[Federal Register Volume 85, Number 100 (Friday, May 22, 2020)]
[Notices]
[Pages 31322-31349]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-10963]
[[Page 31321]]
Vol. 85
Friday,
No. 100
May 22, 2020
Part III
Securities and Exchange Commission
-----------------------------------------------------------------------
Amendments to the National Market System Plan Governing the
Consolidated Audit Trail; Notice
Federal Register / Vol. 85, No. 100 / Friday, May 22, 2020 /
Notices
[[Page 31322]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88890; File No. S7-13-19]
RIN 3235-AM60
Amendments to the National Market System Plan Governing the
Consolidated Audit Trail
AGENCY: Securities and Exchange Commission.
ACTION: Amendments to national market system plan.
-----------------------------------------------------------------------
SUMMARY: The Securities and Exchange Commission is adopting amendments
to the national market system plan governing the consolidated audit
trail. The amendments impose public transparency requirements on the
self-regulatory organizations that are participants in the plan. Under
the amendments, plan participants are required to publish and file with
the Securities and Exchange Commission a complete implementation plan
for the consolidated audit trail and quarterly progress reports. The
amendments also establish financial accountability provisions.
DATES: June 22, 2020.
FOR FURTHER INFORMATION CONTACT: Erika Berg, Special Counsel, at (202)
551-5925, Division of Trading and Markets, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to the
national market system plan governing the consolidated audit trail.
Table of Contents
I. Background
II. Discussion of the Amendments to the CAT NMS Plan
A. Amendments To Increase Operational Transparency
1. Implementation Plan
2. Quarterly Progress Reports
3. Additional Reports
B. Amendments To Increase Financial Accountability
1. Description of the Proposed Amendments
2. Modifications to the Proposed Amendments
3. Discussion of the Comments
III. Paperwork Reduction Act
A. Summary of Collection of Information
1. Implementation Plan
2. Quarterly Progress Reports
B. Proposed Use of Information
1. Implementation Plan
2. Quarterly Progress Reports
C. Respondents
D. Total Initial and Annual Reporting and Recordkeeping Burdens
1. Implementation Plan
2. Quarterly Progress Reports
E. Collection of Information Is Mandatory
F. Confidentiality of Responses to Collection of Information
G. Retention Period for Recordkeeping Requirements
IV. Economic Analysis
A. Baseline
1. Transparency of CAT Implementation Status
2. Status of Implementation
B. Benefits
C. Costs
D. Impact on Efficiency, Competition, and Capital Formation
1. Efficiency
2. Competition
3. Capital Formation
E. Alternatives
1. Fixed versus Relative Financial Accountability Milestone
Dates
2. Different Timelines for Onset of RFRRs
3. Alternate Magnitudes of RFRRs
4. Requiring Error Rates for Manual and Complex Options
Transactions, as Well as Allocation Information for all Options
Transactions To Conform to Standards Set in the CAT NMS Plan on
December 31, 2021
V. Regulatory Flexibility Act Certification
VI. Other Matters
VII. Statutory Authority and Text of the Amendments to the CAT NMS
Plan
I. Background
On September 9, 2019, the Securities and Exchange Commission
(``Commission'' or ``SEC'') proposed to amend the national market
system plan governing the consolidated audit trail (the ``CAT NMS
Plan'') \1\ to include provisions designed to increase operational
transparency surrounding the implementation process and the
Participants' financial accountability for the timely completion of the
consolidated audit trail (the ``CAT'').\2\ Specifically, the Commission
proposed to amend the CAT NMS Plan to require the Participants to
develop a complete implementation plan containing a detailed timeline
with objective milestones to achieve full CAT implementation (the
``Implementation Plan''). The proposed amendments would require the
Implementation Plan to be filed with the Commission and made publicly
available after approval by a Supermajority Vote \3\ of the Operating
Committee.\4\ Prior to the Operating Committee's vote, the proposal
would require the Operating Committee to submit the Implementation Plan
to the Chief Executive Officer (``CEO''), President, or an equivalently
situated senior officer of each Participant. The proposed amendments
would also require the Participants to file with the Commission
[[Page 31323]]
and publicly publish quarterly progress reports (``Quarterly Progress
Reports'' or ``Reports'') approved by at least a Supermajority Vote of
the Operating Committee. Again, prior to the Operating Committee's
vote, the proposal would require the Operating Committee to submit each
Report to the CEO, President, or an equivalently situated senior
officer of each Participant. Finally, the proposed amendments would
establish target deadlines for four important implementation milestones
and reduce the amount of fee recovery available to the Participants if
those target deadlines are missed.\5\
---------------------------------------------------------------------------
\1\ As required by Rule 613, the CAT NMS Plan was filed with the
Commission by the national securities exchanges and national
securities associations (the ``Participants''), who include BATS
Exchange, Inc. (n/k/a Cboe BZX Exchange, Inc.), BATS-Y Exchange,
Inc. (n/k/a Cboe BYX Exchange, Inc.), BOX Exchange LLC, C2 Options
Exchange, Incorporated (n/k/a Cboe C2 Exchange, Inc.), Chicago Board
Options Exchange, Incorporated (n/k/a Cboe Exchange, Inc.), Chicago
Stock Exchange, Inc. (n/k/a NYSE Chicago, Inc.), EDGA Exchange, Inc.
(n/k/a Cboe EDGA Exchange, Inc.), EDGX Exchange, Inc. (n/k/a Cboe
EDGX Exchange, Inc.), Financial Industry Regulatory Authority, Inc.
(``FINRA''), International Securities Exchange, LLC (n/k/a Nasdaq
ISE, LLC), ISE Gemini, LLC (n/k/a Nasdaq GEMX, LLC), Miami
International Securities Exchange LLC, NASDAQ OMX BX, Inc. (n/k/a
Nasdaq BX, Inc.), NASDAQ OMX PHLX LLC (n/k/a Nasdaq PHLX LLC), The
Nasdaq Stock Market LLC, National Stock Exchange, Inc. (n/k/a NYSE
National, Inc.), New York Stock Exchange LLC, NYSE MKT LLC, and NYSE
Arca, Inc. See 17 CFR 242.613; Securities Exchange Act Release No.
78318 (November 15, 2016), 81 FR 84696, (November 23, 2016) (``CAT
NMS Plan Approval Order''). The CAT NMS Plan is Exhibit A to the CAT
NMS Plan Approval Order. See CAT NMS Plan Approval Order, at 84943-
85034. In approving the CAT NMS Plan, the Commission added ISE
Mercury, LLC (n/k/a Nasdaq MRX, LLC) and Investors' Exchange LLC as
Participants to the CAT NMS Plan. See id. at 84728. On January 30,
2017, and March 1, 2019, the Commission noticed for immediate
effectiveness amendments to the CAT NMS Plan to add MIAX PEARL, LLC
and MIAX Emerald, LLC, respectively, as Participants. See Securities
Exchange Act Release Nos. 79898 (January 30, 2017), 82 FR 9250
(February 3, 2017), and 85230 (March 1, 2019), 84 FR 8356 (March 7,
2019). The CAT NMS Plan functions as the limited liability company
agreement of the jointly owned limited liability company formed
under Delaware state law through which the Participants conduct the
activities of the CAT (the ``Company''). Each Participant is a
member of the Company and jointly owns the Company on an equal
basis. The Participants submitted to the Commission a proposed
amendment to the CAT NMS Plan on August 29, 2019, which they
designated as effective on filing. Under the amendment, the limited
liability company agreement of a new limited liability company named
Consolidated Audit Trail, LLC serves as the CAT NMS Plan, replacing
in its entirety the CAT NMS Plan. See Securities Exchange Act
Release No. 87149 (September 27, 2019), 84 FR 52905 (October 3,
2019). On November 27, 2019, the Commission noticed for immediate
effectiveness amendments to the CAT NMS Plan to add Long-Term Stock
Exchange, Inc. as a Participant. See Securities Exchange Act Release
No. 87595 (November 22, 2019), 84 FR 65447 (November 27, 2019).
\2\ See Securities Exchange Act Release No. 86901 (September 9,
2019), 84 FR 48458 (September 13, 2019) (``Proposing Release'').
\3\ A ``Supermajority Vote'' is an ``affirmative vote of at
least two-thirds of all of the members of the Operating Committee or
any Subcommittee, as applicable, authorized to cast a vote with
respect to a matter presented for a vote (whether or not such a
member is present at any meeting at which a vote is taken) by the
Operating Committee or any Subcommittee, as applicable (excluding,
for the avoidance of doubt, any member of the Operating Committee or
any Subcommittee, as applicable, that is recused or subject to a
vote to recuse from such matter pursuant to Section 4.3(d));
provided that if two-thirds of all such members authorized to cast a
vote is not a whole number than that number shall be rounded up to
the nearest whole number.'' See CAT NMS Plan, supra note 1, at
Section 1.1.
\4\ ``Operating Committee'' means ``the governing body of the
Company designated as such and described in Article IV'' of the CAT
NMS Plan. See id. at Section 1.1.
\5\ See Proposing Release, supra note 2, at 48461-74, for a more
complete description of the proposed amendments.
---------------------------------------------------------------------------
In proposing the amendments to the CAT NMS Plan, the Commission
stated that the Participants had neither met the deadlines set forth in
the CAT NMS Plan nor their own proposed extensions of those
deadlines.\6\ The Commission also stated that the Participants had
published a timeline with extended deadlines on the www.catnmsplan.com
website.\7\ Recently, the Commission granted the Participants exemptive
relief to allow for the implementation of phased reporting to the CAT
for Industry Members,\8\ in place of the reporting schedule set forth
for Industry Members in the CAT NMS Plan.\9\ This exemptive relief is
largely consistent with the timeline previously published by the
Participants on the CAT NMS Plan website, with two modifications to
deadlines for equities and options reporting. The Participants
proposed, in their timeline and in their request for exemptive relief,
that core equity reporting for Industry Members would begin on April
20, 2020 and that core options reporting for Industry Members would
begin on May 18, 2020.\10\ In light of impacts on market participants
from COVID-19 and a subsequent no-action request submitted by the
Participants,\11\ the Commission provided exemptive relief authorizing
the Participants' Compliance Rules \12\ to allow core equity reporting
for Industry Members to begin on June 22, 2020 and core options
reporting for Industry Members to begin on July 20, 2020.\13\ While the
Commission believes that the Participants' timeline for Industry Member
reporting now reflects reasonable and feasible deadlines, the continued
potential for delays to the implementation of the CAT persists. The CAT
is a long-awaited tool that the Commission believes will provide
regulators with more timely access to a reasonably comprehensive set of
trading data, thereby enabling regulators to more efficiently and
effectively reconstruct market events, monitor market behavior, and
investigate misconduct. Trade and order data sources currently utilized
by regulators are inadequate to perform these tasks, in part because it
is difficult to compile and use data that is not aggregated in one,
directly accessible consolidated audit trail system. Moreover, repeated
delays in CAT implementation have resulted in uncertainty and--
potentially--increased costs for Industry Members and other market
participants.
---------------------------------------------------------------------------
\6\ The CAT NMS Plan established deadlines related to the
implementation of critical CAT functionality, including (1) the
requirement that the Participants begin recording and reporting data
by November 15, 2017, and (2) the requirement that each Participant
require Industry Members and Small Industry Members to begin
reporting data by November 15, 2018, and November 15, 2019,
respectively. See CAT NMS Plan, supra note 1, at Section 6.7(a). The
Participants requested an exemption extending these deadlines. The
Commission did not grant this request. See, e.g., Statement on
Status of the Consolidated Audit Trail (August 27, 2018), available
at https://www.sec.gov/news/public-statement/tm-status-consolidated-audit-trail (stating that the Participants requested an exemption to
commence Participant reporting on November 15, 2018, and Industry
Member reporting on November 15, 2019). Although the Participants
began reporting some transaction data to the Central Repository on
November 15, 2018, the Participants acknowledged that not all of the
required functionality had been implemented. See CAT NMS Announces
Initiation of Reporting to the Consolidated Audit Trail (November
16, 2018), available at https://www.catnmsplan.com/wp-content/uploads/2018/11/Press-Release-CAT-Launch-final.pdf. See Proposing
Release, supra note 2, at 48458-461 for additional discussion of the
various deadlines missed by the Participants.
\7\ See https://catnmsplan.com/timelines/ (stating that the
Participants' timeline provides for commencement of reporting by
Large Industry Members and Small Industry Members that are reporters
to the Order Audit Trail System (``OATS'') on April 20, 2020) (as
viewed on March 12, 2020).
\8\ See Securities Exchange Act Release No. 88702 (April 20,
2020), 85 FR 23075 (April 24, 2020) (``Exemptive Relief Order'').
\9\ See CAT NMS Plan, supra note 1, at 6.7(a).
\10\ See note 8 supra.
\11\ See id. at 23082 n.105.
\12\ The CAT NMS Plan requires the Participants to ``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 [the CAT NMS Plan].'' See CAT NMS
Plan, supra note 1, at Section 3.11. ``Compliance Rule'' is a
defined term under the CAT NMS Plan and means ``the rule(s)
promulgated by such Participant as contemplated by Section 3.11.''
See id. at Section 1.1.
\13\ See id. at 23082. The Participants stated that they plan to
file revisions to their Compliance Rules consistent with their
exemptive relief request. See id. at 23076 n.13.
---------------------------------------------------------------------------
II. Discussion of the Amendments to the CAT NMS Plan
After careful review and consideration of the comments
received,\14\ the Commission continues to believe that the proposed
amendments to the CAT NMS Plan, with some limited modifications, are
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. The proposed amendments also will help to ensure that the
Participants fulfill their obligations to deliver a functional CAT on a
reasonably achievable timeframe. The Commission is therefore adopting
the proposed amendments with the modifications specified herein.
---------------------------------------------------------------------------
\14\ See https://www.sec.gov/comments/s7-13-19/s71319.htm. Some
of these letters included comments beyond the scope of the proposed
amendments, suggesting changes to the CAT's governance, to the CAT's
technical requirements, or to the CAT's collection of sensitive
personal information (``PII''). See Letter from Thomas Tesauro,
President, Fidelity Capital Markets, to Vanessa Countryman,
Secretary, Commission, dated October 28, 2019 (``Fidelity Letter''),
at 5, available at https://www.sec.gov/comments/s7-13-19/s71319-6357608-196387.pdf; Letter from Dennis M. Kelleher, President & CEO,
and Lev Bagramian, Senior Securities Policy Advisor, Better Markets,
Inc., to Vanessa Countryman, Secretary, Commission, dated October
28, 2019 (``Better Markets Letter''), at 3, 6, 9-12, available at
https://www.sec.gov/comments/s7-13-19/s71319-6355349-196250.pdf;
Letter from Christopher A. Iacovella, Chief Executive Officer,
American Securities Association, to Vanessa Countryman, Secretary,
Commission, dated October 28, 2019 (``ASA Letter''), at 2, available
at https://www.sec.gov/comments/s7-13-19/s71319-6381876-197754.pdf.
Because these subjects are not directly related to the proposed
amendments, they are not addressed in this rulemaking.
---------------------------------------------------------------------------
A. Amendments To Increase Operational Transparency
Currently, the CAT NMS Plan does not contain disclosure provisions
that require the Participants to provide public updates regarding the
CAT implementation process. The proposed amendments were designed to
increase operational transparency by requiring the Participants to file
with the Commission and make publicly available an Implementation Plan
and Quarterly Progress Reports that would provide the Commission and
other market participants with detailed and up-to-date information
about the status of CAT implementation. Commenters were broadly
supportive of these provisions, but some commenters requested that the
Commission modify certain aspects of the proposed amendments. After
considering these comments, and as described more fully below, the
Commission is adopting the operational transparency amendments
[[Page 31324]]
as proposed, with certain modifications.\15\
---------------------------------------------------------------------------
\15\ See Part II.A.1.-2. infra, for a discussion of the
modifications to the proposed amendments.
---------------------------------------------------------------------------
1. Implementation Plan
As proposed, Section 6.6(c)(i) of the CAT NMS Plan would require
the Participants to file with the Commission and make publicly
available on each of the Participant websites (or collectively on the
CAT NMS Plan website) a complete Implementation Plan.\16\ The proposed
Implementation Plan would set forth how and when the Participants will
achieve full CAT implementation, including the Participants' timeline
for achieving both the objective milestones that are set forth in
Section C.10 of Appendix C of the CAT NMS Plan to assess the progress
of CAT implementation \17\ (``Objective Milestones'') and the CAT
implementation milestones associated with the proposed financial
accountability provisions discussed below (``Financial Accountability
Milestones'') \18\ (collectively, the ``Implementation
Milestones'').\19\ Proposed Section 6.6(c)(i) would require the
Implementation Plan to be filed with the Commission and published on
each Participant website or the CAT NMS Plan website no later than
thirty calendar days following the effective date of the proposed
amendments.\20\
---------------------------------------------------------------------------
\16\ See proposed Section 6.6(c)(i).
\17\ See CAT NMS Plan, supra note 1, at Appendix C, Section
C.10.
\18\ The Financial Accountability Milestones, and their relation
to the financial accountability provisions, are described in more
detail in Part II.B. infra.
\19\ The timeline required by proposed Section 6.6(c)(i) would
include the completion date and a description of the status for each
Implementation Milestone. If the Participants decide to complete any
of the Implementation Milestones by releasing functionality in a
phased approach, proposed Section 6.6(c)(i) would further require
the Implementation Plan to describe with specificity each phased
release necessary to achieve the completion of the relevant
Implementation Milestone and to provide completion dates for each
such release. See Proposing Release, supra note 2, at 48461-62, for
additional discussion of the proposed Implementation Plan.
\20\ See proposed Section 6.6(c)(i).
---------------------------------------------------------------------------
Before the Implementation Plan can be filed with the Commission or
made publicly available via a website, proposed Section 6.6(c)(iii)
would require that the Implementation Plan be approved by at least a
Supermajority Vote of the Operating Committee. However, if the
Implementation Plan is approved only by a Supermajority Vote of the
Operating Committee, and not by a unanimous vote of the Operating
Committee (including, for the avoidance of doubt, all members of the
Operating Committee, whether or not present or recused), the proposed
amendments would require each Participant whose Operating Committee
member did not vote to approve the Implementation Plan to separately
file with the Commission and make publicly available on each of the
Participant websites, or collectively on the CAT NMS Plan website, a
statement identifying itself and explaining why the member did not vote
to approve the Implementation Plan.\21\ In addition, the proposed
amendments would require the Operating Committee to submit the
Implementation Plan to the CEO, President, or an equivalently situated
senior officer of each Participant prior to the Operating Committee's
vote.\22\ The Commission anticipates that the Participants will provide
the Implementation Plan to the CEO, President, or an equivalently
situated senior officer of each Participant sufficiently in advance of
the Operating Committee vote to permit review.\23\
---------------------------------------------------------------------------
\21\ See proposed Section 6.6(c)(iii). The proposed amendments
do not require this statement to include any confidential or
sensitive information related to the security of the CAT, the
security of CAT Data, or the operation of the CAT. The Participants
must comply with the security plan developed by the Plan Processor
pursuant to Appendix D, Section 4.1 of the CAT NMS Plan and any
security-related policies and procedures developed pursuant to
Regulation SCI. See CAT NMS Plan, supra note 1, at Appendix D,
Section 4.1 (requiring the Plan Processor to provide to the
Operating Committee a comprehensive security plan, including a
process for responding to security incidents and reporting of such
incidents); 17 CFR 242.1001 (requiring each SCI entity to establish,
maintain, and enforce written policies and procedures reasonably
designed to ensure that its SCI systems have levels of security
adequate to maintain operational capabilities and promote the
maintenance of fair and orderly markets).
\22\ See id.; see also Proposing Release, supra note 2, at
48464, for additional discussion of these requirements. No
commenters objected to these requirements, and one commenter stated
that there was no need to ``go further to require such CEOs,
Presidents and equivalent officers to certify'' the Implementation
Plan, ``an issue raised for comment in the Proposing Release.'' See
Letter from Michael Simon, CAT NMS Plan Operating Committee Chair,
to Vanessa Countryman, Secretary, Commission, dated October 28, 2019
(``Participant Letter''), at 7, available at https://www.sec.gov/comments/s7-13-19/s71319-6357609-196389.pdf; see also Proposing
Release, supra note 2, at 48465. The Commission is not adopting a
certification requirement for the Implementation Plan.
\23\ See, e.g., Proposing Release, supra note 2, at 48476 n.143.
---------------------------------------------------------------------------
The Commission believes that requiring public disclosure regarding
the progress of CAT implementation through the Implementation Plan will
help to ensure that the CAT is developed on a reasonable timeline.
Several commenters expressed general support for the increased
operational transparency that would be provided by the Implementation
Plan. One commenter, for example, stated that ``the proposed
Implementation Plan is appropriate to facilitate public transparency of
the development and implementation milestones required to be achieved
by the Participants and industry members tasked with CAT
implementation'' and asserted that ``the filing of an Implementation
Plan with the Commission may inject additional accountability and
transparency into the Participants['] CAT milestone delivery targets.''
\24\ Another commenter ``agree[d] with the Commission that requiring
the CAT NMS to create and publicize a detailed timeline with concrete
deadlines (as set in the Proposal) would prod the [CAT NMS, LLC]
consortium and the new Plan Processor, FINRA CAT, to progress towards
implementation.'' \25\
---------------------------------------------------------------------------
\24\ See Letter from Christopher Bok, Director, Financial
Information Forum, to Vanessa Countryman, Secretary, Commission,
dated October 28, 2019 (``FIF Letter''), at 4-5 available at https://www.sec.gov/comments/s7-13-19/s71319-6355358-196251.pdf. See also,
e.g., Letter from Theodore R. Lazo, Managing Director & Associate
General Counsel, and Ellen Greene, Managing Director, Financial
Services Operations, Securities Industry and Financial Markets
Association, to Vanessa Countryman, Secretary, Commission, dated
October 28, 2019 (``SIFMA Letter''), at 1, available at https://www.sec.gov/comments/s7-13-19/s71319-6366765-195937.pdf (supporting
the ``Commission'[s] actions to . . . increase transparency around
[the] CAT implementation process''); Fidelity Letter, at 3
(supporting ``the Proposal's operational transparency requirements
to formalize and publicly document CAT implementation progress'').
\25\ See Better Markets Letter, at 6. ``Plan Processor'' means
``the Initial Plan Processor or any other Person selected by the
Operating Committee pursuant to SEC Rule 613 and Sections 4.3(b)(i)
and 6.1, and with regard to the Initial Plan Processor, the
Selection Plan, to perform the CAT processing functions required by
SEC Rule 613 and set forth in this Agreement.'' See CAT NMS Plan,
supra note 1, at Section 1.1. As explained in the Proposing Release,
Thesys Technologies LLC (or ``Thesys CAT LLC'') was initially
selected as the Plan Processor, but was replaced by FINRA (``FINRA
CAT LLC'') on February 26, 2019. See Proposing Release, supra note
2, at 48459-460.
---------------------------------------------------------------------------
Some commenters had more specific comments regarding the proposed
provisions relating to the Implementation Plan. For instance, regarding
the deadline for submitting the Implementation Plan, the Participants
stated that they had already ``developed a timeline for the completion
of the CAT, and therefore believe[d] that 30 days is sufficient to file
with the Commission and publish the Implementation Plan.'' \26\ No
other commenters addressed this issue. Consistent with the Proposing
Release and the views expressed by the Participants, the Commission
continues to believe that thirty calendar days is a sufficient amount
of time for the
[[Page 31325]]
Participants to develop, file, and publish the Implementation Plan.
---------------------------------------------------------------------------
\26\ See Participant Letter, at 6.
---------------------------------------------------------------------------
Regarding the Objective Milestones, the Participants
``confirm[ed]'' that the Objective Milestones ``effectively formalize
the status updates and other informal reports that are in the Updated
Master Plan'' submitted to the Commission on May 16, 2019.\27\ The
Participants further stated that ``basing the objective milestones on
the Updated Master Plan is more appropriate than basing them on
arbitrary milestones or milestones that have not been vetted by the
Participants.'' \28\ However, the Objective Milestones are not based on
the Updated Master Plan. Rather, the Objective Milestones are set forth
in the CAT NMS Plan and provide details and required completion dates
for a series of objective CAT implementation milestones, including
implementation milestones relating to technical specifications,
testing, and production.\29\
---------------------------------------------------------------------------
\27\ See Participant Letter, at 5.
\28\ See id.
\29\ See CAT NMS Plan, supra note 1, at Appendix C, Section
C.10.
---------------------------------------------------------------------------
Another commenter suggested that the Commission should require the
Implementation Plan to be ``prominently publicized on the CAT NMS's
website.'' \30\ The Commission agrees that the CAT NMS Plan website
would be a logical place to publish the Implementation Plan, and this
is a permissible approach under proposed Section 6.6(c)(i).\31\
However, the information contained in the Implementation Plan will be
just as accessible to the public if published on each Participants'
website--another approach permitted by proposed Section 6.6(c)(i) as
long as the required information is published by the timeframe set
forth in the rule, and one that provides each Participant with more
flexibility and control over how and when it complies with the proposed
amendments.
---------------------------------------------------------------------------
\30\ See Better Markets Letter, at 7. This commenter also
thought it ``would be beneficial if the SEC also creates a
`Spotlight' web page . . . and host this timeline along with all
other CAT related filings, notices, and Commission actions,''
because a ``one-stop web page should enable investors, market
participants, journalists, Members of Congress, and all other
interested parties, to remain informed of the progress, or lack
thereof, of the CAT's implementation.'' See id. The Commission notes
that such a page already exists: https://www.sec.gov/divisions/marketreg/rule613-info.htm. As appropriate, the Commission will
continue to update this page as the information required by the
amendments is published by the Participants.
\31\ See proposed Section 6.6(c)(i).
---------------------------------------------------------------------------
For these reasons, and the reasons set forth in the Proposing
Release,\32\ the Commission is adopting the provisions related to the
Implementation Plan substantially as proposed. However, the Commission
believes it is appropriate to make two modifications to clarify the
intended operation of the amendments.
---------------------------------------------------------------------------
\32\ See Proposing Release, supra note 2, at 48461-62, 48464.
---------------------------------------------------------------------------
First, the Commission is modifying language in proposed Section
6.6(c)(i) to clarify the public disclosure requirements of the
operational transparency amendments. In the Proposing Release, the
Commission indicated that the Participants would be required to make
the Implementation Plan available either individually on ``each of the
Participant websites'' or collectively on the CAT NMS Plan website. To
the extent that the Participants choose to publish the Implementation
Plan and Quarterly Progress Reports individually, each Participant is
responsible for posting these materials on its own website, and each
Participant is responsible for posting the materials in a timely
manner. Accordingly, the Commission is modifying the phrasing of
proposed Section 6.6(c)(i) to state that the Participants shall make
the Implementation Plan publicly available on ``each of their
websites'' or collectively on the CAT NMS Plan website.
Second, the Commission is modifying proposed Section 6.6(c)(iii) to
clarify which Participants are required to publish statements that
explain why a particular member of the Operating Committee did not vote
to approve the Implementation Plan or Quarterly Progress Reports. As
proposed, Section 6.6(c)(iii) stated that ``each Participant whose
Operating Committee member did not vote to approve the Implementation
Plan or Quarterly Progress Report shall separately file with the
Commission and make publicly available on each of the Participant
websites, or collectively on the CAT NMS Plan website, a statement
identifying itself and explaining why the member did not vote to
approve the Implementation Plan or Quarterly Progress Report.'' \33\
The Commission is modifying this language to clarify that each
Participant who dissents is not required to make publicly available its
explanatory statements on other Participants' websites. If the
Participants choose to not publish such explanatory statements
collectively on the CAT NMS Plan website, the Participants with
dissenting members will only be required to publish such statements on
their own websites. Accordingly, the Commission is modifying the
amendments to specify that ``each Participant whose Operating Committee
member did not vote to approve the Implementation Plan or Quarterly
Progress Report shall separately file with the Commission a statement
identifying itself and explaining why the member did not vote to
approve the Implementation Plan or Quarterly Progress Report. These
statements shall be made publicly available by each dissenting
Participant on its website or collectively by all Participants on the
CAT NMS Plan website.''
---------------------------------------------------------------------------
\33\ See proposed Section 6.6(c)(iii).
---------------------------------------------------------------------------
2. Quarterly Progress Reports
As proposed, Section 6.6(c)(ii) of the CAT NMS Plan would require
the Participants to file with the Commission and make publicly
available on each of the Participant websites (or collectively on the
CAT NMS Plan website) complete Quarterly Progress Reports providing a
detailed description of the progress made by the Participants toward
achieving each of the Implementation Milestones set forth in the
Implementation Plan.\34\ The proposed amendments describe the
information that would be required to be included in the Quarterly
Progress Reports.
---------------------------------------------------------------------------
\34\ See proposed Section 6.6(c)(ii). If, subsequent to the
publication of the Implementation Plan, the Participants decide to
complete any of the Implementation Milestones by releasing
functionality in a phased approach, the proposed amendments would
require each Quarterly Progress Report to reflect this change by
describing the phases necessary to achieve the completion of the
relevant milestone and providing the information specified by
proposed Section 6.6(c)(ii) for each phase. See id.
---------------------------------------------------------------------------
Specifically, for Implementation Milestones that have been
completed by the end of a given calendar quarter, the proposed
amendments would require the inclusion of the following information:
(1) The completion date provided in the Implementation Plan, (2) the
date on which the Implementation Milestone was actually completed, and
(3) a description of any variance from the Implementation Plan.\35\ For
Implementation Milestones that are in progress at the end of a given
calendar quarter, the proposed amendments would require the inclusion
of the following information: (1) The completion date provided in the
Implementation Plan, (2) the currently targeted completion date, and
(3) a description of (a) the current status of the Implementation
Milestone, (b) any difference between the Implementation Plan
completion date and the currently targeted completion date, including
the basis for making the adjustment and the impact of this adjustment
on any other Implementation Milestone, and (c) any
[[Page 31326]]
other factual indicators that demonstrate the current level of
completion with respect to the Implementation Milestone.\36\ For
Implementation Milestones that have not yet been initiated by the end
of a given calendar quarter, the proposed amendments would require the
inclusion of the following information: (1) The completion date
provided in the Implementation Plan, (2) the currently targeted
completion date, and (3) a description of (a) the current status of the
Implementation Milestone, and (b) any difference between the
Implementation Plan completion date and the currently targeted
completion date, including the basis for making the adjustment and the
impact of this adjustment on any other Implementation Milestone.\37\
---------------------------------------------------------------------------
\35\ See proposed Section 6.6(c)(ii)(A).
\36\ See proposed Section 6.6(c)(ii)(B); see also Proposing
Release, supra note 2, at 48463, for examples of factual indicators
that would satisfy this requirement. As noted below, the Commission
does not believe that the inclusion of factual indicators requires
the Participants to publicly disclose any confidential or sensitive
information related to the security of the CAT, the security of CAT
Data, or the operation of the CAT. See notes 54-61 and associated
text infra, for further discussion.
\37\ See proposed Section 6.6(c)(ii)(C); see also Proposing
Release, supra note 2, at 48462-64, for additional discussion of
these requirements.
---------------------------------------------------------------------------
Proposed Section 6.6(c)(ii) would require the initial Quarterly
Progress Report to be filed and made public no later than fifteen
business days following the end of the calendar quarter in which the
Implementation Plan was filed and made public. Subsequent Reports would
be required to be filed and made public no later than fifteen business
days following the end of each calendar quarter.\38\ Before any
Quarterly Progress Report can be filed with the Commission or made
publicly available via a website, proposed Section 6.6(c)(iii) would
require that the Report be approved by at least a Supermajority Vote of
the Operating Committee. However, if the Report is approved only by a
Supermajority Vote of the Operating Committee, and not by a unanimous
vote of the Operating Committee (including, for the avoidance of doubt,
all members of the Operating Committee, whether or not present or
recused), the proposed amendments would require each Participant whose
Operating Committee member did not vote to approve the Report to
separately file with the Commission and make publicly available on each
of the Participant websites, or collectively on the CAT NMS Plan
website, a statement identifying itself and explaining why the member
did not vote to approve the Report.\39\ In addition, the proposed
amendments would require the Operating Committee to submit the
Quarterly Progress Report to the CEO, President, or an equivalently
situated senior officer of each Participant prior to the Operating
Committee's vote.\40\ The Commission anticipates that the Participants
will provide the Quarterly Progress Report to the CEO, President, or an
equivalently situated senior officer of each Participant sufficiently
in advance of the Operating Committee vote to permit review.\41\
---------------------------------------------------------------------------
\38\ See proposed Section 6.6(c)(ii).
\39\ See proposed Section 6.6(c)(iii). The proposed amendments
do not require this statement to include any confidential or
sensitive information related to the security of the CAT, the
security of CAT Data, or the operation of the CAT. Moreover, the
Participants must comply with the security plan developed by the
Plan Processor pursuant to Appendix D, Section 4.1 of the CAT NMS
Plan and any security-related policies and procedures developed
pursuant to Regulation SCI. See note 21 supra.
\40\ See id.; see also Proposing Release, supra note 2, at
48464, for additional discussion of these requirements. No
commenters objected to these requirements, and one commenter
asserted that there was no need to ``go further to require such
CEOs, Presidents and equivalent officers to certify'' the Reports,
``an issue raised for comment in the Proposing Release.'' See
Participant Letter, at 7; see also Proposing Release, supra note 2,
at 48465. The Commission is not adopting a certification requirement
for the Reports.
\41\ See Proposing Release, supra note 2, at 48477 n.159.
---------------------------------------------------------------------------
The Commission believes that requiring detailed and up-to-date
public disclosure through the proposed Quarterly Progress Reports will
furnish the Commission and market participants with a better
understanding of the progress made by the Participants towards CAT
implementation.\42\ The Participants stated in their comment letter
that the proposed Reports ``would impose requirements that are . . .
unnecessary,'' because ``CAT LLC and FINRA CAT currently provide and
will continue to provide Industry Members and the general public with
extensive and appropriate information related to the progress of the
CAT System build'' and because ``the Commission and its staff . . .
have continued access to extensive information regarding the CAT.''
\43\
---------------------------------------------------------------------------
\42\ As discussed above, some commenters suggested that
requiring the Participants to publish the Implementation Plan would
increase the Participants' accountability for meeting the deadlines
specified in that document. See notes 24-25 and associated text
supra. The Commission agrees and anticipates that requiring the
Participants to publish Quarterly Progress Reports will have a
similar effect.
\43\ See Participant Letter, at 6-7.
---------------------------------------------------------------------------
The Commission, however, disagrees. While the Participants have
provided information regarding CAT implementation to the Commission,
much of the information provided by the Participants to the Commission
has not been shared widely with the public. One commenter asserted that
``not much is publicly known [about] why the CAT is still not up and
running,'' due to the ``secrecy of the CAT NMS consortium'' and the
current lack of transparency.\44\ This commenter ``agree[d] with the
Commission that quarterly detailed reporting is appropriate and would
provide useful information to all interested parties,'' including ``an
early-warning to the Commission and interested-parties about possible
upcoming failures to meet any of the regulatory milestones . . . . ''
\45\ Another Industry Member commenter similarly believed that the
Quarterly Progress Reports would ``provide us more information on the
timing of our CAT reporting obligations, which should help us more
efficiently develop and implement regulatory data collection systems,
adjusting as needed, as well as monitor and better understand the
progress of overall CAT implementation.'' \46\ The Commission agrees
with these comments, and, consistent with the Proposing Release,
continues to believe that the Quarterly Progress Reports will provide
useful information to market participants and other members of the
public.\47\
---------------------------------------------------------------------------
\44\ See Better Markets Letter, at 4.
\45\ See id. at 7.
\46\ See Fidelity Letter, at 3. See also FIF Letter, at 3
(stating that ``additional transparency will better inform all
stakeholders of the status of CAT implementation objectives and
milestones, will reduce uncertainty, and will provide industry
members with further assurances that full CAT implementation will
occur on specified milestones'').
\47\ In addition to providing market participants with
information regarding Industry Member reporting deadlines, the
Quarterly Progress Reports will also include the disclosure of
information regarding the implementation of Participant reporting to
the CAT and the availability of functionality for regulatory users,
which the Participants have not made publicly available up to this
point.
---------------------------------------------------------------------------
One Industry Member commenter not only supported the disclosures
required by the proposed Quarterly Progress Reports, but also
recommended expanding the Reports to include ``financial information
detailing the fees, costs and expenses that the Participants have
incurred to build and implement the CAT,'' which should be ``clearly
tied to the relevant Financial Accountability Milestone'' in the
Reports.\48\ The commenter believed that such information would ``help
Industry Members better understand the universe of costs they might be
asked to pay at
[[Page 31327]]
a future date as well as how those costs relate to each Financial
Accountability Milestone,'' as well as help Industry Members to
``review and comment on individual CAT fee proposals submitted by the
Plan Participants.'' \49\ To the extent that the Participants seek to
recover the fees, costs, and expenses incurred in connection with the
development, implementation, and operation of the CAT, the Commission
believes that relevant information would be included in fee
filings.\50\ Also, fee filings relating to fees incurred after the
effective date of these amendments must clearly indicate to which
Financial Accountability Milestone the fees are related.\51\ All fee
filings with this information would be filed with and published by the
Commission to provide notice to Industry Members and to solicit
comments from market participants.\52\ In addition, the CAT NMS Plan
requires the Participants to publish annual audited financial
statements,\53\ which should also provide more detailed financial
information to market participants. Therefore, the Commission does not
believe that expanding the Quarterly Progress Reports to require this
additional information is necessary.
---------------------------------------------------------------------------
\48\ See Fidelity Letter, at 3-4. The commenter suggested that
such information could be ``disclosed on a one quarter lagging
basis.'' See id. at 3 n.4.
\49\ See id. at 4.
\50\ See Proposing Release, supra note 2, at 48465, for a
discussion of the fee filings that the Participants are required to
submit in order to recover CAT-related fees, costs, and expenses
from Industry Members. See also 15 U.S.C. 78s(b).
\51\ See note 88 and associated text infra, for a discussion of
the information that the Participants would be required to include
in these fee filings under the amendments.
\52\ See, e.g., 15 U.S.C. 78s; 17 CFR 242.608.
\53\ See CAT NMS Plan, supra note 1, at Section 9.2(a). See also
https://catnmsplan.com/announcements/audited-financial-statements
(noting that audited financial statements for the Company from
inception through 2018 are available upon request).
---------------------------------------------------------------------------
The Participants also objected to some of the specific disclosures
required by the proposed Quarterly Progress Report, claiming that the
proposed Reports would ``impose requirements that are . . . at odds
with maintaining the security of the CAT.'' \54\ For example, the
Participants stated that ``requiring the broad publication of detailed
explanations related to connectivity and acceptance testing . . . might
provide information to unscrupulous persons set on finding a way to
access and exploit information in the CAT.'' Similarly, they expressed
concern that ``[p]ublishing pass/fail percentages of test cases and
information with respect to defects remediated in connection with
reporting milestones, and the reasons that certain documentation under
development has not been completed,'' was inappropriate for security
reasons, although they did concede that it was ``appropriate to provide
such information to the Commission and the staff . . . .'' \55\
---------------------------------------------------------------------------
\54\ See Participant Letter, at 6.
\55\ See id.
---------------------------------------------------------------------------
The Commission takes concerns regarding the security of the CAT
very seriously and agrees that the Participants should not include
details in the Quarterly Progress Reports that would reveal any
sensitive security information related to the CAT.\56\ However, the
Commission does not believe that the proposed amendments, or the
examples raised by the Participants in their comment letter, implicate
any such concerns. The examples raised by the Participants as
presenting security concerns are examples provided by the Commission in
the Proposing Release of factual indicators that could be used to
demonstrate the current status of CAT implementation.\57\ These factual
indicators focused on functional requirements (e.g., enabling Industry
Member reporting), as opposed to security requirements, that would
capture the scope and quality of the Participants' progress in
implementing the CAT. The Commission does not believe that the factual
indicators suggested in the Proposing Release require the disclosure of
information that will affect the security of the CAT.
---------------------------------------------------------------------------
\56\ See notes 21, 39 supra.
\57\ See Proposing Release, supra note 2, at 48463.
---------------------------------------------------------------------------
For example, the Commission suggested in the Proposing Release that
factual indicators for milestones related to connectivity and
acceptance testing could include: ``the status of the publication of
test plans; statistics on the amount of expected or actual activity in
the test environment (e.g., number of testers, number of reportable
events, error rates/trends observed); the number of Plan Processor
functional requirements for which defects were found categorized by
criticality; [and] progress remediating defects . . . .'' \58\ These
factual indicators speak solely to the Participants' progress in
developing a usable data reporting system. The inclusion of such
factual indicators in a Quarterly Progress Report would not require the
Participants to specifically identify each defect and explain what
steps have been taken to remedy that particular defect; rather, the
amendments permit data regarding defects to be disclosed in an
aggregated form with a non-specific explanation of progress made
towards remediating defects.\59\ The Commission does not believe that
such disclosures present a security concern, because they will only
provide information regarding the progress made towards implementing
required CAT functionality without revealing any security-related
information.\60\
---------------------------------------------------------------------------
\58\ See id.
\59\ For the same reasons, the Commission does not believe that
publication of aggregated pass/fail percentages for test cases
associated with reporting milestones, or disclosure of the
aggregated number and percentage of functional reporting
requirements that have completed internal testing with all defects
remediated, presents a security risk to the CAT. These factual
indicators do not require the Participants to disclose details
regarding the vulnerabilities or flaws of the CAT that could be
exploited by bad actors. Likewise, the Commission does not believe
that the publication of the ``reasons that certain documentation
under development has not been completed'' presents a security
concern. This suggested factual indicator relates solely to the
development of technical specifications--documentation that is
already public and that does not relate to any security policies or
procedures. The Commission therefore does not believe this factual
indicator raises any security concerns.
\60\ Moreover, the Plan Processor has already begun to release
similar information to the public, which demonstrates that the
factual indicators suggested by the Commission can be published
without implicating security concerns. See, e.g., Industry Test
Release Status, available at https://www.catnmsplan.com/wp-content/uploads/2020/01/1.21.20-Industry-Webinar-Industry-Test-Release-Checkpoint.pdf.
---------------------------------------------------------------------------
As stated in the Proposing Release, the Commission does not believe
that the proposed amendments require the Participants to publicly
disclose any confidential or sensitive information related to the
security of the CAT, the security of CAT Data, or the operation of the
CAT.\61\ Rather, the proposed amendments require only the disclosure of
information related to and demonstrating the progress of the
Participants in developing CAT functionality (e.g., pass/fail
percentages of test cases relating to reporting functionality, not
pass/fail rates relating to the development of security tools and
security-related test cases), and the Commission does not believe that
such disclosures impact the security of the CAT. The Commission is
therefore adopting the disclosure requirements for the Quarterly
Progress Reports as proposed.
---------------------------------------------------------------------------
\61\ See Proposing Release, supra note 2, at 48461 n.42.
---------------------------------------------------------------------------
Finally, the Participants stated that the proposed ``fifteen day-
turnaround period'' was too brief and suggested ``modifying the
proposal to require the filing and posting of the Quarterly Progress
Report[s] no later than 30 days after the end of each quarter.'' \62\
To respond to this comment, the Commission is modifying its proposed
rule to require: (1) That the initial Quarterly Progress Report be
filed with
[[Page 31328]]
the Commission and made publicly available no later than thirty
calendar days after the end of the calendar quarter in which the
Implementation Plan was filed and made publicly available; \63\ and (2)
that each subsequent Quarterly Progress Report be filed with the
Commission and made publicly available no later than thirty calendar
days after the end of each calendar quarter (e.g., October 30, 2020;
January 30, 2021; April 30, 2021; or July 30, 2021).\64\ The Commission
believes this change will help to ensure that the Participants have
sufficient time to prepare, file, and publish high-quality Reports,
while still providing the Commission and market participants with
timely and up-to-date disclosures regarding the process of CAT
implementation.
---------------------------------------------------------------------------
\62\ See Participant Letter, at 7.
\63\ For example, if the Participants filed and made public the
Implementation Plan on August 15, 2020, the initial Quarterly
Progress Report would have to be filed no later than October 30,
2020. See Proposing Release, supra note 2, at 48462 n.57.
\64\ This change will provide the Participants with
approximately eight or nine additional days, on average, to prepare,
file, and publish each Report. See id. at 48462.
---------------------------------------------------------------------------
For these reasons, and the reasons set forth in the Proposing
Release,\65\ the Commission is adopting the provisions related to the
Quarterly Progress Reports substantially as proposed, except that
proposed Section 6.6(c)(ii) will provide the Participants with
additional time to prepare, file, and publish the Quarterly Progress
Reports as described above. In addition, the Commission is adopting
three modifications to proposed Section 6.6(c) to clarify the intended
operation of the amendments.
---------------------------------------------------------------------------
\65\ See Proposing Release, supra note 2, at 48462-64.
---------------------------------------------------------------------------
First, the Commission is modifying language in proposed Section
6.6(c)(ii) to clarify the public disclosure requirements of the
operational transparency amendments. In the Proposing Release, the
Commission indicated that the Participants would be required to make
the Quarterly Progress Reports available either individually on ``each
of the Participant websites'' or collectively on the CAT NMS Plan
website. To the extent that the Participants choose to publish the
Quarterly Progress Reports individually, each Participant is
responsible for posting these materials on its own website, and each
Participant is responsible for posting the materials in a timely
manner. Accordingly, the Commission is modifying the phrasing of
proposed Section 6.6(c)(ii) to state that the Participants shall make
the Quarterly Progress Reports publicly available on ``each of their
websites'' or collectively on the CAT NMS Plan website.
Second, the Commission is modifying proposed Section 6.6(c)(iii) to
specify that ``each Participant whose Operating Committee member did
not vote to approve the Implementation Plan or Quarterly Progress
Report shall separately file with the Commission a statement
identifying itself and explaining why the member did not vote to
approve the Implementation Plan or Quarterly Progress Report. These
statements shall be made publicly available by each dissenting
Participant on its website or collectively by all Participants on the
CAT NMS Plan website.'' \66\
---------------------------------------------------------------------------
\66\ See Part II.A.1. supra, for further discussion of this
modification.
---------------------------------------------------------------------------
Finally, the Commission is modifying the final sentence of proposed
Section 6.6(c)(ii) to clarify which parties are obligated to file and
make publicly available the Quarterly Progress Reports. The proposed
amendments stated that the ``first of such reports shall be filed and
made publicly available within 30 calendar days after the end of the
calendar quarter in which the Implementation Plan was filed and made
publicly available.'' \67\ The Commission is not changing this
obligation, but is modifying the language to state that the
``Participants shall file and make publicly available the first of such
reports within 30 calendar days after the end of the calendar quarter
in which the Participants filed and made publicly available the
Implementation Plan.'' \68\
---------------------------------------------------------------------------
\67\ See proposed Section 6.6(c)(ii).
\68\ These three modifications do not affect the cost estimates
put forward by the Commission in the Proposing Release. See, e.g.,
Proposing Release, supra note 2, at 48475-77.
---------------------------------------------------------------------------
3. Additional Reports
The proposed amendments require that the Participants prepare,
file, and publish an Implementation Plan for the completion of CAT
implementation \69\ and that the Quarterly Progress Reports provide up-
to-date information regarding the Implementation Milestones set forth
in the Implementation Plan. By these terms, the proposed amendments do
not require the Participants to continue any reporting after the CAT
has been implemented.
---------------------------------------------------------------------------
\69\ Specifically, proposed Section 6.6(c)(i) requires that the
Implementation Plan include a timeline for achieving Full
Implementation of CAT NMS Plan Requirements, which is a Financial
Accountability Milestone that requires the Participants to ``have
satisfied all of their obligations to build and implement the CAT,
such that all CAT system functionality required by Rule 613 and the
CAT NMS Plan has been developed, successfully tested, and fully
implemented at the initial Error Rates specified by Section
6.5(d)(i) or less . . . .'' See proposed Section 1.1, ``Full
Implementation of CAT NMS Plan Requirements.'' ``Error Rate'' is a
defined term in the CAT NMS Plan and has the same definition in this
release.
---------------------------------------------------------------------------
One commenter ``urge[d] the Commission to require the same timeline
publication and quarterly reports on progress to apply beyond just the
implementation phase.'' \70\ This commenter believed that ``[t]he same
transparency requirements would be useful when the CAT NMS establishes
upgrades schedules.'' \71\ The Commission believes that requiring
additional reporting is unnecessary at this point. Once the CAT is
fully implemented, market participants will continue to receive
information regarding the operation of the CAT through audited
financial statements published by the Participants \72\ and CAT-related
proposals filed with and published by the Commission.\73\ The
Commission is not requiring additional reporting, but encourages the
Participants to communicate fully with affected market participants
regarding any ``upgrades schedules.''
---------------------------------------------------------------------------
\70\ See Better Markets Letter, at 7.
\71\ See id.
\72\ See CAT NMS Plan, supra note 1, at Section 9.2(a).
\73\ See 15 U.S.C. 78s; 17 CFR 242.608.
---------------------------------------------------------------------------
B. Amendments To Increase Financial Accountability
Currently, the CAT NMS Plan contemplates that the Operating
Committee will establish, and the Participants will implement, fees for
both Participants and Industry Members to recover the costs and
expenses incurred by the Participants in connection with the
development and implementation of the CAT.\74\ The proposed amendments
were designed to increase the financial accountability of the
Participants by establishing target deadlines for four critical
implementation milestones and reducing the amount of fee recovery that
would be available to the Participants if those target deadlines are
missed. Some commenters agreed that the proposed amendments would
reduce the likelihood of further delays to CAT implementation, but all
commenters urged the Commission to incorporate certain modifications to
the proposal. After considering these comments, and as described more
fully below, the Commission is adopting the financial accountability
amendments with certain modifications from the amendments as proposed.
---------------------------------------------------------------------------
\74\ See, e.g., CAT NMS Plan, supra note 1, at Section 11.1(c).
---------------------------------------------------------------------------
[[Page 31329]]
1. Description of the Proposed Amendments
Proposals for any fees established by the Operating Committee, and
implemented by the Participants, to recover from Industry Members the
costs and expenses incurred by the Participants in connection with the
development and implementation of the CAT must be filed with the
Commission and are subject to Commission review for consistency with
the Exchange Act and Article XI of the CAT NMS Plan.\75\ Specifically,
each Participant must demonstrate, under Sections 6(b)(4) and 15A(b)(5)
of the Exchange Act, that such fees result in an equitable allocation
of reasonable dues, fees, and other charges among its members and other
persons using its facilities.\76\ The proposed amendments would not
alter this basic structure, but add a new Section 11.6 to the CAT NMS
Plan to govern the recovery of any fees, costs, and expenses (including
legal and consulting fees, costs, and expenses) incurred by or for the
Company in connection with the development, implementation, and
operation of the CAT, from the effective date of this amendment, until
such time that the Participants have completed Full Implementation of
CAT NMS Plan Requirements \77\ (collectively, the ``Post-Amendment
Expenses'').
---------------------------------------------------------------------------
\75\ 15 U.S.C. 78s(b); 17 CFR 242.608. See also CAT NMS Plan,
supra note 1, at Section 11.1(b) (stating that the Participants must
file proposed fees for Industry Members with the Commission); id. at
Section 11.2(a) (stating that the Operating Committee shall seek to
create transparent, predictable revenue streams for the Company that
are aligned with the anticipated costs to build, operate, and
administer the CAT and the other costs of the Company).
\76\ See 15 U.S.C. 78f(b)(4) (applicable to the national
securities exchanges); 15 U.S.C. 78o-3(b)(5) (applicable to FINRA, a
national securities association).
\77\ See note 69 supra.
---------------------------------------------------------------------------
Proposed Section 11.6 would require the Participants to meet four
Financial Accountability Milestones by certain dates in order to
collect the full amount of any fees established by the Operating
Committee, or implemented by the Participants, to recover Post-
Amendment Expenses from Industry Members (``Post-Amendment Industry
Member Fees''). Specifically, the proposed Financial Accountability
Milestones and target deadlines were: (1) Initial Industry Member Core
Equity Reporting, April 30, 2020 \78\; (2) Full Implementation of Core
Equity Reporting, December 31, 2020 \79\; (3) Full Availability and
Regulatory Utilization of Transactional Database Functionality \80\;
and (4) Full Implementation of CAT NMS Plan Requirements.\81\ Under the
proposed amendments, each Financial Accountability Milestone would be
considered complete as of the date identified in a published Quarterly
Progress Report meeting the requirements of proposed Section
6.6(c).\82\
---------------------------------------------------------------------------
\78\ Under the proposed amendments, Initial Industry Member Core
Equity Reporting was defined as ``the point at which Industry
Members (excluding Small Industry Members that are not OATS
reporters) have begun to report equities transaction data, excluding
Customer Account Information, Customer-ID, and Customer Identifying
Information, to the CAT.''
\79\ Under the proposed amendments, Full Implementation of Core
Equity Reporting was defined as ``the point at which: (a) Industry
Member reporting (excluding reporting by Small Industry Members that
are not OATS reporters) for equities transactions, excluding
Customer Account Information, Customer-ID, and Customer Identifying
Information, is developed, tested, and implemented at a 5 [percent]
Error Rate or less and with sufficient intra-firm linkage, inter-
firm linkage, national securities exchange linkage, and trade
reporting facilities linkage to permit the Participants and the
Commission to analyze the full lifecycle of an order across the
national market system, excluding linkage of representative orders,
from order origination through order execution or order
cancellation; and (b) the query tool functionality required by
Section 6.10(c)(i)(A) and Appendix D, Sections 8.1.1 [through] 8.1.3
and Section 8.2.1 incorporates the Industry Member equities
transaction data described in condition (a) and is available to the
Participants and to the Commission.''
\80\ Under the proposed amendments, Full Availability and
Regulatory Utilization of Transactional Database Functionality was
defined as ``the point at which: (a) Reporting to the Order Audit
Trail System is no longer required for new orders; (b) Industry
Member reporting for equities transactions, simple electronic
options transactions, manual options transactions, and complex
options transactions, including Allocation Reports, but excluding
Customer Account Information, Customer-ID, and Customer Identifying
Information, is developed, tested, and implemented; (c)
representative order linkages, as well as intra-firm linkages,
inter-firm linkages, national securities exchange linkages, and
trade reporting facilities linkages, are developed, tested, and
implemented in a manner that permits the Participants and the
Commission to analyze the full lifecycle of an order across the
national market system, from order origination through order
execution or order cancellation, including any related allocation
information provided in an Allocation Report; (d) CAT Error Rates
satisfy the threshold specified by Section 6.5(d)(i); (e) the query
tool functionality required by Section 6.10(c)(i)(A) and Appendix D,
Sections 8.1.1 [through] 8.1.3, Section 8.2.1, and Section 8.5
incorporates the data described in conditions (b) and (c) and is
available to the Participants and to the Commission; and (f) the
requirements of Section 6.10(a) are met.''
\81\ Under the proposed amendments, Full Implementation of CAT
NMS Plan Requirements was defined as ``the point at which the
Participants have satisfied all of their obligations to build and
implement the CAT, such that all CAT system functionality required
by Rule 613 and the CAT NMS Plan has been developed, successfully
tested, and fully implemented at the initial Error Rates specified
by Section 6.5(d)(i) or less, including functionality that
efficiently permits the Participants and the Commission to access
all CAT Data required to be stored in the Central Repository
pursuant to Section 6.5(a), including Customer Account Information,
Customer-ID, Customer Identifying Information, and Allocation
Reports, and to analyze the full lifecycle of an order across the
national market system, from order origination through order
execution or order cancellation, including any related allocation
information provided in an Allocation Report.'' See also Proposing
Release, supra note 2, at 48466-470, for additional discussion of
the Financial Accountability Milestones and the associated target
deadlines.
\82\ See proposed Section 1.1; proposed Section 6.6(c)(ii)-
(iii).
---------------------------------------------------------------------------
If the Participants meet the target deadline specified for each
Financial Accountability Milestone, the terms of the proposed
amendments would entitle them to collect the full amount \83\ of any
related Post-Amendment Industry Member Fees.\84\ However, if the
Participants do not meet the date specified for each Financial
Accountability Milestone, the proposed amendments would reduce the
amount of related Post-Amendment Industry Member Fees that the
Participants may recover.\85\ The proposed amendments set forth one
recovery schedule for Initial Industry Member Core Equity Reporting and
another recovery schedule for the remaining three Financial
Accountability Milestones. Specifically, if the Participants miss the
target deadline for Initial Industry Member Core Equity Reporting, the
amount of related Post-Amendment Industry Member Fees that the
Participants will be entitled to recover will immediately be reduced by
25 percent and then further reduced by 25 percent for every 60 days by
which the Participants miss the target deadline.\86\ If the
Participants miss the target deadlines for the remaining three
Financial Accountability Milestones, the amount of related Post-
Amendment Industry Member Fees that the Participants will be entitled
to recover for each Financial Accountability Milestone will immediately
be reduced by 25 percent and then further reduced by 25 percent for
every 90 days by which the Participants miss the target deadline.\87\
---------------------------------------------------------------------------
\83\ ``Full amount'' in this context does not mean that the
Participants may collect all of their Post-Amendment Expenses from
Industry Members. Rather, to recover any Post-Amendment Expenses
from Industry Members, the Participants must file with the
Commission proposed rule changes. The Commission will then review
the proposed rule changes for consistency with the Exchange Act and
the CAT NMS Plan.
\84\ See proposed Section 11.6(a)(i).
\85\ See proposed Section 11.6(a)(ii) through (iii).
\86\ See proposed Section 11.6(a)(ii).
\87\ See proposed Section 11.6(a)(iii). See Proposing Release,
supra note 2, at 48470-72, for additional discussion of these
provisions. The proposed amendments also provide that the
Participants will only be permitted to collect any Post-Amendment
Industry Member Fees at the end of the period associated with each
respective Financial Accountability Milestone. See proposed Section
11.6(a)(iv); see also Proposing Release, supra note 2, at 48471-72,
for additional discussion of this provision.
---------------------------------------------------------------------------
[[Page 31330]]
Finally, the proposed amendments include a provision that would
require the Participants to clearly indicate, in all proposals filed
with the Commission to establish or implement Post-Amendment Industry
Member Fees, whether such fees are related to Post-Amendment Expenses
and how the Post-Amendment Expenses are related to a particular
Financial Accountability Milestone.\88\
---------------------------------------------------------------------------
\88\ See proposed Section 11.6(b); see also Proposing Release,
supra note 2, at 48472, for additional discussion of this provision.
---------------------------------------------------------------------------
2. Modifications to the Proposed Amendments
The Commission believes that applying the above-described
conditions, with the modifications set forth below,\89\ to the
Participants' collection of Post-Amendment Industry Member Fees is
appropriate. As explained above, proposals for any fees established by
the Operating Committee, and implemented by the Participants, to
recover the fees, costs, and expenses incurred by the Participants in
connection with the development, implementation, and operation of the
CAT must be filed with the Commission. These fee proposals are then
subject to Commission review for consistency with Article XI of the CAT
NMS Plan and the Exchange Act \90\--including Sections 6(b)(4) and
15A(b)(5) of the Exchange Act, which require that each Participant make
an equitable allocation of reasonable dues, fees, and other charges
among its members and other persons using its facilities.\91\ In light
of the Participants' delays in implementation of the CAT NMS Plan, the
Commission does not believe it would be reasonable for the Participants
to exercise their funding authority under the CAT NMS Plan or the
Exchange Act if the Participants do not meet the target deadlines
specified by the amendments.\92\
---------------------------------------------------------------------------
\89\ See notes 93-109 infra, for a discussion of the
modifications to the proposed amendments.
\90\ 15 U.S.C. 78s(b); 17 CFR 242.608.
\91\ See 15 U.S.C. 78f(b)(4) (applicable to the national
securities exchanges); 15 U.S.C. 78o-3(b)(5) (applicable to FINRA, a
national securities association).
\92\ See Proposing Release, supra note 2, at 48466, 48472, for
additional discussion.
---------------------------------------------------------------------------
The amendments, as proposed, were designed to prevent further
delays to CAT implementation, but the Commission is adopting three
modifications to the proposed amendments to address certain practical
concerns that were identified by the Commission following the
publication of the Proposing Release.
First, the Commission is modifying the first Financial
Accountability Milestone, Initial Industry Member Core Equity
Reporting, and the fee recovery schedule associated with that Financial
Accountability Milestone. The Commission believes that this proposed
Financial Accountability Milestone should be updated. The proposed
target deadline for this Financial Accountability Milestone--April 30,
2020--has passed. Moreover, as noted above, the Commission granted
exemptive relief allowing the Participants' Compliance Rules for
Industry Member reporting to the CAT to extend the deadline for core
equity reporting to June 22, 2020.\93\ The targeted deadline for the
proposed Initial Industry Member Core Equity Reporting milestone is
therefore no longer appropriate, but the Commission still believes that
it is important to include an initial Financial Accountability
Milestone that requires the Participants to develop, test, and
implement the essential infrastructure needed to support Industry
Member reporting--one of the major goals identified by the CAT NMS
Plan.\94\
---------------------------------------------------------------------------
\93\ See notes 8-13 and associated text supra, for a discussion
of the Exemptive Relief Order.
\94\ See CAT NMS Plan, supra note 1, at Section 6.7(a)(v).
---------------------------------------------------------------------------
Accordingly, the Commission is modifying the first Financial
Accountability Milestone. Section 1.1 of the CAT NMS Plan will now
define ``Initial Industry Member Core Equity and Option Reporting'' as
the reporting by Industry Members (excluding Small Industry Members
\95\ that do not report to the Order Audit Trail System (``OATS'')) of
both: (a) Equities transaction data, excluding Customer Account
Information, Customer-ID, and Customer Identifying Information,\96\ to
the CAT; \97\ and (b) options transaction data, excluding Customer
Account Information, Customer-ID, and Customer Identifying Information,
to the CAT.\98\ This Financial Accountability Milestone shall be
considered complete as of the date identified in a published Quarterly
Progress Report meeting the requirements of proposed Section 6.6(c).
The Commission is also modifying proposed Section 11.6(a)(i)(A) to
provide that the target deadline for the Initial Industry Member Core
Equity and Option Reporting milestone is July 31, 2020.\99\
---------------------------------------------------------------------------
\95\ ``Small Industry Member'' is a defined term in Section 1.1
of the CAT NMS Plan and has the same definition in the context of
this adopting release.
\96\ Customer Account Information, Customer-ID, and Customer
Identifying Information are defined terms in Section 1.1 of the CAT
NMS Plan and have the same definitions in the context of this
adopting release.
\97\ The equities transaction data required at this stage is
consistent with the functionality that the Participants describe on
the CAT NMS Plan website as ``Production Go-Live for Equities 2a
file submission and data integrity validations.'' See https://catnmsplan.com/timeline/phase.
\98\ The options transaction data required at this stage is
consistent with the functionality that the Participants describe on
the CAT NMS Plan website as ``Production Go-Live for Options 2b file
submission and data integrity validations.'' See id.
\99\ The target deadline for this Financial Accountability
Milestone falls between scheduled Quarterly Progress Reports. If the
Participants wait to submit the Quarterly Progress Report to the
Commission, it may delay their ability to begin recovering any Post-
Amendment Industry Member Fees to which they may be entitled. In
order to expedite their recovery of Post-Amendment Industry Member
Fees, the Participants may file an interim Quarterly Progress
Report, if they so choose, on the day they achieve this Financial
Accountability Milestone (or any other Financial Accountability
Milestone). See Proposing Release, supra note 2, at 48466 n.79.
---------------------------------------------------------------------------
The Commission believes that this Financial Accountability
Milestone is appropriate because it is designed to achieve the goals of
the proposed Initial Industry Member Core Equity Reporting milestone.
As the Commission noted in the Proposing Release, before Industry
Members may begin reporting data to the CAT, the Participants must
develop, and Industry Members must thoroughly test, file submission
tools, data integrity controls, and various security measures to ensure
that the CAT can safely receive and process this data, as well as
identify data that may not be accurate. These are core operations that
are fundamental to the success of the CAT.\100\ By requiring Industry
Members--excluding Small Industry Members that are not OATS reporters
\101\--to report the first phase of equities and simple electronic
options data to the CAT, the Initial Industry Member Core Equity and
Option Reporting milestone will continue to require the Participants to
demonstrate that they have made significant progress towards
implementing foundational CAT functionality.
---------------------------------------------------------------------------
\100\ See Proposing Release, supra note 2, at 48466.
\101\ The Commission continues to believe that it is appropriate
to exclude Small Industry Members that do not report to OATS from
this Financial Accountability Milestone in order to mirror the
exemptive relief granted to the Participants. See, e.g., Exemptive
Relief Order, supra note 8, at 23082.
---------------------------------------------------------------------------
Moreover, the Commission believes that this Financial
Accountability Milestone, as modified, accounts for the additional
amount of time that the Participants will now be given to achieve the
first Financial Accountability Milestone. The Participants will now
have to begin Industry Member reporting of the first phase of simple
electronic options data to the CAT, in addition to satisfying the
previous requirements of the proposed Initial Industry Member Core
Equity
[[Page 31331]]
Reporting milestone. Recent timelines published by the Participants
indicate that the production environment for Industry Member equities
transaction reporting went live on April 13, 2020,\102\ and the
Participants have indicated that Industry Member reporting for the
first phase of simple electronic options data will begin on July 20,
2020.\103\ The Commission therefore believes that the modified target
deadline of July 31, 2020, for the Initial Industry Member Core Equity
and Option Reporting milestone is reasonable and feasible.
---------------------------------------------------------------------------
\102\ See https://www.catnmsplan.com/announcements/cat-now-open-reporting-broker-dealers.
\103\ See id.
---------------------------------------------------------------------------
Second, the Commission is also modifying the fee recovery schedule
associated with the first Financial Accountability Milestone to reflect
the new target deadline.\104\ Accordingly, if the Participants do not
meet the specified date for the achievement of Initial Industry Member
Core Equity and Option Reporting, Section 11.6(a)(ii) will provide that
the Participants' recovery of Post-Amendment Industry Member Fees will
be reduced according to the following schedule:
---------------------------------------------------------------------------
\104\ In addition, the Commission is modifying the text of
proposed Sections 11.6(a)(ii) and (iii) to add more granular
citations and text that will further clarify which fee recovery
schedule applies to which Financial Accountability Milestone. The
Commission is not modifying the fee recovery schedule for the Full
Implementation of Core Equity Reporting milestone, the Full
Availability and Regulatory Utilization of Transactional Database
Functionality milestone, or the Full Implementation of CAT NMS Plan
Requirements milestone.
---------------------------------------------------------------------------
By 25 percent if the Participants miss the deadline set
forth in Section 11.6(a)(i)(A) by less than 45 days;
By 50 percent if the Participants miss the deadline set
forth in Section 11.6(a)(i)(A) by more than 45 days, but less than 90
days;
By 75 percent if the Participants miss the deadline set
forth in Section 11.6(a)(i)(A) by more than 90 days, but less than 135
days; and
By 100 percent if the Participants miss the deadline set
forth in Section 11.6(a)(i)(A) by more than 135 days.
The Commission believes this fee recovery schedule is appropriate
due to the new target deadline of July 31, 2020. It is critically
important that the Participants remain on schedule to achieve the first
Financial Accountability Milestone, in order to minimize the
possibility that the deadlines for subsequent Financial Accountability
Milestones will be missed.\105\ Moreover, as explained above, the
Commission believes that the Participants should be able to meet the
target deadline.
---------------------------------------------------------------------------
\105\ See also Proposing Release, supra note 2, at 48470-72, for
further discussion of the fee recovery schedules.
---------------------------------------------------------------------------
Third, the Commission is modifying the Full Availability and
Regulatory Utilization of Transaction Database Functionality milestone
to eliminate certain error rate requirements. The proposed amendments
would have required the Participants to achieve the initial error rates
specified by the CAT NMS Plan for Industry Member reporting of manual
and complex options transactions, as well as any options allocation
information, by December 31, 2021,\106\ in order to satisfy the Full
Availability and Regulatory Utilization of Transaction Database
Functionality milestone. However, the Participants estimate that these
functionalities will not be fully implemented until December 13,
2021.\107\ Because these functionalities are estimated to be
implemented within the same month as the targeted date for satisfying
the Full Availability and Regulatory Utilization of Transaction
Database Functionality milestone, upon review, the Commission believes
it is not appropriate to require such error rates for purposes of
financial recovery.\108\ The Commission is not modifying any other
aspects of this Financial Accountability Milestone; the Participants
will still be required to implement the functionality as proposed--
namely, reporting of manual and complex options transactions and
options allocation information--but they will not be required to
satisfy any error rate requirement for these functionalities. The
Participants will also still be required to achieve the initial error
rate specified by the CAT NMS Plan for Industry Member reporting of
equities and simple electronic options transactions, excluding Customer
Account Information, Customer-ID, and Customer Identifying Information,
with all required linkages (including representative order linkages and
equities allocation information) to permit the Participants and the
Commission to analyze the full lifecycle of an order across the
national market system, from order origination through order execution
or order cancellation.\109\
---------------------------------------------------------------------------
\106\ See id.; see also Proposing Release, supra note 2, at
48468-69, for additional discussion of the proposed Financial
Accountability Milestone.
\107\ See note 97 supra; see also Securities Exchange Act
Release No. 87990 (January 16, 2020), 85 FR 3963 (January 23, 2020)
(pending proposed rule change that indicates, among other things,
that such functionality will not be implemented until December 13,
2021). The Commission does not believe that this modification will
significantly impact the Commission's goals for this Financial
Accountability Milestone. When the Participants achieve this
milestone, regulators will still have access to sufficiently
accurate and reliable equities and simple electronic options
transactional data and order linkages that will enable regulators to
analyze the full lifecycle of an order and conduct new and
sophisticated analyses of the markets, including options market
reconstruction and cross-market analyses across full order
lifecycles. See Proposing Release, supra note 2, at 48468-69.
\108\ The CAT NMS Plan, however, still requires an initial error
rate of 5 percent. See CAT NMS Plan, supra note 1, at Section
6.5(d)(i).
\109\ See Section 1.1, ``Full Availability and Regulatory
Utilization of Transactional Database Functionality.''
---------------------------------------------------------------------------
3. Discussion of the Comments
Most commenters agreed with the Commission that increasing the
financial accountability of the Participants will help to prevent
further delays to CAT implementation. One commenter, for example,
``support[ed] the Commission'[s] actions to . . . have formal deadlines
to assist member firms' [CAT] implementation planning . . . and set
financial incentives to avoid further delays.'' \110\ Another commenter
``agree[d] with the Commission that additional Participant
Accountability Milestones should facilitate the completion of the
implementation phase(s) of CAT in an efficient, expeditious and risk-
averse manner, thereby reducing the risk of further delay.'' \111\
Finally, one commenter stated that ``imposing financial accountability
measures on CAT NMS should increase the likelihood of the CAT's
implementation.'' \112\
---------------------------------------------------------------------------
\110\ See SIFMA Letter, at 1.
\111\ See FIF Letter, at 2.
\112\ See Better Markets Letter, at 3 (stating that the ``key
milestones outlined in the Proposed Amendment are good measures that
the Participants are making progress toward delivering a completed
CAT'').
---------------------------------------------------------------------------
However, commenters raised concerns regarding aspects of the
proposed amendments. These concerns generally fell into four
categories: (a) Threshold questions regarding the CAT funding model;
(b) the potential negative impact of the proposed amendments; (c) the
fairness of the proposed amendments; and (d) the possibility of
unforeseen, but reasonable, delays. As discussed in more detail below,
the Commission does not believe that it is necessary to modify the
proposed amendments to address these concerns. Nevertheless, as
discussed above, the Commission is adopting two modifications to the
proposed amendments to account for certain practical issues that were
separately identified by the Commission,\113\ and it is possible that
these modifications may also alleviate some of the concerns expressed
by commenters.
---------------------------------------------------------------------------
\113\ See Part II.B.2. supra.
---------------------------------------------------------------------------
[[Page 31332]]
a. Comments on the CAT Funding Model
Commenters raised threshold questions regarding the Participants'
ability to recover from Industry Members a portion of the fees,
expenses, and costs incurred by the Participants in connection with the
development, implementation, and operation of the CAT. For instance,
one commenter stated that the ``Plan Participants have not provided
justification for imposing fees on broker-dealers for the CAT[] that
will be in addition to fees the Plan Participants already charge
broker-dealers for regulatory funding.'' \114\ Another commenter
observed that ``broker-dealers already provide the [Participant]s a
significant amount of regulatory funding'' and suggested that ``there
should be no new fee for the CAT until member firms are provided with a
fully-documented account of how regulatory fees are currently
allocated, how the CAT fee fits into the existing regulatory framework,
and why assessing broker-dealers an additive regulatory fee is
necessary to fund the creation and operation of the CAT.'' \115\ This
commenter further asserted that ``broker-dealers should not be required
to reimburse the [Participant]s for any part of the costs or expenses
of the CAT other than the direct costs to build and operate the system
itself,'' such as ``third-party support fees (historical legal fees,
consulting fees, and audit fees), operational reserve, and insurance
costs,'' or for ``any payments made to Thesys in connection with the
CAT.'' \116\
---------------------------------------------------------------------------
\114\ See Fidelity Letter, at 5.
\115\ See SIFMA Letter, at 2.
\116\ See id. at 3.
---------------------------------------------------------------------------
These concerns were raised by commenters and addressed by the
Commission when it approved the CAT NMS Plan,\117\ which explicitly
permits the Participants to recover from Industry Members a portion of
the fees, expenses, and costs incurred to build, operate, and
administer the CAT and the other costs of the Company.\118\ After
considering these concerns, the Commission approved the funding model
set forth in the CAT NMS Plan because the Commission believed that it
reflected a ``reasonable exercise of the Participants' funding
authority . . .'' \119\ The Commission stated that the CAT was a
``regulatory facility jointly owned by the Participants,'' that the
``Exchange Act specifically permits the Participants to charge members
fees to fund their self-regulatory obligations,'' and that the funding
model was ``designed to impose fees reasonably related to the
Participants' self-regulatory obligations because the fees would be
directly associated with the costs of establishing and maintaining the
CAT, and notunrelated . . . services.'' \120\
---------------------------------------------------------------------------
\117\ See, e.g., CAT NMS Plan Approval Order, supra note 1, at
84793-95.
\118\ See CAT NMS Plan, supra note 1, at Article XI.
\119\ See CAT NMS Plan Approval Order, supra note 1, at 84794.
\120\ See id.
---------------------------------------------------------------------------
Even though the amendments reflect the Commission's view as to how
the Participants may reasonably exercise their funding authority under
the Exchange Act and the CAT NMS Plan,\121\ the Commission still
believes that the overall structure of the CAT funding model is
appropriate. The CAT continues to be a ``regulatory facility jointly
owned by the Participants,'' the Exchange Act continues to ``permit[]
the Participants to charge members fees to fund their self-regulatory
obligations'' if those fees are reasonable, and the funding model
continues to be ``designed to impose fees reasonably related to the
Participants' self-regulatory obligations because the fees would be
directly associated with the costs of establishing and maintaining the
CAT, and not unrelated . . . services.'' \122\ The Commission therefore
is not modifying the proposed amendments (or the CAT NMS Plan) on these
grounds. However, the Commission stresses that it is not hereby
approving any specific Post-Amendment Industry Member Fees; rather,
such fee proposals must be filed with the Commission by the
Participants, published for public comment, and assessed by the
Commission for consistency with the Exchange Act and the CAT NMS
Plan.\123\
---------------------------------------------------------------------------
\121\ See notes 89-92 and associated text supra.
\122\ See id.
\123\ See id.
---------------------------------------------------------------------------
b. Comments on the Potential Negative Impact of the Proposed Amendments
A few commenters believed that ``strict adherence to the
Participants' delivery of specified target milestone[s] on or before
particular dates (and sanctions imposed as a result of not meeting
those dates) are likely to result in lower quality deliverables and an
incomplete CAT Repository.'' \124\ One commenter specifically
identified a ``subset'' of the number of potential negative
consequences of this approach, including: ``1) Reduced dialogue between
industry member CAT Reporters and the Participants; 2) lower quality
CAT IM Tech Specs; 3) reduced emphasis on the development and
publication of vital industry member guidance . . .; 4) a less
effective issue resolution process; and 5) the implementation of Phase
2a prior to the full development of the CAT system.'' \125\ In short,
the commenter believed that the ``financial penalty structure outlined
in the Proposed Amendments has the clear potential to limit and short
circuit the required cooperative analysis, feedback, and iterative
update process that would result in the reduced quality of deliverables
and place at risk CAT's key regulatory goals.'' \126\ Accordingly, this
commenter suggested that the Commission should essentially delete the
target deadlines, but retain the requirement to complete such
milestones.\127\ Specifically, this commenter stated that the
Commission should perform a ``holistic assessment of the
Participants['] management of CAT implementation . . . based upon: 1)
the successful completion of milestones; 2) detail contained in
Participant Quarterly Progress Reports; . . . 3) industry member
feedback [to supplement the information obtained from Quarterly
Progress Reports],'' and 4) ``engagement with the Operating Committee
and Plan Processor to better gauge whether the Participants are meeting
the obligations delegated to them by the Commission,'' instead of
``strict adherence to enumerated milestone target dates.'' \128\ In the
alternative, ``[s]hould the Commission
[[Page 31333]]
approve and adopt the proposed Plan Amendment to incorporate Financial
Accountability Milestones,'' the commenter believed that the Commission
and the Participants should ``take measures to ensure that the high
degree of collaboration between the industry, Participants, and the
Plan Processor remains in place.'' \129\
---------------------------------------------------------------------------
\124\ See FIF Letter, at 3. See also Participant Letter, at 10
(``Faced with financial penalties for missed deadlines, the
Participants may not be able to fully address legitimate industry
concerns or accommodate requests for delays with respect to future
deadlines.''); Fidelity Letter, at 5 (``We also recognize that
despite best efforts, unforeseen circumstances may occur where it
may be in the collective best interest to extend a target deadline.
In these circumstances, we believe that financial penalties will
create a degree of friction in the development process that is not
conducive to the overall success of the CAT and that may prioritize
rushing to complete a target deadline over a long-term view of the
CAT.'').
\125\ See FIF Letter, at 3, 7. This commenter also recommended
adjusting interim deadlines set by the Participants for certain
phases of CAT implementation. See id. at 5-6 and Appendix B. The
Commission does not believe such adjustments are necessary, as the
Commission believes the current timeline is appropriate and
feasible. However, because such changes could be made without
impacting the target deadlines for the Financial Accountability
Milestones, the Participants can decide to make the recommended
changes.
\126\ See id. at 7-8.
\127\ See id. at 4. See also Participant Letter, at 9 (arguing
that the Financial Accountability Milestones ``should be revised so
that CAT LLC may collect Post-Amendment Industry Member Fees so long
as CAT LLC and the Participants have completed development and
testing and made available to Industry Members and the SEC the CAT
functionality applicable to a particular Milestone'').
\128\ See FIF Letter, at 6, 8.
\129\ See id. at 7.
---------------------------------------------------------------------------
The Commission does not believe that it is appropriate or necessary
to eliminate the target deadlines from the proposed amendments, as
suggested by some commenters. The proposed amendments were not designed
only to achieve CAT implementation, but, more specifically, to achieve
CAT implementation in a timely manner. It has been over three years
since the Commission approved the CAT NMS Plan, and the need for a
better audit trail system remains urgent. Accordingly, the Commission
included target deadlines in the proposed amendments as one measure to
reduce the likelihood of additional delays to CAT implementation. To
remove these target deadlines from the proposed amendments, or to
eliminate the financial incentives associated with the target
deadlines, would fundamentally undercut the goal of the Commission in
promulgating the proposed amendments--namely, the implementation of the
CAT in a reasonable time frame.
Although the Commission is sensitive to commenters' concerns
regarding the potential for ``lower quality deliverables'' due to any
perceived possibility of reduced collaboration,\130\ the proposed
amendments do not alter the fundamental obligations of the
Participants, Industry Members, and Plan Processor to deliver CAT
functionality in a manner that complies with the CAT NMS Plan.\131\ Nor
do the proposed amendments alter or weaken requirements set forth in
the CAT NMS Plan to facilitate collaboration and communication between
the Participants and Industry Members.\132\ The Commission therefore
does not expect the quality of CAT implementation to be adversely
affected by the proposed amendments. Accordingly, the Commission is not
modifying the proposed financial accountability amendments.
---------------------------------------------------------------------------
\130\ One commenter also expressed concern that the proposed
amendments might result in ``the implementation of Phase 2a prior to
the full development of the CAT system.'' See id. at 3. The
Participants are already pursuing an implementation plan that
implements the CAT in phases and that will result in ``Phase 2a''
being implemented ``prior to the full development of the CAT
system.'' The amendments have no effect on this plan.
\131\ See note 145 and associated text infra, for a discussion
of the Industry Members' obligations to comply with the CAT NMS
Plan.
\132\ See, e.g., CAT NMS Plan, supra note 1, at Appendix D,
Section 10.1 through 10.3 (detailing the support to be provided by
the Plan Processor to CAT reporters and CAT users). Many of these
measures have already been implemented by the Participants. See,
e.g., notes 142-144 and associated text supra.
---------------------------------------------------------------------------
c. Comments on the Fairness of the Proposed Amendments
Commenters expressed views regarding the fairness of the proposed
amendments' conditions on financial recovery. ``If the Participants
miss a proposed target deadline,'' one Industry Member commenter
``generally [did] not believe that it [would be] reasonable for the
Plan Participants to fully recover fees, costs, and expenses from
Industry Members, because further delays by Plan Participants will
impose additional costs on Industry Members.'' \133\
---------------------------------------------------------------------------
\133\ See Fidelity Letter, at 5.
---------------------------------------------------------------------------
The Participants, on the other hand, believed that the proposed
amendments were ``inappropriate and unfair,'' because the ``ability of
CAT LLC and the Participants to collect Post-Amendment Industry Member
Fees should turn only on the timely completion of those tasks that are
within their control.'' \134\ For instance, the Participants objected
to the fact that several of the proposed Financial Accountability
Milestones require the achievement of the initial error rates specified
by the CAT NMS Plan. The Participants stated that ``achieving an error
rate of five percent or less involves factors that are beyond their
control,'' because the ``ability and willingness of Industry Members to
devote sufficient resources to accurately and timely report CAT events
. . . will impact initial and subsequent error rates.'' \135\
Similarly, the Participants stated that the requirements contained in
several of the proposed Financial Accountability Milestones regarding
intrafirm and interfirm linkages ``rel[y], in part, on the quality of
the data reported to CAT by Industry Members.'' \136\ The Participants
expressed concern that, ``by conditioning the ability of CAT LLC and
the Participants to collect Post-Amendment Industry Member Fees on
factors dependent on the efforts of Industry Members, the Commission's
proposals inadvertently establish a perverse incentive for Industry
Members to devote less than maximum efforts to comply with their
obligations related to the CAT as they will pay less fees in such
instances.'' \137\
---------------------------------------------------------------------------
\134\ See Participant Letter, at 8-9.
\135\ See id. at 9.
\136\ See id.
\137\ See id. Another commenter also expressed concern that the
proposed amendments ``would be subject to gaming by Industry Members
who stand to benefit from delays, but [who] would not suffer the
consequences of the delays they cause.'' See Better Markets Letter,
at 8. This commenter suggested that the proposed financial
accountability amendments be ``equally applied to Plan Participants
as well as those Industry Members who contribute to any delay'' and
specifically recommended the adoption of a reporting mechanism that
would enable the Commission to determine which parties were
responsible for causing or contributing to a delay. See id. at 3, 8-
9. The Commission continues to believe that it is appropriate to
impose the obligations of the financial accountability amendments
solely on the Participants for the reasons discussed below. See the
discussion at notes 142-148 and associated text infra. Accordingly,
the Commission is not adopting the reporting mechanism proposed by
this commenter.
---------------------------------------------------------------------------
The Participants stated that the proposed Full Availability and
Regulatory Utilization of Transactional Database Functionality
milestone could not be met unless OATS reporting was no longer required
for new orders, which was another example of how the proposed
amendments were ``inappropriate and unfair.'' \138\ The Participants
asserted that achieving this requirement ``depends upon a variety of
factors outside the control of the Participants, including accurate
reporting by Industry Members and FINRA's determination to retire
OATS.'' \139\ According to the Participants, FINRA has indicated that
``the CAT would generally need to achieve a sustained error rate for
Industry Member reporting in a number of categories for a period of at
least 180 days of 5[ percent] or lower, measured on a pre-correction or
as-submitted basis, and 2[ percent] or lower on a post-correction
basis'' before OATS could be safely retired, because a minimum of 180
days was necessary ``to confirm that the Plan Processor is meeting its
obligations and performing its functions adequately'' and material
issues ``may manifest themselves only after surveillance patterns and
other queries have been run and analyzed . . . .'' \140\ Insofar as the
``premature cessation of OATS before CAT data quality levels are
acceptable . . . would expose the market to unnecessary risks because
market surveillance would be compromised,'' the Participants believed
that no ``hard and fast
[[Page 31334]]
deadline'' should be set for the retirement of OATS.\141\
---------------------------------------------------------------------------
\138\ See Participant Letter, at 9; see also proposed Section
1.1, ``Full Availability and Regulatory Utilization of Transactional
Database Functionality.''
\139\ See Participant Letter, at 9.
\140\ See id. at 10-11.
\141\ See id. at 11.
---------------------------------------------------------------------------
Despite their concerns, the Participants have the ability to shape
the reporting behavior of Industry Members, including the quality of
data reported by Industry Members, through various mechanisms,
including through the development of CAT technical specifications with
Industry Members via the Technical Specifications Working Group,\142\
through the creation of a help desk for Industry Members to provide
assistance with any technical issues that may arise,\143\ through the
production of tools that will enable Industry Members to identify and
correct errors,\144\ and through general industry outreach, provided in
the form of FAQs, webinars, or other additional training for Industry
Members. In addition, while the Commission expects Industry Members to
comply with their reporting obligations under the CAT NMS Plan, the
Participants have tools to require such compliance--including
Compliance Rules that will set forth a phased reporting schedule
according to the timeline detailed in the Exemptive Relief Order.\145\
Industry Members should have a strong economic incentive to cooperate
with the Participants' efforts.\146\ Until the CAT is sufficiently
developed so as to permit the retirement of OATS, most Industry Members
will have to report both to OATS and to the CAT, and prolonging the
implementation of the CAT would expand the dual reporting costs that
these Industry Members will have to bear.\147\ For these reasons, and
for the reasons set forth in the Proposing Release,\148\ the Commission
continues to believe that it is appropriate to impose the conditions of
the amendments solely on the Participants.
---------------------------------------------------------------------------
\142\ See Event Materials, including recorded Q&A sessions with
the Technical Specifications Working Group and market participants,
available at https://catnmsplan.com/events/materials. See also
Participant Letter, at 2 (detailing efforts made to liaise with
Industry Members on ``Industry Member reporting, CAT onboarding,
connectivity, security and other topics related to the CAT'').
\143\ See Participant Letter, at 2. Contact information for the
help desk can be found at https://catnmsplan.com/contact.
\144\ See, e.g., CAT NMS Plan, supra note 1, at Appendix D,
Section 10.1 (requiring the Plan Processor to develop tools to allow
each CAT reporter to identify and correct errors and to provide
daily reporting statistics to each CAT reporter).
\145\ See, e.g., CAT NMS Plan, supra note 1, at Section 3.11
(requiring the Participants to enforce compliance with the CAT NMS
Plan by promulgating compliance rules for Industry Members); id. at
Section 6.4 (indicating that data reporting requirements for
Industry Members will be enforced through the Participants'
compliance rules); id. at Section 6.7 (indicating that Industry
Member data reporting deadlines will be enforced through the
Participants' compliance rules). With respect to these compliance
tools, one commenter expressed concern that, ``if there are
legitimate reasons that broker-dealers have not been able to deliver
a 5[ percent] error rate, and the [Participants] believe they will
be financially penalized for a too-high error rate, then the
[Participants] will be incentivized to bring enforcement actions
against broker-dealers solely for the purpose of recouping the lost
funding.'' See SIFMA Letter, at 2. However, any enforcement action
brought by the Participants must comply with the Exchange Act, the
rules promulgated thereunder, and their own rules.
\146\ See, e.g., SIFMA Letter, at 2 (stating that Industry
Members are ``committed to a timely implementation of CAT
reporting'').
\147\ See note 286 and associated text infra.
\148\ See, e.g., Proposing Release, supra note 2, at 48459-460.
---------------------------------------------------------------------------
The Participants' comment letter was particularly focused on
proposed conditions related to error rates, but the Commission believes
that these conditions are appropriate. The proposed Financial
Accountability Milestones that include error rate requirements do not
impose any requirements that are more onerous than initial error rate
requirements already set forth in the CAT NMS Plan.\149\ The
Participants have, in the past, indicated that these initial error rate
requirements are appropriate, because they ``strike[] the balance of
making allowances for adapting to a new reporting regime while ensuring
that the data provided to regulators will be capable of being used to
conduct surveillance and market reconstruction.'' \150\ Furthermore,
because the Participants have chosen to implement Industry Member
reporting in phases,\151\ the Commission generally believes it is
appropriate to require the Participants to satisfy the initial error
rates set by the CAT NMS Plan for each phase that has been completed.
This approach, reflected in the proposed amendments, as modified, only
requires the Participants to focus on data quality for functionality
that has been fully implemented for some time, not on those elements of
the CAT that may still be in development or that have been newly
implemented.
---------------------------------------------------------------------------
\149\ Cf., e.g., CAT NMS Plan, supra note 1, at Section
6.5(d)(i) (``The initial maximum Error Rate shall be set to 5[
percent].''), and proposed Section 1.1, ``Full Implementation of CAT
NMS Plan Requirements'' (requiring the CAT to be ``fully implemented
at the initial Error Rates specified Section 6.5(d)(i) or less'').
\150\ See CAT NMS Plan Approval Order, supra note 1, at 84717.
\151\ See, e.g., Exemptive Relief Order, supra note 8.
---------------------------------------------------------------------------
Moreover, the Commission believes that the amendments, as modified,
give the Participants ample time to achieve the required error rates.
With respect to the Full Implementation of Core Equity Reporting
Requirements milestone, the Participants are currently estimating, and
the Commission believes, that the required Industry Member reporting
and linkages will be fully implemented by October 26, 2020.\152\ The
Participants will therefore have more than two months to achieve the
required error rate by the target deadline for this Financial
Accountability Milestone, which is December 31, 2020.\153\ The next
Financial Accountability Milestone, the Full Availability and
Regulatory Utilization of Transactional Database Functionality
milestone, as modified, requires the Participants to sustain the error
rates achieved for the previous milestone and to achieve the same
requirements for simple electronic options transaction data,
representative order linkages, and equities allocation information by
December 31, 2021. The Participants are currently estimating that the
required options functionality will be implemented by January 4, 2021
\154\ and that the representative order linkage and allocation
information functionality will be implemented by April 26, 2021.\155\
Therefore, the Commission believes that the Participants should have
sufficient time to satisfy those error rate requirements. Likewise, the
Commission believes the target deadline for the Full Implementation of
CAT NMS Plan Requirements milestone provides the Participants with
sufficient time to achieve the required error rates. The Participants
currently estimate that the CAT will be fully implemented by July 11,
2022.\156\ The amendments, as modified, therefore give the Participants
approximately five months to achieve the required error rates,\157\
which the Commission believes is an appropriate amount of time to
address any issues with the final phases of CAT implementation.\158\
---------------------------------------------------------------------------
\152\ See note 97 supra.
\153\ See also Proposing Release, supra note 2, at 48468.
\154\ See note 97 supra.
\155\ See Exemptive Relief Order, supra note 8, at 23081.
\156\ See id.
\157\ The Participants should have more than a year to achieve
some of the required error rates, as the modified Full Availability
and Regulatory Utilization of Transactional Database Functionality
milestone would require the Participants to implement Industry
Member reporting of manual and complex options transaction data,
with options allocation information, by December 31, 2021,
consistent with the Participants' current projections. See id.
\158\ See Proposing Release, supra note 2, at 48470. The
Participants will be required to implement Industry Member reporting
of Customer Account Information, Customer-ID, and Customer
Identifying Information to achieve Full Implementation of CAT NMS
Plan Requirements. See CAT NMS Plan, supra note 1, at Section 1.1
for definitions of these terms. The Participants' CAT Reporting
Customer and Account Technical Specifications indicates that they
began implementing the customer and account information database in
December 2019, see https://www.catnmsplan.com/specifications/im, so
the Commission believes that the Participants should have ample time
to achieve the required error rates for these aspects of CAT
implementation.
---------------------------------------------------------------------------
[[Page 31335]]
The Commission also does not believe that it is necessary to modify
the proposed amendments to address the Participants' concerns regarding
OATS retirement. The Participants have stated that Industry Member
reporting for equities data inclusive of OATS reporting will be fully
implemented by October 26, 2020.\159\ Consequently, the modified
amendments will give the Participants approximately fourteen months to
meet the required error rate for equities data and retire OATS. The
Commission believes that this is a sufficient amount of time to achieve
these goals, based on FINRA's representations regarding the amount of
time it would take to retire OATS.\160\ If the Participants complete
the Full Implementation of Core Equity Reporting Requirements milestone
by the target deadline for that Financial Accountability Milestone, the
Participants will already have achieved the 5 percent error rates
required for equities transaction data reported by Industry Members by
December 31, 2020.\161\ The Participants will then have far more than
180 days in which to achieve the ``5[ percent] or lower, measured on a
pre-correction or as-submitted basis, and 2[ percent] or lower on a
post-correction basis,'' error rates that may be required by FINRA to
retire OATS.\162\ Accordingly, the Commission does not believe any
further modifications to these amendments are appropriate or necessary.
---------------------------------------------------------------------------
\159\ See note 97 supra.
\160\ See, e.g., Participant Letter, at 8-11. Although FINRA is
the only Participant that may determine whether to retire OATS, the
Commission continues to believe that it is appropriate to apply this
condition to all Participants. All of the Participants are jointly
responsible for creating a CAT that is capable of replacing OATS,
and all of the Participants are regulators that will benefit from
the full implementation of the CAT. See Proposing Release, supra
note 2, at 48469 n.106. Moreover, FINRA has developed, and
communicated to the Participants, a plan governing the retirement of
OATS--see, e.g., Participant Letter, at 10-11--and the Commission
expects that such advance planning could make it more likely that
OATS will be retired by the target deadline of December 31, 2021.
Nevertheless, the Commission will continue to monitor the progress
of CAT implementation closely and could consider exempting the
Participants from compliance with this condition at a later date, if
appropriate. See note 147 and associated text infra, noting the
Commission's ability to grant exemptive relief from any requirement
associated with a Financial Accountability Milestone.
\161\ See proposed Section 1.1, ``Full Availability and
Regulatory Utilization of Transactional Database Functionality.''
\162\ See Participant Letter, at 10-11. The Commission does not
believe that its involvement in approving the retirement of OATS and
OATS-related rules should unduly delay the achievement of Full
Availability and Regulatory Utilization of Transactional Database
Functionality. FINRA and the Participants with rules relating to
OATS may submit filings to the Commission at any point to identify
the conditions under which OATS would be retired and OATS-related
provisions removed from the Participants' rulebooks. The Commission
could consider and act on these retirement filings well before the
December 31, 2021 deadline and, if approved, would permit FINRA and
the Participants to subsequently issue a notice indicating when the
conditions identified in the filings are met, thus ensuring that
this condition is fulfilled in a timely manner.
---------------------------------------------------------------------------
d. Comments on the Possibility of Unforeseen, But Reasonable, Delays
Several commenters recommended that the Commission adopt a more
flexible approach that could account for the possibility of reasonable
delays to CAT implementation. For example, one commenter stated that
the ``completion of current and upcoming CAT implementation milestones
are all contingent on several challenging and aggressive deliverables,
many of which will impact the development, testing, and roll-out of
complex technology . . . .'' \163\ This commenter believed that
``factors outside of the Participants' and/or Plan Processor's control
may require the regulators to revisit the reasonableness and viability
of implementation milestones to preserve the ultimate delivery of a
useable CAT in a reasonable timeframe.'' \164\ Accordingly, this
commenter recommended that the Commission ``include provisions to the
Proposed Amendments that allow, after the holistic assessment of all
factors impacting the Participants' ability to meet a particular
milestone date, flexibility to extend milestone dates without holding
Participants directly accountable (financially or otherwise).'' \165\
---------------------------------------------------------------------------
\163\ See FIF Letter, at 4.
\164\ See id.
\165\ See id.; see also Fidelity Letter, at 5 (``We recommend
that the SEC allow for some flexibility or reasonable delays in
target deadlines, particularly in matters that may impact data
quality.'').
---------------------------------------------------------------------------
Another commenter requested that ``the amendments to the CAT NMS
Plan include a formal mechanism to address potential delays in CAT
implementation that may arise for legitimate reasons,'' ``due to a
reasonable need for delay or to factors beyond anyone's control.''
\166\ This commenter suggested that the ``mechanism could be a similar
process to the proposed publications of the implementation plan--
approval from each [Participant]'s senior officer and vote by the
Operating Committee,'' as such a mechanism ``would serve the purpose of
completing the CAT in a timely manner while taking into account the
operational complexity of the CAT implementation process.'' \167\ This
commenter also ``recommended that the Commission take reasonable delays
into account in imposing the proposed financial penalties,'' perhaps by
``suspending the proposed financial penalties based on the cause,
foreseeability and attempts to mitigate the impact of the delay.''
\168\
---------------------------------------------------------------------------
\166\ See SIFMA Letter, at 2. See also Participant Letter, at 9
(``[U]nanticipated issues invariably arise on large technology
projects and CAT is no exception.'').
\167\ See SIFMA Letter, at 2.
\168\ See id. Similarly, the Participants stated that ``the
Commission and all market participants would benefit from a more
flexible approach in which the Commission would assess the
appropriateness of the recovery of Post-Amendment Industry Member
Fees in the context of particular facts and circumstances in the
event of a delay in meeting such a Milestone.'' See Participant
Letter, at 10.
---------------------------------------------------------------------------
Although it is sensitive to the concerns expressed by commenters,
the Commission is adopting a mechanism that would not allow further
delays to occur without consequence. The Participants have already
missed the Commission-approved deadlines set forth in the CAT NMS
Plan.\169\ The Participants are responsible for timely CAT
implementation, including selecting and managing the Plan Processor,
and the process is fundamentally within their control.\170\ Delays to
CAT implementation have serious consequences; they prevent regulators
and market participants from reaping the regulatory benefits of the
CAT, as well as potentially increase costs for Industry Members
attempting to comply with the Participants' projected timelines.\171\
However, the Commission has the authority to grant exemptive relief
from any requirement associated with a particular Financial
Accountability Milestone.\172\ The Commission believes that this
ability, in particular, should alleviate the Participants' concerns
regarding the potential impact of unforeseeable or reasonable delays.
---------------------------------------------------------------------------
\169\ See, e.g., note 6 supra; see also Proposing Release, supra
note 7, at 48458-461.
\170\ See Part II.B.2.c. supra, for further discussion of these
arguments. See also, e.g., Proposing Release, supra note 2, at
48460.
\171\ See, e.g., Fidelity Letter, at 2 (explaining how further
delays by the Participants may impose additional costs on Industry
Members); see also infra Part IV.B.
\172\ See 15 U.S.C. 78mm; 17 CFR 242.608(e).
---------------------------------------------------------------------------
[[Page 31336]]
III. Paperwork Reduction Act
Certain provisions of the amendments adopted by the Commission
contain ``collection of information requirements'' within the meaning
of the Paperwork Reduction Act of 1995 (``PRA'').\173\ The Commission
published a notice requesting comment on the collection of information
requirements in the Proposing Release \174\ and submitted relevant
information to the Office of Management and Budget (``OMB'') for review
in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11.\175\ An agency
may not conduct or sponsor, and a person is not required to respond to,
a collection of information unless the agency displays a currently
valid control number,\176\ and the Commission has applied for an OMB
control number for this collection of information. The title of the new
collection of information is ``CAT NMS Plan Reports.''
---------------------------------------------------------------------------
\173\ 44 U.S.C. 3501 et seq.
\174\ See Proposing Release, supra note 2, at 48474-78.
\175\ 44 U.S.C. 3507; 5 CFR 1320.11.
\176\ 5 CFR 1320.11(l).
---------------------------------------------------------------------------
The Commission requested comment on the proposed collection of
information requirements, but no commenters addressed these issues. The
Commission continues to believe its estimates of the burdens involved
with this collection of information are reasonable, but it has adjusted
some of its estimates to account for the fact that Long Term Stock
Exchange, LLC has been added as a Participant.\177\ Accordingly, there
are now 24 Participants instead of the 23 Participants accounted for in
the Proposing Release.\178\
---------------------------------------------------------------------------
\177\ See note 1 supra.
\178\ See Proposing Release, supra note 2, at 48474-78.
---------------------------------------------------------------------------
A. Summary of Collection of Information
The modified amendments require two new categories of information
collection: (1) The Implementation Plan and (2) the Quarterly Progress
Reports.
1. Implementation Plan
Section 6.6(c)(i) requires the Participants, within 30 calendar
days following the effective date of this amendment, to file with the
Commission and make publicly available on a website a complete
Implementation Plan that includes the Participants' timeline for
achieving Implementation Milestones setting forth how and when the
Participants will facilitate the achievement of Full Implementation of
CAT NMS Plan Requirements. The Operating Committee must submit the
Implementation Plan to the CEO, President, or an equivalently situated
senior officer of each Participant. A Supermajority Vote of the
Operating Committee will then be required to approve the Implementation
Report. However, if the Implementation Plan is approved only by a
Supermajority Vote of the Operating Committee, and not by a unanimous
vote of the Operating Committee, each Participant whose Operating
Committee member did not vote to approve the Implementation Plan shall
separately file with the Commission a statement identifying itself and
explaining why the member did not vote to approve the Implementation
Plan. These statements shall be made publicly available by each
dissenting Participant on its website or collectively by all
Participants on the CAT NMS Plan website.
2. Quarterly Progress Reports
Section 6.6(c)(ii) requires the Participants, within 30 calendar
days after the end of each calendar quarter, to file with the
Commission and make publicly available on a website a complete Report
that provides a detailed description of the progress made by the
Participants towards each of the Implementation Milestones. The
Participants must provide specified information regarding
Implementation Milestones that have been completed, Implementation
Milestones that are in progress, and Implementation Milestones that
have not yet been initiated, such as updated information on currently
targeted completion dates and descriptions of the current status of the
Implementation Milestone, any adjustments to the targeted completion
date, and supporting information demonstrating the current level of
completion. The Operating Committee must submit each Quarterly Progress
Report to the CEO, President, or an equivalently situated senior
officer of each Participant. A Supermajority Vote of the Operating
Committee shall be required to approve each Quarterly Progress Report.
However, if a Quarterly Progress Report is approved only by a
Supermajority Vote of the Operating Committee, and not by a unanimous
vote of the Operating Committee, each Participant whose Operating
Committee member did not vote to approve that Quarterly Progress Report
shall separately file with the Commission a statement identifying
itself and explaining why the member did not vote to approve the
Report. These statements shall be made publicly available by each
dissenting Participant on its website or collectively by all
Participants on the CAT NMS Plan website.
B. Proposed Use of Information
1. Implementation Plan
The Commission believes that the publication of the Implementation
Plan will make available critical information to the Commission, other
regulators, and market participants regarding the intended goals and
deadlines of the Participants. Access to this information will help the
Commission and market participants to monitor the progress of CAT
implementation, thereby reducing uncertainty surrounding this process.
The Commission also anticipates that requiring the Participants to make
public target dates submitted to senior management of each Participant
and approved by a Supermajority Vote of the Operating Committee in the
Implementation Plan will increase the Participants' accountability to
their intended timeline. In addition, the Commission believes that
requiring any Participants whose Operating Committee members do not
vote to approve the Implementation Plan to disclose the basis for that
decision may aid the Commission and the public to better monitor the
progress of CAT implementation, because such an explanation may reveal
critical information regarding whether currently targeted completion
dates are realistic, whether milestones are being or have been
completed in accordance with the requirements of the CAT NMS Plan, and/
or whether potential risks or delays may impede the progress of CAT
implementation.
2. Quarterly Progress Reports
The Commission believes that the publication of the Quarterly
Progress Reports will make available critical information to the
Commission, other regulators, and market participants regarding the
intended goals and deadlines of the Participants. Access to this
information will help the Commission and market participants to monitor
the progress of CAT implementation. The Commission also anticipates
that requiring the Participants to make public their accomplishments in
the Quarterly Progress Reports will keep the Participants accountable
to their intended timeline. Finally, the Commission expects that the
provision of updated quarterly information in a Report, submitted to
senior management of each Participant and approved by a Supermajority
Vote of the Operating Committee, regarding the Participants' progress
towards CAT implementation,
[[Page 31337]]
as well as any explanatory statements by Participants whose Operating
Committee members do not vote to approve the Report, may reduce
uncertainty regarding CAT's implementation deadlines and flag any
concerns regarding the implementation process for the Commission and
market participants.
C. Respondents
The respondents to all collections of information are the
Participants.
D. Total Initial and Annual Reporting and Recordkeeping Burdens
The estimated burdens associated with the modified amendments are
described fully below, but this table briefly summarizes the relevant
burdens.
----------------------------------------------------------------------------------------------------------------
Annual ongoing burden One-time burden per
Category per participant (burden participant (burden
hours/external costs) hours/external costs)
----------------------------------------------------------------------------------------------------------------
Implementation Plan........................................... N/A 75/$8,333.33
Quarterly Progress Reports.................................... 300/$33,333.33 N/A
----------------------------------------------------------------------------------------------------------------
1. Implementation Plan
The Commission believes that each Participant will incur, on
average, a one-time burden of approximately 50 hours \179\ to confer
with other Participants, to draft an Implementation Plan, and to vote
as to whether to approve the Implementation Plan, as required by
Section 6.6(c)(iii). In the CAT NMS Plan Approval Order, the Commission
stated that the Participants had estimated that approximately 20 full-
time employees took approximately 30 months to develop the CAT NMS
Plan, including ``staff time contributed by each Participant to, among
other things, determine the technological requirements for the Central
Repository, develop the RFP, evaluate Bids received, design and collect
the data necessary to evaluate costs and other economic impacts, meet
with Industry Members to solicit feedback, and complete the CAT NMS
Plan submitted to the Commission for consideration.'' \180\ The
Commission then used this information to estimate that the development
of the CAT NMS Plan would require, in aggregate, 14,407 burden hours
for 12 months.\181\
---------------------------------------------------------------------------
\179\ See note 184 infra, for an explanation of the difference
in the estimated burden from the Proposing Release to this release.
\180\ See CAT NMS Plan Approval Order, supra note 1, at n.3285.
\181\ See id.
---------------------------------------------------------------------------
This estimate, based on information provided by the Participants
about the burdens they actually incurred in developing a related
project, reflects the best data available to the Commission in
estimating the number of initial burden hours required to develop the
Implementation Plan. Developing the CAT NMS Plan was a far more complex
project than the development of the Implementation Plan and that the
burdens incurred in developing the CAT NMS Plan may be different in
nature than the costs that the Participants would incur in developing
the Implementation Plan. In this instance, for example, the
Participants will only have 30 calendar days from the effective date of
this amendment to prepare the Implementation Plan, and the Participants
have already created an Updated Master Plan that contains much of the
information required by Section 6.6(c)(i). In addition, the Commission
believes that the Participants should already have gathered much of the
information needed to create the Implementation Plan.\182\ For these
reasons, the Commission believes that the estimated burden for
preparing the Implementation Plan should be one-twelfth the amount of
the burden estimated for the development of the CAT NMS Plan,\183\ or,
on average, 50 initial, one-time burden hours for each
Participant.\184\
---------------------------------------------------------------------------
\182\ See, e.g., Participant Letter, at 6.
\183\ Because the proposed amendment gives the Participants
approximately one month to prepare and publish the Implementation
Plan, the Commission has used an estimate that mirrors the one-month
burden that was incurred by the Participants in developing the CAT
NMS Plan.
\184\ 14,407 CAT NMS Plan burden hours/12 months = 1,200.6
burden hours for all Participants. 1,200.6 aggregate burden hours/24
Participants = 50 burden hours per Participant for the
Implementation Plan. Although the Commission estimated this burden
as 52.2 hours per Participant in the Proposing Release, see note 2
supra, at 48475, this number was reached by dividing the aggregate
burden of 1,200.6 hours by only 23 Participants; now that there are
24 Participants, the burden per Participant has been slightly
reduced. For the same reason, the Commission's estimated breakdown
of this burden has also been revised. The Commission now estimates
that each Participant will spend, on average, 50 internal burden
hours = (Attorney at 7 hours) + (Systems Analyst at 21.5 hours) +
(Compliance Manager at 21.5 hours). All estimates in this section
represent an average; the Commission expects that some Participants
may incur greater costs and some lesser costs due to variances in
economies of scale for Participants who share a common corporate
parent. See, e.g., infra note 257.
---------------------------------------------------------------------------
In addition, the Commission estimates that it will take each
Participant approximately 10 hours, on average, for its member of the
Operating Committee to ensure that the Operating Committee submits the
Implementation Plan to the CEO, President, or equivalently situated
senior officer of each Participant, for each Participant to review the
information contained in the Implementation Plan and for senior
management consultations as needed, and to vote on approving the
Implementation Plan.\185\ The Commission expects each member of the
Operating Committee to be familiar with the process of CAT
implementation, which should ease the task of determining whether to
vote in favor of the Implementation Plan. Accordingly, the Commission
estimates that each Participant will incur, on average, a one-time
burden of 60 hours to prepare the Implementation Plan and to vote as to
whether to approve it,\186\ for a one-time aggregate burden of
approximately 1,440 hours.\187\
---------------------------------------------------------------------------
\185\ For the purposes of the Paperwork Reduction Act, the
Commission is assuming that the member of the Operating Committee is
a Chief Regulatory Officer or a Chief Compliance Officer and will
spend 5 hours on these tasks. However, this task could be performed
by any person designated by the Participant to serve as its
representative on the Operating Committee. See Section 4.2(a) of the
CAT NMS Plan. In addition, the Commission estimates that senior
management who receive the Implementation Plan from the Operating
Committee will spend 5 hours in consultations, including with their
member of the Operating Committee regarding the Implementation Plan.
Because one individual may serve as the representative for multiple
affiliated Participants, the Commission expects that some
Participants may incur greater costs and some lesser costs due to
variances in economies of scale for Participants who share a common
corporate parent.
\186\ 50 burden hours + 10 burden hours = 60 burden hours.
\187\ 60 burden hours x 24 Participants = 1,440 burden hours.
This estimate has increased because there are now 24 Participants.
---------------------------------------------------------------------------
If the Implementation Plan is approved only by a Supermajority
Vote, and not by a unanimous vote, the modified amendments require each
Participant whose Operating Committee member did not vote to approve
the Implementation Plan to separately file with the Commission an
explanatory statement identifying itself and
[[Page 31338]]
explaining why it did not vote to approve the Implementation Plan.\188\
These statements shall be made publicly available by each dissenting
Participant on its website or collectively by all Participants on the
CAT NMS Plan website. Because there are currently 24 Participants, an
Implementation Plan would need to be approved by at least 16 members of
the Operating Committee to satisfy the Supermajority Vote provisions of
the CAT NMS Plan.\189\ At maximum, then, only eight Participants would
file an explanatory statement in connection with an Implementation Plan
approved only by Supermajority Vote.\190\ The Commission estimates that
each of the eight Participants submitting an explanatory statement will
incur, on average, an initial, one-time burden of 15 hours to draft
such statement.\191\ When this aggregate burden is averaged across all
Participants, it amounts to approximately 5 hours per Participant or
120 hours in aggregate.\192\
---------------------------------------------------------------------------
\188\ For the purposes of the Paperwork Reduction Act, the
Commission is assuming that this task will be performed by a Chief
Regulatory Officer or a Chief Compliance Officer. See note 185
supra.
\189\ 24 Participants x \2/3\ Participants = 16 Participants.
\190\ 24 Participants - 16 Participants = 8 Participants.
\191\ The Commission bases this estimate on a full-time
Compliance Manager and the Chief Regulatory Officer or Chief
Compliance Officer each spending 7.5 hours to prepare the
explanatory statement.
\192\ 8 Participants * 15 burden hours = 120 burden hours in
aggregate. 120 burden hours/24 Participants = 5 burden hours. This
estimate has increased because there are now 24 Participants.
---------------------------------------------------------------------------
Finally, the Commission estimates that each Participant will incur,
on average, a one-time burden of approximately 10 hours to ensure that
the Implementation Plan, and any explanatory statement (if applicable),
is filed with the Commission and made publicly available on a
website.\193\ The Commission therefore estimates an aggregate burden of
approximately 240 hours for the Participants to publicly post and
submit to the Commission the Implementation Plan.\194\
---------------------------------------------------------------------------
\193\ The Commission bases this estimate on a full-time
Compliance Manager and Programmer Analyst each spending
approximately 5 hours, for a combined total of approximately 10
hours, to prepare and publicly post the relevant documents.
\194\ 10 burden hours per Participant x 24 Participants = 240
burden hours.
---------------------------------------------------------------------------
In total, therefore, the Commission estimates that each Participant
will incur, on average, a one-time burden of approximately 75 hours
\195\ and approximately 1,800 hours in aggregate to comply with the
provisions of the proposed amendments that relate to the Implementation
Plan.\196\
---------------------------------------------------------------------------
\195\ 50 hours + 10 hours + 5 hours + 10 hours = 75 burden
hours.
\196\ 75 hours x 24 Participants = 1,800 burden hours. This
estimate has increased because there are now 24 Participants. See
Part IV.C. infra for a dollar cost estimate of this burden.
---------------------------------------------------------------------------
The Commission further estimates that each Participant will expend
approximately $8,333.33, on average, in external public relations,
legal, and consulting costs related to the development of the
Implementation Plan. In the CAT NMS Plan Approval Order, the Commission
estimated, based on information provided by the Participants, that the
Participants had collectively spent approximately $2,400,000 in
preparation of the CAT NMS Plan on external public relations, legal,
and consulting costs.\197\ The Commission believes that the estimated
burden for the Implementation Plan should be one-twelfth the amount
estimated for the development of the CAT NMS Plan, because the
Participants will only have 30 calendar days from the effective date of
this amendment to prepare the Implementation Plan and because
preparation of the Implementation Plan is a much less complex project.
Accordingly, the Commission estimates that the Participants will expend
approximately $200,000 in aggregate, and $8,333.33 per Participant, in
external public relations, legal, and consulting costs related to the
preparation of the Implementation Plan.\198\
---------------------------------------------------------------------------
\197\ See CAT NMS Plan Approval Order, supra note 1, at n.3287.
\198\ $2,400,000 CAT NMS Plan costs/12 months = $200,000 for all
Participants. $200,000/24 Participants = $8,333.33 per Participant
for the Implementation Plan. Although the Commission estimated this
burden as $8,695.65 per Participant in the Proposing Release, see
note 2 supra, at 48476, this number was reached by dividing the
aggregate burden of $200,000 by only 23 Participants; now that there
are 24 Participants, the burden per Participant has been slightly
reduced.
---------------------------------------------------------------------------
2. Quarterly Progress Reports
The Commission believes that each Participant will incur, on
average, an ongoing quarterly burden of approximately 60 hours to
confer with other Participants, to draft a Quarterly Progress Report,
to ensure that the Operating Committee submits each Quarterly Progress
Report to the CEO, President, or equivalently situated senior officer
of each Participant, and to vote as to whether to approve each
Quarterly Progress Report, as required by proposed Section
6.6(c)(iii).\199\ This estimate is approximately the same as the burden
related to the development and approval of the Implementation Plan,
because the Quarterly Progress Reports require the Participants to
prepare a detailed description explaining, quantifying, and voting to
approve the description of their progress towards the Implementation
Milestones laid out in the Implementation Plan, including the impact
that any such progress might have on the target completion dates for
Implementation Milestones that have not yet been achieved. The
Commission believes this estimate is appropriate because the
Participants are likely already tracking some of the information
required to be included in the Quarterly Progress Reports.\200\
Accordingly, the Commission estimates, on average, an ongoing quarterly
burden of approximately 60 hours for each Participant,\201\ an ongoing
annual burden of approximately 240 hours for each Participant,\202\ and
an aggregate annual burden of approximately 5,760 hours.\203\
---------------------------------------------------------------------------
\199\ All estimates in this section represent an average; the
Commission expects that some exchanges may incur greater costs and
some lesser costs due to variances in economies of scale for
Participants who share a common corporate parent. See infra note
257.
\200\ See, e.g., Proposing Release, supra note 2, at 48462 n.53
and associated text.
\201\ The Commission estimates that each Participant will spend,
on average, 50 internal burden hours to confer with other
Participants and to compile the Quarterly Progress Report =
(Attorney at 7 hours) + (Systems Analyst at 21.5 hours) +
(Compliance Manager at 21.5 hours). In addition the Commission
estimates, for the purposes of the Paperwork Reduction Act, that the
chief Compliance Officer or Chief Regulatory Officer of each
Participant will spend 5 hours, on average, to submit the Quarterly
Progress Report to the CEO, President, or equivalently situated
senior officer of each Participant, to review the information
contained in each Quarterly Progress Report and for senior
management consultations as needed, and to vote on approving the
Quarterly Progress Report. In addition, the Commission estimates
that the CEO, President, or equivalently situated senior officer of
each Participant will spend 5 hours in consultations, including with
their member of the Operating Committee regarding each Quarterly
Progress Report. 50 hours + 5 hours + 5 hours = 60 hours. Because
one individual may serve as the representative for multiple
affiliated Participants, the Commission expects that some
Participants may incur greater costs and some lesser costs due to
variances in economies of scale for Participants who share a common
corporate parent. Although the Commission estimated this burden as
62.2 hours per Participant in the Proposing Release, see note 2
supra, at 48476-77, this estimate was partially based on the fact
that there were only 23 Participants; now that there are 24
Participants, the burden per Participant has been slightly reduced.
\202\ 60 burden hours per Participant per Quarterly Progress
Report * 4 Quarterly Progress Reports = 240 annual burden hours per
Participant for the Quarterly Progress Reports.
\203\ 240 annual burden hours per Participant * 24 Participants
= 5,760 aggregate annual burden hours. This estimate has increased
because there are now 24 Participants.
---------------------------------------------------------------------------
If any Quarterly Progress Report is approved only by a
Supermajority Vote, and not by a unanimous vote, the proposed
amendments require each
[[Page 31339]]
Participant whose Operating Committee member did not vote to approve
that Quarterly Progress Report to separately file with the Commission
an explanatory statement identifying itself and explaining why it did
not vote to approve the Report.\204\ These statements shall be made
publicly available by each dissenting Participant on its website or
collectively by all Participants on the CAT NMS Plan website. Because
there are currently 24 Participants, each Quarterly Progress Report
would need to be approved by at least 16 members of the Operating
Committee to satisfy the Supermajority Vote provisions of the CAT NMS
Plan.\205\ At maximum, then, only eight Participants would file an
explanatory statement in connection with a Quarterly Progress Report
approved only by Supermajority Vote.\206\ The Commission estimates that
each of the eight Participants submitting an explanatory statement will
incur, on average, an ongoing burden of 15 hours to draft such
statement.\207\ When this aggregate burden is averaged across all
Participants, it amounts to an ongoing quarterly burden of
approximately 5 hours per Participant,\208\ an ongoing annual burden of
approximately 20 hours per Participant,\209\ and an aggregate annual
burden of approximately 420 hours.\210\
---------------------------------------------------------------------------
\204\ For the purposes of the Paperwork Reduction Act, the
Commission is assuming that this task will be performed by a Chief
Regulatory Officer or a Chief Compliance Officer. See note 185
supra.
\205\ See note 189 supra.
\206\ See note 190 supra.
\207\ See note 191 supra.
\208\ 8 Participants * 15 burden hours = 120 burden hours in
aggregate. 120 burden hours/24 Participants = 5 burden hours. This
estimate has increased because there are now 24 Participants.
\209\ 5 burden hours x 4 Quarterly Progress Reports = 20 burden
hours. This estimate has increased because there are now 24
Participants.
\210\ 20 annual burden hours x 24 Participants = 480 burden
hours. This estimate has increased because there are now 24
Participants.
---------------------------------------------------------------------------
Additionally, the Commission estimates that each Participant will
incur an ongoing quarterly burden, on average, of approximately 10
hours to ensure that each Quarterly Progress Report, and any
explanatory statement (if applicable), is filed with the Commission and
made publicly available on a website.\211\ The Commission therefore
estimates an annual burden, on average, of approximately 40 hours for
each Participant,\212\ and an aggregate annual burden of 960 hours for
all Participants,\213\ to publicly post and submit to the Commission
the Reports.
---------------------------------------------------------------------------
\211\ The Commission bases this estimate on a full-time
Compliance Manager and Programmer Analyst each spending
approximately 5 hours, for a combined total of approximately 10
hours, to prepare and publicly post the relevant documents.
\212\ 10 burden hours per Quarterly Progress Report x 4 quarters
= 40 annual burden hours per Participant.
\213\ 40 annual burden hours per Participant x 24 Participants =
960 aggregate annual burden. This estimate has increased because
there are now 24 Participants.
---------------------------------------------------------------------------
In total, therefore, the Commission estimates that each Participant
will incur, on average, an ongoing burden of approximately 75 hours per
Quarterly Progress Report,\214\ for an annual average estimated burden
of 300 hours \215\ and approximately 7,200 hours in aggregate.\216\
---------------------------------------------------------------------------
\214\ 60 hours + 5 hours + 10 hours = 75 burden hours.
\215\ 75 hours x 4 Quarterly Progress Report = 300 hours.
\216\ 300 hours x 24 Participants = 7,200 burden hours. See Part
IV.C. infra for a dollar cost estimate of this burden. This estimate
has increased because there are now 24 Participants.
---------------------------------------------------------------------------
Similarly, the Commission estimates that each Participant will
expend, on an ongoing basis, approximately the same amount of external
public relations, legal, and consulting costs associated with the
Implementation Plan on each Quarterly Progress Report. Accordingly, the
Commission estimates, on average, an ongoing quarterly cost of
approximately $8,333.33 for each Participant, an ongoing annual cost of
$33,333.33 for each Participant,\217\ and an aggregate annual cost of
approximately $800,000.\218\ A portion of these costs may be
recoverable from Industry Members, if consistent with the Exchange Act
and the CAT NMS Plan.\219\
---------------------------------------------------------------------------
\217\ $8,333.33 per Participant per Quarterly Progress Report *
4 Quarterly Progress Reports = $33,333.33 per Participant per year
for the Quarterly Progress Reports. Although the Commission
estimated this burden as $34,782.60 per Participant in the Proposing
Release, see supra note 2, at 48477, this estimate was partially
based on the fact that there were only 23 Participants; now that
there are 24 Participants, the burden per Participant has been
slightly reduced.
\218\ $33,333.33 per Participant * 24 Participants = $800,000
aggregate annual cost.
\219\ See, e.g., Article XI of the CAT NMS Plan.
---------------------------------------------------------------------------
E. Collection of Information Is Mandatory
Each collection of information discussed above is mandatory.
F. Confidentiality of Responses to Collection of Information
Neither the Implementation Plan nor the Quarterly Progress Reports
will be confidential. Rather, each will be publicly posted by the
Participants on a website.
G. Retention Period for Recordkeeping Requirements
National securities exchanges and national securities associations
are required to retain records and information pursuant to Rule 17a-1
under the Exchange Act.\220\
---------------------------------------------------------------------------
\220\ 17 CFR 240.17a-1.
---------------------------------------------------------------------------
IV. Economic Analysis
Section 3(f) of the Exchange Act requires the Commission, whenever
it engages in rulemaking and is required to consider or determine
whether an action is necessary or appropriate in the public interest,
to consider, in addition to the protection of investors, whether the
action would promote efficiency, competition, and capital
formation.\221\ In addition, Section 23(a)(2) of the Exchange Act
requires the Commission, when making rules under the Exchange Act, to
consider the impact such rules would have on competition.\222\ Exchange
Act Section 23(a)(2) prohibits the Commission from adopting any rule
that would impose a burden on competition not necessary or appropriate
in furtherance of the purposes of the Exchange Act. The discussion
below addresses the likely economic effects of the rule, including the
likely effect of the rule on efficiency, competition, and capital
formation.
---------------------------------------------------------------------------
\221\ 15 U.S.C. 78c(f).
\222\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------
As discussed above and in the Proposing Release, since the adoption
of Rule 613 in 2012, CAT implementation has experienced recurrent
delays.\223\ These implementation delays have postponed the benefits of
the CAT NMS Plan to investors \224\ and may have resulted in additional
costs to Industry Members.\225\ The Commission believes that modifying
the CAT NMS Plan to require operational transparency and provide
financial accountability for meeting implementation milestones will
impose more structure on the process and is appropriate to prevent any
further delays to CAT implementation.
---------------------------------------------------------------------------
\223\ See supra Part I; Proposing Release, supra note 2 at Part
IV.A.2.
\224\ See CAT NMS Plan Approval Order, supra note 1, at Section
V.E.
\225\ See infra Part IV.B.
---------------------------------------------------------------------------
The amendments increase operational transparency by requiring
Participants to publish a complete CAT implementation plan, and to
publish a progress report quarterly, both of which require approval by
a Supermajority Vote of the Operating Committee.\226\ The amendments
also establish Financial Accountability Milestones and Reduced Fee
Recovery Rates (``RFRRs'') that take effect and increase in magnitude
in response to delays in meeting certain Financial
[[Page 31340]]
Accountability Milestones.\227\ Thus, the amendments would shift some
costs from Industry Members to Participants if the Participants fail to
meet certain Financial Accountability Milestones.
---------------------------------------------------------------------------
\226\ See supra Part II.A. and infra Part IV.B.
\227\ The Plan allows Participants to recover a percentage of
certain CAT costs from Industry Members. In the event that RFRRs are
triggered, the amendments would reduce the amount of fees that the
Participants are allowed to recover from Industry Members according
to the fee schedule described in Part II.B below.
---------------------------------------------------------------------------
The Commission is making minor changes to the economic analysis it
made in the Proposing Release.\228\ These changes address the
modifications the Commission is making to the amendments, which
include: providing the Participants with additional time to prepare,
file, and publish the Quarterly Progress Reports; eliminating the
requirement that manual and complex options transactions, as well as
allocation information for options transactions reported by Industry
Members, satisfy the initial error rates specified by Section 6.5(d)(i)
of the CAT NMS Plan by December 31, 2021; and modifying the first
Financial Accountability Milestone, Initial Industry Member Core Equity
Reporting, and the fee recovery schedule associated with that Financial
Accountability Milestone. These changes to the Commission's analysis
also address comments related to its economic analysis in the Proposing
Release.
---------------------------------------------------------------------------
\228\ See Proposing Release, supra note 2, at Part IV.
---------------------------------------------------------------------------
A. Baseline
Based on comments received, the Commission is updating its Baseline
analysis. The Commission's analysis of the Baseline from the Proposing
Release and changes to this analysis are discussed below.
1. Transparency of CAT Implementation Status
In the Proposing Release, the Commission discussed how Industry
Members obtain information about the implementation status of the CAT
NMS Plan through several mechanisms.\229\ A few representatives of
Industry Members are privy to information through their participation
on the CAT Advisory Committee, but this information is not widely
available. In addition, the Commission discussed that the Operating
Committee provides a website with information on the CAT NMS Plan, but
that there is no requirement in the CAT NMS Plan to keep it current.
Furthermore, the Operating Committee provides occasional updates to
Industry Members on the state of implementation. Finally, the
Commission stated that Industry Members gain information about CAT
implementation through the Industry Technical Specifications Working
Group.
---------------------------------------------------------------------------
\229\ See Proposing Release, supra note 2, at Part IV.A.
---------------------------------------------------------------------------
In their letter, the Participants detailed additional sources of
public information about CAT implementation. They noted that ``FINRA
CAT and the Participants also hold bi-weekly Industry meetings to
communicate schedule and implementation updates and answer questions.
Industry Member framing calls and deep dive sessions are regularly held
so that Industry Members have input into technical specifications
related to the CAT. As noted above, CAT LLC also conducts regular
webinars and publishes CAT alerts on issues material to the industry
such as connectivity methods, onboarding, and FDID reporting among
others.'' \230\ The Commission is updating its analysis to acknowledge
these additional sources of public information. However, as discussed
above, the Commission continues to believe that additional disclosures
required by the amendments will improve transparency around CAT
implementation.\231\
---------------------------------------------------------------------------
\230\ See Participant Letter, at 6.
\231\ See supra Part II.A.
---------------------------------------------------------------------------
2. Status of Implementation
As discussed above and in the Proposing Release, there have been
repeated delays to implementation and it remains uncertain when CAT
will be fully implemented.\232\ The Commission stated in the Proposing
Release and continues to believe that the multiple missed deadlines in
the CAT NMS Plan have led to uncertainty for Industry Members
surrounding the timeline for CAT implementation.
---------------------------------------------------------------------------
\232\ See supra Part I.; Proposing Release, note 2 supra, at
Part IV.A.2., for a detailed discussion of Plan implementation
status.
---------------------------------------------------------------------------
Although the Participants ``acknowledge[d] the concerns underlying
the Proposed Amendments to the CAT NMS Plan,'' they noted recent
progress with respect to the CAT and stated that ``[t]hese and other
factors suggest that there will be continued progress toward the
expeditious development and implementation of the CAT.'' \233\ The
Participants further stated that the successor Plan Processor ``has
made substantial and rapid progress in building the CAT,'' and detailed
this progress in their letter. The Commission acknowledges this
progress,\234\ but remains concerned about the possibility for
additional delays to CAT implementation. The recent steps toward
implementation have likely decreased industry uncertainty \235\ about
the timeline of CAT implementation, but the Commission believes that
remaining uncertainty about the implementation timeline is likely to be
reduced by adoption of the amendments.
---------------------------------------------------------------------------
\233\ See Participant Letter, at 2.
\234\ Another commenter acknowledged the improvement to the pace
of CAT implementation. See Fidelity Letter, at 5.
\235\ See infra Part IV.B., for further discussion of industry
uncertainty.
---------------------------------------------------------------------------
Recently, the Commission granted the Participants exemptive relief
to allow for the implementation of phased reporting to the CAT for
Industry Members, in place of the reporting schedule set forth for
Industry Members in the CAT NMS Plan.\236\ Further, in light of COVID-
19 and a subsequent no-action request submitted by the Participants,
the Commission recently granted exemptive relief such that the
Compliance Rules formulated by Participants may require core equity
reporting for Industry Members to begin on June 22, 2020 and core
options reporting for Industry Members to begin on July 20, 2020.\237\
---------------------------------------------------------------------------
\236\ See supra Part I.
\237\ See supra Part I.
---------------------------------------------------------------------------
B. Benefits
In the Proposing Release, the Commission stated its preliminarily
belief that the proposed amendments offer two primary benefits.\238\
First, because the amendments include financial accountability
provisions that may cause the CAT to be implemented more expeditiously
and efficiently,\239\ investors could realize the benefits of the CAT
sooner than they would otherwise be realized without the proposed
amendments. Second, the Commission preliminarily believed that Industry
Members would have more certainty surrounding the implementation
timeline for CAT, and the timeline for retirement of OATS, reducing
possible associated and unnecessary implementation and maintenance
costs.\240\ However, the Commission recognized that if the Participants
continue to miss deadlines under the amendments, it would result in
more uncertainty for Industry Members about whether and when the
Participants are capable of achieving CAT implementation, particularly
if the Participants are unable to make progress
[[Page 31341]]
notwithstanding the amendment's financial accountability measures.\241\
---------------------------------------------------------------------------
\238\ See Proposing Release, supra note 2, at Part IV.B.
\239\ See infra Part IV.D.1., for comments on the Commission's
analysis of efficiency.
\240\ See infra Part IV.D.1., for discussion of impacts on
efficiency of Industry Member CAT implementation.
\241\ See Proposing Release, supra note 2, at Part IV.B.
---------------------------------------------------------------------------
Finally, the Commission stated that the requirement that the
Implementation Plan and Quarterly Progress Reports be submitted to the
CEO, President, or an equivalently situated senior officer of each
Participant prior to the Operating Committee approval vote, is intended
to promote senior management attention and promote accountability with
respect to CAT implementation.\242\
---------------------------------------------------------------------------
\242\ Id.
---------------------------------------------------------------------------
One comment from an Industry Member expressed support for the
Commission's belief that uncertainty about the CAT implementation
timeline and implementation delays are potentially costly to Industry
Members.\243\
---------------------------------------------------------------------------
\243\ Fidelity Letter, at 3. See infra Part IV.D.1. for further
discussion.
---------------------------------------------------------------------------
Commenters discussed the potential benefits of increased
operational transparency. One commenter stated that information sharing
and good communication are key to the success of CAT.\244\ Another
commenter stated that ``quarterly detailed reporting is appropriate and
would provide useful information to all interested parties.'' \245\
However, the Participants stated that ``the proposed Quarterly Progress
Reports would impose requirements that are both unnecessary and, in
many instances, at odds with maintaining the security of the CAT.''
\246\ However, as discussed above, while the Participants have provided
information regarding CAT implementation to the Commission, much of the
information provided by the Participants to the Commission has not been
shared widely with the public.\247\ In addition, the Commission takes
concerns regarding the security of the CAT very seriously, but for the
reasons discussed above it does not believe that the proposed
amendments, or the examples raised by the Participants in their comment
letter, implicate any such concerns.\248\ The Commission continues to
believe that the amendments will provide the benefits identified in the
Proposing Release.\249\ As discussed above, the Commission is making
three limited modifications to the amendments, but believes these
modifications are unlikely to significantly change the benefits of the
amendments.
---------------------------------------------------------------------------
\244\ See Fidelity Letter, at 3.
\245\ See Better Markets Letter, at 7.
\246\ See Participant Letter, at 6.
\247\ See supra Part II.A.2.
\248\ See id.
\249\ See Proposing Release, supra note 2, at Part IV.B.
---------------------------------------------------------------------------
The first modification provides the Participants with additional
time to prepare, file, and publish the Quarterly Progress Reports. The
Commission does not believe this additional time in releasing those
reports will significantly reduce the value of the information in the
reports to Industry Members, the public, or the Commission. The
Commission also recognizes that providing the Participants with
adequate time to prepare the Reports may allow modest improvements to
the quality of information contained in the Reports; this could benefit
users of the information contained in the Reports.
The second modification eliminates the proposed requirements that
manual and complex options transactions, as well as allocation
information for options transactions reported by Industry Members, (the
``Specified Data''), satisfy the initial error rates specified by
Section 6.5(d)(i) of the CAT NMS Plan by December 31, 2021. As
discussed below, the Commission believes that while this modification
may diminish the benefits of the amendments to the extent that manual
and complex options transaction data is not as accurate as it would
have otherwise been, any diminishment will be limited to a subset of
CAT transaction data and will be temporary.\250\ The Commission does
not expect this modification will delay the retirement of OATS because
the Specified Data is not included in OATS currently. As a result, this
modification is unlikely to significantly reduce the benefits of the
amendments.\251\
---------------------------------------------------------------------------
\250\ See infra Part IV.E.4., for further discussion of an
alternative approach that does not provide the error rate objective
exclusion for manual and complex options transactions, as well as
representative order linkages and related allocation information for
all equities and options transactions.
\251\ See id.
---------------------------------------------------------------------------
Finally, the Commission is modifying the first Financial
Accountability Milestone, Initial Industry Member Core Equity
Reporting, and the fee recovery schedule associated with that Financial
Accountability Milestone.\252\ The amendments will now define ``Initial
Industry Member Core Equity and Option Reporting'' as the point at
which Industry Members (excluding Small Industry Members that do not
report to the OATS) have begun to report: (a) Equities transaction
data, excluding Customer Account Information, Customer-ID, and Customer
Identifying Information, to the CAT; and (b) options transaction data,
excluding Customer Account Information, Customer-ID, and Customer
Identifying Information, to the CAT. The Commission is also modifying
the amendments to provide that the target deadline for the Initial
Industry Member Core Equity and Option Reporting milestone is July 31,
2020.\253\ The Commission believes that this change will not
significantly reduce the benefits of the amendments because, in light
of the exemptive relief that the Commission has recently granted, the
Commission believes these modifications to the first Financial
Accountability Milestone will appropriately incentivize the
Participants to meet the updated CAT implementation schedule because
failing to meet those milestones will cause the Participants to incur
RFRRs. The Commission recognizes that the financial incentives to meet
the modified first Financial Accountability Milestone are somewhat
reduced, because only expenses incurred after the Effective Date of the
amendments would be subject to RFRRs and the Participants have
presumably incurred most of the implementation expenses associated with
this milestone already. However, the Commission is also modifying the
fee recovery schedule for the first Financial Accountability Milestone
such that RFRRs increase more quickly as delays to achieving the
milestone extend. The Commission believes these adjustments increase
the Participants' financial incentives to meet the first milestone such
that it remains an effective measure to incentivize the Participants to
implement CAT according to the current implementation schedule.
---------------------------------------------------------------------------
\252\ See supra Part II.B.2.
\253\ See supra Part IV.A.2.
---------------------------------------------------------------------------
C. Costs
The Commission continues to believe that the proposed amendments
are likely to have both direct and indirect costs that are likely to be
passed on to investors, as discussed in the Proposing Release.\254\ The
Commission estimated that the direct costs to the Participants from the
proposed amendments would include up to approximately $3.7MM in ongoing
annual costs and total one-time costs of up to approximately
$932,000.\255\ The Commission is updating its analysis of costs in
response to public comments, certain changes to the amendments, and a
change in the number of Participants. The Commission now estimates that
the direct costs to the Participants from the
[[Page 31342]]
proposed amendments include up to approximately $3.8MM in ongoing
annual costs and total one-time costs of up to approximately
$956,000.\256\ The Commission continues to believe that if the RFRRs
are triggered, during a one-year period during implementation, up to
$120MM in costs of CAT implementation and operation could be shifted
from Industry Members to Participants, but this would not change total
direct costs to industry as a whole from the CAT NMS Plan.
---------------------------------------------------------------------------
\254\ See Proposing Release, supra note 2, at Part IV.C.
\255\ These costs are detailed in the Proposing Release. See id.
\256\ These maximum totals assume that upon each approval vote,
eight Participants incur costs to prepare and publish statements
explaining why they did not vote to approve the document in
question. These revised cost estimates are discussed further below.
---------------------------------------------------------------------------
In the next sub-section, the Commission re-estimates the direct
costs of the amendments to account for a change in the number of
Participants. In the sub-section following that re-estimation, the
Commission summarizes its analysis of indirect costs from the Proposing
Release, and updates that analysis in response to comments.
Direct Costs
The Commission estimates that the direct costs to Participants from
the proposed amendments \257\ include up to approximately $3.8MM \258\
in annual costs and total one-time costs of up to approximately
$956,000.\259\ The ongoing annual costs per Participant are comprised
of approximate labor costs of up to $143,000 \260\ and external
consulting costs of $33,000 \261\ to prepare, approve through
Supermajority Vote of the Operating Committee, publish, and when
applicable, for each Participant whose Operating Committee member did
not vote to approve the Implementation Plan to separately file with the
Commission and make available on a public website an explanatory
statement identifying itself and explaining why it did not vote to
approve the Quarterly Progress Report.\262\ The one-time costs per
Participant include up to $36,000 \263\ in labor costs and $8,300 \264\
in external consulting costs to prepare, approve through Supermajority
Vote of the Operating Committee, publish, and when applicable, for each
Participant whose Operating Committee member did not vote to approve
the Implementation Plan to separately file with the Commission and make
available on a public website an explanatory statement identifying
itself and explaining why it did not vote to approve the Implementation
Plan.
---------------------------------------------------------------------------
\257\ Direct costs cited in this paragraph are quantified from
estimates in the PRA. See supra Part III. Discussion of other direct
costs follows discussion of costs from the PRA. The estimated costs
represent averages; the Commission expects that some Participants
will incur greater costs, some lesser. In calculating the costs to
prepare, review, and vote on the Implementation Plan and Quarterly
Progress Reports on a per Participant basis, the Commission
recognizes that its estimates per Participant may be overstated to
the extent that there are economies of scale for Participants who
share a common corporate parent. Specifically, the voting
representative for one Participant may serve as the voting
representative on the Operating Committee for multiple affiliated
Participants under Section 4.2(a) of the CAT NMS Plan. Once this
representative conducts the necessary background work to vote on the
Implementation Plan or a Quarterly Progress Report, and, if
applicable, for the Participant to prepare an explanation of why
this representative did not vote to approve the Implementation Plan
or Quarterly Progress Report, the representative would not need to
duplicate all of his or her efforts for another Participant. Thus,
the Commission believes that its estimates may be overstated for
some Participants in the sense that one representative reviewing and
voting on the Implementation Plan or Quarterly Progress Reports
might not require 5 hours for each exchange for which he or she is
performing this task. On the other hand, the Commission believes
that its estimates for Participants who are not affiliated with
other Participants might be understated for some Participants
because they are unable to benefit from economies of scale.
Representatives for unaffiliated exchanges may require more than 5
hours to perform this same task. The Commission believes that 5
hours is a reasonable estimate of average representative time
required.
\258\ Assuming that each Supermajority Vote has the minimum of
16 Participants voting to approve each Quarterly Progress Report,
total annual ongoing maximum cost is (24 Participants x $117,424 per
Participant + 32 explanatory statements x $6,472.50 per statement =
$3,025,296) in labor costs plus (24 Participants x $33,333 =
$800,000) in external consulting costs = $3,825,296 in total costs.
See infra note 265.
\259\ Assuming that each Supermajority Vote has the minimum of
16 Participants voting to approve the Implementation Plan, total
one-time maximum cost is (24 Participants x $31,514 per Participant
= $756,324) in labor costs plus (24 Participants x $8,333 =
$200,000) in external consulting costs = $956,324 in total costs.
See infra note 263.
\260\ See supra Part III.D. Annual labor costs per Participant
assume preparation, approval through Supermajority Vote of the
Operating Committee, and publication of four Quarterly Progress
Reports and any accompanying statements explaining why a Participant
did not vote to approve the Quarterly Progress Report. Preparation
of each Quarterly Progress Report requires 7 hours of Attorney labor
at $427 per hour; 21.5 hours of Systems Analyst labor at $270 per
hour; 21.5 hours of Compliance Manager labor at $318 per hour. 4 x
[($427 x 7) + ($270 x 21.5) + ($318 x 21.5)] = $62,524. Time for the
Participant's Operating Committee Member to prepare for and vote on
the Quarterly Progress Reports is assumed to be 5 hours at a rate of
$545 per hour. 4 x ($545 x 5) = $10,900, using the hourly rate for a
Chief Compliance Officer. Publication and filing of the Quarterly
Progress Reports and any explanatory statements of the Operating
Committee Member's vote is assumed to require 5 hours of Compliance
Manager labor at $318 per hour and 5 hours of Programmer/Analyst
labor at $247 per hour. 4 x ($318 x 5) + ($247 x 5) = $11,300. The
Quarterly Progress Report shall be submitted to the President, CEO
or equivalently situated senior officer of each Participant prior to
the approval vote of the Operating Committee, and any subsequent
consultation, including with their Operating Committee member, is
assumed to require five hours of labor at $1,635 per hour. 4 x
($1,635 x 5) = $32,700. See infra note 265, for discussion of this
hourly rate. Total annual costs for each Participant are thus
$62,524 + $10,900 + $11,300 + $32,700 = $117,424. If a Participant
is required to prepare a statement explaining why it did not vote to
approve a Quarterly Progress Report, preparation requires 7.5 hours
of Compliance Manager Labor at $318 per hour and 7.5 hours of Chief
Compliance Officer labor at $545 per hour. ($318 x 7.5) + ($545 x
7.5) = $6,472.5. For each Quarterly Progress Report, 24 Participants
will incur costs to prepare the report, but no more than 8 will
incur costs to prepare statements explaining why they did not vote
to approve the Quarterly Progress Report. See supra Part III.D.2.
Consequently, there may be up to 32 such quarterly statements (4 x
8) required annually. Thus, Quarterly Progress Report preparation,
depending on the number of explanatory statements required, would
have an annual aggregate maximum labor cost of (24 x $117,424) + (32
x $6,472.5) = $3,025,296 with a per Participant average labor cost
of $3,025,296 / 24 = $126,054. Hourly rates are based on hourly
rates for Attorneys, Systems Analysts, Compliance Managers, Chief
Compliance Officers, and Programmer/Analysts from SIFMA's Management
& Professional Earnings in the Securities Industry 2013, modified by
Commission staff to account for an 1800-hour work-year and
inflation, and multiplied by 5.35 to account for bonuses, firm size,
employee benefits, and overhead. Salary information for voting
representatives uses the Chief Compliance Officer rate of from
SIFMA's Management & Professional Earnings in the Securities
Industry 2013, modified as above to $545 per hour.
\261\ See supra Part III.D. External consulting costs assume
four Quarterly Progress Reports. 4 x $8,333 = $33,333.
\262\ These annual costs would be incurred until completion of
CAT implementation. See supra Part III.D.2.
\263\ See supra Part III.D.2. Preparation and approval through
Supermajority Vote of the Operating Committee of the Implementation
Plan requires 7 hours of Attorney labor at $427 per hour; 21.5 hours
of Systems Analyst labor at $270 per hour; 21.5 hours of Compliance
Manager labor at $318 per hour. ($427 x 7) + ($270 x 21.5) + ($318 x
21.5) = $15,631. Time for the Participant's Operating Committee
Member to prepare for and vote on the Implementation plan is assumed
to be 5 hours at a rate of $545 per hour. ($545 x 5) = $2,725, using
the hourly rate for a Chief Compliance Officer. Publication and
filing of the Implementation Plan and any explanatory statement of
the Operating Committee Member's vote is assumed to require 5 hours
of Compliance Manager labor at $318 per hour and 5 hours of
Programmer/Analyst labor at $247 per hour. ($318 x 5) + ($247 x 5) =
$2,825. The Implementation Plan shall be submitted to the President,
CEO or equivalently situated senior officer of each Participant
prior to the approval vote of the Operating Committee, and any
subsequent consultation, including with their Operating Committee
Member, is assumed to require five hours of labor at $1,635 per
hour. ($1,635 x 5) = $8,175. See infra note 265, for discussion of
this hourly rate. Total one time labor costs are $15,631 + $2,725 +
$2,825 + $8,175 = $29,356. If an explanatory statement of the
Operating Committee Member's vote needs to be prepared, this would
require 7.5 hours of labor by a Compliance Manager at $318 per hour
and 7.5 hours of labor by the Chief Compliance Officer at $545 per
hour. ($318 x 7.5) + ($545 x 7.5) = $6,472.5. Thus, Implementation
Plan preparation, depending on the number of explanatory statements
required, would have an annual aggregate maximum labor cost of (24 x
$29,356) + (8 x $6,472.5) = $756,324 with a per Participant average
labor cost of $756,324 / 24 = $31,514. Aggregate totals assume 24
Participants and 8 explanatory statements.
\264\ See supra Part III.D.2.
---------------------------------------------------------------------------
[[Page 31343]]
The amendments require that both the Implementation Plan and
Quarterly Progress Reports be submitted to the President, CEO or
equivalently situated senior officer of each Participant prior to the
approval vote by the Operating Committee. In connection with this
requirement, the Commission estimates that each Participant will incur
one-time consultation costs of $8,200 for the Implementation Plan, and
ongoing annual costs of $32,700 for Quarterly Progress Reports until
such time as CAT is fully implemented.\265\
---------------------------------------------------------------------------
\265\ The Commission estimates that the President, CEO or
equivalently situated senior officer of each Participant will spend
approximately five hours in consultations, including with the
Participant's Operating Committee member, and estimates this will
cause each Participant to incur labor costs of (5 x $1,635) = $8,175
for the Implementation Plan and (4 x $8,175) = $32,700 annually for
Quarterly Progress Reports. Hourly rates are based on hourly rates
for Chief Compliance Officers from SIFMA's Management & Professional
Earnings in the Securities Industry 2013, modified by Commission
staff to account for an 1800-hour work-year and inflation, and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead. Salary information for CEO/presidents of
exchanges are not generally publically available as they might be
for CEO/presidents of exchange holding groups. The Commission
estimates an hourly rate for the President, CEO or equivalently
situated senior officer of an exchange by using the hourly rate for
a Chief Compliance Officer of $545 and multiplying by 3 to account
for the expected salary differential.
---------------------------------------------------------------------------
Indirect Costs
In the Proposing Release, the Commission stated its expectation
that the proposed amendments would have additional indirect costs.\266\
These indirect costs include potentially accelerated implementation
costs to Participants, Industry Members, and Service Bureaus.
Furthermore, there could be indirect costs related to the potential for
inefficient acceleration of the implementation of the CAT. The
Commission, however, continues to believe this is unlikely because the
deadlines for Financial Accountability Milestones are aligned with the
most recent timelines published by Participants \267\ and the RFRRs
increase as delays persist until the fee recovery rate would become
zero. Finally, if the RFRRs are triggered, the Commission stated that
it is possible there could be indirect costs related to the possible
market exit of exchanges.\268\
---------------------------------------------------------------------------
\266\ See Proposing Release, supra note 2, at Part IV.C.
\267\ One commenter criticized the Participants' timelines,
suggesting changes to a number of interim milestones. See supra note
125, for a discussion of this argument.
\268\ See Proposing Release, supra note 2, at Part IV.C.
---------------------------------------------------------------------------
The Commission stated that while triggering the RFRRs would cause
Participants to accrue additional costs because they could not recover
these costs from Industry Members, there would be a corresponding
financial benefit to Industry Members because they would not have to
pay those costs.\269\ Consequently, the cost transfers from the RFRRs
would not impose a net cost on industry as a whole.
---------------------------------------------------------------------------
\269\ Id.
---------------------------------------------------------------------------
The Commission's assessment of the likely indirect costs of the
amendments as adopted is unchanged from what was discussed in the
Proposing Release, except as discussed below.\270\
---------------------------------------------------------------------------
\270\ See Proposing Release, supra note 2, at Part IV.C.
---------------------------------------------------------------------------
Commenters noted that lack of flexibility in Financial
Accountability Milestones might precipitate additional indirect costs.
Commenters stated that these indirect costs could include: Lower
quality deliverables; an incomplete CAT Repository; reduced emphasis on
the development and publication of vital industry member guidance; and
the implementation of Phase 2a prior to the full development of the CAT
system. In short, one commenter stated that the ``financial penalty
structure outlined in the Proposed Amendments has the clear potential
to limit and short circuit the required cooperative analysis, feedback,
and iterative update process that would result in the reduced quality
of deliverables and place at risk CAT's key regulatory goals.'' \271\
The Participants further stated that some provisions of the Financial
Accountability Milestones (particularly data error rates, the
retirement of OATS, and sufficient inter- and intra-firm linkages
within CAT data) are not entirely within their control. The
Participants state, ``Faced with financial penalties for missed
deadlines, the Participants may not be able to fully address legitimate
industry concerns or accommodate requests for delays with respect to
future deadlines.'' \272\ The Commission is updating its analysis to
recognize these additional potential indirect costs of the amendments.
Nevertheless, as discussed above, the Commission believes that the
modifications to the Financial Accountability Milestones described
above should alleviate commenters' concerns regarding the potential
impact of unforeseeable or reasonable delays.\273\
---------------------------------------------------------------------------
\271\ See FIF Letter, at 3, 7-8. See also supra Part II.B.2.b.
\272\ See Participant Letter, at 10.
\273\ See supra Part II.B.2.
---------------------------------------------------------------------------
Two commenters stated that the proposal may create incentives for
Industry Members to change their CAT reporting behavior to increase the
likelihood of a delay because triggering RFRRs reduces CAT
implementation costs that Participants can recover from Industry
Members, reducing Industry Member costs.\274\ The Commission believes
this outcome is unlikely for two reasons. First, the Participants are
regulators with regulatory authority over their Industry Members.
Industry Members that fail to comply with CAT reporting rules would
potentially face enforcement actions from any Participant with
regulatory authority over them.\275\ While an Industry Member's
noncompliance with CAT reporting rules might contribute to triggering
RFRRs which could financially benefit all Industry Members by shifting
costs that may have been recoverable through CAT fees by the
Participants, the costs of any enforcement action brought by
Participants with regulatory authority over that Industry Member would
not be shared across Industry Members and those enforcement costs could
include reputational costs.\276\ Second, as discussed above, the
Commission believes that delays to CAT implementation are costly to
Industry Members. Industry Member reporting problems could prolong the
costly period of duplicative reporting that Industry Members face.
Consequently, the Commission believes that Industry Members are
unlikely to minimize their implementation costs by taking actions that
could trigger RFRRs.
---------------------------------------------------------------------------
\274\ See Better Markets Letter, at 7-8; Participant Letter, at
8-9.
\275\ See, e.g., NYSE Rule 6830, Consolidated Audit Trail--
Industry Member Data Reporting; Nasdaq General Equities and Options
Rule 7, Section 3, Consolidated Audit Trail--Industry Member Data
Reporting.
\276\ If Industry Members collectively believe that Participants
are unlikely to take enforcement actions related to CAT reporting,
then Industry Members might believe the potential benefits of
triggering RFRRs outweigh the risk of potential enforcement actions
related to CAT reporting. However, given that this argument hinges
on Industry Members being motivated to trigger RFRRs to avoid costs,
it logically follows that the Participants would also be motivated
to avoid triggering RFRRs to avoid costs and would thus be likely to
take those enforcement actions necessary to avoid triggering RFRRs.
The Commission believes that Industry Members generally understand
that the Participants will enforce their rules, because the
Participants have an obligation under the Exchange Act to enforce
compliance by their members with the Exchange Act, the rules and
regulations thereunder, and the Participants' own rules.
---------------------------------------------------------------------------
As discussed above, the Commission is making certain changes to the
amendments, but believes these changes address concerns that commenters
raised about the proposed amendments and are unlikely to significantly
affect the costs of the amendments.\277\ The
[[Page 31344]]
first modification to the amendments provides the Participants with
additional time to prepare, file, and publish the Quarterly Progress
Reports. The Commission believes it is possible the additional time
provided to complete and publish those Reports may provide minor
reductions to the Participants' costs because the longer timeframe to
prepare the Reports may allow more efficient scheduling of human
resources, such as avoiding overtime.
---------------------------------------------------------------------------
\277\ See supra Part II.B.2., for further discussion of comments
on the proposed amendments and the Commission's modifications to the
amendments.
---------------------------------------------------------------------------
The second modification eliminates the proposed requirement of the
December 31, 2021 Financial Accountability Milestone that the Specified
Data satisfy the initial error rates specified by Section 6.5(d)(i) of
the CAT NMS Plan.\278\ As discussed below, the Commission believes that
while this modification may reduce implementation costs for both
Participants and Industry Members, it does not believe any reduction
will significantly impact the magnitude of implementation costs.
Rather, this modification is more of an efficiency improvement than a
significant cost reduction.\279\
---------------------------------------------------------------------------
\278\ See infra Part IV.E.4., for further discussion of costs
and benefits of the alternative approach proposed in the Proposing
Release.
\279\ See infra Part IV.D.1.
---------------------------------------------------------------------------
Finally, the Commission is modifying the first Financial
Accountability Milestone, Initial Industry Member Core Equity
Reporting, and the fee recovery schedule associated with that milestone
as discussed above.\280\ The Commission believes the Participants will
need to incur similar costs to achieve the objectives associated with
the modified milestone in order to meet the Financial Accountability
Milestone on July 31, 2020 for two reasons. First, while shifting the
first milestone date from April to July 2020 may result in additional
costs being potentially subjected to RFRRs from the first Financial
Accountability Milestone, specifically those related to operating the
Plan and the Central Repository from April 30, 2020 to July 31, 2020,
these costs are no longer part of the second Financial Accountability
Milestone and are no longer subject to RFRRs related to the December
31, 2020 milestone date. Second, the Commission believes that it is
unlikely that the Participants will fail to meet the July 31, 2020
milestone objectives because it believes the milestone dates are
reasonable and feasible deadlines.\281\
---------------------------------------------------------------------------
\280\ See supra Part IV.B.
\281\ See supra Part I.
---------------------------------------------------------------------------
D. Impact on Efficiency, Competition, and Capital Formation
The Commission's analysis of impacts on efficiency, competition and
capital formation presented in the Proposing Release are summarized
below.\282\ The Commission is making minor changes in its analysis to
recognize minor improvements in efficiency from changes to the
amendments as adopted, but its conclusions regarding effects on
competition and capital formation are not materially affected by the
changes to the amendments or public comments.
---------------------------------------------------------------------------
\282\ See Proposing Release, supra note 2, at Part IV.D.
---------------------------------------------------------------------------
1. Efficiency
In the Proposing Release, the Commission stated its preliminary
belief that the proposed amendments would improve the efficiency of
Industry Member implementation of CAT reporting. However, the
Commission preliminarily believed that the financial accountability
provisions could incentivize Participants to inefficiently delay
certain activities associated with later milestones if Participants
believe there is a significant risk of missing an earlier Financial
Accountability Milestone.
The Commission is updating its analysis to recognize a possible
improvement to efficiency relative to the amendments as proposed due to
the elimination of the requirement that the Specified Data satisfy the
initial error rates specified by Section 6.5(d)(i) of the CAT NMS Plan
by December 31, 2021. As discussed below,\283\ the Commission believes
that the brief time interval between the date on which Industry Members
commence reporting these transactions to CAT and the December 31, 2021
Financial Accountability Milestone date may not allow Participants to
efficiently address any error rate problems in this data. As a result,
including this error rate target in the December 31, 2021 Financial
Accountability Milestone date might have caused inefficiencies in
allocation of Participant and Industry Member staff time.
---------------------------------------------------------------------------
\283\ See infra Part IV.E.4.
---------------------------------------------------------------------------
Two commenters agreed with the Commission's conclusion that the
amendments are likely to improve efficiency. One commenter agreed with
the Commission that ``additional Participant Accountability Milestones
should facilitate the completion of the implementation phase(s) of CAT
in an efficient, expeditious and risk-averse manner, thereby reducing
the risk of further delay.'' \284\ However, this commenter
characterized its agreement on efficiency improvements as ``cautious''
due to specific potential indirect costs.\285\ A second commenter
agreed with the Commission's assessment of efficiency improvements for
Industry Member implementation efforts, stating that ``[d]elays in CAT
implementation have cost Industry Members both in hard dollars and
opportunity costs''; the commenter also discussed resources devoted to
CAT implementation or maintaining potentially duplicative reporting
systems, stating ``the sooner the CAT is fully implemented, the sooner
these duplicative reporting systems can be retired, and internal
resources devoted to building the CAT, reallocated to other projects
and initiatives.'' \286\
---------------------------------------------------------------------------
\284\ See FIF Letter, at 2.
\285\ See id., at 7; see also supra Part IV.C., for further
discussion of indirect costs.
\286\ See Fidelity Letter, at 3.
---------------------------------------------------------------------------
2. Competition
a. Competitive Baseline
In the Proposing Release, the Commission described the structure of
the market for trading in NMS securities, as of that time.\287\ While
the Commission's analysis of the state of competition in the Proposing
Release is fundamentally unchanged, the market for trading services in
options and equities currently consists of 23 national securities
exchanges and FINRA, all of which are Participants, as well as off-
exchange trading venues, including broker-dealer internalizers, and 33
NMS stock alternative trading systems (``ATSs''),\288\ which are not
Participants. The exchanges are currently controlled by 7 separate
entities; three of these operate a single exchange.\289\
---------------------------------------------------------------------------
\287\ See Proposing Release, supra note 2, at Part IV.D.2.
\288\ As of April 30, 2020, there are 33 national market system
ATSs operating pursuant to an initial Form ATS-N. See 17 CFR
242.304. A list of ATSs, including access to initial Form ATS-N
filings that are effective, can be found on the Commission website
at https://www.sec.gov/divisions/marketreg/form-ats-n-filings.htm.
\289\ Cboe Global Markets, Inc. controls Cboe Exchange, Inc.,
Cboe C2 Exchange, Inc., Cboe BZX Exchange, Inc., Cboe BYX Exchange,
Inc., Cboe EDGA Exchange, Inc., and Cboe EDGA Exchange, Inc.; Miami
International Holdings, Inc. controls Miami International Securities
Exchange LLC, MIAX Emerald, LLC, and MIAX PEARL, LLC; Nasdaq, Inc.
controls Nasdaq BX, Inc., Nasdaq GEMX, LLC, Nasdaq ISE, LLC, Nasdaq
MRX, LLC, Nasdaq PHLX, LLC, and The Nasdaq Stock Market LLC;
Intercontinental Exchange, Inc. controls New York Stock Exchange,
LLC, NYSE Arca, Inc., NYSE American LLC, NYSE Chicago, Inc., and
NYSE National, Inc. The three entities that control a single-
exchange are IEX Group, Inc. which controls Investors' Exchange LLC,
BOX Holdings Group LLC which controls BOX Exchange LLC, and LTSE
Group, Inc. which controls Long-Term Stock Exchange, Inc.
---------------------------------------------------------------------------
[[Page 31345]]
b. Competitive Effects
In the Proposing Release, the Commission stated its preliminary
belief that the proposed amendments might have competitive effects on
the market for NMS security trading services and the market for equity
listings.\290\ In the case that RFRRs are triggered, one or more
exchanges might exit these markets, although the Commission continues
to believe that this is unlikely. The Commission stated its belief that
triggering an RFRR could also temporarily affect competition among
exchanges and ATSs and broker-dealer internalizers, but did not believe
the effects would be significant.
---------------------------------------------------------------------------
\290\ See Proposing Release, supra note 2, at Part IV.D.2.
---------------------------------------------------------------------------
The Commission preliminarily believed that is it unlikely that
exchanges would exit the market for NMS security trading services or
equity listings if the RFRRs in the proposed amendments are triggered
because such exchanges would be able to secure additional capital from
a larger exchange group, or directly from capital markets.\291\ If an
exchange were to exit, the Commission continues to believe that this
would not significantly impact competition in the market for exchange
trading services or the market for equity listings because these
markets are served by multiple competitors that are likely to swiftly
meet any unsatisfied demand caused by the exit of a competitor.\292\ If
the RFRRs were triggered, the Commission continues to believe that it
could temporarily affect competition between exchanges and ATSs and
broker-dealer internalizers because of transient changes in
Participants' and Industry Members' abilities to invest in their
trading platforms.\293\ However, the Commission continues to believe
that effects, if any, would not be significant.
---------------------------------------------------------------------------
\291\ See Proposing Release, supra note 2, at Part IV.D.2.
\292\ See Proposing Release, supra note 2, at Part IV.D.2.b.
\293\ Id.
---------------------------------------------------------------------------
3. Capital Formation
In the Proposing Release, the Commission stated its belief that the
amendments would have negligible mixed effects on capital
formation.\294\ The Commission preliminarily believed that the
amendments' improvements to investor protections might allow
improvements to capital formation described in the CAT NMS Plan
Approval Order to be realized sooner than they would have otherwise
been in the absence of the proposed amendments. However, if RFRRs are
triggered, exchanges could experience short-term, transitory negative
effects on exchange capital formation because the exchanges would face
additional costs and may not be able to invest in projects or return
profits to shareholders that they would otherwise. The Commission
continues to believe that the amendments would not permanently affect
investors' assessment of expected profitability for exchanges, and thus
would not reduce this capital formation long-term.
---------------------------------------------------------------------------
\294\ See Proposing Release, supra note 2, at Part IV.D.3.
---------------------------------------------------------------------------
E. Alternatives
1. Fixed versus Relative Financial Accountability Milestone Dates
Under the adopted amendments, Financial Accountability Milestone
dates are fixed calendar dates. In the Proposing Release, the
Commission considered an alternative approach that would use relative
Financial Accountability Milestone dates in a scenario when a Financial
Accountability Milestone was not met on schedule.\295\ Under this
alternative approach, the duration of the time period between two
Financial Accountability Milestone dates would be fixed but the
Financial Accountability Milestone dates would be relative. Thus, if a
Financial Accountability Milestone were not achieved on schedule, the
next Financial Accountability Milestone date would be delayed such that
the duration between Financial Accountability Milestone dates was
unchanged.\296\
---------------------------------------------------------------------------
\295\ See Proposing Release, supra note 2, at Part IV.E.1.
\296\ The alternative could be structured such that upon the
achievement of one Financial Accountability Milestone, the next
Financial Accountability Milestone date would become the later of
the Financial Accountability Milestone date specified in the
amendments or the relative date from this alternative approach. This
approach would prevent the subsequent relative Financial
Accountability Milestone date from becoming earlier in the event
that the Participants achieve a Financial Accountability Milestone
ahead of schedule. This would avoid the problem of incentivizing the
Participants to delay Financial Accountability Milestone achievement
to avoid accelerating Financial Accountability Milestone dates, and
would mitigate any risk Industry Members would have from
accelerating Financial Accountability Milestone dates.
---------------------------------------------------------------------------
The primary economic impact of this approach relative to the
amendments as adopted is that it avoids a risk inherent in the fixed
Financial Accountability Milestone date approach of the amendments as
adopted. Under the fixed Financial Accountability Milestone date
approach, if the Participants encounter a delay early in the
implementation process that causes them to miss a Financial
Accountability Milestone date by a significant margin, it may become
more difficult for them to meet future Financial Accountability
Milestone dates.
This alternative approach has two significant costs relative to the
amendments as adopted. First, in a case where a significant delay
arises in connection with an early Financial Accountability Milestone
such that financial RFRRs are triggered, the Participants may be
incentivized to delay meeting the requirements of that Financial
Accountability Milestone in order to give themselves more time to
achieve later Financial Accountability Milestones in order to decrease
their risk of triggering RFRRs for those later Financial Accountability
Milestones.
The second likely additional cost relative to the amendments as
adopted is that the alternative approach would make the ultimate CAT
implementation timeline less certain than in the amendments as adopted,
because early delays would push back implementation dates for later
phases of implementation.
The Commission did not receive any comments on the alternative and,
for the reasons discussed throughout the release, the Commission is
adopting the amendments substantially as proposed.
2. Different Timelines for Onset of RFRRs
In the Proposing Release, the Commission discussed alternative
approaches with Financial Accountability Milestone dates either earlier
or later than the dates in the amendments as adopted.\297\ These
approaches would have certain additional benefits and costs as compared
to the amendments as adopted. The Commission stated that alternative
milestone dates that are not generally aligned with dates published by
or discussed with the Participants are less likely to reflect realistic
expectations for the Participants in implementing the CAT.\298\
---------------------------------------------------------------------------
\297\ See Proposing Release, supra note 2, at Part IV.E.2.
\298\ See id.
---------------------------------------------------------------------------
The Commission did not receive any comments on the alternative and,
for the reasons discussed throughout the release, the Commission is
adopting the amendments substantially as proposed.
3. Alternate Magnitudes of RFRRs
In the Proposing Release, the Commission discussed alternative
approaches with different levels of RFRRs.\299\ Under the amendments as
[[Page 31346]]
adopted, for each period of up to 90 days, or 45 days in the case of
the first Financial Accountability Milestone, by which the Participants
miss Financial Accountability Milestone dates, they would trigger RFRRs
such that they would be allowed to recover 25 percent less of the CAT
costs they would otherwise recover from Industry Members. Alternative
approaches could have higher or lower marginal RFRRs.
---------------------------------------------------------------------------
\299\ See Proposing Release, supra note 2, at Part IV.E.3.
---------------------------------------------------------------------------
The Commission preliminarily believed that alternative approaches
with higher marginal RFRRs (allowing the Participants to recover a
lower share of CAT costs from Industry Members when RFRRs are
triggered) would potentially further incentivize the Participants to
meet Financial Accountability Milestone deadlines, but would also
increase the risk of inefficient acceleration of CAT implementation.
The Commission stated its preliminary belief that alternative
approaches with lower RFRRs (allowing the Participants to recover a
higher share of CAT costs from Industry Members when RFRRs are
triggered) would decrease the incentives Participants have to meet
Financial Accountability Milestone deadlines, but would reduce the risk
of inefficient acceleration of CAT implementation.
The Commission did not receive any comments on the alternative and,
for the reasons discussed throughout the release, the Commission is
adopting the amendments substantially as proposed.
4. Requiring Error Rates for Manual and Complex Options Transactions,
as Well as Allocation Information for All Options Transactions To
Conform to Standards Set in the CAT NMS Plan on December 31, 2021
The Commission's proposed amendments would have required the
Participants to achieve initial error rate targets for the Specified
Data that are described in the CAT NMS Plan, by the December 31, 2021
milestone. Under the amendments as adopted, the December 31, 2021
Financial Accountability Milestone will not include those initial error
rates for the Specified Data. The requirement will remain part of the
December 31, 2022 milestone.
Under the proposed approach, error rates for the Specified Data
would likely be lower in the period between when Industry Members begin
reporting this data and December 31, 2021 because Participants would
likely have devoted more resources in that period to measuring and
lowering these error rates since they were included in the December 31,
2021 milestone. However, the Commission believes that this reduction in
error rates would be unlikely to be significant because the time
between the initiation of reporting of the Specified Data to CAT and
the milestone date of December 31, 2021 is relatively short. It is not
clear to the Commission that the Participants would have sufficient
time to meaningfully address error rate deficiencies for the Specified
Data during that interval of time.\300\ Furthermore, the Commission
believes it is likely the Participants can more efficiently address
error rates in their members' data over a more reasonable period of
time.
---------------------------------------------------------------------------
\300\ Under the amendments as adopted, the Financial
Accountability Milestones will not include these error rates for an
additional year for the Specified Data. The Commission believes that
Participants are likely to address problems in error rates in the
Specified Data during the additional year because excessive errors
in this data may trigger RFRRs at the December 31, 2022 milestone.
However, the Commission acknowledges it is possible that error rates
for the Specified Data will be higher than they would have been
under the proposed amendments during that additional year because
those error rates will not cause RFRRs to be triggered during that
year.
---------------------------------------------------------------------------
Under the proposed approach with the earlier milestone date for the
error rates in question, it is possible that Participants would believe
that triggering RFRRs was unavoidable. There is little time between the
commencement of reporting of the Specified Data and the milestone date
at which the target error rate would apply. This time span might be
inadequate for the Participants to take corrective measures if the
error rates exceeded the target specified in the CAT NMS Plan.
Consequently, Participants might be less incentivized to achieve error
rate targets for other CAT data elements if they believed it were
unlikely they could achieve the error rates for the Specified Data,
leaving them disincentivized to achieve other error rate targets
because they believed RFRRs were unavoidable. This could result in
higher error rates in other CAT data. In contrast, under the amendments
as adopted with the later Financial Accountability Milestone date for
the error rates in question, Participants will not be disincentivized
by a Specified Data error target that may not be reasonable so quickly
after the reporting of this data commences.
It is likely that the proposed approach with the earlier milestone
dates for the error rates in question would be more costly both to
Participants and Industry Members than the approach as adopted. Because
the second Financial Accountability Milestone date occurs so quickly
after the initiation of the Specified Data reporting, Participant
efforts to address deficiencies in error rates might be made through
channels that are less efficient in terms of overall quality of CAT
data than they would be otherwise. For example, in an effort to avoid
missing the error rate targets for the Specified Data, Participants
might assign fewer staff persons to work with Industry Members to
correct errors in core equities and options data that is foundational
for CAT data to be used by regulators.
Finally, under the approach as adopted with a later Financial
Accountability Milestone date for the error rates in question,
regulators should still have access to sufficiently accurate and
reliable options transactional data that will enable regulators to
analyze the full lifecycle of most orders and conduct new and
sophisticated analyses of the markets, including options market
reconstruction and cross-market analyses across the majority of full
order lifecycles. The Commission believes that the approach as adopted
should not delay the retirement of OATS because the Specified Data is
not included in OATS currently. The Commission acknowledges that error
rates for the Specified Data might be higher than for other CAT data
initially under the amendments as adopted, but Participants will need
to achieve the error rate targets specified by Section 6.5(d)(i) of the
CAT NMS Plan to satisfy the third and final milestone under the
amendments, so any diminishment of data quality is likely to be
temporary.
V. Regulatory Flexibility Act Certification
The Regulatory Flexibility Act (``RFA'') \301\ requires Federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities. Section 603(a) \302\ of the Administrative Procedure
Act,\303\ as amended by the RFA, generally requires the Commission to
undertake a regulatory flexibility analysis of all proposed rules, or
proposed rule amendments, to determine the impact of such rulemaking on
``small entities.'' \304\ Section 605(b) of the RFA states that this
requirement shall not apply ``to any proposed or final rule if the head
of the agency certifies that the rule will not, if promulgated, have a
significant
[[Page 31347]]
economic impact on a substantial number of small entities.'' \305\
---------------------------------------------------------------------------
\301\ 5 U.S.C. 601 et seq.
\302\ 5 U.S.C. 603(a).
\303\ 5 U.S.C. 551 et seq.
\304\ The Commission has adopted definitions for the term
``small entity'' for purposes of Commission rulemaking in accordance
with the RFA. Those definitions, as relevant to this proposed
rulemaking, are set forth in 17 CFR 240.0-10. See Securities
Exchange Act Release No. 18451 (January 28, 1982), 47 FR 5215
(February 4, 1982) (File No. AS-305).
\305\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------
The Commission certified in the Proposing Release, pursuant to
Section 605(b) of the RFA, that the proposed amendments to the CAT NMS
Plan would not, if adopted, have a significant impact on a substantial
number of small entities.\306\ The Commission received no comments on
the RFA certification contained in the Proposing Release.
---------------------------------------------------------------------------
\306\ See Proposing Release, supra note 2, at 48488.
---------------------------------------------------------------------------
As explained in the Proposing Release, the amendments to the CAT
NMS Plan only impose requirements on national securities exchanges
registered with the Commission under Section 6 of the Exchange Act and
FINRA.\307\ With respect to the national securities exchanges, the
Commission's definition of a small entity is an exchange that has been
exempt from the reporting requirements of Rule 601 of Regulation NMS,
and is not affiliated with any person (other than a natural person)
that is not a small business or small organization.\308\ None of the
national securities exchanges registered under Section 6 of the
Exchange Act that would be subject to the proposed rule are ``small
entities'' for the purposes of the RFA. In addition, FINRA is not a
``small entity.'' \309\ For these reasons, the amendments will not
apply to any ``small entities.''
---------------------------------------------------------------------------
\307\ See id.
\308\ See 17 CFR 240.0-10(e).
\309\ See Proposing Release, supra note 2, at 48488.
---------------------------------------------------------------------------
For these reasons, the Commission again certifies that the
amendments, as modified and adopted, will not have a significant
economic impact on a substantial number of small entities for the
purposes of the RFA.
VI. Other Matters
Pursuant to the Congressional Review Act,\310\ the Office of
Information and Regulatory Affairs has designated these rules as not a
``major rule,'' as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------
\310\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------
If any of the provisions of these final rules, or the application
thereof to any person or circumstance, is held to be invalid, such
invalidity shall not affect other provisions or application of such
provisions to other persons or circumstances that can be given effect
without the invalid provision or application.
VII. Statutory Authority and Text of the Amendments to the CAT NMS Plan
Pursuant to the Exchange Act and, particularly, Sections 2, 3(b),
5, 6, 11A, 15, 15A, 17(a) and (b), 19, and 23(a) thereof, 15 U.S.C.
78b, 78c(b), 78e, 78f, 78k-1, 78o, 78o-3, 78q(a) and (b), 78s, and
78w(a), and pursuant to Rule 608(a)(2) and (b)(2),\311\ the Commission
amends the CAT NMS Plan in the manner set forth below.
---------------------------------------------------------------------------
\311\ 17 CFR 242.608(a)(2) and (b)(2). These provisions enable
the Commission to propose amendments to any effective NMS Plan by
``publishing the text thereof, together with a statement of the
purpose of such amendment,'' and providing ``interested persons an
opportunity to submit written comments.''
---------------------------------------------------------------------------
Additions are italicized; deletions are [bracketed].
* * * * *
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):
* * * * *
``Financial Accountability Milestone'' means, as the case may
be, Full Implementation of Core Equity Reporting, Full Availability
and Regulatory Utilization of Transactional Database Functionality,
and Full Implementation of CAT NMS Plan Requirements.
* * * * *
``Full Availability and Regulatory Utilization of Transactional
Database Functionality'' means the point at which: (a) reporting to
the Order Audit Trail System (``OATS'') is no longer required for
new orders; (b) Industry Member reporting for equities transactions
and simple electronic options transactions, excluding Customer
Account Information, Customer-ID, and Customer Identifying
Information, with sufficient intra-firm linkage, inter-firm linkage,
national securities exchange linkage, trade reporting facilities
linkage, and representative order linkages (including any equities
allocation information provided in an Allocation Report) to permit
the Participants and the Commission to analyze the full lifecycle of
an order across the national market system, from order origination
through order execution or order cancellation, is developed, tested,
and implemented at a 5% Error Rate or less; (c) Industry Member
reporting for manual options transactions and complex options
transactions, excluding Customer Account Information, Customer-ID,
and Customer Identifying Information, with all required linkages to
permit the Participants and the Commission to analyze the full
lifecycle of an order across the national market system, from order
origination through order execution or order cancellation, including
any options allocation information provided in an Allocation Report,
is developed, tested, and fully implemented; (d) the query tool
functionality required by Section 6.10(c)(i)(A) and Appendix D,
Sections 8.1.1-8.1.3, Section 8.2.1, and Section 8.5 incorporates
the data described in conditions (b)-(c) and is available to the
Participants and to the Commission; and (e) the requirements of
Section 6.10(a) are met. This Financial Accountability Milestone
shall be considered complete as of the date identified in a
Quarterly Progress Report meeting the requirements of Section
6.6(c).
``Full Implementation of CAT NMS Plan Requirements'' means the
point at which the Participants have satisfied all of their
obligations to build and implement the CAT, such that all CAT system
functionality required by Rule 613 and the CAT NMS Plan has been
developed, successfully tested, and fully implemented at the initial
Error Rates specified by Section 6.5(d)(i) or less, including
functionality that efficiently permits the Participants and the
Commission to access all CAT Data required to be stored in the
Central Repository pursuant to Section 6.5(a), including Customer
Account Information, Customer-ID, Customer Identifying Information,
and Allocation Reports, and to analyze the full lifecycle of an
order across the national market system, from order origination
through order execution or order cancellation, including any related
allocation information provided in an Allocation Report. This
Financial Accountability Milestone shall be considered complete as
of the date identified in a Quarterly Progress Report meeting the
requirements of Section 6.6(c).
``Full Implementation of Core Equity Reporting Requirements''
means the point at which: (a) Industry Member reporting (excluding
reporting by Small Industry Members that are not OATS reporters) for
equities transactions, excluding Customer Account Information,
Customer-ID, and Customer Identifying Information, is developed,
tested, and implemented at a 5% Error Rate or less and with
sufficient intra-firm linkage, inter-firm linkage, national
securities exchange linkage, and trade reporting facilities linkage
to permit the Participants and the Commission to analyze the full
lifecycle of an order across the national market system, excluding
linkage of representative orders, from order origination through
order execution or order cancellation; and (b) the query tool
functionality required by Section 6.10(c)(i)(A) and Appendix D,
Sections 8.1.1-8.1.3 and Section 8.2.1 incorporates the Industry
Member equities transaction data described in condition (a) and is
available to the Participants and to the Commission. This Financial
Accountability Milestone shall be considered complete as of the date
identified in a Quarterly Progress Report meeting the requirements
of Section 6.6(c).
* * * * *
``Initial Industry Member Core Equity and Option Reporting''
means the reporting by Industry Members (excluding Small Industry
Members that are not OATS reporters) of both: (a) equities
transaction data, excluding Customer Account Information, Customer-
ID, and Customer Identifying Information; and (b) options
transaction data, excluding Customer Account Information, Customer-
ID, and Customer Identifying Information.
* * * * *
ARTICLE VI
FUNCTIONS AND ACTIVITIES OF CAT SYSTEM
Section 6.1.-Section 6.5. No change.
[[Page 31348]]
Section 6.6. Written Assessments, Audits and Reports.
* * * * *
(c) Implementation Plan and Quarterly Progress Reports.
(i) Within 30 calendar days following the effective date of this
provision, the Participants shall file with the Commission and make
publicly available on each of their websites, or collectively on the
CAT NMS Plan website, a complete CAT implementation plan that
includes the Participants' timeline for achieving the objective
milestones setting forth how and when the Participants will
facilitate the achievement of Full Implementation of CAT NMS Plan
Requirements (the ``Implementation Plan''). The Implementation Plan
shall include:
(A) For each of the objective milestones set forth in Section
C.10 of Appendix C of this Agreement to assess progress toward
implementation of the CAT, the completion date and a description of
the status; and
(B) For each of the Financial Accountability Milestones, the
completion date and a description of the status.
If the Participants decide to complete any of the milestones
identified in the Implementation Plan by releasing functionality in
a phased approach, the Implementation Plan shall describe each
phased release necessary to achieve the completion of the relevant
milestone and provide completion dates for each such release
identified.
(ii) Within 30 calendar days after the end of each calendar
quarter, Participants shall file with the Commission and make
publicly available on each of their websites, or collectively on the
CAT NMS Plan website, a complete report that provides a detailed
description of the progress made by the Participants during that
calendar quarter toward achieving each of the milestones set forth
in the Implementation Plan (the ``Quarterly Progress Report''). If,
subsequent to the publication of the Implementation Plan, the
Participants decide to complete any of the milestones set forth
therein by releasing functionality in a phased approach, each
Quarterly Progress Report shall reflect this change by describing
the phases necessary to achieve the completion of the relevant
milestone and providing the information specified below for each
phase. The Participants shall file and make publicly available the
first of such reports within 30 calendar days after the end of the
calendar quarter in which the Participants filed and made publicly
available the Implementation Plan.
(A) For each milestone completed by the end of a given calendar
quarter, the report shall include the following: (1) The CAT
implementation plan completion date, (2) the date on which the
milestone was completed, and (3) a description of any variance from
the Implementation Plan.
(B) For each milestone in progress at the end of a given
calendar quarter, the report shall include the following: (1) The
CAT implementation plan completion date, (2) the currently targeted
completion date, and (3) a description of:
(a) The current status of the milestone;
(b) any difference between the CAT implementation plan
completion date and the currently targeted completion date,
including the basis for making the adjustment and the impact of this
adjustment on any other milestone; and
(c) any other factual indicators that demonstrate the current
level of completion with respect to the milestone.
(C) For each milestone that has not yet been initiated by the
end of a given calendar quarter, the report shall include the
following: (1) The CAT implementation plan completion date, (2) the
currently targeted completion date, and (3) a description of:
(a) The current status of the milestone; and
(b) any difference between the Implementation Plan completion
date and the currently targeted completion date, including the basis
for making the adjustment and the impact of this adjustment on any
other milestone.
(iii) The Implementation Plan and each Quarterly Progress Report
shall be approved by at least a Supermajority Vote of the Operating
Committee before such documents are filed with the Commission or
made publicly available on each of the Participant websites or
collectively on the CAT NMS Plan website. However, if the
Implementation Plan or any Quarterly Progress Report is approved
only by a Supermajority Vote of the Operating Committee, and not by
a unanimous vote of the Operating Committee (including, for the
avoidance of doubt, all members of the Operating Committee, whether
or not present and whether or not recused), each Participant whose
Operating Committee member did not vote to approve the
Implementation Plan or Quarterly Progress Report shall separately
file with the Commission a statement identifying itself and
explaining why the member did not vote to approve the Implementation
Plan or Quarterly Progress Report. These statements shall be made
publicly available by each dissenting Participant on its website or
collectively by all Participants on the CAT NMS Plan website. The
Operating Committee shall submit the Implementation Plan and
Quarterly Progress Reports to the Chief Executive Officer,
President, or an equivalently situated senior officer of each
Participant, prior to being voted on by the Operating Committee.
* * * * *
ARTICLE XI
FUNDING OF THE COMPANY
Section 11.1.-Section 11.5. No change.
Section 11.6. Funding Incentives for Post-Amendment Expenses.
Notwithstanding the foregoing provisions, this Section shall apply
with respect to all fees, costs, and expenses (including legal and
consulting fees, costs, and expenses) incurred by or for the Company
in connection with the development, implementation, and operation of
the CAT from the effective date of this Section until such time as
Full Implementation of CAT NMS Plan Requirements has been achieved
(``Post-Amendment Expenses'').
(a) The following conditions shall apply to the collection of
any fees established by the Operating Committee or implemented by
the Participants to recover a portion of Post-Amendment Expenses
from Industry Members (``Post-Amendment Industry Member Fees'').
(i) The Participants will be entitled to collect the full amount
of:
(A) Any Post-Amendment Industry Member Fees established or
implemented to recover Post-Amendment Expenses incurred from the
effective date of this Section to the date of Initial Industry
Member Core Equity and Option Reporting (``Period 1''), so long as
such date is no later than July 31, 2020;
(B) Any Post-Amendment Industry Member Fees established or
implemented to recover the Post-Amendment Expenses incurred from the
date immediately following the achievement of Initial Industry
Member Core Equity and Option Reporting to the date of Full
Implementation of Core Equity Reporting (``Period 2''), so long as
such date is no later than December 31, 2020;
(C) Any Post-Amendment Industry Member Fees established or
implemented to recover the Post-Amendment Expenses incurred from the
date immediately following the achievement of Full Implementation of
Core Equity Reporting to the date of Full Availability and
Regulatory Utilization of Transactional Database Functionality
(``Period 3''), so long as such date is no later than December 31,
2021; and
(D) Any Post-Amendment Industry Member Fees established or
implemented to recover the Post-Amendment Expenses incurred from the
date immediately following the achievement of Full Availability and
Regulatory Utilization of Transactional Database Functionality to
the date of Full Implementation of CAT NMS Plan Requirements
(``Period 4''), so long as such date is no later than December 30,
2022.
(ii) The amount of Post-Amendment Industry Member Fees that the
Participants are entitled to collect for Period 1 will be reduced
according to the following schedule if the Participants miss the
deadline set forth for that Period:
(A) By 25% if the Participants miss the deadline set forth in
Section 11.6(a)(i)(A) by less than 45 days;
(B) By 50% if the Participants miss the deadline set forth in
Section 11.6(a)(i)(A) by 45 days or more, but less than 90 days;
(C) By 75% if the Participants miss the deadline set forth in
Section 11.6(a)(i)(A) by 90 days or more, but less than 135 days;
and
(D) By 100% if the Participants miss the deadline set forth in
Section 11.6(a)(i)(A) by 135 days or more.
(iii) The amount of Post-Amendment Industry Member Fees that the
Participants are entitled to collect for Periods 2, 3, and 4 will be
reduced according to the following schedule if the Participants miss
the deadline set forth for that Period:
(A) By 25% if the Participants miss the deadline set forth in
Section 11.6(a)(i)(B)-(D) by less than 90 days;
(B) By 50% if the Participants miss the deadline set forth in
Section 11.6(a)(i)(B)-(D) by 90 days or more, but less than 180
days;
(C) By 75% if the Participants miss the deadline set forth in
Section 11.6(a)(i)(B)-(D) by 180 days or more, but less than 270
days; and
[[Page 31349]]
(D) By 100% if the Participants miss the deadline set forth in
Section 11.6(a)(i)(B)-(D) by 270 days or more.
(iv) The Participants will only be permitted to collect Post-
Amendment Industry Member Fees for Period 1, Period 2, Period 3, or
Period 4 at the end of each respective Period.
(b) In all CAT NMS Plan amendments submitted by the Operating
Committee to the Commission pursuant to Rule 608(b)(3)(i), and in
all filings submitted by the Participants to the Commission under
Section 19(b) of the Exchange Act, to establish or implement Post-
Amendment Industry Member Fees pursuant to this Article, the
Operating Committee or the Participants shall clearly indicate
whether such fees are related to Post-Amendment Expenses incurred
during Period 1, Period 2, Period 3, or Period 4.
* * * * *
By the Commission.
Dated: May 15, 2020.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-10963 Filed 5-21-20; 8:45 am]
BILLING CODE 8011-01-P