplying its 
discounted percentage of total Industry Member message traffic during 
the relevant time period by the Industry Member Allocation,\57\ subject 
to the Minimum Industry Member CAT Fee and the Maximum Industry Member 
CAT Fee.\58\
---------------------------------------------------------------------------

    \53\ Id. at 21058. The CAT NMS Plan defines ``Options Market 
Maker'' as ``a broker-dealer registered with an exchange for the 
purpose of making markets in options contracts traded on the 
exchange.'' See CAT NMS Plan, supra note 1, at Section 1.1.
    \54\ The CAT NMS Plan defines ``CAT Data'' as ``data derived 
from Participant Data, Industry Member Data, SIP Data, and such 
other data as the Operating Committee may designate as `CAT Data' 
from time to time.'' Id.
    \55\ The Proposed Amendment describes the adjusted trade count 
as ``the total number of trades for the quarter minus the total 
number of trade busts.'' See Notice, supra note 4, at 21058.
    \56\ For each Options Market Maker, the discount would apply to 
``(1) all message traffic reported to the CAT by the Options Market 
Maker related to an order originated by a market maker in its market 
making account for a security in which it is registered . . . and 
(2) all message traffic for which a `quote sent time' is reported by 
an Options Exchange on behalf of the given Options Market Maker.'' 
Id.
    \57\ See infra Section III.B.2.
    \58\ See Notice, supra note 4, at 21058.
---------------------------------------------------------------------------

    Under the Proposed Funding Model, when calculating the message 
traffic of an Industry Member that is an equity market maker in NMS 
Stocks (``Equity Market Maker''), its discounted market making message 
traffic count would be calculated by multiplying its market making 
message traffic in NMS Stocks by the NMS Stock trade-to-quote 
ratio.\59\ In the Participants' description of the Proposed Amendment, 
the Operating Committee states that the trade-to-quote ratio would be 
calculated each quarter based on the prior quarter's CAT Data.\60\ The 
proposed discount would be calculated by dividing the adjusted trade 
count by the total number of quotes received by the SIP from an 
exchange. The Equity Market Maker's CAT fee would be calculated by 
multiplying its discounted percentage of total Industry Member message 
traffic during the relevant time period by the Industry Member 
Allocation,\61\ subject to the Minimum Industry Member CAT Fee and the 
Maximum Industry Member CAT Fee.\62\ The discounted message traffic of 
Options Market Makers and Equity Market Makers would be counted as part 
of total Industry Member message traffic.\63\
---------------------------------------------------------------------------

    \59\ Id.
    \60\ Id.
    \61\ See infra Section III.B.2.
    \62\ See Notice, supra note 4, at 21058.
    \63\ Id.
---------------------------------------------------------------------------

B. Participant Fee Schedule

1. Total CAT Costs
    Under the Proposed Funding Model, the CAT fees for the relevant 
period would be designed to cover the total CAT costs associated with 
developing, implementing and operating the CAT for the relevant period 
(``Total CAT Costs'').\64\ In the proposed Participant Fee Schedule, 
the Operating Committee proposes to define Total CAT Costs as ``the 
total budgeted costs for the CAT for the relevant year.'' In addition:
---------------------------------------------------------------------------

    \64\ Id. at 21050.

    The total budgeted costs for the CAT for the relevant year shall 
be the total CAT costs set forth in the annual operating budget 
approved by the Operating Committee pursuant to Section 11.1(a) of 
the CAT NMS Plan. The total budgeted costs for the CAT for the 
relevant year may be adjusted on a quarterly basis as the Operating 
Committee reasonably deems appropriate for the prudent operation of 
the Company. To the extent that the Operating Committee adjusts the 
total budgeted costs for the CAT for the relevant year during its 
quarterly budget review, the adjusted budgeted costs for the CAT 
will be used in calculating the remaining CAT fees for that 
year.\65\
---------------------------------------------------------------------------

    \65\ Id. at 21074.

    The Operating Committee explains that using Total CAT Costs 
budgeted for the year, rather than already incurred CAT costs, would 
allow the Company to collect fees before bills become payable.\66\ The 
Operating Committee notes that, pursuant to Section 11.1(c) of the CAT 
NMS Plan, any surpluses collected will be treated as an operational 
reserve to offset future fees and will not be distributed to the 
Participants as profits.\67\
---------------------------------------------------------------------------

    \66\ Id. at 21063.
    \67\ Id.
---------------------------------------------------------------------------

2. 75%-25% Allocation Between Industry Members and Participants
    The Proposed Funding Model contemplates allocating CAT costs 
between Participants and Industry Members to permit the calculation of 
CAT fees based on market share for Participants and based on message 
traffic for Industry Members.\68\ The Operating Committee proposes to 
implement this allocation through a 75%-25% allocation between Industry 
Members and Participants.\69\ The Participant CAT fees that are a part 
of the proposed Participant Fee Schedule--Appendix B to the Proposed 
Amendment--would apply this allocation to Participants. Participants 
would file proposed rule changes to apply this allocation to Industry 
Members.\70\ In calculating CAT fees for the relevant period under the 
Proposed Funding Model, Industry Members as a group would pay 75% of 
the Total CAT Costs for the relevant period (``Industry Member 
Allocation'') \71\ and Participants as a group would pay 25% of the 
Total CAT Costs for the relevant period (``Participant 
Allocation'').\72\
---------------------------------------------------------------------------

    \68\ In the Original Funding Model, costs were allocated between 
Execution Venues and certain Industry Members, whereas the Proposed 
Funding Model proposes to allocate costs between Participants and 
Industry Members.
    \69\ See Notice, supra note 4, at 21054.
    \70\ As of the date of this Order, only the Nasdaq and Cboe 
Participants have filed proposed rule changes. See supra note 19.
    \71\ The proposed Participant Fee Schedule states ``[t]he 
Industry Member Allocation for each quarter shall be 75% of 1/4th of 
the Total CAT Costs for the relevant year.'' See Notice, supra note 
4, at 21055. Under the Proposed Funding Model, each Industry Member 
would pay a CAT fee calculated by multiplying its message traffic 
percentage of total Industry Member message traffic per quarter by 
the Industry Member Allocation, subject to the market maker 
discounts for message traffic, as applicable, as well as the Minimum 
Industry Member CAT Fee and the Maximum Industry Member CAT Fee. Id.
    \72\ Id. at 21054. The proposed Participant Fee Schedule states 
``[t]he Participant Allocation for each quarter shall be 25% of 1/
4th of the Total CAT Costs for the relevant year.'' Id. at 21055.
---------------------------------------------------------------------------

    In proposing a 75%-25% allocation between Industry Members and 
Participants, the Operating Committee states that it considered a 
variety of different potential allocations between Industry Members and 
Participants.\73\ For example, the Operating Committee states that it 
considered alternatives in which Participants paid larger contributions 
than 25% of the total CAT costs (e.g., a 50%-50% allocation between 
Industry Members and Participants) and alternatives in which 
Participants paid smaller contributions than 25% of the total CAT 
costs.\74\ In the scenario where the Participants paid larger 
contributions than the 25% allocation, the Operating Committee believed 
that this was not fair or equitable to the Participants.\75\ The 
Operating Committee came to this conclusion by assessing the number of 
Industry Members compared to Participants, noting that ``there are only 
25 Participants and approximately 1,237 Industry Members, as of 
December 2020'', and analyzing the total revenue, noting that 
``Participants only represented approximately 4% of the total CAT 
Reporter revenue; Industry Members represented 96% of the total CAT 
Reporter revenue.'' \76\ Thus, the Operating Committee determined that 
allocating more than 25% of the total CAT costs to the Participants was 
not fair and equitable. Similarly, the Operating Committee did not 
believe that the revenue based allocation approach would be fair to the 
Industry Members because it would impose such a significant percentage 
(96%) of CAT costs on Industry Members.\77\ Additionally, the Operating 
Committee determined that there would be practical difficulties in 
assessing the appropriate revenue figures for all CAT

[[Page 40119]]

Reporters. Based upon its analysis, the Operating Committee decided 
that alternative approaches based upon revenue were not appropriate and 
could potentially have unfair impacts on both the Industry Members and 
the Participants.\78\ Ultimately, the Operating Committee believes that 
the 75%-25% allocation will create a more equitable fee split because 
the Industry Members with the most message traffic and the Participant 
complexes with the most market share would pay comparable CAT fees.\79\ 
The Operating Committee analyzed data from the fourth quarter of 2020, 
and determined that the three Industry Members with the most message 
traffic and the Participant complexes with the highest CAT fees would 
pay annual CAT fees in a similar range of five to six million 
dollars.\80\
---------------------------------------------------------------------------

    \73\ Id. at 21054.
    \74\ Id.
    \75\ See Notice, supra note 4, at 21055.
    \76\ Industry Member revenue was calculated based on the total 
revenue reported in the Industry Member's FOCUS reports. Participant 
revenue was calculated based on revenue information provided in Form 
1 amendments and/or publicly reported figures. Participants are not 
required to file uniform FOCUS-type reports regarding revenue like 
Industry Members. Accordingly, the revenue calculation for 
Participants is not as straightforward as for Industry Members. Id. 
at 21055, n.31.
    \77\ Id. at 21055.
    \78\ Id.
    \79\ Id.
    \80\ Id.
---------------------------------------------------------------------------

3. Participant CAT Fees
    As described above, the Proposed Funding Model provides that the 
Operating Committee shall establish a minimum fee to be payable by each 
Participant in addition to a fee based on market share. In the proposed 
Participant Fee Schedule, the Operating Committee establishes 0.75% of 
the Participant Allocation as the Minimum Participant Fee \81\ 
regardless of market share.\82\ The total Minimum Participant Fees to 
be paid by each Participant would be subtracted from the Participant 
Allocation to determine the ``Adjusted Participant Allocation.'' \83\
---------------------------------------------------------------------------

    \81\ See Notice, supra note 4, at 21060.
    \82\ Id.
    \83\ Id.
---------------------------------------------------------------------------

    The proposed Participant Fee Schedule provides that the Equities 
Participant Allocation would be 60% of the Adjusted Participant 
Allocation and the Options Participant Allocation would be 40% of the 
Adjusted Participant Allocation.\84\ The Operating Committee explained 
that this allocation was determined through negotiations among the 
Participants.\85\
---------------------------------------------------------------------------

    \84\ Id. at 21061. A Participant with both options and equities 
market share would be treated as both an Options Participant and an 
Equities Participant. Id.
    \85\ Id.
---------------------------------------------------------------------------

    Each Participant would pay a quarterly Participant CAT fee to 
recover the costs of the CAT going forward. For Equities Participants, 
the quarterly Participant CAT Fee would be calculated by multiplying 
the Equities Participant Allocation by each Equities Participant's 
percentage of total market share of NMS Stocks for all Equities 
Participants for the prior quarter, subject to the Maximum Equities 
Participant Fee (if applicable), and in addition to the Minimum 
Participant Fee.\86\ For Options Participants, the quarterly 
Participant CAT fee would be calculated by multiplying the Options 
Participant Allocation by each Options Participant's percentage of 
total market share in Listed Options for the prior quarter, in addition 
to the Minimum Participant Fee.\87\
---------------------------------------------------------------------------

    \86\ See Notice, supra note 4, at 21061.
    \87\ Id. at 21062.
---------------------------------------------------------------------------

    The quarterly Participant CAT fee would be a quarterly CAT fee 
based on market share from the prior quarter and the allocation of 
Total CAT Costs under the Proposed Funding Model for the relevant 
year.\88\ The Operating Committee proposes a fee schedule to implement 
the quarterly Participant CAT fee whereby each Participant would be 
assessed a CAT fee, on a quarterly basis, that is 25% of 1/4th of the 
total budgeted annual CAT costs for the relevant year, using CAT Data 
to calculate market share from the prior quarter of the relevant 
year.\89\
---------------------------------------------------------------------------

    \88\ Id. at 21062, 21063.
    \89\ Id. at 21063-21064.
---------------------------------------------------------------------------

    Under the Proposed Funding Model, FINRA, as a national securities 
association, would be subject to the Maximum Equities Participant Fee 
as set by the Operating Committee. The Operating Committee proposes to 
establish in the Participant Fee Schedule a Maximum Equities 
Participant Fee equal to the greater of (x) 20% of the Equities 
Participant Allocation or (y) the highest CAT fee required to be paid 
by any other Equities Participant plus 5% of such highest CAT fee.\90\ 
Accordingly, as discussed above, FINRA would pay its quarterly 
Participant CAT fee based on its market share in NMS Stocks, subject to 
the Maximum Equities Participant Fee.
---------------------------------------------------------------------------

    \90\ Id. at 21061.
---------------------------------------------------------------------------

4. Collection of Fees
    The Participants' description of the Proposed Amendment states that 
the Operating Committee proposes to establish a system for the 
collection of CAT fees pursuant to Section 11.4 of the CAT NMS Plan. 
The Company will provide each Participant with an invoice setting forth 
the quarterly Participant CAT fee for each payment period. Each 
Participant will pay its CAT fees to the Company via the centralized 
system for the collection of CAT fees.\91\
---------------------------------------------------------------------------

    \91\ Id. at 21068.
---------------------------------------------------------------------------

IV. Summary of Comments

    The Commission received 19 comment letters on the Proposed 
Amendment.\92\ 15 comment letters

[[Page 40120]]

object to the Proposed Amendment \93\ and one comment letter supports 
the Proposed Amendment.\94\ In addition, the Commission received two 
comment letters requesting data from the Operating Committee,\95\ one 
comment letter requesting data from the Company,\96\ and one comment 
letter from the Operating Committee providing additional details on an 
illustrative example in Exhibit B to the Proposed Amendment,\97\ and 
two response letters from the Operating Committee.\98\
---------------------------------------------------------------------------

    \92\ See Letters to Vanessa Countryman, Secretary, Commission 
from Doug Patterson, Chief Compliance Officer, Cutler Group, LP, 
dated June 1, 2021, available at https://www.sec.gov/comments/4-698/4698-8855258-238423.pdf (``Cutler Letter''); Kelvin To, Founder and 
President, Data Boiler Technologies, LLC, dated May 3, 2021, 
available at https://www.sec.gov/comments/4-698/4698-8749987-237362.pdf (``Data Boiler Letter''); Joanna Mallers, Secretary, FIA 
Principal Traders Group, dated May 7, 2021, available at https://www.sec.gov/comments/4-698/4698-8776522-237685.pdf (``FIA PTG May 
7th Letter''); Joanna Mallers, Secretary, FIA Principal Traders 
Group, dated May 12, 2021, available at https://www.sec.gov/comments/4-698/4698-8793902-237843.pdf (``FIA PTG May 12th 
Letter''); Matthew Price, Chief Operations Officer, Fidelity Capital 
Markets, dated May 12, 2021, available at https://www.sec.gov/comments/4-698/4698-8791746-237802.pdf (``Fidelity Letter''); Howard 
Meyerson, Managing Director, Financial Information Forum, dated 
April 29, 2021, available at https://www.sec.gov/comments/4-698/4698-8736502-237163.pdf (``FIF April 29th Letter''); Howard 
Meyerson, Managing Director, Financial Information Forum, dated May 
21, 2021, available at https://www.sec.gov/comments/4-698/4698-8843662-238307.pdf (``FIF May 21st Letter''); Marcia E. Asquith, 
Executive Vice President, Board and External Relations, Financial 
Industry Regulatory Authority, Inc., dated May 12, 2021, available 
at https://www.sec.gov/comments/4-698/4698-8793900-237824.pdf 
(``FINRA Letter''); Andrew Stevens, General Counsel, IMC, dated May 
20, 2021, available at https://www.sec.gov/comments/4-698/4698-8819440-238105.pdf (``IMC Letter''); Michael Lewin, Chief Executive 
Officer, Istra LLC, dated May 27, 2021, available at https://www.sec.gov/comments/4-698/4698-8847370-238329.pdf (``Istra 
Letter''); Gary Goldsholle, Chief Regulatory Officer and General 
Counsel, Long-Term Stock Exchange, Inc., dated May 19, 2021, 
available at https://www.sec.gov/comments/4-698/4698-8815749-238025.pdf (``LTSE Letter''); Kirsten Wegner, Chief Executive 
Officer, Modern Markets Initiative, dated May 6, 2021, available at 
https://www.sec.gov/comments/4-698/4698-8771339-237583.pdf (``MMI 
Letter''); Michael Blaugrund, Chief Operating Officer, NYSE Inc., 
dated May 10 2021, available at https://www.sec.gov/comments/4-698/4698-8779961-237701.pdf (``NYSE Letter''); William Bartlett, Chief 
Executive Officer, Parallax Volatility Advisers, L.P., dated June 
28, 2021, available at https://www.sec.gov/comments/4-698/4698-9006549-246006.pdf (``Parallax Letter''); Ellen Greene, Managing 
Director, Equity and Options Market Structure, Securities Industry 
and Financial Markets Association, dated May 12, 2021, available at 
https://www.sec.gov/comments/4-698/4698-8790951-237769.pdf (``SIFMA 
Letter''); James Toes, President and Chief Executive Officer, and 
Andrew D'Amore, Chairman of the Board, Security Traders Association, 
dated June 11, 2021, available at https://www.sec.gov/comments/4-698/4698-8905922-244113.pdf (``STA Letter''); Gunjan Chauhan, Senior 
Managing Director, Global Head of SPDR Capital Markets, State Street 
Global Advisors, dated May 12, 2021, available at https://www.sec.gov/comments/4-698/4698-8793896-237842.pdf (``SSGA 
Letter''); Kevin Donohue, General Counsel, Tower Research Capital 
LLC, dated May 12, 2021, available at https://www.sec.gov/comments/4-698/4698-8793895-237841.pdf (``Tower Letter''); and Thomas M. 
Merritt, Deputy General Counsel, dated May 12, 2021, available at 
https://www.sec.gov/comments/4-698/4698-8790127-237768.pdf (``Virtu 
Letter'').
    \93\ See Data Boiler Letter; Fidelity Letter; FIA PTG May 12th 
Letter; FINRA Letter; IMC Letter; Istra Letter; LTSE Letter; MMI 
Letter; NYSE Letter; SIFMA Letter; SSGA Letter; STA Letter; Tower 
Letter; and Virtu Letter.
    \94\ See Cutler Letter (stating ``[h]aving reviewed the 
Proposal, and having compared it to the previous CAT funding model, 
we see the Amendment as a vast improvement that is more fair and 
equitable to both Market Participants and Industry Members. We would 
urge that the Commission approve this amendment.''). Id. at 1.
    \95\ See FIF April 29th Letter; FIF May 21st Letter.
    \96\ See FIA PTG May 7th Letter.
    \97\ See Letter to Vanessa Countryman, Secretary, Commission 
from Michael Simon, CAT NMS Plan Operating Committee Chair, dated 
May 5, 2021, available at https://www.sec.gov/comments/4-698/4698-8760381-237447.pdf (``CAT Operating Committee May 5th Letter'').
    \98\ See Letters to Vanessa Countryman, Secretary, Commission 
from Michael Simon, CAT NMS Plan Operating Committee Chair, dated 
July 14, 2021, available at https://www.sec.gov/comments/4-698/4698-9061305-246406.pdf (``CAT Operating Committee July 14th Letter I''); 
from Michael Simon, CAT NMS Plan Operating Committee Chair, dated 
July 14, 2021, available at https://www.sec.gov/comments/4-698/4698-9061306-246406.pdf (``CAT Operating Committee July 14th Letter 
II''). CAT Operating Committee July 14th Letter II states, ``these 
responses represent the consensus of the Participants, but that all 
Participants may not fully agree with each response set forth in 
this letter.'' CAT Operating Committee July 14th Letter II at 1-2.
---------------------------------------------------------------------------

Scope of Costs To Be Recovered From Industry Members

    Several commenters question the scope of the CAT costs proposed to 
be recovered from Industry Members.\99\ Two commenters state that 
Industry Members should only be responsible for the direct costs to 
build and operate the CAT, not the Participants' costs of doing 
business as SROs, such as insurance and consulting costs.\100\ One 
commenter states that the Exchange Act and Rule 613 do not even require 
the CAT NMS Plan to impose fees on Industry Members,\101\ and that the 
Participants have failed to justify an ``additive CAT fee,'' \102\ and 
notes the Participants were exclusively responsible for developing the 
CAT and for making decisions about the implementation costs for the 
CAT.\103\ Another commenter asks for justification for why Industry 
Members should bear the costs of the CAT build when they had no 
involvement in the process.\104\
---------------------------------------------------------------------------

    \99\ See SIFMA Letter at 4; Virtu Letter at 5-6; FIA PTG May 
12th Letter at 5; Data Boiler Letter at 8; Tower Letter at 3.
    \100\ See SIFMA Letter at 4; FIA PTG May 12th Letter at 5.
    \101\ See Virtu Letter at 2.
    \102\ Id. at 3.
    \103\ Id. at 2.
    \104\ See MMI Letter at 3. Similarly, this commenter also 
requests the rationale for why ``a small number of brokers should 
pay the vast majority of the now-inflated cost without having any 
insight or authority into the methodology and rationale for the 
cost?'' Id. at 2. The Operating Committee responds that its proposed 
Maximum Industry Member CAT Fee would institute a cap on fees to 
fairly allocate costs to Industry Members to avoid certain Industry 
Members paying a significant allocation of Total CAT Costs. See CAT 
Operating Committee July 14th Letter II at 6-7.
---------------------------------------------------------------------------

    In response to comments objecting to the imposition of CAT costs on 
Industry Members,\105\ the Operating Committee states that Industry 
Members should be required to pay CAT costs in accordance with Rule 613 
and the CAT NMS Plan.\106\ The Operating Committee adds that, because 
all market participants would benefit from the enhanced regulatory 
oversight provided by the CAT, Industry Members and Participants should 
both contribute to covering its costs.\107\
---------------------------------------------------------------------------

    \105\ See Virtu Letter at 2-3; MMI Letter at 3.
    \106\ See CAT Operating Committee July 14th Letter II at 4-5.
    \107\ Id. at 5-6.
---------------------------------------------------------------------------

    Six commenters object to the proposed imposition of historical 
costs on Industry Members.\108\ Several commenters note that Industry 
Members had no input into or control over the decisions resulting in 
the historical costs, including the selection of Thesys Technologies, 
LLC as the initial plan processor,\109\ and the subsequent transition 
to FINRA as the plan processor.\110\ One commenter states, ``the 
Participants must meet a high bar for the Commission to alter course 
and support any proposed rule changes that require non-Participants to 
pay the Thesys costs.'' \111\ One commenter questions the rationale for 
requiring Industry Members to pay 75% of the cost of the transition to 
FINRA, explaining that FINRA is completely funded by the industry.\112\ 
Two commenters object to requiring Industry Members to pay the legal 
and consulting fees incurred by Participants prior to the approval of 
the CAT NMS Plan.\113\ Two commenters criticize the Proposed Amendment 
for requiring new Industry Members to pay CAT fees to recover 
historical costs, while exempting new Participants from such a 
requirement.\114\
---------------------------------------------------------------------------

    \108\ See SIFMA Letter at 6; Virtu Letter at 5-6; Data Boiler 
Letter at 8; Istra Letter at 2-3; Tower Letter at 3; Fidelity Letter 
at 3, 5; MMI Letter at 3; Parallax Letter at 1.
    \109\ See SIFMA Letter at 6; Virtu Letter at 5-6; Fidelity 
Letter at 3, 5; Tower Letter at 3; MMI Letter at 3.
    \110\ See Virtu Letter at 6.
    \111\ See Parallax Letter at 1.
    \112\ See Virtu Letter at 6.
    \113\ See Tower Letter at 3; SIFMA Letter at 6.
    \114\ See Virtu Letter at 6; SIFMA Letter at 6-7.
---------------------------------------------------------------------------

    In response to comments questioning the scope of the costs to be 
recovered from Industry Members,\115\ the Operating Committee states 
that the recovery from Industry Members of the historical costs, 
Thesys-related costs and third-party expenses (including legal, 
consulting and audit expenses) is consistent with the CAT NMS Plan and 
the Exchange Act.\116\ The Operating Committee states that, when 
approving the CAT NMS Plan, the Commission noted that the Exchange Act 
permits the Participants to charge their members fees to fund their 
self-regulatory obligations and that the Plan funding model was 
designed to impose fees reasonably related to the Participants' self-
regulatory obligations since the fees would be directly associated with 
the costs to build and maintain the CAT.\117\ Additionally, the 
Operating Committee states that the Commission considered that the 
Participants could recover the costs of creating and funding the CAT 
central repository in the adopting release for Rule 613.\118\ The 
Operating Committee explains that these costs are critical to the 
creation, implementation and maintenance of the Plan and therefore 
should be within the scope of CAT fees.\119\
---------------------------------------------------------------------------

    \115\ See Data Boiler Letter at 8; FIA PTG May 12th Letter at 2; 
Fidelity Letter at 3, 5; Istra Letter at 2-3; MMI Letter at 3; SIFMA 
Letter at 6; Tower Letter at 3; Virtu Letter at 5-6.
    \116\ See CAT Operating Committee July 14th Letter I at 5.
    \117\ Id. at 5.
    \118\ Id. at 5-6.
    \119\ Id. at 6.
---------------------------------------------------------------------------

Lack of Industry Member Input

    Several commenters express concern that the proposal was developed 
without the involvement of Industry Members.\120\ One commenter states 
that it is ``incredulous of the process used to construct a proposed 
allocation model in which Industry Members are allocated 75% of the 
expenses yet had no meaningful input into the model's development.'' 
\121\ Another commenter opines that Industry Members are being required 
to shoulder most of the costs of the CAT without having had any insight

[[Page 40121]]

into the costs.\122\ Two commenters note the lack of representation of 
Industry Members on the Operating Committee.\123\ One commenter 
believes that the technical expertise of the industry should be 
involved in the development of a new cost allocation proposal that 
contains ``a full explanation of the proposed operating costs and . . . 
an appropriately detailed public disclosure of the operating budget.'' 
\124\ Another commenter suggests that the Commission ask the 
Participants to engage with the industry ``to establish a workable 
allocation methodology that is simple, predictable and aligns 
responsibility for funding regulatory infrastructure with receiving 
economic benefits of the marketplace.'' \125\
---------------------------------------------------------------------------

    \120\ See SIFMA Letter at 2; STA Letter at 2-3; Data Boiler 
Letter at 8; FIA PTG May 12th Letter at 2-3; IMC Letter at 2-3; 
Fidelity Letter at 2-3, 4; Tower Letter at 7; MMI Letter at 2, 3, 4.
    \121\ See FIA PTG May 12th Letter at 3.
    \122\ See MMI Letter at 2, 3.
    \123\ See Tower Letter at 7; Data Boiler Letter at 6. See also 
Parallax Letter at 2 (suggesting the admission of Industry Members 
and independent parties as members of the Operating Committee, along 
with full internal disclosure of costs, would benefit the operation 
of the CAT NMS Plan).
    \124\ See Tower Letter at 7.
    \125\ See NYSE Letter at 5. See also SIFMA Letter at 2 (agreeing 
with this statement).
---------------------------------------------------------------------------

    In response to comments noting a lack of industry participation in 
the development of the Proposed Funding Model,\126\ the Operating 
Committee explains that the CAT Advisory Committee and the public 
notice and comment processes afforded by Rule 608 of Regulation NMS 
\127\ and Section 19 of the Exchange Act \128\ have provided Industry 
Members and other market participants the opportunity to express their 
views on the funding model.\129\ With respect to the comments 
expressing concern over a lack of Industry Member representation on the 
Operating Committee, the Operating Committee states that Industry 
Members can provide meaningful input on CAT matters through the current 
governance structure without compromising Commission and SRO oversight 
of Industry Members.\130\
---------------------------------------------------------------------------

    \126\ See FIA PTG May 12th Letter at 2-3; Fidelity Letter at 2-
4; IMC Letter at 2; SIFMA Letter at 2; STA Letter at 2-3; Tower 
Letter at 7.
    \127\ 17 CFR 242.608.
    \128\ 15 U.S.C. 78s.
    \129\ See CAT Operating Committee July 14th Letter I at 7-8.
    \130\ Id. at 8.
---------------------------------------------------------------------------

Participant Conflicts of Interest

    Six commenters believe that the Participants have conflicts of 
interest that are reflected in the cost allocation proposed for the 
Participants and Industry Members.\131\ Two commenters believe that the 
Participants are attempting to further their commercial interests 
through the proposal at the expense of their Industry Member 
competitors.\132\ One commenter believes that the Participants are 
conflicted when determining how much of their own costs they should pay 
and suggests greater transparency to expose any Participant 
conflicts.\133\ Another commenter states, ``[t]o permit for-profit 
exchanges to allocate 75% of the costs of the CAT to Industry Members 
furthers the Participants' commercial interests at the expense of the 
Industry Members, who have no choice but to pay such fees or else be 
subject to regulatory actions by the Participants.'' \134\ This 
commenter suggests that the Commission require the Participants to 
resubmit a proposal with a transparent analysis and requests that 
Industry Members be permitted adequate representation on the Operating 
Committee.\135\
---------------------------------------------------------------------------

    \131\ See SIFMA Letter at 2; Virtu Letter at 2, 6; FIA PTG May 
12th Letter at 2, 3, 4; Tower Letter at 1, 5, 7; Istra Letter at 2; 
MMI Letter at 4. See also Parallax Letter at 3-4 (stating that the 
proposed market maker discounts benefit the Participants who have 
set the standards for market-making activity, including activity 
resulting in message traffic with low order to trade ratios).
    \132\ See SIFMA Letter at 2; Virtu Letter at 2.
    \133\ See FIA PTG May 12th Letter at 3.
    \134\ See Tower Letter at 5.
    \135\ See Tower Letter at 5.
---------------------------------------------------------------------------

    In response to the comments regarding potential conflicts of 
interests behind the proposed cost allocation for Participants and 
Industry Members,\136\ the Operating Committee states that it disagrees 
with the comments and notes that the CAT NMS Plan contains measures to 
protect against potential conflicts of interest related to CAT fees, 
``including the fee filing requirements under the Exchange Act and 
operating the CAT on a break-even basis.'' \137\
---------------------------------------------------------------------------

    \136\ See Data Boiler Letter at 6, 7; FIA PTG May 12th letter at 
2, 3; MMI Letter at 4; Parallax Letter at 3-4; Tower Letter at 1, 5, 
7.
    \137\ See CAT Operating Committee July 14th Letter I at 8.
---------------------------------------------------------------------------

Lack of Transparency

    Several commenters express concern that the Proposed Funding Model 
lacks sufficient transparency into the operating budget as well as the 
costs proposed to be recovered by the CAT fees.\138\ One commenter 
believes the lack of cost data would make it impossible for the 
Commission and Industry Members to determine whether the CAT is 
operating efficiently.\139\ The commenter adds that detailed cost 
information would be useful for Industry Members to evaluate whether 
certain of their activities are causing the CAT to incur higher 
operating costs, and consequently causing increases in their own CAT 
fees.\140\ This commenter added that it is impossible to evaluate 
whether the Proposed Funding Model is consistent with the Exchange Act 
due to lack of information; in particular, details concerning sources 
of the costs and the operating budget.\141\ Similarly, another 
commenter suggests the provision of non-proprietary cost information to 
allow meaningful input from Industry Members.\142\ Another commenter 
believes that it ``feels like we are being asked to hand over [a] blank 
check with the amount to be filled in later.'' \143\ One commenter 
states, ``the Amendment is virtually silent on the use of funds and 
offers no budget for the CAT's ongoing operation.'' \144\
---------------------------------------------------------------------------

    \138\ See SIFMA Letter at 4-5; Virtu Letter at 4-5; SSGA Letter 
at 1-2; Fidelity Letter at 2, 4-5; NYSE Letter at 2; STA Letter at 
1, 3-4; Tower Letter at 2, 5, 7; MMI Letter at 2, 3-4; FIA PTG May 
12th Letter at 2, 5; IMC Letter at 1, 2; Istra Letter at 1, 2; 
Parallax Letter at 1-2, 5.
    \139\ See SIFMA Letter at 5.
    \140\ Id. at 5.
    \141\ Id. at 4.
    \142\ See STA Letter at 3.
    \143\ See Virtu Letter at 4.
    \144\ See NYSE Letter at 2.
---------------------------------------------------------------------------

    Commenters request detailed information on the historical costs and 
the operating budget.\145\ One commenter recommends that the Proposed 
Amendment disclose its costs and technical requirements, and detail the 
historical costs and projected annual budget for the Plan operating 
expenses, professional services expenses, and plan processor 
expenses.\146\ The commenter recommends that the Participants make the 
annual budget public in the future.\147\ Another commenter states that 
the Proposed Amendment lacks an explanation for the 2021 estimated cost 
of $133 million, including the scale of CAT processing, number of 
reported transactions, data storage sizes and processing 
performed.\148\ The commenter states that an operating budget is 
necessary to determine how much of CAT costs is variable based on 
message traffic.\149\ The commenter recommends that the Operating 
Committee propose a new cost allocation plan that includes a full 
accounting of the historical costs and justification for charging these 
costs to Industry Members.\150\ The commenter also recommends that the 
new proposal explain its proposed operating costs and

[[Page 40122]]

publicly disclose its operating budget.\151\
---------------------------------------------------------------------------

    \145\ Id. at 2; Tower Letter at 2, 7; Istra Letter at 2; 
Fidelity Letter at 5; MMI Letter at 2-3, 4; FIA PTG May 12th Letter 
at 5; Parallax Letter at 1-2, 5.
    \146\ See NYSE Letter at 2.
    \147\ Id. at 2.
    \148\ See Tower Letter at 2.
    \149\ Id. at 2.
    \150\ Id. at 7.
    \151\ Id. at 7.
---------------------------------------------------------------------------

    Another commenter notes that the Proposed Amendment lacks detail on 
the historical CAT assessment costs and requests the Participants to 
provide the opportunity to review the costs incurred before the CAT NMS 
Plan was approved, noting that Industry Members should be permitted 
``to refute the validity of any cost and its allocation to Industry 
Members.'' \152\ Another commenter states that the Proposed Amendment 
provides no transparency into historical and annual costs.\153\ One 
commenter requests the Commission to require the Participants to 
provide a cost-sharing structure with greater transparency, including a 
full accounting of historical costs and a detailed public explanation 
of the proposed operating costs.\154\ The commenter urges greater 
transparency in the operating budget, the cost allocation model, and on 
variable costs, such as messaging costs, and fixed costs, such as 
payroll costs.\155\
---------------------------------------------------------------------------

    \152\ See Fidelity Letter at 5.
    \153\ See FIA PTG May 12th Letter at 5.
    \154\ See MMI Letter at 2-3.
    \155\ Id. at 4.
---------------------------------------------------------------------------

    Commenters also request a breakdown of the estimated CAT costs and 
operating budget.\156\ Two commenters request a copy of the 2021 
operating budget with quarterly updates including actual and revised 
projections.\157\ One of the commenters also requests data to permit 
each Industry Member to calculate its fees, including the data used by 
the Operating Committee to calculate the estimates in Exhibit B to the 
Proposed Amendment.\158\ In a response, the Operating Committee 
provides the following data: (1) The budgeted Total CAT Costs for 2021; 
(2) total Industry Member message traffic counts, including the total 
message counts for Options Market Makers and Equity Market Makers, used 
in the proposal's Exhibit B; (3) unrounded trade-to-quote ratios for 
Listed Options and NMS Stocks; and (4) the method used to calculate an 
Industry Member's quarterly CAT fees.\159\ The Operating Committee 
states that Industry Members can contact FINRA CAT to learn which of 
the anonymized Industry Member information in Exhibit B represents its 
traffic, as well as its total message traffic count and percentage or 
number of its reported events that were treated as events of Options 
Market Makers or Equity Market Makers.\160\ The Operating Committee 
also agrees to provide information to permit an Industry Member to 
calculate its actual CAT fees on an ongoing basis.\161\ Subsequently, 
the first commenter requests further information to understand the 
impact of the funding proposal and help each Industry Member reconcile 
the data it received from the Operating Committee and its internal 
records.\162\ The second commenter finds the response from the 
Operating Committee insufficient and requests a copy of the 2021 
operating budget and any quarterly updates and projected costs, a 
breakdown of fixed and variable expenses, and provision to Industry 
Members of data used to support the selected funding model and the 
funding models that were rejected.\163\
---------------------------------------------------------------------------

    \156\ See SSGA Letter at 2; Fidelity Letter at 5; FIF April 29th 
Letter at 1, 2; FIA PTG May 7th Letter at 2.
    \157\ See FIF April 29th Letter at 1; FIA PTG May 7th Letter at 
2; FIA PTG May 12th Letter at 2.
    \158\ See FIF April 29th Letter at 2. This commenter also 
requests that the Operating Committee publicly provide the options 
and equity trade-to-quote ratios used in the Proposed Amendment's 
Exhibit B and the aggregate number of reportable events of each type 
that are counted toward the total number of reportable events. Id.
    \159\ See CAT Operating Committee May 5th Letter. This response 
was also noted by the Operating Committee in a response to comments. 
See CAT Operating Committee July 14th Letter II at 16.
    \160\ See CAT Operating Committee May 5th Letter at 2.
    \161\ Id. at 2, n.8.
    \162\ See FIF May 21st Letter at 2-3.
    \163\ See FIA PTG May 12th Letter at 2.
---------------------------------------------------------------------------

    Several commenters believe the lack of transparency prevents 
Industry Members from estimating their costs and fees.\164\ One 
commenter believes that the Proposed Amendment lacks information needed 
by Industry Members to calculate their fees as well as to analyze the 
fairness and accuracy of the funding model.\165\ The commenter notes 
that 75 of 1,237 Industry Members would be allocated 99% of Industry 
Member fees, and that the Proposed Amendment claims that this is fair 
without factual support.\166\ One commenter acknowledges the data 
subsequently provided in the response from the Operating Committee 
\167\ and suggests that the Participants regularly provide updated 
message traffic data to Industry Members to allow them to estimate 
their CAT fees.\168\ Another commenter opines that the supplementary 
message traffic data and the 2021 budget information provided by the 
Operating Committee is insufficient to allow Industry Members to 
project their CAT fees.\169\ One commenter suggests that cost recovery 
should have ``transparent inputs'' that would permit Industry Members 
to predict their costs and understand the costs of their actions.\170\
---------------------------------------------------------------------------

    \164\ See Tower Letter at 3; SIFMA Letter at 5, 9; Virtu Letter 
at 4.
    \165\ See Tower Letter at 3.
    \166\ Id.
    \167\ See CAT Operating Committee May 5th Letter.
    \168\ See SIFMA Letter at 5.
    \169\ See Virtu Letter at 4.
    \170\ See Istra Letter at 2-3.
---------------------------------------------------------------------------

    In response to comments requesting additional transparency into CAT 
costs,\171\ the Operating Committee states that it has made publicly 
available substantial annual cost data by providing, upon request, its 
audited financial statements from the inception of Consolidated Audit 
Trail LLC and CAT NMS, LLC through 2020, as required by Section 9.2(a) 
of the CAT NMS Plan.\172\ The Operating Committee explains that the 
audited financial statements contain the following cost categories: 
``technology costs, legal, amortization of developed technology, 
consulting, insurance, professional and administration, and public 
relations.'' \173\ The Operating Committee also states that the 
Proposed Funding Model would provide additional cost transparency 
through the provision of the operating budget at the start of each 
year, as well as the budgeted Total CAT Costs to be used in calculating 
the quarterly CAT fees, and any quarterly budget adjustments.\174\ The 
Operating Committee adds that it proposes to provide additional cost 
information to the industry through webinars, among other methods,\175\ 
and notes the cost-related information it provided in its May 5th 
letter.\176\
---------------------------------------------------------------------------

    \171\ See FIA PTG May 12th Letter at 2, 5; Fidelity Letter at 3, 
5; Istra Letter at 2; MMI Letter at 3, 4; NYSE Letter at 2; Parallax 
Letter at 1-2; SIFMA Letter at 4; STA Letter at 3; SSGA Letter at 1-
2; Tower Letter at 2, 4, 7; Virtu Letter at 4.
    \172\ See CAT Operating Committee July 14th Letter I at 4.
    \173\ Id.
    \174\ Id.
    \175\ Id.
    \176\ Id. at 3-4. See also CAT Operating Committee May 5th 
Letter.
---------------------------------------------------------------------------

    Several commenters believe the Proposed Amendment does not properly 
explain increases in historical and annual costs in excess of prior 
estimates.\177\ One commenter states, ``[t]here may well be 
appropriate--or at least understandable--reasoning for historical and 
ongoing costs to greatly exceed expectations, and that is for the 
Participants to explain and the Commission to review as part of its 
oversight of the SROs.'' \178\ Two commenters ask if any corresponding 
benefits accompany the increased cost

[[Page 40123]]

estimates.\179\ One commenter expresses concern that the Participants 
have no accountability for the costs of the project.\180\ Another 
commenter requests assurances that the CAT will not become an ``ever-
growing expense'' for the industry and investors.\181\ Another 
commenter, a proprietary trading firm, states that it ``captures real 
time market data feeds from over 100 venues around the world, in a 
variety of different products . . . The processing of this historical 
market data might reasonably be compared to the kind of processing that 
the CAT is expected to do . . . While we do not claim that this is a 
perfect comparison, we do posit that the cost to build and maintain the 
CAT should be reasonably comparable.'' \182\ The commenter states that 
its annual cost for this platform is ten times less than the cost 
provided in the Proposed Amendment.\183\
---------------------------------------------------------------------------

    \177\ See FIA PTG May 12th Letter at 4-5; SSGA Letter at 1-2; 
Istra Letter at 2; MMI Letter at 1-2, 3-4; Tower Letter at 1, 2-4; 
Parallax Letter at 2.
    \178\ See Parallax Letter at 2.
    \179\ See MMI Letter at 2; SSGA Letter at 2.
    \180\ See FIA PTG May 12th Letter at 5.
    \181\ See SSGA Letter at 2.
    \182\ See Tower Letter at 4.
    \183\ Id.
---------------------------------------------------------------------------

    In response to comments questioning the increases in CAT costs from 
prior estimates,\184\ the Operating Committee explains that data 
processing and storage costs are the primary CAT cost drivers and that 
these costs have increased significantly each year.\185\ First, the 
Operating Committee states that these costs are directly related to 
data volumes reported to the CAT and that the markets have experienced 
record high volumes, noting that in 2019 and 2021, data volumes were 
five times greater than estimated.\186\ To address the increased 
volume, the CAT's storage and computing needs have accordingly 
increased.\187\ Second, the Operating Committee explains that the 
phased introduction of CAT reporting and functionality results in ``a 
substantial increase in message traffic, processing complexity and 
storage requirements.'' \188\ Third, the Operating Committee states 
that the processing and storage of the many complex reporting scenarios 
relating to Industry Member market activity require complicated 
algorithms that result in ``significant data processing and storage 
costs.'' \189\ Finally, the Operating Committee notes that the 
combination of record CAT Data volumes with the stringent performance 
timelines and operational requirements applicable to the processing of 
CAT Data do not allow much flexibility for cost reductions.\190\
---------------------------------------------------------------------------

    \184\ See FIA PTG May 12th Letter at 4-5; Istra Letter at 2; MMI 
Letter at 1-2, 4; Parallax Letter at 1-2; SSGA Letter at 1-2; Tower 
Letter at 1-4.
    \185\ See CAT Operating Committee July 14th Letter I at 2.
    \186\ Id.
    \187\ Id.
    \188\ Id. at 3.
    \189\ Id.
    \190\ Id.
---------------------------------------------------------------------------

    Some commenters believe that the Proposed Funding Model lacks the 
transparency needed to incentivize the Participants to manage CAT costs 
efficiently.\191\ One commenter states the lack of transparency 
precludes the Operating Committee's accountability and suggests a full 
audit of the CAT's historical costs, ongoing budget and a comparison to 
its estimated benefits.\192\ Another commenter believes that allowing 
Industry Members greater visibility into CAT's expenses would increase 
the Participants' accountability to manage costs.\193\
---------------------------------------------------------------------------

    \191\ See SIFMA Letter at 5; Fidelity Letter at 3, 5; Tower 
Letter at 2; FIA PTG May 12th Letter at 5.
    \192\ See Istra Letter at 1.
    \193\ See Fidelity Letter at 5.
---------------------------------------------------------------------------

    In response to comments urging more transparency to ensure the 
Participants manage CAT Costs efficiently,\194\ the Operating Committee 
states that it ``has a strong focus on cost management and is 
significantly incented to keep costs at an appropriate level.'' \195\ 
The Operating Committee notes that it actively pursues cost saving 
measures and has a Cost Management Working Group to address cost 
management needs.\196\ Additionally, the Operating Committee states 
that the plan processor regularly reviews options to lower compute and 
storage needs and works with CAT technology providers to provide 
services in a cost-effective manner.\197\
---------------------------------------------------------------------------

    \194\ See FIA PTG May 12th Letter at 5; Fidelity Letter at 3; 
Tower Letter at 2, 7.
    \195\ See CAT Operating Committee July 14th Letter I at 4-5.
    \196\ Id. at 5.
    \197\ Id.
---------------------------------------------------------------------------

    Finally, one commenter states that the Proposed Amendment needs to 
explain what would happen if actual CAT operating costs exceed the 
budget and what would happen if the CAT becomes over-budget. The 
commenter believes that a revised amendment should provide further 
details on the CAT budget and potential budget surpluses.\198\ In 
response to the comment,\199\ the Operating Committee explains that it 
would address budget shortfalls or excess fees through updates to the 
budgets and operational reserves.\200\ The Operating Committee states 
that to recover the costs of CAT on an ongoing basis, it will use the 
costs in the annual operating budget as the Total CAT Costs to be used 
to calculate CAT fees, and that these budgeted costs may be adjusted on 
a quarterly basis to address any changes to the budget.\201\ The 
Operating Committee states that if CAT fees exceed the CAT costs, 
despite quarterly budget adjustments, any surplus would be treated as 
an operational reserve to offset fees in future payments, in accordance 
with Section 11.1(c) of the CAT NMS Plan.\202\ If CAT fees are less 
than CAT costs, the Operating Committee states that it ``may address 
the shortfall by using the operational reserve, including the amount of 
the shortfall in future fees and/or seeking to recover the costs via 
other measures in accordance with the Exchange Act.'' \203\
---------------------------------------------------------------------------

    \198\ See Fidelity Letter at 3, 5.
    \199\ Id. at 5.
    \200\ See CAT Operating Committee July 14th Letter I at 6.
    \201\ Id. at 6-7.
    \202\ Id. at 7.
    \203\ Id.
---------------------------------------------------------------------------

Allocation of Costs Between Industry Members and Participants

    Many commenters raise concerns about the proposed allocation of 
costs between Industry Members and Participants.\204\ Several 
commenters argue that the allocation lacks justification for the 
decision to recover 75% of Total CAT Costs from Industry Members and 
25% from Participants.\205\ Two commenters believe the allocation to 
Industry Members is ``arbitrary and unsupportable'' under the Exchange 
Act.\206\ One commenter challenges the Participants' justification for 
the allocation--that there are more Industry Members than Participants 
and Industry Members receive much more revenue than Participants--as 
not providing a rational basis on which to claim that the Proposed 
Amendment provides for a fair allocation of reasonable fees and does 
not impose an undue burden on competition.\207\ Another commenter 
states, ``[i]t is unclear from the proposal why the ability to pay is a 
corollary to CAT costs and an appropriate factor in justifying the 
split.'' \208\ One commenter states that costs are not deemed 
reasonable because a party can afford the costs, because the costs are 
not large enough to be material, or because the costs can be shared 
among thousands of

[[Page 40124]]

Industry Members.\209\ Another commenter believes that the cost 
allocation should have focused on what market participants should pay 
based on costs and benefits, rather than ability to pay based on 
aggregate revenues.\210\
---------------------------------------------------------------------------

    \204\ See Fidelity Letter at 2-4; NYSE Letter at 1-2; Tower 
Letter at 4-5; MMI Letter at 4-5; Istra Letter at 3; SIFMA Letter at 
5-8; Virtu Letter at 3-6; Data Boiler Letter at 7; FIA PTG May 12th 
Letter at 3, 4; FINRA Letter at 3, 4-5; Parallax Letter at 2-3.
    \205\ See Fidelity Letter at 3-4; NYSE Letter at 1-2; Tower 
Letter at 4-5; MMI Letter at 4-5; Istra Letter at 3; Virtu Letter at 
3-4; SIFMA Letter at 5-6.
    \206\ See SIFMA Letter at 5-6; Virtu Letter at 3.
    \207\ See SIFMA Letter at 5-6.
    \208\ See Fidelity Letter at 4.
    \209\ See Parallax Letter at 2.
    \210\ See Virtu Letter at 3-4.
---------------------------------------------------------------------------

    One commenter believes the cost allocation is inequitable and an 
undue burden on Industry Members.\211\ The commenter believes that CAT 
fees should only be imposed on beneficiaries of CAT services,\212\ 
allocated in proportion to benefit received.\213\ The commenter 
believes that market participants that pose higher risks and potential 
conflicts of interest should pay higher fees than other market 
participants.\214\
---------------------------------------------------------------------------

    \211\ See Data Boiler Letter at 6, 7.
    \212\ Id. at 6.
    \213\ Id. at 7.
    \214\ Id. at 8.
---------------------------------------------------------------------------

    One commenter approves the proposed elimination of tiering, but 
expresses concern at the allocation, stating that allocating set 
percentages of total costs to one group over another is the wrong 
approach.\215\ The commenter criticizes the Proposed Amendment for 
basing the allocation on ensuring that the highest paying Industry 
Members pay the same as the highest paying Participants.\216\ 
Additionally, this commenter believes that Participants would have no 
incentive to manage costs if they are only responsible for 25% of Total 
CAT Costs.\217\ For the same reason, another commenter believes there 
is little incentive for Participants to justify their historical costs 
or manage a reasonable and efficient operating budget.\218\ The 
commenter believes the cost allocation methodology differences between 
the Industry Members and the Participants warrants further discussion 
and transparency.\219\
---------------------------------------------------------------------------

    \215\ See FIA PTG May 12th Letter at 4. The Operating Committee 
acknowledges the commenter's support of the elimination of tiering. 
See CAT Operating Committee July 14th Letter II at 8, 13.
    \216\ See FIA PTG May 12th Letter at 4.
    \217\ Id.
    \218\ See MMI Letter at 4-5.
    \219\ Id. at 5.
---------------------------------------------------------------------------

    One commenter notes that the Proposed Funding Model does not 
explain how the 75% allocation to Industry Members relates to overall 
CAT costs resulting from Industry Member reporting and therefore may 
not be supported by Section 11.2(a) and Section 11.2(b) of the CAT NMS 
Plan.\220\ Another commenter suggests a 50%-50% cost allocation between 
Industry Members and Participants and argues that any allocation should 
be transparent and predictable and supported by evidence.\221\ The 
commenter suggests that Industry Member costs be allocated based on the 
value any Industry Member receives from the market.\222\ One commenter 
believes the proposal lacks information for commenters to understand 
how CAT costs are allocated across asset classes.\223\ The commenter 
suggests the creation of a predictable cost allocation methodology 
reached through engagement with Industry Members that aligns costs with 
the receipt of benefits from the market.\224\
---------------------------------------------------------------------------

    \220\ See FINRA Letter at 5. Section 11.2(a) of the CAT NMS Plan 
requires the Operating Committee, in establishing the funding of the 
Company, to create transparent, predictable revenue streams for the 
Company that are aligned with the anticipated costs to build, 
operate and administer the CAT and the other costs of the Company. 
Section 11.2(b) requires the Operating Committee to establish an 
allocation of the Company's related costs among Participants and 
Industry Members that is consistent with the Exchange Act, taking 
into account the timeline for implementation of the CAT and 
distinctions in the securities trading operations of Participants 
and Industry Members and their relative impact upon Company 
resources and operations.
    \221\ See Istra Letter at 5-6.
    \222\ Id.
    \223\ See NYSE Letter at 4.
    \224\ Id. at 5.
---------------------------------------------------------------------------

    One commenter believes the proposed allocation is arbitrary because 
the Participants override the allocation with adjusted allocations, 
such as the proposed market maker discounts, the Minimum Industry 
Member CAT Fee and the Maximum Industry Member CAT Fee, and the 
treatment of OTC Equity Security share volume.\225\ The commenter 
believes the Proposed Funding Model would shift the regulatory cost of 
overseeing one Industry Member to another Industry Member, with the 
potential effect of retail investors who transact with small Industry 
Members indirectly subsidizing sophisticated investors who transact 
with large market-makers.\226\ The commenter states, ``the Operating 
Committee has not provided a sufficient regulatory case for a proposed 
funding model which imposes different costs for the same CAT reportable 
events.'' \227\
---------------------------------------------------------------------------

    \225\ See Parallax Letter at 3.
    \226\ Id.
    \227\ Id.
---------------------------------------------------------------------------

    Several commenters believe the proposed cost allocation between 
Industry Members and Participants ignores the time investment and costs 
already incurred by Industry Members to report to the CAT.\228\ One 
commenter notes that Industry Members have had to develop internal 
systems for CAT reporting and that Industry Members have provided 
critical assistance to the Participants in developing Industry Member 
CAT Technical Specifications.\229\ The commenter opines that an 
analysis of the costs incurred by Industry Members for internal 
compliance would demonstrate that the Industry Allocation is not an 
equitable allocation of reasonable fees.\230\ Another commenter notes 
that the Proposed Amendment does not mention the substantial time and 
cost invested by Industry Members into refining reporting 
specifications and building CAT reporting platforms,\231\ and one other 
commenter believes that the Proposed Amendment ignores the substantial 
costs that Industry Members have incurred associated with the 
development, testing and implementation of the CAT.\232\
---------------------------------------------------------------------------

    \228\ See SIFMA Letter at 7-8; FIA PTG May 12th Letter at 5; 
Tower Letter at 4-5. See also Fidelity Letter at 2 (stating that 
Industry Members have spent much time and money on building systems 
to comply with CAT requirements but will not be reimbursed for these 
costs).
    \229\ See SIFMA Letter at 7-8. See also STA Letter at 3 
(describing collaborative efforts by Industry Members and 
Participants to develop technical specifications).
    \230\ See SIFMA Letter at 7-8.
    \231\ See Tower Letter at 4-5.
    \232\ See FIA PTG May 12th Letter at 5.
---------------------------------------------------------------------------

    One commenter states that the Proposed Funding Model treats 
affiliated Participants differently than affiliated Industry Members 
without explaining how this inconsistency is consistent with the 
Exchange Act.\233\ The commenter explains that affiliated Participants 
would be charged based on aggregate market share as a single complex, 
while affiliated Industry Members would be charged individually based 
on individual message traffic. The commenter states, ``[t]his 
methodology seems to be rooted in the Participants' view that it 
provides for a fair allocation of fees under the proposal because it 
results in the largest Participant complexes being charged 
approximately the same level of fees as the largest Industry Members.'' 
The commenter notes that the result is not a fair allocation of 
reasonable fees as the largest Industry Members have multiple 
affiliates that, if viewed as a single aggregated complex like 
affiliated Participants, would pay greater CAT fees than the largest 
Participant complexes.\234\
---------------------------------------------------------------------------

    \233\ See SIFMA Letter at 8.
    \234\ Id.
---------------------------------------------------------------------------

    One commenter questions why equities and options message traffic is 
combined for Industry Member cost allocation purposes, unlike the 
Participant Allocation where 60% of the Total CAT Costs would be 
allocated to

[[Page 40125]]

Equities Participants and 40% would be allocated to Options 
Participants.\235\ The commenter states, ``[i]f message traffic is 
indeed the major driver of CAT costs, then it stands to reason that at 
least 40% of the Industry Member costs be allocated to options (as in 
the Participants' allocation framework), if not significantly more.'' 
\236\
---------------------------------------------------------------------------

    \235\ See Istra Letter at 3-4.
    \236\ Id. at 4.
---------------------------------------------------------------------------

    Four commenters note that, under the proposed allocation, Industry 
Members must not only cover their allocation of the Total CAT Costs, 
but they must also fund FINRA, which would owe its own share of 
Participant CAT fees.\237\ One commenter believes that, including 
FINRA's allocation, the Industry Member Allocation would exceed 
80%.\238\ The commenter notes that the Proposed Amendment does not 
explain why FINRA should be treated the same way as exchanges for 
allocation purposes when Industry Members pay FINRA's operation costs 
through regulatory fees and fines.\239\ Another commenter believes that 
FINRA will raise its fees to help pay for its own Participant 
Allocation, further increasing the cost to be borne by Industry 
Members.\240\ This commenter suggests that the Participants should 
submit a new proposal with a cost methodology supported by data that 
Industry Members can evaluate.\241\ FINRA itself comments, ``[o]ne 
effect of adopting these unsupported allocation criteria would be an 
unjustified increase in FINRA's fee assessments . . .'' \242\ FINRA 
also states that because it relies on regulatory fees from members, the 
Proposed Funding Model would reallocate FINRA's costs to Industry 
Members in addition to the CAT fees to be borne by Industry 
Members.\243\
---------------------------------------------------------------------------

    \237\ See Virtu Letter at 4, 6; Fidelity Letter at 4; SIFMA 
Letter at 7; Tower Letter at 5.
    \238\ See SIFMA Letter at 7.
    \239\ Id.
    \240\ See Fidelity Letter at 4.
    \241\ Id.
    \242\ See FINRA Letter at 9.
    \243\ Id.
---------------------------------------------------------------------------

    In response to comments questioning the justification for the 
proposed 75%-25% allocation,\244\ the Operating Committee states that 
this allocation ``continues to be an equitable allocation of reasonable 
CAT fees between Industry Members and Participants that balances the 
costs paid by each CAT Reporter and the regulatory benefits each 
receives.'' \245\ The Operating Committee reiterates the arguments it 
made in support of the allocation from the Proposed Amendment.\246\
---------------------------------------------------------------------------

    \244\ See Data Boiler Letter at 7; FIA PTG May 12th Letter at 4; 
Fidelity Letter at 2-4; FINRA Letter at 5; Istra Letter at 3; MMI 
Letter at 4; NYSE Letter at 2; Parallax Letter at 2; SIFMA Letter at 
5-8; STA Letter at 4; Tower Letter at 4; Virtu Letter at 3-4.
    \245\ See CAT Operating Committee July 14th Letter II at 2.
    \246\ Id. at 2-4; Notice, supra note 4 at 21054-21055.
---------------------------------------------------------------------------

    Several commenters state that the Proposed Amendment does not 
consider whether regulatory fees and fines paid by Industry Members 
could offset the costs of CAT.\247\ One commenter asserts that the 
Proposed Funding Model did not consider using exchange regulatory 
revenues or profits as sources of funding and did not explain why fines 
paid by Industry Members for CAT reporting violations could not offset 
the costs of operating the CAT.\248\ In addition, the commenter states 
that the Proposed Funding Model did not analyze whether FINRA's Trading 
Activity Fee (``TAF'') could offset the costs of CAT when OATS is 
retired, or whether FINRA could reduce the TAF rate.\249\ The commenter 
said that inclusion of this analysis would reveal that the Industry 
Allocation is not an equitable allocation of reasonable fees.\250\ 
Another commenter argues that Industry Members pay membership fees, 
registration and licensing fees, and regulatory fees to Participants, 
yet the Proposed Funding Model did not address how these fees are 
allocated and why Industry Members must be responsible for a new 
funding requirement.\251\ One commenter believes that revenues from 
fines should be allocated to the Company's operating reserve in order 
to decrease CAT costs.\252\
---------------------------------------------------------------------------

    \247\ See Tower Letter at 5; SIFMA Letter at 7; Virtu Letter at 
3; FIA PTG May 12th Letter at 5; Parallax Letter at 4. See also Data 
Boiler Letter at 7 (suggesting that fines and settlements should 
fund the CAT).
    \248\ See SIFMA Letter at 7. See also MMI Letter at 5-6 (stating 
that information is needed concerning any potential cost-savings to 
FINRA from OATS retirement that could offset the cost of running the 
CAT, as well as a proposed TAF increase in 2022); Virtu Letter at 4 
(stating that the Proposed Amendment should have analyzed whether 
FINRA's TAF could offset CAT costs after OATS has been retired).
    \249\ See SIFMA Letter at 7.
    \250\ Id.
    \251\ See Virtu Letter at 3.
    \252\ See FIA PTG May 12th Letter at 5.
---------------------------------------------------------------------------

    In response to comments suggesting that regulatory fines and cost 
savings due to the retirement of OATS should be used to decrease CAT 
costs,\253\ the Operating Committee states that it will not reduce CAT 
fees based on the ancillary effects of the CAT.\254\ The Operating 
Committee explains that the proposed CAT fees account for the costs to 
create, implement and maintain the CAT, not other aspects of the 
Participants' regulatory operations.\255\
---------------------------------------------------------------------------

    \253\ Id.; MMI Letter at 5-6; SIFMA Letter at 7; Tower Letter at 
5; Virtu Letter at 4.
    \254\ See CAT Operating Committee July 14th Letter I at 6.
    \255\ Id.
---------------------------------------------------------------------------

    Finally, one commenter argues that the elimination of comparability 
as a funding principle removes support for the proposed cost 
allocation.\256\ The commenter explains that comparability was key to 
the decision to propose the 75%-25% allocation to Industry Members and 
Participants when the Participants previously proposed CAT fees in 
2017.\257\ The commenter explains that the Participants removed 
comparability from the funding model because the Proposed Funding Model 
no longer assesses fees through tiers.\258\ The commenter states, ``if 
the principle driving the change to a no-tier approach is to assess 
fees more transparently on CAT Reporters in direct relation to the 
costs that each creates for the CAT with its reporting activity, the 
Proposed Funding Model fails to apply this principle consistently.'' 
\259\ The commenter adds that the Proposed Amendment does not discuss 
the impact of the removal of the tiers and the comparability principle 
on the funding model.\260\
---------------------------------------------------------------------------

    \256\ See FINRA Letter at 2-4.
    \257\ On May 9, 2017, the Operating Committee for the Company 
filed proposed Amendment No. 2 to the CAT NMS Plan to establish the 
CAT fees to be paid by the Participants. See Letter from Michael 
Simon, CAT NMS Plan Operating Committee Chair, to Brent J. Fields, 
Secretary, Commission, dated May 9, 2017. See also Securities 
Exchange Act Release No. 80930 (June 14, 2017), 82 FR 28180 (June 
20, 2017). The Commission issued an order of summary abrogation of 
Amendment No. 2 on July 21, 2017. See Securities Exchange Act 
Release No. 81189 (July 21, 2017), 82 FR 35005 (July 27, 2017). The 
Participants subsequently filed proposed Amendment No. 3 to the CAT 
NMS Plan on October 30, 2017 to establish the Participant CAT fees. 
See Letter from Michael Simon, CAT NMS Plan Operating Committee 
Chair, to Brent J. Fields, Secretary, Commission, dated October 30, 
2017. On December 11, 2017, the Operating Committee filed proposed 
Amendment No. 4 to the CAT NMS Plan, which replaced and superseded 
Amendment No. 3 in its entirety. See Letter from Michael Simon, CAT 
NMS Plan Operating Committee Chair, to Brent J. Fields, Secretary, 
Commission, dated December 11, 2017. See also Securities Exchange 
Act Release No. 82451 (January 5, 2018), 83 FR 1399 (January 11, 
2018). The Participants withdrew Amendment No. 4 to the CAT NMS Plan 
on January 11, 2018. See Letter from Michael Simon, CAT NMS Plan 
Operating Committee Chair, to Brent J. Fields, Secretary, 
Commission, dated January 10, 2018. See also Securities Exchange Act 
Release No. 82892 (March 16, 2018), 83 FR 12633 (March 22, 2018).
    \258\ See FINRA Letter at 4.
    \259\ Id.
    \260\ Id. at 7, n.17.
---------------------------------------------------------------------------

    In response to the comment,\261\ the Operating Committee explains 
that the comparability provision was used to determine fee tiers. Since 
a tiered fee

[[Page 40126]]

structure would not be used under the Proposed Funding Model, the 
Operating Committee believes it is appropriate to delete the 
comparability provision as it is no longer relevant.\262\
---------------------------------------------------------------------------

    \261\ Id. at 2-4.
    \262\ See CAT Operating Committee July 14th Letter II at 4.
---------------------------------------------------------------------------

Allocation of Costs Between Equities and Options Participants

    Two commenters argue that the Proposed Amendment failed to justify 
the proposed 60%-40% allocation of costs between Equities and Options 
Participants.\263\ Both commenters believe the Proposed Amendment lacks 
justification to support the allocation.\264\ One commenter notes that 
the Participants previously stated that message traffic is a key cost 
driver of the CAT.\265\ The commenter attests that the Proposed Funding 
Model would assess Options Participants, which generate significantly 
more message traffic than Equities Participants, a lesser amount of the 
total CAT costs than Equities Participants.\266\ This commenter 
believes the result is inconsistent with the CAT's cost alignment 
principles \267\ and that the Operating Committee does not explain how 
the result is consistent with the funding principles or the Exchange 
Act.\268\ The other commenter believes the allocation is arbitrary and 
unfairly discriminatory.\269\ The commenter opines that the explanation 
provided by the Participants--that the allocation was ``subject to 
negotiations among the Participants''--is not a basis for approval 
under the Exchange Act, and notes that the majority of votes on the 
Operating Committee are held by Participants that operate options 
exchanges.\270\
---------------------------------------------------------------------------

    \263\ See LTSE Letter at 5; FINRA Letter at 6. See also NYSE 
Letter at 2 (describing the proposed allocation as part of ``an 
incomprehensible, distorted program''); MMI Letter at 5 (requesting 
further transparency and discussion on cost allocation methodology 
differences between Participants and Industry Members).
    \264\ See LTSE Letter at 5; FINRA Letter at 6.
    \265\ See FINRA Letter at 6.
    \266\ Id.
    \267\ See Section 11.2(a) and Section 11.2(b) of the CAT NMS 
Plan.
    \268\ See FINRA Letter at 6.
    \269\ See LTSE Letter at 5.
    \270\ Id.
---------------------------------------------------------------------------

    In response to the comments,\271\ the Operating Committee states 
that the proposed 60%-40% allocation of costs between Equities 
Participants and Options Participants is an appropriate allocation that 
is consistent with the CAT NMS Plan, which contemplates allocating 
Participant CAT fees based on activity in options and equities, and 
explains that the allocation was the subject of negotiations among the 
Participants.\272\
---------------------------------------------------------------------------

    \271\ See FINRA Letter at 6; LTSE Letter at 5; MMI Letter at 5; 
NYSE Letter at 2.
    \272\ See CAT Operating Committee July 14th Letter II at 13-14.
---------------------------------------------------------------------------

Use of Message Traffic for Industry Members

    Several commenters object to the use of message traffic as the 
basis of Industry Member CAT fees.\273\ One commenter believes that 
message traffic is not an appropriate measure for allocating fees to 
Industry Members.\274\ The commenter notes that the Participants 
``control how message traffic is defined, how message traffic is 
processed, and whether steps can be taken to reduce message traffic.'' 
\275\ The commenter argues that charging only Industry Members based on 
message traffic is not a fair allocation of reasonable fees because it 
creates no incentive for the Participants to control CAT message 
traffic and CAT costs.\276\ The commenter believes the proliferation of 
exchanges has resulted in higher CAT message traffic, and thus higher 
costs, but notes that this is not analyzed in the funding model.\277\ 
Another commenter suggests that additional data is needed to support 
the apportionment of CAT costs according to message count.\278\
---------------------------------------------------------------------------

    \273\ See SIFMA Letter at 8-10; Istra Letter at 3, 5; Virtu 
Letter at 5; SSGA Letter at 2; Data Boiler Letter at 7. See also 
NYSE Letter at 1, 3 (recommending a cost allocation framework based 
on executed share volume) and STA Letter at 4 (agreeing with the 
suggestion to use executed share volume); Fidelity Letter at 4 
(stating that the Proposed Amendment has not explained why Industry 
Members must pay CAT fees based on message traffic while 
Participants will pay based on market share).
    \274\ See SIFMA Letter at 8-9.
    \275\ Id. at 9.
    \276\ Id.
    \277\ Id.
    \278\ See MMI Letter at 4.
---------------------------------------------------------------------------

    One commenter notes that the elimination of comparability as a 
funding principle removes support for the proposed requirement to base 
Industry Members CAT fees on message traffic and Participant CAT fees 
on market share.\279\ The commenter explains that comparability was key 
to the decision to propose message traffic as the basis of Industry 
Member CAT fees and market share as the basis of Execution Venue CAT 
fees when the Participants previously proposed CAT fees in 2017.\280\
---------------------------------------------------------------------------

    \279\ See FINRA Letter at 3-4.
    \280\ See supra note 257.
---------------------------------------------------------------------------

    Two commenters believe that the Proposed Funding Model needs to 
examine the impact of options quoting activity on CAT.\281\ One 
commenter states that Options Market Maker quoting comprises the ``vast 
majority'' of CAT messaging and that the design of the CAT should be 
reevaluated in case CAT is being ``weighed down by options activity 
with little impact on market quality and traded volume.'' \282\ The 
other commenter states that the Proposed Funding Model lacks an 
analysis of the message traffic and costs generated by Options Market 
Makers that are required by SRO rules to provide quotes in over a 
million options series, even those that do not trade.\283\
---------------------------------------------------------------------------

    \281\ See Istra Letter at 2; SIFMA Letter at 9.
    \282\ See Istra Letter at 2.
    \283\ See SIFMA Letter at 9.
---------------------------------------------------------------------------

    In response to comments questioning the use of message traffic as a 
basis of Industry Member CAT fees,\284\ the Operating Committee states 
that ``the use of message traffic for allocating CAT costs among 
Industry Members is consistent with the CAT NMS Plan as approved by the 
Commission, and the proposal did not seek to change the use of message 
traffic for this purpose in the Proposed Funding Model.'' \285\ The 
Operating Committee notes that it explored allocating the Industry 
Member Allocation based on revenue related to activities in Eligible 
Securities, but decided it would be difficult to determine the types of 
Industry Member revenue to include in the calculation of a CAT fee 
using this approach.\286\
---------------------------------------------------------------------------

    \284\ See Istra Letter at 4-5; MMI Letter at 4; SIFMA Letter at 
8-9.
    \285\ See CAT Operating Committee July 14th Letter II at 6.
    \286\ Id.
---------------------------------------------------------------------------

    One commenter suggests that the Reportable Events that will 
constitute message traffic be defined in the CAT NMS Plan, rather than 
in the IM Reporting Tech Specs, so that any changes to the Reportable 
Events that would be defined as message traffic would be subject to the 
notice and comment process.\287\ In response to the comment,\288\ the 
Operating Committee states that ``delineating the method for reporting 
Reportable Events used in the message traffic count in the Technical 
Specifications, rather than the CAT NMS Plan, is appropriate because 
the technical approach to reporting specific Reportable Events may vary 
over time.'' \289\
---------------------------------------------------------------------------

    \287\ See Fidelity Letter at 2, 3.
    \288\ Id.
    \289\ See CAT Operating Committee July 14th Letter II at 6.
---------------------------------------------------------------------------

    Commenters also believe that the use of message traffic as a basis 
of Industry Member CAT fees could affect market participant behavior 
with harmful consequences to the markets.\290\ Two

[[Page 40127]]

commenters believe the Participants have not analyzed the impact of the 
proposed approach on the markets.\291\ One commenter states that the 
Proposed Funding Model does not address whether market makers would 
reduce their quoting activity in order to reduce their CAT fees, even 
with the proposed market maker discounts.\292\ The other commenter 
believes that such a reduction in message traffic could impact 
liquidity.\293\
---------------------------------------------------------------------------

    \290\ See SIFMA Letter at 9; Virtu Letter at 5; Istra Letter at 
5; SSGA Letter at 2.
    \291\ See SIFMA Letter at 9; Virtu Letter at 5.
    \292\ See SIFMA Letter at 9.
    \293\ See Virtu Letter at 5.
---------------------------------------------------------------------------

    One commenter believes that using message traffic as the basis of 
Industry Member CAT fees will hurt the provision of liquidity and harm 
market quality.\294\ The commenter explains, ``[a] message that becomes 
displayed on an exchange has obvious value to the entire market and not 
only to the broker (or its customer) providing that liquidity. Taxing 
the message will naturally discourage its provision.'' \295\ The 
commenter emphasizes the benefits of displayed quoting on the markets 
and the negative consequences of the potential reduction in this 
activity that could result from the proposed approach.\296\
---------------------------------------------------------------------------

    \294\ See Istra Letter at 5.
    \295\ Id.
    \296\ Id.
---------------------------------------------------------------------------

    One commenter discusses the potential negative impact on ETFs 
caused by the use of message traffic as the basis for Industry Member 
CAT fees.\297\ The commenter believes that the proposed approach would 
result in a reduction in quoting to minimize CAT fees.\298\ The 
commenter states that ETF market making activity is message-intensive 
and any changes in behavior caused by the proposed approach could 
``interfere with the arbitrage mechanism and negate the work by 
Industry Members and exchanges to promote tighter bid-ask spreads, 
deeper markets and greater participation among liquidity providers.'' 
\299\
---------------------------------------------------------------------------

    \297\ See SSGA Letter at 2.
    \298\ Id.
    \299\ Id.
---------------------------------------------------------------------------

    In response to comments questioning the effects of the use of 
message traffic to calculate fees on the markets,\300\ the Operating 
Committee states that its proposed market maker discounts and the 
proposed Maximum Industry Member CAT Fee are designed to address 
potential disincentives. Additionally, the Operating Committee states 
that the market maker discounts ``recognize the value of the market 
making activity to the market as a whole.'' \301\
---------------------------------------------------------------------------

    \300\ See Istra Letter at -5; MMI Letter at 4; SIFMA Letter at 
9; SSGA Letter at 2; Tower Letter at 1; Virtu Letter at 5.
    \301\ See CAT Operating Committee July 14th Letter II at 7.
---------------------------------------------------------------------------

Use of Market Share for Participants

    Several commenters believe that Participants should be assessed 
fees based on message traffic rather than market share.\302\ The 
commenters note that the primary driver of CAT costs is the processing 
and storage of message traffic; therefore, Participants should be 
assessed CAT fees based on message traffic.\303\
---------------------------------------------------------------------------

    \302\ See FIA PTG May 12th Letter at 3; LTSE Letter at 2-3; 
FINRA Letter at 6-7, 9.
    \303\ See FIA PTG May 12th Letter at 3; LTSE Letter at 2; FINRA 
Letter at 6-7, 9.
---------------------------------------------------------------------------

    One commenter believes that using market share to determine 
Participant CAT fees ``gives a free pass to Plan Participants who 
generate high levels of message traffic but have very little market 
share.'' \304\ This commenter believes that using message traffic as 
the basis of Industry Member CAT fees and market share as the basis of 
Participant CAT fees is inherently discriminatory, maximizes Industry 
Member costs and minimizes Participant costs, and appears to result 
from Participant conflicts of interest and a lack of industry input 
until the funding model.\305\ Another commenter believes that using 
message traffic as the basis of Industry Member CAT fees and market 
share as the basis of Participant CAT fees is discriminatory and 
unsupportable.\306\ One commenter believes the Proposed Amendment fails 
to explain why Industry Members will be assessed fees based on message 
traffic while Participants will be assessed fees based on market 
share.\307\ Two commenters believe that the Participants will have no 
incentives to limit message traffic to lower costs if they are not 
being charged CAT fees based on message traffic.\308\
---------------------------------------------------------------------------

    \304\ See FIA PTG May 12th Letter at 3. See also SIFMA Letter at 
9 (stating that message traffic is a key driver of CAT costs and 
that the Participants generate a significant amount of message 
traffic, yet the Participants propose to base their own CAT fees on 
market share). See also Parallax Letter at 3 (recommending an 
analysis of the amount of message traffic that is driven by the 
Participants, such as market maker quoting).
    \305\ See FIA PTG May 12th Letter at 3.
    \306\ See IMC Letter at 2.
    \307\ See Fidelity Letter at 4. See also LTSE Letter at 2-3 
(stating that the Participants have provided no metrics to support 
their rationale that message traffic is not an appropriate basis for 
Participant CAT fees because their message traffic is derivative of 
quotes and orders received from Industry Members that the 
Participants are required to display) and NYSE Letter at 2 (stating 
that the Proposed Amendment does not justify why some costs should 
be split by message traffic and other costs should be split by 
market share).
    \308\ See Virtu Letter at 5; LTSE Letter at 3.
---------------------------------------------------------------------------

    Another commenter, FINRA, believes that requiring market share to 
be the basis of Participant costs is inconsistent with CAT cost 
alignment principles \309\ because message traffic is the key driver of 
costs, not market share.\310\ The commenter notes that if the 
Participants believe FINRA's CAT fee would be too low based on its 
message traffic, FINRA would consider paying a more appropriate amount 
or an allocation based on a combination of message traffic and market 
share.\311\
---------------------------------------------------------------------------

    \309\ See supra note 267.
    \310\ See FINRA Letter at 6.
    \311\ Id. at 9.
---------------------------------------------------------------------------

    This commenter also objects to the use of market share in 
determining its CAT fees.\312\ The commenter states that it would be 
responsible for 20% of the Equities Participant Allocation even though 
it generates less than 1% of equities message traffic reported to the 
CAT.\313\ The commenter explains that its market share would be based 
on trade reporting volume reported through its facilities, which is 
also reported by Industry Members.\314\ The commenter asks how this is 
consistent with the Operating Committee's rationale for the use of 
market share to determine Participant CAT fees--that message traffic is 
not an appropriate basis for Participants because their message traffic 
is derivative of Industry Member reporting activity.\315\ In addition, 
the commenter states that the Operating Committee justifies the use of 
market share for Participants because their business models are focused 
on executions; however, the commenter notes that ``given FINRA's unique 
role, trade volume is reported through FINRA for regulatory purposes, 
not to serve FINRA's business purposes.'' \316\ The commenter adds that 
the Operating Committee justifies the use of market share as a basis 
for FINRA's CAT fees as FINRA would be one of the largest regulatory 
users of the CAT.\317\ The commenter asks ``why regulatory usage is 
offered only to justify FINRA's allocation of the proposed fee that is 
based on unrelated criteria (market share), particularly when all 
Participants may use CAT data for regulatory purposes.'' \318\ The 
commenter argues that the Operating Committee has not analyzed the 
costs of regulatory usage, and states that if a

[[Page 40128]]

regulatory usage fee is appropriate, it should apply to all 
Participants.\319\
---------------------------------------------------------------------------

    \312\ Id. at 7-9.
    \313\ Id. at 8.
    \314\ Id. at 7.
    \315\ Id. at 7.
    \316\ See FINRA Letter at 7-8.
    \317\ Id. at 8.
    \318\ Id.
    \319\ Id. at 8-9.
---------------------------------------------------------------------------

    In response to comments questioning the use of market share to 
calculate Participant fees,\320\ the Operating Committee states that 
the CAT NMS Plan contemplates that Participants pay a CAT fee that is 
based on market share. After considering alternatives to the use of 
market share, the Operating Committee concluded that market share would 
equitably allocate CAT fees among Participants. The Operating Committee 
reiterates arguments it made in support of the use of market share in 
the Proposed Amendment.\321\
---------------------------------------------------------------------------

    \320\ See FIA PTG May 12th Letter at 3; Fidelity Letter at 4; 
FINRA Letter at 6-7; IMC Letter at 2; LTSE Letter at 2-3; MMI Letter 
at 5; NYSE Letter at 2; SIFMA Letter at 8-9.
    \321\ See CAT Operating Committee July 14th Letter II at 12-13; 
Notice, supra note 4, at 21060.
---------------------------------------------------------------------------

Maximum Equities Participant Fee

    Two commenters object to the Maximum Equities Participant Fee 
because they believe that the sole Participant subject to the fee--
FINRA--would be unfairly afforded preferential treatment.\322\ One 
commenter believes that FINRA should receive a higher portion of CAT 
costs than Participants that lack a surveillance business because FINRA 
can capitalize off of the predecessor plan processor's development work 
and its technology will benefit from CAT.\323\ The commenter believes 
that FINRA should not be permitted re-allocation of its CAT fee under 
the Maximum Equities Participant Fee.\324\ The commenter also states, 
``[a]lthough we acknowledge that the nature of OTC trading in penny 
level may inherently be different from the proposed message traffic 
measurement use in Equity/Listed Option Group Split, similar arguments 
may apply to thinly traded securities, ESG stocks, etc., which SEC rule 
should avoid `craft-out.''' \325\
---------------------------------------------------------------------------

    \322\ See Data Boiler Letter at 8-9; LTSE Letter at 5. See also 
NYSE Letter at 2 (noting the added complexity of the ``bespoke fee 
structure for FINRA'').
    \323\ See Data Boiler Letter at 8-9.
    \324\ Id. at 9.
    \325\ Id. at 8.
---------------------------------------------------------------------------

    In response to the comment noting the nature of trading in OTC 
Equity Securities,\326\ the Operating Committee states that it proposes 
to exclude OTC Equity Securities share volume from the calculation of 
market share for national securities exchanges. The Operating Committee 
reiterates the arguments it made in support of the proposed exclusion 
of OTC Equity Securities share volume in the Proposed Amendment.\327\
---------------------------------------------------------------------------

    \326\ Id.
    \327\ See CAT Operating Committee July 14th Letter II at 14; 
Notice, supra note 4, at 21061.
---------------------------------------------------------------------------

    The other commenter believes that the Maximum Equities Participant 
Fee market share caps and re-allocation are arbitrary and unfairly 
discriminatory.\328\ The commenter believes that the proposal lacks 
justification for requiring other Equities Participants to be allocated 
FINRA's market share when FINRA's activity does not occur on their 
markets.\329\ The commenter notes, ``[t]he stated rationale that this 
is necessary for the FINRA fees to be `fair and reasonable' is 
subjective, unsupported by any data, and further highlights the 
shortcomings of a fee model based on market share.'' \330\
---------------------------------------------------------------------------

    \328\ See LTSE Letter at 5.
    \329\ Id.
    \330\ Id.
---------------------------------------------------------------------------

    One commenter, FINRA, also objects to the Maximum Equities 
Participant Fee because it is based on the use of market share for 
calculating FINRA's CAT fees, which FINRA believes is inconsistent with 
the funding principles of the CAT NMS Plan and ill-suited to FINRA's 
unique model.\331\
---------------------------------------------------------------------------

    \331\ See supra text accompanying notes 312-319.
---------------------------------------------------------------------------

    In response to comments received on the Maximum Equities 
Participant Fee,\332\ the Operating Committee reiterates the arguments 
it made in support of the proposed Maximum Equities Participant Fee in 
the Proposed Amendment.\333\
---------------------------------------------------------------------------

    \332\ See Data Boiler Letter at 9; FINRA Letter at 7-9; LTSE 
Letter at 5; NYSE Letter at 2.
    \333\ See CAT Operating Committee July 14th Letter II at 15; 
Notice, supra note 4, at 21062.
---------------------------------------------------------------------------

Minimum Participant Fee

    One commenter objects to the proposed Minimum Participant Fee as 
inconsistent with the notion that market share is a fair method of 
allocation,\334\ and as arbitrary and unfairly discriminatory.\335\ The 
commenter states that this fee would be paid by every Participant, 
regardless of its market share, and notes that this fee can 
significantly increase even if a Participant itself is not creating 
increased costs to the CAT.\336\ The commenter questions why some 
Participants would incur a higher Minimum Participant Fee when only 
certain Participants engage in activity that results in increased CAT 
message traffic.\337\ The commenter also notes that a Participant that 
operates both an options and equities exchange would be assessed only 
one Minimum Participant Fee.\338\
---------------------------------------------------------------------------

    \334\ See LTSE Letter at 4.
    \335\ See LTSE Letter at 4. See also NYSE Letter at 2 (noting 
the added complexity of the Minimum Participant Fee).
    \336\ See LTSE Letter at 4.
    \337\ Id. at 4-5.
    \338\ Id. at 4, n.9.
---------------------------------------------------------------------------

    In response to the comments on the Minimum Participant Fee,\339\ 
the Operating Committee reiterates the arguments it made in support of 
the proposed Minimum Participant Fee in the Proposed Amendment.\340\
---------------------------------------------------------------------------

    \339\ Id. at 4-5; NYSE Letter at 2.
    \340\ See CAT Operating Committee July 14th Letter II at 15; 
Notice, supra note 4, at 21060.
---------------------------------------------------------------------------

Maximum Industry Member CAT Fee

    Several commenters express concern about the Maximum Industry 
Member CAT Fee.\341\ One commenter believes the Maximum Industry Member 
CAT Fee ``exacerbates inequalities'' \342\ and believes that small 
firms should not be responsible for subsidizing the CAT fees for the 
top 36 firms that generate the vast majority of message traffic.\343\ 
Similarly, another commenter believes that a lack of transparency into 
the re-allocation of CAT fees for Industry Members in excess of the 
Maximum Industry Member CAT Fee adds complexity and makes it difficult 
for Industry Members to calculate their costs under the Proposed 
Funding Model.\344\ This commenter also believes the cap of 8% of total 
Industry Member CAT message traffic is arbitrary.\345\
---------------------------------------------------------------------------

    \341\ See Data Boiler Letter at 7-8; Tower Letter at 6; FINRA 
Letter at 5-6; MMI Letter at 5; SIFMA Letter at 9.
    \342\ See Data Boiler Letter at 7.
    \343\ Id.
    \344\ See SIFMA Letter at 9.
    \345\ Id.
---------------------------------------------------------------------------

    Another commenter objects to the 8% cap, explaining that the 
proposal has not fully justified the cap, and that it provides large 
brokers an unfair advantage by requiring other Industry Members, 
including their direct competitors, to pay the large brokers' re-
allocation of fees in excess of the Maximum Industry Member CAT 
Fee.\346\ Finally, one commenter believes the Proposed Funding Model 
insufficiently analyzes the ``cross-subsidization that results from the 
proposed minimum and maximum Industry Member fees'' nor does it explain 
the reasoning behind the creation of the Maximum Industry Member CAT 
Fee.\347\
---------------------------------------------------------------------------

    \346\ See Tower Letter at 6.
    \347\ See FINRA Letter at 5.
---------------------------------------------------------------------------

    In response to comments on the Maximum Industry Member CAT 
Fee,\348\ the Operating Committee reiterates the arguments it made in 
support of the proposed Maximum

[[Page 40129]]

Industry CAT Fee in the Proposed Amendment.\349\
---------------------------------------------------------------------------

    \348\ See Data Boiler Letter at 7-8; FINRA Letter at 5-6; MMI 
Letter at 5; SIFMA Letter at 9; Tower Letter at 6.
    \349\ See CAT Operating Committee July 14th Letter II at 12; 
Notice, supra note 4, at 21059.
---------------------------------------------------------------------------

Minimum Industry Member CAT Fee

    Two commenters object to the Minimum Industry Member CAT Fee.\350\ 
One of the commenters believes the Minimum Industry Member CAT Fee 
poses an undue burden on Industry Members and, by charging a ``de 
minimis fee,'' is inconsistent with Section 11.2(d), which requires the 
Operating Committee to provide for ease of billing and other 
administrative functions.\351\
---------------------------------------------------------------------------

    \350\ See Data Boiler Letter at 7; FINRA Letter at 5-6.
    \351\ See Data Boiler Letter at 7.
---------------------------------------------------------------------------

    The other commenter believes the proposal lacks justification for 
the Minimum Industry CAT Fee, explaining that the fee could increase 
for firms with little message traffic due to the redistribution of CAT 
fees in excess of the Maximum Industry Member CAT Fee.\352\ The 
commenter states this result was not discussed in the Proposed Funding 
Model nor was there a discussion of how the result is consistent with 
the CAT funding principles.\353\
---------------------------------------------------------------------------

    \352\ See FINRA Letter at 5-6.
    \353\ See FINRA Letter at 5-6.
---------------------------------------------------------------------------

    In response to the comments,\354\ the Operating Committee 
reiterates the arguments it made in support of the proposed Minimum 
Industry Member CAT Fee in the Proposed Amendment.\355\
---------------------------------------------------------------------------

    \354\ See Data Boiler Letter at 7; FINRA Letter at 5-6.
    \355\ See CAT Operating Committee July 14th Letter II at 7; 
Notice, supra note 4, at 21058-21059.
---------------------------------------------------------------------------

Market Maker Discounts

    Five commenters object to the proposed market maker discounts.\356\ 
One commenter objects to the market maker discounts due to what it 
deems the improper discounting of Equity Market Maker message traffic 
and the preferential treatment of Options Market Makers at the expense 
of equities Industry Members.\357\ The commenter criticizes the trade-
to-quote ratio that is the basis of the proposed market maker 
discounts, explaining that it ``ignores the realities of the market.'' 
\358\ The commenter suggests only including trades executed on-exchange 
and not off-exchange in the ratio.\359\ Additionally, the commenter 
objects to the use of the SIP best bid and offer information in 
deriving the trade-to-quote ratio, explaining that this method 
undercounts the ``activity and value contribution of equities market 
makers and further underestimates any market maker discount.'' \360\ 
The commenter also argues that, after the Options Market Maker 
discount, equities Industry Members would be required to pay 95% of the 
CAT cost when only responsible for 12% of the message traffic, a 
``grossly unfair cross-subsidy.'' \361\ The commenter states that at 
least 40% of Industry Member costs should be borne by options Industry 
Members if message traffic is the key driver of CAT costs.\362\ Another 
commenter states that the ``massive discounts'' demonstrate that the 
Participants ``have not found a way to perform the core functions 
needed for market surveillance, without the cost of it putting at risk 
an entire segment of the industry.'' \363\
---------------------------------------------------------------------------

    \356\ See Data Boiler Letter at 7, 8, 9; SIFMA Letter at 9; 
Tower Letter at 5-6; Istra Letter at 3-5; Parallax Letter at 3.
    \357\ See Istra Letter at 3-5.
    \358\ Id. at 4-5. See also Parallax Letter at 3 (stating that 
the trade-to-quote ratio needs further analysis).
    \359\ See Istra Letter at 4.
    \360\ Id. at 5.
    \361\ Id. at 4.
    \362\ Id.
    \363\ See Parallax Letter at 3. This commenter also suggests 
that there should be a process to confirm that Industry Members 
accurately identify themselves as market makers to receive the 
proposed market maker discounts, and penalties for those who 
wrongfully identify themselves or their activities to receive a 
discount. Id.
---------------------------------------------------------------------------

    Similarly, another commenter states that 89% of all Industry Member 
CAT Reportable Events comes from Options Market Makers, but the 
proposed Options Market Maker discount reduces 99% of the billable 
events for Options Market Makers, with the result being 94% of Industry 
Members' share allocated to equities non-market makers.\364\ The 
commenter urges the Participants to justify this shift of costs to 
Industry Members that are not Options Market Makers and notes that the 
Proposed Amendment has not analyzed the effects of the discounts or has 
demonstrated that the discounts will be effective.\365\ The commenter 
states that the Proposed Amendment is lacking in several other areas 
with respect to these discounts; there is no discussion of: (1) How the 
proposed market maker discount provides a pricing advantage to market 
makers that is unavailable to other market participants; (2) how the 
trade-to-quote ratio is the correct metric to use for determining the 
market maker discounts; (3) how the discount incentivizes market makers 
to quote more without trading more; (4) how/whether the discount 
calculation will change if the trade-to-quote ratio significantly 
changes; and (5) any impacts on liquidity and market participant 
behavior.\366\ The commenter also believes the Proposed Amendment lacks 
a discussion of its potential impact on business lines across the 
industry, such as, for example, its effect on ATSs, which would not be 
considered market makers and thus could incur high costs.\367\ The 
commenter attests that the Proposed Amendment lacks the information 
necessary to assess the effect of the proposed market maker discounts, 
such as the number of transactions resulting from market makers and how 
market-makers transactions should be discounted from the total number 
of transactions using the trade-to-quote ratio.\368\
---------------------------------------------------------------------------

    \364\ See Tower Letter at 6.
    \365\ Id. at 5-6. See also Parallax Letter at 4 (stating that it 
is important to understand the extent to which Industry Members 
would benefit from the discounts).
    \366\ See Tower Letter at 5.
    \367\ Id. at 6.
    \368\ Id. at 3.
---------------------------------------------------------------------------

    In response to the comment on the proposal's potential effects on 
business lines across the industry,\369\ the Operating Committee states 
that it sought to limit any negative effects on certain CAT Reporters 
resulting from the use of message traffic to calculate fees, such as 
through the proposed market maker discounts and the proposed Maximum 
Industry Member CAT Fee.\370\
---------------------------------------------------------------------------

    \369\ Id. at 6.
    \370\ See CAT Operating Committee July 14th Letter II at 7.
---------------------------------------------------------------------------

    One commenter opposes any market maker discounts, but notes that 
smaller market makers that do not pay or receive rebates deserve 
subsidies to encourage their participation.\371\ Another commenter 
believes the impact of market maker discounts, as well as the Maximum 
Industry Member CAT Fee, adds complexity and makes it difficult for 
Industry Members to calculate their costs.\372\ In response to comments 
on the market maker discounts,\373\ the Operating Committee reiterates 
its rationale for proposing the discounts from the Proposed 
Amendment.\374\
---------------------------------------------------------------------------

    \371\ See Data Boiler Letter at 9.
    \372\ See SIFMA Letter at 9.
    \373\ See FIA PTG May 12th Letter at 4; IMC Letter at 2; Data 
Boiler Letter at 7; SIFMA Letter at 9; Istra Letter at 2-4; Parallax 
Letter at 3; Tower Letter at 5-6.
    \374\ See CAT Operating Committee July 14th Letter II at 9; 
Notice, supra note 4, at 21057-21058.
---------------------------------------------------------------------------

    Two commenters endorse the proposed market maker discounts.\375\ 
One commenter believes any funding plan should include these discounts 
and that additional product-specific

[[Page 40130]]

discounts should be considered.\376\ Another commenter believes the 
discounts prevent market makers from incurring ``a disproportionate 
percentage of CAT costs, which could impact their provision of 
liquidity.'' \377\
---------------------------------------------------------------------------

    \375\ See IMC Letter at 2; FIA PTG May 12th Letter at 4.
    \376\ See IMC Letter at 2.
    \377\ See FIA PTG May 12th Letter at 4.
---------------------------------------------------------------------------

    One commenter requests clarification on the proposed market maker 
discounts, specifying ``cost allocation data and projections on market 
maker vs. non-market maker liquidity providers.'' \378\ The commenter 
also asks for further transparency and discussion on the application of 
the discounts on Industry Members with the most message traffic, at the 
expense of other Industry Members.\379\
---------------------------------------------------------------------------

    \378\ See MMI Letter at 5.
    \379\ Id.
---------------------------------------------------------------------------

Proposed Alternative Funding Models

    Several commenters suggest alternatives to the Proposed Funding 
Model.\380\ One commenter believes that fines and settlements should 
fund the CAT and that market participants that pose higher risks should 
pay higher CAT fees due to regulators' ``extra efforts in deciphering 
their complex business activities.'' \381\ The commenter also suggests 
the Suspicious Activity Report (``SAR'') \382\ as a basis for 
determining Industry Member CAT fees, stating that Industry Members 
that underreport on the SAR should have increased fines.\383\ The 
commenter believes that dark pools should pay higher CAT fees than SROs 
because they pose higher potential risks due to lack of transparency 
and ``vulnerability to conflicts of interest,'' \384\ and also notes 
that internalizers or market makers may pose more of a risk than dark 
pools due to greater vulnerability to conflicts of interest.\385\
---------------------------------------------------------------------------

    \380\ See NYSE Letter at 2-5; Data Boiler Letter at 7-8; STA 
Letter at 4; FIA PTG May 12th Letter at 4; Istra Letter at 5-6; IMC 
Letter at 3; MMI Letter at 5.
    \381\ See Data Boiler Letter at 8.
    \382\ 12 CFR 21.11.
    \383\ See Data Boiler Letter at 7-8.
    \384\ Id.
    \385\ Id. In response to this comment, the Operating Committee 
states that the Proposed Funding Model would treat ATSs as Industry 
Members, requiring all Industry Members to pay a fee based on 
message traffic rather than requiring some ATSs to pay a fee based 
on market share and some ATSs to pay a fee based on message traffic, 
and would also address concerns that treating Execution Venue ATSs 
as Participants could create a barrier to entry for smaller ATSs. 
See CAT Operating Committee July 14th Letter II at 7-8.
---------------------------------------------------------------------------

    Other commenters recommend a funding model administered similar to 
the Commission's Section 31 fees.\386\ Two commenters explain that the 
Participants could be assigned all of the CAT costs and then they would 
decide how to reallocate those costs to their market participants, like 
Section 31 fees.\387\ One of the commenters believes that this method 
would incentivize Participants into better managing CAT costs and 
possibly incentivize them into competing over how to allocate costs 
their market participants.\388\ Another commenter also suggests that 
the Commission could instead increase the rate of Section 31 fees to 
fund the CAT.\389\
---------------------------------------------------------------------------

    \386\ See MMI Letter at 5; Istra Letter at 5-6; FIA PTG May 12th 
Letter at 4; IMC Letter at 2-3; STA Letter at 4; NYSE Letter at 2-5.
    \387\ See MMI Letter at 5; FIA PTG May 12th Letter at 4.
    \388\ See FIA PTG May 12th Letter at 4.
    \389\ See MMI Letter at 5.
---------------------------------------------------------------------------

    One commenter believes that a 50%-50% cost allocation among 
Industry Members and Participants would be preferable to the proposed 
75%-25% cost allocation,\390\ but notes a simpler and direct way of 
allocating costs through derived value, which the commenter believes 
would not deter the provision of liquidity.\391\ The commenter suggests 
using a methodology similar to the Section 31 fee or the Section 31 fee 
methodology itself.\392\
---------------------------------------------------------------------------

    \390\ See Istra Letter at 5.
    \391\ Id. at 5-6.
    \392\ Id.
---------------------------------------------------------------------------

    Another commenter, a national securities exchange, provides a 
detailed alternative funding model administered similarly to Section 31 
fees.\393\ According to the alternative model, CAT costs would be 
allocated based on executed share volume, which is already tracked by 
market participants.\394\ A per share or per contract fee would be 
calculated by dividing the annual budget cost base by projected total 
industry volume.\395\ One-third of the fee would be allocated to the 
purchasing broker-dealer, one-third to the selling broker-dealer, and 
one-third to the exchange or trade reporting facility reporting the 
transaction.\396\ The commenter believes that this allocation would 
align funding responsibility with the receipt of economic benefits from 
the marketplace and would result in transparent and predicable CAT 
funding costs.\397\ The commenter notes that OTC equities would be 
treated differently due to their significantly higher share volumes, 
and suggests that they receive a small portion of the CAT budget that 
would be allocated among the buyer, seller and the Over-the-Counter 
Reporting Facility on a per share basis.\398\ The commenter believes 
that requiring all parties active in each transaction to evenly fund 
the CAT would allocate costs transparently, and that billing in 
accordance with Section 31 fee billing processes would be ``an 
efficient method to administer funding program and provide clarity to 
market participants of their trading expenses.'' \399\
---------------------------------------------------------------------------

    \393\ See NYSE Letter at 2-5.
    \394\ Id. at 3.
    \395\ Id.
    \396\ Id.
    \397\ Id.
    \398\ Id.
    \399\ See NYSE Letter at 5.
---------------------------------------------------------------------------

    Two commenters believe the national securities exchange's suggested 
alternative funding model deserves review.\400\ Both commenters support 
the alternative's suggestion to base funding on executed volume rather 
than message traffic via a structure administered like Section 31 fees 
volume rather than message traffic.\401\ However, one commenter 
expresses concern about the alternative's suggested allocation of the 
per share cost, explaining that FINRA's costs would be passed to 
Industry Members through the TAF.\402\ Additionally, one commenter 
warns that this alternative, and the suggestions to use Section 31 fees 
as a model, could result in costs assessed against investors and urges 
the Commission to consider the possibility of increased costs and 
whether investors should be responsible for these costs.\403\
---------------------------------------------------------------------------

    \400\ See IMC Letter at 3; STA Letter at 4.
    \401\ See IMC Letter at 2-3; STA Letter at 4.
    \402\ See STA Letter at 4.
    \403\ See Parallax Letter at 4-5.
---------------------------------------------------------------------------

V. Proceedings To Determine Whether To Approve or Disapprove the 
Proposed Amendment

    The Commission is instituting proceedings pursuant to Rule 
608(b)(2)(i) of Regulation NMS,\404\ and Rules 700 and 701 of the 
Commission's Rules of Practice,\405\ to determine whether to disapprove 
the Proposed Amendment or to approve the Proposed Amendment with any 
changes or subject to any conditions the Commission deems necessary or 
appropriate after considering public comment. Institution of 
proceedings does not indicate that the Commission has reached any 
conclusions with respect to any of the issues involved. Rather, the 
Commission seeks and encourages interested persons to provide 
additional comment on the Proposed Amendment to inform the Commission's 
analysis.
---------------------------------------------------------------------------

    \404\ 17 CFR 242.608.
    \405\ 17 CFR 201.700; 17 CFR 201.701.
---------------------------------------------------------------------------

    Rule 608(b)(2) of Regulation NMS provides that the Commission 
``shall approve a national market system plan or proposed amendment to 
an effective

[[Page 40131]]

national market system plan, with such changes or subject to such 
conditions as the Commission may deem necessary or appropriate, if it 
finds that such plan or amendment is necessary or appropriate in the 
public interest, for the protection of investors and the maintenance of 
fair and orderly markets, to remove impediments to, and perfect the 
mechanisms of, a national market system, or otherwise in furtherance of 
the purposes of the Exchange Act.'' \406\ Rule 608(b)(2) further 
provides that the Commission shall disapprove a national market system 
plan or proposed amendment if it does not make such a finding.\407\ In 
the Notice, the Commission sought comment on the Proposed Amendment, 
including whether the Proposed Amendment is consistent with the 
Exchange Act.\408\ In this order, pursuant to Rule 608(b)(2)(i) of 
Regulation NMS,\409\ the Commission is providing notice of the grounds 
for disapproval under consideration:
---------------------------------------------------------------------------

    \406\ 17 CFR 242.608(b)(2).
    \407\ Id.
    \408\ See Notice, supra note 4.
    \409\ 17 CFR 242.608(b)(2)(i).
---------------------------------------------------------------------------

     Whether, consistent with Rule 608 of Regulation NMS, the 
Participants have demonstrated how the Proposed Amendment is necessary 
or appropriate in the public interest, for the protection of investors 
and the maintenance of fair and orderly markets, to remove impediments 
to, and perfect the mechanisms of, a national market system, or 
otherwise in furtherance of the purposes of the Exchange Act; \410\
---------------------------------------------------------------------------

    \410\ 17 CFR 242.608(b)(2).
---------------------------------------------------------------------------

     Whether the Participants have demonstrated how the 
Proposed Amendment is consistent with Section 6(b)(4) \411\ and Section 
15A(b)(5),\412\ of the Exchange Act, which require that the rules of a 
national securities exchange ``provide for the equitable allocation of 
reasonable dues, fees, and other charges among its members and issuers 
and other persons using its facilities'' and that the rules of a 
national securities association ``provide for the equitable allocation 
of reasonable dues, fees, and other charges among members and issuers 
and other persons using any facility or system which the association 
operates or controls;''
---------------------------------------------------------------------------

    \411\ 15 U.S.C. 78f(b)(4).
    \412\ 15 U.S.C. 78o-3(b)(5).
---------------------------------------------------------------------------

     Whether the Participants have demonstrated how the 
Proposed Amendment is consistent with Section 6(b)(5) \413\ and Section 
15A(b)(6),\414\ of the Exchange Act, which require that the rules of a 
national securities exchange or national securities association 
``promote just and equitable principles of trade . . . protect 
investors and the public interest; and [to be] not designed to permit 
unfair discrimination between customers, issuers, brokers, or 
dealers;''
---------------------------------------------------------------------------

    \413\ 15 U.S.C. 78f(b)(5).
    \414\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

     Whether the Participants have demonstrated how the 
Proposed Amendment is consistent with Section 6(b)(8) \415\ and Section 
15A(b)(9) \416\ of the Exchange Act, which require that the rules of a 
national securities exchange or national securities association ``do 
not impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of [the Exchange Act];''
---------------------------------------------------------------------------

    \415\ 15 U.S.C. 78f(b)(8).
    \416\ 15 U.S.C. 78o-3(b)(9).
---------------------------------------------------------------------------

     Whether the Participants have demonstrated how the 
Proposed Amendment is consistent with the funding principles of the CAT 
NMS Plan, which state that the Operating Committee shall seek, among 
other things, ``to create transparent, predictable revenue streams for 
the Company that are aligned with the anticipated costs to build, 
operate and administer the CAT and the other costs of the Company,'' 
\417\ ``to establish an allocation of the Company's related costs among 
Participants and Industry Members that is consistent with the Exchange 
Act taking into account . . . distinctions in the securities trading 
operations of Participants and Industry Members and their relative 
impact upon the Company resources and operations,'' \418\ ``to provide 
for ease of billing and other administrative functions,'' \419\ and 
``to avoid any disincentives such as placing an inappropriate burden on 
competition and a reduction in market quality;'' \420\
---------------------------------------------------------------------------

    \417\ Section 11.2(a) of the CAT NMS Plan.
    \418\ Section 11.2(b) of the CAT NMS Plan.
    \419\ Section 11.2(d) of the CAT NMS Plan.
    \420\ Section 11.2(e) of the CAT NMS Plan.
---------------------------------------------------------------------------

     Whether, and if so how, the Proposed Amendment would 
affect efficiency, competition or capital formation; and
     Whether modifications to the Proposed Amendment, or 
conditions to its approval, would be necessary or appropriate in the 
public interest, for the protection of investors and the maintenance of 
fair and orderly markets, to remove impediments to, and perfect the 
mechanisms of, a national market system, or otherwise in furtherance of 
the purposes of the Exchange Act.\421\
---------------------------------------------------------------------------

    \421\ 17 CFR 242.608(b)(2).
---------------------------------------------------------------------------

    As discussed in Section IV., above, the Participants made various 
arguments in support of the Proposed Amendment and the Commission 
received comment letters that expressed concerns about the Proposed 
Amendment, including that the Participants did not provide sufficient 
information to establish that the Proposed Amendment is consistent with 
the Exchange Act and the rules thereunder.
    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a NMS plan filing is consistent with the Exchange Act 
and the rules and regulations issued thereunder . . . is on the plan 
participants that filed the NMS plan filing.'' \422\ The description of 
the NMS plan filing, its purpose and operation, its effect, and a legal 
analysis of its consistency with applicable requirements must all be 
sufficiently detailed and specific to support an affirmative Commission 
finding.\423\ Any failure of the plan participants that filed the NMS 
plan filing to provide such detail and specificity may result in the 
Commission not having a sufficient basis to make an affirmative finding 
that the NMS plan filing is consistent with the Exchange Act and the 
applicable rules and regulations thereunder.\424\
---------------------------------------------------------------------------

    \422\ 17 CFR 201.701(b)(3)(ii).
    \423\ Id.
    \424\ Id.
---------------------------------------------------------------------------

VI. Commission's Solicitation of Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the Proposed Amendment. In particular, the Commission invites the 
written views of interested persons concerning whether the Proposed 
Amendment is consistent with Section 11A or any other provision of the 
Exchange Act, or the rules and regulations thereunder. Although there 
do not appear to be any issues relevant to approval or disapproval that 
would be facilitated by an oral presentation of views, data, and 
arguments, the Commission will consider, pursuant to Rule 608(b)(2)(i) 
of Regulation NMS,\425\ any request for an opportunity to make an oral 
presentation.\426\ The Commission asks that commenters address the 
sufficiency and merit of the Participants' statements in support of the 
Proposed Amendment,\427\ in addition to any other comments they

[[Page 40132]]

may wish to submit about the proposed rule changes. In particular, the 
Commission seeks comment on the following:
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    \425\ 17 CFR 242.608(b)(2)(i).
    \426\ Rule 700(c)(ii) of the Commission's Rules of Practice 
provides that ``[t]he Commission, in its sole discretion, may 
determine whether any issues relevant to approval or disapproval 
would be facilitated by the opportunity for an oral presentation of 
views.'' 17 CFR 201.700(c)(ii).
    \427\ See Notice, supra note 4.
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A. Requests for Comment on the Proposed Funding Model

    1. Commenters' views on the proposed inclusion of ATSs as Industry 
Members for purposes of allocating CAT costs;
    2. Commenters' views on the exclusion of reported OTC Equity 
Securities share volume from the calculation of market share for 
national securities associations;
    3. Commenters' views on the proposed elimination of tiered fees in 
favor of CAT fees that may vary based on message traffic or market 
share, as applicable;
    4. Commenters' views on the proposed elimination from Section 
11.2(c) of the CAT NMS Plan of the requirement that the fees charged to 
CAT Reporters with the most CAT-related activity be generally 
comparable;
    5. Commenters' views on the proposed Minimum Industry Member CAT 
Fee and the requirement that all Industry Members pay such fee, even if 
they have not yet started reporting to the CAT, and any views on 
whether the Proposed Funding Model has provided sufficient information 
on the operation of the fee and on whether the Proposed Funding Model 
has sufficiently explained the operation of the Minimum Industry Member 
CAT Fee Re-Allocation;
    6. Commenters' views on the proposed Maximum Industry Member CAT 
Fee; any views on whether the Proposed Amendment contains sufficient 
justification for the 8% cap chosen for the fee; and any views on 
whether a maximum fee is consistent with the funding principles 
expressed in the CAT NMS Plan that states that the Operating Committee 
shall seek, among other things, ``to create transparent, predictable 
revenue streams for the Company that are aligned with the anticipated 
costs to build, operate and administer the CAT and the other costs of 
the Company,'' \428\ ``to establish an allocation of the Company's 
related costs among Participants and Industry Members that is 
consistent with the Exchange Act taking into account . . . distinctions 
in the securities trading operations of Participants and Industry 
Members and their relative impact upon the Company resources and 
operations,'' \429\ and ``to avoid any disincentives such as placing an 
inappropriate burden on competition and a reduction in market 
quality;'' \430\
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    \428\ Section 11.2(a) of the CAT NMS Plan.
    \429\ Section 11.2(b) of the CAT NMS Plan.
    \430\ Section 11.2(e) of the CAT NMS Plan.
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    7. Commenters' views on why Industry Member CAT fees should be 
capped; views on how such a cap would benefit or harm efficiency, 
competition, and capital formation; and any views on whether there are 
other benefits or costs of adopting such an approach;
    8. Commenters' views on the proposed Minimum Participant Fee and 
the Maximum Equities Participant Fee, including views on the 
calculation of the proposed fees and any views on whether the proposed 
fees raise any competitive issues among the Participants; and any views 
on whether the proposed fees are consistent with the funding principles 
expressed in the CAT NMS Plan, which state that the Operating Committee 
shall seek, among other things, ``to create transparent, predictable 
revenue streams for the Company that are aligned with the anticipated 
costs to build, operate and administer the CAT and the other costs of 
the Company;'' \431\ ``to establish an allocation of the Company's 
related costs among Participants and Industry Members that is 
consistent with the Exchange Act taking into account . . . distinctions 
in the securities trading operations of Participants and Industry 
Members and their relative impact upon the Company resources and 
operations;'' \432\ and ``to avoid any disincentives such as placing an 
inappropriate burden on competition and a reduction in market 
quality;'' \433\
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    \431\ Section 11.2(a) of the CAT NMS Plan.
    \432\ Section 11.2(b) of the CAT NMS Plan.
    \433\ Section 11.2(e) of the CAT NMS Plan.
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    9. Commenters' views on whether FINRA's CAT fee should be capped; 
any views on how such a cap benefits or harms efficiency, competition, 
and capital formation; and any views on whether there are other 
benefits or costs of adopting such an approach;
    10. Commenters' views on why Participants should be charged the 
Minimum Participant Fee; views on how such a minimum would benefit or 
harm efficiency, competition, and capital formation; and any views on 
whether there are other benefits or costs of adopting such an approach;
    11. Commenters' views on the proposed market maker discounts, any 
views on the potential impact of the discounts on market participant 
behavior, including the provision of liquidity; and any views on 
whether the proposed market maker discounts are consistent with the 
funding principles expressed in the CAT NMS Plan, which state that the 
Operating Committee shall seek, among other things, ``to create 
transparent, predictable revenue streams for the Company that are 
aligned with the anticipated costs to build, operate and administer the 
CAT and the other costs of the Company,'' \434\ ``to establish an 
allocation of the Company's related costs among Participants and 
Industry Members that is consistent with the Exchange Act taking into 
account . . . distinctions in the securities trading operations of 
Participants and Industry Members and their relative impact upon the 
Company resources and operations,'' \435\ and ``to avoid any 
disincentives such as placing an inappropriate burden on competition 
and a reduction in market quality;'' \436\
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    \434\ Section 11.2(a) of the CAT NMS Plan.
    \435\ Section 11.2(b) of the CAT NMS Plan.
    \436\ Section 11.2(e) of the CAT NMS Plan.
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    12. Commenters' views on how market-making activity should be 
defined for purposes of the proposed market maker discounts; views on 
whether there is activity included in the definition of market making 
that should not be included for purposes of allocation of CAT fees; and 
any views on whether such a discount should apply to market-making 
activities in all types of securities without regard to security 
characteristics;
    13. Commenters' views on whether other Industry Members (including 
those that do not transact in options) would subsidize the activity of 
Options Market Makers under the proposal; any views on whether Section 
6.4(d)(iii) \437\ of the CAT NMS Plan effectively reduces the message 
traffic of Options Market Makers relative to what it would be 
otherwise, and thus ultimately reduce the CAT fees they would be 
assigned under the Participants' proposal; views on how this 
subsidization would benefit or harm efficiency, competition, and 
capital formation; views on whether there are other benefits or costs 
of adopting such an approach; views (in detail) on whether there is an 
alternative approach

[[Page 40133]]

that would be more beneficial to efficiency, competition, or capital 
formation; and any views on whether the discount to fees allocated to 
Industry Members for market making activity described in the 
Participants' proposal provide a similar magnitude of benefit to Equity 
Market Makers;
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    \437\ Section 6.4(d)(iii) of the CAT NMS Plan states, ``With 
respect to the reporting obligations of an Options Market Maker with 
regard to its quotes in Listed Options, Reportable Events required 
pursuant to Section 6.3(d)(ii) and (iv) shall be reported to the 
Central Repository by an Options Exchange in lieu of the reporting 
of such information by the Options Market Maker. Each Participant 
that is an Options Exchange shall, through its Compliance Rule, 
require its Industry Members that are Options Market Makers to 
report to the Options Exchange the time at which a quote in a Listed 
Option is sent to the Options Exchange (and, if applicable, any 
subsequent quote modifications and/or cancellation time when such 
modification or cancellation is originated by the Options Market 
Maker). Such time information also shall be reported to the Central 
Repository by the Options Exchange in lieu of reporting by the 
Options Market Maker.''
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B. Requests for Comment on the Proposed Fee Schedule

    1. Commenters' views on the determination to allocate 75% of the 
Total CAT Costs to Industry Members and 25% of the Total CAT Costs to 
Participants; and any views on whether this proposed allocation is 
consistent with the funding principles expressed in the CAT NMS Plan, 
which state that the Operating Committee shall seek, among other 
things, ``to establish an allocation of the Company's related costs 
among Participants and Industry Members that is consistent with the 
Exchange Act taking into account . . . distinctions in the securities 
trading operations of Participants and Industry Members and their 
relative impact upon the Company resources and operations,'' \438\ and 
``to avoid any disincentives such as placing an inappropriate burden on 
competition and a reduction in market quality;'' \439\
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    \438\ Section 11.2(b) of the CAT NMS Plan.
    \439\ Section 11.2(e) of the CAT NMS Plan.
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    2. Commenters' views on the rationale provided that the proposed 
75%-25% allocation ensures that Industry Members with the most message 
traffic pay comparable fees to Participant complexes with the most 
market share, considering the proposed deletion from Section 11.2(c) of 
the CAT NMS Plan of the requirement that the fees charged to CAT 
Reporters with the most CAT-related activity be generally comparable;
    3. Commenters' views on whether allocating Participant fees by 
market share while allocating Industry Member fees by message traffic, 
when combined with the proposed 75%-25% split between Participants and 
Industry Member aggregate fees, introduces frictions (such as 
effectively double counting the message traffic sent and received by 
Industry Members, into the CAT fee model due to FINRA's allocation of 
fees from trade volume reported to trade reporting facilities); views 
on how frictions would result; any views on how this would benefit or 
harm efficiency, competition, and capital formation; any views on 
whether there are other benefits or costs of adopting such an approach; 
and any views on whether capping FINRA's contribution to CAT fees as 
described in the Participants' proposal mitigate any benefits or costs 
and to what extent;
    4. Commenters' views on potential alternative allocations of Total 
CAT Costs to Industry Members and Participants, including the 
allocations considered, but rejected, by the Participants, and the 
alternative allocations suggested by commenters as discussed in this 
order;
    5. Commenters' views on how fees would be passed on to Industry 
Members and investors if all CAT costs were allocated to Participants; 
views on how this outcome would be different than under the 
Participants' proposal; views on whether such an approach would benefit 
or harm efficiency, competition, and capital formation; and any views 
on whether there are other benefits or costs of adopting such an 
approach;
    6. Commenters' views on whether Industry Members have sufficient 
information to estimate and budget for their expected allocation of CAT 
fees each quarter; if not, any views on what additional information 
would Industry Members need to develop an estimate of these fees;
    7. Commenters' views on whether a Section 31 fee-like cost 
allocation framework (i.e., a transaction-based fee framework) would 
benefit or harm efficiency, competition, and capital formation, and any 
views on whether there are other benefits or costs of adopting such an 
approach;
    8. Commenters' views on the calculation of the Participant 
Allocation and the Adjusted Participant Allocation;
    9. Commenters' views on the determination to allocate 60% of the 
Adjusted Participant Allocation to Equities Participants and 40% to 
Options Participants, including views on whether the proposed 
allocation is consistent with the funding principles expressed in the 
CAT NMS Plan that state that the Operating Committee shall seek, among 
other things, ``to establish an allocation of the Company's related 
costs among Participants and Industry Members that is consistent with 
the Exchange Act taking into account . . . distinctions in the 
securities trading operations of Participants and Industry Members and 
their relative impact upon the Company resources and operations,'' 
\440\ and ``to avoid any disincentives such as placing an inappropriate 
burden on competition and a reduction in market quality;'' \441\
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    \440\ Section 11.2(b) of the CAT NMS Plan.
    \441\ Section 11.2(e) of the CAT NMS Plan.
---------------------------------------------------------------------------

    10. Commenters' views on an alternative approach that would split 
costs between Participants and Industry Members by proportion of 
aggregate message traffic, then allocate the Participants' portion of 
fees across Participants by market share, with or without the proposed 
60%-40% split between Equities and Options Participants; any views on 
whether this would benefit or harm efficiency, competition and capital 
formation when compared to the Participants' proposal; and any views on 
whether there are other benefits or costs of adopting such an approach;
    11. Commenters' views on whether elements of the Participants' 
proposal entail cross-subsidization of activities (for example: 
Allocating 60% of Participants' fees to Equities Participants and 40% 
to Options Participants is unlikely to reflect these groups' relative 
message traffic; and discounting fees associated with message traffic 
for market-making activities based on quote/trade ratios reduces fees 
paid by Industry Members who are market makers); any views on how these 
cross-subsidizations benefit or harm efficiency, competition, and 
capital formation; and any views on whether there are other benefits or 
costs of adopting such an approach;
    12. Commenters' views on whether the lack of Industry Member 
participation on the Operating Committee prevents the Participants from 
arriving at an equitable allocation of CAT fees between Participants 
and Industry Members, and across members of those groups;
    13. Commenters' views on how any inherent conflicts of interest may 
be addressed in the proposal;
    14. Commenters' views on how allowing the Operating Committee to 
determine by vote how Participant fees are allocated across 
Participants would benefit or harm efficiency, competition, and capital 
formation, assuming that some proportion of CAT fees are to be 
allocated to Participants as a group; and any views on whether there 
are other benefits or costs of adopting such an approach;
    15. Commenters' views on the proposed quarterly Participant CAT 
fee, including views on its calculation; any views on whether the 
proposed fee raises any competitive issues; and any views on whether 
the proposed fee is consistent with the funding principles expressed in 
the CAT NMS Plan, which state that the Operating Committee shall seek, 
among other things, ``to create transparent, predictable revenue 
streams for the Company that are aligned with the anticipated costs to 
build, operate and administer the CAT and the other

[[Page 40134]]

costs of the Company;'' \442\ ``to establish an allocation of the 
Company's related costs among Participants and Industry Members that is 
consistent with the Exchange Act taking into account . . . distinctions 
in the securities trading operations of Participants and Industry 
Members and their relative impact upon the Company resources and 
operations;'' \443\ and ``to avoid any disincentives such as placing an 
inappropriate burden on competition and a reduction in market 
quality;'' \444\ and
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    \442\ Section 11.2(a) of the CAT NMS Plan.
    \443\ Section 11.2(b) of the CAT NMS Plan.
    \444\ Section 11.2(e) of the CAT NMS Plan.
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    16. Commenters' views on the decision to use total budgeted costs 
for the CAT for the relevant year as the Total CAT Costs for 
calculating fees for Participants and Industry Members, rather than 
costs already incurred; views on the statement that the total budgeted 
costs for the CAT may be adjusted on a quarterly basis by the Operating 
Committee; and views on the treatment of any surpluses.

The Commission also requests that commenters provide analysis to 
support their views, if possible.
    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposals should be approved or 
disapproved by August 16, 2021. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
August 30, 2021. Comments may be submitted by any of the following 
methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number 4-698 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 Number 4-698. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be 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. Copies of the filing also will be available for inspection 
and copying at the Participants' principal offices. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number 4-698 and should be submitted on or before 
August 16, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\445\
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    \445\ 17 CFR 200.30-3(a)(85).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-15810 Filed 7-23-21; 8:45 am]
BILLING CODE 8011-01-P