Joint Industry Plan; Order Approving an Amendment to the National Market System Plan Governing the Consolidated Audit Trail; Notice, 62628-62686 [2023-19525]

Download as PDF 62628 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices SECURITIES AND EXCHANGE COMMISSION [Release No. 34–98290; File No. 4–698] Joint Industry Plan; Order Approving an Amendment to the National Market System Plan Governing the Consolidated Audit Trail; Notice September 6, 2023. lotter on DSK11XQN23PROD with NOTICES2 I. Introduction On March 13, 2023, the Consolidated Audit Trail, LLC (‘‘CAT LLC’’), on behalf of the Participants 1 to the National Market System Plan Governing the Consolidated Audit Trail (‘‘CAT NMS Plan’’ or ‘‘Plan’’),2 filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 11A of the Exchange Act 3 and Rule 608 of Regulation National Market System (‘‘Regulation NMS’’) thereunder,4 a proposed amendment to the CAT NMS Plan (‘‘Proposed Amendment’’) to implement a revised funding model (‘‘Executed Share Model’’) for the consolidated audit trail (‘‘CAT’’) 5 and to establish a fee schedule for Participant 1 The Participants are: BOX Exchange LLC, Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe C2 Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., Cboe Exchange, Inc., The Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’), Investors Exchange LLC, Long-Term Stock Exchange, Inc., MEMX LLC, Miami International Securities Exchange, 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’’). 2 The CAT NMS Plan is a national market system plan approved by the Commission pursuant to Section 11A of the Securities Exchange Act of 1934 (‘‘Exchange Act’’) and the rules and regulations thereunder. See Securities Exchange Act Release No. 78318 (Nov. 15, 2016), 81 FR 84696 (Nov. 23, 2016) (‘‘CAT NMS Plan Approval Order’’). The CAT NMS Plan is Exhibit A to the CAT NMS Plan Approval Order. See CAT NMS Plan Approval Order, 81 FR at 84943–85034. The CAT NMS Plan functions as the limited liability company agreement of the jointly owned limited liability company formed under Delaware state law through which the Participants conduct the activities of the CAT (‘‘Company’’). Each Participant is a member of the Company and jointly owns the Company on an equal basis. The Participants submitted to the Commission a proposed amendment to the CAT NMS Plan on August 29, 2019, which they designated as effective on filing. On August 29, 2019, the Participants replaced the CAT NMS Plan in its entirety with the limited liability company agreement of a new limited liability company, CAT LLC, which became the Company. See Securities Exchange Act Release No. 87149 (Sept. 27, 2019), 84 FR 52905 (Oct. 3, 2019). The latest version of the CAT NMS Plan is available at https:// catnmsplan.com/about-cat/cat-nms-plan. 3 15 U.S.C. 78k–1. 4 17 CFR 242.608. 5 The Proposed Amendment modifies the existing funding model in Article XI. of the CAT NMS Plan. VerDate Sep<11>2014 18:56 Sep 11, 2023 Jkt 259001 CAT fees in accordance with the Executed Share Model (‘‘Proposed Participant Fee Schedule’’).6 The Proposed Amendment was published for comment in the Federal Register on March 21, 2023.7 On June 16, 2023, the Commission instituted proceedings pursuant to Rule 608(b)(2)(i) of Regulation NMS 8 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 (‘‘OIP’’).9 This order approves the Proposed Amendment. 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.10 On November 15, 2016, the Commission approved the CAT NMS Plan.11 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.12 Under the CAT NMS Plan, CAT 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 6 See Letter from Brandon Becker, Chair, CAT NMS Plan Operating Committee, to Vanessa Countryman, Secretary, Commission (Mar. 13, 2023) (‘‘Transmittal Letter’’). 7 See Securities Exchange Act Release No. 97151 (Mar. 15, 2023), 88 FR 17086 (Mar. 21, 2023) (‘‘Notice’’). Comments received in response to the Notice can be found on the Commission’s website at https://www.sec.gov/comments/4-698/4-698a.htm. 8 17 CFR 242.608(b)(2)(i). 9 See Securities Exchange Act Release No. 97750 (June 16, 2023), 88 FR 41142 (June 23, 2023). Comments received in response to the OIP can be found on the Commission’s website at https:// www.sec.gov/comments/4-698/4-698-a.htm. 10 17 CFR 242.613. 11 See CAT NMS Plan, supra note 2. 12 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 2, at Section 1.1. See also id. at Section 11.1(b). PO 00000 Frm 00002 Fmt 4701 Sfmt 4703 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 The Plan specifies 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 14 that are Execution Venues,15 including ATSs,16 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 CATrelated 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).’’ 17 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’’).18 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 19 (‘‘Post-Amendment 13 Id. at Section 11.2(b) and (e). 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. 15 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. 16 Id. 17 CAT NMS Plan, supra note 2, at Section 11.2(c). See id. at Article XI for additional detail. 18 See Securities Exchange Act Release No. 88890, 85 FR 31322 (May 22, 2020). 19 ‘‘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 14 The E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices Expenses’’). Section 11.6 establishes target deadlines for four Financial Accountability Milestones (Periods 1, 2, 3 and 4) 20 and reduces the amount of fee recovery available to the Participants if these deadlines are missed.21 lotter on DSK11XQN23PROD with NOTICES2 III. Discussion and Commission Findings After careful review, the Commission, pursuant to Section 11A of the Exchange Act,22 and Rule 608(b)(2) 23 thereunder, is approving the Proposed Amendment. Section 11A of the Exchange Act authorizes the Commission, by rule or order, to authorize or require the self-regulatory organizations to act jointly with respect to matters as to which they share authority under the Exchange Act in planning, developing, operating, or regulating a facility of the national market system.24 Rule 608 of Regulation NMS authorizes two or more SROs, acting jointly, to file with the Commission proposed amendments to an effective NMS plan,25 and further provides that the Commission shall approve an amendment to an effective NMS plan if it finds that the 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.26 The Participants have sufficiently demonstrated that the proposed allocation of fees is reasonable. There are a number of potential approaches to allocating the costs of operating the CAT, all of which have relative strengths and weaknesses. In adopting Rule 613 and approving the CAT NMS Plan, the Commission determined that the CAT was appropriate in order to enable the SROs and the Commission to 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).’’ CAT NMS Plan, supra note 2, at Section 1.1. 20 See CAT NMS Plan, supra note 2, at Section 11.6(a)(i). 21 Id. at Section 11.6(a)(ii) and (iii). 22 15 U.S.C. 78k–1. 23 17 CFR 242.608(b)(2). 24 See 15 U.S.C. 78k–1(a)(3)(B). 25 See 17 CFR 242.608. 26 See 17 CFR 242.608(b)(2). VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 fulfill their responsibilities to oversee the equities and options markets. The CAT NMS Plan requires both Execution Venues (which include the Participants) and Industry Members (which include CAT Executing Brokers) to fund the CAT. The proposed one-third allocation of CAT fees to the applicable Participant in a transaction, the CAT Executing Broker for the buyer in a transaction and the CAT Executing Broker for the seller in a transaction, assesses an equal fee to the three primary roles in a transaction: the buyer, seller and market regulator. In our view, allocating the costs for the CAT among the three parties who play significant roles in transactions reportable to the CAT in this manner represents a reasonable method of allocating costs among the parties who participate in and benefit from those markets. Commenters expressed concern that the Participant exchanges and FINRA would pass their share of costs on to Industry Members. But the Exchange Act expressly contemplates the ability of the Participants to recoup the costs of fulfilling their statutory obligations under the Exchange Act. And, as we explained in adopting Rule 613 and approving the CAT NMS Plan, the CAT is important to the performance of these regulatory activities in modern, interconnected markets, to the ultimate benefit of investors and market participants. Moreover, these costs will not be unchecked. The Participants must file their proposed rule changes relating to fees with the Commission. Those proposed rule changes are published by the Commission and there is an opportunity for public comment. CAT fees, like any fees the Participants collect from their members to fund their SRO responsibilities in market and member regulation, must be consistent with applicable statutory standards under the Exchange Act, including being reasonable, equitable and not unfairly discriminatory. We also conclude that the use of executed equivalent share volume provides a reasonable basis for the calculation of these fees. Executed equivalent share volume is readily determinable and—because it is based on trading activity, which impacts CAT costs—provides a reasonable proxy for the costs to CAT, allowing CAT Reporters to be assessed fees corresponding to the cost burden they impose on the CAT. The use of CAT Executing Brokers is also appropriate because the proposed Executed Share Model is based on executed equivalent shares (emphasis added). Therefore, charging the CAT Executing Brokers would reflect their executing role in PO 00000 Frm 00003 Fmt 4701 Sfmt 4703 62629 each transaction, which is already recorded in transaction reports from the exchanges and FINRA’s equity trade reporting facilities for calculating the CAT fees. Because such entities are already identified and their CAT fees are known, this method could streamline the billing process and allow such entities to calculate their own fees. We also conclude that the division of fees into Prospective CAT Fees and the Historical CAT Assessment provides a reasonable method of allowing Participants to recoup their significant expenditures on the development of CAT to date while ensuring funding for future operations of the system. And the provision of fee calculation information, approach to billing and collection of fees, conforming changes and the Proposed Participant Fee Schedule are all reasonable. The Commission is therefore approving the Proposed Amendment.27 A. Funding Model 1. Overview CAT LLC proposes to replace the funding model set forth in Article XI of the CAT NMS Plan (‘‘Original Funding Model’’) with the Executed Share Model. The Original Funding Model involved a bifurcated approach, where costs associated with building and operating the CAT would be borne by (1) Industry Members (other than alternative trading systems (‘‘ATSs’’) that execute transactions in Eligible Securities (‘‘Execution Venue ATSs’’)) through fixed tiered fees based on message traffic for Eligible Securities, and (2) Participants and Industry Members that are Execution Venue ATSs for Eligible Securities through fixed tiered fees based on market share.28 In contrast, the Executed Share Model would charge fees based on the executed equivalent share volume of transactions in Eligible Securities.29 In addition, instead of charging fees to Industry Members, under the Executed Share Model, fees would be charged to each Industry Member that is a CAT Executing Broker 30 for the buyer in a transaction in Eligible Securities (‘‘CAT Executing Broker for the Buyer’’ or ‘‘CEBB’’) and each Industry Member that is the CAT Executing Broker for the seller in a transaction in Eligible 27 Id. 28 See CAT NMS Plan, supra note 2, at Section 11.3(a) and (b). 29 See Notice, supra note 7, 88 FR at 17086. 30 See infra Section III.A.4. for the definition of CAT Executing Broker. E:\FR\FM\12SEN2.SGM 12SEN2 62630 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices Securities (‘‘CAT Executing Broker for the Seller’’ or ‘‘CEBS’’).31 Under the Executed Share Model, CAT LLC proposes to establish two categories of CAT fees. The first category of CAT fees would be fees (‘‘CAT Fees’’) payable by Participants and Industry Members that are CAT Executing Brokers for the Buyer and for the Seller with regard to CAT costs not previously paid by the Participants (‘‘Prospective CAT Costs’’).32 The second category of CAT fees would be fees (‘‘Historical CAT Assessments’’) to be payable by Industry Members that are CAT Executing Brokers for the Buyer and for the Seller with regard to CAT costs previously paid by the Participants (‘‘Past CAT Costs’’).33 For each category of fees, each CEBB and each CEBS will be required to pay a CAT fee for each such transaction in Eligible Securities in the prior month based on CAT Data.34 The CEBB’s CAT fee or CEBS’s CAT fee (as applicable) for each transaction in Eligible Securities will be calculated by multiplying the number of executed equivalent shares in the transaction by one-third and by the reasonably determined Fee Rate,35 as described below.36 Participants would incur CAT Fees only for Prospective CAT Costs and the Participant CAT Fee will be calculated by multiplying the number of executed equivalent shares in the transaction by one-third and by the reasonably determined Fee Rate.37 The Participants’ one-third share of Historical CAT Costs 38 and such other additional Past CAT Costs as reasonably determined by the Operating Committee will be paid by the cancellation of loans made to the Company on a pro rata basis based on the outstanding loan amounts due under the loans.39 FINRA CAT would be responsible for calculating the CAT fees and submitting invoices to the CAT Executing Brokers based on this CAT Data.40 All data used to calculate the fees under the Executed Share Model would be CAT Data, and, therefore, it would be directly available through the CAT to FINRA CAT for calculating CAT fees.41 Once the Proposed Amendment has been approved by the Commission, the Participants would separately file proposed rule filings pursuant to Section 19(b) of the Exchange Act 42 to establish the amounts of the proposed CAT Fees and Historical CAT Assessments to be charged to Industry Members, subject to the satisfaction of applicable Financial Accountability Milestones as set forth in Section 11.6 of the CAT NMS Plan and the implementation of the billing and collection system for the CAT fees.43 In each proposed rule filing, if the Participants seek to recover amounts under the Financial Accountability Milestones, they would need to discuss their completion of the applicable milestone.44 2. Allocation of Fee Among Participants and Industry Members Under the Executed Share Model, CAT fees would be allocated one-third to the applicable Participant, one-third to the CEBS and one-third to the CEBB of a transaction. Certain commenters opposed the proposed allocation.45 39 See 40 See 41 Id. 42 15 lotter on DSK11XQN23PROD with NOTICES2 31 See Notice, supra note 7, 88 FR at 17087. 32 Id. at 17086; see also proposed Section 11.3(a). The defined term ‘‘CAT Fees’’ applies specifically to CAT fees related to Prospective CAT Costs. Id. 33 See Notice, supra note 7, 88 FR at 17086; see also proposed Section 11.3(b). 34 See Notice, supra note 7, 88 FR at 17093; see also proposed Section 11.3(a)(iii), proposed Section 11.3(b)(iii). 35 See infra Section III.A.5.a. (Prospective CAT Fees—Fee Rate Formula) for the definition and description of the calculation of the Fee Rate. See also infra notes 1100–1102 and accompanying text (stating that the anticipated CAT Fee Rate and the fee rate for Historical CAT Assessments are expected to be relatively small). 36 See Notice, supra note 7, 88 FR at 17095; see also proposed Section 11.3(a)(iii), proposed Section 11.3(b)(iii). 37 See Notice, supra note 7, 88 FR at 17094; see also proposed Section 11.3(a)(ii). 38 The actual amount of Past CAT Costs to be recovered through the Historical CAT Assessments would be reduced by an amount of ‘‘Excluded Costs.’’ The resulting amount would be defined as ‘‘Historical CAT Costs’’ in proposed Section 11.3(b)(i)(C) of the CAT NMS Plan. See infra Section III.A.6.a. for a discussion of Historical CAT Costs. VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 proposed Section 11.3(b)(ii). Notice, supra note 7, 88 FR at 17088. U.S.C. 78s(b). Notice, supra note 7, 88 FR at 17086, 43 See 17122. 44 Proposed Section 11.3(b)(iii)(B)(III) would prohibit any Participant from filing proposed rule filings pursuant to Section 19(b) of the Exchange Act regarding any Historical CAT Assessment until any applicable Financial Accountability Milestone in Section 11.6 of the CAT NMS Plan has been satisfied. 45 See Letters to Vanessa Countryman, Secretary, Commission, from Stephen John Berger, Managing Director, Global Head of Government and Regulatory Policy, Citadel Securities, dated July 14, 2023 (‘‘Citadel July Letter’’); August 22, 2023 (‘‘Citadel August Letter’’); Marcia E. Asquith, Corporate Secretary, EVP, Board and External Relations, FINRA, dated May 25, 2023 (‘‘FINRA May 2023 Letter’’); April 11, 2023 (‘‘FINRA April 2023 Letter’’); and June 22, 2022 (‘‘FINRA June 2022 Letter’’) (the FINRA June 2022 Letter was submitted in response to the prior funding proposal and was attached and incorporated by reference in the FINRA April 2023 Letter); Ellen Greene, Managing Director, Equities & Options Market Structure, and Joseph Corcoran, Managing Director, Associate General Counsel, SIFMA, dated July 13, 2023 (‘‘SIFMA July 2023 Letter’’); June 5, 2023 (‘‘SIFMA June 2023 Letter’’); May 2, 2023 (‘‘SIFMA May 2023 Letter’’); January 12, 2023 (‘‘SIFMA January 2023 Letter’’); December 14, 2022 (‘‘SIFMA December PO 00000 Frm 00004 Fmt 4701 Sfmt 4703 FINRA stated that, while the Proposed Amendment justified the fairness of the Executed Share Model because it would operate like other fees, like FINRA’s Trading Activity Fee (‘‘TAF’’), Section 31 fees, and the options regulatory fee,46 the Proposed Amendment did not support why those fee frameworks should be used as a model in this context.47 For example, FINRA stated that the TAF is designed to recover the costs of FINRA’s regulatory activities, while the CAT fees are intended to align with the costs to build, operate and administer the CAT.48 Further, FINRA stated that the Proposed Amendment has insufficiently explained the connection between the TAF and CAT fees, merely stating that they are similar fees because they are transaction-based fees used to provide funding for regulatory costs.49 FINRA stated that ‘‘CAT LLC’s observations superficially focus on the fact that these fees also use transaction-based metrics (and may be assessed on members) and neglects other factors relevant to the analysis including, for example, that these fees are used in combination with other funding mechanisms and metrics to support an overall funding framework.’’ 50 Another commenter stated that the proposed CAT funding model cannot be compared to Section 31 fees, the TAF, or the options regulatory fee because the commenter believes that CAT fees appear to be unconstrained and out of the industry’s control.51 The commenter explained that, unlike the proposed CAT fees, Section 31 fees are based on an annual budget set by Congress and the options regulatory fee is only applied to customer transactions and thus can be easily passed-on to other market participants (unlike CAT fees for market making activity).52 Additionally, 2022 Letter’’); October 7, 2022 (‘‘SIFMA October 2022 Letter’’); and June 22, 2022 (‘‘SIFMA June 2022 Letter’’) (the SIFMA June 2022 Letter, SIFMA October 2022 Letter, SIFMA December 2022 Letter and SIFMA January 2023 Letter were submitted in response to the prior funding proposal and incorporated by reference in the SIFMA May 2023 Letter); Joanna Mallers, Secretary, FIA Principal Traders Group, dated July 14, 2023 (‘‘FIA Letter’’); Douglas A. Cifu, Chief Executive Officer, Virtu Financial, dated July 13, 2023 (‘‘Virtu Letter’’). See infra note 58. 46 See Notice, supra note 7, 88 FR at 17122. 47 See FINRA June 2022 Letter at 4. 48 See FINRA April 2023 Letter at 8. 49 Id. The commenter also stated that ‘‘it is unclear how assessing on FINRA the largest allocation of the SRO portion of CAT expenses ‘provides funding for regulatory costs’ in any reasonable and equitable sense comparable to the TAF . . .’’ Id. 50 FINRA May 2023 Letter at 3. 51 Citadel July Letter at 27. 52 Id. The commenter also stated that FINRA has sought to avoid increases in the TAF. Id. E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES2 the commenter stated that there is no precedent for fees to be allocated to Industry Members in perpetuity, stating that this would contravene the Exchange Act.53 One commenter disagreed with the Participants’ statement that the Executed Share Model’s similarity to other transaction-based fees approved by the Commission is adequate justification for consistency with the Exchange Act.54 The commenter stated that similarity to other transaction-based fees is not an adequate basis to show that the Executed Share Model is consistent with relevant standards; each proposed fee must be individually supported.55 For example, the commenter stated that the Participants compared the Executed Share Model to Section 31 fees as justification for the Executed Share Model, but failed to address the differences between the Executed Share Model and Section 31 fees, such as the Executed Share Model’s treatment of high-volume trades in low-priced stocks while Section 31 fees are based on the notional value of a trade.56 Commenters also questioned the Participants’ justifications for the onethird allocation methodology. FINRA stated that the Proposed Amendment did not justify why the proposed allocation by thirds to the Participant, buy-side and sell-side is equitable in the context of the CAT NMS Plan.57 FINRA also stated that the Proposed Amendment did not consider alternatives suggested by commenters on a prior proposed funding model,58 such as a model similar to Section 31 fees and a CAT funding model based on the ‘‘Cost Recovery Principle’’ and the ‘‘Benefits Received Principle.’’ 59 FINRA 53 Id. This commenter stated that it is inequitable to require Industry Members to fund CAT costs in perpetuity when they lack representation on the Operating Committee and therefore have little transparency into the drivers of the costs, and there is no plan to contain the costs. See id. at 2. 54 See SIFMA June 2022 Letter at 4. 55 Id. 56 See SIFMA October 2022 Letter at 7. See also Citadel August Letter at 5. 57 See FINRA June 2022 Letter at 3. 58 See Securities Exchange Act Release Nos. 94984 (May 25, 2022), 87 FR 33226 (June 1, 2022); 96394 (Nov. 28, 2022), 87 FR 74183 (Dec. 2, 2022); and Letter from Michael Simon, Chair Emeritus, CAT NMS Plan Operating Committee, to Vanessa Countryman, Secretary, Commission (Feb. 15, 2023). 59 See FINRA April 2023 Letter at 5 (citing Letter to Vanessa Countryman, Secretary, Commission, from Lawrence Harris, Fred V. Keenan Chair in Finance, Professor of Finance and Business and Economics, U.S.C. Marshall School of Business, dated June 21, 2022). VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 urged the Commission to require those alternatives to be analyzed.60 One commenter stated that the Participants have not met their burden to demonstrate the proposed allocation is consistent with the Exchange Act fee standards and not arbitrary.61 The commenter stated that because FINRA is funded by Industry Members, Industry Members would pay over 80% of CAT costs since they must pay not only their own share but FINRA’s as well; therefore, the Commission should disapprove the proposal.62 The commenter stated that the Proposed Amendment does not explain how allocating 80% of total CAT costs to the industry in perpetuity without a mechanism to limit the budget 63 is consistent with the Exchange Act and guidance on SRO filings related to fees because the industry has no role in the governance, oversight or design of CAT and does not benefit from the CAT.64 Another commenter stated that Industry Members will bear significantly more costs than the Proposal suggests if the Participants decide to charge their members to fund their share of CAT fees.65 The commenter stated that ‘‘[i]f the Participants were to do this, it 60 Id. Another commenter suggested a review of alternative approaches to funding, such as the extent to which CAT could be funded by Section 31 fees. See Letter to Vanessa Countryman, Secretary, Commission, from Kirsten Wegner, Chief Executive Officer, Modern Markets Initiative, dated July 13, 2023 (‘‘MMI July Letter’’), at 4. 61 See SIFMA May 2023 Letter at 6; SIFMA June 2023 Letter at 1–2. The commenter also stated that the Proposed Amendment provides unsupported conclusory statements that it meets the requirements of the Exchange Act. See SIFMA June 2023 Letter at 2. See also id. at n 11; FIA Letter at 2. 62 See SIFMA May 2023 Letter at 2. See also SIFMA June 2022 Letter at 1–2 (stating that the proposed cost allocation methodology is inconsistent with Exchange Act fee standards because most costs would be imposed on Industry Members). 63 The commenter stated that the CAT annual budget increased over 30% in the last year. See SIFMA June 2023 Letter at 4. See also Virtu Letter at 4 (stating that the budget increase indicated that the Industry Members could be subject to everincreasing fees with no say on the budget). See also FIA Letter at 3 (stating that ‘‘[w]ith little to no skinin-the-game, the Participants will not be incentivized to control costs.’’). See infra Section III.A.5.b (discussing budgeted CAT costs and comments suggesting a review mechanism to control costs). 64 See SIFMA June 2023 Letter at 3, 4. The commenter stated that approving such a proposal would ‘‘directly threaten[ ] efficiency, competition, and capital formation in U.S. securities markets.’’ Id. at 4. The commenter also quoted a Commission release stating that the Participants are potentially conflicted in allocating CAT fees to themselves and the Industry Members. See Securities Exchange Act Release No. 89618 (Aug. 19, 2020), 85 FR 65470, 65482 (Oct. 15, 2020). Another commenter stated that the allocation of 80% to the industry was unfair. See Virtu Letter at 4. 65 See FIA Letter at 2. PO 00000 Frm 00005 Fmt 4701 Sfmt 4703 62631 would render the entire Funding Model meaningless, with Industry Members bearing 100% of CAT costs.’’ 66 Another commenter also stated that it was inappropriate to place responsibility for funding the CAT ‘‘on industry members that do not stand to benefit from it.’’ 67 One commenter stated that the Proposed Amendment does not demonstrate that it is equitable, as required by Section 6(b)(4),68 or rational, as required by the Administrative Procedure Act,69 to allocate two-thirds of CAT costs to Industry Members, stating that ‘‘there is no suggestion that Industry Members somehow receive 67% of the benefits from CAT.’’ 70 Furthermore, the commenter stated that the Proposed Amendment would result in an inequitable allocation to a small number of Industry Members.71 The commenter also stated that the Proposed Amendment would result in the allocation of all of the costs to build and operate the CAT to Industry Members and would therefore be inconsistent with Section 6(b)(4) to equitably allocate reasonable fees.72 The commenter stated that, in addition to the proposed allocation to Industry Members, FINRA’s 11% cost allocation would be passed-on to Industry Members and that exchanges would also pass-on their 22% cost allocation.73 The commenter stated that, with FINRA’s allocation, 78% of the costs to build and operate the CAT would be allocated to Industry Members under the Proposed Amendment.74 The commenter stated that 78% is the same amount allocated to Industry Members in a prior CAT funding model proposal from 2021, and stated that in the Proposed Amendment, the Operating Committee concedes that the 2021 allocation ‘‘may have an adverse effect on competition, liquidity or other aspects of market structure,’’ 75 however the Proposed Amendment does not explain why using a different metric—executed share volume rather than message traffic—to create the same allocation would not result in similar consequences.76 Further, the commenter stated that Industry Members may also be required 66 Id. 67 See Virtu Letter at 2. U.S.C. 78f(b)(4). 69 5 U.S.C. 551 et seq. 70 See Citadel July Letter at 17. 71 Id. 72 Id. at 1, 16, 22. 73 Id. at 1, 21, 22. 74 Id. at 21. 75 Id. 76 See Citadel July Letter at 21. 68 15 E:\FR\FM\12SEN2.SGM 12SEN2 62632 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices to pay the exchange cost allocation,77 citing a statement in the Proposed Amendment that ‘‘each Participant may determine to charge their members fees to fund their share of the CAT fees.’’ 78 The commenter stated that if exchanges choose to do this, then Industry Members would be responsible for 100% of CAT costs, which would ‘‘distort incentives and hinder the prioritization of critical cost-control measures, as the firms governing CAT are not bearing any of the associated costs.’’ 79 The commenter requested that the Commission prohibit exchanges from passing-on their CAT costs.80 The commenter also stated that even after restructuring the funding model to base allocation on share volume instead of message traffic, as in prior funding model proposals, the allocation to exchanges stayed the same, arguing that the exchanges are unwilling to allocate themselves more than 22% of total costs.81 The commenter stated that the proposed allocation methodology is inconsistent with the Exchange Act because of the excessive percentage of total costs proposed to be allocated to Industry Members and the unfair method of allocating costs among Industry Members,82 stating, ‘‘[t]he allocation methodology will have a direct and negative impact on market efficiency, competition, and capital formation, and the Commission must comprehensively assess those impacts before approving this filing.’’ 83 The commenter stated that the Proposed Amendment does not provide the percentage of total costs to build and operate the CAT that will be borne by Industry Members in practice.84 The commenter stated that it is necessary to determine the ultimate allocation of CAT costs to evaluate whether the proposed allocation is consistent with the Exchange Act, arguing that the statements made in support of the allocation were premised on the Participants being responsible for one77 Id. at 22. See also Citadel August Letter at 2. Citadel July Letter at 22. See also Notice, supra note 7, 88 FR at 17107. The commenter also stated that while the Proposed Amendment describes the funding model as ‘‘neutral as to location and manner of execution,’’ counterparties to off-exchange transactions would receive higher fees than on-exchange transactions if exchanges choose not to pass-on their cost allocation to Industry Members. See Citadel July Letter at 21. See also Notice, supra note 7, 88 FR at 17087. 79 Citadel July Letter at 22. See also id. at 16. See also Citadel August Letter at 2 (stating that an allocation of 100% of CAT costs to Industry Members cannot be lawful). 80 Citadel July Letter at 22. 81 Id. at 10. 82 Id. at 15. 83 Id. 84 See Citadel August Letter at 2. lotter on DSK11XQN23PROD with NOTICES2 78 See VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 third of total CAT costs, and that if this is untrue, ‘‘the filing must be completely reconsidered, taking into account (a) the impact on market efficiency, competition and capital formation of allocating this magnitude of additional costs to Industry Members, (b) whether such a lopsided allocation is fair and equitable, and (c) the implications for CAT governance and budget control if the firms governing CAT do not have any skin-in-the-game.’’ 85 One commenter stated that the Participants do not account for ‘‘the time and expense Industry Members have devoted to developing and maintaining internal systems to be able to report the [sic] CAT, as well as the time and expense Industry Members have devoted to assisting the Operating Committee with its job of developing reporting specifications that allow the CAT to achieve its regulatory purpose’’ in the proposed allocation 86 and that ‘‘this omission is a flaw with the Participants’ decision to allocate twothirds of the CAT costs to Industry Members and its inclusion would demonstrate that the Participants’ Executed Share Model does not provide for the equitable allocation of reasonable fees.’’ 87 Similarly, one commenter stated that the allocation does not take into account fees currently paid by the industry and implementation costs incurred by Industry Members to comply with CAT reporting requirements.88 The commenter stated that Industry Members already provide funding for regulatory matters to exchanges through regulatory fees, membership fees, market data fees, and registration fees, and that these fees must be factored into any equitable or rational allocation of CAT costs.89 The commenter stated that although the Proposed Amendment argues that there is no precedent for regulatory fees to be determined based on the cost of compliance of a regulated entity, it is necessary to take into account all CAT-related costs including those already allocated to Industry 85 Id. 86 SIFMA June 2022 Letter at 4. See also SIFMA January 2023 Letter at 4. 87 SIFMA June 2022 Letter at 4–5. See also SIFMA January 2023 Letter at 5; Virtu Letter at 3. 88 See Citadel July Letter at 17. See also Virtu Letter at 2 (noting that Industry Members ‘‘already provide the Plan Participants with a very substantial level of funding through membership fees, registration and licensing fees, dedicated regulatory fees, and options regulatory fees’’). 89 See Citadel July Letter at 17 (further stating, ‘‘Industry Members are already bearing nearly all of the total CAT-related costs, at a rate much higher than the Commission estimated in its approval of the 2016 CAT NMS Plan.’’ Id. at 18). PO 00000 Frm 00006 Fmt 4701 Sfmt 4703 Members to assess whether the Proposed Amendment is equitable.90 Commenters also objected to statements made in the Proposed Amendment that the complexity of Industry Member business models contributes substantially to the costs of the CAT.91 One commenter stated that the proposed allocation of two-thirds of CAT costs to Industry Members is unfair, unreasonable and arbitrary because the Participants are equally responsible for the complexity of trading activity in the markets.92 The commenter disagreed with the Participants’ argument that the allocation satisfies Exchange Act fee standards because Industry Members and the complexity of their business models drive the costs of the CAT, by stating that the examples of complexities provided were developed to address order types, activities and fee structures (such as the maker-taker fee structure) established by the Participant exchanges.93 The commenter stated that the Participants are just as responsible for such cost-driving complex trading activity in the equity and options markets as Industry Members due to the ‘‘large number of equity and options exchanges established by the exchange families with fundamentally different execution models and order types.’’ 94 The commenter stated that the Participant exchanges have not analyzed how their own business decisions have resulted in the complexity of Industry Member order routing practices and CAT costs.95 Another commenter stated that the complexity arguments in the Proposed Amendment contradict statements from the Operating Committee that stringent performance and other requirements for processing CAT data are significant drivers of CAT costs,96 and that the complexity arguments suggest that costs should be allocated evenly among Industry Members, not just a small group of Industry Members based on volume.97 Commenters also disagreed with other justifications made in the Proposed Amendment for the proposed allocation; specifically, that there are more Industry Members than Participants and that Industry Members receive more in 90 Id. 91 See Notice, supra note 7, 88 FR at 17104. SIFMA May 2023 Letter at 3. See also SIFMA January 2023 Letter at 2, 3–4. 93 See SIFMA May 2023 Letter at 6–7. See also SIFMA January 2023 Letter at 3; Notice, supra note 7, 88 FR at 17104. 94 SIFMA January 2023 Letter at 3. 95 See SIFMA May 2023 Letter at 7. 96 See Citadel July Letter at 17–18. 97 Id. at 18. 92 See E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices revenue than the Participants.98 One commenter stated that these assertions are not relevant in demonstrating that the proposed allocation is fair and reasonable.99 The commenter stated that the Participants are justifying the allocation based on the ability to pay rather than cost generation, which the commenter believes is inconsistent ‘‘with the Participant Exchanges’ proposed approach . . . of allocating CAT costs based on approximate responsibility for generating them . . .’’ and ‘‘with the historical CAT decision to allocate costs to the parties responsible for generating them.’’ 100 The commenter suggested an alternative allocation that would equally split CAT costs between Participant exchanges and Industry Members, while FINRA would be subject only to a nominal regulatory user fee to access CAT Data.101 Another commenter stated that, while most Industry Members will pay little to no CAT costs, 20 Industry Members will be responsible for 75% of the costs allocated to Industry Members.102 The commenter said this would contradict the Proposed Amendment’s arguments that there are more Industry Members than Participants and that Industry Members have greater financial resources than Participants because the Operating Committee would outnumber the Industry Members that would be paying the most in costs.103 The commenter also stated that the Proposed Amendment lacks support for the proposed allocation.104 The commenter stated that the Operating Committee has not met its burden to demonstrate that the proposed allocation is consistent with the 98 See Notice, supra note 7, 88 FR at 17104. SIFMA May 2023 Letter at 7. See also SIFMA January 2023 Letter at 4. 100 See SIFMA May 2023 Letter at 7. The commenter cited to the funding principles in Section 11.2 of the CAT NMS Plan. 101 See SIFMA January 2023 Letter at 4. See also SIFMA May 2023 Letter at 8; SIFMA June 2022 Letter at 5; SIFMA October 2022 Letter at 4. This commenter also suggested another alternative allocation in which costs would be allocated to those Participants and Industry Members most directly responsible for the costs. Under this alternative, Industry Members would be responsible for the cost associated with initial ingestion of the data into the CAT system. The commenter explained that Participants would be responsible for the costs associated with the stages after the data is initially ingested into the CAT system because the regulators directly control and benefit from these stages of the CAT system after ingestion. See SIFMA June 2022 Letter at 5–6. 102 See Citadel July Letter at 17. The commenter also stated that the Proposed Amendment does not explain why it would be equitable to allocate 50% of total CAT costs to 20 Industry Members and 22% of total CAT costs to 24 exchanges. Id. 103 Id. 104 Id. at 13. See also Citadel August Letter at 2. lotter on DSK11XQN23PROD with NOTICES2 99 See VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 Exchange Act.105 The commenter also stated that the Proposed Amendment does not consider the impact of the proposed allocation to Industry Members on market efficiency, competition and capital formation, particularly with respect to the costs the industry will incur to build systems to pass-through their CAT fees, the expected impact on volumes, the expected impact on retail investors, and the expected impact on market makers.106 The commenter suggested alternatives to the proposed allocation methodology.107 The commenter stated that Industry Members should not be allocated more than 50% of ongoing CAT costs (including FINRA’s allocation) due to their lack of industry voting representation and because they already bear nearly all of the total CATrelated costs.108 The commenter also suggested that exchanges should be prohibited from passing-on their CAT cost allocation to market participants,109 and that the Participants consider allocating costs to the Commission ‘‘to align incentives.’’ 110 The commenter recommended a consistent methodology for allocating costs to both Industry Members and exchanges.111 The commenter also recommended an allocation methodology that would ensure that ‘‘a small group of firms are not disproportionately bearing costs given that CAT is designed to facilitate market-wide surveillance across all market participants,’’ 112 and would not inequitably allocate costs to specific market segments (such as ‘‘retail trading activity in NMS stocks’’).113 The commenter suggested that the approach could have ‘‘(I) minimum and maximum fee levels, (II) appropriate calibrations for liquidity provision, (III) a volume component based on notional (instead of executed shares), and (IV) 105 See Citadel July Letter at 13. at 2, 16, 19, 20. The commenter further stated that the Proposed Amendment is inconsistent with the Exchange Act because it cannot equitably allocate fees and will harm market efficiency, competition and capital formation. Id. at 16. 107 Id. at 3, 30, 31. The commenter stated that the Commission must consider reasonable alternatives and that the proposal should be rejected and replaced by a proposal incorporating the commenter’s recommendations. Id. at 30, 2. 108 Id. at 3, 30, 31. 109 See Citadel July Letter at 3, 30, 31. 110 Id. at 3, 31. In response, CAT LLC stated that the Commission is not a party to the CAT NMS Plan, or subject to Rule 608 of Regulation NMS or Section 19(b) of the Exchange Act. See Letter to Vanessa Countryman, Secretary, Commission, from Brandon Becker, CAT NMS Plan Operating Committee Chair, dated July 28, 2023 (‘‘CAT LLC July 2023 Response Letter’’), at 31, n.144. 111 See Citadel July Letter at 30–31. 112 Id. at 30. 113 Id. at 3, 30. 106 Id. PO 00000 Frm 00007 Fmt 4701 Sfmt 4703 62633 consideration of additional metrics that could achieve a more equitable outcome (e.g., broker-dealer capital).’’ 114 Commenters also raised concerns about statements in the Proposed Amendment that CAT costs would be passed on to investors.115 One commenter stated, ‘‘[s]uch an assertion is inaccurate because it is almost certain that there will be scenarios faced by Industry Members in which they will not be able to figure out who was responsible for generating certain Historical CAT Costs.’’ 116 The commenter stated that such assertions would minimize the Participants’ obligation to allocate fees consistent with Exchange Act fee standards and could result in the inequitable allocation of CAT fees to Industry Members under the mistaken belief that such fees would be passed down to investors.117 FINRA objected to statements in the Proposed Amendment that Industry Members can pass through to their customers their CAT cost allocation and additional costs resulting from an increase in FINRA fees.118 FINRA stated that ‘‘[s]ummarily stating that investors can be made to bear the costs resulting from the Funding Model without a detailed description of and transparency into how these fees would be determined or passed on to customers is inadequate, and does not provide interested parties sufficient information to consider the costs and benefits related to the Fee Proposal.’’ 119 Another commenter expressed concern that CAT costs will be passed-through to investors directly or indirectly by affecting the transaction prices of equities, stating that this could negatively impact the investment returns of long-term investors (including retail investors).120 The commenter stated that the Participants have failed to analyze how passing-through CAT costs to investors is consistent with Exchange Act fee standards, and that the Commission has not fully considered 114 See id. at 30. See also Citadel August Letter at 5. 115 See SIFMA May 2023 Letter at 8; FINRA April 2023 Letter at 6–7; Citadel July Letter at 20; Citadel August Letter at 3; Letter to Vanessa Countryman, Secretary, Commission, from Lindsey Weber Keljo, Head—Asset Management Group, SIFMA, dated September 5, 2023 (‘‘SIFMA AMG Letter’’). See also Virtu Letter at 4 (noting the inherent difficulties in implementing systems and processes to track and pass through fees to the appropriate client firms and stating that executing brokers would likely end up absorbing the fees themselves). 116 See SIFMA May 2023 Letter at 8; see also Virtu Letter at 4. 117 See SIFMA May 2023 Letter at 8. 118 See FINRA April 2023 Letter at 6–7. 119 Id. at 7. 120 See SIFMA AMG Letter at 2. E:\FR\FM\12SEN2.SGM 12SEN2 62634 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES2 these economic effects on clients and other end investors.121 One commenter stated that many of the largest Industry Members would be allocated CAT fees based on proprietary trading activity, so they would not be able to pass through their fees to investors.122 The commenter urged an analysis of proprietary executed volume compared to customer executed volume in order to evaluate how CAT costs will be allocated among Industry Members and whether the allocation methodology is fair, equitable and not unfairly discriminatory.123 The commenter also stated that the Proposed Amendment is inconsistent with Section 6(b)(5) by imposing a new and increasing expense on investors, which would negatively impact liquidity and efficiency, and that the proposed allocation to Industry Members would disproportionately impact market makers (because 20 firms would have to pay most of the costs) and retail investors (due to their trading in sub-dollar NMS stocks that increase executed share volume), in violation of Section 6(b)(8).124 In response to the comment stating that the Participants had not analyzed a suggested Section 31-style approach to a funding model,125 CAT LLC stated that the CAT fee approach is similar to the Section 31 fee approach in how an exchange would be obligated to pay a transaction fee based on transactions occurring on that exchange, and that FINRA would be obligated to pay a transaction fee based on transactions in 121 Id. at 2, 3. The commenter stated that, ‘‘[u]nder the Exchange Act, the Participants are required to demonstrate that the Proposed Amendment: (1) provides ‘for the equitable allocation of reasonable dues, fees, and other charges,’ (2) is ‘not designed to permit unfair discrimination between customers, issuers, brokers or dealers’ and (3) does not ‘impose any burden on competition not necessary or appropriate in furtherance of the purposes’ of the Exchange Act.’’ Id. at 1, n.4 (citing to Sections 6 and 15A of the Exchange Act and Rule 700(b)(3)(iii) of the Commission’s Rules of Practice. 15 U.S.C. 78s; 15 U.S.C. 15o–3; 17 CFR 201.700(b)(3)(iii)). Approval of the Proposed Amendment, however, is governed by Rule 608 of Regulation NMS. That rule requires the Commission to approve a proposed amendment to an effective national market system plan if it finds that the 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 Act. 17 CFR 242.608(b)(2). 122 See Citadel July Letter at 20. See also Citadel August Letter at 3. 123 See Citadel August Letter at 3. The commenter said that such an analysis is feasible and should account for aggregate costs to be borne by affiliated entities, stating that this is required in Section 11.2(c) of the 2016 CAT NMS Plan. Id. 124 See Citadel July Letter at 2. See also infra notes 260–265. 125 See FINRA April 2023 Letter at 5. VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 the over-the-counter market.126 CAT LLC stated that the approaches are also similar because, in both, an exchange would be able to determine to pass the fee onto its members, as would FINRA.127 CAT LLC stated that if the Section 31 approach would comply with the Exchange Act, then the proposed CAT fee approach should also comply with the Exchange Act and CEBBs and CEBSs could determine whether to pass such fees onto their clients.128 In response, FINRA stated that the CAT LLC May 2023 Response Letter misrepresented the commenter’s letter by incorrectly stating that the commenter’s letter recommended an approach similar to Section 31 fees.129 FINRA clarified that it was noting that the Commission had received comments suggesting a model like the Section 31 fees, that the Participants had not ‘‘meaningfully analyzed’’ the suggested alternatives in the Proposed Amendment, and that the Commission should require the Participants to analyze the alternatives.130 CAT LLC further responded to FINRA’s objections to the use of the TAF as precedent for CAT fees— specifically, FINRA’s statement that unlike the proposed CAT fees, the TAF recovers the costs of FINRA’s regulatory activities, while the Proposed Amendment is designed to align with the costs to build, operate and administer the CAT.131 CAT LLC stated that there is no distinction between the two points raised by the commenter because CAT only has a regulatory purpose; therefore, costs to build, operate and administer the CAT are inherently regulatory costs.132 CAT LLC also noted that FINRA distinguished the TAF from the proposed CAT fees by describing the TAF as being used in combination with other funding mechanisms to support a funding framework, but CAT LLC stated that ‘‘this does not change the general conclusion that a transaction-based fee complies with the Exchange Act.’’ 133 In response to a commenter that stated that there is no precedent for CAT fees to be allocated to Industry Members in perpetuity, and that the Exchange Act would not allow CAT LLC to require 126 See Letter to Vanessa Countryman, Secretary, Commission, from Brandon Becker, Chair, CAT NMS Plan Operating Committee, dated May 18, 2023 (‘‘CAT LLC May 2023 Response Letter’’), at 9. 127 Id. 128 Id. 129 See FINRA May 2023 Letter at 3, n.8. 130 Id. 131 See FINRA May 2023 Letter at 3. 132 See CAT LLC July 2023 Response Letter at 35. 133 Id. PO 00000 Frm 00008 Fmt 4701 Sfmt 4703 Industry Members to fund unlimited costs in perpetuity,134 CAT LLC stated that the proposed allocation would not require Industry Members to fund all costs since it would divide CAT costs such that one-third would be paid each by the Participant, CEBB and CEBS in a transaction.135 Furthermore, CAT LLC stated that fees would not be paid in perpetuity, as the Fee Rate set by the Operating Committee at the beginning of each year would be based on reasonably budgeted CAT costs and projected total executed equivalent share volume for the year and would be adjusted midyear, and that to implement the Fee Rates, the Participants would need to file fee filings pursuant to Rule 19b–4 with the Commission that must be consistent with the Exchange Act and allow the public the opportunity to comment on the fees.136 CAT LLC added that the Executed Share Model would operate similarly to other fees that the Commission has determined are consistent with the Exchange Act, such as Participants’ sales value fees related to Section 31, the TAF and the options regulatory fee, and that the comment did not recognize that Industry Members can choose to pass-through CAT fees to their customers like they do the Section 31-related sales value fees.137 In response to comments that objected to the proposed allocation to Industry Members because Industry Members would not benefit from the CAT,138 CAT LLC stated allocating costs based on who benefits from the CAT is ‘‘not appropriate or practical.’’ 139 CAT LLC stated that the CAT is intended to benefit all market participants, explaining how it would benefit Industry Members, and stated that it would be ‘‘impractical to determine a model that allocates a measurable amount of benefit that each market participant receives from the CAT.’’ 140 In response to a commenter that suggested that Industry Members should not be allocated any ‘‘costs for matters that primarily benefit the CAT Operating Committee or the SROs,’’ 141 and a commenter that stated that the industry does not benefit from the CAT,142 CAT LLC disagreed that Industry Members do not benefit from the CAT because CAT is critical for the 134 See 135 See Citadel July Letter at 27. CAT LLC July 2023 Response Letter at 14. 136 Id. 137 Id. 138 See Citadel July Letter at 17; Virtu Letter at 2. LLC July 2023 Response Letter at 10. 140 Id. at 11. 141 Citadel July Letter at 32. 142 See Virtu Letter at 4. 139 CAT E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices protection of investors and because CAT supports fair and efficient markets.143 CAT LLC also stated that it was not ‘‘reasonable or practical to attempt to parse CAT costs by who ‘primarily benefits’ from those costs.’’ 144 In response to comments that state that Industry Members could bear 100% of CAT costs if Participants decide to pass-through their costs to them,145 CAT LLC stated that Industry Members can pass through their own CAT fees to their customers, like broker-dealers do for transaction-based fees.146 CAT LLC stated that this may result in Industry Members not having any funding burden if they decide to entirely passthrough their allocation to investors.147 In response to commenters that requested that Participant be prohibited from passing-on their CAT costs to their members,148 CAT LLC stated that Participants are permitted by the Exchange Act to charge their members fees to fund the Participants’ share of CAT fees, as long as they submit fee filings that demonstrate that any proposed fee is consistent with the Exchange Act.149 In response to comments objecting to the proposed allocation to Industry Members for not taking into account regulatory fees currently paid by Industry Members,150 CAT LLC stated that the Proposed Amendment is intended to assess fees ‘‘directly associated with the costs of establishing and maintaining the CAT, and not unrelated SRO services.’’ 151 In response to comments on whether Participants’ models are equally to blame for the complexity of the markets,152 CAT LLC stated that its analysis of the complexity of the industry’s business models is based on the effects of those models on the costs of the CAT, which it stated are more profound than those of Participants, not on complexity of the market in 143 See CAT LLC July 2023 Response Letter at 13. at 12. See also id. at 13. 145 See Citadel July Letter at 16, 22; FIA Letter at 144 Id. 2. 146 See CAT LLC July 2023 Response Letter at 8. lotter on DSK11XQN23PROD with NOTICES2 147 Id. 148 See Citadel July Letter at 3, 22, 30; FIA Letter at 2–3. 149 See CAT LLC July 2023 Response Letter at 9. 150 See Citadel July Letter at 17; Virtu Letter at 2. CAT LLC also objected to one commenter’s description of the CAT as an exchange ‘‘revenue generator,’’ stating that CAT LLC is a business league under Section 501(c)(6) of the Internal Revenue Code, and that enforcement activity obtains restitution for investors and deters future misconduct rather than generating revenue. See CAT LLC July 2023 Response Letter at 13–14 (responding to Citadel July Letter at 17). 151 CAT LLC July 2023 Response Letter at 13. 152 See SIFMA May 2023 Letter at 3; 6–7. See also SIFMA January 2023 Letter at 2, 3–4. VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 general.153 CAT LLC explained that the complexity of the Industry Members’ business models results in significant data processing and storage costs, which Participants do not contribute to as they do not originate market activity or orders.154 CAT LLC explained that (1) the complexity and diversity of Industry Members’ business models and order handling practices require processing and storage of hundreds of reporting scenarios for Industry Members, resulting in significant data processing and storage costs; 155 (2) Industry Members have more late data and corrections than Participants, resulting in significant linker costs; 156 and (3) Industry Members have customers, which results in CAT costs related to customer account information (FDID, CCID and CAIS) and customer investment strategies.157 CAT LLC also stated that Participants would pay the same amount as the CEBBs and CEBSs in each transaction.158 In response to one commenter that stated that Industry Members implemented complex routing strategies to optimize exchange fees and rebates because exchange business decisions resulted in these and other exchange fee structures,159 CAT LLC stated that the commenter did not demonstrate a causal connection between exchange fee structures and CAT costs.160 CAT LLC stated that it was not involved in these Industry Member business decisions and a substantial amount of CAT costs result from such business decisions.161 CAT LLC also stated that Participant activity does not contribute as much to CAT costs as complex Industry Member activity.162 CAT LLC also disagreed with one commenter’s dismissal of CAT LLC’s consideration of Industry Members’ relative ability to pay,163 stating that the Exchange Act specifically requires that the fees be fair and reasonable, which necessitates consideration of the relative ability to pay.164 CAT LLC stated that fairness issues require the Participants to consider the greater financial resources of Industry Members in the 153 See CAT LLC May 2023 Response Letter at 6; CAT LLC July 2023 Response Letter at 6. 154 See CAT LLC May 2023 Response Letter at 7; CAT LLC July 2023 Response Letter at 7. 155 See CAT LLC July 2023 Response Letter at 7. 156 Id. 157 Id. 158 Id. at 6. 159 See SIFMA May 2023 Letter at 7. 160 See CAT LLC July 2023 Response Letter at 6. 161 Id. 162 Id. 163 See SIFMA May 2023 Letter at 7. See also SIFMA January 2023 Letter at 4. 164 See CAT LLC May 2023 Response Letter at 7; CAT LLC July 2023 Response Letter at 7. PO 00000 Frm 00009 Fmt 4701 Sfmt 4703 62635 creation of a funding model. CAT LLC also stated that the commenter’s position runs contrary to its comments that an Industry Member’s ability to pay is an important consideration in the context of CAT fees.165 Additionally, CAT LLC objected to the commenter’s statement that the proposed allocation is ‘‘inconsistent with the historical CAT decision to allocate costs to the parties responsible for generating them.’’ 166 CAT LLC stated that, while the CAT NMS Plan does not require CAT costs to be allocated to parties responsible for generating such costs, the proposed allocation addresses cost burden on the CAT by (i) taking into account the impact of Industry Member activity on CAT costs, and (ii) using trading activity, which CAT LLC believes is a ‘‘reasonable proxy for cost burden on the CAT,’’ 167 as the metric for cost allocation.168 CAT LLC also stated that there are other examples of trading activity-based fees so the funding model would not be novel or unique.169 Additionally, CAT LLC responded to the commenter’s suggested alternative proposal that would equally allocate CAT costs to Participant exchanges and Industry Members, stating that the commenter did not explain why the alternative would satisfy the Exchange Act standards, and noting that CAT LLC had previously considered such an allocation but believed that it would not result in a fair and equitable allocation due to the greater number of Industry Members than Participants, the greater financial resources of Industry Members, and the failure of the suggested allocation to take into account how the complexity of Industry Member business models contributes substantially to CAT costs.170 In response, the commenter stated that the CAT LLC Response Letter did not meaningfully address the concerns it raised about the allocation of CAT costs between Participants and Industry Members.171 CAT LLC further responded, stating that it has responded to the commenter’s comments several times and that just because CAT LLC did not adopt the commenter’s viewpoints does not mean that CAT LLC 165 See CAT LLC July 2023 Response Letter at 7– 8. 166 See CAT LLC May 2023 Response Letter at 7; CAT LLC July 2023 Response Letter at 8; SIFMA May 2023 Letter at 7. 167 See CAT LLC May 2023 Response Letter at 7; CAT LLC July 2023 Response Letter at 8. 168 See CAT LLC May 2023 Response Letter at 7; CAT LLC July 2023 Response Letter at 8. 169 See CAT LLC July 2023 Response Letter at 8. 170 See CAT LLC May 2023 Response Letter at 7. 171 See SIFMA June 2023 Letter at 2. E:\FR\FM\12SEN2.SGM 12SEN2 62636 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices did not consider or respond to the commenter’s comments.172 In response to a commenter that recommended allocating no more than 50% of CAT costs to Industry Members, including the FINRA allocation,173 CAT LLC stated that the commenter did not offer a reasoned basis why such an allocation would be consistent with the Exchange Act.174 CAT LLC also stated that such an allocation would raise fairness concerns because, as compared to Participants, Industry Members have greater financial resources, and their complex business models ‘‘contribute substantially to the costs of the CAT.’’ 175 Furthermore, in response to the commenter’s other suggested allocation methodology which the commenter believed would ensure that a small group of firms and specific market segments would not be subject to inequitable cost burdens,176 CAT LLC stated that the commenter did not explain how the suggested methodology would fit into a funding model or how such a funding model would be consistent with the Exchange Act.177 CAT LLC stated that it evaluated various other funding models over the past seven years and concluded that ‘‘the Executed Share Model provides a variety of advantages in comparison to the alternatives, and satisfies the requirements of the Exchange Act. . .’’ 178 In response, the commenter stated that its suggestions, which included minimum and maximum fee levels, calibrations for liquidity provision, and consideration of additional metrics,179 were included in prior funding model proposals.180 The commenter stated that the CAT Operating Committee should explain why it changed its position on ‘‘the importance of these elements as part of a fair and equitable funding proposal that is consistent with the Exchange Act.’’ 181 The Executed Share Model reflects a reasonable approach to funding the building and operation of the CAT.182 The CAT NMS Plan requires both 172 See CAT LLC July 2023 Response Letter at 27. Citadel July Letter at 31. 174 See CAT LLC July 2023 Response Letter at 10. 175 Id. 176 See Citadel July Letter at 30. 177 See CAT LLC July 2023 Response Letter at 10. 178 Id. at 11–12. 179 See Citadel August Letter at 5. 180 Id. (citing the minimum and maximum fees and market making discounts proposed in a funding model proposal from the CAT Operating Committee that was filed in 2021. See Securities Exchange Act Release No. 91555 (Apr. 14, 2021), 86 FR 21050 (Apr. 21, 2021)). 181 Id. 182 See 17 CFR 242.608(b)(2). lotter on DSK11XQN23PROD with NOTICES2 173 See VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 Participants 183 and Industry Members (which would include CAT Executing Brokers) to fund the CAT.184 The costs of CAT therefore must be allocated in some fashion between Participants and Industry Members, and how to do so is a question of judgment for which there may be multiple reasonable approaches. CAT LLC has proposed to allocate CAT fees equitably among the three parties who have primary roles related to the transaction: the buyer, seller, and market regulator. In response to one commenter that stated that the proposed allocation methodology is inconsistent with the Exchange Act because of an excessive percentage of total costs proposed to be allocated to Industry Members and an unfair method of allocating costs among Industry Members,185 the Commission believes that the proposed allocation is reasonable as discussed below.186 While a commenter said the Proposed Amendment did not justify why the TAF, options regulatory fee, and Section 31 fees should be used as a model in the context of the Executed Share Model,187 CAT was created to serve regulatory purposes. Moreover, CAT Data can only be used by SROs and the Commission for regulatory and surveillance purposes.188 Therefore, the costs incurred by the Participants to build, operate and administer the CAT similarly are regulatory costs, which here the Participants are seeking to recover through the CAT fees. Commenters expressed concerns that the Participants may impose fees on their members to recoup costs relating to CAT, making Industry Members responsible for CAT funding costs beyond those to which they will be directly assessed pursuant to the Executed Share Model,189 that CAT 183 The CAT NMS Plan requires Execution Venues and Industry Members to fund the CAT. The definition of ‘‘Execution Venue’’ includes Participants. See supra note 15. 184 See CAT NMS Plan, supra note 2, at Section 11.1(b), 11.3(a) and (b). Section 11.1(b) of the CAT NMS Plan authorizes the Operating Committee to establish fees for Execution Venues (which include Participants) and Industry Members to fund the CAT and Sections 11.3(a) and (b) of the CAT NMS Plan set forth how these fees would be calculated. See also Rule 613(a)(1)(vii)(D) discussing how the CAT NMS Plan shall discuss the proposed allocation of estimated costs among the plan sponsors, and between the plan sponsors and members of the plan sponsors. 17 CFR 242.613(a)(1)(vii)(D). 185 See Citadel July Letter at 15. 186 See infra notes 189–201 and accompanying text. 187 See FINRA June 2022 Letter at 4; FINRA April 2023 Letter at 8. 188 See 17 CFR 242.613(e)(4)(i)(A); CAT NMS Plan Sections 6.5(c) and 6.5(g) and Appendix D, Section 8.1. 189 See SIFMA May 2023 Letter at 2; Citadel July Letter at 16, 17, 21, 22; Citadel August Letter at 2. PO 00000 Frm 00010 Fmt 4701 Sfmt 4703 costs will be passed-through to investors and that this aspect of the Proposed Amendment lacks information needed to demonstrate that it meets the approval standard and to allow the Commission and other interested parties to consider the resulting economic effects.190 In response to the comments, the Commission acknowledges the concerns but also emphasizes that, as discussed above, the CAT provides important benefits in facilitating effective market surveillance and the Exchange Act expressly contemplates the ability of the Participants to recoup their costs to fulfill their statutory obligations under the Exchange Act.191 To that end, the CAT NMS Plan expressly contemplates the allocation of the costs associated with operating the CAT among the Participants and the Industry Members. The use of the Executed Share Model is a reasonable method, among a number of potential approaches to do so. The Commission recognizes that these operational costs may be passed on in other ways, including by both the Participants and Industry Members, who each may elect to pass on such operational costs as fees to customers indirectly through their charges for services to customers. That would be true regardless of how the Proposed Amendment chose to set the initial allocation. Even if the Participants decide to pass-through the costs of CAT to Industry Members, however, in our view, the rule filing process under Section 19(b) and Rule 19b-4 will still incentivize the Participants to control costs. Any effort to pass-through costs will be subject to that process and, if the Participants fail to control costs, their ability to demonstrate that a proposed fee is reasonable and consistent with the Exchange Act may be compromised. After the Participants file their proposed rule changes relating to fees with the Commission, those proposed rule changes are published by the Commission and there is an opportunity for public comment.192 Although the proposed rule changes could likely take effect upon filing,193 the Commission 190 See SIFMA AMG Letter at 2; FINRA April 2023 Letter at 6–7. 191 Sections 6(b)(1) and 15A(b)(2) of the Exchange Act require that a national securities exchange or national securities association have the capacity to be able to carry out the purposes of the Exchange Act, the rules and regulations thereunder, and the rules of the exchange or association. 15 U.S.C. 78f(b)(1); 15 U.S.C. 78o–3(b)(2). 192 15 U.S.C. 78s(b). 193 15 U.S.C. 78s(b)(3)(A); 17 CFR 240.19b–4(f)(2). Pursuant to Exchange Act Rule 19b–4, a proposed rule change may take effect upon filing with the Commission pursuant to Section 19(b)(3)(A) of the Exchange Act if properly designated by the self- E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES2 can temporarily suspend immediately effective rule changes if such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act.194 If the Commission takes such action, the Commission will institute proceedings under Section 19(b)(2)(B) to determine whether the proposed rule changes should be approved or disapproved.195 Those fees, like any fees the Participants collect from their members to fund their SRO responsibilities in market and member regulation, must be consistent with applicable statutory standards under the Exchange Act, including being reasonable, equitable and not unfairly discriminatory.196 Additionally, as stated by CAT LLC, Industry Members may be able to offset fees that FINRA assesses them by passing their CAT fees through to their customers,197 and as discussed further below, the Commission believes that the additional costs borne by investors are likely small relative to current transaction costs.198 The Commission recognizes that not all Industry Members currently pass through fees and cannot determine in advance the extent to which Industry Members can or will pass-through their CAT fees to investors or would determine to do so in the future. But we believe that many are able to and that at least some will regulatory organization as: (1) constituting a stated policy, practice, or interpretation with respect to the meaning, administration, or enforcement of an existing rule; (2) establishing or changing a due, fee, or other charge applicable only to a member; (3) concerned solely with the administration of the self-regulatory organization. 194 15 U.S.C. 78s(b)(3)(C). 195 15 U.S.C. 78s(b)(2)(B). 196 See Section 6(b)(4); Section 15A(b)(5); Section 6(b)(5); Section 15A(b)(6). 15 U.S.C. 78f(b)(4); 15 U.S.C. 78f(b)(6); 15 U.S.C. 78o–3(b)(5); 15 U.S.C. 78o–3(b)(6). See also e.g., Schedule A to the ByLaws of FINRA, Section 1(a) (stating ‘‘FINRA shall, in accordance with this section, collect member regulatory fees that are designed to recover the costs to FINRA of the supervision and regulation of members, including performing examinations, financial monitoring, and policy, rulemaking, interpretive, and enforcement activities’’). 197 See Notice, supra note 7, 88 FR at 17108; see also CAT LLC July Response Letter at 8–9; cf. SIFMA May 2023 Letter at 8; Citadel July Letter at 20. 198 Any efforts to recoup CAT costs will be subject to statutory and regulatory oversight as appropriate. Under the federal securities laws and FINRA rules, prices for securities and broker-dealer compensation are required to be fair and reasonable, taking into consideration all relevant circumstances. See, e.g., Exchange Act Sections 10(b) and 15(c); FINRA Rules 2121 (Fair Prices and Commissions), 2122 (Charges for Services Performed), and 2341 (Investment Company Securities). See also FINRA Rule 3221 (Non-Cash Compensation). Broker-dealers are also required to disclose the fees they charge related to a transaction pursuant to Exchange Act Rule 10b–10. See 17 CFR 240.10b–10. VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 do so. For all of these reasons, contrary to the view of some commenters,199 the Commission does not believe that the inability to determine the amount of the CAT costs that will be passed along to investors precludes a finding that the allocation model set forth in the Proposed Amendment meets the approval standard. In response to the commenter stating that proprietary trading firms cannot pass-through fees to investors and suggesting that an analysis of proprietary executed volume compared to customer executed volume is necessary to determine if the allocation is fair, equitable, and unfairly discriminatory,200 the Commission believes it is reasonable to charge executing brokers regardless of whether they are trading for their own account or for a customer’s account. The Commission acknowledges that there is not a customer per se for proprietary trades and therefore, proprietary trading firms would not be able to pass-through their CAT fees to customers. However, regardless of whether a firm trades for its own account or for a customer account, in both instances, the firm engages in trading activity to earn a profit. In the Commission’s view, it is reasonable to allow a firm to incur CAT fees for its profit-making business activities, such as proprietary activity. The Commission recognizes that Industry Members may pass-through CAT fees for customer executed volume but in the case of proprietary trades where a firm is trading for its own account, there is no customer to which the firm can pass-through fees, as the firm itself is the ultimate investor, and thus it is reasonable for the firm to be responsible for payment of CAT fees for those trades. Further, the Commission believes it is reasonable to allow a firm to incur CAT fees for its profit-making activity, which in this case is proprietary activity. CAT is a regulatory tool that will be used by the Participants and the Commission to oversee the activities for which Industry Members earn profits and therefore it is reasonable for fees to be charged for that profit-making activity, even if those fees cannot be passed on to customers. While comments raised concerns that the industry would be allocated most of the CAT costs in perpetuity without a mechanism to limit the budget,201 there is a statutory process for notice and comment and Commission review of proposed rule changes relating to fees, under Section 19(b) and Rule 19b–4.202 In addition, the Proposed Amendment requires that the Fee Rate calculated by the Operating Committee twice per year be based on ‘‘reasonably budgeted CAT costs’’ 203 and that such budgeted CAT costs be composed of ‘‘all reasonable fees, costs and expenses reasonably budgeted to be incurred by or for the Company in connection with the development, implementation and operation of the CAT.’’ 204 The Operating Committee must demonstrate that their proposed budget and associated fees are reasonable, and the Participants must provide support for such reasonableness in their associated fee filings. If a Participant cannot demonstrate that their budgeted CAT costs are reasonable in a particular filing, following notice and public comment, then that would provide the Commission with grounds to suspend the filing and ultimately disapprove it, which should impose discipline or constraints on the fee setting process. Further, the concerns expressed that the proposed allocation did not account for the costs already incurred by Industry Members to comply with the CAT or other fees paid by Industry Members to exchanges for other regulatory matters do not render that allocation unreasonable. Both Participants and Industry Members have incurred costs in adapting their operations to report to CAT as is required to achieve the benefits anticipated from the CAT. But the purpose of the funding model is to provide a framework for the recovery of a different set of costs—those incurred by the Participants’ in developing and maintaining the CAT system. Section 11.1(c) of the CAT NMS Plan explicitly permits the Operating Committee to recover those costs, allowing it to ‘‘take into account fees, costs and expenses . . . incurred by the Participants on behalf of the Company . . . and such fees, costs and expenses shall be fairly and reasonably shared among the Participants and Industry Members.’’ 205 The decision to exclude the costs of compliance from this funding model is thus a reasonable one. Further, the Commission does not base its finding with respect to the proposed allocation of costs between Participant and Industry Members on their respective responsibility for any 202 See 199 See SIFMA AMG Letter at 2; FINRA April 2023 Letter at 6–7. 200 See Citadel July Letter at 20; Citadel August Letter at 3. 201 See SIFMA June 2023 Letter at 3, 4; Citadel July Letter at 2; FIA Letter at 2–5. PO 00000 Frm 00011 Fmt 4701 Sfmt 4703 62637 supra notes 192–196 and accompanying text. 203 See proposed Section 11.3(a)(i)(A)(I) and proposed Section 11.3(a)(i)(A)(II). 204 See proposed Section 11.3(a)(i)(C). 205 CAT NMS Plan, supra note 2, at Section 11.1(c). E:\FR\FM\12SEN2.SGM 12SEN2 62638 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices complexity in the markets. Regardless of the origin of that complexity, its existence contributes to the costs of CAT and the purpose of the funding model is to account for those current and future costs, not assess responsibility for the market structure. The Participants’ decision to divide the costs evenly among the three parties who have primary roles related to the transaction is reasonable. As explained below, the Commission agrees with CAT LLC’s statements that, ‘‘[t]he Executed Share Model . . . reflects a reasonable effort to allocate costs based on the extent to which different CAT Reporters participate in and benefit from the equities and options markets,’’ 206 and is ‘‘transparent, would be relatively easy to calculate and administer, and is designed not to have an impact on market activity because it is neutral as to the location and manner of execution.’’ 207 The Participants considered, and have previously proposed, alternative allocations and funding models.208 And the Commission acknowledges the alternative funding models and allocations suggested by commenters.209 Each of those alternatives, as well as those suggested by commenters, has relative strengths and weaknesses. Similarly, the alternatives suggested by a commenter,210 including maximum and minimum fees, appropriate calibrations for liquidity provision and 206 See Notice, supra note 7, 88 FR at 17087. 207 Id. lotter on DSK11XQN23PROD with NOTICES2 208 In the Proposed Amendment, CAT LLC stated that it considered but rejected a number of alternative approaches to the CAT funding model; specifically, an approach based on a CAT Reporter’s cost burden on the CAT, a 50%–50% allocation of costs between Industry Members and Participant exchanges, a revenue-based funding model in which CAT Reporters would pay fees based on their revenue, a message traffic model in which both Industry Members and Participants would be assessed fees based on message traffic in the CAT, a sales value model in which fees would be calculated based on transaction sales models, an alternative allocation in which fees would only be allocated to the CEBS, and the 2018 and 2021 Fee Proposals, a model in which CAT LLC would allocate all costs among the Participants and permit each Participant to charge its own members as it deems appropriate, and a cost allocation based on a strict pro-rata distribution regardless of the type or size of CAT Reporters. Id. at 17105–06, 17117– 19. See also CAT LLC May 2023 Response Letter at 8, where CAT LLC responded that SIFMA did not offer a reasoned basis for why a 50–50 allocation would satisfy the standards set forth in the Exchange Act. While alternative models have been suggested and considered, the proposed Executed Share Model meets the approval standard in Rule 608(b)(2). 209 See FINRA April 2023 Letter at 5; SIFMA January 2023 Letter at 4. See also SIFMA May 2023 Letter at 8; SIFMA June 2022 Letter at 5–6; SIFMA October 2022 Letter at 4; Citadel July Letter at 3, 30, 31, 32. 210 See Citadel August Letter at 5. VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 consideration of additional provisions (e.g., broker-dealer capital), have strengths and weaknesses. For example, imposing maximum and minimum fees would transfer costs from the largest members to the smallest members, distorting the economic incentives of the Executed Share Model. A similar distortion could arise to the extent market maker volume is discounted or otherwise calibrated or to the extent considering other metrics that are not necessarily correlated with the cost drivers of the CAT. Given the potential distortions that could occur with these alternatives, the Commission does not believe that the existence of those alternatives, or the remaining concerns identified by commenters individually or collectively, call into question the Proposed Amendment’s satisfaction of the approval standard in Rule 608(b)(2),211 or otherwise warrant a departure from the policy choices made by the Participants. 3. Executed Equivalent Shares Under the Executed Share Model, a CAT fee would be charged with regard to each transaction in Eligible Securities 212 as reported in CAT Data based on executed equivalent shares.213 A CAT Fee would be imposed with regard to transactions in Eligible Securities in the CAT Data regardless of whether the trade is executed on an exchange or otherwise than on an exchange.214 Proposed Section 11.3(a)(i)(B) of the CAT NMS Plan describes how executed equivalent shares would be counted for purposes of calculating CAT fees. Specifically, the Executed Share Model uses the concept of executed equivalent shares as the transactions subject to a CAT Fee involve NMS Stocks, Listed Options and OTC Equity Securities, each of which have different trading characteristics.215 Proposed Section 11.3(a)(i)(B) would require the shares to be reasonably counted for each type of 211 17 CFR 242.608(b)(2). CAT NMS Plan defines an ‘‘Eligible Security’’ as including all NMS Securities and all OTC Equity Securities. See CAT NMS Plan, supra note 2, at Section 1.1. ‘‘NMS Security’’ is defined as ‘‘any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in Listed Options.’’ Id. ‘‘OTC Equity Security’’ is defined by the CAT NMS Plan as ‘‘any equity security, other than an NMS Security, subject to prompt last sale reporting rules of a registered national securities association and reported to one of such association’s equity trade reporting facilities.’’ Id. 213 See Notice, supra note 7, 88 FR at 17086. 214 Id. at 17093. 215 Id. 212 The PO 00000 Frm 00012 Fmt 4701 Sfmt 4703 Eligible Securities in the following manner: NMS Stocks. Under the Executed Share Model, each executed share for a transaction in NMS Stocks would be counted as one executed equivalent share.216 Accordingly, proposed Section 11.3(a)(i)(B)(I) of the CAT NMS Plan would state that ‘‘[f]or purposes of calculating CAT Fees, executed equivalent shares in a transaction in Eligible Securities will be reasonably counted as follows: (I) each executed share for a transaction in NMS Stocks will be counted as one executed equivalent share.’’ 217 Listed Options. Recognizing that Listed Options trade in contracts rather than shares, each executed contract for a transaction in Listed Options will be counted using the contract multiplier applicable to the specific Listed Option in the relevant transaction.218 Typically, a Listed Option contract represents 100 shares; however, it may also represent another designated number of shares.219 OTC Equity Securities. Similarly, in recognition of the different trading characteristics of OTC Equity Securities as compared to NMS Stocks, the Executed Share Model would discount the share volume of OTC Equity Securities when calculating CAT Fees.220 CAT LLC explained that many OTC Equity Securities are priced at less than one dollar—and a significant number are priced at less than one penny—per share and low-priced shares tend to trade in larger quantities.221 Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks.222 Because the Executed Share Model would calculate CAT Fees based on executed share volume, CAT Reporters trading OTC Equity Securities would likely be subject to higher fees than their market activity may warrant.223 To address this potential concern, CAT LLC proposed that the Executed Share Model would count each executed share for a 216 Id. 217 Proposed Section 11.3(a)(i)(B)(I). Notice, supra note 7, 88 FR at 17093. 219 Id. See also proposed Section 11.3(a)(i)(B)(II). 220 See Notice, supra note 7, 88 FR at 17093. 221 Id. 222 In an example provided by CAT LLC, based on data from 2021, (1) the average price per executed share of OTC Equity Securities was $0.072 and the average price per executed share for NMS Stocks was $49.51; and (2) the average trade size for OTC Equity Securities was 63,474 and the average trade size for NMS Stocks was 166 shares. Trades in OTC Equity Securities accounted for 77% of the number of all equity shares traded, but only 0.51% of the notional value of all equity shares traded. Id. at 17093, n.36. 223 Id. at 17093. 218 See E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices transaction in OTC Equity Securities as 0.01 executed equivalent shares.224 a. Executed Equivalent Share Volume CAT LLC had represented that a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks,225 that trades in OTC Equity Securities accounted for 77% of the number of all equity shares traded, but only 0.51% of the notional value of all equity shares traded,226 and that under the Executed Share Model, CAT Reporters trading OTC Equity Securities would likely be subject to higher fees than their market activity may warrant.227 CAT LLC also explained the analysis it undertook to determine to count each executed share for a transaction in OTC Equity Securities as 0.01 executed equivalent shares, stating the discount was the result of an analysis of several different metrics comparing the markets for OTC Equity Securities and NMS Stocks. CAT LLC stated that ‘‘(1) the ratio of total notional dollar value traded for OTC Equity Securities to OTC Equity Securities and NMS Stocks was 0.051%; (2) the ratio of total trades in OTC Equity Securities to total trades in OTC Equity Securities and NMS Stocks was 0.90%; and (3) the ratio of average share price per trade of OTC Equity Securities to average share price per trade for OTC Equity Securities and NMS Stocks was 0.065%.’’ 228 For ease of application and because the calculations involve averages, CAT LLC decided to round the metrics to 1%.229 In support of the use of executed equivalent shares to allocate costs under the Executed Share Model, CAT LLC explained that ‘‘trading activity provides a reasonable proxy for cost burden on the CAT, and therefore is an appropriate metric for allocating CAT costs among CAT Reporters.’’ 230 CAT LLC stated that it is not feasible to determine the specific cost burden of each CAT Reporter on the CAT, explaining that ‘‘[t]he computation of a specific CAT Reporter’s burden on the CAT is complicated by the many interrelated factors that contribute to CAT costs, including message traffic, data processing, storage, the complexity of reporting requirements, reporting timelines, infrastructure, connectivity and more.’’ 231 CAT LLC added that increased trading activity correlates with an increased cost burden on the CAT and Industry Members are generally engaged in effecting transactions in the market, so executed share volume would be an appropriate metric for the allocation of CAT costs.232 CAT LLC stated that this conclusion is consistent with the Commission’s prior recognition of the use of transaction volume to set regulatory fees.233 Additionally, CAT LLC stated that technology costs dominate all CAT costs, with compute costs comprising more than half of all technology costs, and ‘‘[w]hile [compute costs] are related in part to message traffic, they are driven by the stringent performance timelines, data complexity and operational requirements in the CAT NMS Plan.’’ 234 This was one of the reasons CAT LLC decided to change from using message traffic to calculate CAT fees using executed equivalent share volume.235 Commenters questioned the support for the use of executed share volume instead of message traffic, which was previously proposed in prior funding models.236 FINRA stated that the Proposed Amendment does not explain why the use of executed share volume as the basis of the cost allocation methodology, instead of message traffic, is equitable.237 FINRA explained that in prior models, message traffic was the key proxy for cost generation used to align CAT fees with CAT costs, but the Executed Share Model would base its cost allocation methodology entirely on executed share volume.238 FINRA stated that the Participants’ argument that executed share volume is related to cost generation is not enough to demonstrate that its use is reasonable and equitable.239 Another commenter stated that the Operating Committee cannot explain why the proposed allocation to Industry Members is equitable, noting that it previously stated that charging Industry Members based on message traffic was the most equitable means of establishing fees.240 The commenter stated that allocating costs among Industry Members based on share volume is inconsistent with the Exchange Act.241 The commenter stated that there is no 232 Id. at 17105. evidence to support the Operating Committee’s assertion that trading activity is a reasonable proxy for cost burden on the CAT, explaining that the Operating Committee has stated before that CAT Data processing requirements and message traffic are significant drivers of CAT costs. The same commenter stated that, according to one Participant, options activity creates a greater cost burden than equities trading volume and that the Proposed Amendment does not accurately describe the sources of CAT’s cost burdens.242 The commenter stated that the CAT Operating Committee must demonstrate how the proposed allocation would not unfairly discriminate against equities market participants and compare equities and options activity with respect to (i) their cost burden on the CAT and (ii) the allocation of CAT costs to Industry Members.243 The commenter stated that if the equities markets are subsidizing options activity, this could have broad impacts on equity market liquidity, competition and efficiency that must be assessed under the Exchange Act.244 Further, the commenter stated that allocating costs based on volume would result in costs being mostly allocated to ‘‘an extremely small group of brokerdealers,’’ which would unduly burden competition.245 The commenter stated that the Proposed Amendment also lacks a discussion of the impact of this allocation on market competition, efficiency and liquidity, but that the Operating Committee recognized in the Proposed Amendment that prior proposals, where message traffic was a metric used for fee allocation, could impose an outsized financial impact on certain Industry Members.246 Additionally, FINRA objected to the statement in the Proposed Amendment that ‘‘trading activity provides a reasonable proxy for cost burden on the CAT, and therefore is an appropriate metric for allocating CAT costs among CAT Reporters.’’ 247 The commenter stated that this statement is inconsistent with information that demonstrates that volume from FINRA’s trade reporting facilities (‘‘TRFs’’) contributes ‘‘a very small percentage of annual CAT compute and storage costs.’’ 248 FINRA stated, ‘‘. . . despite the minimal data compute and storage costs for 233 Id. lotter on DSK11XQN23PROD with NOTICES2 234 Id. 224 See proposed Section 11.3(a)(i)(B)(III). 225 See Notice, supra note 7, 88 FR at 17093. 226 Id. at 17093, n.36. 227 Id. at 17093. 228 Id. 229 Id. 230 See Notice, supra note 7, 88 FR at 17103. 231 Id. at 17105; see also id. at 17103. VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 62639 242 Id. 235 See Notice, supra note 7, 88 FR at 17105. 236 See FINRA June 2022 Letter at 3, 4; Citadel July Letter at 10. 237 See FINRA June 2022 Letter at 3. 238 Id. 239 Id. at 4. 240 See Citadel July Letter at 10. 241 Id. at 19. PO 00000 Frm 00013 Fmt 4701 Sfmt 4703 at 18, 19. See also Citadel August Letter at 4. 243 See Citadel August Letter at 4. 244 Id. 245 Citadel July Letter at 19. See also Citadel August Letter at 2–3. 247 FINRA May 2023 Letter at 2 (quoting Notice, supra note 7, 88 FR at 17103.) 248 FINRA May 2023 Letter at 2. 246 Id. E:\FR\FM\12SEN2.SGM 12SEN2 62640 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices transactions reported to the TRF, FINRA would be assessed an estimated 34% of the total CAT costs to be borne amongst the 25 Participants, and more than all options exchanges combined,’’ therefore it cannot support the Participants’ assertion that trading activity is a reasonable proxy for cost burden.249 FINRA stated that the Proposed Amendment ‘‘fails to provide for reasonable fees that are equitably allocated and not unfairly discriminatory, does not reflect a reasonable approach to allocating costs amongst the Participants, nor does it transparently or accurately present information regarding the true sources of cost burdens on the CAT.’’ 250 FINRA further stated that the Executed Share Model is inconsistent with the ‘‘cost alignment’’ funding principle in Section 11.2(b) of the CAT NMS Plan, which requires the Participants to seek to establish an allocation of costs that takes into account distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon Company resources and operations.251 FINRA stated that ‘‘the Proposal fails to establish a sufficient nexus between executed share volume and the technology burdens that generate CAT costs and fails to relate each reporter group’s allocation to the burden that each reporter group imposes on CAT.’’ 252 In response to FINRA’s comment raising concerns about the use of trading activity as a proxy for costs,253 CAT LLC stated that the Proposed Amendment would provide an appropriate approach for allocating CAT costs because Industry Member activity is generally for the purpose of effecting transactions, and trading activity impacts various factors driving CAT costs, such as storage, data processing and message traffic.254 CAT LLC also stated that the Exchange Act does not require fees to be directly correlated with the costs created by the person charged the fee.255 CAT LLC stated that it is difficult to determine the precise cost burden created by each CAT Reporter on the CAT, and believes trading activity is a 249 Id. See also FINRA April 2023 Letter at 8. May 2023 Letter at 4. 251 Id. See also FINRA April 2023 Letter at 7–9; Section 11.2(b) of the CAT NMS Plan. The Proposed Amendment would amend Section 11.2(b). See proposed Section 11.2(b); see also infra Section III.A.8 (Additional Changes from Original Funding Model). 252 FINRA June 2022 Letter at 4. 253 See FINRA May 2023 Letter at 2. 254 See CAT LLC July 2023 Response Letter at 34. 255 Id. lotter on DSK11XQN23PROD with NOTICES2 250 FINRA VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 reasonable proxy for cost burden on the CAT.256 CAT LLC responded to the commenter’s statement that the proposed allocation is inconsistent with the cost alignment principles of the CAT NMS Plan by noting that the Proposed Amendment incorporates the concept of cost burden in at least two ways.257 Specifically, CAT LLC stated that it does so because ‘‘the allocation of CAT costs contemplates the effect of Industry Member activity on the cost of the CAT. . . and because trading activity provides a reasonable proxy for cost burden on the CAT, trading activity is an appropriate metric for allocating CAT costs among CAT Reporters.’’ 258 CAT LLC added that because there are other examples of trading activity-based fees, the Executed Share Model would not be novel or unique.259 One commenter also stated that the Proposed Amendment made no adjustments for sub-dollar trading activity in NMS stocks, when adjustments were made to volume in OTC Equity Securities to adjust for the large number of shares transacted in sub-dollar securities.260 The commenter also stated that it is arbitrary, capricious, and unfairly discriminatory for the CAT Operating Committee to significantly adjust executed share volumes for sub-dollar OTC Equity Securities but not to do the same for sub-dollar NMS stocks, as retail investor transactions will be allocated a disproportionate percentage of total CAT costs simply due to the securities traded.261 The commenter stated that the CAT Operating Committee must explain why it proposes to treat these securities differently and analyze the impact on retail investors.262 The commenter also stated that since fractional shares would be rounded up to one share, the result would overstate volume.263 The commenter stated that the Proposed Amendment thus discriminates against Industry Members that handle retail orders because of the amount of retail activity in sub-dollar stocks and fractional share trading.264 The commenter stated that the Proposed Amendment does not explain why volume by shares was chosen over notional volume, or address its impact on specific Industry Members, investors, 256 Id. 257 CAT LLC May 2023 Response Letter at 7. 258 Id. 259 Id. 260 See Citadel July Letter at 20. Citadel August Letter at 4–5. 262 Id. at 5. 263 See Citadel July Letter at 20. 264 Id. See also Citadel August Letter at 4–5. 261 See PO 00000 Frm 00014 Fmt 4701 Sfmt 4703 or overall market competition, efficiency and liquidity.265 CAT LLC proposed to delete the requirement in existing Section 11.2(b) of the CAT NMS Plan to take into account ‘‘distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon Company resources and operations’’ in establishing the funding of the Company.266 CAT LLC explained that this requirement is related to using message traffic and market share in the calculation of CAT fees, as message traffic and market share were metrics related to the impact of a CAT Reporter on the Company’s resources and operations.267 CAT LLC explained that the requirement is no longer relevant because the proposed Executed Share Model uses the executed equivalent shares metric instead of message traffic and market share.268 With respect to the deletion in Section 11.2(b) of the requirement that, when establishing the funding of the CAT, the Operating Committee must take into account ‘‘distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon Company resources and operations,’’ FINRA stated that the Participants have proposed to delete the language in Section 11.2(b) because the proposed Executed Share Model is inconsistent with the language.269 FINRA stated that the Proposed Amendment ‘‘seeks to amend the core funding principles to align with an unjustified allocation methodology.’’ 270 FINRA stated that any changes to the funding principles ‘‘must be well-reasoned and transparent and must continue to support the achievement of a fair and equitable outcome.’’ 271 In the Commission’s view, the use of executed equivalent share volume as the basis of the proposed cost allocation methodology is reasonable and consistent with the approach taken by the funding principles of the CAT NMS Plan.272 The proposed use of executed equivalent shares would continue to incorporate the concept of cost 265 See Citadel July Letter at 20. See also Citadel August Letter at 5. 266 See proposed Section 11.2(b). 267 See Notice, supra note 7, 88 FR at 17099. 268 Id. 269 See FINRA June 2022 Letter at 4; see also FINRA April 2023 Letter at 7. 270 FINRA June 2022 Letter at 4. The commenter states that the Executed Share Model instead places the greatest emphasis on the funding principle relating to the ‘‘ease of billing and other administrative functions,’’ favoring that principle over cost alignment. Id. at 5. 271 Id.; FINRA April 2023 Letter at 8–9. 272 See Section 11.2(b) of the CAT NMS Plan. E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES2 alignment because trading activity, as reflected through executed equivalent share volume, would, as CAT LLC explained, correlate with the cost burden on the CAT.273 It may not be possible to directly calculate each CAT Reporter’s cost burden on the CAT due to the many factors impacting CAT costs, such as data processing, storage, reporting timelines and requirements, and connectivity. But executed equivalent share volume is a reasonable proxy for those costs because it is a result of trading activity, which CAT LLC explained impacts various CAT cost drivers, such as storage, data processing and message traffic.274 In addition, because the proposed use of executed equivalent share volume would preserve the cost alignment principle, while no longer relying on message traffic, the deletion of the requirement in Section 11.2(b) of the CAT NMS Plan that the Operating Committee, in allocating costs, take into account ‘‘distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon Company resources and operations’’ 275 is reasonable. In response to the commenter that urged the CAT Operating Committee to demonstrate how the proposed allocation would not unfairly discriminate against equities market participants by subsidizing CAT costs related to options market activity,276 the Commission believes that subsidization of options market activity likely is reduced due to other CAT cost burdens, such as those relating to data processing (such as equity linkage processing, which the Commission understands is more complex than options order linkage processing, and thus more costly),277 imposed on the CAT by equity market activity. The Commission, however, does not believe the failure to eliminate the potential subsidization of options market activity (and any potential attendant impacts on liquidity, competition and efficiency) renders the Participants’ Funding Model proposal inconsistent with the Exchange Act. The Commission does not believe it is possible for the Participants to predict with certainty how the magnitude of each driver of CAT costs will change over time. To the extent the other costs noted above exceed, for example, the subsidy accorded to options market 273 CAT LLC May 2023 Response Letter at 7. See also Notice, supra note 7, 88 FR at 17105; see also id. at 17103. 275 See Notice, supra note 7, 88 FR at 17105; see also id. at 17103. 276 See Citadel August Letter at 4. 277 See infra notes 1075–1082 and accompanying text. 274 Id. VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 participants when calculating their executed equivalent shares, there may be no subsidy or even a reverse subsidy from options to equities markets. When the relative magnitudes of these cost drivers change, the amount of any subsidy changes. In light of the potential for the cost drivers to change over time, the Commission believes that the Participants’ proposal is reasonable. The Proposed Amendment’s treatment of sub-dollar NMS stocks and fractional shares is appropriate. The Commission does not believe that the Participants’ failure to discount subdollar NMS stocks renders the Proposed Amendment inconsistent with the Exchange Act. The Commission acknowledges one commenter’s statement that retail investors could be allocated a disproportionate percentage of total CAT costs due to the lack of a discount for sub-penny NMS stocks.278 However, treating a subset of NMS stocks differently from NMS securities could introduce unnecessary complexity or administrative burdens to the extent an NMS stock price falls or rises above a dollar. It is therefore reasonable for the Proposed Amendment to treat all NMS stocks the same, even though certain sub-dollar NMS stocks and fractional shares might have characteristics similar to OTC Equity Securities. Additionally, in response to the commenter’s statement that since fractional shares would be rounded up to one share, the result would overstate volume,279 the Commission notes that CAT fees will be based on the data contained in the transaction reports and transaction reports do not provide for fractional quantities; therefore, CAT fees cannot be calculated using fractional shares or fractional share components of executed orders at this time.280 CAT LLC stated that if FINRA’s equity transaction reporting facilities or the exchanges report transactions in fractional shares in the future, then the calculation of CAT fees would also reflect fractional shares.281 In response to the comment that stated that the Proposed Amendment does not explain why volume by shares was chosen over notional volume,282 calculating the notional value of stock introduces additional complexity as the notional value would have to be calculated and would depend on the value of the execution or trade, whereas the number 278 See Citadel August Letter at 4–5. Citadel July Letter at 20. 280 See Notice, supra note 7, 88 FR at 17089. 281 Id. at 17089, n.23. 282 See Citadel July Letter at 20. See also Citadel August Letter at 5. 279 See PO 00000 Frm 00015 Fmt 4701 Sfmt 4703 62641 of executed shares is reported and, in the cases of options for example, is based on a known multiplier (1/100). While the Commission does not disagree that using executed notional shares may offer advantages and may lessen any discrimination, the Commission believes that the Proposed Amendment’s use of executed shares is administratively easier, less prone to error, and thus for these reasons and the reasons set forth above,283 is a reasonable proxy for allocating the cost of the CAT. The Commission also believes that CAT LLC’s explanation that increased trading activity correlates with an increased cost burden on the CAT is reasonable and that executed share volume is a reasonable proxy for a CAT Reporter’s cost burden on the CAT 284 because increased trading activity impacts message traffic, but also data processing and storage costs.285 The Original Funding Model would have used message traffic and market share to assess CAT fees on Industry Members and Execution Venues, respectively.286 CAT LLC expressed its belief that the use of executed equivalent share volume would be an improvement on the Original Funding Model’s use of message traffic,287 explaining that the use of executed equivalent share volume would result in fees tied to transactions (which CAT LLC stated is the ‘‘traditional source of revenue for Industry Members’’ 288), that the resulting CAT fees would not adversely impact market makers, and that the Executed Share Model is simple to understand and to implement.289 CAT LLC stated that Industry Member revenue is often driven by transactions, but ‘‘[b]ecause message traffic is separate from whether or not a transaction occurs, fees based on message traffic may not correlate with common revenue or fee models,’’ 290 which could negatively impact certain Industry Members in a significant way.291 CAT LLC stated that use of message traffic to calculate fees for Industry Members could adversely impact market makers because they 283 See supra notes 272–275 and accompanying text. 284 See Notice, supra note 7, 88 FR at 17105; id. at 17101–03. 285 Id. at 17105. 286 See CAT NMS Plan, supra note 2, at Section 11.3(a) and (b). 287 See Notice, supra note 7, 88 FR at 17102–03. The Original Funding Model uses message traffic as the basis of Industry Member CAT fees. See CAT NMS Plan, supra note 2, at Section 11.3(b). 288 Notice, supra note 7, 88 FR at 17103. 289 Id. 290 Id. at 17102. 291 Id. E:\FR\FM\12SEN2.SGM 12SEN2 62642 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices generally create high levels of message traffic.292 We agree with CAT LLC regarding the benefits of the Executed Share Model and the drawbacks of the Original Funding Model, and thus believe that the decision to replace the use of message traffic to calculate CAT fees with executed equivalent share volume in the Executed Share Model is reasonable. The Commission acknowledges that executions do not take place on FINRA; however, the CAT NMS Plan already categorizes FINRA as an Execution Venue because it has trades reported by its members to its TRFs for reporting transactions effected otherwise than on an exchange. Thus, treatment of FINRA as an Execution Venue is not a change to the existing CAT NMS Plan.293 Additionally, this allocation of fees to FINRA is similar to how Section 31 fees are assessed on FINRA.294 Moreover, the Executed Share Model does not change the criteria used to charge Execution Venues (market share).295 While there are differences in how the CAT fees would be allocated among the Participants under the Executed Share Model and the existing Original Funding Model, under the Executed Funding Model, as in the Original Funding Model, the fees charged to Participants will continue to be based upon the level of market share of each Participant.296 The Original Funding Model approved by the Commission would have assessed CAT fees on Execution Venues (which would include the Participants) 297 based on market share determined by the share volume for a national securities exchange and determined by reported share volume of trades for a national securities association (i.e., FINRA) that had trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange in NMS 292 Id. at 17103. CAT NMS Plan Approval Order, supra note 2, 81 FR at 84793; CAT NMS Plan, supra note 2, at Section 1.1. (defining ‘‘Executing Venues’’). 294 15 U.S.C. 78ee; Section 31 of the Securities Exchange Act requires each national securities exchange and national securities association to pay transaction fees to the Commission. Specifically, Section 31(c) requires each national securities association to pay to the Commission fees based on the aggregate dollar amount of covered sales transacted by or through any member of the association other than on an exchange. 15 U.S.C. 78ee(c). Section 31(a) permits the Commission to collect transaction fees and assessments designed to recover the costs to the Government of the annual appropriation to the Commission by Congress. 15 U.S.C. 78ee(a). 295 See CAT NMS Plan Approval Order, supra note 2, 81 FR at 84793–97; CAT NMS Plan, supra note 2, at Section 11.2, Section 11.3. 296 Id. 297 See supra note 15. lotter on DSK11XQN23PROD with NOTICES2 293 See VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 Stocks or OTC Equity Securities.298 Additionally, this allocation is similar to how Section 31 fees are assessed on the exchanges and FINRA. FINRA’s allocation of CAT fees under the Executed Share Model will continue to be based on its off-exchange market share. The Commission recognizes that the proposed use of executed equivalent share volume is not a perfect proxy for CAT costs, but believes it is nonetheless a reasonable proxy. The costs of CAT are attributable to a number of factors, such as message traffic, storage, and data processing costs, and that for these reasons, the Commission understands that it is difficult to calculate each CAT Reporter’s individual cost burden on the CAT. Additionally, there are other operational costs of the CAT that cannot be easily attributed to a particular CAT Reporter and that need to be funded, such as costs for CAT NMS Plan requirements related to intake capacity,299 data search tools 300 and data security.301 Based on the breadth of CAT costs, it is not feasible to calculate the cost burden on CAT of each CAT Reporter. A reasonable proxy for CAT cost burden must therefore be used. As discussed above, the Commission believes the proposed use of executed equivalent share volume is a reasonable method of approximating the cost burden of CAT.302 Additionally, CAT LLC stated that the proposed Executed Share Model would not unfairly burden or favor a product or product type because the model would recognize the different types of securities by counting executed equivalent share volume differently for NMS Stocks, Listed Options and OTC Equity Securities.303 The proposed treatment of these different types of securities would result in the equitable allocation of reasonable CAT fees across these securities. The Executed Share Model would count each executed contract for a transaction in Listed Options using the contract multiplier applicable to the specific Listed Option in the relevant 298 See CAT NMS Plan, supra note 2, at Section 11.3(a)(i). 299 In the CAT NMS Plan Notice, the Commission said that it preliminarily believed that intake capacity level is likely to be a primary cost driver for the Central Repository. See Securities Exchange Act Release No. 77724 (Apr. 27, 2016), 81 FR 30614 (May 17, 2016), 81 FR at 30770. 300 See CAT NMS Plan, supra note 2, at Appendix C, Section 8.1–8.2. 301 Id. at Appendix D, Section 4. 302 See supra notes 271–274 and accompanying text. 303 See Notice, supra note 7, 88 FR at 17116. PO 00000 Frm 00016 Fmt 4701 Sfmt 4703 transaction,304 which is appropriate because a Listed Option contract typically represents 100 shares, or it could represent another designated number of shares, and since Listed Options trade in contracts instead of shares, they would need to be converted into shares for purposes of calculating the executed equivalent share volume of a transaction in Listed Options. For OTC Equity Securities, the Executed Share Model would count each executed share for a transaction in OTC Equity Securities as 0.01 executed equivalent shares,305 which is appropriate because CAT LLC represented that this amount was a result of an analysis it conducted of several different metrics comparing the markets for OTC Equity Securities and NMS Stocks, specifically total notional dollar value, total trades, and average share price per trade.306 Additionally, since transactions in OTC Equity Securities typically are priced below one dollar, or even one penny, and tend to trade in larger quantities, this treatment is appropriate to prevent CAT Reporters trading OTC Equity Securities from being assessed higher CAT fees than their activity would deserve. b. Options vs. Equities The equal allocation of Participant CAT fees to Participants, regardless of whether they are transacting in options or in equities, is reasonable. The Original Funding Model would have divided Participant CAT fees by Execution Venues that execute transactions (or in the case of a national securities association, has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange) in NMS Stocks or OTC Equity Securities and by Execution Venues that execute transactions in Listed Options.307 The Executed Share Model instead assesses a CAT fee based purely on executed equivalent share volume.308 CAT LLC explained that the use of equivalent executed share volume is designed to 304 Id. at 17093. A Listed Option contract typically represents 100 shares, or it could represent another designated number of shares. Id. 305 See proposed Section 11.3(a)(i)(B)(III). 306 See supra notes 227–229 and accompanying text. 307 See CAT NMS Plan, supra note 2, at Section 11.3(a)(i), (ii). 308 The Executed Share Model would count executed equivalent share volume differently for NMS Stocks, OTC Equity Securities and Listed Options for purposes of calculating a CAT fee. CAT LLC explains that the proposed approach ‘‘would not favor or unfairly burden any one type of product or product type.’’ See Notice, supra note 7, at 17116. See also supra Section III.A.3. E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices normalize options and equities in the calculation of fees, and to recognize and address the different trading characteristics of different types of securities by counting executed equivalent share volume differently for Listed Options and for equities.309 The use of executed equivalent share volume and, in particular, the different weights assigned to equities versus options, are designed to result in an equitable treatment of the equities and options markets. The proposed treatment of these different types of securities reasonably equalizes the CAT fees across these securities. The Executed Share Model would count each executed contract for a transaction in Listed Options using the contract multiplier applicable to the specific Listed Option in the relevant transaction,310 which is appropriate because one options contract typically represents 100 shares. c. FINRA Allocation Under the Executed Share Model, because FINRA is the Participant primarily responsible for oversight of off-exchange securities trading activity,311 FINRA will likely have greater executed equivalent share volume than other Participants 312 and thus will be responsible for a significant portion of total CAT fees. In the Proposed Amendment, CAT LLC stated that the size of FINRA’s fee is calculated based on the activity in the over-thecounter market.313 CAT LLC stated that the executed equivalent share volume for over-the-counter trades in Eligible Securities in 2021 was 1,361,484,729,008 out of a total volume of 3,963,697,612,395 executed equivalent shares for trades in Eligible Securities.314 CAT LLC stated that approximately 34% of the executed equivalent share volume in Eligible Securities took place in the over-thecounter market.315 309 See Notice, supra note 7, 88 FR at 17108. at 17093. 311 See Securities Exchange Act Release No. 95388 (July 29, 2022), 87 FR 49930 (Aug. 12, 2022), at 49931 (stating that FINRA historically has overseen off-exchange securities trading activity and that ‘‘the Exchange Act’s statutory framework places SRO oversight responsibility with a [national securities association] for trading that occurs elsewhere than an exchange to which a broker or dealer belongs as a member.’’), 49932 (stating that an exchange would primarily have SRO oversight responsibility of its members and their trading on the exchange, while SRO oversight of other trading activity, such as off-exchange trading, is primarily the responsibility of a national securities association). 312 See Notice, supra note 7, 88 FR at 17107. 313 Id. 314 Id. 315 Id. lotter on DSK11XQN23PROD with NOTICES2 310 Id. VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 CAT LLC stated that the assessment of a CAT fee on FINRA in the same manner as the other Participants would not result in a burden on competition for FINRA or for Industry Members engaging in off-exchange activity.316 CAT LLC also stated that FINRA and the exchanges should not be evaluated differently based upon the potential for a particular Participant to recoup its CAT fees through charging fees to its members or through revenue-generating activity other than passing its fees through to its members.317 CAT LLC stated that each Participant, including FINRA, can choose to charge its members fees to fund the Participant’s CAT fees.318 Additionally, CAT LLC stated that FINRA, just like the exchange Participants, has revenue sources other than membership fees,319 explaining that FINRA generates significant revenues via Regulatory Services Agreements (‘‘RSAs’’) with the exchanges, among other sources.320 According to CAT LLC, these other revenue sources may be used to pay CAT fees, and, if they are used, would not lead to an increase in fees for Industry Members.321 Certain commenters objected to the proposed allocation of Participant CAT fees to FINRA.322 A subset of these commenters objected to the allocation to FINRA of 34% of the total CAT costs 323 to be borne by the Participants.324 FINRA stated that this amount was a ‘‘disproportionate share of CAT costs,’’ 325 especially as FINRA does not 316 Id. 317 Id. See also CAT LLC May 2023 Response Letter at 9. 318 See Notice, supra note 7, 88 FR at 17107. 319 Id. at 17108. 320 Id. 321 Id. 322 See FINRA May 2023 Letter; FINRA April 2023 Letter; FINRA June 2022 Letter; SIFMA May 2023 Letter; SIFMA June 2022 Letter; SIFMA October 2022 Letter. One of the commenters supported the points raised in the FINRA April 2023 Letter that stated that the Proposed Amendment would result in the inequitable allocation of fees and should be disapproved. See SIFMA May 2023 Letter at 2. Another commenter supported these points and stated that the fact that one of the biggest Participants was so strongly opposed to the plan was evidence that it should be disapproved. See Virtu Letter at 3. 323 One commenter stated that this estimate is based on 2021 data and urged the Commission to require the Participants to amend the Proposed Amendment to include the 2022 data and fee allocation estimates, stating that the CAT budget has grown significantly from 2021. See FINRA April 2023 Letter at 3, 4–5. In its response to comments, CAT LLC provided the Historical CAT Costs for 2022. The total operating expenses increased from $144,415,268 in 2021 to $181,107,294 for 2022. See Notice, supra note 7, 88 FR at 17111; CAT LLC May 2023 Response Letter at 13. 324 See FINRA May 2023 Letter at 2; FINRA April 2023 Letter at 3; SIFMA May 2023 Letter at 2. 325 FINRA April 2023 Letter at 3. PO 00000 Frm 00017 Fmt 4701 Sfmt 4703 62643 operate a market,326 and that the Proposed Amendment would place an undue burden on FINRA.327 FINRA stated that its share was ‘‘more than double that of the next highest Participant and $4 million more than all option exchanges combined.’’ 328 FINRA also stated that its allocation would largely be based on transaction volume reported to the TRF; however, FINRA stated that TRF transactions generate fewer costs for the CAT,329 as opposed to options activity, but that only 25% of total Participant CAT fees would be assessed for options activity, while the remaining 75% would be assessed for equities activity.330 FINRA stated that ‘‘. . . FINRA would be assessed an estimated 34% of the total CAT costs to be borne amongst the 25 Participants, and more than all options exchanges combined.’’ 331 FINRA stated that, unlike the exchange Participants, transactions are not executed on a FINRA marketplace and FINRA does not receive commercial revenue for those transactions.332 FINRA explained that ‘‘while the NMS stock allocation to FINRA under the Funding Model is based on transactions that are reported to FINRA [TRFs], these transactions are not executed on a FINRA marketplace and FINRA does not retain commercial revenues from those transactions’’ 333 unlike the exchanges that operate each FINRA TRF, which retain the market data and trade reporting revenue of the TRF.334 FINRA stated that, unlike itself, these exchanges would thus have a revenue stream related to the transactions that would be assessed a CAT fee, and that also, unlike FINRA, exchanges generate revenue from listings and proprietary data feeds in NMS securities.335 FINRA also stated that FINRA members can report over-the-counter transactions in listed stocks to the FINRA Alternative Display Facility, although most transactions are reported to a TRF.336 FINRA further stated that it cannot necessarily recoup its costs through RSAs that it has entered into with 326 Id. 327 See FINRA June 2022 Letter at 6. April 2023 Letter at 4; see also FINRA June 2022 Letter at 5. 329 See FINRA April 2023 Letter at 8, n.23. The commenter also stated that ‘‘TRF volume contributes to only a very small percentage of annual CAT compute and storage costs.’’ FINRA May 2023 Letter at 2. 330 See FINRA April 2023 Letter at 8, n.23; FINRA May 2023 Letter at 2. 331 FINRA May 2023 Letter at 2. 332 See FINRA April 2023 Letter at 3. 333 Id. 334 Id. 335 Id. at 4. 336 Id. at 3, n.8. 328 FINRA E:\FR\FM\12SEN2.SGM 12SEN2 62644 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES2 certain exchanges 337 because the exchanges must first agree to be charged CAT costs under the RSAs; therefore, RSAs would not be a reliable source of CAT funding for FINRA.338 Additionally, FINRA questioned CAT LLC’s statement that the Proposed Amendment ‘‘reflects a reasonable effort to allocate costs based on the extent to which different CAT Reporters participate in and benefit from the equities and options markets.’’ 339 Specifically, FINRA asked how this explains the size of its allocation 340 and noted that this statement ‘‘conflates the costs to create and operate the CAT with the usage of CAT data.’’ 341 In the Proposed Amendment, CAT LLC contested the view that FINRA should not be treated as a market center for CAT funding purposes merely because FINRA is not treated as a market center for governance purposes under the National Market System Plan Regarding Consolidated Equity Market Data (‘‘CT Plan’’).342 CAT LLC explained that the purpose and implementation of the CT Plan and the CAT NMS Plan are different.343 CAT LLC stated that while the CAT NMS Plan explicitly contemplates charging fees to all Participants, including FINRA,344 and that the CAT is solely for regulatory purposes, providing a regulatory system to facilitate the performance of the self-regulatory obligations of all of the Participants, including the exchanges and FINRA,345 ‘‘[i]n contrast, the CT Plan governs the public dissemination of real-time consolidated equity market data for NMS stocks.’’ 346 337 This statement was made in response to a statement in the Proposed Amendment that FINRA, like the exchange Participants, has revenue sources other than membership fees, giving as an example the RSAs. See Notice, supra note 7, 88 FR at 17107. 338 See FINRA April 2023 Letter at 4. 339 Id. at 7. 340 Id. 341 Id.; see also FINRA June 2022 Letter at 6. 342 See Notice, supra note 7, 88 FR at 17108. See also Joint Industry Plan; Order Approving, as Modified, a National Market System Plan Regarding Consolidated Equity Market Data; Securities Exchange Act Release No. 92586 (Aug. 6, 2021), 86 FR 44142 (Aug. 11, 2021) (File No. 4–757) (‘‘Order Approving the CT Plan’’). The Order Approving the CT Plan was vacated by the D.C. Circuit on July 5, 2022. See The NASDAQ Stock Market LLC et al. v. SEC, Case No. 21–1167, D.C. Cir. (July 5, 2022). See also Securities Exchange Act Release No. 88827; File No. 4–757 (May 6, 2020), 85 FR 28702 (May 13, 2020) (Order Directing the Exchanges and the Financial Industry Regulatory Authority to Submit a New National Market System Plan Regarding Consolidated Equity Market Data). 343 See Notice, supra note 7, 88 FR at 17108. 344 See CAT NMS Plan, supra note 2, at Sections 11.2 and 11.3. 345 See Notice, supra note 7, 88 FR at 17108. 346 Id. VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 Certain commenters expressed concern about alleged arbitrary treatment of FINRA by the other Participants of the CAT NMS Plan.347 FINRA believes that its ‘‘outsized allocation’’ 348 was because of its limited voting power, only having one out of 25 votes on the Operating Committee as it does not control, nor is under common control with, any other Participant.349 Another commenter stated that the current CAT NMS Plan voting structure results in the unfair and inequitable treatment of FINRA.350 Both commenters believe that the exchange Participants treat FINRA arbitrarily to benefit themselves, treating FINRA as a market center in the CAT NMS Plan while not as a market center under the CT Plan, which governs the public dissemination of real-time consolidated market data for national market system stocks.351 One commenter stated that the Participants do not treat FINRA as a market center under the CT Plan in order to limit FINRA’s voting power and therefore its ability to decide how to allocate market data revenue.352 The commenter stated that this example demonstrates the ‘‘. . . inherent conflicts of interest that for-profit exchanges have in operating as SROs. . .’’ 353 Certain commenters suggested that the Commission issue an order soliciting comment on whether the Operating Committee should be reorganized consistent with the CT Plan.354 One commenter stated, ‘‘[w]e 347 See FINRA April 2023 Letter at 6; SIFMA October 2022 Letter at 3. See also SIFMA May 2023 Letter at 6, n.11. 348 FINRA April 2023 Letter at 7; FINRA June 2022 Letter at 6. 349 FINRA April 2023 Letter at 4, 8. See also FINRA June 2022 Letter at 8. 350 See SIFMA January 2023 Letter at 3, n.7. 351 See FINRA April 2023 Letter at 6, n.16; SIFMA October 2022 Letter at 3. See also SIFMA May 2023 Letter at 6, n.11. One commenter stated that the Participants treat FINRA in ways that are financially beneficial to them without considering FINRA’s role in the marketplace ‘‘. . . as the notfor-profit self-regulator for the entire brokerage industry. . .’’ SIFMA October 2022 Letter at 3. See also SIFMA January 2023 Letter at 4; SIFMA October 2022 Letter at 4; SIFMA May 2023 Letter at 8 (recommending that FINRA be treated differently from the Participant exchanges due to its unique role). 352 See SIFMA October 2022 Letter at 3–4. See also SIFMA May 2023 Letter at 6, n.11. 353 SIFMA October 2022 Letter at 3. See also SIFMA June 2023 Letter at 4 (quoting a Commission release stating that the Participants are potentially conflicted in allocating CAT fees to themselves and the Industry Members); supra note 64. 354 SIFMA October 2022 Letter at 2. See also infra Section III.A.9.f. (suggesting changes to the governance structure of the CAT NMS Plan); see also MMI July Letter at 1–3. The latter commenter also felt that there should be a disclosure of the conflicts of interest the commenter believes are PO 00000 Frm 00018 Fmt 4701 Sfmt 4703 believe such a governance structure for the CAT would help facilitate a fairer structure for the views of the SROs and industry to be heard and incorporated into any further CAT funding proposal by reducing the ability of the largest exchange groups to dictate the terms of any CAT funding proposal over the objections of other SRO Participants and the industry.’’ 355 Commenters also believe the allocation to FINRA would increase the allocation to Industry Members.356 FINRA stated that because it relies on regulatory fees from its members for funding, it must increase its member fees in order to fund CAT costs that it cannot recover from contractual arrangements with TRF business members.357 FINRA stated that the Proposed Amendment does not adequately analyze the allocation’s impact, including whether the allocation would increase Industry Members’ allocation of total costs beyond two-thirds.358 FINRA dismissed as inadequate the Participants’ argument that Industry Members can pass through their costs, stating that the Proposed Amendment lacks a detailed description of and transparency into how the fees may be passed on to customers.359 Another commenter stated that the Participants ‘‘do not address the fact that the Executed Share Model for Prospective CAT Costs allocates twothirds of CAT costs to Industry Members for exchange transactions and more for off-exchange transactions’’ 360 because they cannot demonstrate that the proposed allocation results in an equitable allocation of reasonable fees.361 The commenter stated that Industry Members, who would be subject to two-thirds of Prospective CAT Costs under the Executed Share Model, already pay FINRA’s operating costs through regulatory fines and fees; inherent in having the funding model determined by the Participants.). 355 SIFMA October 2022 Letter at 2. The commenter also stated that the Industry Members are not voting members of the Operating Committee and have no way to direct the cost control efforts of the Participants or change their course if the cost control efforts prove to be unsuccessful. See SIFMA June 2022 Letter at 8. 356 See FINRA April 2023 Letter at 5–7; SIFMA June 2022 Letter at 4; Citadel July Letter at 2, 16, 21, supra notes 73–74 and accompanying text. See also SIFMA October 2022 Letter at 2, 3. 357 See FINRA April 2023 Letter at 5–6. See also FINRA June 2022 Letter at 7. 358 See FINRA April 2023 Letter at 6. 359 Id. at 6–7. 360 SIFMA June 2022 Letter at 4. See also SIFMA October 2022 Letter at 3 (‘‘. . . we believe the proposal is flawed because it fails to appropriately consider that Industry Members pay the full costs of operating FINRA.’’). 361 See SIFMA June 2022 Letter at 4. E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES2 therefore, Industry Members would additionally be indirectly assessed FINRA’s one-third CAT fee for offexchange transactions.362 The commenter suggested an alternative allocation 363 that would subject FINRA only to a nominal regulatory user fee to access CAT Data.364 CAT LLC disagreed with the commenter’s proposal to charge FINRA only a nominal regulatory fee.365 CAT LLC stated that the proposed transaction-based CAT fee is purposely agnostic as to the location of where a trade occurs, and an intent of this design is to avoid influencing whether or where any trading activity would take place. Moreover, CAT LLC stated that FINRA is no different from the exchanges in terms of its regulatory obligations regarding the CAT.366 CAT LLC also stated that FINRA’s allocation is ‘‘fair and reasonable as FINRA is currently, and is expected to continue to be, one of the largest regulatory users of the CAT, and it is responsible for the oversight of the very large over-thecounter securities market.’’ 367 FINRA requested that if the Commission were to approve the Proposed Amendment, that it acknowledge ‘‘FINRA’s need and ability to cover CAT costs that are not recovered through contractual arrangements through member fee increases, so as not to jeopardize FINRA’s ability to carry out its critical regulatory mission.’’ 368 FINRA also stated that it would file a rule change to increase its member fees with the filing of any proposed rule change to effectuate the Funding Model.369 The Commission acknowledges the comments objecting to the allocation to FINRA of 34% of the total CAT costs to be borne by Participants,370 but believes that it is reasonable for the Proposed Amendment to assess fees to FINRA based on executed equivalent share 362 Id. The commenter also stated that the proposed allocation would result in two-thirds of CAT costs for exchange transactions being imposed on Industry Members, and that this amount would be higher for off-exchange transactions as FINRA would be assessed one-third as the venue fee and Industry Members would be indirectly assessed FINRA’s portion of CAT costs as they pay the entire costs of operating FINRA. Id. See also SIFMA October 2022 Letter at 2. 363 See supra notes 100–101 and accompanying text. 364 See SIFMA January 2023 Letter at 4. See also SIFMA May 2023 Letter at 8; SIFMA June 2022 Letter at 5; SIFMA October 2022 Letter at 4; supra notes 100–101 and accompanying text. 365 See CAT LLC May 2023 Response Letter at 8. 366 Id. 367 See CAT LLC July 2023 Response Letter at 35. 368 FINRA April 2023 Letter at 7. 369 Id. 370 Id. at 3; SIFMA May 2023 Letter at 2. VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 volume like the other Participants for purposes of CAT funding. FINRA is a Participant of the CAT NMS Plan. All Participants are mandated under the CAT NMS Plan to fund the CAT.371 The Executed Share Model would assess CAT fees based on executed equivalent share volume. Under the Executed Share Model, CAT fees would be allocated among the buyer, seller, and the market regulator in each transaction. FINRA would pay the Participant CAT fee based on off-exchange trades reported by its members to its trade reporting facilities because FINRA is the market regulator responsible for the market in which the TRF transactions occur. The Executed Share Model, like the current funding model, is designed to allocate CAT fees among the Participants based on market share. Since FINRA is generally the market regulator for the over-the-counter markets, its CAT fees, and thus market share, will be based on the trading activity in the over-the-counter markets reported to it by its members. The trading volume of the over-the-counter markets is greater than that on the exchanges; consequently, FINRA will likely be allocated a greater executed equivalent share volume than the other Participants. However, trading volume generates costs for CAT, therefore, given its role overseeing the over-the-counter market, it is reasonable for FINRA to incur a greater share of CAT fees based on the over-the-counter market’s trading volume. As discussed above, it is difficult to calculate each CAT Reporter’s individual cost burden on the CAT, and a reasonable proxy for CAT cost burden must be used. The proposed use of executed equivalent share volume is a reasonable method of allocating costs because it is readily determinable and equitable since executed share volume is based on trading activity, which impacts CAT costs. In practice, CAT Reporters will be assessed fees corresponding to the cost burden they impose on the CAT through their trading activity, or in FINRA’s case, trading activity in the over-the-counter markets reported to it by its members. The Commission recognizes that there could be other methodologies for allocating costs among CAT Reporters, such as allocations that take into account the manner in which each Participant earns revenue, but these other methodologies may be significantly more complex and would not necessarily more accurately reflect the cost burden of each CAT Reporter. CAT LLC chose to propose the use of 371 See CAT NMS Plan, supra note 2, at Section 11.1(b); Section 11.3(a). PO 00000 Frm 00019 Fmt 4701 Sfmt 4703 62645 executed equivalent share volume, explaining why trading activity is a reasonable proxy for cost burden and an appropriate metric for allocating CAT costs.372 Although there may be multiple permissible approaches to cost allocation, the proposed allocation of Participant CAT fees based on executed equivalent share volume is reasonable and meets the Rule 608 approval standard.373 The Commission agrees with CAT LLC that the Executed Share Model reasonably assesses fees to FINRA in the same manner based on transaction volume as other Participants. The Executed Share Model is reasonably designed to be neutral as to the manner of execution and place of execution.374 All Participants are self-regulatory organizations that have the same regulatory obligations under the Exchange Act, regardless of whether they operate as a for-profit or not-forprofit entity. Their regulatory responsibilities for the operations of CAT are the same.375 The Commission acknowledges the concerns expressed by commenters that FINRA’s allocation could indirectly increase the allocation of CAT fees to Industry Members since Industry Members contribute to FINRA’s funding.376 As discussed above, however, the costs of CAT must be allocated between the Participants and Industry Members according to some formula. Although the Participants and Industry Members have different means of potentially recovering from others some of the costs allocated to them (e.g., the Participants from Industry Members and Industry Members from customers), it is reasonable to allocate costs evenly among the three parties who have primary roles related to the transaction. The Commission agrees with CAT LLC that Industry Members may be able to offset any fees that FINRA assesses them by passing their CAT fees through to their customers, just as they may do with Section 31-related fees and other fees. The Commission recognizes, however, that not all Industry Members currently pass through fees or would determine to do so in the future. Finally, the Commission does not agree that the Participants’ treatment of FINRA is arbitrary because FINRA is treated as a market center for purposes 372 See Notice, supra note 7, 88 FR at 17103. 17 CFR 242.608(b)(2). 374 See Notice, supra note 7, 88 FR at 17107. 375 Id. 376 See FINRA April 2023 Letter at 5–7; SIFMA June 2022 Letter at 4; Citadel July Letter at 2, 16, 21, supra notes 73–74 and accompanying text. See also SIFMA October 2022 Letter at 2, 3; FINRA June 2022 Letter at 4. 373 See E:\FR\FM\12SEN2.SGM 12SEN2 62646 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices of determining its CAT funding obligations while the CT Plan, which governs the public dissemination of consolidated market data, would not have counted FINRA’s market activity for purposes of determining the allocation of votes on the Operating Committee.377 The different treatment of FINRA in these NMS plans reasonably reflects the very different roles that a market center is used for in these contexts. The CT Plan provisions discussed by the commenters involve the determination of which Participant(s) could be eligible for a second vote on the Operating Committee,378 while the Executed Share Model proposes to assess FINRA a Participant CAT Fee based on its role as the regulator for the over-the-counter market in which such trades occur.379 The commenter’s request that the Commission issue an order soliciting comment on whether the Operating Committee should be reorganized consistent with the CT Plan 380 would be better addressed in the context of a separate plan amendment. lotter on DSK11XQN23PROD with NOTICES2 4. CAT Executing Broker As noted above, CAT Executing Brokers will be charged CAT fees.381 CAT LLC proposed to add a definition of ‘‘CAT Executing Broker’’ to Section 1.1 of the CAT NMS Plan. The definition would explain which party would be identified as a CAT Executing Broker in a transaction. With respect to transactions on an exchange and over-the-counter transactions, CAT LLC would use transaction reports reported to the CAT by FINRA or the exchanges to identify the transaction, as well as the CAT Executing Broker for each transaction, for purposes of calculating the CAT fees.382 Under the Participant Technical 377 The CT Plan provided that an exchange group or independent exchange that has more than 15 percent of consolidated equity market share during four of the six calendar months preceding a vote of the operating committee would be authorized to cast two votes. The CT Plan stated that FINRA is not considered a market center for purposes of determining consolidated equity market share solely by virtue of facilitating trades through any TRF that FINRA operates in affiliation with a national securities exchange designed to report transactions otherwise than on an exchange. See supra note 342. 378 See FINRA April 2023 Letter at 6; SIFMA October 2022 Letter at 3. See also SIFMA January 2023 Letter at 4; SIFMA October 2022 Letter at 4; SIFMA May 2023 Letter at 8. 379 See supra notes 371–372 and accompanying text. 380 See SIFMA October 2022 Letter at 2. 381 See Notice, supra note 7, 88 FR at 17087. 382 Id. at 17088. The transaction reports used to identify transactions and CAT Executing Brokers do not provide for fractional quantities; therefore, CAT fees would not be calculated using fractional shares VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 Specifications, for transactions occurring on a Participant exchange, there is a field for the exchange to report the market participant identifier (‘‘MPID’’) of ‘‘the member firm that is responsible for the order on this side of the trade.’’ 383 The Industry Members identified in these fields for the transaction reports would be the CAT Executing Brokers for transactions executed on an exchange.384 FINRA is required to report to the CAT transactions in Eligible Securities reported to a FINRA trade reporting facility (i.e., the TRF, Over-the Counter Reporting Facility (‘‘ORF’’) and Alternative Display Facility (‘‘ADF’’)).385 Under the Participant Technical Specifications, for such transactions reported to a FINRA trade reporting facility, FINRA is required to report the MPID of the executing party as well as the MPID of the contra-side executing party.386 The Industry Members identified in these two fields for the transaction reports would be the CAT Executing Brokers for over-thecounter transactions.387 For transactions on ATSs, if an ATS is identified as the executing party and/ or the contra-side executing party in the TRF/ORF/ADF Transaction Data Event, then the ATS would be a CAT Executing Broker for purposes of the Executed Share Model.388 If the ATS is identified as the executing party for the buyer in such transaction reports, then the ATS would be the CEBB.389 If the ATS is identified as the executing party for the seller in such transaction reports, then the ATS would be the CEBS.390 If the or fractional share components of executed orders. Id. at 17089. See supra notes 280–266 and accompanying text. 383 Section 4.7 (Order Trade Event) and Section 5.2.5.1 (Simple Option Trade Event: Side Details) of the CAT Reporting Technical Specifications for Plan Participants, Version 4.1.0–r17 (Feb. 21, 2023), https://www.catnmsplan.com/sites/default/files/ 2023-02/02.21.2023-CAT-Reporting-TechnicalSpecifications-for-Participants-4.1.0-r17.pdf. 384 See Notice, supra note 7, 88 FR at 17087–88. 385 See Section 6.1 of the CAT Reporting Technical Specifications for Plan Participants (Feb. 21, 2023). A CAT Executing Broker in over-thecounter transactions identified on the TRF/ORF/ ADF Transaction Data Event is determined based on the tape or media report, that is, a trade report that is submitted to a FINRA trade reporting facility and reported to and publicly disseminated by the appropriate exclusive Securities Information Processor. A CAT Executing Broker for over-thecounter transactions is not determined based on a non-tape report (e.g., a regulatory report or a clearing report), which is not publicly disseminated. There is an exception to this statement for away-from-market trades. These are non-media trades reported to the TRF with an ‘‘SRO Required Modifier Code’’ of ‘‘R’’. 386 See Notice, supra note 7, 88 FR at 17087–88. 387 Id. at 17088. 388 Id. at 17088–89. 389 Id. at 17089. 390 Id. PO 00000 Frm 00020 Fmt 4701 Sfmt 4703 ATS is identified as both the executing party and contra-side executing party, the ATS would be both the CEBB and the CEBS.391 ATSs would determine the executing party and the contra-side executing party reported to FINRA’s equity trading facilities in accordance with the transaction reporting requirements for FINRA’s equity trading facilities.392 For transactions that do not occur on an exchange and there is only a FINRA member identified for one side of the trade, that FINRA member would be treated as the CAT Executing Broker for both the buy-side and the sell-side of the transaction, that is, as the CEBS and CEBB.393 Additionally, ‘‘[f]or any trade report on which a Canadian nonmember appears as a party to the trade, the FINRA member must appear as the reporting party.’’ 394 In this situation, the executing broker identified in the ‘‘reportingExecutingMpid’’ field would be billed for both sides of the transaction.395 The Executed Share Model also provides for cancellations and corrections.396 CAT LLC stated that it expects to determine CAT fees based on the transaction reports for a month as of a particular day.397 To the extent that changes are made to the transaction reports on or before the day the CAT fees are determined for the given month, the changes will be reflected in the monthly bill.398 To the extent that changes are made to the transaction reports after the day the CAT fees are determined for that month, subsequent bills will reflect any changes via debits or credits, as applicable.399 CAT LLC represented that it will establish specific policies and procedures regarding the treatment of such adjustments as those related to cancellations and corrections, as is required under the CAT NMS Plan to adopt policies, procedures, and practices regarding the billing and collection of fees.400 Furthermore, CAT LLC stated that it will inform Industry Members and other market participants 391 Id. See also FINRA, Trade Reporting Frequently Asked Questions at Section 203, available at https://www.finra.org/filing-reporting/ market-transparency-reporting/trade-reportingfaq#203; FINRA Regulatory Notice 09–08, available at https://www.finra.org/rules-guidance/notices/0908. 392 See Notice, supra note 7, 88 FR at 17089. 393 See proposed Section 1.1. (definition of ‘‘CAT Executing Broker’’). 394 Notice, supra note 7, 88 FR at 17089. 395 Id. 396 Id. 397 Id. 398 Id. 399 Id. 400 See CAT NMS Plan, supra note 2, at Section 11.1(d). E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices of these policies and procedures via FAQs, CAT Alerts and/or other appropriate methods.401 Certain commenters objected to the proposed definition of ‘‘CAT Executing Broker.’’ 402 One commenter stated that the term ‘‘CAT Executing Broker’’ ‘‘does not appear to be universally defined or accepted by Option Industry Members or Participants’’ and that such lack of acceptance ‘‘present[s] a challenge when firms try to assess the impact the ‘Funding Proposal’ will have on their respective businesses.’’ 403 Accordingly, the commenter advocated that the Executed Share Model follow the ‘‘structure already in place for [collecting] Regulatory Fees,’’ such as charging Clearing Brokers.404 Another commenter stated that the proposed definition of executing broker would result in the inequitable allocation of fees.405 While the commenter supported the change from having clearing firms be assessed Industry Member CAT fees to executing brokers having this obligation,406 because clearing firms would have been unfairly burdened with CAT costs and could have been placed in situations in which they would have been unable to identify the client responsible for the costs,407 the commenter expressed 401 See Notice, supra note 7, 88 FR at 17089. SIFMA May 2023 Letter; Letter from Timothy Miller, Chief Operating Officer, DASH Financial Technologies, LLC to Vanessa Countryman, Secretary, Commission (July 13, 2023) (‘‘DASH July 2023 Letter’’), at 1–2; Letter from Timothy Miller, Chief Operating Officer, DASH Financial Technologies, LLC to Vanessa Countryman, Secretary, Commission (April 11, 2023) (‘‘DASH April 2023 Letter’’), at 1–2. Both the DASH July 2023 Letter and the DASH April 2023 Letter incorporated by reference a separate letter submitted by the commenter on the prior funding proposal (stating that the concerns expressed in the prior letter concerning the operating and competitive burdens of the proposed funding model are unchanged). See Letter from Timothy Miller, Chief Operating Officer, DASH Financial Technologies LLC, to Vanessa Countryman, Secretary, Commission (Jan. 3, 2023) (‘‘DASH January 2023 Letter’’). 403 DASH April 2023 Letter at 1. See also DASH July 2023 Letter at 1–2. 404 DASH April 2023 Letter at 2. See also DASH July 2023 Letter at 1–2. The commenter reiterated that it believes clearing firms are still best suited to process the collection of fees, as this can occur at trade settlement and the cost is ultimately borne by the end beneficiary of each transaction. The commenter further stated that ‘‘there is precedent to follow with other Regulatory Fees, such as ORF and OCC, to streamline the workflow and reduce the number of counterparties involved in the payment/collection process,’’ and ‘‘that in the options industry, ORF and Section 31 fees are not consistently billed to the exchange facing member; but, most of the time, these fees follow the clearing firm associated with the order.’’ 405 See SIFMA May 2023 Letter at 3. 406 Id. See also SIFMA January 2023 Letter at 7– 8. 407 See SIFMA May 2023 Letter at 3–4. See also SIFMA October 2022 Letter at 5. The commenter lotter on DSK11XQN23PROD with NOTICES2 402 See VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 concerns with how the Participants determined which entities would be considered executing brokers.408 In comment letters on the prior funding model proposal,409 which was amended to require executing brokers instead of clearing firms to be assessed CAT fees,410 the commenter requested additional detail on how an executing broker would be defined.411 The commenter subsequently stated that the definition in the current Proposed Amendment suffers from the same problems as the prior proposal in which CAT fees were allocated to clearing firms and would result in the inequitable allocation of CAT fees among Industry Members.412 The commenter explained that CAT operates on a cost-recovery basis, with costs resulting from the number of messages that Participants and Industry Members report to the CAT, the processing and linking of such messages, and the costs of providing tools to regulators to analyze CAT data.413 The commenter stated that the use of message traffic as the basis of fees, in the Original Funding Model, would have ensured that all CAT Reporters would contribute to CAT’s funding.414 However, the commenter stated that, since the Proposed Amendment would not impose fees on all CAT Reporters, instead imposing fees on executing brokers, it would result in an inequitable allocation of fees as the executing brokers would be the last broker among many other brokers handling an order.415 The commenter stated that any analysis of also expressed concerns about the assessment of CAT fees on clearing firms because clearing firms would be required to collect fees and thus would have to develop new systems and processes under the Executed Share Model, and because a clearing firm for a buyer or seller would not always be a party to a trade as it could be the clearer of a trade on behalf of an executing broker. See SIFMA June 2022 Letter at 9; SIFMA October 2022 Letter at 7. 408 See SIFMA May 2023 Letter at 4. 409 See Securities Exchange Act Release No. 94984 (May 25, 2022), 87 FR 33226 (June 1, 2022) (‘‘Prior Funding Model Proposal’’). 410 Two partial amendments were submitted on the Prior Funding Model Proposal. The first partial amendment initially proposed the use of executing brokers. See Securities Exchange Act Release No. 96394 (Nov. 28, 2022), 87 FR 74183 (Dec. 3, 2022). The Prior Funding Model Proposal, as modified by the two partial amendments, was withdrawn by the Participants on March 1, 2023. See Securities Exchange Act Release No. 97212 (Mar. 28, 2023), 88 FR 19693 (Apr. 3, 2023). 411 See SIFMA January 2023 Letter at 2, 8; SIFMA December 2022 Letter at 3. See also SIFMA May 2023 Letter at 4. 412 See SIFMA May 2023 Letter at 4. See also SIFMA June 2022 Letter at 9–10; SIFMA October 2022 Letter at 5. 413 See SIFMA May 2023 Letter at 4. 414 Id. 415 Id. at 4–5. PO 00000 Frm 00021 Fmt 4701 Sfmt 4703 62647 such a funding model must evaluate whether (i) the executing brokers would pass-through or absorb the CAT fees and any negative impacts on competition, noting that the Proposed Amendment would require executing brokers to incur expenses that other Industry Members would not incur since they would be required to collect the Industry Member portion of CAT fees on behalf of the Participants,416 and (ii) Industry Members that executed trades for introducing brokers and acted as order consolidators and ATSs would be responsible for CAT fees for transactions they did not originate and would have to either pay the fee for their clients or develop software and processes to collect the fees from their clients as they often are not capable of passing through fees to the clients that sent them the orders.417 The commenter stated that the Proposed Amendment would subject executing brokers to unfair burdens and require them to ‘‘shoulder CAT costs in scenarios in which they could not determine which client firm was responsible for creating the CAT costs by initiating the transaction.’’ 418 The commenter suggested instead an allocation in which the Industry Member that originated an order would be treated as an ‘‘executing broker’’ and therefore be responsible for Industry Member CAT fees.419 Under this alternative, ‘‘the Industry Member who originates a new principal order or the Industry Member who initially receives and routes a customer order for execution on an agency basis would be directly assessed CAT Fees.’’ 420 The commenter stated that this would be the most reasonable way to allocate CAT costs among Industry Members 421 and that it would be ‘‘relatively easy to accommodate this approach.’’ 422 One other commenter also suggested allocating costs to the party originating an order, stating that this would 416 Id. at 5. See also Virtu Letter at 5 (stating that it is ‘‘highly likely’’ that executing brokers would end up absorbing the fees themselves, as they would not have the systems in place to trace to whom the fees were properly allocable). 417 See SIFMA May 2023 Letter at 5. 418 Id. Another commenter similarly objected to the imposition of CAT fees on Executing Brokers. This commenter, a major wholesaler who also serves as the Executing Broker on many transactions, stated it was unjust to disproportionately burden Executing Brokers in this manner, and noted that the cost of designing processes and systems to route the fees to the appropriate parties could be prohibitive to smaller brokers. See Virtu Letter at 4–5. 419 See SIFMA May 2023 Letter at 5. 420 Id. at 6. 421 Id. at 5. 422 Id. at 6. E:\FR\FM\12SEN2.SGM 12SEN2 62648 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES2 ‘‘streamline the process and more accurately allocate costs . . .’’ 423 One commenter expressed concerns about the imposition of CAT fees on CAT Executing Brokers.424 The commenter stated that charging CAT Executing Brokers ‘‘inordinately burdens Broker Dealers, especially small to medium-sized firms.’’ 425 This commenter recommended using instead the existing structure for regulatory fees, including ‘‘the efficiencies afforded by the current structure, and the resulting alleviation of risk.’’ 426 In this regard, the commenter stated that ‘‘Clearing Firms are best suited to process the collection of fees as it can occur at trade settlement and the cost is ultimately borne by the end beneficiary of each transaction.’’ 427 The commenter also stated that small and medium-sized executing brokers could expect a significant negative impact on their net capital as a result of the proposal, stating, ‘‘. . . the firms will be forced to recoup these costs by passing them on to their clients, either in the form of higher commission rates or as a separate transactional fee. Using [Clearing Member Trade Agreement] commission invoicing and/or SEC 31(b) fees in a broker-to-broker relationship as a proxy, these invoices are generally paid well after the 60-day milestone to qualify the receivable as ‘good capital.’ ’’ 428 In response to the comment about the definition of CAT Executing Broker and the billing and collection process being better suited for clearing firms, CAT LLC stated that the proposed assessment of CAT fees on CAT Executing Brokers only addresses the party obligated to pay the CAT fee.429 CAT LLC stated that a CAT Executing Broker would not be required to follow a particular process for paying CAT fees, as it could pay the fees itself, or require a clearing firm or other third party to pay CAT fees on its behalf.430 For example, CAT LLC stated that a CAT Executing Broker can decide to enter into an arrangement with its clearing broker for the clearing broker to 423 See Citadel July Letter at 20. See also id. at 3, 30, 31. 424 See DASH April 2023 Letter. See also DASH July 2023 Letter at 1–2. 425 See DASH April 2023 Letter at 1. See also DASH January 2023 Letter at 1; DASH July 2023 Letter at 1. 426 DASH January 2023 Letter at 3. See also DASH April 2023 Letter at 1–2; DASH July 2023 Letter at 1–2. 427 DASH April 2023 Letter at 1. See also DASH January 2023 Letter at 1; DASH July 2023 Letter at 1. 428 DASH January 2023 Letter at 2; DASH July 2023 Letter at 1–2. 429 See CAT LLC May 2023 Response Letter at 12; CAT LLC July 2023 Response Letter at 3. 430 See CAT LLC July 2023 Response Letter at 3. VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 collect and pass-through the CAT fees like it does in other contexts.431 With respect to alternatives to the proposed definition of the CAT Executing Broker, CAT LLC stated that the ‘‘originating broker’’ suggestion was from a commenter who had previously recommended charging executing brokers in comment letters on the Prior Funding Model Proposal.432 CAT LLC stated that the commenter’s objection to charging executing brokers in the Executed Share Model was an attempt to further delay the approval of a funding model and the resultant payment of CAT fees by its members, rather than expressing a concern about the merits of charging executing brokers.433 In response, the commenter stated that the Operating Committee mischaracterized the commenter’s position on the assessment of CAT fees to executing brokers by stating in the CAT LLC Response Letter that the commenter changed its position on this proposed change to delay adoption of a CAT funding model.434 The commenter represented that it stated in comment letters it submitted on the Prior Funding Model Proposal 435 that initially proposed the use of executing brokers 436 that (1) the Participants did not define who would be an executing broker in a transaction, (2) a clear definition is necessary for Industry Members to understand when they would be assessed costs under the Executed Share Model, and (3) its understanding was that the concept of executing broker generally refers to the Industry Member that initiates an order.437 The commenter stated that the Participants only provided a definition of executing broker in the Proposed Amendment.438 The commenter stated that it provided concerns about the proposed definition in its May 2023 comment letter, which the commenter stated were mischaracterized by the Operating Committee in the CAT LLC Response Letter in an attempt to rush the Commission to a decision on the Proposed Amendment.439 In response to the comment that imposing fees on executing brokers would result in an inequitable allocation of fees and the suggestion that the use of message traffic as the basis of fees would have ensured that all CAT LLC May 2023 Response Letter at 12. at 2. See also supra note 409. 433 CAT LLC May 2023 Response Letter at 3. 434 See SIFMA June 2023 Letter at 5. 435 See supra note 409. 436 See supra note 410. 437 See SIFMA June 2023 Letter at 5. 438 Id. 439 Id. at 5–6. Reporters would contribute to CAT’s funding, CAT LLC disagreed and stated that because the message traffic is separate from whether or not a transaction occurs, fees based on message traffic may not correlate with common revenue or fee models.440 CAT LLC stated that, as a result, CAT fees based on message traffic could impose an outsized adverse financial impact on certain Industry Members, raising this same issue of an inequitable allocation of fees.441 Further, in response to the commenter’s criticism that in charging executing brokers, the fee would be charged to a subset of Industry Members and, as a result, that subset of Industry Members would incur expenses that other Industry Members would not incur, CAT LLC stated that it continues to believe that charging CAT Executing Brokers would satisfy the requirements of the Exchange Act.442 CAT LLC stated that in the past, the Commission has approved fees that are charged to some, but not all, broker-dealers.443 CAT LLC noted that, for example, FINRA’s TAF is assessed to a subset of FINRA members—that is, it is assessed on the sell side of member transactions.444 CAT LLC also stated that the options exchanges charge options regulatory fees per executed contract side, and, for both options and equities, Section 31related fees are charged to the sell-side in a transaction.445 CAT LLC recognized that, under the proposal to charge CAT Executing Brokers, the CAT Executing Broker, but not other Industry Members involved in a given order lifecycle, would be required to pay the CAT fees, and that Industry Members that sought to recoup such fees would have to develop processes to collect such fees from their clients.446 CAT LLC stated that this regulatory requirement would have a similar effect as other types of regulatory fees, such as the FINRA TAF, the options regulatory fee and Section 31-related sales value pass-through fees because, ‘‘[i]n each such case, a subset of broker-dealers is required to pay a transaction-based regulatory fee, and those broker-dealers seeking to recover such fees from other broker-dealers or non-broker-dealers have established processes with regard to the passthrough of such fees.’’ 447 CAT LLC further stated that it disagrees with charging an originating 431 CAT 432 Id. PO 00000 Frm 00022 Fmt 4701 Sfmt 4703 440 See CAT LLC May 2023 Response Letter at 4. 441 Id. 442 Id. at 3. 443 Id. 444 Id. 445 Id. 446 See CAT LLC May 2023 Response Letter at 4. 447 Id. E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES2 broker instead of an executing broker because there are already several existing examples of transaction-based fees being assessed to executing brokers as opposed to the originating broker (e.g., TAF, Section 31 fees, ORF fees), and it disagrees with the assertion that charging originating brokers would be easier.448 CAT LLC stated that charging the originating Industry Member would be difficult to implement and would increase the costs of implementing CAT fees, whereas charging CAT Executing Brokers is simple, straightforward and in line with existing fee and business models because for any given trade (buy or sell), there is only one CAT Executing Broker to which shares can be allocated.449 As such, CAT LLC stated that ‘‘charging the CAT Executing Broker is simple and straightforward, and leverages a one-to-one relationship between billable events (trades) and billable parties.’’ 450 CAT LLC stated that, for a single trade event, there may be many originating brokers, and each trade must be broken down on a pro-rata basis, ‘‘to account[] for one or more layers of aggregation, disaggregation, and representation of the underlying orders.’’ 451 Therefore, CAT LLC stated that one commenter’s 452 ‘‘suggestion of a model that begins the funding analysis with new order events (e.g., MENO or MONO events) and then looks for any execution or fulfillment that is directly associated with that event does not reduce or mitigate the complexity associated with aggregation.’’ 453 Further, CAT LLC stated that the commenter’s recommendation would not work with the design of the CAT system, stating that ‘‘[w]hile CAT is indeed designed to capture and unwind complex aggregation scenarios, the data and linkages are structured to facilitate regulatory use, and not a billing mechanism that assesses fees on a distinct set of executed trades; it is not simply a matter of using existing CAT linkages.’’ 454 CAT LLC also stated that charging originating brokers would implicate issues related to lifecycle linkage rates, and issues related to corrections, cancellations and allocations, but charging CAT Executing Brokers would avoid such 448 Id. at 5. See also CAT LLC July 2023 Response Letter at 3–4, 4 (detailing challenges of allocating CAT costs to originating brokers). 449 See CAT LLC May 2023 Response Letter at 5. See also CAT LLC July 2023 Response Letter at 3. 450 CAT LLC May 2023 Response Letter at 5. See also CAT LLC July 2023 Response Letter at 4. 451 CAT LLC May 2023 Response Letter at 5. See also CAT LLC July 2023 Response Letter at 3. 452 See SIFMA May 2023 Letter at 5. 453 See CAT LLC May 2023 Response Letter at 5. 454 Id. VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 complications.455 CAT LLC also stated that allocating to the originating broker would not include Industry Members that were only involved in routing and execution, which would include ‘‘some of the largest Industry Members,’’ 456 and that these Industry Members ‘‘are not involved in the origination of orders or originate few orders in relation to their overall market activity.’’ 457 Furthermore, CAT LLC stated that originating brokers would also need to establish processes for paying CAT fees, just as CAT Executing Brokers would.458 One commenter expressed uncertainty about CAT LLC’s response that some of the largest Industry Members are not involved in order origination or originate few orders relative to their market activity, stating that it is unclear to whom the statement is referring since the executing broker and the originating broker would be the same firm in the case of proprietary trading activity.459 Additionally, the commenter stated that the originating broker model should be pursued if it dramatically reduces market-wide implementation costs with a marginal increase in CAT costs, noting that Industry Members could bear most, if not all, CAT costs to implement the originating broker model.460 The commenter stated that, before proceeding, the CAT Operating Committee must publish an analysis of the costs and benefits of the executing broker and originating broker models including any differences in CAT implementation costs and Industry Member implementation costs.461 In response to a comment stating that executing brokers lacked systems and processes to recover costs from their clients and would either choose to absorb the CAT fees or exit the business because of the investments necessary for the cost-recovery process,462 CAT LLC stated that those Industry Members that pass-through CAT fees will accordingly need to develop processes to recover the fees from their clients, like they do for other regulatory-related fees, like the TAF, the options regulatory fee and Section 31-related fees.463 CAT LLC also stated that CAT Executing Brokers would ‘‘have full discretion as to whether and the manner and extent to which they pass on their CAT fees, if at 455 Id. 456 See CAT LLC July 2023 Response Letter at 3. 457 Id. 458 Id. 459 See Citadel August Letter at 6. 460 Id. 461 Id. 462 See Virtu Letter at 5. CAT LLC July 2023 Response Letter at 9. See also id. at 5. 463 See PO 00000 Frm 00023 Fmt 4701 Sfmt 4703 62649 all,’’ noting that ‘‘a CAT Executing Broker could round up its fees to the nearest cent, or decide to charge for, or not charge for certain transactions, or assess a specific fee or incorporate the costs into other fee programs.’’ 464 CAT LLC stated that assessing a transactionbased fee to an executing broker and the executing broker deciding whether and how to pass-through its costs to clients is ‘‘not new or novel.’’ 465 Finally, CAT LLC noted that the Plan Processor would provide trade-by-trade data to CAT Executing Brokers, and will offer a training program for CAT Executing Brokers to help them understand their CAT bills.466 In the Commission’s view, CAT LLC’s definition of ‘‘CAT Executing Broker’’ is reasonable given that the Executed Share Model is based upon the calculation of executed equivalent shares (emphasis added),467 and the executing brokers are reasonably suited to know their own volume and plan for future volume of executed equivalent shares to pay the CAT fees. One commenter’s suggested approach would also result in the assessment of fees on a subset of Industry Members —originating brokers—and thus could raise similar allocation concerns as those raised by the commenter about the proposed approach.468 In addition, as discussed below, the Commission agrees with the Participants that the ease of administration in using the transaction reports to identify the executing broker is an advantage of the Proposed Amendment. Given the similar issues with either approach—either charging the fees to a subset of Industry Members based on whether they are the ‘‘CAT Executing Broker’’ or the originating broker—it is reasonable to choose the less administratively burdensome of the two options. Accordingly, the assessment of CAT fees on CAT Executing Brokers is reasonable.469 In response to the commenter that questioned CAT LLC’s response that some of the largest Industry Members are not involved in order origination or originate few orders relative to their market activity,470 the Commission is not relying on this statement by CAT LLC and understands that the executing broker and the originating broker would be the same in the case of proprietary 464 CAT LLC July 2023 Response Letter at 10. See also id. at 5 (adding that broker-dealers passthrough fees to customers related to Section 31 fees). 465 Id. 466 Id. at 10. See also id. at 5. 467 See Notice, supra note 7, 88 FR at 17086. 468 See SIFMA May 2023 Letter at 5, 6. 469 See 17 CFR 242.608(b)(2). 470 See Citadel August Letter at 6. E:\FR\FM\12SEN2.SGM 12SEN2 lotter on DSK11XQN23PROD with NOTICES2 62650 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices trading activity. Although one commenter suggested that the originating broker model should be pursued if it dramatically reduces market-wide implementation costs with a marginal increase in CAT costs,471 the Commission believes that the executing broker model is reasonable. The Commission understands the argument that charging originating brokers instead of executing brokers would be easier and more cost effective for the executing brokers, but it would be at the expense of the originating brokers. The Commission also understands that charging executing brokers instead of originating brokers is easier and more cost effective for the CAT Plan Processor. Using CAT Data, the CAT Plan Processor can more easily determine which executing broker to charge. On the other hand, if the CAT Plan Processor were to charge originating brokers, the Commission believes the CAT Plan Processor would have to rely on linkages, which may not be one-for-one in all circumstances, to determine which originating broker to charge for an execution. And this difficulty not only would add to the costs of the CAT but also would impact transparency and potentially the relative simplicity of the CAT Fees. Moreover, the Proposed Amendment does not address how executing brokers passthrough CAT fees to their customers. Using transaction reports to identify the transaction for purposes of calculating the CAT fees as well as the CAT Executing Broker for each transaction for purposes of calculating the CAT fees is a straightforward and more objective method of identifying executing brokers than other methods, such as identifying an originating broker through an evaluation of CAT linkages. Although the definition of ‘‘CAT Executing Broker’’ may not be used by the industry or universally accepted, CAT Executing Brokers will be able review their transactions reports and request details regarding the calculation of their fees, which should allow them to better assess the impact of the Executed Share Model on their business models.472 It is appropriate for CAT LLC to establish policies and procedures on the treatment of adjustments related to cancellations and corrections. CAT LLC stated that to the extent changes are made to the transaction reports on or before the day the CAT fees are determined for the given month, the 471 Id. 472 See proposed Section 11.3(a)(iv)(A) and 11.3(b)(iv)(A). See also infra Section III.A.7. (Calculation Information; Billing and Collection of CAT Fees). VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 changes will be reflected in the monthly bill.473 To the extent that changes are made to the transaction reports after the day the CAT fees are determined for that month, subsequent bills will reflect any changes via debits or credits, as applicable.474 It is appropriate to adjust an Industry Member’s or Participant’s CAT fees for cancellations and corrections when such adjustments are made to the transaction reports that are used for calculate CAT fees for that month. Additionally, under Section 11.1(d) of the CAT NMS Plan, the Operating Committee is required to adopt policies and procedures regarding the billing and collection of fees.475 It is the Commission’s view that charging CEBBs and CEBSs is reasonable. The Executed Share Model recognizes that there are three parties who play significant roles in transactions reportable to the CAT: the Participant, the buy-side and the sellside.476 The Proposed Amendment also is based on executed equivalent shares (emphasis added).477 As such, CAT LLC stated that charging the CEBBs and CEBSs would reflect the executing role the CEBB and CEBS have in each transaction.478 Additionally, charging CEBBs and CEBSs is in line with the use of transaction reports from the exchanges and FINRA’s equity trading reporting facilities for calculating the CAT fees.479 Specifically, these transaction reports identify CEBBs and CEBSs, so charging such entities potentially streamlines the fee charging process.480 CAT LLC also explained that charging both the buy-side and the sellside of a transaction would be consistent with other fees, such as the options regulation fee.481 In Rule 613, the Commission made the determination that the costs of the CAT should be shared by the Participants and Industry Members. Charging CAT Executing Brokers, clearing firms or ‘‘originating brokers’’ all would impose the costs initially on a subset of Industry Members. As discussed above, given that the charges are based on executed equivalent shares, it makes sense to use the CAT Executing Brokers as the immediate recipients of the charge. Accordingly, the Commission agrees with CAT LLC that it is reasonable to impose the charge on 473 See Notice, supra note 7, 88 FR at 17089. 474 Id. 475 See CAT NMS Plan, supra note 2, at Section 11.1(d). 476 See Notice, supra note 7, 88 FR at 17104. 477 Id. at 17086. 478 Id. at 17103. 479 Id. 480 Id. 481 Id. at 17108. PO 00000 Frm 00024 Fmt 4701 Sfmt 4703 CAT Executing Brokers. The Commission acknowledges that charging CEBBs and CEBSs would impose a burden on such firms, which could potentially have an effect on their net capital. However, currently, such firms regularly pay transaction-based fees to the Participants, which they may pass-through to their customers who, in turn, could pass their CAT fees to their customers, until the fee is imposed on the ultimate participant in the transaction.482 Additionally, unlike clearing firms that may simply clear a trade on behalf of the executing broker, executing brokers are always parties to a transaction, including instances that may result in CAT costs but not in actual trades, such as unexecuted orders. The Commission therefore agrees with CAT LLC that assessing Industry Members CAT fees on CEBBs and CEBSs would be reasonable for their ‘‘executing role’’ in each transaction.483 5. Prospective CAT Fees a. Fee Rate Formula Under the Executed Share Model, Participants, CEBSs and CEBBs would be subject to fees designed to cover the ongoing budgeted costs of the CAT, as determined by the Operating Committee.484 Each Participant and CAT Executing Broker would be required to pay a CAT Fee related to Prospective CAT Costs for each transaction in Eligible Securities in the prior month based on CAT Data.485 CAT Fees would be calculated by multiplying the executed equivalent shares in the transaction by one-third and the applicable ‘‘Fee Rate.’’ 486 The Commission received no comments on the Fee Rate Formula. At the beginning of each year, the Operating Committee would set the Fee Rate to be used to determine CAT Fees.487 To calculate the Fee Rate for Prospective CAT Costs, the Operating Committee would divide the reasonably budgeted CAT costs by the reasonably projected total executed equivalent share volume of all transactions in Eligible Securities for that year.488 The Operating Committee would base the projected total executed equivalent 482 See Notice, supra note 7, 88 FR at 17103. 483 Id. 484 See proposed Section 11.3(a)(i)(A)(I) and (II); proposed Section 11.3(a)(iii)(A). 485 See proposed Section 11.3(a)(ii)(A) and (iii)(A). 486 Id. 487 See proposed Section 11.3(a)(i)(A)(I). The Fee Rate would be established through a majority vote of the Operating Committee. See Notice, supra note 7, 88 FR at 17108. 488 See proposed Section 11.3(a)(i)(A)(I). E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices share volume on the total executed equivalent share volume of transactions in Eligible Securities from the prior twelve months.489 Additionally, CAT LLC would permit the Operating Committee to use its discretion to analyze likely volume for the upcoming year 490 and Participants would be required to describe the calculation of the projection in their fee filings submitted to the Commission pursuant to Section 19(b) to implement the CAT Fee for Industry Members.491 The Operating Committee also would be required to perform a mid-year adjustment of the Fee Rate for CAT Fees related to Prospective CAT Costs.492 CAT LLC proposed Section 11.3(a)(i)(A)(I) of the CAT NMS Plan to describe the annual calculation of the Fee Rate and the requirement for Participants to file a fee filing for CAT Fees to be charged to Industry Members calculated using the Fee Rate. Under the Executed Share Model, the Operating Committee will calculate the Fee Rate by dividing the reasonably budgeted CAT costs for the year by the reasonably projected total executed equivalent share volume of all transactions in Eligible Securities for the year.493 Should the budgeted costs be higher than actual costs, any budget surplus will be credited against the fees for the following year, as CAT LLC cannot hold higher than a 25% reserve.494 Once the Operating Committee has approved such Fee Rate, the Participants shall be required to file with the Commission, pursuant to Section 19(b) of the Exchange Act,495 CAT Fees to be charged to Industry Members calculated using such Fee Rate.496 Participants and Industry Members will be required to pay CAT Fees calculated using this Fee Rate once such CAT Fees are in effect with regard to Industry Members in accordance with Section 19(b) of the Exchange Act.497 Proposed Section 11.3(a)(i)(A)(II) of the CAT NMS Plan describes the mandatory mid-year calculation of the Fee Rate and the requirement for 489 See proposed Section 11.3(a)(i)(D). Notice, supra note 7, 88 FR at 17094. 491 See proposed Section 11.3(a)(iii)(B); 15 U.S.C. 78s(b). 492 See proposed Section 11.3(a)(i)(A)(II). 493 See proposed Section 11.3(a)(i)(A)(I). 494 See infra Section III.A.5.c (Reserves). 495 15 U.S.C. 78s(b). 496 See proposed Section 11.3(a)(i)(A)(I). 497 Id. Participants to file a fee filing for CAT Fees to be charged Industry Members calculated using the Fee Rate. Under the Executed Share Model, the Operating Committee will adjust the Fee Rate once mid-year 498 by dividing the reasonably budgeted CAT costs for the remainder of the year by the reasonably projected total executed equivalent share volume of all transactions in Eligible Securities for the remainder of the year.499 Once the Operating Committee has approved the new Fee Rate, the Participants shall be required to file with the Commission, pursuant to Section 19(b) of the Exchange Act, CAT Fees to be charged to Industry Members calculated using the new Fee Rate.500 Participants and Industry Members will be required to pay CAT Fees calculated using this new Fee Rate once such CAT Fees are in effect with regard to Industry Members in accordance with Section 19(b) of the Exchange Act.501 CAT LLC proposed to add Section 11.3(a)(i)(A)(III) to the CAT NMS Plan to state that CAT Fees related to Prospective CAT Costs do not sunset automatically; such CAT Fees would remain in place until new CAT Fees are in place with a new Fee Rate.502 CAT LLC proposed to add Section 11.3(a)(i)(A)(IV) to the CAT NMS Plan to provide that the first CAT Fee may commence at the beginning of the year or during the year. If it were to commence during the year, the CAT Fee would be calculated as if it were a midyear calculation.503 The proposed recovery of Prospective CAT Costs is appropriate. It is appropriate to require that each Participant, CEBB and CEBS pay a CAT Fee related to Prospective CAT Costs for each transaction in the prior month based on CAT Data.504 Basing the CAT Fee on transaction data from the prior month is appropriate as it is recent in time and therefore more reflective of current market data, and the Commission did not receive any comments on this issue. The manner in which the Fee Rate for Prospective CAT Costs will be calculated (i.e., by dividing the CAT lotter on DSK11XQN23PROD with NOTICES2 490 See VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 498 See proposed Section 11.3(a)(i)(A)(II). 499 Id. costs reasonably budgeted for the upcoming year by the reasonably projected total executed equivalent share volume of all transactions in Eligible Securities for the year) is reasonable.505 The use of projected executed equivalent share volume in determining the Fee Rate is appropriate because it would provide the likely volume for the year to be used as the denominator. It is reasonable to use the prior twelve months to determine the projected total executed equivalent share volume of all transactions in Eligible Securities for the year 506 because it would be the most recent data available to use to make a projection needed to calculate the Fee Rate, and the most recent data is on balance more likely to resemble the near future. Additionally, as noted above, that the Commission agrees with CAT LLC’s analysis that ‘‘trading activity provides a reasonable proxy for cost burden on the CAT, and therefore is an appropriate metric for allocating CAT costs among CAT Reporters.’’ 507 Further, requiring that the CAT costs be ‘‘reasonably budgeted’’ and projected total executed equivalent share volume be ‘‘reasonably projected’’ is designed to help impose some discipline or constraints in the fee setting process. It is reasonable for CAT LLC to permit the Operating Committee to project the upcoming volume for the upcoming year.508 It is not possible to know exactly what the volume will be before the year begins, so a projection will be necessary. If the volume turns out to be higher than projected, then CAT LLC will be able to use its reserve to cover any shortage. If it is lower, resulting in a budget surplus, the CAT fees for the following year would be lower.509 Furthermore, since the Participants would be required to describe the calculation of the projected total executed equivalent share volume in the fee filings submitted to the Commission, pursuant to Section 19(b) of the Exchange Act, to implement CAT Fees for Industry Members, the public will have an opportunity to review the projection and provide comment.510 500 Id. 505 See 501 Id. 506 See 502 See proposed Section 11.3(a)(i)(A)(III). proposed Section 11.3(a)(i)(A)(IV). 504 See proposed Section 11.3(a)(ii)(A) and (iii)(A). 503 See PO 00000 Frm 00025 Fmt 4701 Sfmt 4703 62651 proposed Section 11.3(a)(i)(A)(I). proposed Section 11.3(a)(i)(D). 507 See Notice, supra note 7, 88 FR at 17103. 508 Id. at 17094. 509 See infra Section III.A.5.c (Reserves). 510 See proposed Section 11.3(a)(iii)(B). E:\FR\FM\12SEN2.SGM 12SEN2 62652 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices The annual and mid-year adjustments of the Fee Rate for Prospective CAT Costs 511 are appropriate because they would ensure that CAT Fees related to Prospective CAT Costs would stay aligned with changes to the budget and projected volume occurring as the year progresses with contemporaneous data. Additionally, calculating a CAT Fee that starts mid-year as if it were a mid-year Fee Rate calculation is appropriate because calculating it that way would base the CAT Fee on the budgeted CAT costs and projected total executed equivalent share volume of all transactions in Eligible Securities for the remainder of the year, rather than for the entire year. This is an appropriate treatment of a CAT Fee that would commence mid-year, not at the beginning of the year. b. Budgeted CAT Costs The calculation of the Fee Rate for CAT Fees related to Prospective CAT Costs requires the determination of the Budgeted CAT Costs for the year or other relevant period.512 Proposed Section 11.3(a)(i)(C) of the CAT NMS Plan provides that the budgeted CAT costs for the year shall be comprised of all reasonable fees, costs and expenses reasonably budgeted to be incurred by or for the Company in connection with the development, implementation and operation of the CAT as set forth in the annual operating budget approved by the Operating Committee pursuant to Section 11.1(a) of the CAT NMS Plan, or as adjusted during the year by the Operating Committee.513 Section 11.1(a) of the CAT NMS Plan describes the requirement for the Operating Committee to approve an operating budget for CAT LLC on an annual basis. It requires the budget to ‘‘include the projected costs of the Company, including the costs of developing and operating the CAT for the upcoming year, and the sources of all revenues to cover such costs, as well as the funding of any reserve that the Operating Committee reasonably deems appropriate for prudent operation of the 511 See proposed Section 11.3(a)(i)(A)(I) and (II). proposed Section 11.3(a)(i)(A)(I). 513 CAT LLC proposed to use budgeted CAT costs in calculating CAT Fees rather than costs incurred. CAT LLC explained that using budgeted CAT costs is necessary to build financial stability to support the Company as a going concern, in accordance with the funding principle in Section 11.2(f) of the CAT NMS Plan, because it would allow CAT LLC to collect fees before bills become payable. CAT LLC stated that if CAT Fees were only collected after bills become payable, Participants would have to continue to fund the CAT for all CAT costs to pay bills as they are due. See Notice, supra note 7, 88 FR at 17114. lotter on DSK11XQN23PROD with NOTICES2 512 See VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 Company.’’ 514 CAT LLC proposed to amend Section 11.1(a) to require the Operating Committee to approve a reasonable operating budget for CAT LLC on an annual basis.515 CAT LLC also proposed to amend Section 11.1(b) of the CAT NMS Plan to add a reference to Section 11.1. Currently, Section 11.1(b) states that ‘‘[s]ubject to Section 11.2, the Operating Committee shall have the discretion to establish funding for the Company’’ including establishing fees to be paid by the Participants and Industry Members (that shall be implemented by the Participants) . . .’’ 516 CAT LLC proposed to add a reference to Section 11.1 so that ‘‘[s]ubject to Section 11.1 and Section 11.2’’ the Operating Committee would have the discretion to establish funding for the Company.517 CAT LLC explained that this proposed change is relevant because Section 11.1 relates to the budget and the budget is used to calculate fees.518 CAT LLC also proposed to add subparagraph (i) to Section 11.1(a) of the CAT NMS Plan to list the types of CAT costs to be included in the budget. Specifically, CAT LLC proposed to state that ‘‘[w]ithout limiting the foregoing, the reasonably budgeted CAT costs shall include technology (including cloud hosting services, operating fees, CAIS operating fees, change request fees and capitalized developed technology costs), legal, consulting, insurance, professional and administration, and public relations costs, a reserve, and such other categories as reasonably determined by the Operating Committee to be included in the budget.’’ 519 Certain commenters noted a lack of detail provided on the cost categories.520 One commenter stated 514 See CAT NMS Plan, supra note 2, at Section 11.1(a). 515 See proposed Section 11.1(a). 516 See CAT NMS Plan, supra note 2, at Section 11.1(b). 517 See Notice, supra note 6, 88 FR at 17090. 518 Id. 519 Id. CAT LLC has stated that it will consider providing additional detailed subcategories regarding technology costs, but notes that what it is currently providing is consistent with what is made publicly available on its website. CAT LLC has stated that it will consider the need to provide additional detailed subcategories for any area besides technology, both because technology costs account for the majority of the budget and because it is not considered ‘‘best practices’’ to disclose detailed legal or insurance information, as these are particularly sensitive. Id. Detailed information is always available to the Commission for review upon request. Id. 520 See SIFMA January 2023 Letter at 6; Citadel July Letter at 13–14; FIA Letter at 2–5; Letter to Vanessa Countryman, Secretary, Commission, from Joseph Corcoran, Managing Director, Associate General Counsel and Ellen Greene, Managing Director, Equities and Options Market Structure, PO 00000 Frm 00026 Fmt 4701 Sfmt 4703 that the budget line item categories are too high level.521 The commenter urged the inclusion of much greater detail and specificity on the budget spending choices, especially in technology,522 to allow Industry Members and the public to understand and evaluate CAT spending decisions.523 Similarly, other commenters requested more transparency into the drivers of CAT costs, in particular, technology costs, which they stated is the largest expense item.524 One commenter stated that their ‘‘concerns are exacerbated by the general lack of transparency coming from the CAT Operating Committee. Despite continued requests for information about key drivers of the rapidly growing CAT costs, the CAT Operating Committee points to highlevel financial and operating budgets published by the Committee that merely provide broad categories of costs and expenses. Likewise, in the current structure, the SEC staff also have no incentive to control costs . . . This process does not afford industry members with appropriate notice of, and opportunity to comment on, material changes to the CAT. Nor does it adhere to the requirements under the Exchange Act to weigh the costs and benefits of proposed changes to the NMS plan.’’ 525 Another commenter stated that the Operating Committee refuses to provide cost transparency, such as more details on the broad expense categories provided in the operating expenses (as well as the Historical CAT Costs) provided in the Proposed Amendment.526 The SIFMA, and Howard Meyerson, Managing Director, Financial Information Forum, dated July 31, 2023 (‘‘FIF and SIFMA Letter’’), at 8. 521 See SIFMA January 2023 Letter at 6. 522 Id. (stating that CAT spending on technology should be broken into further refined cost breakdowns of the following categories: cloud hosting services, operating fees, CAIS operating fees and change request fees). The proposed breakdown is consistent with what is currently provided to the public. See Notice, supra note 6, 88 FR at 17090. See also FIF and SIFMA Letter at 8. 523 See SIFMA January 2023 Letter at 6. 524 See FIF and SIFMA Letter at 8. The commenter stated that the 2023 budget divides technology costs, estimated to be $222.5 million and 95.3% of total operating costs, into four categories with cloud hosting services represents 75.5% of estimated CAT costs for 2023. Id. The commenter requested the Commission and the Participants to make publicly available the financial terms of the contract between the Participants and Amazon Web Services (‘‘AWS’’), the cloud hosting services provider, and publish all invoices from AWS. Id. The Commission declines to mandate the publication of a contract between private parties. Similarly, the Commission declines to mandate the publication of AWS invoices. The Participants can choose to publish this information if they believe it is appropriate. 525 See FIA Letter at 2–5. 526 See Citadel July Letter at 13–14. See also id. at 23. E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices commenter believes that the lack of transparency into costs would prevent the Commission from finding that the proposed allocation methodology is reasonable 527 and would raise concerns that inappropriate expenses would be allocated to Industry Members, like litigation expenses incurred by the Operating Committee against the Commission, and expenses prohibited by the Financial Accountability Amendments from being recovered by the Operating Committee.528 The commenter also stated that the Proposed Amendment lacks sufficient detail for the Commission to perform the required economic analysis.529 The commenter suggested enhancements to improve budget transparency.530 The commenter suggested that all CAT operating budgets should remain published on the CAT website 531 and that any material change to the CAT system, related technology contracts or implementation scope should require the filing of an NMS plan amendment explaining the necessity of the change and include a robust cost-benefit analysis.532 In addition, the commenter suggested that exchanges be responsible for costs that exceed the budget in order to incentivize cost control,533 and that Industry Members should not be allocated costs for matters specifically for the benefit of the Operating Committee or the Commission (such as costs related to litigation ‘‘or filings that are inconsistent with the Exchange Act’’ 534), stating that ‘‘Industry Members should also not be allocated costs relating to how data is presented to, and used by, regulatory Staff at the SROs or the Commission.’’ 535 Furthermore, the commenter suggested that change requests that do not involve specific NMS Plan requirements should be allocated to the requestor, including the Commission.536 527 Id. at 2, 15, 26. at 2. 529 Id. at 11. Rule 613(a)(5) of Regulation NMS requires the Commission to conduct an assessment of the Proposed Amendment’s impact on efficiency, competition and capital formation, which is not the same economic analysis as the Commission conducts when engaged in a rulemaking. 17 CFR 242.613(a)(5). The Proposed Amendment contains the information needed for the Commission to conduct this assessment. See infra Section IV. See also infra note 1044. 530 See Citadel July Letter at 33–35. 531 Id. at 3, 34. 532 Id. See also FIF and SIFMA Letter at 13. 533 See Citadel July Letter at 3, 32. 534 Id. at 32. 535 Id. 536 Id. lotter on DSK11XQN23PROD with NOTICES2 528 Id. VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 Commenters also discussed a need for a cost review mechanism,537 with several commenters citing to high operating costs as evidence for the need of one.538 One commenter stated that CAT costs are increasing at an unsustainable level and need to be controlled.539 The commenter stated that the Commission lacks a process to manage CAT costs as CAT operating costs are not part of the Commission’s budget and do not require an appropriation.540 The commenter urged that there is a need to allow the public, the Commission and industry to have a better understanding of the drivers of CAT operating costs,541 why they have exceeded the operating costs estimated in the CAT NMS Plan,542 and why they are projected to increase 27% from 2022 to 2023.543 The commenter requested that the Commission direct the Participants to analyze the increase in CAT operating costs and to evaluate future expected annual CAT operating cost increases,544 and also advised the Commission not to mandate any new processing or reporting requirements until such analysis has concluded.545 One commenter stated that asset managers were concerned about the lack of an independent cost review mechanism for the CAT budget to ensure that future fees are fair and reasonable and spending will be appropriate and cost-effective.546 Similarly, another commenter stated that an independent cost review mechanism is necessary to ensure future CAT fees are fair and reasonable and to safeguard against unchecked spending.547 The commenter urged the 537 See SIFMA May 2023 Letter at 3, 8–10; Citadel July Letter at 8, 26, 27; FIF and SIFMA Letter at 8– 9; SIFMA AMG Letter at 3. See also SIFMA October 2022 Letter at 5–6; SIFMA January 2023 Letter at 2, 5–6; SIFMA June 2023 Letter at 2, n.10, 4; Virtu Letter at 4; MMI July Letter at 3–4; FIA Letter at 3, 5. 538 See, e.g., MMI July Letter at 3; Virtu Letter at 4, FIF and SIFMA Letter at 2, 5–9; SIFMA AMG Letter at 3. 539 FIF and SIFMA Letter at 2, 5. The commenter stated that internal costs and costs associated with trading workflow changes to comply with certain CAT reporting requirements should also be considered, arguing that these costs would significantly exceed CAT operating costs are 100% paid for by broker-dealers and exchanges. Id. at 2, 5, 6. 540 Id. at 8. 541 Id. 542 Id. at 7, 9. 543 Id. at 9. 544 FIF and SIFMA Letter at 4. 545 Id. 546 See SIFMA AMG Letter at 3. 547 See SIFMA May 2023 Letter at 3, 8–10. See also SIFMA October 2022 Letter at 5–6; SIFMA January 2023 Letter at 2, 5–6; SIFMA June 2023 Letter at 2, n.10, 4; Citadel July Letter at 2, 26 (stating that that ‘‘the trajectory of annual operating expenses is unconstrained,’’ and that the PO 00000 Frm 00027 Fmt 4701 Sfmt 4703 62653 inclusion of a mechanism to allow the public to review the annual CAT budget before it is finalized, since, as proposed, the public would only have the opportunity to review the CAT budget when the Participants submit proposed rule changes, pursuant to Section 19(b) of the Exchange Act,548 to implement CAT fees on Industry Members.549 The commenter also stated that it is unlikely that the Commission would decide that a proposed CAT fee does not meet Exchange Act fee standards and require the Participants to modify the CAT budget because it would be a lengthy, time-consuming process and due to ‘‘the regulatory value of CAT data and the CAT system to the Commission.’’ 550 The commenter stated that the Commission is ‘‘directly conflicted in its role as the user and beneficiary of the CAT system for regulatory functions and its role as the reviewer of the CAT budget and fee filings, a conflict that is only heightened due to a lack of a Commission funding obligation for CAT.’’ 551 The commenter also requested that ‘‘the Participants’ proposed budget include as a separate line-item projected usage costs and system change costs related to the Commission’s use and design of the CAT system.’’ 552 Similarly, another commenter suggested that an independent expert committee assess whether cost levels and third party arrangements are reasonable, and whether more cost-control measures are warranted,553 and that the Commission formally approve the CAT budget on an annual basis.554 The commenter further stated that the Proposed Amendment made no attempt to specify the key drivers of costs, such as explaining the requirements that resulted in significant cost increases, or the design alternatives the Operating Committee previously considered.555 The commenter added that Industry Members must fund a 25% reserve above budgeted amounts, and ad-hoc discussions between the Operating Committee and the ‘‘magnitude and trajectory’’ of the costs are not reasonable since Industry Members have borne nearly all CAT-related costs’’); Citadel August Letter at 7. 548 15 U.S.C. 78s(b). 549 See SIFMA May 2023 Letter at 8–9. See also SIFMA June 2022 Letter at 8–9; SIFMA October 2022 Letter at 6; SIFMA January 2023 Letter at 5, 6. 550 SIFMA May 2023 Letter at 9. 551 Id. at 9–10. 552 Id. See also SIFMA January 2023 Letter at 6. 553 See Citadel July Letter at 3, 33. 554 Id. 555 Id. at 14. E:\FR\FM\12SEN2.SGM 12SEN2 62654 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES2 Commission could result in higher costs.556 The commenter also suggested enhancements to reduce overall CAT operating costs.557 Specifically, the commenter suggested that the Operating Committee and the Commission stop making changes to the CAT to stabilize operating costs, stating that there are changes slated for development that are currently subject to exemptive relief, and other requirements the commenter believes are outside the scope of the CAT NMS Plan that would result in costs that outweigh benefits.558 The commenter suggested that the Operating Committee file an updated NMS plan to reflect the status quo,559 and work with the Commission and industry to identify technical requirements that could be modified to reduce costs without sacrificing the key benefits of the CAT system, like moving timelines from T+1 to T+2.560 The commenter also suggested that steps should be taken to streamline the CAT submission process to minimize reporting errors and to reduce industry implementation costs, like implementing further data validation.561 One commenter stated that if the Participants ‘‘determine to charge their members fees to fund their share of CAT fees,’’ then Industry Members would bear 100% of CAT costs, and thus,’’[w]ith little to no skinin-the-game, the Participants will not be incentivized to control costs.’’ 562 The commenter further stated that they join other commenters in calling for an ‘‘independent cost review mechanism.’’ 563 In response to the comment that suggested that all CAT operating budgets should remain published on the CAT website,564 CAT LLC stated that it publishes its annual financial statements from 2017-on and voluntarily publishes its annual operating budget and updates to the budget occurring during the year.565 CAT LLC stated that, in response to the comment, it intends that prior CAT operating budgets will stay available on the CAT website.566 at 26. Citadel July Letter at 33–35. 558 Id. at 3, 32–33. One other commenter echoed some of these same considerations. See MMI July Letter at 4. 559 See Citadel July Letter at 3, 33. 560 Id. 561 Id. 562 See FIA Letter at 3. See also Citadel August Letter at 2. 563 FIA Letter at 5. 564 See Citadel July Letter at 3, 34. 565 See CAT LLC July 2023 Response Letter at 26. 566 Id. In response to a commenter suggesting that the exchanges be responsible for any costs that exceeded the approved budget,567 CAT LLC stated that this suggestion would not result in a fair and equitable allocation consistent with the Exchange Act because Industry Member trading activity ‘‘contributes significantly’’ 568 to CAT costs and it would not be fair for Participants to bear CAT costs exceeding the budget if unexpected increases in trading volume resulted in the increased CAT costs.569 CAT LLC also stated that this suggestion could incentivize the Participants to base the budget on ‘‘the most conservative projections for future Industry Member data volume’’ 570 to not be responsible for costs that go over the budget.571 In addition, CAT LLC noted that the Proposed Amendment would include both a requirement to adjust the Fee Rate during the year to address any changes in projected or actual transaction volume or budgeted or actual CAT costs, and an operational reserve to address shortfalls in collected fees versus actual CAT costs.572 In response to suggestions to use an independent cost review mechanism,573 CAT LLC stated that such a review process is unnecessary because it would go beyond what is required by either Rule 613 or the CAT NMS Plan, and would be superfluous since any CAT fees must, prior to being implemented, undergo the review process detailed in Rule 608 and Section 19(b) of the Exchange Act.574 CAT LLC also noted that the Commission is entitled to request additional budget or cost information it views as necessary to better evaluate those fees.575 CAT LLC also stated that it already provides significant cost transparency through the public disclosure of its quarterly budget information and its financials, and that it is already actively engaged in cost discipline efforts, including through a designated cost-management working group.576 CAT LLC further explained that Participants are subject to regulatory requirements to implement CAT and oversee their members and cannot have their compliance subject to 556 Id. 567 See 557 See 568 See VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 Citadel July Letter at 32. CAT LLC July 2023 Response Letter at 12. a third party without such restrictions.577 CAT LLC added that the Commission itself could have its ability to oversee the securities markets undermined if CAT is subject to review by a third party without regulatory restrictions.578 In response, one commenter stated that the CAT LLC Response Letter did not meaningfully address its concerns about the lack of a cost control mechanism.579 CAT LLC provided a further response to commenters that recommended the adoption of an independent cost review mechanism for CAT costs,580 stating that a review process is not necessary or appropriate.581 CAT LLC explained that it is already actively involved in cost discipline efforts, such as through a designated cost management working group, and already provides ‘‘significant cost transparency’’ by publishing its quarterly budget information and financial information.582 CAT LLC also stated that such a review process would go beyond the requirements of Rule 613 and would be unnecessary because changes to the funding model would be filed as a plan amendment under Rule 608 of Regulation NMS and CAT fees for Industry Members would be filed pursuant to Section 19(b) of the Exchange Act, and both processes would permit the public to comment on such proposals.583 CAT LLC further stated that providing a third-party that does not have regulatory obligations control over the annual budget could ‘‘impermissibly restrict the Participants from discharging their regulatory obligations’’ and undermine the Commission’s ability to oversee the securities markets.584 CAT LLC also responded to the commenter that urged the Commission to annually approve the CAT budget 585 by stating that such an approval process would not be necessary or appropriate as CAT LLC is a private entity subject to the requirements of the Exchange Act, not a governmental entity, and CAT fees would be filed with the Commission under Rule 608 of Regulation NMS and Section 19(b) of the Exchange Act and subject to the Commission’s review for consistency with the Exchange Act.586 577 Id. 569 Id. 578 Id. 570 Id. 579 See 572 Id. 573 See SIFMA May 2023 Letter at 3, 8–10. See also SIFMA October 2022 Letter at 5–6; SIFMA January 2023 Letter at 2, 5–6; SIFMA June 2023 Letter at 2, n.10, 4; Citadel July Letter at 3, 33; FIA Letter at 5. 574 See CAT LLC May 2023 Response Letter at 10. 575 Id. 576 Id. PO 00000 Frm 00028 SIFMA June 2023 Letter at 2. Citadel July Letter at 33; FIA Letter at 5; MMI July Letter at 2; SIFMA June 2023 Letter at 2; id. at n.10; Virtu Letter at 4. 581 See CAT LLC July 2023 Response Letter at 19. 582 Id. at 20. 583 Id. at 19–20. 584 Id. at 20. 585 See Citadel July Letter at 33. 586 See CAT LLC July 2023 Response Letter at 20– 21. 580 See 571 Id. Fmt 4701 Sfmt 4703 E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices Furthermore, CAT LLC stated that the Commission can request budget and financial information from CAT LLC if necessary for the evaluation of CAT fee filings.587 In response to the commenter that asked whether the Participants would have an incentive to manage costs because they proposed to allocate most costs to Industry Members,588 CAT LLC stated that it ‘‘strongly disagrees with the suggestion that the Participants would not be incentivized to control CAT costs if they are only responsible for one-third of the CAT costs going forward.’’ 589 CAT LLC stated that the Participants have been focused on cost management when paying 100% of CAT costs and will continue this focus since they will be paying one-third of CAT costs, a ‘‘significant incentive to keep costs at an appropriate level.’’ 590 In response to comments expressing concern about increasing CAT operating costs,591 CAT LLC described its commitment to cost management,592 stating that cost management is a top priority and that it works to reduce costs in a number of ways, including through the Cost Management Working Group comprised of senior members of the Participants that works to find and address cost management needs.593 CAT LLC also noted that Rule 613 and the CAT NMS Plan ‘‘impose significant regulatory obligations on the Participants regarding how to design, build and operate the CAT System’’ and that the Commission could compel the Participants to comply with Rule 613 or the CAT NMS Plan through enforcement actions if CAT LLC and the Participants ever fail to do so.594 CAT LLC stated that its largest cost driver is the processing and storage of CAT data in the cloud, representing 75% of all CAT costs.595 CAT LLC stated that CAT NMS Plan requirements ‘‘do not allow for any material flexibility in cloud architecture design choices, processing timelines (e.g., the use of non-peak processing windows), or lower-cost storage costs,’’ limiting CAT LLC’s cost management efforts, and provided examples where CAT LLC and the Plan Processor worked to optimize cloud cost savings 587 Id. at 21. FIA Letter at 4–5. 589 See CAT LLC July 2023 Response Letter at 26. 590 Id. 591 See Citadel July Letter at 7–9, MMI July Letter at 1, 4, SIFMA June 2023 Letter at 4; Virtu Letter at 4. 592 See CAT LLC July 2023 Response Letter at 22– 25. 593 Id. at 22. 594 Id. 595 Id. lotter on DSK11XQN23PROD with NOTICES2 588 See VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 despite regulatory constraints.596 CAT LLC described other steps it has taken to save costs, such as through requests to the Commission for exemptive relief and litigation challenging the Commission’s interpretation of specific requirements of the CAT NMS Plan,597 as well as identification of other changes that could substantially lower costs but would require exemptive relief or the filing of a Plan amendment.598 In response to one commenter’s recommendation that CAT LLC work with the Commission to identify technical requirements that could be modified to reduce costs without sacrificing the key benefits of the CAT system,599 CAT LLC stated that both it and the Plan Processor work to identify and raise with Commission staff potential fundamental changes to the CAT NMS Plan that would limit costs without compromising on regulatory goals, and provided examples of such changes.600 The Commission acknowledges the comments expressing concern about increases to the CAT operating budget, particularly why it is now five times the amount estimated in the CAT NMS Plan Approval Order,601 and the comments urging the need for a cost review mechanism,602 but believes the Participants have reasonably explained why they chose not to include an independent cost review mechanism for budgeted CAT costs for the reasons stated above and in the Notice. Given the transparency of the budget and Rule 19b–4 process, the one-third allocation of costs to Participants, which provides them with at least some incentive to control costs, and the pre-existing requirement for an independent audit of all fees, costs and expenses incurred by the Participants prior to filing this 596 Id. at 23. at 24. 598 See CAT LLC July 2023 Response Letter at 25. 599 See Citadel July Letter at 33. 600 See CAT LLC July 2023 Response Letter at 25– 26. 601 See, e.g., Citadel August Letter at 8; Citadel July Letter at 2, 5. The Commission acknowledges a commenter’s suggestion that the Commission perform its own analysis of the budget increases. Under the Proposed Amendment, the Participants must submit Rule 19b–4 filings that include a discussion of the budget that was used to calculate the Fee Rate. At such time the Commission, Industry Members and the public will have an opportunity analyze the budget. This Order, which approves the Funding Model, does not weigh-in on the budgets or the resulting Fee Rates. 602 See SIFMA May 2023 Letter at 3, 8–10; Citadel July Letter at 8, 26, 27; FIF and SIFMA Letter at 2, 5–9; SIFMA AMG Letter at 3. See also SIFMA October 2022 Letter at 5–6; SIFMA January 2023 Letter at 2, 5–6; SIFMA June 2023 Letter at 2, n.10, 4; Virtu Letter at 4; MMI July Letter at 3–4; FIA Letter at 3, 5. 597 Id. PO 00000 Frm 00029 Fmt 4701 Sfmt 4703 62655 amendment,603 it is reasonable not to have an additional independent costreview mechanism for the reasons set forth above. The Commission believes that the incentive to control costs still exists even if the Participants passthrough to Industry Members some or most of the costs of the CAT. This is because, in order to pass-through CAT costs, the Participants would have to submit rule filings under the Section 19(b) fee filing process. To the extent the Participants fail to control costs, their ability to demonstrate that a proposed fee is reasonable and consistent with the Exchange Act may be compromised. While the above obligations and controls are sufficient, other cost discipline mechanisms proposed by CAT LLC would provide beneficial cost transparency, which would help keep fees and costs reasonable.604 For example, (1) Section 9.2(a) of the CAT NMS Plan requires CAT LLC to make public an audited balance sheet, income statement, statement of cash flows and statement of changes in equity, and requires the Operating Committee to maintain a system of accounting established and administered in accordance with GAAP and to prepare financial statements or information supplied to the Participants in accordance with GAAP; 605 (2) CAT LLC publicly provides the annual operating budget and updates to the budget on the CAT NMS Plan website and also has held webinars about CAT costs and alternative funding models; (3) involvement by CAT LLC and FINRA CAT in efforts to reduce CAT costs through CAT working groups and review of options to lower costly needs and obtain services in a cost-effective manner; and (4) Commission oversight of CAT funding through attendance at Operating Committee, Subcommittee and working group meetings and review of the Proposed Amendment and any associated CAT fees.606 Additionally, the specification of the items required to be included in the operating budget is 603 See CAT NMS Plan, supra note 2 at Section 6.2(a)(v)(B). 604 See Notice, supra note 7, 88 FR at 17117. 605 See CAT NMS Plan, supra note 2, at Section 9.2(a). Section 9.2(a) states that unaudited statements shall be subject to year-end adjustments and may not include footnotes. 606 See Notice, supra note 7, 88 FR at 17117. CAT LLC also lists the following as cost-control mechanisms: (1) CAT LLC must operate on a breakeven basis, in which fees would be used to recover costs and a reserve, and a surplus would be treated as an operational reserve to offset future fees (see CAT NMS Plan, supra note 2, at Section 11.1(c)); (2) CAT LLC qualifies as a Section 501(c)(6) business league, which means it is not organized for profit and no part of its net earnings can inure to the benefit of any private shareholder or individual (26 U.S.C. 501(c)(6)). E:\FR\FM\12SEN2.SGM 12SEN2 62656 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices appropriate in that it will help the Commission, Industry Members and others evaluate CAT costs for purposes of commenting on CAT fees when they are proposed under Section 19(b) of the Exchange Act.607 This additional detail should provide sufficient information about the budget for the Commission to determine whether such proposed fees are reasonable, and obviate the need for a separate Commission approval of the CAT budget, as suggested by commenters.608 Additionally, the Commission understands that technology costs account for more than 90% of the CAT budget 609 and thus believes that it is appropriate for the CAT NMS Plan to require the Participants to separate such costs into costs for cloud hosting services, operating fees, CAIS operating fees, change request fees and capitalized developed technology costs.610 One commenter requested further information to be provided on technology costs.611 The Participants would be required to describe each line item (including such technology costs) in the fee filings for Industry Member CAT Fees and the Historical CAT Assessment, including the reasons for changes in each line item from the prior CAT fee filing, and that this information would be provided with sufficient detail to demonstrate the budget or Historical CAT Costs (as applicable) is reasonable and appropriate.612 Because the Participants are also assessed CAT fees, they have at least some incentive similar to that of the Industry Members to keep costs down. As discussed above, the Commission believes that this incentive still exists even if the Participants passthrough to Industry Members some or most of the costs of the CAT, because any effort to pass on costs would require Participants to submit filings under the Section 19(b)(2) rule filing process. Moreover, to the extent the Industry Members have concerns about the amounts allocated for each category in a particular budget, those concerns can be raised when the fee filings are submitted for Prospective CAT fees. The Section 19(b)(2) rule filing process provides an opportunity for public comments and will allow commenters to raise concerns if they believe fees, including CAT Fees, are not reasonable and equitably allocated, would result in unfair discrimination, or would impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. While a commenter stated that the Commission is a conflicted party due to its use of the CAT and its responsibility to review CAT fee filings,613 the Commission is not a party to the Plan.614 Moreover, as regulator of the Participants, the Commission oversees and enforces compliance with the Plan, as well as consistency of any fees with statutory and regulatory standards.615 Additionally, one commenter recommended the inclusion of the Commission’s line item costs associated with its usage and design of the CAT in the budget.616 In response,617 CAT LLC responded that, because all costs related to CAT are a result of the Commission’s adoption of Rule 613 and the total costs are reflected in the budget, it would be impractical to break out Commissionspecific costs and would not be useful as a practical matter.618 The Commission agrees that it would be impractical to add a Commissionspecific line item in the budget, in part because it would be difficult to separate costs associated with Commission use of the CAT system from costs associated with Participant use of the CAT system.619 Moreover, the implementation of the CAT—while mandated by the Commission through Rule 613—has been managed by the Participants and the Plan Processor; the Commission does not believe that any changes to its design have been made that are inconsistent with the CAT NMS Plan as approved in 2016, such that the inclusion of a line item in the budget attributing certain design costs to the Commission would be inaccurate and misleading.620 The Commission acknowledges the enhancements a commenter suggested to reduce CAT operating costs by modifying the technical specifications (e.g., by moving certain timelines to T+2 from T+1) and streamlining the reporting submission process (e.g., 613 See lotter on DSK11XQN23PROD with NOTICES2 607 15 U.S.C. 78s(b). 608 See proposed Section 11.1(a)(i); proposed Section 11.3(a)(iii)(B) (requiring the information to be provided in the Industry Member CAT Fee filings submitted by the Participants to be of sufficient detail to demonstrate that the budget for the upcoming year, or part of year as applicable, is reasonable and appropriate). 609 See Notice, supra note 7, 88 FR at 17090. 610 Id. at 17117. 611 See supra note 522. 612 See proposed Section 11.3(a)(iii)(B); proposed Section 11.3(b)(iii)(B)(II). VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 SIFMA May 2023 Letter at 9–10. 17 CFR 242.608(a)(1) (stating that NMS plans are filed by two or more SROs). 615 See 17 CFR 242.608(b)(2), (c), (d); 17 CFR 242.613(h). 616 See SIFMA May 2023 Letter at 10. CAT LLC May 2023 Response Letter at 11. 617 See SIFMA May 2023 Letter at 10. 618 See CAT LLC May 2023 Response Letter at 11. 619 All Participants are required to use the CAT in their surveillance programs. See CAT NMS Plan, supra note 2, at Section 6.10. 620 For further discussion, see infra Section III.A.9.c.–d. 614 See PO 00000 Frm 00030 Fmt 4701 Sfmt 4703 implementing further data validation),621 but such suggestions are better addressed in the context of a separate plan amendment. The commenter also suggested that the CAT Operating Committee and the Commission stop making any changes to the CAT and noted that there are several changes that are currently subject to exemptive relief that are slated for development.622 The Commission disagrees that the changes cited by the commenter are new CAT NMS Plan requirements; indeed the relevant Commission orders granting exemptive relief discuss the various requirements under the CAT NMS Plan that form the basis of the relief granted.623 Furthermore, any amendments to the requirements in the CAT NMS Plan must be filed with the Commission and published for notice and comment and generally shall not become effective unless approved by the Commission.624 Regarding the suggested enhancements to improve CAT transparency,625 the CAT NMS Plan and Rules 608 and 613 of Regulation NMS provide for sufficient advance notice of material changes to the CAT system and related costs. As discussed above, changes to the CAT NMS Plan must be filed with the Commission as an NMS plan amendment pursuant to Rule 608 of Regulation NMS and therefore be subject to notice and comment, and the Commission shall consider, in determining to approve the amendment, the impact of the amendment on efficiency, competition and capital formation.626 Additionally, Section 6.9 of the CAT NMS Plan requires a Supermajority Vote of the CAT Operating Committee in order to make Material Amendments 627 to the Technical Specifications. Section 6.9, however, does not provide unfettered discretion to the CAT Operating 621 See Citadel July Letter at 33–35. 622 Id. 623 See Securities Exchange Act Release No. 97350 (May 18, 2023), 88 FR 33655 (May 24, 2023); Securities Exchange Act Release No. 90689 (Dec.16, 2020), 85 FR 83667 (Dec. 22, 2020); Securities Exchange Act Release No. 90688 (Dec. 16, 2020), 85 FR 83634 (Dec. 22, 2020). 624 See Rule 608(b)(1); 17 CFR 242.608(b)(1). However, a plan amendment can be put into effect upon filing with the Commission if it is designated as solely administrative, technical or ministerial. See Rule 608(b)(3). 625 See supra notes 530–532. 626 Rule 613(a)(5). 17 CFR 242.613(a)(5). 627 The CAT NMS Plan defines a ‘‘Material Amendment’’ as an amendment to the Technical Specifications that ‘‘would require a Participant or an Industry Member to engage in significant changes to the coding necessary to submit information to the Central Repository pursuant to this Agreement or if it is required to safeguard the security or confidentiality of the CAT Data.’’ See CAT NMS Plan, supra note 2, at Section 6.9(c). E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices Committee to make changes to the CAT system; any amendments to the CAT Technical Specifications must be consistent with the CAT NMS Plan. If the CAT Operating Committee or the Commission wish to impose additional requirements that are not contemplated by the CAT NMS Plan, such requirements must be proposed through an amendment to the CAT NMS Plan, filed under Rule 608 of Regulation NMS, which must be published for notice and comment.628 The Commission agrees with the commenter that all CAT operating budgets should remain published on the CAT NMS Plan website, as they have been since 2022, and understands that CAT LLC will continue to do so in the future.629 Therefore, the Commission does not believe it is necessary to add an explicit requirement to this effect. The use of budgeted CAT costs is appropriate to determine the Fee Rate because it ties the Fee Rate to the costs that the CAT will likely incur during the relevant period which are also the Prospective CAT Costs that will need to be apportioned among the Participants and CAT Executing Brokers.630 Should the use of budgeted costs result in a budget surplus, that surplus would translate to lower fees in the coming year because there would be a lower requirement for reserves.631 Also, using budgeted costs to determine the Fee Rate facilitates financial stability, allowing CAT LLC to collect fees before bills become payable.632 The requirements that the Operating Committee approve a ‘‘reasonable’’ operating budget for CAT LLC,633 that fees, costs and expenses be ‘‘reasonable’’ and that they be ‘‘reasonably budgeted to be incurred by or for the Company in connection with the development, implementation and operation of the CAT as set forth in the annual operating budget approved by the Operating Committee’’ 634 is appropriate in the public interest.635 The existing CAT NMS Plan did not include such language, potentially providing the Participants full discretion to pass along 628 See 629 See Rule 608(b)(1). 17 CFR 242.608(b)(1). CAT LLC May 2023 Response Letter at 10– 11. lotter on DSK11XQN23PROD with NOTICES2 c. Reserve CAT LLC proposed to add a requirement to Section 11.1(a)(i) of the CAT NMS Plan that the budget shall include ‘‘a reserve and such other cost categories as reasonably determined by the Operating Committee to be included in the budget.’’ 636 CAT LLC also proposed to add paragraph (ii) to Section 11.1(a) of the CAT NMS Plan to state that ‘‘[f]or the reserve referenced in paragraph (a)(i) of this Section, the budget will include an amount reasonably necessary to allow the Company to maintain a reserve of not more than 25% of the annual budget.’’ 637 Moreover, CAT LLC would calculate the reserve based on the amount of the budget other than the reserve.638 In addition, proposed subparagraph (ii) of Section 11.1(a) of the CAT NMS Plan would state that ‘‘[t]o the extent collected CAT fees exceed CAT costs, including the reserve of 25% of the annual budget, such surplus will be used to offset future fees.’’ 639 Proposed Section 11.1(a)(ii) of the CAT NMS Plan provides that ‘‘[f]or the avoidance of doubt, the Company will only include an amount for the reserve in the annual budget if the Company does not have a sufficient reserve (which shall be up to but not more than 25% of the annual budget).’’ 640 One commenter stated that the proposed reserve of not more than 25% of the CAT budget is excessive.641 The commenter noted that the support provided for the proposed change was the Participants’ difficulty in forecasting 636 Proposed 630 See Notice, supra note 7, 88 FR at 17114. 631 See infra Section III.A.5.c. (Reserve). 632 See id. 633 See proposed Section 11.1(a). 634 Proposed Section 11.3(a)(i)(C). 635 One commenter complained that Participants were not providing the public with an opportunity to review the budget until after it was finalized. See SIFMA May 2023 Letter at 8–10. As CAT LLC explained, this appears to be based on a misunderstanding, as CAT LLC provides the annual budget and quarterly updates to the public. See CAT LLC May 2023 Response Letter at 11. VerDate Sep<11>2014 to Industry Members costs that are not reasonable. Such costs could have included costs that were incurred due to Participant mismanagement, costs that were inflated or costs that should reasonably be allocated to only the Participants. Requiring these costs to be reasonable and reasonably budgeted imposes discipline on CAT spending, and the Commission, Industry Members and others will be able to review budget information during the rule filing process under Section 19(b) of the Exchange Act. 18:06 Sep 11, 2023 Jkt 259001 Section 11.1(a)(i). Section 11.1(a)(ii). 638 Specifically, proposed Section 11.1(a)(ii) of the CAT NMS Plan would state that ‘‘[f]or the avoidance of doubt, the calculation of the amount of the reserve would exclude the amount of the reserve from the budget.’’ 639 Id. 640 Id. 641 See SIFMA January 2023 Letter at 6, n.15. See also Citadel July Letter at 26 (objecting to the requirement that Industry Members ‘‘fund an additional 25% reserve over budgeted amounts each year.’’). 637 Proposed PO 00000 Frm 00031 Fmt 4701 Sfmt 4703 62657 CAT costs, which the commenter stated demonstrates a need for an independent cost review mechanism.642 The Proposed Amendment providing that the annual operating budget include a reserve of not more than 25% of the annual budget is reasonable.643 Because the CAT is a critical regulatory tool/system, the CAT needs to have a stable funding source to build financial stability to support the Company as a going concern.644 Funding for the CAT, as noted in Section 11.1(b), is the responsibility of the Participants and the industry.645 Because CAT fees are charged based on the budget, which is based on anticipated volume, it is reasonable to have a reserve on hand to prevent a shortfall in the event there is an unexpectedly high volume in a given year. A reserve would help to assure that the CAT has sufficient resources to cover costs should there be unanticipated costs or costs that are higher than expected. CAT LLC explained that the proposed reserve amount of not more than 25% of the annual budget is based on a comparison of actual CAT costs and budgeted costs from 2020 through the first nine months of 2022 that demonstrated that actual CAT costs exceeded budgeted costs by 20% during this time period.646 CAT LLC also noted difficulty in predicting variable CAT costs in concluding to cap the reserve at 25%.647 Additionally, CAT LLC explained that CAT fees will be collected approximately three months after trading activity on which a CAT fee is based, or 25% of the year.648 CAT LLC stated that the reserve would be available to address funding needs related to this three-month delay.649 No commenter stated that they thought anything higher than a 25% reserve was necessary and no commenter provided an alternative solution to make sure that CAT remains funded and able to pay its bills. The Commission therefore believes that a reserve of no more than 25% is reasonable based on the factors listed by CAT LLC. In addition, the Commission recognizes that if CAT fees exceed CAT costs, including the reserve, the surplus will be used to offset future fees, and that a reserve will only be included in the annual budget on which the fees are based if CAT LLC does not have a 642 See SIFMA January 2023 Letter at 6, n.15. Notice, supra note 6, 88 FR at 17090. 644 See CAT NMS Plan, supra note 2, at Section 11.2(f). 645 Id. at Section 11.1(b). 646 See Notice, supra note 7, 88 FR at 17090. 647 Id. 648 Id. at 17091. 649 Id. 643 See E:\FR\FM\12SEN2.SGM 12SEN2 62658 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices sufficient reserve, which would be limited to 25% of the annual budget.650 The Commission also recognizes that the Company must operate on a breakeven basis and that any surpluses would be treated as an operational reserve to offset future fees and not be distributed to Participants as profits.651 The Commission further recognizes that proposed Section 11.1(a)(ii) states that CAT LLC will only include an amount for the reserve in the annual budget if the Company does not have a sufficient reserve; therefore, the Participants would not be collecting additional fees if CAT LLC already has a reserve of 25% of the annual budget.652 Furthermore, the reserve would be calculated by CAT LLC based on the amount of the budget other than the reserve because the reserve is meant to fund CAT LLC to pay its bills if necessary.653 These requirements should obviate the need for a refund mechanism. To date, CAT has been solely funded by the Participants.654 The CAT NMS Plan, however, requires funding for the CAT come from both Participants and Industry Members.655 It is the Commission’s view that establishing a reserve is a reasonable way to ensure that future funding is secured from all intended parties, rather than relying on Participants alone. d. Fee Filings Under Section 19(b) of the Exchange Act for Industry Member CAT Fees CAT LLC described the information that Participants would be required to include in their fee filings to be made pursuant to Section 19(b) of the Exchange Act and Rule 19b–4 thereunder for Industry Member CAT Fees in proposed paragraph (B) of proposed Section 11.3(a)(iii) of the CAT NMS Plan.656 Specifically, such filings 650 Id. See also proposed Section 11.1(a)(ii). CAT NMS Plan requires that a surplus of the Company’s revenues over its expenses be treated as an operational reserve to offset future fees. See CAT NMS Plan, supra note 2, at Section 11.1(c). 652 See Notice, supra note 7, 88 FR at 17091. See also proposed Section 11.1(a)(ii). 653 See Notice, supra note 7, 88 FR at 17090. See also proposed Section 11.1(a)(ii). 654 One commenter objected to CAT LLC’s reference to the financial viability of the CAT as an attempt to ‘‘coerce the Commission into prematurely opining on a funding proposal that does not meet basic Exchange Act requirements.’’ See Citadel August Letter at 1. For the reasons explained in this order, the Funding Model meets the applicable standard for approval. 655 See CAT NMS Plan, supra note 2, at Section 11.1(b), 11.3(a) and (b). 656 CAT LLC stated that it expected the fee filings required to be made by the Participants pursuant to Section 19(b) of the Exchange Act with regard to CAT Fees to be filed pursuant to Section 19(b)(3)(A) of the Exchange Act and Rule 19b–4(f)(2) lotter on DSK11XQN23PROD with NOTICES2 651 The VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 would be required to include with regard to the CAT Fee: (A) the Fee Rate; (B) the budget for the upcoming year (or remainder of the year, as applicable), including a brief description of each line item in the budget, including (1) technology line items of cloud hosting services, operating fees, CAIS operating fees, change request fees and capitalized developed technology costs, (2) legal, (3) consulting, (4) insurance, (5) professional and administration, and (6) public relations costs, a reserve and/or such other categories as reasonably determined by the Operating Committee to be included in the budget and the reason for changes in each such line item from the prior CAT Fee filing; 657 (C) a discussion of how the budget is reconciled to the collected fees; and (D) the projected total executed equivalent share volume of all transactions in Eligible Securities for the year (or remainder of the year, as applicable), and a description of the calculation of the projection. This detail would describe how the Fee Rate is calculated and explain how the budget used in the calculation is reconciled to the collected fees.658 In addition, CAT LLC proposed to state that the budgeted CAT costs described in the fee filings must provide sufficient detail to demonstrate that the CAT budget used in calculating the CAT Fees is reasonable and appropriate.659 The collection of CAT Fees from Industry Members is subject to Section 11.6 of the CAT NMS Plan regarding the Financial Accountability Milestones.660 Accordingly, CAT LLC proposed to state that Participants will not make fee filings pursuant to Section 19(b) of the Exchange Act 661 regarding CAT Fees until the Financial Accountability Milestone related to Period 4 described thereunder. CAT LLC further stated that in accordance with Section 19(b)(3)(A) of the Exchange Act and Rule 19b–4(f)(2) thereunder, such fee filings would be effective upon filing. See Notice, supra note 7, 88 FR at 17095, n.38. Pursuant to Section 19(b)(3)(A) and Rule 19b–4(f)(2), a proposed rule change can take effect upon filing with the Commission if designated by the SRO as establishing or changing a due, fee, or other charge imposed by the SRO. 15 U.S.C. 78s(b), 15 U.S.C. 78s(b)(3)(A), 17 CFR 240.19b–4(f)(2). 657 CAT LLC stated that it intends to include any other categories as reasonably determined by the Operation Committee. Accordingly, this provision refers to ‘‘such other categories as reasonably determined by the Operating Committee to be included in the budget.’’ Notice, supra note 7, 88 FR at 17095, n.39. 658 As a practical matter, the fee filing would provide the exact fee per executed equivalent share to be paid for the CAT Fees, by multiplying the Fee Rate by one-third and describing the relevant number of decimal places for the fee. See Notice, supra note 7, 88 FR at 17095, n.40. 659 See proposed Section 11.3(a)(iii)(B). 660 See CAT NMS Plan, supra note 2, at Section 11.6; see also supra note 18. 661 15 U.S.C. 78s(b). PO 00000 Frm 00032 Fmt 4701 Sfmt 4703 in Section 11.6 of the CAT NMS Plan has been satisfied.662 As discussed above, one commenter stated that the budget line-item categories, which would be included in the Section 19(b) fee filings, are too high level.663 The commenter urged the inclusion of much greater detail and specificity on the budget spending choices, especially in technology, to allow Industry Members and the public to understand and evaluate CAT spending decisions.664 The proposed process for implementing CAT Fees related to Prospective CAT Costs for Industry Members is reasonable. Under the Executed Share Model, the Participants would be required to submit fee filings pursuant to Section 19(b) of the Exchange Act to change the Fee Rates for Industry Members twice a year, once at the beginning and once during the year.665 It is appropriate to accompany each Fee Rate change with a Section 19(b) fee filing because it would provide notice to Industry Members and the public of the Fee Rate change and permit such entities to provide comment on the change. In addition to the budget information already provided by the Participants on the CAT website, the detail provided in the fee filings for the budget would provide transparency into the budget as it would describe the line items of the budget and any changes to the budget and allow the public the ability to comment on the budget.666 The fee filings must discuss how the budget is reconciled to collected fees, which would provide the public an opportunity to comment on the effectiveness of the reconciliation.667 The Executed Share Model establishes the framework for Industry Member CAT fees; details of the Budgeted CAT Costs will be provided in the Section 19(b) fee filings submitted by the Participants. One commenter objected to how the Proposed Amendment addressed the Financial Accountability Amendments Period 4 668 expenses.669 The commenter stated that if full implementation does not occur by September 27, 2023, the Operating Committee cannot recover from Industry 662 See proposed Section 11.3(a)(iii)(C); see also CAT NMS Plan, supra note 2, at Section 11.6(a)(i)(D). 663 See supra note 521. 664 Id. 665 See proposed Section 11.3(a)(i)(A)(I) and (II). 666 See proposed Section 11.3(a)(iii)(B). 667 Id. 668 See CAT NMS Plan, supra note 2, at Section 11.6. 669 See Citadel July Letter at 24. E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices Members any expenses related to Period 4.670 The commenter explained that the Proposed Amendment states that costs incurred during Period 4 may be allocated to Industry Members and that the Operating Committee had requested exemptive relief to extend the deadline for full implementation until August 31, 2024, which would allow the Participants to recover all Period 4 expenses from Industry Members.671 The commenter stated that the expenses related to Period 4 would likely total more than $400 million, and expressed the belief that this amount may be allocated in its entirety to Industry Members if the terms of the CAT NMS Plan are not enforced.672 The commenter stated that this issue is ‘‘highly relevant to the Commission’s analysis of the 2023 Funding Proposal’’ 673 and recommended three alternatives for the Commission to address the matter: (1) to state that relevant financial accountability provisions will be enforced as written and permit the Operating Committee to allocate Period 4 expenses only to the extent permitted by the CAT NMS Plan (reduced by 75%, and by 100% if full implementation does not occur by September 27, 2023); 674 (2) defer judgment and provide that Period 4 expenses cannot be allocated to Industry Members; 675 or (3) defer judgment and permit the Operating Committee to allocate Period 4 expenses to Industry Members and analyze the potential impact of allocating all Period 4 costs to Industry Members on market efficiency, competition and capital formation.676 The commenter urged the Commission to conduct this analysis before waiting for a subsequent filing, stating that once the Commission approves an allocation methodology, ‘‘the CAT Operating Committee would simply apply that approved methodology to the costs incurred during a specific time period.’’ 677 In response to the commenter’s criticism that the Proposed Amendment does not adequately address the Period 4 expenses,678 CAT LLC stated that it recognizes the applicability of the Financial Accountability Milestones on lotter on DSK11XQN23PROD with NOTICES2 670 Id. 671 Id. at 24–25. The commenter further explained that the Commission has reserved judgment on whether the terms of the Financial Accountability Amendments in Section 11.6 of the CAT NMS Plan would be enforced. 672 Id. at 25. 673 Id. 674 See Citadel July Letter at 25. 675 Id. 676 Id. 677 Id. at 26. 678 Id. at 24. VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 the collection of CAT Fees and Historical CAT Assessments.679 CAT LLC stated that the Participants will not file CAT fee filings until they believe any applicable Financial Accountability Milestone has been satisfied, and noted that the Commission has not made a determination regarding the Participants’ satisfaction of the Financial Accountability Milestones.680 As stated by the Participants, the Proposed Amendment acknowledges that the Participants are prohibited from submitting Exchange Act filings regarding Prospective CAT Fees until the Financial Accountability Milestone related to Period 4 described in Section 11.6 of the CAT NMS Plan has been satisfied.681 This is a reasonable approach for addressing how fee filings will be handled in conjunction with a determination of the Participants’ compliance with the Financial Accountability Milestones. Under existing Section 11.6, the Participants will not be able to recover the full costs of the CAT for a period if the relevant Financial Accountability Milestone has not been satisfied.682 Because the amount the Participants cannot recover from Industry Members is not known until the Financial Accountability Milestone has been satisfied, it would not be appropriate for the Participants to require Industry Members to pay CAT costs in advance, as the amount of such costs could be reduced.683 The Commission acknowledges the concerns raised and suggestions offered by the commenter but the Commission is not making a finding on the satisfaction of the Period 4 Financial Accountability Milestone in this Order nor is such a finding required. This filing merely establishes the framework under which costs will be allocated, not the amount to be allocated. The Participants will not be able to submit filings to recover Prospective CAT Fees or Historical CAT Assessments to recover Period 4 expenses until the Period 4 Milestone has been satisfied. When they do submit such filings, the question of compliance will impact how much can be recovered under the applicable framework; this model will then be used to determine how to allocate that amount. e. Participant CAT Fees for Prospective CAT Costs CAT LLC proposed to describe the Participant CAT Fees related to 62659 Prospective CAT Costs in proposed Section 11.3(a)(ii) of the CAT NMS Plan. Specifically, under proposed Section 11.3(a)(ii)(A) of the CAT NMS Plan, each Participant that is a national securities exchange will be required to pay the CAT Fee for each transaction in Eligible Securities executed on the exchange in the prior month based on CAT Data. Each Participant that is a national securities association will be required to pay the CAT Fee for each transaction in Eligible Securities executed otherwise than on an exchange in the prior month based on CAT Data.684 The CAT Fee for each transaction in Eligible Securities will be calculated by multiplying the number of executed equivalent shares in the transaction by one-third and by the Fee Rate determined pursuant to proposed Section 11.3(a)(i).685 CAT LLC also proposed Section 11.3(a)(ii)(B) of the CAT NMS Plan to provide that Participants would only be required to pay CAT Fees when Industry Members are required to pay CAT Fees. CAT Fees charged to Industry Members become effective in accordance with the requirements of Section 19(b) of the Exchange Act.686 In contrast, CAT Fees charged to Participants are implemented via an approval of the CAT Fees by the Operating Committee in accordance with the requirements of the CAT NMS Plan.687 Specifically, to implement the Participant CAT fees, CAT LLC proposed to add the Proposed Participant Fee Schedule, entitled ‘‘Consolidated Audit Trail Funding Fees,’’ to Appendix B of the CAT NMS Plan. Proposed Paragraph (a) stated that ‘‘[e]ach Participant shall pay the CAT Fee set forth in Section 11.3(a) of the CAT NMS Plan to Consolidated Audit Trail, LLC in the manner prescribed by Consolidated Audit Trail, LLC on a monthly basis based on the Participant’s transactions in Eligible Securities in the prior month.’’ 688 Because each Participant would be required to pay a CAT Fee once a Fee Rate has been established by the Operating Committee, and because of the time and burden required, CAT LLC stated that it would not submit an amendment to the CAT NMS Plan every time the Fee Rate is established or adjusted.689 It is reasonable to require that each Participant pay a CAT Fee related to 684 See proposed Section 11.3(a)(ii)(A). 685 Id. 679 See CAT LLC July 2023 Response Letter at 30. 680 Id. 681 See 682 See proposed Section 11.3(a)(iii)(C). CAT NMS Plan, supra note 2, at Section 11.6. 683 See PO 00000 infra note 807. Frm 00033 Fmt 4701 Sfmt 4703 686 See proposed Section 11.3(a)(i)(A)(I) and (II); see also 15 U.S.C. 78s(b). 687 See Notice, supra note 7, 88 FR at 17094. 688 Paragraph (a) of the Proposed Participant Fee Schedule. 689 See Notice, supra note 7, 88 FR at 17108–09. E:\FR\FM\12SEN2.SGM 12SEN2 62660 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices Prospective CAT Costs for each transaction in the prior month based on CAT Data.690 The CAT NMS Plan requires the Participants to contribute to the funding of the CAT.691 Additionally, as CAT LLC explained, the Executed Share Model recognizes the Participants (as market regulators) as one of the three parties who have primary roles in a transaction,692 so it is appropriate for a transaction-based funding model to assess a CAT Fee upon the Participants. The Commission also believes it is reasonable that proposed Section 11.3(a)(ii)(B) provides that the Participants would be required to pay CAT Fees only when Industry Members are required to pay CAT Fees. The CAT Fees charged to Participants would be implemented through an approval of the CAT Fees by the Operating Committee and not through a plan amendment submitted each time the Fee Rate changes,693 while CAT Fees charged to Industry Members may only become effective in accordance with the requirements of Section 19(b) of the Exchange Act.694 However, both Participants and Industry Members would be subject to the same Fee Rate 695 so it is appropriate to provide that Participants would be required to pay the Participant CAT Fee once CAT Fees based on the Fee Rate are effective for Industry Members. The Proposed Participant Fee Schedule is reasonable. As the Proposed Participant Fee Schedule requires each Participant to pay the CAT Fee detailed in Section 11.3(a) of the CAT NMS Plan on a monthly basis, based on the Participant’s transactions in Eligible Securities in the prior month, in the manner prescribed by CAT LLC,696 the proposed fee schedule is appropriate because it imposes the Executed Share Model’s Participant CAT Fee obligation on the Participants by specifically requiring the Participants to pay a CAT Fee in accordance with the Executed Share Model. The requirement in the Proposed Participant Fee Schedule clearly sets forth how the Participants will calculate their monthly CAT Fee obligation, and therefore does not believe that it is necessary for the Participants to submit an amendment to the CAT NMS Plan each time the Fee Rate changes; the formula for lotter on DSK11XQN23PROD with NOTICES2 690 See proposed Section 11.3(a)(ii). CAT NMS Plan, supra note 2, at Section 11.1(b), Section 11.3(a). 692 See Notice, supra note 7, 88 FR at 17104. 693 Id. at 17108–09. 694 See proposed Section 11.3(a)(i)(A). See also 15 U.S.C. 78s(b). 695 See proposed Section 11.3(a)(ii)(A) and (B). 696 See paragraph (a) of the Proposed Participant Fee Schedule. 691 See VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 calculating fees will be constant although the Fee Rate that would be applied, which is objectively determined, will change only following a Participant fee filing under section 19(b) of the Exchange Act.697 This approach is reasonable in this circumstance because the CAT NMS Plan sets forth the Executed Share Model, the Participants are required to pay CAT Fees pursuant to the CAT NMS Plan and the same Fee Rate that would apply to Industry Members would apply to Participants.698 6. Historical CAT Assessment a. Calculation of Historical CAT Assessment Under the Executed Share Model, Past CAT Costs will be recovered from CEBBs and CEBSs through Historical CAT Assessments.699 Pursuant to proposed Section 11.3(b) of the CAT NMS Plan the Operating Committee will establish one or more Historical CAT Assessments depending upon the timing of any approval of the Proposed Amendment and the completion of the Financial Accountability Milestones.700 In establishing a Historical CAT Assessment, the Operating Committee will determine a ‘‘Historical Recovery Period’’ 701 and calculate a ‘‘Historical Fee Rate’’ 702 for that Historical Recovery Period. Then, for each month in which a Historical CAT Assessment is in effect, each CEBB and each CEBS will pay a fee (the Historical CAT Assessment) for each transaction in Eligible Securities executed by the CEBB or CEBS from the prior month as set forth in CAT Data, where the Historical CAT Assessment for each transaction will be calculated by multiplying the number of executed equivalent shares in the transaction by one-third and by the Historical Fee Rate 697 See Notice, supra note 7, 88 FR at 17109. proposed Section 11.3(a)(ii)(A) and (B). 699 See Notice, supra note 7, 88 FR at 17086; see also proposed Section 11.3(b); supra notes 32–33 and accompanying text (defining Historical CAT Assessments). 700 See proposed Section 11.3(b)(iii). See Notice, supra note 7, 88 FR at 17096, n.43; see also supra note 18 and CAT NMS Plan, supra note 2, at Section 11.6. 701 The Historical Recovery Period would be used to calculate the Historical Fee Rate for a Historical CAT Assessment. Proposed Section 11.3(b)(i)(D) of the CAT NMS Plan provides the Operating Committee with the discretion to reasonably establish the length of the Historical Recovery Period as long as no such period is less than 24 months and more than five years. See infra Section III.A.6.b. 702 The Historical Fee Rate is the fee rate used to calculate the Historical CAT Assessment. See infra Section III.A.6.c. 698 See PO 00000 Frm 00034 Fmt 4701 Sfmt 4703 reasonably determined pursuant to proposed Section 11.3(b)(i).703 The actual amount of Past CAT Costs to be recovered through the Historical CAT Assessments would be reduced by an amount of ‘‘Excluded Costs.’’ 704 The resulting amount would be defined as ‘‘Historical CAT Costs’’ in proposed Section 11.3(b)(i)(C) of the CAT NMS Plan. Proposed Section 11.3(b)(i)(C) states that ‘‘[t]he Operating Committee will reasonably determine the Historical CAT Costs sought to be recovered by each Historical CAT Assessment, where the Historical CAT Costs will be Past CAT Costs minus Past CAT Costs reasonably excluded from Historical CAT Costs by the Operating Committee.’’ 705 The Historical CAT Costs would not include an amount of ‘‘Excluded Costs’’ so that Industry Members would not be assessed a Historical CAT Assessment to recover such Excluded Costs.706 Certain commenters objected to the method of calculating the Historical CAT Assessment using current transaction activity.707 One commenter disagreed with the proposed method ‘‘due to difficulty of using current volumes and trading activity by individual Industry Members as a mechanism for assessing costs in the past where the trading volumes and individual Industry Member trading activity likely were different.’’ 708 The commenter also stated that the proposed assessment of Past CAT Costs on current Industry Members based on their current trading activity is not fair or reasonable because new Industry Members would be assessed a share of Past CAT Costs even if they were not in operation when those costs were incurred, and that such costs would be attributable to Industry Members that are no longer in business.709 The 703 See proposed Section 11.3(b)(iii)(A). Excluded Costs would be $48,874,937 in CAT costs incurred from November 15, 2017 through November 15, 2018, and $14,749,362 in costs related to the termination of the initial Plan Processor. See CAT LLC July 2023 Response Letter at 19. 705 Proposed Section 11.3(b)(i)(C). 706 See Notice, supra note 7, 88 FR at 17111. According to the Proposed Amendment, ‘‘[e]ach Historical CAT Assessment will seek to recover from CAT Executing Brokers two-thirds of Historical CAT Costs incurred during the period covered by the Historical CAT Assessment.’’ Proposed Section 11.3(b)(i)(C). The Historical CAT Costs would be Past CAT Costs minus the Excluded Costs. Id. 707 See SIFMA June 2023 Letter at 4; SIFMA January 2023 Letter at 7; SIFMA October 2022 Letter at 5; Citadel July Letter at 24, 32; MMI July Letter at 4; Virtu Letter at 4. 708 SIFMA October 2022 Letter at 5. 709 See SIFMA January 2023 Letter at 7. See also FIA Letter at 4 (stating that it is ‘‘patently unfair’’ to allocate all historical costs to current Industry 704 The E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES2 commenter added that the Proposed Amendment has not explained how allocating ‘‘approximately $350 million in historical costs . . . to a small group of executing broker firms based on current market volumes’’ is consistent with the Exchange Act or how it would impact liquidity and competition.710 The commenter stated that since the proposed allocation would be based on current market share and unrelated to the firms or activity that contributed to historical costs, there would be little ability for executing brokers to pass on such costs.711 Another commenter stated that the Proposed Amendment lacked a clear mechanism for Industry Members to pass-on historical costs to other market participants.712 The commenter stated, ‘‘[i]t appears challenging for the CAT Operating Committee to allocate historical costs in a way that is directly tied to historical activity, which makes it more difficult for Industry Members to pass-on these costs to other market participants.’’ 713 Another commenter suggested a ‘‘review of current market percentage share dictating cost structure—e.g., industry fluctuations—how current market share [sic] not reflective of past/future market shares- need for adjustments.’’ 714 One commenter recommended a reevaluation of the use of transaction fees to assess Past CAT Costs,715 and suggested an alternative approach in which Past CAT Costs would be assigned to Industry Members ‘‘based on the lesser of (i) the CAT Fees that would be assessed on an Industry Member under the Participants’ proposed approach of using current trading activity or (ii) the CAT Fees that would be assessed on such member based on their prior trading activity in the years since 2016 when the CAT was being built and then operationalized . . .’’ 716 The commenter stated that the share of Past CAT Costs belonging to Industry Members that are no longer in business could be calculated using this approach and then divided equally among the Members based on their current market activity because current ‘‘Industry Members had no control over the stops and starts incurred in the development of CAT.’’). 710 SIFMA June 2023 Letter at 4. This statement was echoed by another commenter. See Virtu Letter at 4. 711 SIFMA June 2023 Letter at 4. The commenter also stated that the assessment of ‘‘retroactive liability for monies spent that private parties had no control over’’ for public purposes would violate the Fifth Amendment Takings Clause. See infra Section III.9.d. 712 See Citadel July Letter at 24. 713 Id. at 32. 714 See MMI July Letter at 4. 715 See SIFMA October 2022 Letter at 5. 716 SIFMA January 2023 Letter at 7. VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 current Industry Members, while Industry Members that entered into business after certain Past CAT Costs were incurred would be assessed Past CAT Costs starting in the year after which they started operating based on the above approach.717 The commenter acknowledged that, while this approach would require more effort by the Participants, it would be ‘‘significantly closer to the fair and reasonable standard in the Exchange Act than the approach set forth by the Participants in the Executed Share Model.’’ 718 Additionally, commenters objected to the allocation of Past CAT Costs to Industry Members.719 One commenter stated that the Participants have failed to justify the allocation of Past CAT Costs to Industry Members during the period when only Participants were reporting to the CAT.720 Certain commenters stated that Industry Members should not be assessed any fees related to the decision to employ Thesys Technologies, LLC as the Plan Processor or legal or consulting fees incurred by the Participants in the creation of the CAT NMS Plan.721 One commenter stated that the Proposed Amendment fails to provide how much of the allocation to Industry Members is related to Thesys Technologies, LLC, and, therefore, the Participants have not demonstrated how the Executed Share Model is consistent with the Exchange Act.722 Another commenter stated that it would be inappropriate to allocate any costs related to Thesys Technologies, LLC’s role as the plan processor, including the costs of transitioning to a new plan processor, or the Operating Committee’s costs of litigation against the Commission.723 The commenter expressed concern about a lack of transparency into Historical CAT Costs and the size of such costs, stating that the historical costs are excessive and inconsistent with the CAT NMS Plan.724 The commenter stated that a lack of transparency into historical costs raises questions about whether Industry Members would be allocated costs for the period when Thesys Technologies, LLC was the plan processor, noting that 717 Id. 718 Id. 719 See SIFMA January 2023 Letter at 6–7; SIFMA October 2022 Letter at 7; SIFMA June 2022 Letter at 7; Citadel July Letter at 3, 23, 24, 31, 32; FIA Letter at 4; MMI July Letter at 4 (suggesting accountability for historic costs). 720 See SIFMA October 2022 Letter at 7. 721 See SIFMA June 2022 Letter at 7; SIFMA January 2023 Letter at 6–7; FIA Letter at 4. 722 See SIFMA June 2022 Letter at 7. 723 See Citadel July Letter at 31. 724 Id. at 23. See also Citadel August Letter at 6– 7. PO 00000 Frm 00035 Fmt 4701 Sfmt 4703 62661 the Proposed Amendment only intended to exclude $64 million in costs related to the ‘‘failed engagement of Thesys,’’ when the costs were much higher; 725 whether Industry Members would be allocated costs related to litigation between the Operating Committee and the Commission; 726 and whether Industry Members would be allocated costs related to repeated filing of prior funding models.727 The commenter stated that, without knowing the total amount of Historical CAT Costs, or basic information about such costs, the Commission cannot determine whether Historical CAT Costs are reasonable and cannot assess the impact of the proposed allocation on market liquidity, efficiency and competition.728 For example, the commenter stated that the CAT Operating Committee has not assessed ‘‘whether trading activity may decline or bid-offer spreads may widen.’’ 729 The commenter stated that the CAT Operating Committee ‘‘recklessly argues’’ that the proposed allocation of Historical CAT Costs is not concerning due to the existence of higher transaction-based fees.730 In addition, the commenter stated that Industry Members have borne nearly all of the total CAT-related costs due to ‘‘a near-constant barrage’’ of changes to technical specifications.731 The commenter recommended not allocating any historical costs to Industry Members.732 One commenter stated that Industry Members were not subject to CAT obligations before the CAT NMS Plan’s approval, had no input into the selection of the service providers, and that ‘‘it is difficult to envision how the Participants could demonstrate that such an allocation provides for the equitable allocation of reasonable fees due to the fact that the CAT NMS Plan 725 See Citadel July Letter at 23. See also id. at 23, n.100; id. at 8 (stating that ‘‘missteps’’ by the Operating Committee related to the hiring of the initial plan processor and the hiring of FINRA CAT to replace the initial plan processor resulted in ‘‘wasted expenditures’’ of more than $100 million). See also Citadel August Letter at 7. 726 See Citadel July Letter at 23. See also Citadel August Letter at 7. 727 See Citadel July Letter at 24. See also Citadel August Letter at 7. 728 See Citadel August Letter at 7. 729 Id. 730 Id. 731 See Citadel July Letter at 31. The commenter noted that in 2016, the Commission estimated that broker-dealers would incur 90% of total CATrelated costs, even if not allocated any costs for building and operating the CAT. The commenter stated that updates to these estimates would show that this figure would underestimate their cost burdens. See id. 732 Id. at 3, 31, 32. E:\FR\FM\12SEN2.SGM 12SEN2 62662 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices did not exist during the period prior to its approval.’’ 733 The commenter also stated that the Participants have not analyzed different alternatives to collecting Past CAT Costs and the costs associated with such alternatives or the costs associated with the proposed approach.734 The commenter urged collaboration between the Participants and Industry Members on the allocation of Past CAT Costs.735 With respect to one commenter’s criticisms of the calculation and assessment of the Historical CAT Assessment,736 CAT LLC stated that the commenter had a ‘‘persistent misunderstanding’’ of the Historical CAT Assessment, explaining that, contrary to the commenter’s assertions in its comment letters, the Historical CAT Assessment would be assessed based on current market activity, not past market activity.737 While the fee rate would be calculated based on Historical CAT Costs, the fee rate would be applied to current market transactions.738 CAT LLC stated that the process of assessing fees for the Historical CAT Assessment would be exactly the same as with CAT Fees related to Prospective CAT Costs, and would be passed through in the same manner if a CEBB or CEBS so chooses.739 CAT LLC also stated that it would provide CAT Executing Brokers with details of their CAT fees to facilitate this process.740 In response, the commenter stated that the CAT LLC Response Letter did not meaningfully address the concerns it raised about ‘‘the inability of firms defined as ‘executing brokers’ to transfer fees to those who may be more appropriate to bear certain historical CAT costs in the first place.’’ 741 CAT LLC reiterated that the Historical CAT Assessment would be assessed in the same manner as CAT Fees for Prospective CAT Costs, and could likewise be passed-through by the CEBB or CEBS,742 and that CAT LLC would provide the relevant data to help CAT 733 See SIFMA June 2022 Letter at 7. SIFMA October 2022 Letter at 5. 735 Id. See also SIFMA October 2022 Letter at 2 (‘‘[w]e also reiterate our call for the Participants to work with SIFMA and the industry in a collaborative manner to establish a viable CAT funding model.’’). 736 See SIFMA May 2023 Letter at 8; SIFMA October 2022 Letter at 4–5; supra notes 708–713 and accompanying text. 737 See CAT LLC May 2023 Response Letter at 9. 738 Id. 739 Id. 740 Id. 741 See SIFMA June 2023 Letter at 2. 742 See CAT LLC July 2023 Response Letter at 16. lotter on DSK11XQN23PROD with NOTICES2 734 See VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 Executing Brokers pass-through the fees.743 In response to a commenter that stated that a small group of brokerdealers would shoulder the Historical CAT Costs and asked whether allocating these costs to a small group of executing brokers based on current market volume is consistent with the Exchange Act,744 CAT LLC stated that ‘‘almost 700 of the 1100 Industry Members would have an obligation to contribute to Historical CAT Costs. . . not just a few CAT Executing Brokers’’ 745 and since ‘‘the fees vary in accordance with the market activity of the CAT Executing Brokers, certain CAT Executing Brokers will have large bills for very significant market activity.’’ 746 CAT LLC also reiterated that the Section 11.2(b) of the CAT NMS Plan contemplates that Industry Members would contribute to funding the costs of the CAT and that CAT Executing Brokers may pass on their CAT fees so they would not have any obligation to pay CAT fees.747 CAT LLC also clarified that Industry Members would be allocated Historical CAT Costs over a period of time that would be no less than 24 months and no more than five years, not in a single lump sum,748 and stated that ‘‘it would potentially be appropriate to spread the Historical CAT Costs over a time period of a little less than three years, a time period which is within the two to five year range for the Historical Recovery Period.’’ 749 In response to the commenter that stated that Industry Members are bearing almost all of the CAT-related costs,750 CAT LLC stated that the commenter was conflating the Industry Members’ internal costs to comply with CAT reporting requirements with the direct costs of the CAT.751 CAT LLC stated that the Proposed Amendment is intended to address the funding of the direct costs of the CAT and not Participants and Industry Members’ compliance costs.752 CAT LLC provided a comparison of Historical CAT Costs to Prospective CAT Costs, demonstrating that the $233 743 Id. 744 See SIFMA June 2023 Letter at 4. See also Virtu Letter at 4. 745 See CAT LLC July 2023 Response Letter at 15. 746 Id. 747 Id. 748 Id. 749 See CAT LLC July 2023 Response Letter at 17. CAT LLC also provided a comparison of Historical CAT Costs to Prospective CAT Costs, demonstrating that the $233 million 2023 CAT budget is approximately 45% of the $518 million in Historical CAT Costs (through 2022). Id. 750 See Citadel July Letter at 31. 751 See CAT LLC July 2023 Response Letter at 16. 752 Id. PO 00000 Frm 00036 Fmt 4701 Sfmt 4703 million 2023 CAT budget is approximately 45% of the $518 million in Historical CAT Costs (through 2022).753 CAT LLC stated that it expects to propose a fee rate for the Historical CAT Assessment that would be similar to or smaller than other transactionbased fees, and provided examples in which CEBBs and CEBSs would be assessed less than 1/1000 of a penny per executed equivalent share.754 CAT LLC noted that broker-dealers are currently charged other transaction-based fees that are higher than the proposed CAT fees.755 In response to commenters that objected to the allocation to Industry Members of Historical CAT Costs related to the initial Plan Processor,756 CAT LLC stated that the Historical CAT Costs to be allocated to Industry Members would not include two categories of costs related to the initial Plan Processor: $48,874,937 in CAT costs incurred from November 15, 2017 through November 15, 2018, and $14,749,362 in costs related to the termination of the initial Plan Processor.757 CAT LLC stated that the Participants would remain responsible for these costs.758 In the Commission’s view, the proposed recovery of Past CAT Costs via the Historical CAT Assessment is reasonable, and it is reasonable to require that each CEBB and CEBS pay a Historical CAT Assessment for each transaction in the prior month based on CAT Data.759 First, current Industry Members are actively reporting to the CAT 760 and therefore receive the benefits from the CAT. The CAT provides more effective oversight of market activity, which could increase investor confidence, resulting in expanded investment opportunities and increased trading activity.761 Second, it would be difficult to impose fees on Industry Members for their activity in the past because some Industry Members may no longer be in business and such Industry Members would not have taken into consideration the Historical CAT Assessment when entering into the past transactions.762 In this case, the Commission understands, 753 Id. at 17. at 18. 755 Id. at 18–19. 756 See FIA Letter at 4; Citadel July Letter at 23, 31. 757 See CAT LLC July 2023 Response Letter at 19. 758 Id. 759 See proposed Section 11.3(a)(ii)(A) and (iii)(A). 760 See Notice, supra note 7, 88 FR at 17113. 761 CAT NMS Plan Approval Order, at 81 FR at 84993. 762 See Notice, supra note 7, 88 FR at 17113. 754 Id. E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES2 from CAT LLC’s analysis of Industry Members, that there is ‘‘substantial continuity’’ among the largest Industry Members, going back to 2020,763 and thus it is likely that the Industry Members responsible for substantial transaction activity in 2020 (and perhaps earlier, beyond the scope of CAT LLC’s analysis) would also be responsible for substantial transaction activity in 2023, mitigating concerns that current Industry Members would be responsible for CAT fees for the past transaction activity of non-operational Industry Members. Additionally, requiring CAT Executing Brokers to pay Historical CAT Assessments is appropriate because the Participants have thus far paid all Past CAT Costs and the CAT NMS Plan contemplates that both Industry Members and Participants would fund the Company.764 Furthermore, it is reasonable, in the Commission’s view, for the Participants to exclude certain costs from the Past CAT Costs to be recovered from Industry Members; for example, such excluded costs would encompass costs incurred when Industry Members as a group were not reporting to the CAT, and costs associated with the conclusion of the relationship with the Initial Plan Processor.765 CAT LLC also proposes to require the Operating Committee, in determining fees on Participants and Industry Members, to take into account fees, costs and expenses (including legal and consulting fees) reasonably incurred by the Participants on behalf of the Company prior to the Effective Date in connection with the creation and implementation of the CAT.766 In the Commission’s view, requiring the Operating Committee to take into account fees, costs and expenses (including legal and consulting fees) reasonably incurred by the Participants on behalf of the Company prior to the Effective Date in connection with the creation and implementation of the CAT, when determining fees for Participants and Industry Members will constrain the Operating Committee from assessing fees based on costs and expenses that are not reasonable. Further, the proposed exclusion of the ‘‘Excluded Costs’’ from Past CAT Costs is reasonable in the Commission’s view 763 Id. at 17113, n.116 (stating that there has been substantial continuity in the largest Industry Members over time and providing statistics about the continuity). 764 See, e.g., CAT NMS Plan, supra note 2, at Section 11.1(b), Section 11.1(c), Section 11.2(b), Section 11.3. 765 See Notice, supra note 7, 88 FR at 17111. 766 See proposed Section 11.1(c) (emphasis added). VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 because it would not require all costs incurred by the Participants to be recovered from Industry Members through the Historical CAT Assessment, specifically excluding those costs related to the delay in the start of reporting to the CAT and costs related to the conclusion of the relationship with the Initial Plan Processor.767 Finally, the Proposed Amendment sets forth a process that the Commission believes will offer an appropriate level of transparency into Historical CAT Costs. In response to a commenter that objected to the level of transparency provided about the total amount of Historical CAT Costs, and basic information about such costs, and stated that, as a result, the Commission cannot determine whether Historical CAT Costs are reasonable and cannot assess the impact of the proposed allocation on market liquidity, efficiency and competition,768 as discussed in Section III.A.6.e. herein, the Section 19(b) fee filings to be filed with the Commission by the Participants to impose the Historical CAT Assessment on Industry Members must include detailed information on the Historical CAT Costs, including the amount and type of Historical CAT Costs, and will allow the public the ability to comment on the Historical CAT Costs.769 In addition to addressing all relevant statutory requirements, including the requirements that the fees are reasonable, equitably allocated, not unfairly discriminatory, and do not unduly burden competition,770 these proposed Section 19(b) fee filings must contain ‘‘sufficient detail to demonstrate that such costs are reasonable and appropriate,’’ 771 which would provide the public and the Commission the detail needed to evaluate the Historical CAT Assessments. Once the proposed Section 19(b) fee filings are filed by the Participants, the Commission will review them for consistency with the Exchange Act and the CAT NMS Plan. In response to the comment that stated that the CAT Operating Committee has not assessed ‘‘whether trading activity may decline or bid-offer spreads may widen,’’ 772 and in response to the comment that the CAT Operating Committee ‘‘recklessly argues’’ that the proposed allocation of Historical CAT Costs is not concerning due to the existence of higher 767 See Notice, supra note 7, 88 FR at 17111. Citadel August Letter at 7. 769 See proposed Section 11.3(b)(iii)(B)(II). 770 15 U.S.C. 78f(b)(4), 15 U.S.C. 78o–3(b)(5); 15 U.S.C. 78f(b)(5), 15 U.S.C. 78o–3(b)(6); 15 U.S.C. 78f(b)(8), 15 U.S.C. 78o–3(b)(9). 771 See proposed Section 11.3(b)(iii)(B)(II). 772 See Citadel August Letter at 7. 768 See PO 00000 Frm 00037 Fmt 4701 Sfmt 4703 62663 transaction-based fees,773 as stated above, the Proposed Amendment does not approve per se the amount of the Historical CAT Costs; it sets forth the model but leaves the amount and description of the Historical CAT Costs for the Section 19(b) fee filings. The Commission recognizes, however, that the Participants have disclosed the amount of the Historical CAT Costs in the Proposed Amendment.774 While such Historical CAT Costs are not being approved by the Commission at this time, the Commission understands that such amounts provide an indication of what might be charged. In this regard, the Commission notes the Participants have included in Exhibit C to the Proposed Amendment a chart setting forth an example Historical CAT Assessment, for illustrative purposes only, that each CAT Executing Broker would pay based on its transactions in Eligible Securities in December 2022 related to CAT costs from prior to 2022. The chart indicated that the Historical Fee Rate for the assumed December 2022 period was $0.0000417950 per executed equivalent share. The Commission believes that potential Historical CAT Assessments are likely to be significantly lower than fees assessed pursuant to Section 31.775 Accordingly, the Commission believes that any potential impact on trading activity or bid-ask spreads would likely be limited. b. Historical Recovery Period The ‘‘Historical Recovery Period’’ would be used to calculate the Historical Fee Rate for a Historical CAT Assessment.776 Proposed Section 11.3(b)(i)(D) of the CAT NMS Plan provides the Operating Committee with the discretion to reasonably establish the length of the Historical Recovery Period as long as no such period is less than 24 months and more than five years. CAT LLC analyzed potential recovery periods and determined that the Historical Fee Rate calculated using 773 Id. 774 See Notice, supra note 7, 88 FR at 17110–11 (providing Historical CAT Costs prior to 2022). CAT LLC also provided updated Historical CAT Costs through 2022. See CAT LLC July 2023 Response Letter at 17. 775 See infra notes 1099–1102 and accompanying text (stating that a comparison to recent Section 31 fees of $0.00009 per share to $0.0004 per share indicates that the anticipated Historical Fee Rate and Fee Rate, assuming the Fee Rate is of a similar magnitude as the Historical Fee Rate, are expected to be relatively small). See also infra note 1102 (discussing another example Historical Fee Rate that was provided in the CAT LLC July 2023 Response Letter at 18–19 that was close to the Historical Fee Rate in Exhibit C of the Proposed Amendment). 776 See proposed Section 11.3(b)(i)(D)(I). E:\FR\FM\12SEN2.SGM 12SEN2 62664 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices the proposed Historical Recovery Period of two to five years would be reasonable for Industry Members even if they had to pay both the ongoing CAT Fee and the Historical Fee Assessment simultaneously.777 Additionally, in determining the range for the Historical Recovery Period, CAT LLC ‘‘sought to weigh the need for a reasonable Historical Fee Rate that spreads the Historical CAT Costs over an appropriate amount of time and the need to repay the loan notes to the Participants in a timely fashion.’’ 778 In the Commission’s view, it is reasonable for the Operating Committee to establish the length of the Historical Recovery Period to be no less than 24 months and no more than five years. According to the Participants, ‘‘[t]he length of the Historical Recovery Period used in calculating each Historical Fee Rate will be reasonably established by the Operating Committee based on the amount of the Historical CAT Costs to be recovered by the Historical CAT Assessment.’’ 779 The Operating Committee is authorized by the CAT NMS Plan to establish the funding of CAT LLC, including the fees to be paid by Participants and Industry Members.780 Because the Historical Recovery Period is used in the calculation of Historical CAT Assessments to recover costs incurred to fund the CAT, the Commission views it as appropriate for the Operating Committee to determine a reasonable length of time for the Historical Recovery Period since the Operating Committee has authority over CAT funding pursuant to the Plan. c. Historical Fee Rate The Historical Fee Rate would be used to calculate Historical CAT Assessments. The Operating Committee will calculate the Historical Fee Rate for each Historical CAT Assessment by dividing the Historical CAT Costs for each Historical CAT Assessment by the reasonably projected total executed equivalent share volume of all transactions in Eligible Securities for the Historical Recovery Period.781 lotter on DSK11XQN23PROD with NOTICES2 777 See Notice, supra note 7, 88 FR at 17096–97. CAT LLC acknowledged that the Historical CAT Assessment would need to be calculated using upto-date Historical CAT Costs and executed equivalent share volume. Id. at 17097. 778 Id. at 17096. 779 Id. at 17097. 780 See CAT NMS Plan, supra note 2, at Section 11.1(b). 781 See proposed Section 11.3(b)(i)(A). Proposed Section 11.3(b)(i)(B) provides that the executed equivalent shares used to calculate the Historical CAT Assessment would be counted in the same manner as executed equivalent shares used to VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 Additionally, proposed Section 11.3(b)(i)(A) states that once the Operating Committee has approved a Historical Fee Rate, the Participants will be required to file with the Commission, pursuant to Section 19(b) of the Exchange Act,782 the Historical CAT Assessment to be charged to Industry Members using the Historical Fee Rate.783 Industry Members would be required to pay such Historical CAT Assessment using such Historical Fee Rate once such Historical CAT Assessment is in effect in accordance with Section 19(b) of the Exchange Act.784 Proposed Section 11.3(b)(i)(E) of the CAT NMS Plan provides that ‘‘[t]he Operating Committee shall reasonably determine the projected total executed equivalent share volume of all transactions in Eligible Securities for each Historical Recovery Period based on the executed equivalent share volume of all transactions in Eligible Securities for the prior twelve months.’’ 785 CAT LLC would allow the Operating Committee to base its projected total executed equivalent share volume on the prior twelve months, but to use its discretion to analyze the likely volume for the upcoming year.786 Participants would be required to describe the calculation of the projection in their fee filings submitted to the Commission, pursuant to Section 19(b) of the Exchange Act, to implement the Historical CAT Assessments on Industry Members.787 The calculation of the Historical Fee Rate by dividing Historical CAT Costs by the projected total executed equivalent share volume of all transactions in Eligible Securities for the Historical Recovery Period 788 is reasonable. First, it is appropriate for the Historical Fee Rate to be based on Historical CAT Costs. The Proposed Amendment defines Historical CAT Costs as Past CAT Costs minus the Past CAT Costs reasonably excluded from Historical CAT Costs by the Operating Committee 789 (e.g., the Excluded Costs).790 It is appropriate to use the Historical CAT Costs related to a calculate CAT Fees related to Prospective CAT Costs. 782 15 U.S.C. 78s(b). 783 See proposed Section 11.3(b)(i)(A). 784 Id.; see also 15 U.S.C. 78s(b); see infra Section III.A.6.e. (Historical CAT Assessment—Fee Filings under Section 19(b) of the Exchange Act for Industry Member CAT Fees) for a discussion of Section 19(b) filing requirements. 785 Proposed Section 11.3(b)(i)(E). 786 See Notice, supra note 7, 88 FR at 17097. 787 See proposed Section 11.3(b)(iii)(B)(II). 788 See proposed Section 11.3(b)(i)(A). 789 See proposed Section 11.3(b)(i)(C). 790 See Notice, supra note 7, 88 FR at 17111. PO 00000 Frm 00038 Fmt 4701 Sfmt 4703 Historical CAT Assessment to calculate the Historical Fee Rate used to calculate the Historical CAT Assessment because the Participants are seeking to recover the Historical CAT Costs through the Historical CAT Assessment.791 The use of Historical CAT Costs is appropriate to determine the Historical Fee Rate because it ties the Historical Fee Rate to the costs that the CAT has incurred and will be apportioned among the CAT Executing Brokers for recovery. Second, it is appropriate to use the projected total executed equivalent share volume of all transactions in Eligible Securities for the Historical Recovery Period to calculate the Historical Fee Rate because this would provide the likely volume for the Historical Recovery Period to be used as the denominator, similar to the manner in which the Fee Rate for Prospective CAT Fees would be calculated. This proposed projection of total executed equivalent share volume based on the prior twelve months is appropriate because it balances the use of data that is sufficiently long to avoid short term fluctuations while providing data close in time to the calculation of the Fee Rate or Historical Fee Rate.792 Additionally, it is appropriate for CAT LLC to permit the Operating Committee to use its discretion to analyze the likely volume for the upcoming year.793 This would allow the Operating Committee to use its judgment when estimating projected total executed equivalent share volume if the volume over the prior twelve months was unusual or otherwise unfit to serve as the basis of a future volume estimate. Furthermore, since the Participants would be required to describe the calculation of the projected total executed equivalent share volume in the fee filings submitted to the Commission, pursuant to Section 19(b) of the Exchange Act, to implement the Historical CAT Assessments on Industry Members, the public will have an opportunity to review the projection and provide comment.794 d. Length of Time Historical CAT Assessment Would Be in Effect Proposed Section 11.3(b)(i)(D)(II) of the CAT NMS Plan would describe the length of time that a Historical CAT Assessment would be in effect. This period of time may be longer or shorter than the Historical Recovery Period used to calculate the Historical Fee Rate for a Historical CAT Assessment. Each Historical CAT Assessment calculated 791 See proposed Section 11.3(b)(i)(C). Notice, supra note 7, 88 FR at 17116–17. 793 Id. at 17097. 794 See proposed Section 11.3(b)(iii)(B)(II). 792 See E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices using the Historical Fee Rate would remain in effect until all Historical CAT Costs for that Historical CAT Assessment are collected.795 CAT LLC stated that ‘‘[a]ny Historical CAT Assessment would remain in effect until the relevant Historical CAT Costs are collected, whether that time is shorter or longer than the Historical Recovery Period used in calculating the Historical Fee Rate.’’ 796 The length of time that the Historical CAT Assessment would be in effect would depend ‘‘on the amount of the Historical CAT Assessments collected based on the actual volume during the time that the Historical CAT Assessment is in effect.’’ 797 In the Commission’s view, it is reasonable for Industry Members to be charged a Historical CAT Assessment until all Historical CAT Costs for the Historical CAT Assessment are collected. The Commission understands that the amount of Historical CAT Costs collected will vary depending on how the actual volume compares to the estimated volume. To the extent the actual volume exceeds the estimated volume, a Historical CAT Assessment would be collected faster and thus would be in effect for a shorter period. Similarly, to the extent the actual volume is less than the estimated volume, the Historical CAT Assessment would be collected slower and thus would be in effect for a longer period. lotter on DSK11XQN23PROD with NOTICES2 e. Fee Filings Under Section 19(b) of the Exchange Act for Industry Member CAT Fees Once the Operating Committee has approved a Historical Fee Rate, the Participants shall be required to file with the Commission, pursuant to Section 19(b) of the Exchange Act,798 such Historical CAT Assessment to be charged Industry Members calculated using such Historical Fee Rate.799 CAT LLC proposes to provide additional details regarding the fee filings to be filed by the Participants regarding each Historical CAT Assessment pursuant to Section 19(b) of the Exchange Act in proposed Section 11.3(b)(iii)(B) of the CAT NMS Plan. Specifically, this provision would describe that fee filings would be required for each Historical CAT Assessment, the content of such fee filings, and the effect of the Financial Accountability Milestones described in Section 11.6 of the CAT NMS Plan on the fee filings.800 795 See proposed Section 11.3(b)(i)(D)(II). supra note 7, 88 FR at 17097. Proposed Section 11.3(b)(iii)(B)(I) of the CAT NMS Plan would state that ‘‘Participants will be required to file with the SEC pursuant to Section 19(b) of the Exchange Act a filing for each Historical CAT Assessment.’’ 801 CAT LLC proposes to provide additional detail about the information that Participants would be required to include in the filings for the Historical CAT Assessments in proposed Section 11.3(b)(iii)(B)(II). The proposed paragraph sets forth the information about the Historical CAT Assessments that should be included in the fee filings required to be made by the Participants pursuant to Section 19(b) of the Exchange Act.802 Specifically, such filings would be required to include: (A) the Historical Fee Rate; (B) a brief description of the amount and type of Historical CAT Costs, including (1) the technology line items of cloud hosting services, operating fees, CAIS operating fees, change request fees and capitalized developed technology costs, (2) legal, (3) consulting, (4) insurance, (5) professional and administration, and (6) public relations costs; (C) the Historical Recovery Period and the reasons for its length; and (D) the projected total executed equivalent share volume of all transactions in Eligible Securities for the Historical Recovery Period, and a description of the calculation of the projection.803 In addition, CAT LLC proposes to clarify that the Historical CAT Costs described in the fee filings must provide sufficient detail to demonstrate that such costs are reasonable and appropriate.804 Therefore, CAT LLC proposes to add the following sentence to proposed Section 11.3(b)(iii)(B)(II) of the CAT NMS Plan: ‘‘The information provided in this Section would be provided with sufficient detail to demonstrate that the Historical CAT Costs are reasonable and appropriate.’’ 805 Proposed Section 11.3(b)(iii)(B)(III) provides that the Participants will not make CAT fee filings pursuant to Section 19(b) of the Exchange Act 806 regarding a Historical CAT Assessment until any applicable Financial Accountability Milestone has been satisfied. This provision is appropriate as it takes into account existing requirements set forth in Section 11.6 of the CAT NMS Plan that prevent the Participants from recovering fees related 796 Notice, 801 Proposed 797 Id. 802 15 798 15 U.S.C. 78s(b). proposed Section 11.3(b)(i)(A). 800 See proposed Section 11.3(b)(iii)(B)(I), (II), (III). 799 See VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 Section 11.3(b)(iii)(B)(II). U.S.C. 78s(b). 803 See proposed Section 11.3(b)(iii)(B)(II). 804 Id. 805 Id. 806 15 U.S.C. 78s(b). PO 00000 Frm 00039 Fmt 4701 Sfmt 4703 62665 to any given Financial Accountability Milestone until that Financial Accountability Milestone has been achieved.807 The Commission emphasizes that the fee filings filed with the Commission, pursuant to Section 19(b) of the Exchange Act,808 to implement each Historical CAT Assessment on Industry Members will need to provide sufficient information to enable the Commission to make a determination on whether and when the Participants have satisfied each of the Financial Accountability Milestones—questions that the Commission is not deciding herein. This Order only approves the establishment of the framework by which the Participants will propose Historical CAT Assessments to be charged to Industry Members.809 In the Commission’s view, the proposed requirement for the Participants to file fee filings with the Commission, pursuant to Section 19(b) of the Exchange Act,810 to implement each Historical Fee Assessment on Industry Members is appropriate. The detail provided in the fee filings for the Historical CAT Assessment would provide transparency into the Past CAT Costs as it would describe the amount and type of Historical CAT Costs and allow the public the ability to comment on the Historical CAT Costs.811 The fee filings must contain sufficient detail to demonstrate that the fees are consistent with the Exchange Act, including that such costs are reasonable and 807 See, e.g., Section 11.6(a)(iv) (‘‘The Participants will only be permitted to collect Post-Amendment Industry Member Fees for Period 1, Period 2, Period 3, or Period 4 at the end of each respective Period.’’). Section 11.6 of the CAT NMS Plan is designed to reduce the amount of fees, costs, and expenses that the Participants may recover from Industry Members if the Participants miss the target deadlines established by that Section. To the extent that the Participants miss a target deadline established by Section 11.6, the Participants would be responsible for paying a larger amount of CATrelated fees, costs, and expenses on their own. The Commission expects that the portion of these fees, costs, and expenses that is attributable to for-profit national securities exchanges would likely be paid out of their existing profits, whereas the portion of these fees, costs, and expenses that is attributable to non-profit national securities associations like FINRA would likely be paid out of past revenue or new and/or existing fees. The Commission would evaluate any such new or existing fees in accordance with Section 6(b)(4) and Section 15A(b)(5) of the Exchange Act. 15 U.S.C. 78f(b)(4); 15 U.S.C. 78o–3(b)(5). 808 15 U.S.C. 78s(b). 809 The Commission does not believe it could determine whether the Historical CAT Costs associated with a Financial Accountability Milestone are ‘‘reasonable or appropriate’’ under Section 11.3(b)(iii)(B)(II) without such information. 810 15 U.S.C. 78s(b). 811 See proposed Section 11.3(b)(iii)(B)(II). E:\FR\FM\12SEN2.SGM 12SEN2 62666 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES2 appropriate,812 and provide the public with the detail needed to evaluate the Historical CAT Assessments for comment. The Proposed Amendment offers an appropriate level of transparency into the Past CAT Costs used for the Historical CAT Assessment so that the industry and the public will be able to understand and assess the Past CAT Costs and the Historical Fee Rate. The Proposed Amendment requires the Section 19(b) fee filings to be submitted to the Commission by the Participants to establish the Historical CAT Assessments for Industry Members to contain the following information: ‘‘(A) the Historical Fee Rate; (B) a brief description of the amount and type of Historical CAT Costs, including (1) the technology line items of cloud hosting services, operating fees, CAIS operating fees, change request fees and capitalized developed technology costs, (2) legal, (3) consulting, (4) insurance, (5) professional and administration, and (6) public relations costs; (C) the Historical Recovery Period and the reasons for its length; and (D) the projected total executed equivalent share volume of all transactions in Eligible Securities for the Historical Recovery Period, and a description of the calculation of the projection.’’ 813 CAT LLC explained that this information ‘‘would provide Industry Members and other interested parties with a clear understanding of the calculation of each Historical CAT Assessment and its relationship to Historical CAT Costs.’’ 814 In the Commission’s view, the detail provided in the fee filings for the Historical CAT Assessment would provide transparency into the Past CAT Costs as the filings would describe the amount and type of Historical CAT Costs and allow the public the ability to comment on the Historical CAT Costs.815 Additionally, pursuant to the Proposed Amendment being approved, the fee filings will also need to contain ‘‘sufficient detail to demonstrate that such costs are reasonable and appropriate,’’ 816 which would provide the public and the Commission the detail needed to evaluate the Historical CAT Assessments for consistency with the Exchange Act and the CAT NMS Plan. f. Past CAT Costs and Participants Proposed Section 11.3(b)(ii) of the CAT NMS Plan would clarify that the Participants would not be required to pay the Historical CAT Assessment as the Participants previously have paid all Past CAT Costs. It would state that, ‘‘[b]ecause Participants previously have paid Past CAT Costs via loans to the Company, Participants would not be required to pay any Historical CAT Assessment.’’ 817 In addition, proposed Section 11.3(b)(ii) of the CAT NMS Plan would state that the Historical CAT fees collected from Industry Members would be allocated to Participants for repayment of the outstanding loan notes of the Participants to the Company on a pro rata basis; such fees would not be allocated to Participants based on the executed equivalent share volume of transactions in Eligible Securities.818 Specifically, proposed Section 11.3(b)(ii) of the CAT NMS Plan would state that ‘‘[i]n lieu of a Historical CAT Assessment, the Participants’ one-third share of Historical CAT Costs and such other additional Past CAT Costs as reasonably determined by the Operating Committee will be paid by the cancellation of loans made to the Company on a pro rata basis based on the outstanding loan amounts due under the loans.’’ 819 Furthermore, proposed Section 11.3(b)(ii) of the CAT NMS Plan would emphasize that ‘‘[t]he Historical CAT Assessment is designed to recover two-thirds of the Historical CAT Costs.’’ 820 The proposed allocation of the Historical CAT Assessment solely to CEBSs and CEBBs, and ultimately Industry Members, is reasonable. The Historical CAT Assessment will still be divided into thirds.821 CAT LLC stated that the Participants’ one-third share of Historical CAT Costs and such other additional Past CAT Costs as reasonably determined by the Operating Committee ‘‘will be paid by the cancellation of loans made to the Company on a pro rata basis based on the outstanding loan amounts due under the loans’’ and that the Participants will also be 100% responsible for the Excluded Costs.822 CAT LLC explained that the terms of the loan agreements between CAT LLC and the Participants dictate that repayment of the notes will be on a pro rata basis.823 The pro rata basis for cancelling the loans is appropriate because repayment of the loans made by the Participants is required pro rata per the loan agreements between the 817 Proposed Section 11.3(b)(ii). Notice, supra note 7, 88 FR at 17112. 819 Proposed Section 11.3(b)(ii). 820 Id. 821 Id. 822 Notice, supra note 7, 88 FR at 17097, n.48. 823 Id. at 17112. 818 See 812 Id. 813 Proposed Section 11.3(b)(iii)(B)(II). supra note 7, 88 FR at 17098. 815 See proposed Section 11.3(b)(iii)(B)(II). 816 Id. 814 Notice, VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 PO 00000 Frm 00040 Fmt 4701 Sfmt 4703 Participants and CAT LLC.824 The CAT NMS Plan permits the Participants to seek recovery of CAT costs from Industry Members, which includes Past CAT Costs.825 However, similar to cancelling the loans, the Executed Share Model would require the Participants to pay CAT fees related to Prospective CAT Costs.826 7. Calculation Information; Billing and Collection of CAT Fees CAT LLC proposed to provide Participants and CAT Executing Brokers with details regarding the calculation of their CAT Fees upon request.827 Specifically, CAT LLC proposed to add Section 11.3(a)(iv)(A) to the CAT NMS Plan to provide that ‘‘[d]etails regarding the calculation of a Participant or CAT Executing Brokers’ CAT Fees will be provided upon request to such Participant or CAT Executing Broker.’’ 828 Similarly, for the Historical CAT Assessment, under proposed Section 11.3(b)(iv)(A), ‘‘at minimum, such details would include each CAT Executing Broker’s executed equivalent share volume and corresponding fee.’’ 829 In both cases, the new sections require that these details be separated by (1) Listed Options, NMS Stocks and OTC Equity Securities, (2) by transactions executed on each exchange and transactions executed otherwise than on an exchange, and (3) by buyside transactions and sell-side transactions.830 Additionally, for each CAT Fee and Historical CAT Assessment, at a minimum, CAT LLC will make publicly available the aggregate executed equivalent share volume and corresponding aggregate fee also by (1) Listed Options, NMS Stocks and OTC Equity Securities, (2) by transactions executed on each exchange and transactions executed otherwise than on an exchange, and (3) by buyside transactions and sell-side transactions.831 The Commission understands that the publicly available aggregate statistics will be made available by CAT LLC on a monthly basis with each invoice. CAT LLC stated that consistent with Section 11.1(d) of the CAT NMS Plan, it will adopt policies, procedures and practices regarding the billing and 824 Id. 825 See CAT NMS Plan, supra note 2, at Section 11.1(b), Section 11.3(b). 826 See proposed Section 11.3(a)(ii). 827 See Notice, supra note 7, 88 FR at 17086. 828 Proposed Section 11.3(a)(iv)(A). 829 Proposed Section 11.3(b)(iv)(A). 830 See proposed Section 11.3(a)(iv)(A); proposed Section 11.3(b)(iv)(A) 831 See proposed Section 11.3(a)(iv)(B); proposed Section 11.3(b)(iv)(B). E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices collection of fees Section 11.4 of the CAT NMS Plan.832 In addition, pursuant to Section 11.4 of the CAT NMS Plan, CAT LLC will establish a system for the collection of CAT fees from Participants and Industry Members.833 Under Section 11.4 of the CAT NMS Plan, the Participants must require each Industry Member to pay all applicable fees authorized under this Article XI within thirty (30) days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated). If an Industry Member fails to pay any such fee when due, such Industry Member shall pay interest on the outstanding balance from such due date until such fee is paid at a per annum rate equal to the lesser of: (a) the Prime Rate plus 300 basis points; or (b) the maximum rate permitted by applicable law.834 Similarly, as set forth in Section 3.7(b) of the CAT NMS Plan, each Participant must pay all fees or other amounts required to be paid under the Plan within thirty (30) days after receipt of an invoice or other notice indicating payment is due (unless a longer payment period is otherwise indicated) (‘‘Payment Date’’). The Participant shall pay interest on the outstanding balance from the Payment Date until such fee or amount is paid at a per annum rate equal to the lesser of: (i) the Prime Rate plus 300 basis points; or (ii) the maximum rate permitted by applicable law.835 The Commission did not receive any objections to nor any comments regarding the calculation of this interest rate. The proposed provision to Participants and CAT Executing Brokers with details regarding the calculation of their CAT Fees upon request is reasonable. In the Commission’s view, providing CAT Execution Brokers information regarding the calculation of their CAT Fees will aid in transparency and permit CAT Execution Brokers to confirm the accuracy of their invoices for CAT Fees. The publication of the aggregate executed equivalent share volume and aggregate fee is appropriate because it would allow Participants and CAT Executing Brokers a high-level validation of executed volume and fees. 832 See Notice, supra note 6, 88 FR at 17089. at 17101. 834 See CAT NMS Plan, supra note 2, at Section 11.4. 835 Id. at Section 3.7(b). If any such remaining outstanding balance is not paid within thirty (30) days after the Payment Date, the Participants shall file an amendment to this Agreement requesting the termination of the participation in the Company of such Participant, and its right to any Company Interest, with the Commission. lotter on DSK11XQN23PROD with NOTICES2 833 Id. VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 8. Additional Changes From Original Funding Model CAT LLC proposed to delete the term ‘‘Execution Venue’’ and its definition from Section 1.1 of the CAT NMS Plan, explaining that this term is not relevant in the Executed Share Model.836 Section 1.1 of the existing CAT NMS Plan defined ‘‘Execution Venue’’ to mean ‘‘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).’’ The Original Funding Model would have imposed fees based on market share to CAT Reporters that are Execution Venues, including ATSs, and fees based on message traffic for Industry Members’ non-ATS activities.837 In contrast, the Executed Share Model does not use the term ‘‘Execution Venue,’’ as the Executed Share Model imposes fees based on the executed equivalent shares of transactions in Eligible Securities for three categories of CAT Reporters: Participants, CEBBs and CEBSs.838 CAT LLC also proposed to amend Section 11.2(c) and Section 11.3(a) and (b) of the CAT NMS Plan to require Participants and CAT Executing Brokers to pay CAT fees based on the number of executed equivalent shares in a transaction in Eligible Securities instead of based on market share and message traffic.839 First, CAT LLC proposed to delete subparagraphs (i) and (ii) of Section 11.2(c) and replace these subparagraphs with the requirement that the fee structure in which the fees charged to ‘‘Participants and Industry Members are based upon the executed equivalent share volume of transactions in Eligible Securities.’’ 840 The deleted provisions would have required the Operating Committee, in establishing the funding of the Company, to seek to establish a tiered fee structure in which the fees charged to: (i) CAT Reporters that are Execution Venues, including ATSs, are based upon the level of market share and (ii) Industry Members’ non-ATS activities are based upon message traffic. Second, CAT LLC proposed to amend Sections 11.3(a) and 11.3(b) of the CAT NMS Plan to remove detail regarding fixed fees and fee tiers for market share and message traffic by Participants and Notice, supra note 7, 88 FR at 17099. CAT NMS Plan, supra note 2, at Section 11.3(a)(i) and (ii); Section 11.3(b). 838 See proposed Section 11.3(a)(ii) and (iii); proposed Section 11.3(b)(iii). 839 See Notice, supra note 7, 88 FR at 17099. 840 Proposed Section 11.2(c). 62667 Execution Venue ATSs under the Original Funding Model.841 Section 11.3(a) currently describes the fixed CAT fees to be paid by Participants and Execution Venue ATSs based on market share and Section 11.3(b) currently describes the fixed CAT fees to be paid by Industry Members (other than Execution Venue ATSs) based on message traffic.842 The text in these sections would be replaced with proposed Sections 11.3(a) and (b), which, as discussed above, would describe the calculation and application of the CAT Fees related to Prospective CAT Costs and the Historical CAT Assessments. These proposed changes to Sections 11.3(a) and (b) would also replace references to ‘‘fixed fees’’ with ‘‘fees’’ instead. CAT LLC explained that the concept of fixed fees is not relevant in the Executed Share Model.843 CAT LLC also proposed to amend Sections 11.1(d), 11.2(c), 11.3(a) and 11.3(b) of the CAT NMS Plan to eliminate tiered fees and related concepts because the Executed Share Model does not utilize tiering.844 First, CAT LLC proposed to remove a reference to the ‘‘assignment of tiers’’ from Section 11.1(d). CAT LLC also proposed to remove two sentences from Section 11.1(d) permitting the Operating Committee to change the tier assigned to any Person. Second, CAT LLC proposed to amend Section 11.2(c) to delete a reference to a tiered fee structure (specifically, deleting the word ‘‘tiered’’) so that CAT fees would not be tiered under the Executed Share Model. Third, CAT LLC proposed to delete subparagraph (iii) of Section 11.2(c), which required the Operating Committee, in establishing the funding of the Company, to seek to establish a fee structure in which the fees charged to CAT Reporters with the most CATrelated 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 affiliates between or among CAT Reporters, whether Execution Venues and/or Industry Members).845 CAT LLC explained that this comparability provision was a factor used to determine the tiers for Industry Members and Execution Venues under the Original Funding Model, but that it is no longer necessary since the proposed Executed Share 836 See 837 See PO 00000 Frm 00041 Fmt 4701 Sfmt 4703 841 See Notice, supra note 7, 88 FR at 17100–01. CAT NMS Plan, supra note 2, at Section 11.3(a) and (b). 843 See Notice, supra note 7, 88 FR at 17101. 844 Id. at 17100–01. 845 Id. at 17100. 842 See E:\FR\FM\12SEN2.SGM 12SEN2 lotter on DSK11XQN23PROD with NOTICES2 62668 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices Model would not use a tiered fee structure.846 Finally, as discussed above, CAT LLC proposed to amend Sections 11.3(a) and (b) to replace the language with proposed Sections 11.3(a) and (b), which would describe the calculation and application of the CAT Fees related to Prospective CAT Costs and the Historical CAT Assessments. CAT LLC states that such proposed changes would remove the references to tiers in Sections 11.3(a)(i) and (ii) and 11.3(b).847 In addition, CAT LLC proposed to amend the CAT funding principles to clarify that CAT Fees and the Historical CAT Assessments are intended to be cost-based fees.848 Specifically, CAT LLC proposed to amend the funding principle set forth in Section 11.2(c) by making a specific reference to ‘‘the costs of the CAT.’’ Proposed Section 11.2(c) would state, ‘‘[i]n establishing the funding of the Company, the Operating Committee shall seek . . . to establish a fee structure in which the fees charged to Participants and Industry Members are based upon the executed equivalent share volume of transactions in Eligible Securities, and the costs of the CAT (emphasis added).’’ 849 In the Commission’s view, the proposed deletion of the term ‘‘Execution Venue’’ from the CAT NMS Plan is reasonable because the term is no longer relevant to the CAT NMS Plan. The proposed Executed Share Model does not impose fees on Execution Venues and would instead impose fees on Participants and CAT Executing Brokers (and, ultimately, Industry Members) and therefore it is appropriate to delete the term. Additionally, it is reasonable to amend Section 11.2(c) and Section 11.3(a) and (b) of the CAT NMS Plan to reflect the proposed use of the number of executed equivalent shares in transactions in Eligible Securities in calculating CAT fees. These changes are appropriate because, unlike the Original Funding Model, the proposed Executed Share Model would not use message traffic, or a tiered fee structure. Further, the proposed elimination of tiered fees and related concepts from the CAT NMS Plan and the proposed replacement of ‘‘fixed fees’’ with references to ‘‘fees’’ in the CAT NMS Plan are reasonable. The Original Funding Model would use a tiered fee structure of fixed fees; however, the proposed Executed Share Model would require each Participant and CAT 846 Id. 847 Id. at 17100–01. at 17099. 849 Proposed Section 11.2(c). 848 Id. VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 Executing Broker to pay a CAT fee based on its transactions in Eligible Securities.850 CAT LLC explained that ‘‘[t]he proposed non-tiering approach is simpler and more objective to administer than the tiering approach’’ 851 and that removing tiers ‘‘eliminates a variety of subjective analyses and judgments from the model and simplifies the determination of CAT fees.’’ 852 Additionally, the Proposed Amendment would replace the concept of ‘‘fixed fees’’ with ‘‘fees’’ because CAT fees will vary in accordance with the number of executed equivalent shares in a transaction.853 The proposed elimination of tiered fees and related concepts from the CAT NMS Plan and the proposed replacement of ‘‘fixed fees’’ with references to ‘‘fees’’ in the CAT NMS Plan are reasonable because these changes conform the CAT NMS Plan funding model to the proposed Executed Share Model. Additionally, the Proposed Amendment would amend Section 11.2(c) to make clear that the fee structure established by the Operating Committee to charge fees to Participants and Industry Members would also be based on the costs of the CAT.854 CAT LLC explained that the change clarifies that the CAT fees are cost-based fees designed to recover the cost of the creation, implementation and operation of the CAT.855 These proposed changes are appropriate because they would update language in the Original Funding Model to reflect the operation of the proposed Executed Share Model. 9. Other Comments a. Lack of Industry Input A number of commenters stated that the Proposed Amendment lacks input from the industry.856 One commenter 850 See proposed Section 11.3(a)(ii)(A), (a)(iii)(A), (b)(iii)(A). 851 Notice, supra note 7, 88 FR at 17100. 852 Id. 853 Id. at 17101. 854 See proposed Section 11.2(c) (‘‘. . . fees charged to Participants and Industry Members are based upon the executed equivalent share volume of transactions in Eligible Securities, and the costs of the CAT.’’ (emphasis added)). 855 See Notice, supra note 7, 88 FR at 17099. 856 See DASH April 2023 Letter at 2; DASH January 2023 Letter at 3; SIFMA June 2023 Letter at 4; SIFMA May 2023 Letter at 2; SIFMA June 2022 Letter at 2; SIFMA January 2023 Letter at 2; Citadel July Letter at 9–10. See also FINRA June 2022 Letter at 8, 9 (advocating for a more inclusive development process that would include input from the industry); MMI July Letter at 2, 4; Virtu Letter at 6 (stating that they would like to have a meaningful dialogue with the Participants and that the best way forward is for the interested parties to meet and devise an equitable solution); FIA Letter at 4 (stating that they have ‘‘raised concerns over the lack of industry participation in the development, operation and cost allocation PO 00000 Frm 00042 Fmt 4701 Sfmt 4703 stated that the Participants did not meaningfully solicit input from the industry when developing the Executed Share Model.857 Another commenter stated that the Proposed Amendment reflects a lack of representation by executing brokers and offered its participation in future discussions and advisory committees on the topic of CAT funding.858 One commenter stated that ‘‘[t]he impact of CAT on the brokerage community must be taken seriously by the SRO committee, and brokers need their voice heard on the committee’s recommendations. To date, we have seen little evidence of either.’’ 859 This commenter also suggested the allocation of human resources to hire industry experts in industry workflows and public-private engagement to assist with building the CAT.860 In response, CAT LLC stated that it has engaged with the industry on the funding model over the past seven years, explaining that it has discussed funding model issues with the CAT Advisory Committee, which includes representation from the industry, as well as with industry associations such as SIFMA and the Financial Information Forum, and with individual Industry Members; analyzed and responded to comment letters on the prior proposals; and hosted webinars for the industry on funding issues.861 CAT LLC stated that it welcomes industry input on the funding model but believes a decision on the model is overdue.862 In response, one commenter stated that Industry Members are willing to work with the Commission and the Participants to develop a CAT funding model.863 The commenter urged collaboration and dialogue between the Participants and the Industry Members before the filing of a formal proposal with the Commission.864 The commenter also stated that limiting industry input to the notice and comment process for NMS plan amendments is an inefficient process processes of the CAT’’ and they ‘‘believe that at a minimum, the CAT Operating Committee should be reconfigured, with Industry Members comprising the percentage of the Committee equivalent to whatever cost allocation percentage is eventually allocated to them.’’). 857 See SIFMA May 2023 Letter at 2. See also SIFMA June 2023 Letter at 4, 5; SIFMA June 2022 Letter at 2; SIFMA January 2023 Letter at 2. 858 See DASH April 2023 Letter at 2; DASH January 2023 Letter at 3. 859 MMI July Letter at 4. 860 Id. 861 See CAT LLC May 2023 Response Letter at 12. 862 Id. 863 See SIFMA June 2023 Letter at 4. 864 Id. E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices resulting in significant delays.865 Another commenter stated that the Operating Committee refuses to engage the industry in constructive dialogue, instead choosing to file funding proposals that are inconsistent with the Exchange Act.866 The commenter also stated that the CAT Advisory Committee has been completely ignored by the Operating Committee and that its recommendations are non-binding.867 CAT LLC further responded to two commenters that stated that CAT LLC refused to collaborate with the industry in the development of the Proposed Amendment.868 CAT LLC stated that it has engaged with the industry over the last seven years, discussing funding model issues with the CAT Advisory Committee, holding industry-wide webinars on funding issues, and meeting with industry associations and individual Industry Members to discuss funding model issues.869 CAT LLC stated that it has ‘‘repeatedly sought the views of SIFMA and other industry participants on specific aspects of the model.’’ 870 CAT LLC listed ideas suggested by the industry that it adopted in revised versions of the funding model 871 and stated ‘‘the current model results from years of modifications that have been made in significant part in response to industry comments to earlier versions.’’ 872 The Commission understands that Industry Members and other market participants have been able to provide input into CAT funding through meetings with CAT LLC, participation in webinars held by CAT LLC on CAT costs and potential alternative funding models,873 and through the provision of comments on the current and prior proposed funding models.874 The Commission encourages frequent and constructive collaboration between the industry and CAT LLC. b. Implementation One commenter suggested that upon approval of any CAT funding model, 865 Id. at 4–5. Citadel July Letter at 9–10. 867 Id. at 6. 868 See MMI July Letter at 2; SIFMA June 2023 Letter at 4. 869 See CAT LLC July 2023 Response Letter at 26– 27. 870 Id. at 28. 871 Id. at 27–28. 872 Id. at 28. 873 See CAT Industry Webinar: CAT Costs (Sept. 21, 2021), available at https://catnmsplan.com/ sites/default/files/2021-09/09.21.21-CAT-Costs_ 0.pdf; CAT Industry Webinar: Fee Models (Sept. 22, 2021), available at https://catnmsplan.com/sites/ default/files/2021-09/09.22.21-CAT-Fee-Model.pdf. 874 See, e.g., supra note 58; see also https:// www.sec.gov/comments/4-698/4-698-a.htm. lotter on DSK11XQN23PROD with NOTICES2 866 See VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 Industry Members should be given at least a year ‘‘to implement any necessary changes to systems and processes for them to be able to capture their portion of CAT costs.’’ 875 CAT LLC responded that it was unlikely to take Industry Members a year to implement any needed changes, particularly given the relatively small fees likely to be incurred by most small Industry Members that would not require extensive new processes to pay.876 The Commission acknowledges this comment but highlights, as did CAT LLC,877 that the Participants have entirely funded the CAT to date; in the Commission’s view, it is imperative that CAT funding be established in a timely manner after approval of the Executed Share Model. c. Rule 613 and the CAT NMS Plan Certain commenters stated that the CAT as it is structured today is not what was contemplated by Rule 613 of Regulation NMS.878 One commenter recommended that the Commission come up with a new structure for the CAT.879 The commenter stated that Rule 613 and the 2016 CAT NMS Plan do not support CAT as it is currently structured 880 and provided examples where it believes that subsequent changes to the CAT requested by the Commission have caused the CAT to become inconsistent with the requirements of Rule 613 and the 2016 CAT NMS Plan.881 According to the commenter: (1) Rule 613 requires the reporting of certain events and that the events must be linked to their originating order, but the Commission has required the reporting of events that are not CAT-reportable and are not linked to particular orders (for example, Rule 613 requires the reporting of the cancellation of an order, but the Commission has also required the reporting of messages acknowledging the receipt of a cancellation request); 882 (2) the Commission expanded the CAT to include OTC equities and requestsfor-quotes; 883 (3) the CAT NMS Plan contemplates that data will be available to the Commission on a T+5 basis, but the Commission and staff have insisted that certain data be available to the Commission for use before T+5; 884 (4) Rule 613 requires the reporting of every material term of an order, but the Commission has also required the reporting of the port-level settings applicable to all orders sent to a port on an exchange.885 The commenter stated that these changes to CAT resulted from discussions between the Commission and the Participants, that such changes ‘‘significantly increased CAT costs,’’ and that Industry Members with ‘‘no voice and little transparency’’ into the building of the CAT system would be allocated most of the increased CAT costs.886 The commenter stated that the Commission approval of a funding proposal for a system that is not consistent with Rule 613 and the CAT NMS Plan would be arbitrary and capricious action.887 Another commenter stated that some of the drivers of CAT costs are the addition of various new system features and reporting requirements that were established as the result of discussion between Commission staff and the CAT Operating Committee.888 The commenter stated that some of these requirements have been driven by ‘‘informal reinterpretations’’ of the Plan and have resulted in material changes to the CAT without proper weighing of costs and benefits associated with such changes.889 The commenter further stated that the Participants should confirm that the existing CAT system meets the requirements of the Plan, before the funding proposal is finalized.890 One commenter believes that the Commission should require an amendment to the CAT NMS Plan for new reporting requirements or enhancements for which costs and benefits were never considered by Commission in the economic analysis for the approval of the CAT NMS Plan.891 This commenter believes that the Commission is imposing CAT processing requirements that are not required by Rule 613 and the CAT NMS Plan.892 The commenter further believes these ‘‘changes’’ should be subject to greater review by the Industry Members and the public at large, and therefore 884 See SIFMA June 2023 Letter at 6. See also Citadel July Letter at 32–33. 886 See SIFMA June 2023 Letter at 7. 887 Id. 888 See FIA Letter at 5. 889 Id. 890 Id. 891 See FIF and SIFMA Letter at 4, 5. 892 Id. at 9–12 (discussing various ‘‘processing changes’’ the commenter believes the Commission intends to impose, as well as summarizing the objections made by the Participants to these ‘‘changes’’). 885 Id. 875 SIFMA 876 See May 2023 Letter at 2. CAT LLC May 2023 Response Letter at 12. 877 Id. 878 See SIFMA June 2023 Letter at 2, 6–7; Citadel July Letter at 5; FIA Letter at 5; FIF and SIFMA Letter at 4, 5, 8–23. 879 See SIFMA Letter June 2023 at 6. 880 Id. at 6–7. 881 Id. at 6. 882 Id. at 6–7. 883 Id. at 7. PO 00000 Frm 00043 Fmt 4701 Sfmt 4703 62669 E:\FR\FM\12SEN2.SGM 12SEN2 62670 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES2 should be filed as amendments to the CAT NMS Plan, thereby requiring a cost-benefit analysis to be conducted by the Commission and public disclosure.893 The commenter stated that the Commission has mandated additional reporting requirements for CAT that the commenter does not believe to be within the scope of Rule 613 and the CAT NMS Plan, and that these additional reporting requirements should be subject to an appropriate costbenefit analysis.894 The commenter stated their concern that these reporting requirements would be very costly to implement and questioned whether the surveillance value of these additional reporting requirements justified the additional costs that will be imposed on market participants (and potentially passed through to customers).895 The commenter further stated that, to the extent that these additional reporting requirements are found to be within the scope of Rule 613 and the CAT NMS Plan, the Commission should grant exemptive relief with respect to these requirements because of the additional costs.896 The commenter also stated that if the Commission does not grant exemptive relief, then the Commission should require an amendment to the CAT NMS Plan, that sets forth the costs and benefits, for each of these additional reporting requirements because the commenter believes that these reporting requirements were not considered as part of the cost estimates in the CAT NMS Plan.897 Another commenter stated that changes and cost overruns have changed the structure of the CAT from what was contemplated by Rule 613.898 The 893 Id. at 10–11. This commenter also stated that there were several ‘‘processing requirements’’ that could reduce CAT operating costs and that the Commission should direct the Participants to analyze these ‘‘processing requirements’’ and make that analysis available to the public for discussion. Id. at 12–13. 894 See FIF and SIFMA Letter at 13–23 (discussing various reporting requirements that the commenter does not consider to be within the scope of Rule 613 and the CAT NMS Plan or believes that exemptive relief should be granted because of the costs for implementing these requirements, including: requiring CAT reporting of verbal (unstructured) activity; requiring CAT reporting of non-executable RFQ responses; requiring CAT reporting of request messages; requiring that an order recipient report rejections to CAT; requiring an order sender to report venue (order recipient) port settings; requiring CAT reporting of linkage of representative to customer orders and linkage of order fulfillments to representative and principal orders; various requirements with respect to CAIS reporting; and other CAT reporting requirements relating to quoting activity on the OTC Link ATS operated by OTC Markets). 895 Id. at 14. 896 Id. 897 Id. 898 See Citadel July Letter at 7. VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 commenter believes that the Operating Committee and the Commission have engaged in ad-hoc discussions to interpret what the Plan requires ‘‘without adequate notice to Industry Members or due consideration of the costs and benefits associated with such interpretations.’’ 899 The commenter stated that the Commission has not regularly assessed whether costs resulting from a specific interpretation of Rule 613 and the CAT NMS Plan outweigh benefits.900 The commenter requested that the Commission revisit its assumptions from the CAT NMS Plan Approval Order 901 due to inaccurate cost estimates, a failure to retire duplicative systems, impracticality of technology requirements, a lack of effective governance, and a lack of processes to consider requests to add more data.902 The commenter also stated that the Commission must update the economic analysis from the CAT NMS Plan Approval Order 903 to revise its estimates of costs to build and operate CAT using actual costs incurred,904 to project average annual increases in the CAT operating budget,905 and to update its analysis of CAT-related costs to be borne by Industry Members.906 The commenter stated that the 2016 CAT NMS Plan lacked a funding model, so the Commission did not consider the implications of allocating costs to Industry Members to build and operate the CAT.907 The commenter stated that the Proposed Amendment would allocate at least 78% and up to 100% of costs to Industry Members and a small group of Industry Members will pay the majority of these costs (and potentially both historical and ongoing costs simultaneously).908 The commenter stated that the proposed allocation would have ‘‘dramatic effects’’ on market efficiency, competition and capital formation,909 stating that ‘‘[t]he allocation methodology will have a direct and negative impact on market efficiency, competition, and capital 899 Id. at 6. 900 Id. 901 See supra note 2. Citadel July Letter at 5; see also FIF and SIFMA Letter at 24–26. 903 See CAT NMS Plan Approval Order, supra note 2. 904 See Citadel July Letter at 12. The commenter stated that 2016 figures underestimated such implementation costs for larger broker-dealers by assuming cost savings would be realized through retirement of other reporting systems which haven’t been retired yet. Id. at 12–13. 905 Id. at 13. 906 Id. at 12. 907 Id. 908 See Citadel July Letter at 12; id. at 12, n.57. 909 Id. at 12. 902 See PO 00000 Frm 00044 Fmt 4701 Sfmt 4703 formation, and the Commission must comprehensively assess those impacts before approving this filing.’’ 910 Additionally, the commenter stated that Rule 613 requires the Participants to provide an estimate of the costs associated with creating, implementing and maintaining the CAT, the costs, benefits and rationale for the choices made in developing the CAT NMS Plan, and their own analysis of the plan’s impact on competition, efficiency and capital formation.911 The commenter requested the Commission to require the members of the Operating Committee to update the analysis required by Rule 613 in light of a ‘‘massive increase’’ in costs since 2016.912 Another commenter similarly suggested that additional oversight and public review of the actual costs and purpose of the CAT is called for, and also requested additional transparency on the status of legacy reporting systems, since their retirement could offset some of the CAT fees.913 In response to one commenter that stated that Rule 613 and the CAT NMS Plan no longer reflect the operation of the CAT,914 CAT LLC stated that the CAT was implemented in accordance with Rule 613 and the CAT NMS Plan and that the CAT NMS Plan permits the recovery of costs incurred in the creation, implementation and maintenance of the CAT.915 CAT LLC also responded to comments that raised concerns about the Commission’s interpretations of CAT NMS Plan requirements that were not related to the funding model and the costs and benefits of those interpretations.916 CAT LLC stated that the Proposed Amendment is not the appropriate forum to resolve interpretive questions.917 CAT LLC also stated that, for proposed changes to the CAT NMS Plan, the Participants are following the process in Rule 608 for plan amendments and noted that material changes to the CAT system would require an amendment to the CAT NMS Plan,918 but not a material change to a technology contract as the CAT NMS Plan permits the Operating 910 Id. at 15. at 14–15; see also FIF and SIFMA Letter at 24–25. 912 See Citadel July Letter at 15. 913 See MMI July Letter at 6. This commenter did not specifically request that the Operating Committee update the Rule 613 analysis. 914 See SIFMA June 2023 Letter at 7. 915 See CAT LLC July 2023 Response Letter at 28. 916 See Citadel July Letter at 32–34; FIA Letter at 3, 4; MMI July Letter at 4. 917 See CAT LLC July 2023 Response Letter at 29. 918 Id. 911 Id. E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES2 Committee to enter into, modify or terminate a material contract.919 The CAT NMS Plan is consistent with Rule 613 and we do not believe that any changes have been made that are inconsistent with the Plan as approved in 2016, as amended in 2020.920 The examples provided by commenters of changes to the CAT requested by the Commission,921 in the Commission’s view, were included in the CAT NMS Plan approved by the Commission in 2016.922 Rule 608 and Rule 613 of Regulation NMS provide advance notice of material changes to the CAT system and related costs by requiring changes to the CAT NMS Plan to be filed with the Commission as an NMS plan amendment pursuant to Rule 608 of Regulation NMS and thereby be subject to notice and comment, and require that the Commission consider, in determining to approve the amendment, the impact of the amendment on efficiency, competition and capital formation.923 Section 6.9 of the CAT NMS Plan does not provide unfettered discretion to the CAT Operating Committee to make Material Amendments to the CAT system. If the CAT Operating Committee or the Commission wish to impose additional requirements to the CAT NMS Plan, such requirements must be proposed through an amendment to the CAT NMS Plan, filed under Rule 608 of Regulation NMS. Such amendments must be published for notice and comment.924 Additionally, Rule 613(a)(5) of Regulation NMS 925 requires the Commission to consider, in determining whether to approve an amendment to the CAT NMS Plan, the impact of the 919 Id. at 30 (citing to Section 4.3 of the CAT NMS Plan). 920 See Securities Exchange Act Release No. 89387 (July 24, 2020), 85 FR 45941 (July 30, 2020); Financial Accountability Amendments, supra note 18. 921 See SIFMA June 2023 Letter at 6, 7, supra notes 881–885 and accompanying text; Citadel July Letter at 33–35; FIF and SIFMA Letter at 8–23. The issues raised by those commenters are either being adjudicated in a separate forum or addressed through a request for exemptive relief. See Petition for Review, USCA Case No. 22–1234; Request for Exemption from Certain Provisions of the CAT NMS Plan Related to Reporting of Certain Verbal Activity, Floor and Upstairs Activity, available at https://catnmsplan.com/sites/default/files/2023-03/ 03.31.23-CAT-Exemption-Request-Verbal-Floorand-Upstairs-Activity.pdf. 22–1234; Request for Exemption from Certain Provisions of the CAT NMS Plan Related to Reporting of Certain Verbal Activity, Floor and Upstairs Activity, available at https://catnmsplan.com/sites/default/files/2023-03/ 03.31.23-CAT-Exemption-Request-Verbal-Floorand-Upstairs-Activity.pdf. 922 See Securities Exchange Act Release No. 95234 (July 8, 2022), 87 FR 42247 (July 14, 2022). 923 Rule 613(a)(5). 17 CFR 242.613(a)(5). 924 See Rule 608(a)(1). 17 CFR 242.608(a)(1). 925 17 CFR 242.613(a)(5). VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 amendment on efficiency, competition and capital formation; therefore, this Order contains an analysis of the Proposed Amendment’s impact on efficiency, competition, and capital formation. d. Funding in the Appropriation Process Certain commenters believe that funding for the CAT should be accomplished through Congressional appropriations.926 These commenters characterized the CAT as a Commission tool for law enforcement.927 One commenter stated that the Proposed Amendment would ‘‘evade’’ 928 the separation of powers established by the Constitution, arguing that since the CAT is a ‘‘Commission system used for enforcement’’ 929 and that law enforcement ‘‘is an executive prerogative,’’ 930 Congress must approve public funds to build the CAT through the appropriations process.931 The commenter stated ‘‘[t]he Constitution does not permit the Commission to fund its own enforcement apparatus through the backdoor—to require the SROs to raise and spend hundreds of millions of dollars to build a new law enforcement tool for the Commission.’’ 932 The commenter also stated that the assessment of ‘‘retroactive liability for monies spent that private parties had no control over’’ for public purposes would violate the Fifth Amendment Takings Clause.933 Another commenter stated that the Proposed Amendment is unconstitutional because it would require Industry Members to provide the Operating Committee with a blank check to fund 100% of costs in perpetuity for a law enforcement tool designed for the Commission that has not been authorized by Congress.934 The commenter also stated that requiring the Participants to build ‘‘a multi-billion 926 See SIFMA June 2023 Letter at 8; Citadel July Letter at 28–29; FIA Letter at 3; MMI July Letter at 2–4. See also MMI July Letter at 1–2. This commenter suggested evaluating whether the CAT is truly an NMS plan, or if it is better viewed as a Commission system whose budget should be subject to Congressional approval and oversight. In response, CAT LLC stated that this comment is outside the scope of the Proposed Amendment. See CAT LLC July 2023 Response Letter at 31, n.144. 927 See SIFMA June 2023 Letter at 8; FIA Letter at 3; Citadel July Letter at 28, 29. See also MMI July Letter at 2–4 (categorizing the CAT as a Commission system, required by and dictated by the Commission that should be funded in the same way as other Commission functions). 928 See SIFMA June 2023 Letter at 8. 929 Id. See also FIA Letter at 3. 930 See SIFMA June 2023 Letter at 8. 931 Id. 932 Id. See also Citadel July Letter at 28, 29. 933 See SIFMA June 2023 Letter at 8. 934 See Citadel July Letter at 29. PO 00000 Frm 00045 Fmt 4701 Sfmt 4703 62671 dollar enforcement tool’’ is beyond the scope of Section 11A’s authorization to the Commission to require SROs to act jointly or facilitate the development of a national market system.935 Another commenter stated that the Commission has directed the development of CAT to supplement the government’s surveillance program while the Funding Proposal effectively places all or most of the costs of the CAT on the Industry Members, who have no voice in its control or development.936 The commenter states that these costs are essentially a tax on the industry from an agency and should require Congressional oversight.937 Additionally, one commenter suggested the treatment of the CAT budget in terms of accounting and transparency as a Commission system, and a cap on the budget for CAT which, if exceeded, would trigger Congressional budget oversight.938 In response to recent comments expressing concern that the Industry Member allocation would raise constitutional issues,939 CAT LLC stated that the first commenter to raise this issue had never once before challenged the constitutionality of Rule 613 or the CAT NMS Plan.940 CAT LLC stated ‘‘SIFMA’s strategic decision to inundate the Commission with these arguments— which directly contradict its prior statements that industry contributions are ‘justifiable under the Exchange Act’—just two days before a scheduled SEC Open Meeting to consider the Funding Proposal suggests their ultimate strategy is to delay the Commission’s review and approval of any funding model that would require the industry to contribute to the funding of the CAT.’’ 941 CAT LLC urged the Commission to not let the commenter further delay a decision on the Proposed Amendment by filing comments that it could have submitted years before.942 CAT LLC also noted that, despite the commenter’s argument that requiring Industry Members to contribute to CAT costs was a constitutional takings problem, the commenter had suggested a funding model for the CAT based on a 50%-50% allocation of costs divided among Participants and Industry 935 Id. at 28. FIA Letter at 3. 936 See 937 Id. 938 See MMI July Letter at 2, 4. SIFMA June 2023 Letter at 7–9; Citadel July Letter at 28–29; FIA Letter at 3; Virtu Letter at 2. 940 See CAT LLC July 2023 Response Letter at 31. 941 Id. at 32. 942 Id. at 33. 939 See E:\FR\FM\12SEN2.SGM 12SEN2 62672 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES2 Members.943 CAT LLC stated that regardless of how this issue is resolved, the Participants should be able to recover their investment in CAT because Rule 613 and the CAT NMS Plan contemplate Industry Member contributions to CAT funding.944 In characterizing CAT as solely a ‘‘Commission tool used for enforcement,’’ these comments misunderstand its purposes.945 CAT serves multiple regulatory purposes for both SROs and the Commission. SROs have long had audit trail systems and the SROs themselves, as well as the Commission, have long used the market data from those systems to oversee the securities markets and fulfill their responsibilities under federal securities laws.946 In directing the SROs to file an NMS plan establishing the CAT, the Commission sought to address shortcomings in those existing systems and create an audit trail system that would provide both the SROs and the Commission with timely access to a comprehensive set of trading data sufficient to oversee modern markets. And in approving the CAT NMS Plan, the Commission determined that the Plan would substantially improve the ability of both the SROs and the Commission to perform these regulatory activities to the benefit of investors and markets.947 In this respect, the CAT’s regulatory and enforcement utility to the SROs as well as the Commission is similar to many of the SROs’ other self-regulatory functions that are funded in part by Industry Members. And this dual purpose is consistent with the long history of SRO and Commission oversight of the securities markets. Selfregulation in the securities industry predates the securities laws and, in enacting the Exchange Act in 1934, Congress formalized this structure, purposefully determining to rely on selfregulation as a fundamental component of U.S. market and broker-dealer regulation.948 Among other things, Congress determined that effectively 943 Id. at 31. See also SIFMA May 2023 Letter at 2; supra note 101 and accompanying text. 944 See CAT LLC July 2023 Response Letter at 33. 945 See SIFMA June 2023 Letter at 8; FIA Letter at 3; Citadel July Letter at 28, 29. See also MMI July Letter at 2–4 (categorizing the CAT as a Commission system, required by and dictated by the Commission that should be funded in the same way as other Commission functions). 946 See Securities Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722 (Aug. 1, 2012) (‘‘CAT Adopting Release’’) at 45727. 947 See CAT NMS Plan Approval Order, supra note 2, 81 FR at 84727, 84800. 948 See Securities Exchange Act Release No. 50700 (Nov. 18, 2004), 69 FR 71255 (Dec. 8, 2004) (‘‘Concept Release Concerning Self-Regulation’’). VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 regulating the inner-workings of the securities industry at the federal level was cost prohibitive and inefficient.949 And industry participants preferred the less invasive regulation by their peers to direct government regulation.950 Congress and the Commission have repeatedly reaffirmed that decision in the years since.951 And Courts have repeatedly affirmed the constitutionality of this system of self-regulation.952 As contemplated by Congress, the SROs have also long funded their frontline responsibility to supervise their members’ compliance with their own rules and the federal securities laws, subject to Commission oversight, through fees on those members.953 The participation of Industry Members in the funding of CAT is no different. The assertion by commenters that the funding of the CAT violates the Appropriations Clause or other constitutional limitations thus lacks merit. The funding of an initiative, such as CAT, that has utility to both the SROs and the Commission does not implicate the Appropriations Clause in the manner that has been questioned in courts.954 As the Supreme Court has 949 Id., citing S. Rep. No. 1455, 73d Cong., 2d Sess. (1934); H.R. Doc. No. 1383, 73d Cong., 2d Sess. (1934); S. Rep. No. 1455, 73d Cong., 2d Sess. (1934).; see also S. Rep. No. 94–75, 94th Cong., 1st Sess. 7, II (1975) (stating that a principal reason for retaining a self-regulatory regime was the ‘‘sheer ineffectiveness of attempting to assure [regulation] directly through the government on a wide scale’’) 950 See Concept Release on Self-Regulation, supra note 948, 69 FR at 71256–57. 951 See e.g., Exchange Act Amendments of 1975, Pubic Law 29, 89 Stat. 97 (1975); 1961–1963 Special Study of Securities Markets. Securities and Exchange Commission, Report of Special Study of Securities Markets, (‘‘Special Study’’), H.R. Doc. No. 95, 88th Cong., 1st Sess. (1963) and Market 2000: An Examination of Current Equity Market Developments, Division of Market Regulation, U.S. Securities and Exchange Commission (January 1994) (‘‘Market 2000 Report’’). 952 See Todd & Co. v. SEC, 557 F.2d 1008, 1012– 13 (3d Cir. 1977); First Jersey Sec., Inc. v. Bergen, 605 F.2d 690, 697 (3d Cir. 1979); Sorrell v. SEC, 679 F.2d 1323, 1325–26 (9th Cir. 1982); R.H. Johnson & Co. v. SEC, 198 F.2d 690, 695 (2d Cir. 1952); see generally Oklahoma v. United States, 62 F.4th 221, 229 (6th Cir. 2023). 953 See Concept Release Concerning SelfRegulation, supra note 948, 69 FR at 71268–69, citing Exchange Act Section 6(b)(4), 15 U.S.C. 78f(b)(4); Exchange Act Section 15A(b)(5), 15 U.S.C. 78o–3(b)(5); Exchange Act Section 15A(b)(2) and 6(b)(1) 15 U.S.C. 78o–3(b)(2) and 78f(b)(1).] 954 For these reasons, we disagree with the assertion of commenters that the Fifth Circuit’s reasoning in Cmty. Fin. Servs. Ass’n of Am., Ltd. v. CFPB, 51 F.4th 616, 642 (5th Cir. 2022), cert. granted sub nom. CFPB v. Com. Fin. Servs. Ass’n, U.S. (Feb. 27, 2023), casts doubt on the constitutionality of CAT. The holding in that case rested on the court’s view that the CFPB’s ‘‘perpetual self-directed, double-insulated funding structure’’ was ‘‘unprecedented’’ for an agency that ‘‘wields vast rulemaking, enforcement, and adjudicatory authority.’’ See also CFPB v. Law Offices of Crystal Maroney, 63 F.4th174, 181–83 PO 00000 Frm 00046 Fmt 4701 Sfmt 4703 stated, that clause ‘‘means simply that no money can be paid out of the Treasury unless it has been appropriated by an act of Congress.’’ 955 The use of SRO and Industry Member funding for a self-regulatory initiative— which, as discussed below, falls within the authority provided by Congress— does not transgress that principle. Nor does Industry Members’ participation in CAT funding implicate the Takings Clause. In choosing to participate in the securities industry, Industry Members could not have had any ‘‘distinct investment-backed expectations’’ 956 that they would not have to share in funding regulatory initiatives such as development and maintenance of a consolidated audit trail for tracking securities trading, the purpose of which is to ‘‘strengthen the integrity and efficiency of the markets’’ and thus ‘‘enhance investor protection and increase capital formation.’’ 957 Finally, the creation of CAT falls within the Commission’s authority under the Exchange Act.958 Pursuant to that Act, each national securities exchange and national securities association must be organized and have the capacity to comply, and enforce compliance by its members, with its rules, and with the federal securities laws, rules, and regulations.959 And, among other things, the Commission has a responsibility to oversee those organizations and to enforce compliance by the members of exchanges and associations with the respective exchange’s or association’s rules, and the federal securities laws and regulations.960 Congress has also charged the Commission with ‘‘insur[ing] the maintenance of fair and (2d. Cir. 2023) (disagreeing with Fifth Circuit’s reasoning and rejecting challenge to CFPB’s funding structure). 955 See Cincinnati Soap Co. v. United States, 301 U.S. 308, 321 (1937); see also Off. Of Pers. Mgmt. v. Richmond, 496 U.S. 414, 424 (1990) (The Appropriations Clause requires that ‘‘the payment of money from the Treasury must be authorized by a statute.’’). 956 See Penn Central Transp. Co. v. New York City, 438 U.S. 104, 124 (1978). 957 See CAT NMS Plan Approval Order, supra note 2, 81 FR at 84727. 958 See 15 U.S.C. 78b, 78c(b), 78e, 78f, 78k–1, 78o, 78o–3; cf. Nasdaq Stock Mkt. LLC v. SEC, 38 F.4th 1126, 1131 (D.C. Cir. 2022) (explaining that Congress granted the Commission ‘‘ ‘broad, discretionary powers’ to ensure ‘maximum flexibility’ in ‘oversee[ing] the development of a national market system’ and ‘implement[ing] its specific components in accordance with the findings and . . . objectives’ of the legislation,’’ quoting S. Rep. 94–75, at 7 (1975)). 959 See, e.g., Sections 6(b)(1), 19(g)(1) and 15A(b)(2) of the Exchange Act, 15 U.S.C. 78f(b)(1), 78s(g)(1), and 78o–3(b)(2). 960 See, e.g., Sections 2, 6(b), 15A(b), and 19(h)(1) of the Exchange Act, 15 U.S.C. 78b, 15 U.S.C. 78f(b), 15 U.S.C. 78o–3(b), and 15 U.S.C. 78s(h)(1). E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices honest markets,’’ removing ‘‘impediments to’’ and perfecting ‘‘the mechanisms of a national market system for securities’’ and ‘‘provid[ing] for regulation and control of’’ transactions on securities exchanges and the overthe-counter market.961 In furtherance of these responsibilities, Congress authorized the Commission to ‘‘impose requirements necessary to make such regulation and control reasonably complete and effective’’ 962 as well as to make such rules and regulations ‘‘as may be necessary or appropriate to implement the provisions’’ of the Exchange Act.963 More recently, Congress also directed the Commission to facilitate the establishment of a national market system in accordance with specified findings and objectives.964 The initial Congressional findings were that the securities markets are an important national asset that must be preserved and strengthened, and that new data processing and communications techniques create the opportunity for more efficient and effective market operations.965 Congress then proceeded to mandate a national market system composed of multiple competing markets that are linked through technology, directing the Commission to ‘‘use its authority under [the Exchange Act] to facilitate the establishment of a national market system,’’ including ‘‘by rule’’ ‘‘to authorize or require selfregulatory organizations to act jointly with respect to matters as to which they share authority under [the Exchange Act] in planning, developing, operating, or regulation a national market system.’’ 966 The creation of the CAT was an appropriate exercise of this authority. The Commission’s task pursuant to the mandate in Section 11A has been to facilitate an appropriately balanced market structure that promotes competition among markets, while minimizing the potentially adverse effects of fragmentation. An appropriately balanced market structure also must provide for strong investor protection.967 As the Commission explained in adopting Rule 613, the creation of a consolidated audit trail with the ability to surveil cross-market 961 See Section 2 of the Exchange Act, 15 U.S.C. lotter on DSK11XQN23PROD with NOTICES2 78b. 962 Id. 963 Section 964 Section 23(a)(1) of the Exchange Act. 11A of the Exchange Act, 15 U.S.C. 78k–1. 965 15 U.S.C. 78k–1(a)(1). 966 15 U.S.C. 78k–1(a)(3)(B). 967 See Securities Exchange Act Release No. 61358 (Jan. 14, 2010), 75 FR 3594 (Jan. 21, 2010) at 3597. VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 activity had become key to the ability of both the SROs and the Commission to perform many of their core regulatory functions in the modern iteration of the national market system.968 While the SROs and the Commission relied on existing audit trails and data in fulfilling their regulatory responsibilities prior to CAT, each of those systems had its own flaws and drawbacks, and there was a significant disparity in the audit trail requirements among the exchanges and FINRA. At the same time, the rapid change to fast, electronic markets on which trading was dispersed across market centers gave rise to an increasing need to a more uniform audit trail with cross-market compatibility.969 The establishment of the CAT thus enabled the SROs and the Commission to more efficiently and effectively perform their respective regulatory responsibilities, including to analyze and reconstruct market events, monitor market behavior, conduct market analysis to support regulatory decisions, and perform surveillance, investigation, and enforcement activities.970 Contrary to one commenter’s suggestion, the Supreme Court’s major questions doctrine is not implicated here. In directing the SROs to act jointly to create an accurate, complete, accessible and timely audit trail to replace these existing audit trails, the Commission did not claim an ‘‘[e]xtraordinary grant[ ] of regulatory authority’’ based on ‘‘vague,’’ ‘‘cryptic,’’ ‘‘ancillary,’’ or ‘‘modest’’ statutory language.971 Nor did it assert authority that falls outside its ‘‘particular 968 See CAT Adopting Release, supra note 946. Indeed, many SROs, in commenting on that rule, recognized the essential nature of the project. Id. at 45736, quoting Letter from Marcia E. Asquith, Senior Vice President and Corporate Secretary, FINRA, and Janet McGinness Kissane, Senior Vice President and Corporate Secretary, NYSE Euronext, to Elizabeth M. Murphy, Secretary, Commission, dated August 9, 2010 (‘‘the evolution of the U.S. equity markets and the technological advancements that have recently taken place have created an environment where a consolidated audit trail is now essential to ensuring the proper surveillance of the securities markets and maintaining the confidence of investors in those markets.’’). 969 See Securities Exchange Act Release No. 62174 (May 26, 2010), 75 FR 32556 (June 8, 2010) (‘‘CAT Proposing Release’’). Even prior to proposing the creation of the CAT in 2010, the Commission had twice requested comment regarding how best to enhance the capability of SROs and the Commission to effectively and efficiently conduct cross-market supervision of trading activity. See Securities Exchange Act Release No. 47849 (May 14, 2003), 68 FR 27722 (May 20, 2003) (File No. S7– 11–03) (‘‘Intermarket Trading Concept Release’’) and Concept Release Concerning Self-Regulation. 970 See CAT Adopting Release, supra note 946, 77 FR at 45727; see also CAT NMS Plan Approval Order, supra note 2, 81 FR at 84727, 84738, 84800. 971 West Virginia v. EPA, 142 S. Ct. 2587, 2608– 10 (2022) (quotation omitted). PO 00000 Frm 00047 Fmt 4701 Sfmt 4703 62673 domain.’’ 972 And, while CAT is undoubtedly a large database, that is a function of the size of the ‘‘complex, dispersed, and highly automated national market system’’ 973 Congress expressly charged the SROs and the Commission with overseeing. As detailed above, the collection of securities transaction data by the SROs and the Commission is an important factor in enabling both to fulfill their statutory responsibilities and has a long history. There is no reason to question that Congress would have intended for the Commission to address the serious shortcomings and regulatory obstacles associated with the lack of a consolidated audit trail. And there is therefore no basis for dispensing with ordinary principles of statutory construction to require express authorization for CAT by Congress.974 e. Rule 608 and Rule 19b–4 Certain commenters believe the assessment of CAT fees on Industry Members through filings submitted by each exchange under Rule 19b–4 is likely inconsistent with Rule 608.975 One commenter stated that the Commission amended Rule 608 in 2020 to remove the effective-upon-filing procedure for NMS plan fees by requiring that NMS plan fees be subject to notice and comment and Commission approval prior to becoming effective.976 The commenter also stated that the 2020 amendment specifically contemplates that CAT fees would be subject to Rule 608,977 however the Commission was considering approving a process for CAT fees that would not permit a meaningful review opportunity, contrary to the Rule 608 amendment.978 The commenter acknowledged that the CAT NMS Plan provides for Section 19(b) fee filings but also stated that (1) the CAT NMS Plan was approved prior to the amendment of Rule 608 in 2020 and (2) the CAT NMS Plan is silent about whether Section 19(b) fee filings would need to be made after the Operating Committee receives approval to assess the fees under Rule 608.979 The commenter suggested that due to the ‘‘infirmities with the process for establishing and assessing CAT Fees 972 Alabama Ass’n of Realtors v. HHS, 141 S. Ct. 2485, 2489 (2021) (per curiam). 973 See CAT Adopting Release, supra note 946, 77 FR at 45723. 974 Contra Biden v. Nebraska, 143 S. Ct. 2355, 2372, 2375 (2023), 143 S.Ct. 2355, 2372, 2375 (2023). 975 See SIFMA June 2023 Letter at 4, 9; Citadel July Letter at 15. 976 See SIFMA June 2023 Letter at 9. 977 Id. 978 Id. 979 Id. at 9, n.45. E:\FR\FM\12SEN2.SGM 12SEN2 62674 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices under the Funding Proposal,’’ the Operating Committee must create a new funding process consistent with Rule 608 and stated that the Commission cannot find that the Proposed Amendment is consistent with the Exchange Act.980 Another commenter stated that the proposed approach seems inconsistent with recent Commission rulemaking to ensure that fee filings related to an NMS plan can no longer be effective upon filing.981 In response to one commenter that stated that the filing of Industry Member CAT fees under Rule 19b–4 likely violates Rule 608 of Regulation NMS,982 CAT LLC stated that it disagreed with the comment because the Proposed Amendment complies with Rule 608.983 CAT LLC stated that Section 11.1(b) of the CAT NMS Plan requires the Participants to file Industry Member CAT fees pursuant to Section 19(b) of the Exchange Act,984 and Section 19(b) permits fees to become effective upon filing.985 CAT LLC also noted that the funding methodology for Participant fees would be established through the Proposed Amendment, which was filed in accordance with Rule 608; therefore, Participant CAT fees would be adopted in accordance with Rule 608.986 CAT LLC stated that Industry Member CAT fees would be filed pursuant to Rule 19b–4 and those filings would be based on the Proposed Amendment, which would have to be approved pursuant to Rule 608, therefore ‘‘any Industry Member CAT fees will have been subject to the same extensive notice and comment process as Participant CAT fees and must satisfy the requirements of the Exchange Act.’’ 987 The Commission disagrees with the commenters’ position. The filing of Industry Member CAT fees under Rule 19b–4 is consistent with the structure of the CAT. The CAT NMS Plan functions as a joint agreement amongst the SROs who are parties to the CAT NMS Plan. But Industry Members are not parties to the Plan and the Plan itself does not bind Industry Members. Rather, Rule 608(c) of Regulation NMS requires each SRO to enforce compliance by its members with an effective NMS plan of which it is a sponsor or a participant.988 980 Id. 981 See Citadel July Letter at 15. SIFMA June 2023 Letter at 9. 983 See CAT LLC July 2023 Response Letter at 30. 984 Id. 985 Id. 986 Id. at 31. 987 Id. 988 17 CFR 242.608(c). See also CAT NMS Plan at Section 3.11 (requiring each Participant to comply with and enforce compliance, as required lotter on DSK11XQN23PROD with NOTICES2 982 See VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 Additionally, Rule 613(g) requires: (1) each SRO plan sponsor to file a proposed rule change to require its members to comply with Rule 613 and the CAT NMS Plan pursuant to Section 19(b)(2) of the Exchange Act and Rule 19b–4 thereunder; 989 (2) each member of an SRO plan sponsor to comply with the CAT NMS Plan; 990 (3) each SRO plan sponsor to agree to enforce compliance by its members with the CAT NMS Plan; 991 and (4) the CAT NMS Plan to include a mechanism to ensure compliance with the CAT NMS Plan.992 Thus, Industry Members’ CAT reporting requirements stem from rules the Participants put in place for their members pursuant to the Section 19(b)(2) rule filing process.993 The amendments to Rule 608 (‘‘Rescission of Effective-Upon-Filing Procedure for NMS Plan Fee Amendments’’), among other things, rescinded Rule 608(b)(3)(i),994 a provision that permitted fee changes assessed under NMS plans to become effective-upon-filing, and required NMS Plan fee amendments to be filed pursuant to Rule 608(b)(1) and (2), thus mandating an opportunity for public comment and Commission approval by order before the effectiveness of such fees.995 Vendors and subscribers of market data under the Market Data Plans are subject to vendor or subscribers’ fees charged by the applicable NMS Plan and filed by the NMS Plan using Rule 608. As these vendors and subscribers are not parties to the NMS Plans, the mechanism by which fees are imposed on them is contractual. Specifically, in order to receive market data under the NMS Plans, vendors and subscribers must individually enter into a vendor and/or a subscription agreement under which they agree to pay fees.996 The rescission by Rule 608(c), by its Industry Members with the provisions of Rule 613 and the CAT NMS Plan). 989 17 CFR 242.613(g)(1). 990 17 CFR 242.613(g)(2). 991 17 CFR 242.613(g)(3). 992 17 CFR 242.613(g)(4). 993 See Securities Exchange Act Release No. 80256 (Mar. 15, 2017), 82 FR 14526 (Mar. 21, 2017). 994 17 CFR 242.608(b)(3)(i). 995 See Securities Exchange Act Release No. 89618 (Aug. 19, 2020), 85 FR 65470, 65471 (Oct. 15, 2020). 996 See, e.g., UTP Plan Subscriber Agreement, available at https://www.utpplan.com/DOC/ subagreement.pdf; Second Restatement of the Plan Submitted to the Securities and Exchange Commission Pursuant to Rule 11Aa3–1 under the Securities Exchange Act of 1934, composite as of June 3, 2021, available at https://www.ctaplan.com/ publicdocs/ctaplan/notifications/trader-update/ 110000358917/CTA%20Plan%20%20Composite%20as%20of%20 June%203,%202021.pdf, at Exhibit C (Form of Vendor Contract); at Exhibit D (Form of Subscriber Contracts). PO 00000 Frm 00048 Fmt 4701 Sfmt 4703 impacted the way the Commission considers fees imposed on vendors and subscribers of market data under Market Data Plans since their fees are filed by the NMS Plans pursuant to Rule 608. In contrast, all Industry Members who are CAT Reporters are members of at least one Participant. Industry Members are bound by the rules of the Participant(s) of which they are members. The process for adopting rules of a Participant that affect their members is through the Section 19(b) rule filing process, which includes the ability to adopt immediately-effective fees.997 Additionally, fees filed by the Section 19(b) rule filing process are still subject to public notice and comment, and the Commission may suspend and institute proceedings on these filings.998 For these reasons, the Commission does not believe that the Rescission of Effective-Upon-Filing Procedure for NMS Plan Fee Amendments impacts the CAT NMS Plan provisions relating to how Industry Member fees are filed with the Commission. f. Governance One commenter stated that the CAT governance structure is flawed because exchange groups with multiple affiliated exchanges have ‘‘significant influence’’ over the Operating Committee and can ‘‘dictate many CAT-related decisions’’ such as the allocation of CAT costs.999 The commenter further stated that Industry Members lack representation on the Operating Committee; therefore, they cannot vote on the design, implementation or funding of the CAT.1000 The commenter stated that the governance structure results in the allocation of all CAT costs to Industry Members.1001 Additionally, the commenter believes the governance structure permits the Operating Committee to provide minimal information on the costs to be allocated to Industry Members,1002 stating that the financial information that has been provided by the Operating Committee through audited financial statements and an annual financial and operating budget is disclosed in broad categories and lacks detail about the key drivers of the costs, and that the annual financial and operating budget does not predict costs accurately.1003 Based on this lack of detail, the commenter stated that market participants cannot assess 997 15 U.S.C. 78s(b)(3)(A). See also 17 CFR 240.19b–4(f)(2). See also supra notes 192–196 and accompanying text. 999 See Citadel July Letter at 5, 6. 1000 Id. at 6. 1001 See id. 1002 Id. 1003 Id. at 6–7; id. at n.14. 998 Id. E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices whether total CAT costs are reasonable and cannot suggest cost-saving alternatives and must rely on the Operating Committee to contain the budget.1004 The commenter stated, ‘‘[i]t is clearly inequitable to compel Industry Members to provide a blank check to fund these spiraling costs in perpetuity, without any governance role or any plan to contain overall costs,’’ 1005 and that allocating all CAT costs to firms without representation ‘‘marginalize[s] costrelated considerations.’’ 1006 The commenter also stated that the governance structure does not require the Operating Committee or the Commission to assess whether the costs of a specific interpretation of the Plan outweigh any benefits.1007 The commenter recommended the following enhancements to improve CAT governance: (1) each exchange group and national securities association should have one vote on the Operating Committee, but will have a second vote if ‘‘the exchange group or national securities association has a market center or centers that trade more than 15 percent of consolidated equity and options market share;’’ 1008 (2) all actions related to funding by the Operating Committee should be authorized by supermajority vote; 1009 and (3) Industry Members should have voting representation on the Operating Committee commensurate with the costs allocated to them.1010 The commenter stated that if industry representation cannot be achieved through an NMS plan, the plan is not an appropriate vehicle for CAT governance.1011 In response to comments objecting to a lack of Industry Member voting 1004 See Citadel July Letter at 7. at 2. See also id. at 23 (stating Section 6(b)(4), Section 6(b)(5) and Section 6(b)(8) of the Exchange Act do not allow a private entity to require Industry Members to provide a blank check in perpetuity because this is not an equitable allocation of reasonable fees and would greatly harm market competition, efficiency and liquidity). 1006 Id. at 7. 1007 Id. See also MMI July Letter at 4 (suggesting ‘‘[i]ncentivization of cost-consciousness and accountability for SEC interpretations and mandates for CAT reporting specifications, interpretations, and usage of CAT.’’). 1008 See Citadel July Letter at 34. 1009 Id. at 3, 34. 1010 Id. See also MMI July Letter at 1, 2 (requesting the Commission require Industry Member representation on the Operating Committee before approving any funding proposal, with SIFMA acting as the broker representative); FIA Letter at 4 (stating that the CAT Operating Committee should be reconfigured, with Industry Members comprising the percentage of the Committee equivalent to whatever cost allocation percentage is eventually allocated to them). 1011 See Citadel July Letter at 34. In response, CAT LLC stated that this comment is outside the scope of the Proposed Amendment. See CAT LLC July 2023 Response Letter at 31, n.144. lotter on DSK11XQN23PROD with NOTICES2 1005 Id. VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 representation on the Operating Committee and suggesting their inclusion based on the proportion of costs allocated to them,1012 CAT LLC stated that the addition of Industry Member voting representation is not consistent with the Exchange Act.1013 CAT LLC stated that ‘‘allowing Industry Members to control CAT LLC as the commenters suggest could adversely affect the regulatory objectives of the CAT’’ 1014 as Industry Members ‘‘have no statutory obligation to protect investors or to act in the public interest, nor do they have any regulatory obligation to operate the CAT System in a manner that is consistent with the Rule 613 and the CAT NMS Plan.’’ 1015 CAT LLC stated that Industry Members can provide input through Plan amendments and fee filings and the CAT Advisory Committee.1016 In response to a comment suggesting changes to the allocation of Participant voting rights,1017 CAT LLC stated that this issue is beyond the scope of the CAT funding model. CAT LLC also responded to the commenter’s suggestion that all funding actions by the Operating Committee require a supermajority vote by stating that it disagreed with the suggestion because all Operating Committee actions relate in a way to CAT costs; therefore, imposing a supermajority requirement could undermine governance.1018 Regarding SRO and Industry Member voting rights, the Commission does not believe that modification of the voting rights, which the Commission considered when it approved the CAT NMS Plan, is within the scope of the Proposed Amendment.1019 Furthermore, in response to those comments suggesting the addition of Industry Members as voting members on the operating committee, we note that—in vacating the Order Approving the CT Plan—the D.C. Circuit concluded that the inclusion of non-SRO representation on the operating committee of the CT Plan was inconsistent with Section 11A of the Exchange Act.1020 Industry Members do have an opportunity to attend meetings of the Operating Committee through the CAT Advisory 1012 See FIA Letter at 4; Citadel July Letter at 34; MMI July Letter at 2. 1013 See CAT LLC July 2023 Response Letter at 21. 1014 Id. 1015 Id. 1016 Id. 1017 See Citadel July Letter at 34. 1018 See CAT LLC July 2023 Response Letter at 21–22. 1019 See CAT NMS Plan Approval Order, supra note 2, 81 FR at 84728–30. 1020 See The NASDAQ Stock Market LLC et al. v. SEC, Case No. 21–1167, D.C. Cir. (July 5, 2022). 15 U.S.C. 78k–1. PO 00000 Frm 00049 Fmt 4701 Sfmt 4703 62675 Committee. According to Section 4.13(d) of the CAT NMS Plan, ‘‘[m]embers of the Advisory Committee shall have the right to attend meetings of the Operating Committee or any Subcommittee, to receive information concerning the operation of the Central Repository (subject to Section 4.13(e)), and to submit their views to the Operating Committee or any Subcommittee on matters pursuant to [the CAT NMS Plan] prior to a decision by the Operating Committee on such matters.1021 g. Miscellaneous Certain commenters urged the Commission to address data security concerns associated with the CAT.1022 One commenter suggested that the Commission prioritize finalizing the proposed amendments to the CAT NMS Plan to enhance data security.1023 Commenters also raised concerns that the Commission was considering the Proposed Amendment at the same time it is considering modifying certain Commission rules governing equity market structure.1024 One commenter expressed concern that the Commission would approve the Proposed Amendment prematurely without careful consideration.1025 The commenter also stated that the Commission is ‘‘rushing forward to approve the latest proposal without taking advantage of the allotted time under the Exchange Act for careful consideration’’ and ‘‘prematurely moving forward’’ while simultaneously considering revisions of the rules governing equity and options market structure and proceeding with other proposals that will impose costs on Industry Members.1026 The commenter stated that ‘‘[t]he unequitable distribution of CAT costs contemplated by the Funding Proposal will exacerbate these problems, harming the functioning of U.S. securities markets.’’ 1027 The 1021 See CAT NMS Plan, supra note 2, at Section 4.13. See also 17 CFR 242.613(b)(7). 1022 See Citadel July Letter at 3, 35; SIFMA June 2023 Letter at 2; Virtu Letter at 4. 1023 See Citadel July Letter at 3, 35; see Securities Exchange Act Release No. 89632 (Aug. 21, 2020), 85 FR 65990 (Oct. 16, 2020). Two other commenters stated that the Commission has failed to address data security concerns associated with the CAT. See SIFMA June 2023 Letter at 2; Virtu Letter at 4. 1024 See SIFMA June 2023 Letter at 3; Citadel July Letter at n.54 and 113; see Exchange Act Release Nos. 96496, 88 FR 5440 (Jan. 27, 2023) (Regulation Best Execution); 96495, 88 FR 128 (Jan. 3, 2023) (Order Competition Rule); 96494, 87 FR 80266 (Dec. 29, 2022) (Minimum Pricing Increments); 96493, 88 FR 3786 (Jan. 20, 2023) (Order Execution Information). 1025 See SIFMA June 2023 Letter at 3. 1026 Id. See also Virtu Letter at 4. 1027 See SIFMA June 2023 Letter at 3. E:\FR\FM\12SEN2.SGM 12SEN2 62676 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices commenter further stated that the Commission cannot determine whether the proposed allocation of costs is equitable without assessing the distribution of costs and benefits under the other pending proposals.1028 In response to comments that urged the Commission to prioritize CAT data security concerns,1029 CAT LLC stated that ‘‘CAT security is of paramount importance, and the CAT System is protected by a comprehensive information security program required by the CAT NMS Plan and overseen by a dedicated CISO, as well as via SEC oversight . . .’’ 1030 CAT LLC stated that security concerns should not be used to prevent appropriate funding of the CAT, noting that appropriate funding can help to ensure the security of CAT Data.1031 CAT LLC also responded to comments that expressed concern that the Commission was considering the Proposed Amendment while also considering changes to Commission rules governing equity market structure.1032 CAT LLC stated that the Commission’s consideration of its market structure proposals should not impede its decision on the Proposed Amendment, which would ensure appropriate funding of the CAT as these are different decisions.1033 In response to the commenter that stated that the Commission would be rushing to approve the Proposed Amendment,1034 CAT LLC stated that ‘‘the current model results from years of modifications that have been made in significant part in response to industry comments to earlier versions,’’ 1035 and that because the current proposal ‘‘differs very little from the immediately preceding funding model,’’ commenters had more than 400 days to comment on the substance of the Proposed Amendment.1036 The CAT data security issues and the costs and benefits of unrelated pending equity market structure proposals 1037 are beyond the scope of the Proposed Amendment, which is limited to CAT funding. Further, the Commission’s ability to consider the proposed amendments to the CAT NMS Plan to enhance data security is not impacted lotter on DSK11XQN23PROD with NOTICES2 1028 Id. 1029 See Citadel July Letter at 35; SIFMA June 2023 Letter at 2; Virtu Letter at 4. 1030 See CAT LLC July 2023 Response Letter at 33. 1031 Id. 1032 See Citadel July Letter at 26, n.112; SIFMA June 2023 Letter at 3; Virtu Letter at 4. 1033 See CAT LLC July 2023 Response Letter at 34. 1034 See SIFMA June 2023 Letter at 3. 1035 See CAT LLC July 2023 Response Letter at 28. 1036 Id. 1037 See supra note 1024. VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 by the Proposed Amendment, as it is a separate proposal and both are being considered in due course.1038 Given the time between the Prior Funding Model Proposal and the OIP of the Proposed Amendment, the Commission has also had ample time for ‘‘careful consideration’’ of the Executed Share Model as the Proposed Amendment’s proposed changes to the CAT NMS Plan are closely similar to the changes proposed in the Prior Funding Model Proposal,1039 as modified by the two partial amendments that were filed, respectively, in November 2022 and February 2023.1040 Additionally, the time spent for the Commission’s review of the Proposed Amendment is consistent with the time permitted by Rule 608(b) for the Commission to approve or disapprove NMS plan amendments,1041 for both the Prior Funding Model Proposal (for which the Commission extended to 300 days from the date of notice publication the date by which the Commission would conclude proceedings to determine whether to approve or disapprove the Prior Funding Model Proposal),1042 and this Proposed Amendment. IV. Efficiency, Competition, and Capital Formation In determining whether to approve a proposed amendment, and whether such amendment is in the public interest, Rule 613 requires the Commission to consider the potential effects of the proposed amendment on efficiency, competition, and capital formation.1043 In its analysis, the Commission has reviewed the arguments about such effects put forth by the Participants and commenters and independently analyzed the likely effects of the Proposed Amendment on efficiency, competition, and capital formation.1044 Several commenters stated that, because CAT costs incurred 1038 See supra note 1023. 1039 See supra note 409. 1040 See supra note 410. 1041 17 CFR 242.608(b). 1042 See Securities Exchange Act Release No. 96725 (Jan. 20, 2023), 88 FR 5059 (Jan. 26, 2023). 1043 17 CFR 242.613(a)(5). 1044 Some commenters stated that the Participants’ analysis of the effects of the Proposed Amendment on Efficiency, Competition, and Capital Formation was lacking analysis and/or information (see, e.g., SIFMA June Letter at 4; Citadel July Letter at 2, 11, 12–13, and 16) and several commenters made general statements that the Proposed Amendment would have negative effects on Efficiency, Competition, and Capital Formation (see, e.g., SIFMA June Letter at 3; Citadel July Letter at 12 and 15). The Commission has independently analyzed the Proposed Amendment using information from the Participants and commenters as well as additional information as indicated. PO 00000 Frm 00050 Fmt 4701 Sfmt 4703 to date are greater than those estimated at the time the CAT NMS Plan was approved, the Commission should update its economic analysis of that plan. Because that analysis was conducted in the process of deciding whether to approve the original plan and was appropriately based upon the information available to the Commission at the time it made that determination, we decline to do so. However, in analyzing the potential impacts of the Proposed Amendment on efficiency, competition, and capital formation—including our discussion of the economic baseline—the Commission has supplemented the analysis in the CAT NMS Plan Approval Order with additional information learned since the time of that Order. Therefore, for the purposes of this analysis, the effects are measured against a baseline that recognizes that the Proposed Amendment replaces certain provisions of the CAT NMS Plan and the Proposed Amendment also provides detail not previously included in the CAT NMS Plan.1045 As a result, the Commission provides the baseline required to conduct a comprehensive analysis of the Proposed Amendment in light of issues raised in the Notice and public comments. Based on its analysis, the Commission believes that the Proposed Amendment will involve efficiency gains along some dimensions but will likely also involve tradeoffs against other forms of efficiency, could negatively alter the competitive position of particular competitors, though the fees associated with the Proposed Amendment are unlikely to be large enough to affect overall competition, and will result in insignificant effects on capital formation.1046 These effects are discussed below. A. Efficiency 1. Baseline In the CAT NMS Plan Approval Order, the Commission identified certain elements of the Original Funding Model that could have negative implications for efficiency and also stated that the significant uncertainty in the Original Funding Model could also have implications for efficiency.1047 In 1045 Some of the conclusions of the Proposed Amendment on Efficiency, Competition, and Capital Formation provided by the commenters and Participants are assessed relative to alternatives rather than the baseline the Commission used in the analysis herein. 1046 See supra Section III for a discussion of why the Commission is approving the Proposed Amendment. 1047 See CAT NMS Plan Approval Order, supra note 2, 81 FR at 84882. E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices consideration of the comment letters submitted in response to the Executed Share Model, the Commission recognizes that the Original Funding Model would have also resulted in additional inefficiencies. Overall, the Original Funding Model could have resulted in negative, but likely insignificant, reductions in operational efficiencies, skewed incentives for efficiency, and reductions in market efficiencies. lotter on DSK11XQN23PROD with NOTICES2 a. Operational Efficiency The tiered structure of the Original Funding Model would also have led to uncertainties affecting operational efficiencies of Industry Members and Participants. In particular, Industry Members would not have known their per-message cost until the end of the month, though they would have charged their customers in real time, creating an inefficiency. In particular, the Original Funding Model would have charged flat fees to Industry Members and Participants in the same tiers (‘‘Original CAT Fees’’). Thus, Industry Members with message traffic near the top of the tier would pay lower fees per message than Industry Members in the same tier but with lower message traffic. Likewise, Participants with more market share in their tiers would pay lower fees per executed share. Even if Industry Members and Participants could predict which tier they would be in, passingthrough fees would involve Industry Members and Participants charging based on expected per-message or pershare Original CAT Fees rather than actual per-message or per-share Original CAT Fees, which could have been higher or lower than expected. This uncertainty creates an operational inefficiency in structuring the fee passthrough. Also, charging Industry Members a flat fee that depends on their message traffic could result in Industry Members, who generally earn revenue only for executed orders,1048 getting charged for orders that do not transact. This could have resulted in certain Industry Members paying more in Original CAT Fees than they generated from transactions. Further, some Industry Members would have found passing through fees only to those whose orders transact operationally more efficient by increasing existing fees (or reducing incentives such as payment for order flow). These situations would have resulted in transacted orders subsidizing the burdens of message traffic (assuming message traffic is the only cost driver). 1048 See Notice, supra note 7, 88 FR at 17103. VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 Complexities associated with creating tiers in the Original Funding Model would also have created operational inefficiencies. To ensure that the CAT NMS Plan covered its costs with the tiered fees, the creation of the fee schedule would have involved deciding on the number of tiers, estimating how many Industry Members would qualify for each tier, estimating how much to charge each tier, and then justifying each decision. The potential for disagreements resulting from the complexity and the challenges in drafting justifications for such complex decisions could have involved a cumbersome and inefficient fee setting experience. b. Incentive Effects The Original Funding Model also could have affected efficiency by skewing incentives. Because fees to be charged by CAT are based on cost recovery, aligning such fees with burdens on CAT could promote efficiency by creating incentives to limit costs. If message traffic is the only cost driver of CAT, the Original Funding Model created incentives for Industry Members to limit costs by limiting their unnecessary message traffic,1049 but the tiered structure of the Original Funding Model would have dampened these incentives, and message traffic is not the only cost driver of CAT. Further, the uncertainty in the allocations across equities or options and across Participants or Industry Members meant that the Original Funding Model would have created the risk that the inefficiencies of such allocations were less than perfectly aligned with costs. Finally, any pass-throughs to Participants’ members or the customers of Industry Members could have further dampened the incentives for cost efficiency. As a result, the Original Funding Model would not have perfectly aligned fees with the costs imposed on CAT, limiting the incentives for cost efficiency. While the Original Funding Model would have set fees for Industry Members based on their message traffic, the efficiency benefits were unlikely to have been significant. First, its tiered structure would have dampened the incentives to reduce the costs of CAT by reducing unnecessary message traffic. In particular, the Original Funding Model would have assigned Industry Members to tiers based on their message traffic. Within a tier, however, all Industry Members would have been charged the same flat fee. Thus, an additional 1049 See CAT NMS Plan Approval Order, supra note 2, 81 FR at 84881. PO 00000 Frm 00051 Fmt 4701 Sfmt 4703 62677 message would have been free in terms of CAT costs unless it put the Industry Member into a higher tier. So, only those Industry Members close to a cutoff would have had the incentive to reduce message traffic, and Industry Members who expected to be in the top tier would have had no incentive to reduce unnecessary message traffic. Further, Industry Members cannot reduce message traffic without altering how they handle customer orders, which could be counter to their duties, or reducing liquidity, which could reduce market efficiency. Therefore, absent evidence of significant unnecessary message traffic, the efficiency improvements of basing Original CAT Fees on message traffic are unlikely to have been significant. In addition, since the approval of the CAT NMS Plan, additional information about the cost drivers have been made public and suggest that message traffic is not the only cost driver.1050 In particular, a September 2021 report shows that 51% of CAT costs are from the ‘‘Linker,’’ 17% from storage, and 15% from ‘‘Data, Processing, Collection, & ETL.’’ In addition, the Participants in their response to commenters indicated that 75% of CAT costs are the processing and storage of CAT data in the cloud.1051 The ‘‘Linker’’ costs are the costs to link order messages across a lifecycle.1052 These costs involve looking across four days of data and are likely related to message traffic. While the report does not separate options messages from equities messages, it does indicate that Participant message traffic involved in linkage processing is much larger than Industry Member message traffic. However, the Commission understands that complexity of the order lifecycles is a cost driver within the linkage processing, and certain order handling practices of Industry Members, such as the use of riskless principal transactions, involve more complex linkages than other order handling practices. Indeed, while one commenter stated, ‘‘costs are a direct result of the total number of messages that CAT Reporters (both Participants and 1050 See CAT Industry Webinar: CAT Costs, supra note 873. The Participants stated in this presentation to Industry Members in Sept. 2021, that, ‘‘[t]he primary cost drivers for the CAT are compute costs (e.g., linker) and storage costs. These costs are volume based and have increased significantly each year beyond the volume estimate included in the Plan.’’ 1051 CAT LLC July 2023 Response Letter at 22. For the first quarter of 2023, 72.9% of CAT costs are cloud costs (See CAT Financial and Operating Budget | CATNMSPLAN). 1052 Id. See also, CAT NMS Plan Approval Order, supra note 2, 81 FR at 85024–5 for a discussion of linkage requirements. E:\FR\FM\12SEN2.SGM 12SEN2 62678 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices Industry Members) send to CAT, the costs of processing and linking such messages, and the costs to CAT of providing tools and mechanisms to the SEC and SROs to analyze the CAT data,’’ 1053 the processing and linking and regulatory use costs are not perfectly aligned with message traffic. The Original Funding Model did not indicate how Original CAT Fees would be allocated to equities versus options, but this allocation decision would have had an effect on efficiency. The options markets account for the vast majority of message traffic, but most of the options market message traffic is on-exchange message traffic (mostly market maker quotes).1054 However, option market maker quotes likely do not have complex order lifecycles that would drive the costs of the linkage processing. Further, the Commission understands that the linkage processing of equities orders is generally more complex than the linkage processing of options orders. As a result, it is unlikely that the Original Funding Model would have successfully matched Original CAT Fees with cost burdens without a complex algorithm to allocate costs across equities and options. The Original Funding Model also had the potential to result in a lack of incentives for Participants to seek efficient ways to achieve the regulatory objectives of CAT.1055 In particular, the Original Funding Model did not specify the allocation between Industry Members and Participants and it could have skewed heavily toward Industry Members. If the Original CAT Fees would have offset CAT costs without the Participants internalizing those CAT costs, Participants could lack the incentive to limit costs. Thus, a lower allocation to Participants could reduce Participants’ incentives to limit CAT costs. The ability for Participants and Industry Members to pass through fees could reduce incentive effects of the Original Funding Model, but the Commission believes that Participants and Industry Members would still have 1053 SIFMA May 2023 Letter at 4. because options market makers do not report many of their quotes to CAT, instead sending a quote-sent time stamp to options exchanges that is included in the exchanges’ CAT data, additional option market maker quotes increase the message traffic of Participants rather than option market makers and are, thus, not counted in the message traffic of Industry Members in the Original Funding Model. Consequently, roughly 72% of CAT message traffic could only affect Participant fees, which are capped in the Original Funding Model, though the Plan does not define the exact cap. See CAT NMS Plan Approval Order, supra note 2, 81 FR at 84873. 1055 See CAT NMS Plan Approval Order, supra note 2, 81 FR at 84891–2. lotter on DSK11XQN23PROD with NOTICES2 1054 Furthermore, VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 had some incentives to limit costs. In the CAT Approval Order, the Commission recognized that FINRA could pass through its fees to its members.1056 Other Participants could have also passed through their fees to their members, but such pass-throughs could take several forms. The Commission understands that Participants, including FINRA, have many revenue sources, such as transaction fees, data fees, connectivity fees, listing fees, regulatory fees. In fact, because the Original Funding Model charged Participants based on their market share, the most direct way for Participants to pass through the costs would have been to increase fees related to their market share—their transaction fees, which are based on a fee schedule set pre-trade. Because the per volume CAT fee would have been unknown at the time the Participants had to file the transaction fees for such volume, the Participants would have internalized the risk of the pass-through fees not covering their Original CAT Fees. Likewise, Industry Members who passthrough their Original CAT Fees would have had reduced incentives to limit CAT costs, but the inability to structure their pass through to perfectly align with Original CAT Fees would have forced some internalization of costs. c. Market Efficiency The Original Funding Model could have resulted in market inefficiencies, though these inefficiencies were unlikely to be significant.1057 Several of these inefficiencies derive from the fact that the Original Funding Model would have charged Industry Members a flat fee according to a tiered fee schedule. An Industry Member’s tier would have been determined by its message traffic. Because providing liquidity, including but not restricted to market making, involves more potential message traffic, the Original Funding Model could discourage liquidity provision. Discouraging liquidity provision could reduce liquidity, particularly in less liquid securities, potentially reducing market efficiency. The tiered nature of the Original Funding Model reduced the potential reduction in liquidity by flattening the fees, but this could create its own inefficiencies if Industry Members alter activity to avoid qualifying for a higher tier. The Commission concluded in the CAT NMS Plan Approval Order that any changes in behavior were unlikely except in those Industry Members near at 84853. CAT NMS Plan Approval Order, supra note 2, 81 FR at 84879. a fee-tier cutoff point, and, therefore, these behavior changes would likely not have a significant effect on market quality or efficiency.1058 2. Analysis of the Proposed Amendment The Participants provided an analysis of efficiency in the Notice. In particular, the Participants state that, ‘‘By providing for the financial viability of the CAT, the [Executed Share Model] would allow the CAT to provide its intended benefits. For example, the CAT is intended to provide significant improvements in efficiency related to how regulatory data is collected and used. In addition, the CAT could result in improvements in market efficiency by deterring violative activity.’’ 1059 The Commission considered whether the Executed Share Model promotes efficiency along several dimensions: operational efficiency, incentive alignment, and market efficiency. In this analysis, the Commission considered both how the Executed Share Model differs from the Original Funding Model and the additional details in the Executed Share Model not previously included in the CAT NMS Plan. In the analysis below, the Commission explains that the Executed Share Model itself will promote operational efficiency and market efficiency, trade off some efficiencies associated with aligning fees with CAT costs against others, and create some efficiencyimproving incentives at the expense of others. The analysis also recognizes below that some commenters stated that the Executed Share Model is less efficient than it could be. a. Operational Efficiency The Commission believes that the Executed Share Model presents some operational efficiency improvements over the Original Funding Model while recognizing that commenters point out that it may not be as efficient as other alternatives. The Executed Share Model could improve efficiency over the Original Funding Model by providing more certainty on potential costs for Industry Members and by reducing the complexity of the fees. However, it is not clear that the Executed Share Model presents an operational efficiency improvement over the Original Funding Model with respect to precision of estimates of expected total fees to be collected. Relative to the Original Funding Model, Industry Members and Participants will be better able to observe their fee per activity, in this 1056 Id. 1057 See PO 00000 Frm 00052 Fmt 4701 Sfmt 4703 1058 Id. at 84879. Notice, supra note 7, 88 FR at 17115. 1059 See E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES2 case per share transacted, and can more easily pass all or a portion of those fees through to members or customers. Under the Executed Share Model, the CAT Fee and Historical CAT Assessments per Executed Equivalent Share are known before an order is submitted such that all market participants can estimate in advance the fees charged on each potential transaction rather than Industry Members only learning about their fees per message after the end of the month under the Original Funding Model.1060 Having more precise information on fee rates helps Industry Members and Participants who choose to pass-through these fees to create fee schedules for their customers that better reflect their costs, resulting in operational efficiencies. In response to the commenter who said that Industry Members ‘‘are not set up to track and pass-through fees to the client [brokerdealers] that sent them the orders that resulted in executions’’ 1061 and other similar comments,1062 the Commission understands that such Industry Members generally have arrangements with client broker-dealers for services based on executed shares and these arrangements could include charges to cover various fees.1063 Further, CAT LLC argues that charging the executing brokers as specified in the Executed Share Model is an efficient way for CAT LLC to bill Participants and Industry Members as it is simple, straightforward, and in-line with existing fee and business models.1064 They also acknowledge that certain Industry Members will have to develop processes to collect pass-through CAT fees from clients and describe that the Plan Processor plans to make available trade-by-trade data to CAT Executing Brokers for each CAT bill, which will 1060 See supra Section IV.A.1.a for a discussion of how the per-message fees would have varied within the flat-fee tiers of the Original Funding Model. Also, one commenter stated that the Proposed Amendment would afford industry with a ‘‘straightforward rate to be applied across buyers and sellers.’’ See DASH July Letter at 2. 1061 See SIFMA May 2023 Letter at 5. 1062 See, e.g., SIFMA June 2023 Letter at 2; MMI July Letter at 2; Citadel July Letter at 20 and 24; Citadel Letter August 2023 at 5–6; and Virtu Letter at 4–5. Citadel July Letter at 20 and 24 also focused specifically on the ability for IMs to pass through Historical CAT Assessments, but those fees would also have a fixed rate charged to future executed shares, so passing those fees through would still represent an efficiency improvement over the Original Funding Model. 1063 See supra Section IV.A.1.a for information on current fee arrangements based on executed shares. See also CAT LLC July 2023 Response Letter at 9 and 34. 1064 See CAT LLC July 2023 Response Letter at 3– 4. VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 facilitate the passing-through of CAT fees.1065 The Commission believes that the Executed Share Model reduces the complexities of the Original Funding Model, improving operational efficiency, but that the Executed Share Model may not increase the precision in estimating the fees to be collected, thus creating uncertainty in its impact on operational efficiency. The Executed Share Model will not involve designing a tiered structure that estimates how many Industry Members and Participants will qualify for each tier based on projections of each’s message traffic or market share, coming up with cutoffs and flat fees in each tier to cover projected costs, and justifying each projection model, tier cutoff, and flat fee. Instead, the Executed Share Model involves estimating future volume, dividing budgeted costs by the estimated future volume, and justifying the estimated future volume model and budgeted costs. Thus, the Executed Share Model will be much less complex for Participants to implement. However, because the Executed Share Model involves estimating future volume and the Commission has observed significant fluctuations in volume, the fees actually collected in the Executed Share Model will not necessarily match the budgeted costs. Because the Original Funding Model had similar uncertainties, the Commission cannot determine if this inefficiency is more or less severe for the Executed Share Model. The Commission recognizes the inefficiencies pointed out by some commenters associated with invoicing CEBBs and CEBSs directly rather than using clearing brokers to collect fees.1066 Because the Original Funding Model allowed for but did not specify the use of clearing brokers, this inefficiency is not relative to the baseline but is relative to an alternative. The industry’s current practice is to collect certain regulatory fees from the sell-side clearing broker-dealer. One commenter stated, ‘‘[c]learing Firms are best suited to process the collection of fees as it can occur at trade settlement and the cost is ultimately borne by the end beneficiary of each transaction. This seems prudent from a logistical and efficiency perspective and, in our opinion, also introduces the least financial risk to the industry today.’’ 1067 This commenter also made similar statements in 1065 See CAT LLC July 2023 Response Letter at 9– 10. 1066 See DASH January 3 Letter at 1. 1067 Id. PO 00000 Frm 00053 Fmt 4701 Sfmt 4703 62679 subsequent comment letters.1068 However, as another commenter noted, collecting CAT fees from clearing broker-dealers could introduce inefficiencies as well.1069 b. Incentive Effects The Commission recognizes the potential for the Executed Share Model to affect incentives and, therefore, either improve or harm efficiency. Aligning fees with costs promotes economic efficiency because Industry Members and Participants bear the costs they directly or indirectly impose on CAT NMS, creating the incentive to limit costs. Overall, the Executed Share Model will have inefficiencies related to not perfectly aligning with costs, but might not be any more inefficient than 1068 See DASH April Letter at 1; DASH July Letter at 1. 1069 This could result in Industry Member CAT fees being borne by clearing broker-dealers. The SIFMA May 2023 Letter said that allocating ‘‘CAT Fees to clearing brokers would have led to unfair burdens on them and could have resulted in them shouldering the burden of CAT costs in scenarios in which they could not determine which clearing client was responsible for the costs.’’ This commenter, commenting on the prior funding proposal which originally proposed to assess CAT fees on clearing brokers instead of executing brokers, stated that clearing brokers would especially have difficulty passing on the Past CAT Costs to their clearing clients. See Letter from Ellen Greene, Managing Director, Equities & Options Market Structure, and Joseph Corcoran, Managing Director, Associate General Counsel, SIFMA, to Vanessa Countryman, Secretary, Commission (Oct. 7, 2022), at 4–5, available at https://www.sec.gov/ comments/4-698/4698-20145239-310561.pdf. This commenter also discussed the additional implementation and operational costs the prior funding model would impose on clearing brokerdealers. See Letter from Ellen Greene, Managing Director, Equities & Options Market Structure, and Joseph Corcoran, Managing Director, Associate General Counsel, SIFMA, to Vanessa Countryman, Secretary, Commission (June 22, 2022) (‘‘SIFMA June 2022 Letter’’), at 9, available at https:// www.sec.gov/comments/4-698/4698-20132695303187.pdf. Also, the Proposed Amendment requires the collection of CAT fees from both the buy and sell side of the transaction. Commenters on the prior funding proposal stated that current industry practice does not involve clearing brokerdealers collecting fees from the buy-side of the transaction, and thus it might require costly implementation steps from clearing broker-dealers. See Letter from Kirsten Wegner, Chief Executive Officer, Modern Markets Initiative, to Vanessa Countryman, Secretary, Commission (June 21, 2022), at 3, available at https://www.sec.gov/ comments/4-698/4698-20132603-303126.pdf; SIFMA June 2022 Letter at 9; see https:// www.sec.gov/comments/4-698/4698-20132603303126.pdf; SIFMA June 2022 Letter at 9. See also supra note 58. CAT LLC describes in their response to comments that charging clearing brokers would be less efficient than charging executing brokers because it would require linking executed shares to clearing brokers. They argue that charging executing brokers is simple, straightforward, and in-line with existing fee and business models. They also describe how CAT LLC is planning to make passthrough of costs easier, which would also increase operational efficiency for Participants and Industry Members. See CAT LLC July 2023 Response Letter at 3 and 5. E:\FR\FM\12SEN2.SGM 12SEN2 62680 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES2 the Original Funding Model. In particular, basing Industry Member fees on share volume rather than message traffic could reduce efficiency relative to the Original Funding Model, but the efficiency benefits of the Original Funding Model would have been dampened by its tiered structure. The Commission recognizes that, based on the breadth of CAT costs, it is not feasible to calculate the cost burden on CAT of each CAT Reporter 1070 and the Executed Share Model could also have some efficiency improvements over the Original Funding Model. The Commission also recognizes the potential risks of the Proposed Amendments on not incentivizing Participants enough to consider cost efficiency. In addition, the Commission considered other incentives as well, but believes that the potential magnitude of CAT fees is unlikely to significantly affect these efficiencies. Because CAT costs have some relation to message traffic, a fee schedule less dependent on message traffic such as the Executed Share Model will be less efficient on this dimension. As such, the Executed Share Model could create inefficiencies relative to the messagetraffic based Original Funding Model. Further, the Executed Share Model could result in Participants or Industry Members paying different fees across transactions despite potential similarities in cost. For example, Participants or Industry Members will be charged ten times the fee for a 1,000 share transaction than for a 100 share transaction. While 1,000 share transactions may, on average, have a higher burden on CAT than a 100 share transaction because such transactions are more likely to involve more messages and more complex lifecycles, the burden of a 1,000 share transaction on CAT versus a 100 share transaction is unlikely to be ten times higher. However, the incentive efficiencies of the message-traffic based fees in the Original Funding Model would have been dampened by several factors,1071 including the tiered structure of the 1070 See Notice, supra note 7, 88 FR at 17103 (‘‘In light of the many inter-related cost drivers of the CAT (e.g., storage, message traffic, processing), determining the precise cost burden imposed by each individual CAT Reporter on CAT is not feasible.’’). See also CAT LLC July 2023 Response Letter at 34, where the Participants describe that it is difficult to determine the precise cost burden imposed by each individual CAT reporter. They state that increased trading activity impacts message traffic, data processing, storage, and other factors and, thus, correlate with cost burdens and that Industry Member activity is generally for the purpose of transacting. 1071 See supra Section IV.A.1.c for further discussion of the inefficiencies of the Original Funding Model. VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 Original Funding Model and by the fact that message traffic is not the only significant cost driver for CAT.1072 One commenter raised other potential inefficiencies related to outsized allocations to transactions for retail investors associated with those retail investors trading low priced NMS stocks.1073 The Commission recognizes that such an allocation could discourage brokers from servicing retail investors if they cannot pass through all CAT costs to investors and/or that retail investors could be paying for a large portion of CAT costs. In the Approval Order, the Commission recognized that retail investors were likely to bear costs for CAT and were beneficiaries of CAT.1074 Further, if the Executed Share Model over-allocates fees to equity market transactions relative to options market or OTC equity transactions, it will create inefficiency by artificially inflating equity transaction costs while artificially decreasing options and OTC transaction costs. The Commission has mixed information on whether the Executed Share Model will, indeed, over-allocate fees to the equity markets. One commenter stated that equity trading volume creates a relatively low burden relative to options activity.1075 The Commission disagrees with this statement. Based on March 2023 public market data,1076 equities (NMS and OTC) account for approximately 73% of the equivalent share volume while options account for approximately 27%. On the contrary, based on an analysis of 1072 See supra note 1050 and accompanying text for a discussion of CAT cost drivers. The biggest cost driver is for linking order messages into a lifecycle, followed by storage costs. 1073 See Citadel July Letter at 20. This commenter states that trades in stocks with sub $1 prices account for 33% of retail NMS stock trading and that rounding fractional shares to 1 share further increases the share of CAT costs charged to retail transactions. See also Citadel August Letter at 4. 1074 See, e.g., CAT NMS Plan Approval Order, supra note 2, 81 FR at 84863, 84881, 84888, and 84893 for examples of statements on investors bearing the costs of CAT and at 84833 to 84845 for ways that investors benefit from CAT. 1075 See FINRA April 2023 Letter at note 23. See also Citadel August Letter at 4 citing to the FINRA April 2023 Letter. 1076 Calculated using monthly market volume data from Cboe for equities: Cboe, US Equities: Historical Market Volume Data, available at https:// www.cboe.com/us/equities/market_statistics/ historical_market_volume/, OCC for options: Options Clearing Corp., Market Data: Monthly & Weekly Volume Statistics, available at https:// www.theocc.com/market-data/market-data-reports/ volume-and-open-interest/monthly-weekly-volumestatistics, and FINRA for OTC securities: FINRA, Over-the-Counter-Equities: Market Statistics, available at https://otce.finra.org/otce/ marketStatistics/historicalData. Option contract volume is multiplied by 100 and OTC volume is divided by 100 to establish rough estimates of equivalent share volume to reported equity transactions. PO 00000 Frm 00054 Fmt 4701 Sfmt 4703 March 2023 CAT data, equities account for 23% of message traffic while options account for 77%.1077 The message traffic in the options market is driven by options market quotes, which are reported by options exchanges. If processing and storing CAT messages is a primary cost driver and option and equity messages are equally burdensome, aligning fees to costs would result in the Participants and Industry Members in the equities markets being assessed approximately 23% of the fees, suggesting that the Executed Share Model allocation of approximately 73% of the fees overallocates fees to equities. However, because equity order linking complexity likely accounts for higher costs than option order linking complexity, the higher allocation of CAT fees to equity market Participants and Industry Members could promote efficiency. The linkage processing costs of CAT are three times the storage costs.1078 The Commission estimated that roughly 90% of CAT Participant message traffic and 72% of total message traffic is comprised of options market quotes.1079 While option market maker quotes account for such a large fraction of message traffic and, thus, storage costs, option market maker quotes involve lower linkage costs than other messages.1080 Indeed, the equities market accounted for about 48.4% of the number of linkages processed and the number of options linkages processed was a third of the number of options messages reported, reflecting less linkage processing for many options market maker quotes.1081 Additionally, the Commission understands that 1077 CAT Plan Participant and Industry Member Report Card Monthly Summary Tables, which contain the number of records processed into CAT. 1078 See supra note 1050 and accompanying text for a discussion of cost drivers. ‘‘Linker’’ accounts for 51% of CAT costs while storage accounts for 17%. Data processing, Collection and ETL costs are 15%. 1079 Mar. 2023 CAT data. If processing and storing CAT messages is a primary cost driver, options exchanges’ collective 8.9% share of CAT costs (compared to equity exchanges’ 13.6% share and FINRA’s 10.8% share) may also appear to inefficiently over-allocate the Participants’ share of CAT costs to equity exchanges. However, processing and storage costs combined account for lower costs than linkage processing. See id. 1080 See supra Section IV.A.1.b for further discussion of option market maker quotes. 1081 Based on Mar. 2023 CAT data containing statistics for validations and linkage for files submitted to FINRA CAT, the equities market accounted for 1.24 trillion linkages processed on 1.20 trillion messages reported while the options market accounted for 1.33 trillion linkages processed on 4.02 trillion messages reported. Most options market maker quotes have only two events in their CAT Lifecycle (i.e., quote and quote cancelation) and don’t require linkage to other CAT events. E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices equities linkages can be more complex, and thus more costly to process, than are options messages. As a result, the Commission disagrees with the commenter’s assertion that equity trading volume creates a relatively low burden relative to options activity. The Commission believes that the Executed Share Model presents a risk, as the Original Funding Model did,1082 that Participants might not have the incentive to seek efficient ways to achieve the regulatory objectives of CAT. While the Executed Share Model specifies an allocation that was unknown in the Original Funding Model, several commenters question whether the allocation provides Participants with incentives to seek efficiency.1083 Commenters also expressed concern with rising CAT costs to illustrate the magnitude of this potential inefficiency,1084 stating that they do not have enough transparency on cost drivers to assess whether CAT costs are reasonable,1085 that no data or estimates regarding future costs were provided,1086 and that the Proposed Amendment has no mechanism to control or limit the budget.1087 Some commenters further stated that the ability to pass through fees lessens Participants’ incentive to control costs.1088 The Participants have stated that the transparency and level of detail in the fee filings will impose a discipline on the Participants to justify the costs of CAT.1089 For example, separating 1082 See supra Section IV.A.1.b. e.g., Citadel July Letter at 1, 5, 6, and 16; Citadel August Letter at 2; MMI July Letter at 1–3. 1084 See, e.g., Citadel July Letter at 2, 5, 7–9, 23, and 26–27; Citadel August Letter at 7–8; FIA PTG at 4–5; FIF/SIFMA at 5. One commenter pointed out that CAT costs typically exceed the budget by 20% (See Citadel July Letter at 8–9, n.21; Citadel August Letter at 7). In addition, one commenter stated that CAT operating costs significantly exceed cost estimates in the CAT NMS Plan and recent increases in CAT operating costs are not sustainable (See FIF/SIFMA Letter at 7–8). 1085 See, e.g., Citadel July Letter at 2, 6–7, 13–14, and nn.63, 64; Citadel August Letter at 6–7; FIA PTG at 1 and 4, MMI July Letter at 3. In addition, one commenter stated that enhanced transparency about CAT costs is necessary, especially for the cloud costs (See FIF/SIFMA Letter at 8–9). 1086 See Citadel August Letter at 7. 1087 See, e.g., SIFMA June Letter at 2 and 4; Virtu Letter at 4; FIF/SIFMA Letter at 5; SIFMA AMG Letter at 3. One commenter (FIF/SIFMA Letter at 5) pointed out that there is no legal limit to CAT costs. One commenter (Citadel August Letter at 7) states that there are no constraints on costs. 1088 See, e.g., FIA PTG Letter at 2–3; Citadel July Letter at 16 and 22; and MMI July Letter at 4. 1089 See also, CAT LLC May 2023 Response Letter at 10–11 for a discussion of other efforts to manage the costs of CAT. The Participants provide a more comprehensive response about cost management efforts (See CAT LLC July 2023 Response Letter at 19–20). They state that Industry Members will have ample opportunity to comment, there will be lotter on DSK11XQN23PROD with NOTICES2 1083 See, VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 Historical CAT Costs from Prospective CAT Costs allows Industry Members more insight into the sources of CAT costs underlying the fees and to allow Industry Members to comment on the size of such fees. The Participants offer explanations for the increases in CAT costs. For example, at the adoption of the CAT NMS Plan in 2016, the Commission estimated that the CAT would receive 58 billion records per day, but the Participants state that as of the fourth quarter of 2022, the CAT receives an average 418 billion records per day.1090 This highlights the difficulty in estimating future costs because costs are directly related to trading activity. While the Participants did not provide data or estimates regarding future costs, they discussed how costs are related to trading activity, which should help Industry Members and other market participants form their own estimates. The Participants also disagree that they are not incentivized to manage costs with a one-third allocation. They argue that currently, there is a strong incentive to manage costs while paying 100% of the costs and that incentive will continue with a one-third allocation. They state that CAT costs are substantial and they will continue to receive critical review.1091 In response to comments on whether the exchanges will pass through all of their fees, some of the equity exchange Participants already charge transaction fees at the maximum level allowed by regulation, which prevents them from increasing their transaction fees to efficiently pass through all CAT fees to their members.1092 As a result, such equities exchanges will likely internalize some of their CAT fees, ensuring some incentive to limit costs. In addition, the fact that FINRA is expected to be the heaviest regulatory user of CAT suggests that FINRA being responsible for a large proportion of CAT costs promotes efficiency.1093 Further, the Participants quarterly budget information and financials, there is Commission oversight, and the Participants have ongoing cost discipline efforts through a cost management group and other efforts. For more details of the activities of the cost management group, see CAT LLC July 2023 Response Letter at 22–26. 1090 See CAT LLC July 2023 Response Letter at 22. 1091 See CAT LLC July 2023 Response Letter at 22. 1092 See Securities Exchange Act Release No. 96494 (Dec. 14, 2022), 87 FR 80266, tbl.5 (Dec. 29, 2022). While exchanges charge several tiers of fees, they will not be able to raise the fees that already match the fee cap. 1093 But see FINRA April 2023 Letter: ‘‘it is unclear . . . how the outsized allocation to FINRA is based on the extent to which FINRA participates in and benefits from the markets. In addition, this rationale conflates the costs to create and operate CAT with the usage of CAT data.’’ The Commission PO 00000 Frm 00055 Fmt 4701 Sfmt 4703 62681 argue that the complexity and diversity of Industry Members’ chosen business models and order handling practices contributes substantially to CAT costs because they result in increased processing and storage costs.1094 In contrast, exchange features are not nearly as diverse as the ways in which Industry Members execute trades.1095 In addition, Industry Members have customers that create CAT costs related to FDIDs, CCIDs, and CAIS, while Participants do not.1096 Further, the Participants state that ‘‘Industry Members have far more late data and corrections than Participants’’ and that ‘‘[t]he linker costs related to late data and corrections are significant.’’ 1097 The Commission believes that Industry Members being responsible for a large proportion of CAT costs promotes efficiency. This is particularly valid for late data and corrections, which is something Industry Members can directly control to reduce overall CAT costs. The Commission believes the Executed Share Model trades off incentives to inefficiently spend too much against incentives to inefficiently spend too little. The Commission does not believe that being responsible for CAT costs (or having to internalize CAT costs they do not pass through) will result in Participants having the incentive to under-spend on regulatory tools.1098 Any such under-spending would not reduce the Participants’ selfregulatory duties and could result in inefficiencies in their own regulatory costs. One commenter stated that charging for Historical CAT Costs using current volumes bears no relation to the contributions to CAT Costs.1099 The Commission agrees that the Historical Assessments in the Executed Share Model do not provide much incentive for efficiency. However, this does not reflect a change in the efficiency from the Original Funding Model, because Industry Members cannot retroactively change their behavior to reduce CAT believes that data usage does significantly contribute to CAT costs. Query tools, for example, account for 7% of CAT costs. See supra note 1050. Note that FINRA’s allocation in the Original Funding Model (∼48% for Participants’ share of the costs allocated to equities) could have been the same or greater than the allocation in the Executed Share Model. 1094 See CAT LLC July 2023 Response Letter at 7. 1095 See supra note 1094. 1096 See supra note 1094. 1097 See supra note 1094. 1098 The Participants state that they seed to reduce costs ‘‘without adversely affecting the regulatory goals of the CAT.’’ See CAT LLC July 2023 Response Letter at 22. 1099 See SIFMA January 2023 Letter at 7. E:\FR\FM\12SEN2.SGM 12SEN2 62682 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices lotter on DSK11XQN23PROD with NOTICES2 costs under either model. Indeed, by separating Historical CAT Assessments from CAT Fees, the Executed Share Model could allow Industry Members and Participants to more clearly assess how their own actions could affect the Prospective CAT Costs and their CAT Fees to promote improvements to efficiency relative to the Original Funding Model. The Executed Share Model could change other incentives that could potentially affect efficiencies, but the expected magnitude of CAT Fees will mitigate the impact of such incentive changes. For example, if the fees for OTC transactions are not passed on to non-FINRA members, the Executed Share Model could discourage FINRA membership by those who have a choice. Further, the Historical Fee Rate in Exhibit C of $0.0000417950 per Executed Equivalent Share would result in each CEBB and CEBS paying $0.00001393167 per Executed Equivalent Share (one third of $0.0000417950). A comparison to recent Section 31 fees of $0.00009 per share to $0.0004 per share 1100 and average effective half spreads of $0.013 1101 indicates that the anticipated Historical Fee Rate and Fee Rate, assuming the Fee Rate is of a similar magnitude as the Historical Fee Rate, are expected to be relatively small.1102 1100 Section 31 fees are expressed per dollar volume traded. Translating this to a per share range involves identifying reasonable high and low trade sizes. The lower end of this range comes from the 25th percentile in $ trade size of 1,200 and share trade size of 71 from the first quarter of 2021. The higher end of this range comes from the 75th percentile in $ trade size of 5,200 and share trade size of 300 from the first quarter of 2021. Section 31 fees have ranged from $5.10 per $Million to $23.10 per $Million from Oct. 1, 2016 to Mar. 1, 2023. The CAT LLC July 2023 Response Letter at 18–19 offers two additional comparisons to transaction-based fees. They state that ‘‘Nasdaq charges various transaction-based equities fees, ranging from $0.0005 per share to $0.0030 [per share].’’ They also state that ‘‘Cboe charges an options regulatory fee that is $0.0017 per contract, and NYSE American charges an options regulatory fee of $0.0055.’’ Assuming that option contracts are for 100 shares of the underlying, this would translate to options regulatory fees of $0.000017 and $0.000055 per equivalent share. 1101 This is the average share-weighted effective spread across more liquid stocks from the first quarter of 2021. More liquid stocks were defined as the stocks in the most actively traded decile by total daily trading volume. Effective spreads are a measure of transaction costs. For each trade, the effective spread was calculated as the absolute value of the difference between the trade price and the quote midpoint at the time of the trade. Less liquid stocks have higher effective spreads, making the CAT fees even smaller relative to transaction costs. 1102 See Notice, supra note 7, 88 FR at 17130. In particular, Exhibit C sets forth illustrative Historical CAT Assessments. While this is an illustrative example and actual Historical CAT Assessments may differ, the Commission believes that the VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 c. Market Efficiency The Commission believes that the Executed Share Model will promote market efficiency, but has uncertainty as to the degree of any improvement. The Executed Share Model eliminates the disincentives to provide liquidity of the Original Funding Model that could have resulted in market inefficiencies, including removing the potential for perverse incentives near the tier cutoffs.1103 Instead of paying higher fees with more message traffic, which would discourage liquidity providing activity,1104 the Executed Share Model charges a fee for each Executed Equivalent Share. Because market making and other liquidity providing activity tends to have a high ratio of message traffic to transactions, the Executed Share Model could be more favorable towards providing liquidity than the Original Funding Model. Promoting liquidity provision promotes market efficiency. However, because the Original Funding Model addressed this disincentive in its tier structure, the Commission cannot be certain that the Historical Fee Rate per equivalent share, will be calculated using the methods laid out in the table ‘‘Calculation of Historical CAT Assessment.’’ Further, the Commission assumes that the example Historical Fee Rate is of the approximate magnitude of potential Historical Fee Rates because this rate was calculated using actual CAT costs and volume estimates grounded in historical volume. While the rate may be imprecise for the reasons discussed in Exhibit C, the rate is unlikely to be orders of magnitudes larger because the sample fees assume two-year collection whereas the Operating Committee could choose a longer collection period. While Exhibit C only estimates Historical Fee Rates, the Commission does not expect Fee Rates to be significantly larger than Historical Fee Rates because Historical Fees will cover a longer time period than CAT Fees and will cover a broader scope of activities than CAT Fees. Historical Costs include costs incurred since the CAT Approval in Nov. 2016 to build, operate and maintain CAT up to a certain date and will be spread out over two to five years (the estimate was based on spreading it out two years). On the other hand, CAT Fees are based on Prospective Costs, which are estimates of monthly costs from a certain date forward and include costs to operate and maintain CAT. While some commenters expressed concern about increasing CAT costs that are much higher than those estimated in the 2016 Approval Order (See, e.g., SIFMA June Letter at 4; MMI July Letter at 3; and Virtu Letter at 4), some of those costs may reflect implementation costs in addition to ongoing costs. Once CAT is fully implemented, the Commission expects annual operating costs to reflect ongoing costs only. See also CAT LLC July 2023 Response Letter at 17 for a comparison and discussion of historical and prospective CAT costs. The CAT LLC July 2023 Response Letter at 18–19 also provides another example of a Historical Fee Rate. They add an additional year and consider all Historical CAT Costs for prior to 2023 and find that each CEBB and CEBS would pay $0.0000142689 per executed equivalent share (one third of $0.0000428068). The Historical Fee Rate based in this example is close to the Historical Fee Rate in Exhibit C. 1103 See supra Section IV.A.1.a. 1104 Id. PO 00000 Frm 00056 Fmt 4701 Sfmt 4703 reduction of this disincentive would have a significant effect on market efficiency. Further, the Commission previously concluded that the effect of behavior changes around the tier cutoffs on market efficiency was likely not significant.1105 As a result, the Commission believes the removal of tiers promotes market efficiency but is unable to conclude that it will significantly improve market efficiency. Some commenters stated that the Proposed Amendments would harm liquidity provision and increase costs for investors, thus harming market efficiency.1106 The Commission recognizes that in charging fees only to CEBB and CEBS, the fees will be charged to fewer Industry Members than under the Original Funding Model and that market makers could be charged a large proportion of those fees. This could increase the importance of passing through fees to the ability to spread those fees out among more market participants. The Commission believes that efficiency improvements to the ability to pass through fees 1107 will help alleviate the risk that CAT fees will harm liquidity provision from market makers and market efficiency. Some commenters argued that under the Proposed Amendment all CAT fees will ultimately be passed through to investors 1108 and retail investors in particular,1109 thereby increasing transaction costs for investors and reducing market efficiency. The Commission recognizes that CAT fees may be passed through to investors, but the Proposed Amendment covers the allocation of CAT fees for operating the CAT among Participants and Industry Members and does not address whether Industry Members pass through their CAT fees to their customers.1110 Further, Industry Members may have passed through CAT fees to their customer under the Original Funding Model as well. Hence, any impact on market efficiency of CAT fees being potentially passed through to investors under the Proposed Amendment may not represent a change to the baseline. Finally, while Industry Members may pass through CAT fees to their customers, the customers also receive a 1105 See supra note 1058 and accompanying text. e.g., MMI July Letter at 2; Citadel July Letter at 2; Virtu Letter at 5. One commenter stated that the Proposed Amendments would disproportionately impact market makers in particular (see Citadel July Letter at 2 and Citadel August Letter at 4). 1107 See supra Section IV.A.1 for a discussion of pass-through efficiency improvements. 1108 See SIFMA AMG Letter at 2. 1109 See Virtu Letter at 5. 1110 See supra Section III.A.2. 1106 See, E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices benefit from the CAT. The CAT provides more effective oversight of market activity, which could increase investor confidence, resulting in expanded investment opportunities and increased trading activity.1111 B. Competition Several commenters stated that the Proposed Amendments present a burden on competition.1112 The Commission analyzed the impact of the Proposed Amendments on the competition for trading services, brokerdealer services, and regulatory services. The Commission believes the Proposed Amendment could negatively alter the competitive position of a few types of competitors for trading services and broker-dealer services, but the Commission also believes that whether such changes will render these markets less competitive overall is uncertain. Specifically, the Commission believes that the Executed Share Model could provide exchanges with a competitive advantage relative to off-exchange market makers who internalize in providing trading services. Further, the Executed Share Model could provide competitive advantages to certain broker-dealer business models over others and could harm the competitive position of smaller broker-dealers by putting a strain on their net capital. 1. Baseline In the CAT NMS Plan Approval Order, the Commission identified certain elements of the Original Funding Model that could have negative implications for competition in trading services, broker-dealer services, and regulatory services.1113 In addition, the Commission stated ‘‘the uncertainty regarding how the [Operating] Committee allocated the fees used to fund the Central Repository could affect the conclusions on competition.’’ 1114 lotter on DSK11XQN23PROD with NOTICES2 a. Trading Services The market for trading services, which is served by exchanges, ATSs, and liquidity providers (internalizers and others), relies on competition to supply investors with execution services at efficient prices. These trading venues, which compete to match traders with counterparties, provide a framework for price negotiation and disseminate trading information. The competitors for trading services compete 1111 See supra note 761 and preceding text. SIFMA June Letter at 1–2; SIFMA July Letter at 2; Virtu Letter at 2 and 3; and Citadel July Letter at 1. 1113 See CAT NMS Plan Approval Order, supra note 2, 81 FR at 84882–84884. 1114 See id. at 84882 n.2800. 1112 See VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 on a number of dimensions, such as transaction fees and execution quality, and some attempt to attract order flow by paying for that order flow or otherwise rebating. The market for trading services in options and equities consists of 24 national securities exchanges, which are all Plan Participants, and off-exchange trading venues including broker-dealer internalizers, which execute substantial volumes of transactions in equities, and 39 ATSs, which are not Plan Participants.1115 Aside from trading venues, exchange market makers provide trading services in the securities market. These firms stand ready to buy and sell a security ‘‘on a regular and continuous basis at publicly quoted prices.’’ 1116 Exchange market makers quote both buy and sell prices in a security held in inventory, for their own account, for the business purpose of generating a profit from trading with a spread between the sell and buy prices. Off-exchange market makers also stand ready to buy and sell out of their own inventory, but they do not quote buy and sell prices.1117 In the Original Funding Model, the portion of fees allocated to the exchanges, FINRA, and ATSs would have been divided among them according to market share of share volume and the portion allocated to Industry Members would have been divided among them according to message traffic, including message traffic sent to and from an ATS.1118 The Operating Committee would have allocated fees for the equities market and options market separately based on market share in each market. The Commission concluded that the Original Funding Model could have resulted in a competitive advantage for exchanges over ATSs because message traffic to and from an ATS would have generated fee obligations on the broker-dealer that sponsors the ATS, while exchanges would have incurred almost no message traffic fees.1119 In addition, the Commission recognized uncertainties associated with the allocation of fees that could have affected competition, such as the level of fees at each tier (though the entities in the smallest 1115 See Securities Exchange Act Release No. 61358, 75 FR 3594 (Nov. 23, 2016) at 3598–3560, (for a discussion of the types of trading centers). The number of ATSs includes 34 NMS ATSs from https://www.sec.gov/divisions/marketreg/form-atsn-filings.htm and 5 OTC ATSs. 1116 See SEC, Market Maker, available at https:// www.sec.gov/answers/mktmaker.htm. 1117 See Securities Exchange Act Release No. 96495, 88 FR at 181 (Jan. 3, 2023). 1118 See CAT NMS Plan Approval Order, supra note 2, 81 FR at 84793. 1119 See id. at 84883. PO 00000 Frm 00057 Fmt 4701 Sfmt 4703 62683 activity tier would have paid the lowest fees) and whether off-exchange liquidity providers would have paid fees similar to similarly-sized ATSs and exchanges. Finally, the Commission recognized potentially differential fees across market participants, including lower fees for internalizers, which could affect competition.1120 b. Broker-Dealer Services For simplification, the Commission presents its analysis as if the competition to provide broker-dealer services encompasses one broad market with multiple segments even though, in terms of competition, it actually may be more realistic to think of it as numerous inter-related markets. There are approximately 1,100 broker-dealers that are CAT Reporters.1121 The competition to provide broker-dealer services covers many different markets for a variety of services, including, but not limited to, managing orders for customers and routing them to various trading venues, holding customer funds and securities, handling clearance and settlement of trades, intermediating between customers and carrying/clearing brokers, dealing in government bonds, private placements of securities, and effecting transactions in mutual funds that involve transferring funds directly to the issuer. Some broker-dealers may specialize in just one narrowly defined service, while others may provide a wide variety of services. The market for broker-dealer services relies on competition among brokerdealers to provide the services listed above to their customers at efficient levels of quality and quantity. The broker-dealer industry is highly competitive, with most business concentrated among a small set of large broker-dealers and thousands of small broker-dealers competing for niche or regional segments of the market. Brokerdealers often compete among each other through commission rates, service quality, and service variety and some bundle their services. At present, some broker-dealers specializing in individual investors charge zero commissions and instead cover costs by receiving payment for order flow or charging more for other services. To limit costs and make business more viable, small broker-dealers often contract with larger broker-dealers or service bureaus to handle certain functions, such as clearing and execution, or to update 1120 See 1121 See E:\FR\FM\12SEN2.SGM id. at 84879. Notice, supra note 7, 88 FR at 17104. 12SEN2 62684 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices their technology.1122 Large brokerdealers typically enjoy economies of scale over small broker-dealers and compete with each other to service the smaller broker-dealers, who are both their competitors and their customers. Some broker-dealers may offer specialized services in one line of business mentioned above, while other broker-dealers may offer diversified services across many different lines of businesses. As such, the competitive dynamics within each of these specific lines of business for broker-dealers is different, depending on the number of broker-dealers that operate in the given segment and the market share that the broker-dealers occupy. The CAT NMS Plan Approval Order described the Original Funding Model as an explicit source of financial obligation for broker-dealers and therefore an important feature to evaluate when considering potential differential effects of the Plan on competition in the market for brokerdealer services.1123 The Commission understood that the Original Funding Model should have resulted in the smallest broker-dealers paying the lowest fees,1124 but the Plan did not outline how the magnitudes of fees would have differed across the tiers or whether the smallest broker-dealers would have paid the highest permessage fees. The Commission concluded that, regardless of the differential effects of the CAT NMS Plan Funding Model on small versus large broker-dealers, the CAT NMS Plan Funding Model, in aggregate, would have likely not reduced competition in the overall market for broker-dealer services.1125 lotter on DSK11XQN23PROD with NOTICES2 c. Regulatory Services In the CAT Approval Order, the Commission considered the effect of the CAT NMS Plan on competition to provide regulatory services.1126 SROs compete to provide regulatory services in at least two ways. First, because SROs are responsible for regulating their members and the trading within venues they operate, their regulatory oversight is bundled with the operations of their venues. Consequently, for a brokerdealer, selecting a trading venue also involves being subject to regulatory oversight of the SRO that operates that 1122 See Securities Exchange Act Release No. 63241 (Nov. 3, 2010), 75 FR 69791, 69822 (Nov. 15, 2010) (Risk Management Controls for Brokers or Dealers with Market Access). 1123 See CAT NMS Plan Approval Order, supra note 2, 81 FR at 84885. 1124 See id. at 84884. 1125 See id. at 84887. 1126 See id. at 84887. VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 venue. Second, SROs can provide regulatory services for other SROs through the use of RSAs.1127 In addition, some regulatory activity is coordinated among SROs through multiparty 17d–2 agreements.1128 FINRA is the primary provider of contracted regulatory services. Any new competitors for regulatory services would face significant barriers to entry in building up the necessary expertise and technical capabilities.1129 RSAs are contracts that would not be renegotiated as often as CAT Fees would vary, which limits the precision to which FINRA can increase the charges on these agreements as a mechanism to pass through its CAT Fees. Since the start of the CAT NMS Plan implementation, the Commission has not observed a change in the competition for regulatory services. 2. Analysis of the Proposed Amendment a. Trading Services The Participants state that, ‘‘the [Executed Share Model] would not impose an inappropriate burden on competition,’’ arguing that transactionbased models for fee recovery are already in place.1130 The Commission agrees that transaction-based models do offer some efficiency benefits over the Original Funding Model,1131 but believes the Proposed Amendment may provide a competitive advantage to exchanges and a competitive disadvantage to executing brokerdealers who internalize. The effects on these competitors might not affect the overall level of competition because the fees are expected to be relatively small. The Commission believes that the Proposed Amendment may provide a competitive advantage for exchanges over off-exchange trading venues, but this advantage may not be large relative to the level of competition and relative to the advantages for exchanges in the Original Funding Model. In particular, the Executed Share Model will allocate higher CAT fee allocations to Industry Members relative to Participants, but 1127 See supra note 320 and accompanying text. 17 CFR 240.17d–2. 1129 The Commission stated in the Approval Order that ‘‘CAT may reduce barriers to entry for this market’’ while acknowledging other barriers to entry. See CAT NMS Plan Approval Order, supra note 2, 81 FR at 84887, note 2849 (describing the barriers to entry addressed by CAT). See also Securities Exchange Act Release No. 95388 (July 29, 2022), 87 FR 49930 (August 12, 2022) at 49961 (describing the barriers to entry of potential new national securities associations more generally). 1130 See Notice, supra note 7, 88 FR at 17115. 1131 See supra Section IV.A.2.b and IV.A.2.c for discussions of efficiency gains associated with basing CAT fees on shares executed rather than message traffic. 1128 See PO 00000 Frm 00058 Fmt 4701 Sfmt 4703 exchanges, one type of Participant, could be in a better position to avoid raising transaction fees to offset their CAT fee allocations. Using March 2023 data, the Commission estimates that 31% of share volume is reported to FINRA trade reporting facilities while the remaining 69% is reported by exchanges.1132 The Commission believes that FINRA’s allocation of CAT fees likely will be passed through to Industry Members.1133 If FINRA’s CAT fees are passed through to Industry Members, the Commission believes that Industry Members could bear 77% of CAT costs,1134 assuming that the exchanges do not also directly passthrough their CAT fee allocations to their members.1135 In fact, if the exchanges are able to offset their CAT fees in ways other than increasing transaction fees on exchanges, the cost to transact on ATSs or directly through broker-dealers will appear to increase more in response to CAT fee allocations, providing exchanges with a competitive advantage.1136 This is particularly probable for exchanges who do not rely solely on revenues from transaction fees. However, ATSs might be better off relative to exchanges under the Executed Share Model than they would have been under the Original Share Model, which would have resulted in a competitive disadvantage for ATSs.1137 The Executed Share Model could increase the costs of internalization 1132 Calculated using monthly market volume data from CBOE for equities, OCC for options, and FINRA for OTC securities. Option contract volume is multiplied by 100 and OTC volume is divided by 100 to establish equivalent share volume to reported equity transactions. 1133 See FINRA April 2023 Letter at 7 (‘‘If the Funding Model is approved by the Commission, FINRA intends to file a rule change to increase member fees simultaneous with the filing of any proposed rule change to effectuate the Funding Model.’’). 1134 This results from dividing the FINRA allocation (31%) by its share of each off-exchange or OTC Executed Equivalent Share, three, and then adding the Industry Member share, two-thirds, to the result (31% × 1⁄3 + 2⁄3 = 77%) and ignores what Industry Members would pass to investors. Several commenters expressed concerns about the competitive effects of Industry Members paying 78– 80% of CAT fees, assuming 100% FINRA pass through, and potentially more if exchanges pass through as well (See, e.g., Virtu Letter at 1–2 and 4, FIA PTG Letter at 2–3, and Citadel July Letter at 16, 21 and 22). The Commission analysis assesses this competition from the ability to competitively price transaction services. 1135 If exchanges passed their CAT fees onto their members in full, the Industry Members would effectively bear 100% of the CAT allocation (ignoring what they would pass to investors). 1136 One commenter stated that the Proposed Amendments will result in off-exchange transactions being assessed higher fees than onexchange transactions (See Citadel July Letter at 21). 1137 See supra note 1119 and accompanying text. E:\FR\FM\12SEN2.SGM 12SEN2 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices relative to agency order matching (or riskless principal), creating a competitive disadvantage for the internalization model, reversing the competitive advantage internalizers would have had under the Original Funding Model.1138 Specifically, offexchange market makers will be assessed at least CEBB or CEBS for their internalizing trades, both when trading with non-broker-dealer customers or broker-dealers who are not FINRA members and also when internalizing the orders of FINRA members or their customers. However, they do not have more than one customer to which to directly pass-through this fee. In particular, if an exchange were to directly pass-through its CAT Assessments, it could split its 1⁄3 fee across buyers and sellers, or 1⁄6 each (each side would also have a 1⁄3 CAT assessment as CEBB or CEBS for a total of 1⁄2). However, for internalizers to directly pass-through their fees would mean the internalized customer (whether an Industry Member or not) would pay 2⁄3 of the fee plus whatever pass-through they pay for the FINRA assessment (up to 1⁄3). Alternatively, an internalizer could also recover CAT assessments by reducing payment for order flow or price improvement.1139 Any of these alternatives could hurt internalizers competitively and create the incentive to not fully pass-through their fees,1140 thus reducing their profit margins. In addition, some executing brokers could be charged two-thirds of the fee per Executed Equivalent Share when internalizing the orders of customers or non-FINRA broker-dealers, though this is likely rare. More generally, any market makers, whether on exchange or not, will be charged fees for their proprietary trading, and this could create competitive advantages in certain situations. The Commission recognizes that this likely would result in onexchange market makers in equities being at a competitive disadvantage in having to absorb the fees because they do not know the identities of their 1138 See 1139 See supra note 1120 and accompanying text. CAT LLC July 2023 Response Letter at 9– lotter on DSK11XQN23PROD with NOTICES2 10. 1140 One commenter stated that many executing brokers will absorb CAT fees (See Virtu Letter at 5). However, the Participants argue that the executing brokers may determine to pass their CAT fees through to their own customers and thus may not absorb the CAT fees (See CAT LLC July 2023 Response Letter at 8–9). Another commenter stated that fees charged on proprietary trading cannot be passed through (See Citadel July Letter at 19–20; see also Citadel August Letter at 3). This latter commenter also stated that the potential to pass through some CAT costs does not alleviate the competitive issues (See Citadel July Letter at 19; see also Citadel August Letter at 4). VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 counter-parties to directly pass-through the fees and they do not have other arrangements, such as payment for order flow, that could facilitate indirectly passing-through fees. Because other liquidity providers who post limit orders and quotes to trade would face the same cost, the displayed quotations on exchanges could appear to be less competitive overall but would likely increase only marginally—enough to cover CAT assessments. Such a marginal increase could also help to offset any disadvantage to internalization because marginally wider spreads could help internalizers avoid reductions in price improvement and payment for order flow. In options, however, the Executed Share Model could result in exchange members who bring an order to an exchange experiencing a competitive advantage in price improvement auctions. In particular, because knowing who is responsible for the order allows them to pass-through their fees, they can bid more competitively in the auctions than can exchange members who cannot directly pass-through the fees. However, the Commission believes that the magnitude of changes in any competitive advantages or disadvantages is unlikely to significantly affect order flow because fee differences between competing venues are only one of many factors (such as availability of non-displayed order types and price impact characteristics of transactions on different venues) that broker-dealers consider when choosing how to route their order flow. Further, the Executed Share Model levels the playing field between exchanges and ATSs relative to the Original Funding Model.1141 In particular, the assessments and any pass-throughs paid by broker-dealers or investors of an execution on an ATS could be similar to those of an execution on an exchange, depending on how (and whether) ATSs and exchanges choose to pass-through their fees. Further, the magnitude of the fees in the example in Exhibit C are small relative to current transaction costs.1142 b. Broker-Dealer Services The Commission believes that the Executed Share Model alleviates concerns with the Original Funding Model about the allocation of fees across small and large broker-dealers. In particular, by charging CEBBs and 1141 See supra note 1120 and accompanying text for a discussion of the effect of the Original Funding Model on ATSs. 1142 See supra notes 1100, 1101, and 1102 and accompanying text for analysis of the potential magnitude of fees under the Executed Share Model. PO 00000 Frm 00059 Fmt 4701 Sfmt 4703 62685 CEBSs based on Executed Equivalent Shares, small broker-dealers are less likely to face CAT fees that are outsized relative to their revenue, whether they act as executing brokers or are charged pass-throughs by executing brokers. This could reduce barriers to entry. On the other hand, the efficiency gains in passing through fees from the Executed Share Model will not be evenly distributed across broker-dealer competitive strategies. In particular, where competition has driven commissions to zero, the Executed Share Model Fees are more easily passed through to customers of brokerdealers who offer a wider variety of services than for broker-dealers who do not. These latter broker-dealers could be at a competitive disadvantage if they have no other option but to absorb such fees or accept reduced payment for order flow as a form of pass-through from executing brokers. Because more established broker-dealers are more likely to be the ones offering a wider variety of services, this effect could increase barriers to entry. Furthermore, as one commenter stated, there may be capital requirements associated with carrying the receivable associated with passingthrough these CAT fees, which could be burdensome for small and mediumsized Executing Brokers.1143 According to this commenter, these burdens, coupled with FINRA Rule 15c3–1 will significantly impact healthy small and medium-sized brokers.1144 If so, the Executed Share Model could increase barriers to entry in providing brokerdealer services. However, whether and how to pass-on the CAT assessments is at the discretion of Executing Brokers.1145 Further, the economic effect of not passing-on fees is equivalent to passing-on fees to clients who pay more than 30 days after the Executing Broker has booked the receivable.1146 Therefore, this issue boils down to the magnitude of the potential costs and whether small and medium-sized Executing Brokers are treated the same as others. If small and 1143 See DASH January 2023 Letter at 1; DASH April 2023 Letter at 1. 1144 See DASH January 2023 Letter at 2. 1145 See supra Section III.A.4 for further discussion of the comments on net capital and the Commission’s response to those comments. 1146 The effect on net capital comes when Industry Members record that they expect to receive a pass-through from customers as an asset (a ‘‘booked’’ receivable) more than 30 days before when their customers pay. If the Industry Members book a receivable for the pass-through more than 30 days before they collect, they cannot count that receivable as an asset toward net capital. If Industry Members instead do not pass-through the fees, they will not have a receivable at all to count toward net capital. E:\FR\FM\12SEN2.SGM 12SEN2 62686 Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / Notices medium-sized Executing Brokers have lower trading activity than large Executing Brokers, their CAT assessments will be lower as well. Further, the per equivalent share fee rate will be the same across all Executing Brokers in the Executed Share Model whereas it would not have been under the Original Funding Model. In fact, small broker-dealers, including Executing Brokers, could be better positioned competitively under the Executed Share Model than under the Original Funding model, which contained uncertainty in the tier structure and whether small brokerdealers would have paid more in assessments than they earn in revenues. One commenter stated that the top 10 (20) Industry Members would be allocated 50% (70%) of the fees under the Executed Share Model, ‘‘unduly burdening competition’’.1147 The Commission has considered this concentration and believes that several factors alleviate this concern. In particular, the Commission believes that many of these Industry Members will pass through much of their fees to client broker-dealers.1148 In addition, the Commission believes that the Industry Members that will be charged the most under the Proposed Amendments engage in different services than brokerdealers who are charged the least or not charged fees at all under the Proposed Amendments.1149 Therefore, these two sets of broker-dealers are not direct competitors. c. Regulatory Services The Commission recognizes that if FINRA were to pass through its CAT fees by increasing its fees for RSAs over time, FINRA could be less competitive in providing regulatory services.1150 1147 See Citadel July Letter at 19. supra Section IV.A.2.a. 1149 Broker dealers that compete as electronic liquidity providers in high-volume securities are likely to have the highest executed share volume and thus pay the highest fees. However, these broker-dealers compete against each other in providing this service, and thus are likely to be similarly burdened by fees under the amendment. Broker-dealers that pay the lowest or no fees are unlikely to compete in this activity because such activity entails high fixed costs in specialized technology and thus are unlikely to gain a competitive advantage from the amendment. 1150 The Participants state, ‘‘[b]y treating each Participant the same, the CAT fees would not become a competitive issue by and among the Participants.’’ See Notice supra note 7, 88 FR at 17115. See also a similar statement at 17122. This conclusion does not seem to address competition to lotter on DSK11XQN23PROD with NOTICES2 1148 See VerDate Sep<11>2014 18:06 Sep 11, 2023 Jkt 259001 This could increase the chances either of exchanges conducting more of their own regulatory services or of another SRO attempting to compete with FINRA for RSAs. Indeed, such potential competitors would not have the burden of having to cover CAT Fees for offexchange and OTC volume. However, because RSAs are not renegotiated as often as CAT Fees are likely to change, FINRA will likely not attempt to cover all of their share of CAT costs by increasing what they charge for RSAs.1151 Further, even with access to CAT, the barriers to entry in competing for RSAs could limit new competitors. C. Capital Formation In the CAT NMS Plan Approval Order, the Commission stated that the Original Funding Model for CAT was not wholly certain and, thus, stated the ‘‘view that there is uncertainty concerning the extent to which investors will bear Plan costs and consequently to what extent Plan costs could affect investors’ allocation of capital.’’ 1152 The Participants state that they believe the Proposed Amendment would have a positive effect on capital formation due to improvements in investor confidence.1153 The Commission recognizes that the Proposed Amendment may have negative effects on capital formation if the CAT fees ultimately borne by investors are large enough to affect investors’ allocation of capital or if capital constraints of small or mid-sized broker-dealers significantly hinder innovating to find more efficient ways to service investors.1154 However, the Commission believes that the net capital effect would not be significant.1155 Further, the additional costs borne by investors are likely small relative to provide regulatory services specifically. However, the comments about the treatment of FINRA in, for example, the FINRA April 2023 Letter at 2–5 warrants considering this competition given FINRA’s position in providing RSAs. 1151 See FINRA April 2023 Letter at 7 (‘‘If the Funding Model is approved by the Commission, FINRA intends to file a rule change to increase member fees simultaneous with the filing of any proposed rule change to effectuate the Funding Model.’’). 1152 See CAT NMS Plan Approval Order, supra note 2, 81 FR at 84893. 1153 See Notice, supra note 7, 88 FR at 17115. 1154 See, e.g., DASH April 2023 Letter at 1; Virtu Letter at 2; SIFMA AMG at 2–3. 1155 See supra Section III.A.4 for a response to a commenter’s concerns regarding net capital and supra Section IV.B.2.b for an explanation of why the net capital effects are like to be small. PO 00000 Frm 00060 Fmt 4701 Sfmt 9990 current transaction costs.1156 While recognizing that the Executed Share Model might change which investors ultimately bear CAT costs, the Executed Share Model might not change the total costs borne by investors relative to the Original Funding Model. V. Conclusion For the reasons discussed, the Commission, pursuant to Section 11A of the Exchange Act,1157 and Rule 608(b)(2) 1158 thereunder, is approving the Proposed Amendment. Section 11A of the Exchange Act authorizes the Commission, by rule or order, to authorize or require the self-regulatory organizations to act jointly with respect to matters as to which they share authority under the Exchange Act in planning, developing, operating, or regulating a facility of the national market system.1159 Rule 608 of Regulation NMS authorizes two or more SROs, acting jointly, to file with the Commission proposed amendments to an effective NMS plan,1160 and further provides that the Commission shall approve an amendment to an effective NMS plan if it finds that the 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.1161 For the reasons set forth above, the Commission finds that the Proposed Amendment meets the required standard. It is therefore ordered, pursuant to Section 11A of the Exchange Act,1162 and Rule 608(b)(2) 1163 thereunder, that the Proposed Amendment (File No. 4– 698) be, and hereby is, approved. By the Commission. J. Matthew DeLesDernier, Deputy Secretary. [FR Doc. 2023–19525 Filed 9–11–23; 8:45 am] BILLING CODE 8011–01–P 1156 See supra notes 1100, 1101, and 1102 and accompanying text for analysis of the potential magnitude of fees under the Executed Share Model. 1157 15 U.S.C. 78k–1. 1158 17 CFR 242.608(b)(2). 1159 See 15 U.S.C. 78k–1(a)(3)(B). 1160 See 17 CFR 242.608. 1161 See 17 CFR 242.608(b)(2). 1162 15 U.S.C. 78k–1. 1163 17 CFR 242.608(b)(2). E:\FR\FM\12SEN2.SGM 12SEN2

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 88, Number 175 (Tuesday, September 12, 2023)]
[Notices]
[Pages 62628-62686]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-19525]

[[Page 62627]]

Vol. 88

Tuesday,

No. 175

September 12, 2023

Part II

Securities and Exchange Commission

-----------------------------------------------------------------------

Joint Industry Plan; Order Approving an Amendment to the National
Market System Plan Governing the Consolidated Audit Trail; Notice

Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 /
Notices

[[Page 62628]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98290; File No. 4-698]

Joint Industry Plan; Order Approving an Amendment to the National
Market System Plan Governing the Consolidated Audit Trail; Notice

September 6, 2023.

I. Introduction

On March 13, 2023, the Consolidated Audit Trail, LLC (``CAT LLC''),
on behalf of the Participants \1\ to the National Market System Plan
Governing the Consolidated Audit Trail (``CAT NMS Plan'' or
``Plan''),\2\ filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 11A of the Exchange Act \3\ and
Rule 608 of Regulation National Market System (``Regulation NMS'')
thereunder,\4\ a proposed amendment to the CAT NMS Plan (``Proposed
Amendment'') to implement a revised funding model (``Executed Share
Model'') for the consolidated audit trail (``CAT'') \5\ and to
establish a fee schedule for Participant CAT fees in accordance with
the Executed Share Model (``Proposed Participant Fee Schedule'').\6\
The Proposed Amendment was published for comment in the Federal
Register on March 21, 2023.\7\
---------------------------------------------------------------------------

\1\ The Participants are: BOX Exchange LLC, Cboe BYX Exchange,
Inc., Cboe BZX Exchange, Inc., Cboe C2 Exchange, Inc., Cboe EDGA
Exchange, Inc., Cboe EDGX Exchange, Inc., Cboe Exchange, Inc., The
Financial Industry Regulatory Authority, Inc. (``FINRA''), Investors
Exchange LLC, Long-Term Stock Exchange, Inc., MEMX LLC, Miami
International Securities Exchange, 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'').
\2\ The CAT NMS Plan is a national market system plan approved
by the Commission pursuant to Section 11A of the Securities Exchange
Act of 1934 (``Exchange Act'') and the rules and regulations
thereunder. See Securities Exchange Act Release No. 78318 (Nov. 15,
2016), 81 FR 84696 (Nov. 23, 2016) (``CAT NMS Plan Approval
Order''). The CAT NMS Plan is Exhibit A to the CAT NMS Plan Approval
Order. See CAT NMS Plan Approval Order, 81 FR at 84943-85034. The
CAT NMS Plan functions as the limited liability company agreement of
the jointly owned limited liability company formed under Delaware
state law through which the Participants conduct the activities of
the CAT (``Company''). Each Participant is a member of the Company
and jointly owns the Company on an equal basis. The Participants
submitted to the Commission a proposed amendment to the CAT NMS Plan
on August 29, 2019, which they designated as effective on filing. On
August 29, 2019, the Participants replaced the CAT NMS Plan in its
entirety with the limited liability company agreement of a new
limited liability company, CAT LLC, which became the Company. See
Securities Exchange Act Release No. 87149 (Sept. 27, 2019), 84 FR
52905 (Oct. 3, 2019). The latest version of the CAT NMS Plan is
available at https://catnmsplan.com/about-cat/cat-nms-plan.
\3\ 15 U.S.C. 78k-1.
\4\ 17 CFR 242.608.
\5\ The Proposed Amendment modifies the existing funding model
in Article XI. of the CAT NMS Plan.
\6\ See Letter from Brandon Becker, Chair, CAT NMS Plan
Operating Committee, to Vanessa Countryman, Secretary, Commission
(Mar. 13, 2023) (``Transmittal Letter'').
\7\ See Securities Exchange Act Release No. 97151 (Mar. 15,
2023), 88 FR 17086 (Mar. 21, 2023) (``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.
---------------------------------------------------------------------------

On June 16, 2023, the Commission instituted proceedings pursuant to
Rule 608(b)(2)(i) of Regulation NMS \8\ 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 (``OIP'').\9\
---------------------------------------------------------------------------

\8\ 17 CFR 242.608(b)(2)(i).
\9\ See Securities Exchange Act Release No. 97750 (June 16,
2023), 88 FR 41142 (June 23, 2023). Comments received in response to
the OIP can be found on the Commission's website at https://www.sec.gov/comments/4-698/4-698-a.htm.
---------------------------------------------------------------------------

This order approves the Proposed Amendment.

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.\10\ On November 15, 2016, the Commission
approved the CAT NMS Plan.\11\ 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.\12\
---------------------------------------------------------------------------

\10\ 17 CFR 242.613.
\11\ See CAT NMS Plan, supra note 2.
\12\ 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 2, at Section
1.1. See also id. at Section 11.1(b).
---------------------------------------------------------------------------

Under the CAT NMS Plan, CAT 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\ The Plan specifies 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 \14\ that are
Execution Venues,\15\ including ATSs,\16\ 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).'' \17\
---------------------------------------------------------------------------

\13\ Id. at Section 11.2(b) and (e).
\14\ 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.
\15\ 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.
\16\ Id.
\17\ CAT NMS Plan, supra note 2, at Section 11.2(c). See id. at
Article XI for additional detail.
---------------------------------------------------------------------------

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'').\18\ 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 \19\
(``Post-Amendment

[[Page 62629]]

Expenses''). Section 11.6 establishes target deadlines for four
Financial Accountability Milestones (Periods 1, 2, 3 and 4) \20\ and
reduces the amount of fee recovery available to the Participants if
these deadlines are missed.\21\
---------------------------------------------------------------------------

\18\ See Securities Exchange Act Release No. 88890, 85 FR 31322
(May 22, 2020).
\19\ ``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).'' CAT NMS Plan, supra note 2, at
Section 1.1.
\20\ See CAT NMS Plan, supra note 2, at Section 11.6(a)(i).
\21\ Id. at Section 11.6(a)(ii) and (iii).
---------------------------------------------------------------------------

III. Discussion and Commission Findings

After careful review, the Commission, pursuant to Section 11A of
the Exchange Act,\22\ and Rule 608(b)(2) \23\ thereunder, is approving
the Proposed Amendment. Section 11A of the Exchange Act authorizes the
Commission, by rule or order, to authorize or require the self-
regulatory organizations to act jointly with respect to matters as to
which they share authority under the Exchange Act in planning,
developing, operating, or regulating a facility of the national market
system.\24\ Rule 608 of Regulation NMS authorizes two or more SROs,
acting jointly, to file with the Commission proposed amendments to an
effective NMS plan,\25\ and further provides that the Commission shall
approve an amendment to an effective NMS plan if it finds that the
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.\26\
---------------------------------------------------------------------------

\22\ 15 U.S.C. 78k-1.
\23\ 17 CFR 242.608(b)(2).
\24\ See 15 U.S.C. 78k-1(a)(3)(B).
\25\ See 17 CFR 242.608.
\26\ See 17 CFR 242.608(b)(2).
---------------------------------------------------------------------------

The Participants have sufficiently demonstrated that the proposed
allocation of fees is reasonable. There are a number of potential
approaches to allocating the costs of operating the CAT, all of which
have relative strengths and weaknesses. In adopting Rule 613 and
approving the CAT NMS Plan, the Commission determined that the CAT was
appropriate in order to enable the SROs and the Commission to fulfill
their responsibilities to oversee the equities and options markets. The
CAT NMS Plan requires both Execution Venues (which include the
Participants) and Industry Members (which include CAT Executing
Brokers) to fund the CAT. The proposed one-third allocation of CAT fees
to the applicable Participant in a transaction, the CAT Executing
Broker for the buyer in a transaction and the CAT Executing Broker for
the seller in a transaction, assesses an equal fee to the three primary
roles in a transaction: the buyer, seller and market regulator. In our
view, allocating the costs for the CAT among the three parties who play
significant roles in transactions reportable to the CAT in this manner
represents a reasonable method of allocating costs among the parties
who participate in and benefit from those markets.
Commenters expressed concern that the Participant exchanges and
FINRA would pass their share of costs on to Industry Members. But the
Exchange Act expressly contemplates the ability of the Participants to
recoup the costs of fulfilling their statutory obligations under the
Exchange Act. And, as we explained in adopting Rule 613 and approving
the CAT NMS Plan, the CAT is important to the performance of these
regulatory activities in modern, interconnected markets, to the
ultimate benefit of investors and market participants. Moreover, these
costs will not be unchecked. The Participants must file their proposed
rule changes relating to fees with the Commission. Those proposed rule
changes are published by the Commission and there is an opportunity for
public comment. CAT fees, like any fees the Participants collect from
their members to fund their SRO responsibilities in market and member
regulation, must be consistent with applicable statutory standards
under the Exchange Act, including being reasonable, equitable and not
unfairly discriminatory.
We also conclude that the use of executed equivalent share volume
provides a reasonable basis for the calculation of these fees. Executed
equivalent share volume is readily determinable and--because it is
based on trading activity, which impacts CAT costs--provides a
reasonable proxy for the costs to CAT, allowing CAT Reporters to be
assessed fees corresponding to the cost burden they impose on the CAT.
The use of CAT Executing Brokers is also appropriate because the
proposed Executed Share Model is based on executed equivalent shares
(emphasis added). Therefore, charging the CAT Executing Brokers would
reflect their executing role in each transaction, which is already
recorded in transaction reports from the exchanges and FINRA's equity
trade reporting facilities for calculating the CAT fees. Because such
entities are already identified and their CAT fees are known, this
method could streamline the billing process and allow such entities to
calculate their own fees. We also conclude that the division of fees
into Prospective CAT Fees and the Historical CAT Assessment provides a
reasonable method of allowing Participants to recoup their significant
expenditures on the development of CAT to date while ensuring funding
for future operations of the system. And the provision of fee
calculation information, approach to billing and collection of fees,
conforming changes and the Proposed Participant Fee Schedule are all
reasonable. The Commission is therefore approving the Proposed
Amendment.\27\
---------------------------------------------------------------------------

\27\ Id.
---------------------------------------------------------------------------

A. Funding Model

1. Overview
CAT LLC proposes to replace the funding model set forth in Article
XI of the CAT NMS Plan (``Original Funding Model'') with the Executed
Share Model. The Original Funding Model involved a bifurcated approach,
where costs associated with building and operating the CAT would be
borne by (1) Industry Members (other than alternative trading systems
(``ATSs'') that execute transactions in Eligible Securities
(``Execution Venue ATSs'')) through fixed tiered fees based on message
traffic for Eligible Securities, and (2) Participants and Industry
Members that are Execution Venue ATSs for Eligible Securities through
fixed tiered fees based on market share.\28\ In contrast, the Executed
Share Model would charge fees based on the executed equivalent share
volume of transactions in Eligible Securities.\29\ In addition, instead
of charging fees to Industry Members, under the Executed Share Model,
fees would be charged to each Industry Member that is a CAT Executing
Broker \30\ for the buyer in a transaction in Eligible Securities
(``CAT Executing Broker for the Buyer'' or ``CEBB'') and each Industry
Member that is the CAT Executing Broker for the seller in a transaction
in Eligible

[[Page 62630]]

Securities (``CAT Executing Broker for the Seller'' or ``CEBS'').\31\
---------------------------------------------------------------------------

\28\ See CAT NMS Plan, supra note 2, at Section 11.3(a) and (b).
\29\ See Notice, supra note 7, 88 FR at 17086.
\30\ See infra Section III.A.4. for the definition of CAT
Executing Broker.
\31\ See Notice, supra note 7, 88 FR at 17087.
---------------------------------------------------------------------------

Under the Executed Share Model, CAT LLC proposes to establish two
categories of CAT fees. The first category of CAT fees would be fees
(``CAT Fees'') payable by Participants and Industry Members that are
CAT Executing Brokers for the Buyer and for the Seller with regard to
CAT costs not previously paid by the Participants (``Prospective CAT
Costs'').\32\ The second category of CAT fees would be fees
(``Historical CAT Assessments'') to be payable by Industry Members that
are CAT Executing Brokers for the Buyer and for the Seller with regard
to CAT costs previously paid by the Participants (``Past CAT
Costs'').\33\
---------------------------------------------------------------------------

\32\ Id. at 17086; see also proposed Section 11.3(a). The
defined term ``CAT Fees'' applies specifically to CAT fees related
to Prospective CAT Costs. Id.
\33\ See Notice, supra note 7, 88 FR at 17086; see also proposed
Section 11.3(b).
---------------------------------------------------------------------------

For each category of fees, each CEBB and each CEBS will be required
to pay a CAT fee for each such transaction in Eligible Securities in
the prior month based on CAT Data.\34\ The CEBB's CAT fee or CEBS's CAT
fee (as applicable) for each transaction in Eligible Securities will be
calculated by multiplying the number of executed equivalent shares in
the transaction by one-third and by the reasonably determined Fee
Rate,\35\ as described below.\36\ Participants would incur CAT Fees
only for Prospective CAT Costs and the Participant CAT Fee will be
calculated by multiplying the number of executed equivalent shares in
the transaction by one-third and by the reasonably determined Fee
Rate.\37\ The Participants' one-third share of Historical CAT Costs
\38\ and such other additional Past CAT Costs as reasonably determined
by the Operating Committee will be paid by the cancellation of loans
made to the Company on a pro rata basis based on the outstanding loan
amounts due under the loans.\39\
---------------------------------------------------------------------------

\34\ See Notice, supra note 7, 88 FR at 17093; see also proposed
Section 11.3(a)(iii), proposed Section 11.3(b)(iii).
\35\ See infra Section III.A.5.a. (Prospective CAT Fees--Fee
Rate Formula) for the definition and description of the calculation
of the Fee Rate. See also infra notes 1100-1102 and accompanying
text (stating that the anticipated CAT Fee Rate and the fee rate for
Historical CAT Assessments are expected to be relatively small).
\36\ See Notice, supra note 7, 88 FR at 17095; see also proposed
Section 11.3(a)(iii), proposed Section 11.3(b)(iii).
\37\ See Notice, supra note 7, 88 FR at 17094; see also proposed
Section 11.3(a)(ii).
\38\ The actual amount of Past CAT Costs to be recovered through
the Historical CAT Assessments would be reduced by an amount of
``Excluded Costs.'' The resulting amount would be defined as
``Historical CAT Costs'' in proposed Section 11.3(b)(i)(C) of the
CAT NMS Plan. See infra Section III.A.6.a. for a discussion of
Historical CAT Costs.
\39\ See proposed Section 11.3(b)(ii).
---------------------------------------------------------------------------

FINRA CAT would be responsible for calculating the CAT fees and
submitting invoices to the CAT Executing Brokers based on this CAT
Data.\40\ All data used to calculate the fees under the Executed Share
Model would be CAT Data, and, therefore, it would be directly available
through the CAT to FINRA CAT for calculating CAT fees.\41\
---------------------------------------------------------------------------

\40\ See Notice, supra note 7, 88 FR at 17088.
\41\ Id.
---------------------------------------------------------------------------

Once the Proposed Amendment has been approved by the Commission,
the Participants would separately file proposed rule filings pursuant
to Section 19(b) of the Exchange Act \42\ to establish the amounts of
the proposed CAT Fees and Historical CAT Assessments to be charged to
Industry Members, subject to the satisfaction of applicable Financial
Accountability Milestones as set forth in Section 11.6 of the CAT NMS
Plan and the implementation of the billing and collection system for
the CAT fees.\43\ In each proposed rule filing, if the Participants
seek to recover amounts under the Financial Accountability Milestones,
they would need to discuss their completion of the applicable
milestone.\44\
---------------------------------------------------------------------------

\42\ 15 U.S.C. 78s(b).
\43\ See Notice, supra note 7, 88 FR at 17086, 17122.
\44\ Proposed Section 11.3(b)(iii)(B)(III) would prohibit any
Participant from filing proposed rule filings pursuant to Section
19(b) of the Exchange Act regarding any Historical CAT Assessment
until any applicable Financial Accountability Milestone in Section
11.6 of the CAT NMS Plan has been satisfied.
---------------------------------------------------------------------------

2. Allocation of Fee Among Participants and Industry Members
Under the Executed Share Model, CAT fees would be allocated one-
third to the applicable Participant, one-third to the CEBS and one-
third to the CEBB of a transaction. Certain commenters opposed the
proposed allocation.\45\
---------------------------------------------------------------------------

\45\ See Letters to Vanessa Countryman, Secretary, Commission,
from Stephen John Berger, Managing Director, Global Head of
Government and Regulatory Policy, Citadel Securities, dated July 14,
2023 (``Citadel July Letter''); August 22, 2023 (``Citadel August
Letter''); Marcia E. Asquith, Corporate Secretary, EVP, Board and
External Relations, FINRA, dated May 25, 2023 (``FINRA May 2023
Letter''); April 11, 2023 (``FINRA April 2023 Letter''); and June
22, 2022 (``FINRA June 2022 Letter'') (the FINRA June 2022 Letter
was submitted in response to the prior funding proposal and was
attached and incorporated by reference in the FINRA April 2023
Letter); Ellen Greene, Managing Director, Equities & Options Market
Structure, and Joseph Corcoran, Managing Director, Associate General
Counsel, SIFMA, dated July 13, 2023 (``SIFMA July 2023 Letter'');
June 5, 2023 (``SIFMA June 2023 Letter''); May 2, 2023 (``SIFMA May
2023 Letter''); January 12, 2023 (``SIFMA January 2023 Letter'');
December 14, 2022 (``SIFMA December 2022 Letter''); October 7, 2022
(``SIFMA October 2022 Letter''); and June 22, 2022 (``SIFMA June
2022 Letter'') (the SIFMA June 2022 Letter, SIFMA October 2022
Letter, SIFMA December 2022 Letter and SIFMA January 2023 Letter
were submitted in response to the prior funding proposal and
incorporated by reference in the SIFMA May 2023 Letter); Joanna
Mallers, Secretary, FIA Principal Traders Group, dated July 14, 2023
(``FIA Letter''); Douglas A. Cifu, Chief Executive Officer, Virtu
Financial, dated July 13, 2023 (``Virtu Letter''). See infra note
58.
---------------------------------------------------------------------------

FINRA stated that, while the Proposed Amendment justified the
fairness of the Executed Share Model because it would operate like
other fees, like FINRA's Trading Activity Fee (``TAF''), Section 31
fees, and the options regulatory fee,\46\ the Proposed Amendment did
not support why those fee frameworks should be used as a model in this
context.\47\ For example, FINRA stated that the TAF is designed to
recover the costs of FINRA's regulatory activities, while the CAT fees
are intended to align with the costs to build, operate and administer
the CAT.\48\ Further, FINRA stated that the Proposed Amendment has
insufficiently explained the connection between the TAF and CAT fees,
merely stating that they are similar fees because they are transaction-
based fees used to provide funding for regulatory costs.\49\ FINRA
stated that ``CAT LLC's observations superficially focus on the fact
that these fees also use transaction-based metrics (and may be assessed
on members) and neglects other factors relevant to the analysis
including, for example, that these fees are used in combination with
other funding mechanisms and metrics to support an overall funding
framework.'' \50\
---------------------------------------------------------------------------

\46\ See Notice, supra note 7, 88 FR at 17122.
\47\ See FINRA June 2022 Letter at 4.
\48\ See FINRA April 2023 Letter at 8.
\49\ Id. The commenter also stated that ``it is unclear how
assessing on FINRA the largest allocation of the SRO portion of CAT
expenses `provides funding for regulatory costs' in any reasonable
and equitable sense comparable to the TAF . . .'' Id.
\50\ FINRA May 2023 Letter at 3.
---------------------------------------------------------------------------

Another commenter stated that the proposed CAT funding model cannot
be compared to Section 31 fees, the TAF, or the options regulatory fee
because the commenter believes that CAT fees appear to be unconstrained
and out of the industry's control.\51\ The commenter explained that,
unlike the proposed CAT fees, Section 31 fees are based on an annual
budget set by Congress and the options regulatory fee is only applied
to customer transactions and thus can be easily passed-on to other
market participants (unlike CAT fees for market making activity).\52\
Additionally,

[[Page 62631]]

the commenter stated that there is no precedent for fees to be
allocated to Industry Members in perpetuity, stating that this would
contravene the Exchange Act.\53\
---------------------------------------------------------------------------

\51\ Citadel July Letter at 27.
\52\ Id. The commenter also stated that FINRA has sought to
avoid increases in the TAF. Id.
\53\ Id. This commenter stated that it is inequitable to require
Industry Members to fund CAT costs in perpetuity when they lack
representation on the Operating Committee and therefore have little
transparency into the drivers of the costs, and there is no plan to
contain the costs. See id. at 2.
---------------------------------------------------------------------------

One commenter disagreed with the Participants' statement that the
Executed Share Model's similarity to other transaction-based fees
approved by the Commission is adequate justification for consistency
with the Exchange Act.\54\ The commenter stated that similarity to
other transaction-based fees is not an adequate basis to show that the
Executed Share Model is consistent with relevant standards; each
proposed fee must be individually supported.\55\ For example, the
commenter stated that the Participants compared the Executed Share
Model to Section 31 fees as justification for the Executed Share Model,
but failed to address the differences between the Executed Share Model
and Section 31 fees, such as the Executed Share Model's treatment of
high-volume trades in low-priced stocks while Section 31 fees are based
on the notional value of a trade.\56\
---------------------------------------------------------------------------

\54\ See SIFMA June 2022 Letter at 4.
\55\ Id.
\56\ See SIFMA October 2022 Letter at 7. See also Citadel August
Letter at 5.
---------------------------------------------------------------------------

Commenters also questioned the Participants' justifications for the
one-third allocation methodology. FINRA stated that the Proposed
Amendment did not justify why the proposed allocation by thirds to the
Participant, buy-side and sell-side is equitable in the context of the
CAT NMS Plan.\57\ FINRA also stated that the Proposed Amendment did not
consider alternatives suggested by commenters on a prior proposed
funding model,\58\ such as a model similar to Section 31 fees and a CAT
funding model based on the ``Cost Recovery Principle'' and the
``Benefits Received Principle.'' \59\ FINRA urged the Commission to
require those alternatives to be analyzed.\60\
---------------------------------------------------------------------------

\57\ See FINRA June 2022 Letter at 3.
\58\ See Securities Exchange Act Release Nos. 94984 (May 25,
2022), 87 FR 33226 (June 1, 2022); 96394 (Nov. 28, 2022), 87 FR
74183 (Dec. 2, 2022); and Letter from Michael Simon, Chair Emeritus,
CAT NMS Plan Operating Committee, to Vanessa Countryman, Secretary,
Commission (Feb. 15, 2023).
\59\ See FINRA April 2023 Letter at 5 (citing Letter to Vanessa
Countryman, Secretary, Commission, from Lawrence Harris, Fred V.
Keenan Chair in Finance, Professor of Finance and Business and
Economics, U.S.C. Marshall School of Business, dated June 21, 2022).
\60\ Id. Another commenter suggested a review of alternative
approaches to funding, such as the extent to which CAT could be
funded by Section 31 fees. See Letter to Vanessa Countryman,
Secretary, Commission, from Kirsten Wegner, Chief Executive Officer,
Modern Markets Initiative, dated July 13, 2023 (``MMI July
Letter''), at 4.
---------------------------------------------------------------------------

One commenter stated that the Participants have not met their
burden to demonstrate the proposed allocation is consistent with the
Exchange Act fee standards and not arbitrary.\61\ The commenter stated
that because FINRA is funded by Industry Members, Industry Members
would pay over 80% of CAT costs since they must pay not only their own
share but FINRA's as well; therefore, the Commission should disapprove
the proposal.\62\ The commenter stated that the Proposed Amendment does
not explain how allocating 80% of total CAT costs to the industry in
perpetuity without a mechanism to limit the budget \63\ is consistent
with the Exchange Act and guidance on SRO filings related to fees
because the industry has no role in the governance, oversight or design
of CAT and does not benefit from the CAT.\64\ Another commenter stated
that Industry Members will bear significantly more costs than the
Proposal suggests if the Participants decide to charge their members to
fund their share of CAT fees.\65\ The commenter stated that ``[i]f the
Participants were to do this, it would render the entire Funding Model
meaningless, with Industry Members bearing 100% of CAT costs.'' \66\
Another commenter also stated that it was inappropriate to place
responsibility for funding the CAT ``on industry members that do not
stand to benefit from it.'' \67\
---------------------------------------------------------------------------

\61\ See SIFMA May 2023 Letter at 6; SIFMA June 2023 Letter at
1-2. The commenter also stated that the Proposed Amendment provides
unsupported conclusory statements that it meets the requirements of
the Exchange Act. See SIFMA June 2023 Letter at 2. See also id. at n
11; FIA Letter at 2.
\62\ See SIFMA May 2023 Letter at 2. See also SIFMA June 2022
Letter at 1-2 (stating that the proposed cost allocation methodology
is inconsistent with Exchange Act fee standards because most costs
would be imposed on Industry Members).
\63\ The commenter stated that the CAT annual budget increased
over 30% in the last year. See SIFMA June 2023 Letter at 4. See also
Virtu Letter at 4 (stating that the budget increase indicated that
the Industry Members could be subject to ever-increasing fees with
no say on the budget). See also FIA Letter at 3 (stating that
``[w]ith little to no skin-in-the-game, the Participants will not be
incentivized to control costs.''). See infra Section III.A.5.b
(discussing budgeted CAT costs and comments suggesting a review
mechanism to control costs).
\64\ See SIFMA June 2023 Letter at 3, 4. The commenter stated
that approving such a proposal would ``directly threaten[ ]
efficiency, competition, and capital formation in U.S. securities
markets.'' Id. at 4. The commenter also quoted a Commission release
stating that the Participants are potentially conflicted in
allocating CAT fees to themselves and the Industry Members. See
Securities Exchange Act Release No. 89618 (Aug. 19, 2020), 85 FR
65470, 65482 (Oct. 15, 2020). Another commenter stated that the
allocation of 80% to the industry was unfair. See Virtu Letter at 4.
\65\ See FIA Letter at 2.
\66\ Id.
\67\ See Virtu Letter at 2.
---------------------------------------------------------------------------

One commenter stated that the Proposed Amendment does not
demonstrate that it is equitable, as required by Section 6(b)(4),\68\
or rational, as required by the Administrative Procedure Act,\69\ to
allocate two-thirds of CAT costs to Industry Members, stating that
``there is no suggestion that Industry Members somehow receive 67% of
the benefits from CAT.'' \70\ Furthermore, the commenter stated that
the Proposed Amendment would result in an inequitable allocation to a
small number of Industry Members.\71\
---------------------------------------------------------------------------

\68\ 15 U.S.C. 78f(b)(4).
\69\ 5 U.S.C. 551 et seq.
\70\ See Citadel July Letter at 17.
\71\ Id.
---------------------------------------------------------------------------

The commenter also stated that the Proposed Amendment would result
in the allocation of all of the costs to build and operate the CAT to
Industry Members and would therefore be inconsistent with Section
6(b)(4) to equitably allocate reasonable fees.\72\ The commenter stated
that, in addition to the proposed allocation to Industry Members,
FINRA's 11% cost allocation would be passed-on to Industry Members and
that exchanges would also pass-on their 22% cost allocation.\73\ The
commenter stated that, with FINRA's allocation, 78% of the costs to
build and operate the CAT would be allocated to Industry Members under
the Proposed Amendment.\74\ The commenter stated that 78% is the same
amount allocated to Industry Members in a prior CAT funding model
proposal from 2021, and stated that in the Proposed Amendment, the
Operating Committee concedes that the 2021 allocation ``may have an
adverse effect on competition, liquidity or other aspects of market
structure,'' \75\ however the Proposed Amendment does not explain why
using a different metric--executed share volume rather than message
traffic--to create the same allocation would not result in similar
consequences.\76\
---------------------------------------------------------------------------

\72\ Id. at 1, 16, 22.
\73\ Id. at 1, 21, 22.
\74\ Id. at 21.
\75\ Id.
\76\ See Citadel July Letter at 21.
---------------------------------------------------------------------------

Further, the commenter stated that Industry Members may also be
required

[[Page 62632]]

to pay the exchange cost allocation,\77\ citing a statement in the
Proposed Amendment that ``each Participant may determine to charge
their members fees to fund their share of the CAT fees.'' \78\ The
commenter stated that if exchanges choose to do this, then Industry
Members would be responsible for 100% of CAT costs, which would
``distort incentives and hinder the prioritization of critical cost-
control measures, as the firms governing CAT are not bearing any of the
associated costs.'' \79\ The commenter requested that the Commission
prohibit exchanges from passing-on their CAT costs.\80\ The commenter
also stated that even after restructuring the funding model to base
allocation on share volume instead of message traffic, as in prior
funding model proposals, the allocation to exchanges stayed the same,
arguing that the exchanges are unwilling to allocate themselves more
than 22% of total costs.\81\ The commenter stated that the proposed
allocation methodology is inconsistent with the Exchange Act because of
the excessive percentage of total costs proposed to be allocated to
Industry Members and the unfair method of allocating costs among
Industry Members,\82\ stating, ``[t]he allocation methodology will have
a direct and negative impact on market efficiency, competition, and
capital formation, and the Commission must comprehensively assess those
impacts before approving this filing.'' \83\
---------------------------------------------------------------------------

\77\ Id. at 22. See also Citadel August Letter at 2.
\78\ See Citadel July Letter at 22. See also Notice, supra note
7, 88 FR at 17107. The commenter also stated that while the Proposed
Amendment describes the funding model as ``neutral as to location
and manner of execution,'' counterparties to off-exchange
transactions would receive higher fees than on-exchange transactions
if exchanges choose not to pass-on their cost allocation to Industry
Members. See Citadel July Letter at 21. See also Notice, supra note
7, 88 FR at 17087.
\79\ Citadel July Letter at 22. See also id. at 16. See also
Citadel August Letter at 2 (stating that an allocation of 100% of
CAT costs to Industry Members cannot be lawful).
\80\ Citadel July Letter at 22.
\81\ Id. at 10.
\82\ Id. at 15.
\83\ Id.
---------------------------------------------------------------------------

The commenter stated that the Proposed Amendment does not provide
the percentage of total costs to build and operate the CAT that will be
borne by Industry Members in practice.\84\ The commenter stated that it
is necessary to determine the ultimate allocation of CAT costs to
evaluate whether the proposed allocation is consistent with the
Exchange Act, arguing that the statements made in support of the
allocation were premised on the Participants being responsible for one-
third of total CAT costs, and that if this is untrue, ``the filing must
be completely reconsidered, taking into account (a) the impact on
market efficiency, competition and capital formation of allocating this
magnitude of additional costs to Industry Members, (b) whether such a
lopsided allocation is fair and equitable, and (c) the implications for
CAT governance and budget control if the firms governing CAT do not
have any skin-in-the-game.'' \85\
---------------------------------------------------------------------------

\84\ See Citadel August Letter at 2.
\85\ Id.
---------------------------------------------------------------------------

One commenter stated that the Participants do not account for ``the
time and expense Industry Members have devoted to developing and
maintaining internal systems to be able to report the [sic] CAT, as
well as the time and expense Industry Members have devoted to assisting
the Operating Committee with its job of developing reporting
specifications that allow the CAT to achieve its regulatory purpose''
in the proposed allocation \86\ and that ``this omission is a flaw with
the Participants' decision to allocate two-thirds of the CAT costs to
Industry Members and its inclusion would demonstrate that the
Participants' Executed Share Model does not provide for the equitable
allocation of reasonable fees.'' \87\
---------------------------------------------------------------------------

\86\ SIFMA June 2022 Letter at 4. See also SIFMA January 2023
Letter at 4.
\87\ SIFMA June 2022 Letter at 4-5. See also SIFMA January 2023
Letter at 5; Virtu Letter at 3.
---------------------------------------------------------------------------

Similarly, one commenter stated that the allocation does not take
into account fees currently paid by the industry and implementation
costs incurred by Industry Members to comply with CAT reporting
requirements.\88\ The commenter stated that Industry Members already
provide funding for regulatory matters to exchanges through regulatory
fees, membership fees, market data fees, and registration fees, and
that these fees must be factored into any equitable or rational
allocation of CAT costs.\89\ The commenter stated that although the
Proposed Amendment argues that there is no precedent for regulatory
fees to be determined based on the cost of compliance of a regulated
entity, it is necessary to take into account all CAT-related costs
including those already allocated to Industry Members to assess whether
the Proposed Amendment is equitable.\90\
---------------------------------------------------------------------------

\88\ See Citadel July Letter at 17. See also Virtu Letter at 2
(noting that Industry Members ``already provide the Plan
Participants with a very substantial level of funding through
membership fees, registration and licensing fees, dedicated
regulatory fees, and options regulatory fees'').
\89\ See Citadel July Letter at 17 (further stating, ``Industry
Members are already bearing nearly all of the total CAT-related
costs, at a rate much higher than the Commission estimated in its
approval of the 2016 CAT NMS Plan.'' Id. at 18).
\90\ Id.
---------------------------------------------------------------------------

Commenters also objected to statements made in the Proposed
Amendment that the complexity of Industry Member business models
contributes substantially to the costs of the CAT.\91\ One commenter
stated that the proposed allocation of two-thirds of CAT costs to
Industry Members is unfair, unreasonable and arbitrary because the
Participants are equally responsible for the complexity of trading
activity in the markets.\92\ The commenter disagreed with the
Participants' argument that the allocation satisfies Exchange Act fee
standards because Industry Members and the complexity of their business
models drive the costs of the CAT, by stating that the examples of
complexities provided were developed to address order types, activities
and fee structures (such as the maker-taker fee structure) established
by the Participant exchanges.\93\ The commenter stated that the
Participants are just as responsible for such cost-driving complex
trading activity in the equity and options markets as Industry Members
due to the ``large number of equity and options exchanges established
by the exchange families with fundamentally different execution models
and order types.'' \94\ The commenter stated that the Participant
exchanges have not analyzed how their own business decisions have
resulted in the complexity of Industry Member order routing practices
and CAT costs.\95\ Another commenter stated that the complexity
arguments in the Proposed Amendment contradict statements from the
Operating Committee that stringent performance and other requirements
for processing CAT data are significant drivers of CAT costs,\96\ and
that the complexity arguments suggest that costs should be allocated
evenly among Industry Members, not just a small group of Industry
Members based on volume.\97\
---------------------------------------------------------------------------

\91\ See Notice, supra note 7, 88 FR at 17104.
\92\ See SIFMA May 2023 Letter at 3. See also SIFMA January 2023
Letter at 2, 3-4.
\93\ See SIFMA May 2023 Letter at 6-7. See also SIFMA January
2023 Letter at 3; Notice, supra note 7, 88 FR at 17104.
\94\ SIFMA January 2023 Letter at 3.
\95\ See SIFMA May 2023 Letter at 7.
\96\ See Citadel July Letter at 17-18.
\97\ Id. at 18.
---------------------------------------------------------------------------

Commenters also disagreed with other justifications made in the
Proposed Amendment for the proposed allocation; specifically, that
there are more Industry Members than Participants and that Industry
Members receive more in

[[Page 62633]]

revenue than the Participants.\98\ One commenter stated that these
assertions are not relevant in demonstrating that the proposed
allocation is fair and reasonable.\99\ The commenter stated that the
Participants are justifying the allocation based on the ability to pay
rather than cost generation, which the commenter believes is
inconsistent ``with the Participant Exchanges' proposed approach . . .
of allocating CAT costs based on approximate responsibility for
generating them . . .'' and ``with the historical CAT decision to
allocate costs to the parties responsible for generating them.'' \100\
The commenter suggested an alternative allocation that would equally
split CAT costs between Participant exchanges and Industry Members,
while FINRA would be subject only to a nominal regulatory user fee to
access CAT Data.\101\ Another commenter stated that, while most
Industry Members will pay little to no CAT costs, 20 Industry Members
will be responsible for 75% of the costs allocated to Industry
Members.\102\ The commenter said this would contradict the Proposed
Amendment's arguments that there are more Industry Members than
Participants and that Industry Members have greater financial resources
than Participants because the Operating Committee would outnumber the
Industry Members that would be paying the most in costs.\103\
---------------------------------------------------------------------------

\98\ See Notice, supra note 7, 88 FR at 17104.
\99\ See SIFMA May 2023 Letter at 7. See also SIFMA January 2023
Letter at 4.
\100\ See SIFMA May 2023 Letter at 7. The commenter cited to the
funding principles in Section 11.2 of the CAT NMS Plan.
\101\ See SIFMA January 2023 Letter at 4. See also SIFMA May
2023 Letter at 8; SIFMA June 2022 Letter at 5; SIFMA October 2022
Letter at 4. This commenter also suggested another alternative
allocation in which costs would be allocated to those Participants
and Industry Members most directly responsible for the costs. Under
this alternative, Industry Members would be responsible for the cost
associated with initial ingestion of the data into the CAT system.
The commenter explained that Participants would be responsible for
the costs associated with the stages after the data is initially
ingested into the CAT system because the regulators directly control
and benefit from these stages of the CAT system after ingestion. See
SIFMA June 2022 Letter at 5-6.
\102\ See Citadel July Letter at 17. The commenter also stated
that the Proposed Amendment does not explain why it would be
equitable to allocate 50% of total CAT costs to 20 Industry Members
and 22% of total CAT costs to 24 exchanges. Id.
\103\ Id.
---------------------------------------------------------------------------

The commenter also stated that the Proposed Amendment lacks support
for the proposed allocation.\104\ The commenter stated that the
Operating Committee has not met its burden to demonstrate that the
proposed allocation is consistent with the Exchange Act.\105\ The
commenter also stated that the Proposed Amendment does not consider the
impact of the proposed allocation to Industry Members on market
efficiency, competition and capital formation, particularly with
respect to the costs the industry will incur to build systems to pass-
through their CAT fees, the expected impact on volumes, the expected
impact on retail investors, and the expected impact on market
makers.\106\
---------------------------------------------------------------------------

\104\ Id. at 13. See also Citadel August Letter at 2.
\105\ See Citadel July Letter at 13.
\106\ Id. at 2, 16, 19, 20. The commenter further stated that
the Proposed Amendment is inconsistent with the Exchange Act because
it cannot equitably allocate fees and will harm market efficiency,
competition and capital formation. Id. at 16.
---------------------------------------------------------------------------

The commenter suggested alternatives to the proposed allocation
methodology.\107\ The commenter stated that Industry Members should not
be allocated more than 50% of ongoing CAT costs (including FINRA's
allocation) due to their lack of industry voting representation and
because they already bear nearly all of the total CAT-related
costs.\108\ The commenter also suggested that exchanges should be
prohibited from passing-on their CAT cost allocation to market
participants,\109\ and that the Participants consider allocating costs
to the Commission ``to align incentives.'' \110\ The commenter
recommended a consistent methodology for allocating costs to both
Industry Members and exchanges.\111\ The commenter also recommended an
allocation methodology that would ensure that ``a small group of firms
are not disproportionately bearing costs given that CAT is designed to
facilitate market-wide surveillance across all market participants,''
\112\ and would not inequitably allocate costs to specific market
segments (such as ``retail trading activity in NMS stocks'').\113\ The
commenter suggested that the approach could have ``(I) minimum and
maximum fee levels, (II) appropriate calibrations for liquidity
provision, (III) a volume component based on notional (instead of
executed shares), and (IV) consideration of additional metrics that
could achieve a more equitable outcome (e.g., broker-dealer capital).''
\114\
---------------------------------------------------------------------------

\107\ Id. at 3, 30, 31. The commenter stated that the Commission
must consider reasonable alternatives and that the proposal should
be rejected and replaced by a proposal incorporating the commenter's
recommendations. Id. at 30, 2.
\108\ Id. at 3, 30, 31.
\109\ See Citadel July Letter at 3, 30, 31.
\110\ Id. at 3, 31. In response, CAT LLC stated that the
Commission is not a party to the CAT NMS Plan, or subject to Rule
608 of Regulation NMS or Section 19(b) of the Exchange Act. See
Letter to Vanessa Countryman, Secretary, Commission, from Brandon
Becker, CAT NMS Plan Operating Committee Chair, dated July 28, 2023
(``CAT LLC July 2023 Response Letter''), at 31, n.144.
\111\ See Citadel July Letter at 30-31.
\112\ Id. at 30.
\113\ Id. at 3, 30.
\114\ See id. at 30. See also Citadel August Letter at 5.
---------------------------------------------------------------------------

Commenters also raised concerns about statements in the Proposed
Amendment that CAT costs would be passed on to investors.\115\ One
commenter stated, ``[s]uch an assertion is inaccurate because it is
almost certain that there will be scenarios faced by Industry Members
in which they will not be able to figure out who was responsible for
generating certain Historical CAT Costs.'' \116\ The commenter stated
that such assertions would minimize the Participants' obligation to
allocate fees consistent with Exchange Act fee standards and could
result in the inequitable allocation of CAT fees to Industry Members
under the mistaken belief that such fees would be passed down to
investors.\117\ FINRA objected to statements in the Proposed Amendment
that Industry Members can pass through to their customers their CAT
cost allocation and additional costs resulting from an increase in
FINRA fees.\118\ FINRA stated that ``[s]ummarily stating that investors
can be made to bear the costs resulting from the Funding Model without
a detailed description of and transparency into how these fees would be
determined or passed on to customers is inadequate, and does not
provide interested parties sufficient information to consider the costs
and benefits related to the Fee Proposal.'' \119\ Another commenter
expressed concern that CAT costs will be passed-through to investors
directly or indirectly by affecting the transaction prices of equities,
stating that this could negatively impact the investment returns of
long-term investors (including retail investors).\120\ The commenter
stated that the Participants have failed to analyze how passing-through
CAT costs to investors is consistent with Exchange Act fee standards,
and that the Commission has not fully considered

[[Page 62634]]

these economic effects on clients and other end investors.\121\
---------------------------------------------------------------------------

\115\ See SIFMA May 2023 Letter at 8; FINRA April 2023 Letter at
6-7; Citadel July Letter at 20; Citadel August Letter at 3; Letter
to Vanessa Countryman, Secretary, Commission, from Lindsey Weber
Keljo, Head--Asset Management Group, SIFMA, dated September 5, 2023
(``SIFMA AMG Letter''). See also Virtu Letter at 4 (noting the
inherent difficulties in implementing systems and processes to track
and pass through fees to the appropriate client firms and stating
that executing brokers would likely end up absorbing the fees
themselves).
\116\ See SIFMA May 2023 Letter at 8; see also Virtu Letter at
4.
\117\ See SIFMA May 2023 Letter at 8.
\118\ See FINRA April 2023 Letter at 6-7.
\119\ Id. at 7.
\120\ See SIFMA AMG Letter at 2.
\121\ Id. at 2, 3. The commenter stated that, ``[u]nder the
Exchange Act, the Participants are required to demonstrate that the
Proposed Amendment: (1) provides `for the equitable allocation of
reasonable dues, fees, and other charges,' (2) is `not designed to
permit unfair discrimination between customers, issuers, brokers or
dealers' and (3) does not `impose any burden on competition not
necessary or appropriate in furtherance of the purposes' of the
Exchange Act.'' Id. at 1, n.4 (citing to Sections 6 and 15A of the
Exchange Act and Rule 700(b)(3)(iii) of the Commission's Rules of
Practice. 15 U.S.C. 78s; 15 U.S.C. 15o-3; 17 CFR
201.700(b)(3)(iii)). Approval of the Proposed Amendment, however, is
governed by Rule 608 of Regulation NMS. That rule requires the
Commission to approve a proposed amendment to an effective national
market system plan if it finds that the 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 Act. 17
CFR 242.608(b)(2).
---------------------------------------------------------------------------

One commenter stated that many of the largest Industry Members
would be allocated CAT fees based on proprietary trading activity, so
they would not be able to pass through their fees to investors.\122\
The commenter urged an analysis of proprietary executed volume compared
to customer executed volume in order to evaluate how CAT costs will be
allocated among Industry Members and whether the allocation methodology
is fair, equitable and not unfairly discriminatory.\123\ The commenter
also stated that the Proposed Amendment is inconsistent with Section
6(b)(5) by imposing a new and increasing expense on investors, which
would negatively impact liquidity and efficiency, and that the proposed
allocation to Industry Members would disproportionately impact market
makers (because 20 firms would have to pay most of the costs) and
retail investors (due to their trading in sub-dollar NMS stocks that
increase executed share volume), in violation of Section 6(b)(8).\124\
---------------------------------------------------------------------------

\122\ See Citadel July Letter at 20. See also Citadel August
Letter at 3.
\123\ See Citadel August Letter at 3. The commenter said that
such an analysis is feasible and should account for aggregate costs
to be borne by affiliated entities, stating that this is required in
Section 11.2(c) of the 2016 CAT NMS Plan. Id.
\124\ See Citadel July Letter at 2. See also infra notes 260-
265.
---------------------------------------------------------------------------

In response to the comment stating that the Participants had not
analyzed a suggested Section 31-style approach to a funding model,\125\
CAT LLC stated that the CAT fee approach is similar to the Section 31
fee approach in how an exchange would be obligated to pay a transaction
fee based on transactions occurring on that exchange, and that FINRA
would be obligated to pay a transaction fee based on transactions in
the over-the-counter market.\126\ CAT LLC stated that the approaches
are also similar because, in both, an exchange would be able to
determine to pass the fee onto its members, as would FINRA.\127\ CAT
LLC stated that if the Section 31 approach would comply with the
Exchange Act, then the proposed CAT fee approach should also comply
with the Exchange Act and CEBBs and CEBSs could determine whether to
pass such fees onto their clients.\128\
---------------------------------------------------------------------------

\125\ See FINRA April 2023 Letter at 5.
\126\ See Letter to Vanessa Countryman, Secretary, Commission,
from Brandon Becker, Chair, CAT NMS Plan Operating Committee, dated
May 18, 2023 (``CAT LLC May 2023 Response Letter''), at 9.
\127\ Id.
\128\ Id.
---------------------------------------------------------------------------

In response, FINRA stated that the CAT LLC May 2023 Response Letter
misrepresented the commenter's letter by incorrectly stating that the
commenter's letter recommended an approach similar to Section 31
fees.\129\ FINRA clarified that it was noting that the Commission had
received comments suggesting a model like the Section 31 fees, that the
Participants had not ``meaningfully analyzed'' the suggested
alternatives in the Proposed Amendment, and that the Commission should
require the Participants to analyze the alternatives.\130\
---------------------------------------------------------------------------

\129\ See FINRA May 2023 Letter at 3, n.8.
\130\ Id.
---------------------------------------------------------------------------

CAT LLC further responded to FINRA's objections to the use of the
TAF as precedent for CAT fees--specifically, FINRA's statement that
unlike the proposed CAT fees, the TAF recovers the costs of FINRA's
regulatory activities, while the Proposed Amendment is designed to
align with the costs to build, operate and administer the CAT.\131\ CAT
LLC stated that there is no distinction between the two points raised
by the commenter because CAT only has a regulatory purpose; therefore,
costs to build, operate and administer the CAT are inherently
regulatory costs.\132\ CAT LLC also noted that FINRA distinguished the
TAF from the proposed CAT fees by describing the TAF as being used in
combination with other funding mechanisms to support a funding
framework, but CAT LLC stated that ``this does not change the general
conclusion that a transaction-based fee complies with the Exchange
Act.'' \133\
---------------------------------------------------------------------------

\131\ See FINRA May 2023 Letter at 3.
\132\ See CAT LLC July 2023 Response Letter at 35.
\133\ Id.
---------------------------------------------------------------------------

In response to a commenter that stated that there is no precedent
for CAT fees to be allocated to Industry Members in perpetuity, and
that the Exchange Act would not allow CAT LLC to require Industry
Members to fund unlimited costs in perpetuity,\134\ CAT LLC stated that
the proposed allocation would not require Industry Members to fund all
costs since it would divide CAT costs such that one-third would be paid
each by the Participant, CEBB and CEBS in a transaction.\135\
Furthermore, CAT LLC stated that fees would not be paid in perpetuity,
as the Fee Rate set by the Operating Committee at the beginning of each
year would be based on reasonably budgeted CAT costs and projected
total executed equivalent share volume for the year and would be
adjusted mid-year, and that to implement the Fee Rates, the
Participants would need to file fee filings pursuant to Rule 19b-4 with
the Commission that must be consistent with the Exchange Act and allow
the public the opportunity to comment on the fees.\136\ CAT LLC added
that the Executed Share Model would operate similarly to other fees
that the Commission has determined are consistent with the Exchange
Act, such as Participants' sales value fees related to Section 31, the
TAF and the options regulatory fee, and that the comment did not
recognize that Industry Members can choose to pass-through CAT fees to
their customers like they do the Section 31-related sales value
fees.\137\
---------------------------------------------------------------------------

\134\ See Citadel July Letter at 27.
\135\ See CAT LLC July 2023 Response Letter at 14.
\136\ Id.
\137\ Id.
---------------------------------------------------------------------------

In response to comments that objected to the proposed allocation to
Industry Members because Industry Members would not benefit from the
CAT,\138\ CAT LLC stated allocating costs based on who benefits from
the CAT is ``not appropriate or practical.'' \139\ CAT LLC stated that
the CAT is intended to benefit all market participants, explaining how
it would benefit Industry Members, and stated that it would be
``impractical to determine a model that allocates a measurable amount
of benefit that each market participant receives from the CAT.'' \140\
In response to a commenter that suggested that Industry Members should
not be allocated any ``costs for matters that primarily benefit the CAT
Operating Committee or the SROs,'' \141\ and a commenter that stated
that the industry does not benefit from the CAT,\142\ CAT LLC disagreed
that Industry Members do not benefit from the CAT because CAT is
critical for the

[[Page 62635]]

protection of investors and because CAT supports fair and efficient
markets.\143\ CAT LLC also stated that it was not ``reasonable or
practical to attempt to parse CAT costs by who `primarily benefits'
from those costs.'' \144\
---------------------------------------------------------------------------

\138\ See Citadel July Letter at 17; Virtu Letter at 2.
\139\ CAT LLC July 2023 Response Letter at 10.
\140\ Id. at 11.
\141\ Citadel July Letter at 32.
\142\ See Virtu Letter at 4.
\143\ See CAT LLC July 2023 Response Letter at 13.
\144\ Id. at 12. See also id. at 13.
---------------------------------------------------------------------------

In response to comments that state that Industry Members could bear
100% of CAT costs if Participants decide to pass-through their costs to
them,\145\ CAT LLC stated that Industry Members can pass through their
own CAT fees to their customers, like broker-dealers do for
transaction-based fees.\146\ CAT LLC stated that this may result in
Industry Members not having any funding burden if they decide to
entirely pass-through their allocation to investors.\147\ In response
to commenters that requested that Participant be prohibited from
passing-on their CAT costs to their members,\148\ CAT LLC stated that
Participants are permitted by the Exchange Act to charge their members
fees to fund the Participants' share of CAT fees, as long as they
submit fee filings that demonstrate that any proposed fee is consistent
with the Exchange Act.\149\
---------------------------------------------------------------------------

\145\ See Citadel July Letter at 16, 22; FIA Letter at 2.
\146\ See CAT LLC July 2023 Response Letter at 8.
\147\ Id.
\148\ See Citadel July Letter at 3, 22, 30; FIA Letter at 2-3.
\149\ See CAT LLC July 2023 Response Letter at 9.
---------------------------------------------------------------------------

In response to comments objecting to the proposed allocation to
Industry Members for not taking into account regulatory fees currently
paid by Industry Members,\150\ CAT LLC stated that the Proposed
Amendment is intended to assess fees ``directly associated with the
costs of establishing and maintaining the CAT, and not unrelated SRO
services.'' \151\
---------------------------------------------------------------------------

\150\ See Citadel July Letter at 17; Virtu Letter at 2. CAT LLC
also objected to one commenter's description of the CAT as an
exchange ``revenue generator,'' stating that CAT LLC is a business
league under Section 501(c)(6) of the Internal Revenue Code, and
that enforcement activity obtains restitution for investors and
deters future misconduct rather than generating revenue. See CAT LLC
July 2023 Response Letter at 13-14 (responding to Citadel July
Letter at 17).
\151\ CAT LLC July 2023 Response Letter at 13.
---------------------------------------------------------------------------

In response to comments on whether Participants' models are equally
to blame for the complexity of the markets,\152\ CAT LLC stated that
its analysis of the complexity of the industry's business models is
based on the effects of those models on the costs of the CAT, which it
stated are more profound than those of Participants, not on complexity
of the market in general.\153\ CAT LLC explained that the complexity of
the Industry Members' business models results in significant data
processing and storage costs, which Participants do not contribute to
as they do not originate market activity or orders.\154\ CAT LLC
explained that (1) the complexity and diversity of Industry Members'
business models and order handling practices require processing and
storage of hundreds of reporting scenarios for Industry Members,
resulting in significant data processing and storage costs; \155\ (2)
Industry Members have more late data and corrections than Participants,
resulting in significant linker costs; \156\ and (3) Industry Members
have customers, which results in CAT costs related to customer account
information (FDID, CCID and CAIS) and customer investment
strategies.\157\ CAT LLC also stated that Participants would pay the
same amount as the CEBBs and CEBSs in each transaction.\158\ In
response to one commenter that stated that Industry Members implemented
complex routing strategies to optimize exchange fees and rebates
because exchange business decisions resulted in these and other
exchange fee structures,\159\ CAT LLC stated that the commenter did not
demonstrate a causal connection between exchange fee structures and CAT
costs.\160\ CAT LLC stated that it was not involved in these Industry
Member business decisions and a substantial amount of CAT costs result
from such business decisions.\161\ CAT LLC also stated that Participant
activity does not contribute as much to CAT costs as complex Industry
Member activity.\162\
---------------------------------------------------------------------------

\152\ See SIFMA May 2023 Letter at 3; 6-7. See also SIFMA
January 2023 Letter at 2, 3-4.
\153\ See CAT LLC May 2023 Response Letter at 6; CAT LLC July
2023 Response Letter at 6.
\154\ See CAT LLC May 2023 Response Letter at 7; CAT LLC July
2023 Response Letter at 7.
\155\ See CAT LLC July 2023 Response Letter at 7.
\156\ Id.
\157\ Id.
\158\ Id. at 6.
\159\ See SIFMA May 2023 Letter at 7.
\160\ See CAT LLC July 2023 Response Letter at 6.
\161\ Id.
\162\ Id.
---------------------------------------------------------------------------

CAT LLC also disagreed with one commenter's dismissal of CAT LLC's
consideration of Industry Members' relative ability to pay,\163\
stating that the Exchange Act specifically requires that the fees be
fair and reasonable, which necessitates consideration of the relative
ability to pay.\164\ CAT LLC stated that fairness issues require the
Participants to consider the greater financial resources of Industry
Members in the creation of a funding model. CAT LLC also stated that
the commenter's position runs contrary to its comments that an Industry
Member's ability to pay is an important consideration in the context of
CAT fees.\165\
---------------------------------------------------------------------------

\163\ See SIFMA May 2023 Letter at 7. See also SIFMA January
2023 Letter at 4.
\164\ See CAT LLC May 2023 Response Letter at 7; CAT LLC July
2023 Response Letter at 7.
\165\ See CAT LLC July 2023 Response Letter at 7-8.
---------------------------------------------------------------------------

Additionally, CAT LLC objected to the commenter's statement that
the proposed allocation is ``inconsistent with the historical CAT
decision to allocate costs to the parties responsible for generating
them.'' \166\ CAT LLC stated that, while the CAT NMS Plan does not
require CAT costs to be allocated to parties responsible for generating
such costs, the proposed allocation addresses cost burden on the CAT by
(i) taking into account the impact of Industry Member activity on CAT
costs, and (ii) using trading activity, which CAT LLC believes is a
``reasonable proxy for cost burden on the CAT,'' \167\ as the metric
for cost allocation.\168\ CAT LLC also stated that there are other
examples of trading activity-based fees so the funding model would not
be novel or unique.\169\
---------------------------------------------------------------------------

\166\ See CAT LLC May 2023 Response Letter at 7; CAT LLC July
2023 Response Letter at 8; SIFMA May 2023 Letter at 7.
\167\ See CAT LLC May 2023 Response Letter at 7; CAT LLC July
2023 Response Letter at 8.
\168\ See CAT LLC May 2023 Response Letter at 7; CAT LLC July
2023 Response Letter at 8.
\169\ See CAT LLC July 2023 Response Letter at 8.
---------------------------------------------------------------------------

Additionally, CAT LLC responded to the commenter's suggested
alternative proposal that would equally allocate CAT costs to
Participant exchanges and Industry Members, stating that the commenter
did not explain why the alternative would satisfy the Exchange Act
standards, and noting that CAT LLC had previously considered such an
allocation but believed that it would not result in a fair and
equitable allocation due to the greater number of Industry Members than
Participants, the greater financial resources of Industry Members, and
the failure of the suggested allocation to take into account how the
complexity of Industry Member business models contributes substantially
to CAT costs.\170\
---------------------------------------------------------------------------

\170\ See CAT LLC May 2023 Response Letter at 7.
---------------------------------------------------------------------------

In response, the commenter stated that the CAT LLC Response Letter
did not meaningfully address the concerns it raised about the
allocation of CAT costs between Participants and Industry Members.\171\
CAT LLC further responded, stating that it has responded to the
commenter's comments several times and that just because CAT LLC did
not adopt the commenter's viewpoints does not mean that CAT LLC

[[Page 62636]]

did not consider or respond to the commenter's comments.\172\
---------------------------------------------------------------------------

\171\ See SIFMA June 2023 Letter at 2.
\172\ See CAT LLC July 2023 Response Letter at 27.
---------------------------------------------------------------------------

In response to a commenter that recommended allocating no more than
50% of CAT costs to Industry Members, including the FINRA
allocation,\173\ CAT LLC stated that the commenter did not offer a
reasoned basis why such an allocation would be consistent with the
Exchange Act.\174\ CAT LLC also stated that such an allocation would
raise fairness concerns because, as compared to Participants, Industry
Members have greater financial resources, and their complex business
models ``contribute substantially to the costs of the CAT.'' \175\
Furthermore, in response to the commenter's other suggested allocation
methodology which the commenter believed would ensure that a small
group of firms and specific market segments would not be subject to
inequitable cost burdens,\176\ CAT LLC stated that the commenter did
not explain how the suggested methodology would fit into a funding
model or how such a funding model would be consistent with the Exchange
Act.\177\ CAT LLC stated that it evaluated various other funding models
over the past seven years and concluded that ``the Executed Share Model
provides a variety of advantages in comparison to the alternatives, and
satisfies the requirements of the Exchange Act. . .'' \178\
---------------------------------------------------------------------------

\173\ See Citadel July Letter at 31.
\174\ See CAT LLC July 2023 Response Letter at 10.
\175\ Id.
\176\ See Citadel July Letter at 30.
\177\ See CAT LLC July 2023 Response Letter at 10.
\178\ Id. at 11-12.
---------------------------------------------------------------------------

In response, the commenter stated that its suggestions, which
included minimum and maximum fee levels, calibrations for liquidity
provision, and consideration of additional metrics,\179\ were included
in prior funding model proposals.\180\ The commenter stated that the
CAT Operating Committee should explain why it changed its position on
``the importance of these elements as part of a fair and equitable
funding proposal that is consistent with the Exchange Act.'' \181\
---------------------------------------------------------------------------

\179\ See Citadel August Letter at 5.
\180\ Id. (citing the minimum and maximum fees and market making
discounts proposed in a funding model proposal from the CAT
Operating Committee that was filed in 2021. See Securities Exchange
Act Release No. 91555 (Apr. 14, 2021), 86 FR 21050 (Apr. 21, 2021)).
\181\ Id.
---------------------------------------------------------------------------

The Executed Share Model reflects a reasonable approach to funding
the building and operation of the CAT.\182\ The CAT NMS Plan requires
both Participants \183\ and Industry Members (which would include CAT
Executing Brokers) to fund the CAT.\184\ The costs of CAT therefore
must be allocated in some fashion between Participants and Industry
Members, and how to do so is a question of judgment for which there may
be multiple reasonable approaches. CAT LLC has proposed to allocate CAT
fees equitably among the three parties who have primary roles related
to the transaction: the buyer, seller, and market regulator. In
response to one commenter that stated that the proposed allocation
methodology is inconsistent with the Exchange Act because of an
excessive percentage of total costs proposed to be allocated to
Industry Members and an unfair method of allocating costs among
Industry Members,\185\ the Commission believes that the proposed
allocation is reasonable as discussed below.\186\
---------------------------------------------------------------------------

\182\ See 17 CFR 242.608(b)(2).
\183\ The CAT NMS Plan requires Execution Venues and Industry
Members to fund the CAT. The definition of ``Execution Venue''
includes Participants. See supra note 15.
\184\ See CAT NMS Plan, supra note 2, at Section 11.1(b),
11.3(a) and (b). Section 11.1(b) of the CAT NMS Plan authorizes the
Operating Committee to establish fees for Execution Venues (which
include Participants) and Industry Members to fund the CAT and
Sections 11.3(a) and (b) of the CAT NMS Plan set forth how these
fees would be calculated. See also Rule 613(a)(1)(vii)(D) discussing
how the CAT NMS Plan shall discuss the proposed allocation of
estimated costs among the plan sponsors, and between the plan
sponsors and members of the plan sponsors. 17 CFR
242.613(a)(1)(vii)(D).
\185\ See Citadel July Letter at 15.
\186\ See infra notes 189-201 and accompanying text.
---------------------------------------------------------------------------

While a commenter said the Proposed Amendment did not justify why
the TAF, options regulatory fee, and Section 31 fees should be used as
a model in the context of the Executed Share Model,\187\ CAT was
created to serve regulatory purposes. Moreover, CAT Data can only be
used by SROs and the Commission for regulatory and surveillance
purposes.\188\ Therefore, the costs incurred by the Participants to
build, operate and administer the CAT similarly are regulatory costs,
which here the Participants are seeking to recover through the CAT
fees.
---------------------------------------------------------------------------

\187\ See FINRA June 2022 Letter at 4; FINRA April 2023 Letter
at 8.
\188\ See 17 CFR 242.613(e)(4)(i)(A); CAT NMS Plan Sections
6.5(c) and 6.5(g) and Appendix D, Section 8.1.
---------------------------------------------------------------------------

Commenters expressed concerns that the Participants may impose fees
on their members to recoup costs relating to CAT, making Industry
Members responsible for CAT funding costs beyond those to which they
will be directly assessed pursuant to the Executed Share Model,\189\
that CAT costs will be passed-through to investors and that this aspect
of the Proposed Amendment lacks information needed to demonstrate that
it meets the approval standard and to allow the Commission and other
interested parties to consider the resulting economic effects.\190\ In
response to the comments, the Commission acknowledges the concerns but
also emphasizes that, as discussed above, the CAT provides important
benefits in facilitating effective market surveillance and the Exchange
Act expressly contemplates the ability of the Participants to recoup
their costs to fulfill their statutory obligations under the Exchange
Act.\191\ To that end, the CAT NMS Plan expressly contemplates the
allocation of the costs associated with operating the CAT among the
Participants and the Industry Members. The use of the Executed Share
Model is a reasonable method, among a number of potential approaches to
do so.
---------------------------------------------------------------------------

\189\ See SIFMA May 2023 Letter at 2; Citadel July Letter at 16,
17, 21, 22; Citadel August Letter at 2.
\190\ See SIFMA AMG Letter at 2; FINRA April 2023 Letter at 6-7.
\191\ Sections 6(b)(1) and 15A(b)(2) of the Exchange Act require
that a national securities exchange or national securities
association have the capacity to be able to carry out the purposes
of the Exchange Act, the rules and regulations thereunder, and the
rules of the exchange or association. 15 U.S.C. 78f(b)(1); 15 U.S.C.
78o-3(b)(2).
---------------------------------------------------------------------------

The Commission recognizes that these operational costs may be
passed on in other ways, including by both the Participants and
Industry Members, who each may elect to pass on such operational costs
as fees to customers indirectly through their charges for services to
customers. That would be true regardless of how the Proposed Amendment
chose to set the initial allocation. Even if the Participants decide to
pass-through the costs of CAT to Industry Members, however, in our
view, the rule filing process under Section 19(b) and Rule 19b-4 will
still incentivize the Participants to control costs. Any effort to
pass-through costs will be subject to that process and, if the
Participants fail to control costs, their ability to demonstrate that a
proposed fee is reasonable and consistent with the Exchange Act may be
compromised. After the Participants file their proposed rule changes
relating to fees with the Commission, those proposed rule changes are
published by the Commission and there is an opportunity for public
comment.\192\ Although the proposed rule changes could likely take
effect upon filing,\193\ the Commission

[[Page 62637]]

can temporarily suspend immediately effective rule changes if such
action is necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the purposes of
the Exchange Act.\194\ If the Commission takes such action, the
Commission will institute proceedings under Section 19(b)(2)(B) to
determine whether the proposed rule changes should be approved or
disapproved.\195\ Those fees, like any fees the Participants collect
from their members to fund their SRO responsibilities in market and
member regulation, must be consistent with applicable statutory
standards under the Exchange Act, including being reasonable, equitable
and not unfairly discriminatory.\196\ Additionally, as stated by CAT
LLC, Industry Members may be able to offset fees that FINRA assesses
them by passing their CAT fees through to their customers,\197\ and as
discussed further below, the Commission believes that the additional
costs borne by investors are likely small relative to current
transaction costs.\198\ The Commission recognizes that not all Industry
Members currently pass through fees and cannot determine in advance the
extent to which Industry Members can or will pass-through their CAT
fees to investors or would determine to do so in the future. But we
believe that many are able to and that at least some will do so. For
all of these reasons, contrary to the view of some commenters,\199\ the
Commission does not believe that the inability to determine the amount
of the CAT costs that will be passed along to investors precludes a
finding that the allocation model set forth in the Proposed Amendment
meets the approval standard.
---------------------------------------------------------------------------

\192\ 15 U.S.C. 78s(b).
\193\ 15 U.S.C. 78s(b)(3)(A); 17 CFR 240.19b-4(f)(2). Pursuant
to Exchange Act Rule 19b-4, a proposed rule change may take effect
upon filing with the Commission pursuant to Section 19(b)(3)(A) of
the Exchange Act if properly designated by the self-regulatory
organization as: (1) constituting a stated policy, practice, or
interpretation with respect to the meaning, administration, or
enforcement of an existing rule; (2) establishing or changing a due,
fee, or other charge applicable only to a member; (3) concerned
solely with the administration of the self-regulatory organization.
\194\ 15 U.S.C. 78s(b)(3)(C).
\195\ 15 U.S.C. 78s(b)(2)(B).
\196\ See Section 6(b)(4); Section 15A(b)(5); Section 6(b)(5);
Section 15A(b)(6). 15 U.S.C. 78f(b)(4); 15 U.S.C. 78f(b)(6); 15
U.S.C. 78o-3(b)(5); 15 U.S.C. 78o-3(b)(6). See also e.g., Schedule A
to the By-Laws of FINRA, Section 1(a) (stating ``FINRA shall, in
accordance with this section, collect member regulatory fees that
are designed to recover the costs to FINRA of the supervision and
regulation of members, including performing examinations, financial
monitoring, and policy, rulemaking, interpretive, and enforcement
activities'').
\197\ See Notice, supra note 7, 88 FR at 17108; see also CAT LLC
July Response Letter at 8-9; cf. SIFMA May 2023 Letter at 8; Citadel
July Letter at 20.
\198\ Any efforts to recoup CAT costs will be subject to
statutory and regulatory oversight as appropriate. Under the federal
securities laws and FINRA rules, prices for securities and broker-
dealer compensation are required to be fair and reasonable, taking
into consideration all relevant circumstances. See, e.g., Exchange
Act Sections 10(b) and 15(c); FINRA Rules 2121 (Fair Prices and
Commissions), 2122 (Charges for Services Performed), and 2341
(Investment Company Securities). See also FINRA Rule 3221 (Non-Cash
Compensation). Broker-dealers are also required to disclose the fees
they charge related to a transaction pursuant to Exchange Act Rule
10b-10. See 17 CFR 240.10b-10.
\199\ See SIFMA AMG Letter at 2; FINRA April 2023 Letter at 6-7.
---------------------------------------------------------------------------

In response to the commenter stating that proprietary trading firms
cannot pass-through fees to investors and suggesting that an analysis
of proprietary executed volume compared to customer executed volume is
necessary to determine if the allocation is fair, equitable, and
unfairly discriminatory,\200\ the Commission believes it is reasonable
to charge executing brokers regardless of whether they are trading for
their own account or for a customer's account. The Commission
acknowledges that there is not a customer per se for proprietary trades
and therefore, proprietary trading firms would not be able to pass-
through their CAT fees to customers. However, regardless of whether a
firm trades for its own account or for a customer account, in both
instances, the firm engages in trading activity to earn a profit. In
the Commission's view, it is reasonable to allow a firm to incur CAT
fees for its profit-making business activities, such as proprietary
activity. The Commission recognizes that Industry Members may pass-
through CAT fees for customer executed volume but in the case of
proprietary trades where a firm is trading for its own account, there
is no customer to which the firm can pass-through fees, as the firm
itself is the ultimate investor, and thus it is reasonable for the firm
to be responsible for payment of CAT fees for those trades. Further,
the Commission believes it is reasonable to allow a firm to incur CAT
fees for its profit-making activity, which in this case is proprietary
activity. CAT is a regulatory tool that will be used by the
Participants and the Commission to oversee the activities for which
Industry Members earn profits and therefore it is reasonable for fees
to be charged for that profit-making activity, even if those fees
cannot be passed on to customers.
---------------------------------------------------------------------------

\200\ See Citadel July Letter at 20; Citadel August Letter at 3.
---------------------------------------------------------------------------

While comments raised concerns that the industry would be allocated
most of the CAT costs in perpetuity without a mechanism to limit the
budget,\201\ there is a statutory process for notice and comment and
Commission review of proposed rule changes relating to fees, under
Section 19(b) and Rule 19b-4.\202\ In addition, the Proposed Amendment
requires that the Fee Rate calculated by the Operating Committee twice
per year be based on ``reasonably budgeted CAT costs'' \203\ and that
such budgeted CAT costs be composed of ``all reasonable fees, costs and
expenses reasonably budgeted to be incurred by or for the Company in
connection with the development, implementation and operation of the
CAT.'' \204\ The Operating Committee must demonstrate that their
proposed budget and associated fees are reasonable, and the
Participants must provide support for such reasonableness in their
associated fee filings. If a Participant cannot demonstrate that their
budgeted CAT costs are reasonable in a particular filing, following
notice and public comment, then that would provide the Commission with
grounds to suspend the filing and ultimately disapprove it, which
should impose discipline or constraints on the fee setting process.
---------------------------------------------------------------------------

\201\ See SIFMA June 2023 Letter at 3, 4; Citadel July Letter at
2; FIA Letter at 2-5.
\202\ See supra notes 192-196 and accompanying text.
\203\ See proposed Section 11.3(a)(i)(A)(I) and proposed Section
11.3(a)(i)(A)(II).
\204\ See proposed Section 11.3(a)(i)(C).
---------------------------------------------------------------------------

Further, the concerns expressed that the proposed allocation did
not account for the costs already incurred by Industry Members to
comply with the CAT or other fees paid by Industry Members to exchanges
for other regulatory matters do not render that allocation
unreasonable. Both Participants and Industry Members have incurred
costs in adapting their operations to report to CAT as is required to
achieve the benefits anticipated from the CAT. But the purpose of the
funding model is to provide a framework for the recovery of a different
set of costs--those incurred by the Participants' in developing and
maintaining the CAT system. Section 11.1(c) of the CAT NMS Plan
explicitly permits the Operating Committee to recover those costs,
allowing it to ``take into account fees, costs and expenses . . .
incurred by the Participants on behalf of the Company . . . and such
fees, costs and expenses shall be fairly and reasonably shared among
the Participants and Industry Members.'' \205\ The decision to exclude
the costs of compliance from this funding model is thus a reasonable
one.
---------------------------------------------------------------------------

\205\ CAT NMS Plan, supra note 2, at Section 11.1(c).
---------------------------------------------------------------------------

Further, the Commission does not base its finding with respect to
the proposed allocation of costs between Participant and Industry
Members on their respective responsibility for any

[[Page 62638]]

complexity in the markets. Regardless of the origin of that complexity,
its existence contributes to the costs of CAT and the purpose of the
funding model is to account for those current and future costs, not
assess responsibility for the market structure. The Participants'
decision to divide the costs evenly among the three parties who have
primary roles related to the transaction is reasonable.
As explained below, the Commission agrees with CAT LLC's statements
that, ``[t]he Executed Share Model . . . reflects a reasonable effort
to allocate costs based on the extent to which different CAT Reporters
participate in and benefit from the equities and options markets,''
\206\ and is ``transparent, would be relatively easy to calculate and
administer, and is designed not to have an impact on market activity
because it is neutral as to the location and manner of execution.''
\207\ The Participants considered, and have previously proposed,
alternative allocations and funding models.\208\ And the Commission
acknowledges the alternative funding models and allocations suggested
by commenters.\209\ Each of those alternatives, as well as those
suggested by commenters, has relative strengths and weaknesses.
Similarly, the alternatives suggested by a commenter,\210\ including
maximum and minimum fees, appropriate calibrations for liquidity
provision and consideration of additional provisions (e.g., broker-
dealer capital), have strengths and weaknesses. For example, imposing
maximum and minimum fees would transfer costs from the largest members
to the smallest members, distorting the economic incentives of the
Executed Share Model. A similar distortion could arise to the extent
market maker volume is discounted or otherwise calibrated or to the
extent considering other metrics that are not necessarily correlated
with the cost drivers of the CAT. Given the potential distortions that
could occur with these alternatives, the Commission does not believe
that the existence of those alternatives, or the remaining concerns
identified by commenters individually or collectively, call into
question the Proposed Amendment's satisfaction of the approval standard
in Rule 608(b)(2),\211\ or otherwise warrant a departure from the
policy choices made by the Participants.
---------------------------------------------------------------------------

\206\ See Notice, supra note 7, 88 FR at 17087.
\207\ Id.
\208\ In the Proposed Amendment, CAT LLC stated that it
considered but rejected a number of alternative approaches to the
CAT funding model; specifically, an approach based on a CAT
Reporter's cost burden on the CAT, a 50%-50% allocation of costs
between Industry Members and Participant exchanges, a revenue-based
funding model in which CAT Reporters would pay fees based on their
revenue, a message traffic model in which both Industry Members and
Participants would be assessed fees based on message traffic in the
CAT, a sales value model in which fees would be calculated based on
transaction sales models, an alternative allocation in which fees
would only be allocated to the CEBS, and the 2018 and 2021 Fee
Proposals, a model in which CAT LLC would allocate all costs among
the Participants and permit each Participant to charge its own
members as it deems appropriate, and a cost allocation based on a
strict pro-rata distribution regardless of the type or size of CAT
Reporters. Id. at 17105-06, 17117-19. See also CAT LLC May 2023
Response Letter at 8, where CAT LLC responded that SIFMA did not
offer a reasoned basis for why a 50-50 allocation would satisfy the
standards set forth in the Exchange Act. While alternative models
have been suggested and considered, the proposed Executed Share
Model meets the approval standard in Rule 608(b)(2).
\209\ See FINRA April 2023 Letter at 5; SIFMA January 2023
Letter at 4. See also SIFMA May 2023 Letter at 8; SIFMA June 2022
Letter at 5-6; SIFMA October 2022 Letter at 4; Citadel July Letter
at 3, 30, 31, 32.
\210\ See Citadel August Letter at 5.
\211\ 17 CFR 242.608(b)(2).
---------------------------------------------------------------------------

3. Executed Equivalent Shares
Under the Executed Share Model, a CAT fee would be charged with
regard to each transaction in Eligible Securities \212\ as reported in
CAT Data based on executed equivalent shares.\213\ A CAT Fee would be
imposed with regard to transactions in Eligible Securities in the CAT
Data regardless of whether the trade is executed on an exchange or
otherwise than on an exchange.\214\
---------------------------------------------------------------------------

\212\ The CAT NMS Plan defines an ``Eligible Security'' as
including all NMS Securities and all OTC Equity Securities. See CAT
NMS Plan, supra note 2, at Section 1.1. ``NMS Security'' is defined
as ``any security or class of securities for which transaction
reports are collected, processed, and made available pursuant to an
effective transaction reporting plan, or an effective national
market system plan for reporting transactions in Listed Options.''
Id. ``OTC Equity Security'' is defined by the CAT NMS Plan as ``any
equity security, other than an NMS Security, subject to prompt last
sale reporting rules of a registered national securities association
and reported to one of such association's equity trade reporting
facilities.'' Id.
\213\ See Notice, supra note 7, 88 FR at 17086.
\214\ Id. at 17093.
---------------------------------------------------------------------------

Proposed Section 11.3(a)(i)(B) of the CAT NMS Plan describes how
executed equivalent shares would be counted for purposes of calculating
CAT fees. Specifically, the Executed Share Model uses the concept of
executed equivalent shares as the transactions subject to a CAT Fee
involve NMS Stocks, Listed Options and OTC Equity Securities, each of
which have different trading characteristics.\215\ Proposed Section
11.3(a)(i)(B) would require the shares to be reasonably counted for
each type of Eligible Securities in the following manner:
---------------------------------------------------------------------------

\215\ Id.
---------------------------------------------------------------------------

NMS Stocks. Under the Executed Share Model, each executed share for
a transaction in NMS Stocks would be counted as one executed equivalent
share.\216\ Accordingly, proposed Section 11.3(a)(i)(B)(I) of the CAT
NMS Plan would state that ``[f]or purposes of calculating CAT Fees,
executed equivalent shares in a transaction in Eligible Securities will
be reasonably counted as follows: (I) each executed share for a
transaction in NMS Stocks will be counted as one executed equivalent
share.'' \217\
---------------------------------------------------------------------------

\216\ Id.
\217\ Proposed Section 11.3(a)(i)(B)(I).
---------------------------------------------------------------------------

Listed Options. Recognizing that Listed Options trade in contracts
rather than shares, each executed contract for a transaction in Listed
Options will be counted using the contract multiplier applicable to the
specific Listed Option in the relevant transaction.\218\ Typically, a
Listed Option contract represents 100 shares; however, it may also
represent another designated number of shares.\219\
---------------------------------------------------------------------------

\218\ See Notice, supra note 7, 88 FR at 17093.
\219\ Id. See also proposed Section 11.3(a)(i)(B)(II).
---------------------------------------------------------------------------

OTC Equity Securities. Similarly, in recognition of the different
trading characteristics of OTC Equity Securities as compared to NMS
Stocks, the Executed Share Model would discount the share volume of OTC
Equity Securities when calculating CAT Fees.\220\ CAT LLC explained
that many OTC Equity Securities are priced at less than one dollar--and
a significant number are priced at less than one penny--per share and
low-priced shares tend to trade in larger quantities.\221\ Accordingly,
a disproportionately large number of shares are involved in
transactions involving OTC Equity Securities versus NMS Stocks.\222\
Because the Executed Share Model would calculate CAT Fees based on
executed share volume, CAT Reporters trading OTC Equity Securities
would likely be subject to higher fees than their market activity may
warrant.\223\ To address this potential concern, CAT LLC proposed that
the Executed Share Model would count each executed share for a

[[Page 62639]]

transaction in OTC Equity Securities as 0.01 executed equivalent
shares.\224\
---------------------------------------------------------------------------

\220\ See Notice, supra note 7, 88 FR at 17093.
\221\ Id.
\222\ In an example provided by CAT LLC, based on data from
2021, (1) the average price per executed share of OTC Equity
Securities was $0.072 and the average price per executed share for
NMS Stocks was $49.51; and (2) the average trade size for OTC Equity
Securities was 63,474 and the average trade size for NMS Stocks was
166 shares. Trades in OTC Equity Securities accounted for 77% of the
number of all equity shares traded, but only 0.51% of the notional
value of all equity shares traded. Id. at 17093, n.36.
\223\ Id. at 17093.
\224\ See proposed Section 11.3(a)(i)(B)(III).
---------------------------------------------------------------------------

a. Executed Equivalent Share Volume
CAT LLC had represented that a disproportionately large number of
shares are involved in transactions involving OTC Equity Securities
versus NMS Stocks,\225\ that trades in OTC Equity Securities accounted
for 77% of the number of all equity shares traded, but only 0.51% of
the notional value of all equity shares traded,\226\ and that under the
Executed Share Model, CAT Reporters trading OTC Equity Securities would
likely be subject to higher fees than their market activity may
warrant.\227\ CAT LLC also explained the analysis it undertook to
determine to count each executed share for a transaction in OTC Equity
Securities as 0.01 executed equivalent shares, stating the discount was
the result of an analysis of several different metrics comparing the
markets for OTC Equity Securities and NMS Stocks. CAT LLC stated that
``(1) the ratio of total notional dollar value traded for OTC Equity
Securities to OTC Equity Securities and NMS Stocks was 0.051%; (2) the
ratio of total trades in OTC Equity Securities to total trades in OTC
Equity Securities and NMS Stocks was 0.90%; and (3) the ratio of
average share price per trade of OTC Equity Securities to average share
price per trade for OTC Equity Securities and NMS Stocks was 0.065%.''
\228\ For ease of application and because the calculations involve
averages, CAT LLC decided to round the metrics to 1%.\229\
---------------------------------------------------------------------------

\225\ See Notice, supra note 7, 88 FR at 17093.
\226\ Id. at 17093, n.36.
\227\ Id. at 17093.
\228\ Id.
\229\ Id.
---------------------------------------------------------------------------

In support of the use of executed equivalent shares to allocate
costs under the Executed Share Model, CAT LLC explained that ``trading
activity provides a reasonable proxy for cost burden on the CAT, and
therefore is an appropriate metric for allocating CAT costs among CAT
Reporters.'' \230\ CAT LLC stated that it is not feasible to determine
the specific cost burden of each CAT Reporter on the CAT, explaining
that ``[t]he computation of a specific CAT Reporter's burden on the CAT
is complicated by the many inter-related factors that contribute to CAT
costs, including message traffic, data processing, storage, the
complexity of reporting requirements, reporting timelines,
infrastructure, connectivity and more.'' \231\ CAT LLC added that
increased trading activity correlates with an increased cost burden on
the CAT and Industry Members are generally engaged in effecting
transactions in the market, so executed share volume would be an
appropriate metric for the allocation of CAT costs.\232\ CAT LLC stated
that this conclusion is consistent with the Commission's prior
recognition of the use of transaction volume to set regulatory
fees.\233\ Additionally, CAT LLC stated that technology costs dominate
all CAT costs, with compute costs comprising more than half of all
technology costs, and ``[w]hile [compute costs] are related in part to
message traffic, they are driven by the stringent performance
timelines, data complexity and operational requirements in the CAT NMS
Plan.'' \234\ This was one of the reasons CAT LLC decided to change
from using message traffic to calculate CAT fees using executed
equivalent share volume.\235\
---------------------------------------------------------------------------

\230\ See Notice, supra note 7, 88 FR at 17103.
\231\ Id. at 17105; see also id. at 17103.
\232\ Id. at 17105.
\233\ Id.
\234\ Id.
\235\ See Notice, supra note 7, 88 FR at 17105.
---------------------------------------------------------------------------

Commenters questioned the support for the use of executed share
volume instead of message traffic, which was previously proposed in
prior funding models.\236\ FINRA stated that the Proposed Amendment
does not explain why the use of executed share volume as the basis of
the cost allocation methodology, instead of message traffic, is
equitable.\237\ FINRA explained that in prior models, message traffic
was the key proxy for cost generation used to align CAT fees with CAT
costs, but the Executed Share Model would base its cost allocation
methodology entirely on executed share volume.\238\ FINRA stated that
the Participants' argument that executed share volume is related to
cost generation is not enough to demonstrate that its use is reasonable
and equitable.\239\
---------------------------------------------------------------------------

\236\ See FINRA June 2022 Letter at 3, 4; Citadel July Letter at
10.
\237\ See FINRA June 2022 Letter at 3.
\238\ Id.
\239\ Id. at 4.
---------------------------------------------------------------------------

Another commenter stated that the Operating Committee cannot
explain why the proposed allocation to Industry Members is equitable,
noting that it previously stated that charging Industry Members based
on message traffic was the most equitable means of establishing
fees.\240\ The commenter stated that allocating costs among Industry
Members based on share volume is inconsistent with the Exchange
Act.\241\ The commenter stated that there is no evidence to support the
Operating Committee's assertion that trading activity is a reasonable
proxy for cost burden on the CAT, explaining that the Operating
Committee has stated before that CAT Data processing requirements and
message traffic are significant drivers of CAT costs. The same
commenter stated that, according to one Participant, options activity
creates a greater cost burden than equities trading volume and that the
Proposed Amendment does not accurately describe the sources of CAT's
cost burdens.\242\ The commenter stated that the CAT Operating
Committee must demonstrate how the proposed allocation would not
unfairly discriminate against equities market participants and compare
equities and options activity with respect to (i) their cost burden on
the CAT and (ii) the allocation of CAT costs to Industry Members.\243\
The commenter stated that if the equities markets are subsidizing
options activity, this could have broad impacts on equity market
liquidity, competition and efficiency that must be assessed under the
Exchange Act.\244\
---------------------------------------------------------------------------

\240\ See Citadel July Letter at 10.
\241\ Id. at 19.
\242\ Id. at 18, 19. See also Citadel August Letter at 4.
\243\ See Citadel August Letter at 4.
\244\ Id.
---------------------------------------------------------------------------

Further, the commenter stated that allocating costs based on volume
would result in costs being mostly allocated to ``an extremely small
group of broker-dealers,'' which would unduly burden competition.\245\
The commenter stated that the Proposed Amendment also lacks a
discussion of the impact of this allocation on market competition,
efficiency and liquidity, but that the Operating Committee recognized
in the Proposed Amendment that prior proposals, where message traffic
was a metric used for fee allocation, could impose an outsized
financial impact on certain Industry Members.\246\
---------------------------------------------------------------------------

\245\ Citadel July Letter at 19.
\246\ Id. See also Citadel August Letter at 2-3.
---------------------------------------------------------------------------

Additionally, FINRA objected to the statement in the Proposed
Amendment that ``trading activity provides a reasonable proxy for cost
burden on the CAT, and therefore is an appropriate metric for
allocating CAT costs among CAT Reporters.'' \247\ The commenter stated
that this statement is inconsistent with information that demonstrates
that volume from FINRA's trade reporting facilities (``TRFs'')
contributes ``a very small percentage of annual CAT compute and storage
costs.'' \248\ FINRA stated, ``. . . despite the minimal data compute
and storage costs for

[[Page 62640]]

transactions reported to the TRF, FINRA would be assessed an estimated
34% of the total CAT costs to be borne amongst the 25 Participants, and
more than all options exchanges combined,'' therefore it cannot support
the Participants' assertion that trading activity is a reasonable proxy
for cost burden.\249\ FINRA stated that the Proposed Amendment ``fails
to provide for reasonable fees that are equitably allocated and not
unfairly discriminatory, does not reflect a reasonable approach to
allocating costs amongst the Participants, nor does it transparently or
accurately present information regarding the true sources of cost
burdens on the CAT.'' \250\
---------------------------------------------------------------------------

\247\ FINRA May 2023 Letter at 2 (quoting Notice, supra note 7,
88 FR at 17103.)
\248\ FINRA May 2023 Letter at 2.
\249\ Id. See also FINRA April 2023 Letter at 8.
\250\ FINRA May 2023 Letter at 4.
---------------------------------------------------------------------------

FINRA further stated that the Executed Share Model is inconsistent
with the ``cost alignment'' funding principle in Section 11.2(b) of the
CAT NMS Plan, which requires the Participants to seek to establish an
allocation of costs that takes into account distinctions in the
securities trading operations of Participants and Industry Members and
their relative impact upon Company resources and operations.\251\ FINRA
stated that ``the Proposal fails to establish a sufficient nexus
between executed share volume and the technology burdens that generate
CAT costs and fails to relate each reporter group's allocation to the
burden that each reporter group imposes on CAT.'' \252\
---------------------------------------------------------------------------

\251\ Id. See also FINRA April 2023 Letter at 7-9; Section
11.2(b) of the CAT NMS Plan. The Proposed Amendment would amend
Section 11.2(b). See proposed Section 11.2(b); see also infra
Section III.A.8 (Additional Changes from Original Funding Model).
\252\ FINRA June 2022 Letter at 4.
---------------------------------------------------------------------------

In response to FINRA's comment raising concerns about the use of
trading activity as a proxy for costs,\253\ CAT LLC stated that the
Proposed Amendment would provide an appropriate approach for allocating
CAT costs because Industry Member activity is generally for the purpose
of effecting transactions, and trading activity impacts various factors
driving CAT costs, such as storage, data processing and message
traffic.\254\ CAT LLC also stated that the Exchange Act does not
require fees to be directly correlated with the costs created by the
person charged the fee.\255\ CAT LLC stated that it is difficult to
determine the precise cost burden created by each CAT Reporter on the
CAT, and believes trading activity is a reasonable proxy for cost
burden on the CAT.\256\
---------------------------------------------------------------------------

\253\ See FINRA May 2023 Letter at 2.
\254\ See CAT LLC July 2023 Response Letter at 34.
\255\ Id.
\256\ Id.
---------------------------------------------------------------------------

CAT LLC responded to the commenter's statement that the proposed
allocation is inconsistent with the cost alignment principles of the
CAT NMS Plan by noting that the Proposed Amendment incorporates the
concept of cost burden in at least two ways.\257\ Specifically, CAT LLC
stated that it does so because ``the allocation of CAT costs
contemplates the effect of Industry Member activity on the cost of the
CAT. . . and because trading activity provides a reasonable proxy for
cost burden on the CAT, trading activity is an appropriate metric for
allocating CAT costs among CAT Reporters.'' \258\ CAT LLC added that
because there are other examples of trading activity-based fees, the
Executed Share Model would not be novel or unique.\259\
---------------------------------------------------------------------------

\257\ CAT LLC May 2023 Response Letter at 7.
\258\ Id.
\259\ Id.
---------------------------------------------------------------------------

One commenter also stated that the Proposed Amendment made no
adjustments for sub-dollar trading activity in NMS stocks, when
adjustments were made to volume in OTC Equity Securities to adjust for
the large number of shares transacted in sub-dollar securities.\260\
The commenter also stated that it is arbitrary, capricious, and
unfairly discriminatory for the CAT Operating Committee to
significantly adjust executed share volumes for sub-dollar OTC Equity
Securities but not to do the same for sub-dollar NMS stocks, as retail
investor transactions will be allocated a disproportionate percentage
of total CAT costs simply due to the securities traded.\261\ The
commenter stated that the CAT Operating Committee must explain why it
proposes to treat these securities differently and analyze the impact
on retail investors.\262\ The commenter also stated that since
fractional shares would be rounded up to one share, the result would
overstate volume.\263\ The commenter stated that the Proposed Amendment
thus discriminates against Industry Members that handle retail orders
because of the amount of retail activity in sub-dollar stocks and
fractional share trading.\264\ The commenter stated that the Proposed
Amendment does not explain why volume by shares was chosen over
notional volume, or address its impact on specific Industry Members,
investors, or overall market competition, efficiency and
liquidity.\265\
---------------------------------------------------------------------------

\260\ See Citadel July Letter at 20.
\261\ See Citadel August Letter at 4-5.
\262\ Id. at 5.
\263\ See Citadel July Letter at 20.
\264\ Id. See also Citadel August Letter at 4-5.
\265\ See Citadel July Letter at 20. See also Citadel August
Letter at 5.
---------------------------------------------------------------------------

CAT LLC proposed to delete the requirement in existing Section
11.2(b) of the CAT NMS Plan to take into account ``distinctions in the
securities trading operations of Participants and Industry Members and
their relative impact upon Company resources and operations'' in
establishing the funding of the Company.\266\ CAT LLC explained that
this requirement is related to using message traffic and market share
in the calculation of CAT fees, as message traffic and market share
were metrics related to the impact of a CAT Reporter on the Company's
resources and operations.\267\ CAT LLC explained that the requirement
is no longer relevant because the proposed Executed Share Model uses
the executed equivalent shares metric instead of message traffic and
market share.\268\
---------------------------------------------------------------------------

\266\ See proposed Section 11.2(b).
\267\ See Notice, supra note 7, 88 FR at 17099.
\268\ Id.
---------------------------------------------------------------------------

With respect to the deletion in Section 11.2(b) of the requirement
that, when establishing the funding of the CAT, the Operating Committee
must take into account ``distinctions in the securities trading
operations of Participants and Industry Members and their relative
impact upon Company resources and operations,'' FINRA stated that the
Participants have proposed to delete the language in Section 11.2(b)
because the proposed Executed Share Model is inconsistent with the
language.\269\ FINRA stated that the Proposed Amendment ``seeks to
amend the core funding principles to align with an unjustified
allocation methodology.'' \270\ FINRA stated that any changes to the
funding principles ``must be well-reasoned and transparent and must
continue to support the achievement of a fair and equitable outcome.''
\271\
---------------------------------------------------------------------------

\269\ See FINRA June 2022 Letter at 4; see also FINRA April 2023
Letter at 7.
\270\ FINRA June 2022 Letter at 4. The commenter states that the
Executed Share Model instead places the greatest emphasis on the
funding principle relating to the ``ease of billing and other
administrative functions,'' favoring that principle over cost
alignment. Id. at 5.
\271\ Id.; FINRA April 2023 Letter at 8-9.
---------------------------------------------------------------------------

In the Commission's view, the use of executed equivalent share
volume as the basis of the proposed cost allocation methodology is
reasonable and consistent with the approach taken by the funding
principles of the CAT NMS Plan.\272\ The proposed use of executed
equivalent shares would continue to incorporate the concept of cost

[[Page 62641]]

alignment because trading activity, as reflected through executed
equivalent share volume, would, as CAT LLC explained, correlate with
the cost burden on the CAT.\273\ It may not be possible to directly
calculate each CAT Reporter's cost burden on the CAT due to the many
factors impacting CAT costs, such as data processing, storage,
reporting timelines and requirements, and connectivity. But executed
equivalent share volume is a reasonable proxy for those costs because
it is a result of trading activity, which CAT LLC explained impacts
various CAT cost drivers, such as storage, data processing and message
traffic.\274\ In addition, because the proposed use of executed
equivalent share volume would preserve the cost alignment principle,
while no longer relying on message traffic, the deletion of the
requirement in Section 11.2(b) of the CAT NMS Plan that the Operating
Committee, in allocating costs, take into account ``distinctions in the
securities trading operations of Participants and Industry Members and
their relative impact upon Company resources and operations'' \275\ is
reasonable.
---------------------------------------------------------------------------

\272\ See Section 11.2(b) of the CAT NMS Plan.
\273\ CAT LLC May 2023 Response Letter at 7.
\274\ Id. See also Notice, supra note 7, 88 FR at 17105; see
also id. at 17103.
\275\ See Notice, supra note 7, 88 FR at 17105; see also id. at
17103.
---------------------------------------------------------------------------

In response to the commenter that urged the CAT Operating Committee
to demonstrate how the proposed allocation would not unfairly
discriminate against equities market participants by subsidizing CAT
costs related to options market activity,\276\ the Commission believes
that subsidization of options market activity likely is reduced due to
other CAT cost burdens, such as those relating to data processing (such
as equity linkage processing, which the Commission understands is more
complex than options order linkage processing, and thus more
costly),\277\ imposed on the CAT by equity market activity. The
Commission, however, does not believe the failure to eliminate the
potential subsidization of options market activity (and any potential
attendant impacts on liquidity, competition and efficiency) renders the
Participants' Funding Model proposal inconsistent with the Exchange
Act. The Commission does not believe it is possible for the
Participants to predict with certainty how the magnitude of each driver
of CAT costs will change over time. To the extent the other costs noted
above exceed, for example, the subsidy accorded to options market
participants when calculating their executed equivalent shares, there
may be no subsidy or even a reverse subsidy from options to equities
markets. When the relative magnitudes of these cost drivers change, the
amount of any subsidy changes. In light of the potential for the cost
drivers to change over time, the Commission believes that the
Participants' proposal is reasonable.
---------------------------------------------------------------------------

\276\ See Citadel August Letter at 4.
\277\ See infra notes 1075-1082 and accompanying text.
---------------------------------------------------------------------------

The Proposed Amendment's treatment of sub-dollar NMS stocks and
fractional shares is appropriate. The Commission does not believe that
the Participants' failure to discount sub-dollar NMS stocks renders the
Proposed Amendment inconsistent with the Exchange Act. The Commission
acknowledges one commenter's statement that retail investors could be
allocated a disproportionate percentage of total CAT costs due to the
lack of a discount for sub-penny NMS stocks.\278\ However, treating a
subset of NMS stocks differently from NMS securities could introduce
unnecessary complexity or administrative burdens to the extent an NMS
stock price falls or rises above a dollar. It is therefore reasonable
for the Proposed Amendment to treat all NMS stocks the same, even
though certain sub-dollar NMS stocks and fractional shares might have
characteristics similar to OTC Equity Securities. Additionally, in
response to the commenter's statement that since fractional shares
would be rounded up to one share, the result would overstate
volume,\279\ the Commission notes that CAT fees will be based on the
data contained in the transaction reports and transaction reports do
not provide for fractional quantities; therefore, CAT fees cannot be
calculated using fractional shares or fractional share components of
executed orders at this time.\280\ CAT LLC stated that if FINRA's
equity transaction reporting facilities or the exchanges report
transactions in fractional shares in the future, then the calculation
of CAT fees would also reflect fractional shares.\281\ In response to
the comment that stated that the Proposed Amendment does not explain
why volume by shares was chosen over notional volume,\282\ calculating
the notional value of stock introduces additional complexity as the
notional value would have to be calculated and would depend on the
value of the execution or trade, whereas the number of executed shares
is reported and, in the cases of options for example, is based on a
known multiplier (1/100). While the Commission does not disagree that
using executed notional shares may offer advantages and may lessen any
discrimination, the Commission believes that the Proposed Amendment's
use of executed shares is administratively easier, less prone to error,
and thus for these reasons and the reasons set forth above,\283\ is a
reasonable proxy for allocating the cost of the CAT.
---------------------------------------------------------------------------

\278\ See Citadel August Letter at 4-5.
\279\ See Citadel July Letter at 20.
\280\ See Notice, supra note 7, 88 FR at 17089.
\281\ Id. at 17089, n.23.
\282\ See Citadel July Letter at 20. See also Citadel August
Letter at 5.
\283\ See supra notes 272-275 and accompanying text.
---------------------------------------------------------------------------

The Commission also believes that CAT LLC's explanation that
increased trading activity correlates with an increased cost burden on
the CAT is reasonable and that executed share volume is a reasonable
proxy for a CAT Reporter's cost burden on the CAT \284\ because
increased trading activity impacts message traffic, but also data
processing and storage costs.\285\ The Original Funding Model would
have used message traffic and market share to assess CAT fees on
Industry Members and Execution Venues, respectively.\286\ CAT LLC
expressed its belief that the use of executed equivalent share volume
would be an improvement on the Original Funding Model's use of message
traffic,\287\ explaining that the use of executed equivalent share
volume would result in fees tied to transactions (which CAT LLC stated
is the ``traditional source of revenue for Industry Members'' \288\),
that the resulting CAT fees would not adversely impact market makers,
and that the Executed Share Model is simple to understand and to
implement.\289\ CAT LLC stated that Industry Member revenue is often
driven by transactions, but ``[b]ecause message traffic is separate
from whether or not a transaction occurs, fees based on message traffic
may not correlate with common revenue or fee models,'' \290\ which
could negatively impact certain Industry Members in a significant
way.\291\ CAT LLC stated that use of message traffic to calculate fees
for Industry Members could adversely impact market makers because they

[[Page 62642]]

generally create high levels of message traffic.\292\ We agree with CAT
LLC regarding the benefits of the Executed Share Model and the
drawbacks of the Original Funding Model, and thus believe that the
decision to replace the use of message traffic to calculate CAT fees
with executed equivalent share volume in the Executed Share Model is
reasonable.
---------------------------------------------------------------------------

\284\ See Notice, supra note 7, 88 FR at 17105; id. at 17101-03.
\285\ Id. at 17105.
\286\ See CAT NMS Plan, supra note 2, at Section 11.3(a) and
(b).
\287\ See Notice, supra note 7, 88 FR at 17102-03. The Original
Funding Model uses message traffic as the basis of Industry Member
CAT fees. See CAT NMS Plan, supra note 2, at Section 11.3(b).
\288\ Notice, supra note 7, 88 FR at 17103.
\289\ Id.
\290\ Id. at 17102.
\291\ Id.
\292\ Id. at 17103.
---------------------------------------------------------------------------

The Commission acknowledges that executions do not take place on
FINRA; however, the CAT NMS Plan already categorizes FINRA as an
Execution Venue because it has trades reported by its members to its
TRFs for reporting transactions effected otherwise than on an exchange.
Thus, treatment of FINRA as an Execution Venue is not a change to the
existing CAT NMS Plan.\293\ Additionally, this allocation of fees to
FINRA is similar to how Section 31 fees are assessed on FINRA.\294\
---------------------------------------------------------------------------

\293\ See CAT NMS Plan Approval Order, supra note 2, 81 FR at
84793; CAT NMS Plan, supra note 2, at Section 1.1. (defining
``Executing Venues'').
\294\ 15 U.S.C. 78ee; Section 31 of the Securities Exchange Act
requires each national securities exchange and national securities
association to pay transaction fees to the Commission. Specifically,
Section 31(c) requires each national securities association to pay
to the Commission fees based on the aggregate dollar amount of
covered sales transacted by or through any member of the association
other than on an exchange. 15 U.S.C. 78ee(c). Section 31(a) permits
the Commission to collect transaction fees and assessments designed
to recover the costs to the Government of the annual appropriation
to the Commission by Congress. 15 U.S.C. 78ee(a).
---------------------------------------------------------------------------

Moreover, the Executed Share Model does not change the criteria
used to charge Execution Venues (market share).\295\ While there are
differences in how the CAT fees would be allocated among the
Participants under the Executed Share Model and the existing Original
Funding Model, under the Executed Funding Model, as in the Original
Funding Model, the fees charged to Participants will continue to be
based upon the level of market share of each Participant.\296\ The
Original Funding Model approved by the Commission would have assessed
CAT fees on Execution Venues (which would include the Participants)
\297\ based on market share determined by the share volume for a
national securities exchange and determined by reported share volume of
trades for a national securities association (i.e., FINRA) that had
trades reported by its members to its trade reporting facility or
facilities for reporting transactions effected otherwise than on an
exchange in NMS Stocks or OTC Equity Securities.\298\ Additionally,
this allocation is similar to how Section 31 fees are assessed on the
exchanges and FINRA. FINRA's allocation of CAT fees under the Executed
Share Model will continue to be based on its off-exchange market share.
---------------------------------------------------------------------------

\295\ See CAT NMS Plan Approval Order, supra note 2, 81 FR at
84793-97; CAT NMS Plan, supra note 2, at Section 11.2, Section 11.3.
\296\ Id.
\297\ See supra note 15.
\298\ See CAT NMS Plan, supra note 2, at Section 11.3(a)(i).
---------------------------------------------------------------------------

The Commission recognizes that the proposed use of executed
equivalent share volume is not a perfect proxy for CAT costs, but
believes it is nonetheless a reasonable proxy. The costs of CAT are
attributable to a number of factors, such as message traffic, storage,
and data processing costs, and that for these reasons, the Commission
understands that it is difficult to calculate each CAT Reporter's
individual cost burden on the CAT. Additionally, there are other
operational costs of the CAT that cannot be easily attributed to a
particular CAT Reporter and that need to be funded, such as costs for
CAT NMS Plan requirements related to intake capacity,\299\ data search
tools \300\ and data security.\301\ Based on the breadth of CAT costs,
it is not feasible to calculate the cost burden on CAT of each CAT
Reporter. A reasonable proxy for CAT cost burden must therefore be
used. As discussed above, the Commission believes the proposed use of
executed equivalent share volume is a reasonable method of
approximating the cost burden of CAT.\302\ Additionally, CAT LLC stated
that the proposed Executed Share Model would not unfairly burden or
favor a product or product type because the model would recognize the
different types of securities by counting executed equivalent share
volume differently for NMS Stocks, Listed Options and OTC Equity
Securities.\303\ The proposed treatment of these different types of
securities would result in the equitable allocation of reasonable CAT
fees across these securities. The Executed Share Model would count each
executed contract for a transaction in Listed Options using the
contract multiplier applicable to the specific Listed Option in the
relevant transaction,\304\ which is appropriate because a Listed Option
contract typically represents 100 shares, or it could represent another
designated number of shares, and since Listed Options trade in
contracts instead of shares, they would need to be converted into
shares for purposes of calculating the executed equivalent share volume
of a transaction in Listed Options. For OTC Equity Securities, the
Executed Share Model would count each executed share for a transaction
in OTC Equity Securities as 0.01 executed equivalent shares,\305\ which
is appropriate because CAT LLC represented that this amount was a
result of an analysis it conducted of several different metrics
comparing the markets for OTC Equity Securities and NMS Stocks,
specifically total notional dollar value, total trades, and average
share price per trade.\306\ Additionally, since transactions in OTC
Equity Securities typically are priced below one dollar, or even one
penny, and tend to trade in larger quantities, this treatment is
appropriate to prevent CAT Reporters trading OTC Equity Securities from
being assessed higher CAT fees than their activity would deserve.
---------------------------------------------------------------------------

\299\ In the CAT NMS Plan Notice, the Commission said that it
preliminarily believed that intake capacity level is likely to be a
primary cost driver for the Central Repository. See Securities
Exchange Act Release No. 77724 (Apr. 27, 2016), 81 FR 30614 (May 17,
2016), 81 FR at 30770.
\300\ See CAT NMS Plan, supra note 2, at Appendix C, Section
8.1-8.2.
\301\ Id. at Appendix D, Section 4.
\302\ See supra notes 271-274 and accompanying text.
\303\ See Notice, supra note 7, 88 FR at 17116.
\304\ Id. at 17093. A Listed Option contract typically
represents 100 shares, or it could represent another designated
number of shares. Id.
\305\ See proposed Section 11.3(a)(i)(B)(III).
\306\ See supra notes 227-229 and accompanying text.
---------------------------------------------------------------------------

b. Options vs. Equities
The equal allocation of Participant CAT fees to Participants,
regardless of whether they are transacting in options or in equities,
is reasonable. The Original Funding Model would have divided
Participant CAT fees by Execution Venues that execute transactions (or
in the case of a national securities association, has trades reported
by its members to its trade reporting facility or facilities for
reporting transactions effected otherwise than on an exchange) in NMS
Stocks or OTC Equity Securities and by Execution Venues that execute
transactions in Listed Options.\307\ The Executed Share Model instead
assesses a CAT fee based purely on executed equivalent share
volume.\308\ CAT LLC explained that the use of equivalent executed
share volume is designed to

[[Page 62643]]

normalize options and equities in the calculation of fees, and to
recognize and address the different trading characteristics of
different types of securities by counting executed equivalent share
volume differently for Listed Options and for equities.\309\ The use of
executed equivalent share volume and, in particular, the different
weights assigned to equities versus options, are designed to result in
an equitable treatment of the equities and options markets. The
proposed treatment of these different types of securities reasonably
equalizes the CAT fees across these securities. The Executed Share
Model would count each executed contract for a transaction in Listed
Options using the contract multiplier applicable to the specific Listed
Option in the relevant transaction,\310\ which is appropriate because
one options contract typically represents 100 shares.
---------------------------------------------------------------------------

\307\ See CAT NMS Plan, supra note 2, at Section 11.3(a)(i),
(ii).
\308\ The Executed Share Model would count executed equivalent
share volume differently for NMS Stocks, OTC Equity Securities and
Listed Options for purposes of calculating a CAT fee. CAT LLC
explains that the proposed approach ``would not favor or unfairly
burden any one type of product or product type.'' See Notice, supra
note 7, at 17116. See also supra Section III.A.3.
\309\ See Notice, supra note 7, 88 FR at 17108.
\310\ Id. at 17093.
---------------------------------------------------------------------------

c. FINRA Allocation
Under the Executed Share Model, because FINRA is the Participant
primarily responsible for oversight of off-exchange securities trading
activity,\311\ FINRA will likely have greater executed equivalent share
volume than other Participants \312\ and thus will be responsible for a
significant portion of total CAT fees. In the Proposed Amendment, CAT
LLC stated that the size of FINRA's fee is calculated based on the
activity in the over-the-counter market.\313\ CAT LLC stated that the
executed equivalent share volume for over-the-counter trades in
Eligible Securities in 2021 was 1,361,484,729,008 out of a total volume
of 3,963,697,612,395 executed equivalent shares for trades in Eligible
Securities.\314\ CAT LLC stated that approximately 34% of the executed
equivalent share volume in Eligible Securities took place in the over-
the-counter market.\315\
---------------------------------------------------------------------------

\311\ See Securities Exchange Act Release No. 95388 (July 29,
2022), 87 FR 49930 (Aug. 12, 2022), at 49931 (stating that FINRA
historically has overseen off-exchange securities trading activity
and that ``the Exchange Act's statutory framework places SRO
oversight responsibility with a [national securities association]
for trading that occurs elsewhere than an exchange to which a broker
or dealer belongs as a member.''), 49932 (stating that an exchange
would primarily have SRO oversight responsibility of its members and
their trading on the exchange, while SRO oversight of other trading
activity, such as off-exchange trading, is primarily the
responsibility of a national securities association).
\312\ See Notice, supra note 7, 88 FR at 17107.
\313\ Id.
\314\ Id.
\315\ Id.
---------------------------------------------------------------------------

CAT LLC stated that the assessment of a CAT fee on FINRA in the
same manner as the other Participants would not result in a burden on
competition for FINRA or for Industry Members engaging in off-exchange
activity.\316\ CAT LLC also stated that FINRA and the exchanges should
not be evaluated differently based upon the potential for a particular
Participant to recoup its CAT fees through charging fees to its members
or through revenue-generating activity other than passing its fees
through to its members.\317\ CAT LLC stated that each Participant,
including FINRA, can choose to charge its members fees to fund the
Participant's CAT fees.\318\ Additionally, CAT LLC stated that FINRA,
just like the exchange Participants, has revenue sources other than
membership fees,\319\ explaining that FINRA generates significant
revenues via Regulatory Services Agreements (``RSAs'') with the
exchanges, among other sources.\320\ According to CAT LLC, these other
revenue sources may be used to pay CAT fees, and, if they are used,
would not lead to an increase in fees for Industry Members.\321\
---------------------------------------------------------------------------

\316\ Id.
\317\ Id. See also CAT LLC May 2023 Response Letter at 9.
\318\ See Notice, supra note 7, 88 FR at 17107.
\319\ Id. at 17108.
\320\ Id.
\321\ Id.
---------------------------------------------------------------------------

Certain commenters objected to the proposed allocation of
Participant CAT fees to FINRA.\322\ A subset of these commenters
objected to the allocation to FINRA of 34% of the total CAT costs \323\
to be borne by the Participants.\324\ FINRA stated that this amount was
a ``disproportionate share of CAT costs,'' \325\ especially as FINRA
does not operate a market,\326\ and that the Proposed Amendment would
place an undue burden on FINRA.\327\ FINRA stated that its share was
``more than double that of the next highest Participant and $4 million
more than all option exchanges combined.'' \328\ FINRA also stated that
its allocation would largely be based on transaction volume reported to
the TRF; however, FINRA stated that TRF transactions generate fewer
costs for the CAT,\329\ as opposed to options activity, but that only
25% of total Participant CAT fees would be assessed for options
activity, while the remaining 75% would be assessed for equities
activity.\330\ FINRA stated that ``. . . FINRA would be assessed an
estimated 34% of the total CAT costs to be borne amongst the 25
Participants, and more than all options exchanges combined.'' \331\
---------------------------------------------------------------------------

\322\ See FINRA May 2023 Letter; FINRA April 2023 Letter; FINRA
June 2022 Letter; SIFMA May 2023 Letter; SIFMA June 2022 Letter;
SIFMA October 2022 Letter. One of the commenters supported the
points raised in the FINRA April 2023 Letter that stated that the
Proposed Amendment would result in the inequitable allocation of
fees and should be disapproved. See SIFMA May 2023 Letter at 2.
Another commenter supported these points and stated that the fact
that one of the biggest Participants was so strongly opposed to the
plan was evidence that it should be disapproved. See Virtu Letter at
3.
\323\ One commenter stated that this estimate is based on 2021
data and urged the Commission to require the Participants to amend
the Proposed Amendment to include the 2022 data and fee allocation
estimates, stating that the CAT budget has grown significantly from
2021. See FINRA April 2023 Letter at 3, 4-5. In its response to
comments, CAT LLC provided the Historical CAT Costs for 2022. The
total operating expenses increased from $144,415,268 in 2021 to
$181,107,294 for 2022. See Notice, supra note 7, 88 FR at 17111; CAT
LLC May 2023 Response Letter at 13.
\324\ See FINRA May 2023 Letter at 2; FINRA April 2023 Letter at
3; SIFMA May 2023 Letter at 2.
\325\ FINRA April 2023 Letter at 3.
\326\ Id.
\327\ See FINRA June 2022 Letter at 6.
\328\ FINRA April 2023 Letter at 4; see also FINRA June 2022
Letter at 5.
\329\ See FINRA April 2023 Letter at 8, n.23. The commenter also
stated that ``TRF volume contributes to only a very small percentage
of annual CAT compute and storage costs.'' FINRA May 2023 Letter at
2.
\330\ See FINRA April 2023 Letter at 8, n.23; FINRA May 2023
Letter at 2.
\331\ FINRA May 2023 Letter at 2.
---------------------------------------------------------------------------

FINRA stated that, unlike the exchange Participants, transactions
are not executed on a FINRA marketplace and FINRA does not receive
commercial revenue for those transactions.\332\ FINRA explained that
``while the NMS stock allocation to FINRA under the Funding Model is
based on transactions that are reported to FINRA [TRFs], these
transactions are not executed on a FINRA marketplace and FINRA does not
retain commercial revenues from those transactions'' \333\ unlike the
exchanges that operate each FINRA TRF, which retain the market data and
trade reporting revenue of the TRF.\334\ FINRA stated that, unlike
itself, these exchanges would thus have a revenue stream related to the
transactions that would be assessed a CAT fee, and that also, unlike
FINRA, exchanges generate revenue from listings and proprietary data
feeds in NMS securities.\335\ FINRA also stated that FINRA members can
report over-the-counter transactions in listed stocks to the FINRA
Alternative Display Facility, although most transactions are reported
to a TRF.\336\
---------------------------------------------------------------------------

\332\ See FINRA April 2023 Letter at 3.
\333\ Id.
\334\ Id.
\335\ Id. at 4.
\336\ Id. at 3, n.8.
---------------------------------------------------------------------------

FINRA further stated that it cannot necessarily recoup its costs
through RSAs that it has entered into with

[[Page 62644]]

certain exchanges \337\ because the exchanges must first agree to be
charged CAT costs under the RSAs; therefore, RSAs would not be a
reliable source of CAT funding for FINRA.\338\ Additionally, FINRA
questioned CAT LLC's statement that the Proposed Amendment ``reflects a
reasonable effort to allocate costs based on the extent to which
different CAT Reporters participate in and benefit from the equities
and options markets.'' \339\ Specifically, FINRA asked how this
explains the size of its allocation \340\ and noted that this statement
``conflates the costs to create and operate the CAT with the usage of
CAT data.'' \341\
---------------------------------------------------------------------------

\337\ This statement was made in response to a statement in the
Proposed Amendment that FINRA, like the exchange Participants, has
revenue sources other than membership fees, giving as an example the
RSAs. See Notice, supra note 7, 88 FR at 17107.
\338\ See FINRA April 2023 Letter at 4.
\339\ Id. at 7.
\340\ Id.
\341\ Id.; see also FINRA June 2022 Letter at 6.
---------------------------------------------------------------------------

In the Proposed Amendment, CAT LLC contested the view that FINRA
should not be treated as a market center for CAT funding purposes
merely because FINRA is not treated as a market center for governance
purposes under the National Market System Plan Regarding Consolidated
Equity Market Data (``CT Plan'').\342\ CAT LLC explained that the
purpose and implementation of the CT Plan and the CAT NMS Plan are
different.\343\ CAT LLC stated that while the CAT NMS Plan explicitly
contemplates charging fees to all Participants, including FINRA,\344\
and that the CAT is solely for regulatory purposes, providing a
regulatory system to facilitate the performance of the self-regulatory
obligations of all of the Participants, including the exchanges and
FINRA,\345\ ``[i]n contrast, the CT Plan governs the public
dissemination of real-time consolidated equity market data for NMS
stocks.'' \346\
---------------------------------------------------------------------------

\342\ See Notice, supra note 7, 88 FR at 17108. See also Joint
Industry Plan; Order Approving, as Modified, a National Market
System Plan Regarding Consolidated Equity Market Data; Securities
Exchange Act Release No. 92586 (Aug. 6, 2021), 86 FR 44142 (Aug. 11,
2021) (File No. 4-757) (``Order Approving the CT Plan''). The Order
Approving the CT Plan was vacated by the D.C. Circuit on July 5,
2022. See The NASDAQ Stock Market LLC et al. v. SEC, Case No. 21-
1167, D.C. Cir. (July 5, 2022). See also Securities Exchange Act
Release No. 88827; File No. 4-757 (May 6, 2020), 85 FR 28702 (May
13, 2020) (Order Directing the Exchanges and the Financial Industry
Regulatory Authority to Submit a New National Market System Plan
Regarding Consolidated Equity Market Data).
\343\ See Notice, supra note 7, 88 FR at 17108.
\344\ See CAT NMS Plan, supra note 2, at Sections 11.2 and 11.3.
\345\ See Notice, supra note 7, 88 FR at 17108.
\346\ Id.
---------------------------------------------------------------------------

Certain commenters expressed concern about alleged arbitrary
treatment of FINRA by the other Participants of the CAT NMS Plan.\347\
FINRA believes that its ``outsized allocation'' \348\ was because of
its limited voting power, only having one out of 25 votes on the
Operating Committee as it does not control, nor is under common control
with, any other Participant.\349\ Another commenter stated that the
current CAT NMS Plan voting structure results in the unfair and
inequitable treatment of FINRA.\350\ Both commenters believe that the
exchange Participants treat FINRA arbitrarily to benefit themselves,
treating FINRA as a market center in the CAT NMS Plan while not as a
market center under the CT Plan, which governs the public dissemination
of real-time consolidated market data for national market system
stocks.\351\ One commenter stated that the Participants do not treat
FINRA as a market center under the CT Plan in order to limit FINRA's
voting power and therefore its ability to decide how to allocate market
data revenue.\352\ The commenter stated that this example demonstrates
the ``. . . inherent conflicts of interest that for-profit exchanges
have in operating as SROs. . .'' \353\
---------------------------------------------------------------------------

\347\ See FINRA April 2023 Letter at 6; SIFMA October 2022
Letter at 3. See also SIFMA May 2023 Letter at 6, n.11.
\348\ FINRA April 2023 Letter at 7; FINRA June 2022 Letter at 6.
\349\ FINRA April 2023 Letter at 4, 8. See also FINRA June 2022
Letter at 8.
\350\ See SIFMA January 2023 Letter at 3, n.7.
\351\ See FINRA April 2023 Letter at 6, n.16; SIFMA October 2022
Letter at 3. See also SIFMA May 2023 Letter at 6, n.11. One
commenter stated that the Participants treat FINRA in ways that are
financially beneficial to them without considering FINRA's role in
the marketplace ``. . . as the not-for-profit self-regulator for the
entire brokerage industry. . .'' SIFMA October 2022 Letter at 3. See
also SIFMA January 2023 Letter at 4; SIFMA October 2022 Letter at 4;
SIFMA May 2023 Letter at 8 (recommending that FINRA be treated
differently from the Participant exchanges due to its unique role).
\352\ See SIFMA October 2022 Letter at 3-4. See also SIFMA May
2023 Letter at 6, n.11.
\353\ SIFMA October 2022 Letter at 3. See also SIFMA June 2023
Letter at 4 (quoting a Commission release stating that the
Participants are potentially conflicted in allocating CAT fees to
themselves and the Industry Members); supra note 64.
---------------------------------------------------------------------------

Certain commenters suggested that the Commission issue an order
soliciting comment on whether the Operating Committee should be
reorganized consistent with the CT Plan.\354\ One commenter stated,
``[w]e believe such a governance structure for the CAT would help
facilitate a fairer structure for the views of the SROs and industry to
be heard and incorporated into any further CAT funding proposal by
reducing the ability of the largest exchange groups to dictate the
terms of any CAT funding proposal over the objections of other SRO
Participants and the industry.'' \355\
---------------------------------------------------------------------------

\354\ SIFMA October 2022 Letter at 2. See also infra Section
III.A.9.f. (suggesting changes to the governance structure of the
CAT NMS Plan); see also MMI July Letter at 1-3. The latter commenter
also felt that there should be a disclosure of the conflicts of
interest the commenter believes are inherent in having the funding
model determined by the Participants.).
\355\ SIFMA October 2022 Letter at 2. The commenter also stated
that the Industry Members are not voting members of the Operating
Committee and have no way to direct the cost control efforts of the
Participants or change their course if the cost control efforts
prove to be unsuccessful. See SIFMA June 2022 Letter at 8.
---------------------------------------------------------------------------

Commenters also believe the allocation to FINRA would increase the
allocation to Industry Members.\356\ FINRA stated that because it
relies on regulatory fees from its members for funding, it must
increase its member fees in order to fund CAT costs that it cannot
recover from contractual arrangements with TRF business members.\357\
FINRA stated that the Proposed Amendment does not adequately analyze
the allocation's impact, including whether the allocation would
increase Industry Members' allocation of total costs beyond two-
thirds.\358\ FINRA dismissed as inadequate the Participants' argument
that Industry Members can pass through their costs, stating that the
Proposed Amendment lacks a detailed description of and transparency
into how the fees may be passed on to customers.\359\ Another commenter
stated that the Participants ``do not address the fact that the
Executed Share Model for Prospective CAT Costs allocates two-thirds of
CAT costs to Industry Members for exchange transactions and more for
off-exchange transactions'' \360\ because they cannot demonstrate that
the proposed allocation results in an equitable allocation of
reasonable fees.\361\ The commenter stated that Industry Members, who
would be subject to two-thirds of Prospective CAT Costs under the
Executed Share Model, already pay FINRA's operating costs through
regulatory fines and fees;

[[Page 62645]]

therefore, Industry Members would additionally be indirectly assessed
FINRA's one-third CAT fee for off-exchange transactions.\362\ The
commenter suggested an alternative allocation \363\ that would subject
FINRA only to a nominal regulatory user fee to access CAT Data.\364\
---------------------------------------------------------------------------

\356\ See FINRA April 2023 Letter at 5-7; SIFMA June 2022 Letter
at 4; Citadel July Letter at 2, 16, 21, supra notes 73-74 and
accompanying text. See also SIFMA October 2022 Letter at 2, 3.
\357\ See FINRA April 2023 Letter at 5-6. See also FINRA June
2022 Letter at 7.
\358\ See FINRA April 2023 Letter at 6.
\359\ Id. at 6-7.
\360\ SIFMA June 2022 Letter at 4. See also SIFMA October 2022
Letter at 3 (``. . . we believe the proposal is flawed because it
fails to appropriately consider that Industry Members pay the full
costs of operating FINRA.'').
\361\ See SIFMA June 2022 Letter at 4.
\362\ Id. The commenter also stated that the proposed allocation
would result in two-thirds of CAT costs for exchange transactions
being imposed on Industry Members, and that this amount would be
higher for off-exchange transactions as FINRA would be assessed one-
third as the venue fee and Industry Members would be indirectly
assessed FINRA's portion of CAT costs as they pay the entire costs
of operating FINRA. Id. See also SIFMA October 2022 Letter at 2.
\363\ See supra notes 100-101 and accompanying text.
\364\ See SIFMA January 2023 Letter at 4. See also SIFMA May
2023 Letter at 8; SIFMA June 2022 Letter at 5; SIFMA October 2022
Letter at 4; supra notes 100-101 and accompanying text.
---------------------------------------------------------------------------

CAT LLC disagreed with the commenter's proposal to charge FINRA
only a nominal regulatory fee.\365\ CAT LLC stated that the proposed
transaction-based CAT fee is purposely agnostic as to the location of
where a trade occurs, and an intent of this design is to avoid
influencing whether or where any trading activity would take place.
Moreover, CAT LLC stated that FINRA is no different from the exchanges
in terms of its regulatory obligations regarding the CAT.\366\ CAT LLC
also stated that FINRA's allocation is ``fair and reasonable as FINRA
is currently, and is expected to continue to be, one of the largest
regulatory users of the CAT, and it is responsible for the oversight of
the very large over-the-counter securities market.'' \367\
---------------------------------------------------------------------------

\365\ See CAT LLC May 2023 Response Letter at 8.
\366\ Id.
\367\ See CAT LLC July 2023 Response Letter at 35.
---------------------------------------------------------------------------

FINRA requested that if the Commission were to approve the Proposed
Amendment, that it acknowledge ``FINRA's need and ability to cover CAT
costs that are not recovered through contractual arrangements through
member fee increases, so as not to jeopardize FINRA's ability to carry
out its critical regulatory mission.'' \368\ FINRA also stated that it
would file a rule change to increase its member fees with the filing of
any proposed rule change to effectuate the Funding Model.\369\
---------------------------------------------------------------------------

\368\ FINRA April 2023 Letter at 7.
\369\ Id.
---------------------------------------------------------------------------

The Commission acknowledges the comments objecting to the
allocation to FINRA of 34% of the total CAT costs to be borne by
Participants,\370\ but believes that it is reasonable for the Proposed
Amendment to assess fees to FINRA based on executed equivalent share
volume like the other Participants for purposes of CAT funding. FINRA
is a Participant of the CAT NMS Plan. All Participants are mandated
under the CAT NMS Plan to fund the CAT.\371\ The Executed Share Model
would assess CAT fees based on executed equivalent share volume. Under
the Executed Share Model, CAT fees would be allocated among the buyer,
seller, and the market regulator in each transaction. FINRA would pay
the Participant CAT fee based on off-exchange trades reported by its
members to its trade reporting facilities because FINRA is the market
regulator responsible for the market in which the TRF transactions
occur. The Executed Share Model, like the current funding model, is
designed to allocate CAT fees among the Participants based on market
share. Since FINRA is generally the market regulator for the over-the-
counter markets, its CAT fees, and thus market share, will be based on
the trading activity in the over-the-counter markets reported to it by
its members. The trading volume of the over-the-counter markets is
greater than that on the exchanges; consequently, FINRA will likely be
allocated a greater executed equivalent share volume than the other
Participants. However, trading volume generates costs for CAT,
therefore, given its role overseeing the over-the-counter market, it is
reasonable for FINRA to incur a greater share of CAT fees based on the
over-the-counter market's trading volume. As discussed above, it is
difficult to calculate each CAT Reporter's individual cost burden on
the CAT, and a reasonable proxy for CAT cost burden must be used. The
proposed use of executed equivalent share volume is a reasonable method
of allocating costs because it is readily determinable and equitable
since executed share volume is based on trading activity, which impacts
CAT costs. In practice, CAT Reporters will be assessed fees
corresponding to the cost burden they impose on the CAT through their
trading activity, or in FINRA's case, trading activity in the over-the-
counter markets reported to it by its members.
---------------------------------------------------------------------------

\370\ Id. at 3; SIFMA May 2023 Letter at 2.
\371\ See CAT NMS Plan, supra note 2, at Section 11.1(b);
Section 11.3(a).
---------------------------------------------------------------------------

The Commission recognizes that there could be other methodologies
for allocating costs among CAT Reporters, such as allocations that take
into account the manner in which each Participant earns revenue, but
these other methodologies may be significantly more complex and would
not necessarily more accurately reflect the cost burden of each CAT
Reporter. CAT LLC chose to propose the use of executed equivalent share
volume, explaining why trading activity is a reasonable proxy for cost
burden and an appropriate metric for allocating CAT costs.\372\
Although there may be multiple permissible approaches to cost
allocation, the proposed allocation of Participant CAT fees based on
executed equivalent share volume is reasonable and meets the Rule 608
approval standard.\373\
---------------------------------------------------------------------------

\372\ See Notice, supra note 7, 88 FR at 17103.
\373\ See 17 CFR 242.608(b)(2).
---------------------------------------------------------------------------

The Commission agrees with CAT LLC that the Executed Share Model
reasonably assesses fees to FINRA in the same manner based on
transaction volume as other Participants. The Executed Share Model is
reasonably designed to be neutral as to the manner of execution and
place of execution.\374\ All Participants are self-regulatory
organizations that have the same regulatory obligations under the
Exchange Act, regardless of whether they operate as a for-profit or
not-for-profit entity. Their regulatory responsibilities for the
operations of CAT are the same.\375\
---------------------------------------------------------------------------

\374\ See Notice, supra note 7, 88 FR at 17107.
\375\ Id.
---------------------------------------------------------------------------

The Commission acknowledges the concerns expressed by commenters
that FINRA's allocation could indirectly increase the allocation of CAT
fees to Industry Members since Industry Members contribute to FINRA's
funding.\376\ As discussed above, however, the costs of CAT must be
allocated between the Participants and Industry Members according to
some formula. Although the Participants and Industry Members have
different means of potentially recovering from others some of the costs
allocated to them (e.g., the Participants from Industry Members and
Industry Members from customers), it is reasonable to allocate costs
evenly among the three parties who have primary roles related to the
transaction. The Commission agrees with CAT LLC that Industry Members
may be able to offset any fees that FINRA assesses them by passing
their CAT fees through to their customers, just as they may do with
Section 31-related fees and other fees. The Commission recognizes,
however, that not all Industry Members currently pass through fees or
would determine to do so in the future.
---------------------------------------------------------------------------

\376\ See FINRA April 2023 Letter at 5-7; SIFMA June 2022 Letter
at 4; Citadel July Letter at 2, 16, 21, supra notes 73-74 and
accompanying text. See also SIFMA October 2022 Letter at 2, 3; FINRA
June 2022 Letter at 4.
---------------------------------------------------------------------------

Finally, the Commission does not agree that the Participants'
treatment of FINRA is arbitrary because FINRA is treated as a market
center for purposes

[[Page 62646]]

of determining its CAT funding obligations while the CT Plan, which
governs the public dissemination of consolidated market data, would not
have counted FINRA's market activity for purposes of determining the
allocation of votes on the Operating Committee.\377\ The different
treatment of FINRA in these NMS plans reasonably reflects the very
different roles that a market center is used for in these contexts. The
CT Plan provisions discussed by the commenters involve the
determination of which Participant(s) could be eligible for a second
vote on the Operating Committee,\378\ while the Executed Share Model
proposes to assess FINRA a Participant CAT Fee based on its role as the
regulator for the over-the-counter market in which such trades
occur.\379\ The commenter's request that the Commission issue an order
soliciting comment on whether the Operating Committee should be
reorganized consistent with the CT Plan \380\ would be better addressed
in the context of a separate plan amendment.
---------------------------------------------------------------------------

\377\ The CT Plan provided that an exchange group or independent
exchange that has more than 15 percent of consolidated equity market
share during four of the six calendar months preceding a vote of the
operating committee would be authorized to cast two votes. The CT
Plan stated that FINRA is not considered a market center for
purposes of determining consolidated equity market share solely by
virtue of facilitating trades through any TRF that FINRA operates in
affiliation with a national securities exchange designed to report
transactions otherwise than on an exchange. See supra note 342.
\378\ See FINRA April 2023 Letter at 6; SIFMA October 2022
Letter at 3. See also SIFMA January 2023 Letter at 4; SIFMA October
2022 Letter at 4; SIFMA May 2023 Letter at 8.
\379\ See supra notes 371-372 and accompanying text.
\380\ See SIFMA October 2022 Letter at 2.
---------------------------------------------------------------------------

4. CAT Executing Broker
As noted above, CAT Executing Brokers will be charged CAT
fees.\381\ CAT LLC proposed to add a definition of ``CAT Executing
Broker'' to Section 1.1 of the CAT NMS Plan. The definition would
explain which party would be identified as a CAT Executing Broker in a
transaction.
---------------------------------------------------------------------------

\381\ See Notice, supra note 7, 88 FR at 17087.
---------------------------------------------------------------------------

With respect to transactions on an exchange and over-the-counter
transactions, CAT LLC would use transaction reports reported to the CAT
by FINRA or the exchanges to identify the transaction, as well as the
CAT Executing Broker for each transaction, for purposes of calculating
the CAT fees.\382\ Under the Participant Technical Specifications, for
transactions occurring on a Participant exchange, there is a field for
the exchange to report the market participant identifier (``MPID'') of
``the member firm that is responsible for the order on this side of the
trade.'' \383\ The Industry Members identified in these fields for the
transaction reports would be the CAT Executing Brokers for transactions
executed on an exchange.\384\ FINRA is required to report to the CAT
transactions in Eligible Securities reported to a FINRA trade reporting
facility (i.e., the TRF, Over-the Counter Reporting Facility (``ORF'')
and Alternative Display Facility (``ADF'')).\385\ Under the Participant
Technical Specifications, for such transactions reported to a FINRA
trade reporting facility, FINRA is required to report the MPID of the
executing party as well as the MPID of the contra-side executing
party.\386\ The Industry Members identified in these two fields for the
transaction reports would be the CAT Executing Brokers for over-the-
counter transactions.\387\
---------------------------------------------------------------------------

\382\ Id. at 17088. The transaction reports used to identify
transactions and CAT Executing Brokers do not provide for fractional
quantities; therefore, CAT fees would not be calculated using
fractional shares or fractional share components of executed orders.
Id. at 17089. See supra notes 280-266 and accompanying text.
\383\ Section 4.7 (Order Trade Event) and Section 5.2.5.1
(Simple Option Trade Event: Side Details) of the CAT Reporting
Technical Specifications for Plan Participants, Version 4.1.0-r17
(Feb. 21, 2023), https://www.catnmsplan.com/sites/default/files/2023-02/02.21.2023-CAT-Reporting-Technical-Specifications-for-Participants-4.1.0-r17.pdf.
\384\ See Notice, supra note 7, 88 FR at 17087-88.
\385\ See Section 6.1 of the CAT Reporting Technical
Specifications for Plan Participants (Feb. 21, 2023). A CAT
Executing Broker in over-the-counter transactions identified on the
TRF/ORF/ADF Transaction Data Event is determined based on the tape
or media report, that is, a trade report that is submitted to a
FINRA trade reporting facility and reported to and publicly
disseminated by the appropriate exclusive Securities Information
Processor. A CAT Executing Broker for over-the-counter transactions
is not determined based on a non-tape report (e.g., a regulatory
report or a clearing report), which is not publicly disseminated.
There is an exception to this statement for away-from-market trades.
These are non-media trades reported to the TRF with an ``SRO
Required Modifier Code'' of ``R''.
\386\ See Notice, supra note 7, 88 FR at 17087-88.
\387\ Id. at 17088.
---------------------------------------------------------------------------

For transactions on ATSs, if an ATS is identified as the executing
party and/or the contra-side executing party in the TRF/ORF/ADF
Transaction Data Event, then the ATS would be a CAT Executing Broker
for purposes of the Executed Share Model.\388\ If the ATS is identified
as the executing party for the buyer in such transaction reports, then
the ATS would be the CEBB.\389\ If the ATS is identified as the
executing party for the seller in such transaction reports, then the
ATS would be the CEBS.\390\ If the ATS is identified as both the
executing party and contra-side executing party, the ATS would be both
the CEBB and the CEBS.\391\ ATSs would determine the executing party
and the contra-side executing party reported to FINRA's equity trading
facilities in accordance with the transaction reporting requirements
for FINRA's equity trading facilities.\392\
---------------------------------------------------------------------------

\388\ Id. at 17088-89.
\389\ Id. at 17089.
\390\ Id.
\391\ Id. See also FINRA, Trade Reporting Frequently Asked
Questions at Section 203, available at https://www.finra.org/filing-reporting/market-transparency-reporting/trade-reporting-faq#203;
FINRA Regulatory Notice 09-08, available at https://www.finra.org/rules-guidance/notices/09-08.
\392\ See Notice, supra note 7, 88 FR at 17089.
---------------------------------------------------------------------------

For transactions that do not occur on an exchange and there is only
a FINRA member identified for one side of the trade, that FINRA member
would be treated as the CAT Executing Broker for both the buy-side and
the sell-side of the transaction, that is, as the CEBS and CEBB.\393\
Additionally, ``[f]or any trade report on which a Canadian non-member
appears as a party to the trade, the FINRA member must appear as the
reporting party.'' \394\ In this situation, the executing broker
identified in the ``reportingExecutingMpid'' field would be billed for
both sides of the transaction.\395\
---------------------------------------------------------------------------

\393\ See proposed Section 1.1. (definition of ``CAT Executing
Broker'').
\394\ Notice, supra note 7, 88 FR at 17089.
\395\ Id.
---------------------------------------------------------------------------

The Executed Share Model also provides for cancellations and
corrections.\396\ CAT LLC stated that it expects to determine CAT fees
based on the transaction reports for a month as of a particular
day.\397\ To the extent that changes are made to the transaction
reports on or before the day the CAT fees are determined for the given
month, the changes will be reflected in the monthly bill.\398\ To the
extent that changes are made to the transaction reports after the day
the CAT fees are determined for that month, subsequent bills will
reflect any changes via debits or credits, as applicable.\399\ CAT LLC
represented that it will establish specific policies and procedures
regarding the treatment of such adjustments as those related to
cancellations and corrections, as is required under the CAT NMS Plan to
adopt policies, procedures, and practices regarding the billing and
collection of fees.\400\ Furthermore, CAT LLC stated that it will
inform Industry Members and other market participants

[[Page 62647]]

of these policies and procedures via FAQs, CAT Alerts and/or other
appropriate methods.\401\
---------------------------------------------------------------------------

\396\ Id.
\397\ Id.
\398\ Id.
\399\ Id.
\400\ See CAT NMS Plan, supra note 2, at Section 11.1(d).
\401\ See Notice, supra note 7, 88 FR at 17089.
---------------------------------------------------------------------------

Certain commenters objected to the proposed definition of ``CAT
Executing Broker.'' \402\ One commenter stated that the term ``CAT
Executing Broker'' ``does not appear to be universally defined or
accepted by Option Industry Members or Participants'' and that such
lack of acceptance ``present[s] a challenge when firms try to assess
the impact the `Funding Proposal' will have on their respective
businesses.'' \403\ Accordingly, the commenter advocated that the
Executed Share Model follow the ``structure already in place for
[collecting] Regulatory Fees,'' such as charging Clearing Brokers.\404\
---------------------------------------------------------------------------

\402\ See SIFMA May 2023 Letter; Letter from Timothy Miller,
Chief Operating Officer, DASH Financial Technologies, LLC to Vanessa
Countryman, Secretary, Commission (July 13, 2023) (``DASH July 2023
Letter''), at 1-2; Letter from Timothy Miller, Chief Operating
Officer, DASH Financial Technologies, LLC to Vanessa Countryman,
Secretary, Commission (April 11, 2023) (``DASH April 2023 Letter''),
at 1-2. Both the DASH July 2023 Letter and the DASH April 2023
Letter incorporated by reference a separate letter submitted by the
commenter on the prior funding proposal (stating that the concerns
expressed in the prior letter concerning the operating and
competitive burdens of the proposed funding model are unchanged).
See Letter from Timothy Miller, Chief Operating Officer, DASH
Financial Technologies LLC, to Vanessa Countryman, Secretary,
Commission (Jan. 3, 2023) (``DASH January 2023 Letter'').
\403\ DASH April 2023 Letter at 1. See also DASH July 2023
Letter at 1-2.
\404\ DASH April 2023 Letter at 2. See also DASH July 2023
Letter at 1-2. The commenter reiterated that it believes clearing
firms are still best suited to process the collection of fees, as
this can occur at trade settlement and the cost is ultimately borne
by the end beneficiary of each transaction. The commenter further
stated that ``there is precedent to follow with other Regulatory
Fees, such as ORF and OCC, to streamline the workflow and reduce the
number of counterparties involved in the payment/collection
process,'' and ``that in the options industry, ORF and Section 31
fees are not consistently billed to the exchange facing member; but,
most of the time, these fees follow the clearing firm associated
with the order.''
---------------------------------------------------------------------------

Another commenter stated that the proposed definition of executing
broker would result in the inequitable allocation of fees.\405\ While
the commenter supported the change from having clearing firms be
assessed Industry Member CAT fees to executing brokers having this
obligation,\406\ because clearing firms would have been unfairly
burdened with CAT costs and could have been placed in situations in
which they would have been unable to identify the client responsible
for the costs,\407\ the commenter expressed concerns with how the
Participants determined which entities would be considered executing
brokers.\408\ In comment letters on the prior funding model
proposal,\409\ which was amended to require executing brokers instead
of clearing firms to be assessed CAT fees,\410\ the commenter requested
additional detail on how an executing broker would be defined.\411\ The
commenter subsequently stated that the definition in the current
Proposed Amendment suffers from the same problems as the prior proposal
in which CAT fees were allocated to clearing firms and would result in
the inequitable allocation of CAT fees among Industry Members.\412\
---------------------------------------------------------------------------

\405\ See SIFMA May 2023 Letter at 3.
\406\ Id. See also SIFMA January 2023 Letter at 7-8.
\407\ See SIFMA May 2023 Letter at 3-4. See also SIFMA October
2022 Letter at 5. The commenter also expressed concerns about the
assessment of CAT fees on clearing firms because clearing firms
would be required to collect fees and thus would have to develop new
systems and processes under the Executed Share Model, and because a
clearing firm for a buyer or seller would not always be a party to a
trade as it could be the clearer of a trade on behalf of an
executing broker. See SIFMA June 2022 Letter at 9; SIFMA October
2022 Letter at 7.
\408\ See SIFMA May 2023 Letter at 4.
\409\ See Securities Exchange Act Release No. 94984 (May 25,
2022), 87 FR 33226 (June 1, 2022) (``Prior Funding Model
Proposal'').
\410\ Two partial amendments were submitted on the Prior Funding
Model Proposal. The first partial amendment initially proposed the
use of executing brokers. See Securities Exchange Act Release No.
96394 (Nov. 28, 2022), 87 FR 74183 (Dec. 3, 2022). The Prior Funding
Model Proposal, as modified by the two partial amendments, was
withdrawn by the Participants on March 1, 2023. See Securities
Exchange Act Release No. 97212 (Mar. 28, 2023), 88 FR 19693 (Apr. 3,
2023).
\411\ See SIFMA January 2023 Letter at 2, 8; SIFMA December 2022
Letter at 3. See also SIFMA May 2023 Letter at 4.
\412\ See SIFMA May 2023 Letter at 4. See also SIFMA June 2022
Letter at 9-10; SIFMA October 2022 Letter at 5.
---------------------------------------------------------------------------

The commenter explained that CAT operates on a cost-recovery basis,
with costs resulting from the number of messages that Participants and
Industry Members report to the CAT, the processing and linking of such
messages, and the costs of providing tools to regulators to analyze CAT
data.\413\ The commenter stated that the use of message traffic as the
basis of fees, in the Original Funding Model, would have ensured that
all CAT Reporters would contribute to CAT's funding.\414\ However, the
commenter stated that, since the Proposed Amendment would not impose
fees on all CAT Reporters, instead imposing fees on executing brokers,
it would result in an inequitable allocation of fees as the executing
brokers would be the last broker among many other brokers handling an
order.\415\ The commenter stated that any analysis of such a funding
model must evaluate whether (i) the executing brokers would pass-
through or absorb the CAT fees and any negative impacts on competition,
noting that the Proposed Amendment would require executing brokers to
incur expenses that other Industry Members would not incur since they
would be required to collect the Industry Member portion of CAT fees on
behalf of the Participants,\416\ and (ii) Industry Members that
executed trades for introducing brokers and acted as order
consolidators and ATSs would be responsible for CAT fees for
transactions they did not originate and would have to either pay the
fee for their clients or develop software and processes to collect the
fees from their clients as they often are not capable of passing
through fees to the clients that sent them the orders.\417\ The
commenter stated that the Proposed Amendment would subject executing
brokers to unfair burdens and require them to ``shoulder CAT costs in
scenarios in which they could not determine which client firm was
responsible for creating the CAT costs by initiating the transaction.''
\418\
---------------------------------------------------------------------------

\413\ See SIFMA May 2023 Letter at 4.
\414\ Id.
\415\ Id. at 4-5.
\416\ Id. at 5. See also Virtu Letter at 5 (stating that it is
``highly likely'' that executing brokers would end up absorbing the
fees themselves, as they would not have the systems in place to
trace to whom the fees were properly allocable).
\417\ See SIFMA May 2023 Letter at 5.
\418\ Id. Another commenter similarly objected to the imposition
of CAT fees on Executing Brokers. This commenter, a major wholesaler
who also serves as the Executing Broker on many transactions, stated
it was unjust to disproportionately burden Executing Brokers in this
manner, and noted that the cost of designing processes and systems
to route the fees to the appropriate parties could be prohibitive to
smaller brokers. See Virtu Letter at 4-5.
---------------------------------------------------------------------------

The commenter suggested instead an allocation in which the Industry
Member that originated an order would be treated as an ``executing
broker'' and therefore be responsible for Industry Member CAT
fees.\419\ Under this alternative, ``the Industry Member who originates
a new principal order or the Industry Member who initially receives and
routes a customer order for execution on an agency basis would be
directly assessed CAT Fees.'' \420\ The commenter stated that this
would be the most reasonable way to allocate CAT costs among Industry
Members \421\ and that it would be ``relatively easy to accommodate
this approach.'' \422\ One other commenter also suggested allocating
costs to the party originating an order, stating that this would

[[Page 62648]]

``streamline the process and more accurately allocate costs . . .''
\423\
---------------------------------------------------------------------------

\419\ See SIFMA May 2023 Letter at 5.
\420\ Id. at 6.
\421\ Id. at 5.
\422\ Id. at 6.
\423\ See Citadel July Letter at 20. See also id. at 3, 30, 31.
---------------------------------------------------------------------------

One commenter expressed concerns about the imposition of CAT fees
on CAT Executing Brokers.\424\ The commenter stated that charging CAT
Executing Brokers ``inordinately burdens Broker Dealers, especially
small to medium-sized firms.'' \425\ This commenter recommended using
instead the existing structure for regulatory fees, including ``the
efficiencies afforded by the current structure, and the resulting
alleviation of risk.'' \426\ In this regard, the commenter stated that
``Clearing Firms are best suited to process the collection of fees as
it can occur at trade settlement and the cost is ultimately borne by
the end beneficiary of each transaction.'' \427\ The commenter also
stated that small and medium-sized executing brokers could expect a
significant negative impact on their net capital as a result of the
proposal, stating, ``. . . the firms will be forced to recoup these
costs by passing them on to their clients, either in the form of higher
commission rates or as a separate transactional fee. Using [Clearing
Member Trade Agreement] commission invoicing and/or SEC 31(b) fees in a
broker-to-broker relationship as a proxy, these invoices are generally
paid well after the 60-day milestone to qualify the receivable as `good
capital.' '' \428\
---------------------------------------------------------------------------

\424\ See DASH April 2023 Letter. See also DASH July 2023 Letter
at 1-2.
\425\ See DASH April 2023 Letter at 1. See also DASH January
2023 Letter at 1; DASH July 2023 Letter at 1.
\426\ DASH January 2023 Letter at 3. See also DASH April 2023
Letter at 1-2; DASH July 2023 Letter at 1-2.
\427\ DASH April 2023 Letter at 1. See also DASH January 2023
Letter at 1; DASH July 2023 Letter at 1.
\428\ DASH January 2023 Letter at 2; DASH July 2023 Letter at 1-
2.
---------------------------------------------------------------------------

In response to the comment about the definition of CAT Executing
Broker and the billing and collection process being better suited for
clearing firms, CAT LLC stated that the proposed assessment of CAT fees
on CAT Executing Brokers only addresses the party obligated to pay the
CAT fee.\429\ CAT LLC stated that a CAT Executing Broker would not be
required to follow a particular process for paying CAT fees, as it
could pay the fees itself, or require a clearing firm or other third
party to pay CAT fees on its behalf.\430\ For example, CAT LLC stated
that a CAT Executing Broker can decide to enter into an arrangement
with its clearing broker for the clearing broker to collect and pass-
through the CAT fees like it does in other contexts.\431\
---------------------------------------------------------------------------

\429\ See CAT LLC May 2023 Response Letter at 12; CAT LLC July
2023 Response Letter at 3.
\430\ See CAT LLC July 2023 Response Letter at 3.
\431\ CAT LLC May 2023 Response Letter at 12.
---------------------------------------------------------------------------

With respect to alternatives to the proposed definition of the CAT
Executing Broker, CAT LLC stated that the ``originating broker''
suggestion was from a commenter who had previously recommended charging
executing brokers in comment letters on the Prior Funding Model
Proposal.\432\ CAT LLC stated that the commenter's objection to
charging executing brokers in the Executed Share Model was an attempt
to further delay the approval of a funding model and the resultant
payment of CAT fees by its members, rather than expressing a concern
about the merits of charging executing brokers.\433\
---------------------------------------------------------------------------

\432\ Id. at 2. See also supra note 409.
\433\ CAT LLC May 2023 Response Letter at 3.
---------------------------------------------------------------------------

In response, the commenter stated that the Operating Committee
mischaracterized the commenter's position on the assessment of CAT fees
to executing brokers by stating in the CAT LLC Response Letter that the
commenter changed its position on this proposed change to delay
adoption of a CAT funding model.\434\ The commenter represented that it
stated in comment letters it submitted on the Prior Funding Model
Proposal \435\ that initially proposed the use of executing brokers
\436\ that (1) the Participants did not define who would be an
executing broker in a transaction, (2) a clear definition is necessary
for Industry Members to understand when they would be assessed costs
under the Executed Share Model, and (3) its understanding was that the
concept of executing broker generally refers to the Industry Member
that initiates an order.\437\ The commenter stated that the
Participants only provided a definition of executing broker in the
Proposed Amendment.\438\ The commenter stated that it provided concerns
about the proposed definition in its May 2023 comment letter, which the
commenter stated were mischaracterized by the Operating Committee in
the CAT LLC Response Letter in an attempt to rush the Commission to a
decision on the Proposed Amendment.\439\
---------------------------------------------------------------------------

\434\ See SIFMA June 2023 Letter at 5.
\435\ See supra note 409.
\436\ See supra note 410.
\437\ See SIFMA June 2023 Letter at 5.
\438\ Id.
\439\ Id. at 5-6.
---------------------------------------------------------------------------

In response to the comment that imposing fees on executing brokers
would result in an inequitable allocation of fees and the suggestion
that the use of message traffic as the basis of fees would have ensured
that all CAT Reporters would contribute to CAT's funding, CAT LLC
disagreed and stated that because the message traffic is separate from
whether or not a transaction occurs, fees based on message traffic may
not correlate with common revenue or fee models.\440\ CAT LLC stated
that, as a result, CAT fees based on message traffic could impose an
outsized adverse financial impact on certain Industry Members, raising
this same issue of an inequitable allocation of fees.\441\ Further, in
response to the commenter's criticism that in charging executing
brokers, the fee would be charged to a subset of Industry Members and,
as a result, that subset of Industry Members would incur expenses that
other Industry Members would not incur, CAT LLC stated that it
continues to believe that charging CAT Executing Brokers would satisfy
the requirements of the Exchange Act.\442\ CAT LLC stated that in the
past, the Commission has approved fees that are charged to some, but
not all, broker-dealers.\443\ CAT LLC noted that, for example, FINRA's
TAF is assessed to a subset of FINRA members--that is, it is assessed
on the sell side of member transactions.\444\ CAT LLC also stated that
the options exchanges charge options regulatory fees per executed
contract side, and, for both options and equities, Section 31-related
fees are charged to the sell-side in a transaction.\445\ CAT LLC
recognized that, under the proposal to charge CAT Executing Brokers,
the CAT Executing Broker, but not other Industry Members involved in a
given order lifecycle, would be required to pay the CAT fees, and that
Industry Members that sought to recoup such fees would have to develop
processes to collect such fees from their clients.\446\ CAT LLC stated
that this regulatory requirement would have a similar effect as other
types of regulatory fees, such as the FINRA TAF, the options regulatory
fee and Section 31-related sales value pass-through fees because,
``[i]n each such case, a subset of broker-dealers is required to pay a
transaction-based regulatory fee, and those broker-dealers seeking to
recover such fees from other broker-dealers or non-broker-dealers have
established processes with regard to the pass-through of such fees.''
\447\
---------------------------------------------------------------------------

\440\ See CAT LLC May 2023 Response Letter at 4.
\441\ Id.
\442\ Id. at 3.
\443\ Id.
\444\ Id.
\445\ Id.
\446\ See CAT LLC May 2023 Response Letter at 4.
\447\ Id.
---------------------------------------------------------------------------

CAT LLC further stated that it disagrees with charging an
originating

[[Page 62649]]

broker instead of an executing broker because there are already several
existing examples of transaction-based fees being assessed to executing
brokers as opposed to the originating broker (e.g., TAF, Section 31
fees, ORF fees), and it disagrees with the assertion that charging
originating brokers would be easier.\448\ CAT LLC stated that charging
the originating Industry Member would be difficult to implement and
would increase the costs of implementing CAT fees, whereas charging CAT
Executing Brokers is simple, straightforward and in line with existing
fee and business models because for any given trade (buy or sell),
there is only one CAT Executing Broker to which shares can be
allocated.\449\ As such, CAT LLC stated that ``charging the CAT
Executing Broker is simple and straightforward, and leverages a one-to-
one relationship between billable events (trades) and billable
parties.'' \450\ CAT LLC stated that, for a single trade event, there
may be many originating brokers, and each trade must be broken down on
a pro-rata basis, ``to account[] for one or more layers of aggregation,
disaggregation, and representation of the underlying orders.'' \451\
Therefore, CAT LLC stated that one commenter's \452\ ``suggestion of a
model that begins the funding analysis with new order events (e.g.,
MENO or MONO events) and then looks for any execution or fulfillment
that is directly associated with that event does not reduce or mitigate
the complexity associated with aggregation.'' \453\ Further, CAT LLC
stated that the commenter's recommendation would not work with the
design of the CAT system, stating that ``[w]hile CAT is indeed designed
to capture and unwind complex aggregation scenarios, the data and
linkages are structured to facilitate regulatory use, and not a billing
mechanism that assesses fees on a distinct set of executed trades; it
is not simply a matter of using existing CAT linkages.'' \454\ CAT LLC
also stated that charging originating brokers would implicate issues
related to lifecycle linkage rates, and issues related to corrections,
cancellations and allocations, but charging CAT Executing Brokers would
avoid such complications.\455\ CAT LLC also stated that allocating to
the originating broker would not include Industry Members that were
only involved in routing and execution, which would include ``some of
the largest Industry Members,'' \456\ and that these Industry Members
``are not involved in the origination of orders or originate few orders
in relation to their overall market activity.'' \457\ Furthermore, CAT
LLC stated that originating brokers would also need to establish
processes for paying CAT fees, just as CAT Executing Brokers
would.\458\
---------------------------------------------------------------------------

\448\ Id. at 5. See also CAT LLC July 2023 Response Letter at 3-
4, 4 (detailing challenges of allocating CAT costs to originating
brokers).
\449\ See CAT LLC May 2023 Response Letter at 5. See also CAT
LLC July 2023 Response Letter at 3.
\450\ CAT LLC May 2023 Response Letter at 5. See also CAT LLC
July 2023 Response Letter at 4.
\451\ CAT LLC May 2023 Response Letter at 5. See also CAT LLC
July 2023 Response Letter at 3.
\452\ See SIFMA May 2023 Letter at 5.
\453\ See CAT LLC May 2023 Response Letter at 5.
\454\ Id.
\455\ Id.
\456\ See CAT LLC July 2023 Response Letter at 3.
\457\ Id.
\458\ Id.
---------------------------------------------------------------------------

One commenter expressed uncertainty about CAT LLC's response that
some of the largest Industry Members are not involved in order
origination or originate few orders relative to their market activity,
stating that it is unclear to whom the statement is referring since the
executing broker and the originating broker would be the same firm in
the case of proprietary trading activity.\459\ Additionally, the
commenter stated that the originating broker model should be pursued if
it dramatically reduces market-wide implementation costs with a
marginal increase in CAT costs, noting that Industry Members could bear
most, if not all, CAT costs to implement the originating broker
model.\460\ The commenter stated that, before proceeding, the CAT
Operating Committee must publish an analysis of the costs and benefits
of the executing broker and originating broker models including any
differences in CAT implementation costs and Industry Member
implementation costs.\461\
---------------------------------------------------------------------------

\459\ See Citadel August Letter at 6.
\460\ Id.
\461\ Id.
---------------------------------------------------------------------------

In response to a comment stating that executing brokers lacked
systems and processes to recover costs from their clients and would
either choose to absorb the CAT fees or exit the business because of
the investments necessary for the cost-recovery process,\462\ CAT LLC
stated that those Industry Members that pass-through CAT fees will
accordingly need to develop processes to recover the fees from their
clients, like they do for other regulatory-related fees, like the TAF,
the options regulatory fee and Section 31-related fees.\463\ CAT LLC
also stated that CAT Executing Brokers would ``have full discretion as
to whether and the manner and extent to which they pass on their CAT
fees, if at all,'' noting that ``a CAT Executing Broker could round up
its fees to the nearest cent, or decide to charge for, or not charge
for certain transactions, or assess a specific fee or incorporate the
costs into other fee programs.'' \464\ CAT LLC stated that assessing a
transaction-based fee to an executing broker and the executing broker
deciding whether and how to pass-through its costs to clients is ``not
new or novel.'' \465\ Finally, CAT LLC noted that the Plan Processor
would provide trade-by-trade data to CAT Executing Brokers, and will
offer a training program for CAT Executing Brokers to help them
understand their CAT bills.\466\
---------------------------------------------------------------------------

\462\ See Virtu Letter at 5.
\463\ See CAT LLC July 2023 Response Letter at 9. See also id.
at 5.
\464\ CAT LLC July 2023 Response Letter at 10. See also id. at 5
(adding that broker-dealers pass-through fees to customers related
to Section 31 fees).
\465\ Id.
\466\ Id. at 10. See also id. at 5.
---------------------------------------------------------------------------

In the Commission's view, CAT LLC's definition of ``CAT Executing
Broker'' is reasonable given that the Executed Share Model is based
upon the calculation of executed equivalent shares (emphasis
added),\467\ and the executing brokers are reasonably suited to know
their own volume and plan for future volume of executed equivalent
shares to pay the CAT fees. One commenter's suggested approach would
also result in the assessment of fees on a subset of Industry Members
--originating brokers--and thus could raise similar allocation concerns
as those raised by the commenter about the proposed approach.\468\ In
addition, as discussed below, the Commission agrees with the
Participants that the ease of administration in using the transaction
reports to identify the executing broker is an advantage of the
Proposed Amendment. Given the similar issues with either approach--
either charging the fees to a subset of Industry Members based on
whether they are the ``CAT Executing Broker'' or the originating
broker--it is reasonable to choose the less administratively burdensome
of the two options. Accordingly, the assessment of CAT fees on CAT
Executing Brokers is reasonable.\469\
---------------------------------------------------------------------------

\467\ See Notice, supra note 7, 88 FR at 17086.
\468\ See SIFMA May 2023 Letter at 5, 6.
\469\ See 17 CFR 242.608(b)(2).
---------------------------------------------------------------------------

In response to the commenter that questioned CAT LLC's response
that some of the largest Industry Members are not involved in order
origination or originate few orders relative to their market
activity,\470\ the Commission is not relying on this statement by CAT
LLC and understands that the executing broker and the originating
broker would be the same in the case of proprietary

[[Page 62650]]

trading activity. Although one commenter suggested that the originating
broker model should be pursued if it dramatically reduces market-wide
implementation costs with a marginal increase in CAT costs,\471\ the
Commission believes that the executing broker model is reasonable. The
Commission understands the argument that charging originating brokers
instead of executing brokers would be easier and more cost effective
for the executing brokers, but it would be at the expense of the
originating brokers. The Commission also understands that charging
executing brokers instead of originating brokers is easier and more
cost effective for the CAT Plan Processor. Using CAT Data, the CAT Plan
Processor can more easily determine which executing broker to charge.
On the other hand, if the CAT Plan Processor were to charge originating
brokers, the Commission believes the CAT Plan Processor would have to
rely on linkages, which may not be one-for-one in all circumstances, to
determine which originating broker to charge for an execution. And this
difficulty not only would add to the costs of the CAT but also would
impact transparency and potentially the relative simplicity of the CAT
Fees. Moreover, the Proposed Amendment does not address how executing
brokers pass-through CAT fees to their customers.
---------------------------------------------------------------------------

\470\ See Citadel August Letter at 6.
\471\ Id.
---------------------------------------------------------------------------

Using transaction reports to identify the transaction for purposes
of calculating the CAT fees as well as the CAT Executing Broker for
each transaction for purposes of calculating the CAT fees is a
straightforward and more objective method of identifying executing
brokers than other methods, such as identifying an originating broker
through an evaluation of CAT linkages. Although the definition of ``CAT
Executing Broker'' may not be used by the industry or universally
accepted, CAT Executing Brokers will be able review their transactions
reports and request details regarding the calculation of their fees,
which should allow them to better assess the impact of the Executed
Share Model on their business models.\472\ It is appropriate for CAT
LLC to establish policies and procedures on the treatment of
adjustments related to cancellations and corrections. CAT LLC stated
that to the extent changes are made to the transaction reports on or
before the day the CAT fees are determined for the given month, the
changes will be reflected in the monthly bill.\473\ To the extent that
changes are made to the transaction reports after the day the CAT fees
are determined for that month, subsequent bills will reflect any
changes via debits or credits, as applicable.\474\ It is appropriate to
adjust an Industry Member's or Participant's CAT fees for cancellations
and corrections when such adjustments are made to the transaction
reports that are used for calculate CAT fees for that month.
Additionally, under Section 11.1(d) of the CAT NMS Plan, the Operating
Committee is required to adopt policies and procedures regarding the
billing and collection of fees.\475\
---------------------------------------------------------------------------

\472\ See proposed Section 11.3(a)(iv)(A) and 11.3(b)(iv)(A).
See also infra Section III.A.7. (Calculation Information; Billing
and Collection of CAT Fees).
\473\ See Notice, supra note 7, 88 FR at 17089.
\474\ Id.
\475\ See CAT NMS Plan, supra note 2, at Section 11.1(d).
---------------------------------------------------------------------------

It is the Commission's view that charging CEBBs and CEBSs is
reasonable. The Executed Share Model recognizes that there are three
parties who play significant roles in transactions reportable to the
CAT: the Participant, the buy-side and the sell-side.\476\ The Proposed
Amendment also is based on executed equivalent shares (emphasis
added).\477\ As such, CAT LLC stated that charging the CEBBs and CEBSs
would reflect the executing role the CEBB and CEBS have in each
transaction.\478\ Additionally, charging CEBBs and CEBSs is in line
with the use of transaction reports from the exchanges and FINRA's
equity trading reporting facilities for calculating the CAT fees.\479\
Specifically, these transaction reports identify CEBBs and CEBSs, so
charging such entities potentially streamlines the fee charging
process.\480\ CAT LLC also explained that charging both the buy-side
and the sell-side of a transaction would be consistent with other fees,
such as the options regulation fee.\481\
---------------------------------------------------------------------------

\476\ See Notice, supra note 7, 88 FR at 17104.
\477\ Id. at 17086.
\478\ Id. at 17103.
\479\ Id.
\480\ Id.
\481\ Id. at 17108.
---------------------------------------------------------------------------

In Rule 613, the Commission made the determination that the costs
of the CAT should be shared by the Participants and Industry Members.
Charging CAT Executing Brokers, clearing firms or ``originating
brokers'' all would impose the costs initially on a subset of Industry
Members. As discussed above, given that the charges are based on
executed equivalent shares, it makes sense to use the CAT Executing
Brokers as the immediate recipients of the charge. Accordingly, the
Commission agrees with CAT LLC that it is reasonable to impose the
charge on CAT Executing Brokers. The Commission acknowledges that
charging CEBBs and CEBSs would impose a burden on such firms, which
could potentially have an effect on their net capital. However,
currently, such firms regularly pay transaction-based fees to the
Participants, which they may pass-through to their customers who, in
turn, could pass their CAT fees to their customers, until the fee is
imposed on the ultimate participant in the transaction.\482\
Additionally, unlike clearing firms that may simply clear a trade on
behalf of the executing broker, executing brokers are always parties to
a transaction, including instances that may result in CAT costs but not
in actual trades, such as unexecuted orders. The Commission therefore
agrees with CAT LLC that assessing Industry Members CAT fees on CEBBs
and CEBSs would be reasonable for their ``executing role'' in each
transaction.\483\
---------------------------------------------------------------------------

\482\ See Notice, supra note 7, 88 FR at 17103.
\483\ Id.
---------------------------------------------------------------------------

5. Prospective CAT Fees
a. Fee Rate Formula
Under the Executed Share Model, Participants, CEBSs and CEBBs would
be subject to fees designed to cover the ongoing budgeted costs of the
CAT, as determined by the Operating Committee.\484\ Each Participant
and CAT Executing Broker would be required to pay a CAT Fee related to
Prospective CAT Costs for each transaction in Eligible Securities in
the prior month based on CAT Data.\485\ CAT Fees would be calculated by
multiplying the executed equivalent shares in the transaction by one-
third and the applicable ``Fee Rate.'' \486\ The Commission received no
comments on the Fee Rate Formula.
---------------------------------------------------------------------------

\484\ See proposed Section 11.3(a)(i)(A)(I) and (II); proposed
Section 11.3(a)(iii)(A).
\485\ See proposed Section 11.3(a)(ii)(A) and (iii)(A).
\486\ Id.
---------------------------------------------------------------------------

At the beginning of each year, the Operating Committee would set
the Fee Rate to be used to determine CAT Fees.\487\ To calculate the
Fee Rate for Prospective CAT Costs, the Operating Committee would
divide the reasonably budgeted CAT costs by the reasonably projected
total executed equivalent share volume of all transactions in Eligible
Securities for that year.\488\ The Operating Committee would base the
projected total executed equivalent

[[Page 62651]]

share volume on the total executed equivalent share volume of
transactions in Eligible Securities from the prior twelve months.\489\
Additionally, CAT LLC would permit the Operating Committee to use its
discretion to analyze likely volume for the upcoming year \490\ and
Participants would be required to describe the calculation of the
projection in their fee filings submitted to the Commission pursuant to
Section 19(b) to implement the CAT Fee for Industry Members.\491\ The
Operating Committee also would be required to perform a mid-year
adjustment of the Fee Rate for CAT Fees related to Prospective CAT
Costs.\492\
---------------------------------------------------------------------------

\487\ See proposed Section 11.3(a)(i)(A)(I). The Fee Rate would
be established through a majority vote of the Operating Committee.
See Notice, supra note 7, 88 FR at 17108.
\488\ See proposed Section 11.3(a)(i)(A)(I).
\489\ See proposed Section 11.3(a)(i)(D).
\490\ See Notice, supra note 7, 88 FR at 17094.
\491\ See proposed Section 11.3(a)(iii)(B); 15 U.S.C. 78s(b).
\492\ See proposed Section 11.3(a)(i)(A)(II).
---------------------------------------------------------------------------

CAT LLC proposed Section 11.3(a)(i)(A)(I) of the CAT NMS Plan to
describe the annual calculation of the Fee Rate and the requirement for
Participants to file a fee filing for CAT Fees to be charged to
Industry Members calculated using the Fee Rate. Under the Executed
Share Model, the Operating Committee will calculate the Fee Rate by
dividing the reasonably budgeted CAT costs for the year by the
reasonably projected total executed equivalent share volume of all
transactions in Eligible Securities for the year.\493\ Should the
budgeted costs be higher than actual costs, any budget surplus will be
credited against the fees for the following year, as CAT LLC cannot
hold higher than a 25% reserve.\494\
---------------------------------------------------------------------------

\493\ See proposed Section 11.3(a)(i)(A)(I).
\494\ See infra Section III.A.5.c (Reserves).
---------------------------------------------------------------------------

Once the Operating Committee has approved such Fee Rate, the
Participants shall be required to file with the Commission, pursuant to
Section 19(b) of the Exchange Act,\495\ CAT Fees to be charged to
Industry Members calculated using such Fee Rate.\496\ Participants and
Industry Members will be required to pay CAT Fees calculated using this
Fee Rate once such CAT Fees are in effect with regard to Industry
Members in accordance with Section 19(b) of the Exchange Act.\497\
---------------------------------------------------------------------------

\495\ 15 U.S.C. 78s(b).
\496\ See proposed Section 11.3(a)(i)(A)(I).
\497\ Id.
---------------------------------------------------------------------------

Proposed Section 11.3(a)(i)(A)(II) of the CAT NMS Plan describes
the mandatory mid-year calculation of the Fee Rate and the requirement
for Participants to file a fee filing for CAT Fees to be charged
Industry Members calculated using the Fee Rate. Under the Executed
Share Model, the Operating Committee will adjust the Fee Rate once mid-
year \498\ by dividing the reasonably budgeted CAT costs for the
remainder of the year by the reasonably projected total executed
equivalent share volume of all transactions in Eligible Securities for
the remainder of the year.\499\ Once the Operating Committee has
approved the new Fee Rate, the Participants shall be required to file
with the Commission, pursuant to Section 19(b) of the Exchange Act, CAT
Fees to be charged to Industry Members calculated using the new Fee
Rate.\500\ Participants and Industry Members will be required to pay
CAT Fees calculated using this new Fee Rate once such CAT Fees are in
effect with regard to Industry Members in accordance with Section 19(b)
of the Exchange Act.\501\
---------------------------------------------------------------------------

\498\ See proposed Section 11.3(a)(i)(A)(II).
\499\ Id.
\500\ Id.
\501\ Id.
---------------------------------------------------------------------------

CAT LLC proposed to add Section 11.3(a)(i)(A)(III) to the CAT NMS
Plan to state that CAT Fees related to Prospective CAT Costs do not
sunset automatically; such CAT Fees would remain in place until new CAT
Fees are in place with a new Fee Rate.\502\
---------------------------------------------------------------------------

\502\ See proposed Section 11.3(a)(i)(A)(III).
---------------------------------------------------------------------------

CAT LLC proposed to add Section 11.3(a)(i)(A)(IV) to the CAT NMS
Plan to provide that the first CAT Fee may commence at the beginning of
the year or during the year. If it were to commence during the year,
the CAT Fee would be calculated as if it were a mid-year
calculation.\503\
---------------------------------------------------------------------------

\503\ See proposed Section 11.3(a)(i)(A)(IV).
---------------------------------------------------------------------------

The proposed recovery of Prospective CAT Costs is appropriate. It
is appropriate to require that each Participant, CEBB and CEBS pay a
CAT Fee related to Prospective CAT Costs for each transaction in the
prior month based on CAT Data.\504\ Basing the CAT Fee on transaction
data from the prior month is appropriate as it is recent in time and
therefore more reflective of current market data, and the Commission
did not receive any comments on this issue.
---------------------------------------------------------------------------

\504\ See proposed Section 11.3(a)(ii)(A) and (iii)(A).
---------------------------------------------------------------------------

The manner in which the Fee Rate for Prospective CAT Costs will be
calculated (i.e., by dividing the CAT costs reasonably budgeted for the
upcoming year by the reasonably projected total executed equivalent
share volume of all transactions in Eligible Securities for the year)
is reasonable.\505\ The use of projected executed equivalent share
volume in determining the Fee Rate is appropriate because it would
provide the likely volume for the year to be used as the denominator.
It is reasonable to use the prior twelve months to determine the
projected total executed equivalent share volume of all transactions in
Eligible Securities for the year \506\ because it would be the most
recent data available to use to make a projection needed to calculate
the Fee Rate, and the most recent data is on balance more likely to
resemble the near future. Additionally, as noted above, that the
Commission agrees with CAT LLC's analysis that ``trading activity
provides a reasonable proxy for cost burden on the CAT, and therefore
is an appropriate metric for allocating CAT costs among CAT
Reporters.'' \507\ Further, requiring that the CAT costs be
``reasonably budgeted'' and projected total executed equivalent share
volume be ``reasonably projected'' is designed to help impose some
discipline or constraints in the fee setting process. It is reasonable
for CAT LLC to permit the Operating Committee to project the upcoming
volume for the upcoming year.\508\ It is not possible to know exactly
what the volume will be before the year begins, so a projection will be
necessary. If the volume turns out to be higher than projected, then
CAT LLC will be able to use its reserve to cover any shortage. If it is
lower, resulting in a budget surplus, the CAT fees for the following
year would be lower.\509\ Furthermore, since the Participants would be
required to describe the calculation of the projected total executed
equivalent share volume in the fee filings submitted to the Commission,
pursuant to Section 19(b) of the Exchange Act, to implement CAT Fees
for Industry Members, the public will have an opportunity to review the
projection and provide comment.\510\
---------------------------------------------------------------------------

\505\ See proposed Section 11.3(a)(i)(A)(I).
\506\ See proposed Section 11.3(a)(i)(D).
\507\ See Notice, supra note 7, 88 FR at 17103.
\508\ Id. at 17094.
\509\ See infra Section III.A.5.c (Reserves).
\510\ See proposed Section 11.3(a)(iii)(B).

---------------------------------------------------------------------------

[[Page 62652]]

The annual and mid-year adjustments of the Fee Rate for Prospective
CAT Costs \511\ are appropriate because they would ensure that CAT Fees
related to Prospective CAT Costs would stay aligned with changes to the
budget and projected volume occurring as the year progresses with
contemporaneous data. Additionally, calculating a CAT Fee that starts
mid-year as if it were a mid-year Fee Rate calculation is appropriate
because calculating it that way would base the CAT Fee on the budgeted
CAT costs and projected total executed equivalent share volume of all
transactions in Eligible Securities for the remainder of the year,
rather than for the entire year. This is an appropriate treatment of a
CAT Fee that would commence mid-year, not at the beginning of the year.
---------------------------------------------------------------------------

\511\ See proposed Section 11.3(a)(i)(A)(I) and (II).
---------------------------------------------------------------------------

b. Budgeted CAT Costs
The calculation of the Fee Rate for CAT Fees related to Prospective
CAT Costs requires the determination of the Budgeted CAT Costs for the
year or other relevant period.\512\ Proposed Section 11.3(a)(i)(C) of
the CAT NMS Plan provides that the budgeted CAT costs for the year
shall be comprised of all reasonable fees, costs and expenses
reasonably budgeted to be incurred by or for the Company in connection
with the development, implementation and operation of the CAT as set
forth in the annual operating budget approved by the Operating
Committee pursuant to Section 11.1(a) of the CAT NMS Plan, or as
adjusted during the year by the Operating Committee.\513\
---------------------------------------------------------------------------

\512\ See proposed Section 11.3(a)(i)(A)(I).
\513\ CAT LLC proposed to use budgeted CAT costs in calculating
CAT Fees rather than costs incurred. CAT LLC explained that using
budgeted CAT costs is necessary to build financial stability to
support the Company as a going concern, in accordance with the
funding principle in Section 11.2(f) of the CAT NMS Plan, because it
would allow CAT LLC to collect fees before bills become payable. CAT
LLC stated that if CAT Fees were only collected after bills become
payable, Participants would have to continue to fund the CAT for all
CAT costs to pay bills as they are due. See Notice, supra note 7, 88
FR at 17114.
---------------------------------------------------------------------------

Section 11.1(a) of the CAT NMS Plan describes the requirement for
the Operating Committee to approve an operating budget for CAT LLC on
an annual basis. It requires the budget to ``include the projected
costs of the Company, including the costs of developing and operating
the CAT for the upcoming year, and the sources of all revenues to cover
such costs, as well as the funding of any reserve that the Operating
Committee reasonably deems appropriate for prudent operation of the
Company.'' \514\ CAT LLC proposed to amend Section 11.1(a) to require
the Operating Committee to approve a reasonable operating budget for
CAT LLC on an annual basis.\515\
---------------------------------------------------------------------------

\514\ See CAT NMS Plan, supra note 2, at Section 11.1(a).
\515\ See proposed Section 11.1(a).
---------------------------------------------------------------------------

CAT LLC also proposed to amend Section 11.1(b) of the CAT NMS Plan
to add a reference to Section 11.1. Currently, Section 11.1(b) states
that ``[s]ubject to Section 11.2, the Operating Committee shall have
the discretion to establish funding for the Company'' including
establishing fees to be paid by the Participants and Industry Members
(that shall be implemented by the Participants) . . .'' \516\ CAT LLC
proposed to add a reference to Section 11.1 so that ``[s]ubject to
Section 11.1 and Section 11.2'' the Operating Committee would have the
discretion to establish funding for the Company.\517\ CAT LLC explained
that this proposed change is relevant because Section 11.1 relates to
the budget and the budget is used to calculate fees.\518\
---------------------------------------------------------------------------

\516\ See CAT NMS Plan, supra note 2, at Section 11.1(b).
\517\ See Notice, supra note 6, 88 FR at 17090.
\518\ Id.
---------------------------------------------------------------------------

CAT LLC also proposed to add subparagraph (i) to Section 11.1(a) of
the CAT NMS Plan to list the types of CAT costs to be included in the
budget. Specifically, CAT LLC proposed to state that ``[w]ithout
limiting the foregoing, the reasonably budgeted CAT costs shall include
technology (including cloud hosting services, operating fees, CAIS
operating fees, change request fees and capitalized developed
technology costs), legal, consulting, insurance, professional and
administration, and public relations costs, a reserve, and such other
categories as reasonably determined by the Operating Committee to be
included in the budget.'' \519\
---------------------------------------------------------------------------

\519\ Id. CAT LLC has stated that it will consider providing
additional detailed subcategories regarding technology costs, but
notes that what it is currently providing is consistent with what is
made publicly available on its website. CAT LLC has stated that it
will consider the need to provide additional detailed subcategories
for any area besides technology, both because technology costs
account for the majority of the budget and because it is not
considered ``best practices'' to disclose detailed legal or
insurance information, as these are particularly sensitive. Id.
Detailed information is always available to the Commission for
review upon request. Id.
---------------------------------------------------------------------------

Certain commenters noted a lack of detail provided on the cost
categories.\520\ One commenter stated that the budget line item
categories are too high level.\521\ The commenter urged the inclusion
of much greater detail and specificity on the budget spending choices,
especially in technology,\522\ to allow Industry Members and the public
to understand and evaluate CAT spending decisions.\523\ Similarly,
other commenters requested more transparency into the drivers of CAT
costs, in particular, technology costs, which they stated is the
largest expense item.\524\ One commenter stated that their ``concerns
are exacerbated by the general lack of transparency coming from the CAT
Operating Committee. Despite continued requests for information about
key drivers of the rapidly growing CAT costs, the CAT Operating
Committee points to high-level financial and operating budgets
published by the Committee that merely provide broad categories of
costs and expenses. Likewise, in the current structure, the SEC staff
also have no incentive to control costs . . . This process does not
afford industry members with appropriate notice of, and opportunity to
comment on, material changes to the CAT. Nor does it adhere to the
requirements under the Exchange Act to weigh the costs and benefits of
proposed changes to the NMS plan.'' \525\ Another commenter stated that
the Operating Committee refuses to provide cost transparency, such as
more details on the broad expense categories provided in the operating
expenses (as well as the Historical CAT Costs) provided in the Proposed
Amendment.\526\ The

[[Page 62653]]

commenter believes that the lack of transparency into costs would
prevent the Commission from finding that the proposed allocation
methodology is reasonable \527\ and would raise concerns that
inappropriate expenses would be allocated to Industry Members, like
litigation expenses incurred by the Operating Committee against the
Commission, and expenses prohibited by the Financial Accountability
Amendments from being recovered by the Operating Committee.\528\ The
commenter also stated that the Proposed Amendment lacks sufficient
detail for the Commission to perform the required economic
analysis.\529\
---------------------------------------------------------------------------

\520\ See SIFMA January 2023 Letter at 6; Citadel July Letter at
13-14; FIA Letter at 2-5; Letter to Vanessa Countryman, Secretary,
Commission, from Joseph Corcoran, Managing Director, Associate
General Counsel and Ellen Greene, Managing Director, Equities and
Options Market Structure, SIFMA, and Howard Meyerson, Managing
Director, Financial Information Forum, dated July 31, 2023 (``FIF
and SIFMA Letter''), at 8.
\521\ See SIFMA January 2023 Letter at 6.
\522\ Id. (stating that CAT spending on technology should be
broken into further refined cost breakdowns of the following
categories: cloud hosting services, operating fees, CAIS operating
fees and change request fees). The proposed breakdown is consistent
with what is currently provided to the public. See Notice, supra
note 6, 88 FR at 17090. See also FIF and SIFMA Letter at 8.
\523\ See SIFMA January 2023 Letter at 6.
\524\ See FIF and SIFMA Letter at 8. The commenter stated that
the 2023 budget divides technology costs, estimated to be $222.5
million and 95.3% of total operating costs, into four categories
with cloud hosting services represents 75.5% of estimated CAT costs
for 2023. Id. The commenter requested the Commission and the
Participants to make publicly available the financial terms of the
contract between the Participants and Amazon Web Services (``AWS''),
the cloud hosting services provider, and publish all invoices from
AWS. Id. The Commission declines to mandate the publication of a
contract between private parties. Similarly, the Commission declines
to mandate the publication of AWS invoices. The Participants can
choose to publish this information if they believe it is
appropriate.
\525\ See FIA Letter at 2-5.
\526\ See Citadel July Letter at 13-14. See also id. at 23.
\527\ Id. at 2, 15, 26.
\528\ Id. at 2.
\529\ Id. at 11. Rule 613(a)(5) of Regulation NMS requires the
Commission to conduct an assessment of the Proposed Amendment's
impact on efficiency, competition and capital formation, which is
not the same economic analysis as the Commission conducts when
engaged in a rulemaking. 17 CFR 242.613(a)(5). The Proposed
Amendment contains the information needed for the Commission to
conduct this assessment. See infra Section IV. See also infra note
1044.
---------------------------------------------------------------------------

The commenter suggested enhancements to improve budget
transparency.\530\ The commenter suggested that all CAT operating
budgets should remain published on the CAT website \531\ and that any
material change to the CAT system, related technology contracts or
implementation scope should require the filing of an NMS plan amendment
explaining the necessity of the change and include a robust cost-
benefit analysis.\532\
---------------------------------------------------------------------------

\530\ See Citadel July Letter at 33-35.
\531\ Id. at 3, 34.
\532\ Id. See also FIF and SIFMA Letter at 13.
---------------------------------------------------------------------------

In addition, the commenter suggested that exchanges be responsible
for costs that exceed the budget in order to incentivize cost
control,\533\ and that Industry Members should not be allocated costs
for matters specifically for the benefit of the Operating Committee or
the Commission (such as costs related to litigation ``or filings that
are inconsistent with the Exchange Act'' \534\), stating that
``Industry Members should also not be allocated costs relating to how
data is presented to, and used by, regulatory Staff at the SROs or the
Commission.'' \535\ Furthermore, the commenter suggested that change
requests that do not involve specific NMS Plan requirements should be
allocated to the requestor, including the Commission.\536\
---------------------------------------------------------------------------

\533\ See Citadel July Letter at 3, 32.
\534\ Id. at 32.
\535\ Id.
\536\ Id.
---------------------------------------------------------------------------

Commenters also discussed a need for a cost review mechanism,\537\
with several commenters citing to high operating costs as evidence for
the need of one.\538\ One commenter stated that CAT costs are
increasing at an unsustainable level and need to be controlled.\539\
The commenter stated that the Commission lacks a process to manage CAT
costs as CAT operating costs are not part of the Commission's budget
and do not require an appropriation.\540\ The commenter urged that
there is a need to allow the public, the Commission and industry to
have a better understanding of the drivers of CAT operating costs,\541\
why they have exceeded the operating costs estimated in the CAT NMS
Plan,\542\ and why they are projected to increase 27% from 2022 to
2023.\543\ The commenter requested that the Commission direct the
Participants to analyze the increase in CAT operating costs and to
evaluate future expected annual CAT operating cost increases,\544\ and
also advised the Commission not to mandate any new processing or
reporting requirements until such analysis has concluded.\545\
---------------------------------------------------------------------------

\537\ See SIFMA May 2023 Letter at 3, 8-10; Citadel July Letter
at 8, 26, 27; FIF and SIFMA Letter at 8-9; SIFMA AMG Letter at 3.
See also SIFMA October 2022 Letter at 5-6; SIFMA January 2023 Letter
at 2, 5-6; SIFMA June 2023 Letter at 2, n.10, 4; Virtu Letter at 4;
MMI July Letter at 3-4; FIA Letter at 3, 5.
\538\ See, e.g., MMI July Letter at 3; Virtu Letter at 4, FIF
and SIFMA Letter at 2, 5-9; SIFMA AMG Letter at 3.
\539\ FIF and SIFMA Letter at 2, 5. The commenter stated that
internal costs and costs associated with trading workflow changes to
comply with certain CAT reporting requirements should also be
considered, arguing that these costs would significantly exceed CAT
operating costs are 100% paid for by broker-dealers and exchanges.
Id. at 2, 5, 6.
\540\ Id. at 8.
\541\ Id.
\542\ Id. at 7, 9.
\543\ Id. at 9.
\544\ FIF and SIFMA Letter at 4.
\545\ Id.
---------------------------------------------------------------------------

One commenter stated that asset managers were concerned about the
lack of an independent cost review mechanism for the CAT budget to
ensure that future fees are fair and reasonable and spending will be
appropriate and cost-effective.\546\ Similarly, another commenter
stated that an independent cost review mechanism is necessary to ensure
future CAT fees are fair and reasonable and to safeguard against
unchecked spending.\547\ The commenter urged the inclusion of a
mechanism to allow the public to review the annual CAT budget before it
is finalized, since, as proposed, the public would only have the
opportunity to review the CAT budget when the Participants submit
proposed rule changes, pursuant to Section 19(b) of the Exchange
Act,\548\ to implement CAT fees on Industry Members.\549\ The commenter
also stated that it is unlikely that the Commission would decide that a
proposed CAT fee does not meet Exchange Act fee standards and require
the Participants to modify the CAT budget because it would be a
lengthy, time-consuming process and due to ``the regulatory value of
CAT data and the CAT system to the Commission.'' \550\ The commenter
stated that the Commission is ``directly conflicted in its role as the
user and beneficiary of the CAT system for regulatory functions and its
role as the reviewer of the CAT budget and fee filings, a conflict that
is only heightened due to a lack of a Commission funding obligation for
CAT.'' \551\ The commenter also requested that ``the Participants'
proposed budget include as a separate line-item projected usage costs
and system change costs related to the Commission's use and design of
the CAT system.'' \552\ Similarly, another commenter suggested that an
independent expert committee assess whether cost levels and third party
arrangements are reasonable, and whether more cost-control measures are
warranted,\553\ and that the Commission formally approve the CAT budget
on an annual basis.\554\ The commenter further stated that the Proposed
Amendment made no attempt to specify the key drivers of costs, such as
explaining the requirements that resulted in significant cost
increases, or the design alternatives the Operating Committee
previously considered.\555\ The commenter added that Industry Members
must fund a 25% reserve above budgeted amounts, and ad-hoc discussions
between the Operating Committee and the

[[Page 62654]]

Commission could result in higher costs.\556\
---------------------------------------------------------------------------

\546\ See SIFMA AMG Letter at 3.
\547\ See SIFMA May 2023 Letter at 3, 8-10. See also SIFMA
October 2022 Letter at 5-6; SIFMA January 2023 Letter at 2, 5-6;
SIFMA June 2023 Letter at 2, n.10, 4; Citadel July Letter at 2, 26
(stating that that ``the trajectory of annual operating expenses is
unconstrained,'' and that the ``magnitude and trajectory'' of the
costs are not reasonable since Industry Members have borne nearly
all CAT-related costs''); Citadel August Letter at 7.
\548\ 15 U.S.C. 78s(b).
\549\ See SIFMA May 2023 Letter at 8-9. See also SIFMA June 2022
Letter at 8-9; SIFMA October 2022 Letter at 6; SIFMA January 2023
Letter at 5, 6.
\550\ SIFMA May 2023 Letter at 9.
\551\ Id. at 9-10.
\552\ Id. See also SIFMA January 2023 Letter at 6.
\553\ See Citadel July Letter at 3, 33.
\554\ Id.
\555\ Id. at 14.
\556\ Id. at 26.
---------------------------------------------------------------------------

The commenter also suggested enhancements to reduce overall CAT
operating costs.\557\ Specifically, the commenter suggested that the
Operating Committee and the Commission stop making changes to the CAT
to stabilize operating costs, stating that there are changes slated for
development that are currently subject to exemptive relief, and other
requirements the commenter believes are outside the scope of the CAT
NMS Plan that would result in costs that outweigh benefits.\558\ The
commenter suggested that the Operating Committee file an updated NMS
plan to reflect the status quo,\559\ and work with the Commission and
industry to identify technical requirements that could be modified to
reduce costs without sacrificing the key benefits of the CAT system,
like moving timelines from T+1 to T+2.\560\ The commenter also
suggested that steps should be taken to streamline the CAT submission
process to minimize reporting errors and to reduce industry
implementation costs, like implementing further data validation.\561\
One commenter stated that if the Participants ``determine to charge
their members fees to fund their share of CAT fees,'' then Industry
Members would bear 100% of CAT costs, and thus,''[w]ith little to no
skin-in-the-game, the Participants will not be incentivized to control
costs.'' \562\ The commenter further stated that they join other
commenters in calling for an ``independent cost review mechanism.''
\563\
---------------------------------------------------------------------------

\557\ See Citadel July Letter at 33-35.
\558\ Id. at 3, 32-33. One other commenter echoed some of these
same considerations. See MMI July Letter at 4.
\559\ See Citadel July Letter at 3, 33.
\560\ Id.
\561\ Id.
\562\ See FIA Letter at 3. See also Citadel August Letter at 2.
\563\ FIA Letter at 5.
---------------------------------------------------------------------------

In response to the comment that suggested that all CAT operating
budgets should remain published on the CAT website,\564\ CAT LLC stated
that it publishes its annual financial statements from 2017-on and
voluntarily publishes its annual operating budget and updates to the
budget occurring during the year.\565\ CAT LLC stated that, in response
to the comment, it intends that prior CAT operating budgets will stay
available on the CAT website.\566\
---------------------------------------------------------------------------

\564\ See Citadel July Letter at 3, 34.
\565\ See CAT LLC July 2023 Response Letter at 26.
\566\ Id.
---------------------------------------------------------------------------

In response to a commenter suggesting that the exchanges be
responsible for any costs that exceeded the approved budget,\567\ CAT
LLC stated that this suggestion would not result in a fair and
equitable allocation consistent with the Exchange Act because Industry
Member trading activity ``contributes significantly'' \568\ to CAT
costs and it would not be fair for Participants to bear CAT costs
exceeding the budget if unexpected increases in trading volume resulted
in the increased CAT costs.\569\ CAT LLC also stated that this
suggestion could incentivize the Participants to base the budget on
``the most conservative projections for future Industry Member data
volume'' \570\ to not be responsible for costs that go over the
budget.\571\ In addition, CAT LLC noted that the Proposed Amendment
would include both a requirement to adjust the Fee Rate during the year
to address any changes in projected or actual transaction volume or
budgeted or actual CAT costs, and an operational reserve to address
shortfalls in collected fees versus actual CAT costs.\572\
---------------------------------------------------------------------------

\567\ See Citadel July Letter at 32.
\568\ See CAT LLC July 2023 Response Letter at 12.
\569\ Id.
\570\ Id.
\571\ Id.
\572\ Id.
---------------------------------------------------------------------------

In response to suggestions to use an independent cost review
mechanism,\573\ CAT LLC stated that such a review process is
unnecessary because it would go beyond what is required by either Rule
613 or the CAT NMS Plan, and would be superfluous since any CAT fees
must, prior to being implemented, undergo the review process detailed
in Rule 608 and Section 19(b) of the Exchange Act.\574\ CAT LLC also
noted that the Commission is entitled to request additional budget or
cost information it views as necessary to better evaluate those
fees.\575\ CAT LLC also stated that it already provides significant
cost transparency through the public disclosure of its quarterly budget
information and its financials, and that it is already actively engaged
in cost discipline efforts, including through a designated cost-
management working group.\576\ CAT LLC further explained that
Participants are subject to regulatory requirements to implement CAT
and oversee their members and cannot have their compliance subject to a
third party without such restrictions.\577\ CAT LLC added that the
Commission itself could have its ability to oversee the securities
markets undermined if CAT is subject to review by a third party without
regulatory restrictions.\578\ In response, one commenter stated that
the CAT LLC Response Letter did not meaningfully address its concerns
about the lack of a cost control mechanism.\579\
---------------------------------------------------------------------------

\573\ See SIFMA May 2023 Letter at 3, 8-10. See also SIFMA
October 2022 Letter at 5-6; SIFMA January 2023 Letter at 2, 5-6;
SIFMA June 2023 Letter at 2, n.10, 4; Citadel July Letter at 3, 33;
FIA Letter at 5.
\574\ See CAT LLC May 2023 Response Letter at 10.
\575\ Id.
\576\ Id.
\577\ Id.
\578\ Id.
\579\ See SIFMA June 2023 Letter at 2.
---------------------------------------------------------------------------

CAT LLC provided a further response to commenters that recommended
the adoption of an independent cost review mechanism for CAT
costs,\580\ stating that a review process is not necessary or
appropriate.\581\ CAT LLC explained that it is already actively
involved in cost discipline efforts, such as through a designated cost
management working group, and already provides ``significant cost
transparency'' by publishing its quarterly budget information and
financial information.\582\ CAT LLC also stated that such a review
process would go beyond the requirements of Rule 613 and would be
unnecessary because changes to the funding model would be filed as a
plan amendment under Rule 608 of Regulation NMS and CAT fees for
Industry Members would be filed pursuant to Section 19(b) of the
Exchange Act, and both processes would permit the public to comment on
such proposals.\583\ CAT LLC further stated that providing a third-
party that does not have regulatory obligations control over the annual
budget could ``impermissibly restrict the Participants from discharging
their regulatory obligations'' and undermine the Commission's ability
to oversee the securities markets.\584\ CAT LLC also responded to the
commenter that urged the Commission to annually approve the CAT budget
\585\ by stating that such an approval process would not be necessary
or appropriate as CAT LLC is a private entity subject to the
requirements of the Exchange Act, not a governmental entity, and CAT
fees would be filed with the Commission under Rule 608 of Regulation
NMS and Section 19(b) of the Exchange Act and subject to the
Commission's review for consistency with the Exchange Act.\586\

[[Page 62655]]

Furthermore, CAT LLC stated that the Commission can request budget and
financial information from CAT LLC if necessary for the evaluation of
CAT fee filings.\587\
---------------------------------------------------------------------------

\580\ See Citadel July Letter at 33; FIA Letter at 5; MMI July
Letter at 2; SIFMA June 2023 Letter at 2; id. at n.10; Virtu Letter
at 4.
\581\ See CAT LLC July 2023 Response Letter at 19.
\582\ Id. at 20.
\583\ Id. at 19-20.
\584\ Id. at 20.
\585\ See Citadel July Letter at 33.
\586\ See CAT LLC July 2023 Response Letter at 20-21.
\587\ Id. at 21.
---------------------------------------------------------------------------

In response to the commenter that asked whether the Participants
would have an incentive to manage costs because they proposed to
allocate most costs to Industry Members,\588\ CAT LLC stated that it
``strongly disagrees with the suggestion that the Participants would
not be incentivized to control CAT costs if they are only responsible
for one-third of the CAT costs going forward.'' \589\ CAT LLC stated
that the Participants have been focused on cost management when paying
100% of CAT costs and will continue this focus since they will be
paying one-third of CAT costs, a ``significant incentive to keep costs
at an appropriate level.'' \590\
---------------------------------------------------------------------------

\588\ See FIA Letter at 4-5.
\589\ See CAT LLC July 2023 Response Letter at 26.
\590\ Id.
---------------------------------------------------------------------------

In response to comments expressing concern about increasing CAT
operating costs,\591\ CAT LLC described its commitment to cost
management,\592\ stating that cost management is a top priority and
that it works to reduce costs in a number of ways, including through
the Cost Management Working Group comprised of senior members of the
Participants that works to find and address cost management needs.\593\
CAT LLC also noted that Rule 613 and the CAT NMS Plan ``impose
significant regulatory obligations on the Participants regarding how to
design, build and operate the CAT System'' and that the Commission
could compel the Participants to comply with Rule 613 or the CAT NMS
Plan through enforcement actions if CAT LLC and the Participants ever
fail to do so.\594\ CAT LLC stated that its largest cost driver is the
processing and storage of CAT data in the cloud, representing 75% of
all CAT costs.\595\ CAT LLC stated that CAT NMS Plan requirements ``do
not allow for any material flexibility in cloud architecture design
choices, processing timelines (e.g., the use of non-peak processing
windows), or lower-cost storage costs,'' limiting CAT LLC's cost
management efforts, and provided examples where CAT LLC and the Plan
Processor worked to optimize cloud cost savings despite regulatory
constraints.\596\ CAT LLC described other steps it has taken to save
costs, such as through requests to the Commission for exemptive relief
and litigation challenging the Commission's interpretation of specific
requirements of the CAT NMS Plan,\597\ as well as identification of
other changes that could substantially lower costs but would require
exemptive relief or the filing of a Plan amendment.\598\
---------------------------------------------------------------------------

\591\ See Citadel July Letter at 7-9, MMI July Letter at 1, 4,
SIFMA June 2023 Letter at 4; Virtu Letter at 4.
\592\ See CAT LLC July 2023 Response Letter at 22-25.
\593\ Id. at 22.
\594\ Id.
\595\ Id.
\596\ Id. at 23.
\597\ Id. at 24.
\598\ See CAT LLC July 2023 Response Letter at 25.
---------------------------------------------------------------------------

In response to one commenter's recommendation that CAT LLC work
with the Commission to identify technical requirements that could be
modified to reduce costs without sacrificing the key benefits of the
CAT system,\599\ CAT LLC stated that both it and the Plan Processor
work to identify and raise with Commission staff potential fundamental
changes to the CAT NMS Plan that would limit costs without compromising
on regulatory goals, and provided examples of such changes.\600\
---------------------------------------------------------------------------

\599\ See Citadel July Letter at 33.
\600\ See CAT LLC July 2023 Response Letter at 25-26.
---------------------------------------------------------------------------

The Commission acknowledges the comments expressing concern about
increases to the CAT operating budget, particularly why it is now five
times the amount estimated in the CAT NMS Plan Approval Order,\601\ and
the comments urging the need for a cost review mechanism,\602\ but
believes the Participants have reasonably explained why they chose not
to include an independent cost review mechanism for budgeted CAT costs
for the reasons stated above and in the Notice. Given the transparency
of the budget and Rule 19b-4 process, the one-third allocation of costs
to Participants, which provides them with at least some incentive to
control costs, and the pre-existing requirement for an independent
audit of all fees, costs and expenses incurred by the Participants
prior to filing this amendment,\603\ it is reasonable not to have an
additional independent cost-review mechanism for the reasons set forth
above. The Commission believes that the incentive to control costs
still exists even if the Participants pass-through to Industry Members
some or most of the costs of the CAT. This is because, in order to
pass-through CAT costs, the Participants would have to submit rule
filings under the Section 19(b) fee filing process. To the extent the
Participants fail to control costs, their ability to demonstrate that a
proposed fee is reasonable and consistent with the Exchange Act may be
compromised. While the above obligations and controls are sufficient,
other cost discipline mechanisms proposed by CAT LLC would provide
beneficial cost transparency, which would help keep fees and costs
reasonable.\604\ For example, (1) Section 9.2(a) of the CAT NMS Plan
requires CAT LLC to make public an audited balance sheet, income
statement, statement of cash flows and statement of changes in equity,
and requires the Operating Committee to maintain a system of accounting
established and administered in accordance with GAAP and to prepare
financial statements or information supplied to the Participants in
accordance with GAAP; \605\ (2) CAT LLC publicly provides the annual
operating budget and updates to the budget on the CAT NMS Plan website
and also has held webinars about CAT costs and alternative funding
models; (3) involvement by CAT LLC and FINRA CAT in efforts to reduce
CAT costs through CAT working groups and review of options to lower
costly needs and obtain services in a cost-effective manner; and (4)
Commission oversight of CAT funding through attendance at Operating
Committee, Subcommittee and working group meetings and review of the
Proposed Amendment and any associated CAT fees.\606\ Additionally, the
specification of the items required to be included in the operating
budget is

[[Page 62656]]

appropriate in that it will help the Commission, Industry Members and
others evaluate CAT costs for purposes of commenting on CAT fees when
they are proposed under Section 19(b) of the Exchange Act.\607\ This
additional detail should provide sufficient information about the
budget for the Commission to determine whether such proposed fees are
reasonable, and obviate the need for a separate Commission approval of
the CAT budget, as suggested by commenters.\608\ Additionally, the
Commission understands that technology costs account for more than 90%
of the CAT budget \609\ and thus believes that it is appropriate for
the CAT NMS Plan to require the Participants to separate such costs
into costs for cloud hosting services, operating fees, CAIS operating
fees, change request fees and capitalized developed technology
costs.\610\
---------------------------------------------------------------------------

\601\ See, e.g., Citadel August Letter at 8; Citadel July Letter
at 2, 5. The Commission acknowledges a commenter's suggestion that
the Commission perform its own analysis of the budget increases.
Under the Proposed Amendment, the Participants must submit Rule 19b-
4 filings that include a discussion of the budget that was used to
calculate the Fee Rate. At such time the Commission, Industry
Members and the public will have an opportunity analyze the budget.
This Order, which approves the Funding Model, does not weigh-in on
the budgets or the resulting Fee Rates.
\602\ See SIFMA May 2023 Letter at 3, 8-10; Citadel July Letter
at 8, 26, 27; FIF and SIFMA Letter at 2, 5-9; SIFMA AMG Letter at 3.
See also SIFMA October 2022 Letter at 5-6; SIFMA January 2023 Letter
at 2, 5-6; SIFMA June 2023 Letter at 2, n.10, 4; Virtu Letter at 4;
MMI July Letter at 3-4; FIA Letter at 3, 5.
\603\ See CAT NMS Plan, supra note 2 at Section 6.2(a)(v)(B).
\604\ See Notice, supra note 7, 88 FR at 17117.
\605\ See CAT NMS Plan, supra note 2, at Section 9.2(a). Section
9.2(a) states that unaudited statements shall be subject to year-end
adjustments and may not include footnotes.
\606\ See Notice, supra note 7, 88 FR at 17117. CAT LLC also
lists the following as cost-control mechanisms: (1) CAT LLC must
operate on a break-even basis, in which fees would be used to
recover costs and a reserve, and a surplus would be treated as an
operational reserve to offset future fees (see CAT NMS Plan, supra
note 2, at Section 11.1(c)); (2) CAT LLC qualifies as a Section
501(c)(6) business league, which means it is not organized for
profit and no part of its net earnings can inure to the benefit of
any private shareholder or individual (26 U.S.C. 501(c)(6)).
\607\ 15 U.S.C. 78s(b).
\608\ See proposed Section 11.1(a)(i); proposed Section
11.3(a)(iii)(B) (requiring the information to be provided in the
Industry Member CAT Fee filings submitted by the Participants to be
of sufficient detail to demonstrate that the budget for the upcoming
year, or part of year as applicable, is reasonable and appropriate).
\609\ See Notice, supra note 7, 88 FR at 17090.
\610\ Id. at 17117.
---------------------------------------------------------------------------

One commenter requested further information to be provided on
technology costs.\611\ The Participants would be required to describe
each line item (including such technology costs) in the fee filings for
Industry Member CAT Fees and the Historical CAT Assessment, including
the reasons for changes in each line item from the prior CAT fee
filing, and that this information would be provided with sufficient
detail to demonstrate the budget or Historical CAT Costs (as
applicable) is reasonable and appropriate.\612\ Because the
Participants are also assessed CAT fees, they have at least some
incentive similar to that of the Industry Members to keep costs down.
As discussed above, the Commission believes that this incentive still
exists even if the Participants pass-through to Industry Members some
or most of the costs of the CAT, because any effort to pass on costs
would require Participants to submit filings under the Section 19(b)(2)
rule filing process. Moreover, to the extent the Industry Members have
concerns about the amounts allocated for each category in a particular
budget, those concerns can be raised when the fee filings are submitted
for Prospective CAT fees. The Section 19(b)(2) rule filing process
provides an opportunity for public comments and will allow commenters
to raise concerns if they believe fees, including CAT Fees, are not
reasonable and equitably allocated, would result in unfair
discrimination, or would impose any burden on competition that is not
necessary or appropriate in furtherance of the purposes of the Exchange
Act. While a commenter stated that the Commission is a conflicted party
due to its use of the CAT and its responsibility to review CAT fee
filings,\613\ the Commission is not a party to the Plan.\614\ Moreover,
as regulator of the Participants, the Commission oversees and enforces
compliance with the Plan, as well as consistency of any fees with
statutory and regulatory standards.\615\
---------------------------------------------------------------------------

\611\ See supra note 522.
\612\ See proposed Section 11.3(a)(iii)(B); proposed Section
11.3(b)(iii)(B)(II).
\613\ See SIFMA May 2023 Letter at 9-10.
\614\ See 17 CFR 242.608(a)(1) (stating that NMS plans are filed
by two or more SROs).
\615\ See 17 CFR 242.608(b)(2), (c), (d); 17 CFR 242.613(h).
---------------------------------------------------------------------------

Additionally, one commenter recommended the inclusion of the
Commission's line item costs associated with its usage and design of
the CAT in the budget.\616\ In response,\617\ CAT LLC responded that,
because all costs related to CAT are a result of the Commission's
adoption of Rule 613 and the total costs are reflected in the budget,
it would be impractical to break out Commission-specific costs and
would not be useful as a practical matter.\618\ The Commission agrees
that it would be impractical to add a Commission-specific line item in
the budget, in part because it would be difficult to separate costs
associated with Commission use of the CAT system from costs associated
with Participant use of the CAT system.\619\ Moreover, the
implementation of the CAT--while mandated by the Commission through
Rule 613--has been managed by the Participants and the Plan Processor;
the Commission does not believe that any changes to its design have
been made that are inconsistent with the CAT NMS Plan as approved in
2016, such that the inclusion of a line item in the budget attributing
certain design costs to the Commission would be inaccurate and
misleading.\620\
---------------------------------------------------------------------------

\616\ See SIFMA May 2023 Letter at 10. CAT LLC May 2023 Response
Letter at 11.
\617\ See SIFMA May 2023 Letter at 10.
\618\ See CAT LLC May 2023 Response Letter at 11.
\619\ All Participants are required to use the CAT in their
surveillance programs. See CAT NMS Plan, supra note 2, at Section
6.10.
\620\ For further discussion, see infra Section III.A.9.c.-d.
---------------------------------------------------------------------------

The Commission acknowledges the enhancements a commenter suggested
to reduce CAT operating costs by modifying the technical specifications
(e.g., by moving certain timelines to T+2 from T+1) and streamlining
the reporting submission process (e.g., implementing further data
validation),\621\ but such suggestions are better addressed in the
context of a separate plan amendment. The commenter also suggested that
the CAT Operating Committee and the Commission stop making any changes
to the CAT and noted that there are several changes that are currently
subject to exemptive relief that are slated for development.\622\ The
Commission disagrees that the changes cited by the commenter are new
CAT NMS Plan requirements; indeed the relevant Commission orders
granting exemptive relief discuss the various requirements under the
CAT NMS Plan that form the basis of the relief granted.\623\
Furthermore, any amendments to the requirements in the CAT NMS Plan
must be filed with the Commission and published for notice and comment
and generally shall not become effective unless approved by the
Commission.\624\ Regarding the suggested enhancements to improve CAT
transparency,\625\ the CAT NMS Plan and Rules 608 and 613 of Regulation
NMS provide for sufficient advance notice of material changes to the
CAT system and related costs. As discussed above, changes to the CAT
NMS Plan must be filed with the Commission as an NMS plan amendment
pursuant to Rule 608 of Regulation NMS and therefore be subject to
notice and comment, and the Commission shall consider, in determining
to approve the amendment, the impact of the amendment on efficiency,
competition and capital formation.\626\ Additionally, Section 6.9 of
the CAT NMS Plan requires a Supermajority Vote of the CAT Operating
Committee in order to make Material Amendments \627\ to the Technical
Specifications. Section 6.9, however, does not provide unfettered
discretion to the CAT Operating

[[Page 62657]]

Committee to make changes to the CAT system; any amendments to the CAT
Technical Specifications must be consistent with the CAT NMS Plan. If
the CAT Operating Committee or the Commission wish to impose additional
requirements that are not contemplated by the CAT NMS Plan, such
requirements must be proposed through an amendment to the CAT NMS Plan,
filed under Rule 608 of Regulation NMS, which must be published for
notice and comment.\628\ The Commission agrees with the commenter that
all CAT operating budgets should remain published on the CAT NMS Plan
website, as they have been since 2022, and understands that CAT LLC
will continue to do so in the future.\629\ Therefore, the Commission
does not believe it is necessary to add an explicit requirement to this
effect.
---------------------------------------------------------------------------

\621\ See Citadel July Letter at 33-35.
\622\ Id.
\623\ See Securities Exchange Act Release No. 97350 (May 18,
2023), 88 FR 33655 (May 24, 2023); Securities Exchange Act Release
No. 90689 (Dec.16, 2020), 85 FR 83667 (Dec. 22, 2020); Securities
Exchange Act Release No. 90688 (Dec. 16, 2020), 85 FR 83634 (Dec.
22, 2020).
\624\ See Rule 608(b)(1); 17 CFR 242.608(b)(1). However, a plan
amendment can be put into effect upon filing with the Commission if
it is designated as solely administrative, technical or ministerial.
See Rule 608(b)(3).
\625\ See supra notes 530-532.
\626\ Rule 613(a)(5). 17 CFR 242.613(a)(5).
\627\ The CAT NMS Plan defines a ``Material Amendment'' as an
amendment to the Technical Specifications that ``would require a
Participant or an Industry Member to engage in significant changes
to the coding necessary to submit information to the Central
Repository pursuant to this Agreement or if it is required to
safeguard the security or confidentiality of the CAT Data.'' See CAT
NMS Plan, supra note 2, at Section 6.9(c).
\628\ See Rule 608(b)(1). 17 CFR 242.608(b)(1).
\629\ See CAT LLC May 2023 Response Letter at 10-11.
---------------------------------------------------------------------------

The use of budgeted CAT costs is appropriate to determine the Fee
Rate because it ties the Fee Rate to the costs that the CAT will likely
incur during the relevant period which are also the Prospective CAT
Costs that will need to be apportioned among the Participants and CAT
Executing Brokers.\630\ Should the use of budgeted costs result in a
budget surplus, that surplus would translate to lower fees in the
coming year because there would be a lower requirement for
reserves.\631\ Also, using budgeted costs to determine the Fee Rate
facilitates financial stability, allowing CAT LLC to collect fees
before bills become payable.\632\
---------------------------------------------------------------------------

\630\ See Notice, supra note 7, 88 FR at 17114.
\631\ See infra Section III.A.5.c. (Reserve).
\632\ See id.
---------------------------------------------------------------------------

The requirements that the Operating Committee approve a
``reasonable'' operating budget for CAT LLC,\633\ that fees, costs and
expenses be ``reasonable'' and that they be ``reasonably budgeted to be
incurred by or for the Company in connection with the development,
implementation and operation of the CAT as set forth in the annual
operating budget approved by the Operating Committee'' \634\ is
appropriate in the public interest.\635\ The existing CAT NMS Plan did
not include such language, potentially providing the Participants full
discretion to pass along to Industry Members costs that are not
reasonable. Such costs could have included costs that were incurred due
to Participant mismanagement, costs that were inflated or costs that
should reasonably be allocated to only the Participants. Requiring
these costs to be reasonable and reasonably budgeted imposes discipline
on CAT spending, and the Commission, Industry Members and others will
be able to review budget information during the rule filing process
under Section 19(b) of the Exchange Act.
---------------------------------------------------------------------------

\633\ See proposed Section 11.1(a).
\634\ Proposed Section 11.3(a)(i)(C).
\635\ One commenter complained that Participants were not
providing the public with an opportunity to review the budget until
after it was finalized. See SIFMA May 2023 Letter at 8-10. As CAT
LLC explained, this appears to be based on a misunderstanding, as
CAT LLC provides the annual budget and quarterly updates to the
public. See CAT LLC May 2023 Response Letter at 11.
---------------------------------------------------------------------------

c. Reserve
CAT LLC proposed to add a requirement to Section 11.1(a)(i) of the
CAT NMS Plan that the budget shall include ``a reserve and such other
cost categories as reasonably determined by the Operating Committee to
be included in the budget.'' \636\ CAT LLC also proposed to add
paragraph (ii) to Section 11.1(a) of the CAT NMS Plan to state that
``[f]or the reserve referenced in paragraph (a)(i) of this Section, the
budget will include an amount reasonably necessary to allow the Company
to maintain a reserve of not more than 25% of the annual budget.''
\637\ Moreover, CAT LLC would calculate the reserve based on the amount
of the budget other than the reserve.\638\ In addition, proposed
subparagraph (ii) of Section 11.1(a) of the CAT NMS Plan would state
that ``[t]o the extent collected CAT fees exceed CAT costs, including
the reserve of 25% of the annual budget, such surplus will be used to
offset future fees.'' \639\ Proposed Section 11.1(a)(ii) of the CAT NMS
Plan provides that ``[f]or the avoidance of doubt, the Company will
only include an amount for the reserve in the annual budget if the
Company does not have a sufficient reserve (which shall be up to but
not more than 25% of the annual budget).'' \640\
---------------------------------------------------------------------------

\636\ Proposed Section 11.1(a)(i).
\637\ Proposed Section 11.1(a)(ii).
\638\ Specifically, proposed Section 11.1(a)(ii) of the CAT NMS
Plan would state that ``[f]or the avoidance of doubt, the
calculation of the amount of the reserve would exclude the amount of
the reserve from the budget.''
\639\ Id.
\640\ Id.
---------------------------------------------------------------------------

One commenter stated that the proposed reserve of not more than 25%
of the CAT budget is excessive.\641\ The commenter noted that the
support provided for the proposed change was the Participants'
difficulty in forecasting CAT costs, which the commenter stated
demonstrates a need for an independent cost review mechanism.\642\
---------------------------------------------------------------------------

\641\ See SIFMA January 2023 Letter at 6, n.15. See also Citadel
July Letter at 26 (objecting to the requirement that Industry
Members ``fund an additional 25% reserve over budgeted amounts each
year.'').
\642\ See SIFMA January 2023 Letter at 6, n.15.
---------------------------------------------------------------------------

The Proposed Amendment providing that the annual operating budget
include a reserve of not more than 25% of the annual budget is
reasonable.\643\ Because the CAT is a critical regulatory tool/system,
the CAT needs to have a stable funding source to build financial
stability to support the Company as a going concern.\644\ Funding for
the CAT, as noted in Section 11.1(b), is the responsibility of the
Participants and the industry.\645\ Because CAT fees are charged based
on the budget, which is based on anticipated volume, it is reasonable
to have a reserve on hand to prevent a shortfall in the event there is
an unexpectedly high volume in a given year. A reserve would help to
assure that the CAT has sufficient resources to cover costs should
there be unanticipated costs or costs that are higher than expected.
CAT LLC explained that the proposed reserve amount of not more than 25%
of the annual budget is based on a comparison of actual CAT costs and
budgeted costs from 2020 through the first nine months of 2022 that
demonstrated that actual CAT costs exceeded budgeted costs by 20%
during this time period.\646\ CAT LLC also noted difficulty in
predicting variable CAT costs in concluding to cap the reserve at
25%.\647\ Additionally, CAT LLC explained that CAT fees will be
collected approximately three months after trading activity on which a
CAT fee is based, or 25% of the year.\648\ CAT LLC stated that the
reserve would be available to address funding needs related to this
three-month delay.\649\ No commenter stated that they thought anything
higher than a 25% reserve was necessary and no commenter provided an
alternative solution to make sure that CAT remains funded and able to
pay its bills. The Commission therefore believes that a reserve of no
more than 25% is reasonable based on the factors listed by CAT LLC.
---------------------------------------------------------------------------

\643\ See Notice, supra note 6, 88 FR at 17090.
\644\ See CAT NMS Plan, supra note 2, at Section 11.2(f).
\645\ Id. at Section 11.1(b).
\646\ See Notice, supra note 7, 88 FR at 17090.
\647\ Id.
\648\ Id. at 17091.
\649\ Id.
---------------------------------------------------------------------------

In addition, the Commission recognizes that if CAT fees exceed CAT
costs, including the reserve, the surplus will be used to offset future
fees, and that a reserve will only be included in the annual budget on
which the fees are based if CAT LLC does not have a

[[Page 62658]]

sufficient reserve, which would be limited to 25% of the annual
budget.\650\ The Commission also recognizes that the Company must
operate on a break-even basis and that any surpluses would be treated
as an operational reserve to offset future fees and not be distributed
to Participants as profits.\651\ The Commission further recognizes that
proposed Section 11.1(a)(ii) states that CAT LLC will only include an
amount for the reserve in the annual budget if the Company does not
have a sufficient reserve; therefore, the Participants would not be
collecting additional fees if CAT LLC already has a reserve of 25% of
the annual budget.\652\ Furthermore, the reserve would be calculated by
CAT LLC based on the amount of the budget other than the reserve
because the reserve is meant to fund CAT LLC to pay its bills if
necessary.\653\ These requirements should obviate the need for a refund
mechanism.
---------------------------------------------------------------------------

\650\ Id. See also proposed Section 11.1(a)(ii).
\651\ The CAT NMS Plan requires that a surplus of the Company's
revenues over its expenses be treated as an operational reserve to
offset future fees. See CAT NMS Plan, supra note 2, at Section
11.1(c).
\652\ See Notice, supra note 7, 88 FR at 17091. See also
proposed Section 11.1(a)(ii).
\653\ See Notice, supra note 7, 88 FR at 17090. See also
proposed Section 11.1(a)(ii).
---------------------------------------------------------------------------

To date, CAT has been solely funded by the Participants.\654\ The
CAT NMS Plan, however, requires funding for the CAT come from both
Participants and Industry Members.\655\ It is the Commission's view
that establishing a reserve is a reasonable way to ensure that future
funding is secured from all intended parties, rather than relying on
Participants alone.
---------------------------------------------------------------------------

\654\ One commenter objected to CAT LLC's reference to the
financial viability of the CAT as an attempt to ``coerce the
Commission into prematurely opining on a funding proposal that does
not meet basic Exchange Act requirements.'' See Citadel August
Letter at 1. For the reasons explained in this order, the Funding
Model meets the applicable standard for approval.
\655\ See CAT NMS Plan, supra note 2, at Section 11.1(b),
11.3(a) and (b).
---------------------------------------------------------------------------

d. Fee Filings Under Section 19(b) of the Exchange Act for Industry
Member CAT Fees
CAT LLC described the information that Participants would be
required to include in their fee filings to be made pursuant to Section
19(b) of the Exchange Act and Rule 19b-4 thereunder for Industry Member
CAT Fees in proposed paragraph (B) of proposed Section 11.3(a)(iii) of
the CAT NMS Plan.\656\ Specifically, such filings would be required to
include with regard to the CAT Fee: (A) the Fee Rate; (B) the budget
for the upcoming year (or remainder of the year, as applicable),
including a brief description of each line item in the budget,
including (1) technology line items of cloud hosting services,
operating fees, CAIS operating fees, change request fees and
capitalized developed technology costs, (2) legal, (3) consulting, (4)
insurance, (5) professional and administration, and (6) public
relations costs, a reserve and/or such other categories as reasonably
determined by the Operating Committee to be included in the budget and
the reason for changes in each such line item from the prior CAT Fee
filing; \657\ (C) a discussion of how the budget is reconciled to the
collected fees; and (D) the projected total executed equivalent share
volume of all transactions in Eligible Securities for the year (or
remainder of the year, as applicable), and a description of the
calculation of the projection. This detail would describe how the Fee
Rate is calculated and explain how the budget used in the calculation
is reconciled to the collected fees.\658\ In addition, CAT LLC proposed
to state that the budgeted CAT costs described in the fee filings must
provide sufficient detail to demonstrate that the CAT budget used in
calculating the CAT Fees is reasonable and appropriate.\659\
---------------------------------------------------------------------------

\656\ CAT LLC stated that it expected the fee filings required
to be made by the Participants pursuant to Section 19(b) of the
Exchange Act with regard to CAT Fees to be filed pursuant to Section
19(b)(3)(A) of the Exchange Act and Rule 19b-4(f)(2) thereunder. CAT
LLC further stated that in accordance with Section 19(b)(3)(A) of
the Exchange Act and Rule 19b-4(f)(2) thereunder, such fee filings
would be effective upon filing. See Notice, supra note 7, 88 FR at
17095, n.38. Pursuant to Section 19(b)(3)(A) and Rule 19b-4(f)(2), a
proposed rule change can take effect upon filing with the Commission
if designated by the SRO as establishing or changing a due, fee, or
other charge imposed by the SRO. 15 U.S.C. 78s(b), 15 U.S.C.
78s(b)(3)(A), 17 CFR 240.19b-4(f)(2).
\657\ CAT LLC stated that it intends to include any other
categories as reasonably determined by the Operation Committee.
Accordingly, this provision refers to ``such other categories as
reasonably determined by the Operating Committee to be included in
the budget.'' Notice, supra note 7, 88 FR at 17095, n.39.
\658\ As a practical matter, the fee filing would provide the
exact fee per executed equivalent share to be paid for the CAT Fees,
by multiplying the Fee Rate by one-third and describing the relevant
number of decimal places for the fee. See Notice, supra note 7, 88
FR at 17095, n.40.
\659\ See proposed Section 11.3(a)(iii)(B).
---------------------------------------------------------------------------

The collection of CAT Fees from Industry Members is subject to
Section 11.6 of the CAT NMS Plan regarding the Financial Accountability
Milestones.\660\ Accordingly, CAT LLC proposed to state that
Participants will not make fee filings pursuant to Section 19(b) of the
Exchange Act \661\ regarding CAT Fees until the Financial
Accountability Milestone related to Period 4 described in Section 11.6
of the CAT NMS Plan has been satisfied.\662\
---------------------------------------------------------------------------

\660\ See CAT NMS Plan, supra note 2, at Section 11.6; see also
supra note 18.
\661\ 15 U.S.C. 78s(b).
\662\ See proposed Section 11.3(a)(iii)(C); see also CAT NMS
Plan, supra note 2, at Section 11.6(a)(i)(D).
---------------------------------------------------------------------------

As discussed above, one commenter stated that the budget line-item
categories, which would be included in the Section 19(b) fee filings,
are too high level.\663\ The commenter urged the inclusion of much
greater detail and specificity on the budget spending choices,
especially in technology, to allow Industry Members and the public to
understand and evaluate CAT spending decisions.\664\
---------------------------------------------------------------------------

\663\ See supra note 521.
\664\ Id.
---------------------------------------------------------------------------

The proposed process for implementing CAT Fees related to
Prospective CAT Costs for Industry Members is reasonable. Under the
Executed Share Model, the Participants would be required to submit fee
filings pursuant to Section 19(b) of the Exchange Act to change the Fee
Rates for Industry Members twice a year, once at the beginning and once
during the year.\665\ It is appropriate to accompany each Fee Rate
change with a Section 19(b) fee filing because it would provide notice
to Industry Members and the public of the Fee Rate change and permit
such entities to provide comment on the change.
---------------------------------------------------------------------------

\665\ See proposed Section 11.3(a)(i)(A)(I) and (II).
---------------------------------------------------------------------------

In addition to the budget information already provided by the
Participants on the CAT website, the detail provided in the fee filings
for the budget would provide transparency into the budget as it would
describe the line items of the budget and any changes to the budget and
allow the public the ability to comment on the budget.\666\ The fee
filings must discuss how the budget is reconciled to collected fees,
which would provide the public an opportunity to comment on the
effectiveness of the reconciliation.\667\ The Executed Share Model
establishes the framework for Industry Member CAT fees; details of the
Budgeted CAT Costs will be provided in the Section 19(b) fee filings
submitted by the Participants.
---------------------------------------------------------------------------

\666\ See proposed Section 11.3(a)(iii)(B).
\667\ Id.
---------------------------------------------------------------------------

One commenter objected to how the Proposed Amendment addressed the
Financial Accountability Amendments Period 4 \668\ expenses.\669\ The
commenter stated that if full implementation does not occur by
September 27, 2023, the Operating Committee cannot recover from
Industry

[[Page 62659]]

Members any expenses related to Period 4.\670\ The commenter explained
that the Proposed Amendment states that costs incurred during Period 4
may be allocated to Industry Members and that the Operating Committee
had requested exemptive relief to extend the deadline for full
implementation until August 31, 2024, which would allow the
Participants to recover all Period 4 expenses from Industry
Members.\671\ The commenter stated that the expenses related to Period
4 would likely total more than $400 million, and expressed the belief
that this amount may be allocated in its entirety to Industry Members
if the terms of the CAT NMS Plan are not enforced.\672\
---------------------------------------------------------------------------

\668\ See CAT NMS Plan, supra note 2, at Section 11.6.
\669\ See Citadel July Letter at 24.
\670\ Id.
\671\ Id. at 24-25. The commenter further explained that the
Commission has reserved judgment on whether the terms of the
Financial Accountability Amendments in Section 11.6 of the CAT NMS
Plan would be enforced.
\672\ Id. at 25.
---------------------------------------------------------------------------

The commenter stated that this issue is ``highly relevant to the
Commission's analysis of the 2023 Funding Proposal'' \673\ and
recommended three alternatives for the Commission to address the
matter: (1) to state that relevant financial accountability provisions
will be enforced as written and permit the Operating Committee to
allocate Period 4 expenses only to the extent permitted by the CAT NMS
Plan (reduced by 75%, and by 100% if full implementation does not occur
by September 27, 2023); \674\ (2) defer judgment and provide that
Period 4 expenses cannot be allocated to Industry Members; \675\ or (3)
defer judgment and permit the Operating Committee to allocate Period 4
expenses to Industry Members and analyze the potential impact of
allocating all Period 4 costs to Industry Members on market efficiency,
competition and capital formation.\676\ The commenter urged the
Commission to conduct this analysis before waiting for a subsequent
filing, stating that once the Commission approves an allocation
methodology, ``the CAT Operating Committee would simply apply that
approved methodology to the costs incurred during a specific time
period.'' \677\
---------------------------------------------------------------------------

\673\ Id.
\674\ See Citadel July Letter at 25.
\675\ Id.
\676\ Id.
\677\ Id. at 26.
---------------------------------------------------------------------------

In response to the commenter's criticism that the Proposed
Amendment does not adequately address the Period 4 expenses,\678\ CAT
LLC stated that it recognizes the applicability of the Financial
Accountability Milestones on the collection of CAT Fees and Historical
CAT Assessments.\679\ CAT LLC stated that the Participants will not
file CAT fee filings until they believe any applicable Financial
Accountability Milestone has been satisfied, and noted that the
Commission has not made a determination regarding the Participants'
satisfaction of the Financial Accountability Milestones.\680\
---------------------------------------------------------------------------

\678\ Id. at 24.
\679\ See CAT LLC July 2023 Response Letter at 30.
\680\ Id.
---------------------------------------------------------------------------

As stated by the Participants, the Proposed Amendment acknowledges
that the Participants are prohibited from submitting Exchange Act
filings regarding Prospective CAT Fees until the Financial
Accountability Milestone related to Period 4 described in Section 11.6
of the CAT NMS Plan has been satisfied.\681\ This is a reasonable
approach for addressing how fee filings will be handled in conjunction
with a determination of the Participants' compliance with the Financial
Accountability Milestones. Under existing Section 11.6, the
Participants will not be able to recover the full costs of the CAT for
a period if the relevant Financial Accountability Milestone has not
been satisfied.\682\ Because the amount the Participants cannot recover
from Industry Members is not known until the Financial Accountability
Milestone has been satisfied, it would not be appropriate for the
Participants to require Industry Members to pay CAT costs in advance,
as the amount of such costs could be reduced.\683\ The Commission
acknowledges the concerns raised and suggestions offered by the
commenter but the Commission is not making a finding on the
satisfaction of the Period 4 Financial Accountability Milestone in this
Order nor is such a finding required. This filing merely establishes
the framework under which costs will be allocated, not the amount to be
allocated. The Participants will not be able to submit filings to
recover Prospective CAT Fees or Historical CAT Assessments to recover
Period 4 expenses until the Period 4 Milestone has been satisfied. When
they do submit such filings, the question of compliance will impact how
much can be recovered under the applicable framework; this model will
then be used to determine how to allocate that amount.
---------------------------------------------------------------------------

\681\ See proposed Section 11.3(a)(iii)(C).
\682\ See CAT NMS Plan, supra note 2, at Section 11.6.
\683\ See infra note 807.
---------------------------------------------------------------------------

e. Participant CAT Fees for Prospective CAT Costs
CAT LLC proposed to describe the Participant CAT Fees related to
Prospective CAT Costs in proposed Section 11.3(a)(ii) of the CAT NMS
Plan. Specifically, under proposed Section 11.3(a)(ii)(A) of the CAT
NMS Plan, each Participant that is a national securities exchange will
be required to pay the CAT Fee for each transaction in Eligible
Securities executed on the exchange in the prior month based on CAT
Data. Each Participant that is a national securities association will
be required to pay the CAT Fee for each transaction in Eligible
Securities executed otherwise than on an exchange in the prior month
based on CAT Data.\684\ The CAT Fee for each transaction in Eligible
Securities will be calculated by multiplying the number of executed
equivalent shares in the transaction by one-third and by the Fee Rate
determined pursuant to proposed Section 11.3(a)(i).\685\
---------------------------------------------------------------------------

\684\ See proposed Section 11.3(a)(ii)(A).
\685\ Id.
---------------------------------------------------------------------------

CAT LLC also proposed Section 11.3(a)(ii)(B) of the CAT NMS Plan to
provide that Participants would only be required to pay CAT Fees when
Industry Members are required to pay CAT Fees. CAT Fees charged to
Industry Members become effective in accordance with the requirements
of Section 19(b) of the Exchange Act.\686\ In contrast, CAT Fees
charged to Participants are implemented via an approval of the CAT Fees
by the Operating Committee in accordance with the requirements of the
CAT NMS Plan.\687\ Specifically, to implement the Participant CAT fees,
CAT LLC proposed to add the Proposed Participant Fee Schedule, entitled
``Consolidated Audit Trail Funding Fees,'' to Appendix B of the CAT NMS
Plan. Proposed Paragraph (a) stated that ``[e]ach Participant shall pay
the CAT Fee set forth in Section 11.3(a) of the CAT NMS Plan to
Consolidated Audit Trail, LLC in the manner prescribed by Consolidated
Audit Trail, LLC on a monthly basis based on the Participant's
transactions in Eligible Securities in the prior month.'' \688\ Because
each Participant would be required to pay a CAT Fee once a Fee Rate has
been established by the Operating Committee, and because of the time
and burden required, CAT LLC stated that it would not submit an
amendment to the CAT NMS Plan every time the Fee Rate is established or
adjusted.\689\
---------------------------------------------------------------------------

\686\ See proposed Section 11.3(a)(i)(A)(I) and (II); see also
15 U.S.C. 78s(b).
\687\ See Notice, supra note 7, 88 FR at 17094.
\688\ Paragraph (a) of the Proposed Participant Fee Schedule.
\689\ See Notice, supra note 7, 88 FR at 17108-09.
---------------------------------------------------------------------------

It is reasonable to require that each Participant pay a CAT Fee
related to

[[Page 62660]]

Prospective CAT Costs for each transaction in the prior month based on
CAT Data.\690\ The CAT NMS Plan requires the Participants to contribute
to the funding of the CAT.\691\ Additionally, as CAT LLC explained, the
Executed Share Model recognizes the Participants (as market regulators)
as one of the three parties who have primary roles in a
transaction,\692\ so it is appropriate for a transaction-based funding
model to assess a CAT Fee upon the Participants.
---------------------------------------------------------------------------

\690\ See proposed Section 11.3(a)(ii).
\691\ See CAT NMS Plan, supra note 2, at Section 11.1(b),
Section 11.3(a).
\692\ See Notice, supra note 7, 88 FR at 17104.
---------------------------------------------------------------------------

The Commission also believes it is reasonable that proposed Section
11.3(a)(ii)(B) provides that the Participants would be required to pay
CAT Fees only when Industry Members are required to pay CAT Fees. The
CAT Fees charged to Participants would be implemented through an
approval of the CAT Fees by the Operating Committee and not through a
plan amendment submitted each time the Fee Rate changes,\693\ while CAT
Fees charged to Industry Members may only become effective in
accordance with the requirements of Section 19(b) of the Exchange
Act.\694\ However, both Participants and Industry Members would be
subject to the same Fee Rate \695\ so it is appropriate to provide that
Participants would be required to pay the Participant CAT Fee once CAT
Fees based on the Fee Rate are effective for Industry Members.
---------------------------------------------------------------------------

\693\ Id. at 17108-09.
\694\ See proposed Section 11.3(a)(i)(A). See also 15 U.S.C.
78s(b).
\695\ See proposed Section 11.3(a)(ii)(A) and (B).
---------------------------------------------------------------------------

The Proposed Participant Fee Schedule is reasonable. As the
Proposed Participant Fee Schedule requires each Participant to pay the
CAT Fee detailed in Section 11.3(a) of the CAT NMS Plan on a monthly
basis, based on the Participant's transactions in Eligible Securities
in the prior month, in the manner prescribed by CAT LLC,\696\ the
proposed fee schedule is appropriate because it imposes the Executed
Share Model's Participant CAT Fee obligation on the Participants by
specifically requiring the Participants to pay a CAT Fee in accordance
with the Executed Share Model. The requirement in the Proposed
Participant Fee Schedule clearly sets forth how the Participants will
calculate their monthly CAT Fee obligation, and therefore does not
believe that it is necessary for the Participants to submit an
amendment to the CAT NMS Plan each time the Fee Rate changes; the
formula for calculating fees will be constant although the Fee Rate
that would be applied, which is objectively determined, will change
only following a Participant fee filing under section 19(b) of the
Exchange Act.\697\ This approach is reasonable in this circumstance
because the CAT NMS Plan sets forth the Executed Share Model, the
Participants are required to pay CAT Fees pursuant to the CAT NMS Plan
and the same Fee Rate that would apply to Industry Members would apply
to Participants.\698\
---------------------------------------------------------------------------

\696\ See paragraph (a) of the Proposed Participant Fee
Schedule.
\697\ See Notice, supra note 7, 88 FR at 17109.
\698\ See proposed Section 11.3(a)(ii)(A) and (B).
---------------------------------------------------------------------------

6. Historical CAT Assessment
a. Calculation of Historical CAT Assessment
Under the Executed Share Model, Past CAT Costs will be recovered
from CEBBs and CEBSs through Historical CAT Assessments.\699\ Pursuant
to proposed Section 11.3(b) of the CAT NMS Plan the Operating Committee
will establish one or more Historical CAT Assessments depending upon
the timing of any approval of the Proposed Amendment and the completion
of the Financial Accountability Milestones.\700\ In establishing a
Historical CAT Assessment, the Operating Committee will determine a
``Historical Recovery Period'' \701\ and calculate a ``Historical Fee
Rate'' \702\ for that Historical Recovery Period. Then, for each month
in which a Historical CAT Assessment is in effect, each CEBB and each
CEBS will pay a fee (the Historical CAT Assessment) for each
transaction in Eligible Securities executed by the CEBB or CEBS from
the prior month as set forth in CAT Data, where the Historical CAT
Assessment for each transaction will be calculated by multiplying the
number of executed equivalent shares in the transaction by one-third
and by the Historical Fee Rate reasonably determined pursuant to
proposed Section 11.3(b)(i).\703\
---------------------------------------------------------------------------

\699\ See Notice, supra note 7, 88 FR at 17086; see also
proposed Section 11.3(b); supra notes 32-33 and accompanying text
(defining Historical CAT Assessments).
\700\ See proposed Section 11.3(b)(iii). See Notice, supra note
7, 88 FR at 17096, n.43; see also supra note 18 and CAT NMS Plan,
supra note 2, at Section 11.6.
\701\ The Historical Recovery Period would be used to calculate
the Historical Fee Rate for a Historical CAT Assessment. Proposed
Section 11.3(b)(i)(D) of the CAT NMS Plan provides the Operating
Committee with the discretion to reasonably establish the length of
the Historical Recovery Period as long as no such period is less
than 24 months and more than five years. See infra Section
III.A.6.b.
\702\ The Historical Fee Rate is the fee rate used to calculate
the Historical CAT Assessment. See infra Section III.A.6.c.
\703\ See proposed Section 11.3(b)(iii)(A).
---------------------------------------------------------------------------

The actual amount of Past CAT Costs to be recovered through the
Historical CAT Assessments would be reduced by an amount of ``Excluded
Costs.'' \704\ The resulting amount would be defined as ``Historical
CAT Costs'' in proposed Section 11.3(b)(i)(C) of the CAT NMS Plan.
Proposed Section 11.3(b)(i)(C) states that ``[t]he Operating Committee
will reasonably determine the Historical CAT Costs sought to be
recovered by each Historical CAT Assessment, where the Historical CAT
Costs will be Past CAT Costs minus Past CAT Costs reasonably excluded
from Historical CAT Costs by the Operating Committee.'' \705\ The
Historical CAT Costs would not include an amount of ``Excluded Costs''
so that Industry Members would not be assessed a Historical CAT
Assessment to recover such Excluded Costs.\706\
---------------------------------------------------------------------------

\704\ The Excluded Costs would be $48,874,937 in CAT costs
incurred from November 15, 2017 through November 15, 2018, and
$14,749,362 in costs related to the termination of the initial Plan
Processor. See CAT LLC July 2023 Response Letter at 19.
\705\ Proposed Section 11.3(b)(i)(C).
\706\ See Notice, supra note 7, 88 FR at 17111. According to the
Proposed Amendment, ``[e]ach Historical CAT Assessment will seek to
recover from CAT Executing Brokers two-thirds of Historical CAT
Costs incurred during the period covered by the Historical CAT
Assessment.'' Proposed Section 11.3(b)(i)(C). The Historical CAT
Costs would be Past CAT Costs minus the Excluded Costs. Id.
---------------------------------------------------------------------------

Certain commenters objected to the method of calculating the
Historical CAT Assessment using current transaction activity.\707\ One
commenter disagreed with the proposed method ``due to difficulty of
using current volumes and trading activity by individual Industry
Members as a mechanism for assessing costs in the past where the
trading volumes and individual Industry Member trading activity likely
were different.'' \708\ The commenter also stated that the proposed
assessment of Past CAT Costs on current Industry Members based on their
current trading activity is not fair or reasonable because new Industry
Members would be assessed a share of Past CAT Costs even if they were
not in operation when those costs were incurred, and that such costs
would be attributable to Industry Members that are no longer in
business.\709\ The

[[Page 62661]]

commenter added that the Proposed Amendment has not explained how
allocating ``approximately $350 million in historical costs . . . to a
small group of executing broker firms based on current market volumes''
is consistent with the Exchange Act or how it would impact liquidity
and competition.\710\ The commenter stated that since the proposed
allocation would be based on current market share and unrelated to the
firms or activity that contributed to historical costs, there would be
little ability for executing brokers to pass on such costs.\711\
Another commenter stated that the Proposed Amendment lacked a clear
mechanism for Industry Members to pass-on historical costs to other
market participants.\712\ The commenter stated, ``[i]t appears
challenging for the CAT Operating Committee to allocate historical
costs in a way that is directly tied to historical activity, which
makes it more difficult for Industry Members to pass-on these costs to
other market participants.'' \713\ Another commenter suggested a
``review of current market percentage share dictating cost structure--
e.g., industry fluctuations--how current market share [sic] not
reflective of past/future market shares- need for adjustments.'' \714\
---------------------------------------------------------------------------

\707\ See SIFMA June 2023 Letter at 4; SIFMA January 2023 Letter
at 7; SIFMA October 2022 Letter at 5; Citadel July Letter at 24, 32;
MMI July Letter at 4; Virtu Letter at 4.
\708\ SIFMA October 2022 Letter at 5.
\709\ See SIFMA January 2023 Letter at 7. See also FIA Letter at
4 (stating that it is ``patently unfair'' to allocate all historical
costs to current Industry Members based on their current market
activity because current ``Industry Members had no control over the
stops and starts incurred in the development of CAT.'').
\710\ SIFMA June 2023 Letter at 4. This statement was echoed by
another commenter. See Virtu Letter at 4.
\711\ SIFMA June 2023 Letter at 4. The commenter also stated
that the assessment of ``retroactive liability for monies spent that
private parties had no control over'' for public purposes would
violate the Fifth Amendment Takings Clause. See infra Section
III.9.d.
\712\ See Citadel July Letter at 24.
\713\ Id. at 32.
\714\ See MMI July Letter at 4.
---------------------------------------------------------------------------

One commenter recommended a reevaluation of the use of transaction
fees to assess Past CAT Costs,\715\ and suggested an alternative
approach in which Past CAT Costs would be assigned to Industry Members
``based on the lesser of (i) the CAT Fees that would be assessed on an
Industry Member under the Participants' proposed approach of using
current trading activity or (ii) the CAT Fees that would be assessed on
such member based on their prior trading activity in the years since
2016 when the CAT was being built and then operationalized . . .''
\716\ The commenter stated that the share of Past CAT Costs belonging
to Industry Members that are no longer in business could be calculated
using this approach and then divided equally among the current Industry
Members, while Industry Members that entered into business after
certain Past CAT Costs were incurred would be assessed Past CAT Costs
starting in the year after which they started operating based on the
above approach.\717\ The commenter acknowledged that, while this
approach would require more effort by the Participants, it would be
``significantly closer to the fair and reasonable standard in the
Exchange Act than the approach set forth by the Participants in the
Executed Share Model.'' \718\
---------------------------------------------------------------------------

\715\ See SIFMA October 2022 Letter at 5.
\716\ SIFMA January 2023 Letter at 7.
\717\ Id.
\718\ Id.
---------------------------------------------------------------------------

Additionally, commenters objected to the allocation of Past CAT
Costs to Industry Members.\719\ One commenter stated that the
Participants have failed to justify the allocation of Past CAT Costs to
Industry Members during the period when only Participants were
reporting to the CAT.\720\ Certain commenters stated that Industry
Members should not be assessed any fees related to the decision to
employ Thesys Technologies, LLC as the Plan Processor or legal or
consulting fees incurred by the Participants in the creation of the CAT
NMS Plan.\721\ One commenter stated that the Proposed Amendment fails
to provide how much of the allocation to Industry Members is related to
Thesys Technologies, LLC, and, therefore, the Participants have not
demonstrated how the Executed Share Model is consistent with the
Exchange Act.\722\
---------------------------------------------------------------------------

\719\ See SIFMA January 2023 Letter at 6-7; SIFMA October 2022
Letter at 7; SIFMA June 2022 Letter at 7; Citadel July Letter at 3,
23, 24, 31, 32; FIA Letter at 4; MMI July Letter at 4 (suggesting
accountability for historic costs).
\720\ See SIFMA October 2022 Letter at 7.
\721\ See SIFMA June 2022 Letter at 7; SIFMA January 2023 Letter
at 6-7; FIA Letter at 4.
\722\ See SIFMA June 2022 Letter at 7.
---------------------------------------------------------------------------

Another commenter stated that it would be inappropriate to allocate
any costs related to Thesys Technologies, LLC's role as the plan
processor, including the costs of transitioning to a new plan
processor, or the Operating Committee's costs of litigation against the
Commission.\723\ The commenter expressed concern about a lack of
transparency into Historical CAT Costs and the size of such costs,
stating that the historical costs are excessive and inconsistent with
the CAT NMS Plan.\724\ The commenter stated that a lack of transparency
into historical costs raises questions about whether Industry Members
would be allocated costs for the period when Thesys Technologies, LLC
was the plan processor, noting that the Proposed Amendment only
intended to exclude $64 million in costs related to the ``failed
engagement of Thesys,'' when the costs were much higher; \725\ whether
Industry Members would be allocated costs related to litigation between
the Operating Committee and the Commission; \726\ and whether Industry
Members would be allocated costs related to repeated filing of prior
funding models.\727\ The commenter stated that, without knowing the
total amount of Historical CAT Costs, or basic information about such
costs, the Commission cannot determine whether Historical CAT Costs are
reasonable and cannot assess the impact of the proposed allocation on
market liquidity, efficiency and competition.\728\ For example, the
commenter stated that the CAT Operating Committee has not assessed
``whether trading activity may decline or bid-offer spreads may
widen.'' \729\ The commenter stated that the CAT Operating Committee
``recklessly argues'' that the proposed allocation of Historical CAT
Costs is not concerning due to the existence of higher transaction-
based fees.\730\ In addition, the commenter stated that Industry
Members have borne nearly all of the total CAT-related costs due to ``a
near-constant barrage'' of changes to technical specifications.\731\
The commenter recommended not allocating any historical costs to
Industry Members.\732\
---------------------------------------------------------------------------

\723\ See Citadel July Letter at 31.
\724\ Id. at 23. See also Citadel August Letter at 6-7.
\725\ See Citadel July Letter at 23. See also id. at 23, n.100;
id. at 8 (stating that ``missteps'' by the Operating Committee
related to the hiring of the initial plan processor and the hiring
of FINRA CAT to replace the initial plan processor resulted in
``wasted expenditures'' of more than $100 million). See also Citadel
August Letter at 7.
\726\ See Citadel July Letter at 23. See also Citadel August
Letter at 7.
\727\ See Citadel July Letter at 24. See also Citadel August
Letter at 7.
\728\ See Citadel August Letter at 7.
\729\ Id.
\730\ Id.
\731\ See Citadel July Letter at 31. The commenter noted that in
2016, the Commission estimated that broker-dealers would incur 90%
of total CAT-related costs, even if not allocated any costs for
building and operating the CAT. The commenter stated that updates to
these estimates would show that this figure would underestimate
their cost burdens. See id.
\732\ Id. at 3, 31, 32.
---------------------------------------------------------------------------

One commenter stated that Industry Members were not subject to CAT
obligations before the CAT NMS Plan's approval, had no input into the
selection of the service providers, and that ``it is difficult to
envision how the Participants could demonstrate that such an allocation
provides for the equitable allocation of reasonable fees due to the
fact that the CAT NMS Plan

[[Page 62662]]

did not exist during the period prior to its approval.'' \733\
---------------------------------------------------------------------------

\733\ See SIFMA June 2022 Letter at 7.
---------------------------------------------------------------------------

The commenter also stated that the Participants have not analyzed
different alternatives to collecting Past CAT Costs and the costs
associated with such alternatives or the costs associated with the
proposed approach.\734\ The commenter urged collaboration between the
Participants and Industry Members on the allocation of Past CAT
Costs.\735\
---------------------------------------------------------------------------

\734\ See SIFMA October 2022 Letter at 5.
\735\ Id. See also SIFMA October 2022 Letter at 2 (``[w]e also
reiterate our call for the Participants to work with SIFMA and the
industry in a collaborative manner to establish a viable CAT funding
model.'').
---------------------------------------------------------------------------

With respect to one commenter's criticisms of the calculation and
assessment of the Historical CAT Assessment,\736\ CAT LLC stated that
the commenter had a ``persistent misunderstanding'' of the Historical
CAT Assessment, explaining that, contrary to the commenter's assertions
in its comment letters, the Historical CAT Assessment would be assessed
based on current market activity, not past market activity.\737\ While
the fee rate would be calculated based on Historical CAT Costs, the fee
rate would be applied to current market transactions.\738\ CAT LLC
stated that the process of assessing fees for the Historical CAT
Assessment would be exactly the same as with CAT Fees related to
Prospective CAT Costs, and would be passed through in the same manner
if a CEBB or CEBS so chooses.\739\ CAT LLC also stated that it would
provide CAT Executing Brokers with details of their CAT fees to
facilitate this process.\740\
---------------------------------------------------------------------------

\736\ See SIFMA May 2023 Letter at 8; SIFMA October 2022 Letter
at 4-5; supra notes 708-713 and accompanying text.
\737\ See CAT LLC May 2023 Response Letter at 9.
\738\ Id.
\739\ Id.
\740\ Id.
---------------------------------------------------------------------------

In response, the commenter stated that the CAT LLC Response Letter
did not meaningfully address the concerns it raised about ``the
inability of firms defined as `executing brokers' to transfer fees to
those who may be more appropriate to bear certain historical CAT costs
in the first place.'' \741\ CAT LLC reiterated that the Historical CAT
Assessment would be assessed in the same manner as CAT Fees for
Prospective CAT Costs, and could likewise be passed-through by the CEBB
or CEBS,\742\ and that CAT LLC would provide the relevant data to help
CAT Executing Brokers pass-through the fees.\743\
---------------------------------------------------------------------------

\741\ See SIFMA June 2023 Letter at 2.
\742\ See CAT LLC July 2023 Response Letter at 16.
\743\ Id.
---------------------------------------------------------------------------

In response to a commenter that stated that a small group of
broker-dealers would shoulder the Historical CAT Costs and asked
whether allocating these costs to a small group of executing brokers
based on current market volume is consistent with the Exchange
Act,\744\ CAT LLC stated that ``almost 700 of the 1100 Industry Members
would have an obligation to contribute to Historical CAT Costs. . . not
just a few CAT Executing Brokers'' \745\ and since ``the fees vary in
accordance with the market activity of the CAT Executing Brokers,
certain CAT Executing Brokers will have large bills for very
significant market activity.'' \746\ CAT LLC also reiterated that the
Section 11.2(b) of the CAT NMS Plan contemplates that Industry Members
would contribute to funding the costs of the CAT and that CAT Executing
Brokers may pass on their CAT fees so they would not have any
obligation to pay CAT fees.\747\ CAT LLC also clarified that Industry
Members would be allocated Historical CAT Costs over a period of time
that would be no less than 24 months and no more than five years, not
in a single lump sum,\748\ and stated that ``it would potentially be
appropriate to spread the Historical CAT Costs over a time period of a
little less than three years, a time period which is within the two to
five year range for the Historical Recovery Period.'' \749\
---------------------------------------------------------------------------

\744\ See SIFMA June 2023 Letter at 4. See also Virtu Letter at
4.
\745\ See CAT LLC July 2023 Response Letter at 15.
\746\ Id.
\747\ Id.
\748\ Id.
\749\ See CAT LLC July 2023 Response Letter at 17. CAT LLC also
provided a comparison of Historical CAT Costs to Prospective CAT
Costs, demonstrating that the $233 million 2023 CAT budget is
approximately 45% of the $518 million in Historical CAT Costs
(through 2022). Id.
---------------------------------------------------------------------------

In response to the commenter that stated that Industry Members are
bearing almost all of the CAT-related costs,\750\ CAT LLC stated that
the commenter was conflating the Industry Members' internal costs to
comply with CAT reporting requirements with the direct costs of the
CAT.\751\ CAT LLC stated that the Proposed Amendment is intended to
address the funding of the direct costs of the CAT and not Participants
and Industry Members' compliance costs.\752\
---------------------------------------------------------------------------

\750\ See Citadel July Letter at 31.
\751\ See CAT LLC July 2023 Response Letter at 16.
\752\ Id.
---------------------------------------------------------------------------

CAT LLC provided a comparison of Historical CAT Costs to
Prospective CAT Costs, demonstrating that the $233 million 2023 CAT
budget is approximately 45% of the $518 million in Historical CAT Costs
(through 2022).\753\ CAT LLC stated that it expects to propose a fee
rate for the Historical CAT Assessment that would be similar to or
smaller than other transaction-based fees, and provided examples in
which CEBBs and CEBSs would be assessed less than 1/1000 of a penny per
executed equivalent share.\754\ CAT LLC noted that broker-dealers are
currently charged other transaction-based fees that are higher than the
proposed CAT fees.\755\
---------------------------------------------------------------------------

\753\ Id. at 17.
\754\ Id. at 18.
\755\ Id. at 18-19.
---------------------------------------------------------------------------

In response to commenters that objected to the allocation to
Industry Members of Historical CAT Costs related to the initial Plan
Processor,\756\ CAT LLC stated that the Historical CAT Costs to be
allocated to Industry Members would not include two categories of costs
related to the initial Plan Processor: $48,874,937 in CAT costs
incurred from November 15, 2017 through November 15, 2018, and
$14,749,362 in costs related to the termination of the initial Plan
Processor.\757\ CAT LLC stated that the Participants would remain
responsible for these costs.\758\
---------------------------------------------------------------------------

\756\ See FIA Letter at 4; Citadel July Letter at 23, 31.
\757\ See CAT LLC July 2023 Response Letter at 19.
\758\ Id.
---------------------------------------------------------------------------

In the Commission's view, the proposed recovery of Past CAT Costs
via the Historical CAT Assessment is reasonable, and it is reasonable
to require that each CEBB and CEBS pay a Historical CAT Assessment for
each transaction in the prior month based on CAT Data.\759\ First,
current Industry Members are actively reporting to the CAT \760\ and
therefore receive the benefits from the CAT. The CAT provides more
effective oversight of market activity, which could increase investor
confidence, resulting in expanded investment opportunities and
increased trading activity.\761\ Second, it would be difficult to
impose fees on Industry Members for their activity in the past because
some Industry Members may no longer be in business and such Industry
Members would not have taken into consideration the Historical CAT
Assessment when entering into the past transactions.\762\ In this case,
the Commission understands,

[[Page 62663]]

from CAT LLC's analysis of Industry Members, that there is
``substantial continuity'' among the largest Industry Members, going
back to 2020,\763\ and thus it is likely that the Industry Members
responsible for substantial transaction activity in 2020 (and perhaps
earlier, beyond the scope of CAT LLC's analysis) would also be
responsible for substantial transaction activity in 2023, mitigating
concerns that current Industry Members would be responsible for CAT
fees for the past transaction activity of non-operational Industry
Members.
---------------------------------------------------------------------------

\759\ See proposed Section 11.3(a)(ii)(A) and (iii)(A).
\760\ See Notice, supra note 7, 88 FR at 17113.
\761\ CAT NMS Plan Approval Order, at 81 FR at 84993.
\762\ See Notice, supra note 7, 88 FR at 17113.
\763\ Id. at 17113, n.116 (stating that there has been
substantial continuity in the largest Industry Members over time and
providing statistics about the continuity).
---------------------------------------------------------------------------

Additionally, requiring CAT Executing Brokers to pay Historical CAT
Assessments is appropriate because the Participants have thus far paid
all Past CAT Costs and the CAT NMS Plan contemplates that both Industry
Members and Participants would fund the Company.\764\ Furthermore, it
is reasonable, in the Commission's view, for the Participants to
exclude certain costs from the Past CAT Costs to be recovered from
Industry Members; for example, such excluded costs would encompass
costs incurred when Industry Members as a group were not reporting to
the CAT, and costs associated with the conclusion of the relationship
with the Initial Plan Processor.\765\ CAT LLC also proposes to require
the Operating Committee, in determining fees on Participants and
Industry Members, to take into account fees, costs and expenses
(including legal and consulting fees) reasonably incurred by the
Participants on behalf of the Company prior to the Effective Date in
connection with the creation and implementation of the CAT.\766\
---------------------------------------------------------------------------

\764\ See, e.g., CAT NMS Plan, supra note 2, at Section 11.1(b),
Section 11.1(c), Section 11.2(b), Section 11.3.
\765\ See Notice, supra note 7, 88 FR at 17111.
\766\ See proposed Section 11.1(c) (emphasis added).
---------------------------------------------------------------------------

In the Commission's view, requiring the Operating Committee to take
into account fees, costs and expenses (including legal and consulting
fees) reasonably incurred by the Participants on behalf of the Company
prior to the Effective Date in connection with the creation and
implementation of the CAT, when determining fees for Participants and
Industry Members will constrain the Operating Committee from assessing
fees based on costs and expenses that are not reasonable. Further, the
proposed exclusion of the ``Excluded Costs'' from Past CAT Costs is
reasonable in the Commission's view because it would not require all
costs incurred by the Participants to be recovered from Industry
Members through the Historical CAT Assessment, specifically excluding
those costs related to the delay in the start of reporting to the CAT
and costs related to the conclusion of the relationship with the
Initial Plan Processor.\767\
---------------------------------------------------------------------------

\767\ See Notice, supra note 7, 88 FR at 17111.
---------------------------------------------------------------------------

Finally, the Proposed Amendment sets forth a process that the
Commission believes will offer an appropriate level of transparency
into Historical CAT Costs. In response to a commenter that objected to
the level of transparency provided about the total amount of Historical
CAT Costs, and basic information about such costs, and stated that, as
a result, the Commission cannot determine whether Historical CAT Costs
are reasonable and cannot assess the impact of the proposed allocation
on market liquidity, efficiency and competition,\768\ as discussed in
Section III.A.6.e. herein, the Section 19(b) fee filings to be filed
with the Commission by the Participants to impose the Historical CAT
Assessment on Industry Members must include detailed information on the
Historical CAT Costs, including the amount and type of Historical CAT
Costs, and will allow the public the ability to comment on the
Historical CAT Costs.\769\ In addition to addressing all relevant
statutory requirements, including the requirements that the fees are
reasonable, equitably allocated, not unfairly discriminatory, and do
not unduly burden competition,\770\ these proposed Section 19(b) fee
filings must contain ``sufficient detail to demonstrate that such costs
are reasonable and appropriate,'' \771\ which would provide the public
and the Commission the detail needed to evaluate the Historical CAT
Assessments. Once the proposed Section 19(b) fee filings are filed by
the Participants, the Commission will review them for consistency with
the Exchange Act and the CAT NMS Plan.
---------------------------------------------------------------------------

\768\ See Citadel August Letter at 7.
\769\ See proposed Section 11.3(b)(iii)(B)(II).
\770\ 15 U.S.C. 78f(b)(4), 15 U.S.C. 78o-3(b)(5); 15 U.S.C.
78f(b)(5), 15 U.S.C. 78o-3(b)(6); 15 U.S.C. 78f(b)(8), 15 U.S.C.
78o-3(b)(9).
\771\ See proposed Section 11.3(b)(iii)(B)(II).
---------------------------------------------------------------------------

In response to the comment that stated that the CAT Operating
Committee has not assessed ``whether trading activity may decline or
bid-offer spreads may widen,'' \772\ and in response to the comment
that the CAT Operating Committee ``recklessly argues'' that the
proposed allocation of Historical CAT Costs is not concerning due to
the existence of higher transaction-based fees,\773\ as stated above,
the Proposed Amendment does not approve per se the amount of the
Historical CAT Costs; it sets forth the model but leaves the amount and
description of the Historical CAT Costs for the Section 19(b) fee
filings. The Commission recognizes, however, that the Participants have
disclosed the amount of the Historical CAT Costs in the Proposed
Amendment.\774\ While such Historical CAT Costs are not being approved
by the Commission at this time, the Commission understands that such
amounts provide an indication of what might be charged. In this regard,
the Commission notes the Participants have included in Exhibit C to the
Proposed Amendment a chart setting forth an example Historical CAT
Assessment, for illustrative purposes only, that each CAT Executing
Broker would pay based on its transactions in Eligible Securities in
December 2022 related to CAT costs from prior to 2022. The chart
indicated that the Historical Fee Rate for the assumed December 2022
period was $0.0000417950 per executed equivalent share. The Commission
believes that potential Historical CAT Assessments are likely to be
significantly lower than fees assessed pursuant to Section 31.\775\
Accordingly, the Commission believes that any potential impact on
trading activity or bid-ask spreads would likely be limited.
---------------------------------------------------------------------------

\772\ See Citadel August Letter at 7.
\773\ Id.
\774\ See Notice, supra note 7, 88 FR at 17110-11 (providing
Historical CAT Costs prior to 2022). CAT LLC also provided updated
Historical CAT Costs through 2022. See CAT LLC July 2023 Response
Letter at 17.
\775\ See infra notes 1099-1102 and accompanying text (stating
that a comparison to recent Section 31 fees of $0.00009 per share to
$0.0004 per share indicates that the anticipated Historical Fee Rate
and Fee Rate, assuming the Fee Rate is of a similar magnitude as the
Historical Fee Rate, are expected to be relatively small). See also
infra note 1102 (discussing another example Historical Fee Rate that
was provided in the CAT LLC July 2023 Response Letter at 18-19 that
was close to the Historical Fee Rate in Exhibit C of the Proposed
Amendment).
---------------------------------------------------------------------------

b. Historical Recovery Period
The ``Historical Recovery Period'' would be used to calculate the
Historical Fee Rate for a Historical CAT Assessment.\776\ Proposed
Section 11.3(b)(i)(D) of the CAT NMS Plan provides the Operating
Committee with the discretion to reasonably establish the length of the
Historical Recovery Period as long as no such period is less than 24
months and more than five years. CAT LLC analyzed potential recovery
periods and determined that the Historical Fee Rate calculated using

[[Page 62664]]

the proposed Historical Recovery Period of two to five years would be
reasonable for Industry Members even if they had to pay both the
ongoing CAT Fee and the Historical Fee Assessment simultaneously.\777\
Additionally, in determining the range for the Historical Recovery
Period, CAT LLC ``sought to weigh the need for a reasonable Historical
Fee Rate that spreads the Historical CAT Costs over an appropriate
amount of time and the need to repay the loan notes to the Participants
in a timely fashion.'' \778\ In the Commission's view, it is reasonable
for the Operating Committee to establish the length of the Historical
Recovery Period to be no less than 24 months and no more than five
years. According to the Participants, ``[t]he length of the Historical
Recovery Period used in calculating each Historical Fee Rate will be
reasonably established by the Operating Committee based on the amount
of the Historical CAT Costs to be recovered by the Historical CAT
Assessment.'' \779\ The Operating Committee is authorized by the CAT
NMS Plan to establish the funding of CAT LLC, including the fees to be
paid by Participants and Industry Members.\780\ Because the Historical
Recovery Period is used in the calculation of Historical CAT
Assessments to recover costs incurred to fund the CAT, the Commission
views it as appropriate for the Operating Committee to determine a
reasonable length of time for the Historical Recovery Period since the
Operating Committee has authority over CAT funding pursuant to the
Plan.
---------------------------------------------------------------------------

\776\ See proposed Section 11.3(b)(i)(D)(I).
\777\ See Notice, supra note 7, 88 FR at 17096-97. CAT LLC
acknowledged that the Historical CAT Assessment would need to be
calculated using up-to-date Historical CAT Costs and executed
equivalent share volume. Id. at 17097.
\778\ Id. at 17096.
\779\ Id. at 17097.
\780\ See CAT NMS Plan, supra note 2, at Section 11.1(b).
---------------------------------------------------------------------------

c. Historical Fee Rate
The Historical Fee Rate would be used to calculate Historical CAT
Assessments. The Operating Committee will calculate the Historical Fee
Rate for each Historical CAT Assessment by dividing the Historical CAT
Costs for each Historical CAT Assessment by the reasonably projected
total executed equivalent share volume of all transactions in Eligible
Securities for the Historical Recovery Period.\781\ Additionally,
proposed Section 11.3(b)(i)(A) states that once the Operating Committee
has approved a Historical Fee Rate, the Participants will be required
to file with the Commission, pursuant to Section 19(b) of the Exchange
Act,\782\ the Historical CAT Assessment to be charged to Industry
Members using the Historical Fee Rate.\783\ Industry Members would be
required to pay such Historical CAT Assessment using such Historical
Fee Rate once such Historical CAT Assessment is in effect in accordance
with Section 19(b) of the Exchange Act.\784\
---------------------------------------------------------------------------

\781\ See proposed Section 11.3(b)(i)(A). Proposed Section
11.3(b)(i)(B) provides that the executed equivalent shares used to
calculate the Historical CAT Assessment would be counted in the same
manner as executed equivalent shares used to calculate CAT Fees
related to Prospective CAT Costs.
\782\ 15 U.S.C. 78s(b).
\783\ See proposed Section 11.3(b)(i)(A).
\784\ Id.; see also 15 U.S.C. 78s(b); see infra Section
III.A.6.e. (Historical CAT Assessment--Fee Filings under Section
19(b) of the Exchange Act for Industry Member CAT Fees) for a
discussion of Section 19(b) filing requirements.
---------------------------------------------------------------------------

Proposed Section 11.3(b)(i)(E) of the CAT NMS Plan provides that
``[t]he Operating Committee shall reasonably determine the projected
total executed equivalent share volume of all transactions in Eligible
Securities for each Historical Recovery Period based on the executed
equivalent share volume of all transactions in Eligible Securities for
the prior twelve months.'' \785\ CAT LLC would allow the Operating
Committee to base its projected total executed equivalent share volume
on the prior twelve months, but to use its discretion to analyze the
likely volume for the upcoming year.\786\ Participants would be
required to describe the calculation of the projection in their fee
filings submitted to the Commission, pursuant to Section 19(b) of the
Exchange Act, to implement the Historical CAT Assessments on Industry
Members.\787\
---------------------------------------------------------------------------

\785\ Proposed Section 11.3(b)(i)(E).
\786\ See Notice, supra note 7, 88 FR at 17097.
\787\ See proposed Section 11.3(b)(iii)(B)(II).
---------------------------------------------------------------------------

The calculation of the Historical Fee Rate by dividing Historical
CAT Costs by the projected total executed equivalent share volume of
all transactions in Eligible Securities for the Historical Recovery
Period \788\ is reasonable. First, it is appropriate for the Historical
Fee Rate to be based on Historical CAT Costs. The Proposed Amendment
defines Historical CAT Costs as Past CAT Costs minus the Past CAT Costs
reasonably excluded from Historical CAT Costs by the Operating
Committee \789\ (e.g., the Excluded Costs).\790\ It is appropriate to
use the Historical CAT Costs related to a Historical CAT Assessment to
calculate the Historical Fee Rate used to calculate the Historical CAT
Assessment because the Participants are seeking to recover the
Historical CAT Costs through the Historical CAT Assessment.\791\ The
use of Historical CAT Costs is appropriate to determine the Historical
Fee Rate because it ties the Historical Fee Rate to the costs that the
CAT has incurred and will be apportioned among the CAT Executing
Brokers for recovery. Second, it is appropriate to use the projected
total executed equivalent share volume of all transactions in Eligible
Securities for the Historical Recovery Period to calculate the
Historical Fee Rate because this would provide the likely volume for
the Historical Recovery Period to be used as the denominator, similar
to the manner in which the Fee Rate for Prospective CAT Fees would be
calculated. This proposed projection of total executed equivalent share
volume based on the prior twelve months is appropriate because it
balances the use of data that is sufficiently long to avoid short term
fluctuations while providing data close in time to the calculation of
the Fee Rate or Historical Fee Rate.\792\ Additionally, it is
appropriate for CAT LLC to permit the Operating Committee to use its
discretion to analyze the likely volume for the upcoming year.\793\
This would allow the Operating Committee to use its judgment when
estimating projected total executed equivalent share volume if the
volume over the prior twelve months was unusual or otherwise unfit to
serve as the basis of a future volume estimate. Furthermore, since the
Participants would be required to describe the calculation of the
projected total executed equivalent share volume in the fee filings
submitted to the Commission, pursuant to Section 19(b) of the Exchange
Act, to implement the Historical CAT Assessments on Industry Members,
the public will have an opportunity to review the projection and
provide comment.\794\
---------------------------------------------------------------------------

\788\ See proposed Section 11.3(b)(i)(A).
\789\ See proposed Section 11.3(b)(i)(C).
\790\ See Notice, supra note 7, 88 FR at 17111.
\791\ See proposed Section 11.3(b)(i)(C).
\792\ See Notice, supra note 7, 88 FR at 17116-17.
\793\ Id. at 17097.
\794\ See proposed Section 11.3(b)(iii)(B)(II).
---------------------------------------------------------------------------

d. Length of Time Historical CAT Assessment Would Be in Effect
Proposed Section 11.3(b)(i)(D)(II) of the CAT NMS Plan would
describe the length of time that a Historical CAT Assessment would be
in effect. This period of time may be longer or shorter than the
Historical Recovery Period used to calculate the Historical Fee Rate
for a Historical CAT Assessment. Each Historical CAT Assessment
calculated

[[Page 62665]]

using the Historical Fee Rate would remain in effect until all
Historical CAT Costs for that Historical CAT Assessment are
collected.\795\ CAT LLC stated that ``[a]ny Historical CAT Assessment
would remain in effect until the relevant Historical CAT Costs are
collected, whether that time is shorter or longer than the Historical
Recovery Period used in calculating the Historical Fee Rate.'' \796\
The length of time that the Historical CAT Assessment would be in
effect would depend ``on the amount of the Historical CAT Assessments
collected based on the actual volume during the time that the
Historical CAT Assessment is in effect.'' \797\
---------------------------------------------------------------------------

\795\ See proposed Section 11.3(b)(i)(D)(II).
\796\ Notice, supra note 7, 88 FR at 17097.
\797\ Id.
---------------------------------------------------------------------------

In the Commission's view, it is reasonable for Industry Members to
be charged a Historical CAT Assessment until all Historical CAT Costs
for the Historical CAT Assessment are collected. The Commission
understands that the amount of Historical CAT Costs collected will vary
depending on how the actual volume compares to the estimated volume. To
the extent the actual volume exceeds the estimated volume, a Historical
CAT Assessment would be collected faster and thus would be in effect
for a shorter period. Similarly, to the extent the actual volume is
less than the estimated volume, the Historical CAT Assessment would be
collected slower and thus would be in effect for a longer period.
e. Fee Filings Under Section 19(b) of the Exchange Act for Industry
Member CAT Fees
Once the Operating Committee has approved a Historical Fee Rate,
the Participants shall be required to file with the Commission,
pursuant to Section 19(b) of the Exchange Act,\798\ such Historical CAT
Assessment to be charged Industry Members calculated using such
Historical Fee Rate.\799\ CAT LLC proposes to provide additional
details regarding the fee filings to be filed by the Participants
regarding each Historical CAT Assessment pursuant to Section 19(b) of
the Exchange Act in proposed Section 11.3(b)(iii)(B) of the CAT NMS
Plan. Specifically, this provision would describe that fee filings
would be required for each Historical CAT Assessment, the content of
such fee filings, and the effect of the Financial Accountability
Milestones described in Section 11.6 of the CAT NMS Plan on the fee
filings.\800\
---------------------------------------------------------------------------

\798\ 15 U.S.C. 78s(b).
\799\ See proposed Section 11.3(b)(i)(A).
\800\ See proposed Section 11.3(b)(iii)(B)(I), (II), (III).
---------------------------------------------------------------------------

Proposed Section 11.3(b)(iii)(B)(I) of the CAT NMS Plan would state
that ``Participants will be required to file with the SEC pursuant to
Section 19(b) of the Exchange Act a filing for each Historical CAT
Assessment.'' \801\ CAT LLC proposes to provide additional detail about
the information that Participants would be required to include in the
filings for the Historical CAT Assessments in proposed Section
11.3(b)(iii)(B)(II). The proposed paragraph sets forth the information
about the Historical CAT Assessments that should be included in the fee
filings required to be made by the Participants pursuant to Section
19(b) of the Exchange Act.\802\ Specifically, such filings would be
required to include: (A) the Historical Fee Rate; (B) a brief
description of the amount and type of Historical CAT Costs, including
(1) the technology line items of cloud hosting services, operating
fees, CAIS operating fees, change request fees and capitalized
developed technology costs, (2) legal, (3) consulting, (4) insurance,
(5) professional and administration, and (6) public relations costs;
(C) the Historical Recovery Period and the reasons for its length; and
(D) the projected total executed equivalent share volume of all
transactions in Eligible Securities for the Historical Recovery Period,
and a description of the calculation of the projection.\803\
---------------------------------------------------------------------------

\801\ Proposed Section 11.3(b)(iii)(B)(II).
\802\ 15 U.S.C. 78s(b).
\803\ See proposed Section 11.3(b)(iii)(B)(II).
---------------------------------------------------------------------------

In addition, CAT LLC proposes to clarify that the Historical CAT
Costs described in the fee filings must provide sufficient detail to
demonstrate that such costs are reasonable and appropriate.\804\
Therefore, CAT LLC proposes to add the following sentence to proposed
Section 11.3(b)(iii)(B)(II) of the CAT NMS Plan: ``The information
provided in this Section would be provided with sufficient detail to
demonstrate that the Historical CAT Costs are reasonable and
appropriate.'' \805\
---------------------------------------------------------------------------

\804\ Id.
\805\ Id.
---------------------------------------------------------------------------

Proposed Section 11.3(b)(iii)(B)(III) provides that the
Participants will not make CAT fee filings pursuant to Section 19(b) of
the Exchange Act \806\ regarding a Historical CAT Assessment until any
applicable Financial Accountability Milestone has been satisfied. This
provision is appropriate as it takes into account existing requirements
set forth in Section 11.6 of the CAT NMS Plan that prevent the
Participants from recovering fees related to any given Financial
Accountability Milestone until that Financial Accountability Milestone
has been achieved.\807\
---------------------------------------------------------------------------

\806\ 15 U.S.C. 78s(b).
\807\ See, e.g., Section 11.6(a)(iv) (``The Participants will
only be permitted to collect Post-Amendment Industry Member Fees for
Period 1, Period 2, Period 3, or Period 4 at the end of each
respective Period.''). Section 11.6 of the CAT NMS Plan is designed
to reduce the amount of fees, costs, and expenses that the
Participants may recover from Industry Members if the Participants
miss the target deadlines established by that Section. To the extent
that the Participants miss a target deadline established by Section
11.6, the Participants would be responsible for paying a larger
amount of CAT-related fees, costs, and expenses on their own. The
Commission expects that the portion of these fees, costs, and
expenses that is attributable to for-profit national securities
exchanges would likely be paid out of their existing profits,
whereas the portion of these fees, costs, and expenses that is
attributable to non-profit national securities associations like
FINRA would likely be paid out of past revenue or new and/or
existing fees. The Commission would evaluate any such new or
existing fees in accordance with Section 6(b)(4) and Section
15A(b)(5) of the Exchange Act. 15 U.S.C. 78f(b)(4); 15 U.S.C. 78o-
3(b)(5).
---------------------------------------------------------------------------

The Commission emphasizes that the fee filings filed with the
Commission, pursuant to Section 19(b) of the Exchange Act,\808\ to
implement each Historical CAT Assessment on Industry Members will need
to provide sufficient information to enable the Commission to make a
determination on whether and when the Participants have satisfied each
of the Financial Accountability Milestones--questions that the
Commission is not deciding herein. This Order only approves the
establishment of the framework by which the Participants will propose
Historical CAT Assessments to be charged to Industry Members.\809\
---------------------------------------------------------------------------

\808\ 15 U.S.C. 78s(b).
\809\ The Commission does not believe it could determine whether
the Historical CAT Costs associated with a Financial Accountability
Milestone are ``reasonable or appropriate'' under Section
11.3(b)(iii)(B)(II) without such information.
---------------------------------------------------------------------------

In the Commission's view, the proposed requirement for the
Participants to file fee filings with the Commission, pursuant to
Section 19(b) of the Exchange Act,\810\ to implement each Historical
Fee Assessment on Industry Members is appropriate. The detail provided
in the fee filings for the Historical CAT Assessment would provide
transparency into the Past CAT Costs as it would describe the amount
and type of Historical CAT Costs and allow the public the ability to
comment on the Historical CAT Costs.\811\ The fee filings must contain
sufficient detail to demonstrate that the fees are consistent with the
Exchange Act, including that such costs are reasonable and

[[Page 62666]]

appropriate,\812\ and provide the public with the detail needed to
evaluate the Historical CAT Assessments for comment.
---------------------------------------------------------------------------

\810\ 15 U.S.C. 78s(b).
\811\ See proposed Section 11.3(b)(iii)(B)(II).
\812\ Id.
---------------------------------------------------------------------------

The Proposed Amendment offers an appropriate level of transparency
into the Past CAT Costs used for the Historical CAT Assessment so that
the industry and the public will be able to understand and assess the
Past CAT Costs and the Historical Fee Rate. The Proposed Amendment
requires the Section 19(b) fee filings to be submitted to the
Commission by the Participants to establish the Historical CAT
Assessments for Industry Members to contain the following information:
``(A) the Historical Fee Rate; (B) a brief description of the amount
and type of Historical CAT Costs, including (1) the technology line
items of cloud hosting services, operating fees, CAIS operating fees,
change request fees and capitalized developed technology costs, (2)
legal, (3) consulting, (4) insurance, (5) professional and
administration, and (6) public relations costs; (C) the Historical
Recovery Period and the reasons for its length; and (D) the projected
total executed equivalent share volume of all transactions in Eligible
Securities for the Historical Recovery Period, and a description of the
calculation of the projection.'' \813\ CAT LLC explained that this
information ``would provide Industry Members and other interested
parties with a clear understanding of the calculation of each
Historical CAT Assessment and its relationship to Historical CAT
Costs.'' \814\ In the Commission's view, the detail provided in the fee
filings for the Historical CAT Assessment would provide transparency
into the Past CAT Costs as the filings would describe the amount and
type of Historical CAT Costs and allow the public the ability to
comment on the Historical CAT Costs.\815\ Additionally, pursuant to the
Proposed Amendment being approved, the fee filings will also need to
contain ``sufficient detail to demonstrate that such costs are
reasonable and appropriate,'' \816\ which would provide the public and
the Commission the detail needed to evaluate the Historical CAT
Assessments for consistency with the Exchange Act and the CAT NMS Plan.
---------------------------------------------------------------------------

\813\ Proposed Section 11.3(b)(iii)(B)(II).
\814\ Notice, supra note 7, 88 FR at 17098.
\815\ See proposed Section 11.3(b)(iii)(B)(II).
\816\ Id.
---------------------------------------------------------------------------

f. Past CAT Costs and Participants
Proposed Section 11.3(b)(ii) of the CAT NMS Plan would clarify that
the Participants would not be required to pay the Historical CAT
Assessment as the Participants previously have paid all Past CAT Costs.
It would state that, ``[b]ecause Participants previously have paid Past
CAT Costs via loans to the Company, Participants would not be required
to pay any Historical CAT Assessment.'' \817\ In addition, proposed
Section 11.3(b)(ii) of the CAT NMS Plan would state that the Historical
CAT fees collected from Industry Members would be allocated to
Participants for repayment of the outstanding loan notes of the
Participants to the Company on a pro rata basis; such fees would not be
allocated to Participants based on the executed equivalent share volume
of transactions in Eligible Securities.\818\ Specifically, proposed
Section 11.3(b)(ii) of the CAT NMS Plan would state that ``[i]n lieu of
a Historical CAT Assessment, the Participants' one-third share of
Historical CAT Costs and such other additional Past CAT Costs as
reasonably determined by the Operating Committee will be paid by the
cancellation of loans made to the Company on a pro rata basis based on
the outstanding loan amounts due under the loans.'' \819\ Furthermore,
proposed Section 11.3(b)(ii) of the CAT NMS Plan would emphasize that
``[t]he Historical CAT Assessment is designed to recover two-thirds of
the Historical CAT Costs.'' \820\
---------------------------------------------------------------------------

\817\ Proposed Section 11.3(b)(ii).
\818\ See Notice, supra note 7, 88 FR at 17112.
\819\ Proposed Section 11.3(b)(ii).
\820\ Id.
---------------------------------------------------------------------------

The proposed allocation of the Historical CAT Assessment solely to
CEBSs and CEBBs, and ultimately Industry Members, is reasonable. The
Historical CAT Assessment will still be divided into thirds.\821\ CAT
LLC stated that the Participants' one-third share of Historical CAT
Costs and such other additional Past CAT Costs as reasonably determined
by the Operating Committee ``will be paid by the cancellation of loans
made to the Company on a pro rata basis based on the outstanding loan
amounts due under the loans'' and that the Participants will also be
100% responsible for the Excluded Costs.\822\ CAT LLC explained that
the terms of the loan agreements between CAT LLC and the Participants
dictate that repayment of the notes will be on a pro rata basis.\823\
The pro rata basis for cancelling the loans is appropriate because
repayment of the loans made by the Participants is required pro rata
per the loan agreements between the Participants and CAT LLC.\824\ The
CAT NMS Plan permits the Participants to seek recovery of CAT costs
from Industry Members, which includes Past CAT Costs.\825\ However,
similar to cancelling the loans, the Executed Share Model would require
the Participants to pay CAT fees related to Prospective CAT Costs.\826\
---------------------------------------------------------------------------

\821\ Id.
\822\ Notice, supra note 7, 88 FR at 17097, n.48.
\823\ Id. at 17112.
\824\ Id.
\825\ See CAT NMS Plan, supra note 2, at Section 11.1(b),
Section 11.3(b).
\826\ See proposed Section 11.3(a)(ii).
---------------------------------------------------------------------------

7. Calculation Information; Billing and Collection of CAT Fees
CAT LLC proposed to provide Participants and CAT Executing Brokers
with details regarding the calculation of their CAT Fees upon
request.\827\ Specifically, CAT LLC proposed to add Section
11.3(a)(iv)(A) to the CAT NMS Plan to provide that ``[d]etails
regarding the calculation of a Participant or CAT Executing Brokers'
CAT Fees will be provided upon request to such Participant or CAT
Executing Broker.'' \828\ Similarly, for the Historical CAT Assessment,
under proposed Section 11.3(b)(iv)(A), ``at minimum, such details would
include each CAT Executing Broker's executed equivalent share volume
and corresponding fee.'' \829\ In both cases, the new sections require
that these details be separated by (1) Listed Options, NMS Stocks and
OTC Equity Securities, (2) by transactions executed on each exchange
and transactions executed otherwise than on an exchange, and (3) by
buy-side transactions and sell-side transactions.\830\ Additionally,
for each CAT Fee and Historical CAT Assessment, at a minimum, CAT LLC
will make publicly available the aggregate executed equivalent share
volume and corresponding aggregate fee also by (1) Listed Options, NMS
Stocks and OTC Equity Securities, (2) by transactions executed on each
exchange and transactions executed otherwise than on an exchange, and
(3) by buy-side transactions and sell-side transactions.\831\ The
Commission understands that the publicly available aggregate statistics
will be made available by CAT LLC on a monthly basis with each invoice.
---------------------------------------------------------------------------

\827\ See Notice, supra note 7, 88 FR at 17086.
\828\ Proposed Section 11.3(a)(iv)(A).
\829\ Proposed Section 11.3(b)(iv)(A).
\830\ See proposed Section 11.3(a)(iv)(A); proposed Section
11.3(b)(iv)(A)
\831\ See proposed Section 11.3(a)(iv)(B); proposed Section
11.3(b)(iv)(B).
---------------------------------------------------------------------------

CAT LLC stated that consistent with Section 11.1(d) of the CAT NMS
Plan, it will adopt policies, procedures and practices regarding the
billing and

[[Page 62667]]

collection of fees Section 11.4 of the CAT NMS Plan.\832\ In addition,
pursuant to Section 11.4 of the CAT NMS Plan, CAT LLC will establish a
system for the collection of CAT fees from Participants and Industry
Members.\833\ Under Section 11.4 of the CAT NMS Plan, the Participants
must require each Industry Member to pay all applicable fees authorized
under this Article XI within thirty (30) days after receipt of an
invoice or other notice indicating payment is due (unless a longer
payment period is otherwise indicated). If an Industry Member fails to
pay any such fee when due, such Industry Member shall pay interest on
the outstanding balance from such due date until such fee is paid at a
per annum rate equal to the lesser of: (a) the Prime Rate plus 300
basis points; or (b) the maximum rate permitted by applicable law.\834\
---------------------------------------------------------------------------

\832\ See Notice, supra note 6, 88 FR at 17089.
\833\ Id. at 17101.
\834\ See CAT NMS Plan, supra note 2, at Section 11.4.
---------------------------------------------------------------------------

Similarly, as set forth in Section 3.7(b) of the CAT NMS Plan, each
Participant must pay all fees or other amounts required to be paid
under the Plan within thirty (30) days after receipt of an invoice or
other notice indicating payment is due (unless a longer payment period
is otherwise indicated) (``Payment Date''). The Participant shall pay
interest on the outstanding balance from the Payment Date until such
fee or amount is paid at a per annum rate equal to the lesser of: (i)
the Prime Rate plus 300 basis points; or (ii) the maximum rate
permitted by applicable law.\835\ The Commission did not receive any
objections to nor any comments regarding the calculation of this
interest rate.
---------------------------------------------------------------------------

\835\ Id. at Section 3.7(b). If any such remaining outstanding
balance is not paid within thirty (30) days after the Payment Date,
the Participants shall file an amendment to this Agreement
requesting the termination of the participation in the Company of
such Participant, and its right to any Company Interest, with the
Commission.
---------------------------------------------------------------------------

The proposed provision to Participants and CAT Executing Brokers
with details regarding the calculation of their CAT Fees upon request
is reasonable. In the Commission's view, providing CAT Execution
Brokers information regarding the calculation of their CAT Fees will
aid in transparency and permit CAT Execution Brokers to confirm the
accuracy of their invoices for CAT Fees. The publication of the
aggregate executed equivalent share volume and aggregate fee is
appropriate because it would allow Participants and CAT Executing
Brokers a high-level validation of executed volume and fees.
8. Additional Changes From Original Funding Model
CAT LLC proposed to delete the term ``Execution Venue'' and its
definition from Section 1.1 of the CAT NMS Plan, explaining that this
term is not relevant in the Executed Share Model.\836\ Section 1.1 of
the existing CAT NMS Plan defined ``Execution Venue'' to mean ``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).''
The Original Funding Model would have imposed fees based on market
share to CAT Reporters that are Execution Venues, including ATSs, and
fees based on message traffic for Industry Members' non-ATS
activities.\837\ In contrast, the Executed Share Model does not use the
term ``Execution Venue,'' as the Executed Share Model imposes fees
based on the executed equivalent shares of transactions in Eligible
Securities for three categories of CAT Reporters: Participants, CEBBs
and CEBSs.\838\
---------------------------------------------------------------------------

\836\ See Notice, supra note 7, 88 FR at 17099.
\837\ See CAT NMS Plan, supra note 2, at Section 11.3(a)(i) and
(ii); Section 11.3(b).
\838\ See proposed Section 11.3(a)(ii) and (iii); proposed
Section 11.3(b)(iii).
---------------------------------------------------------------------------

CAT LLC also proposed to amend Section 11.2(c) and Section 11.3(a)
and (b) of the CAT NMS Plan to require Participants and CAT Executing
Brokers to pay CAT fees based on the number of executed equivalent
shares in a transaction in Eligible Securities instead of based on
market share and message traffic.\839\
---------------------------------------------------------------------------

\839\ See Notice, supra note 7, 88 FR at 17099.
---------------------------------------------------------------------------

First, CAT LLC proposed to delete subparagraphs (i) and (ii) of
Section 11.2(c) and replace these subparagraphs with the requirement
that the fee structure in which the fees charged to ``Participants and
Industry Members are based upon the executed equivalent share volume of
transactions in Eligible Securities.'' \840\ The deleted provisions
would have required the Operating Committee, in establishing the
funding of the Company, to seek to establish a tiered fee structure in
which the fees charged to: (i) CAT Reporters that are Execution Venues,
including ATSs, are based upon the level of market share and (ii)
Industry Members' non-ATS activities are based upon message traffic.
---------------------------------------------------------------------------

\840\ Proposed Section 11.2(c).
---------------------------------------------------------------------------

Second, CAT LLC proposed to amend Sections 11.3(a) and 11.3(b) of
the CAT NMS Plan to remove detail regarding fixed fees and fee tiers
for market share and message traffic by Participants and Execution
Venue ATSs under the Original Funding Model.\841\ Section 11.3(a)
currently describes the fixed CAT fees to be paid by Participants and
Execution Venue ATSs based on market share and Section 11.3(b)
currently describes the fixed CAT fees to be paid by Industry Members
(other than Execution Venue ATSs) based on message traffic.\842\ The
text in these sections would be replaced with proposed Sections 11.3(a)
and (b), which, as discussed above, would describe the calculation and
application of the CAT Fees related to Prospective CAT Costs and the
Historical CAT Assessments. These proposed changes to Sections 11.3(a)
and (b) would also replace references to ``fixed fees'' with ``fees''
instead. CAT LLC explained that the concept of fixed fees is not
relevant in the Executed Share Model.\843\
---------------------------------------------------------------------------

\841\ See Notice, supra note 7, 88 FR at 17100-01.
\842\ See CAT NMS Plan, supra note 2, at Section 11.3(a) and
(b).
\843\ See Notice, supra note 7, 88 FR at 17101.
---------------------------------------------------------------------------

CAT LLC also proposed to amend Sections 11.1(d), 11.2(c), 11.3(a)
and 11.3(b) of the CAT NMS Plan to eliminate tiered fees and related
concepts because the Executed Share Model does not utilize
tiering.\844\ First, CAT LLC proposed to remove a reference to the
``assignment of tiers'' from Section 11.1(d). CAT LLC also proposed to
remove two sentences from Section 11.1(d) permitting the Operating
Committee to change the tier assigned to any Person. Second, CAT LLC
proposed to amend Section 11.2(c) to delete a reference to a tiered fee
structure (specifically, deleting the word ``tiered'') so that CAT fees
would not be tiered under the Executed Share Model. Third, CAT LLC
proposed to delete subparagraph (iii) of Section 11.2(c), which
required the Operating Committee, in establishing the funding of the
Company, to seek 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
(where, for these comparability purposes, the tiered fee structure
takes into consideration affiliates between or among CAT Reporters,
whether Execution Venues and/or Industry Members).\845\ CAT LLC
explained that this comparability provision was a factor used to
determine the tiers for Industry Members and Execution Venues under the
Original Funding Model, but that it is no longer necessary since the
proposed Executed Share

[[Page 62668]]

Model would not use a tiered fee structure.\846\ Finally, as discussed
above, CAT LLC proposed to amend Sections 11.3(a) and (b) to replace
the language with proposed Sections 11.3(a) and (b), which would
describe the calculation and application of the CAT Fees related to
Prospective CAT Costs and the Historical CAT Assessments. CAT LLC
states that such proposed changes would remove the references to tiers
in Sections 11.3(a)(i) and (ii) and 11.3(b).\847\
---------------------------------------------------------------------------

\844\ Id. at 17100-01.
\845\ Id. at 17100.
\846\ Id.
\847\ Id. at 17100-01.
---------------------------------------------------------------------------

In addition, CAT LLC proposed to amend the CAT funding principles
to clarify that CAT Fees and the Historical CAT Assessments are
intended to be cost-based fees.\848\ Specifically, CAT LLC proposed to
amend the funding principle set forth in Section 11.2(c) by making a
specific reference to ``the costs of the CAT.'' Proposed Section
11.2(c) would state, ``[i]n establishing the funding of the Company,
the Operating Committee shall seek . . . to establish a fee structure
in which the fees charged to Participants and Industry Members are
based upon the executed equivalent share volume of transactions in
Eligible Securities, and the costs of the CAT (emphasis added).'' \849\
---------------------------------------------------------------------------

\848\ Id. at 17099.
\849\ Proposed Section 11.2(c).
---------------------------------------------------------------------------

In the Commission's view, the proposed deletion of the term
``Execution Venue'' from the CAT NMS Plan is reasonable because the
term is no longer relevant to the CAT NMS Plan. The proposed Executed
Share Model does not impose fees on Execution Venues and would instead
impose fees on Participants and CAT Executing Brokers (and, ultimately,
Industry Members) and therefore it is appropriate to delete the term.
Additionally, it is reasonable to amend Section 11.2(c) and Section
11.3(a) and (b) of the CAT NMS Plan to reflect the proposed use of the
number of executed equivalent shares in transactions in Eligible
Securities in calculating CAT fees. These changes are appropriate
because, unlike the Original Funding Model, the proposed Executed Share
Model would not use message traffic, or a tiered fee structure.
Further, the proposed elimination of tiered fees and related
concepts from the CAT NMS Plan and the proposed replacement of ``fixed
fees'' with references to ``fees'' in the CAT NMS Plan are reasonable.
The Original Funding Model would use a tiered fee structure of fixed
fees; however, the proposed Executed Share Model would require each
Participant and CAT Executing Broker to pay a CAT fee based on its
transactions in Eligible Securities.\850\ CAT LLC explained that
``[t]he proposed non-tiering approach is simpler and more objective to
administer than the tiering approach'' \851\ and that removing tiers
``eliminates a variety of subjective analyses and judgments from the
model and simplifies the determination of CAT fees.'' \852\
Additionally, the Proposed Amendment would replace the concept of
``fixed fees'' with ``fees'' because CAT fees will vary in accordance
with the number of executed equivalent shares in a transaction.\853\
The proposed elimination of tiered fees and related concepts from the
CAT NMS Plan and the proposed replacement of ``fixed fees'' with
references to ``fees'' in the CAT NMS Plan are reasonable because these
changes conform the CAT NMS Plan funding model to the proposed Executed
Share Model.
---------------------------------------------------------------------------

\850\ See proposed Section 11.3(a)(ii)(A), (a)(iii)(A),
(b)(iii)(A).
\851\ Notice, supra note 7, 88 FR at 17100.
\852\ Id.
\853\ Id. at 17101.
---------------------------------------------------------------------------

Additionally, the Proposed Amendment would amend Section 11.2(c) to
make clear that the fee structure established by the Operating
Committee to charge fees to Participants and Industry Members would
also be based on the costs of the CAT.\854\ CAT LLC explained that the
change clarifies that the CAT fees are cost-based fees designed to
recover the cost of the creation, implementation and operation of the
CAT.\855\ These proposed changes are appropriate because they would
update language in the Original Funding Model to reflect the operation
of the proposed Executed Share Model.
---------------------------------------------------------------------------

\854\ See proposed Section 11.2(c) (``. . . fees charged to
Participants and Industry Members are based upon the executed
equivalent share volume of transactions in Eligible Securities, and
the costs of the CAT.'' (emphasis added)).
\855\ See Notice, supra note 7, 88 FR at 17099.
---------------------------------------------------------------------------

9. Other Comments
a. Lack of Industry Input
A number of commenters stated that the Proposed Amendment lacks
input from the industry.\856\ One commenter stated that the
Participants did not meaningfully solicit input from the industry when
developing the Executed Share Model.\857\ Another commenter stated that
the Proposed Amendment reflects a lack of representation by executing
brokers and offered its participation in future discussions and
advisory committees on the topic of CAT funding.\858\ One commenter
stated that ``[t]he impact of CAT on the brokerage community must be
taken seriously by the SRO committee, and brokers need their voice
heard on the committee's recommendations. To date, we have seen little
evidence of either.'' \859\ This commenter also suggested the
allocation of human resources to hire industry experts in industry
workflows and public-private engagement to assist with building the
CAT.\860\
---------------------------------------------------------------------------

\856\ See DASH April 2023 Letter at 2; DASH January 2023 Letter
at 3; SIFMA June 2023 Letter at 4; SIFMA May 2023 Letter at 2; SIFMA
June 2022 Letter at 2; SIFMA January 2023 Letter at 2; Citadel July
Letter at 9-10. See also FINRA June 2022 Letter at 8, 9 (advocating
for a more inclusive development process that would include input
from the industry); MMI July Letter at 2, 4; Virtu Letter at 6
(stating that they would like to have a meaningful dialogue with the
Participants and that the best way forward is for the interested
parties to meet and devise an equitable solution); FIA Letter at 4
(stating that they have ``raised concerns over the lack of industry
participation in the development, operation and cost allocation
processes of the CAT'' and they ``believe that at a minimum, the CAT
Operating Committee should be reconfigured, with Industry Members
comprising the percentage of the Committee equivalent to whatever
cost allocation percentage is eventually allocated to them.'').
\857\ See SIFMA May 2023 Letter at 2. See also SIFMA June 2023
Letter at 4, 5; SIFMA June 2022 Letter at 2; SIFMA January 2023
Letter at 2.
\858\ See DASH April 2023 Letter at 2; DASH January 2023 Letter
at 3.
\859\ MMI July Letter at 4.
\860\ Id.
---------------------------------------------------------------------------

In response, CAT LLC stated that it has engaged with the industry
on the funding model over the past seven years, explaining that it has
discussed funding model issues with the CAT Advisory Committee, which
includes representation from the industry, as well as with industry
associations such as SIFMA and the Financial Information Forum, and
with individual Industry Members; analyzed and responded to comment
letters on the prior proposals; and hosted webinars for the industry on
funding issues.\861\ CAT LLC stated that it welcomes industry input on
the funding model but believes a decision on the model is overdue.\862\
---------------------------------------------------------------------------

\861\ See CAT LLC May 2023 Response Letter at 12.
\862\ Id.
---------------------------------------------------------------------------

In response, one commenter stated that Industry Members are willing
to work with the Commission and the Participants to develop a CAT
funding model.\863\ The commenter urged collaboration and dialogue
between the Participants and the Industry Members before the filing of
a formal proposal with the Commission.\864\ The commenter also stated
that limiting industry input to the notice and comment process for NMS
plan amendments is an inefficient process

[[Page 62669]]

resulting in significant delays.\865\ Another commenter stated that the
Operating Committee refuses to engage the industry in constructive
dialogue, instead choosing to file funding proposals that are
inconsistent with the Exchange Act.\866\ The commenter also stated that
the CAT Advisory Committee has been completely ignored by the Operating
Committee and that its recommendations are non-binding.\867\
---------------------------------------------------------------------------

\863\ See SIFMA June 2023 Letter at 4.
\864\ Id.
\865\ Id. at 4-5.
\866\ See Citadel July Letter at 9-10.
\867\ Id. at 6.
---------------------------------------------------------------------------

CAT LLC further responded to two commenters that stated that CAT
LLC refused to collaborate with the industry in the development of the
Proposed Amendment.\868\ CAT LLC stated that it has engaged with the
industry over the last seven years, discussing funding model issues
with the CAT Advisory Committee, holding industry-wide webinars on
funding issues, and meeting with industry associations and individual
Industry Members to discuss funding model issues.\869\ CAT LLC stated
that it has ``repeatedly sought the views of SIFMA and other industry
participants on specific aspects of the model.'' \870\ CAT LLC listed
ideas suggested by the industry that it adopted in revised versions of
the funding model \871\ and stated ``the current model results from
years of modifications that have been made in significant part in
response to industry comments to earlier versions.'' \872\
---------------------------------------------------------------------------

\868\ See MMI July Letter at 2; SIFMA June 2023 Letter at 4.
\869\ See CAT LLC July 2023 Response Letter at 26-27.
\870\ Id. at 28.
\871\ Id. at 27-28.
\872\ Id. at 28.
---------------------------------------------------------------------------

The Commission understands that Industry Members and other market
participants have been able to provide input into CAT funding through
meetings with CAT LLC, participation in webinars held by CAT LLC on CAT
costs and potential alternative funding models,\873\ and through the
provision of comments on the current and prior proposed funding
models.\874\ The Commission encourages frequent and constructive
collaboration between the industry and CAT LLC.
---------------------------------------------------------------------------

\873\ See CAT Industry Webinar: CAT Costs (Sept. 21, 2021),
available at https://catnmsplan.com/sites/default/files/2021-09/09.21.21-CAT-Costs_0.pdf; CAT Industry Webinar: Fee Models (Sept.
22, 2021), available at https://catnmsplan.com/sites/default/files/2021-09/09.22.21-CAT-Fee-Model.pdf.
\874\ See, e.g., supra note 58; see also https://www.sec.gov/comments/4-698/4-698-a.htm.
---------------------------------------------------------------------------

b. Implementation
One commenter suggested that upon approval of any CAT funding
model, Industry Members should be given at least a year ``to implement
any necessary changes to systems and processes for them to be able to
capture their portion of CAT costs.'' \875\ CAT LLC responded that it
was unlikely to take Industry Members a year to implement any needed
changes, particularly given the relatively small fees likely to be
incurred by most small Industry Members that would not require
extensive new processes to pay.\876\
---------------------------------------------------------------------------

\875\ SIFMA May 2023 Letter at 2.
\876\ See CAT LLC May 2023 Response Letter at 12.
---------------------------------------------------------------------------

The Commission acknowledges this comment but highlights, as did CAT
LLC,\877\ that the Participants have entirely funded the CAT to date;
in the Commission's view, it is imperative that CAT funding be
established in a timely manner after approval of the Executed Share
Model.
---------------------------------------------------------------------------

\877\ Id.
---------------------------------------------------------------------------

c. Rule 613 and the CAT NMS Plan
Certain commenters stated that the CAT as it is structured today is
not what was contemplated by Rule 613 of Regulation NMS.\878\ One
commenter recommended that the Commission come up with a new structure
for the CAT.\879\ The commenter stated that Rule 613 and the 2016 CAT
NMS Plan do not support CAT as it is currently structured \880\ and
provided examples where it believes that subsequent changes to the CAT
requested by the Commission have caused the CAT to become inconsistent
with the requirements of Rule 613 and the 2016 CAT NMS Plan.\881\
According to the commenter: (1) Rule 613 requires the reporting of
certain events and that the events must be linked to their originating
order, but the Commission has required the reporting of events that are
not CAT-reportable and are not linked to particular orders (for
example, Rule 613 requires the reporting of the cancellation of an
order, but the Commission has also required the reporting of messages
acknowledging the receipt of a cancellation request); \882\ (2) the
Commission expanded the CAT to include OTC equities and requests-for-
quotes; \883\ (3) the CAT NMS Plan contemplates that data will be
available to the Commission on a T+5 basis, but the Commission and
staff have insisted that certain data be available to the Commission
for use before T+5; \884\ (4) Rule 613 requires the reporting of every
material term of an order, but the Commission has also required the
reporting of the port-level settings applicable to all orders sent to a
port on an exchange.\885\ The commenter stated that these changes to
CAT resulted from discussions between the Commission and the
Participants, that such changes ``significantly increased CAT costs,''
and that Industry Members with ``no voice and little transparency''
into the building of the CAT system would be allocated most of the
increased CAT costs.\886\ The commenter stated that the Commission
approval of a funding proposal for a system that is not consistent with
Rule 613 and the CAT NMS Plan would be arbitrary and capricious
action.\887\
---------------------------------------------------------------------------

\878\ See SIFMA June 2023 Letter at 2, 6-7; Citadel July Letter
at 5; FIA Letter at 5; FIF and SIFMA Letter at 4, 5, 8-23.
\879\ See SIFMA Letter June 2023 at 6.
\880\ Id. at 6-7.
\881\ Id. at 6.
\882\ Id. at 6-7.
\883\ Id. at 7.
\884\ See SIFMA June 2023 Letter at 6.
\885\ Id. See also Citadel July Letter at 32-33.
\886\ See SIFMA June 2023 Letter at 7.
\887\ Id.
---------------------------------------------------------------------------

Another commenter stated that some of the drivers of CAT costs are
the addition of various new system features and reporting requirements
that were established as the result of discussion between Commission
staff and the CAT Operating Committee.\888\ The commenter stated that
some of these requirements have been driven by ``informal
reinterpretations'' of the Plan and have resulted in material changes
to the CAT without proper weighing of costs and benefits associated
with such changes.\889\ The commenter further stated that the
Participants should confirm that the existing CAT system meets the
requirements of the Plan, before the funding proposal is
finalized.\890\
---------------------------------------------------------------------------

\888\ See FIA Letter at 5.
\889\ Id.
\890\ Id.
---------------------------------------------------------------------------

One commenter believes that the Commission should require an
amendment to the CAT NMS Plan for new reporting requirements or
enhancements for which costs and benefits were never considered by
Commission in the economic analysis for the approval of the CAT NMS
Plan.\891\ This commenter believes that the Commission is imposing CAT
processing requirements that are not required by Rule 613 and the CAT
NMS Plan.\892\ The commenter further believes these ``changes'' should
be subject to greater review by the Industry Members and the public at
large, and therefore

[[Page 62670]]

should be filed as amendments to the CAT NMS Plan, thereby requiring a
cost-benefit analysis to be conducted by the Commission and public
disclosure.\893\ The commenter stated that the Commission has mandated
additional reporting requirements for CAT that the commenter does not
believe to be within the scope of Rule 613 and the CAT NMS Plan, and
that these additional reporting requirements should be subject to an
appropriate cost-benefit analysis.\894\ The commenter stated their
concern that these reporting requirements would be very costly to
implement and questioned whether the surveillance value of these
additional reporting requirements justified the additional costs that
will be imposed on market participants (and potentially passed through
to customers).\895\ The commenter further stated that, to the extent
that these additional reporting requirements are found to be within the
scope of Rule 613 and the CAT NMS Plan, the Commission should grant
exemptive relief with respect to these requirements because of the
additional costs.\896\ The commenter also stated that if the Commission
does not grant exemptive relief, then the Commission should require an
amendment to the CAT NMS Plan, that sets forth the costs and benefits,
for each of these additional reporting requirements because the
commenter believes that these reporting requirements were not
considered as part of the cost estimates in the CAT NMS Plan.\897\
---------------------------------------------------------------------------

\891\ See FIF and SIFMA Letter at 4, 5.
\892\ Id. at 9-12 (discussing various ``processing changes'' the
commenter believes the Commission intends to impose, as well as
summarizing the objections made by the Participants to these
``changes'').
\893\ Id. at 10-11. This commenter also stated that there were
several ``processing requirements'' that could reduce CAT operating
costs and that the Commission should direct the Participants to
analyze these ``processing requirements'' and make that analysis
available to the public for discussion. Id. at 12-13.
\894\ See FIF and SIFMA Letter at 13-23 (discussing various
reporting requirements that the commenter does not consider to be
within the scope of Rule 613 and the CAT NMS Plan or believes that
exemptive relief should be granted because of the costs for
implementing these requirements, including: requiring CAT reporting
of verbal (unstructured) activity; requiring CAT reporting of non-
executable RFQ responses; requiring CAT reporting of request
messages; requiring that an order recipient report rejections to
CAT; requiring an order sender to report venue (order recipient)
port settings; requiring CAT reporting of linkage of representative
to customer orders and linkage of order fulfillments to
representative and principal orders; various requirements with
respect to CAIS reporting; and other CAT reporting requirements
relating to quoting activity on the OTC Link ATS operated by OTC
Markets).
\895\ Id. at 14.
\896\ Id.
\897\ Id.
---------------------------------------------------------------------------

Another commenter stated that changes and cost overruns have
changed the structure of the CAT from what was contemplated by Rule
613.\898\ The commenter believes that the Operating Committee and the
Commission have engaged in ad-hoc discussions to interpret what the
Plan requires ``without adequate notice to Industry Members or due
consideration of the costs and benefits associated with such
interpretations.'' \899\ The commenter stated that the Commission has
not regularly assessed whether costs resulting from a specific
interpretation of Rule 613 and the CAT NMS Plan outweigh benefits.\900\
The commenter requested that the Commission revisit its assumptions
from the CAT NMS Plan Approval Order \901\ due to inaccurate cost
estimates, a failure to retire duplicative systems, impracticality of
technology requirements, a lack of effective governance, and a lack of
processes to consider requests to add more data.\902\
---------------------------------------------------------------------------

\898\ See Citadel July Letter at 7.
\899\ Id. at 6.
\900\ Id.
\901\ See supra note 2.
\902\ See Citadel July Letter at 5; see also FIF and SIFMA
Letter at 24-26.
---------------------------------------------------------------------------

The commenter also stated that the Commission must update the
economic analysis from the CAT NMS Plan Approval Order \903\ to revise
its estimates of costs to build and operate CAT using actual costs
incurred,\904\ to project average annual increases in the CAT operating
budget,\905\ and to update its analysis of CAT-related costs to be
borne by Industry Members.\906\ The commenter stated that the 2016 CAT
NMS Plan lacked a funding model, so the Commission did not consider the
implications of allocating costs to Industry Members to build and
operate the CAT.\907\ The commenter stated that the Proposed Amendment
would allocate at least 78% and up to 100% of costs to Industry Members
and a small group of Industry Members will pay the majority of these
costs (and potentially both historical and ongoing costs
simultaneously).\908\ The commenter stated that the proposed allocation
would have ``dramatic effects'' on market efficiency, competition and
capital formation,\909\ stating that ``[t]he allocation methodology
will have a direct and negative impact on market efficiency,
competition, and capital formation, and the Commission must
comprehensively assess those impacts before approving this filing.''
\910\
---------------------------------------------------------------------------

\903\ See CAT NMS Plan Approval Order, supra note 2.
\904\ See Citadel July Letter at 12. The commenter stated that
2016 figures underestimated such implementation costs for larger
broker-dealers by assuming cost savings would be realized through
retirement of other reporting systems which haven't been retired
yet. Id. at 12-13.
\905\ Id. at 13.
\906\ Id. at 12.
\907\ Id.
\908\ See Citadel July Letter at 12; id. at 12, n.57.
\909\ Id. at 12.
\910\ Id. at 15.
---------------------------------------------------------------------------

Additionally, the commenter stated that Rule 613 requires the
Participants to provide an estimate of the costs associated with
creating, implementing and maintaining the CAT, the costs, benefits and
rationale for the choices made in developing the CAT NMS Plan, and
their own analysis of the plan's impact on competition, efficiency and
capital formation.\911\ The commenter requested the Commission to
require the members of the Operating Committee to update the analysis
required by Rule 613 in light of a ``massive increase'' in costs since
2016.\912\ Another commenter similarly suggested that additional
oversight and public review of the actual costs and purpose of the CAT
is called for, and also requested additional transparency on the status
of legacy reporting systems, since their retirement could offset some
of the CAT fees.\913\
---------------------------------------------------------------------------

\911\ Id. at 14-15; see also FIF and SIFMA Letter at 24-25.
\912\ See Citadel July Letter at 15.
\913\ See MMI July Letter at 6. This commenter did not
specifically request that the Operating Committee update the Rule
613 analysis.
---------------------------------------------------------------------------

In response to one commenter that stated that Rule 613 and the CAT
NMS Plan no longer reflect the operation of the CAT,\914\ CAT LLC
stated that the CAT was implemented in accordance with Rule 613 and the
CAT NMS Plan and that the CAT NMS Plan permits the recovery of costs
incurred in the creation, implementation and maintenance of the
CAT.\915\
---------------------------------------------------------------------------

\914\ See SIFMA June 2023 Letter at 7.
\915\ See CAT LLC July 2023 Response Letter at 28.
---------------------------------------------------------------------------

CAT LLC also responded to comments that raised concerns about the
Commission's interpretations of CAT NMS Plan requirements that were not
related to the funding model and the costs and benefits of those
interpretations.\916\ CAT LLC stated that the Proposed Amendment is not
the appropriate forum to resolve interpretive questions.\917\ CAT LLC
also stated that, for proposed changes to the CAT NMS Plan, the
Participants are following the process in Rule 608 for plan amendments
and noted that material changes to the CAT system would require an
amendment to the CAT NMS Plan,\918\ but not a material change to a
technology contract as the CAT NMS Plan permits the Operating

[[Page 62671]]

Committee to enter into, modify or terminate a material contract.\919\
---------------------------------------------------------------------------

\916\ See Citadel July Letter at 32-34; FIA Letter at 3, 4; MMI
July Letter at 4.
\917\ See CAT LLC July 2023 Response Letter at 29.
\918\ Id.
\919\ Id. at 30 (citing to Section 4.3 of the CAT NMS Plan).
---------------------------------------------------------------------------

The CAT NMS Plan is consistent with Rule 613 and we do not believe
that any changes have been made that are inconsistent with the Plan as
approved in 2016, as amended in 2020.\920\ The examples provided by
commenters of changes to the CAT requested by the Commission,\921\ in
the Commission's view, were included in the CAT NMS Plan approved by
the Commission in 2016.\922\ Rule 608 and Rule 613 of Regulation NMS
provide advance notice of material changes to the CAT system and
related costs by requiring changes to the CAT NMS Plan to be filed with
the Commission as an NMS plan amendment pursuant to Rule 608 of
Regulation NMS and thereby be subject to notice and comment, and
require that the Commission consider, in determining to approve the
amendment, the impact of the amendment on efficiency, competition and
capital formation.\923\ Section 6.9 of the CAT NMS Plan does not
provide unfettered discretion to the CAT Operating Committee to make
Material Amendments to the CAT system. If the CAT Operating Committee
or the Commission wish to impose additional requirements to the CAT NMS
Plan, such requirements must be proposed through an amendment to the
CAT NMS Plan, filed under Rule 608 of Regulation NMS. Such amendments
must be published for notice and comment.\924\ Additionally, Rule
613(a)(5) of Regulation NMS \925\ requires the Commission to consider,
in determining whether to approve an amendment to the CAT NMS Plan, the
impact of the amendment on efficiency, competition and capital
formation; therefore, this Order contains an analysis of the Proposed
Amendment's impact on efficiency, competition, and capital formation.
---------------------------------------------------------------------------

\920\ See Securities Exchange Act Release No. 89387 (July 24,
2020), 85 FR 45941 (July 30, 2020); Financial Accountability
Amendments, supra note 18.
\921\ See SIFMA June 2023 Letter at 6, 7, supra notes 881-885
and accompanying text; Citadel July Letter at 33-35; FIF and SIFMA
Letter at 8-23. The issues raised by those commenters are either
being adjudicated in a separate forum or addressed through a request
for exemptive relief. See Petition for Review, USCA Case No. 22-
1234; Request for Exemption from Certain Provisions of the CAT NMS
Plan Related to Reporting of Certain Verbal Activity, Floor and
Upstairs Activity, available at https://catnmsplan.com/sites/default/files/2023-03/03.31.23-CAT-Exemption-Request-Verbal-Floor-and-Upstairs-Activity.pdf. 22-1234; Request for Exemption from
Certain Provisions of the CAT NMS Plan Related to Reporting of
Certain Verbal Activity, Floor and Upstairs Activity, available at
https://catnmsplan.com/sites/default/files/2023-03/03.31.23-CAT-Exemption-Request-Verbal-Floor-and-Upstairs-Activity.pdf.
\922\ See Securities Exchange Act Release No. 95234 (July 8,
2022), 87 FR 42247 (July 14, 2022).
\923\ Rule 613(a)(5). 17 CFR 242.613(a)(5).
\924\ See Rule 608(a)(1). 17 CFR 242.608(a)(1).
\925\ 17 CFR 242.613(a)(5).
---------------------------------------------------------------------------

d. Funding in the Appropriation Process
Certain commenters believe that funding for the CAT should be
accomplished through Congressional appropriations.\926\ These
commenters characterized the CAT as a Commission tool for law
enforcement.\927\ One commenter stated that the Proposed Amendment
would ``evade'' \928\ the separation of powers established by the
Constitution, arguing that since the CAT is a ``Commission system used
for enforcement'' \929\ and that law enforcement ``is an executive
prerogative,'' \930\ Congress must approve public funds to build the
CAT through the appropriations process.\931\ The commenter stated
``[t]he Constitution does not permit the Commission to fund its own
enforcement apparatus through the backdoor--to require the SROs to
raise and spend hundreds of millions of dollars to build a new law
enforcement tool for the Commission.'' \932\ The commenter also stated
that the assessment of ``retroactive liability for monies spent that
private parties had no control over'' for public purposes would violate
the Fifth Amendment Takings Clause.\933\
---------------------------------------------------------------------------

\926\ See SIFMA June 2023 Letter at 8; Citadel July Letter at
28-29; FIA Letter at 3; MMI July Letter at 2-4. See also MMI July
Letter at 1-2. This commenter suggested evaluating whether the CAT
is truly an NMS plan, or if it is better viewed as a Commission
system whose budget should be subject to Congressional approval and
oversight. In response, CAT LLC stated that this comment is outside
the scope of the Proposed Amendment. See CAT LLC July 2023 Response
Letter at 31, n.144.
\927\ See SIFMA June 2023 Letter at 8; FIA Letter at 3; Citadel
July Letter at 28, 29. See also MMI July Letter at 2-4 (categorizing
the CAT as a Commission system, required by and dictated by the
Commission that should be funded in the same way as other Commission
functions).
\928\ See SIFMA June 2023 Letter at 8.
\929\ Id. See also FIA Letter at 3.
\930\ See SIFMA June 2023 Letter at 8.
\931\ Id.
\932\ Id. See also Citadel July Letter at 28, 29.
\933\ See SIFMA June 2023 Letter at 8.
---------------------------------------------------------------------------

Another commenter stated that the Proposed Amendment is
unconstitutional because it would require Industry Members to provide
the Operating Committee with a blank check to fund 100% of costs in
perpetuity for a law enforcement tool designed for the Commission that
has not been authorized by Congress.\934\ The commenter also stated
that requiring the Participants to build ``a multi-billion dollar
enforcement tool'' is beyond the scope of Section 11A's authorization
to the Commission to require SROs to act jointly or facilitate the
development of a national market system.\935\ Another commenter stated
that the Commission has directed the development of CAT to supplement
the government's surveillance program while the Funding Proposal
effectively places all or most of the costs of the CAT on the Industry
Members, who have no voice in its control or development.\936\ The
commenter states that these costs are essentially a tax on the industry
from an agency and should require Congressional oversight.\937\
Additionally, one commenter suggested the treatment of the CAT budget
in terms of accounting and transparency as a Commission system, and a
cap on the budget for CAT which, if exceeded, would trigger
Congressional budget oversight.\938\
---------------------------------------------------------------------------

\934\ See Citadel July Letter at 29.
\935\ Id. at 28.
\936\ See FIA Letter at 3.
\937\ Id.
\938\ See MMI July Letter at 2, 4.
---------------------------------------------------------------------------

In response to recent comments expressing concern that the Industry
Member allocation would raise constitutional issues,\939\ CAT LLC
stated that the first commenter to raise this issue had never once
before challenged the constitutionality of Rule 613 or the CAT NMS
Plan.\940\ CAT LLC stated ``SIFMA's strategic decision to inundate the
Commission with these arguments--which directly contradict its prior
statements that industry contributions are `justifiable under the
Exchange Act'--just two days before a scheduled SEC Open Meeting to
consider the Funding Proposal suggests their ultimate strategy is to
delay the Commission's review and approval of any funding model that
would require the industry to contribute to the funding of the CAT.''
\941\ CAT LLC urged the Commission to not let the commenter further
delay a decision on the Proposed Amendment by filing comments that it
could have submitted years before.\942\ CAT LLC also noted that,
despite the commenter's argument that requiring Industry Members to
contribute to CAT costs was a constitutional takings problem, the
commenter had suggested a funding model for the CAT based on a 50%-50%
allocation of costs divided among Participants and Industry

[[Page 62672]]

Members.\943\ CAT LLC stated that regardless of how this issue is
resolved, the Participants should be able to recover their investment
in CAT because Rule 613 and the CAT NMS Plan contemplate Industry
Member contributions to CAT funding.\944\
---------------------------------------------------------------------------

\939\ See SIFMA June 2023 Letter at 7-9; Citadel July Letter at
28-29; FIA Letter at 3; Virtu Letter at 2.
\940\ See CAT LLC July 2023 Response Letter at 31.
\941\ Id. at 32.
\942\ Id. at 33.
\943\ Id. at 31. See also SIFMA May 2023 Letter at 2; supra note
101 and accompanying text.
\944\ See CAT LLC July 2023 Response Letter at 33.
---------------------------------------------------------------------------

In characterizing CAT as solely a ``Commission tool used for
enforcement,'' these comments misunderstand its purposes.\945\ CAT
serves multiple regulatory purposes for both SROs and the Commission.
SROs have long had audit trail systems and the SROs themselves, as well
as the Commission, have long used the market data from those systems to
oversee the securities markets and fulfill their responsibilities under
federal securities laws.\946\ In directing the SROs to file an NMS plan
establishing the CAT, the Commission sought to address shortcomings in
those existing systems and create an audit trail system that would
provide both the SROs and the Commission with timely access to a
comprehensive set of trading data sufficient to oversee modern markets.
And in approving the CAT NMS Plan, the Commission determined that the
Plan would substantially improve the ability of both the SROs and the
Commission to perform these regulatory activities to the benefit of
investors and markets.\947\
---------------------------------------------------------------------------

\945\ See SIFMA June 2023 Letter at 8; FIA Letter at 3; Citadel
July Letter at 28, 29. See also MMI July Letter at 2-4 (categorizing
the CAT as a Commission system, required by and dictated by the
Commission that should be funded in the same way as other Commission
functions).
\946\ See Securities Exchange Act Release No. 67457 (July 18,
2012), 77 FR 45722 (Aug. 1, 2012) (``CAT Adopting Release'') at
45727.
\947\ See CAT NMS Plan Approval Order, supra note 2, 81 FR at
84727, 84800.
---------------------------------------------------------------------------

In this respect, the CAT's regulatory and enforcement utility to
the SROs as well as the Commission is similar to many of the SROs'
other self-regulatory functions that are funded in part by Industry
Members. And this dual purpose is consistent with the long history of
SRO and Commission oversight of the securities markets. Self-regulation
in the securities industry predates the securities laws and, in
enacting the Exchange Act in 1934, Congress formalized this structure,
purposefully determining to rely on self-regulation as a fundamental
component of U.S. market and broker-dealer regulation.\948\ Among other
things, Congress determined that effectively regulating the inner-
workings of the securities industry at the federal level was cost
prohibitive and inefficient.\949\ And industry participants preferred
the less invasive regulation by their peers to direct government
regulation.\950\ Congress and the Commission have repeatedly reaffirmed
that decision in the years since.\951\ And Courts have repeatedly
affirmed the constitutionality of this system of self-regulation.\952\
As contemplated by Congress, the SROs have also long funded their
frontline responsibility to supervise their members' compliance with
their own rules and the federal securities laws, subject to Commission
oversight, through fees on those members.\953\ The participation of
Industry Members in the funding of CAT is no different.
---------------------------------------------------------------------------

\948\ See Securities Exchange Act Release No. 50700 (Nov. 18,
2004), 69 FR 71255 (Dec. 8, 2004) (``Concept Release Concerning
Self-Regulation'').
\949\ Id., citing S. Rep. No. 1455, 73d Cong., 2d Sess. (1934);
H.R. Doc. No. 1383, 73d Cong., 2d Sess. (1934); S. Rep. No. 1455,
73d Cong., 2d Sess. (1934).; see also S. Rep. No. 94-75, 94th Cong.,
1st Sess. 7, II (1975) (stating that a principal reason for
retaining a self-regulatory regime was the ``sheer ineffectiveness
of attempting to assure [regulation] directly through the government
on a wide scale'')
\950\ See Concept Release on Self-Regulation, supra note 948, 69
FR at 71256-57.
\951\ See e.g., Exchange Act Amendments of 1975, Pubic Law 29,
89 Stat. 97 (1975); 1961-1963 Special Study of Securities Markets.
Securities and Exchange Commission, Report of Special Study of
Securities Markets, (``Special Study''), H.R. Doc. No. 95, 88th
Cong., 1st Sess. (1963) and Market 2000: An Examination of Current
Equity Market Developments, Division of Market Regulation, U.S.
Securities and Exchange Commission (January 1994) (``Market 2000
Report'').
\952\ See Todd & Co. v. SEC, 557 F.2d 1008, 1012-13 (3d Cir.
1977); First Jersey Sec., Inc. v. Bergen, 605 F.2d 690, 697 (3d Cir.
1979); Sorrell v. SEC, 679 F.2d 1323, 1325-26 (9th Cir. 1982); R.H.
Johnson & Co. v. SEC, 198 F.2d 690, 695 (2d Cir. 1952); see
generally Oklahoma v. United States, 62 F.4th 221, 229 (6th Cir.
2023).
\953\ See Concept Release Concerning Self-Regulation, supra note
948, 69 FR at 71268-69, citing Exchange Act Section 6(b)(4), 15
U.S.C. 78f(b)(4); Exchange Act Section 15A(b)(5), 15 U.S.C. 78o-
3(b)(5); Exchange Act Section 15A(b)(2) and 6(b)(1) 15 U.S.C. 78o-
3(b)(2) and 78f(b)(1).]
---------------------------------------------------------------------------

The assertion by commenters that the funding of the CAT violates
the Appropriations Clause or other constitutional limitations thus
lacks merit. The funding of an initiative, such as CAT, that has
utility to both the SROs and the Commission does not implicate the
Appropriations Clause in the manner that has been questioned in
courts.\954\ As the Supreme Court has stated, that clause ``means
simply that no money can be paid out of the Treasury unless it has been
appropriated by an act of Congress.'' \955\ The use of SRO and Industry
Member funding for a self-regulatory initiative--which, as discussed
below, falls within the authority provided by Congress--does not
transgress that principle.
---------------------------------------------------------------------------

\954\ For these reasons, we disagree with the assertion of
commenters that the Fifth Circuit's reasoning in Cmty. Fin. Servs.
Ass'n of Am., Ltd. v. CFPB, 51 F.4th 616, 642 (5th Cir. 2022), cert.
granted sub nom. CFPB v. Com. Fin. Servs. Ass'n, U.S. (Feb. 27,
2023), casts doubt on the constitutionality of CAT. The holding in
that case rested on the court's view that the CFPB's ``perpetual
self-directed, double-insulated funding structure'' was
``unprecedented'' for an agency that ``wields vast rulemaking,
enforcement, and adjudicatory authority.'' See also CFPB v. Law
Offices of Crystal Maroney, 63 F.4th174, 181-83 (2d. Cir. 2023)
(disagreeing with Fifth Circuit's reasoning and rejecting challenge
to CFPB's funding structure).
\955\ See Cincinnati Soap Co. v. United States, 301 U.S. 308,
321 (1937); see also Off. Of Pers. Mgmt. v. Richmond, 496 U.S. 414,
424 (1990) (The Appropriations Clause requires that ``the payment of
money from the Treasury must be authorized by a statute.'').
---------------------------------------------------------------------------

Nor does Industry Members' participation in CAT funding implicate
the Takings Clause. In choosing to participate in the securities
industry, Industry Members could not have had any ``distinct
investment-backed expectations'' \956\ that they would not have to
share in funding regulatory initiatives such as development and
maintenance of a consolidated audit trail for tracking securities
trading, the purpose of which is to ``strengthen the integrity and
efficiency of the markets'' and thus ``enhance investor protection and
increase capital formation.'' \957\
---------------------------------------------------------------------------

\956\ See Penn Central Transp. Co. v. New York City, 438 U.S.
104, 124 (1978).
\957\ See CAT NMS Plan Approval Order, supra note 2, 81 FR at
84727.
---------------------------------------------------------------------------

Finally, the creation of CAT falls within the Commission's
authority under the Exchange Act.\958\ Pursuant to that Act, each
national securities exchange and national securities association must
be organized and have the capacity to comply, and enforce compliance by
its members, with its rules, and with the federal securities laws,
rules, and regulations.\959\ And, among other things, the Commission
has a responsibility to oversee those organizations and to enforce
compliance by the members of exchanges and associations with the
respective exchange's or association's rules, and the federal
securities laws and regulations.\960\ Congress has also charged the
Commission with ``insur[ing] the maintenance of fair and

[[Page 62673]]

honest markets,'' removing ``impediments to'' and perfecting ``the
mechanisms of a national market system for securities'' and
``provid[ing] for regulation and control of'' transactions on
securities exchanges and the over-the-counter market.\961\ In
furtherance of these responsibilities, Congress authorized the
Commission to ``impose requirements necessary to make such regulation
and control reasonably complete and effective'' \962\ as well as to
make such rules and regulations ``as may be necessary or appropriate to
implement the provisions'' of the Exchange Act.\963\
---------------------------------------------------------------------------

\958\ See 15 U.S.C. 78b, 78c(b), 78e, 78f, 78k-1, 78o, 78o-3;
cf. Nasdaq Stock Mkt. LLC v. SEC, 38 F.4th 1126, 1131 (D.C. Cir.
2022) (explaining that Congress granted the Commission `` `broad,
discretionary powers' to ensure `maximum flexibility' in
`oversee[ing] the development of a national market system' and
`implement[ing] its specific components in accordance with the
findings and . . . objectives' of the legislation,'' quoting S. Rep.
94-75, at 7 (1975)).
\959\ See, e.g., Sections 6(b)(1), 19(g)(1) and 15A(b)(2) of the
Exchange Act, 15 U.S.C. 78f(b)(1), 78s(g)(1), and 78o-3(b)(2).
\960\ See, e.g., Sections 2, 6(b), 15A(b), and 19(h)(1) of the
Exchange Act, 15 U.S.C. 78b, 15 U.S.C. 78f(b), 15 U.S.C. 78o-3(b),
and 15 U.S.C. 78s(h)(1).
\961\ See Section 2 of the Exchange Act, 15 U.S.C. 78b.
\962\ Id.
\963\ Section 23(a)(1) of the Exchange Act.
---------------------------------------------------------------------------

More recently, Congress also directed the Commission to facilitate
the establishment of a national market system in accordance with
specified findings and objectives.\964\ The initial Congressional
findings were that the securities markets are an important national
asset that must be preserved and strengthened, and that new data
processing and communications techniques create the opportunity for
more efficient and effective market operations.\965\ Congress then
proceeded to mandate a national market system composed of multiple
competing markets that are linked through technology, directing the
Commission to ``use its authority under [the Exchange Act] to
facilitate the establishment of a national market system,'' including
``by rule'' ``to authorize or require self-regulatory organizations to
act jointly with respect to matters as to which they share authority
under [the Exchange Act] in planning, developing, operating, or
regulation a national market system.'' \966\
---------------------------------------------------------------------------

\964\ Section 11A of the Exchange Act, 15 U.S.C. 78k-1.
\965\ 15 U.S.C. 78k-1(a)(1).
\966\ 15 U.S.C. 78k-1(a)(3)(B).
---------------------------------------------------------------------------

The creation of the CAT was an appropriate exercise of this
authority. The Commission's task pursuant to the mandate in Section 11A
has been to facilitate an appropriately balanced market structure that
promotes competition among markets, while minimizing the potentially
adverse effects of fragmentation. An appropriately balanced market
structure also must provide for strong investor protection.\967\ As the
Commission explained in adopting Rule 613, the creation of a
consolidated audit trail with the ability to surveil cross-market
activity had become key to the ability of both the SROs and the
Commission to perform many of their core regulatory functions in the
modern iteration of the national market system.\968\ While the SROs and
the Commission relied on existing audit trails and data in fulfilling
their regulatory responsibilities prior to CAT, each of those systems
had its own flaws and drawbacks, and there was a significant disparity
in the audit trail requirements among the exchanges and FINRA. At the
same time, the rapid change to fast, electronic markets on which
trading was dispersed across market centers gave rise to an increasing
need to a more uniform audit trail with cross-market
compatibility.\969\ The establishment of the CAT thus enabled the SROs
and the Commission to more efficiently and effectively perform their
respective regulatory responsibilities, including to analyze and
reconstruct market events, monitor market behavior, conduct market
analysis to support regulatory decisions, and perform surveillance,
investigation, and enforcement activities.\970\
---------------------------------------------------------------------------

\967\ See Securities Exchange Act Release No. 61358 (Jan. 14,
2010), 75 FR 3594 (Jan. 21, 2010) at 3597.
\968\ See CAT Adopting Release, supra note 946. Indeed, many
SROs, in commenting on that rule, recognized the essential nature of
the project. Id. at 45736, quoting Letter from Marcia E. Asquith,
Senior Vice President and Corporate Secretary, FINRA, and Janet
McGinness Kissane, Senior Vice President and Corporate Secretary,
NYSE Euronext, to Elizabeth M. Murphy, Secretary, Commission, dated
August 9, 2010 (``the evolution of the U.S. equity markets and the
technological advancements that have recently taken place have
created an environment where a consolidated audit trail is now
essential to ensuring the proper surveillance of the securities
markets and maintaining the confidence of investors in those
markets.'').
\969\ See Securities Exchange Act Release No. 62174 (May 26,
2010), 75 FR 32556 (June 8, 2010) (``CAT Proposing Release''). Even
prior to proposing the creation of the CAT in 2010, the Commission
had twice requested comment regarding how best to enhance the
capability of SROs and the Commission to effectively and efficiently
conduct cross-market supervision of trading activity. See Securities
Exchange Act Release No. 47849 (May 14, 2003), 68 FR 27722 (May 20,
2003) (File No. S7-11-03) (``Intermarket Trading Concept Release'')
and Concept Release Concerning Self-Regulation.
\970\ See CAT Adopting Release, supra note 946, 77 FR at 45727;
see also CAT NMS Plan Approval Order, supra note 2, 81 FR at 84727,
84738, 84800.
---------------------------------------------------------------------------

Contrary to one commenter's suggestion, the Supreme Court's major
questions doctrine is not implicated here. In directing the SROs to act
jointly to create an accurate, complete, accessible and timely audit
trail to replace these existing audit trails, the Commission did not
claim an ``[e]xtraordinary grant[ ] of regulatory authority'' based on
``vague,'' ``cryptic,'' ``ancillary,'' or ``modest'' statutory
language.\971\ Nor did it assert authority that falls outside its
``particular domain.'' \972\ And, while CAT is undoubtedly a large
database, that is a function of the size of the ``complex, dispersed,
and highly automated national market system'' \973\ Congress expressly
charged the SROs and the Commission with overseeing. As detailed above,
the collection of securities transaction data by the SROs and the
Commission is an important factor in enabling both to fulfill their
statutory responsibilities and has a long history. There is no reason
to question that Congress would have intended for the Commission to
address the serious shortcomings and regulatory obstacles associated
with the lack of a consolidated audit trail. And there is therefore no
basis for dispensing with ordinary principles of statutory construction
to require express authorization for CAT by Congress.\974\
---------------------------------------------------------------------------

\971\ West Virginia v. EPA, 142 S. Ct. 2587, 2608-10 (2022)
(quotation omitted).
\972\ Alabama Ass'n of Realtors v. HHS, 141 S. Ct. 2485, 2489
(2021) (per curiam).
\973\ See CAT Adopting Release, supra note 946, 77 FR at 45723.
\974\ Contra Biden v. Nebraska, 143 S. Ct. 2355, 2372, 2375
(2023), 143 S.Ct. 2355, 2372, 2375 (2023).
---------------------------------------------------------------------------

e. Rule 608 and Rule 19b-4
Certain commenters believe the assessment of CAT fees on Industry
Members through filings submitted by each exchange under Rule 19b-4 is
likely inconsistent with Rule 608.\975\ One commenter stated that the
Commission amended Rule 608 in 2020 to remove the effective-upon-filing
procedure for NMS plan fees by requiring that NMS plan fees be subject
to notice and comment and Commission approval prior to becoming
effective.\976\ The commenter also stated that the 2020 amendment
specifically contemplates that CAT fees would be subject to Rule
608,\977\ however the Commission was considering approving a process
for CAT fees that would not permit a meaningful review opportunity,
contrary to the Rule 608 amendment.\978\ The commenter acknowledged
that the CAT NMS Plan provides for Section 19(b) fee filings but also
stated that (1) the CAT NMS Plan was approved prior to the amendment of
Rule 608 in 2020 and (2) the CAT NMS Plan is silent about whether
Section 19(b) fee filings would need to be made after the Operating
Committee receives approval to assess the fees under Rule 608.\979\ The
commenter suggested that due to the ``infirmities with the process for
establishing and assessing CAT Fees

[[Page 62674]]

under the Funding Proposal,'' the Operating Committee must create a new
funding process consistent with Rule 608 and stated that the Commission
cannot find that the Proposed Amendment is consistent with the Exchange
Act.\980\ Another commenter stated that the proposed approach seems
inconsistent with recent Commission rulemaking to ensure that fee
filings related to an NMS plan can no longer be effective upon
filing.\981\
---------------------------------------------------------------------------

\975\ See SIFMA June 2023 Letter at 4, 9; Citadel July Letter at
15.
\976\ See SIFMA June 2023 Letter at 9.
\977\ Id.
\978\ Id.
\979\ Id. at 9, n.45.
\980\ Id.
\981\ See Citadel July Letter at 15.
---------------------------------------------------------------------------

In response to one commenter that stated that the filing of
Industry Member CAT fees under Rule 19b-4 likely violates Rule 608 of
Regulation NMS,\982\ CAT LLC stated that it disagreed with the comment
because the Proposed Amendment complies with Rule 608.\983\ CAT LLC
stated that Section 11.1(b) of the CAT NMS Plan requires the
Participants to file Industry Member CAT fees pursuant to Section 19(b)
of the Exchange Act,\984\ and Section 19(b) permits fees to become
effective upon filing.\985\ CAT LLC also noted that the funding
methodology for Participant fees would be established through the
Proposed Amendment, which was filed in accordance with Rule 608;
therefore, Participant CAT fees would be adopted in accordance with
Rule 608.\986\ CAT LLC stated that Industry Member CAT fees would be
filed pursuant to Rule 19b-4 and those filings would be based on the
Proposed Amendment, which would have to be approved pursuant to Rule
608, therefore ``any Industry Member CAT fees will have been subject to
the same extensive notice and comment process as Participant CAT fees
and must satisfy the requirements of the Exchange Act.'' \987\
---------------------------------------------------------------------------

\982\ See SIFMA June 2023 Letter at 9.
\983\ See CAT LLC July 2023 Response Letter at 30.
\984\ Id.
\985\ Id.
\986\ Id. at 31.
\987\ Id.
---------------------------------------------------------------------------

The Commission disagrees with the commenters' position. The filing
of Industry Member CAT fees under Rule 19b-4 is consistent with the
structure of the CAT. The CAT NMS Plan functions as a joint agreement
amongst the SROs who are parties to the CAT NMS Plan. But Industry
Members are not parties to the Plan and the Plan itself does not bind
Industry Members. Rather, Rule 608(c) of Regulation NMS requires each
SRO to enforce compliance by its members with an effective NMS plan of
which it is a sponsor or a participant.\988\ Additionally, Rule 613(g)
requires: (1) each SRO plan sponsor to file a proposed rule change to
require its members to comply with Rule 613 and the CAT NMS Plan
pursuant to Section 19(b)(2) of the Exchange Act and Rule 19b-4
thereunder; \989\ (2) each member of an SRO plan sponsor to comply with
the CAT NMS Plan; \990\ (3) each SRO plan sponsor to agree to enforce
compliance by its members with the CAT NMS Plan; \991\ and (4) the CAT
NMS Plan to include a mechanism to ensure compliance with the CAT NMS
Plan.\992\ Thus, Industry Members' CAT reporting requirements stem from
rules the Participants put in place for their members pursuant to the
Section 19(b)(2) rule filing process.\993\
---------------------------------------------------------------------------

\988\ 17 CFR 242.608(c). See also CAT NMS Plan at Section 3.11
(requiring each Participant to comply with and enforce compliance,
as required by Rule 608(c), by its Industry Members with the
provisions of Rule 613 and the CAT NMS Plan).
\989\ 17 CFR 242.613(g)(1).
\990\ 17 CFR 242.613(g)(2).
\991\ 17 CFR 242.613(g)(3).
\992\ 17 CFR 242.613(g)(4).
\993\ See Securities Exchange Act Release No. 80256 (Mar. 15,
2017), 82 FR 14526 (Mar. 21, 2017).
---------------------------------------------------------------------------

The amendments to Rule 608 (``Rescission of Effective-Upon-Filing
Procedure for NMS Plan Fee Amendments''), among other things, rescinded
Rule 608(b)(3)(i),\994\ a provision that permitted fee changes assessed
under NMS plans to become effective-upon-filing, and required NMS Plan
fee amendments to be filed pursuant to Rule 608(b)(1) and (2), thus
mandating an opportunity for public comment and Commission approval by
order before the effectiveness of such fees.\995\ Vendors and
subscribers of market data under the Market Data Plans are subject to
vendor or subscribers' fees charged by the applicable NMS Plan and
filed by the NMS Plan using Rule 608. As these vendors and subscribers
are not parties to the NMS Plans, the mechanism by which fees are
imposed on them is contractual. Specifically, in order to receive
market data under the NMS Plans, vendors and subscribers must
individually enter into a vendor and/or a subscription agreement under
which they agree to pay fees.\996\ The rescission impacted the way the
Commission considers fees imposed on vendors and subscribers of market
data under Market Data Plans since their fees are filed by the NMS
Plans pursuant to Rule 608.
---------------------------------------------------------------------------

\994\ 17 CFR 242.608(b)(3)(i).
\995\ See Securities Exchange Act Release No. 89618 (Aug. 19,
2020), 85 FR 65470, 65471 (Oct. 15, 2020).
\996\ See, e.g., UTP Plan Subscriber Agreement, available at
https://www.utpplan.com/DOC/subagreement.pdf; Second Restatement of
the Plan Submitted to the Securities and Exchange Commission
Pursuant to Rule 11Aa3-1 under the Securities Exchange Act of 1934,
composite as of June 3, 2021, available at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/110000358917/CTA%20Plan%20-%20Composite%20as%20of%20June%203,%202021.pdf, at
Exhibit C (Form of Vendor Contract); at Exhibit D (Form of
Subscriber Contracts).
---------------------------------------------------------------------------

In contrast, all Industry Members who are CAT Reporters are members
of at least one Participant. Industry Members are bound by the rules of
the Participant(s) of which they are members. The process for adopting
rules of a Participant that affect their members is through the Section
19(b) rule filing process, which includes the ability to adopt
immediately-effective fees.\997\ Additionally, fees filed by the
Section 19(b) rule filing process are still subject to public notice
and comment, and the Commission may suspend and institute proceedings
on these filings.\998\ For these reasons, the Commission does not
believe that the Rescission of Effective-Upon-Filing Procedure for NMS
Plan Fee Amendments impacts the CAT NMS Plan provisions relating to how
Industry Member fees are filed with the Commission.
---------------------------------------------------------------------------

\997\ 15 U.S.C. 78s(b)(3)(A).
\998\ Id. See also 17 CFR 240.19b-4(f)(2). See also supra notes
192-196 and accompanying text.
---------------------------------------------------------------------------

f. Governance
One commenter stated that the CAT governance structure is flawed
because exchange groups with multiple affiliated exchanges have
``significant influence'' over the Operating Committee and can
``dictate many CAT-related decisions'' such as the allocation of CAT
costs.\999\ The commenter further stated that Industry Members lack
representation on the Operating Committee; therefore, they cannot vote
on the design, implementation or funding of the CAT.\1000\ The
commenter stated that the governance structure results in the
allocation of all CAT costs to Industry Members.\1001\ Additionally,
the commenter believes the governance structure permits the Operating
Committee to provide minimal information on the costs to be allocated
to Industry Members,\1002\ stating that the financial information that
has been provided by the Operating Committee through audited financial
statements and an annual financial and operating budget is disclosed in
broad categories and lacks detail about the key drivers of the costs,
and that the annual financial and operating budget does not predict
costs accurately.\1003\ Based on this lack of detail, the commenter
stated that market participants cannot assess

[[Page 62675]]

whether total CAT costs are reasonable and cannot suggest cost-saving
alternatives and must rely on the Operating Committee to contain the
budget.\1004\ The commenter stated, ``[i]t is clearly inequitable to
compel Industry Members to provide a blank check to fund these
spiraling costs in perpetuity, without any governance role or any plan
to contain overall costs,'' \1005\ and that allocating all CAT costs to
firms without representation ``marginalize[s] cost-related
considerations.'' \1006\ The commenter also stated that the governance
structure does not require the Operating Committee or the Commission to
assess whether the costs of a specific interpretation of the Plan
outweigh any benefits.\1007\
---------------------------------------------------------------------------

\999\ See Citadel July Letter at 5, 6.
\1000\ Id. at 6.
\1001\ See id.
\1002\ Id.
\1003\ Id. at 6-7; id. at n.14.
\1004\ See Citadel July Letter at 7.
\1005\ Id. at 2. See also id. at 23 (stating Section 6(b)(4),
Section 6(b)(5) and Section 6(b)(8) of the Exchange Act do not allow
a private entity to require Industry Members to provide a blank
check in perpetuity because this is not an equitable allocation of
reasonable fees and would greatly harm market competition,
efficiency and liquidity).
\1006\ Id. at 7.
\1007\ Id. See also MMI July Letter at 4 (suggesting
``[i]ncentivization of cost-consciousness and accountability for SEC
interpretations and mandates for CAT reporting specifications,
interpretations, and usage of CAT.'').
---------------------------------------------------------------------------

The commenter recommended the following enhancements to improve CAT
governance: (1) each exchange group and national securities association
should have one vote on the Operating Committee, but will have a second
vote if ``the exchange group or national securities association has a
market center or centers that trade more than 15 percent of
consolidated equity and options market share;'' \1008\ (2) all actions
related to funding by the Operating Committee should be authorized by
supermajority vote; \1009\ and (3) Industry Members should have voting
representation on the Operating Committee commensurate with the costs
allocated to them.\1010\ The commenter stated that if industry
representation cannot be achieved through an NMS plan, the plan is not
an appropriate vehicle for CAT governance.\1011\
---------------------------------------------------------------------------

\1008\ See Citadel July Letter at 34.
\1009\ Id. at 3, 34.
\1010\ Id. See also MMI July Letter at 1, 2 (requesting the
Commission require Industry Member representation on the Operating
Committee before approving any funding proposal, with SIFMA acting
as the broker representative); FIA Letter at 4 (stating that the CAT
Operating Committee should be reconfigured, with Industry Members
comprising the percentage of the Committee equivalent to whatever
cost allocation percentage is eventually allocated to them).
\1011\ See Citadel July Letter at 34. In response, CAT LLC
stated that this comment is outside the scope of the Proposed
Amendment. See CAT LLC July 2023 Response Letter at 31, n.144.
---------------------------------------------------------------------------

In response to comments objecting to a lack of Industry Member
voting representation on the Operating Committee and suggesting their
inclusion based on the proportion of costs allocated to them,\1012\ CAT
LLC stated that the addition of Industry Member voting representation
is not consistent with the Exchange Act.\1013\ CAT LLC stated that
``allowing Industry Members to control CAT LLC as the commenters
suggest could adversely affect the regulatory objectives of the CAT''
\1014\ as Industry Members ``have no statutory obligation to protect
investors or to act in the public interest, nor do they have any
regulatory obligation to operate the CAT System in a manner that is
consistent with the Rule 613 and the CAT NMS Plan.'' \1015\ CAT LLC
stated that Industry Members can provide input through Plan amendments
and fee filings and the CAT Advisory Committee.\1016\
---------------------------------------------------------------------------

\1012\ See FIA Letter at 4; Citadel July Letter at 34; MMI July
Letter at 2.
\1013\ See CAT LLC July 2023 Response Letter at 21.
\1014\ Id.
\1015\ Id.
\1016\ Id.
---------------------------------------------------------------------------

In response to a comment suggesting changes to the allocation of
Participant voting rights,\1017\ CAT LLC stated that this issue is
beyond the scope of the CAT funding model. CAT LLC also responded to
the commenter's suggestion that all funding actions by the Operating
Committee require a supermajority vote by stating that it disagreed
with the suggestion because all Operating Committee actions relate in a
way to CAT costs; therefore, imposing a supermajority requirement could
undermine governance.\1018\
---------------------------------------------------------------------------

\1017\ See Citadel July Letter at 34.
\1018\ See CAT LLC July 2023 Response Letter at 21-22.
---------------------------------------------------------------------------

Regarding SRO and Industry Member voting rights, the Commission
does not believe that modification of the voting rights, which the
Commission considered when it approved the CAT NMS Plan, is within the
scope of the Proposed Amendment.\1019\ Furthermore, in response to
those comments suggesting the addition of Industry Members as voting
members on the operating committee, we note that--in vacating the Order
Approving the CT Plan--the D.C. Circuit concluded that the inclusion of
non-SRO representation on the operating committee of the CT Plan was
inconsistent with Section 11A of the Exchange Act.\1020\ Industry
Members do have an opportunity to attend meetings of the Operating
Committee through the CAT Advisory Committee. According to Section
4.13(d) of the CAT NMS Plan, ``[m]embers of the Advisory Committee
shall have the right to attend meetings of the Operating Committee or
any Subcommittee, to receive information concerning the operation of
the Central Repository (subject to Section 4.13(e)), and to submit
their views to the Operating Committee or any Subcommittee on matters
pursuant to [the CAT NMS Plan] prior to a decision by the Operating
Committee on such matters.\1021\
---------------------------------------------------------------------------

\1019\ See CAT NMS Plan Approval Order, supra note 2, 81 FR at
84728-30.
\1020\ See The NASDAQ Stock Market LLC et al. v. SEC, Case No.
21-1167, D.C. Cir. (July 5, 2022). 15 U.S.C. 78k-1.
\1021\ See CAT NMS Plan, supra note 2, at Section 4.13. See also
17 CFR 242.613(b)(7).
---------------------------------------------------------------------------

g. Miscellaneous
Certain commenters urged the Commission to address data security
concerns associated with the CAT.\1022\ One commenter suggested that
the Commission prioritize finalizing the proposed amendments to the CAT
NMS Plan to enhance data security.\1023\ Commenters also raised
concerns that the Commission was considering the Proposed Amendment at
the same time it is considering modifying certain Commission rules
governing equity market structure.\1024\
---------------------------------------------------------------------------

\1022\ See Citadel July Letter at 3, 35; SIFMA June 2023 Letter
at 2; Virtu Letter at 4.
\1023\ See Citadel July Letter at 3, 35; see Securities Exchange
Act Release No. 89632 (Aug. 21, 2020), 85 FR 65990 (Oct. 16, 2020).
Two other commenters stated that the Commission has failed to
address data security concerns associated with the CAT. See SIFMA
June 2023 Letter at 2; Virtu Letter at 4.
\1024\ See SIFMA June 2023 Letter at 3; Citadel July Letter at
n.54 and 113; see Exchange Act Release Nos. 96496, 88 FR 5440 (Jan.
27, 2023) (Regulation Best Execution); 96495, 88 FR 128 (Jan. 3,
2023) (Order Competition Rule); 96494, 87 FR 80266 (Dec. 29, 2022)
(Minimum Pricing Increments); 96493, 88 FR 3786 (Jan. 20, 2023)
(Order Execution Information).
---------------------------------------------------------------------------

One commenter expressed concern that the Commission would approve
the Proposed Amendment prematurely without careful consideration.\1025\
The commenter also stated that the Commission is ``rushing forward to
approve the latest proposal without taking advantage of the allotted
time under the Exchange Act for careful consideration'' and
``prematurely moving forward'' while simultaneously considering
revisions of the rules governing equity and options market structure
and proceeding with other proposals that will impose costs on Industry
Members.\1026\ The commenter stated that ``[t]he unequitable
distribution of CAT costs contemplated by the Funding Proposal will
exacerbate these problems, harming the functioning of U.S. securities
markets.'' \1027\ The

[[Page 62676]]

commenter further stated that the Commission cannot determine whether
the proposed allocation of costs is equitable without assessing the
distribution of costs and benefits under the other pending
proposals.\1028\
---------------------------------------------------------------------------

\1025\ See SIFMA June 2023 Letter at 3.
\1026\ Id. See also Virtu Letter at 4.
\1027\ See SIFMA June 2023 Letter at 3.
\1028\ Id.
---------------------------------------------------------------------------

In response to comments that urged the Commission to prioritize CAT
data security concerns,\1029\ CAT LLC stated that ``CAT security is of
paramount importance, and the CAT System is protected by a
comprehensive information security program required by the CAT NMS Plan
and overseen by a dedicated CISO, as well as via SEC oversight . . .''
\1030\ CAT LLC stated that security concerns should not be used to
prevent appropriate funding of the CAT, noting that appropriate funding
can help to ensure the security of CAT Data.\1031\
---------------------------------------------------------------------------

\1029\ See Citadel July Letter at 35; SIFMA June 2023 Letter at
2; Virtu Letter at 4.
\1030\ See CAT LLC July 2023 Response Letter at 33.
\1031\ Id.
---------------------------------------------------------------------------

CAT LLC also responded to comments that expressed concern that the
Commission was considering the Proposed Amendment while also
considering changes to Commission rules governing equity market
structure.\1032\ CAT LLC stated that the Commission's consideration of
its market structure proposals should not impede its decision on the
Proposed Amendment, which would ensure appropriate funding of the CAT
as these are different decisions.\1033\
---------------------------------------------------------------------------

\1032\ See Citadel July Letter at 26, n.112; SIFMA June 2023
Letter at 3; Virtu Letter at 4.
\1033\ See CAT LLC July 2023 Response Letter at 34.
---------------------------------------------------------------------------

In response to the commenter that stated that the Commission would
be rushing to approve the Proposed Amendment,\1034\ CAT LLC stated that
``the current model results from years of modifications that have been
made in significant part in response to industry comments to earlier
versions,'' \1035\ and that because the current proposal ``differs very
little from the immediately preceding funding model,'' commenters had
more than 400 days to comment on the substance of the Proposed
Amendment.\1036\
---------------------------------------------------------------------------

\1034\ See SIFMA June 2023 Letter at 3.
\1035\ See CAT LLC July 2023 Response Letter at 28.
\1036\ Id.
---------------------------------------------------------------------------

The CAT data security issues and the costs and benefits of
unrelated pending equity market structure proposals \1037\ are beyond
the scope of the Proposed Amendment, which is limited to CAT funding.
Further, the Commission's ability to consider the proposed amendments
to the CAT NMS Plan to enhance data security is not impacted by the
Proposed Amendment, as it is a separate proposal and both are being
considered in due course.\1038\ Given the time between the Prior
Funding Model Proposal and the OIP of the Proposed Amendment, the
Commission has also had ample time for ``careful consideration'' of the
Executed Share Model as the Proposed Amendment's proposed changes to
the CAT NMS Plan are closely similar to the changes proposed in the
Prior Funding Model Proposal,\1039\ as modified by the two partial
amendments that were filed, respectively, in November 2022 and February
2023.\1040\ Additionally, the time spent for the Commission's review of
the Proposed Amendment is consistent with the time permitted by Rule
608(b) for the Commission to approve or disapprove NMS plan
amendments,\1041\ for both the Prior Funding Model Proposal (for which
the Commission extended to 300 days from the date of notice publication
the date by which the Commission would conclude proceedings to
determine whether to approve or disapprove the Prior Funding Model
Proposal),\1042\ and this Proposed Amendment.
---------------------------------------------------------------------------

\1037\ See supra note 1024.
\1038\ See supra note 1023.
\1039\ See supra note 409.
\1040\ See supra note 410.
\1041\ 17 CFR 242.608(b).
\1042\ See Securities Exchange Act Release No. 96725 (Jan. 20,
2023), 88 FR 5059 (Jan. 26, 2023).
---------------------------------------------------------------------------

IV. Efficiency, Competition, and Capital Formation

In determining whether to approve a proposed amendment, and whether
such amendment is in the public interest, Rule 613 requires the
Commission to consider the potential effects of the proposed amendment
on efficiency, competition, and capital formation.\1043\ In its
analysis, the Commission has reviewed the arguments about such effects
put forth by the Participants and commenters and independently analyzed
the likely effects of the Proposed Amendment on efficiency,
competition, and capital formation.\1044\ Several commenters stated
that, because CAT costs incurred to date are greater than those
estimated at the time the CAT NMS Plan was approved, the Commission
should update its economic analysis of that plan. Because that analysis
was conducted in the process of deciding whether to approve the
original plan and was appropriately based upon the information
available to the Commission at the time it made that determination, we
decline to do so. However, in analyzing the potential impacts of the
Proposed Amendment on efficiency, competition, and capital formation--
including our discussion of the economic baseline--the Commission has
supplemented the analysis in the CAT NMS Plan Approval Order with
additional information learned since the time of that Order. Therefore,
for the purposes of this analysis, the effects are measured against a
baseline that recognizes that the Proposed Amendment replaces certain
provisions of the CAT NMS Plan and the Proposed Amendment also provides
detail not previously included in the CAT NMS Plan.\1045\ As a result,
the Commission provides the baseline required to conduct a
comprehensive analysis of the Proposed Amendment in light of issues
raised in the Notice and public comments.
---------------------------------------------------------------------------

\1043\ 17 CFR 242.613(a)(5).
\1044\ Some commenters stated that the Participants' analysis of
the effects of the Proposed Amendment on Efficiency, Competition,
and Capital Formation was lacking analysis and/or information (see,
e.g., SIFMA June Letter at 4; Citadel July Letter at 2, 11, 12-13,
and 16) and several commenters made general statements that the
Proposed Amendment would have negative effects on Efficiency,
Competition, and Capital Formation (see, e.g., SIFMA June Letter at
3; Citadel July Letter at 12 and 15). The Commission has
independently analyzed the Proposed Amendment using information from
the Participants and commenters as well as additional information as
indicated.
\1045\ Some of the conclusions of the Proposed Amendment on
Efficiency, Competition, and Capital Formation provided by the
commenters and Participants are assessed relative to alternatives
rather than the baseline the Commission used in the analysis herein.
---------------------------------------------------------------------------

Based on its analysis, the Commission believes that the Proposed
Amendment will involve efficiency gains along some dimensions but will
likely also involve tradeoffs against other forms of efficiency, could
negatively alter the competitive position of particular competitors,
though the fees associated with the Proposed Amendment are unlikely to
be large enough to affect overall competition, and will result in
insignificant effects on capital formation.\1046\ These effects are
discussed below.
---------------------------------------------------------------------------

\1046\ See supra Section III for a discussion of why the
Commission is approving the Proposed Amendment.
---------------------------------------------------------------------------

A. Efficiency

1. Baseline
In the CAT NMS Plan Approval Order, the Commission identified
certain elements of the Original Funding Model that could have negative
implications for efficiency and also stated that the significant
uncertainty in the Original Funding Model could also have implications
for efficiency.\1047\ In

[[Page 62677]]

consideration of the comment letters submitted in response to the
Executed Share Model, the Commission recognizes that the Original
Funding Model would have also resulted in additional inefficiencies.
Overall, the Original Funding Model could have resulted in negative,
but likely insignificant, reductions in operational efficiencies,
skewed incentives for efficiency, and reductions in market
efficiencies.
---------------------------------------------------------------------------

\1047\ See CAT NMS Plan Approval Order, supra note 2, 81 FR at
84882.
---------------------------------------------------------------------------

a. Operational Efficiency
The tiered structure of the Original Funding Model would also have
led to uncertainties affecting operational efficiencies of Industry
Members and Participants. In particular, Industry Members would not
have known their per-message cost until the end of the month, though
they would have charged their customers in real time, creating an
inefficiency. In particular, the Original Funding Model would have
charged flat fees to Industry Members and Participants in the same
tiers (``Original CAT Fees''). Thus, Industry Members with message
traffic near the top of the tier would pay lower fees per message than
Industry Members in the same tier but with lower message traffic.
Likewise, Participants with more market share in their tiers would pay
lower fees per executed share. Even if Industry Members and
Participants could predict which tier they would be in, passing-through
fees would involve Industry Members and Participants charging based on
expected per-message or per-share Original CAT Fees rather than actual
per-message or per-share Original CAT Fees, which could have been
higher or lower than expected. This uncertainty creates an operational
inefficiency in structuring the fee pass-through.
Also, charging Industry Members a flat fee that depends on their
message traffic could result in Industry Members, who generally earn
revenue only for executed orders,\1048\ getting charged for orders that
do not transact. This could have resulted in certain Industry Members
paying more in Original CAT Fees than they generated from transactions.
Further, some Industry Members would have found passing through fees
only to those whose orders transact operationally more efficient by
increasing existing fees (or reducing incentives such as payment for
order flow). These situations would have resulted in transacted orders
subsidizing the burdens of message traffic (assuming message traffic is
the only cost driver).
---------------------------------------------------------------------------

\1048\ See Notice, supra note 7, 88 FR at 17103.
---------------------------------------------------------------------------

Complexities associated with creating tiers in the Original Funding
Model would also have created operational inefficiencies. To ensure
that the CAT NMS Plan covered its costs with the tiered fees, the
creation of the fee schedule would have involved deciding on the number
of tiers, estimating how many Industry Members would qualify for each
tier, estimating how much to charge each tier, and then justifying each
decision. The potential for disagreements resulting from the complexity
and the challenges in drafting justifications for such complex
decisions could have involved a cumbersome and inefficient fee setting
experience.
b. Incentive Effects
The Original Funding Model also could have affected efficiency by
skewing incentives. Because fees to be charged by CAT are based on cost
recovery, aligning such fees with burdens on CAT could promote
efficiency by creating incentives to limit costs. If message traffic is
the only cost driver of CAT, the Original Funding Model created
incentives for Industry Members to limit costs by limiting their
unnecessary message traffic,\1049\ but the tiered structure of the
Original Funding Model would have dampened these incentives, and
message traffic is not the only cost driver of CAT. Further, the
uncertainty in the allocations across equities or options and across
Participants or Industry Members meant that the Original Funding Model
would have created the risk that the inefficiencies of such allocations
were less than perfectly aligned with costs. Finally, any pass-throughs
to Participants' members or the customers of Industry Members could
have further dampened the incentives for cost efficiency. As a result,
the Original Funding Model would not have perfectly aligned fees with
the costs imposed on CAT, limiting the incentives for cost efficiency.
---------------------------------------------------------------------------

\1049\ See CAT NMS Plan Approval Order, supra note 2, 81 FR at
84881.
---------------------------------------------------------------------------

While the Original Funding Model would have set fees for Industry
Members based on their message traffic, the efficiency benefits were
unlikely to have been significant. First, its tiered structure would
have dampened the incentives to reduce the costs of CAT by reducing
unnecessary message traffic. In particular, the Original Funding Model
would have assigned Industry Members to tiers based on their message
traffic. Within a tier, however, all Industry Members would have been
charged the same flat fee. Thus, an additional message would have been
free in terms of CAT costs unless it put the Industry Member into a
higher tier. So, only those Industry Members close to a cutoff would
have had the incentive to reduce message traffic, and Industry Members
who expected to be in the top tier would have had no incentive to
reduce unnecessary message traffic. Further, Industry Members cannot
reduce message traffic without altering how they handle customer
orders, which could be counter to their duties, or reducing liquidity,
which could reduce market efficiency. Therefore, absent evidence of
significant unnecessary message traffic, the efficiency improvements of
basing Original CAT Fees on message traffic are unlikely to have been
significant.
In addition, since the approval of the CAT NMS Plan, additional
information about the cost drivers have been made public and suggest
that message traffic is not the only cost driver.\1050\ In particular,
a September 2021 report shows that 51% of CAT costs are from the
``Linker,'' 17% from storage, and 15% from ``Data, Processing,
Collection, & ETL.'' In addition, the Participants in their response to
commenters indicated that 75% of CAT costs are the processing and
storage of CAT data in the cloud.\1051\ The ``Linker'' costs are the
costs to link order messages across a lifecycle.\1052\ These costs
involve looking across four days of data and are likely related to
message traffic. While the report does not separate options messages
from equities messages, it does indicate that Participant message
traffic involved in linkage processing is much larger than Industry
Member message traffic. However, the Commission understands that
complexity of the order lifecycles is a cost driver within the linkage
processing, and certain order handling practices of Industry Members,
such as the use of riskless principal transactions, involve more
complex linkages than other order handling practices. Indeed, while one
commenter stated, ``costs are a direct result of the total number of
messages that CAT Reporters (both Participants and

[[Page 62678]]

Industry Members) send to CAT, the costs of processing and linking such
messages, and the costs to CAT of providing tools and mechanisms to the
SEC and SROs to analyze the CAT data,'' \1053\ the processing and
linking and regulatory use costs are not perfectly aligned with message
traffic.
---------------------------------------------------------------------------

\1050\ See CAT Industry Webinar: CAT Costs, supra note 873. The
Participants stated in this presentation to Industry Members in
Sept. 2021, that, ``[t]he primary cost drivers for the CAT are
compute costs (e.g., linker) and storage costs. These costs are
volume based and have increased significantly each year beyond the
volume estimate included in the Plan.''
\1051\ CAT LLC July 2023 Response Letter at 22. For the first
quarter of 2023, 72.9% of CAT costs are cloud costs (See CAT
Financial and Operating Budget [bond] CATNMSPLAN).
\1052\ Id. See also, CAT NMS Plan Approval Order, supra note 2,
81 FR at 85024-5 for a discussion of linkage requirements.
\1053\ SIFMA May 2023 Letter at 4.
---------------------------------------------------------------------------

The Original Funding Model did not indicate how Original CAT Fees
would be allocated to equities versus options, but this allocation
decision would have had an effect on efficiency. The options markets
account for the vast majority of message traffic, but most of the
options market message traffic is on-exchange message traffic (mostly
market maker quotes).\1054\ However, option market maker quotes likely
do not have complex order lifecycles that would drive the costs of the
linkage processing. Further, the Commission understands that the
linkage processing of equities orders is generally more complex than
the linkage processing of options orders. As a result, it is unlikely
that the Original Funding Model would have successfully matched
Original CAT Fees with cost burdens without a complex algorithm to
allocate costs across equities and options.
---------------------------------------------------------------------------

\1054\ Furthermore, because options market makers do not report
many of their quotes to CAT, instead sending a quote-sent time stamp
to options exchanges that is included in the exchanges' CAT data,
additional option market maker quotes increase the message traffic
of Participants rather than option market makers and are, thus, not
counted in the message traffic of Industry Members in the Original
Funding Model. Consequently, roughly 72% of CAT message traffic
could only affect Participant fees, which are capped in the Original
Funding Model, though the Plan does not define the exact cap. See
CAT NMS Plan Approval Order, supra note 2, 81 FR at 84873.
---------------------------------------------------------------------------

The Original Funding Model also had the potential to result in a
lack of incentives for Participants to seek efficient ways to achieve
the regulatory objectives of CAT.\1055\ In particular, the Original
Funding Model did not specify the allocation between Industry Members
and Participants and it could have skewed heavily toward Industry
Members. If the Original CAT Fees would have offset CAT costs without
the Participants internalizing those CAT costs, Participants could lack
the incentive to limit costs. Thus, a lower allocation to Participants
could reduce Participants' incentives to limit CAT costs.
---------------------------------------------------------------------------

\1055\ See CAT NMS Plan Approval Order, supra note 2, 81 FR at
84891-2.
---------------------------------------------------------------------------

The ability for Participants and Industry Members to pass through
fees could reduce incentive effects of the Original Funding Model, but
the Commission believes that Participants and Industry Members would
still have had some incentives to limit costs. In the CAT Approval
Order, the Commission recognized that FINRA could pass through its fees
to its members.\1056\ Other Participants could have also passed through
their fees to their members, but such pass-throughs could take several
forms. The Commission understands that Participants, including FINRA,
have many revenue sources, such as transaction fees, data fees,
connectivity fees, listing fees, regulatory fees. In fact, because the
Original Funding Model charged Participants based on their market
share, the most direct way for Participants to pass through the costs
would have been to increase fees related to their market share--their
transaction fees, which are based on a fee schedule set pre-trade.
Because the per volume CAT fee would have been unknown at the time the
Participants had to file the transaction fees for such volume, the
Participants would have internalized the risk of the pass-through fees
not covering their Original CAT Fees. Likewise, Industry Members who
pass-through their Original CAT Fees would have had reduced incentives
to limit CAT costs, but the inability to structure their pass through
to perfectly align with Original CAT Fees would have forced some
internalization of costs.
---------------------------------------------------------------------------

\1056\ Id. at 84853.
---------------------------------------------------------------------------

c. Market Efficiency
The Original Funding Model could have resulted in market
inefficiencies, though these inefficiencies were unlikely to be
significant.\1057\ Several of these inefficiencies derive from the fact
that the Original Funding Model would have charged Industry Members a
flat fee according to a tiered fee schedule. An Industry Member's tier
would have been determined by its message traffic. Because providing
liquidity, including but not restricted to market making, involves more
potential message traffic, the Original Funding Model could discourage
liquidity provision. Discouraging liquidity provision could reduce
liquidity, particularly in less liquid securities, potentially reducing
market efficiency. The tiered nature of the Original Funding Model
reduced the potential reduction in liquidity by flattening the fees,
but this could create its own inefficiencies if Industry Members alter
activity to avoid qualifying for a higher tier. The Commission
concluded in the CAT NMS Plan Approval Order that any changes in
behavior were unlikely except in those Industry Members near a fee-tier
cutoff point, and, therefore, these behavior changes would likely not
have a significant effect on market quality or efficiency.\1058\
---------------------------------------------------------------------------

\1057\ See CAT NMS Plan Approval Order, supra note 2, 81 FR at
84879.
\1058\ Id. at 84879.
---------------------------------------------------------------------------

2. Analysis of the Proposed Amendment
The Participants provided an analysis of efficiency in the Notice.
In particular, the Participants state that, ``By providing for the
financial viability of the CAT, the [Executed Share Model] would allow
the CAT to provide its intended benefits. For example, the CAT is
intended to provide significant improvements in efficiency related to
how regulatory data is collected and used. In addition, the CAT could
result in improvements in market efficiency by deterring violative
activity.'' \1059\
---------------------------------------------------------------------------

\1059\ See Notice, supra note 7, 88 FR at 17115.
---------------------------------------------------------------------------

The Commission considered whether the Executed Share Model promotes
efficiency along several dimensions: operational efficiency, incentive
alignment, and market efficiency. In this analysis, the Commission
considered both how the Executed Share Model differs from the Original
Funding Model and the additional details in the Executed Share Model
not previously included in the CAT NMS Plan. In the analysis below, the
Commission explains that the Executed Share Model itself will promote
operational efficiency and market efficiency, trade off some
efficiencies associated with aligning fees with CAT costs against
others, and create some efficiency-improving incentives at the expense
of others. The analysis also recognizes below that some commenters
stated that the Executed Share Model is less efficient than it could
be.
a. Operational Efficiency
The Commission believes that the Executed Share Model presents some
operational efficiency improvements over the Original Funding Model
while recognizing that commenters point out that it may not be as
efficient as other alternatives. The Executed Share Model could improve
efficiency over the Original Funding Model by providing more certainty
on potential costs for Industry Members and by reducing the complexity
of the fees. However, it is not clear that the Executed Share Model
presents an operational efficiency improvement over the Original
Funding Model with respect to precision of estimates of expected total
fees to be collected.
Relative to the Original Funding Model, Industry Members and
Participants will be better able to observe their fee per activity, in
this

[[Page 62679]]

case per share transacted, and can more easily pass all or a portion of
those fees through to members or customers. Under the Executed Share
Model, the CAT Fee and Historical CAT Assessments per Executed
Equivalent Share are known before an order is submitted such that all
market participants can estimate in advance the fees charged on each
potential transaction rather than Industry Members only learning about
their fees per message after the end of the month under the Original
Funding Model.\1060\ Having more precise information on fee rates helps
Industry Members and Participants who choose to pass-through these fees
to create fee schedules for their customers that better reflect their
costs, resulting in operational efficiencies. In response to the
commenter who said that Industry Members ``are not set up to track and
pass-through fees to the client [broker-dealers] that sent them the
orders that resulted in executions'' \1061\ and other similar
comments,\1062\ the Commission understands that such Industry Members
generally have arrangements with client broker-dealers for services
based on executed shares and these arrangements could include charges
to cover various fees.\1063\ Further, CAT LLC argues that charging the
executing brokers as specified in the Executed Share Model is an
efficient way for CAT LLC to bill Participants and Industry Members as
it is simple, straightforward, and in-line with existing fee and
business models.\1064\ They also acknowledge that certain Industry
Members will have to develop processes to collect pass-through CAT fees
from clients and describe that the Plan Processor plans to make
available trade-by-trade data to CAT Executing Brokers for each CAT
bill, which will facilitate the passing-through of CAT fees.\1065\
---------------------------------------------------------------------------

\1060\ See supra Section IV.A.1.a for a discussion of how the
per-message fees would have varied within the flat-fee tiers of the
Original Funding Model. Also, one commenter stated that the Proposed
Amendment would afford industry with a ``straightforward rate to be
applied across buyers and sellers.'' See DASH July Letter at 2.
\1061\ See SIFMA May 2023 Letter at 5.
\1062\ See, e.g., SIFMA June 2023 Letter at 2; MMI July Letter
at 2; Citadel July Letter at 20 and 24; Citadel Letter August 2023
at 5-6; and Virtu Letter at 4-5. Citadel July Letter at 20 and 24
also focused specifically on the ability for IMs to pass through
Historical CAT Assessments, but those fees would also have a fixed
rate charged to future executed shares, so passing those fees
through would still represent an efficiency improvement over the
Original Funding Model.
\1063\ See supra Section IV.A.1.a for information on current fee
arrangements based on executed shares. See also CAT LLC July 2023
Response Letter at 9 and 34.
\1064\ See CAT LLC July 2023 Response Letter at 3-4.
\1065\ See CAT LLC July 2023 Response Letter at 9-10.
---------------------------------------------------------------------------

The Commission believes that the Executed Share Model reduces the
complexities of the Original Funding Model, improving operational
efficiency, but that the Executed Share Model may not increase the
precision in estimating the fees to be collected, thus creating
uncertainty in its impact on operational efficiency. The Executed Share
Model will not involve designing a tiered structure that estimates how
many Industry Members and Participants will qualify for each tier based
on projections of each's message traffic or market share, coming up
with cutoffs and flat fees in each tier to cover projected costs, and
justifying each projection model, tier cutoff, and flat fee. Instead,
the Executed Share Model involves estimating future volume, dividing
budgeted costs by the estimated future volume, and justifying the
estimated future volume model and budgeted costs. Thus, the Executed
Share Model will be much less complex for Participants to implement.
However, because the Executed Share Model involves estimating future
volume and the Commission has observed significant fluctuations in
volume, the fees actually collected in the Executed Share Model will
not necessarily match the budgeted costs. Because the Original Funding
Model had similar uncertainties, the Commission cannot determine if
this inefficiency is more or less severe for the Executed Share Model.
The Commission recognizes the inefficiencies pointed out by some
commenters associated with invoicing CEBBs and CEBSs directly rather
than using clearing brokers to collect fees.\1066\ Because the Original
Funding Model allowed for but did not specify the use of clearing
brokers, this inefficiency is not relative to the baseline but is
relative to an alternative. The industry's current practice is to
collect certain regulatory fees from the sell-side clearing broker-
dealer. One commenter stated, ``[c]learing Firms are best suited to
process the collection of fees as it can occur at trade settlement and
the cost is ultimately borne by the end beneficiary of each
transaction. This seems prudent from a logistical and efficiency
perspective and, in our opinion, also introduces the least financial
risk to the industry today.'' \1067\ This commenter also made similar
statements in subsequent comment letters.\1068\ However, as another
commenter noted, collecting CAT fees from clearing broker-dealers could
introduce inefficiencies as well.\1069\
---------------------------------------------------------------------------

\1066\ See DASH January 3 Letter at 1.
\1067\ Id.
\1068\ See DASH April Letter at 1; DASH July Letter at 1.
\1069\ This could result in Industry Member CAT fees being borne
by clearing broker-dealers. The SIFMA May 2023 Letter said that
allocating ``CAT Fees to clearing brokers would have led to unfair
burdens on them and could have resulted in them shouldering the
burden of CAT costs in scenarios in which they could not determine
which clearing client was responsible for the costs.'' This
commenter, commenting on the prior funding proposal which originally
proposed to assess CAT fees on clearing brokers instead of executing
brokers, stated that clearing brokers would especially have
difficulty passing on the Past CAT Costs to their clearing clients.
See Letter from Ellen Greene, Managing Director, Equities & Options
Market Structure, and Joseph Corcoran, Managing Director, Associate
General Counsel, SIFMA, to Vanessa Countryman, Secretary, Commission
(Oct. 7, 2022), at 4-5, available at https://www.sec.gov/comments/4-698/4698-20145239-310561.pdf. This commenter also discussed the
additional implementation and operational costs the prior funding
model would impose on clearing broker-dealers. See Letter from Ellen
Greene, Managing Director, Equities & Options Market Structure, and
Joseph Corcoran, Managing Director, Associate General Counsel,
SIFMA, to Vanessa Countryman, Secretary, Commission (June 22, 2022)
(``SIFMA June 2022 Letter''), at 9, available at https://www.sec.gov/comments/4-698/4698-20132695-303187.pdf. Also, the
Proposed Amendment requires the collection of CAT fees from both the
buy and sell side of the transaction. Commenters on the prior
funding proposal stated that current industry practice does not
involve clearing broker-dealers collecting fees from the buy-side of
the transaction, and thus it might require costly implementation
steps from clearing broker-dealers. See Letter from Kirsten Wegner,
Chief Executive Officer, Modern Markets Initiative, to Vanessa
Countryman, Secretary, Commission (June 21, 2022), at 3, available
at https://www.sec.gov/comments/4-698/4698-20132603-303126.pdf;
SIFMA June 2022 Letter at 9; see https://www.sec.gov/comments/4-698/4698-20132603-303126.pdf; SIFMA June 2022 Letter at 9. See also
supra note 58. CAT LLC describes in their response to comments that
charging clearing brokers would be less efficient than charging
executing brokers because it would require linking executed shares
to clearing brokers. They argue that charging executing brokers is
simple, straightforward, and in-line with existing fee and business
models. They also describe how CAT LLC is planning to make pass-
through of costs easier, which would also increase operational
efficiency for Participants and Industry Members. See CAT LLC July
2023 Response Letter at 3 and 5.
---------------------------------------------------------------------------

b. Incentive Effects
The Commission recognizes the potential for the Executed Share
Model to affect incentives and, therefore, either improve or harm
efficiency. Aligning fees with costs promotes economic efficiency
because Industry Members and Participants bear the costs they directly
or indirectly impose on CAT NMS, creating the incentive to limit costs.
Overall, the Executed Share Model will have inefficiencies related to
not perfectly aligning with costs, but might not be any more
inefficient than

[[Page 62680]]

the Original Funding Model. In particular, basing Industry Member fees
on share volume rather than message traffic could reduce efficiency
relative to the Original Funding Model, but the efficiency benefits of
the Original Funding Model would have been dampened by its tiered
structure. The Commission recognizes that, based on the breadth of CAT
costs, it is not feasible to calculate the cost burden on CAT of each
CAT Reporter \1070\ and the Executed Share Model could also have some
efficiency improvements over the Original Funding Model. The Commission
also recognizes the potential risks of the Proposed Amendments on not
incentivizing Participants enough to consider cost efficiency. In
addition, the Commission considered other incentives as well, but
believes that the potential magnitude of CAT fees is unlikely to
significantly affect these efficiencies.
---------------------------------------------------------------------------

\1070\ See Notice, supra note 7, 88 FR at 17103 (``In light of
the many inter-related cost drivers of the CAT (e.g., storage,
message traffic, processing), determining the precise cost burden
imposed by each individual CAT Reporter on CAT is not feasible.'').
See also CAT LLC July 2023 Response Letter at 34, where the
Participants describe that it is difficult to determine the precise
cost burden imposed by each individual CAT reporter. They state that
increased trading activity impacts message traffic, data processing,
storage, and other factors and, thus, correlate with cost burdens
and that Industry Member activity is generally for the purpose of
transacting.
---------------------------------------------------------------------------

Because CAT costs have some relation to message traffic, a fee
schedule less dependent on message traffic such as the Executed Share
Model will be less efficient on this dimension. As such, the Executed
Share Model could create inefficiencies relative to the message-traffic
based Original Funding Model. Further, the Executed Share Model could
result in Participants or Industry Members paying different fees across
transactions despite potential similarities in cost. For example,
Participants or Industry Members will be charged ten times the fee for
a 1,000 share transaction than for a 100 share transaction. While 1,000
share transactions may, on average, have a higher burden on CAT than a
100 share transaction because such transactions are more likely to
involve more messages and more complex lifecycles, the burden of a
1,000 share transaction on CAT versus a 100 share transaction is
unlikely to be ten times higher. However, the incentive efficiencies of
the message-traffic based fees in the Original Funding Model would have
been dampened by several factors,\1071\ including the tiered structure
of the Original Funding Model and by the fact that message traffic is
not the only significant cost driver for CAT.\1072\
---------------------------------------------------------------------------

\1071\ See supra Section IV.A.1.c for further discussion of the
inefficiencies of the Original Funding Model.
\1072\ See supra note 1050 and accompanying text for a
discussion of CAT cost drivers. The biggest cost driver is for
linking order messages into a lifecycle, followed by storage costs.
---------------------------------------------------------------------------

One commenter raised other potential inefficiencies related to
outsized allocations to transactions for retail investors associated
with those retail investors trading low priced NMS stocks.\1073\ The
Commission recognizes that such an allocation could discourage brokers
from servicing retail investors if they cannot pass through all CAT
costs to investors and/or that retail investors could be paying for a
large portion of CAT costs. In the Approval Order, the Commission
recognized that retail investors were likely to bear costs for CAT and
were beneficiaries of CAT.\1074\
---------------------------------------------------------------------------

\1073\ See Citadel July Letter at 20. This commenter states that
trades in stocks with sub $1 prices account for 33% of retail NMS
stock trading and that rounding fractional shares to 1 share further
increases the share of CAT costs charged to retail transactions. See
also Citadel August Letter at 4.
\1074\ See, e.g., CAT NMS Plan Approval Order, supra note 2, 81
FR at 84863, 84881, 84888, and 84893 for examples of statements on
investors bearing the costs of CAT and at 84833 to 84845 for ways
that investors benefit from CAT.
---------------------------------------------------------------------------

Further, if the Executed Share Model over-allocates fees to equity
market transactions relative to options market or OTC equity
transactions, it will create inefficiency by artificially inflating
equity transaction costs while artificially decreasing options and OTC
transaction costs. The Commission has mixed information on whether the
Executed Share Model will, indeed, over-allocate fees to the equity
markets. One commenter stated that equity trading volume creates a
relatively low burden relative to options activity.\1075\ The
Commission disagrees with this statement. Based on March 2023 public
market data,\1076\ equities (NMS and OTC) account for approximately 73%
of the equivalent share volume while options account for approximately
27%. On the contrary, based on an analysis of March 2023 CAT data,
equities account for 23% of message traffic while options account for
77%.\1077\ The message traffic in the options market is driven by
options market quotes, which are reported by options exchanges. If
processing and storing CAT messages is a primary cost driver and option
and equity messages are equally burdensome, aligning fees to costs
would result in the Participants and Industry Members in the equities
markets being assessed approximately 23% of the fees, suggesting that
the Executed Share Model allocation of approximately 73% of the fees
over-allocates fees to equities.
---------------------------------------------------------------------------

\1075\ See FINRA April 2023 Letter at note 23. See also Citadel
August Letter at 4 citing to the FINRA April 2023 Letter.
\1076\ Calculated using monthly market volume data from Cboe for
equities: Cboe, US Equities: Historical Market Volume Data,
available at https://www.cboe.com/us/equities/market_statistics/historical_market_volume/, OCC for options: Options Clearing Corp.,
Market Data: Monthly & Weekly Volume Statistics, available at
https://www.theocc.com/market-data/market-data-reports/volume-and-open-interest/monthly-weekly-volume-statistics, and FINRA for OTC
securities: FINRA, Over-the-Counter-Equities: Market Statistics,
available at https://otce.finra.org/otce/marketStatistics/historicalData. Option contract volume is multiplied by 100 and OTC
volume is divided by 100 to establish rough estimates of equivalent
share volume to reported equity transactions.
\1077\ CAT Plan Participant and Industry Member Report Card
Monthly Summary Tables, which contain the number of records
processed into CAT.
---------------------------------------------------------------------------

However, because equity order linking complexity likely accounts
for higher costs than option order linking complexity, the higher
allocation of CAT fees to equity market Participants and Industry
Members could promote efficiency. The linkage processing costs of CAT
are three times the storage costs.\1078\ The Commission estimated that
roughly 90% of CAT Participant message traffic and 72% of total message
traffic is comprised of options market quotes.\1079\ While option
market maker quotes account for such a large fraction of message
traffic and, thus, storage costs, option market maker quotes involve
lower linkage costs than other messages.\1080\ Indeed, the equities
market accounted for about 48.4% of the number of linkages processed
and the number of options linkages processed was a third of the number
of options messages reported, reflecting less linkage processing for
many options market maker quotes.\1081\ Additionally, the Commission
understands that

[[Page 62681]]

equities linkages can be more complex, and thus more costly to process,
than are options messages. As a result, the Commission disagrees with
the commenter's assertion that equity trading volume creates a
relatively low burden relative to options activity.
---------------------------------------------------------------------------

\1078\ See supra note 1050 and accompanying text for a
discussion of cost drivers. ``Linker'' accounts for 51% of CAT costs
while storage accounts for 17%. Data processing, Collection and ETL
costs are 15%.
\1079\ Mar. 2023 CAT data. If processing and storing CAT
messages is a primary cost driver, options exchanges' collective
8.9% share of CAT costs (compared to equity exchanges' 13.6% share
and FINRA's 10.8% share) may also appear to inefficiently over-
allocate the Participants' share of CAT costs to equity exchanges.
However, processing and storage costs combined account for lower
costs than linkage processing. See id.
\1080\ See supra Section IV.A.1.b for further discussion of
option market maker quotes.
\1081\ Based on Mar. 2023 CAT data containing statistics for
validations and linkage for files submitted to FINRA CAT, the
equities market accounted for 1.24 trillion linkages processed on
1.20 trillion messages reported while the options market accounted
for 1.33 trillion linkages processed on 4.02 trillion messages
reported. Most options market maker quotes have only two events in
their CAT Lifecycle (i.e., quote and quote cancelation) and don't
require linkage to other CAT events.
---------------------------------------------------------------------------

The Commission believes that the Executed Share Model presents a
risk, as the Original Funding Model did,\1082\ that Participants might
not have the incentive to seek efficient ways to achieve the regulatory
objectives of CAT. While the Executed Share Model specifies an
allocation that was unknown in the Original Funding Model, several
commenters question whether the allocation provides Participants with
incentives to seek efficiency.\1083\ Commenters also expressed concern
with rising CAT costs to illustrate the magnitude of this potential
inefficiency,\1084\ stating that they do not have enough transparency
on cost drivers to assess whether CAT costs are reasonable,\1085\ that
no data or estimates regarding future costs were provided,\1086\ and
that the Proposed Amendment has no mechanism to control or limit the
budget.\1087\ Some commenters further stated that the ability to pass
through fees lessens Participants' incentive to control costs.\1088\
---------------------------------------------------------------------------

\1082\ See supra Section IV.A.1.b.
\1083\ See, e.g., Citadel July Letter at 1, 5, 6, and 16;
Citadel August Letter at 2; MMI July Letter at 1-3.
\1084\ See, e.g., Citadel July Letter at 2, 5, 7-9, 23, and 26-
27; Citadel August Letter at 7-8; FIA PTG at 4-5; FIF/SIFMA at 5.
One commenter pointed out that CAT costs typically exceed the budget
by 20% (See Citadel July Letter at 8-9, n.21; Citadel August Letter
at 7). In addition, one commenter stated that CAT operating costs
significantly exceed cost estimates in the CAT NMS Plan and recent
increases in CAT operating costs are not sustainable (See FIF/SIFMA
Letter at 7-8).
\1085\ See, e.g., Citadel July Letter at 2, 6-7, 13-14, and
nn.63, 64; Citadel August Letter at 6-7; FIA PTG at 1 and 4, MMI
July Letter at 3. In addition, one commenter stated that enhanced
transparency about CAT costs is necessary, especially for the cloud
costs (See FIF/SIFMA Letter at 8-9).
\1086\ See Citadel August Letter at 7.
\1087\ See, e.g., SIFMA June Letter at 2 and 4; Virtu Letter at
4; FIF/SIFMA Letter at 5; SIFMA AMG Letter at 3. One commenter (FIF/
SIFMA Letter at 5) pointed out that there is no legal limit to CAT
costs. One commenter (Citadel August Letter at 7) states that there
are no constraints on costs.
\1088\ See, e.g., FIA PTG Letter at 2-3; Citadel July Letter at
16 and 22; and MMI July Letter at 4.
---------------------------------------------------------------------------

The Participants have stated that the transparency and level of
detail in the fee filings will impose a discipline on the Participants
to justify the costs of CAT.\1089\ For example, separating Historical
CAT Costs from Prospective CAT Costs allows Industry Members more
insight into the sources of CAT costs underlying the fees and to allow
Industry Members to comment on the size of such fees. The Participants
offer explanations for the increases in CAT costs. For example, at the
adoption of the CAT NMS Plan in 2016, the Commission estimated that the
CAT would receive 58 billion records per day, but the Participants
state that as of the fourth quarter of 2022, the CAT receives an
average 418 billion records per day.\1090\ This highlights the
difficulty in estimating future costs because costs are directly
related to trading activity. While the Participants did not provide
data or estimates regarding future costs, they discussed how costs are
related to trading activity, which should help Industry Members and
other market participants form their own estimates.
---------------------------------------------------------------------------

\1089\ See also, CAT LLC May 2023 Response Letter at 10-11 for a
discussion of other efforts to manage the costs of CAT. The
Participants provide a more comprehensive response about cost
management efforts (See CAT LLC July 2023 Response Letter at 19-20).
They state that Industry Members will have ample opportunity to
comment, there will be quarterly budget information and financials,
there is Commission oversight, and the Participants have ongoing
cost discipline efforts through a cost management group and other
efforts. For more details of the activities of the cost management
group, see CAT LLC July 2023 Response Letter at 22-26.
\1090\ See CAT LLC July 2023 Response Letter at 22.
---------------------------------------------------------------------------

The Participants also disagree that they are not incentivized to
manage costs with a one-third allocation. They argue that currently,
there is a strong incentive to manage costs while paying 100% of the
costs and that incentive will continue with a one-third allocation.
They state that CAT costs are substantial and they will continue to
receive critical review.\1091\ In response to comments on whether the
exchanges will pass through all of their fees, some of the equity
exchange Participants already charge transaction fees at the maximum
level allowed by regulation, which prevents them from increasing their
transaction fees to efficiently pass through all CAT fees to their
members.\1092\ As a result, such equities exchanges will likely
internalize some of their CAT fees, ensuring some incentive to limit
costs. In addition, the fact that FINRA is expected to be the heaviest
regulatory user of CAT suggests that FINRA being responsible for a
large proportion of CAT costs promotes efficiency.\1093\ Further, the
Participants argue that the complexity and diversity of Industry
Members' chosen business models and order handling practices
contributes substantially to CAT costs because they result in increased
processing and storage costs.\1094\ In contrast, exchange features are
not nearly as diverse as the ways in which Industry Members execute
trades.\1095\ In addition, Industry Members have customers that create
CAT costs related to FDIDs, CCIDs, and CAIS, while Participants do
not.\1096\ Further, the Participants state that ``Industry Members have
far more late data and corrections than Participants'' and that ``[t]he
linker costs related to late data and corrections are significant.''
\1097\ The Commission believes that Industry Members being responsible
for a large proportion of CAT costs promotes efficiency. This is
particularly valid for late data and corrections, which is something
Industry Members can directly control to reduce overall CAT costs.
---------------------------------------------------------------------------

\1091\ See CAT LLC July 2023 Response Letter at 22.
\1092\ See Securities Exchange Act Release No. 96494 (Dec. 14,
2022), 87 FR 80266, tbl.5 (Dec. 29, 2022). While exchanges charge
several tiers of fees, they will not be able to raise the fees that
already match the fee cap.
\1093\ But see FINRA April 2023 Letter: ``it is unclear . . .
how the outsized allocation to FINRA is based on the extent to which
FINRA participates in and benefits from the markets. In addition,
this rationale conflates the costs to create and operate CAT with
the usage of CAT data.'' The Commission believes that data usage
does significantly contribute to CAT costs. Query tools, for
example, account for 7% of CAT costs. See supra note 1050. Note that
FINRA's allocation in the Original Funding Model (~48% for
Participants' share of the costs allocated to equities) could have
been the same or greater than the allocation in the Executed Share
Model.
\1094\ See CAT LLC July 2023 Response Letter at 7.
\1095\ See supra note 1094.
\1096\ See supra note 1094.
\1097\ See supra note 1094.
---------------------------------------------------------------------------

The Commission believes the Executed Share Model trades off
incentives to inefficiently spend too much against incentives to
inefficiently spend too little. The Commission does not believe that
being responsible for CAT costs (or having to internalize CAT costs
they do not pass through) will result in Participants having the
incentive to under-spend on regulatory tools.\1098\ Any such under-
spending would not reduce the Participants' self-regulatory duties and
could result in inefficiencies in their own regulatory costs.
---------------------------------------------------------------------------

\1098\ The Participants state that they seed to reduce costs
``without adversely affecting the regulatory goals of the CAT.'' See
CAT LLC July 2023 Response Letter at 22.
---------------------------------------------------------------------------

One commenter stated that charging for Historical CAT Costs using
current volumes bears no relation to the contributions to CAT
Costs.\1099\ The Commission agrees that the Historical Assessments in
the Executed Share Model do not provide much incentive for efficiency.
However, this does not reflect a change in the efficiency from the
Original Funding Model, because Industry Members cannot retroactively
change their behavior to reduce CAT

[[Page 62682]]

costs under either model. Indeed, by separating Historical CAT
Assessments from CAT Fees, the Executed Share Model could allow
Industry Members and Participants to more clearly assess how their own
actions could affect the Prospective CAT Costs and their CAT Fees to
promote improvements to efficiency relative to the Original Funding
Model.
---------------------------------------------------------------------------

\1099\ See SIFMA January 2023 Letter at 7.
---------------------------------------------------------------------------

The Executed Share Model could change other incentives that could
potentially affect efficiencies, but the expected magnitude of CAT Fees
will mitigate the impact of such incentive changes. For example, if the
fees for OTC transactions are not passed on to non-FINRA members, the
Executed Share Model could discourage FINRA membership by those who
have a choice. Further, the Historical Fee Rate in Exhibit C of
$0.0000417950 per Executed Equivalent Share would result in each CEBB
and CEBS paying $0.00001393167 per Executed Equivalent Share (one third
of $0.0000417950). A comparison to recent Section 31 fees of $0.00009
per share to $0.0004 per share \1100\ and average effective half
spreads of $0.013 \1101\ indicates that the anticipated Historical Fee
Rate and Fee Rate, assuming the Fee Rate is of a similar magnitude as
the Historical Fee Rate, are expected to be relatively small.\1102\
---------------------------------------------------------------------------

\1100\ Section 31 fees are expressed per dollar volume traded.
Translating this to a per share range involves identifying
reasonable high and low trade sizes. The lower end of this range
comes from the 25\th\ percentile in $ trade size of 1,200 and share
trade size of 71 from the first quarter of 2021. The higher end of
this range comes from the 75\th\ percentile in $ trade size of 5,200
and share trade size of 300 from the first quarter of 2021. Section
31 fees have ranged from $5.10 per $Million to $23.10 per $Million
from Oct. 1, 2016 to Mar. 1, 2023. The CAT LLC July 2023 Response
Letter at 18-19 offers two additional comparisons to transaction-
based fees. They state that ``Nasdaq charges various transaction-
based equities fees, ranging from $0.0005 per share to $0.0030 [per
share].'' They also state that ``Cboe charges an options regulatory
fee that is $0.0017 per contract, and NYSE American charges an
options regulatory fee of $0.0055.'' Assuming that option contracts
are for 100 shares of the underlying, this would translate to
options regulatory fees of $0.000017 and $0.000055 per equivalent
share.
\1101\ This is the average share-weighted effective spread
across more liquid stocks from the first quarter of 2021. More
liquid stocks were defined as the stocks in the most actively traded
decile by total daily trading volume. Effective spreads are a
measure of transaction costs. For each trade, the effective spread
was calculated as the absolute value of the difference between the
trade price and the quote midpoint at the time of the trade. Less
liquid stocks have higher effective spreads, making the CAT fees
even smaller relative to transaction costs.
\1102\ See Notice, supra note 7, 88 FR at 17130. In particular,
Exhibit C sets forth illustrative Historical CAT Assessments. While
this is an illustrative example and actual Historical CAT
Assessments may differ, the Commission believes that the Historical
Fee Rate per equivalent share, will be calculated using the methods
laid out in the table ``Calculation of Historical CAT Assessment.''
Further, the Commission assumes that the example Historical Fee Rate
is of the approximate magnitude of potential Historical Fee Rates
because this rate was calculated using actual CAT costs and volume
estimates grounded in historical volume. While the rate may be
imprecise for the reasons discussed in Exhibit C, the rate is
unlikely to be orders of magnitudes larger because the sample fees
assume two-year collection whereas the Operating Committee could
choose a longer collection period. While Exhibit C only estimates
Historical Fee Rates, the Commission does not expect Fee Rates to be
significantly larger than Historical Fee Rates because Historical
Fees will cover a longer time period than CAT Fees and will cover a
broader scope of activities than CAT Fees. Historical Costs include
costs incurred since the CAT Approval in Nov. 2016 to build, operate
and maintain CAT up to a certain date and will be spread out over
two to five years (the estimate was based on spreading it out two
years). On the other hand, CAT Fees are based on Prospective Costs,
which are estimates of monthly costs from a certain date forward and
include costs to operate and maintain CAT. While some commenters
expressed concern about increasing CAT costs that are much higher
than those estimated in the 2016 Approval Order (See, e.g., SIFMA
June Letter at 4; MMI July Letter at 3; and Virtu Letter at 4), some
of those costs may reflect implementation costs in addition to
ongoing costs. Once CAT is fully implemented, the Commission expects
annual operating costs to reflect ongoing costs only. See also CAT
LLC July 2023 Response Letter at 17 for a comparison and discussion
of historical and prospective CAT costs. The CAT LLC July 2023
Response Letter at 18-19 also provides another example of a
Historical Fee Rate. They add an additional year and consider all
Historical CAT Costs for prior to 2023 and find that each CEBB and
CEBS would pay $0.0000142689 per executed equivalent share (one
third of $0.0000428068). The Historical Fee Rate based in this
example is close to the Historical Fee Rate in Exhibit C.
---------------------------------------------------------------------------

c. Market Efficiency
The Commission believes that the Executed Share Model will promote
market efficiency, but has uncertainty as to the degree of any
improvement. The Executed Share Model eliminates the disincentives to
provide liquidity of the Original Funding Model that could have
resulted in market inefficiencies, including removing the potential for
perverse incentives near the tier cutoffs.\1103\ Instead of paying
higher fees with more message traffic, which would discourage liquidity
providing activity,\1104\ the Executed Share Model charges a fee for
each Executed Equivalent Share. Because market making and other
liquidity providing activity tends to have a high ratio of message
traffic to transactions, the Executed Share Model could be more
favorable towards providing liquidity than the Original Funding Model.
Promoting liquidity provision promotes market efficiency. However,
because the Original Funding Model addressed this disincentive in its
tier structure, the Commission cannot be certain that the reduction of
this disincentive would have a significant effect on market efficiency.
Further, the Commission previously concluded that the effect of
behavior changes around the tier cutoffs on market efficiency was
likely not significant.\1105\ As a result, the Commission believes the
removal of tiers promotes market efficiency but is unable to conclude
that it will significantly improve market efficiency.
---------------------------------------------------------------------------

\1103\ See supra Section IV.A.1.a.
\1104\ Id.
\1105\ See supra note 1058 and accompanying text.
---------------------------------------------------------------------------

Some commenters stated that the Proposed Amendments would harm
liquidity provision and increase costs for investors, thus harming
market efficiency.\1106\ The Commission recognizes that in charging
fees only to CEBB and CEBS, the fees will be charged to fewer Industry
Members than under the Original Funding Model and that market makers
could be charged a large proportion of those fees. This could increase
the importance of passing through fees to the ability to spread those
fees out among more market participants. The Commission believes that
efficiency improvements to the ability to pass through fees \1107\ will
help alleviate the risk that CAT fees will harm liquidity provision
from market makers and market efficiency.
---------------------------------------------------------------------------

\1106\ See, e.g., MMI July Letter at 2; Citadel July Letter at
2; Virtu Letter at 5. One commenter stated that the Proposed
Amendments would disproportionately impact market makers in
particular (see Citadel July Letter at 2 and Citadel August Letter
at 4).
\1107\ See supra Section IV.A.1 for a discussion of pass-through
efficiency improvements.
---------------------------------------------------------------------------

Some commenters argued that under the Proposed Amendment all CAT
fees will ultimately be passed through to investors \1108\ and retail
investors in particular,\1109\ thereby increasing transaction costs for
investors and reducing market efficiency. The Commission recognizes
that CAT fees may be passed through to investors, but the Proposed
Amendment covers the allocation of CAT fees for operating the CAT among
Participants and Industry Members and does not address whether Industry
Members pass through their CAT fees to their customers.\1110\ Further,
Industry Members may have passed through CAT fees to their customer
under the Original Funding Model as well. Hence, any impact on market
efficiency of CAT fees being potentially passed through to investors
under the Proposed Amendment may not represent a change to the
baseline. Finally, while Industry Members may pass through CAT fees to
their customers, the customers also receive a

[[Page 62683]]

benefit from the CAT. The CAT provides more effective oversight of
market activity, which could increase investor confidence, resulting in
expanded investment opportunities and increased trading activity.\1111\
---------------------------------------------------------------------------

\1108\ See SIFMA AMG Letter at 2.
\1109\ See Virtu Letter at 5.
\1110\ See supra Section III.A.2.
\1111\ See supra note 761 and preceding text.
---------------------------------------------------------------------------

B. Competition

Several commenters stated that the Proposed Amendments present a
burden on competition.\1112\ The Commission analyzed the impact of the
Proposed Amendments on the competition for trading services, broker-
dealer services, and regulatory services. The Commission believes the
Proposed Amendment could negatively alter the competitive position of a
few types of competitors for trading services and broker-dealer
services, but the Commission also believes that whether such changes
will render these markets less competitive overall is uncertain.
Specifically, the Commission believes that the Executed Share Model
could provide exchanges with a competitive advantage relative to off-
exchange market makers who internalize in providing trading services.
Further, the Executed Share Model could provide competitive advantages
to certain broker-dealer business models over others and could harm the
competitive position of smaller broker-dealers by putting a strain on
their net capital.
---------------------------------------------------------------------------

\1112\ See SIFMA June Letter at 1-2; SIFMA July Letter at 2;
Virtu Letter at 2 and 3; and Citadel July Letter at 1.
---------------------------------------------------------------------------

1. Baseline
In the CAT NMS Plan Approval Order, the Commission identified
certain elements of the Original Funding Model that could have negative
implications for competition in trading services, broker-dealer
services, and regulatory services.\1113\ In addition, the Commission
stated ``the uncertainty regarding how the [Operating] Committee
allocated the fees used to fund the Central Repository could affect the
conclusions on competition.'' \1114\
---------------------------------------------------------------------------

\1113\ See CAT NMS Plan Approval Order, supra note 2, 81 FR at
84882-84884.
\1114\ See id. at 84882 n.2800.
---------------------------------------------------------------------------

a. Trading Services
The market for trading services, which is served by exchanges,
ATSs, and liquidity providers (internalizers and others), relies on
competition to supply investors with execution services at efficient
prices. These trading venues, which compete to match traders with
counterparties, provide a framework for price negotiation and
disseminate trading information. The competitors for trading services
compete on a number of dimensions, such as transaction fees and
execution quality, and some attempt to attract order flow by paying for
that order flow or otherwise rebating.
The market for trading services in options and equities consists of
24 national securities exchanges, which are all Plan Participants, and
off-exchange trading venues including broker-dealer internalizers,
which execute substantial volumes of transactions in equities, and 39
ATSs, which are not Plan Participants.\1115\ Aside from trading venues,
exchange market makers provide trading services in the securities
market. These firms stand ready to buy and sell a security ``on a
regular and continuous basis at publicly quoted prices.'' \1116\
Exchange market makers quote both buy and sell prices in a security
held in inventory, for their own account, for the business purpose of
generating a profit from trading with a spread between the sell and buy
prices. Off-exchange market makers also stand ready to buy and sell out
of their own inventory, but they do not quote buy and sell
prices.\1117\
---------------------------------------------------------------------------

\1115\ See Securities Exchange Act Release No. 61358, 75 FR 3594
(Nov. 23, 2016) at 3598-3560, (for a discussion of the types of
trading centers). The number of ATSs includes 34 NMS ATSs from
https://www.sec.gov/divisions/marketreg/form-ats-n-filings.htm and 5
OTC ATSs.
\1116\ See SEC, Market Maker, available at https://www.sec.gov/answers/mktmaker.htm.
\1117\ See Securities Exchange Act Release No. 96495, 88 FR at
181 (Jan. 3, 2023).
---------------------------------------------------------------------------

In the Original Funding Model, the portion of fees allocated to the
exchanges, FINRA, and ATSs would have been divided among them according
to market share of share volume and the portion allocated to Industry
Members would have been divided among them according to message
traffic, including message traffic sent to and from an ATS.\1118\ The
Operating Committee would have allocated fees for the equities market
and options market separately based on market share in each market. The
Commission concluded that the Original Funding Model could have
resulted in a competitive advantage for exchanges over ATSs because
message traffic to and from an ATS would have generated fee obligations
on the broker-dealer that sponsors the ATS, while exchanges would have
incurred almost no message traffic fees.\1119\ In addition, the
Commission recognized uncertainties associated with the allocation of
fees that could have affected competition, such as the level of fees at
each tier (though the entities in the smallest activity tier would have
paid the lowest fees) and whether off-exchange liquidity providers
would have paid fees similar to similarly-sized ATSs and exchanges.
Finally, the Commission recognized potentially differential fees across
market participants, including lower fees for internalizers, which
could affect competition.\1120\
---------------------------------------------------------------------------

\1118\ See CAT NMS Plan Approval Order, supra note 2, 81 FR at
84793.
\1119\ See id. at 84883.
\1120\ See id. at 84879.
---------------------------------------------------------------------------

b. Broker-Dealer Services
For simplification, the Commission presents its analysis as if the
competition to provide broker-dealer services encompasses one broad
market with multiple segments even though, in terms of competition, it
actually may be more realistic to think of it as numerous inter-related
markets. There are approximately 1,100 broker-dealers that are CAT
Reporters.\1121\ The competition to provide broker-dealer services
covers many different markets for a variety of services, including, but
not limited to, managing orders for customers and routing them to
various trading venues, holding customer funds and securities, handling
clearance and settlement of trades, intermediating between customers
and carrying/clearing brokers, dealing in government bonds, private
placements of securities, and effecting transactions in mutual funds
that involve transferring funds directly to the issuer. Some broker-
dealers may specialize in just one narrowly defined service, while
others may provide a wide variety of services.
---------------------------------------------------------------------------

\1121\ See Notice, supra note 7, 88 FR at 17104.
---------------------------------------------------------------------------

The market for broker-dealer services relies on competition among
broker-dealers to provide the services listed above to their customers
at efficient levels of quality and quantity. The broker-dealer industry
is highly competitive, with most business concentrated among a small
set of large broker-dealers and thousands of small broker-dealers
competing for niche or regional segments of the market. Broker-dealers
often compete among each other through commission rates, service
quality, and service variety and some bundle their services. At
present, some broker-dealers specializing in individual investors
charge zero commissions and instead cover costs by receiving payment
for order flow or charging more for other services. To limit costs and
make business more viable, small broker-dealers often contract with
larger broker-dealers or service bureaus to handle certain functions,
such as clearing and execution, or to update

[[Page 62684]]

their technology.\1122\ Large broker-dealers typically enjoy economies
of scale over small broker-dealers and compete with each other to
service the smaller broker-dealers, who are both their competitors and
their customers.
---------------------------------------------------------------------------

\1122\ See Securities Exchange Act Release No. 63241 (Nov. 3,
2010), 75 FR 69791, 69822 (Nov. 15, 2010) (Risk Management Controls
for Brokers or Dealers with Market Access).
---------------------------------------------------------------------------

Some broker-dealers may offer specialized services in one line of
business mentioned above, while other broker-dealers may offer
diversified services across many different lines of businesses. As
such, the competitive dynamics within each of these specific lines of
business for broker-dealers is different, depending on the number of
broker-dealers that operate in the given segment and the market share
that the broker-dealers occupy.
The CAT NMS Plan Approval Order described the Original Funding
Model as an explicit source of financial obligation for broker-dealers
and therefore an important feature to evaluate when considering
potential differential effects of the Plan on competition in the market
for broker-dealer services.\1123\ The Commission understood that the
Original Funding Model should have resulted in the smallest broker-
dealers paying the lowest fees,\1124\ but the Plan did not outline how
the magnitudes of fees would have differed across the tiers or whether
the smallest broker-dealers would have paid the highest per-message
fees. The Commission concluded that, regardless of the differential
effects of the CAT NMS Plan Funding Model on small versus large broker-
dealers, the CAT NMS Plan Funding Model, in aggregate, would have
likely not reduced competition in the overall market for broker-dealer
services.\1125\
---------------------------------------------------------------------------

\1123\ See CAT NMS Plan Approval Order, supra note 2, 81 FR at
84885.
\1124\ See id. at 84884.
\1125\ See id. at 84887.
---------------------------------------------------------------------------

c. Regulatory Services
In the CAT Approval Order, the Commission considered the effect of
the CAT NMS Plan on competition to provide regulatory services.\1126\
SROs compete to provide regulatory services in at least two ways.
First, because SROs are responsible for regulating their members and
the trading within venues they operate, their regulatory oversight is
bundled with the operations of their venues. Consequently, for a
broker-dealer, selecting a trading venue also involves being subject to
regulatory oversight of the SRO that operates that venue. Second, SROs
can provide regulatory services for other SROs through the use of
RSAs.\1127\ In addition, some regulatory activity is coordinated among
SROs through multiparty 17d-2 agreements.\1128\ FINRA is the primary
provider of contracted regulatory services. Any new competitors for
regulatory services would face significant barriers to entry in
building up the necessary expertise and technical capabilities.\1129\
---------------------------------------------------------------------------

\1126\ See id. at 84887.
\1127\ See supra note 320 and accompanying text.
\1128\ See 17 CFR 240.17d-2.
\1129\ The Commission stated in the Approval Order that ``CAT
may reduce barriers to entry for this market'' while acknowledging
other barriers to entry. See CAT NMS Plan Approval Order, supra note
2, 81 FR at 84887, note 2849 (describing the barriers to entry
addressed by CAT). See also Securities Exchange Act Release No.
95388 (July 29, 2022), 87 FR 49930 (August 12, 2022) at 49961
(describing the barriers to entry of potential new national
securities associations more generally).
---------------------------------------------------------------------------

RSAs are contracts that would not be renegotiated as often as CAT
Fees would vary, which limits the precision to which FINRA can increase
the charges on these agreements as a mechanism to pass through its CAT
Fees. Since the start of the CAT NMS Plan implementation, the
Commission has not observed a change in the competition for regulatory
services.
2. Analysis of the Proposed Amendment
a. Trading Services
The Participants state that, ``the [Executed Share Model] would not
impose an inappropriate burden on competition,'' arguing that
transaction-based models for fee recovery are already in place.\1130\
The Commission agrees that transaction-based models do offer some
efficiency benefits over the Original Funding Model,\1131\ but believes
the Proposed Amendment may provide a competitive advantage to exchanges
and a competitive disadvantage to executing broker-dealers who
internalize. The effects on these competitors might not affect the
overall level of competition because the fees are expected to be
relatively small.
---------------------------------------------------------------------------

\1130\ See Notice, supra note 7, 88 FR at 17115.
\1131\ See supra Section IV.A.2.b and IV.A.2.c for discussions
of efficiency gains associated with basing CAT fees on shares
executed rather than message traffic.
---------------------------------------------------------------------------

The Commission believes that the Proposed Amendment may provide a
competitive advantage for exchanges over off-exchange trading venues,
but this advantage may not be large relative to the level of
competition and relative to the advantages for exchanges in the
Original Funding Model. In particular, the Executed Share Model will
allocate higher CAT fee allocations to Industry Members relative to
Participants, but exchanges, one type of Participant, could be in a
better position to avoid raising transaction fees to offset their CAT
fee allocations. Using March 2023 data, the Commission estimates that
31% of share volume is reported to FINRA trade reporting facilities
while the remaining 69% is reported by exchanges.\1132\ The Commission
believes that FINRA's allocation of CAT fees likely will be passed
through to Industry Members.\1133\ If FINRA's CAT fees are passed
through to Industry Members, the Commission believes that Industry
Members could bear 77% of CAT costs,\1134\ assuming that the exchanges
do not also directly pass-through their CAT fee allocations to their
members.\1135\ In fact, if the exchanges are able to offset their CAT
fees in ways other than increasing transaction fees on exchanges, the
cost to transact on ATSs or directly through broker-dealers will appear
to increase more in response to CAT fee allocations, providing
exchanges with a competitive advantage.\1136\ This is particularly
probable for exchanges who do not rely solely on revenues from
transaction fees. However, ATSs might be better off relative to
exchanges under the Executed Share Model than they would have been
under the Original Share Model, which would have resulted in a
competitive disadvantage for ATSs.\1137\
---------------------------------------------------------------------------

\1132\ Calculated using monthly market volume data from CBOE for
equities, OCC for options, and FINRA for OTC securities. Option
contract volume is multiplied by 100 and OTC volume is divided by
100 to establish equivalent share volume to reported equity
transactions.
\1133\ See FINRA April 2023 Letter at 7 (``If the Funding Model
is approved by the Commission, FINRA intends to file a rule change
to increase member fees simultaneous with the filing of any proposed
rule change to effectuate the Funding Model.'').
\1134\ This results from dividing the FINRA allocation (31%) by
its share of each off-exchange or OTC Executed Equivalent Share,
three, and then adding the Industry Member share, two-thirds, to the
result (31% x \1/3\ + \2/3\ = 77%) and ignores what Industry Members
would pass to investors. Several commenters expressed concerns about
the competitive effects of Industry Members paying 78-80% of CAT
fees, assuming 100% FINRA pass through, and potentially more if
exchanges pass through as well (See, e.g., Virtu Letter at 1-2 and
4, FIA PTG Letter at 2-3, and Citadel July Letter at 16, 21 and 22).
The Commission analysis assesses this competition from the ability
to competitively price transaction services.
\1135\ If exchanges passed their CAT fees onto their members in
full, the Industry Members would effectively bear 100% of the CAT
allocation (ignoring what they would pass to investors).
\1136\ One commenter stated that the Proposed Amendments will
result in off-exchange transactions being assessed higher fees than
on-exchange transactions (See Citadel July Letter at 21).
\1137\ See supra note 1119 and accompanying text.
---------------------------------------------------------------------------

The Executed Share Model could increase the costs of
internalization

[[Page 62685]]

relative to agency order matching (or riskless principal), creating a
competitive disadvantage for the internalization model, reversing the
competitive advantage internalizers would have had under the Original
Funding Model.\1138\ Specifically, off-exchange market makers will be
assessed at least CEBB or CEBS for their internalizing trades, both
when trading with non-broker-dealer customers or broker-dealers who are
not FINRA members and also when internalizing the orders of FINRA
members or their customers. However, they do not have more than one
customer to which to directly pass-through this fee. In particular, if
an exchange were to directly pass-through its CAT Assessments, it could
split its \1/3\ fee across buyers and sellers, or \1/6\ each (each side
would also have a \1/3\ CAT assessment as CEBB or CEBS for a total of
\1/2\). However, for internalizers to directly pass-through their fees
would mean the internalized customer (whether an Industry Member or
not) would pay \2/3\ of the fee plus whatever pass-through they pay for
the FINRA assessment (up to \1/3\). Alternatively, an internalizer
could also recover CAT assessments by reducing payment for order flow
or price improvement.\1139\ Any of these alternatives could hurt
internalizers competitively and create the incentive to not fully pass-
through their fees,\1140\ thus reducing their profit margins. In
addition, some executing brokers could be charged two-thirds of the fee
per Executed Equivalent Share when internalizing the orders of
customers or non-FINRA broker-dealers, though this is likely rare.
---------------------------------------------------------------------------

\1138\ See supra note 1120 and accompanying text.
\1139\ See CAT LLC July 2023 Response Letter at 9-10.
\1140\ One commenter stated that many executing brokers will
absorb CAT fees (See Virtu Letter at 5). However, the Participants
argue that the executing brokers may determine to pass their CAT
fees through to their own customers and thus may not absorb the CAT
fees (See CAT LLC July 2023 Response Letter at 8-9). Another
commenter stated that fees charged on proprietary trading cannot be
passed through (See Citadel July Letter at 19-20; see also Citadel
August Letter at 3). This latter commenter also stated that the
potential to pass through some CAT costs does not alleviate the
competitive issues (See Citadel July Letter at 19; see also Citadel
August Letter at 4).
---------------------------------------------------------------------------

More generally, any market makers, whether on exchange or not, will
be charged fees for their proprietary trading, and this could create
competitive advantages in certain situations. The Commission recognizes
that this likely would result in on-exchange market makers in equities
being at a competitive disadvantage in having to absorb the fees
because they do not know the identities of their counter-parties to
directly pass-through the fees and they do not have other arrangements,
such as payment for order flow, that could facilitate indirectly
passing-through fees. Because other liquidity providers who post limit
orders and quotes to trade would face the same cost, the displayed
quotations on exchanges could appear to be less competitive overall but
would likely increase only marginally--enough to cover CAT assessments.
Such a marginal increase could also help to offset any disadvantage to
internalization because marginally wider spreads could help
internalizers avoid reductions in price improvement and payment for
order flow. In options, however, the Executed Share Model could result
in exchange members who bring an order to an exchange experiencing a
competitive advantage in price improvement auctions. In particular,
because knowing who is responsible for the order allows them to pass-
through their fees, they can bid more competitively in the auctions
than can exchange members who cannot directly pass-through the fees.
However, the Commission believes that the magnitude of changes in
any competitive advantages or disadvantages is unlikely to
significantly affect order flow because fee differences between
competing venues are only one of many factors (such as availability of
non-displayed order types and price impact characteristics of
transactions on different venues) that broker-dealers consider when
choosing how to route their order flow. Further, the Executed Share
Model levels the playing field between exchanges and ATSs relative to
the Original Funding Model.\1141\ In particular, the assessments and
any pass-throughs paid by broker-dealers or investors of an execution
on an ATS could be similar to those of an execution on an exchange,
depending on how (and whether) ATSs and exchanges choose to pass-
through their fees. Further, the magnitude of the fees in the example
in Exhibit C are small relative to current transaction costs.\1142\
---------------------------------------------------------------------------

\1141\ See supra note 1120 and accompanying text for a
discussion of the effect of the Original Funding Model on ATSs.
\1142\ See supra notes 1100, 1101, and 1102 and accompanying
text for analysis of the potential magnitude of fees under the
Executed Share Model.
---------------------------------------------------------------------------

b. Broker-Dealer Services
The Commission believes that the Executed Share Model alleviates
concerns with the Original Funding Model about the allocation of fees
across small and large broker-dealers. In particular, by charging CEBBs
and CEBSs based on Executed Equivalent Shares, small broker-dealers are
less likely to face CAT fees that are outsized relative to their
revenue, whether they act as executing brokers or are charged pass-
throughs by executing brokers. This could reduce barriers to entry.
On the other hand, the efficiency gains in passing through fees
from the Executed Share Model will not be evenly distributed across
broker-dealer competitive strategies. In particular, where competition
has driven commissions to zero, the Executed Share Model Fees are more
easily passed through to customers of broker-dealers who offer a wider
variety of services than for broker-dealers who do not. These latter
broker-dealers could be at a competitive disadvantage if they have no
other option but to absorb such fees or accept reduced payment for
order flow as a form of pass-through from executing brokers. Because
more established broker-dealers are more likely to be the ones offering
a wider variety of services, this effect could increase barriers to
entry.
Furthermore, as one commenter stated, there may be capital
requirements associated with carrying the receivable associated with
passing-through these CAT fees, which could be burdensome for small and
medium-sized Executing Brokers.\1143\ According to this commenter,
these burdens, coupled with FINRA Rule 15c3-1 will significantly impact
healthy small and medium-sized brokers.\1144\ If so, the Executed Share
Model could increase barriers to entry in providing broker-dealer
services. However, whether and how to pass-on the CAT assessments is at
the discretion of Executing Brokers.\1145\ Further, the economic effect
of not passing-on fees is equivalent to passing-on fees to clients who
pay more than 30 days after the Executing Broker has booked the
receivable.\1146\ Therefore, this issue boils down to the magnitude of
the potential costs and whether small and medium-sized Executing
Brokers are treated the same as others. If small and

[[Page 62686]]

medium-sized Executing Brokers have lower trading activity than large
Executing Brokers, their CAT assessments will be lower as well.
Further, the per equivalent share fee rate will be the same across all
Executing Brokers in the Executed Share Model whereas it would not have
been under the Original Funding Model. In fact, small broker-dealers,
including Executing Brokers, could be better positioned competitively
under the Executed Share Model than under the Original Funding model,
which contained uncertainty in the tier structure and whether small
broker-dealers would have paid more in assessments than they earn in
revenues.
---------------------------------------------------------------------------

\1143\ See DASH January 2023 Letter at 1; DASH April 2023 Letter
at 1.
\1144\ See DASH January 2023 Letter at 2.
\1145\ See supra Section III.A.4 for further discussion of the
comments on net capital and the Commission's response to those
comments.
\1146\ The effect on net capital comes when Industry Members
record that they expect to receive a pass-through from customers as
an asset (a ``booked'' receivable) more than 30 days before when
their customers pay. If the Industry Members book a receivable for
the pass-through more than 30 days before they collect, they cannot
count that receivable as an asset toward net capital. If Industry
Members instead do not pass-through the fees, they will not have a
receivable at all to count toward net capital.
---------------------------------------------------------------------------

One commenter stated that the top 10 (20) Industry Members would be
allocated 50% (70%) of the fees under the Executed Share Model,
``unduly burdening competition''.\1147\ The Commission has considered
this concentration and believes that several factors alleviate this
concern. In particular, the Commission believes that many of these
Industry Members will pass through much of their fees to client broker-
dealers.\1148\ In addition, the Commission believes that the Industry
Members that will be charged the most under the Proposed Amendments
engage in different services than broker-dealers who are charged the
least or not charged fees at all under the Proposed Amendments.\1149\
Therefore, these two sets of broker-dealers are not direct competitors.
---------------------------------------------------------------------------

\1147\ See Citadel July Letter at 19.
\1148\ See supra Section IV.A.2.a.
\1149\ Broker dealers that compete as electronic liquidity
providers in high-volume securities are likely to have the highest
executed share volume and thus pay the highest fees. However, these
broker-dealers compete against each other in providing this service,
and thus are likely to be similarly burdened by fees under the
amendment. Broker-dealers that pay the lowest or no fees are
unlikely to compete in this activity because such activity entails
high fixed costs in specialized technology and thus are unlikely to
gain a competitive advantage from the amendment.
---------------------------------------------------------------------------

c. Regulatory Services
The Commission recognizes that if FINRA were to pass through its
CAT fees by increasing its fees for RSAs over time, FINRA could be less
competitive in providing regulatory services.\1150\ This could increase
the chances either of exchanges conducting more of their own regulatory
services or of another SRO attempting to compete with FINRA for RSAs.
Indeed, such potential competitors would not have the burden of having
to cover CAT Fees for off-exchange and OTC volume. However, because
RSAs are not renegotiated as often as CAT Fees are likely to change,
FINRA will likely not attempt to cover all of their share of CAT costs
by increasing what they charge for RSAs.\1151\ Further, even with
access to CAT, the barriers to entry in competing for RSAs could limit
new competitors.
---------------------------------------------------------------------------

\1150\ The Participants state, ``[b]y treating each Participant
the same, the CAT fees would not become a competitive issue by and
among the Participants.'' See Notice supra note 7, 88 FR at 17115.
See also a similar statement at 17122. This conclusion does not seem
to address competition to provide regulatory services specifically.
However, the comments about the treatment of FINRA in, for example,
the FINRA April 2023 Letter at 2-5 warrants considering this
competition given FINRA's position in providing RSAs.
\1151\ See FINRA April 2023 Letter at 7 (``If the Funding Model
is approved by the Commission, FINRA intends to file a rule change
to increase member fees simultaneous with the filing of any proposed
rule change to effectuate the Funding Model.'').
---------------------------------------------------------------------------

C. Capital Formation

In the CAT NMS Plan Approval Order, the Commission stated that the
Original Funding Model for CAT was not wholly certain and, thus, stated
the ``view that there is uncertainty concerning the extent to which
investors will bear Plan costs and consequently to what extent Plan
costs could affect investors' allocation of capital.'' \1152\ The
Participants state that they believe the Proposed Amendment would have
a positive effect on capital formation due to improvements in investor
confidence.\1153\
---------------------------------------------------------------------------

\1152\ See CAT NMS Plan Approval Order, supra note 2, 81 FR at
84893.
\1153\ See Notice, supra note 7, 88 FR at 17115.
---------------------------------------------------------------------------

The Commission recognizes that the Proposed Amendment may have
negative effects on capital formation if the CAT fees ultimately borne
by investors are large enough to affect investors' allocation of
capital or if capital constraints of small or mid-sized broker-dealers
significantly hinder innovating to find more efficient ways to service
investors.\1154\ However, the Commission believes that the net capital
effect would not be significant.\1155\ Further, the additional costs
borne by investors are likely small relative to current transaction
costs.\1156\ While recognizing that the Executed Share Model might
change which investors ultimately bear CAT costs, the Executed Share
Model might not change the total costs borne by investors relative to
the Original Funding Model.
---------------------------------------------------------------------------

\1154\ See, e.g., DASH April 2023 Letter at 1; Virtu Letter at
2; SIFMA AMG at 2-3.
\1155\ See supra Section III.A.4 for a response to a commenter's
concerns regarding net capital and supra Section IV.B.2.b for an
explanation of why the net capital effects are like to be small.
\1156\ See supra notes 1100, 1101, and 1102 and accompanying
text for analysis of the potential magnitude of fees under the
Executed Share Model.
---------------------------------------------------------------------------

V. Conclusion

For the reasons discussed, the Commission, pursuant to Section 11A
of the Exchange Act,\1157\ and Rule 608(b)(2) \1158\ thereunder, is
approving the Proposed Amendment. Section 11A of the Exchange Act
authorizes the Commission, by rule or order, to authorize or require
the self-regulatory organizations to act jointly with respect to
matters as to which they share authority under the Exchange Act in
planning, developing, operating, or regulating a facility of the
national market system.\1159\ Rule 608 of Regulation NMS authorizes two
or more SROs, acting jointly, to file with the Commission proposed
amendments to an effective NMS plan,\1160\ and further provides that
the Commission shall approve an amendment to an effective NMS plan if
it finds that the 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.\1161\
---------------------------------------------------------------------------

\1157\ 15 U.S.C. 78k-1.
\1158\ 17 CFR 242.608(b)(2).
\1159\ See 15 U.S.C. 78k-1(a)(3)(B).
\1160\ See 17 CFR 242.608.
\1161\ See 17 CFR 242.608(b)(2).
---------------------------------------------------------------------------

For the reasons set forth above, the Commission finds that the
Proposed Amendment meets the required standard.
It is therefore ordered, pursuant to Section 11A of the Exchange
Act,\1162\ and Rule 608(b)(2) \1163\ thereunder, that the Proposed
Amendment (File No. 4-698) be, and hereby is, approved.
---------------------------------------------------------------------------

\1162\ 15 U.S.C. 78k-1.
\1163\ 17 CFR 242.608(b)(2).

By the Commission.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-19525 Filed 9-11-23; 8:45 am]
BILLING CODE 8011-01-P

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.