Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend FINRA Rule 6897(b) (CAT Cost Recovery Fees) To Implement a Historical Consolidated Audit Trail Recovery Assessment, 77558-77564 [2024-21625]
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Federal Register / Vol. 89, No. 184 / Monday, September 23, 2024 / Notices
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a customer and, based on that
assessment, to make a reasonable
determination of whether to approve the
borrowing or lending arrangement, is
reasonably designed to protect
investors. Whether a specific borrowing
or lending arrangement creates the
potential for a conflict or other abuse
that could harm an investor requires
analysis of the facts and circumstances.
Because of its supervisory obligations, a
broker-dealer is both obligated and best
positioned to analyze the facts and
circumstances related to a borrowing or
lending arrangements between one of its
registered persons and a customer. In
addition, consistent with the flexibility
firms have to develop their own
supervisory systems under Rule 3110,
the member firm is also best positioned
to determine reasonable controls to
supervise for compliance with the
proposed rule change based on its
assessment of the risks involved with a
borrowing or lending arrangement that
falls within one of the five exceptions to
Rule 3240. While not required,
reasonably designed controls could
include the supervisory, disclosure or
other requirements suggested by
commenters (such as providing
disclosure, collateralizing loans between
one of its registered persons and a
customer, interviewing customers, and
applying heightened scrutiny as it
perceives higher risks). As such, the
proposed rule change represents an
important safeguard for protecting
investors from conflicts or other abuses
that could harm them in such
arrangements. Moreover, in exercising
its supervisory obligations under FINRA
Rule 3110, a member firm may always
choose to prohibit or restrict borrowing
and lending arrangements as it sees fit
and in light of the risks presented by an
arrangement. For example, if the brokerdealer determines that the risks to the
customer of lending money to a
registered person cannot be effectively
managed, the proposed rule change
would allow the firm to disapprove or
further restrict the arrangement. For
these reasons, the proposed rule change
is reasonably designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, and, in general, to
protect investors and the public interest.
IV. Conclusion
For the reasons set forth above, the
Commission finds that the proposed
rule change is consistent with Section
15A(b)(6) of the Exchange Act, which
requires, among other things, that
FINRA rules be designed to prevent
fraudulent and manipulative acts and
practices, promote just and equitable
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principles of trade, and, in general,
protect investors and the public
interest.169
It is therefore ordered pursuant to
Section 19(b)(2) of the Exchange Act 170
that the proposal (SR–FINRA–2024–
001), be and hereby is approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.171
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–21622 Filed 9–20–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–101064; File No. SR–
FINRA–2024–014]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend FINRA Rule
6897(b) (CAT Cost Recovery Fees) To
Implement a Historical Consolidated
Audit Trail Recovery Assessment
September 17, 2024.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on
September 5, 2024, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by FINRA. FINRA has designated the
proposed rule change as ‘‘establishing or
changing a due, fee or other charge’’
under Section 19(b)(3)(A)(ii) of the Act 3
and Rule 19b–4(f)(2) thereunder,4 which
renders the proposal effective upon
receipt of this filing by the Commission.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to amend FINRA
Rule 6897(b) (CAT Cost Recovery Fees)
to implement a historical Consolidated
Audit Trail (‘‘CAT’’) recovery
169 15
U.S.C. 78o–3(b)(6).
U.S.C. 78s(b)(2).
171 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(ii).
4 17 CFR 240.19b–4(f)(2).
170 15
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assessment designed to permit FINRA to
recoup its contributions to recoverable
historical costs of the National Market
System Plan Governing the
Consolidated Audit Trail incurred prior
to January 1, 2022.5
The text of the proposed rule change
is available on FINRA’s website at
https://www.finra.org, at the principal
office of FINRA and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
FINRA included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. FINRA has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Background
On July 11, 2012, the Commission
adopted Rule 613 of Regulation NMS,
which required the self-regulatory
organizations 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 across all markets,
from the time of order inception through
routing, cancellation, modification, or
execution.6 On November 15, 2016, the
Commission approved the CAT NMS
Plan (‘‘Plan’’ or ‘‘CAT NMS Plan’’).7
Under the CAT NMS Plan, the
Operating Committee has the discretion
to establish funding for Consolidated
Audit Trail, LLC (‘‘CAT LLC’’) to
operate the CAT, including establishing
fees for Industry Members to be assessed
by CAT LLC that would be implemented
5 Pursuant to Section 11.3(b) of the CAT NMS
Plan, FINRA filed a separate proposed rule change
to establish fees assessed to Industry Members,
payable to Consolidated Audit Trail, LLC, related to
recoverable historical CAT costs incurred prior to
January 1, 2022. See File No. SR–FINRA–2024–013.
Unless otherwise specified, capitalized terms used
in this rule filing are defined as set forth in the CAT
NMS Plan and FINRA Rule 6800 Series
(Consolidated Audit Trail Compliance Rule).
6 See Securities Exchange Act Release No. 67457
(July 18, 2012), 77 FR 45722 (August 1, 2012).
7 See Securities Exchange Act Release No. 79318
(November 15, 2016), 81 FR 84696 (November 23,
2016) (‘‘CAT NMS Plan Approval Order’’).
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Federal Register / Vol. 89, No. 184 / Monday, September 23, 2024 / Notices
on behalf of CAT LLC by the
Participants.8 The Operating Committee
adopted a revised funding model to
fund the CAT (‘‘CAT Funding Model’’)
and, on September 6, 2023, the
Commission approved the CAT Funding
Model, after concluding that the model
was reasonable and that it satisfied the
requirements of Section 11A of the
Exchange Act and Rule 608 thereunder.9
The CAT Funding Model provides a
framework for the recovery of the costs
to create, develop, and maintain the
CAT, including providing a method for
allocating costs to fund the CAT among
Participants and Industry Members. The
CAT Funding Model establishes two
categories of fees: (1) CAT fees assessed
by CAT LLC and payable by certain
Industry Members to recover a portion
of historical CAT costs previously paid
by the Participants (‘‘Historical CAT
Assessment’’ fees); 10 and (2) CAT fees
assessed by CAT LLC and payable by
Participants and Industry Members to
fund prospective CAT costs.11 With
respect to Historical CAT Assessment
fees, to date, the CAT Operating
Committee has established Historical
CAT Assessment 1 with regard to
historical CAT costs incurred prior to
January 1, 2022 (‘‘Historical CAT Costs
1’’).12
In light of the filing of File No. SR–
FINRA–2024–013, which implements
Historical CAT Assessment 1 with
regard to Industry Members, FINRA is
filing the instant proposed rule change
to establish a fee to allow FINRA to
recoup its contributions to the
Participants’ assessed share of Historical
CAT Costs 1 (‘‘Historical CAT Cost
Recovery Assessment 1’’). Historical
CAT Cost Recovery Assessment 1 is
designed to allow FINRA to recover its
designated portion of Historical CAT
Costs 1—amounting to $4,391,414—in a
manner consistent with the Exchange
Act and the CAT Funding Model
Approval Order. In the Approval Order,
the Commission acknowledged that ‘‘the
Exchange Act expressly contemplates
the ability of the Participants to recoup
their costs to fulfill their statutory
obligations under the Exchange Act.’’ 13
The Commission also noted FINRA’s
statement ‘‘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.’’ 14
Given the approval of the CAT Funding
Model and FINRA’s proposed rule
change to establish Historical CAT
Assessment 1 in accordance with the
CAT Funding Model,15 FINRA is
submitting this filing to implement
Historical CAT Cost Recovery
Assessment 1.16
FINRA’s Designated Portion of
Historical CAT Costs 1
As discussed in File No. SR–FINRA–
2024–013, which seeks to implement
Historical CAT Assessment 1,17 to date,
FINRA and the other Participants have
agreed to pay all Past CAT Costs via
loans to CAT LLC. Specifically, in the
absence of an SEC-approved model
establishing how the Participants were
to fund the creation, implementation,
and maintenance of the CAT, in 2017,
FINRA and the other Participants
unanimously agreed to apportion all
CAT operational costs amongst the
group and to fund the CAT through a
series of interest-free loans. Through
these loans, FINRA contributed
$13,174,243 or roughly 4.14% toward
the $318,059,819 in operating expenses
composing Historical CAT Costs 1. Of
that approximately $13 million
expenditure, FINRA expects to recover
$8,782,829 in loan repayments from
CAT LLC following implementation of
Historical CAT Assessment 1, and,
under the CAT Funding Model, will
forgive the remaining $4,391,414 in loan
repayments, which FINRA now seeks to
recover through the implementation of
Historical CAT Cost Recovery
Assessment 1.18
The following table illustrates
FINRA’s approximate contributions to
the Plan Participants’ collective onethird share of Historical CAT Costs 1
during each of the relevant periods.19
Participants’
collective share of
historical CAT
costs 1
Period
Pre-FAM Period (Prior to June 22, 2020) ...................................................................................................
8 See
Section 11.1(b) of the CAT NMS Plan.
Securities Exchange Act Release No. 98290
(September 6, 2023), 88 FR 62628 (September 12,
2023) (‘‘CAT Funding Model Approval Order’’).
10 See Section 11.3(b) of the CAT NMS Plan.
11 See Section 11.3(a) of the CAT NMS Plan.
12 See File No. SR–FINRA–2024–013.
13 CAT Funding Model Approval Order, 88 FR
62628, 62636–37.
14 FINRA has consistently made clear its intention
to file a rule change to implement member CAT fees
simultaneous with the filing of any proposed rule
change to effectuate the CAT Funding Model. See
Letter from Marcia E. Asquith, Corporate Secretary,
EVP, Board and External Relations, FINRA, to
Vanessa Countryman, Secretary, SEC, dated April
11, 2023 (‘‘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.’’); see also Letter from Marcia E. Asquith,
Corporate Secretary, EVP, Board and External
Relations, FINRA, to Vanessa Countryman,
Secretary, SEC, dated June 22, 2022 (‘‘FINRA June
2022 Letter’’) at 6 (‘‘[G]iven FINRA’s unique nature,
FINRA necessarily must seek recovery in turn for
the costs it is allocated.’’). FINRA also requested
that, if the Commission were to approve the CAT
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9 See
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Funding Model, 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.’’ See
CAT Funding Model Approval Order, 88 FR 62628,
62645.
15 See File No. SR–FINRA–2024–013.
16 The CAT NMS Plan states that ‘‘[n]o Participant
will make a filing with the SEC pursuant to Section
19(b) of the Exchange Act regarding any Historical
CAT Assessment until any applicable Financial
Accountability Milestone described in Section 11.6
has been satisfied.’’ See Section 11.3(b)(iii)(B)(III) of
the CAT NMS Plan. The CAT NMS Plan further
states that ‘‘in all filings submitted by the
Participants to the Commission under Section 19(b)
of the Exchange Act, to establish or implement PostAmendment Industry Member Fees pursuant to this
Article, . . . the Participants shall clearly indicate
whether such fees are related to Post-Amendment
Expenses incurred during Period 1, Period 2, Period
3, or Period 4.’’ See Section 11.6(b) of the CAT NMS
Plan. As discussed in File No. SR–FINRA–2024–
013, all applicable Financial Accountability
Milestones for Historical CAT Assessment 1 and, by
extension, Historical CAT Cost Recovery
Assessment 1—that is, Period 1, Period 2, and
Period 3 of the Financial Accountability
Milestones—have been satisfied. Furthermore, the
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77559
$41,430,243
FINRA’s
share of
historical CAT
costs 1
$1,716,067
costs sought to be recovered via both Historical
CAT Assessment 1 and Historical CAT Cost
Recovery Assessment 1 relate to Post-Amendment
Expenses incurred during Periods 1, 2 and 3 of the
Financial Accountability Milestones.
17 Historical CAT Assessment 1 seeks to recover
from CAT Executing Brokers two-thirds of
Historical CAT Costs 1—the $318,059,819 in
recoverable costs incurred by CAT LLC prior to
January 1, 2022.
18 FINRA notes that, as is the case with respect
to Historical CAT Assessment 1 discussed in File
No. SR–FINRA–2024–013, FINRA’s recovery under
the instant proposed rule change also would not
include any portion of Excluded Costs, i.e.,
$48,874,937 in CAT costs incurred from November
15, 2017 through November 15, 2018, $19,628,791
of costs paid to the the [sic] Initial Plan Processor
from November 16, 2018 through February 2019
when the relationship with the Initial Plan
Processor was concluded, and $14,749,362 of costs
related to the termination of the relationship with
the Initial Plan Processor.
19 A detailed description (including the amounts)
of all costs incurred by the Participants during the
pre-FAM period (prior to June 22, 2020) and during
each relevant FAM period, i.e., FAM Period 1, FAM
Period 2, and FAM Period 3, is provided in File No.
SR–FINRA–2024–013.
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Participants’
collective share of
historical CAT
costs 1
Period
FAM Period 1 ...............................................................................................................................................
FAM Period 2 ...............................................................................................................................................
FAM Period 3 ...............................................................................................................................................
2,125,781
14,325,493
48,138,423
88,051
593,371
1,993,925
Total (through January 1, 2022) ..................................................................................................................
106,019,940
4,391,414
FINRA’s recovery of these
approximately $4.4 million in Historical
CAT Costs is reasonable and consistent
with the Exchange Act. As discussed
herein and in File No. SR–FINRA–
2024–013, these costs were reasonable,
appropriate and necessary for the
creation, implementation and
maintenance of the CAT. As stated by
FINRA and permitted under the
Exchange Act, FINRA will seek to
recover its portion of the Participants’
share of CAT costs to ensure that FINRA
can fulfill its regulatory mandate and
responsibilities.20
Historical CAT Cost Recovery
Assessment 1
FINRA is proposing to amend Rule
6897(b) (CAT Cost Recovery Fees) to
implement Historical CAT Cost
Recovery Assessment 1 at this time to
allow FINRA to recover its contributions
to the Participants’ designated one-third
share of Historical CAT Costs 1.21
FINRA intends that the fee framework
for the Historical CAT Cost Recovery
Assessment 1 would generally
correspond to the framework put in
place by CAT LLC with respect to
Historical CAT Assessment 1, as
provided for in File No. SR–FINRA–
2024–013. FINRA also intends that the
timing and commencement of payment
for Historical CAT Cost Recovery
Assessment 1 generally would
correspond with that established by
CAT LLC with respect to Historical CAT
Assessment 1, as provided for in File
No. SR–FINRA–2024–013. Thus, as with
Historical CAT Assessment 1, FINRA
proposes that each member CAT
Executing Broker shall receive its first
invoice from FINRA for Historical CAT
Cost Recovery Assessment 1 in
November 2024, setting forth fees
calculated based on October 2024
transactions in Eligible Securities
executed otherwise than on an
exchange, as reflected in CAT Data.
The following fields of the Participant
Technical Specifications indicate the
CAT Executing Brokers for transactions
executed otherwise than on an
exchange.22
TRF/ORF/ADF Transaction Data
Event 23
No.
Field name
Data type
Description
26 .......................
28 .......................
reporting Executing Mpid ..............
contra Executing Mpid ..................
Member Alias ................................
Member Alias ................................
MPID of the executing party .........
MPID of the contra-side executing
party.
As discussed in File No. SR–FINRA–
2024–013, the Operating Committee has
determined that Historical Fee Rate 1 is
$0.00003994969693072937 per executed
equivalent share, and, under the CAT
Funding Model, each of the CAT
Executing Broker for the Buyer
(‘‘CEBB’’), CAT Executing Broker for the
Seller (‘‘CEBS’’), and relevant
Participant for a given transaction in an
20 See
supra note 14.
approving the CAT Funding Model, the
Commission noted that it ‘‘believe[d] that FINRA’s
allocation of CAT fees likely will be passed through
to Industry Members.’’ See CAT Funding Model
Approval Order, 88 FR 62628, 62684.
22 As per Section 1.1 of the Plan, for a transaction
in an Eligible Security executed otherwise than on
an exchange and required to be reported to an
equity trade reporting facility of a registered
national securities association, i.e., one of FINRA’s
Trade Reporting Facilities (each a ‘‘TRF’’), OTC
Reporting Facility (‘‘ORF’’) or Alternative Display
Facility (‘‘ADF’’), the CEBB and CEBS are the
Industry Members identified as the executing
broker and the contra-side executing broker in the
TRF/ORF/ADF transaction data event in CAT Data.
In those circumstances where there is a nonIndustry Member identified as the contra-side
executing broker in the TRF/ORF/ADF transaction
data event or no contra-side executing broker is
identified in the TRF/ORF/ADF transaction data
21 In
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FINRA’s
share of
historical CAT
costs 1
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Include key
R.
C.
Eligible Security would be responsible
for one-third of that rate, or
$0.00001331656564357646 per executed
equivalent share.24 In line with this
approach, with respect to FINRA’s
portion of the Participants’ one-third
share, FINRA is proposing that, for
Historical CAT Cost Recovery
Assessment 1, the Participants’ assessed
fee rate would be split evenly between
the CEBB and CEBS to establish a
Historical CAT Cost Recovery Fee Rate
1 of $0.000007 per executed equivalent
share 25 for transactions where FINRA is
the relevant Participant.26
FINRA proposes to amend Rule
6897(b)(1)(A) to implement Historical
CAT Cost Recovery Assessment 1.
Proposed Rule 6897(b)(1)(A)(i) would
provide that each member CAT
Executing Broker shall receive its first
event, then the Industry Member identified as the
executing broker in the TRF/ORF/ADF transaction
data event would be treated as, and be required to
pay the fee assessed to, both the CEBB and CEBS.
23 See Table 61, Section 6.1 (TRF/ORF/ADF
Transaction Data Event) of the CAT Reporting
Technical Specifications for Plan Participants.
24 Dividing $0.00003994969693072937 by three
equals $0.00001331656564357646. As noted in File
No. SR–FINRA–2024–013, CAT LLC determined to
use six decimal places for Historical CAT
Assessment 1 (i.e., $0.000013 per executed
equivalent share) to balance the accuracy of the
calculation with the potential systems and other
impracticalities of using additional decimal places
in the calculation.
25 In approving the CAT Funding Model, the
Commission concluded that ‘‘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.’’ See CAT
Funding Model Approval Order, 88 FR 62628,
62640. Under the CAT NMS Plan, executed
equivalent shares in a transaction in Eligible
Securities are reasonably counted as follows: (1)
each executed share for a transaction in NMS
Stocks will be counted as one executed equivalent
share; (2) each executed contract for a transaction
in Listed Options will be counted based on the
multiplier applicable to the specific Listed Options
(i.e., 100 executed equivalent shares or such other
applicable multiplier); and (3) each executed share
for a transaction in OTC Equity Securities shall be
counted as 0.01 executed equivalent share. See
Section 11.3(a)(i)(B) and 11.3(b)(i)(B) of the CAT
NMS Plan.
26 Dividing $0.00001331656564357646 by two
and rounding to six decimal places equals
$0.000007. FINRA believes that it is appropriate at
this time to use six decimal places to maintain
consistency with the approach determined by CAT
LLC.
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Federal Register / Vol. 89, No. 184 / Monday, September 23, 2024 / Notices
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invoice from FINRA in November 2024,
setting forth the Historical CAT Cost
Recovery Assessment 1 fees calculated
based on transactions in October 2024,
and shall receive similar invoices from
FINRA for Historical CAT Cost Recovery
Assessment 1 for each month thereafter
in which Historical CAT Cost Recovery
Assessment 1 is in effect. As provided
in proposed Rule 6897(b)(1)(A)(ii),
FINRA shall provide each member CAT
Executing Broker with an invoice for
Historical CAT Cost Recovery
Assessment 1 on a monthly basis. Each
monthly invoice from FINRA (separate
from the invoice provide by CAT LLC
with respect to Historical CAT
Assessment 1) shall set forth a fee for
each transaction in Eligible Securities
executed by the CAT Executing Broker
in its capacity as the CEBB and/or the
CEBS (as applicable) otherwise than on
an exchange as set forth in CAT Data.
The fee assessed to each CEBB and
CEBS for each such transaction will be
calculated by multiplying the number of
executed equivalent shares in the
transaction by the Historical CAT Cost
Recovery Fee Rate 1 of $0.000007 per
executed equivalent share.
Further, as provided in proposed Rule
6897(b)(1)(A)(iii), Historical CAT Cost
Recovery Assessment 1 will remain in
effect until $4,391,414 (FINRA’s
contribution to the one-third share of
Historical CAT Costs 1 assessed to the
Plan Participants) is collected from
member CAT Executing Brokers
collectively, which is estimated to be
four months, but could be for a longer
or shorter period of time.27 FINRA will
provide notice when Historical CAT
Cost Recovery Assessment 1 will no
longer be in effect. Proposed Rule
6897(b)(1)(A)(iv) provides that each
member CAT Executing broker shall be
required to pay each invoice for
Historical CAT Cost Recovery
Assessment 1 within 30 days of receipt
of such invoice or other notice
indicating payment is due (unless a
longer payment period is otherwise
indicated) and such payment must be
made in the manner prescribed by
FINRA, as set forth in Rule 6897(b)(2).
As with Historical CAT Assessment 1,
since Historical CAT Cost Recovery
Assessment 1 is a monthly fee based on
transaction volume from the prior
month, Historical CAT Cost Recovery
27 From June 1, 2023, through May 31, 2024, the
average monthly executed equivalent share volume
in Eligible Securities where FINRA is the relevant
Participant was approximately 104.7 billion shares.
Assuming similar 2024 trading volumes, FINRA
would recover its approximately $4.4 million
portion of the Participants’ assessed share of
Historical CAT Costs 1 within four months. Given
the fee rate and total amount to be recovered, the
proposed four-month recovery period is reasonable.
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Assessment 1 may result in the
collection of more than FINRA’s
approximately $4.4 million contribution
to Historical CAT Costs 1. To the extent
that occurs, any excess money collected
during the final month in which
Historical CAT Cost Recovery
Assessment 1 is in effect will be used to
offset future member fees assessed by
FINRA in connection with FINRA’s
designated CAT costs as a Plan
Participant.28
Beginning with the initial invoice for
Historical CAT Cost Recovery
Assessment 1 in November 2024, FINRA
will make available to each member
CAT Executing Broker a copy of the
relevant details for fee liable
transactions executed each month
otherwise than on an exchange. Similar
to the information that would be
provided by CAT LLC to CAT Executing
Brokers in assessing the off-exchange
portion of Historical CAT Assessment 1
each month,29 such information would
provide member CAT Executing Brokers
with the ability to understand the
details regarding the calculation of their
Historical CAT Cost Recovery
Assessment 1 fees. To assist Industry
Members in complying with Historical
CAT Assessment 1, in November 2023
CAT LLC began making mock invoices
with details for any fee liable
transactions, including those executed
otherwise than on an exchange,
available to CAT Executing Brokers.30
FINRA intends to likewise provide these
same trade elements in the trade billing
details accompanying FINRA invoices
each month that Historical CAT Cost
Recovery Assessment 1 is in effect.31
28 A similar approach will be taken by CAT LLC
with respect to any excess money collected
pursuant to Historical CAT Assessment 1 during its
final month. See File No. SR–FINRA–2024–013.
29 See File No. SR–FINRA–2024–013.
30 As detailed in File No. SR–FINRA–2024–013,
in addition to providing mock invoices, CAT LLC
has worked to address Industry Member concerns
regarding reconciliation of invoices for Historical
CAT Assessment 1, including providing guidance
and processes to assist firms in their efforts to
perform reconciliations in connection with CAT
invoice data. Specifically, FCAT is providing
certain key elements of the trade to CAT Reporters,
such as the tradeID and branch sequence, in the
trade billing details accompanying CAT invoices to
provide CAT Executing Brokers with alternative
methods for matching fee-liable transactions with
their internal books and records. See File No. SR–
FINRA–2024–013.
See also CAT Technical Specifications for Billing
Trade Details; Trade Details Schema, https://
catnmsplan.com/sites/default/files/2024-02/
02.05.24-Billing-Trade-Details-Schema.json; CAT
Billing Scenarios, Version 1.0 (November 30, 2023),
https://www.catnmsplan.com/sites/default/files/
2024-01/01.12.2024-CAT-Billing-Scenarios-v1.0.pdf.
31 FINRA billing methodology for Historical CAT
Cost Recovery Assessment 1 is aligned with the
billing methodology for CAT LLC’s Historical CAT
Assessment 1 under the SEC-approved CAT
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FINRA will also make publicly
available on its website: (i) the total
amount invoiced each month that
Historical CAT Cost Recovery
Assessment 1 is in effect, (ii) the total
amount invoiced for Historical CAT
Cost Recovery Assessment 1 for all
months since its commencement, and
(iii) the total costs remaining to be
collected from members in aggregate for
Historical CAT Cost Recovery
Assessment 1. By reviewing statistics
regarding how much has been invoiced
and how much remains to be invoiced
for Historical CAT Cost Recovery
Assessment 1, members would have
sufficient information to reasonably
track how much longer Historical CAT
Cost Recovery Assessment 1 is likely to
be in place.
FINRA has filed the proposed rule
change for immediate effectiveness. The
effective date and the implementation
date will be the date of filing.
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,32 which
requires, among other things, that
FINRA rules must be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, and, in
general, to protect investors and the
public interest; and must not be
designed to permit unfair
discrimination between customers,
issuers, brokers or dealers. FINRA also
believes that the proposed rule change
is consistent with the provisions of
Section 15A(b)(5) of the Act,33 which
requires, among other things, that
FINRA rules provide for the equitable
allocation of reasonable dues, fees and
other charges among members and
issuers and other persons using any
facility or system that FINRA operates
or controls. FINRA further believes that
the proposed rule change is consistent
with Section 15A(b)(9) of the Act, which
Funding Model. As with the Historical CAT
Assessment 1 invoices to be provided by CAT LLC
to Industry Members, the invoices that FINRA
would provide in connection with Historical CAT
Cost Recovery Assessment 1 are designed to allow
member CEBBs and CEBSs to reconcile the invoiced
amounts with the included underlying fee-liable
transaction details each month. As noted in File No.
SR–FINRA–2024–013, the CAT NMS Plan does not
address the manner or extent to which CAT
Executing Brokers may seek to pass on any CAT
fees to their customers, and, as such, facilitating
CEBBs’ and CEBSs’ ability to pass through
Historical CAT Assessment 1 fees to their clients is
outside the scope of the proposal. Likewise,
facilitating CEBBs’ and CEBSs’ ability to pass
through their Historical CAT Cost Recovery
Assessment 1 fees to their clients is also outside the
scope of the instant proposal.
32 15 U.S.C. 78o–3(b)(6).
33 15 U.S.C. 78o–3(b)(5).
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requires that FINRA rules not impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purpose of the Exchange Act.34
Section 15A(b)(2) of the Act also
requires that FINRA be ‘‘so organized
and [have] the capacity to be able to
carry out the purposes’’ of the Act and
‘‘to comply, and . . . to enforce
compliance by its members, and persons
associated with its members,’’ with the
provisions of the Exchange Act.35
FINRA believes that this proposed
rule change is consistent with the Act
because it is designed to assist FINRA
in meeting regulatory obligations
pursuant to the Plan. In approving the
Plan, the SEC noted that the Plan ‘‘is
necessary and 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 mechanism of a national
market system, or is otherwise in
furtherance of the purposes of the
Act.’’ 36 To the extent that this proposed
rule change implements a requirement
that facilitates FINRA’s achievement of
its regulatory obligations under the Plan
and applies specific requirements to
FINRA members in this regard, FINRA
believes that this proposed rule change
furthers the objectives of the Plan, as
identified by the SEC, and is therefore
consistent with the Act.
As discussed in detail in File No. SR–
FINRA–2024–013, FINRA believes that
the proposed fees paid by the CEBBs
and CEBSs in connection with
Historical CAT Assessment 1 are
reasonable, equitably allocated and not
unfairly discriminatory. Historical CAT
Cost Recovery Assessment 1 would
similarly allow FINRA to recover its
designated portion of Historical CAT
Costs 1 from member CAT Executing
Brokers in a fair and reasonable manner,
as contemplated by the Exchange Act
and consistent with the CAT Funding
Model Approval Order.
Proposed Historical CAT Cost
Recovery Assessment 1 would be
charged to member CAT Executing
Brokers in support of the maintenance
of a consolidated audit trail for
regulatory purposes. The proposed fees,
therefore, are consistent with the
Commission’s view that regulatory fees
be used for regulatory purposes. The
proposed fees would not cover FINRA
services unrelated to the CAT, and any
surplus would be used as a reserve to
offset future member fees assessed by
FINRA to recover its contributions, as a
Plan Participant, to CAT costs.37
Accordingly, FINRA believes that the
proposed fees are reasonable, equitable
and not unfairly discriminatory.
The reasonableness of Historical CAT
Cost Recovery Assessment 1 and its
consistency with the Exchange Act
likewise is grounded in the facts
described above and detailed in File No.
SR–FINRA–2024–013. Specifically, the
expenses that compose the portion of
Historical CAT Costs 1 sought to be
recovered through Historical CAT Cost
Recovery Assessment 1 were recognized
by the SEC as appropriate for recovery
pursuant to the formula approved in the
CAT Funding Model (i.e., technology,
legal, consulting, insurance,
professional administration, and public
relations costs). FINRA has determined
that these costs, which are described in
detail in File No. SR–FINRA–2024–013,
are reasonable and it is appropriate that
FINRA recover its Participant
contribution to such costs through
Historical CAT Cost Recovery
Assessment 1. FINRA also has
determined that Historical CAT Cost
Recovery Assessment 1 provides for the
equitable allocation of fees among
FINRA members and is not unfairly
discriminatory, as discussed herein.
Historical CAT Cost Recovery
Assessment 1 is designed to allow
FINRA to recover its designated portion
of Historical CAT Costs 1, consistent
with the Exchange Act and the CAT
Funding Model Approval Order.38 In
approving the CAT Funding Model, the
Commission noted FINRA’s request 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.’’ 39 The Commission
also recognized that ‘‘the Exchange Act
expressly contemplates the ability of the
Participants to recoup their costs to
fulfill their statutory obligations under
the Exchange Act.’’ 40 The Commission
further noted FINRA’s statement ‘‘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.’’ 41 The instant
proposed rule change to adopt
Historical CAT Cost Recovery
Assessment 1 represents such a fee with
respect to Historical CAT Costs 1.
37 See
38 See
supra note 28 and accompanying text.
supra note 14 and 27 and accompanying
text.
34 15
U.S.C. 78o–3(b)(9).
35 See 15 U.S.C. 78o–3(b)(2).
36 CAT NMS Plan Approval Order, 81 FR 84696,
84697.
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39 See CAT Funding Model Approval Order, 88
FR 62628, 62645.
40 See supra note 39 at 62636–37.
41 See supra note 39.
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Without a mechanism to recover its
CAT costs, FINRA, which is unique
among the Participants as a not-forprofit, national securities association,
would not be able to effectively sustain
its regulatory mission. Thus, consistent
with the cost allocation framework put
in place by the SEC-approved CAT
Funding Model, whereby CEBBs and
CEBSs share equal responsibility for the
costs assessed directly to Industry
Members based on their transactions in
Eligible Securities, FINRA is seeking to
recoup its designated portion of
Historical CAT Costs 1 in a like manner
that is fair, reasonable, and equitably
allocated among FINRA’s member firms
in their capacity as CAT Executing
Brokers.
Historical CAT Cost Recovery
Assessment 1 is designed to recover
FINRA’s portion of Historical CAT Costs
1 incurred by CAT LLC associated with
the development, implementation, and
operation of the CAT system under the
CAT NMS Plan. Thus, Historical CAT
Cost Recovery Assessment 1 also is
designed to support FINRA’s efforts to
align its operating expenses with its
operating revenues, target break-even
cash flows, and continue to responsibly
manage expenses driven by mandatory
initiatives, like the CAT NMS Plan, in
a manner consistent with FINRA’s
public Financial Guiding Principles.42
FINRA’s approach in determining
Historical CAT Cost Recovery Fee Rate
1, which is generally consistent with the
approach provided for under the SECapproved CAT Funding Model, is also
reasonable and consistent with the
Exchange Act. Specifically, similar to
the CAT cost assessment methodology
approved by the Commission, FINRA
proposes to allocate equally among
member CEBBs and CEBSs the portion
of Participants’ one-third share of
Historical CAT Costs 1 previously paid
by FINRA.43 FINRA proposes to
42 See FINRA’s Financial Guiding Principles,
https://www.finra.org/sites/default/files/finra_
financial_guiding_principles_0.pdf. See also
Securities Exchange Act Release No. 90176 (October
14, 2020), 85 FR 66592, 66602–03 (October 20,
2020) (Notice of Filing and Immediate Effectiveness
of File No. SR–FINRA–2020–032).
43 In its approval of the CAT Funding Model, the
Commission determined that charging CAT fees to
CAT Executing Brokers was reasonable. In reaching
this conclusion the Commission noted that the use
of CAT Executing Brokers is appropriate because
the CAT Funding Model is based upon the
calculation of executed equivalent shares, and,
therefore, charging CAT Executing Brokers would
reflect their executing role in each transaction.
Furthermore, the Commission noted that, because
CAT Executing Brokers are already identified in
transaction reports from FINRA’s equity trade
reporting facilities recorded in CAT Data, charging
CAT Executing Brokers could streamline the billing
process. See CAT Funding Model Approval Order,
88 FR 62628, 62629.
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determine Historical CAT Cost Recovery
Fee Rate 1 by dividing the portion of
Historical Fee Rate 1 assessed to the
Participants under the CAT Funding
Model, i.e., $0.00001331656564357646
per executed equivalent share, by two
and rounding to six decimal places such
that member CEBBs and CEBSs would
each be subject to an equal fee, i.e.,
$0.000007 per executed equivalent
share, for each transaction in Eligible
Securities executed otherwise than on
an exchange. Therefore, for each month
that Historical CAT Cost Recovery
Assessment 1 is in effect, member
CEBBs and CEBSs will pay a fee to
FINRA based on the same transactions
used to determine fees payable by
CEBBs and CEBSs to CAT LLC under
Historical CAT Assessment 1 for offexchange transactions. FINRA believes
that this approach is reasonable in that,
as is the case with the SEC-approved
CAT Funding Model, it apportions the
assessed fee for members equally
between the CAT Executing Broker for
the buyer and the seller.44
FINRA believes that it is reasonable,
appropriate, and consistent with the
Exchange Act to determine Historical
CAT Cost Recovery Assessment 1 by
dividing Historical CAT Assessment 1,
i.e., $0.000013 per executed equivalent
share, by two and round to six decimal
places which equals $0.000007 such
that member CEBBs and CEBSs would
each be subject to an equal fee of
$0.000007 per executed equivalent
share.45 As discussed above, equally
apportioning the fee between the CEBBs
and CEBSs is consistent with the
approach to apportioning costs between
Executing Brokers under the SECapproved CAT Funding Model. In
addition, FINRA believes it is
reasonable and appropriate at this time
to divide Historical CAT Assessment 1
by two and round the Historical CAT
Cost Recovery Assessment 1 fee rate to
six decimal places. As noted above and
in File No. SR–FINRA–2024–013, CAT
LLC determined to use six decimal
places for the Historical CAT
Assessment 1 fee rate to balance the
accuracy of the calculation with the
potential systems and other
impracticalities of using additional
decimal places in the calculation.
FINRA likewise believes that it is
appropriate at this time to use six
decimal places to maintain consistency
with the approach determined by CAT
LLC, to which members have been
testing since earlier this year, which
should reduce potential complexity in
connection with the fee and billing
44 See
45 See
supra note 43.
supra note 26 and accompanying text.
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structure for Historical CAT Cost
Recovery Assessment 1.
From June 2023 through May 2024,
the average monthly executed
equivalent share volume in Eligible
Securities where FINRA is the relevant
Participant was approximately 104.7
billion shares. Assuming similar trading
volumes, under Historical CAT Cost
Recovery Assessment 1, FINRA would
recover its portion of the Participants’
assessed share of Historical CAT Costs
1 within approximately four months.46
Given the relatively modest fee rate and
amount to be recovered, the expected
four-month recovery period is fair,
reasonable, and equitable, and will
allow FINRA to recover its costs in a
relatively short timeframe without
imposing significant additional
financial or compliance burdens on
members.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
FINRA does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. Section
15A(b)(9) of the Act 47 requires that
FINRA’s rules not impose any burden
on competition that is not necessary or
appropriate in furtherance of the
purpose of the Exchange Act. FINRA
notes that Historical CAT Cost Recovery
Assessment 1 is designed to assist
FINRA in meeting its regulatory
obligations pursuant to the Plan.
Furthermore, in approving the CAT
Funding Model, the SEC analyzed the
potential competitive impact of the CAT
Funding Model, including competitive
issues related to market services, trading
services and regulatory services,
efficiency concerns, and capital
formation.48 The SEC also analyzed the
potential effect of CAT fees calculated
pursuant to the CAT Funding Model on
affected categories of market
participants, including Participants
(including exchanges and FINRA),
Industry Members (including
subcategories of Industry Members,
such as alternative trading systems, CAT
Executing Brokers and market makers),
and investors generally, and considered
market effects related to equities and
options, among other things.49 Based on
this analysis, the SEC approved the CAT
Funding Model as compliant with the
Exchange Act. The Historical CAT Cost
Recovery Assessment 1 fee framework is
46 See
supra note 27.
U.S.C. 78o–3(b)(9).
48 See CAT Funding Model Approval Order, 88
FR 62628, 62678–86.
49 See supra note 48.
47 15
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generally consistent with the fee
framework of the CAT Funding Model,
as approved by the SEC.
As discussed in File No. SR–FINRA–
2024–013, each of the inputs into the
calculation of Historical CAT
Assessment 1 is reasonable and the
resulting fee rate for Historical CAT
Assessment 1 is reasonable. Therefore,
Historical CAT Cost Recovery
Assessment 1, for these same reasons, is
reasonable and would not impose any
burden on competition that is not
necessary or appropriate in furtherance
of the purpose of the Exchange Act.
Economic Impact Assessment
Based on the regulatory need
discussed above, FINRA has undertaken
an economic impact assessment, as set
forth below, to analyze the potential
economic impacts of the proposed rule
change, including potential costs,
benefits, and distributional and
competitive effects, relative to the
current baseline.
Regulatory Need
As discussed above under the
‘‘FINRA’s Designated Portion of
Historical CAT Costs 1’’ section, FINRA
is filing a proposed rule change to
establish Historical CAT Cost Recovery
Assessment 1 to recover its designated
portion of the Participants’ share of
Historical CAT Costs 1. FINRA intends
that the fee framework and timeline for
Historical CAT Cost Recovery
Assessment 1 generally correspond to
the fee framework and timeline put in
place by CAT LLC with respect to
Historical CAT Costs 1, as provided for
in File No. SR–FINRA–2024–013 and as
discussed above.
Economic Baseline
Also, as discussed above under the
‘‘FINRA’s Designated Portion of
Historical CAT Costs 1’’ section, FINRA
arrived at the fee rate for Historical CAT
Cost Recovery Assessment 1 by dividing
by two the fee rate assessed to the
Participants in connection with the
implementation of Historical CAT Costs
1, i.e., $0.000013 per executed
equivalent share, and rounding the
result to six decimal places.50
For the twelve months from June 1,
2023, through May 31, 2024, based on
transactions reported to a FINRA TRF or
to the ORF, there were 896 firm MPIDs
that executed at least one purchase or
sale of an equivalent share of an Eligible
Security.51 The top 50 MPIDs by
50 See
also File No. SR–FINRA–2024–013.
the twelve months from June 1, 2023,
through May 31, 2024, approximately 1.25 trillion
shares of NMS stocks were reported to the TRF, and
51 For
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reported executed equivalent share
volume bought and/or sold
2,161,308,428,108 equivalent shares, or
85.08% of total shares bought and/or
sold.
Economic Impacts
FINRA’s proposal to recover its
designated portion of the Participants’
share of Historical CAT Costs 1 applies
an approach generally consistent with
the CAT Funding Model as approved by
the SEC in that it assesses half of the fee
rate that is assessed to FINRA under
Historical CAT Assessment 1 (rounded
to six decimal places) to each of the
CEBB and CEBS for transactions where
FINRA is the relevant Participant.52
With regard to off-exchange transactions
in Eligible Securities, generally the same
members that will be assessed Historical
CAT Cost Recovery Assessment 1 will
also be assessed Historical CAT
Assessment 1. Therefore, FINRA’s
proposed approach in recovering its
designated portion of Historical CAT
Costs 1 should reduce potential
complexity in connection with the fee
and billing structure for Historical CAT
Cost Recovery Assessment 1. The
recovery period for FINRA’s portion of
the share of Historical CAT Costs 1 is
expected to be four months, which is
shorter than the Historical Recovery
Period for the two-thirds portion of
Historical CAT Costs 1 assessed to
Industry Members.53
Where CEBBs and CEBSs choose to
pass Historical CAT Cost Recovery
Assessment 1 on to customers, some
customers could attempt to avoid
incurring this temporary cost by
delaying trades until after FINRA’s
contribution to the Participants’ share of
Historical CAT Costs 1 is paid. FINRA
believes this is an unlikely outcome
because this fee is only one part of a
trader’s decision regarding whether and
where to trade. In addition, as the
Historical CAT Cost Recovery
Assessment 1 recovery period is
dependent on the level of trading
activity, delaying trading may only
serve to lengthen the recovery period.
However, traders that do trade during
the recovery period may incur relatively
more costs than those that trade after the
recovery period has ended.
As the SEC noted in approving the
revised CAT Funding Model, if FINRA
passes on its portion of the CAT fee
allocation to its member firms and
exchanges choose not to pass through
their CAT fee allocations to their
members, the cost to transact offexchange may increase relative to
executing on an exchange, potentially
giving exchanges a competitive
advantage.54 However, we do not know
whether or to what extent (or how) the
exchanges may seek to recover their
portion of the Historical CAT Costs 1,
and we do not know whether or to what
extent member firms will choose to pass
through exchange-incurred CAT fees to
customers. We also note that FINRA
members remain subject to regulatory
obligations, such as best execution
obligations, with respect to their order
routing decisions.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section
19(b)(3)(A)(ii) of the Exchange Act 55
and Rule 19b–4(f)(2) thereunder,56
because it establishes or changes a due,
or fee.
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend the rule change if
it appears to the Commission that the
action is necessary or appropriate in the
public interest, for the protection of
investors, or would otherwise further
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
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IV. Solicitation of Comments
approximately 1.16 trillion shares of OTC Equity
Securities were reported to ORF. Given that each
executed share for a transaction in an OTC Equity
Security is counted as 0.01 equivalent share, FINRA
estimates that the executed equivalent share volume
for NMS stocks and OTC Equity Securities reported
to a FINRA equity trade reporting facility in that
twelve-month period is approximately 1.26 trillion
shares. Dividing that figure by twelve provides the
average monthly executed equivalent share volume
of approximately 104.7 billion shares.
52 See CAT Funding Model Approval Order, 88
FR 62628; See also File No. SR–FINRA–2024–013.
53 See File No. SR–FINRA–2024–013.
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Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
54 See
supra note 52 at 62684.
U.S.C. 78s(b)(3)(A)(ii).
56 17 CFR 240.19b–4(f)(2).
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include file number SR–
FINRA–2024–014 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to file
number SR–FINRA–2024–014. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of
FINRA. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection.
All submissions should refer to file
number SR–FINRA–2024–014 and
should be submitted on or before
October 15, 2024.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.57
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–21625 Filed 9–20–24; 8:45 am]
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]]>Agencies
[Federal Register Volume 89, Number 184 (Monday, September 23, 2024)]
[Notices]
[Pages 77558-77564]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-21625]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101064; File No. SR-FINRA-2024-014]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Amend FINRA Rule 6897(b) (CAT Cost Recovery
Fees) To Implement a Historical Consolidated Audit Trail Recovery
Assessment
September 17, 2024.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 5, 2024, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by FINRA. FINRA has designated
the proposed rule change as ``establishing or changing a due, fee or
other charge'' under Section 19(b)(3)(A)(ii) of the Act \3\ and Rule
19b-4(f)(2) thereunder,\4\ which renders the proposal effective upon
receipt of this filing by the Commission. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(ii).
\4\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend FINRA Rule 6897(b) (CAT Cost Recovery
Fees) to implement a historical Consolidated Audit Trail (``CAT'')
recovery assessment designed to permit FINRA to recoup its
contributions to recoverable historical costs of the National Market
System Plan Governing the Consolidated Audit Trail incurred prior to
January 1, 2022.\5\
---------------------------------------------------------------------------
\5\ Pursuant to Section 11.3(b) of the CAT NMS Plan, FINRA filed
a separate proposed rule change to establish fees assessed to
Industry Members, payable to Consolidated Audit Trail, LLC, related
to recoverable historical CAT costs incurred prior to January 1,
2022. See File No. SR-FINRA-2024-013. Unless otherwise specified,
capitalized terms used in this rule filing are defined as set forth
in the CAT NMS Plan and FINRA Rule 6800 Series (Consolidated Audit
Trail Compliance Rule).\\
---------------------------------------------------------------------------
The text of the proposed rule change is available on FINRA's
website at https://www.finra.org, at the principal office of FINRA and
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
On July 11, 2012, the Commission adopted Rule 613 of Regulation
NMS, which required the self-regulatory organizations 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 across all markets, from the
time of order inception through routing, cancellation, modification, or
execution.\6\ On November 15, 2016, the Commission approved the CAT NMS
Plan (``Plan'' or ``CAT NMS Plan'').\7\ Under the CAT NMS Plan, the
Operating Committee has the discretion to establish funding for
Consolidated Audit Trail, LLC (``CAT LLC'') to operate the CAT,
including establishing fees for Industry Members to be assessed by CAT
LLC that would be implemented
[[Page 77559]]
on behalf of CAT LLC by the Participants.\8\ The Operating Committee
adopted a revised funding model to fund the CAT (``CAT Funding Model'')
and, on September 6, 2023, the Commission approved the CAT Funding
Model, after concluding that the model was reasonable and that it
satisfied the requirements of Section 11A of the Exchange Act and Rule
608 thereunder.\9\
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\6\ See Securities Exchange Act Release No. 67457 (July 18,
2012), 77 FR 45722 (August 1, 2012).
\7\ See Securities Exchange Act Release No. 79318 (November 15,
2016), 81 FR 84696 (November 23, 2016) (``CAT NMS Plan Approval
Order'').
\8\ See Section 11.1(b) of the CAT NMS Plan.
\9\ See Securities Exchange Act Release No. 98290 (September 6,
2023), 88 FR 62628 (September 12, 2023) (``CAT Funding Model
Approval Order'').
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The CAT Funding Model provides a framework for the recovery of the
costs to create, develop, and maintain the CAT, including providing a
method for allocating costs to fund the CAT among Participants and
Industry Members. The CAT Funding Model establishes two categories of
fees: (1) CAT fees assessed by CAT LLC and payable by certain Industry
Members to recover a portion of historical CAT costs previously paid by
the Participants (``Historical CAT Assessment'' fees); \10\ and (2) CAT
fees assessed by CAT LLC and payable by Participants and Industry
Members to fund prospective CAT costs.\11\ With respect to Historical
CAT Assessment fees, to date, the CAT Operating Committee has
established Historical CAT Assessment 1 with regard to historical CAT
costs incurred prior to January 1, 2022 (``Historical CAT Costs
1'').\12\
---------------------------------------------------------------------------
\10\ See Section 11.3(b) of the CAT NMS Plan.
\11\ See Section 11.3(a) of the CAT NMS Plan.
\12\ See File No. SR-FINRA-2024-013.
---------------------------------------------------------------------------
In light of the filing of File No. SR-FINRA-2024-013, which
implements Historical CAT Assessment 1 with regard to Industry Members,
FINRA is filing the instant proposed rule change to establish a fee to
allow FINRA to recoup its contributions to the Participants' assessed
share of Historical CAT Costs 1 (``Historical CAT Cost Recovery
Assessment 1''). Historical CAT Cost Recovery Assessment 1 is designed
to allow FINRA to recover its designated portion of Historical CAT
Costs 1--amounting to $4,391,414--in a manner consistent with the
Exchange Act and the CAT Funding Model Approval Order. In the Approval
Order, the Commission acknowledged that ``the Exchange Act expressly
contemplates the ability of the Participants to recoup their costs to
fulfill their statutory obligations under the Exchange Act.'' \13\ The
Commission also noted FINRA's statement ``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.'' \14\ Given the approval of
the CAT Funding Model and FINRA's proposed rule change to establish
Historical CAT Assessment 1 in accordance with the CAT Funding
Model,\15\ FINRA is submitting this filing to implement Historical CAT
Cost Recovery Assessment 1.\16\
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\13\ CAT Funding Model Approval Order, 88 FR 62628, 62636-37.
\14\ FINRA has consistently made clear its intention to file a
rule change to implement member CAT fees simultaneous with the
filing of any proposed rule change to effectuate the CAT Funding
Model. See Letter from Marcia E. Asquith, Corporate Secretary, EVP,
Board and External Relations, FINRA, to Vanessa Countryman,
Secretary, SEC, dated April 11, 2023 (``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.''); see also Letter from Marcia E. Asquith, Corporate
Secretary, EVP, Board and External Relations, FINRA, to Vanessa
Countryman, Secretary, SEC, dated June 22, 2022 (``FINRA June 2022
Letter'') at 6 (``[G]iven FINRA's unique nature, FINRA necessarily
must seek recovery in turn for the costs it is allocated.''). FINRA
also requested that, if the Commission were to approve the CAT
Funding Model, 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.'' See CAT
Funding Model Approval Order, 88 FR 62628, 62645.
\15\ See File No. SR-FINRA-2024-013.
\16\ The CAT NMS Plan states that ``[n]o Participant will make a
filing with the SEC pursuant to Section 19(b) of the Exchange Act
regarding any Historical CAT Assessment until any applicable
Financial Accountability Milestone described in Section 11.6 has
been satisfied.'' See Section 11.3(b)(iii)(B)(III) of the CAT NMS
Plan. The CAT NMS Plan further states that ``in all filings
submitted by the Participants to the Commission under Section 19(b)
of the Exchange Act, to establish or implement Post-Amendment
Industry Member Fees pursuant to this Article, . . . the
Participants shall clearly indicate whether such fees are related to
Post-Amendment Expenses incurred during Period 1, Period 2, Period
3, or Period 4.'' See Section 11.6(b) of the CAT NMS Plan. As
discussed in File No. SR-FINRA-2024-013, all applicable Financial
Accountability Milestones for Historical CAT Assessment 1 and, by
extension, Historical CAT Cost Recovery Assessment 1--that is,
Period 1, Period 2, and Period 3 of the Financial Accountability
Milestones--have been satisfied. Furthermore, the costs sought to be
recovered via both Historical CAT Assessment 1 and Historical CAT
Cost Recovery Assessment 1 relate to Post-Amendment Expenses
incurred during Periods 1, 2 and 3 of the Financial Accountability
Milestones.
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FINRA's Designated Portion of Historical CAT Costs 1
As discussed in File No. SR-FINRA-2024-013, which seeks to
implement Historical CAT Assessment 1,\17\ to date, FINRA and the other
Participants have agreed to pay all Past CAT Costs via loans to CAT
LLC. Specifically, in the absence of an SEC-approved model establishing
how the Participants were to fund the creation, implementation, and
maintenance of the CAT, in 2017, FINRA and the other Participants
unanimously agreed to apportion all CAT operational costs amongst the
group and to fund the CAT through a series of interest-free loans.
Through these loans, FINRA contributed $13,174,243 or roughly 4.14%
toward the $318,059,819 in operating expenses composing Historical CAT
Costs 1. Of that approximately $13 million expenditure, FINRA expects
to recover $8,782,829 in loan repayments from CAT LLC following
implementation of Historical CAT Assessment 1, and, under the CAT
Funding Model, will forgive the remaining $4,391,414 in loan
repayments, which FINRA now seeks to recover through the implementation
of Historical CAT Cost Recovery Assessment 1.\18\
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\17\ Historical CAT Assessment 1 seeks to recover from CAT
Executing Brokers two-thirds of Historical CAT Costs 1--the
$318,059,819 in recoverable costs incurred by CAT LLC prior to
January 1, 2022.
\18\ FINRA notes that, as is the case with respect to Historical
CAT Assessment 1 discussed in File No. SR-FINRA-2024-013, FINRA's
recovery under the instant proposed rule change also would not
include any portion of Excluded Costs, i.e., $48,874,937 in CAT
costs incurred from November 15, 2017 through November 15, 2018,
$19,628,791 of costs paid to the the [sic] Initial Plan Processor
from November 16, 2018 through February 2019 when the relationship
with the Initial Plan Processor was concluded, and $14,749,362 of
costs related to the termination of the relationship with the
Initial Plan Processor.
---------------------------------------------------------------------------
The following table illustrates FINRA's approximate contributions
to the Plan Participants' collective one-third share of Historical CAT
Costs 1 during each of the relevant periods.\19\
---------------------------------------------------------------------------
\19\ A detailed description (including the amounts) of all costs
incurred by the Participants during the pre-FAM period (prior to
June 22, 2020) and during each relevant FAM period, i.e., FAM Period
1, FAM Period 2, and FAM Period 3, is provided in File No. SR-FINRA-
2024-013.
------------------------------------------------------------------------
Participants'
collective share FINRA's share of
Period of historical CAT historical CAT
costs 1 costs 1
------------------------------------------------------------------------
Pre-FAM Period (Prior to June 22, $41,430,243 $1,716,067
2020)............................
[[Page 77560]]
FAM Period 1...................... 2,125,781 88,051
FAM Period 2...................... 14,325,493 593,371
FAM Period 3...................... 48,138,423 1,993,925
-------------------------------------
Total (through January 1, 2022)... 106,019,940 4,391,414
------------------------------------------------------------------------
FINRA's recovery of these approximately $4.4 million in Historical
CAT Costs is reasonable and consistent with the Exchange Act. As
discussed herein and in File No. SR-FINRA-2024-013, these costs were
reasonable, appropriate and necessary for the creation, implementation
and maintenance of the CAT. As stated by FINRA and permitted under the
Exchange Act, FINRA will seek to recover its portion of the
Participants' share of CAT costs to ensure that FINRA can fulfill its
regulatory mandate and responsibilities.\20\
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\20\ See supra note 14.
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Historical CAT Cost Recovery Assessment 1
FINRA is proposing to amend Rule 6897(b) (CAT Cost Recovery Fees)
to implement Historical CAT Cost Recovery Assessment 1 at this time to
allow FINRA to recover its contributions to the Participants'
designated one-third share of Historical CAT Costs 1.\21\ FINRA intends
that the fee framework for the Historical CAT Cost Recovery Assessment
1 would generally correspond to the framework put in place by CAT LLC
with respect to Historical CAT Assessment 1, as provided for in File
No. SR-FINRA-2024-013. FINRA also intends that the timing and
commencement of payment for Historical CAT Cost Recovery Assessment 1
generally would correspond with that established by CAT LLC with
respect to Historical CAT Assessment 1, as provided for in File No. SR-
FINRA-2024-013. Thus, as with Historical CAT Assessment 1, FINRA
proposes that each member CAT Executing Broker shall receive its first
invoice from FINRA for Historical CAT Cost Recovery Assessment 1 in
November 2024, setting forth fees calculated based on October 2024
transactions in Eligible Securities executed otherwise than on an
exchange, as reflected in CAT Data.
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\21\ In approving the CAT Funding Model, the Commission noted
that it ``believe[d] that FINRA's allocation of CAT fees likely will
be passed through to Industry Members.'' See CAT Funding Model
Approval Order, 88 FR 62628, 62684.
---------------------------------------------------------------------------
The following fields of the Participant Technical Specifications
indicate the CAT Executing Brokers for transactions executed otherwise
than on an exchange.\22\
---------------------------------------------------------------------------
\22\ As per Section 1.1 of the Plan, for a transaction in an
Eligible Security executed otherwise than on an exchange and
required to be reported to an equity trade reporting facility of a
registered national securities association, i.e., one of FINRA's
Trade Reporting Facilities (each a ``TRF''), OTC Reporting Facility
(``ORF'') or Alternative Display Facility (``ADF''), the CEBB and
CEBS are the Industry Members identified as the executing broker and
the contra-side executing broker in the TRF/ORF/ADF transaction data
event in CAT Data. In those circumstances where there is a non-
Industry Member identified as the contra-side executing broker in
the TRF/ORF/ADF transaction data event or no contra-side executing
broker is identified in the TRF/ORF/ADF transaction data event, then
the Industry Member identified as the executing broker in the TRF/
ORF/ADF transaction data event would be treated as, and be required
to pay the fee assessed to, both the CEBB and CEBS.
---------------------------------------------------------------------------
TRF/ORF/ADF Transaction Data Event \23\
---------------------------------------------------------------------------
\23\ See Table 61, Section 6.1 (TRF/ORF/ADF Transaction Data
Event) of the CAT Reporting Technical Specifications for Plan
Participants.
----------------------------------------------------------------------------------------------------------------
No. Field name Data type Description Include key
----------------------------------------------------------------------------------------------------------------
26............................. reporting Member Alias...... MPID of the R.
Executing Mpid. executing party.
28............................. contra Executing Member Alias...... MPID of the contra- C.
Mpid. side executing
party.
----------------------------------------------------------------------------------------------------------------
As discussed in File No. SR-FINRA-2024-013, the Operating Committee
has determined that Historical Fee Rate 1 is $0.00003994969693072937
per executed equivalent share, and, under the CAT Funding Model, each
of the CAT Executing Broker for the Buyer (``CEBB''), CAT Executing
Broker for the Seller (``CEBS''), and relevant Participant for a given
transaction in an Eligible Security would be responsible for one-third
of that rate, or $0.00001331656564357646 per executed equivalent
share.\24\ In line with this approach, with respect to FINRA's portion
of the Participants' one-third share, FINRA is proposing that, for
Historical CAT Cost Recovery Assessment 1, the Participants' assessed
fee rate would be split evenly between the CEBB and CEBS to establish a
Historical CAT Cost Recovery Fee Rate 1 of $0.000007 per executed
equivalent share \25\ for transactions where FINRA is the relevant
Participant.\26\
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\24\ Dividing $0.00003994969693072937 by three equals
$0.00001331656564357646. As noted in File No. SR-FINRA-2024-013, CAT
LLC determined to use six decimal places for Historical CAT
Assessment 1 (i.e., $0.000013 per executed equivalent share) to
balance the accuracy of the calculation with the potential systems
and other impracticalities of using additional decimal places in the
calculation.
\25\ In approving the CAT Funding Model, the Commission
concluded that ``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.'' See CAT Funding Model Approval Order, 88 FR 62628,
62640. Under the CAT NMS Plan, executed equivalent shares in a
transaction in Eligible Securities are reasonably counted as
follows: (1) each executed share for a transaction in NMS Stocks
will be counted as one executed equivalent share; (2) each executed
contract for a transaction in Listed Options will be counted based
on the multiplier applicable to the specific Listed Options (i.e.,
100 executed equivalent shares or such other applicable multiplier);
and (3) each executed share for a transaction in OTC Equity
Securities shall be counted as 0.01 executed equivalent share. See
Section 11.3(a)(i)(B) and 11.3(b)(i)(B) of the CAT NMS Plan.
\26\ Dividing $0.00001331656564357646 by two and rounding to six
decimal places equals $0.000007. FINRA believes that it is
appropriate at this time to use six decimal places to maintain
consistency with the approach determined by CAT LLC.
---------------------------------------------------------------------------
FINRA proposes to amend Rule 6897(b)(1)(A) to implement Historical
CAT Cost Recovery Assessment 1. Proposed Rule 6897(b)(1)(A)(i) would
provide that each member CAT Executing Broker shall receive its first
[[Page 77561]]
invoice from FINRA in November 2024, setting forth the Historical CAT
Cost Recovery Assessment 1 fees calculated based on transactions in
October 2024, and shall receive similar invoices from FINRA for
Historical CAT Cost Recovery Assessment 1 for each month thereafter in
which Historical CAT Cost Recovery Assessment 1 is in effect. As
provided in proposed Rule 6897(b)(1)(A)(ii), FINRA shall provide each
member CAT Executing Broker with an invoice for Historical CAT Cost
Recovery Assessment 1 on a monthly basis. Each monthly invoice from
FINRA (separate from the invoice provide by CAT LLC with respect to
Historical CAT Assessment 1) shall set forth a fee for each transaction
in Eligible Securities executed by the CAT Executing Broker in its
capacity as the CEBB and/or the CEBS (as applicable) otherwise than on
an exchange as set forth in CAT Data. The fee assessed to each CEBB and
CEBS for each such transaction will be calculated by multiplying the
number of executed equivalent shares in the transaction by the
Historical CAT Cost Recovery Fee Rate 1 of $0.000007 per executed
equivalent share.
Further, as provided in proposed Rule 6897(b)(1)(A)(iii),
Historical CAT Cost Recovery Assessment 1 will remain in effect until
$4,391,414 (FINRA's contribution to the one-third share of Historical
CAT Costs 1 assessed to the Plan Participants) is collected from member
CAT Executing Brokers collectively, which is estimated to be four
months, but could be for a longer or shorter period of time.\27\ FINRA
will provide notice when Historical CAT Cost Recovery Assessment 1 will
no longer be in effect. Proposed Rule 6897(b)(1)(A)(iv) provides that
each member CAT Executing broker shall be required to pay each invoice
for Historical CAT Cost Recovery Assessment 1 within 30 days of receipt
of such invoice or other notice indicating payment is due (unless a
longer payment period is otherwise indicated) and such payment must be
made in the manner prescribed by FINRA, as set forth in Rule
6897(b)(2).
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\27\ From June 1, 2023, through May 31, 2024, the average
monthly executed equivalent share volume in Eligible Securities
where FINRA is the relevant Participant was approximately 104.7
billion shares. Assuming similar 2024 trading volumes, FINRA would
recover its approximately $4.4 million portion of the Participants'
assessed share of Historical CAT Costs 1 within four months. Given
the fee rate and total amount to be recovered, the proposed four-
month recovery period is reasonable.
---------------------------------------------------------------------------
As with Historical CAT Assessment 1, since Historical CAT Cost
Recovery Assessment 1 is a monthly fee based on transaction volume from
the prior month, Historical CAT Cost Recovery Assessment 1 may result
in the collection of more than FINRA's approximately $4.4 million
contribution to Historical CAT Costs 1. To the extent that occurs, any
excess money collected during the final month in which Historical CAT
Cost Recovery Assessment 1 is in effect will be used to offset future
member fees assessed by FINRA in connection with FINRA's designated CAT
costs as a Plan Participant.\28\
---------------------------------------------------------------------------
\28\ A similar approach will be taken by CAT LLC with respect to
any excess money collected pursuant to Historical CAT Assessment 1
during its final month. See File No. SR-FINRA-2024-013.
---------------------------------------------------------------------------
Beginning with the initial invoice for Historical CAT Cost Recovery
Assessment 1 in November 2024, FINRA will make available to each member
CAT Executing Broker a copy of the relevant details for fee liable
transactions executed each month otherwise than on an exchange. Similar
to the information that would be provided by CAT LLC to CAT Executing
Brokers in assessing the off-exchange portion of Historical CAT
Assessment 1 each month,\29\ such information would provide member CAT
Executing Brokers with the ability to understand the details regarding
the calculation of their Historical CAT Cost Recovery Assessment 1
fees. To assist Industry Members in complying with Historical CAT
Assessment 1, in November 2023 CAT LLC began making mock invoices with
details for any fee liable transactions, including those executed
otherwise than on an exchange, available to CAT Executing Brokers.\30\
FINRA intends to likewise provide these same trade elements in the
trade billing details accompanying FINRA invoices each month that
Historical CAT Cost Recovery Assessment 1 is in effect.\31\
---------------------------------------------------------------------------
\29\ See File No. SR-FINRA-2024-013.
\30\ As detailed in File No. SR-FINRA-2024-013, in addition to
providing mock invoices, CAT LLC has worked to address Industry
Member concerns regarding reconciliation of invoices for Historical
CAT Assessment 1, including providing guidance and processes to
assist firms in their efforts to perform reconciliations in
connection with CAT invoice data. Specifically, FCAT is providing
certain key elements of the trade to CAT Reporters, such as the
tradeID and branch sequence, in the trade billing details
accompanying CAT invoices to provide CAT Executing Brokers with
alternative methods for matching fee-liable transactions with their
internal books and records. See File No. SR-FINRA-2024-013.
See also CAT Technical Specifications for Billing Trade
Details; Trade Details Schema, https://catnmsplan.com/sites/default/files/2024-02/02.05.24-Billing-Trade-Details-Schema.json; CAT
Billing Scenarios, Version 1.0 (November 30, 2023), https://www.catnmsplan.com/sites/default/files/2024-01/01.12.2024-CAT-Billing-Scenarios-v1.0.pdf.
\31\ FINRA billing methodology for Historical CAT Cost Recovery
Assessment 1 is aligned with the billing methodology for CAT LLC's
Historical CAT Assessment 1 under the SEC-approved CAT Funding
Model. As with the Historical CAT Assessment 1 invoices to be
provided by CAT LLC to Industry Members, the invoices that FINRA
would provide in connection with Historical CAT Cost Recovery
Assessment 1 are designed to allow member CEBBs and CEBSs to
reconcile the invoiced amounts with the included underlying fee-
liable transaction details each month. As noted in File No. SR-
FINRA-2024-013, the CAT NMS Plan does not address the manner or
extent to which CAT Executing Brokers may seek to pass on any CAT
fees to their customers, and, as such, facilitating CEBBs' and
CEBSs' ability to pass through Historical CAT Assessment 1 fees to
their clients is outside the scope of the proposal. Likewise,
facilitating CEBBs' and CEBSs' ability to pass through their
Historical CAT Cost Recovery Assessment 1 fees to their clients is
also outside the scope of the instant proposal.
---------------------------------------------------------------------------
FINRA will also make publicly available on its website: (i) the
total amount invoiced each month that Historical CAT Cost Recovery
Assessment 1 is in effect, (ii) the total amount invoiced for
Historical CAT Cost Recovery Assessment 1 for all months since its
commencement, and (iii) the total costs remaining to be collected from
members in aggregate for Historical CAT Cost Recovery Assessment 1. By
reviewing statistics regarding how much has been invoiced and how much
remains to be invoiced for Historical CAT Cost Recovery Assessment 1,
members would have sufficient information to reasonably track how much
longer Historical CAT Cost Recovery Assessment 1 is likely to be in
place.
FINRA has filed the proposed rule change for immediate
effectiveness. The effective date and the implementation date will be
the date of filing.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\32\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest; and must not be designed to permit unfair
discrimination between customers, issuers, brokers or dealers. FINRA
also believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(5) of the Act,\33\ which requires, among
other things, that FINRA rules provide for the equitable allocation of
reasonable dues, fees and other charges among members and issuers and
other persons using any facility or system that FINRA operates or
controls. FINRA further believes that the proposed rule change is
consistent with Section 15A(b)(9) of the Act, which
[[Page 77562]]
requires that FINRA rules not impose any burden on competition that is
not necessary or appropriate in furtherance of the purpose of the
Exchange Act.\34\ Section 15A(b)(2) of the Act also requires that FINRA
be ``so organized and [have] the capacity to be able to carry out the
purposes'' of the Act and ``to comply, and . . . to enforce compliance
by its members, and persons associated with its members,'' with the
provisions of the Exchange Act.\35\
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\32\ 15 U.S.C. 78o-3(b)(6).
\33\ 15 U.S.C. 78o-3(b)(5).
\34\ 15 U.S.C. 78o-3(b)(9).
\35\ See 15 U.S.C. 78o-3(b)(2).
---------------------------------------------------------------------------
FINRA believes that this proposed rule change is consistent with
the Act because it is designed to assist FINRA in meeting regulatory
obligations pursuant to the Plan. In approving the Plan, the SEC noted
that the Plan ``is necessary and 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 mechanism of a
national market system, or is otherwise in furtherance of the purposes
of the Act.'' \36\ To the extent that this proposed rule change
implements a requirement that facilitates FINRA's achievement of its
regulatory obligations under the Plan and applies specific requirements
to FINRA members in this regard, FINRA believes that this proposed rule
change furthers the objectives of the Plan, as identified by the SEC,
and is therefore consistent with the Act.
---------------------------------------------------------------------------
\36\ CAT NMS Plan Approval Order, 81 FR 84696, 84697.
---------------------------------------------------------------------------
As discussed in detail in File No. SR-FINRA-2024-013, FINRA
believes that the proposed fees paid by the CEBBs and CEBSs in
connection with Historical CAT Assessment 1 are reasonable, equitably
allocated and not unfairly discriminatory. Historical CAT Cost Recovery
Assessment 1 would similarly allow FINRA to recover its designated
portion of Historical CAT Costs 1 from member CAT Executing Brokers in
a fair and reasonable manner, as contemplated by the Exchange Act and
consistent with the CAT Funding Model Approval Order.
Proposed Historical CAT Cost Recovery Assessment 1 would be charged
to member CAT Executing Brokers in support of the maintenance of a
consolidated audit trail for regulatory purposes. The proposed fees,
therefore, are consistent with the Commission's view that regulatory
fees be used for regulatory purposes. The proposed fees would not cover
FINRA services unrelated to the CAT, and any surplus would be used as a
reserve to offset future member fees assessed by FINRA to recover its
contributions, as a Plan Participant, to CAT costs.\37\ Accordingly,
FINRA believes that the proposed fees are reasonable, equitable and not
unfairly discriminatory.
---------------------------------------------------------------------------
\37\ See supra note 28 and accompanying text.
---------------------------------------------------------------------------
The reasonableness of Historical CAT Cost Recovery Assessment 1 and
its consistency with the Exchange Act likewise is grounded in the facts
described above and detailed in File No. SR-FINRA-2024-013.
Specifically, the expenses that compose the portion of Historical CAT
Costs 1 sought to be recovered through Historical CAT Cost Recovery
Assessment 1 were recognized by the SEC as appropriate for recovery
pursuant to the formula approved in the CAT Funding Model (i.e.,
technology, legal, consulting, insurance, professional administration,
and public relations costs). FINRA has determined that these costs,
which are described in detail in File No. SR-FINRA-2024-013, are
reasonable and it is appropriate that FINRA recover its Participant
contribution to such costs through Historical CAT Cost Recovery
Assessment 1. FINRA also has determined that Historical CAT Cost
Recovery Assessment 1 provides for the equitable allocation of fees
among FINRA members and is not unfairly discriminatory, as discussed
herein.
Historical CAT Cost Recovery Assessment 1 is designed to allow
FINRA to recover its designated portion of Historical CAT Costs 1,
consistent with the Exchange Act and the CAT Funding Model Approval
Order.\38\ In approving the CAT Funding Model, the Commission noted
FINRA's request 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.'' \39\ The Commission
also recognized that ``the Exchange Act expressly contemplates the
ability of the Participants to recoup their costs to fulfill their
statutory obligations under the Exchange Act.'' \40\ The Commission
further noted FINRA's statement ``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.'' \41\ The instant proposed rule change
to adopt Historical CAT Cost Recovery Assessment 1 represents such a
fee with respect to Historical CAT Costs 1.
---------------------------------------------------------------------------
\38\ See supra note 14 and 27 and accompanying text.
\39\ See CAT Funding Model Approval Order, 88 FR 62628, 62645.
\40\ See supra note 39 at 62636-37.
\41\ See supra note 39.
---------------------------------------------------------------------------
Without a mechanism to recover its CAT costs, FINRA, which is
unique among the Participants as a not-for-profit, national securities
association, would not be able to effectively sustain its regulatory
mission. Thus, consistent with the cost allocation framework put in
place by the SEC-approved CAT Funding Model, whereby CEBBs and CEBSs
share equal responsibility for the costs assessed directly to Industry
Members based on their transactions in Eligible Securities, FINRA is
seeking to recoup its designated portion of Historical CAT Costs 1 in a
like manner that is fair, reasonable, and equitably allocated among
FINRA's member firms in their capacity as CAT Executing Brokers.
Historical CAT Cost Recovery Assessment 1 is designed to recover
FINRA's portion of Historical CAT Costs 1 incurred by CAT LLC
associated with the development, implementation, and operation of the
CAT system under the CAT NMS Plan. Thus, Historical CAT Cost Recovery
Assessment 1 also is designed to support FINRA's efforts to align its
operating expenses with its operating revenues, target break-even cash
flows, and continue to responsibly manage expenses driven by mandatory
initiatives, like the CAT NMS Plan, in a manner consistent with FINRA's
public Financial Guiding Principles.\42\
---------------------------------------------------------------------------
\42\ See FINRA's Financial Guiding Principles, https://www.finra.org/sites/default/files/finra_financial_guiding_principles_0.pdf. See also Securities
Exchange Act Release No. 90176 (October 14, 2020), 85 FR 66592,
66602-03 (October 20, 2020) (Notice of Filing and Immediate
Effectiveness of File No. SR-FINRA-2020-032).
---------------------------------------------------------------------------
FINRA's approach in determining Historical CAT Cost Recovery Fee
Rate 1, which is generally consistent with the approach provided for
under the SEC-approved CAT Funding Model, is also reasonable and
consistent with the Exchange Act. Specifically, similar to the CAT cost
assessment methodology approved by the Commission, FINRA proposes to
allocate equally among member CEBBs and CEBSs the portion of
Participants' one-third share of Historical CAT Costs 1 previously paid
by FINRA.\43\ FINRA proposes to
[[Page 77563]]
determine Historical CAT Cost Recovery Fee Rate 1 by dividing the
portion of Historical Fee Rate 1 assessed to the Participants under the
CAT Funding Model, i.e., $0.00001331656564357646 per executed
equivalent share, by two and rounding to six decimal places such that
member CEBBs and CEBSs would each be subject to an equal fee, i.e.,
$0.000007 per executed equivalent share, for each transaction in
Eligible Securities executed otherwise than on an exchange. Therefore,
for each month that Historical CAT Cost Recovery Assessment 1 is in
effect, member CEBBs and CEBSs will pay a fee to FINRA based on the
same transactions used to determine fees payable by CEBBs and CEBSs to
CAT LLC under Historical CAT Assessment 1 for off-exchange
transactions. FINRA believes that this approach is reasonable in that,
as is the case with the SEC-approved CAT Funding Model, it apportions
the assessed fee for members equally between the CAT Executing Broker
for the buyer and the seller.\44\
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\43\ In its approval of the CAT Funding Model, the Commission
determined that charging CAT fees to CAT Executing Brokers was
reasonable. In reaching this conclusion the Commission noted that
the use of CAT Executing Brokers is appropriate because the CAT
Funding Model is based upon the calculation of executed equivalent
shares, and, therefore, charging CAT Executing Brokers would reflect
their executing role in each transaction. Furthermore, the
Commission noted that, because CAT Executing Brokers are already
identified in transaction reports from FINRA's equity trade
reporting facilities recorded in CAT Data, charging CAT Executing
Brokers could streamline the billing process. See CAT Funding Model
Approval Order, 88 FR 62628, 62629.
\44\ See supra note 43.
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FINRA believes that it is reasonable, appropriate, and consistent
with the Exchange Act to determine Historical CAT Cost Recovery
Assessment 1 by dividing Historical CAT Assessment 1, i.e., $0.000013
per executed equivalent share, by two and round to six decimal places
which equals $0.000007 such that member CEBBs and CEBSs would each be
subject to an equal fee of $0.000007 per executed equivalent share.\45\
As discussed above, equally apportioning the fee between the CEBBs and
CEBSs is consistent with the approach to apportioning costs between
Executing Brokers under the SEC-approved CAT Funding Model. In
addition, FINRA believes it is reasonable and appropriate at this time
to divide Historical CAT Assessment 1 by two and round the Historical
CAT Cost Recovery Assessment 1 fee rate to six decimal places. As noted
above and in File No. SR-FINRA-2024-013, CAT LLC determined to use six
decimal places for the Historical CAT Assessment 1 fee rate to balance
the accuracy of the calculation with the potential systems and other
impracticalities of using additional decimal places in the calculation.
FINRA likewise believes that it is appropriate at this time to use six
decimal places to maintain consistency with the approach determined by
CAT LLC, to which members have been testing since earlier this year,
which should reduce potential complexity in connection with the fee and
billing structure for Historical CAT Cost Recovery Assessment 1.
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\45\ See supra note 26 and accompanying text.
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From June 2023 through May 2024, the average monthly executed
equivalent share volume in Eligible Securities where FINRA is the
relevant Participant was approximately 104.7 billion shares. Assuming
similar trading volumes, under Historical CAT Cost Recovery Assessment
1, FINRA would recover its portion of the Participants' assessed share
of Historical CAT Costs 1 within approximately four months.\46\ Given
the relatively modest fee rate and amount to be recovered, the expected
four-month recovery period is fair, reasonable, and equitable, and will
allow FINRA to recover its costs in a relatively short timeframe
without imposing significant additional financial or compliance burdens
on members.
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\46\ See supra note 27.
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B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. Section 15A(b)(9) of the Act
\47\ requires that FINRA's rules not impose any burden on competition
that is not necessary or appropriate in furtherance of the purpose of
the Exchange Act. FINRA notes that Historical CAT Cost Recovery
Assessment 1 is designed to assist FINRA in meeting its regulatory
obligations pursuant to the Plan.
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\47\ 15 U.S.C. 78o-3(b)(9).
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Furthermore, in approving the CAT Funding Model, the SEC analyzed
the potential competitive impact of the CAT Funding Model, including
competitive issues related to market services, trading services and
regulatory services, efficiency concerns, and capital formation.\48\
The SEC also analyzed the potential effect of CAT fees calculated
pursuant to the CAT Funding Model on affected categories of market
participants, including Participants (including exchanges and FINRA),
Industry Members (including subcategories of Industry Members, such as
alternative trading systems, CAT Executing Brokers and market makers),
and investors generally, and considered market effects related to
equities and options, among other things.\49\ Based on this analysis,
the SEC approved the CAT Funding Model as compliant with the Exchange
Act. The Historical CAT Cost Recovery Assessment 1 fee framework is
generally consistent with the fee framework of the CAT Funding Model,
as approved by the SEC.
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\48\ See CAT Funding Model Approval Order, 88 FR 62628, 62678-
86.
\49\ See supra note 48.
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As discussed in File No. SR-FINRA-2024-013, each of the inputs into
the calculation of Historical CAT Assessment 1 is reasonable and the
resulting fee rate for Historical CAT Assessment 1 is reasonable.
Therefore, Historical CAT Cost Recovery Assessment 1, for these same
reasons, is reasonable and would not impose any burden on competition
that is not necessary or appropriate in furtherance of the purpose of
the Exchange Act.
Economic Impact Assessment
Based on the regulatory need discussed above, FINRA has undertaken
an economic impact assessment, as set forth below, to analyze the
potential economic impacts of the proposed rule change, including
potential costs, benefits, and distributional and competitive effects,
relative to the current baseline.
Regulatory Need
As discussed above under the ``FINRA's Designated Portion of
Historical CAT Costs 1'' section, FINRA is filing a proposed rule
change to establish Historical CAT Cost Recovery Assessment 1 to
recover its designated portion of the Participants' share of Historical
CAT Costs 1. FINRA intends that the fee framework and timeline for
Historical CAT Cost Recovery Assessment 1 generally correspond to the
fee framework and timeline put in place by CAT LLC with respect to
Historical CAT Costs 1, as provided for in File No. SR-FINRA-2024-013
and as discussed above.
Economic Baseline
Also, as discussed above under the ``FINRA's Designated Portion of
Historical CAT Costs 1'' section, FINRA arrived at the fee rate for
Historical CAT Cost Recovery Assessment 1 by dividing by two the fee
rate assessed to the Participants in connection with the implementation
of Historical CAT Costs 1, i.e., $0.000013 per executed equivalent
share, and rounding the result to six decimal places.\50\
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\50\ See also File No. SR-FINRA-2024-013.
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For the twelve months from June 1, 2023, through May 31, 2024,
based on transactions reported to a FINRA TRF or to the ORF, there were
896 firm MPIDs that executed at least one purchase or sale of an
equivalent share of an Eligible Security.\51\ The top 50 MPIDs by
[[Page 77564]]
reported executed equivalent share volume bought and/or sold
2,161,308,428,108 equivalent shares, or 85.08% of total shares bought
and/or sold.
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\51\ For the twelve months from June 1, 2023, through May 31,
2024, approximately 1.25 trillion shares of NMS stocks were reported
to the TRF, and approximately 1.16 trillion shares of OTC Equity
Securities were reported to ORF. Given that each executed share for
a transaction in an OTC Equity Security is counted as 0.01
equivalent share, FINRA estimates that the executed equivalent share
volume for NMS stocks and OTC Equity Securities reported to a FINRA
equity trade reporting facility in that twelve-month period is
approximately 1.26 trillion shares. Dividing that figure by twelve
provides the average monthly executed equivalent share volume of
approximately 104.7 billion shares.
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Economic Impacts
FINRA's proposal to recover its designated portion of the
Participants' share of Historical CAT Costs 1 applies an approach
generally consistent with the CAT Funding Model as approved by the SEC
in that it assesses half of the fee rate that is assessed to FINRA
under Historical CAT Assessment 1 (rounded to six decimal places) to
each of the CEBB and CEBS for transactions where FINRA is the relevant
Participant.\52\ With regard to off-exchange transactions in Eligible
Securities, generally the same members that will be assessed Historical
CAT Cost Recovery Assessment 1 will also be assessed Historical CAT
Assessment 1. Therefore, FINRA's proposed approach in recovering its
designated portion of Historical CAT Costs 1 should reduce potential
complexity in connection with the fee and billing structure for
Historical CAT Cost Recovery Assessment 1. The recovery period for
FINRA's portion of the share of Historical CAT Costs 1 is expected to
be four months, which is shorter than the Historical Recovery Period
for the two-thirds portion of Historical CAT Costs 1 assessed to
Industry Members.\53\
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\52\ See CAT Funding Model Approval Order, 88 FR 62628; See also
File No. SR-FINRA-2024-013.
\53\ See File No. SR-FINRA-2024-013.
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Where CEBBs and CEBSs choose to pass Historical CAT Cost Recovery
Assessment 1 on to customers, some customers could attempt to avoid
incurring this temporary cost by delaying trades until after FINRA's
contribution to the Participants' share of Historical CAT Costs 1 is
paid. FINRA believes this is an unlikely outcome because this fee is
only one part of a trader's decision regarding whether and where to
trade. In addition, as the Historical CAT Cost Recovery Assessment 1
recovery period is dependent on the level of trading activity, delaying
trading may only serve to lengthen the recovery period. However,
traders that do trade during the recovery period may incur relatively
more costs than those that trade after the recovery period has ended.
As the SEC noted in approving the revised CAT Funding Model, if
FINRA passes on its portion of the CAT fee allocation to its member
firms and exchanges choose not to pass through their CAT fee
allocations to their members, the cost to transact off-exchange may
increase relative to executing on an exchange, potentially giving
exchanges a competitive advantage.\54\ However, we do not know whether
or to what extent (or how) the exchanges may seek to recover their
portion of the Historical CAT Costs 1, and we do not know whether or to
what extent member firms will choose to pass through exchange-incurred
CAT fees to customers. We also note that FINRA members remain subject
to regulatory obligations, such as best execution obligations, with
respect to their order routing decisions.
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\54\ See supra note 52 at 62684.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Exchange Act \55\ and Rule 19b-4(f)(2)
thereunder,\56\ because it establishes or changes a due, or fee.
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\55\ 15 U.S.C. 78s(b)(3)(A)(ii).
\56\ 17 CFR 240.19b-4(f)(2).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend the rule
change if it appears to the Commission that the action is necessary or
appropriate in the public interest, for the protection of investors, or
would otherwise further the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-FINRA-2024-014 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-FINRA-2024-014. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of FINRA. Do not include
personal identifiable information in submissions; you should submit
only information that you wish to make available publicly. We may
redact in part or withhold entirely from publication submitted material
that is obscene or subject to copyright protection.
All submissions should refer to file number SR-FINRA-2024-014 and
should be submitted on or before October 15, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\57\
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\57\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-21625 Filed 9-20-24; 8:45 am]
BILLING CODE 8011-01-P
