[Federal Register Volume 85, Number 117 (Wednesday, June 17, 2020)]
[Notices]
[Pages 36623-36626]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-13000]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89052; File No. 4-698]
Joint Industry Plan; Notice of Filing of Amendment to the
National Market System Plan Governing the Consolidated Audit Trail by
BOX Options Exchange LLC, Cboe BYX Exchange, Inc., Cboe BZX Exchange,
Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., Cboe C2
Options Exchange, Inc., Cboe Exchange, Inc., Financial Industry
Regulatory Authority, Inc., Investors' Exchange LLC, Long-Term Stock
Exchange LLC, Miami International Securities Exchange, LLC, MIAX
EMERALD, LLC, MIAX PEARL, LLC, Nasdaq BX, Inc., Nasdaq GEMX, LLC,
Nasdaq ISE, LLC, Nasdaq MRX, LLC, Nasdaq PHLX LLC, The Nasdaq Stock
Market LLC, New York Stock Exchange LLC, NYSE Arca, Inc., NYSE
American, LLC, NYSE Chicago, Inc. and NYSE National, Inc.
June 11, 2020.
I. Introduction
On April 14, 2020, the Operating Committee for Consolidated Audit
Trail, LLC, on behalf of the following parties to the National Market
System Plan Governing the Consolidated Audit Trail (the ``CAT NMS
Plan'' or ``Plan''): \1\ BOX Options Exchange LLC, Cboe BYX Exchange,
Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX
Exchange, Inc., Cboe C2 Options Exchange, Inc., Cboe Exchange, Inc.,
Financial Industry Regulatory Authority, Inc., Long-Term Stock Exchange
LLC, Investors' Exchange, LLC, Miami International Securities Exchange,
LLC, MIAX EMERALD, LLC, MIAX PEARL, LLC, Nasdaq GEMX, LLC, Nasdaq ISE,
LLC, Nasdaq MRX, LLC, Nasdaq BX, Inc., Nasdaq PHLX LLC, The NASDAQ
Stock Market LLC, New York Stock Exchange LLC, NYSE Arca, Inc., NYSE
Chicago, Inc., NYSE American, LLC and NYSE National, Inc.
(collectively, the ``Participants,'' ``self-regulatory organizations,''
or ``SROs'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') pursuant to Section 11A(a)(3) of the
Securities Exchange Act of 1934 (``Exchange Act''),\2\ and Rule 608
thereunder,\3\ a proposed amendment to the CAT NMS Plan to revise data
reporting requirements for Firm Designated ID.\4\ The Commission is
publishing this notice to solicit comments from interested persons on
the amendment.\5\
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\1\ On February 27, 2015, BOX Options Exchange LLC, Cboe BYX
Exchange, Inc., Cboe BZX Exchange, Inc., Cboe C2 Options Exchange,
Inc., Cboe Exchange Inc., Cboe EDGA Exchange, Inc., Cboe EDGX
Exchange, Inc., Financial Industry Regulatory Authority, Inc., Miami
International Securities Exchange LLC, Nasdaq BX, Inc., Nasdaq ISE
LLC, Nasdaq GEMX, 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. filed with the
Commission, pursuant to Section 11A of the Exchange Act and Rule 608
of Regulation NMS thereunder, the CAT NMS Plan. 15 U.S.C. 78k-1; 17
CFR 242.608. The 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); 79318
(November 15, 2016), 81 FR 84696 (November 23, 2016) (``CAT NMS Plan
Approval Order''). On January 30, 2017, the Commission noticed for
immediate effectiveness an amendment to the Plan to add MIAX PEARL,
LLC as a Participant. See Securities Exchange Act Release No. 79898,
82 FR 9250 (February 3, 2017). On March 1, 2019, the Commission
noticed for immediate effectiveness an amendment to the Plan to add
MIAX Emerald, LLC as a Participant. See Securities Exchange Act
Release No. 85230, 84 FR 8356 (March 7, 2019). On November 2, 2019,
the Commission noticed for immediate effectiveness an amendment to
the Plan to add Long-Term Stock Exchange LLC as a Participant. See
Securities Exchange Act Release No. 87595, 84 FR 65447 (November 27,
2019).
\2\ 15 U.S.C 78k-1(a)(3).
\3\ 17 CFR 242.608.
\4\ See Letter from Michael Simon, CAT NMS Plan Operating
Committee Chair, to Brent J. Fields, Secretary, Commission, dated
April 20, 2020.
\5\ 17 CFR 242.608.
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II. Description of the Plan
Set forth in this Section II is the statement of the purpose and
summary of the amendment, along with information required by Rule
608(a)(4) and (5) under the Exchange Act,\6\ as prepared and submitted
by the Participants to the Commission.\7\ The proposed revisions to the
CAT NMS Plan, as prepared and submitted by the Participants, are
attached as Appendix A.
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\6\ See 17 CFR 242.608(a)(4) and (a)(5).
\7\ See supra note 4.
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A. Description of the Amendments to the CAT NMS Plan
Section 1.1 of the CAT NMS Plan defines the term ``Firm Designated
ID'' to mean ``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.'' As discussed
in more detail below, the Participants propose to amend the
requirements for Firm Designated IDs in four ways: (1) To prohibit the
use of account numbers as Firm Designated IDs for trading accounts that
are not proprietary accounts; (2) to require that the Firm Designated
ID for a trading account be persistent over time for each Industry
Member so that a single account may be tracked across time within a
single Industry Member; (3) to permit the use of relationship
identifiers as Firm Designated IDs in certain circumstances; and (4) to
permit the use of entity identifiers as Firm Designated IDs in certain
circumstances.
1. Prohibit Use of Account Numbers
The Participants believe that the use of account numbers as the
Firm Designated ID could give rise to additional security risks related
to CAT Data. By prohibiting the use of account numbers as Firm
Designated IDs, the Participants intend to limit the potential capture
of sensitive data in the CAT that could be used to effect an
unauthorized transaction in an account.
The Participants propose to prohibit the use of account numbers as
the Firm Designated ID solely for trading accounts that are not
proprietary accounts. After discussions with the industry, the
Participants believe that each Industry Member must make its own risk
determination as to whether it believes it is necessary to mask the
actual account number for any proprietary account of the Industry
Member when reporting the Firm Designated ID to CAT.
Accordingly, the Participants propose to amend the definition of a
``Firm Designated ID'' in Section 1.1 to provide that Industry Members
may not use account numbers as the Firm Designated ID for trading
accounts that are not proprietary accounts. Specifically, the
Participants propose to add the following to the definition of a Firm
Designated ID: ``provided, however, such identifier may not be the
account number for such trading account if the
[[Page 36624]]
trading account is not a proprietary account.'' \8\
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\8\ Appendix C of the CAT NMS Plan noted that broker-dealers
would be permitted to use an account number as the Firm Designated
ID. Section A, Appendix C, CAT NMS Plan at C-8. The Participants do
not propose to amend this statement in Section A of Appendix C of
the CAT NMS Plan as it is a one-time report addressing ``the
requirements set forth in SEC Rule 613(a)(1)(i) through (a)(1)(vi)
that the `Participants specify and explain the choices they made to
meet the requirements specified in [SEC Rule 613] for the [CAT].' ''
Appendix C of the CAT NMS Plan at C-1.
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2. Persistent Firm Designated ID
The CAT NMS Plan currently requires that the Firm Designated ID
assigned by an Industry Member to a trading account be unique for each
account for each business date. The Participants believe, however, that
the Firm Designated ID assigned by an Industry Member to a trading
account should be persistent over time, not for each business day.\9\
With this change, a single account could be tracked across time within
a single Industry Member using the Firm Designated ID. Without such a
change, such tracking would only be possible using Customer
information. Accordingly, the proposed persistence requirement would
enhance the regulatory utility of the order and transaction data
without accessing Customer information.
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\9\ If an Industry Member assigns a new account number or entity
identifier to a client or customer due to a merger, acquisition or
some other corporate action, then the Industry Member should create
a new Firm Designated ID to identify the new account identifier/
relationship identifier/entity identifier in use at the Industry
Member for the entity. In addition, if a previously assigned Firm
Designated ID is no longer in use by an Industry Member (e.g., if
the trading account associated with the Firm Designated ID has been
closed), then an Industry Member may reuse the Firm Designated ID
for another trading account. The Plan Processor will maintain a
history of the use of each Firm Designated ID, including, for
example, the effective dates of the Firm Designated ID with respect
to each associated trading account.
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To effect this change, the Participants propose to amend the
definition of ``Firm Designated ID'' in Section 1.1 of the CAT NMS Plan
to add ``and persistent'' after ``unique'' and delete ``for each
business date'' so that the definition of ``Firm Designated ID'' would
read, in relevant part, as follows:
a unique and persistent 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.
Together with adding a requirement of persistence to the Firm
Designated ID definition, deleting ``for each business date'' would
make clear that the same, unique Firm Designated ID must be used by an
Industry Member for a trading account over time, which will facilitate
the regulatory use of CAT Data by searching with the Firm Designated
ID.
3. Relationship Identifiers
The Participants propose to permit an Industry Member to provide a
relationship identifier as the Firm Designated ID, rather [than] an
identifier that represents a trading account, in certain scenarios in
which an Industry Member does not have an account number available to
its order handling and/or execution system at the time of order receipt
(e.g., certain institutional accounts, managed accounts, accounts for
individuals).\10\ In such scenarios, the trading account structure may
not be available when a new order is first received from a client and,
instead, only an identifier representing the client's trading
relationship is available. In these limited instances, the Industry
Member may provide an identifier used by the Industry Member to
represent the client's trading relationship with the Industry Member
instead of an account number.
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\10\ The Commission has corrected the grammar of this sentence
by adding the word ``than.''
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When a trading relationship is established at a broker-dealer for
clients, the broker-dealer typically creates a parent account, under
which additional subaccounts are created. However, in some cases, the
broker-dealer establishes the parent relationship for a client using a
relationship identifier as opposed to an actual parent account. The
relationship identifier could be any of a variety of identifiers, such
as a short name for a relevant individual or institution. This
relationship identifier is established prior to any trading for the
client. If a relationship identifier has been established rather than a
parent account, and an order is placed on behalf of the client, any
executed trades will be kept in a firm account (e.g., a facilitation or
average price account) until they are allocated to the proper
subaccount(s), i.e., the accounts associated with the parent
relationship identifier connecting them to the client.
Relationship identifiers are used in circumstances in which the
account structure is not available to the trading system at the time of
order placement. The clients have established accounts prior to the
trade that satisfy relevant regulatory obligations for opening
accounts, such as Know Your Customer and other customer obligations.
However, the order receipt workflows operate using relationship
identifiers, not accounts.
For Firm Designated ID purposes, as with an identifier for a
trading account, the relationship identifier must be persistent over
time. The relationship identifier also must be unique among all
identifiers from any given Industry Member. With these requirements, a
single relationship could be tracked across time within a single
Industry Member using the Firm Designated ID. In addition, the
relationship identifier must be masked as the relationship identifier
could be a name or otherwise provide an indication as to the identity
of the relationship. The masking requirement would avoid potentially
revealing the identity of the relationship.
An example of the use of a relationship identifier as a Firm
Designated ID would be as follows: Suppose that Big Fund Manager is
known in Industry Member A's systems as ``BFM1.'' When an order is
placed by Big Fund Manager, the order is tagged to BFM1. Industry
Member A could use a masked version of BFM1 in place of the Firm
Designated ID representing a trading account when reporting a new order
from Big Fund Manager instead of the account numbers to which executed
shares/contracts will be allocated at a later time via a booking or
other system. Similarly, another example of the use of a relationship
identifier as a Firm Designated ID would involve an individual in place
of the Big Fund Manager in the above example.
To permit the use of relationship identifiers as a Firm Designated
ID as described above, the Participants propose to amend the definition
of a ``Firm Designated ID'' in Section 1.1 to state that a Firm
Designated ID means, in part, ``a unique and persistent relationship
identifier when an Industry Member does not have an account number
available to its order handling and/or execution system at the time of
order receipt, provided, however, such identifier must be masked.''
4. Entity Identifiers
The Participants propose to permit Industry Members to provide an
entity identifier, rather than an identifier that represents a trading
account, when an employee of the Industry Member is exercising
discretion over multiple client accounts and creates an aggregated
order for which a trading account number of the Industry Member is not
available at the time of order origination. An entity identifier is an
identifier of the Industry Member that represents the firm
discretionary relationship with the client rather than a firm trading
account.
[[Page 36625]]
The scenarios in which a firm uses an entity identifier are
comparable to when a firm uses a relationship identifier (as described
above) except the entity identifier represents the Industry Member
rather than a client. As with relationship identifiers, entity
identifiers are used in circumstances in which the account structure is
not available to the trading system at the time of order placement. In
this workflow, the Industry Member's order handling and execution
system does not have an account number at the time of order
origination. The relevant clients that will receive an allocation of
the execution have established accounts prior to the trade that satisfy
relevant regulatory obligations for opening accounts, such as Know Your
Customer and other customer obligations. However, the order origination
workflows operate using entity identifiers, not accounts.
For Firm Designated ID purposes, as with the identifier for a
trading account or a relationship, the entity identifier must be
persistent over time. The entity identifier also must be unique among
all identifiers from any given Industry Member. The Participants
believe that each Industry Member must make its own risk determination
as to whether it believes it is necessary to mask the entity identifier
when using an entity identifier to report the Firm Designated ID to
CAT.
An example of the use of an entity identifier as a Firm Designated
ID would be when Industry Member 1 has an employee that is a registered
representative that has discretion over several client accounts held at
Industry Member 1. The registered representative places an order that
he will later allocate to individual client accounts. At the time the
order is placed, the trading system only knows it involves a
representative of Industry Member 1 and it does not have a specific
trading account that could be used for Firm Designated ID reporting.
Therefore, Industry Member 1 could report IM1, its entity identifier,
as the FDID with the new order.
To permit the use of an entity identifier as a Firm Designated ID
as described above, the Participants propose to amend the definition of
a ``Firm Designated ID'' in Section 1.1 to state that a Firm Designated
ID means, in part, ``a unique and persistent entity identifier when an
employee of an Industry Member is exercising discretion over multiple
client accounts and creates an aggregated order for which a trading
account number of the Industry Member is not available at the time of
order origination.''
B. Governing or Constituent Documents
Not applicable.
C. Implementation of Amendment
The Participants propose to implement the Firm Designated ID with
the commencement of Industry Member CAT reporting.
D. Development and Implementation Phases
The Participants propose to implement the Firm Designated ID with
the commencement of Industry Member CAT reporting.
E. Analysis of Impact on Competition
The Participants believe the proposed amendments will have a
positive impact on competition, efficiency and capital formation. The
Participants believe that the use of account numbers as the Firm
Designated ID could give rise to additional security risks related to
CAT Data. By proposing to revise the CAT NMS Plan to prohibit the use
of account numbers as Firm Designated IDs, the Participants intend to
limit the potential capture of sensitive data in the CAT that could be
used to effect an unauthorized transaction in an account. By enhancing
the security of the CAT, this proposed change to the CAT NMS Plan would
further the goals of efficiency and capital formation.
In addition, the Participants believe that the proposed persistence
requirement would enhance the regulatory utility of the order and
transaction data without accessing Customer information. With this
change, a single account could be tracked across time within a single
Industry Member using the Firm Designated ID. Without such a change,
such tracking would only be possible using Customer information. By
enhancing the regulatory utility of the CAT while reducing the need to
access Customer information, the proposed amendment would enhance the
efficiency and capital formation of our markets.
Furthermore, the proposed amendments to permit the use of
relationship identifiers and entity identifiers as Firm Designated IDs
will enhance the efficiency of CAT reporting. These changes will permit
Industry Members to continue to maintain existing order workflows,
rather than employing resources to alter those workflows solely for CAT
reporting purposes.
Finally, the Participants do not believe that the proposed
amendments would impact competition among Industry Members. The
proposed amendments would revise the data reporting requirements for
Firm Designated IDs, and, as such, are applicable to all Industry
Members. In addition, given that the proposed amendments rely on
existing workflows, the proposed amendments would not cause certain
Industry Members to incur additional expenses to alter their existing
workflows.
F. Written Understanding or Agreements Relating to Interpretation of,
or Participation in, Plan
Not applicable.
G. Approval by Plan Sponsors in Accordance with Plan
Section 12.3 of the CAT NMS Plan states that, subject to certain
exceptions, the Plan may be amended from time to time only by a written
amendment, authorized by the affirmative vote of not less than two-
thirds of all of the Participants, that has been approved by the SEC
pursuant to Rule 608 or has otherwise become effective under Rule 608.
The Participants, by a vote of the Operating Committee taken on April
14, 2020, have authorized the filing of this proposed amendment with
the SEC in accordance with the Plan.
H. Description of Operation of Facility Contemplated by the Proposed
Amendment
Not applicable.
I. Terms and Conditions of Access
Not applicable.
J. Method and Frequency of Processor Evaluation
Not applicable.
K. Dispute Resolution
Not applicable.
III. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the amendment is
necessary or appropriate in the public interest, for the protection of
investors and the maintenance of fair and orderly markets, to remove
impediments to, and perfect the mechanisms of, a national market
system, or otherwise in furtherance of the purposes of the Act. In
particular, the Commission seeks comment on the following:
(1) Do commenters agree that using account numbers as a Firm
Designated ID could give rise to additional security risks for CAT
Data?
(2) Should each Industry Member make its own determination as to
whether it is necessary to mask the actual account number for any
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proprietary account of the Industry Member when reporting the Firm
Designated ID?
(3) Should each Industry Member make its own determination as to
whether it is it necessary to mask the entity identifier when using an
entity identifier to report a Firm Designated ID?
(4) Would requiring the Firm Designated ID assigned by a broker-
dealer to be persistent and unique for each account for each business
date be sufficient to allow a single account to be tracked across time
within a single Industry Member's records?
(5) Does the proposed amendment clearly define when and under what
circumstances relationship identifiers could be used by Industry
Members in lieu of standard Firm Designated IDs? Should the amended
definition of Firm Designated ID, or the Participants' Compliance
Rules,\11\ specify when or how relationship identifiers can be used?
Does the proposed definition of Firm Designated ID make clear what it
means for relationship identifiers to be ``masked''?
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\11\ 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. See CAT NMS Plan, supra
note 1, at Section 1.1. Section 3.11 states that ``[e]ach
Participant shall comply with and enforce compliance, as required by
SEC Rule 608(c), by its Industry Members with the provisions of SEC
Rule 613 and of this Agreement, as applicable, to the Participant
and its Industry Members. The Participants shall endeavor to
promulgate consistent rules (after taking into account circumstances
and considerations that may impact Participants differently)
requiring compliance by their respective Industry Members with the
provisions of SEC Rule 613 and this Agreement.'' See id. at Section
3.11.
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(6) Does the proposed amendment clearly define when entity
identifiers could be used by Industry Members in lieu of standard Firm
Designated IDs? Should the amended definition of Firm Designated ID, or
the Participants' Compliance Rules, specify when entity identifiers can
be used?
(7) Would the proposed amendment providing for usage of
relationship identifiers and entity identifiers have any negative
impact on customer obligations that broker-dealers have with regard to
client accounts, such as know-your-customer obligations?
(8) Would the proposed amendment cause Industry Members to incur
additional expenses to alter their existing workflows? If so, what is
the scope of these additional expenses?
(9) Would the proposed amendment impact efficiency, competition or
capital formation?
(10) Would the proposed amendment impact competition? If so, what
type of competitors would be affected and in what market? Would this
change in competition affect the services and/or prices customers
experience in this market?
(11) Would any efficiency gains of the proposed amendment impact
capital formation? If so, how? Would there be other impacts on capital
formation?
(12) Do commenters agree with the Participants that by enhancing
the regulatory utility of the CAT while reducing the need to access
Customer information, the proposed amendment would enhance the
efficiency and capital formation of our markets? How so?
(13) Will the proposed amendment enhance the efficiency of CAT
reporting by permitting the usage of relationship identifiers and
entity identifiers as Firm Designated IDs? Will the proposed amendment
permit Industry Members to maintain existing order workflows, rather
than employing resources to alter those workflows solely for CAT
reporting purposes?
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number 4-698 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number 4-698. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed plan amendment that are filed
with the Commission, and all written communications relating to the
amendment between the Commission and any person, other than those that
may be withheld from the public in accordance with the provisions of 5
U.S.C. 552, will be available for website viewing and printing in the
Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing also will be available for inspection
and copying at the Participants' offices. All comments received will be
posted without change. Persons submitting comments are cautioned that
we do not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number 4-698
and should be submitted on or before July 8, 2020.
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
Appendix A
[additions italicized; deletions bracketed]
LIMITED LIABILITY COMPANY AGREEMENT OF CONSOLIDATED AUDIT TRAIL, LLC
* * * * *
ARTICLE I
Section 1.1. Definitions. As used throughout this Agreement
(including, for the avoidance of doubt, the Exhibits, Appendices,
Attachments, Recitals and Schedules identified in this Agreement):
* * * * *
``Firm Designated ID'' means (1) a unique and persistent
identifier for each trading account designated by Industry Members
for purposes of providing data to the Central Repository provided,
however, such identifier may not be the account number for such
trading account if the trading account is not a proprietary account;
(2) a unique and persistent relationship identifier when an Industry
Member does not have an account number available to its order
handling and/or execution system at the time of order receipt,
provided, however, such identifier must be masked; or (3) a unique
and persistent entity identifier when an employee of an Industry
Member is exercising discretion over multiple client accounts and
creates an aggregated order for which a trading account number of
the Industry Member is not available at the time of order
origination, where each such identifier is unique among all
identifiers from any given Industry Member [for each business date].
* * * * *
[FR Doc. 2020-13000 Filed 6-16-20; 8:45 am]
BILLING CODE 8011-01-P