Proposed Amendments to the National Market System Plan Governing the Consolidated Audit Trail
| Citation | 84 FR 48458 |
| Record Number | 2019-19852 |
| Published date | 13 September 2019 |
| Section | Notices |
| Court | Securities And Exchange Commission |
Federal Register, Volume 84 Issue 178 (Friday, September 13, 2019)
[Federal Register Volume 84, Number 178 (Friday, September 13, 2019)]
[Notices]
[Pages 48458-48494]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-19852]
[[Page 48457]]
Vol. 84
Friday,
No. 178
September 13, 2019
Part IIISecurities and Exchange Commission-----------------------------------------------------------------------Proposed Amendments to the National Market System Plan Governing the
Consolidated Audit Trail; Notice
Federal Register / Vol. 84 , No. 178 / Friday, September 13, 2019 /
Notices
[[Page 48458]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86901; File No. S7-13-19]
RIN 3235-AM60
Proposed Amendments to the National Market System Plan Governing
the Consolidated Audit Trail
AGENCY: Securities and Exchange Commission.
ACTION: Proposed amendments to national market system plan.
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SUMMARY: The Securities and Exchange Commission (``Commission'' or
``SEC'') is proposing amendments to the National Market System Plan
Governing the Consolidated Audit Trail (``CAT NMS Plan''). The proposed
amendments impose public transparency requirements on the self-
regulatory organizations that are participants to the CAT NMS Plan
(each, a ``Participant'' and collectively, the ``Participants''). The
Participants would be required to file with the Commission and publish
a complete implementation plan for the Consolidated Audit Trail
(``CAT'') and quarterly progress reports, each of which must be
approved by a supermajority vote of the Operating Committee of CAT NMS,
LLC. The proposed amendments also establish financial accountability
provisions.
DATES: Comments should be received on or before October 28, 2019.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/proposed.shtml); or
Send an email to [email protected]. Please include
File No. S7-13-19 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File No. S7-13-19. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
internet website (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for website viewing and printing in the Commission's
Public Reference Room, 100 F Street NE, Washington, DC 20549 on
official business days between the hours of 10:00 a.m. and 3:00 p.m.
All comments received will be posted without change. Persons submitting
comments are cautioned that the Commission does not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Erika Berg, Special Counsel, at (202)
551-5925; Leigh Duffy, Special Counsel, at (202) 551-5928; or Susan
Poklemba, Attorney-Advisor, at (202) 551-3360, Division of Trading and
Markets, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-7010.
SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to
the CAT NMS Plan.\1\
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\1\ See Securities Exchange Act Release No. 78318 (November 15,
2016), 81 FR 84696 (November 23, 2016), at 84943.
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Table of Contents
I. Background
II. Description of Proposed Amendments
A. Amendments To Increase Operational Transparency
B. Financial Accountability Amendments for Implementation of the
CAT
1. Financial Accountability Milestones and Target Deadlines
2. Collection of Post Amendment Industry Member Fees
3. Identification of Post-Amendment Expenses in Submissions to
the Commission
III. Paperwork Reduction Act
A. Summary of Collection of Information
1. Implementation Plan
2. Quarterly Progress Reports
B. Proposed Use of Information
1. Implementation Plan
2. Quarterly Progress Reports
C. Respondents
D. Total Initial and Annual Reporting and Recordkeeping Burdens
1. Implementation Plan
2. Quarterly Progress Reports
E. Collection of Information is Mandatory
F. Confidentiality of Responses to Collection of Information
G. Retention Period for Recordkeeping Requirements
H. Request for Comments
IV. Economic Analysis
A. Baseline
1. Transparency of CAT Implementation Status
2. Status of Implementation
B. Benefits
C. Costs
D. Impact on Efficiency, Competition, and Capital Formation
1. Efficiency
2. Competition
3. Capital Formation
E. Alternatives
1. Fixed versus Relative Financial Accountability Milestone
Dates
2. Different Timelines for Onset of RFRRs
3. Alternate Magnitudes of RFRRs
F. Request for Comment on the Economic Analysis
V. Consideration of Impact on the Economy
VI. Regulatory Flexibility Act Certification
VII. Statutory Authority and Text of the Proposed Amendments to the
CAT NMS Plan
I. Background
In July 2012, the Commission adopted Rule 613 of Regulation NMS,
which requires the national securities exchanges and national
securities associations (``self-regulatory organizations'') to jointly
develop and submit to the Commission a national market system plan to
create, implement and maintain a consolidated audit trail (``CAT'').\2\
Back then, and even today, trading data was and is inconsistent across
the self-regulatory organizations and certain market activity is
difficult to compile because it is not aggregated in one, directly
accessible consolidated audit trail system. The goal of Rule 613 was to
create a system that provides regulators with more timely access to a
sufficiently comprehensive set of trading data, enabling regulators to
more efficiently and effectively reconstruct market events, monitor
market behavior, and identify and investigate misconduct. Rule 613 thus
aims to modernize a reporting infrastructure to oversee the trading
activity generated across numerous markets in today's national market
system.
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\2\ See Securities Exchange Act Release No. 67457 (July 18,
2012), 77 FR 45722 (August 1, 2012) (``Rule 613 Adopting Release'').
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On November 15, 2016, the Commission approved the national market
system plan required by Rule 613 (``CAT NMS Plan'' or ``Plan'') that
was submitted by the self-regulatory organizations (the
``Participants'').\3\ In
[[Page 48459]]
the CAT NMS Plan,\4\ the Participants described the numerous elements
they proposed to include in the CAT, including (1) requirements for the
plan processor responsible for building, operating and maintaining the
Central Repository (``Plan Processor''),\5\ (2) requirements for the
creation and functioning of the Central Repository, (3) requirements
applicable to the reporting of CAT Data \6\ by Participants and their
members (``Industry Members''),\7\ (4) requirements relating to the
security and confidentiality of CAT Data, (5) governance principles for
CAT NMS LLC (``Company''),\8\ and (6) provisions for the establishment
of funding to pay for the operation of the CAT, including the
establishment of fees that the Participants and Industry Members will
pay.\9\
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\3\ The National Market System Plan Governing the Consolidated
Audit Trail was filed with the Commission by the Participants who
include BATS Exchange, Inc. (n/k/a Cboe BZX Exchange, Inc.), BATS-Y
Exchange, Inc. (n/k/a Cboe BYX Exchange, Inc.), BOX Options Exchange
LLC, C2 Options Exchange, Incorporated (n/k/a Cboe C2 Exchange,
Inc.), Chicago Board Options Exchange, Incorporated (n/k/a Cboe
Exchange, Inc.), Chicago Stock Exchange, Inc. (n/k/a NYSE Chicago,
Inc.), EDGA Exchange, Inc. (n/k/a Cboe EDGA Exchange, Inc.), EDGX
Exchange, Inc. (n/k/a Cboe EDGX Exchange, Inc.), Financial Industry
Regulatory Authority, Inc. (``FINRA''), International Securities
Exchange, LLC (n/k/a NASDAQ ISE, LLC), ISE Gemini, LLC (n/k/a NASDAQ
GEMX, LLC), Miami International Securities Exchange LLC, NASDAQ OMX
BX, Inc. (n/k/a NASDAQ BX, Inc.), NASDAQ OMX PHLX LLC (n/k/a NASDAQ
PHLX LLC), The NASDAQ Stock Market LLC, National Stock Exchange,
Inc. (n/k/a NYSE National, Inc.), New York Stock Exchange LLC, NYSE
MKT LLC, and NYSE Arca, Inc.
\4\ See Securities Exchange Act Release No. 78318 (November 15,
2016), 81 FR 84696, (November 23, 2016) (``CAT NMS Plan Approval
Order''). The CAT NMS Plan is Exhibit A to the CAT NMS Plan Approval
Order. See CAT NMS Plan Approval Order, at 84943-85034. In approving
the CAT NMS Plan, the Commission added ISE Mercury, LLC (n/k/a
Nasdaq MRX, LLC) and Investors Exchange LLC as Participants to the
CAT NMS Plan. See id. at 84728. On January 30, 2017 and March 1,
2019, the Commission noticed for immediate effectiveness amendments
to the Plan to add MIAX Pearl, LLC and MIAX Emerald, LLC,
respectively, as Participants. See Securities Exchange Act Release
Nos. 79898 (January 30, 2017), 82 FR 9250 (February 3, 2017), and
85230 (March 1, 2019), 84 FR 8356 (March 7, 2019). Unless otherwise
noted, capitalized terms are used as defined in Rule 613, in the CAT
NMS Plan, or in this release.
\5\ The Central Repository is the repository responsible for the
receipt, consolidation, and retention of all information reported to
the CAT. See CAT NMS Plan, supra note 4, at Section 1.1.
\6\ ``CAT Data'' is defined in the CAT NMS Plan as ``data
derived from Participant Data, Industry Member Data, SIP Data, and
such other data as the Operating Committee [of the Company] may
designate as `CAT Data' from time to time.'' See id. The Operating
Committee is the governing body of the Company. See id.
\7\ ``Industry Member'' is defined in the CAT NMS Plan as ``a
member of a national securities exchange or a member of a national
securities association.'' See id.
\8\ The CAT NMS Plan is the limited liability company agreement
of the Company, a jointly owned limited liability company formed
under Delaware state law, through which the Participants conduct the
activities of the CAT. Each Participant is a member of the Company
and jointly owns the Company on an equal basis. The Participants
submitted to the Commission a proposed amendment to the CAT NMS Plan
on August 29, 2019, which they designated as effective on filing.
With the proposed amendment, the limited liability company agreement
of a new limited liability company named Consolidated Audit Trail,
LLC would serve as the CAT NMS Plan, replacing in its entirety the
CAT NMS Plan. See Notice of Filing of Amendment to the National
Market System Governing the Consolidated Audit Trail, available at
https://catnmsplan.com/wp-content/uploads/2019/09/CAT-2.0-Plan-Amendment(as-filed-with-SEC-8.29.19)_(175663431)_(1).pdf.
\9\ See CAT NMS Plan, supra note 4, at Section 11.1. The CAT NMS
Plan notes that the Participants shall file with the Commission
under Section 19(b) of the Act any such fees on Industry Members
that the Operating Committee of the Company approves. See id. at
Section 11.1(b).
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The Participants also set forth, in the CAT NMS Plan, deadlines
related to the implementation of the CAT, including (1) the requirement
that the Participants select a Plan Processor within two months
following approval of the CAT NMS Plan,\10\ (2) the requirement that
the Participants begin recording and reporting data to the Central
Repository by November 15, 2017,\11\ and (3) the requirement that each
Participant require Industry Members and Small Industry Members \12\ to
begin reporting information to the Central Repository by November 15,
2018,\13\ and November 15, 2019, respectively.\14\
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\10\ 17 CFR 242.613(a)(3)(i). See also CAT NMS Plan, supra note
4, at Section 6.1(a). Two months following approval of the CAT NMS
Plan was January 15, 2017 (a Sunday).
\11\ See CAT NMS Plan, supra note 4, at Section 6.7(a)(iii).
\12\ The CAT NMS Plan defines Small Industry Member as ``an
Industry Member that qualifies as a small broker-dealer as defined
in SEC Rule 613.'' See id. at Section 1.1. Rule 613(a)(3)(vi) uses
the definition of small broker-dealer as defined in Rule 0-10(c),
which defines such a broker-dealer as (1) having had total capital
(net worth plus subordinated liabilities) of less than $500,000 on
the date in the prior fiscal year as of which its audited financial
statements were prepared pursuant to Rule 17a-5(d) or, if not
required to file such statements, a broker or dealer that had total
capital (net worth plus subordinated liabilities) of less than
$500,000 on the last business day of the preceding fiscal year (or
in the time that it has been in business, if shorter); and (2) is
not affiliated with any person (other than a natural person) that is
not a small business or small organization as defined in Rule 0-10.
See Rule 613 Adopting Release, supra note 2, at 45804; 17 CFR
242.613(a)(3)(vi); 17 CFR 240.0-10(c).
\13\ See CAT NMS Plan, supra note 4, at Section 6.7(a)(v).
\14\ See id. at Section 6.7(a)(vi).
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On January 18, 2017, the Participants filed with the Commission
notice of their selection of the Plan Processor.\15\ On January 17,
2017, the Participants selected Thesys Technologies LLC to build the
CAT system, pending execution of a Plan Processor Agreement between
Thesys Technologies LLC and the Participants.\16\ The Plan Processor
Agreement was executed on April 6, 2017, after which Thesys CAT LLC
(``Thesys CAT''), a wholly owned subsidiary of Thesys Technologies LLC,
became the Plan Processor for the CAT.
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\15\ See Letter from Participants to Brent J. Fields, Secretary,
Commission, dated January 18, 2017, available at https://www.sec.gov/divisions/marketreg/rule613-info-notice-of-plan-processor-selection.pdf.
\16\ Id.
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The next critical deadline required by the CAT NMS Plan was for the
Participants to begin recording and reporting data to the Central
Repository by November 15, 2017.\17\ The Participants, however, did not
begin reporting data by that deadline. On November 13, 2017, two days
before the deadline for Participant reporting, and having previously
provided assurances as late as the summer of 2017 that initial data
reporting would commence on schedule and in accordance with the CAT NMS
Plan, the Participants filed a request for exemptive relief in which
they sought, among other things, to delay the deadline by which they
must report to the CAT for one year, and to extend the deadlines by
which Industry Members and Small Industry Members must report by 17
months.\18\ The Commission did not grant this request.\19\ SEC Chairman
Clayton instead issued a statement on November 14, 2017 noting that he
would not support extensions of the CAT deadlines on the terms proposed
by the Participants.\20\ Chairman Clayton stated the importance of the
CAT in enhancing the protection of investors and the markets by
providing regulators with consolidated oversight of the securities
markets. Chairman Clayton also instructed Commission staff to engage
with the Participants as necessary and appropriate.\21\
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\17\ See supra note 11.
\18\ See Letter from the Participants to Brent J. Fields,
Secretary, Commission, dated November 13, 2017 (``November 2017
Exemption Request'').
\19\ See Statement on Status of the Consolidated Audit Trail
(November 14, 2017), available at https://www.sec.gov/news/public-statement/statement-status-consolidated-audit-trail-chairman-jay-clayton.
\20\ Id.
\21\ Id.
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Since then, Commission staff has engaged with the Participants with
a focus on trying to ensure that project management, resource, and
governance deficiencies are addressed, including development of a
credible and comprehensive work plan with verifiable milestones.\22\
Among other things, Commission staff has encouraged the Participants to
enhance their focus on project management and accountability.\23\ As
sophisticated market participants with vast experience related to
various data systems and data management protocols, the Participants
are capable of
[[Page 48460]]
managing--and uniquely situated to manage--the implementation of the
CAT.
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\22\ See Statement on Status of the Consolidated Audit Trail
(August 27, 2018), available at https://www.sec.gov/news/public-statement/tm-status-consolidated-audit-trail.
\23\ Id.
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On May 1, 2018, the SEC's Division of Trading and Markets
(``Division'') sent a letter to the Participants expressing concern
about the lack of progress on CAT implementation. The Division called
on senior personnel at each Participant to focus on completing the CAT
as soon as practicable with all of the functionality required by the
CAT NMS Plan. The Division also requested a master plan (``Master
Plan'') for completing the CAT,\24\ including a timeline with
development and completion milestones.\25\ The Division requested that
the Master Plan detail all material steps to fully implement both
Participant and Industry Member reporting, and describe how the
Participants will better manage the Plan Processor's performance. The
Participants submitted the requested Master Plan on May 25, 2018. The
Master Plan stated that Participant reporting would begin on November
15, 2018, one year past the deadline in the CAT NMS Plan.\26\
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\24\ The Division of Trading and Markets also requested that the
Participants streamline their decision-making and governance
processes to ensure more timely implementation. See Letter from
Brett Redfearn, Director, Division of Trading and Markets,
Commission, to Michael J. Simon, Chair, CAT NMS Plan Operating
Committee, dated May 1, 2018. See also note 22.
\25\ The Master Plan projects Industry Member reporting will
commence in phases, with equities reporting beginning in November
2019 and simple options reporting beginning in May 2020, with final
implementation of the CAT through Small Industry Member reporting
occurring by November 2022. See Industry Update on the Consolidated
Audit Trail (June 28, 2018), at 4, available at https://www.catnmsplan.com/wp-content/uploads/2018/06/CAT-Industry-Webcast-6.28.18.pdf.
\26\ See supra note 22.
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On November 15, 2018, the Participants began reporting quote,
order, trade and other transaction data to the Central Repository;
however, as the Participants acknowledge, the CAT system did not
include all of the functionality required by the CAT NMS Plan, such as
linkages between reported events and regulators' query
functionality.\27\ On November 16, 2018, the Participants stated that
Thesys CAT would complete all of the required functionality by March
31, 2019.\28\ But on February 1, 2019, the Company announced that it
would be transitioning from Thesys CAT to a new Plan Processor,\29\ and
on February 26, 2019, the Operating Committee voted to select FINRA as
the successor Plan Processor to Thesys CAT.\30\ As a result of this and
various other factors, the functionality the Participants represented
Thesys CAT would complete by March 31, 2019 was not delivered.
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\27\ See CAT NMS Announces Initiation of Reporting to the
Consolidated Audit Trail (November 16, 2018), available at https://www.catnmsplan.com/wp-content/uploads/2018/11/Press-Release-CAT-Launch-final.pdf.
\28\ Id.
\29\ See News, available at https://www.catnmsplan.com/news-page/index.html (February 1, 2019).
\30\ See Letter from Michael J. Simon, Chair, CAT NMS, LLC
Operating Committee, to Brent J. Fields, Secretary, Commission,
dated April 9, 2019, available at https://www.sec.gov/divisions/marketreg/rule613-info-notice-of-plan-processor-selection-040919.pdf.
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The Participants are responsible for their selection of a Plan
Processor, for the management of the Plan Processor, and for compliance
with the CAT NMS Plan. The Participants and the Plan Processor failed
to comply with the following deadlines in the CAT NMS Plan and missed
the following milestone completion dates:
The November 15, 2017 milestone completion date for the
Plan Processor publishing final technical specifications for the
submission of order data for Industry Members; \31\
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\31\ See CAT NMS Plan, supra note 4, at Appendix C, Section
C.10(b).
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the May 15, 2018 milestone completion date for the Plan
Processor publishing technical specifications for Industry Member
submission of customer data; \32\
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\32\ See id. at Appendix C, Section C.10(a).
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the May 15, 2018 milestone completion date for the Plan
Processor making the testing environment available on a voluntary basis
and beginning connectivity testing and accepting order data from
Industry Members for testing purposes; \33\
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\33\ See id. at Appendix C, Section C.10(b).
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the August 15, 2018 milestone completion date for Industry
Member order submission testing; \34\
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\34\ See id. at Appendix C, Section C.10(a); id. at Appendix C,
Section C.10(b).
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the October 15, 2018 milestone completion date for
Industry Member reporting of customer information to the Central
Repository; \35\ and
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\35\ See id. at Appendix C, Section C.10(a).
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the November 15, 2018 deadline for full Industry Member
reporting.\36\
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\36\ See id. at Section 6.4; Section 6.7(a)(v).
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In light of these missed deadlines and milestone completion dates,
Chairman Clayton determined that it was necessary to dedicate
additional oversight resources to this project. Accordingly, Chairman
Clayton appointed a staff person to coordinate the Commission's efforts
to monitor the Participants' development of the CAT.\37\
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\37\ See SEC Names Manisha Kimmel as Senior Policy Advisor to
the Chairman on the Consolidated Audit Trail (January 29, 2019),
available at https://www.sec.gov/news/press-release/2019-5.
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The Commission is concerned by the continued potential for delays
to the implementation of the CAT. In an April 3, 2019 Industry Update
presentation, the Operating Committee presented a revised
implementation timeline for Industry Member reporting with deadlines
that extend even further beyond those previously shared with Industry
Members.\38\ The revised deadline for Industry Member reporting of all
transaction data to the CAT is December 2021, with the exception of
customer and account information which the Participants will require
the reporting of by July 2022.\39\ These deadlines further extend the
initially established November 15, 2018 Industry Member reporting
deadline in the CAT NMS Plan,\40\ the phased deadlines for Industry
Member reporting in the Master Plan, and the April 13, 2020 and the
April 20, 2021 deadlines for Industry Member and Small Industry Member
reporting proposed in the November 2017 Exemptive Request. The
Commission has not approved these implementation deadlines.
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\38\ See Consolidated Audit Trail: CAT Reporting Technical
Specifications for Industry Members Draft 2 Version 1.1 Key Changes
(April 3, 2019), available at https://www.catnmsplan.com/wp-content/uploads/2019/04/CAT_Industry_Call_04032019_Presentation.pdf. See
also CAT Reporting Timelines, available at https://www.catnmsplan.com/timelines/. The Commission notes that it has not
approved these dates.
\39\ See Consolidated Audit Trail: CAT Reporting Technical
Specifications for Industry Members Draft 2 Version 1.1 Key Changes
(April 3, 2019), available at https://www.catnmsplan.com/wp-content/uploads/2019/04/CAT_Industry_Call_04032019_Presentation.pdf, at 3,
4.
\40\ See CAT NMS Plan, supra note 4, at Section 6.7(a)(v).
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The Commission preliminarily believes that amendments to the CAT
NMS Plan are appropriate and necessary to help ensure the Participants'
fulfillment of their obligations to deliver a functional CAT in a
reasonable time frame. While the Commission believes that the
Commission staff's continued engagement with the Participants is
important to the effort to deliver a functional CAT, the Commission
also preliminarily believes that increased transparency through
formalized and public documentation of the Participants' implementation
progress will increase the Participants' accountability for the
efficient completion of CAT. The Commission also preliminarily believes
that modifying the CAT NMS Plan to require
[[Page 48461]]
additional financial accountability to meet implementation deadlines is
appropriate to achieve the CAT's timely completion.
The Commission therefore proposes to amend the CAT NMS Plan to
require the Participants to develop a complete implementation plan
containing a detailed timeline with objective milestones to achieve
full CAT implementation (the ``Implementation Plan''). This
Implementation Plan would be filed with the Commission and made
publicly available after approval by a Supermajority Vote \41\ of the
Operating Committee. The Implementation Plan must be submitted by the
Operating Committee to the Chief Executive Officer (``CEO''),
President, or an equivalently situated senior officer of each
Participant, prior to being voted on by the Operating Committee.
Additionally, to further improve implementation transparency, the
Commission proposes requiring the Participants to provide the
Commission and the public with quarterly progress reports (``Quarterly
Progress Reports'' or ``Reports'') approved by at least a Supermajority
Vote of the Operating Committee.\42\ The Quarterly Progress Reports
must also be submitted by the Operating Committee to the CEO,
President, or an equivalently situated senior officer of each
Participant, prior to being voted on by the Operating Committee. The
proposed amendments also include provisions regarding financial
accountability to facilitate implementation of the CAT in an
expeditious and efficient manner.
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\41\ Section 1.1 of the CAT NMS Plan defines a ``Supermajority
Vote'' as an ``affirmative vote of at least two-thirds of all of the
members of the Operating Committee or any Subcommittee, as
applicable, authorized to cast a vote with respect to a matter
presented for a vote (whether or not such a member is present at any
meeting at which a vote is taken) by the Operating Committee or any
Subcommittee, as applicable (excluding, for the avoidance of doubt,
any member of the Operating Committee or any Subcommittee, as
applicable, that is recused or subject to a vote to recuse from such
matter pursuant to Section 4.3(d)); provided that if two-thirds of
all such members authorized to cast a vote is not a whole number
then that number shall be rounded up to the nearest whole number.''
\42\ The Commission does not believe, on a preliminary basis,
that the requirements of the Implementation Plan or the Quarterly
Progress Reports, discussed below in Part II.A., require the
Participants to disclose any confidential or sensitive information
related to the security of the CAT, the security of CAT Data, or the
operation of the CAT.
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II. Description of Proposed Amendments
In order to address shortcomings in the completeness, accuracy,
accessibility, and timeliness of existing audit trail systems, the
Commission adopted Rule 613 in 2012 to direct the Participants to
create and file the CAT NMS Plan.\43\ The CAT was intended not only to
replace an existing regulatory data infrastructure that was ``outdated
and inadequate to effectively oversee a complex, dispersed, and highly
automated national market system,'' \44\ but also to provide benefits
to market participants in the form of improved market surveillance and
related analyses.\45\ Today, almost seven years after the adoption of
Rule 613, the need for a better audit trail system is no less pressing.
Yet, as described above,\46\ the Participants' progress towards
implementing the CAT has suffered multiple setbacks, and the
Participants have repeatedly missed relevant deadlines.\47\ These
delays to CAT implementation have left the Commission and the
Participants without access to a comprehensive database to help
facilitate analyses of market events and other matters. Moreover, the
repeated delays in CAT implementation have resulted in uncertainty for
Industry Members and other market participants.\48\
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\43\ See supra note 2.
\44\ Id. at 45723.
\45\ Id. at 45730-33.
\46\ See Part I supra.
\47\ See, e.g., Industry Update on the Consolidated Audit Trail
9/7/2017 (August 25, 2017), available at https://catnmsplan.com/news-page/industry-update-on-the-consolidated-audit-trail/index.html
(stating that ``the implementation timelines for establishing the
CAT are in effect''); Industry Update on the Consolidated Audit
Trail (September 7, 2017), available at https://catnmsplan.com/wp-content/uploads/2017/09/Industry-Update-on-the-Consolidated-Audit-Trail-090817.pdf (indicating that the Participants were implementing
the CAT according to the timeline set forth in the CAT NMS Plan).
\48\ See, e.g., Part IV.A.2.
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A. Amendments To Increase Operational Transparency
Public disclosure of information about CAT implementation would
furnish a better understanding of progress on the CAT to market
participants and members of the investing public, all of whom stand to
benefit from the improved efficiencies and regulatory capabilities of
the CAT. Moreover, CAT implementation also affects Industry Members,
who are required to report data to the CAT and are therefore keenly
interested in the details and timing of CAT implementation. Currently,
the CAT NMS Plan does not contain disclosure provisions that require
the Participants to provide public updates on implementation progress
and developments.
To address concerns about insufficient transparency and
accountability regarding the CAT's implementation, the Commission
proposes to amend Section 6.6 of the CAT NMS Plan. Specifically, the
Commission proposes to amend the CAT NMS Plan by adding a new Section
6.6(c) to require the Participants to file with the Commission and
publish on their own websites (or, if the Participants wish to publish
collectively, on the CAT NMS Plan website) the Implementation Plan
setting forth how and when the Participants will achieve full CAT
implementation, including the Participants' timeline for achieving both
(1) the objective milestones that are set forth in Section C.10 of
Appendix C of the CAT NMS Plan to assess the progress of CAT
implementation \49\ (``Objective Milestones'') and (2) the CAT
implementation milestones associated with the proposed financial
accountability provisions discussed below (``Financial Accountability
Milestones'') \50\ (collectively, the ``Implementation
Milestones'').\51\
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\49\ See CAT NMS Plan, supra note 4, at Appendix C Section C.10.
\50\ The Financial Accountability Milestones, and their relation
to proposed financial accountability provisions, are described in
more detail in Part II.B. infra.
\51\ The Participants would be free to include, as may be
appropriate, additional Implementation Milestones not otherwise
required by the proposed plan amendment. For example, the
Participants may choose to add Implementation Milestones regarding
system security or external testing with CAT Reporters.
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If the Participants decide to complete any of the Implementation
Milestones by releasing functionality in a phased approach, the
proposed rule would require the Implementation Plan to also describe
each phased release necessary to achieve the completion of the relevant
Implementation Milestone and to provide completion dates for each such
release.\52\ The proposed rule also requires the Participants to
include the completion date and a description of the status for each
Implementation Milestone identified in the Implementation Plan, which,
for example, could include discussion about the extent to which an
[[Page 48462]]
Implementation Milestone has been successfully completed. The
Implementation Plan would be required to be filed with the Commission
and published on each Participant website or the CAT NMS Plan website
no later than 30 calendar days following the effective date of this
amendment.
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\52\ For example, the CAT NMS Plan identifies ``Industry Members
(other than Small Industry Members) begin reporting customer/
institutional/firm account information to the Central Repository for
processing'' as one of the Objective Milestones. See CAT NMS Plan,
supra note 4, at Appendix C, Section 10. Recent timelines published
by the Participants indicate, however, that the Participants have
decided to complete this milestone by releasing functionality in a
phased approach--first implementing Industry Member reporting for
equities transactions and then implementing Industry Member
reporting for options in a separate phase. See, e.g., CAT Reporting
Timelines, available at https://catnmsplan.com/timelines/. The
proposed amendment would therefore require the Implementation Plan
to provide completion dates for each of these phases.
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The Commission preliminarily believes that requiring the proposed
Implementation Plan is appropriate to facilitate public transparency of
the CAT's development. The Commission believes 30 calendar days is a
sufficient amount of time to create the Implementation Plan because the
Participants have previously engaged in the exercise of considering and
developing timelines and milestones for implementation purposes when
developing the Master Plan, and many of the Participants are active in
data systems development and operation.
The Commission further believes that requiring this added
transparency will aid the public in more easily monitoring the status
of the implementation of the CAT. The CAT NMS Plan currently requires
the Chief Compliance Officer of the Company to appropriately document
objective milestones to the Commission. The Commission understands from
the Participants' status update calls and discussions that the
Participants are already engaged in documenting their progress toward
CAT implementation for the Objective Milestones.\53\ Therefore, the
proposed amendment is requiring the incremental step that the
information related to this documentation be made public via the
Implementation Plan. The Commission does not expect that this
incremental step would be unduly burdensome. The proposed amendment
also requires the Participants to provide information regarding
progress toward and completion of the Financial Accountability
Milestones. Requiring the Participants to disclose their progress
toward and completion of Financial Accountability Milestones will
provide information not contained in the Objective Milestones regarding
the development and availability of critical regulatory tools. The
Commission believes that it is important to provide this information in
a comprehensive timeline. Information related to the production of
critical regulatory tools is also of interest to market participants,
who will benefit from the increased regulatory capabilities of the
CAT.\54\
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\53\ See also CAT NMS Plan, supra note 4, at Section 6.7(b).
\54\ Moreover, inclusion of the Financial Accountability
Milestones in the Implementation Plan will provide the Commission
and the public with more information regarding the implementation
deadlines. See Part II.B. infra for additional discussion of the
financial accountability provisions.
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Moreover, the Commission preliminarily believes it is appropriate
to require the Participants to disclose whether they intend to complete
any of the Implementation Milestones in phases and any related
completion dates, because recent timelines published by the
Participants indicate that the Participants intend to release certain
functionality in phases. For example, while the CAT NMS Plan identifies
only one implementation date for Industry Member reporting, the
Participants have indicated that Industry Member reporting will be
implemented in several phases that each have a different implementation
deadline.\55\ The Implementation Plan should reflect the current,
phased approach to CAT implementation for this milestone, not the
approach to CAT implementation that was contemplated at the time the
CAT NMS Plan was approved. By requiring phasing to be addressed, the
Implementation Plan will both furnish a common understanding of the
status of CAT implementation at the time the Implementation Plan is
made public, as well as indicate how completing the Implementation
Milestones will lead to the achievement of full CAT implementation.
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\55\ See note 52 supra.
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The Commission also believes that, to the extent the Participants
meet the dates specified in the timeline, the publication of such
timeline will reduce uncertainty as to the expected implementation
timeline for Industry Members, which would aid Industry Members in
staging their resources and otherwise managing implementation planning,
which should reduce the risk of additional delays. The Commission
further believes that the Implementation Plan's timeline, paired with
Implementation Milestones, will serve to clarify what level of CAT
system functionality will be delivered on a given date. Finally, the
Commission anticipates that requiring the Participants to disclose
their deadlines and the status of Implementation Milestones to the
public through the Implementation Plan will provide accountability both
to the Commission and to Industry Members regarding the Participants'
progress toward CAT implementation.
The Commission also proposes to amend the CAT NMS Plan to add
proposed Section 6.6(c)(ii) to require Participants to file with the
Commission and publish on each Participant website, or collectively on
the CAT NMS Plan website, complete Quarterly Progress Reports. These
Reports would be filed and made public no later than fifteen business
days following the end of each calendar quarter (e.g., by April 21,
2020; July 22, 2020; October 22, 2020; or January 25, 2021) and would
describe in detail the progress made by the Participants during the
prior calendar quarter toward achieving each of the Implementation
Milestones set forth in the Implementation Plan.\56\ The initial Report
to be filed by the Participants would be filed and made public no later
than fifteen business days following the end of the calendar quarter in
which the Implementation Plan was filed and made public.\57\ The
Reports would divide the Implementation Milestones into the following
three categories: (1) Implementation Milestones that have been
completed, (2) Implementation Milestones that are still in progress and
(3) Implementation Milestones that have not yet been initiated.
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\56\ If, subsequent to the publication of the Implementation
Plan, the Participants decide to complete any of the Implementation
Milestones by releasing functionality in a phased approach, the
proposed amendment requires the Participants to reflect this change
in the Quarterly Progress Reports by describing the phases necessary
to achieve the completion of the relevant milestones and providing
specified information on the progress made for each release.
\57\ For example, if the Participants filed and made public the
Implementation Plan on March 18, 2020 the initial Report would have
to be filed no later than April 21, 2020.
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For each Implementation Milestone completed by the end of a given
calendar quarter, the Report would include the following: (1) The
completion date provided in the Implementation Plan, (2) the date on
which the Implementation Milestone was actually completed, and (3) a
description of any variance from the Implementation Plan.\58\
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\58\ For example, a description of any variance from the
Implementation Plan could explain why the completion of a given
Implementation Milestone was delayed from the date set forth in the
Implementation Plan or, if the Implementation Milestone was broken
out into multiple phases, the extent to which the completed
Implementation Milestone satisfied the functionality required by the
Implementation Plan for that milestone.
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For each Implementation Milestone in progress at the end of a given
calendar quarter, the Report would include the following: (1) The
completion date provided in the Implementation Plan, (2) the currently
targeted completion date, and (3) a description of (a) the current
status of the Implementation Milestone, (b) any difference between the
Implementation Plan completion date and the currently targeted
completion date, including the basis for
[[Page 48463]]
making the adjustment and the impact of this adjustment on any other
Implementation Milestone, and (c) any other factual indicators that
demonstrate the current level of completion with respect to the
Implementation Milestone.\59\ Factual indicators could include any data
relevant to the Objective Milestone (e.g., (1) for milestones related
to the publication of documentation: The current version of the
documentation under development or published; the number of and
explanation for any open issues not yet resolved; (2) for milestones
related to connectivity and acceptance testing: The status of the
publication of test plans; statistics on the amount of expected or
actual activity in the test environment (e.g., number of testers,
number of reportable events, error rates/trends observed), the number
of Plan Processor functional requirements \60\ for which defects were
found categorized by criticality; progress remediating defects; (3) for
milestones related to reporting: Development progress as defined by the
number of functional requirements not yet started, in progress, or
complete; the number and percentage of functional requirements for
which internal testing is in progress and the related pass/fail
percentages of associated test cases; the number and percentage of
functional requirements that have completed internal testing with all
defects remediated; the number of Plan requirements met or outstanding;
a list of Plan requirements met or outstanding).
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\59\ For example, if an Implementation Milestone is the
publication of Industry Member technical specifications, a
description of the status could state: That the Plan Processor
produced a draft that was circulated to Industry Members on [insert
date]; that the Participants are reviewing feedback and expect to
issue final technical specifications by [insert date]; and that the
draft is complete except for a [specified topic], because of a
[specified reason]. As an example of a description identifying any
difference between the Implementation Plan completion date and the
current targeted completion date, including the basis for making the
adjustment and the impact of this adjustment on any other
Implementation Milestone, the Participants could state: That the
Implementation Plan completion date was [insert date], but the
Participants are revising such date to [insert new targeted
completion date], because [insert topic] proved to be more
complicated than anticipated due to [insert reason]. The description
could continue to state that the Participants believe the new
targeted completion date is appropriate because, for example, they
have designed a new approach to deliver the required functionality
to address the issue in the technical specifications that is
currently under development as of [insert date].
\60\ Appendix D outlines minimum functional and technical
requirements established by the Participants of the CAT NMS Plan for
the Plan Processor. See CAT NMS Plan, supra note 4, Appendix D-1.
Examples of such functional requirements for the CAT system include
the ability to provide feedback on the reasons for errors in data
submissions, and the ingestion of data submitted to the Central
Repository by Industry Members. See id. at Appendix D, Sections 7.4,
7.5.
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For each Implementation Milestone that has not yet been initiated
by the end of a given calendar quarter, the Report would include the
following: (1) The completion date provided in the Implementation Plan,
(2) the currently targeted completion date, and (3) a description of
(a) the current status of the Implementation Milestone, and (b) any
difference between the Implementation Plan completion date and the
currently targeted completion date, including the basis for making the
adjustment and the impact of this adjustment on any other
Implementation Milestone.
The Commission preliminarily believes that the Quarterly Progress
Reports will facilitate transparency by ensuring that current and
comprehensive information about the CAT's state of development is
regularly communicated to the Commission, Industry Members, and the
public at large.\61\ Moreover, the Commission preliminarily believes
that the requirements set forth for the proposed Quarterly Progress
Reports are appropriate. Because the Participants should already be
actively monitoring their progress on the implementation of the CAT,
the Commission believes 15 business days is a reasonable amount of time
in which to prepare Reports based on the information the Participants
have already gathered.\62\
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\61\ For example, the Commission expects that the Quarterly
Progress Reports will provide the Commission and the public with
more granular and up-to-date information regarding the likelihood
that the Participants will meet the target deadlines associated with
the Financial Accountability Milestones and/or the likelihood that
the Participants will be permitted to recover related fees, costs,
or expenses from Industry Members. The Financial Accountability
Milestones, and their related financial accountability provisions,
are discussed in Part II.B. infra.
\62\ See, e.g., note 53 supra.
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The Participants are required to provide both the Implementation
Plan completion date and the actual or currently targeted completion
date for each Implementation Milestone so that the original completion
date will serve as a baseline against which to measure progress if
there is a difference between the two dates, as supplemented by the
information provided in the commentary. The Commission preliminarily
believes that progress can be effectively evaluated based upon whether
the Implementation Plan completion dates are being met.
The Commission also preliminarily believes that information
provided in the required descriptions for the Implementation Milestones
will yield valuable insights into the progress of CAT implementation,
for example by providing an early indication of the potential for
delays. The Commission also preliminarily believes that requiring the
disclosure of the information provided in the descriptions would
encourage the Participants to consider whether resources need to be
realigned, so that adjustments can be made to the implementation
process. In regard to the Implementation Milestones completed by the
end of a given calendar quarter, the proposed amendments would require
the Participants to describe any variance from the Implementation Plan.
The Commission preliminarily believes that such information could
reflect whether the Participants have only partially achieved the
functionality required by certain Implementation Milestones. In regard
to the Implementation Milestones in progress at the end of a given
calendar quarter, the proposed amendments would require the
Participants to describe the status of the Implementation Milestone,
any difference between the completion dates provided, including the
basis for making the adjustment and the impact such adjustment might
have on any other Implementation Milestone, and other factual
indicators that demonstrate the current level of completion with
respect to the milestone. The Commission preliminarily believes that
such information could reveal if there is an increasingly negative
variance between the Implementation Plan completion date and the
targeted completion date, as well as the cause for such variance. The
required information could also provide an indication of whether
corrections are needed to get the implementation process back on track
and whether the currently targeted completion dates provided in a
Report are realistic. In regard to the Implementation Milestones that
have not yet been initiated by the end of a given calendar quarter, the
proposed amendments would require the Participants to describe the
current status for the Implementation Milestone and any difference
between the completion dates provided, including the basis for making
the adjustment.
The Commission expects that quarterly communication of this
information will aid Industry Members by providing more information on
the timing of their CAT reporting obligations, which, correspondingly,
should aid them in efficiently developing and implementing their
regulatory data collection systems and allow them to make their own
[[Page 48464]]
adjustments as needed. In addition, the Commission anticipates that the
Quarterly Progress Reports will aid the Commission, Industry Members
and others in monitoring and better understanding the progress of CAT
implementation.
The Commission also proposes to amend the CAT NMS Plan to add
proposed Section 6.6(c)(iii) to require that the Implementation Plan
and each Quarterly Progress Report be approved by at least a
Supermajority Vote of the Operating Committee before such documents are
filed with the Commission or made publicly available on each of the
Participant websites or collectively on the CAT NMS Plan website.
However, if the Implementation Plan or any Quarterly Progress Report is
approved only by a Supermajority Vote of the Operating Committee, and
not by a unanimous vote of the Operating Committee (including, for the
avoidance of doubt, all members of the Operating Committee, whether or
not present and whether or not recused), proposed Section 6.6(c)(iii)
would require each Participant whose Operating Committee member did not
vote to approve the Implementation Plan or Quarterly Progress Report
separately file with the Commission and make publicly available on each
of the Participant websites, or collectively on the CAT NMS Plan
website, a statement identifying itself and explaining why the member
did not vote to approve the Implementation Plan or Quarterly Progress
Report. Prior to the Operating Committee's vote, the Implementation
Plan and Quarterly Progress Reports shall also be submitted by the
Operating Committee to the CEO, President, or an equivalently situated
senior officer (or, ``senior management'') of each Participant.\63\
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\63\ In addition to the senior management personnel who will
receive the Implementation Plan and Quarterly Progress Reports under
the proposed amendment, each Participant has a voting member (and an
alternate voting member) representing it on the Operating Committee
who will receive these documents. One individual may serve as the
voting member of the Operating Committee for multiple affiliated
Participants. See CAT NMS Plan, supra note 4, at Section 4.2(a).
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The Commission preliminarily believes that the Operating Committee
should vote on the Implementation Plan and each Quarterly Report
because the Operating Committee, as the manager of the Company, already
votes on all actions for which a vote is required under the CAT NMS
Plan.\64\ The Commission further preliminarily believes that
specifically requiring the approval of the Operating Committee by at
least a Supermajority Vote will lend credibility to the timelines
presented by Participants in the Implementation Plan and Reports, which
may otherwise be lacking given that the timelines for Industry Member
CAT implementation have been revised multiple times.\65\ In addition,
the requirement that the Implementation Plan and Quarterly Progress
Reports be submitted to the CEO, President, or an equivalently situated
senior officer of each Participant, prior to the Operating Committee's
vote, is intended to promote senior management attention and promote
accountability with respect to CAT implementation.
---------------------------------------------------------------------------
\64\ See CAT NMS Plan, supra note 4, at Sections 4.1 and 4.3.
\65\ See Part I supra.
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If the Operating Committee does not unanimously vote to approve the
Implementation Plan or any Quarterly Progress Report, the proposed
amendments require each Participant whose Operating Committee member
did not vote to approve the Implementation Plan or Quarterly Progress
Report to separately file with the Commission and make publicly
available on each of the Participant websites, or collectively on the
CAT NMS Plan website, a statement identifying itself and explaining why
the member did not vote to approve the Implementation Plan or Quarterly
Progress Report. The Commission preliminarily believes that the
requirement may aid the Commission and the public to better monitor the
progress of CAT implementation, because such an explanation may reveal
critical information regarding whether currently targeted completion
dates are realistic, whether milestones are being or have been
completed in accordance with the requirements of the CAT NMS Plan, and/
or whether potential risks or delays may impede the progress of CAT
implementation.
The Commission requests comment on the amendments to increase
operational transparency. Specifically, the Commission solicits comment
on the following:
1. Are the Implementation Plan and the Quarterly Progress Report
effective mechanisms for providing the Commission and Industry Members
with transparency into CAT implementation? Why or why not?
2. Are the details and requirements of the Implementation Plan
appropriate and reasonable? Why or why not? Would additional details or
requirements for the Implementation Plan be beneficial?
3. The proposed amendment requires the Participants to file and
publish the Implementation Plan within 30 calendar days following the
effective date of proposed Section 6.6(c). Is 30 calendar days a
reasonable period of time in which to file and publish such a document?
Why or why not? Does this timeline give the Operating Committee a
sufficient amount of time to approve the Implementation Plan? Why or
why not? Would a longer or shorter period of time, such as 45 calendar
days or 15 calendar days, be more appropriate?
4. The proposed Amendment requires the Participants to file and
publish a Quarterly Progress Report each calendar quarter on each
Participant website or collectively on the CAT NMS Plan website. Is a
quarterly interval the right interval? Would a longer or shorter
interval be more effective?
5. The proposed amendment requires the Participants to file and
publish the Quarterly Progress Report no later than fifteen business
days following the end of each calendar quarter. Is fifteen business
days a reasonable period of time in which to file and publish such a
report? Why or why not? Does this timeline give the Operating Committee
a sufficient amount of time to approve the Quarterly Progress Reports?
Why or why not? Would a longer or shorter period of time, such as
thirty business days or five business days, be more appropriate?
6. The proposed amendment establishes the deadline for filing and
publishing the Quarterly Progress Report on the basis of business days.
Are business days an appropriate measure by which to establish this
deadline? Or would calendar days be more appropriate? Why or why not?
7. Are the details and requirements of the Quarterly Progress
Report appropriate and reasonable? Why or why not? Would additional
details or requirements for the report be beneficial? For example,
should the Quarterly Progress Reports include financial information
detailing the fees, costs, and expenses that the Participants have
incurred to build and implement the CAT? If so, should these fees,
costs, and expenses be clearly tied to the relevant Financial
Accountability Milestone? Why or why not?
8. The proposed amendment requires the Operating Committee to
approve the Implementation Plan and each Quarterly Progress Report by
at least a Supermajority Vote. Is it appropriate to require a
Supermajority Vote, or should the Commission require a majority vote or
a unanimous vote of the Operating Committee? Why or why not? Is it
appropriate to require that the Operating Committee vote on this
matter? Why or why not? If this matter should be
[[Page 48465]]
delegated to a Subcommittee, please explain which Subcommittee should
vote to approve the Implementation Plan and Quarterly Progress Report
and why.
9. If the Implementation Plan or any Quarterly Progress Report is
not approved by a unanimous vote of the Operating Committee, the
proposed amendment requires each Participant whose Operating Committee
member did not vote to approve the Implementation Plan or Quarterly
Progress Report separately file with the Commission and make publicly
available on each of the Participant websites, or collectively on the
CAT NMS Plan website, a statement identifying itself and explaining why
the member did not vote to approve the Implementation Plan or Quarterly
Progress Report. Is this an appropriate requirement? Why or why not?
Should the Commission require the Implementation Plan or the Quarterly
Progress Reports, or the members who did not vote to approve the
Implementation Plan or a Quarterly Report, as the case may be, to
provide any additional information? If so, what information should be
provided, and why?
10. The proposed amendment requires that the Implementation Plan
and each Quarterly Progress Report be submitted to the CEO, President,
or an equivalently situated senior officer of each Participant, prior
to being voted on by the Operating Committee. Is this an appropriate
requirement to promote senior management attention and promote
accountability with respect to CAT implementation? Why or why not?
Should the Commission specify when the Implementation Plan and
Quarterly Progress Reports should be submitted to the CEO, President,
or equivalently situated senior officer of each Participant? If so, how
many days prior to the Operating Committee vote should the
Implementation Plan and Quarterly Progress Reports be submitted to
senior management? To the extent that the Commission implements such a
requirement, would the deadlines set forth in the proposed amendment
for the submission of the Implementation Plan and Quarterly Progress
Reports to the Commission need to be adjusted? Why or why not? By how
many days should they be adjusted? Please explain your responses.
11. Please identify any alternative means to promote senior
management attention and promote accountability with respect to CAT
implementation. For example, should the Commission require the senior
management of each Participant (e.g., the CEO, President, or an
equivalently situated senior officer) to certify that the contents of
the Implementation Plan and each Quarterly Progress Report are accurate
and complete in all material respects? What should qualify as material?
Should the certification be made to the best of an officer's knowledge
and reasonable belief after reasonable investigation? Is the CEO or
President the appropriate person to make the certification? If not,
please explain why. If the CEO or President is not the appropriate
person, which equivalently situated senior officer would be
appropriate? Would additional details or requirements for such
certifications be beneficial? If so, what are those details or
requirements? Please explain your responses.
12. Are there other factors that impact the ability of the
Participants to implement the CAT NMS Plan that would not be addressed
by further disclosure that the Commission should address?
B. Financial Accountability Amendments for Implementation of the CAT
As discussed above, there have been multiple delays in CAT
implementation since the adoption of Rule 613. To prevent additional
delays, the Commission proposes to amend the CAT NMS Plan to include
financial accountability provisions that are designed to align
financial accountability with regulatory obligations and contribute to
an expeditious implementation of the CAT.
Currently, Section 11.1 of the CAT NMS Plan contemplates that the
Operating Committee will establish, and the Participants will
implement, fees for Participants and Industry Members to recover the
costs and expenses incurred by the Participants in connection with the
development, implementation, and operation of the CAT.\66\ Proposals
for any such fees must be filed with the Commission pursuant to Section
19(b) of the Exchange Act and are subject to Commission review for
consistency with the Exchange Act and Article XI of the CAT NMS
Plan.\67\ Specifically, each Participant must demonstrate, under
Sections 6(b)(4) and 15A(b)(5) of the Exchange Act, that such fee
filings provide for the equitable allocation of reasonable dues, fees,
and other charges among its members and other persons using its
facilities.\68\ The proposed amendment would not alter this basic
structure, but would add a new Section 11.6 to govern the recovery of
any fees, costs, and expenses (including legal and consulting fees,
costs, and expenses) incurred \69\ by or for the Company in connection
with the development, implementation, and operation of the CAT,\70\
from the effective date of this amendment, if adopted by the
Commission, until such time that the Participants have completed Full
Implementation of CAT NMS Plan Requirements \71\ (collectively, the
``Post-Amendment Expenses'').
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\66\ See, e.g., CAT NMS Plan, supra note 4, at Section 11.1(c).
\67\ Section 19(b) of the Exchange Act requires the Participants
to submit proposed rule changes to the Commission. 15 U.S.C. 78s(b);
see also CAT NMS Plan, supra note 4, at Section 11.1(b) (noting that
the Participants must file proposed fees for Industry Members with
the Commission).
\68\ See 15 U.S.C. 78f(b)(4) (applicable to the national
securities exchanges); 15 U.S.C. 78o-3(b)(5) (applicable to FINRA, a
national securities association).
\69\ For the purposes of proposed Section 11.6, determination of
when a fee, cost, or expense is considered ``incurred'' shall be
based on Generally Accepted Accounting Principles (``GAAP''), as
those principles must also be applied to all accounting or financial
statements prepared by the Operating Committee under Section 9.2 of
the CAT NMS Plan. See note 4 supra. For example, a fee, cost, or
expense related to a good or service would generally be considered
incurred upon acquisition of the good or service in accordance with
GAAP.
\70\ See, CAT NMS Plan, supra note 4, at Section 11.1(b)-(c),
Section 11.2(a)-(b), and Section 11.3(c) (relating to the funding of
the development, implementation and operating costs of the Company).
\71\ As part of the proposed amendment, Section 1.1 of the CAT
NMS Plan will be amended to include a definition of ``Full
Implementation of CAT NMS Plan Requirements.'' This term will mean
``the point at which: (a) The Participants have satisfied all of
their obligations to build and implement the CAT, such that all CAT
system functionality required by Rule 613 and the CAT NMS Plan has
been developed, successfully tested, and fully implemented with the
initial Error Rates specified by Section 6.5(d)(i) of the CAT NMS
Plan, including, but not limited to, functionality that efficiently
permits the Participants and the Commission to access all CAT Data
required to be stored in the Central Repository pursuant to Section
6.5(a) of the CAT NMS Plan and to analyze the full lifecycle of an
order, from order origination through order execution or order
cancellation, across the national market system. This Financial
Accountability Milestone shall be considered complete as of the date
identified in a Quarterly Progress Report meeting the requirements
of Section 6.6(c).'' This definition is discussed further below. See
Part II.B.1.d. infra.
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Proposed Section 11.6 would apply new conditions to the collection
of any fees established by the Operating Committee, or implemented by
the Participants, to recover a portion of Post-Amendment Expenses from
Industry Members (``Post-Amendment Industry Member Fees'').
Specifically, proposed Section 11.6 would require the Participants to
meet four critical CAT implementation milestones--the Financial
Accountability Milestones--by certain dates in order to collect the
full amount of any related Post-Amendment Industry Member Fees
[[Page 48466]]
established by the Operating Committee or implemented by the
Participants. If the Participants fail to meet the target deadlines set
forth in proposed Section 11.6, they would only be entitled to collect
a portion of the amount of the relevant Post-Amendment Industry Member
Fees, as determined by the amount of time by which the Participants
have missed the target deadlines.
The Commission preliminarily believes applying these new conditions
to the Post-Amendment Industry Member Fees is appropriate. At the time
the Commission approved the CAT NMS Plan, the Commission believed it
was reasonable, in accordance with Section 6(b)(4) of the Exchange
Act,\72\ for the Participants to recover a portion of the fees, costs,
and expenses associated with the development and implementation of the
CAT from Industry Members.\73\ This belief, however, was based on the
Commission's expectation that the Participants would be complying with
the CAT NMS Plan, which required the implementation of certain CAT
functionality by the dates set forth in the CAT NMS Plan. As noted
above, the Participants have missed multiple dates codified in the CAT
NMS Plan.\74\ Accordingly, the regulatory aims of the CAT NMS Plan have
yet to be achieved. Accordingly, the Commission is proposing financial
accountability rules that address the Commission's view of what it
would consider to be ``reasonable fees'' and a reasonable exercise of
the Participants' funding authority under the CAT NMS Plan in the
context of CAT implementation going forward.
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\72\ 15 U.S.C. 78f(b)(4) (requiring the rules of a national
securities exchange to provide for ``equitable allocation of
reasonable dues, fees, and other charges among its members and
issuers and other persons using its facilities'').
\73\ See, e.g., CAT NMS Plan Approval Order, supra note 4, at
84794.
\74\ See Part I supra.
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The specific terms of the proposed amendment are discussed in more
detail below.
1. Financial Accountability Milestones and Target Deadlines
Proposed Section 11.6 identifies four critical CAT implementation
milestones: (1) Initial Industry Member Core Equity Reporting, (2) Full
Implementation of Core Equity Reporting Requirements, (3) Full
Availability and Regulatory Utilization of Transactional Database
Functionality, and (4) Full Implementation of CAT NMS Plan Requirements
(collectively, the ``Financial Accountability Milestones'' \75\). For
each Financial Accountability Milestone, the Commission has also
identified a target deadline for completion.
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\75\ This term is defined at proposed Section 1.1.
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a. Initial Industry Member Core Equity Reporting
The Commission proposes to amend Section 1.1 of the CAT NMS Plan to
define ``Initial Industry Member Core Equity Reporting'' as the point
at which Industry Members (excluding Small Industry Members \76\ that
are do not report to the Order Audit Trail System (``OATS'')) have
begun to report equities transaction data, excluding Customer Account
Information, Customer-ID, and Customer Identifying Information,\77\ to
the CAT.\78\ This Financial Accountability Milestone shall be
considered complete as of the date identified in a published Quarterly
Progress Report meeting the requirements of proposed Section
6.6(c).\79\ The Commission also proposes to add Section 11.6(a)(i)(A)
to provide that the Participants will be entitled to collect the full
amount of any Post-Amendment Industry Member Fees established or
implemented to recover Post-Amendment Expenses incurred from the date
of this amendment's adoption by the Commission\80\ to the date of
Initial Industry Member Core Equity Reporting (``Period 1''), so long
as such date is no later than April 30, 2020.\81\
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\76\ As defined by Section 1.1 of the CAT NMS Plan, and for the
purposes of this proposing release, ``Small Industry Member'' an
Industry Member that qualifies as a small broker-dealer as defined
in SEC Rule 613. See also 17 CFR 242.613(a)(3)(vi) (defining small
broker-dealers by reference to 17 CFR 240.0-10(c), which defines a
small broker dealer as one with ``total capital . . . of less than
$500,000 on the date in the prior fiscal year as of which its
audited financial statements were prepared or, if not required to
file such statements, a broker or dealer that had total capital . .
. of less than $500,000 on the last business day of the preceding
fiscal year'' and one that is ``not affiliated with any person . . .
that is not a small business or small organization'').
\77\ Customer Account Information, Customer-ID, and Customer
Identifying Information are defined terms in Section 1.1 of the CAT
NMS Plan and are the same definitions in the context of this
proposing release.
\78\ The Commission notes that the equities transaction data
required at this stage is consistent with the functionality that the
Participants currently plan to implement at ``Phase 2a'' in the
latest draft of the Technical Specifications. See CAT Reporting
Technical Specifications for Industry Members, Version 2.2 (June 24,
2019), at vii, available at https://www.catnmsplan.com/wp-content/uploads/2019/06/Industry-Member-Tech-Specs-v2.2-Clean.pdf.
\79\ The target deadline for Initial Industry Member Core Equity
Reporting falls on April 30, 2020--between scheduled Quarterly
Progress Reports. If the Participants wait to submit the Quarterly
Progress Report to the Commission, it may delay their ability to
begin recovering any Post-Amendment Industry Member Fees to which
they may be entitled. Accordingly, the Commission notes that the
Participants may file an interim Quarterly Progress Report, if they
so choose, on the day they achieve this Financial Accountability
Milestone (or any other Financial Accountability Milestone) in order
to expedite their recovery of Post-Amendment Industry Member Fees.
\80\ The proposed amendment will not affect the Participants'
ability to collect CAT-related fees, costs, or expenses incurred up
to the date that proposed Section 11.6 is adopted. See proposed
Section 11.6.
\81\ See proposed Section 11.6(a)(i)(A). To the extent that the
Initial Industry Member Core Equity Reporting milestone is achieved
at some later date, the Participants will only be entitled to
collect a portion of the amount of the Post-Amendment Industry
Member Fees established or implemented for Period 1. See proposed
Section 11.6(a)(ii); see also Part II.B.2. infra for additional
discussion regarding the conditions attached to Post-Amendment
Industry Member Fee collection.
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The Commission preliminarily believes that Initial Industry Member
Core Equity Reporting is an appropriate Financial Accountability
Milestone, because this milestone requires the Participants to develop,
test, and implement essential infrastructure needed to support Industry
Member reporting--one of the major goals identified by the CAT NMS
Plan.\82\ Before Industry Members may begin reporting any equities
transaction data to the CAT, the Participants must develop, and
Industry Members must thoroughly test, file submission tools, data
integrity controls, and various security measures to ensure that the
CAT can safely receive and process this data, as well as identify data
that may not be accurate. These are core operations that are
fundamental to the success of the CAT. By requiring Industry Members--
excluding Small Industry Members that are not OATS reporters \83\--to
begin reporting the first phase of equities transaction data to the
CAT, the Participants will demonstrate that they have made significant
progress towards implementing foundational CAT functionality.
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\82\ See CAT NMS Plan, supra note 4, at Section 6.7(a)(v).
\83\ The Commission preliminarily believes that it is
appropriate to exclude Small Industry Members that do not report to
OATS from this Financial Accountability Milestone in order to mirror
the timelines projected by the Participants. See, e.g., Industry
Update on CAT Reporting Technical Specifications for Industry
Members (April 3, 2019), available at https://www.catnmsplan.com/wp-content/uploads/2019/04/CAT_Industry_Call_04032019_Presentation.pdf;
see also CAT Reporting Timelines, available at https://www.catnmsplan.com/timelines/.
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Furthermore, the Commission preliminarily believes that it is
appropriate to require the Participants to achieve Initial Industry
Member Core Equity Reporting by April 30, 2020 in order to recover the
full amount of any related Post-Amendment Industry
[[Page 48467]]
Member Fees, because the Participants have indicated that they plan to
implement basic equities transaction reporting for Industry Members
(excluding Small Industry Members that are not OATS reporters) by that
date. Recent timelines published by the Participants indicate that the
production environment for Industry Member equities reporting will go
live in April 2020.\84\ Based on this representation, the Commission
preliminarily believes the proposed deadline of April 30, 2020 for
Initial Industry Member Core Equity Reporting is both reasonable and
feasible.
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\84\ See, e.g., id. The Participants have also released
finalized technical specifications for Industry Member reporting, as
well as a symbol list providing the scope of securities for which
Industry Member reporting will be required, which the Commission
believes are critical steps towards achieving Initial Industry
Member Core Equity Reporting by April 30, 2020. With this
information, the Industry Members should be able to make meaningful
progress towards developing the internal infrastructure needed to
report to the CAT. See note 78 supra. See also, e.g., Industry
Update on the Consolidated Audit Trail (February 20, 2019),
available at https://www.catnmsplan.com/wp-content/uploads/2019/02/CAT_Industry_Webcast_02.20.2019_vF.pdf (stating that there will be
no material design changes to the technical specifications for
Industry Member reporting and instructing Industry Members to
continue as planned with development efforts); CAT Reportable Equity
Securities Symbol Master, available at https://www.catnmsplan.com/symbol-master/index.html.
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b. Full Implementation of Core Equity Reporting Requirements
The Commission proposes to amend Section 1.1 of the CAT NMS Plan to
define ``Full Implementation of Core Equity Reporting Requirements'' as
the point at which: (a) Industry Member reporting (excluding reporting
by Small Industry Members that are not OATS reporters) for equities
transactions, excluding Customer Account Information, Customer-ID, and
Customer Identifying Information,\85\ is developed, tested, and fully
implemented at a 5% Error Rate \86\ or less and with sufficient intra-
firm linkage, inter-firm linkage, national securities exchange linkage,
and trade reporting facilities linkage to permit the Participants and
the Commission to analyze the full lifecycle of an order across the
national market system, excluding linkage of representative orders,
from order origination through order execution or order cancellation;
\87\ and (b) the query tool functionality required by Section
6.10(c)(i)(A) and Appendix D, Sections 8.1.1-8.1.3 and Section 8.2.1 of
the CAT NMS Plan incorporates the Industry Member equity transaction
data described in condition (a) and is available to the Participants
and to the Commission. This Financial Accountability Milestone shall be
considered complete as of the date identified in a Quarterly Progress
Report meeting the requirements of Section 6.6(c).\88\ The Commission
also proposes to add Section 11.6(a)(i)(B) to provide that the
Participants will be entitled to collect the full amount of any Post-
Amendment Industry Member Fees established or implemented to recover
Post-Amendment Expenses incurred from the date immediately following
the achievement of Initial Industry Member Core Equity Reporting to the
date of Full Implementation of Core Equity Reporting Requirements
(``Period 2''), so long as such date is no later than December 31,
2020.\89\
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\85\ See note 77 supra.
\86\ ``Error Rate'' is a term defined in Section 1.1 of the CAT
NMS Plan to mean ``the percentage of reportable events collected by
the central repository in which the data reported does not fully and
accurately reflect the order even that occurred in the market.'' See
also 17 CFR 242.613(j)(6).
\87\ The equities transaction data required at this stage is
consistent with the functionality that the Participants currently
plan to implement at ``Phase 2a'' in the latest draft of the
Technical Specifications. See note 78 supra.
\88\ See also note 79 supra.
\89\ See proposed Section 11.6(a)(i)(B). To the extent that the
Full Implementation of Core Equity Reporting Requirements milestone
is achieved at some later date, the Participants will only be
entitled to collect a portion of the amount of the Post-Amendment
Industry Member Fees established or implemented for Period 2. See
proposed Section 11.6(a)(iii); see also Part II.B.2. infra for
additional discussion regarding the conditions attached to Post-
Amendment Industry Member Fee collection.
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The Commission preliminarily believes that Full Implementation of
Core Equity Reporting Requirements is an appropriate Financial
Accountability Milestone, because this milestone requires the
Participants to show that they have taken significant steps towards
achieving one of the primary goals identified in the CAT NMS Plan--
Industry Member reporting.\90\ Whereas the previous Financial
Accountability Milestone only required that the Participants
sufficiently develop and test the CAT so as to allow Industry Members
(excluding Small Industry Members that are not OATS reporters) to begin
reporting equities transaction data, this Financial Accountability
Milestone requires Participants to have fully implemented the first
phase of equities transaction reporting for Industry Members (excluding
Small Industry Members that are not OATS reporters) at an Error Rate
that is consistent with the initial Error Rate threshold set forth in
the CAT NMS Plan.\91\ Equities transaction data produced by the CAT at
this stage must also be sufficiently interlinked so as to permit full
analysis of an order's lifecycle across the national market, excluding
full linkage of representative orders.\92\ These requirements are
designed to ensure that the Participants have developed, tested, and
implemented an audit trail system that produces meaningful and accurate
equities transaction data, including data that can be used to evaluate
the full lifecycle of an equities order.\93\ The achievement of such
benchmarks would demonstrate that the Participants have made
significant progress towards full implementation of Industry Member
reporting.\94\
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\90\ See CAT NMS Plan, supra note 4, at Section 6.7(a)(v).
\91\ See, e.g., CAT NMS Plan, supra note 4, at Section 6.5(d)(i)
of the CAT NMS Plan (specifying that the ``initial maximum Error
Rate shall be set to 5%'').
\92\ Although full linkage of representative orders is not
required by this milestone, the technical specifications provided to
Industry Members indicate that, by April 2020, linkage ``between the
representative street side order and the order being represented
when the representative order was originated specifically to
represent a single order . . . and there is: (1) an existing direct
electronic link in the firm's system between the order being
represented and the representative order, and (2) any resulting
executions are immediately and automatically applied to the
represented order in the firm's system[.]'' See CAT Reporting
Technical Specifications for Industry Members, Version 2.2 (June 24,
2019), available at https://www.catnmsplan.com/wp-content/uploads/2019/06/Industry-Member-Tech-Specs-v2.2-Clean.pdf.
\93\ See, e.g., id. at 6, 154 (setting forth specifications for
a firm-designated ID and representative order flag, which are
examples of two fields not available through OATS).
\94\ The Commission preliminarily believes that it is
appropriate to exclude Small Industry Members that do not report to
OATS from this Financial Accountability Milestone, in order to
mirror the timelines projected by the Participants. See, e.g.,
Industry Update on CAT Reporting Technical Specifications for
Industry Members (April 3, 2019), available at https://www.catnmsplan.com/wp-content/uploads/2019/04/CAT_Industry_Call_04032019_Presentation.pdf; see also CAT Reporting
Timelines, available at https://www.catnmsplan.com/timelines/.
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The second prong of this Financial Accountability Milestone
requires that the equities transaction data collected by the CAT at
this stage be made available to regulators through two basic query
tools required by the CAT NMS Plan--a targeted query tool that will
enable regulators to retrieve data via an online query screen with a
variety of predefined selection criteria, and a user-defined direct
query tool that will provide regulators with the ability to query data
using all available attributes and data sources.\95\ These query tools
[[Page 48468]]
should enable regulators to access and use the provided data to perform
essential analyses of the equities markets, including equity market
reconstruction, and to pursue data-driven policy-making. By requiring
the Participants to develop these tools and make them available to the
Commission and other regulators at this stage, the second prong of this
Financial Accountability Milestone is designed to ensure that the CAT
is built in a manner that will allow regulators to access CAT Data in
order to realize the regulatory benefits associated with the CAT.
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\95\ See, e.g., CAT NMS Plan, supra note 4, at Section
6.10(c)(i)(A)-(B); see id. at Appendix D, Sections 8.1.1-8.1.3, and
Section 8.2.1. Section 6.10(c)(i)(A) of the CAT NMS Plan requires
the Plan Processor to ``provide Participants and the SEC with access
to all CAT Data stored in the Central Repository'' via an ``online
targeted query tool.'' Appendix D, Section 8.1.1-8.1.3 of the CAT
NMS Plan describes the required functionality associated with this
regulatory tool. Appendix D, Section 8.2.1 describes the required
functionality associated with a user-defined direct query tool that
will ``deliver large sets of data that can then be used in internal
surveillance or market analysis applications.'' See id. at Sections
8.2. This tool is also described at Section 6.10(c)(i)(B) of the CAT
NMS Plan.
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The Commission preliminarily believes that it is appropriate to
require the Participants to achieve Full Implementation of Core Equity
Reporting Requirements by December 31, 2020 in order to receive the
full amount of any related Post-Amendment Industry Member Fees. This
deadline is consistent with the Participants' most recent projections--
for example, the most recent timelines published by the Participants
indicate that the Participants intend to substantially complete
implementation of equities reporting for Industry Member (excluding
Small Industry Members that do not report to OATS) by October 2020,\96\
and the Commission understands that the relevant query tool
functionality should go live into production on a timeline that is
generally consistent with the proposed deadline of December 31, 2020.
Accordingly, the Commission preliminarily believes the target deadline
of December 31, 2020 for Full Implementation of Core Equity Reporting
Requirements is both reasonable and feasible.
---------------------------------------------------------------------------
\96\ See, e.g., Industry Update on CAT Reporting Technical
Specifications for Industry Members (April 3, 2019), available at
https://www.catnmsplan.com/wp-content/uploads/2019/04/CAT_Industry_Call_04032019_Presentation.pdf; see also CAT Reporting
Timelines, available at https://www.catnmsplan.com/timelines/.
---------------------------------------------------------------------------
c. Full Availability and Regulatory Utilization of Transactional
Database Functionality
The Commission proposes to amend Section 1.1 of the CAT NMS Plan to
define ``Full Availability and Regulatory Utilization of Transactional
Database Functionality'' as the point at which: (a) reporting to the
Order Audit Trail System (``OATS'') is no longer required for new
orders; (b) Industry Member reporting for equities transactions, simple
electronic options transactions, manual options transactions, and
complex options transactions, including Allocation Reports,\97\ but
excluding Customer Account Information, Customer-ID, and Customer
Identifying Information, is developed, tested, and fully implemented;
(c) representative order linkages, as well as intra-firm linkages,
inter-firm linkages, national securities exchange linkages, and trade
reporting facilities linkages, are developed, tested, and fully
implemented in a manner that permits the Participants and the
Commission to analyze the full lifecycle of an order across the
national market system, from order origination through order execution
or order cancellation, including any related allocation information
provided in an Allocation Report; \98\ (d) CAT Error Rates satisfy the
threshold specified by Section 6.5(d)(i); (e) the query tool
functionality required by Section 6.10(c)(i)(A) and Appendix D,
Sections 8.1.1-8.1.3, Section 8.2.1, and Section 8.5 incorporates the
data described in conditions (b) and (c) and is available to the
Participants and to the Commission; and (f) the requirements of Section
6.10(a) are met. This Financial Accountability Milestone shall be
considered complete as of the date identified in a Quarterly Progress
Report published meeting the requirements of Section 6.6(c).\99\
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\97\ ``Allocation Report'' is defined term in Section 1.1 of the
CAT NMS Plan and carries the same meaning in the context of this
proposing release.
\98\ The allocation information provided in an Allocation Report
will be linked to person(s) having the authority to trade on behalf
of the account using Firm Designated ID--a unique identifier for
each trading account designated by Industry Members for purposes of
providing data to the Central Repository, where each such identifier
is unique among all identifiers from any given Industry Member for
each business date. See CAT NMS Plan, supra note 4, at Section 1.1.
Allocations are not required to be directly linked to orders or
executions. See id.
\99\ See also note 79 supra.
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The Commission also proposes Section 11.6(a)(i)(C) to provide that
the Participants will be entitled to collect the full amount of any
Post-Amendment Industry Member Fees established or implemented to
recover Post-Amendment Expenses incurred from the date immediately
following the achievement of Full Implementation of Core Equity
Reporting Requirements to the date of Full Availability and Regulatory
Utilization of Transactional Database Functionality (``Period 3''), so
long as such date is no later than December 31, 2021.\100\
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\100\ See proposed Section 11.6(a)(i)(C). To the extent that
Full Availability and Regulatory Utilization of Transactional
Database Functionality is achieved at some later date, the
Participants will only be entitled to collect a portion of the
amount of the Post-Amendment Industry Member Fees established or
implemented for Period 3. See proposed Section 11.6(a)(iii); see
also Part II.B.2. infra for additional discussion regarding the
conditions attached to Post-Amendment Industry Member Fee
collection.
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The Commission preliminarily believes that Full Availability and
Regulatory Utilization of Transactional Database Functionality is an
appropriate Financial Accountability Milestone, because this milestone
will require the Participants to demonstrate substantial completion of
CAT implementation. Whereas the previous Financial Accountability
Milestone focused only on the implementation of basic equities
transaction reporting for Industry Members (excluding Small Industry
Members that are not OATS reporters), this Financial Accountability
Milestone requires the Participants to have fully implemented the first
phase of reporting for equities, simple options, manual options, and
complex options. This Financial Accountability Milestone also requires
the Participants to implement representative order linkages, in
addition to intra-firm linkages, inter-firm linkages, national
securities exchange linkages, and trade reporting linkages, including
any related allocation information included in an Allocation Report.
Therefore, at this stage, the CAT should contain sufficient equities
and options transactional data and order linkages to enable regulators
to analyze the full lifecycle of an order, from order origination
through order execution or order cancellation, including any related
allocation information provided in an Allocation Report, as well as
conduct other sophisticated analyses of the markets. For instance, the
CAT should give regulators access to an options audit trail system
that, for the first time, makes possible options market reconstruction
and cross-market analyses across full order lifecycles.\101\
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\101\ Although the Consolidated Options Audit Trail System
(``COATS'') provides an audit trail for options, CAT will contain
broker-dealer data and order data not currently available through
COATS, enabling regulators to perform more sophisticated analyses on
options data. Moreover, CAT will contain equities data as well as
options data, which will enable regulators to conduct cross-market
analyses and surveillances.
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Full Availability and Regulatory Utilization of Transactional
Database Functionality further requires that core elements of the CAT
are reasonably accurate, reliable, and accessible to regulators. For
instance, this Financial Accountability Milestone requires that CAT
Error Rates satisfy the 5% initial maximum Error Rate set forth in
Section
[[Page 48469]]
6.5(d)(i) of the CAT NMS Plan.\102\ The Commission preliminarily
believes this is appropriate because the Participants have, in the
past, expressed the belief that an initial Error Rate of 5% ``strikes
the balance of making allowances for adapting to a new reporting regime
while ensuring that the data provided to regulators will be capable of
being used to conduct surveillance and market reconstruction.'' \103\
This Financial Accountability Milestone also requires that certain
regulatory tools incorporate Industry Member data, are available to
regulators, and have been implemented pursuant to the provisions of the
CAT NMS Plan, including not only the online targeted query tool and the
user-defined direct query tool discussed above,\104\ but also
surveillance systems reasonably designed to make use of CAT data.\105\
Moreover, achievement of Full Availability and Regulatory Utilization
of Transactional Database Functionality requires the Participants to
demonstrate, through retirement of the existing OATS system,\106\ that
the CAT is sufficiently accurate, reliable, and accessible to
regulators to be adopted as the audit trail system for equities
transactions. The Commission believes that all of these requirements
should ensure that regulators are able to use and rely on the CAT at
this stage to conduct the kind of improved market surveillance that the
Commission envisioned when it adopted Rule 613.\107\
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\102\ See proposed Section 1.1, ``Full Availability and
Regulatory Utilization of Transactional Database Functionality,'' at
(b). See also CAT NMS Plan, supra note 4, at Section 6.5(d)(i).
\103\ See CAT NMS Plan Approval Order, supra note 4, at 84717.
\104\ See Section II.B.1.b. supra.
\105\ Full Availability and Regulatory Utilization of
Transactional Database Functionality requires that the requirements
of Appendix D, Section 8.1.1-8.1.3, Section 8.2.1, and Section 8.5
of the CAT NMS Plan, which describe the performance requirements and
service level agreements for necessary regulatory tools, have been
met for any data contained in the CAT. The ``surveillance systems''
required by Section 6.10(a) and the query tool functionality
required by Section 6.10(c)(i)(A) of the CAT NMS Plan must also be
implemented. See proposed Section 1.1, ``Full Availability and
Regulatory Utilization of Transaction Database Functionality,'' at
(e)-(f).
\106\ To achieve this Financial Accountability Milestone, OATS
reporting must no longer be required for new orders. This prong can
only be accomplished by retiring OATS. Although FINRA is the only
Participant in direct control of OATS retirement, the Commission
still believes it is appropriate to apply this milestone to all
Participants. All of the Participants are jointly responsible for
creating a CAT that is capable of replacing OATS. All Participants
are regulators that will benefit from the full implementation of the
CAT. See, e.g., CAT NMS Plan, supra note 4, at Appendix C, Section
C.9. (discussing retirement of OATS).
\107\ See Rule 613 Adopting Release, supra note 2, at 45788.
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The Commission preliminarily believes that it is appropriate to
require the Participants to achieve Full Availability and Regulatory
Utilization of Transactional Database Functionality by December 31,
2021 in order to recover the full amount of any related Post-Amendment
Industry Member Fees. This deadline is consistent with the
Participants' most recent projections for completion of Industry Member
reporting, representative order linkages, and the development of
regulatory query tools for options and equities. The most recent
timelines issued by the Participants suggest that Industry Member
reporting and representative order linkages will be implemented by
December 2021,\108\ and the Commission further understands that the
online targeted query tool and user-directed direct query tool for both
options and equities should go live into production on a timeline that
is generally consistent with the proposed deadline of December 31,
2021. Therefore, the Commission's proposed deadline of December 31,
2021 is consistent with the Participants' timeline for these items.
---------------------------------------------------------------------------
\108\ See, e.g., note 96 supra.
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Moreover, so long as the Participants diligently work towards
building the CAT according to the requirements of the CAT NMS Plan, the
Commission preliminarily believes that the Participants should
reasonably be able to demonstrate, by December 31, 2021, both that the
CAT is fully and effectively functional for equities data such that the
CAT is capable of replacing OATS such that reporting to OATS will no
longer be required for new orders. The Participants' timelines indicate
that, by December 31, 2021, Industry Members and Small Industry Members
that report to OATS will have been reporting equities transaction data
to CAT for approximately 20 months,\109\ which should give the
Participants and other CAT Reporters a reasonable opportunity to
address or correct any material data quality issues. The Commission
further notes that the conditions of Full Availability and Regulatory
Utilization of Transactional Database Functionality are designed to
ensure that regulators are able to perform at least their normal range
of regulatory tasks using CAT Data instead of OATS data. The Commission
therefore preliminarily believes that it is reasonable and feasible to
establish December 31, 2021 as the deadline for this Financial
Accountability Milestone.\110\
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\109\ See supra note 96 and associated text. The Participants do
not currently intend to implement transaction reporting for Small
Industry Members that do not report to OATS until December 2021.
However, because these Industry Members do not report to OATS, the
Commission preliminarily believes that this should not impact the
ability of the Participants to retire OATS by the target deadline of
December 31, 2021.
\110\ The Commission also believes that tying full recovery of
CAT-related expenses to this Financial Accountability Milestone will
increase the likelihood that OATS will be retired by the proposed
date, thereby reducing uncertainty amongst Industry Members and,
potentially, compressing the period of duplicative reporting to
which Industry Members might otherwise be subjected.
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With respect to the additional requirements designed to ensure that
the CAT Data provided by Industry Members will be reasonably accurate,
reliable, and accessible to regulators, the Commission also
preliminarily believes that the Participants should be able to meet
these requirements by December 31, 2021. For example, proposed Section
11.6(a)(i)(C) and proposed Section 1.1 would provide the Participants
with approximately two years from the date of this amendment's adoption
to develop, test, and implement the surveillance systems required by
Section 6.10(a) of the CAT NMS Plan,\111\ whereas the CAT NMS Plan
indicates that a shorter span of fourteen months would be a sufficient
period of time to accomplish that task.\112\ The Commission therefore
preliminarily believes the target deadline of December 31, 2021 for
Full Availability and Regulatory Utilization of Transactional Database
Functionality is both reasonable and feasible.
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\111\ Section 6.10(a) of the CAT NMS Plan requires the
Participants to use the tools described in Appendix D to ``develop
and implement a surveillance system, or enhance existing
surveillance systems, reasonably designed to make use of the
consolidated information contained in the Central Repository.'' See
note 4 supra.
\112\ See CAT NMS Plan, supra note 4, at Section 6.7(a)(iv); see
also id. at Section 6.10(a).
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d. Full Implementation of CAT NMS Plan Requirements
The Commission proposes to amend Section 1.1 of the CAT NMS Plan to
define ``Full Implementation of CAT NMS Plan Requirements'' as the
point at which the Participants have satisfied all of their obligations
to build and implement the CAT, such that all CAT system functionality
required by Rule 613 and the CAT NMS Plan has been developed,
successfully tested, and fully implemented at the initial Error Rates
specified by Section 6.5(d)(i) of the CAT NMS Plan or less, including
functionality that efficiently permits the Participants and the
Commission to access all CAT Data required to be stored in the Central
Repository pursuant to Section 6.5(a) of the CAT NMS Plan, including
Customer Account
[[Page 48470]]
Information, Customer-ID, Customer Identifying Information, and
Allocation Reports, and to analyze the full lifecycle of an order
across the national market system, from order origination through order
execution or order cancellation, including any related allocation
information provided in an Allocation Report.\113\ This Financial
Accountability Milestone shall be considered complete as of the date
identified in a Quarterly Progress Report meeting the requirements of
Section 6.6(c).\114\ The Commission also proposes to add Section
11.6(a)(i)(D) to provide that the Participants will be entitled to
collect the full amount of any Post-Amendment Industry Member Fees
established or implemented to recover Post-Amendment Expenses incurred
from the date immediately following the achievement of Full
Availability and Regulatory Utilization of Transactional Database
Functionality to the date of Full Implementation of CAT NMS Plan
Requirements (``Period 4''), so long as such date is no later than
December 30, 2022.\115\
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\113\ See notes 97-98 supra.
\114\ See also note 79 supra.
\115\ See proposed Section 11.6(a)(i)(D). To the extent that
Full CAT NMS Plan Requirements is achieved at some later date, the
Participants will only be entitled to collect a portion of the
amount of the Post-Amendment Industry Member Fees established or
implemented for Period 4. See proposed Section 11.6(a)(iii); see
also Part II.B.2. infra for additional discussion regarding the
conditions attached to Post-Amendment Industry Member Fee
collection.
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The Commission preliminarily believes that Full Implementation of
CAT NMS Plan Requirements is appropriate as the final Financial
Accountability Milestone.\116\ This Financial Accountability Milestone
will require the Participants to show that they have satisfied all of
their obligations to build and implement the CAT system functionality
required by Rule 613, including functionality that would allow the
Participants and the Commission to efficiently access all transactional
data and, for the first time, customer information stored in the
Central Repository. Whereas the previous Financial Accountability
Milestones do not require the Participants to provide customer
information like Customer Account Information, Customer-ID, and
Customer Identifying Information, the Participants must have developed,
tested, and implemented reporting functionality for these elements to
satisfy the parameters of Full Implementation of CAT NMS Plan
Requirements.
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\116\ Because the provisions of proposed Section 11.6 are meant
to incentivize full CAT implementation, under the proposal, these
provisions will not apply once Full Implementation of CAT NMS Plan
Requirements is achieved.
---------------------------------------------------------------------------
The creation of a unique Customer-ID under the CAT NMS Plan, is
critical to achieving the full regulatory benefit of the CAT.\117\ In
the Commission's experience, it is now common for individuals and
entities to trade through multiple broker-dealer accounts and for
individuals engaged in wrongdoing to execute trades through multiple
broker-dealers. A Customer-ID will be the key that ties all of the
trading by one Customer together and as such, will facilitate the
ability of regulators to identify all the orders and actions
attributable to a specific Customer regardless of where that Customer
routes orders or executes trades--a linkage which does not exist now.
---------------------------------------------------------------------------
\117\ See, e.g., Rule 613 Adopting Release, supra note 2, at
45756.
---------------------------------------------------------------------------
Moreover, currently available audit trail data does not directly
identify the customer associated with trading activity, so regulators
conducting market surveillance must undertake multiple steps to request
additional information after identifying suspect trades in order to
link those trades with specific individuals. The inclusion of Customer-
IDs in the CAT, at Full Implementation of CAT NMS Plan Requirements,
would therefore significantly improve the capabilities of regulators
because the CAT will be able to connect suspicious trading activity
directly to a particular Customer through the Customer-ID. In addition,
the Customer-ID will also enable a regulator to surveil the trading
activity of market participants in both equity and options markets by
Customer-ID, and thus a Customer-ID will improve regulators' efficiency
in conducting cross-market and cross-product surveillance, which could
in turn reduce violative behavior and protect investors from harm.
Accordingly, the Commission believes that it is important to
require the Participants to demonstrate that the Participants have
developed, tested, and fully implemented functionality that efficiently
permits the Commission and other regulators to access Customer-IDs,
along with other Customer and Account information.
In addition to providing this integral customer information,
achievement of Full Implementation of CAT NMS Requirements would also
mean that the Participants have created an audit trail system that
provides reasonably accurate, reliable and useful information. Full
Implementation of CAT NMS Requirements mandates that the CAT produce
data at the initial Error Rate specified by the CAT NMS Plan,\118\ as
well as functionality that would efficiently permit the Participants
and the Commission to analyze the full lifecycle of an order, including
any subsequent allocation, across the national market system. These
requirements are designed to help facilitate the implementation of the
CAT functions in a manner that enables the Commission and other
regulators to conduct the improved market surveillance envisioned by
the Commission when it adopted Rule 613--the ultimate goal of this
project.
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\118\ See CAT NMS Plan, supra note 4, at Section 6.5(d)(i). See
also note 103 supra.
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Furthermore, the Commission preliminarily believes that it is
appropriate to require the Participants to achieve Full Implementation
of CAT NMS Plan Requirements by December 30, 2022 in order to recover
the full amount of any Post-Amendment Industry Member Fees. This
deadline is consistent with the Participants' most recent projections,
which indicate that the Participants intend to achieve full CAT
implementation by July 2022.\119\ In fact, the Commission's target
deadline of December 30, 2022 gives the Participants an additional five
months to achieve Full Implementation of CAT NMS Plan Requirements.
Accordingly, the Commission preliminarily believes that the proposed
target deadline of December 30, 2022 for Full Implementation of CAT NMS
Plan Requirements is both reasonable and feasible.
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\119\ See, e.g., note 96 supra.
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2. Collection of Post Amendment Industry Member Fees
As noted above, the Commission is proposing that the Participants
will be entitled to collect the full amount \120\ of any Post-Amendment
Industry Member Fees related to the achievement of the Financial
Accountability Milestones described above so long as they meet
specified dates, which dates are consistent with the timelines most
recently published by the Participants.\121\ If the Participants do
[[Page 48471]]
not meet the specified date for the achievement of Initial Industry
Member Core Equity Reporting, proposed Section 11.6(a)(ii) will provide
that the Participants' recovery of Post-Amendment Industry Member Fees
will be reduced according to the following schedule:
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\120\ ``Full amount'' in this context does not mean that the
Participants may collect all of their Post-Amendment Expenses from
Industry Members. Rather, pursuant to the provisions of Article XI
of the CAT NMS Plan, the Participants may recover an appropriate
portion of these fees from Industry Members. Specifically, to
recover any Post-Amendment Expenses from Industry Members, the
Participants must file with the Commission proposed rule changes
under Section 19(b) of the Act, setting for their proposed
allocation and justifying why the proposed allocation is consistent
with the Act. The Commission would then review the proposed rule
changes for consistency with the Exchange Act and the CAT NMS Plan.
\121\ See proposed Section 11.6(a)(i).
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By 25% if the Participants miss the deadline set forth in
proposed Section 11.6(a)(i)(A) by less than 60 days;
By 50% if the Participants miss the deadline set forth in
proposed Section 11.6(a)(i)(A) by 60 days or more, but less than 120
days;
By 75% if the Participants miss the deadline set forth in
proposed Section 11.6(a)(i)(A) by 120 days or more, but less than 180
days;
By 100% if the Participants miss the deadline set forth in
proposed Section 11.6(a)(i)(A) by 180 days or more.
If the Participants do not meet the specified dates for the
achievement of Full Implementation of Core Equity Reporting
Requirements, Full Availability and Regulatory Utilization of
Transactional Database Functionality, or Full Implementation of CAT NMS
Plan Requirements, proposed Section 11.6(a)(iii) will provide that the
Participants' recovery of Post-Amendment Industry Member Fees will be
reduced according to the following schedule:
By 25% if the Participants miss the deadline set forth in
proposed Section 11.6(a)(i) by less than 90 days;
By 50% if the Participants miss the deadline set forth in
proposed Section 11.6(a)(i) by 90 days or more, but less than 180 days;
By 75% if the Participants miss the deadline set forth in
proposed Section 11.6(a)(i) by 180 days or more, but less than 270
days; and
By 100% if the Participants miss the deadline set forth in
proposed Section 11.6(a)(i) by 270 days or more.
Proposed Section 11.6(a)(iv) provides that the Participants will only
be entitled to collect Post-Amendment Industry Member Fees for Period
1, Period 2, Period 3, or Period 4 at the end of each respective
Period.
The Commission preliminarily believes these conditions on CAT
funding are appropriate. It has been almost three years since the
Commission approved the CAT NMS Plan, but insufficient progress has
been made towards the implementation of CAT, and the Participants have
repeatedly missed deadlines set forth by the CAT NMS Plan. The
Commission preliminarily believes that the proposed rules will provide
accountability to facilitate implementation of the CAT in an
expeditious and efficient manner, and according to a schedule that is
consistent with the most recent timelines published by the
Participants.\122\
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\122\ See Part II.B.1. for more discussion of the deadlines
established by the proposed amendments.
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As explained above, the Commission has identified four meaningful
Financial Accountability Milestones and paired those Financial
Accountability Milestones with reasonable and feasible target deadlines
set approximately eight months to one year apart. The Participants will
be able to recover the full amount of any Post-Amendment Industry
Member Fees if the Participants achieve the Financial Accountability
Milestones identified in the proposed rule amendment by the specified
dates. However, the Commission preliminarily believes that it is
appropriate to impose financial accountability on the Participants by
incrementally reducing the amount of CAT funding that Participants may
recover from Industry Members, according to the schedules set forth
above.
Fee recovery for most of the Financial Accountability Milestones--
Full Implementation of Core Equity Reporting Requirements, Full
Availability and Regulatory Utilization of Transactional Database
Functionality, and Full Implementation of CAT NMS Plan Requirements--
will be governed by a fee schedule that gradually reduces the amount of
recovery that the Participants are entitled to by 25% for each quarter
by which the Participants miss the target deadline. The Commission
preliminarily believes this structure will appropriately balance the
need to keep Participants on a firm implementation schedule with the
need to incentivize the Participants to continue their progress towards
implementation even if the target deadlines identified in the proposed
amendment are missed. As discussed above,\123\ the Commission believes
that the target deadlines identified for these three milestones are
reasonable and feasible, because these deadlines are consistent with
recent timelines provided by the Participants. The Commission therefore
does not believe that it is necessary to allow for a grace period
before reducing the Participants' recovery. However, by providing a
full quarter before each subsequent, and additional, reduction to fee
recovery, the proposed schedule gives the Participants an ample amount
of time to achieve each milestone before further reductions are
imposed. Moreover, the Commission believes that the proposed amount of
the reduction--25% per quarter--is appropriate, because it is
sufficiently large to incentivize prompt implementation, but not so
large as to be unnecessarily punitive.
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\123\ See Part II.B.1.b.-d. supra.
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A slightly different schedule is proposed for Initial Industry
Member Core Equity Reporting. For that milestone, the proposal would
reduce the initial recovery by 25% if the Participants miss the
proposed deadline by less than 60 days and by an additional 25% for
every additional 60 days by which the Participants miss the proposed
deadline. While the Commission is imposing the same 25% fee reduction
in this instance, the proposed fee recovery schedule for Initial
Industry Member Core Equity Reporting is tighter than the schedule for
the other three Financial Accountability Milestones. The Commission
preliminarily believes that this is an appropriate schedule because
this Financial Accountability Milestone should be the easiest for the
Participants to achieve. Industry Members have developed relevant
experience in reporting equities transaction data to OATS, and the
Participants have made significant progress towards development of the
necessary technical specifications, suggesting that the Participants
remain on track with their own projections. In addition, the Commission
believes it is critically important that the Participants remain on
schedule to achieve the first Financial Accountability Milestone, in
order to minimize the possibility that the deadlines for subsequent
Financial Accountability Milestones will be missed.\124\ For those
reasons, the Commission believes the fee recovery schedule for Initial
Industry Member Core Equity Reporting is appropriate.
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\124\ See, e.g., Part IV.E.1.
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The Commission preliminarily believes that the incremental approach
followed by both fee recovery schedules, which provide the Participants
with a considerable amount of recovery unless the Participants miss the
target deadline by a considerable amount of time, will also promote
implementation of the CAT in accordance with the deadlines outlined by
this proposed amendment. The sooner the Participants achieve each
Financial Accountability Milestone, the sooner the Participants will be
able to begin recovering any related Post-Amendment Industry Member
Fees.\125\
[[Page 48472]]
Moreover, so long as the Participants complete each particular
Financial Accountability Milestone substantially before the target
deadline for the next Financial Accountability Milestone arrives, the
Participants should be able to recover a portion of their fees, costs,
and expenses from Industry Members, subject to the Exchange Act and the
provisions of the CAT NMS Plan. Although failing to meet one target
deadline might make it more difficult to comply with the next target
deadline, the proposed amendment does not preclude the possibility that
the Participants may be entitled to some measure of recovery going
forward.\126\ The Commission preliminarily believes that the
Participants will continue to make progress towards full CAT
implementation even if one target deadline is missed because they still
will have the opportunity to recover fees, costs, and expenses from
Industry Members, albeit a smaller portion of those fees, costs, and
expenses.\127\
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\125\ See, e.g., proposed Section 11.6(a)(iv) (providing that
the Participants may only collect relevant Post-Amendment Industry
Member Fees at the end of Period 1, 2, 3 and/or 4).
\126\ For example, suppose the Participants missed the deadline
for Initial Industry Member Core Equity Reporting by 180 days or
more and were therefore not entitled to any recovery for Period 1.
In this scenario, the Participants might still be able to meet the
deadline for the next Financial Accountability Milestone, Full
Implementation of Core Equity Reporting Requirements, or achieve
that Financial Accountability Milestone within 270 days of the
proposed deadline, thus entitling them to partial recovery under the
proposed amendment. As another example, suppose the Participants did
not achieve Full Implementation of Core Equity Reporting
Requirements until January 1, 2021, but were able to meet the target
deadline for the next Financial Accountability Milestone--Full
Availability and Regulatory Utilization of Transactional Database
Functionality. Because the Participants did not achieve Full
Implementation of Core Equity Reporting Requirements on schedule,
but were less than 90 days late, the Participants would be entitled
to collect 75% of the Post-Amendment Industry Member Fees
established for Period 2 upon achievement of Full Implementation of
Core Equity Reporting Requirements and the full amount of Post-
Amendment Industry Member Fees for Period 3 upon achievement of Full
Availability and Regulatory Utilization of Transactional Database
Functionality.
\127\ See, e.g., note 191 infra.
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As noted above, the Commission must review fee filings submitted by
the Participants pursuant to Section 19(b) of the Exchange Act to
implement fees to recover the costs and expenses incurred by the
Participants in connection with the development, implementation, and
operation of the CAT.\128\ These filings must specify the percentage of
the costs and expenses that will be allocated to the Participants on
the one hand and the Industry Members on the other hand, as well as
explain how costs and expenses will be allocated within each group.
Each Participant must also demonstrate, under Sections 6(b)(4) and
15A(b)(5), that such fee filings provide for the equitable allocation
of reasonable dues, fees, and other charges among its members and other
persons using its facilities.\129\ In light of the continued delays to
CAT implementation, the Commission preliminarily believes that it is
appropriate, at this time, to set forth the circumstances under which
the full recovery of fees, costs, and expenses from Industry Members
would not be reasonable under Sections 6(b)(4) or 15A(b)(5) of the
Exchange Act or reasonably related to the Participants' self-regulatory
obligations under the CAT NMS Plan.\130\ The Commission preliminarily
believes that it would not be a reasonable exercise of the
Participants' funding authority under the CAT NMS Plan to fully recover
fees, costs, and expenses from Industry Members if the Participants
miss the target deadlines specified in the proposed amendment, because
any delays by the Participants could increase uncertainty for and,
potentially, impose additional costs on Industry Members.\131\ In
addition, the proposed amendments will increase transparency for
Industry Members by setting forth the circumstances under which the
full recovery of fees, costs, and expenses from Industry Members would
not be reasonable.
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\128\ See notes 66-68 supra.
\129\ See note 68 supra.
\130\ See notes 72-73 and associated text supra.
\131\ See, e.g., Section IV.B. infra.
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3. Identification of Post-Amendment Expenses in Submissions to the
Commission
Under proposed Section 11.6(b), all CAT NMS Plan amendments
submitted by the Operating Committee to the Commission pursuant to Rule
608(b)(3)(i),\132\ and all filings submitted by the Participants to the
Commission under Section 19(b) of the Exchange Act,\133\ to establish
or implement Post-Amendment Industry Member Fees pursuant to Article XI
of the CAT NMS Plan, must clearly indicate whether such fees are
related to Post-Amendment Expenses incurred during Period 1, Period 2,
Period 3, or Period 4. Requiring the Participants to specify whether
any proposed fees are related to Post-Amendment Expenses, and the
Period to which they are related, will help the Commission to determine
whether it must consider the provisions of proposed Section 11.6 in
evaluating the proposed fees.
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\132\ 17 CFR 242.608(b)(3)(i).
\133\ 15 U.S.C. 78s(b).
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The Commission requests comment on these proposed financial
accountability provisions. To the extent possible, please provide
specific data, analyses, or studies for support. The Commission
particularly solicits comment on the following issues:
13. Is it appropriate for the Commission to apply the financial
accountability provisions of proposed Section 11.6 to Post-Amendment
Expenses? Why or why not? Should the financial accountability
provisions of proposed Section 11.6 be applied to fees, costs, or
expenses incurred by the Company in connection with the development,
implementation, and operation of the CAT, or to some other set of fees,
costs, or expenses? Why or why not? Would it be appropriate to limit
Section 11.6 to apply only to fees, costs, or expenses incurred by the
Company in connection with the development or implementation of the
CAT? Why or why not? Should the Commission further define what it means
to ``incur'' an expense? If so, how? Can the current definition of
``incurred'' in the proposing release be used to avoid the application
of proposed Section 11.6? If so, please explain and describe how the
Commission should address this.
14. Is it appropriate for the Commission to tie CAT funding to the
achievement of Financial Accountability Milestones? Why or why not?
Please explain your response.
15. With respect to Period 1:
a. Is the proposed Financial Accountability Milestone of Initial
Industry Member Core Equity Reporting appropriate? Why or why not? What
other milestone should be used to end Period 1? Why?
b. Is the definition of Initial Industry Member Core Equity
Reporting appropriate? Why or why not? Please explain your response.
i. Should the definition of Initial Industry Member Core Equity
Reporting be amended to include additional types of reporting or data?
Should it be amended to remove some of the reporting or data
requirements currently identified? Why or why not? Please explain your
response.
ii. If the definition is amended, should the target deadline for
Period 1 be amended? Why or why not? Please explain your response.
c. Is the target deadline of April 30, 2020 appropriate? Why or why
not? What alternative deadline would be more appropriate? Why? Please
explain your response.
16. With respect to Period 2:
a. Is the proposed Financial Accountability Milestone of Full
Implementation of Core Equity Reporting Requirements appropriate?
[[Page 48473]]
Why or why not? What other milestone should be used to end Period 2?
Why? Please explain your response.
b. Is the definition of Full Implementation of Core Equity
Reporting Requirements appropriate? Why or why not? Please explain your
response.
i. Should the definition of Full Implementation of Core Equity
Reporting Requirements be amended to include other kinds of Industry
Member reporting or linkages? If so, which additional kinds of Industry
Member reporting or linkages should be included and why? Please explain
your response.
ii. Should the definition of Full Implementation of Core Equity
Reporting Requirements be amended to reduce or strike the reporting
linkages requirement? If reduced, how should the requirements be
reduced? Why? Please explain your response.
iii. Should the definition of Full Implementation of Core Equity
Reporting Requirements be amended to require a less stringent Error
Rate? If so, what should the Error Rate be and why? Please explain your
response.
iv. Should the definition of Full Implementation of Core Equity
Reporting Requirements amend the requirement that the query tool
functionality required by Section 6.10(c)(i)(A) and Appendix D,
Sections 8.1.1-8.1.3 and Section 8.2.1 incorporates Industry Member
equities data or the requirement that the query tool functionality is
available to the Participants and the Commission? How should the
requirement be amended? Why? Please explain your response.
v. If the definition is amended, should the target deadline for
Period 2 be amended? Why or why not? Please explain your response.
c. Is the start date for Period 2 appropriate? Why or why not?
Please explain your response.
d. Is the target deadline of December 31, 2020 appropriate? Why or
why not? What alternative deadline would be more appropriate? Why?
Please explain your response.
17. With respect to Period 3:
a. Is the proposed Financial Accountability Milestone of Full
Availability and Regulatory Utilization of Transactional Database
Functionality appropriate? Why or why not? What other milestone should
be used to end Period 3? Why? Please explain your response.
b. Is the definition of Full Availability and Regulatory
Utilization of Transactional Database Functionality appropriate? Why or
why not? Please explain your response.
i. Should the definition of Full Availability and Regulatory
Utilization of Transactional Database Functionality be amended to
require that the Commission must have approved a filing from FINRA to
retire OATS, as well as any filings from the Participants to remove
OATS-related provisions from their rules, or to remove the requirement
that OATS reporting is no longer required for new orders? Why or why
not? Please explain your response.
ii. Should the definition of Full Implementation of Core Equity
Reporting Requirements be amended to include other kinds of Industry
Member reporting or linkages? If so, which additional kinds of Industry
Member reporting or linkages should be included and why? Please explain
your response.
iii. Should the definition of Full Availability and Regulatory
Utilization of Transactional Database Functionality be amended to
require a less stringent Error Rate? If so, what should the Error Rate
be and why? Please explain your response. Should the Commission require
the Participants to demonstrate that Error Rates are stable? If so, how
would Participants do that? If the Participants are in compliance with
Appendix C, Section 3 of the CAT NMS Plan, would that sufficient? How
long should the Error Rate remain below the specified threshold in
order to be considered ``stable''?
iv. Should the Commission amend the requirement that the query tool
functionality required by Section 6.10(c)(i)(A) and Appendix D,
Sections 8.1.1-8.1.3, Section 8.2.1, and Section 8.5 incorporates the
data required by conditions (b) and (c) or the requirement that the
query tool functionality is available to the Participants and the
Commission? How should the requirement be amended? Why? Please explain
your response.
v. Should the Commission amend the requirement that the
requirements of Section 6.10(a) are met? How should the requirement be
amended? Why? Please explain your response.
vi. If the definition is amended, should the target deadline for
Period 3 be amended? Why or why not? Please explain your response.
c. Is the start date for Period 3 appropriate? Why or why not?
Please explain your response.
d. Is the target deadline of December 31, 2020 appropriate? Why or
why not? What alternative deadline would be more appropriate? Why?
Please explain your response.
e. Are there any conditions that the Commission should consider in
evaluating whether OATS can be retired? Please explain your response.
18. With respect to Period 4:
a. Is the proposed Financial Accountability Milestone of Full
Implementation of CAT NMS Plan Requirements appropriate? Why or why
not? What other milestone should be used to end Period 4? Why? Please
explain your response.
b. Is the definition of Full Implementation of CAT NMS Plan
Requirements appropriate? Why or why not? Please explain your response.
i. Is additional detail needed to describe the obligations of the
Participants under Rule 613 and the CAT NMS Plan? If so, why, and what
language would sufficiently describe these obligations? Please explain
your response.
ii. If the definition is amended, should the target deadline for
Period 4 be amended? Why or why not? Please explain your response.
c. Is the start date for Period 4 appropriate? Why or why not?
Please explain your response.
d. Is the target deadline of December 30, 2022 appropriate? Why or
why not? What alternative deadline would be more appropriate? Why?
Please explain your response.
19. Are the selected Financial Accountability Milestones
appropriate? If not, what other Financial Accountability Milestones
should be included?
20. Is it appropriate for the Commission to permit the Participants
to submit updated, interim or addendum Quarterly Progress Reports for
completed Financial Accountability Milestones? Why or why not? What
information should be required in these interim or addendum Quarterly
Progress Reports so that the Commission can rely on such reports?
Should the Participants only be able to submit interim or addendum
Quarterly Progress Reports in connection with certain Financial
Accountability Milestones? If so, which ones? Please explain your
response.
21. Is it appropriate to end the application of proposed Section
11.6 once Full Implementation of CAT NMS Requirements has been
achieved? Why or why not? Please explain your response.
22. Should the Commission establish more than 4 Periods and/or use
more than 4 Financial Accountability Milestones? If so, how many
Periods should the Commission establish? What should the other
Financial Accountability Milestones be? Why? Please explain your
response.
23. Should the Commission establish fewer than 4 Periods and/or use
fewer Financial Accountability Milestones? If so, how many Periods
should the
[[Page 48474]]
Commission establish? What milestones should be removed, or how should
the existing milestones be edited? Please explain your response.
24. Is it appropriate for the Commission to incrementally reduce
the amount of Post-Amendment Industry Member Fees that the Participants
may recover if they miss the target deadlines specified in Period 1,
Period 2, Period 3, or Period 4? Why or why not? Would a different
percentage of recovery be more appropriate if target deadlines are
missed? If so, what percentage and on what schedule? Why? Is it
appropriate for the Commission to use different recovery schedules for
Period 1 and for Periods 2-4? Why or why not? Should a different
recovery schedule be used for Period 1? If so, how should the recovery
schedule be amended? Why? Please explain your response.
25. Is it appropriate that the Participants may only collect Post-
Amendment Industry Member Fees at the end of Period 1, Period 2, Period
3, or Period 4? Why or why not? If not, at what other point(s) should
the Participants be able to collect these fees, and how would the
Commission determine whether and how the provisions of Section 11.6
apply? Please explain your response.
26. Do commenters believe that the proposed incentives will
motivate the Participants to implement the CAT in an expeditious and
efficient manner? Why or why not? Would an alternative methodology be
more effective? If so, please describe this methodology and explain why
it would be more effective.
27. Is it appropriate for the Commission to require the Operating
Committee or the Participants to clearly label any CAT NMS Plan
amendments or fee filings submitted to establish or implement Post-
Amendment Industry Member Fees to indicate whether such fees are
related to Post-Amendment Expenses incurred during Period 1, Period 2,
Period 3, or Period 4? Why or why not? If not, how would the Commission
determine whether and how the provisions of Section 11.6 apply? Please
explain your response.
28. Should the Commission require the Participants to provide an
independent audit of the fees, costs, and expenses incurred from the
effective date of this proposed amendment? Why or why not?
III. Paperwork Reduction Act
Certain provisions of the proposed rule contain ``collection of
information requirements'' within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\134\ The Commission is submitting
these collections of information to the Office of Management and Budget
(``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 CFR
1320.11.\135\ An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless the agency
displays a currently valid control number.\136\ The title of the new
collection of information is ``CAT NMS Plan Reports.''
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\134\ 44 U.S.C. 3501 et seq.
\135\ 44 U.S.C. 3507; 5 CFR 1320.11.
\136\ 5 CFR 1320.11(l).
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A. Summary of Collection of Information
The proposed amendment would require two new categories of
information collection: (1) The Implementation Plan and (2) the
Quarterly Progress Reports.\137\ These categories are described more
fully below.
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\137\ The proposed amendment also requires the Participants to
include certain information in certain CAT NMS Plan amendments
submitted by the Operating Committee to the Commission pursuant to
Rule 608(b)(3) and all filings submitted by the Participants to the
Commission under Section 19(b) of the Exchange Act to establish or
implement Post-Amendment Industry Member Fees. However, the
Commission does not expect the baseline number of CAT NMS Plan
amendments or Section 19(b) filings, or the burdens associated with
these submissions, to increase as a result of the proposed
amendment. The Commission therefore believes that these burdens are
already accounted for in the Paperwork Reduction Act Information
Collection submissions for Form 19b-4 and Rule 11Aa3-2. See OMB
Control No. 3235-0045 (Aug. 19, 2016), 81 FR 57946 (Aug. 24, 2016)
(Request to OMB for Extension of Rule 19b-4 and Form 19b-4 PRA); OMB
Control No. 3235-0500 (December 22, 2004), 70 FR 929 (January 5,
2005) (Proposed Collection for Rule 11Aa3-2 and Request for
Comment).
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1. Implementation Plan
Proposed Section 6.6(c)(i) would require the Participants, within
30 calendar days following the effective date of this amendment, to
file with the Commission and make publicly available on a website a
complete Implementation Plan that includes the Participants' timeline
for achieving Implementation Milestones setting forth how and when the
Participants will facilitate the achievement of Full Implementation of
CAT NMS Plan Requirements. Under proposed Section 6.6(c)(iii), the
Operating Committee shall be required to submit the Implementation Plan
to the CEO, President, or an equivalently situated senior officer of
each Participant. A Supermajority Vote of the Operating Committee shall
then be required to approve the Implementation Report. However, if the
Implementation Plan is approved only by a Supermajority Vote of the
Operating Committee, and not by a unanimous vote of the Operating
Committee, each Participant whose Operating Committee member did not
vote to approve the Implementation Plan shall separately file with the
Commission and make publicly available on a website a statement
identifying itself and explaining why the member did not vote to
approve the Implementation Plan.
2. Quarterly Progress Reports
Proposed Section 6.6(c)(ii) would further require the Participants,
within 15 business days after the end of each calendar quarter, to file
with the Commission and make publicly available on a website a complete
Report that provides a detailed description of the progress made by the
Participants towards each of the Implementation Milestones. The
Participants must provide specified information regarding
Implementation Milestones that have been completed, Implementation
Milestones that are in progress, and Implementation Milestones that
have not yet been initiated, such as updated information on currently
targeted completion dates and descriptions of the current status of the
Implementation Milestone, any adjustments to the targeted completion
date, and supporting information demonstrating the current level of
completion. Under proposed Section 6.6(c)(iii), the Operating Committee
shall be required to submit each Quarterly Progress Report to the CEO,
President, or an equivalently situated senior officer of each
Participant. A Supermajority Vote of the Operating Committee shall be
required to approve each Quarterly Progress Report. However, if a
Quarterly Progress Report is approved only by a Supermajority Vote of
the Operating Committee, and not by a unanimous vote of the Operating
Committee, each Participant whose Operating Committee member did not
vote to approve that Quarterly Progress Report shall separately file
with the Commission and make publicly available on a website a
statement identifying itself and explaining why the member did not vote
to approve the Report.
B. Proposed Use of Information
1. Implementation Plan
The Commission believes that the publication of the proposed
Implementation Plan will make available critical information to the
Commission, other regulators, and market participants regarding the
[[Page 48475]]
intended goals and deadlines of the Participants. Access to this
information will help the Commission and market participants to monitor
the progress of CAT implementation, thereby reducing uncertainty
surrounding this process. The Commission also anticipates that
requiring the Participants to make public target dates submitted to
senior management of each Participant and approved by a Supermajority
Vote of the Operating Committee in the Implementation Plan will
increase the Participants' accountability to their intended timeline.
In addition, the Commission believes that requiring any Participants
whose Operating Committee members do not vote to approve the
Implementation Plan to disclose the basis for that decision may aid the
Commission and the public to better monitor the progress of CAT
implementation, because such an explanation may reveal critical
information regarding whether currently targeted completion dates are
realistic, whether milestones are being or have been completed in
accordance with the requirements of the CAT NMS Plan, and/or whether
potential risks or delays may impede the progress of CAT
implementation.
2. Quarterly Progress Reports
The Commission believes that the publication of the proposed
Quarterly Progress Reports will make available critical information to
the Commission, other regulators, and market participants regarding the
intended goals and deadlines of the Participants. Access to this
information will help the Commission and market participants to monitor
the progress of CAT implementation. The Commission also anticipates
that requiring the Participants to make public their accomplishments in
the Quarterly Progress Reports will keep the Participants accountable
to their intended timeline. Finally, the Commission expects that the
provision of updated quarterly information in a Report, submitted to
senior management of each Participant and approved by a Supermajority
Vote of the Operating Committee, regarding the Participants' progress
towards CAT implementation, as well as any explanatory statements by
Participants whose Operating Committee members do not vote to approve
the Report, may reduce uncertainty regarding CAT's implementation
deadlines and flag any concerns regarding the implementation process
for the Commission and market participants.
C. Respondents
The respondents to all collections of information would be the
Participants.
D. Total Initial and Annual Reporting and Recordkeeping Burdens
The estimated burdens associated with the proposed amendments are
described fully below, but the below table briefly summarizes the
relevant burdens set forth in this Proposing Release.
----------------------------------------------------------------------------------------------------------------
Annual ongoing burden One-time burden per
Category per participant (burden participant (burden
hours/external costs) hours/external costs)
----------------------------------------------------------------------------------------------------------------
Implementation Plan........................................... N/A 76.8/$8,695.65
Quarterly Progress Reports.................................... 307.2/$34,782.60 N/A
----------------------------------------------------------------------------------------------------------------
1. Implementation Plan
The Commission preliminarily believes that each Participant will
incur, on average, a one-time burden of approximately 57.2 hours to
confer with other Participants, to draft an Implementation Plan, and to
vote as to whether to approve the Implementation Plan, as required by
proposed Section 6.6(c)(iii). In the CAT NMS Plan Approval Order, the
Commission noted that the Participants had estimated that approximately
20 full-time employees took approximately 30 months to develop the CAT
NMS Plan, including ``staff time contributed by each Participant to,
among other things, determine the technological requirements for the
Central Repository, develop the RFP, evaluate Bids received, design and
collect the data necessary to evaluate costs and other economic
impacts, meet with Industry Members to solicit feedback, and complete
the CAT NMS Plan submitted to the Commission for consideration.'' \138\
The Commission then used this information to estimate that the
development of the CAT NMS Plan would require, in aggregate, 14,407
burden hours for 12 months.\139\
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\138\ See CAT NMS Plan Approval Order, supra note 4, at n.3285.
\139\ See id.
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This estimate, based on information provided by the Participants
about the burdens they actually incurred in developing a related
project, reflects the best data available to the Commission in
estimating the number of initial burden hours required to develop the
Implementation Plan. The Commission notes that developing the CAT NMS
Plan was a far more complex project than the development of the
Implementation Plan and that the burdens incurred in developing the CAT
NMS Plan may be different in nature than the costs that the
Participants would incur in developing the Implementation Plan. In this
instance, for example, the Participants will only have 30 calendar days
from the effective date of this amendment to prepare the Implementation
Plan, and the Participants have already created a Master Plan that
contains much of the information required by proposed Section
6.6(c)(i). In addition, the Commission believes that the Participants
should already have gathered much of the information needed to create
the Implementation Plan.\140\ For these reasons, the Commission
preliminarily believes that the estimated burden for preparing the
Implementation Plan should be one-twelfth the amount of the burden
estimated for the development of the CAT NMS Plan,\141\ or, on average,
52.2 initial, one-time burden hours for each Participant.\142\
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\140\ See, e.g., note 53 supra.
\141\ Because the proposed amendment gives the Participants
approximately one month to prepare and publish the Implementation
Plan, the Commission has preliminarily used an estimate that mirrors
the one-month burden that was incurred by the Participants in
developing the CAT NMS Plan.
\142\ 14,407 CAT NMS Plan burden hours / 12 months = 1,200.6
burden hours for all Participants. 1,200.6 aggregate burden hours /
23 Participants = 52.2 burden hours per Participant for the
Implementation Plan. The Commission preliminarily estimates that
each Participant will spend, on average, 52.2 internal burden hours
= (Attorney at 7 hours) + (Systems Analyst at 22.6 hours) +
(Compliance Manager at 22.6 hours). As discussed further in Section
IV.C., all estimates in this section represent an average; the
Commission expects that some Participants may incur greater costs
and some lesser costs due to variances in economies of scale for
Participants who share a common corporate parent. See note 217
infra.
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In addition, the Commission estimates that it will take each
Participant approximately 10 hours, on average, for
[[Page 48476]]
its member of the Operating Committee to ensure that the Operating
Committee submits the Implementation Plan to the CEO, President, or
equivalently situated senior officer of each Participant, for each
Participant to review the information contained in the Implementation
Plan and for senior management consultations as needed, and to vote on
approving the Implementation Plan.\143\ The Commission expects each
member of the Operating Committee to be familiar with the process of
CAT implementation, which should ease the task of determining whether
to vote in favor of the Implementation Plan. Accordingly, the
Commission estimates that each Participant will incur, on average, a
one-time burden of 62.2 hours to prepare the Implementation Plan and to
vote as to whether to approve it,\144\ for a one-time aggregate burden
of approximately 1,430.6 hours.\145\
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\143\ For the purposes of the Paperwork Reduction Act, the
Commission is assuming that the member of the Operating Committee is
a Chief Regulatory Officer or a Chief Compliance Officer and will
spend 5 hours on these tasks. However, the Commission notes that
this task could be performed by any person designated by the
Participant to serve as its representative on the Operating
Committee. See Section 4.2(a) of the CAT NMS Plan. In addition, the
Commission estimates that senior management who receive the
Implementation Plan from the Operating Committee will spend 5 hours
in consultations, including with their member of the Operating
Committee regarding the Implementation Plan. Because one individual
may serve as the representative for multiple affiliated
Participants, the Commission expects that some Participants may
incur greater costs and some lesser costs due to variances in
economies of scale for Participants who share a common corporate
parent.
\144\ 52.2 burden hours + 10 burden hours = 62.2 burden hours.
\145\ 62.2 burden hours x 23 Participants = 1,430.6 burden
hours.
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If the Implementation Plan is approved only by a Supermajority
Vote, and not by a unanimous vote, the proposed amendments require each
Participant whose Operating Committee member did not vote to approve
the Implementation Plan to separately file with the Commission and make
available on a public website an explanatory statement identifying
itself and explaining why it did not vote to approve the Implementation
Plan.\146\ Because there are currently 23 Participants, an
Implementation Plan would need to be approved by at least 16 members of
the Operating Committee to satisfy the Supermajority Vote provisions of
the CAT NMS Plan.\147\ At maximum, then, only seven Participants would
file an explanatory statement in connection with an Implementation Plan
approved only by Supermajority Vote.\148\ The Commission preliminarily
estimates that each of the seven Participants submitting an explanatory
statement will incur, on average, an initial, one-time burden of 15
hours to draft such statement.\149\ When this aggregate burden is
averaged across all Participants, it amounts to approximately 4.6 hours
per Participant or 105 hours in aggregate.\150\
---------------------------------------------------------------------------
\146\ For the purposes of the Paperwork Reduction Act, the
Commission is assuming that this task will be performed by a Chief
Regulatory Officer or a Chief Compliance Officer. See note 143
supra.
\147\ 23 Participants x \2/3\ Participants = 15.33 Participants.
Section 1.1 of the CAT NMS Plan indicates that, ``if two-thirds of
all . . . members authorized to cast a vote is not a whole number
then that number shall be rounded up to the nearest whole number.''
\148\ 23 Participants-16 Participants = 7 Participants.
\149\ The Commission bases this estimate on a full-time
Compliance Manager and the Chief Regulatory Officer or Chief
Compliance Officer each spending 7.5 hours to prepare the
explanatory statement.
\150\ 7 Participants * 15 burden hours = 105 burden hours in
aggregate. 105 burden hours / 23 Participants = 4.6 burden hours.
---------------------------------------------------------------------------
Finally, the Commission estimates that each Participant will incur,
on average, a one-time burden of approximately 10 hours to ensure that
the Implementation Plan, and any explanatory statement (if applicable),
is filed with the Commission and made publicly available on a
website.\151\ The Commission therefore estimates an aggregate burden of
approximately 230 hours for the Participants to publicly post and
submit to the Commission the Implementation Plan.\152\
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\151\ The Commission bases this estimate on a full-time
Compliance Manager and Programmer Analyst each spending
approximately 5 hours, for a combined total of approximately 10
hours, to prepare and publicly post the relevant documents.
\152\ 10 burden hours per Participant x 23 Participants = 230
burden hours.
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In total, therefore, the Commission estimates that each Participant
will incur, on average, a one-time burden of approximately 76.8 hours
\153\ and approximately 1,766.4 hours in aggregate to comply with the
provisions of the proposed amendments that relate to the Implementation
Plan.\154\
---------------------------------------------------------------------------
\153\ 52.2 hours + 10 hours + 4.6 hours + 10 hours = 76.8 burden
hours.
\154\ 76.8 hours x 23 Participants = 1,766.4 burden hours. See
Section IV.C. infra for a dollar cost estimate of this burden.
---------------------------------------------------------------------------
The Commission further estimates that each Participant will expend
approximately $8,695.65, on average, in external public relations,
legal, and consulting costs related to the development of the
Implementation Plan. In the CAT NMS Plan Approval Order, the Commission
estimated, based on information provided by the Participants, that the
Participants had collectively spent approximately $2,400,000 in
preparation of the CAT NMS Plan on external public relations, legal,
and consulting costs.\155\ The Commission preliminarily believes that
the estimated burden for the Implementation Plan should be one-twelfth
the amount estimated for the development of the CAT NMS Plan, because
the Participants will only have 30 calendar days from the effective
date of this amendment to prepare the Implementation Plan and because
preparation of the Implementation Plan is a much less complex project.
Accordingly, the Commission estimates that the Participants will expend
approximately $200,000 in aggregate, and $8,695.65 per Participant, in
external public relations, legal, and consulting costs related to the
preparation of the Implementation Plan.\156\
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\155\ See CAT NMS Plan Approval Order, at n.3287, supra note 4.
\156\ $2,400,000 CAT NMS Plan costs / 12 months = $200,000 for
all Participants. $200,000 / 23 Participants = $8,695.65 per
Participant for the Implementation Plan.
---------------------------------------------------------------------------
2. Quarterly Progress Reports
The Commission preliminarily believes that each Participant will
incur, on average, an ongoing quarterly burden of approximately 62.2
hours to confer with other Participants, to draft a Quarterly Progress
Report, to ensure that the Operating Committee submits each Quarterly
Progress Report to the CEO, President, or equivalently situated senior
officer of each Participant, and to vote as to whether to approve each
Quarterly Progress Report, as required by proposed Section
6.6(c)(iii).\157\ This estimate is approximately the same as the burden
related to the development and approval of the Implementation Plan,
because the Quarterly Progress Reports require the Participants to
prepare a detailed description explaining, quantifying, and voting to
approve the description of their progress towards the Implementation
Milestones laid out in the Implementation Plan, including the impact
that any such progress might have on the target completion dates for
Implementation Milestones that have not yet been achieved. The
Commission believes this estimate is appropriate because the
Participants are likely already tracking some of the information
required to be included in the Quarterly Progress Reports.\158\
Accordingly, the Commission estimates, on average, an
[[Page 48477]]
ongoing quarterly burden of approximately 62.2 hours for each
Participant,\159\ an ongoing annual burden of approximately 248.8 hours
for each Participant,\160\ and an aggregate annual burden of
approximately 5,722.4 hours.\161\
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\157\ As discussed further in Section IV.C., all estimates in
this section represent an average; the Commission expects that some
exchanges may incur greater costs and some lesser costs due to
variances in economies of scale for Participants who share a common
corporate parent. See note 217 infra.
\158\ See, e.g., note 53 supra.
\159\ The Commission preliminarily estimates that each
Participant will spend, on average, 52.2 internal burden hours to
confer with other Participants and to compile the Quarterly Progress
Report = (Attorney at 7 hours) + (Systems Analyst at 22.6 hours) +
(Compliance Manager at 22.6 hours). In addition the Commission
preliminarily estimates, for the purposes of the Paperwork Reduction
Act, that the chief Compliance Officer or Chief Regulatory Officer
of each Participant will spend 5 hours, on average, to submit the
Quarterly Progress Report to the CEO, President, or equivalently
situated senior officer of each Participant, to review the
information contained in each Quarterly Progress Report and for
senior management consultations as needed, and to vote on approving
the Quarterly Progress Report. In addition, the Commission estimates
that the CEO, President, or equivalently situated senior officer of
each Participant will spend 5 hours in consultations, including with
their member of the Operating Committee regarding each Quarterly
Progress Report. 52.2 hours + 5 hours + 5 hours = 62.2 hours.
Because one individual may serve as the representative for multiple
affiliated Participants, the Commission expects that some
Participants may incur greater costs and some lesser costs due to
variances in economies of scale for Participants who share a common
corporate parent.
\160\ 62.2 burden hours per Participant per Quarterly Progress
Report * 4 Quarterly Progress Reports = 248.8 annual burden hours
per Participant for the Quarterly Progress Reports.
\161\ 248.8 annual burden hours per Participant * 23
Participants = 5,722.4 aggregate annual burden hours.
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If any Quarterly Progress Report is approved only by a
Supermajority Vote, and not by a unanimous vote, the proposed
amendments require each Participant whose Operating Committee member
did not vote to approve that Quarterly Progress Report to separately
file with the Commission and make available on a public website an
explanatory statement identifying itself and explaining why it did not
vote to approve the Report.\162\ Because there are currently 23
Participants, each Quarterly Progress Report would need to be approved
by at least 16 members of the Operating Committee to satisfy the
Supermajority Vote provisions of the CAT NMS Plan.\163\ At maximum,
then, only seven Participants would file an explanatory statement in
connection with a Quarterly Progress Report approved only by
Supermajority Vote.\164\ The Commission preliminarily estimates that
each of the seven Participants submitting an explanatory statement will
incur, on average, an ongoing burden of 15 hours to draft such
statement.\165\ When this aggregate burden is averaged across all
Participants, it amounts to an ongoing quarterly burden of
approximately 4.6 hours per Participant,\166\ an ongoing annual burden
of approximately 18.3 hours per Participant,\167\ and an aggregate
annual burden of approximately 420 hours.\168\
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\162\ For the purposes of the Paperwork Reduction Act, the
Commission is assuming that this task will be performed by a Chief
Regulatory Officer or a Chief Compliance Officer. See note 143
supra.
\163\ See note 147 supra.
\164\ See note 148 supra.
\165\ See note 149 supra.
\166\ 7 Participants * 15 burden hours = 105 burden hours in
aggregate. 105 burden hours / 23 Participants = 4.6 burden hours.
\167\ 4.6 burden hours x 4 Quarterly Progress Reports = 18.3
burden hours.
\168\ 18.3 annual burden hours x 23 Participants = 420 burden
hours.
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Additionally, the Commission estimates that each Participant will
incur an ongoing quarterly burden, on average, of approximately 10
hours to ensure that each Quarterly Progress Report, and any
explanatory statement (if applicable), is filed with the Commission and
made publicly available on a website.\169\ The Commission therefore
estimates an annual burden, on average, of approximately 40 hours for
each Participant,\170\ and an aggregate annual burden of 920 hours for
all Participants,\171\ to publicly post and submit to the Commission
the Reports.
---------------------------------------------------------------------------
\169\ The Commission bases this estimate on a full-time
Compliance Manager and Programmer Analyst each spending
approximately 5 hours, for a combined total of approximately 10
hours, to prepare and publicly post the relevant documents.
\170\ 10 burden hours per Quarterly Progress Report x 4 quarters
= 40 annual burden hours per Participant.
\171\ 40 annual burden hours per Participant x 23 Participants =
920 aggregate annual burden.
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In total, therefore, the Commission estimates that each Participant
will incur, on average, an ongoing burden of approximately 76.8 hours
per Quarterly Progress Report,\172\ for an annual average estimated
burden of 307.2 hours \173\ and approximately 7,065.6 hours in
aggregate.\174\
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\172\ 62.2 hours + 4.6 hours + 10 hours = 76.8 burden hours.
\173\ 76.8 hours x 4 Quarterly Progress Report = 307.2 hours.
\174\ 307.2 hours x 23 Participants = 7,065.6 burden hours. See
Section IV.C. infra for a dollar cost estimate of this burden.
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Similarly, the Commission estimates that each Participant will
expend, on an ongoing basis, approximately the same amount of external
public relations, legal, and consulting costs associated with the
Implementation Plan on each Quarterly Progress Report. Accordingly, the
Commission estimates, on average, an ongoing quarterly cost of
approximately $8,695.65 for each Participant, an ongoing annual cost of
$34,782.60 for each Participant,\175\ and an aggregate annual cost of
approximately $799,999.80.\176\ The Commission notes that a portion of
these costs may be recoverable from Industry Members, if consistent
with the Exchange Act and the CAT NMS Plan.\177\
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\175\ $8,695.65 per Participant per Quarterly Progress Report *
4 Quarterly Progress Reports = $34,782.60 per Participant per year
for the Quarterly Progress Reports.
\176\ $34,782.60 per Participant * 23 Participants = $799,999.80
aggregate annual cost.
\177\ See, e.g., Article XI of the CAT NMS Plan.
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E. Collection of Information Is Mandatory
Each collection of information discussed above would be a mandatory
collection of information.
F. Confidentiality of Responses to Collection of Information
Neither the Implementation Plan nor the Quarterly Progress Reports
would be confidential. Rather, each would be publicly posted by the
Participants on a website.
G. Retention Period for Recordkeeping Requirements
National securities exchanges and national securities associations
are required to retain records and information pursuant to Rule 17a-1
under the Exchange Act.\178\
---------------------------------------------------------------------------
\178\ 17 CFR 240.17a-1.
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H. Request for Comments
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comments to:
29. Evaluate whether the proposed collections of information are
necessary for the proper performance of the functions of the agency,
including whether the information shall have practical utility;
30. Evaluate the accuracy of our estimates of the burden of the
proposed collection of information;
31. Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected; and
32. Evaluate whether there are ways to minimize the burden of
collection of information on those who are to respond, including
through the use of automated collection techniques or other forms of
information technology.
Persons submitting comments on the collection of information
requirements should direct them to the Office of Management and Budget,
Attention: Desk Officer for the Securities and Exchange Commission,
Office of Information and Regulatory Affairs, Washington, DC 20503, and
should also
[[Page 48478]]
send a copy of their comments to Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090, with reference
to File Number 4-698. Requests for materials submitted to OMB by the
Commission with regard to this collection of information should be in
writing, with reference to File Number 4-698 and be submitted to the
Securities and Exchange Commission, Office of FOIA/PA Services, 100 F
Street NE, Washington, DC 20549-2736. As OMB is required to make a
decision concerning the collection of information between 30 and 60
days after publication, a comment to OMB is best assured of having its
full effect if OMB receives it within 30 days of publication.
IV. Economic Analysis
Section 3(f) of the Exchange Act requires the Commission, whenever
it engages in rulemaking and is required to consider or determine
whether an action is necessary or appropriate in the public interest,
to consider, in addition to the protection of investors, whether the
action would promote efficiency, competition, and capital
formation.\179\ In addition, Section 23(a)(2) of the Exchange Act
requires the Commission, when making rules under the Exchange Act, to
consider the impact such rules would have on competition.\180\ Exchange
Act Section 23(a)(2) prohibits the Commission from adopting any rule
that would impose a burden on competition not necessary or appropriate
in furtherance of the purposes of the Exchange Act. The discussion
below addresses the likely economic effects of the proposed rule,
including the likely effect of the proposed rule on efficiency,
competition, and capital formation.
---------------------------------------------------------------------------
\179\ 15 U.S.C. 78c(f).
\180\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------
As discussed above, since the adoption of Rule 613 in 2012, CAT
implementation has experienced recurrent delays.\181\ These
implementation delays postpone the benefits of the CAT NMS Plan to
investors \182\ and may result in additional costs to Industry
Members.\183\ In the Notice, the Commission discussed how the
governance structure of the CAT NMS Plan could affect the costs and
benefits of the CAT NMS Plan and noted that the Commission retains the
ability to modify the CAT NMS Plan.\184\ The CAT NMS Plan does not
require the Participants to provide transparency to industry or
investors regarding implementation, nor does it create financial
accountability for the Participants to complete the implementation
process. The Commission preliminarily believes that modifying the CAT
NMS Plan to require operational transparency and provide financial
accountability for meeting implementation milestones will impose more
structure on the process and is appropriate to achieve timely
completion of the CAT. The proposed amendments would: (1) Provide more
accountability and transparency by requiring the Operating Committee to
approve by Supermajority Vote and file with the Commission and publish
on a public website certain information, including the Implementation
Plan as well as quarterly reports detailing progress made toward
achieving the Implementation Milestones set forth in the Implementation
Plan and (2) introduce financial accountability to the CAT NMS Plan by
requiring the Participants to meet four critical CAT implementation
milestones--the Financial Accountability Milestones--by certain dates
in order to collect the full amount of any related Post-Amendment
Industry Member Fees established by the Operating Committee or
implemented by the Participants.\185\
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\181\ See Part I supra.
\182\ See CAT NMS Plan Approval Order, supra note 4, at Section
V.E.
\183\ See Part IV.A. infra.
\184\ See Securities Exchange Act Release No. 77724 (April 27,
2016), 81 FR 30614 (May 17, 2016) (File No. 4-698) (``Notice''), at
Section IV.E.3.d.1.
\185\ See Part II supra.
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The proposed amendments would increase operational transparency by
requiring Participants to publish a complete CAT implementation plan,
and publish a complete progress report quarterly.\186\ Further, the
proposed amendments require approval by a Supermajority Vote of the
Operating Committee for both the implementation plan and the quarterly
progress reports.\187\ These operational transparency provisions of the
proposed amendments should provide Industry Members with more certainty
surrounding the implementation timeline of CAT, reducing associated and
unnecessary implementation costs.\188\
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\186\ See Part II.A. supra.
\187\ See Part IV.B, infra for further discussion of this
approval requirement.
\188\ The Commission preliminarily believes that uncertainty in
the CAT NMS Plan implementation timeline may potentially increase
Industry Member implementation costs. See Part IV.B, infra for
further discussion.
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The proposed amendments also establish Financial Accountability
Milestones and Reduced Fee Recovery Rates (``RFRRs'') that take effect
and increase in magnitude in response to delays in meeting certain
Financial Accountability Milestones.\189\ Thus, the proposed amendments
would shift some costs from Industry Members to Participants if the
Participants fail to meet certain Financial Accountability
Milestones.\190\ The Commission preliminarily believes this cost
shifting would offset any Industry Member costs imposed by delays in
implementation. The Commission further believes that the RFRRs
incentivize the Participants to implement the CAT NMS Plan
expeditiously and efficiently, which would result in investors
realizing the benefits of the CAT NMS Plan sooner. If the Participants
miss the deadline for Initial Industry Member Core Equity Reporting by
more than 180 days, or the deadlines for the other three Financial
Accountability Milestones by more than 270 days, the structure of the
RFRRs would not allow them to recover expenses incurred during the
Period. The Commission acknowledges that after 270 days or 180 days, as
applicable, the amendments would no longer directly incentivize the
Participants, because the 0% recovery rate cannot be further reduced by
continued delays. However, the Participants would continue to incur and
be solely responsible for the operating costs of the Central
Repository, and could not share any ongoing operational costs incurred
during the Period with Industry Members.\191\ Participants would only
be
[[Page 48479]]
allowed to partially recover from Industry Members those expenses
incurred after the Period ended, which could only be achieved by
meeting the applicable Financial Accountability Milestones.
Furthermore, to the extent that Financial Accountability Milestones are
inherently sequential, Participants would continue to be incentivized
to complete the current Period by achieving the Financial
Accountability Milestones to avoid triggering RFRRs in the subsequent
Period. Consequently, although incentives would be diminished, the
Participants would continue to be incentivized to complete the Period
by meeting the Financial Accountability Milestones.
---------------------------------------------------------------------------
\189\ The Plan allows Participants to recover a percentage of
certain CAT costs from Industry Members. The Plan anticipates that
the Participants will submit a fee filing that establishes what
percentage of CAT expenses will be passed on to Industry Members,
and how CAT expenses will be shared among Participants and among
Industry Members. Because no CAT fee filing has been approved, the
proportion of CAT costs that will be borne by Industry Members is
unknown. The magnitude of the incentives from RFRRs ultimately
depends on the proportion of fees that Participants are permitted to
recover from Industry Members.
In the event that RFRRs are triggered, the Commission proposes
to reduce the amount of fees that the Participants are allowed to
recover from Industry Members according to the fee schedule
described in Part II.B.2. supra.
\190\ Although some Industry Members provide advice to the
Participants through the actions of the CAT Advisory Committee, they
do not have votes on the CAT Operating Committee and thus cannot
initiate or control actions taken by the Operating Committee that
might facilitate expeditious and efficient implementation of the
Plan. Furthermore, in later stages of CAT implementation, in the
event that Industry Members' actions might delay implementation of
the Plan, the Participants have regulatory authority over Industry
Members and can use that authority to address failures by Industry
Members to comply with reporting requirements under the Plan.
\191\ The Participants' Central Repository costs consist of both
implementation costs and operating costs, as discussed below; see
note 227 infra. If Participants missed a Financial Accountability
Milestone by 270 days and triggered a 0% RFRR, none of the expenses
the Participants incurred during the Period could be recovered from
Industry Members. However, the Participants would continue to incur
operating costs for the Central Repository, and the magnitude of
those operating costs during the period would be a function of the
duration of the Period. To minimize the financial impact of the
RFRRs, the Participants would continue to be incentivized to meet
the Financial Accountability Milestones and end the Period, so that
they would no longer be solely responsible for the operating costs
of the Central Repository and could again, potentially, resume
sharing these costs with Industry Members.
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Wherever possible, the Commission has quantified the likely
economic effects of the amendments, including the direct costs to the
Participants. However, some of the costs, benefits, and other economic
effects we discuss are inherently difficult to quantify, including the
benefits of accelerating the realization of the improvements to
investor protection that are expected to result from the implementation
of the CAT, the benefits of transparency to industry members and the
public, and the potential impact on competition among exchanges.
Additionally, the Commission preliminarily believes costs caused by
uncertainty in the timeline for CAT implementation and retirement of
duplicative reporting systems may vary significantly across Industry
Members because of the diversity of their approaches to regulatory data
reporting. Therefore, much of our discussion is qualitative in nature.
Our inability to quantify certain costs, benefits, and effects does not
imply that such costs, benefits, or effects are less significant. We
request that commenters provide relevant data and information to assist
us in analyzing the economic consequences of the proposed amendments.
A. Baseline
1. Transparency of CAT Implementation Status
Industry Members obtain information about the implementation status
of the CAT NMS Plan through several mechanisms.\192\ These include
information gleaned from participation in the CAT Advisory Committee;
information provided on websites operated by the CAT Operating
Committee; presentations to industry sponsored by the CAT Operating
Committee; and information presented at meetings of the Industry
Technical Specifications Working Group.
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\192\ The Plan requires that the Chief Compliance Officer shall
appropriately document objective milestones to assess progress
toward the implementation of the Plan, but has no requirement that
this information be disseminated to industry or the Commission. See
CAT NMS Plan, supra note 4, at Section 6.7(b).
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A few representatives of Industry Members are privy to information
through their participation on the CAT Advisory Committee, but this
information is not widely available to industry. These advisory
committee members ``have the right to attend meetings of the Operating
Committee or any Subcommittee, to receive information concerning the
operation of the Central Repository,'' subject to certain limitations
outlined in the CAT NMS Plan.\193\ Further, ``Members of the Advisory
Committee shall receive the same information concerning the operation
of the Central Repository as the Operating Committee; provided,
however, that the Operating Committee may withhold information it
reasonably determines requires confidential treatment. Any information
received by members of the Advisory Committee in furtherance of the
performance of their functions pursuant to this Agreement shall remain
confidential unless otherwise specified by the Operating Committee.''
\194\ The Commission preliminarily believes that Industry Members of
the CAT Advisory Committee may be provided with significant information
regarding the status of implementation, but given the confidential
treatment required by the CAT NMS Plan, the Industry Members on the
Advisory Committee are not free to share it with other Industry
Members. Consequently, the Commission preliminarily believes that most
Industry Members obtain little information about CAT implementation
through this mechanism.
---------------------------------------------------------------------------
\193\ See CAT NMS Plan, supra note 4, at Section 4.13.
\194\ See CAT NMS Plan Approval Order, supra note 4, at Section
VI.D.1.a, note 3243.
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In addition, the Operating Committee provides a website with
information on the CAT NMS Plan, but there is no requirement in the CAT
NMS Plan to keep it current.\195\ The website provides access to the
current CAT NMS Plan, current technical specifications, an archive of
information presented at past industry events, and other information
about the CAT of interest to industry.
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\195\ See https://www.catnmsplan.com/index.html. The public can
also glean information about Plan implementation from this website.
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Furthermore, the Operating Committee provides occasional updates to
industry on the state of implementation. These updates are documented
on the CAT NMS Plan website. These updates include the April 3, 2019,
Industry Outreach presentation in which the Operating Committee
presented a revised implementation timeline for Industry Member
reporting with deadlines that extend even further beyond those in the
CAT NMS Plan.\196\ Subsequent to this presentation, the CAT NMS Plan
website added a ``Timeline'' section. The CAT NMS Plan, however, has no
requirement that this be updated.
---------------------------------------------------------------------------
\196\ See note 47 supra.
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Another source of information about CAT implementation available to
the industry is the Industry Technical Specifications Working Group.
This working group, which makes recommendations on Industry Member-
specific implementation issues, is comprised of members of the Advisory
Committee and additional industry organization representatives, with
subject matter experts from the industry invited to lead or facilitate
discussion of a particular issue. This working group is not bound by
confidentiality agreements, so some information discussed in the
working group is shared with members of the industry, primarily through
outreach efforts by industry associations.
2. Status of Implementation
As discussed previously, there have been repeated delays to
implementation and it remains uncertain when CAT will be fully
implemented.\197\ Although the Participants have not yet published a
timeline detailing when full functionality of Participant reporting
would be completed by the new plan processor, in a April 2019 Industry
Outreach presentation, the Operating Committee presented a revised
implementation timeline for Industry Member reporting with deadlines
that extend even further beyond those in the CAT NMS Plan. The revised
deadline
[[Page 48480]]
for Industry Member reporting to the CAT would require the reporting by
Industry Members of equities data by April 2020 and simple options data
by May 2020.\198\ These delays to implementation of the CAT NMS Plan
delay the time at which investors will realize the significant benefits
of the CAT contemplated in the CAT NMS Plan Approval Order.\199\
Specifically, delays in the implementation of the CAT have delayed
improvements in regulatory activities such as market analysis and
reconstruction, surveillance, and investigations, leading to delays in
increased investor protection.\200\
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\197\ See Part I supra for a detailed discussion of Plan
implementation status.
\198\ See note 47 supra.
\199\ See CAT NMS Plan Approval Order, supra note 4, at Section
V.E.
\200\ See id. The Approval Order noted that, by providing
regulators with more complete, accurate, accessible, and timely
trade and order data, the CAT would improve regulatory activities
such as market analysis and reconstruction, surveillance, and
investigations, leading to increased investor protection.
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In addition, the Commission preliminarily believes that the
multiple missed deadlines in the CAT NMS Plan has led to uncertainty
for Industry Members surrounding the timeline of CAT
implementation.\201\ In the CAT NMS Plan Approval Order, the Commission
discussed the complexities of, and diversity of approaches to, Industry
Member regulatory data reporting,\202\ and the costs that Industry
Members face in implementing CAT reporting.\203\ The Commission
understands that for many Industry Members, significant changes to
regulatory data reporting systems require planning for the allocation
of financial, technological, and human resources. The Commission lacks
specific information on the status of Industry Member CAT reporting
implementation efforts, but recognizes the possibility that some
Industry Members, particularly those that self-report regulatory data,
may already be incurring costs due to this uncertainty, as discussed
further below.\204\ Therefore, the Commission recognizes that it is
possible that Industry Members may be incurring additional costs,
beyond those anticipated due to the delay.\205\ Finally, the Commission
believes that any Industry Members that have begun implementation
activities are likely incurring costs for tracking and planning for CAT
implementation and notes that the length of the implementation period
has extended longer than anticipated. This may increase costs to
Industry Members.
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\201\ As discussed in the CAT NMS Plan Approval Order, many
Industry Members rely on service bureaus to report their regulatory
data. These service bureaus face the same uncertainty that is
described here for Industry Members. Some but not all service
bureaus are Industry Members. See CAT NMS Plan Approval Order, supra
note 4, at Section V.F.1.c.(2).
\202\ See id.
\203\ See id. at Section V.F.2.
\204\ In the case of the majority of Industry Members that rely
on service providers for their regulatory data reporting, those
service providers face significant CAT implementation costs and
similar uncertainty as large self-reporting Industry Members, and
any additional costs the service providers face in implementing CAT
reporting due to this uncertainty are likely to be passed on to
their Industry Member customers.
\205\ See Part IV.B, infra.
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B. Benefits
The Commission preliminarily believes the proposed amendments offer
two primary benefits. First, because the amendments include financial
accountability provisions that may cause the CAT to be implemented more
expeditiously and efficiently, investors could realize the benefits of
the CAT sooner than they would be realized without the proposed
amendments. Second, the Commission preliminarily believes that Industry
Members would have more certainty surrounding the implementation
timeline of CAT, and the timeline for retirement of OATS,\206\ reducing
possible associated and unnecessary implementation and maintenance
costs.\207\
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\206\ The Commission continues to believe that the period of
duplicative reporting of OATS data will be less than 2-2.5 years,
but recognizes that the multiple delays in CAT implementation has
increased uncertainty about when the duplicative reporting period
will commence and end. Neither the Plan nor the Participants'
industry outreach materials currently offer guidance to Industry
Members on when duplicative reporting systems are likely to be
retired. Consequently, Industry Members cannot reasonably estimate
the expected duration of the period of duplicative reporting, or
when it might begin and/or end. In the CAT Approval Order,
duplicative reporting was anticipated to cost Industry Members up to
$1.4 billion annually between the time when Industry Members begin
to report data to the CAT and when duplicative regulatory data
reporting systems are retired. See CAT NMS Plan Approval Order,
supra note 4, at Section V.F.2.b.
\207\ See Part IV.D.1. infra for discussion of impacts on
efficiency of Industry Member CAT implementation.
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The amendment's financial accountability provisions may cause the
CAT to be implemented more expeditiously and efficiently, which could
allow investors to realize the benefits of the CAT sooner than they
would be realized without the proposed amendments. While the Commission
continues to believe that implementation of CAT will allow the
Participants to improve their regulatory activities to the benefit of
investors,\208\ the Commission also notes that implementation of the
proposed amendments may accelerate the Participants' realization of
costs relative to the current state of development. These include costs
to build and operate the Central Repository, report Participant data to
CAT, and to update their regulatory surveillance to take advantage of
data available in the Central Repository.\209\ Consequently, the
Commission preliminarily believes that the Participants may have a
financial disincentive to implement CAT expeditiously and efficiently
because delays in CAT implementation delay realization of some of these
costs, such as costs to update their regulatory surveillance. By
amending the CAT NMS Plan to provide RFRRs to encourage implementation,
the Commission preliminarily believes the Participants will be more
likely to implement CAT expeditiously and efficiently to the benefit of
investors.\210\
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\208\ See CAT NMS Plan Approval Order, supra note 4, at Section
V.E.2.
\209\ See CAT NMS Plan Approval Order, supra note 4, at Section
V.F.
\210\ Missing Financial Accountability Milestones will result in
Participants not being able to recoup certain costs from Industry
Members. This will increase the costs for which Participants will
ultimately be responsible, with those costs increasing as
implementation delays persist.
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As discussed in more detail in the CAT NMS Plan Approval Order, by
providing regulators with more complete, accurate, accessible, and
timely trade and order data, the CAT is expected to improve regulatory
activities such as market analysis and reconstruction, surveillance,
and investigations, leading to increased investor protection.\211\ If
the Participants complete the implementation of the CAT more
expeditiously and efficiently as a result of the proposed amendments,
these benefits will be realized more quickly.
---------------------------------------------------------------------------
\211\ Id. at Section V.E.
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The Commission preliminarily believes that the proposed amendments
should provide Industry Members with more certainty surrounding the
implementation timeline of CAT and the retirement schedule for OATS,
which should help reduce any unnecessary implementation and maintenance
costs associated with this uncertainty.\212\ As discussed previously,
the Commission recognizes that there is significant uncertainty
regarding the CAT implementation timeline. Further, based on
discussions with Industry Members and staff expertise, the Commission
preliminarily believes that this uncertainty may be causing Industry
Members to incur costs they would not have incurred had the CAT been
completed on its original
[[Page 48481]]
schedule.\213\ As noted above, for many Industry Members, significant
changes to regulatory data reporting systems require planning for the
allocation of financial, technological, and human resources, and the
Commission preliminarily believes that uncertainty surrounding CAT
implementation timelines may be hampering Industry Members' ability to
efficiently perform that planning. The amendments may result in the
Participants implementing CAT more expeditiously and efficiently and
should reduce uncertainty because Industry Members will be aware of the
financial accountability measures that Participants face if Financial
Accountability Milestones are missed, and are likely to assume that the
Participants will be incentivized to meet those milestones. Further,
information in the Implementation Plan and Quarterly Progress Reports,
and the associated requirement for approval by a Supermajority Vote of
the Operating Committee, combined with any statement identifying
Participants that did not vote to approve and explaining why the member
did not vote to approve, would provide Industry Members with more
complete and possibly more reliable information on implementation
requirements and timing. This may allow them to implement CAT reporting
more efficiently, particularly if the content of the disclosures
provides sufficient information to provide greater certainty on
implementation progress. However, the Commission preliminarily believes
this benefit may be limited somewhat by the fact that Participants may
be incentivized not to vote against approval of the Implementation Plan
or Quarterly Progress Reports because doing so would cause them to
incur costs associated with preparing, filing with the Commission and
publishing an explanatory statement of their Operating Committee
Member's vote. Consequently, in the event that a Participant is
inclined to vote against approval of the Implementation Plan or a
Quarterly Progress Report, in the absence of enough votes to prevent
approval, the Participant may be incentivized to vote to approve the
Implementation Plan or Quarterly Progress Report and thus not provide
an explanatory statement that might contain information useful to
Industry Members.
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\212\ See Part IV.A.2. supra for discussion of uncertainty
surrounding CAT implementation timing.
\213\ In the course of reviewing the CAT NMS Plan and preparing
the Notice, Commission staff gathered information in conversations
with Industry Members on how Industry Members implement changes in
regulatory data reporting requirements and what factors drive
Industry Member costs when those requirements change. See Notice,
supra Note 184, at n880.
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Based on staff expertise and discussions with Industry
Members,\214\ the Commission preliminarily believes that potential
reductions in cost due to uncertainty could be attributed to a number
of factors. Less uncertainty about the CAT implementation timeline may
allow Industry Members and service bureaus to make efficient decisions
regarding when to commence implementation activities and how to
implement in the most cost-efficient manner. More certainty may allow
Industry Members to negotiate more favorable contracts with vendors
because they will have more certainty about date ranges when vendor
services would be required for CAT reporting implementation activities.
Furthermore, as discussed in the CAT NMS Plan Approval Order,
maintaining legacy data reporting systems like those used to report
OATS is likely to entail allocation of technological and human
resources. If Industry Members have more certainty regarding how long
these resources are required, they may make more cost-efficient
decisions regarding maintaining or replacing hardware and software used
to report legacy regulatory data. Finally, the uncertainty surrounding
the timeline of CAT implementation may impose significant opportunity
costs on Industry Members. Because changes to regulatory data reporting
systems can be significant IT projects for Industry Members, Industry
Members may defer other large projects that might require an
overlapping set of resources until the operational and financial
requirements and timing for CAT implementation are better known.
Decreasing uncertainty may allow Industry Members to better plan for
and proceed with other projects that may have been deferred due to
uncertainty in the CAT implementation timeline.
---------------------------------------------------------------------------
\214\ See Notice, supra Note 184, at n880.
---------------------------------------------------------------------------
The Commission recognizes that if the Participants continue to miss
deadlines under the amendments, it would result in more uncertainty for
Industry Members with respect to whether and when the Participants are
capable of achieving CAT implementation, particularly if the
Participants are unable to make progress with the financial
accountability measures. The Commission preliminarily believes this
uncertainty is mitigated by the increased transparency afforded by the
Quarterly Progress Reports, which should allow Industry Members to see
progress toward meeting Implementation Milestones.
Finally, the requirement that the Implementation Plan and Quarterly
Progress Reports be submitted to the CEO, President, or an equivalently
situated senior officer of each Participant prior to the Operating
Committee approval vote, is intended to promote senior management
attention and promote accountability with respect to CAT
implementation. The Commission preliminarily believes that this
requirement may thereby facilitate the expeditious and efficient
implementation of CAT.
C. Costs
The Commission preliminarily believes the proposed amendments are
likely to have both direct and indirect costs, detailed below. The
Commission preliminarily estimates that the direct costs to the
Participants from the proposed amendments include up to approximately
$3.7 MM in ongoing annual costs and total one-time costs of up to
approximately $932,000.\215\ If the RFRRs are triggered, during a one-
year period during implementation, up to $120MM in costs of CAT
implementation and operation could be shifted from Industry Members to
Participants, but this would not change total costs to industry as a
whole from the CAT NMS Plan. The Commission expects, however, that the
proposed amendments would have additional indirect costs. These consist
of potentially accelerated implementation costs to Participants,
Industry Members, and Service Bureaus; possible costs related to the
potential for inefficient acceleration of the implementation of the
CAT; and costs related to the possible market exit of exchanges if the
RFRRs in the amendments are triggered. These costs are likely to be
passed on to investors.
---------------------------------------------------------------------------
\215\ These maximum totals assume that upon each approval vote,
seven Participants incur costs to prepare and publish statements
explaining why they did not vote to approve the document in
question. These costs are discussed further below.
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For purposes of the PRA,\216\ the Commission preliminarily
estimates that the direct costs to Participants from the proposed
amendments \217\ include
[[Page 48482]]
up to approximately $3.7MM \218\ in annual costs and total one-time
costs of up to approximately $932,000.\219\ The ongoing annual costs
per Participant are comprised of approximate labor costs of up to
$145,000 \220\ and external consulting costs of $35,000 \221\ to
prepare, approve through Supermajority Vote of the Operating Committee,
publish, and when applicable, for each Participant whose Operating
Committee member did not vote to approve the Implementation Plan to
separately file with the Commission and make available on a public
website an explanatory statement identifying itself and explaining why
it did not vote to approve the Quarterly Progress Report.\222\ The one-
time costs per Participant include up to $36,000 \223\ in labor costs
and $8,700 \224\ in external consulting costs to prepare, approve
through Supermajority Vote of the Operating Committee, publish, and
when applicable, for each Participant whose Operating Committee member
did not vote to approve the Implementation Plan to separately file with
the Commission and make available on a public website an explanatory
statement identifying itself and explaining why it did not vote to
approve the Implementation Plan.
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\216\ Direct costs cited in this paragraph are quantified from
estimates in the PRA. See Part III supra. Discussion of other direct
costs follows discussion of costs from the PRA.
\217\ The PRA estimates cost represent an average; the
Commission expects that some Participants will incur greater costs,
some lesser. In calculating the costs to prepare, review, and vote
on the Implementation Plan and Quarterly Progress Reports on a per
Participant basis, the Commission recognizes that its estimates per
Participant may be overstated to the extent that there are economies
of scale for Participants who share a common corporate parent.
Specifically, the voting representative for one Participant may
serve as the voting representative on the Operating Committee for
multiple affiliated Participants under Section 4.2(a) of the CAT NMS
Plan. Once this representative conducts the necessary background
work to vote on the Implementation Plan or a Quarterly Progress
Report, and, if applicable, for the Participant to prepare an
explanation of why this representative did not vote to approve the
Implementation Plan or Quarterly Progress Report, the representative
would not need to duplicate all of his or her efforts for another
Participant. Thus, the Commission believes that its estimates may be
overstated for some Participants in the sense that one
representative reviewing and voting on the Implementation Plan or
Quarterly Progress Reports might not require 5 hours for each
exchange for which he or she is performing this task. On the other
hand, the Commission believes that its estimates for Participants
who are not affiliated with other Participants might be understated
for some Participants because they are unable to benefit from
economies of scale. Representatives for unaffiliated exchanges may
require more than 5 hours to perform this same task. The Commission
preliminarily believes that 5 hours is a reasonable estimate of
average representative time required.
\218\ Assuming that each Supermajority Vote has the minimum of
16 Participants voting to approve each Quarterly Progress Report,
total annual ongoing maximum cost is (23 Participants x $119,471 per
Participant + 28 explanatory statements x $6,472.50 per statement =
$2,747,838) in labor costs plus (23 Participants x $34,800 =
$800,400) in external consulting costs = $3,729,468 in total costs.
See Note 220, infra.
\219\ Assuming that each Supermajority Vote has the minimum of
16 Participants voting to approve the Implementation Plan, total
one-time maximum cost is (23 Participants x $29,868 per Participant
= $686,959) in labor costs plus (23 Participants x $8,700 =
$200,100) in external consulting costs = $932,367 in total costs.
See Note 223, infra.
\220\ See Part III.D. supra. Annual labor costs per Participant
assume preparation, approval through Supermajority Vote of the
Operating Committee, and publication of four Quarterly Progress
Reports and any accompanying statements explaining why a Participant
did not vote to approve the Quarterly Progress Report. Preparation
of each Quarterly Progress Report requires 7 hours of Attorney labor
at $427 per hour; 22.6 hours of Systems Analyst labor at $270 per
hour; 22.6 hours of Compliance Manager labor at $318 per hour. 4 x
[($427 x 7) + ($270 x 22.6) + ($318 x 22.6)] = $65,111. Time for the
Participant's Operating Committee Member to prepare for and vote on
the Quarterly Progress Reports is assumed to be 5 hours at a rate of
$545 per hour. 4 x ($545 x 5) = $10,900, using the hourly rate for a
Chief Compliance Officer. Publication and filing of the Quarterly
Progress Reports and any explanatory statements of the Operating
Committee Member's vote is assumed to require 5 hours of Compliance
Manager labor at $318 per hour and 5 hours of Programmer/Analyst
labor at $220 per hour. 4 x ($318 x 5) + ($220 x 5) = $10,760. The
Quarterly Progress Report shall be submitted to the President, CEO
or equivalently situated senior officer of each Participant prior to
the approval vote of the Operating Committee, and any subsequent
consultation, including with their Operating Committee member, is
assumed to require five hours of labor at $1,635 per hour. 4 x
($1,635 x 5) = $32,700. See Note 225 infra, for discussion of this
hourly rate. Total annual costs for each Participant are thus
$65,111 + $10,900 + $10,760 + $32,700 = $119,471. If a Participant
is required to prepare a statement explaining why it did not vote to
approve a Quarterly Progress Report, preparation requires 7.5 hours
of Compliance Manager Labor at $318 per hour and 7.5 hours of Chief
Compliance Officer labor at $545 per hour. ($318 x 7.5) + ($545 x
7.5) = $6472.5. For each Quarterly Progress Report, 23 Participants
will incur costs to prepare the report, but no more than 7 will
incur costs to prepare statements explaining why they did not vote
to approve the Quarterly Progress Report. See Part III.D.2, supra.
Consequently, there may be up to 28 such quarterly statements (4 x
7) required annually. Thus, Quarterly Progress Report preparation,
depending on the number of explanatory statements required, would
have an annual aggregate maximum labor cost of (23 x $119,471) + (28
x $6472.5) = $3,729,468 with a per Participant average labor cost of
$3,729,468 / 23 = $127,351. Hourly rates are based on hourly rates
for Attorneys, Systems Analysts, and Compliance Managers from
SIFMA's Management & Professional Earnings in the Securities
Industry 2013, modified by Commission staff to account for an 1800-
hour work-year and inflation, and multiplied by 5.35 to account for
bonuses, firm size, employee benefits, and overhead. Salary
information for voting representatives uses the Chief Compliance
Officer rate of from SIFMA's Management & Professional Earnings in
the Securities Industry 2013, modified as above to $545 per hour.
\221\ See Part III.D. supra. External consulting costs assume
four Quarterly Progress Reports. 4 x $8,696 = $34,784.
\222\ These annual costs would be incurred until completion of
the CAT Implementation Plan. See Part III.D.2. supra.
\223\ See Part III.D.2. supra. Preparation and approval through
Supermajority Vote of the Operating Committee of the Implementation
Plan requires 7 hours of Attorney labor at $427 per hour; 22.6 hours
of Systems Analyst labor at $270 per hour; 22.6 hours of Compliance
Manager labor at $318 per hour. ($427 x 7) + ($270 x 22.6) + ($318 x
22.6) = $16,278. Time for the Participant's Operating Committee
Member to prepare for and vote on the Implementation plan is assumed
to be 5 hours at a rate of $545 per hour. ($545 x 5) = $2,725, using
the hourly rate for a Chief Compliance Officer. Publication and
filing of the Implementation Plan and any explanatory statement of
the Operating Committee Member's vote is assumed to require 5 hours
of Compliance Manager labor at $318 per hour and 5 hours of
Programmer/Analyst labor at $220 per hour. ($318 x 5) + ($220 x 5) =
$2,690. The Implementation Plan shall be submitted to the President,
CEO or equivalently situated senior officer of each Participant
prior to the approval vote of the Operating Committee, and any
subsequent consultation, including with their Operating Committee
Member, is assumed to require five hours of labor at $1,635 per
hour. ($1,635 x 5) = $8,175. See Note 225, infra, for discussion of
this hourly rate. Total one time labor costs are $16,278 + $2,725 +
$2,690 + $8,175 = $29,868. If an explanatory statement of the
Operating Committee Member's vote needs to be prepared, this would
require 7.5 hours of labor by a Compliance Manager at $318 per hour
and 7.5 hours of labor by the Chief Compliance Officer at $545 per
hour. ($318 x 7.5) + ($545 x 7.5) = $6,473. Thus, Implementation
Plan preparation, depending on the number of explanatory statements
required, would have an annual aggregate maximum labor cost of (23 x
$29,868) + (7 x $6472.5) = $732,267 with a per Participant average
labor cost of $732,267 / 23 = $31,838. Aggregate totals assume 23
Participants and 7 explanatory statements.
\224\ See Part III.D.2. supra.
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The Proposed Amendments require that both the Implementation Plan
and Quarterly Progress Reports be submitted to the President, CEO or
equivalently situated senior officer of each Participant prior to the
approval vote by the Operating Committee. In connection with this
requirement, the Commission preliminarily estimates that each SRO will
incur one-time consultation costs of $8,200 for the Implementation
Plan, and ongoing annual costs of $33,000 for Quarterly Progress
Reports until such time as CAT is fully implemented.\225\
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\225\ The Commission estimates that the President, CEO or
equivalently situated senior officer of each Participant will spend
approximately five hours in consultations, including with the
Participant's Operating Committee member, and estimates this will
cause each Participant to incur labor costs of (5 x $1635) = $8,175
for the Implementation Plan and (4 x $8,175) = $32,700 annually for
Quarterly Progress Reports. Hourly rates are based on hourly rates
for Chief Compliance Officers from SIFMA's Management & Professional
Earnings in the Securities Industry 2013, modified by Commission
staff to account for an 1,800-hour work-year and inflation, and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead. Salary information for CEO/presidents of
exchanges are not generally publically available as they might be
for CEO/presidents of exchange holding groups. The Commission
estimates an hourly rate for the President, CEO or equivalently
situated senior officer of an exchange by using the hourly rate for
a Chief Compliance Officer of $545 and multiplying by 3 to account
for the expected salary differential.
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If the RFRRs are triggered, during a one-year period during
implementation, up to $120MM in costs of CAT implementation and
operation could be shifted from Industry Members to Participants, but
this would not change total costs to industry as a whole from the CAT
NMS Plan.\226\ In the absence of
[[Page 48483]]
an approved fee filing, the Commission is unable to precisely estimate
the magnitude of the costs associated with RFRRs that individual
Participants would incur under such a scenario; however, the Commission
believes RFRR costs during any one-year period for individual
Participants are unlikely to exceed $46.4MM for the largest Participant
and $0.4MM for the smallest Participant, and are likely to be
significantly lower than these maximums.\227\ If RFRRs are triggered,
there would be a reduction in exchange profitability and there might be
transitory effects on exchange capital formation because the exchanges
would face additional costs and may not be able to invest in projects
or return profits to shareholders as they would have otherwise.\228\ In
the case of FINRA, which is organized as a nonprofit member
organization, costs from RFRRs could not be passed to FINRA's Industry
Members.\229\ This may affect FINRA's ability to invest in other
projects that could promote investor protection.
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\226\ The Commission estimates a maximum cost during a Period of
up to one year by making certain assumptions. First, in the CAT NMS
Plan Approval Order, the Commission estimated maximum implementation
costs and annual operating costs for the Central Repository of $65MM
and $55MM respectively; see CAT NMS Plan Approval Order, supra note
4, at Section V.F.1.a. If the Participants were allowed to recover
100% of those costs from Industry Members, if milestones under these
amendments were achieved, and if all implementation costs were
incurred during a single Period, Central Repository costs for a
Period of up to one year would likely be no higher than $65MM + 55MM
= $120MM. In such a scenario, Participants could incur maximum RFRR
costs during a single year of $120MM if they missed the Financial
Accountability Milestone by more than 270 days. Because the first
Period's duration is less than one year, its maximum would be lower
because a full year's operating costs for the Central Repository
would not be incurred.
\227\ Assuming equity exchanges bore 100% of Participant fees
and using widely reported equity trading volume for February 2019,
and assuming fees were allocated by market share of equity trading
volume, the largest equity venue would incur 38.7% x $120MM =
$46.4MM and the smallest equity venue would incur 0.3% x $120MM =
$0.4MM in RFRR costs. For an example of widely reported equity
trading volume, see the CBOE's compilation of equity trading volume
at http://markets.cboe.com/us/equities/market_statistics/historical_market_volume/. The actual RFRR costs would likely be
significantly lower than these maximums. For example, it is unlikely
that 100% of implementation costs that presumably cover expenses
from pre-implementation through the entire implementation period
would be incurred in a single year, and the Commission preliminarily
believes that some of these costs have already been incurred. This
is a maximum single one-year RFRR cost because the estimated Central
Repository operating cost is an annual figure. During a one-year
implementation Period, the Commission assumes the Central Repository
would incur one year of operating costs. However, when a Financial
Accountability Milestone is missed, the Period may exceed one year
in duration and additional operating costs would be incurred.
Consequently, the implementation Period RFRR cost incurred by the
Participants would be a function of the length of the delay and the
actual operating costs incurred by the Plan Processor during that
implementation Period.
\228\ See Part IV.D.3. infra.
\229\ All of FINRA's members are Industry Members, while most
but not all Industry Members are FINRA members.
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The Commission preliminarily believes that the proposed amendments
are likely to have indirect costs to some Participants, Industry
Members, and service bureaus due to acceleration of CAT implementation
costs relative to the current delayed timeline. In the CAT NMS Plan
Approval Order, the Commission estimated CAT implementation costs for
Participants, Industry Members, and service bureaus that provide
certain order handling, connectivity, and clearing services to Industry
Members.\230\ These three groups may have indirectly benefited from
implementation delays as implementation costs were deferred, while the
benefits to investors anticipated by the CAT NMS Plan Approval Order
have likewise been deferred. To the extent that the proposed amendments
reduce those delays, the unintended cost deferral to these groups will
be ended.
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\230\ See CAT NMS Plan Approval Order, supra note 4, at Section
V.F.1.
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The Commission preliminarily believes that the amendments could
result in an inefficiently accelerated implementation of the CAT, which
could potentially increase overall CAT implementation costs to
Participants, Industry Members, and ultimately to investors.\231\
Because the Participants would have financial accountability for
meeting the Financial Accountability Milestones, the Participants might
choose to incur additional and inefficient costs to avoid missing
deadlines because the magnitude of the additional costs incurred to
meet the Financial Accountability Milestone dates may be less than the
magnitude of the reduction in expenses the Participants could recover
due to the RFRRs outlined in these amendments.\232\ If the Participants
do not exceed Financial Accountability Milestone dates by more than 180
or 270 days, as applicable, Industry Members would share in funding
some of those additional costs.\233\ Because the proposed amendments
have provisions that improve transparency, these effects could be
magnified to the extent that the Participants seek to avoid missing
Implementation Milestones required in the amendments. Furthermore,
accelerated implementation might result in inefficient implementation
decisions. For example, Participants could deliver less help desk
functionality, reporter portal features, or infrastructure design so
that they can avoid missing a Financial Accountability Milestone
deadline. While these reductions in functionality might still meet the
requirements of the CAT NMS Plan, they might make the CAT less
effective or efficient for reporters and users of CAT data than it
would have been with greater functionality. The costs of such
reductions in functionality may accrue primarily to Industry Members or
users of CAT data.
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\231\ See CAT NMS Plan Approval Order, supra note 4, at Section
V.F.2.a.
\232\ For example, Participants might incur $50MM in additional
costs to avoid missing a Financial Accountability Milestone date by
a week and incurring resultant RFRR costs of $30MM. Because the
$50MM cost would be partially funded by Industry Members, incurring
this expense might be financially rational for the Participants.
Such an acceleration may be inefficient in the sense that
accelerating implementation by one week might not provide benefits
to industry and investors that warrant an additional $50MM in
investment in the CAT. Inefficient acceleration might also result in
missed opportunities for value-added features of CAT. For example,
inefficient acceleration of implementation might cause the
Participants to delay implementing an effective Help Desk, or to
defer improvements to the reporters' portal.
\233\ The CAT NMS Plan Approval Order contemplated a fee
structure in which costs of developing, implementing, and operating
the Central Repository would be shared between Participants and
Industry Members. See CAT NMS Plan Approval Order, supra note 4, at
Section IV.F.1.
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The Commission preliminarily believes that the likelihood of an
inefficiently accelerated CAT implementation is low for two reasons.
First, the deadlines for Financial Accountability Milestones are
aligned with the most recent timelines published by Participants.
Therefore the Commission preliminarily believes that the dates are
feasible and thus are unlikely to pressure the Participants to
inefficiently accelerate CAT implementation to avoid triggering RFRRs.
Second, the financial accountability measures in the proposed
amendments are designed in a manner that should mitigate this risk
because RFRRs continue to increase as delays persist, until the fee
recovery rate becomes zero. Specifically, the costs associated with
missing a deadline for a Financial Accountability Milestone by a short
period (for example, less than 90 days) would be less than the costs
associated with missing a deadline for a Financial Accountability
Milestone by a longer period (for example, more than 90 days).
Consequently, Participants may be less likely to inefficiently
accelerate implementation to avoid RFRRs because the RFRRs reduce
rather than eliminate the Participants' ability to recoup costs from
Industry Members
[[Page 48484]]
for delays of less than 270 (or in the case of Period 1,180) days.
The Commission also notes that additional indirect costs may accrue
to market participants due to exchanges leaving the market for trading
services, which could result from the impact of the amendments on
competition, as discussed further below.\234\ Market participants face
certain fixed costs in establishing connectivity to exchanges and
adapting their trading strategies for changes in available trading
venues. Consequently, competitor exits from the market for exchange
services may be costly to other market participants who must update
trading strategies to reflect what trading venues are available. The
Commission believes it is unlikely that such costs will accrue because
the failure of exchanges due to the financial accountability provisions
in the proposed amendments is unlikely. The Commission preliminarily
believes that exchanges that might require additional capital to meet
their financial obligations under the CAT NMS Plan could acquire it
through financial markets because exchanges are generally profitable
and investors in exchanges are likely to view costs from RFRRs as one-
time events that do not affect long-term exchange profitability. Also,
in many cases, exchanges are part of a larger exchange group that could
provide additional capital if needed.\235\
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\234\ See Part IV.D.2. infra.
\235\ See Part IV.D.2. infra for a more in depth discussion of
the competitive effects of the proposed amendments.
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Finally, while triggering the RFRRs in these amendments would cause
Participants to accrue additional costs because they could not recover
these costs from Industry Members, there would be a corresponding
financial benefit to Industry Members because they would not have to
pay those costs. Consequently, the cost transfers from the RFRRs in the
proposed amendments do not impose a net cost on industry as a whole.
The Participants could attempt to shift the costs to Industry Members
through changes to their broader fee structures. However, changes to
the Participants' fees would need to be filed with the Commission.
D. Impact on Efficiency, Competition, and Capital Formation
1. Efficiency
The Commission preliminarily believes that the proposed amendments
will have an effect on efficiency. In general, the Commission
preliminarily believes that the proposed amendments will improve the
efficiency of Plan implementation activities by Industry Members.
However, the Commission preliminarily believes that the financial
accountability provisions could also potentially reduce the efficiency
of Plan implementation by the Participants by incentivizing them to
delay certain later-period implementation activities if Participants
believe there is a significant risk of missing a Financial
Accountability Milestone date in an earlier period.
The Commission preliminarily believes that the proposed amendments
will improve the efficiency of Industry Member implementation of CAT
reporting. As discussed previously, uncertainty and delays in CAT
implementation and OATS retirement could have costs for broker-
dealers.\236\ The financial accountability and public disclosures
required by the proposed amendments should provide more certainty to
Industry Members regarding when they will be required to begin
reporting data to CAT and when they will be able to retire duplicative
reporting systems. This should aid Industry Members in efficiently
developing and implementing their CAT data reporting systems, planning
the maintenance and eventual retirement of duplicative systems, and
allowing them to make adjustments to those plans as needed.
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\236\ See Part IV.A.1. supra.
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However, the Commission preliminarily believes that the financial
accountability provisions could incentivize Participants to
inefficiently delay certain later-period implementation activities if
Participants believe there is a significant risk of missing a Financial
Accountability Milestone date in an earlier Period. To illustrate,
during Period 1, in the absence of the proposed amendments, it may be
efficient for Participants to invest in activities that enable meeting
Financial Accountability Milestones in Periods 2, 3, and 4. If,
however, Participants believe that they likely will not meet the Period
1 Financial Accountability Milestone and will thus likely trigger an
RFRR during Period 1, Participants may defer investing in Period 2, 3,
and 4 activities during Period 1 because investments that enable
meeting later Period Financial Accountability Milestones would be
subject to a Period 1 RFRR because the expenses were incurred during
Period 1. Furthermore, some Participants might delay financial
investment in some implementation activities if additional costs from
triggering RFRRs provoke financial distress. The Commission
preliminarily believes this outcome is unlikely because the Commission
preliminarily believes that exchanges that might require additional
capital to meet their financial obligations under the CAT NMS Plan
could acquire it through financial markets. Exchanges are generally
profitable, and investors in exchanges are likely to view costs from
RFRRs as one-time events that do not affect long-term exchange
profitability.\237\ The Commission preliminarily believes that the
structure of the financial accountability provisions may attenuate the
risk of inefficient delay of financial investment in later Period
Financial Accountability Milestones to some degree because delaying
such investment is likely to increase the risk of triggering an RFRR in
a later Period. This would make it relatively more costly to delay
later Period implementation investments when facing potential RFRRs for
those periods.
---------------------------------------------------------------------------
\237\ See Part IV.C.4. infra.
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2. Competition
a. Competitive Baseline
The Commission described the structure of the market for trading in
NMS securities, as of that time, in the Notice and the CAT NMS Plan
Approval Order.\238\ While the Commission's analysis of the state of
competition in the Notice is fundamentally unchanged, the market for
trading services in options and equities currently consists of 23
national securities exchanges, all but one of which are Plan
Participants,\239\ as well as off-exchange trading venues, including
broker-dealer internalizers, and 31 ATSs,\240\ which are not Plan
Participants. The exchanges are currently controlled by 7 separate
entities; three of these operate a single exchange.\241\
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\238\ See CAT NMS Plan Approval Order, supra note 4, at Section
V.G.1.
\239\ LTSE is not yet a Participant to the CAT NMS Plan.
\240\ As of 8/26/19 there are 31 NMS Stock ATSs operating
pursuant to an initial Form ATS-N. A list of NMS Stock ATSs,
including access to initial Form ATS-N filings that are effective,
can be found on the Commission website at https://www.sec.gov/divisions/marketreg/form-ats-n-filings.htm.
\241\ Cboe Global Markets, Inc. controls BYX, BZX, C2, EDGA,
EDGX, and CBOE; Miami Internal Holdings, Inc. controls Miami
International, MIAX Emerald, and MIAX PEARL; NASDAQ, Inc. controls
BX, GEMX, ISE, MRX, PHLX, and Nasdaq; Intercontinental Exchange,
Inc. controls NYSE, Arca, American, Chicago, and National. The three
entities that control a single-exchange are IEX Group which controls
IEX, a consortium of broker-dealers which controls BOX, and Long
Term Stock Exchange, Inc. which controls LTSE.
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b. Competitive Effects
The Commission preliminarily believes that the proposed amendments
might have competitive effects on the
[[Page 48485]]
market for NMS security trading services and the market for equity
listings. In the case that RFRRs are triggered, one or more exchanges
might exit these markets, although the Commission preliminarily
believes this is unlikely.\242\ The Commission preliminarily believes
that triggering an RFRR could also temporarily affect competition
between exchanges and ATSs and broker-dealer internalizers, but does
not believe the effects will be significant.
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\242\ A potential entrant to the market might be marginally more
likely to delay entry due to the proposed amendments, but given that
a new entrant's fee burden would be a function of its market share,
presumably a new entrant would begin with a relatively low market
share. The Commission, therefore, does not preliminarily believe
that an entity considering forming an exchange would decline to do
so because of additional uncertainty about CAT NMS Plan financial
responsibilities. Consequently, the Commission preliminarily
believes that the proposed amendments are unlikely to have effects
on innovation by new entrants.
---------------------------------------------------------------------------
The Commission preliminarily believes that is it unlikely that
exchanges that are part of an exchange group would exit the market for
NMS security trading services or equity listings if the RFRRs in the
proposed amendments are triggered because the larger exchange group
could provide additional capital to an exchange that would otherwise
exit the market. Such costs are one-time events and are unlikely to
change an exchange operator's assessment of the long-term economics of
operating the exchange.\243\
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\243\ The Commission preliminarily believes that the license to
operate an exchange is a valuable asset even when the extant
exchange has low volume because exchange families and new entrants
sometimes acquire both high and low volume exchanges. See, e.g.,
https://ir.theice.com/press/press-releases/all-categories/2018/07-18-2018-133237540 and http://cdn.batstrading.com/resources/press_releases/CBOE-Holdings-Announces-Close-of-Acquisition-of-Bats-Global-Markets-FINAL-3-1-17.pdf. As long as the RFRR-related costs
incurred by an exchange are less than the cost of registering and
implementing a new exchange from scratch, exchange families with
adequate financial resources are likely to invest additional capital
in an exchange that would otherwise fail due to the RFRRs.
The Commission recognizes that under the proposed amendments,
exchanges do not incur RFRR costs in isolation; if one exchange
incurs RFRR costs, all exchanges incur RFRR costs. Consequently, an
exchange family might need to further capitalize multiple exchanges.
The Commission believes failure of entire exchange groups is
unlikely because the Commission preliminarily believes that exchange
groups that might require additional capital to meet their financial
obligations under the Plan could acquire it through financial
markets because exchanges are generally profitable and investors in
exchanges are likely to view costs from RFRRs as one-time events
that do not affect long-term exchange profitability.
---------------------------------------------------------------------------
However, for smaller exchanges that are not part of a larger
exchange family that could provide additional capital, the Commission
recognizes that it is possible that such exchanges could be forced to
exit the market, although the Commission believes this is unlikely to
occur. Specifically, the Commission believes it is unlikely that
exchanges would be forced to leave the market because the Commission
preliminarily believes that exchanges that required additional capital
to meet their financial obligations under the CAT NMS Plan would be
able to secure it through financial markets.
Even if an exchange were to exit, the Commission does not believe
this would significantly impact competition in the market for exchange
trading services or the market for equity listings because these
markets are served by multiple competitors. Consequently, demand for
these services in the event of the exit of a competitor is likely to be
swiftly met by existing competitors. The Commission recognizes that
small exchanges may have unique business models that are not currently
offered by competitors to these independent exchanges, but the
Commission preliminarily believes a competitor could create similar
business models if demand were adequate, and if they did not do so, it
seems likely new entrants would do so if the exiting exchange were
otherwise profitable.
If the RFRRs are triggered, the Commission preliminarily believes
that it could temporarily affect competition between exchanges and ATSs
and broker-dealer internalizers. However, the Commission preliminarily
believes that these effects would not be significant. As discussed
previously, in the event RFRRs are triggered, up to $120MM in costs
could be shifted from Industry Members to Participants in a one-year
Period.\244\ This increase in costs to Participants could have
transient negative effects on Participants' ability to invest in their
exchanges.\245\ The corresponding cost savings to Industry Members
could have transient positive effects on Industry Members' abilities to
invest in their ATSs or internalization operations, which could include
temporarily reducing fees in order to attract order flow. Although this
may temporarily provide ATSs and broker-dealer internalizers with a
competitive advantage over exchanges in attracting order flow, the
Commission preliminarily believes that these effects will not be
significant because broker-dealers make strategic decisions to expose
orders on exchanges or route orders to ATSs or internalizers based on
other factors, such as order characteristics and temporary market
conditions, that will not be impacted by the proposed amendments.
---------------------------------------------------------------------------
\244\ See Part IV.C. supra.
\245\ See Part IV.D.3. infra.
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3. Capital Formation
The Commission preliminarily believes the amendments will have
negligible mixed effects on capital formation. The Commission
preliminarily believes that it is possible the amendments' improvements
to investor protections may allow improvements to capital formation
anticipated in the CAT NMS Plan Approval Order to be realized sooner
than they would be in the absence of the proposed amendments. As
discussed previously, delays in implementation of the CAT NMS Plan have
delayed investors' realization of improvements to investor protection
anticipated in the CAT NMS Plan Approval Order. By incentivizing the
Participants to implement the CAT NMS Plan expeditiously, the
amendments may permit investors to realize these benefits sooner than
they would otherwise. These improvements to investor protections may
improve capital formation.\246\ However, some costs of the amendments--
particularly the direct costs--are likely to be passed on to
investors.\247\ Because these are not ongoing costs, the Commission
preliminarily believes any negative effects on capital formation will
be transitory. If RFRRs are triggered, the exchanges could face
significant costs associated with expenses that could not be shared
with Industry Members. These additional costs to Participants would be
offset by savings by Industry Members. The Commission preliminarily
believes these transfers between Participants and Industry Members are
unlikely to affect capital formation because while the costs to
Participants might be passed on to investors through relatively higher
prices to transact on exchanges for broker-dealers that would then pass
these costs on to their customers, the savings to Industry Members
might be passed on by broker-dealers to their customers as well, so the
net impact to investors should be negligible.
---------------------------------------------------------------------------
\246\ See CAT NMS Plan Approval Order, supra note 4, at Section
V.G.1.
\247\ Costs associated with triggering RFRRs would not increase
the cost of the CAT, but rather constitute a transfer between
Participants and Industry Members. The Commission preliminarily
believes these costs are unlikely to be directly transferred to
investors, but notes competitive effects of these transfers in Part
IV.D.2. supra.
---------------------------------------------------------------------------
If RFRRs are triggered, exchanges could experience short-term,
transitory negative effects on exchange capital formation because the
exchanges would
[[Page 48486]]
face additional costs and may not be able to invest in projects or
return profits to shareholders that they would otherwise. However, the
Commission preliminarily believes costs from RFRRs would be viewed as
transitory by investors because they would end with full CAT
implementation. Consequently, the Commission preliminarily believes
that the amendments would not permanently affect investors' assessment
of expected profitability for exchanges, and thus would not reduce this
capital formation long-term.
E. Alternatives
1. Fixed versus Relative Financial Accountability Milestone Dates
The Commission considered an alternative approach that would use
relative Financial Accountability Milestone dates in a scenario when a
Financial Accountability Milestone was not met on schedule. Under the
proposed amendments, Financial Accountability Milestone dates are fixed
calendar dates. Under this alternative approach, the duration of the
time period between two Financial Accountability Milestone dates would
be static but the Financial Accountability Milestone dates would be
relative. Thus, if a Financial Accountability Milestone were not
achieved on schedule, the next Financial Accountability Milestone date
would be delayed such that the duration of Periods between Financial
Accountability Milestone dates was unchanged.\248\ For example, if
sequential Financial Accountability Milestone dates are April 30, 2020
and December 31, 2020, achieving the first Financial Accountability
Milestone on May 31, 2020 would automatically reset the next Financial
Accountability Milestone date to January 31, 2021, leaving the duration
of the period between the two dates unchanged.
---------------------------------------------------------------------------
\248\ The alternative could be structured such that upon the end
of a Period, the next Financial Accountability Milestone date would
become the later of the Financial Accountability Milestone date in
the amendments or the relative date from this alternative approach.
This approach would prevent the subsequent relative Financial
Accountability Milestone date from becoming earlier in the event
that the Participants achieve a Financial Accountability Milestone
ahead of schedule. This would avoid the problem of incentivizing the
Participants to delay Financial Accountability Milestone achievement
to avoid accelerating Financial Accountability Milestone dates, and
would mitigate any risk Industry Members would have from
accelerating Financial Accountability Milestone dates.
---------------------------------------------------------------------------
The primary economic impact of this approach relative to the
proposal is that it avoids a risk inherent in the fixed Financial
Accountability Milestone date approach of the proposal. Under the fixed
Financial Accountability Milestone date approach, if the Participants
encounter a delay early in the implementation process that causes them
to miss a Financial Accountability Milestone date by a significant
margin, it may become more difficult for them to meet future Financial
Accountability Milestone dates. Under such a scenario, the proposed
amendments may lose some of their incentive value because the
Participants may not be able to avoid triggering at least some of the
RFRRs after missing an early Financial Accountability Milestone date.
Under the alternative approach with relative Financial Accountability
Milestone dates, if the Participants miss a deadline early in the
implementation timeline and trigger the RFRRs, they would not
necessarily find later deadlines so difficult to meet that they lose
their economic incentive to meet the later Financial Accountability
Milestone dates.
This alternative approach has two significant costs relative to the
proposed amendments. First, in a case where a significant delay arises
in an early implementation Period such that financial RFRRs are
triggered during that Period, the Participants may be incentivized to
delay meeting the Period-ending requirement in order to give themselves
more time to achieve later-Period Financial Accountability Milestones
in order to decrease their risk of triggering RFRRs in later Periods.
Such a scenario could significantly delay the retirement of OATS, which
would be costly to Industry Members if it extended their period of
duplicative reporting.\249\ Under both the proposed amendments and in
this alternative, the structure of the financial accountability
provisions might mitigate but not eliminate this risk because RFRRs
increase over time; consequently, if a Financial Accountability
Milestone is missed and an RFRR is triggered, Participants should
remain incentivized to implement in an expeditious manner to avoid
triggering a higher RFRR during the same Period of implementation.
However, under the alternative approach, the Financial Accountability
Milestone date for OATS retirement could be pushed back due to missing
an earlier Financial Accountability Milestone, which could necessitate
a longer period of costly duplicative reporting for Industry Members.
---------------------------------------------------------------------------
\249\ See CAT NMS Plan Approval Order, supra note 4, at Section
V.F.2.b.
---------------------------------------------------------------------------
The second likely additional cost relative to the proposal is that
the alternative approach would make the ultimate CAT implementation
timeline less certain than in the proposal, because delays in early
Periods would push back implementation dates for later Periods of
implementation. However, under the proposed approach, missing an early-
Period Financial Accountability Milestone could also result in delays
in meeting later Financial Accountability Milestones, and because the
potential length of future delays would not be defined by the structure
of the proposed amendments, they would be less transparent to Industry
Members. However, under the proposed amendments, realized delays would
be documented in Quarterly Progress Reports and thus should aid
Industry Members in updating expectations on implementation timelines.
2. Different Timelines for Onset of RFRRs
The Commission considered alternative approaches with different
Financial Accountability Milestone dates. These approaches would have
certain additional benefits and costs as compared to the proposal. For
example, earlier Financial Accountability Milestones might accelerate
the time at which investors realize the benefits of the CAT, but would
increase the likelihood that the implementation of CAT would be
accelerated to a degree that is inefficient.\250\ Alternatively,
delaying Financial Accountability Milestone dates would increase the
time that investors do not realize the benefits of CAT and that
Industry Members experience uncertainty that increases their
implementation costs, but might avoid the risk of inefficiently
accelerating the implementation of CAT.\251\ The Commission further
notes that alternative milestone dates that are not generally aligned
with dates published by or discussed with the Participants are less
likely to reflect realistic expectations for the Participants in
implementing the CAT.\252\
---------------------------------------------------------------------------
\250\ See Note 232, supra.
\251\ See Part IV.C. supra.
\252\ See Part II.B.1. supra.
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3. Alternate Magnitudes of RFRRs
The Commission considered alternative approaches with different
levels of RFRRs. Under the proposed amendments, for each period of up
to 90 days by which the Participants miss Financial Accountability
Milestone dates, they would trigger RFRRs such that they would be
allowed to recover 25% less of the CAT costs they would otherwise
recover from Industry
[[Page 48487]]
Members. Alternative approaches could have higher or lower marginal
RFRRs.
The Commission preliminarily believes that alternative approaches
with higher marginal RFRRs (allowing the Participants to recover a
lower share of CAT costs from Industry Members when RFRRs are
triggered) would potentially further incentivize the Participants to
meet Financial Accountability Milestone deadlines, but would also
increase the risk of inefficient acceleration of CAT
implementation.\253\
---------------------------------------------------------------------------
\253\ See Note 233, supra.
---------------------------------------------------------------------------
The Commission preliminarily believes that alternative approaches
with lower RFRRs (allowing the Participants to recover a higher share
of CAT costs from Industry Members when RFRRs are triggered) would
decrease the incentives Participants have to meet Financial
Accountability Milestone deadlines, but would reduce the risk of
inefficient acceleration of CAT implementation.
F. Request for Comment on the Economic Analysis
The Commission is sensitive to the potential economic effects,
including the costs and benefits, of the proposed amendments to the CAT
NMS Plan. The Commission has identified above certain costs and
benefits associated with the proposal and requests comment on all
aspects of its preliminary economic analysis. The Commission encourages
commenters to identify, discuss, analyze, and supply relevant data,
information, or statistics regarding any such costs or benefits. In
particular, the Commission seeks comment on the following:
33. Do you believe the Commission's analysis of the potential
effects of the proposed amendments to the CAT NMS Plan is reasonable?
Why or why not? Please explain in detail.
34. Do you believe the Commission's description of the state of
implementation of the CAT NMS Plan is accurate? Why or why not? Please
explain in detail.
35. Do you believe that the multiple delays in implementation of
the CAT NMS Plan has led to uncertainty surrounding CAT implementation
that may be causing Industry Members to incur costs they would not have
incurred had the CAT been completed on its original schedule? Why or
why not? Please explain in detail.
36. The structure of the RFRRs provides that after missing a
Financial Accountability Milestone by 270 days (or 180 days as
applicable), Participants would not be allowed to recover any
implementation costs for the delayed implementation Period. For the
remainder of the implementation Period, Participants would continue to
incur expenses associated with the Plan Processor's operation of the
Central Repository, and would not be able to share those expenses with
Industry Members. Do you believe the Participants' inability to share
those expenses with Industry Members will continue to incentivize the
Participants to proceed with Plan implementation? Why or why not?
Please explain in detail.
37. Do you agree with the Commission's assessment of the
transparency of Plan implementation? Why or why not? Please explain in
detail.
38. Do you agree with the Commission's assessment of the status of
Plan implementation? Why or why not? Please explain in detail.
39. The Commission requests that commenters provide relevant data
and information to assist us in analyzing the economic consequences of
the proposed amendments. In particular, the Commission requests data
and information regarding the costs incurred by Industry Members
because of uncertainty surrounding CAT implementation.
40. Do you agree with the Commission's assessment of the benefits
of the proposed amendments? Why or why not? Please explain in detail.
41. Do you believe that the proposed amendments increase the
likelihood that OATS will be retired by December 31, 2021? Do you
believe that the amendments are likely to compress the period of
duplicative reporting by Industry Members? Why or why not? Please
explain in detail.
42. Do you believe the proposed amendments will decrease
uncertainty for Industry Members regarding the timing and requirements
of Plan implementation? Why or why not? Please explain in detail.
43. Do you believe this reduction in uncertainty will reduce costs
of Plan Implementation by Industry Members? Why or why not? Please
explain in detail.
44. Do the Participants have economic disincentives to Plan
implementation that the Commission has not recognized? What are they?
Please describe in detail.
45. Are there other economic incentives the Commission could
propose to incentivize the Participants to implement the CAT NMS Plan
expeditiously and efficiently? Please describe them in detail.
46. Do you agree with the Commission's analysis of the direct costs
of the proposed amendments? Why or why not?
47. Do commenters agree that Participants' costs related to
approval of the Implementation Plan and Quarterly Progress Reports are
likely to have economies of scale, whereby the representatives of
Participants that are members of exchange groups may spend less time
per exchange on this task, while representatives of Participants that
are not part of an exchange group may require more time to review and
vote on the Implementation Plan and/or Quarterly Progress Reports, and
prepare and publish on each of the Participant websites or collectively
on the CAT NMS Plan website any statements identifying Participants
that did not vote to approve and explaining why? Why or why not?
48. Do commenters agree with the Commission's estimate for hourly
costs for Operating Committee members performing activities necessary
for approval by a Supermajority Vote under the amendments? If not,
please provide alternate estimates if possible.
49. Do commenters agree with the Commission's estimate for hourly
costs associated with the President, CEO or equivalently situated
senior officer of each Participant? If not, please provide alternative
estimates of the hourly costs for the President, CEO or equivalently
situated senior officer of each Participant to consult as needed with
the Participant's Operating Committee member.
50. Please provide estimates of the time required for a Participant
and publish a statement identifying itself and explaining why it did
not vote to approve the Implementation Plan or Quarterly Report. Also,
please identify who (i.e. General Counsel, Chief Compliance Officer or
other executive) would be involved in preparing such a statement.
51. Please comment on the Commission's estimate of the maximum cost
of RFRRs to the Participants. Are there alternative methodologies to
estimate these costs? Please describe and provide detailed analysis if
possible.
52. Do you agree with the Commission's analysis of the indirect
costs of the proposed amendments? Why or why not?
53. Are the proposed amendments likely to cause an inefficient
acceleration as described above of Plan implementation as described
above? Why or why not?
54. Do you believe the proposed amendments are likely to improve
the
[[Page 48488]]
efficiency of Plan implementation? Why or why not?
55. Do you believe the proposed amendments' incentive structure
could potentially reduce the efficiency of Plan implementation by
incentivizing Participants to delay certain later-Period implementation
activities if Participants believe there is a significant risk of
missing a Financial Accountability Milestone date in an earlier Period?
Why or why not? Please describe how in detail.
56. The Commission requests comment on all aspects of this analysis
and, in particular, on whether the Proposed Amendments would place a
burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act, as well as the effect of the proposal
on efficiency, competition, and capital formation.
57. Do you agree with the Commission's assessment of the current
state of competition in the market for trading services? Why or why
not?
58. Do you agree with the Commission's assessment of the current
state of competition in the market for NMS stock listings? Why or why
not?
59. Do you believe that in the event that RFRRs are triggered, one
or more exchanges might exit the market for trading services? Please
explain in detail.
60. If one or more exchanges were to exit the market for trading
services, would competition in this market suffer? Why or why not? Are
there exchanges that might leave this market that have business models
that could not be copied by an existing competitor or new entrant?
Would such business models be likely to be copied by an existing
competitor or new entrant? Why or why not? Please explain in detail.
61. Do you believe that some Participants might be motivated to
trigger RFRRs to financially distress competitors? Why or why not?
Please explain in detail.
62. Do you believe the proposed amendments will have effects on
capital formation that the Commission has not recognized? Please
explain in detail.
63. Do you agree that the proposed amendments may improve capital
formation by accelerating the investor protection benefits anticipated
by the CAT Approval Order? Why or why not?
64. Would an alternative approach that used relative Financial
Accountability Milestone dates rather than fixed Financial
Accountability Milestone dates better incentivize the Participants to
implement the CAT NMS Plan expeditiously and efficiently? Why or why
not? Would such an approach have benefits or costs that the Commission
has not recognized? Please explain in detail.
65. Are there alternative Financial Accountability Milestone dates
that the Commission should use? What economic benefits and costs would
those alternative dates have? Please describe in detail.
66. The Commission requests comment on alternative incentive
structures. Is the proposed schedule for reducing the fee recovery
levels by 25% for each period of up to 90 days that the Participants
miss implementation Financial Accountability Milestone dates adequate
to incentivize the Participants to implement CAT expeditiously and
efficiently? Is there some other RFRR level that is more appropriate?
Should the time period between reductions in RFRR levels be shorter or
longer than 90 days? Please explain.
V. Consideration of Impact on the Economy
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA''),\254\ the Commission requests comment on the
potential effect of this proposal on the United States economy on an
annual basis. The Commission also requests comment on any potential
increases in costs or prices for consumers or individual industries,
and any potential effect on competition, investment, or innovation.
Commenters are requested to provide empirical data and other factual
support for their views, to the extent possible.
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\254\ Public Law 104-121, Title II, 110 Stat. 857 (1996)
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note
to 5 U.S.C. 601).
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VI. Regulatory Flexibility Act Certification
The Regulatory Flexibility Act (``RFA'') \255\ requires Federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities. Section 603(a) \256\ of the Administrative Procedure
Act,\257\ as amended by the RFA, generally requires the Commission to
undertake a regulatory flexibility analysis of all proposed rules, or
proposed rule amendments, to determine the impact of such rulemaking on
``small entities.'' \258\ Section 605(b) of the RFA states that this
requirement shall not apply ``to any proposed or final rule if the head
of the agency certifies that the rule will not, if promulgated, have a
significant economic impact on a substantial number of small
entities.'' \259\
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\255\ 5 U.S.C. 601 et seq.
\256\ 5 U.S.C. 603(a).
\257\ 5 U.S.C. 551 et seq.
\258\ The Commission has adopted definitions for the term
``small entity'' for purposes of Commission rulemaking in accordance
with the RFA. Those definitions, as relevant to this proposed
rulemaking, are set forth in 17 CFR 240.0-10. See Securities
Exchange Act Release No. 18451 (January 28, 1982), 47 FR 5215
(February 4, 1982) (File No. AS-305).
\259\ 5 U.S.C. 605(b).
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The proposed rule amendments would only impose requirements on
national securities exchanges registered with the Commission under
Section 6 of the Exchange Act and FINRA. With respect to the national
securities exchanges, the Commission's definition of a small entity is
an exchange that has been exempt from the reporting requirements of
Rule 601 of Regulation NMS, and is not affiliated with any person
(other than a natural person) that is not a small business or small
organization.\260\ None of the national securities exchanges registered
under Section 6 of the Exchange Act that would be subject to the
proposed rule are ``small entities'' for purposes of the RFA. In
addition, FINRA is not a ``small entity.'' \261\ For these reasons, the
proposed rule will not apply to any ``small entities.'' Therefore, for
the purposes of the RFA, the Commission certifies that the proposed
rule would not have a significant economic impact on a substantial
number of small entities.
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\260\ See 17 CFR 240.0-10(e).
\261\ See 13 CFR 121.201
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The Commission requests comment regarding this certification. In
particular, the Commission solicits comment on the following:
67. Do commenters agree with the Commission's certification that
the proposed rule would not have a significant economic impact on a
substantial number of small entities? If not, please describe the
nature of any impact on small entities and provide empirical data to
illustrate the extent of the impact.
VII. Statutory Authority and Text of the Proposed Amendments to the CAT
NMS Plan
Pursuant to the Exchange Act and, particularly, Sections 2, 3(b),
5, 6, 11A, 15, 15A, 17(a) and (b), 19, and 23(a) thereof, 15 U.S.C.
78b, 78c(b), 78e, 78f, 78k-1, 78o, 78o-3, 78q(a) and (b), 78s, 78w(a),
and pursuant to Rule 608(a)(2) and (b)(2),\262\ the Commission proposes
[[Page 48489]]
to amend the CAT NMS Plan in the manner set forth below.
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\262\ 17 CFR 242.608(a)(2) and (b)(2). These provisions enable
the Commission to propose amendments to any effective NMS Plan by
``publishing the text thereof, together with a statement of the
purpose of such amendment,'' and providing ``interested persons an
opportunity to submit written comments.''
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Additions are underlined; deletions are [bracketed].
* * * * *
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By the Commission.
Dated: September 9, 2019.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2019-19852 Filed 9-12-19; 8:45 am]
BILLING CODE 8011-01-C
