[Federal Register Volume 85, Number 80 (Friday, April 24, 2020)]
[Notices]
[Pages 23075-23083]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-08705]
[[Page 23075]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88702]
Order Granting Conditional Exemptive Relief, Pursuant to Section
36 of the Securities Exchange Act of 1934 (``Exchange Act'') and Rule
608(e) of Regulation NMS Under the Exchange Act, From Sections 6.4,
6.7(a)(v) and 6.7(a)(vi) of the National Market System Plan Governing
the Consolidated Audit Trail
April 20, 2020.
I. Introduction
By letter dated February 19, 2020, BOX Exchange, LLC, Cboe BYX
Exchange, Inc., Cboe BZX Exchange, Inc., Cboe C2 Exchange, Inc., Cboe
EDGA Exchange Inc., Cboe EDGX Exchange, Inc., Cboe Exchange, Inc.,
Financial Industry Regulatory Authority, Inc., Investors Exchange LLC,
Long Term Stock Exchange, Inc., Miami International Securities Exchange
LLC, MIAX Emerald, LLC; MIAX Pearl, LLC, Nasdaq BX, Inc., Nasdaq GEMX,
LLC, Nasdaq ISE, LLC, Nasdaq MRX, LLC, Nasdaq PHLX LLC, The NASDAQ
Stock Market LLC, New York Stock Exchange LLC, NYSE American LLC, NYSE
Arca, Inc., NYSE Chicago, Inc., and NYSE National, Inc. (collectively,
the ``Participants'') to the National Market System Plan Governing the
Consolidated Audit Trail (``CAT NMS Plan'' or ``Plan''),\1\ requested
that the Securities and Exchange Commission (``Commission'' or ``SEC'')
grant exemptive relief from certain requirements in the CAT NMS Plan
pursuant to Section 36 of the Securities Exchange Act of 1934
(``Exchange Act'') \2\ and Rule 608(e) of Regulation NMS under the
Exchange Act.\3\ Specifically, the Participants seek exemptive relief
from requirements in Sections 6.4, 6.7(a)(v) and 6.7(a)(vi) of the CAT
NMS Plan related to Industry Member \4\ reporting of Industry Member
Data \5\ to the Central Repository \6\ to allow for the implementation
of phased reporting for Industry Members to the Consolidated Audit
Trail (``CAT'') as described below.
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\1\ The CAT NMS Plan was published for comment in the Federal
Register on May 17, 2016, and approved by the Commission, as
modified, on November 15, 2016. See Securities Exchange Act Release
Nos. 77724 (April 27, 2016), 81 FR 30614 (May 17, 2016) (``Notice of
Filing of the CAT NMS Plan''); 79318 (November 15, 2016), 81 FR
84696 (November 23, 2016) (``CAT NMS Plan Approval Order''). The CAT
NMS Plan is Exhibit A of the CAT NMS Plan Approval Order. See CAT
NMS Plan Approval Order, at 84943-85034.
\2\ 15 U.S.C. 78mm(a)(1).
\3\ 17 CFR 242.608(e).
\4\ The CAT NMS Plan defines ``Industry Member'' as a member of
a national securities exchange or a member of a national securities
association. See CAT NMS Plan Approval Order, supra note 1, at
84946, Ex. A, Section 1.1. The CAT NMS Plan defines ``Small Industry
Member'' as an Industry Member that qualifies as a small broker-
dealer as defined in Rule 613. See id. at 84947, Ex. A, Section 1.1.
Rule 613(a)(3)(v) uses the definition of ``small broker-dealer''
contained in Exchange Act Rule 0-10, ``Small entities under the
Securities Exchange Act for purposes of the Regulatory Flexibility
Act.'' Exchange Rule 0-10(c) defines a ``small broker-dealer'' as a
broker or dealer that: (1) 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 240.17a5(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 this section. See 17
CFR 242.613(a)(3)(v); see also 17 CFR 240.0-10(c). In a separate
order, the Commission granted the Participants' request for
exemptive relief from enforcing compliance with certain provisions
of the CAT NMS Plan with respect to broker-dealers that do not
qualify as Small Industry Members solely because they satisfy Rule
0-10(i)(2) under the Exchange Act, and as a result, are deemed to be
affiliated with an entity that is not a small business or a small
organization (``Introducing Industry Member''). See Order Granting
Limited Exemptive Relief, Pursuant to Section 36 of the Securities
Exchange Act of 1934 (``Exchange Act'') and Rule 608(e) of
Regulation NMS Under the Exchange Act, Related to Certain
Introducing Brokers, From the Requirements of the National Market
System Plan Governing the Consolidated Audit Trail, Securities
Exchange Act Release No. 34-88703 (dated April 20, 2020). Under that
Order, the Participants will be exempted from requiring compliance
with the requirements of the CAT NMS Plan that apply to Large
Industry Members with respect to Introducing Industry Members that
meet the capital standard in Rule 0-10(c)(1) and that are Small
Industry Non-OATS Reporters, provided that each Participant requires
such Introducing Industry Members, through its Compliance Rule, to
comply with the requirements of the CAT NMS Plan applicable to Small
Industry Members.
\5\ Industry Member Data is the data specified in Sections
6.4(d)(i)-(ii) of the CAT NMS Plan, which includes customer
information. See CAT NMS Plan Approval Order, supra note 1, at
84961, Ex. A, Sections 6.4(d)(i)-(ii).
\6\ See Letter from Michael Simon, Chair, CAT NMS Plan Operating
Committee, to Vanessa Countryman, Secretary, Securities and Exchange
Commission, dated February 19, 2020 (``February 19, 2020 Exemption
Request''). Unless otherwise noted, capitalized terms are used as
defined in Rule 613 or in the CAT NMS Plan. The Participants state
that this letter amends and replaces in its entirety the original
exemptive request letter submitted to the Commission on September
26, 2019. See Letter from Michael Simon, Chair, CAT NMS Plan
Operating Committee, to Vanessa Countryman, Secretary, Securities
and Exchange Commission, dated September 26, 2019.
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Rule 608(c) of Regulation NMS under the Exchange Act requires that
each self-regulatory organization (``SRO'') comply with and, absent
reasonable justification or excuse, enforce compliance by its members
with, the terms of any effective NMS plan of which it is a sponsor or a
participant.\7\ Section 6.4 of the CAT NMS Plan, which governs data
reporting and recording by Industry Members, provides that the
requirements for Industry Members under that section shall become
effective on the second anniversary of the Effective Date in the case
of Industry Members other than Small Industry Members, or the third
anniversary of the Effective Date in the case of Small Industry
Members.\8\ Section 6.7(a)(v) of the CAT NMS Plan provides that each
Participant, through its Compliance Rule,\9\ shall require its Industry
Members (other than Small Industry Members) to report Industry Member
Data to the Central Repository within two years after the Effective
Date.\10\ Section 6.7(a)(vi) of the CAT NMS Plan provides that each
Participant, through its Compliance Rule, shall require its Small
Industry Members to report Industry Member Data to the Central
Repository within three years after the Effective Date.\11\
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\7\ 17 CFR 242.608(c).
\8\ See CAT NMS Plan Approval Order, supra note 1, at 84960, Ex.
A, Section 6.4. The Effective Date of the CAT NMS Plan was November
15, 2016. See supra note 1. Therefore, two years after the Effective
Date is November 15, 2018, and three years after the Effective Date
is November 15, 2019.
\9\ The CAT NMS Plan defines ``Compliance Rule'' as, with
respect to a Participant, the rule(s) promulgated by such
Participant as contemplated by Section 3.11 of the CAT NMS Plan. See
CAT NMS Plan, supra note 1, at Section 1.1. Section 3.11,
``Compliance Undertaking,'' requires each Participant to promulgate
consistent rules requiring compliance by their respective Industry
Members with the provisions of Rule 613 and the CAT NMS Plan. See
CAT NMS Plan Approval Order, supra note 1, at 84945, 84950, Ex. A,
Section 3.11. Between January 17, 2017 and February 2, 2017, each
Participant filed a Compliance Rule reflecting the requirements in
Section 6.7(a)(v) of the CAT NMS Plan that each Participant require
its Industry Members (other than Small Industry Members) to report
Industry Member Data to the Central Repository by November 15, 2018,
and in Section 6.7(a)(vi) of the CAT NMS Plan that each Participant
require its Small Industry Members to report Industry Member Data to
the Central Repository by November 15, 2019. See Securities Exchange
Act Release Nos. 80256 (March 15, 2017), 82 FR 14526 (March 21,
2017) (``CAT Compliance Rule Joint Approval Order''); 80255 (March
15, 2017), 82 FR 14563, (March 21, 2017) (``FINRA CAT Compliance
Rule Approval Order'').
\10\ See CAT NMS Plan Approval Order, supra note 1, at 84963,
Ex. A, Section 6.7(a)(v). Section 1.1 of the CAT NMS Plan defines
``Effective Date'' as ``the date of approval of this Agreement by
the Commission.'' Id. at 84946, Ex. A, Section 1.1. The Effective
Date of the CAT NMS Plan was November 15, 2016. Therefore, two years
after the Effective Date is November 15, 2018.
\11\ See CAT NMS Plan Approval Order, supra note 1, at 84963,
Ex. A, Section 6.7(a)(vi). The Effective Date of the CAT NMS Plan
was November 15, 2016. See id. at 84946, Ex. A, Section 1.1.
Therefore, three years after the Effective Date is November 15,
2019.
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For the reasons set forth below, this Order grants the
Participants' request for exemptions from specified provisions of the
CAT NMS Plan as set forth in the February 19, 2020 Exemption Request,
subject to certain conditions.
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II. Description
The Participants state that under the CAT NMS Plan, the
Participants are required, through their Compliance Rules, to require
their Industry Members (other than Small Industry Members) (``Large
Industry Members'') to commence reporting Industry Member Data to the
Central Repository by November 15, 2018, and to require their Small
Industry Members to commence reporting Industry Member Data to the
Central Repository by November 15, 2019.\12\ As set forth in the
February 19, 2020 Exemption Request, the Participants propose to
implement phased reporting for Industry Member reporting to the CAT
(``Phased Reporting'') in place of the CAT reporting schedule for
Industry Members set forth in the CAT NMS Plan.\13\ The Participants
state that Phased Reporting would have five phases, Phases 2a through
2e, and further represent that the full scope of CAT Data \14\ required
under the CAT NMS Plan will be available when all five phases of Phased
Reporting are complete, subject to any applicable exemptive relief or
amendments to the CAT NMS Plan.\15\ The Participants state that each
phase of Phased Reporting is described in the Technical Specifications
for Industry Members, which provide detailed guidance regarding the
data to be reported for each phase.\16\ The Participants believe that
Phased Reporting ``would facilitate significant Industry Member
reporting as quickly as possible by leaving certain complex reporting
requirements to later phases.'' \17\
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\12\ See February 19, 2020 Exemption Request at 2. The
Participants state that Section 3.11 of the CAT NMS Plan requires
the Participants to ``endeavor to promulgate consistent rules . . .
requiring compliance by their respective Industry Members with the
provisions of SEC Rule 613'' and the CAT NMS Plan. See id. at n.7
\13\ See February 19, 2020 Exemption Request at 2. The
Participants represent that they engaged in in-depth discussions
with the industry and FINRA CAT, LLC, the Plan Processor, regarding
the scope and timing of Industry Member reporting, prior to the
exemption request. See id. The Participants plan to file revisions
to their Compliance Rules consistent with the exemptive relief
requested in the February 19, 2020 Exemption Request, including
revisions to testing and related dates associated with Industry
Member CAT reporting. See id.
\14\ ``CAT Data'' means data derived from Participant Data,
Industry Member Data, SIP Data, and such other data as the Operating
Committee may designate as ``CAT Data'' from time to time. See
Section 1.1 of the CAT NMS Plan.
\15\ See February 19, 2020 Exemption Request at 2.
\16\ See February 19, 2020 Exemption Request at 2 n.10.
Specifically, the Participants state that Phases 2a-2e of the Phased
Reporting are described in Table 1: Industry Specifications Phased
Approach in the CAT Reporting Technical Specifications for Industry
Members (version 2.2.1 r3) (Jan. 31, 2020); Table 1: Industry
Specifications Phased Approach, CAT Reporting Technical
Specifications for Industry Member (version 3.0.0) (Jan. 31, 2020);
and Table 1: Industry Customer & Account Specifications Phased
Approach, CAT Reporting Customer & Account Technical Specifications
for Industry Members (Version 1.0) (Jan. 23, 2020) (collectively
with amendments, ``Industry Member Technical Specifications''), each
of which is available at www.catnmsplan.com.
\17\ February 19, 2020 Exemption Request at 2.
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A. Phase 2a Scope
The Participants state that in the first phase of Phased Reporting
(``Phase 2a''), Large Industry Members and Small Industry OATS
Reporters \18\ would be required to report ``Phase 2a Industry Member
Data'' to the Central Repository by April 20, 2020.\19\ The
Participants state that Large Industry Members and Small Industry OATS
Reporters would be required to submit data to the CAT for the same
events and scenarios during Phase 2a.\20\
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\18\ ``Small Industry OATS Reporters'' are Industry Members that
are currently required to record and report information to FINRA's
Order Audit Trail System pursuant to applicable self-regulatory
organization (``SRO'') rules. See February 19, 2020 Exemption
Request at 3.
\19\ See February 19, 2020 Exemption Request at 3. The
Participants state that Small Industry Members that are not required
to record and report information to FINRA's OATS pursuant to
applicable SRO rules (``Small Industry Non-OATS Reporters'') would
not be required to report Phase 2a Industry Member Data to the
Central Repository until December 13, 2021, which is twenty months
after Large Industry Members and Small Industry OATS Reporters would
begin reporting. See February 19, 2020 Exemption Request at 3.
\20\ See February 19, 2020 Exemption Request at 3.
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The Participants state that ``Phase 2a Industry Member Data'' would
be Industry Member Data that is required to be reported to the Central
Repository commencing in Phase 2a as set forth in the Industry Member
Technical Specifications, and that Phase 2a Industry Member Data would
include Industry Member Data solely related to Eligible Securities that
are equities.\21\ Specifically, the Participants state that Phase 2a
Industry Member Data would include all events and scenarios covered by
OATS,\22\ which includes information related to the receipt or
origination of orders, order transmittal, and order modifications,
cancellations and executions.\23\ The Participants also state that
Phase 2a Industry Member Data would include Reportable Events for:
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\21\ See February 19, 2020 Exemption Request at 3. The
Participants state that the items required to be reported commencing
in Phase 2a do not include the items required to be reported in
Phase 2c or Phase 2d. While the following summarizes the categories
of Industry Member Data to be reported for Phase 2a, the
Participants state that the Industry Member Technical Specifications
provide detailed guidance regarding the data to be reported for each
Phase. See id. at 2-3. In addition, the Participants state that they
plan to file revisions to their Compliance Rules consistent with the
exemptive relief requested in the February 19, 2020 Exemption
Request. See id.
\22\ See FINRA Rule 7440.
\23\ See February 19, 2020 Exemption Request at 3.
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Proprietary orders, including market maker orders, for
Eligible Securities that are equities;
electronic quotes in listed equity Eligible Securities
(i.e., NMS stocks) sent to a national securities exchange or FINRA's
Alternative Display Facility (``ADF'');
electronic quotes in unlisted Eligible Securities (i.e.,
OTC Equity Securities) received by an Industry Member operating an
interdealer quotation system (``IDQS''); and
electronic quotes in unlisted Eligible Securities sent to
an IDQS or other quotation system not operated by a Participant or
Industry Member.\24\
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\24\ See February 19, 2020 Exemption Request at 3-4.
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According to the Participants, Phase 2a Industry Member Data would
include Firm Designated IDs (``FDIDs''), which Industry Members must
report to the CAT as required by Sections 6.3(d)(i)(A) and
6.4(d)(ii)(C) of the CAT NMS Plan.\25\ The Participants state that in
Phase 2a, Industry Members would be required to report all street side
representative orders,\26\ including both agency and proprietary orders
and mark such orders as representative orders, except in certain
limited exceptions as described in the Industry Member Technical
Specifications.\27\ The Participants state that in Phase 2a, Industry
Members would be required to report the link between the street side
representative order and the order being represented when: (1) The
representative order was originated specifically to represent a single
order received either from a customer or another broker-dealer; and (2)
there is (a) an existing direct electronic link in the Industry
Member's system between the order being represented and the
representative order and (b) any resulting executions are immediately
and automatically applied to the represented order in the Industry
Member's system.\28\
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\25\ See February 19, 2020 Exemption Request at 4. Section
6.3(d)(i)(A) of the CAT NMS Plan, as applied by Section 6.4(d)(i),
requires Industry Members to submit the Firm Designated ID for the
original receipt or origination of an order. Section 6.4(d)(ii)(C)
of the CAT NMS Plan requires Industry Members to record and report
to the Central Repository, for original receipt and origination of
an order, the Firm Designated ID.
\26\ See February 19, 2020 Exemption Request at 4. The
Participants state that a representative order is an order
originated in a firm owned or controlled account, including
principal, agency average price and omnibus accounts, by an Industry
Member for the purpose of working one or more customer or client
orders. See id.
\27\ See February 19, 2020 Exemption Request at 4.
\28\ See February 19, 2020 Exemption Request at 4.
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[[Page 23077]]
The Participants state that Phase 2a Industry Member Data also
would include the manual and Electronic Capture Time for Manual Order
Events.\29\ The Participants state that specifically, for each
Reportable Event in Section 6.3(d) of the CAT NMS Plan, Industry
Members would be required to provide a timestamp pursuant to Section
6.8(b) of the CAT NMS Plan.\30\ The Participants explain that
accordingly, for Phase 2a, Industry Members would be required to
provide both the manual and Electronic Capture Time for Manual Order
Events.\31\ The Participants state that Industry Members would be
required to report special handling instructions for the original
receipt or origination of an order during Phase 2a.\32\ In addition,
during Phase 2a, the Participants state that Industry Members will be
required to report, when routing an order, whether the order was routed
as an intermarket sweep order (``ISO'').\33\
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\29\ See February 19, 2020 Exemption Request at 4.
\30\ See February 19, 2020 Exemption Request at 4. The
Participants state that Section 6.8(b) of the CAT NMS Plan states
that Industry Members shall be permitted to record and report: (i)
Manual Order Events to the Central Repository in increments up to
and including one second, provided that . . . Industry Members shall
be required to record and report the time when a Manual Order Event
has been captured electronically in an order handling and execution
system of such . . . Industry Member (``Electronic Capture Time'')
in milliseconds.
\31\ See February 19, 2020 Exemption Request at 5. The
Participants state that Industry Members would be required to
provide an Electronic Capture Time following the manual capture time
only for new orders that are Manual Order Events and, in certain
instances, routes that are Manual Order Events. The Participants
state that the Electronic Capture Time would not be required for
other Manual Order Events. See id. at n.14.
\32\ See February 19, 2020 Exemption Request at 5.
\33\ See February 19, 2020 Exemption Request at 5. The
Participants state that Industry Members would be required to report
special handling instructions on routes other than ISOs in Phase 2c,
rather than Phase 2a. See id.
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The Participants state that in Phase 2a, Industry Members would not
be required to report modifications of a previously routed order in
certain limited instances.\34\ The Participants explain that
specifically, if a trader or trading software modifies a previously
routed order, the routing firm is not required to report the
modification of an order route if the destination to which the order
was routed is a CAT Reporter that is required to report the
corresponding order activity.\35\ The Participants state that if,
however, the order was modified by a Customer or other non-CAT
Reporter, and subsequently the routing Industry Member sends a
modification to the destination to which the order was originally
routed, then the routing Industry Member must report the modification
of the order route.\36\ In addition, the Participants state that in
Phase 2a, Industry Members would not be required to report a
cancellation of an order received from a Customer after the order has
been executed.\37\
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\34\ See February 19, 2020 Exemption Request at 5.
\35\ See February 19, 2020 Exemption Request at 5.
\36\ See February 19, 2020 Exemption Request at 5. The
Participants represent that this approach is comparable to the
approach set forth in OATS Compliance FAQ 35. See id. at n.15.
\37\ See February 19, 2020 Exemption Request at 5.
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For Phase 2a, Participants would require Small Industry OATS
Reporters to begin reporting to the Central Repository at the same time
as Large Industry Members.\38\ The Participants state that aligning the
start of CAT reporting for Small Industry OATS Reporters with that of
Large Industry Members under the Phased Reporting approach is designed
to accelerate the retirement of OATS, and that having data from the
Small Industry Members currently reporting to OATS available when Large
Industry Members begin reporting would substantially facilitate a more
expeditious retirement of OATS.\39\ The Participants further state that
the retirement of OATS would lead to a significant cost savings for the
industry by eliminating the need to maintain two duplicative reporting
systems, as described in the CAT NMS Plan and as noted by the
industry.\40\
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\38\ See February 19, 2020 Exemption Request at 5.
\39\ See February 19, 2020 Exemption Request at 5.
\40\ See February 19, 2020 Exemption Request at 6.
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In addition, the Participants state that commencing Phase 2a CAT
reporting for Small Industry OATS Reporters and Large Industry Members
simultaneously should not create significant burdens for Small Industry
OATS Reporters because the additional year allotted to Small Industry
Members under the CAT NMS Plan was intended to give Small Industry
Members additional time to comply with the new reporting
requirements.\41\ The Participants believe this contention is supported
by language in the Rule 613 Adopting Release indicating that small
broker-dealers were provided with an additional year to begin reporting
because ``small broker-dealers, particularly those that operate manual
systems, might be particularly impacted because of their more modest
financial resources and may need additional time to upgrade to an
electronic method of reporting audit trail data to the central
repository.'' \42\ However, the Participants state that they do not
believe that this concern applies to small broker-dealers that are OATS
Reporters.\43\ The Participants explain that while their proposed
exemption would accelerate CAT reporting obligations for approximately
230 Small Industry Members, 220 of those firms already report to OATS
through clearing firms or other third-party providers, all of which
will begin reporting to the CAT at the same time as Large Industry
Members.\44\ As a result, the Participants believe that (1) additional
technical requirements or costs to accelerate reporting requirements
for these firms should be limited, and (2) that this change would allow
introducing and clearing firms to avoid the costs associated with
maintaining two systems during the additional transition year otherwise
provided to Small Industry Members.\45\ Of the ten Small Industry
Members that report to OATS on their own behalf, the Participants state
that eight have very few reportable events and, consequently, the
Participants believe that these Industry Members would not have
significant burdens reporting to the CAT rather than continuing to
report to OATS.\46\
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\41\ See February 19, 2020 Exemption Request at 6.
\42\ See February 19, 2020 Exemption Request at 6; see also
Securities Exchange Act Rel. No. 67457 (July 18, 2012), 77 FR 45722,
45749 (August 1, 2012) (``Rule 613 Adopting Release'').
\43\ See February 19, 2020 Exemption Request at 6.
\44\ See February 19, 2020 Exemption Request at 6.
\45\ See February 19, 2020 Exemption Request at 6.
\46\ See February 19, 2020 Exemption Request at 6. The
Participants state that in one recent month, five of the ten firms
submitted fewer than 100 reports during the month, with four
submitting fewer than 50. See id. at n.19.
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The Participants also believe that Phase 2a will serve as a
substantial step forward for CAT reporting because it will cover not
only all OATS events and scenarios from all OATS reporters, but will
also include a variety of data not covered by OATS or other SRO
systems.\47\ In addition, the Participants state that Large Industry
Members and Small Industry OATS Reporters would be required to report
the FDID during Phase 2a, and that the FDID will allow regulators to
identify that the same account is trading within a single broker-
dealer.\48\ Furthermore, the Participants state that during Phase 2a,
certain linkages between street side representative orders and the
related customer order will be enabled, which will provide significant
benefits to regulators using the data, and that these
[[Page 23078]]
linkages are not required under the OATS rules.\49\
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\47\ See February 19, 2020 Exemption Request at 6. For example,
the Participants state that during Phase 2a, Large Industry Members
and Small Industry OATS Reporters will be required to report all
proprietary orders, including market maker orders, whereas market
making and representative proprietary orders are not required to be
captured under the OATS rules. See id.
\48\ See February 19, 2020 Exemption Request at 7. The
Participants state that when the Customer information reporting
begins, the Firm Designated ID will be used to link accounts to
specific customers. See id. at n.20.
\49\ See February 19, 2020 Exemption Request at 7.
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In regard to Small Industry Non-OATS Reporters, the Participants do
not propose to require these reporters to commence CAT reporting at the
same time as Large Industry Members on April 20, 2020.\50\ Instead, the
Participants propose to require Small Industry Non-OATS Reporters to
begin reporting Phase 2a Industry Member Data by December 13, 2021,
twenty months after Large Industry Members and Small Industry OATS
Reporters begin reporting Phase 2a Industry Member Data to the Central
Repository.\51\ The Participants determined not to accelerate Phase 2a
CAT reporting for Small Industry Non-OATS Reporters because unlike
Small Industry OATS Reporters, the burdens of CAT reporting are
significantly greater for those firms that are not currently reporting
to OATS.\52\ In addition, because Small Industry Non-OATS Reporters do
not report to OATS, the Participants state that accelerating their
reporting would not have any effect on the retirement of OATS.\53\
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\50\ See February 19, 2020 Exemption Request at 7.
\51\ See February 19, 2020 Exemption Request at 7.
\52\ See February 19, 2020 Exemption Request at 7.
\53\ See February 19, 2020 Exemption Request at 7.
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B. Phase 2b Scope
The Participants state that in the second phase of Phased Reporting
(``Phase 2b''), Large Industry Members would be required to report to
the Central Repository ``Phase 2b Industry Member Data'' by May 18,
2020.\54\ Small Industry Members, however, would not be required to
report Phase 2b Industry Member Data to the Central Repository until
December 13, 2021, which is nineteen months after Large Industry
Members begin reporting such data to the Central Repository.\55\
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\54\ See February 19, 2020 Exemption Request at 7.
\55\ See February 19, 2020 Exemption Request at 7.
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The Participants state that ``Phase 2b Industry Member Data'' would
be Industry Member Data required to be reported to the Central
Repository commencing in Phase 2b as set forth in the Industry Member
Technical Specifications.\56\ Specifically, the Participants state that
Phase 2b Industry Member Data would include Industry Member Data
related to Eligible Securities that are options and related to simple
electronic option orders, excluding electronic paired option
orders.\57\ The Participants explain that a simple electronic option
order is an order to buy or sell a single option that is not related to
or dependent on any other transaction for pricing and timing of
execution that is either received or routed electronically by an
Industry Member.\58\ The Participants state that electronic receipt of
an order is defined as the initial receipt of an order by an Industry
Member in electronic form in standard format directly into an order
handling or execution system.\59\ The Participants state that
electronic routing of an order is the routing of an order via
electronic medium in standard format from one Industry Member's order
handling or execution system to an exchange or another Industry
Member.\60\ The Participants further explain that an electronic paired
option order is an electronic option order that contains both the buy
and sell side that is routed to another Industry Member or exchange for
crossing and/or price improvement as a single transaction on an
exchange.\61\ The Participants add that responses to auctions of simple
orders and paired simple orders would be reportable in Phase 2b.\62\
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\56\ See February 19, 2020 Exemption Request at 7. The
Participants state that while the following summarizes the
categories of Industry Member Data to be reported for Phase 2b, the
Industry Member Technical Specifications provide detailed guidance
regarding the data to be reported for each Phase. See id. at 7, 2-3.
\57\ See February 19, 2020 Exemption Request at 7. The
Participants state that the items required to be reported in Phase
2b do not include the items required to be reported in Phase 2d, as
discussed below. See id. at n.21.
\58\ See February 19, 2020 Exemption Request a 7-8.
\59\ See February 19, 2020 Exemption Request at 8.
\60\ See February 19, 2020 Exemption Request at 8.
\61\ See February 19, 2020 Exemption Request at 8.
\62\ See February 19, 2020 Exemption Request at 8.
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Furthermore, the Participants state that combined orders in options
would be treated in Phase 2b in the same way as equity representative
orders are treated in Phase 2a.\63\ The Participants state that a
combined order would mean, as permitted by SRO rules, a single, simple
order in Listed Options created by combining individual, simple orders
in Listed Options from a customer with the same exchange origin code
before routing to an exchange.\64\ The Participants state that during
Phase 2b, the single combined order sent to an exchange must be
reported and marked as a combined order, but the linkage to the
underlying orders is not required to be reported until Phase 2d.\65\
---------------------------------------------------------------------------
\63\ See February 19, 2020 Exemption Request at 8.
\64\ See February 19, 2020 Exemption Request at 8.
\65\ See February 19, 2020 Exemption Request at 8.
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C. Phase 2c Scope
The Participants state that in the third phase of Phased Reporting
(``Phase 2c''), Large Industry Members would be required to report to
the Central Repository ``Phase 2c Industry Member Data'' by April 26,
2021.\66\ Small Industry Members would be required to report to the
Central Repository ``Phase 2c Industry Member Data'' by December 13,
2021, which is seven months after Large Industry Members begin
reporting such data to the Central Repository.\67\
---------------------------------------------------------------------------
\66\ See February 19, 2020 Exemption Request at 8.
\67\ See February 19, 2020 Exemption Request at 8.
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The Participants state that ``Phase 2c Industry Member Data'' would
be Industry Member Data related to Eligible Securities that are
equities other than Phase 2a Industry Member Data, Phase 2d Industry
Member Data, or Phase 2e Industry Member Data.\68\ Specifically, the
Participants state that Phase 2c Industry Member Data would include
Industry Member Data that is related to Eligible Securities that are
equities and that is related to: (1) Allocation Reports as required to
be recorded and reported to the Central Repository pursuant to Section
6.4(d)(ii)(A)(1) of the CAT NMS Plan; (2) quotes in unlisted Eligible
Securities sent to an IDQS operated by a CAT Reporter (reportable by
the Industry Member sending the quotes) (except for quotes reportable
in Phase 2d, as discussed below); (3) electronic quotes in listed
equity Eligible Securities (i.e., NMS stocks) that are not sent to a
national securities exchange or FINRA's Alternative Display Facility;
(4) reporting changes to client instructions regarding modifications to
algorithms; (5) marking as a representative order any order originated
to work a customer order in price guarantee scenarios, such as a
guaranteed VWAP; (6) flagging rejected external routes to indicate a
route was not accepted by the receiving destination; (7) linkage of
duplicate electronic messages related to a Manual Order Event between
the electronic event and the original manual route; (8) special
handling instructions on order route reports (other than the ISO, which
is required to be reported in Phase 2a); (9) quote identifier on trade
events; (10) reporting of large trader identifiers \69\ (``LTID'') (if
applicable) for accounts with Reportable Events that are reportable to
CAT as of and including Phase 2c; \70\ (11) reporting of date
[[Page 23079]]
account opened or Account Effective Date \71\ (as applicable) for
accounts and reporting of a flag indicating the Firm Designated ID type
as account or relationship; (12) order effective time for orders that
are received by an Industry Member and do not become effective until a
later time; (13) the modification or cancellation of an internal route
of an order; and (14) linkages to the customer orders(s) being
represented for representative order scenarios, including agency
average price trades, net trades, aggregated orders, and disconnected
Order Management System (``OMS'')--Execution Management System
(``EMS'') scenarios, as required in the Industry Member Technical
Specifications.\72\
---------------------------------------------------------------------------
\68\ See February 19, 2020 Exemption Request at 8. The
Participants state that while the following summarizes the
categories of Industry Member Data to be reported for Phase 2c, the
Industry Member Technical Specifications provide detailed guidance
regarding the data to be reported for each Phase. See id. at 8, 2-3.
\69\ See definition of ``Customer Account Information'' in
Section 1.1 of the CAT NMS Plan. See also Rule 13h-1 under the
Exchange Act.
\70\ The CAT NMS Plan requires LTID to be reported to the CAT as
part of Customer Account Information. As set forth in the February
19, 2020 Exemption Request, the Participants propose to require the
reporting of LTID to the CAT in Phases 2c and 2d, instead of with
the rest of Customer Account Information in Phase 2e, which
potentially could result in an earlier elimination of broker-dealer
recordkeeping, reporting and monitoring requirements of the Large
Trader Rule. See February 19, 2020 Exemption Request at 9-11.
\71\ See definition of ``Customer Account Information'' and
``Account Effective Date'' in Section 1.1 of the CAT NMS Plan.
\72\ See February 19, 2020 Exemption Request at 8-9. The
Participants state that in Phase 2c, for any scenarios that involve
orders originated in different systems that are not directly linked,
such as a customer order originated in an OMS and represented by a
principal order originated in an EMS that is not linked to the OMS,
marking and linkages must be reported as required in the Industry
Member Technical Specifications. See id. at n.24.
---------------------------------------------------------------------------
The Participants state that Phase 2c Industry Member Data also
includes electronic quotes that are provided by or received in a CAT
Reporter's order/quote handling or execution systems in Eligible
Securities that are equities and are provided by an Industry Member to
other market participants off a national securities exchange under the
following conditions: (1) An equity bid or offer is displayed publicly
or has been communicated (a) for listed securities to the Alternative
Display Facility (ADF) operated by FINRA; or (b) for unlisted equity
securities to an ``inter-dealer quotation system'' as defined in FINRA
Rule 6420(c); or (2) an equity bid or offer which is accessible
electronically by customers or other market participants and is
immediately actionable for execution or routing; i.e., no further
manual or electronic action is required by the responder providing the
quote in order to execute or cause a trade to be executed).\73\ The
Participants state that with respect to OTC Equity Securities, OTC
Equity Securities quotes sent by an Industry Member to an IDQS operated
by an Industry Member CAT Reporter (other than such an IDQS that does
not match and execute orders) are reportable by the Industry Member
sending them in Phase 2c.\74\ The Participants explain that
accordingly, any response to a request for quote or other form of
solicitation response provided in a standard electronic format (e.g.,
FIX) that meets this quote definition (i.e., an equity bid or offer
which is accessible electronically by customers or other market
participants and is immediately actionable for execution or routing)
would be reportable in Phase 2c.\75\
---------------------------------------------------------------------------
\73\ See February 19, 2020 Exemption Request at 9.
\74\ See February 19, 2020 Exemption Request at 9.
\75\ See February 19, 2020 Exemption Request at 9.
---------------------------------------------------------------------------
D. Phase 2d Scope
The Participants state that in the fourth phase of Phased Reporting
(``Phase 2d''), Large Industry Members and Small Industry Members would
be required to report to the Central Repository ``Phase 2d Industry
Member Data'' by December 13, 2021.\76\ The Participants state that the
full scope of CAT Data other than Phase 2e Industry Member Data will be
required to be reported to the CAT when Phase 2d has been implemented,
subject to any applicable exemptive relief or amendments to the CAT NMS
Plan.\77\
---------------------------------------------------------------------------
\76\ See February 19, 2020 Exemption Request at 9.
\77\ See February 19, 2020 Exemption Request at 10.
---------------------------------------------------------------------------
The Participants state that ``Phase 2d Industry Member Data'' is
Industry Member Data that is related to Eligible Securities that are
options other than Phase 2b Industry Member Data, Industry Member Data
that is related to Eligible Securities that are equities other than
Phase 2a Industry Member Data or Phase 2c Industry Member Data, and
Industry Member Data other than Phase 2e Industry Member Data.\78\
---------------------------------------------------------------------------
\78\ See February 19, 2020 Exemption Request at 9-10. The
Participants state that reporting information regarding the
modification or cancellation of a route is necessary to create the
full lifecycle of an order. Accordingly, the reporting of
information related to the modification or cancellation of a route
(similar to the data required for the routing of an order and
modification and cancellation of an order) is required pursuant to
Sections 6.3(d)(ii) and (iv) of the CAT NMS Plan. See id. at 10
n.25. The Participants state that while the following summarizes the
categories of Industry Member Data to be reported for Phase 2d, the
Industry Member Technical Specifications provide detailed guidance
regarding the data to be reported for each Phase. See id. at 10, 2-
3.
---------------------------------------------------------------------------
The Participants state that Phase 2d Industry Member Data includes
with respect to the Eligible Securities that are options: (1) Simple
manual orders; (2) electronic and manual paired orders; (3) all complex
orders with linkages to all CAT-reportable legs; (4) LTIDs (if
applicable) for accounts with Reportable Events for Phase 2d; (5) date
account opened or Account Effective Date (as applicable) for accounts
with an LTID and flag indicating the Firm Designated ID type as account
or relationship for such accounts; (6) Allocation Reports as required
to be recorded and reported to the Central Repository pursuant to
Section 6.4(d)(ii)(A)(1) of the CAT NMS Plan; (7) the modification or
cancellation of an internal route of an order; and (8) linkage between
a combined order and the original customer orders.\79\ The Participants
state that Phase 2d Industry Member Data also would include electronic
quotes that are provided by or received in a CAT Reporter's order/quote
handling or execution systems in Eligible Securities that are options
and are provided by an Industry Member to other market participants off
a national securities exchange under the following conditions: A listed
option bid or offer which is accessible electronically by customers or
other market participants and is immediately actionable (i.e., no
further action is required by the responder providing the quote in
order to execute or cause a trade to be executed).\80\ The Participants
state that accordingly, any response to a request for quote or other
form of solicitation response provided in standard electronic format
(e.g., FIX) that meets this definition would be reportable in Phase 2d
for options.\81\
---------------------------------------------------------------------------
\79\ See February 19, 2020 Exemption Request at 10.
\80\ See February 19, 2020 Exemption Request at 10.
\81\ See February 19, 2020 Exemption Request at 10.
---------------------------------------------------------------------------
The Participants state that Phase 2d Industry Member Data also
would include with respect to Eligible Securities that are options or
equities (1) receipt time of cancellation and modification instructions
through Order Cancel Request and Order Modification Request events; (2)
modifications of previously routed orders in certain instances; and (3)
OTC Equity Securities quotes sent by an Industry Member to an IDQS
operated by an Industry Member CAT Reporter that does not match and
execute orders. In addition, the Participants state that subject to any
exemptive or other relief, Phase 2d Industry Member Data will include
verbal or manual quotes on an exchange floor or in the over-the-counter
market, where verbal quotes and manual quotes are defined as bids or
offers in Eligible Securities provided verbally or that are provided or
received other than via a CAT Reporter's order handling and execution
system (e.g., quotations
[[Page 23080]]
provided via email or instant messaging).\82\
---------------------------------------------------------------------------
\82\ See February 19, 2020 Exemption Request at 10.
---------------------------------------------------------------------------
E. Phase 2e Scope
The Participants state that in the fifth phase of Phased Reporting
(``Phase 2e''), both Large Industry Members and Small Industry Members
would be required to report to the Central Repository ``Phase 2e
Industry Member Data'' by July 11, 2022.\83\ The Participants state
that ``Phase 2e Industry Member Data'' includes Customer Account
Information and Customer Identifying Information, other than LTIDs,
date account opened/Account Effective Date and Firm Designated ID type
flag previously reported to the CAT.\84\ The Participants state that
LTIDs and Account Effective Date are both provided in Phases 2c and 2d
in certain circumstances, as discussed above.\85\ The Participants
state that the terms ``Customer Account Information'' and ``Customer
Identifying Information'' are defined in Section 1.1 of the CAT NMS
Plan.\86\ The Participants represent that the full scope of CAT Data
will be required to be reported to the CAT when Phase 2e has been
implemented, subject to any applicable exemptive relief or amendments
to the CAT NMS Plan.\87\
---------------------------------------------------------------------------
\83\ See February 19, 2020 Exemption Request at 11; see supra
note 16.
\84\ See February 19, 2020 Exemption Request at 11.
\85\ See February 19, 2020 Exemption Request at 11.
\86\ See February 19, 2020 Exemption Request at 11. The term
``Customer Account Information'' includes account numbers, and the
term ``Customer Identifying Information'' includes, with respect to
individuals, dates of birth and individual tax payer identification
numbers and social security numbers (collectively, ``SSNs''). See
Section 1.1 of the CAT NMS Plan. The Participants state that they
requested exemptive relief from the requirements for the
Participants to require their members to provide dates of birth,
account numbers and social security numbers for individuals to the
CAT. See Letter from Michael Simon, CAT NMS Plan Operating Committee
Chair, to Vanessa Countryman, SEC, Request for Exemptive Relief from
Certain Provisions of the CAT NMS Plan related to Social Security
Numbers, Dates of Birth and Account Numbers (Jan. 29, 2020). On
March 17, 2020, the Commission granted conditional exemptive relief
to allow for an alternative approach to generating a CAT Customer ID
without requiring Industry Members to report individual social
security numbers or tax payer identification numbers and (2) to
allow for an alternative approach that exempts the reporting of
dates of birth and account numbers associated with natural person
retail Customers to the CAT, and instead will require Industry
Members to report the year of birth associated with natural person
retail Customers and the FDID for each trading account associated
with the Customer. See Securities Exchange Act Release No. 88393, 85
FR 16152, 16152 (March 20, 2020).
\87\ See February 19, 2020 Exemption Request at 11.
---------------------------------------------------------------------------
F. Industry Member Testing Requirements
The Participants state that the CAT NMS Plan sets forth certain
timelines for testing for various aspects of the implementation of
Industry Member reporting to the CAT.\88\ The Participants elaborate
that specifically, Section 10 of Appendix C of the CAT NMS Plan sets
forth testing timelines for Large and Small Industry Members involving,
in relevant part, the publication and implementation of the methods for
providing information to the Customer-ID database, the submission of
order and market maker quote data to Central Repository, and the
linkage of the lifecycle of order events.\89\ Given the Participants'
proposal to shift from two specified dates for the commencement of CAT
reporting for Large and Small Industry Members to Phased Reporting,
which features varying commencement dates according to each Phase for
Large Industry Members, Small Industry OATS Reporters, and Small
Industry Non-OATS Reporters, as described above, the Participants
recognize that the testing milestones set forth in Appendix C of the
CAT NMS Plan do not easily correspond to Phased Reporting.\90\
Accordingly, the Participants propose to replace the Industry Member
testing milestones in Appendix C with the following testing
milestones.\91\ The Participants represent that in each case, the
proposed testing timeline would provide ample testing time for Industry
Members.\92\ The proposed testing timeline is as follows:
---------------------------------------------------------------------------
\88\ See February 19, 2020 Exemption Request at 11.
\89\ See February 19, 2020 Exemption Request at 11.
\90\ See February 19, 2020 Exemption Request at 11.
\91\ See February 19, 2020 Exemption Request at 11. The
Participants state that each of the testing milestones has been set
forth in the updated master plan provided to the SEC. See id. The
Division of Trading and Markets requested a master plan from the
Participants detailing all the material steps necessary to fully
implement both Participant and Industry Member reporting as part of
completing the CAT, among other items. See Securities Exchange Act
Release No. 86901, 84 FR 48458, 48460 (September 13, 2019)
(``Proposed Transparency and Financial Accountability Amendments'').
\92\ See February 19, 2020 Exemption Request at 11. See Section
10.1, Appendix D of the CAT NMS Plan.
---------------------------------------------------------------------------
Industry Member file submission and data integrity testing
for Phases 2a and 2b begins in December 2019;
Industry Member testing of the Reporter Portal, including
data integrity error correction tools and data submissions, begins in
February 2020;
The Industry Member test environment will be open with
intra-firm linkage validations to Industry Members for both Phases 2a
and 2b in April 2020;
The Industry Member test environment will be open to
Industry Members with inter-firm linkage validations for both Phases 2a
and 2b in July 2020;
The Industry Member test environment will be open to
Industry Members with Phase 2c functionality (full representative order
linkages) in January 2021;
The Industry Member test environment will be open to
Industry Members with Phase 2d functionality (manual options orders,
complex options orders, and options allocations) in June 2021;
Participant exchanges that support options market making
quoting will begin accepting Quote Sent Time on quotes from Industry
Members no later than April 2020;
The Industry Member test environment (customer and account
information) will be open to Industry Members in January 2022.\93\
---------------------------------------------------------------------------
\93\ See February 19, 2020 Exemption Request at 11-12.
---------------------------------------------------------------------------
III. Request for Relief
In order to allow for the implementation of Phased Reporting, the
Participants request, in the February 19, 2020 Exemption Request, that
the Commission grant each Participant exemptive relief from the
requirement in Section 6.4 of the CAT NMS Plan that ``[t]he
requirements for Industry Members under this Section 6.4 shall become
effective on the second anniversary of the Effective Date in the case
of Industry Members other than Small Industry Members, or the third
anniversary of the Effective Date in the case of Small Industry
Members'' (i.e., November 15, 2018 and November 15, 2019,
respectively).\94\ The Participants also request that the Commission
grant each Participant exemptive relief from the requirement in Section
6.7(a)(v) of the CAT NMS Plan for each Participant, through its
Compliance Rule, to require its Industry Members (other than Small
Industry Members) to report to the Central Repository Industry Member
Data within two 2 years after the Effective Date (i.e., by November 15,
2018); and the requirement in Section 6.7(a)(vi) of the CAT NMS Plan
for each Participant, through its Compliance Rule, to require its Small
Industry Members to report to the Central Repository Industry Member
Data
[[Page 23081]]
within three 3 years after the Effective Date (i.e., by November 15,
2019).\95\
---------------------------------------------------------------------------
\94\ See February 19, 2020 Exemption Request at 12.
\95\ See February 19, 2020 Exemption Request at 12.
---------------------------------------------------------------------------
In support of their request for an exemption, the Participants
state that Industry Members have expressed concern about being out of
compliance with the reporting deadlines as currently set forth in the
Compliance Rules, and have indicated that there is a need for formal
guidance as to the revised CAT reporting schedule for Industry
Members.\96\ The Participants state that such certainty would assist
Industry Members in their efforts to ensure compliance with the
regulatory requirements related to the CAT.\97\ The Participants state
that the full scope of CAT Data will be required to be reported when
all five phases of Phased Reporting have been implemented, subject to
any applicable exemptive relief or amendments to the CAT NMS Plan.\98\
---------------------------------------------------------------------------
\96\ See February 19, 2020 Exemption Request at 2. The
Participants state that they plan to file revisions to their
Compliance Rules consistent with the exemptive relief requested in
the February 19, 2020 Exemption Request, including revisions to
testing and related dates associated with Industry Member CAT
reporting. See id.
\97\ See February 19, 2020 Exemption Request at 2.
\98\ See February 19, 2020 Exemption Request at 13.
---------------------------------------------------------------------------
The Participants also state that, as a condition to the exemption,
each Participant would implement the Phased Reporting described above
through its Compliance Rule by requiring:
For Phase 2a Industry Member Data: Its Large Industry
Members and its Small Industry OATS Reporters to commence reporting to
the Central Repository Phase 2a Industry Member Data by April 20, 2020,
and its Small Industry Non-OATS Reporters to commence reporting to the
Central Repository Phase 2a Industry Member Data by December 13, 2021;
For Phase 2b Industry Member Data: Its Large Industry
Members to commence reporting to the Central Repository Phase 2b
Industry Member Data by May 18, 2020, and its Small Industry Members to
commence reporting to the Central Repository Phase 2b Industry Member
Data by December 13, 2021;
For Phase 2c Industry Member Data: Its Large Industry
Members to commence reporting to the Central Repository Phase 2c
Industry Member Data by April 26, 2021, and its Small Industry Members
to commence reporting to the Central Repository Phase 2c Industry
Member Data by December 13, 2021;
For Phase 2d Industry Member Data: Its Large Industry
Members and Small Industry Members to commence reporting to the Central
Repository Phase 2d Industry Member Data by December 13, 2021; and
For Phase 2e Industry Member Data: Its Large Industry
Members and Small Industry Members to commence reporting to the Central
Repository Phase 2e Industry Member Data by July 11, 2022.\99\
---------------------------------------------------------------------------
\99\ See February 19, 2020 Exemption Request at 12-13.
---------------------------------------------------------------------------
The Participants also state that, as a further condition to the
exemption, each Participant would implement the testing timelines
described above through its Compliance Rule by requiring the following:
Industry Member file submission and data integrity testing
for Phases 2a and 2b to begin in December 2019.
Industry Member testing of the Reporter Portal, including
data integrity error correction tools and data submissions, to begin in
February 2020.
The Industry Member test environment will be open with
intra-firm linkage validations to Industry Members for both Phases 2a
and 2b in April 2020.
The Industry Member test environment will be open to
Industry Members with inter-firm linkage validations for both Phases 2a
and 2b in July 2020.
The Industry Member test environment will be open to
Industry Members with Phase 2c functionality (full representative order
linkages) in January 2021.
The Industry Member test environment will be open to
Industry Members with Phase 2d functionality (manual options orders,
complex options orders, and options allocations) in June 2021.
Participant exchanges that support options market making
quoting will begin accepting Quote Sent Time on quotes from Industry
Members no later than April 2020.
The Industry Member test environment (customer and account
information) will be open to Industry Members in January 2022.\100\
---------------------------------------------------------------------------
\100\ See February 19, 2020 Exemption Request at 13.
---------------------------------------------------------------------------
IV. Discussion
Section 36 of the Exchange Act grants the Commission the authority,
with certain limitations, to ``conditionally or unconditionally exempt
any person, security, or transaction . . . from any provision or
provisions of [the Exchange Act] or of any rule or regulation
thereunder, to the extent that such exemption is necessary or
appropriate in the public interest, and is consistent with the
protection of investors.'' \101\ Rule 608(e) of Regulation NMS under
the Exchange Act authorizes the Commission to exempt, either
unconditionally or on specified terms and conditions, any self-
regulatory organization, member thereof, or specified security, from
the provisions of the rule if the Commission determines that such
exemption is consistent with the public interest, the protection of
investors, the maintenance of fair and orderly markets and the removal
of impediments to, and perfection of the mechanisms of, a national
market system.\102\
---------------------------------------------------------------------------
\101\ 15 U.S.C. 78mm(a)(1).
\102\ 17 CFR 242.608(e).
---------------------------------------------------------------------------
The Commission believes that exemptive relief pursuant to Section
36 of the Exchange Act to allow for the implementation of Phased
Reporting for Industry Members is appropriate in the public interest,
and is consistent with the protection of investors and that, pursuant
to Rule 608(e), such relief is consistent with the public interest, the
protection of investors, the maintenance of fair and orderly markets
and the removal of impediments to, and perfection of the mechanisms of,
a national market system. In accordance with the CAT NMS Plan, the
Participants adopted Compliance Rules to require their Industry Members
to commence reporting Industry Member Data by November 15, 2018 for
Large Industry Members, and November 15, 2019 for Small Industry
Members, respectively.\103\ Industry Members, however, have not been
able to commence reporting Industry Member Data to the CAT because
there has not been a system in place capable of accepting the required
Industry Member Data.
---------------------------------------------------------------------------
\103\ See FINRA CAT Compliance Rule Approval Order, supra note
9; CAT Compliance Rule Joint Approval Order, supra note 9.
---------------------------------------------------------------------------
Allowing the Participants to revise the Industry Member CAT
reporting requirements in the Compliance Rules to be consistent with
Phased Reporting as described in this Order will facilitate an
incremental approach to CAT implementation. Such an approach could
contribute to more efficient development of the overall CAT system,
which has been subject to delays, and could provide certainty to
Industry Members as they implement their regulatory data collection
systems and make any necessary adjustments.
Although the Participants proposed in the February 19, 2020
Exemption
[[Page 23082]]
Request that Phase 2a reporting would commence on April 20, 2020 and
Phase 2b reporting would commence on May 18, 2020,\104\ in light of
COVID-19 and the Participants' subsequent March 19, 2020 No Action
Request,\105\ the Commission believes that the Participants should be
granted an exemption from the CAT NMS Plan so that the Compliance Rules
may require Phase 2a reporting to commence on June 22, 2020 and Phase
2b reporting to commence on July 20, 2020, provided that Industry
Members who elect to report to the CAT prior to such dates be permitted
to report to the CAT as early as April 20, 2020 for Phase 2a reporting
and as early as May 18, 2020 for Phase 2b reporting. The Participants
represented in their March 19, 2020 No Action Request that the CAT will
be ready to accept CAT reports from Industry Members as of April 20,
2020 \106\ and that the Participants understand that the Plan Processor
for the CAT will be able to meet its upcoming system build and
production dates.\107\
---------------------------------------------------------------------------
\104\ See February 19, 2020 Exemption Request at 3, 7.
\105\ On March 19, 2020 the Participants requested additional
time for Industry Members to prepare for the commencement of
reporting and stated that Phase 2a and Phase 2b reporting would
commence on June 22, 2020 and July 20, 2020, respectively. The
Participants stated that industry groups have requested extensions
of CAT implementation dates for at least 60 days. See Letter from
Michael Simon, Chair, CAT NMS Plan Operating Committee, to Brett
Redfearn, Director, Division of Trading and Markets, U.S. Securities
and Exchange Commission, dated March 19, 2020 (``March 19, 2020 No
Action Request'') available at https://www.catnmsplan.com/sites/default/files/2020-03/Plan%20Participant%27s%20Request%20for%20No%20Action%20Relief.pdf;
see also Letter from Christopher Bok, Esq., Director, Financial
Information Forum, to Michael Simon, Chair, CAT NMS Plan Operating
Committee, dated March 16, 2020 available at https://fif.com/comment-letters/category/?download=2129:fif-request-for-immediate-phase-2a-and-phase-2b-relief (requesting an immediate pause of at
least 60 days from near term CAT Phase 2a and Phase 2b milestones in
response to COVID-19, one of the effects of which would be to shift
the Phase 2a and Phase 2b compliance dates to June 22, 2020 and July
20, 2020, respectively).
\106\ See March 19, 2020 No Action Request at 1.
\107\ See id. at 2.
---------------------------------------------------------------------------
The Commission believes that separating the reporting dates for
OATS reporting firms from those that have no OATS reporting obligations
is appropriate because firms that do not currently report to OATS will
face a different range of costs and tasks to implement and maintain CAT
reporting, since these firms are likely to have little to no regulatory
data reporting infrastructure in place.\108\ Unlike these firms, Small
Industry OATS Reporters already have regulatory data reporting
infrastructure in place to support OATS reporting, and because Phase 2a
reporting would include all events and scenarios covered by OATS,\109\
the Commission believes that it should be less costly for Small
Industry OATS Reporters to comply with the Large Industry Member
reporting deadline than it would be for Small Industry Non-OATS
Reporters. In addition, Small Industry OATS Reporters, as Small
Industry Members, have had notice that they were going to be required
to start reporting to the CAT on November 15, 2019 since the CAT NMS
Plan was approved on November 15, 2016.\110\ Therefore, the Phase 2a
start date associated with accelerating the CAT reporting obligations
for Small Industry OATS Reporters so that they report on the same date
as Large Industry Members would still serve to extend their reporting
deadline by seven months beyond the compliance date in the CAT NMS
Plan. Moreover, while this exemption allows the Participants'
Compliance Rules to require the CAT reporting date for Small Industry
OATS Reporters to be the same as that for Large Industry Members in
Phase 2a, the reporting deadline for Small Industry OATS Reporters
would remain the same as for Small Industry Non-OATS Reporters for
Phases 2b, 2c, and 2d--i.e., Small Industry Members would not be
required to report Industry Member Data associated with Phases 2b, 2c,
and 2d until December 13, 2021. Thus, all Small Industry Members could
gain an additional 24 months beyond the compliance date in the CAT NMS
Plan to prepare for CAT Reporting for Phases 2b, 2c, and 2d via the
Phased Reporting schedule.
---------------------------------------------------------------------------
\108\ See CAT NMS Plan Approval Order, supra note 1, at 84860.
\109\ See February 19, 2020 Exemption Request at 3.
\110\ The Effective Date of the CAT NMS Plan was November 15,
2016. See supra note 1. Section 6.4 of the CAT NMS Plan, which
governs data reporting and recording by Industry Members, provides
that the requirements for Industry Members under that section shall
become effective on the third anniversary of the Effective Date in
the case of Small Industry Members. See id. Therefore, November 15,
2019 is three years after the Effective Date of the CAT NMS Plan.
---------------------------------------------------------------------------
The Commission's exemption is limited to Sections 6.4, 6.7(a)(v)
and 6.7(a)(vi) of the CAT NMS Plan related to Industry Member reporting
of Industry Member Data to the Central Repository. The Commission's
exemption does not extend to any other dates or obligations in the CAT
NMS Plan. In addition, even though the Commission is permitting the
start dates for Phase 2a and Phase 2b Industry Member reporting to be
extended compared to what was in the February 19, 2020 Exemption
Request as discussed above,\111\ the exemption is conditioned upon the
Participants complying with all other dates that are a part of Phased
Reporting, as announced in the published timeline that has already been
communicated to broker-dealers, given that Industry Member reporting
was required to begin over a year ago per the CAT NMS Plan.\112\ The
Commission believes it is appropriate to impose such a condition
because the Participants have stated that FINRA CAT has been very clear
that it will be prepared to accept data from any Industry Member that
has completed onboarding and certification testing by April 20, 2020
for Phase 2a reporting, and will similarly be ready by May 18, 2020 for
Phase 2b reporting as described on www.catnmsplan.com.\113\
---------------------------------------------------------------------------
\111\ See supra note 104.
\112\ See CAT NMS Plan website, Timeline, https://catnmsplan.com/timelines/ (last visited March 26, 2020). For
example, for Phases 2a and 2b, Industry Members must comply with the
full functionality associated with Production Environment Go-Live
for intrafirm linkage validations (Release 2--Intrafirm Linkage) on
July 27, 2020, and August 24, 2020, respectively, and Industry
Members must comply with the full functionality associated with
Production Environment Go-Live for firm-to-firm linkage validations
(Release 3--Interfirm Linkage) on October 26, 2020, and January 4,
2021, respectively. See id.
Industry Members were required to start reporting to the CAT on
November 15, 2018, according to Section 6.4 of the CAT NMS Plan,
which governs data reporting and recording by Industry Members. See
supra note 8.
\113\ On March 27, 2020, the Participants submitted a letter to
further the discussion regarding the timeline for Industry Member
reporting. See Letter from Michael Simon, Chair, CAT NMS Plan
Operating Committee, to Brett Redfearn, Director, Division of
Trading and Markets, U.S. Securities and Exchange Commission, dated
March 27, 2020 available at https://www.catnmsplan.com/sites/default/files/2020-03/03.27.20-%20Participant%27s%20Relief%20Request.pdf. The Participants stated
that the reporting dates included in the February 19, 2020 Exemption
Request remain operable from the Participants' and Plan Processor's
perspective and provide a clear path for Industry Members that have
completed certification testing and are prepared to meet those
deadlines. See id. at 1-2. The Participants also stated that the
Participants and FINRA CAT have been communicating to the industry
since last fall that the CAT system will be ready to receive
Industry Member Data on April 20, 2020, and that this date remains
operative from the perspective of both FINRA CAT and the
Participants. See id. at 1.
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Based on the foregoing, the Commission is granting this conditional
exemptive relief from Sections 6.4, 6.7(a)(v) and 6.7(a)(vi) of the CAT
NMS Plan related to Industry Member reporting of Industry Member Data
to the Central Repository to allow for the implementation of Phased
Reporting for Industry Members to the CAT. This order granting
exemptive relief is conditioned upon each Participant implementing the
Phased Reporting
[[Page 23083]]
described above, in a manner consistent with the February 19, 2020
Exemption Request, including each of the representations made in the
February 19, 2020 Exemption Request, as modified by the discussion in
Section IV of this Order. As noted above, the Participants have
represented in their February 19, 2020 Exemption Request that the full
scope of CAT Data required under the CAT NMS Plan will be available
when all five phases of Phased Reporting are complete, subject to any
applicable exemptive relief or amendments to the CAT NMS Plan.\114\
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\114\ See February 19, 2020 Exemption Request at 2.
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Accordingly, it is hereby ordered, pursuant to Section 36 of the
Exchange Act \115\ and Rule 608(e) of Regulation NMS,\116\ that the
Commission grants the Participants' request for exemptive relief, as
set forth in the February 19, 2020 Exemption Request from the
requirements in Sections 6.4, 6.7(a)(v) and 6.7(a)(vi) of the CAT NMS
Plan related to Industry Member reporting of Industry Member Data to
the Central Repository to allow for the implementation of Phased
Reporting, subject to the conditions described above.
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\115\ 15 U.S.C. 78mm(a)(1).
\116\ 17 CFR 242.608(e).
By the Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-08705 Filed 4-23-20; 8:45 am]
BILLING CODE 8011-01-P