# Proposed Amendments to the National Market System Plan Governing the Consolidated Audit Trail > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2019-19852 ## Record - **Collection:** Federal Register - **Document type:** Notice - **Published:** September 13, 2019 - **Citation:** 84 FR 48458 ## Text SECURITIES AND EXCHANGE COMMISSION [Release No. 34-86901; File No. S7-13-19] RIN 3235-AM60 Proposed Amendments to the National Market System Plan Governing the Consolidated Audit Trail AGENCY: Securities and Exchange Commission. ACTION: Proposed amendments to national market system plan. SUMMARY: The Securities and Exchange Commission (“Commission” or “SEC”) is proposing amendments to the National Market System Plan Governing the Consolidated Audit Trail (“CAT NMS Plan”). The proposed amendments impose public transparency requirements on the self-regulatory organizations that are participants to the CAT NMS Plan (each, a “Participant” and collectively, the “Participants”). The Participants would be required to file with the Commission and publish a complete implementation plan for the Consolidated Audit Trail (“CAT”) and quarterly progress reports, each of which must be approved by a supermajority vote of the Operating Committee of CAT NMS, LLC. The proposed amendments also establish financial accountability provisions. DATES: Comments should be received on or before October 28, 2019. ADDRESSES: Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's internet comment form ( http://www.sec.gov/rules/proposed.shtml ); or • Send an email to rule-comments@sec.gov. Please include File No. S7-13-19 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090. All submissions should refer to File No. S7-13-19. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's internet website ( http://www.sec.gov/rules/proposed.shtml ). Comments are also available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change. Persons submitting comments are cautioned that the Commission does not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. Studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the Commission's website. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at www.sec.gov to receive notifications by email. FOR FURTHER INFORMATION CONTACT: Erika Berg, Special Counsel, at (202) 551-5925; Leigh Duffy, Special Counsel, at (202) 551-5928; or Susan Poklemba, Attorney-Advisor, at (202) 551-3360, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-7010. SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to the CAT NMS Plan. 1 1 See Securities Exchange Act Release No. 78318 (November 15, 2016), 81 FR 84696 (November 23, 2016), at 84943. Table of Contents I. Background II. Description of Proposed Amendments A. Amendments To Increase Operational Transparency B. Financial Accountability Amendments for Implementation of the CAT 1. Financial Accountability Milestones and Target Deadlines 2. Collection of Post Amendment Industry Member Fees 3. Identification of Post-Amendment Expenses in Submissions to the Commission III. Paperwork Reduction Act A. Summary of Collection of Information 1. Implementation Plan 2. Quarterly Progress Reports B. Proposed Use of Information 1. Implementation Plan 2. Quarterly Progress Reports C. Respondents D. Total Initial and Annual Reporting and Recordkeeping Burdens 1. Implementation Plan 2. Quarterly Progress Reports E. Collection of Information is Mandatory F. Confidentiality of Responses to Collection of Information G. Retention Period for Recordkeeping Requirements H. Request for Comments IV. Economic Analysis A. Baseline 1. Transparency of CAT Implementation Status 2. Status of Implementation B. Benefits C. Costs D. Impact on Efficiency, Competition, and Capital Formation 1. Efficiency 2. Competition 3. Capital Formation E. Alternatives 1. Fixed versus Relative Financial Accountability Milestone Dates 2. Different Timelines for Onset of RFRRs 3. Alternate Magnitudes of RFRRs F. Request for Comment on the Economic Analysis V. Consideration of Impact on the Economy VI. Regulatory Flexibility Act Certification VII. Statutory Authority and Text of the Proposed Amendments to the CAT NMS Plan I. Background In July 2012, the Commission adopted Rule 613 of Regulation NMS, which requires the national securities exchanges and national securities associations (“self-regulatory organizations”) to jointly develop and submit to the Commission a national market system plan to create, implement and maintain a consolidated audit trail (“CAT”). 2 Back then, and even today, trading data was and is inconsistent across the self-regulatory organizations and certain market activity is difficult to compile because it is not aggregated in one, directly accessible consolidated audit trail system. The goal of Rule 613 was to create a system that provides regulators with more timely access to a sufficiently comprehensive set of trading data, enabling regulators to more efficiently and effectively reconstruct market events, monitor market behavior, and identify and investigate misconduct. Rule 613 thus aims to modernize a reporting infrastructure to oversee the trading activity generated across numerous markets in today's national market system. 2 See Securities Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722 (August 1, 2012) (“Rule 613 Adopting Release”). On November 15, 2016, the Commission approved the national market system plan required by Rule 613 (“CAT NMS Plan” or “Plan”) that was submitted by the self-regulatory organizations (the “Participants”). 3 In the CAT NMS Plan, 4 the Participants described the numerous elements they proposed to include in the CAT, including (1) requirements for the plan processor responsible for building, operating and maintaining the Central Repository (“Plan Processor”), 5 (2) requirements for the creation and functioning of the Central Repository, (3) requirements applicable to the reporting of CAT Data 6 by Participants and their members (“Industry Members”), 7 (4) requirements relating to the security and confidentiality of CAT Data, (5) governance principles for CAT NMS LLC (“Company”), 8 and (6) provisions for the establishment of funding to pay for the operation of the CAT, including the establishment of fees that the Participants and Industry Members will pay. 9 3 The National Market System Plan Governing the Consolidated Audit Trail was filed with the Commission by the Participants who include BATS Exchange, Inc. (n/k/a Cboe BZX Exchange, Inc.), BATS-Y Exchange, Inc. (n/k/a Cboe BYX Exchange, Inc.), BOX Options Exchange LLC, C2 Options Exchange, Incorporated (n/k/a Cboe C2 Exchange, Inc.), Chicago Board Options Exchange, Incorporated (n/k/a Cboe Exchange, Inc.), Chicago Stock Exchange, Inc. (n/k/a NYSE Chicago, Inc.), EDGA Exchange, Inc. (n/k/a Cboe EDGA Exchange, Inc.), EDGX Exchange, Inc. (n/k/a Cboe EDGX Exchange, Inc.), Financial Industry Regulatory Authority, Inc. (“FINRA”), International Securities Exchange, LLC (n/k/a NASDAQ ISE, LLC), ISE Gemini, LLC (n/k/a NASDAQ GEMX, LLC), Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc. (n/k/a NASDAQ BX, Inc.), NASDAQ OMX PHLX LLC (n/k/a NASDAQ PHLX LLC), The NASDAQ Stock Market LLC, National Stock Exchange, Inc. (n/k/a NYSE National, Inc.), New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc. 4 See Securities Exchange Act Release No. 78318 (November 15, 2016), 81 FR 84696, (November 23, 2016) (“CAT NMS Plan Approval Order”). The CAT NMS Plan is Exhibit A to the CAT NMS Plan Approval Order. See CAT NMS Plan Approval Order, at 84943-85034. In approving the CAT NMS Plan, the Commission added ISE Mercury, LLC (n/k/a Nasdaq MRX, LLC) and Investors Exchange LLC as Participants to the CAT NMS Plan. See id. at 84728. On January 30, 2017 and March 1, 2019, the Commission noticed for immediate effectiveness amendments to the Plan to add MIAX Pearl, LLC and MIAX Emerald, LLC, respectively, as Participants. See Securities Exchange Act Release Nos. 79898 (January 30, 2017), 82 FR 9250 (February 3, 2017), and 85230 (March 1, 2019), 84 FR 8356 (March 7, 2019). Unless otherwise noted, capitalized terms are used as defined in Rule 613, in the CAT NMS Plan, or in this release. 5 The Central Repository is the repository responsible for the receipt, consolidation, and retention of all information reported to the CAT. See CAT NMS Plan, supra note 4, at Section 1.1. 6 “CAT Data” is defined in the CAT NMS Plan as “data derived from Participant Data, Industry Member Data, SIP Data, and such other data as the Operating Committee [of the Company] may designate as `CAT Data' from time to time.” See id. The Operating Committee is the governing body of the Company. See id. 7 “Industry Member” is defined in the CAT NMS Plan as “a member of a national securities exchange or a member of a national securities association.” See id. 8 The CAT NMS Plan is the limited liability company agreement of the Company, a jointly owned limited liability company formed under Delaware state law, through which the Participants conduct the activities of the CAT. Each Participant is a member of the Company and jointly owns the Company on an equal basis. The Participants submitted to the Commission a proposed amendment to the CAT NMS Plan on August 29, 2019, which they designated as effective on filing. With the proposed amendment, the limited liability company agreement of a new limited liability company named Consolidated Audit Trail, LLC would serve as the CAT NMS Plan, replacing in its entirety the CAT NMS Plan. See Notice of Filing of Amendment to the National Market System Governing the Consolidated Audit Trail, available at https://catnmsplan.com/wp-content/uploads/2019/09/CAT-2.0-Plan-Amendment(as-filed-with-SEC-8.29.19)_(175663431)_(1).pdf. 9 See CAT NMS Plan, supra note 4, at Section 11.1. The CAT NMS Plan notes that the Participants shall file with the Commission under Section 19(b) of the Act any such fees on Industry Members that the Operating Committee of the Company approves. See id. at Section 11.1(b). The Participants also set forth, in the CAT NMS Plan, deadlines related to the implementation of the CAT, including (1) the requirement that the Participants select a Plan Processor within two months following approval of the CAT NMS Plan, 10 (2) the requirement that the Participants begin recording and reporting data to the Central Repository by November 15, 2017, 11 and (3) the requirement that each Participant require Industry Members and Small Industry Members 12 to begin reporting information to the Central Repository by November 15, 2018, 13 and November 15, 2019, respectively. 14 10 17 CFR 242.613(a)(3)(i). See also CAT NMS Plan, supra note 4, at Section 6.1(a). Two months following approval of the CAT NMS Plan was January 15, 2017 (a Sunday). 11 See CAT NMS Plan, supra note 4, at Section 6.7(a)(iii). 12 The CAT NMS Plan defines Small Industry Member as “an Industry Member that qualifies as a small broker-dealer as defined in SEC Rule 613.” See id. at Section 1.1. Rule 613(a)(3)(vi) uses the definition of small broker-dealer as defined in Rule 0-10(c), which defines such a broker-dealer as (1) having had total capital (net worth plus subordinated liabilities) of less than $500,000 on the date in the prior fiscal year as of which its audited financial statements were prepared pursuant to Rule 17a-5(d) or, if not required to file such statements, a broker or dealer that had total capital (net worth plus subordinated liabilities) of less than $500,000 on the last business day of the preceding fiscal year (or in the time that it has been in business, if shorter); and (2) is not affiliated with any person (other than a natural person) that is not a small business or small organization as defined in Rule 0-10. See Rule 613 Adopting Release, supra note 2, at 45804; 17 CFR 242.613(a)(3)(vi); 17 CFR 240.0-10(c). 13 See CAT NMS Plan, supra note 4, at Section 6.7(a)(v). 14 See id. at Section 6.7(a)(vi). On January 18, 2017, the Participants filed with the Commission notice of their selection of the Plan Processor. 15 On January 17, 2017, the Participants selected Thesys Technologies LLC to build the CAT system, pending execution of a Plan Processor Agreement between Thesys Technologies LLC and the Participants. 16 The Plan Processor Agreement was executed on April 6, 2017, after which Thesys CAT LLC (“Thesys CAT”), a wholly owned subsidiary of Thesys Technologies LLC, became the Plan Processor for the CAT. 15 See Letter from Participants to Brent J. Fields, Secretary, Commission, dated January 18, 2017, available at https://www.sec.gov/divisions/marketreg/rule613-info-notice-of-plan-processor-selection.pdf. 16 Id. The next critical deadline required by the CAT NMS Plan was for the Participants to begin recording and reporting data to the Central Repository by November 15, 2017. 17 The Participants, however, did not begin reporting data by that deadline. On November 13, 2017, two days before the deadline for Participant reporting, and having previously provided assurances as late as the summer of 2017 that initial data reporting would commence on schedule and in accordance with the CAT NMS Plan, the Participants filed a request for exemptive relief in which they sought, among other things, to delay the deadline by which they must report to the CAT for one year, and to extend the deadlines by which Industry Members and Small Industry Members must report by 17 months. 18 The Commission did not grant this request. 19 SEC Chairman Clayton instead issued a statement on November 14, 2017 noting that he would not support extensions of the CAT deadlines on the terms proposed by the Participants. 20 Chairman Clayton stated the importance of the CAT in enhancing the protection of investors and the markets by providing regulators with consolidated oversight of the securities markets. Chairman Clayton also instructed Commission staff to engage with the Participants as necessary and appropriate. 21 17 See supra note 11. 18 See Letter from the Participants to Brent J. Fields, Secretary, Commission, dated November 13, 2017 (“November 2017 Exemption Request”). 19 See Statement on Status of the Consolidated Audit Trail (November 14, 2017), available at https://www.sec.gov/news/public-statement/statement-status-consolidated-audit-trail-chairman-jay-clayton. 20 Id. 21 Id. Since then, Commission staff has engaged with the Participants with a focus on trying to ensure that project management, resource, and governance deficiencies are addressed, including development of a credible and comprehensive work plan with verifiable milestones. 22 Among other things, Commission staff has encouraged the Participants to enhance their focus on project management and accountability. 23 As sophisticated market participants with vast experience related to various data systems and data management protocols, the Participants are capable of managing—and uniquely situated to manage—the implementation of the CAT. 22 See Statement on Status of the Consolidated Audit Trail (August 27, 2018), available at https://www.sec.gov/news/public-statement/tm-status-consolidated-audit-trail. 23 Id. On May 1, 2018, the SEC's Division of Trading and Markets (“Division”) sent a letter to the Participants expressing concern about the lack of progress on CAT implementation. The Division called on senior personnel at each Participant to focus on completing the CAT as soon as practicable with all of the functionality required by the CAT NMS Plan. The Division also requested a master plan (“Master Plan”) for completing the CAT, 24 including a timeline with development and completion milestones. 25 The Division requested that the Master Plan detail all material steps to fully implement both Participant and Industry Member reporting, and describe how the Participants will better manage the Plan Processor's performance. The Participants submitted the requested Master Plan on May 25, 2018. The Master Plan stated that Participant reporting would begin on November 15, 2018, one year past the deadline in the CAT NMS Plan. 26 24 The Division of Trading and Markets also requested that the Participants streamline their decision-making and governance processes to ensure more timely implementation. See Letter from Brett Redfearn, Director, Division of Trading and Markets, Commission, to Michael J. Simon, Chair, CAT NMS Plan Operating Committee, dated May 1, 2018. See also note 22. 25 The Master Plan projects Industry Member reporting will commence in phases, with equities reporting beginning in November 2019 and simple options reporting beginning in May 2020, with final implementation of the CAT through Small Industry Member reporting occurring by November 2022. See Industry Update on the Consolidated Audit Trail (June 28, 2018), at 4, available at https://www.catnmsplan.com/wp-content/uploads/2018/06/CAT-Industry-Webcast-6.28.18.pdf. 26 See supra note 22. On November 15, 2018, the Participants began reporting quote, order, trade and other transaction data to the Central Repository; however, as the Participants acknowledge, the CAT system did not include all of the functionality required by the CAT NMS Plan, such as linkages between reported events and regulators' query functionality. 27 On November 16, 2018, the Participants stated that Thesys CAT would complete all of the required functionality by March 31, 2019. 28 But on February 1, 2019, the Company announced that it would be transitioning from Thesys CAT to a new Plan Processor, 29 and on February 26, 2019, the Operating Committee voted to select FINRA as the successor Plan Processor to Thesys CAT. 30 As a result of this and various other factors, the functionality the Participants represented Thesys CAT would complete by March 31, 2019 was not delivered. 27 See CAT NMS Announces Initiation of Reporting to the Consolidated Audit Trail (November 16, 2018), available at https://www.catnmsplan.com/wp-content/uploads/2018/11/Press-Release-CAT-Launch-final.pdf. 28 Id. 29 See News, available at https://www.catnmsplan.com/news-page/index.html (February 1, 2019). 30 See Letter from Michael J. Simon, Chair, CAT NMS, LLC Operating Committee, to Brent J. Fields, Secretary, Commission, dated April 9, 2019, available at https://www.sec.gov/divisions/marketreg/rule613-info-notice-of-plan-processor-selection-040919.pdf. The Participants are responsible for their selection of a Plan Processor, for the management of the Plan Processor, and for compliance with the CAT NMS Plan. The Participants and the Plan Processor failed to comply with the following deadlines in the CAT NMS Plan and missed the following milestone completion dates: • The November 15, 2017 milestone completion date for the Plan Processor publishing final technical specifications for the submission of order data for Industry Members; 31 31 See CAT NMS Plan, supra note 4, at Appendix C, Section C.10(b). • the May 15, 2018 milestone completion date for the Plan Processor publishing technical specifications for Industry Member submission of customer data; 32 32 See id. at Appendix C, Section C.10(a). • the May 15, 2018 milestone completion date for the Plan Processor making the testing environment available on a voluntary basis and beginning connectivity testing and accepting order data from Industry Members for testing purposes; 33 33 See id. at Appendix C, Section C.10(b). • the August 15, 2018 milestone completion date for Industry Member order submission testing; 34 34 See id. at Appendix C, Section C.10(a); id. at Appendix C, Section C.10(b). • the October 15, 2018 milestone completion date for Industry Member reporting of customer information to the Central Repository; 35 and 35 See id. at Appendix C, Section C.10(a). • the November 15, 2018 deadline for full Industry Member reporting. 36 36 See id. at Section 6.4; Section 6.7(a)(v). In light of these missed deadlines and milestone completion dates, Chairman Clayton determined that it was necessary to dedicate additional oversight resources to this project. Accordingly, Chairman Clayton appointed a staff person to coordinate the Commission's efforts to monitor the Participants' development of the CAT. 37 37 See SEC Names Manisha Kimmel as Senior Policy Advisor to the Chairman on the Consolidated Audit Trail (January 29, 2019), available at https://www.sec.gov/news/press-release/2019-5. The Commission is concerned by the continued potential for delays to the implementation of the CAT. In an April 3, 2019 Industry Update presentation, the Operating Committee presented a revised implementation timeline for Industry Member reporting with deadlines that extend even further beyond those previously shared with Industry Members. 38 The revised deadline for Industry Member reporting of all transaction data to the CAT is December 2021, with the exception of customer and account information which the Participants will require the reporting of by July 2022. 39 These deadlines further extend the initially established November 15, 2018 Industry Member reporting deadline in the CAT NMS Plan, 40 the phased deadlines for Industry Member reporting in the Master Plan, and the April 13, 2020 and the April 20, 2021 deadlines for Industry Member and Small Industry Member reporting proposed in the November 2017 Exemptive Request. The Commission has not approved these implementation deadlines. 38 See Consolidated Audit Trail: CAT Reporting Technical Specifications for Industry Members Draft 2 Version 1.1 Key Changes (April 3, 2019), available at https://www.catnmsplan.com/wp-content/uploads/2019/04/CAT_Industry_Call_04032019_Presentation.pdf. See also CAT Reporting Timelines, available at https://www.catnmsplan.com/timelines/. The Commission notes that it has not approved these dates. 39 See Consolidated Audit Trail: CAT Reporting Technical Specifications for Industry Members Draft 2 Version 1.1 Key Changes (April 3, 2019), available at https://www.catnmsplan.com/wp-content/uploads/2019/04/CAT_Industry_Call_04032019_Presentation.pdf, at 3, 4. 40 See CAT NMS Plan, supra note 4, at Section 6.7(a)(v). The Commission preliminarily believes that amendments to the CAT NMS Plan are appropriate and necessary to help ensure the Participants' fulfillment of their obligations to deliver a functional CAT in a reasonable time frame. While the Commission believes that the Commission staff's continued engagement with the Participants is important to the effort to deliver a functional CAT, the Commission also preliminarily believes that increased transparency through formalized and public documentation of the Participants' implementation progress will increase the Participants' accountability for the efficient completion of CAT. The Commission also preliminarily believes that modifying the CAT NMS Plan to require additional financial accountability to meet implementation deadlines is appropriate to achieve the CAT's timely completion. The Commission therefore proposes to amend the CAT NMS Plan to require the Participants to develop a complete implementation plan containing a detailed timeline with objective milestones to achieve full CAT implementation (the “Implementation Plan”). This Implementation Plan would be filed with the Commission and made publicly available after approval by a Supermajority Vote 41 of the Operating Committee. The Implementation Plan must be submitted by the Operating Committee to the Chief Executive Officer (“CEO”), President, or an equivalently situated senior officer of each Participant, prior to being voted on by the Operating Committee. Additionally, to further improve implementation transparency, the Commission proposes requiring the Participants to provide the Commission and the public with quarterly progress reports (“Quarterly Progress Reports” or “Reports”) approved by at least a Supermajority Vote of the Operating Committee. 42 The Quarterly Progress Reports must also be submitted by the Operating Committee to the CEO, President, or an equivalently situated senior officer of each Participant, prior to being voted on by the Operating Committee. The proposed amendments also include provisions regarding financial accountability to facilitate implementation of the CAT in an expeditious and efficient manner. 41 Section 1.1 of the CAT NMS Plan defines a “Supermajority Vote” as an “affirmative vote of at least two-thirds of all of the members of the Operating Committee or any Subcommittee, as applicable, authorized to cast a vote with respect to a matter presented for a vote (whether or not such a member is present at any meeting at which a vote is taken) by the Operating Committee or any Subcommittee, as applicable (excluding, for the avoidance of doubt, any member of the Operating Committee or any Subcommittee, as applicable, that is recused or subject to a vote to recuse from such matter pursuant to Section 4.3(d)); provided that if two-thirds of all such members authorized to cast a vote is not a whole number then that number shall be rounded up to the nearest whole number.” 42 The Commission does not believe, on a preliminary basis, that the requirements of the Implementation Plan or the Quarterly Progress Reports, discussed below in Part II.A., require the Participants to disclose any confidential or sensitive information related to the security of the CAT, the security of CAT Data, or the operation of the CAT. II. Description of Proposed Amendments In order to address shortcomings in the completeness, accuracy, accessibility, and timeliness of existing audit trail systems, the Commission adopted Rule 613 in 2012 to direct the Participants to create and file the CAT NMS Plan. 43 The CAT was intended not only to replace an existing regulatory data infrastructure that was “outdated and inadequate to effectively oversee a complex, dispersed, and highly automated national market system,” 44 but also to provide benefits to market participants in the form of improved market surveillance and related analyses. 45 Today, almost seven years after the adoption of Rule 613, the need for a better audit trail system is no less pressing. Yet, as described above, 46 the Participants' progress towards implementing the CAT has suffered multiple setbacks, and the Participants have repeatedly missed relevant deadlines. 47 These delays to CAT implementation have left the Commission and the Participants without access to a comprehensive database to help facilitate analyses of market events and other matters. Moreover, the repeated delays in CAT implementation have resulted in uncertainty for Industry Members and other market participants. 48 43 See supra note 2. 44 Id. at 45723. 45 Id. at 45730-33. 46 See Part I supra. 47 See, e.g., Industry Update on the Consolidated Audit Trail 9/7/2017 (August 25, 2017), available at https://catnmsplan.com/news-page/industry-update-on-the-consolidated-audit-trail/index.html (stating that “the implementation timelines for establishing the CAT are in effect”); Industry Update on the Consolidated Audit Trail (September 7, 2017), available at https://catnmsplan.com/wp-content/uploads/2017/09/Industry-Update-on-the-Consolidated-Audit-Trail-090817.pdf (indicating that the Participants were implementing the CAT according to the timeline set forth in the CAT NMS Plan). 48 See, e.g., Part IV.A.2. A. Amendments To Increase Operational Transparency Public disclosure of information about CAT implementation would furnish a better understanding of progress on the CAT to market participants and members of the investing public, all of whom stand to benefit from the improved efficiencies and regulatory capabilities of the CAT. Moreover, CAT implementation also affects Industry Members, who are required to report data to the CAT and are therefore keenly interested in the details and timing of CAT implementation. Currently, the CAT NMS Plan does not contain disclosure provisions that require the Participants to provide public updates on implementation progress and developments. To address concerns about insufficient transparency and accountability regarding the CAT's implementation, the Commission proposes to amend Section 6.6 of the CAT NMS Plan. Specifically, the Commission proposes to amend the CAT NMS Plan by adding a new Section 6.6(c) to require the Participants to file with the Commission and publish on their own websites (or, if the Participants wish to publish collectively, on the CAT NMS Plan website) the Implementation Plan setting forth how and when the Participants will achieve full CAT implementation, including the Participants' timeline for achieving both (1) the objective milestones that are set forth in Section C.10 of Appendix C of the CAT NMS Plan to assess the progress of CAT implementation 49 (“Objective Milestones”) and (2) the CAT implementation milestones associated with the proposed financial accountability provisions discussed below (“Financial Accountability Milestones”) 50 (collectively, the “Implementation Milestones”). 51 49 See CAT NMS Plan, supra note 4, at Appendix C Section C.10. 50 The Financial Accountability Milestones, and their relation to proposed financial accountability provisions, are described in more detail in Part II.B. infra. 51 The Participants would be free to include, as may be appropriate, additional Implementation Milestones not otherwise required by the proposed plan amendment. For example, the Participants may choose to add Implementation Milestones regarding system security or external testing with CAT Reporters. If the Participants decide to complete any of the Implementation Milestones by releasing functionality in a phased approach, the proposed rule would require the Implementation Plan to also describe each phased release necessary to achieve the completion of the relevant Implementation Milestone and to provide completion dates for each such release. 52 The proposed rule also requires the Participants to include the completion date and a description of the status for each Implementation Milestone identified in the Implementation Plan, which, for example, could include discussion about the extent to which an Implementation Milestone has been successfully completed. The Implementation Plan would be required to be filed with the Commission and published on each Participant website or the CAT NMS Plan website no later than 30 calendar days following the effective date of this amendment. 52 For example, the CAT NMS Plan identifies “Industry Members (other than Small Industry Members) begin reporting customer/institutional/firm account information to the Central Repository for processing” as one of the Objective Milestones. See CAT NMS Plan, supra note 4, at Appendix C, Section 10. Recent timelines published by the Participants indicate, however, that the Participants have decided to complete this milestone by releasing functionality in a phased approach—first implementing Industry Member reporting for equities transactions and then implementing Industry Member reporting for options in a separate phase. See, e.g., CAT Reporting Timelines, available at https://catnmsplan.com/timelines/. The proposed amendment would therefore require the Implementation Plan to provide completion dates for each of these phases. The Commission preliminarily believes that requiring the proposed Implementation Plan is appropriate to facilitate public transparency of the CAT's development. The Commission believes 30 calendar days is a sufficient amount of time to create the Implementation Plan because the Participants have previously engaged in the exercise of considering and developing timelines and milestones for implementation purposes when developing the Master Plan, and many of the Participants are active in data systems development and operation. The Commission further believes that requiring this added transparency will aid the public in more easily monitoring the status of the implementation of the CAT. The CAT NMS Plan currently requires the Chief Compliance Officer of the Company to appropriately document objective milestones to the Commission. The Commission understands from the Participants' status update calls and discussions that the Participants are already engaged in documenting their progress toward CAT implementation for the Objective Milestones. 53 Therefore, the proposed amendment is requiring the incremental step that the information related to this documentation be made public via the Implementation Plan. The Commission does not expect that this incremental step would be unduly burdensome. The proposed amendment also requires the Participants to provide information regarding progress toward and completion of the Financial Accountability Milestones. Requiring the Participants to disclose their progress toward and completion of Financial Accountability Milestones will provide information not contained in the Objective Milestones regarding the development and availability of critical regulatory tools. The Commission believes that it is important to provide this information in a comprehensive timeline. Information related to the production of critical regulatory tools is also of interest to market participants, who will benefit from the increased regulatory capabilities of the CAT. 54 53 See also CAT NMS Plan, supra note 4, at Section 6.7(b). 54 Moreover, inclusion of the Financial Accountability Milestones in the Implementation Plan will provide the Commission and the public with more information regarding the implementation deadlines. See Part II.B. infra for additional discussion of the financial accountability provisions. Moreover, the Commission preliminarily believes it is appropriate to require the Participants to disclose whether they intend to complete any of the Implementation Milestones in phases and any related completion dates, because recent timelines published by the Participants indicate that the Participants intend to release certain functionality in phases. For example, while the CAT NMS Plan identifies only one implementation date for Industry Member reporting, the Participants have indicated that Industry Member reporting will be implemented in several phases that each have a different implementation deadline. 55 The Implementation Plan should reflect the current, phased approach to CAT implementation for this milestone, not the approach to CAT implementation that was contemplated at the time the CAT NMS Plan was approved. By requiring phasing to be addressed, the Implementation Plan will both furnish a common understanding of the status of CAT implementation at the time the Implementation Plan is made public, as well as indicate how completing the Implementation Milestones will lead to the achievement of full CAT implementation. 55 See note 52 supra. The Commission also believes that, to the extent the Participants meet the dates specified in the timeline, the publication of such timeline will reduce uncertainty as to the expected implementation timeline for Industry Members, which would aid Industry Members in staging their resources and otherwise managing implementation planning, which should reduce the risk of additional delays. The Commission further believes that the Implementation Plan's timeline, paired with Implementation Milestones, will serve to clarify what level of CAT system functionality will be delivered on a given date. Finally, the Commission anticipates that requiring the Participants to disclose their deadlines and the status of Implementation Milestones to the public through the Implementation Plan will provide accountability both to the Commission and to Industry Members regarding the Participants' progress toward CAT implementation. The Commission also proposes to amend the CAT NMS Plan to add proposed Section 6.6(c)(ii) to require Participants to file with the Commission and publish on each Participant website, or collectively on the CAT NMS Plan website, complete Quarterly Progress Reports. These Reports would be filed and made public no later than fifteen business days following the end of each calendar quarter ( e.g., by April 21, 2020; July 22, 2020; October 22, 2020; or January 25, 2021) and would describe in detail the progress made by the Participants during the prior calendar quarter toward achieving each of the Implementation Milestones set forth in the Implementation Plan. 56 The initial Report to be filed by the Participants would be filed and made public no later than fifteen business days following the end of the calendar quarter in which the Implementation Plan was filed and made public. 57 The Reports would divide the Implementation Milestones into the following three categories: (1) Implementation Milestones that have been completed, (2) Implementation Milestones that are still in progress and (3) Implementation Milestones that have not yet been initiated. 56 If, subsequent to the publication of the Implementation Plan, the Participants decide to complete any of the Implementation Milestones by releasing functionality in a phased approach, the proposed amendment requires the Participants to reflect this change in the Quarterly Progress Reports by describing the phases necessary to achieve the completion of the relevant milestones and providing specified information on the progress made for each release. 57 For example, if the Participants filed and made public the Implementation Plan on March 18, 2020 the initial Report would have to be filed no later than April 21, 2020. For each Implementation Milestone completed by the end of a given calendar quarter, the Report would include the following: (1) The completion date provided in the Implementation Plan, (2) the date on which the Implementation Milestone was actually completed, and (3) a description of any variance from the Implementation Plan. 58 58 For example, a description of any variance from the Implementation Plan could explain why the completion of a given Implementation Milestone was delayed from the date set forth in the Implementation Plan or, if the Implementation Milestone was broken out into multiple phases, the extent to which the completed Implementation Milestone satisfied the functionality required by the Implementation Plan for that milestone. For each Implementation Milestone in progress at the end of a given calendar quarter, the Report would include the following: (1) The completion date provided in the Implementation Plan, (2) the currently targeted completion date, and (3) a description of (a) the current status of the Implementation Milestone, (b) any difference between the Implementation Plan completion date and the currently targeted completion date, including the basis for making the adjustment and the impact of this adjustment on any other Implementation Milestone, and (c) any other factual indicators that demonstrate the current level of completion with respect to the Implementation Milestone. 59 Factual indicators could include any data relevant to the Objective Milestone ( e.g., (1) for milestones related to the publication of documentation: The current version of the documentation under development or published; the number of and explanation for any open issues not yet resolved; (2) for milestones related to connectivity and acceptance testing: The status of the publication of test plans; statistics on the amount of expected or actual activity in the test environment ( e.g., number of testers, number of reportable events, error rates/trends observed), the number of Plan Processor functional requirements 60 for which defects were found categorized by criticality; progress remediating defects; (3) for milestones related to reporting: Development progress as defined by the number of functional requirements not yet started, in progress, or complete; the number and percentage of functional requirements for which internal testing is in progress and the related pass/fail percentages of associated test cases; the number and percentage of functional requirements that have completed internal testing with all defects remediated; the number of Plan requirements met or outstanding; a list of Plan requirements met or outstanding). 59 For example, if an Implementation Milestone is the publication of Industry Member technical specifications, a description of the status could state: That the Plan Processor produced a draft that was circulated to Industry Members on [insert date]; that the Participants are reviewing feedback and expect to issue final technical specifications by [insert date]; and that the draft is complete except for a [specified topic], because of a [specified reason]. As an example of a description identifying any difference between the Implementation Plan completion date and the current targeted completion date, including the basis for making the adjustment and the impact of this adjustment on any other Implementation Milestone, the Participants could state: That the Implementation Plan completion date was [insert date], but the Participants are revising such date to [insert new targeted completion date], because [insert topic] proved to be more complicated than anticipated due to [insert reason]. The description could continue to state that the Participants believe the new targeted completion date is appropriate because, for example, they have designed a new approach to deliver the required functionality to address the issue in the technical specifications that is currently under development as of [insert date]. 60 Appendix D outlines minimum functional and technical requirements established by the Participants of the CAT NMS Plan for the Plan Processor. See CAT NMS Plan, supra note 4, Appendix D-1. Examples of such functional requirements for the CAT system include the ability to provide feedback on the reasons for errors in data submissions, and the ingestion of data submitted to the Central Repository by Industry Members. See id. at Appendix D, Sections 7.4, 7.5. For each Implementation Milestone that has not yet been initiated by the end of a given calendar quarter, the Report would include the following: (1) The completion date provided in the Implementation Plan, (2) the currently targeted completion date, and (3) a description of (a) the current status of the Implementation Milestone, and (b) any difference between the Implementation Plan completion date and the currently targeted completion date, including the basis for making the adjustment and the impact of this adjustment on any other Implementation Milestone. The Commission preliminarily believes that the Quarterly Progress Reports will facilitate transparency by ensuring that current and comprehensive information about the CAT's state of development is regularly communicated to the Commission, Industry Members, and the public at large. 61 Moreover, the Commission preliminarily believes that the requirements set forth for the proposed Quarterly Progress Reports are appropriate. Because the Participants should already be actively monitoring their progress on the implementation of the CAT, the Commission believes 15 business days is a reasonable amount of time in which to prepare Reports based on the information the Participants have already gathered. 62 61 For example, the Commission expects that the Quarterly Progress Reports will provide the Commission and the public with more granular and up-to-date information regarding the likelihood that the Participants will meet the target deadlines associated with the Financial Accountability Milestones and/or the likelihood that the Participants will be permitted to recover related fees, costs, or expenses from Industry Members. The Financial Accountability Milestones, and their related financial accountability provisions, are discussed in Part II.B. infra. 62 See, e.g., note 53 supra. The Participants are required to provide both the Implementation Plan completion date and the actual or currently targeted completion date for each Implementation Milestone so that the original completion date will serve as a baseline against which to measure progress if there is a difference between the two dates, as supplemented by the information provided in the commentary. The Commission preliminarily believes that progress can be effectively evaluated based upon whether the Implementation Plan completion dates are being met. The Commission also preliminarily believes that information provided in the required descriptions for the Implementation Milestones will yield valuable insights into the progress of CAT implementation, for example by providing an early indication of the potential for delays. The Commission also preliminarily believes that requiring the disclosure of the information provided in the descriptions would encourage the Participants to consider whether resources need to be realigned, so that adjustments can be made to the implementation process. In regard to the Implementation Milestones completed by the end of a given calendar quarter, the proposed amendments would require the Participants to describe any variance from the Implementation Plan. The Commission preliminarily believes that such information could reflect whether the Participants have only partially achieved the functionality required by certain Implementation Milestones. In regard to the Implementation Milestones in progress at the end of a given calendar quarter, the proposed amendments would require the Participants to describe the status of the Implementation Milestone, any difference between the completion dates provided, including the basis for making the adjustment and the impact such adjustment might have on any other Implementation Milestone, and other factual indicators that demonstrate the current level of completion with respect to the milestone. The Commission preliminarily believes that such information could reveal if there is an increasingly negative variance between the Implementation Plan completion date and the targeted completion date, as well as the cause for such variance. The required information could also provide an indication of whether corrections are needed to get the implementation process back on track and whether the currently targeted completion dates provided in a Report are realistic. In regard to the Implementation Milestones that have not yet been initiated by the end of a given calendar quarter, the proposed amendments would require the Participants to describe the current status for the Implementation Milestone and any difference between the completion dates provided, including the basis for making the adjustment. The Commission expects that quarterly communication of this information will aid Industry Members by providing more information on the timing of their CAT reporting obligations, which, correspondingly, should aid them in efficiently developing and implementing their regulatory data collection systems and allow them to make their own adjustments as needed. In addition, the Commission anticipates that the Quarterly Progress Reports will aid the Commission, Industry Members and others in monitoring and better understanding the progress of CAT implementation. The Commission also proposes to amend the CAT NMS Plan to add proposed Section 6.6(c)(iii) to require that the Implementation Plan and each Quarterly Progress Report be approved by at least a Supermajority Vote of the Operating Committee before such documents are filed with the Commission or made publicly available on each of the Participant websites or collectively on the CAT NMS Plan website. However, if the Implementation Plan or any Quarterly Progress Report is approved only by a Supermajority Vote of the Operating Committee, and not by a unanimous vote of the Operating Committee (including, for the avoidance of doubt, all members of the Operating Committee, whether or not present and whether or not recused), proposed Section 6.6(c)(iii) would require each Participant whose Operating Committee member did not vote to approve the Implementation Plan or Quarterly Progress Report separately file with the Commission and make publicly available on each of the Participant websites, or collectively on the CAT NMS Plan website, a statement identifying itself and explaining why the member did not vote to approve the Implementation Plan or Quarterly Progress Report. Prior to the Operating Committee's vote, the Implementation Plan and Quarterly Progress Reports shall also be submitted by the Operating Committee to the CEO, President, or an equivalently situated senior officer (or, “senior management”) of each Participant. 63 63 In addition to the senior management personnel who will receive the Implementation Plan and Quarterly Progress Reports under the proposed amendment, each Participant has a voting member (and an alternate voting member) representing it on the Operating Committee who will receive these documents. One individual may serve as the voting member of the Operating Committee for multiple affiliated Participants. See CAT NMS Plan, supra note 4, at Section 4.2(a). The Commission preliminarily believes that the Operating Committee should vote on the Implementation Plan and each Quarterly Report because the Operating Committee, as the manager of the Company, already votes on all actions for which a vote is required under the CAT NMS Plan. 64 The Commission further preliminarily believes that specifically requiring the approval of the Operating Committee by at least a Supermajority Vote will lend credibility to the timelines presented by Participants in the Implementation Plan and Reports, which may otherwise be lacking given that the timelines for Industry Member CAT implementation have been revised multiple times. 65 In addition, the requirement that the Implementation Plan and Quarterly Progress Reports be submitted to the CEO, President, or an equivalently situated senior officer of each Participant, prior to the Operating Committee's vote, is intended to promote senior management attention and promote accountability with respect to CAT implementation. 64 See CAT NMS Plan, supra note 4, at Sections 4.1 and 4.3. 65 See Part I supra. If the Operating Committee does not unanimously vote to approve the Implementation Plan or any Quarterly Progress Report, the proposed amendments require each Participant whose Operating Committee member did not vote to approve the Implementation Plan or Quarterly Progress Report to separately file with the Commission and make publicly available on each of the Participant websites, or collectively on the CAT NMS Plan website, a statement identifying itself and explaining why the member did not vote to approve the Implementation Plan or Quarterly Progress Report. The Commission preliminarily believes that the requirement may aid the Commission and the public to better monitor the progress of CAT implementation, because such an explanation may reveal critical information regarding whether currently targeted completion dates are realistic, whether milestones are being or have been completed in accordance with the requirements of the CAT NMS Plan, and/or whether potential risks or delays may impede the progress of CAT implementation. The Commission requests comment on the amendments to increase operational transparency. Specifically, the Commission solicits comment on the following: 1. Are the Implementation Plan and the Quarterly Progress Report effective mechanisms for providing the Commission and Industry Members with transparency into CAT implementation? Why or why not? 2. Are the details and requirements of the Implementation Plan appropriate and reasonable? Why or why not? Would additional details or requirements for the Implementation Plan be beneficial? 3. The proposed amendment requires the Participants to file and publish the Implementation Plan within 30 calendar days following the effective date of proposed Section 6.6(c). Is 30 calendar days a reasonable period of time in which to file and publish such a document? Why or why not? Does this timeline give the Operating Committee a sufficient amount of time to approve the Implementation Plan? Why or why not? Would a longer or shorter period of time, such as 45 calendar days or 15 calendar days, be more appropriate? 4. The proposed Amendment requires the Participants to file and publish a Quarterly Progress Report each calendar quarter on each Participant website or collectively on the CAT NMS Plan website. Is a quarterly interval the right interval? Would a longer or shorter interval be more effective? 5. The proposed amendment requires the Participants to file and publish the Quarterly Progress Report no later than fifteen business days following the end of each calendar quarter. Is fifteen business days a reasonable period of time in which to file and publish such a report? Why or why not? Does this timeline give the Operating Committee a sufficient amount of time to approve the Quarterly Progress Reports? Why or why not? Would a longer or shorter period of time, such as thirty business days or five business days, be more appropriate? 6. The proposed amendment establishes the deadline for filing and publishing the Quarterly Progress Report on the basis of business days. Are business days an appropriate measure by which to establish this deadline? Or would calendar days be more appropriate? Why or why not? 7. Are the details and requirements of the Quarterly Progress Report appropriate and reasonable? Why or why not? Would additional details or requirements for the report be beneficial? For example, should the Quarterly Progress Reports include financial information detailing the fees, costs, and expenses that the Participants have incurred to build and implement the CAT? If so, should these fees, costs, and expenses be clearly tied to the relevant Financial Accountability Milestone? Why or why not? 8. The proposed amendment requires the Operating Committee to approve the Implementation Plan and each Quarterly Progress Report by at least a Supermajority Vote. Is it appropriate to require a Supermajority Vote, or should the Commission require a majority vote or a unanimous vote of the Operating Committee? Why or why not? Is it appropriate to require that the Operating Committee vote on this matter? Why or why not? If this matter should be delegated to a Subcommittee, please explain which Subcommittee should vote to approve the Implementation Plan and Quarterly Progress Report and why. 9. If the Implementation Plan or any Quarterly Progress Report is not approved by a unanimous vote of the Operating Committee, the proposed amendment requires each Participant whose Operating Committee member did not vote to approve the Implementation Plan or Quarterly Progress Report separately file with the Commission and make publicly available on each of the Participant websites, or collectively on the CAT NMS Plan website, a statement identifying itself and explaining why the member did not vote to approve the Implementation Plan or Quarterly Progress Report. Is this an appropriate requirement? Why or why not? Should the Commission require the Implementation Plan or the Quarterly Progress Reports, or the members who did not vote to approve the Implementation Plan or a Quarterly Report, as the case may be, to provide any additional information? If so, what information should be provided, and why? 10. The proposed amendment requires that the Implementation Plan and each Quarterly Progress Report be submitted to the CEO, President, or an equivalently situated senior officer of each Participant, prior to being voted on by the Operating Committee. Is this an appropriate requirement to promote senior management attention and promote accountability with respect to CAT implementation? Why or why not? Should the Commission specify when the Implementation Plan and Quarterly Progress Reports should be submitted to the CEO, President, or equivalently situated senior officer of each Participant? If so, how many days prior to the Operating Committee vote should the Implementation Plan and Quarterly Progress Reports be submitted to senior management? To the extent that the Commission implements such a requirement, would the deadlines set forth in the proposed amendment for the submission of the Implementation Plan and Quarterly Progress Reports to the Commission need to be adjusted? Why or why not? By how many days should they be adjusted? Please explain your responses. 11. Please identify any alternative means to promote senior management attention and promote accountability with respect to CAT implementation. For example, should the Commission require the senior management of each Participant ( e.g., the CEO, President, or an equivalently situated senior officer) to certify that the contents of the Implementation Plan and each Quarterly Progress Report are accurate and complete in all material respects? What should qualify as material? Should the certification be made to the best of an officer's knowledge and reasonable belief after reasonable investigation? Is the CEO or President the appropriate person to make the certification? If not, please explain why. If the CEO or President is not the appropriate person, which equivalently situated senior officer would be appropriate? Would additional details or requirements for such certifications be beneficial? If so, what are those details or requirements? Please explain your responses. 12. Are there other factors that impact the ability of the Participants to implement the CAT NMS Plan that would not be addressed by further disclosure that the Commission should address? B. Financial Accountability Amendments for Implementation of the CAT As discussed above, there have been multiple delays in CAT implementation since the adoption of Rule 613. To prevent additional delays, the Commission proposes to amend the CAT NMS Plan to include financial accountability provisions that are designed to align financial accountability with regulatory obligations and contribute to an expeditious implementation of the CAT. Currently, Section 11.1 of the CAT NMS Plan contemplates that the Operating Committee will establish, and the Participants will implement, fees for Participants and Industry Members to recover the costs and expenses incurred by the Participants in connection with the development, implementation, and operation of the CAT. 66 Proposals for any such fees must be filed with the Commission pursuant to Section 19(b) of the Exchange Act and are subject to Commission review for consistency with the Exchange Act and Article XI of the CAT NMS Plan. 67 Specifically, each Participant must demonstrate, under Sections 6(b)(4) and 15A(b)(5) of the Exchange Act, that such fee filings provide for the equitable allocation of reasonable dues, fees, and other charges among its members and other persons using its facilities. 68 The proposed amendment would not alter this basic structure, but would add a new Section 11.6 to govern the recovery of any fees, costs, and expenses (including legal and consulting fees, costs, and expenses) incurred 69 by or for the Company in connection with the development, implementation, and operation of the CAT, 70 from the effective date of this amendment, if adopted by the Commission, until such time that the Participants have completed Full Implementation of CAT NMS Plan Requirements 71 (collectively, the “Post-Amendment Expenses”). 66 See, e.g., CAT NMS Plan, supra note 4, at Section 11.1(c). 67 Section 19(b) of the Exchange Act requires the Participants to submit proposed rule changes to the Commission. 15 U.S.C. 78s(b); see also CAT NMS Plan, supra note 4, at Section 11.1(b) (noting that the Participants must file proposed fees for Industry Members with the Commission). 68 See 15 U.S.C. 78f(b)(4) (applicable to the national securities exchanges); 15 U.S.C. 78 o -3(b)(5) (applicable to FINRA, a national securities association). 69 For the purposes of proposed Section 11.6, determination of when a fee, cost, or expense is considered “incurred” shall be based on Generally Accepted Accounting Principles (“GAAP”), as those principles must also be applied to all accounting or financial statements prepared by the Operating Committee under Section 9.2 of the CAT NMS Plan. See note 4 supra. For example, a fee, cost, or expense related to a good or service would generally be considered incurred upon acquisition of the good or service in accordance with GAAP. 70 See, CAT NMS Plan, supra note 4, at Section 11.1(b)-(c), Section 11.2(a)-(b), and Section 11.3(c) (relating to the funding of the development, implementation and operating costs of the Company). 71 As part of the proposed amendment, Section 1.1 of the CAT NMS Plan will be amended to include a definition of “Full Implementation of CAT NMS Plan Requirements.” This term will mean “the point at which: (a) The Participants have satisfied all of their obligations to build and implement the CAT, such that all CAT system functionality required by Rule 613 and the CAT NMS Plan has been developed, successfully tested, and fully implemented with the initial Error Rates specified by Section 6.5(d)(i) of the CAT NMS Plan, including, but not limited to, functionality that efficiently permits the Participants and the Commission to access all CAT Data required to be stored in the Central Repository pursuant to Section 6.5(a) of the CAT NMS Plan and to analyze the full lifecycle of an order, from order origination through order execution or order cancellation, across the national market system. This Financial Accountability Milestone shall be considered complete as of the date identified in a Quarterly Progress Report meeting the requirements of Section 6.6(c).” This definition is discussed further below. See Part II.B.1.d. infra. Proposed Section 11.6 would apply new conditions to the collection of any fees established by the Operating Committee, or implemented by the Participants, to recover a portion of Post-Amendment Expenses from Industry Members (“Post-Amendment Industry Member Fees”). Specifically, proposed Section 11.6 would require the Participants to meet four critical CAT implementation milestones—the Financial Accountability Milestones—by certain dates in order to collect the full amount of any related Post-Amendment Industry Member Fees established by the Operating Committee or implemented by the Participants. If the Participants fail to meet the target deadlines set forth in proposed Section 11.6, they would only be entitled to collect a portion of the amount of the relevant Post-Amendment Industry Member Fees, as determined by the amount of time by which the Participants have missed the target deadlines. The Commission preliminarily believes applying these new conditions to the Post-Amendment Industry Member Fees is appropriate. At the time the Commission approved the CAT NMS Plan, the Commission believed it was reasonable, in accordance with Section 6(b)(4) of the Exchange Act, 72 for the Participants to recover a portion of the fees, costs, and expenses associated with the development and implementation of the CAT from Industry Members. 73 This belief, however, was based on the Commission's expectation that the Participants would be complying with the CAT NMS Plan, which required the implementation of certain CAT functionality by the dates set forth in the CAT NMS Plan. As noted above, the Participants have missed multiple dates codified in the CAT NMS Plan. 74 Accordingly, the regulatory aims of the CAT NMS Plan have yet to be achieved. Accordingly, the Commission is proposing financial accountability rules that address the Commission's view of what it would consider to be “reasonable fees” and a reasonable exercise of the Participants' funding authority under the CAT NMS Plan in the context of CAT implementation going forward. 72 15 U.S.C. 78f(b)(4) (requiring the rules of a national securities exchange to provide for “equitable allocation of reasonable dues, fees, and other charges among its members and issuers and other persons using its facilities”). 73 See, e.g., CAT NMS Plan Approval Order, supra note 4, at 84794. 74 See Part I supra. The specific terms of the proposed amendment are discussed in more detail below. 1. Financial Accountability Milestones and Target Deadlines Proposed Section 11.6 identifies four critical CAT implementation milestones: (1) Initial Industry Member Core Equity Reporting, (2) Full Implementation of Core Equity Reporting Requirements, (3) Full Availability and Regulatory Utilization of Transactional Database Functionality, and (4) Full Implementation of CAT NMS Plan Requirements (collectively, the “Financial Accountability Milestones” 75 ). For each Financial Accountability Milestone, the Commission has also identified a target deadline for completion. 75 This term is defined at proposed Section 1.1. a. Initial Industry Member Core Equity Reporting The Commission proposes to amend Section 1.1 of the CAT NMS Plan to define “Initial Industry Member Core Equity Reporting” as the point at which Industry Members (excluding Small Industry Members 76 that are do not report to the Order Audit Trail System (“OATS”)) have begun to report equities transaction data, excluding Customer Account Information, Customer-ID, and Customer Identifying Information, 77 to the CAT. 78 This Financial Accountability Milestone shall be considered complete as of the date identified in a published Quarterly Progress Report meeting the requirements of proposed Section 6.6(c). 79 The Commission also proposes to add Section 11.6(a)(i)(A) to provide that the Participants will be entitled to collect the full amount of any Post-Amendment Industry Member Fees established or implemented to recover Post-Amendment Expenses incurred from the date of this amendment's adoption by the Commission 80 to the date of Initial Industry Member Core Equity Reporting (“Period 1”), so long as such date is no later than April 30, 2020. 81 76 As defined by Section 1.1 of the CAT NMS Plan, and for the purposes of this proposing release, “Small Industry Member” an Industry Member that qualifies as a small broker-dealer as defined in SEC Rule 613. See also 17 CFR 242.613(a)(3)(vi) (defining small broker-dealers by reference to 17 CFR 240.0-10(c), which defines a small broker dealer as one with “total capital . . . of less than $500,000 on the date in the prior fiscal year as of which its audited financial statements were prepared or, if not required to file such statements, a broker or dealer that had total capital . . . of less than $500,000 on the last business day of the preceding fiscal year” and one that is “not affiliated with any person . . . that is not a small business or small organization”). 77 Customer Account Information, Customer-ID, and Customer Identifying Information are defined terms in Section 1.1 of the CAT NMS Plan and are the same definitions in the context of this proposing release. 78 The Commission notes that the equities transaction data required at this stage is consistent with the functionality that the Participants currently plan to implement at “Phase 2a” in the latest draft of the Technical Specifications. See CAT Reporting Technical Specifications for Industry Members, Version 2.2 (June 24, 2019), at vii, available at https://www.catnmsplan.com/wp-content/uploads/2019/06/Industry-Member-Tech-Specs-v2.2-Clean.pdf. 79 The target deadline for Initial Industry Member Core Equity Reporting falls on April 30, 2020—between scheduled Quarterly Progress Reports. If the Participants wait to submit the Quarterly Progress Report to the Commission, it may delay their ability to begin recovering any Post-Amendment Industry Member Fees to which they may be entitled. Accordingly, the Commission notes that the Participants may file an interim Quarterly Progress Report, if they so choose, on the day they achieve this Financial Accountability Milestone (or any other Financial Accountability Milestone) in order to expedite their recovery of Post-Amendment Industry Member Fees. 80 The proposed amendment will not affect the Participants' ability to collect CAT-related fees, costs, or expenses incurred up to the date that proposed Section 11.6 is adopted. See proposed Section 11.6. 81 See proposed Section 11.6(a)(i)(A). To the extent that the Initial Industry Member Core Equity Reporting milestone is achieved at some later date, the Participants will only be entitled to collect a portion of the amount of the Post-Amendment Industry Member Fees established or implemented for Period 1. See proposed Section 11.6(a)(ii); see also Part II.B.2. infra for additional discussion regarding the conditions attached to Post-Amendment Industry Member Fee collection. The Commission preliminarily believes that Initial Industry Member Core Equity Reporting is an appropriate Financial Accountability Milestone, because this milestone requires the Participants to develop, test, and implement essential infrastructure needed to support Industry Member reporting—one of the major goals identified by the CAT NMS Plan. 82 Before Industry Members may begin reporting any equities transaction data to the CAT, the Participants must develop, and Industry Members must thoroughly test, file submission tools, data integrity controls, and various security measures to ensure that the CAT can safely receive and process this data, as well as identify data that may not be accurate. These are core operations that are fundamental to the success of the CAT. By requiring Industry Members—excluding Small Industry Members that are not OATS reporters 83 —to begin reporting the first phase of equities transaction data to the CAT, the Participants will demonstrate that they have made significant progress towards implementing foundational CAT functionality. 82 See CAT NMS Plan, supra note 4, at Section 6.7(a)(v). 83 The Commission preliminarily believes that it is appropriate to exclude Small Industry Members that do not report to OATS from this Financial Accountability Milestone in order to mirror the timelines projected by the Participants. See, e.g., Industry Update on CAT Reporting Technical Specifications for Industry Members (April 3, 2019), available at https://www.catnmsplan.com/wp-content/uploads/2019/04/CAT_Industry_Call_04032019_Presentation.pdf; see also CAT Reporting Timelines, available at https://www.catnmsplan.com/timelines/. Furthermore, the Commission preliminarily believes that it is appropriate to require the Participants to achieve Initial Industry Member Core Equity Reporting by April 30, 2020 in order to recover the full amount of any related Post-Amendment Industry Member Fees, because the Participants have indicated that they plan to implement basic equities transaction reporting for Industry Members (excluding Small Industry Members that are not OATS reporters) by that date. Recent timelines published by the Participants indicate that the production environment for Industry Member equities reporting will go live in April 2020. 84 Based on this representation, the Commission preliminarily believes the proposed deadline of April 30, 2020 for Initial Industry Member Core Equity Reporting is both reasonable and feasible. 84 See, e.g., id. The Participants have also released finalized technical specifications for Industry Member reporting, as well as a symbol list providing the scope of securities for which Industry Member reporting will be required, which the Commission believes are critical steps towards achieving Initial Industry Member Core Equity Reporting by April 30, 2020. With this information, the Industry Members should be able to make meaningful progress towards developing the internal infrastructure needed to report to the CAT. See note 78 supra. See also, e.g., Industry Update on the Consolidated Audit Trail (February 20, 2019), available at https://www.catnmsplan.com/wp-content/uploads/2019/02/CAT_Industry_Webcast_02.20.2019_vF.pdf (stating that there will be no material design changes to the technical specifications for Industry Member reporting and instructing Industry Members to continue as planned with development efforts); CAT Reportable Equity Securities Symbol Master, available at https://www.catnmsplan.com/symbol-master/index.html. b. Full Implementation of Core Equity Reporting Requirements The Commission proposes to amend Section 1.1 of the CAT NMS Plan to define “Full Implementation of Core Equity Reporting Requirements” as the point at which: (a) Industry Member reporting (excluding reporting by Small Industry Members that are not OATS reporters) for equities transactions, excluding Customer Account Information, Customer-ID, and Customer Identifying Information, 85 is developed, tested, and fully implemented at a 5% Error Rate 86 or less and with sufficient intra-firm linkage, inter-firm linkage, national securities exchange linkage, and trade reporting facilities linkage to permit the Participants and the Commission to analyze the full lifecycle of an order across the national market system, excluding linkage of representative orders, from order origination through order execution or order cancellation; 87 and (b) the query tool functionality required by Section 6.10(c)(i)(A) and Appendix D, Sections 8.1.1-8.1.3 and Section 8.2.1 of the CAT NMS Plan incorporates the Industry Member equity transaction data described in condition (a) and is available to the Participants and to the Commission. This Financial Accountability Milestone shall be considered complete as of the date identified in a Quarterly Progress Report meeting the requirements of Section 6.6(c). 88 The Commission also proposes to add Section 11.6(a)(i)(B) to provide that the Participants will be entitled to collect the full amount of any Post-Amendment Industry Member Fees established or implemented to recover Post-Amendment Expenses incurred from the date immediately following the achievement of Initial Industry Member Core Equity Reporting to the date of Full Implementation of Core Equity Reporting Requirements (“Period 2”), so long as such date is no later than December 31, 2020. 89 85 See note 77 supra. 86 “Error Rate” is a term defined in Section 1.1 of the CAT NMS Plan to mean “the percentage of reportable events collected by the central repository in which the data reported does not fully and accurately reflect the order even that occurred in the market.” See also 17 CFR 242.613(j)(6). 87 The equities transaction data required at this stage is consistent with the functionality that the Participants currently plan to implement at “Phase 2a” in the latest draft of the Technical Specifications. See note 78 supra. 88 See also note 79 supra. 89 See proposed Section 11.6(a)(i)(B). To the extent that the Full Implementation of Core Equity Reporting Requirements milestone is achieved at some later date, the Participants will only be entitled to collect a portion of the amount of the Post-Amendment Industry Member Fees established or implemented for Period 2. See proposed Section 11.6(a)(iii); see also Part II.B.2. infra for additional discussion regarding the conditions attached to Post-Amendment Industry Member Fee collection. The Commission preliminarily believes that Full Implementation of Core Equity Reporting Requirements is an appropriate Financial Accountability Milestone, because this milestone requires the Participants to show that they have taken significant steps towards achieving one of the primary goals identified in the CAT NMS Plan—Industry Member reporting. 90 Whereas the previous Financial Accountability Milestone only required that the Participants sufficiently develop and test the CAT so as to allow Industry Members (excluding Small Industry Members that are not OATS reporters) to begin reporting equities transaction data, this Financial Accountability Milestone requires Participants to have fully implemented the first phase of equities transaction reporting for Industry Members (excluding Small Industry Members that are not OATS reporters) at an Error Rate that is consistent with the initial Error Rate threshold set forth in the CAT NMS Plan. 91 Equities transaction data produced by the CAT at this stage must also be sufficiently interlinked so as to permit full analysis of an order's lifecycle across the national market, excluding full linkage of representative orders. 92 These requirements are designed to ensure that the Participants have developed, tested, and implemented an audit trail system that produces meaningful and accurate equities transaction data, including data that can be used to evaluate the full lifecycle of an equities order. 93 The achievement of such benchmarks would demonstrate that the Participants have made significant progress towards full implementation of Industry Member reporting. 94 90 See CAT NMS Plan, supra note 4, at Section 6.7(a)(v). 91 See, e.g., CAT NMS Plan, supra note 4, at Section 6.5(d)(i) of the CAT NMS Plan (specifying that the “initial maximum Error Rate shall be set to 5%”). 92 Although full linkage of representative orders is not required by this milestone, the technical specifications provided to Industry Members indicate that, by April 2020, linkage “between the representative street side order and the order being represented when the representative order was originated specifically to represent a single order . . . and there is: (1) an existing direct electronic link in the firm's system between the order being represented and the representative order, and (2) any resulting executions are immediately and automatically applied to the represented order in the firm's system[.]” See CAT Reporting Technical Specifications for Industry Members, Version 2.2 (June 24, 2019), available at https://www.catnmsplan.com/wp-content/uploads/2019/06/Industry-Member-Tech-Specs-v2.2-Clean.pdf. 93 See, e.g., id. at 6, 154 (setting forth specifications for a firm-designated ID and representative order flag, which are examples of two fields not available through OATS). 94 The Commission preliminarily believes that it is appropriate to exclude Small Industry Members that do not report to OATS from this Financial Accountability Milestone, in order to mirror the timelines projected by the Participants. See, e.g., Industry Update on CAT Reporting Technical Specifications for Industry Members (April 3, 2019), available at https://www.catnmsplan.com/wp-content/uploads/2019/04/CAT_Industry_Call_04032019_Presentation.pdf; see also CAT Reporting Timelines, available at https://www.catnmsplan.com/timelines/. The second prong of this Financial Accountability Milestone requires that the equities transaction data collected by the CAT at this stage be made available to regulators through two basic query tools required by the CAT NMS Plan—a targeted query tool that will enable regulators to retrieve data via an online query screen with a variety of predefined selection criteria, and a user-defined direct query tool that will provide regulators with the ability to query data using all available attributes and data sources. 95 These query tools should enable regulators to access and use the provided data to perform essential analyses of the equities markets, including equity market reconstruction, and to pursue data-driven policy-making. By requiring the Participants to develop these tools and make them available to the Commission and other regulators at this stage, the second prong of this Financial Accountability Milestone is designed to ensure that the CAT is built in a manner that will allow regulators to access CAT Data in order to realize the regulatory benefits associated with the CAT. 95 See, e.g., CAT NMS Plan, supra note 4, at Section 6.10(c)(i)(A)-(B); see id. at Appendix D, Sections 8.1.1-8.1.3, and Section 8.2.1. Section 6.10(c)(i)(A) of the CAT NMS Plan requires the Plan Processor to “provide Participants and the SEC with access to all CAT Data stored in the Central Repository” via an “online targeted query tool.” Appendix D, Section 8.1.1-8.1.3 of the CAT NMS Plan describes the required functionality associated with this regulatory tool. Appendix D, Section 8.2.1 describes the required functionality associated with a user-defined direct query tool that will “deliver large sets of data that can then be used in internal surveillance or market analysis applications.” See id. at Sections 8.2. This tool is also described at Section 6.10(c)(i)(B) of the CAT NMS Plan. The Commission preliminarily believes that it is appropriate to require the Participants to achieve Full Implementation of Core Equity Reporting Requirements by December 31, 2020 in order to receive the full amount of any related Post-Amendment Industry Member Fees. This deadline is consistent with the Participants' most recent projections—for example, the most recent timelines published by the Participants indicate that the Participants intend to substantially complete implementation of equities reporting for Industry Member (excluding Small Industry Members that do not report to OATS) by October 2020, 96 and the Commission understands that the relevant query tool functionality should go live into production on a timeline that is generally consistent with the proposed deadline of December 31, 2020. Accordingly, the Commission preliminarily believes the target deadline of December 31, 2020 for Full Implementation of Core Equity Reporting Requirements is both reasonable and feasible. 96 See, e.g., Industry Update on CAT Reporting Technical Specifications for Industry Members (April 3, 2019), available at https://www.catnmsplan.com/wp-content/uploads/2019/04/CAT_Industry_Call_04032019_Presentation.pdf; see also CAT Reporting Timelines, available at https://www.catnmsplan.com/timelines/. c. Full Availability and Regulatory Utilization of Transactional Database Functionality The Commission proposes to amend Section 1.1 of the CAT NMS Plan to define “Full Availability and Regulatory Utilization of Transactional Database Functionality” as the point at which: (a) reporting to the Order Audit Trail System (“OATS”) is no longer required for new orders; (b) Industry Member reporting for equities transactions, simple electronic options transactions, manual options transactions, and complex options transactions, including Allocation Reports, 97 but excluding Customer Account Information, Customer-ID, and Customer Identifying Information, is developed, tested, and fully implemented; (c) representative order linkages, as well as intra-firm linkages, inter-firm linkages, national securities exchange linkages, and trade reporting facilities linkages, are developed, tested, and fully implemented in a manner that permits the Participants and the Commission to analyze the full lifecycle of an order across the national market system, from order origination through order execution or order cancellation, including any related allocation information provided in an Allocation Report; 98 (d) CAT Error Rates satisfy the threshold specified by Section 6.5(d)(i); (e) the query tool functionality required by Section 6.10(c)(i)(A) and Appendix D, Sections 8.1.1-8.1.3, Section 8.2.1, and Section 8.5 incorporates the data described in conditions (b) and (c) and is available to the Participants and to the Commission; and (f) the requirements of Section 6.10(a) are met. This Financial Accountability Milestone shall be considered complete as of the date identified in a Quarterly Progress Report published meeting the requirements of Section 6.6(c). 99 97 “Allocation Report” is defined term in Section 1.1 of the CAT NMS Plan and carries the same meaning in the context of this proposing release. 98 The allocation information provided in an Allocation Report will be linked to person(s) having the authority to trade on behalf of the account using Firm Designated ID—a unique identifier for each trading account designated by Industry Members for purposes of providing data to the Central Repository, where each such identifier is unique among all identifiers from any given Industry Member for each business date. See CAT NMS Plan, supra note 4, at Section 1.1. Allocations are not required to be directly linked to orders or executions. See id. 99 See also note 79 supra. The Commission also proposes Section 11.6(a)(i)(C) to provide that the Participants will be entitled to collect the full amount of any Post-Amendment Industry Member Fees established or implemented to recover Post-Amendment Expenses incurred from the date immediately following the achievement of Full Implementation of Core Equity Reporting Requirements to the date of Full Availability and Regulatory Utilization of Transactional Database Functionality (“Period 3”), so long as such date is no later than December 31, 2021. 100 100 See proposed Section 11.6(a)(i)(C). To the extent that Full Availability and Regulatory Utilization of Transactional Database Functionality is achieved at some later date, the Participants will only be entitled to collect a portion of the amount of the Post-Amendment Industry Member Fees established or implemented for Period 3. See proposed Section 11.6(a)(iii); see also Part II.B.2. infra for additional discussion regarding the conditions attached to Post-Amendment Industry Member Fee collection. The Commission preliminarily believes that Full Availability and Regulatory Utilization of Transactional Database Functionality is an appropriate Financial Accountability Milestone, because this milestone will require the Participants to demonstrate substantial completion of CAT implementation. Whereas the previous Financial Accountability Milestone focused only on the implementation of basic equities transaction reporting for Industry Members (excluding Small Industry Members that are not OATS reporters), this Financial Accountability Milestone requires the Participants to have fully implemented the first phase of reporting for equities, simple options, manual options, and complex options. This Financial Accountability Milestone also requires the Participants to implement representative order linkages, in addition to intra-firm linkages, inter-firm linkages, national securities exchange linkages, and trade reporting linkages, including any related allocation information included in an Allocation Report. Therefore, at this stage, the CAT should contain sufficient equities and options transactional data and order linkages to enable regulators to analyze the full lifecycle of an order, from order origination through order execution or order cancellation, including any related allocation information provided in an Allocation Report, as well as conduct other sophisticated analyses of the markets. For instance, the CAT should give regulators access to an options audit trail system that, for the first time, makes possible options market reconstruction and cross-market analyses across full order lifecycles. 101 101 Although the Consolidated Options Audit Trail System (“COATS”) provides an audit trail for options, CAT will contain broker-dealer data and order data not currently available through COATS, enabling regulators to perform more sophisticated analyses on options data. Moreover, CAT will contain equities data as well as options data, which will enable regulators to conduct cross-market analyses and surveillances. Full Availability and Regulatory Utilization of Transactional Database Functionality further requires that core elements of the CAT are reasonably accurate, reliable, and accessible to regulators. For instance, this Financial Accountability Milestone requires that CAT Error Rates satisfy the 5% initial maximum Error Rate set forth in Section 6.5(d)(i) of the CAT NMS Plan. 102 The Commission preliminarily believes this is appropriate because the Participants have, in the past, expressed the belief that an initial Error Rate of 5% “strikes the balance of making allowances for adapting to a new reporting regime while ensuring that the data provided to regulators will be capable of being used to conduct surveillance and market reconstruction.” 103 This Financial Accountability Milestone also requires that certain regulatory tools incorporate Industry Member data, are available to regulators, and have been implemented pursuant to the provisions of the CAT NMS Plan, including not only the online targeted query tool and the user-defined direct query tool discussed above, 104 but also surveillance systems reasonably designed to make use of CAT data. 105 Moreover, achievement of Full Availability and Regulatory Utilization of Transactional Database Functionality requires the Participants to demonstrate, through retirement of the existing OATS system, 106 that the CAT is sufficiently accurate, reliable, and accessible to regulators to be adopted as the audit trail system for equities transactions. The Commission believes that all of these requirements should ensure that regulators are able to use and rely on the CAT at this stage to conduct the kind of improved market surveillance that the Commission envisioned when it adopted Rule 613. 107 102 See proposed Section 1.1, “Full Availability and Regulatory Utilization of Transactional Database Functionality,” at (b). See also CAT NMS Plan, supra note 4, at Section 6.5(d)(i). 103 See CAT NMS Plan Approval Order, supra note 4, at 84717. 104 See Section II.B.1.b. supra. 105 Full Availability and Regulatory Utilization of Transactional Database Functionality requires that the requirements of Appendix D, Section 8.1.1-8.1.3, Section 8.2.1, and Section 8.5 of the CAT NMS Plan, which describe the performance requirements and service level agreements for necessary regulatory tools, have been met for any data contained in the CAT. The “surveillance systems” required by Section 6.10(a) and the query tool functionality required by Section 6.10(c)(i)(A) of the CAT NMS Plan must also be implemented. See proposed Section 1.1, “Full Availability and Regulatory Utilization of Transaction Database Functionality,” at (e)-(f). 106 To achieve this Financial Accountability Milestone, OATS reporting must no longer be required for new orders. This prong can only be accomplished by retiring OATS. Although FINRA is the only Participant in direct control of OATS retirement, the Commission still believes it is appropriate to apply this milestone to all Participants. All of the Participants are jointly responsible for creating a CAT that is capable of replacing OATS. All Participants are regulators that will benefit from the full implementation of the CAT. See, e.g., CAT NMS Plan, supra note 4, at Appendix C, Section C.9. (discussing retirement of OATS). 107 See Rule 613 Adopting Release, supra note 2, at 45788. The Commission preliminarily believes that it is appropriate to require the Participants to achieve Full Availability and Regulatory Utilization of Transactional Database Functionality by December 31, 2021 in order to recover the full amount of any related Post-Amendment Industry Member Fees. This deadline is consistent with the Participants' most recent projections for completion of Industry Member reporting, representative order linkages, and the development of regulatory query tools for options and equities. The most recent timelines issued by the Participants suggest that Industry Member reporting and representative order linkages will be implemented by December 2021, 108 and the Commission further understands that the online targeted query tool and user-directed direct query tool for both options and equities should go live into production on a timeline that is generally consistent with the proposed deadline of December 31, 2021. Therefore, the Commission's proposed deadline of December 31, 2021 is consistent with the Participants' timeline for these items. 108 See, e.g., note 96 supra. Moreover, so long as the Participants diligently work towards building the CAT according to the requirements of the CAT NMS Plan, the Commission preliminarily believes that the Participants should reasonably be able to demonstrate, by December 31, 2021, both that the CAT is fully and effectively functional for equities data such that the CAT is capable of replacing OATS such that reporting to OATS will no longer be required for new orders. The Participants' timelines indicate that, by December 31, 2021, Industry Members and Small Industry Members that report to OATS will have been reporting equities transaction data to CAT for approximately 20 months, 109 which should give the Participants and other CAT Reporters a reasonable opportunity to address or correct any material data quality issues. The Commission further notes that the conditions of Full Availability and Regulatory Utilization of Transactional Database Functionality are designed to ensure that regulators are able to perform at least their normal range of regulatory tasks using CAT Data instead of OATS data. The Commission therefore preliminarily believes that it is reasonable and feasible to establish December 31, 2021 as the deadline for this Financial Accountability Milestone. 110 109 See supra note 96 and associated text. The Participants do not currently intend to implement transaction reporting for Small Industry Members that do not report to OATS until December 2021. However, because these Industry Members do not report to OATS, the Commission preliminarily believes that this should not impact the ability of the Participants to retire OATS by the target deadline of December 31, 2021. 110 The Commission also believes that tying full recovery of CAT-related expenses to this Financial Accountability Milestone will increase the likelihood that OATS will be retired by the proposed date, thereby reducing uncertainty amongst Industry Members and, potentially, compressing the period of duplicative reporting to which Industry Members might otherwise be subjected. With respect to the additional requirements designed to ensure that the CAT Data provided by Industry Members will be reasonably accurate, reliable, and accessible to regulators, the Commission also preliminarily believes that the Participants should be able to meet these requirements by December 31, 2021. For example, proposed Section 11.6(a)(i)(C) and proposed Section 1.1 would provide the Participants with approximately two years from the date of this amendment's adoption to develop, test, and implement the surveillance systems required by Section 6.10(a) of the CAT NMS Plan, 111 whereas the CAT NMS Plan indicates that a shorter span of fourteen months would be a sufficient period of time to accomplish that task. 112 The Commission therefore preliminarily believes the target deadline of December 31, 2021 for Full Availability and Regulatory Utilization of Transactional Database Functionality is both reasonable and feasible. 111 Section 6.10(a) of the CAT NMS Plan requires the Participants to use the tools described in Appendix D to “develop and implement a surveillance system, or enhance existing surveillance systems, reasonably designed to make use of the consolidated information contained in the Central Repository.” See note 4 supra. 112 See CAT NMS Plan, supra note 4, at Section 6.7(a)(iv); see also id. at Section 6.10(a). d. Full Implementation of CAT NMS Plan Requirements The Commission proposes to amend Section 1.1 of the CAT NMS Plan to define “Full Implementation of CAT NMS Plan Requirements” as the point at which the Participants have satisfied all of their obligations to build and implement the CAT, such that all CAT system functionality required by Rule 613 and the CAT NMS Plan has been developed, successfully tested, and fully implemented at the initial Error Rates specified by Section 6.5(d)(i) of the CAT NMS Plan or less, including functionality that efficiently permits the Participants and the Commission to access all CAT Data required to be stored in the Central Repository pursuant to Section 6.5(a) of the CAT NMS Plan, including Customer Account Information, Customer-ID, Customer Identifying Information, and Allocation Reports, and to analyze the full lifecycle of an order across the national market system, from order origination through order execution or order cancellation, including any related allocation information provided in an Allocation Report. 113 This Financial Accountability Milestone shall be considered complete as of the date identified in a Quarterly Progress Report meeting the requirements of Section 6.6(c). 114 The Commission also proposes to add Section 11.6(a)(i)(D) to provide that the Participants will be entitled to collect the full amount of any Post-Amendment Industry Member Fees established or implemented to recover Post-Amendment Expenses incurred from the date immediately following the achievement of Full Availability and Regulatory Utilization of Transactional Database Functionality to the date of Full Implementation of CAT NMS Plan Requirements (“Period 4”), so long as such date is no later than December 30, 2022. 115 113 See notes 97-98 supra. 114 See also note 79 supra. 115 See proposed Section 11.6(a)(i)(D). To the extent that Full CAT NMS Plan Requirements is achieved at some later date, the Participants will only be entitled to collect a portion of the amount of the Post-Amendment Industry Member Fees established or implemented for Period 4. See proposed Section 11.6(a)(iii); see also Part II.B.2. infra for additional discussion regarding the conditions attached to Post-Amendment Industry Member Fee collection. The Commission preliminarily believes that Full Implementation of CAT NMS Plan Requirements is appropriate as the final Financial Accountability Milestone. 116 This Financial Accountability Milestone will require the Participants to show that they have satisfied all of their obligations to build and implement the CAT system functionality required by Rule 613, including functionality that would allow the Participants and the Commission to efficiently access all transactional data and, for the first time, customer information stored in the Central Repository. Whereas the previous Financial Accountability Milestones do not require the Participants to provide customer information like Customer Account Information, Customer-ID, and Customer Identifying Information, the Participants must have developed, tested, and implemented reporting functionality for these elements to satisfy the parameters of Full Implementation of CAT NMS Plan Requirements. 116 Because the provisions of proposed Section 11.6 are meant to incentivize full CAT implementation, under the proposal, these provisions will not apply once Full Implementation of CAT NMS Plan Requirements is achieved. The creation of a unique Customer-ID under the CAT NMS Plan, is critical to achieving the full regulatory benefit of the CAT. 117 In the Commission's experience, it is now common for individuals and entities to trade through multiple broker-dealer accounts and for individuals engaged in wrongdoing to execute trades through multiple broker-dealers. A Customer-ID will be the key that ties all of the trading by one Customer together and as such, will facilitate the ability of regulators to identify all the orders and actions attributable to a specific Customer regardless of where that Customer routes orders or executes trades—a linkage which does not exist now. 117 See, e.g., Rule 613 Adopting Release, supra note 2, at 45756. Moreover, currently available audit trail data does not directly identify the customer associated with trading activity, so regulators conducting market surveillance must undertake multiple steps to request additional information after identifying suspect trades in order to link those trades with specific individuals. The inclusion of Customer-IDs in the CAT, at Full Implementation of CAT NMS Plan Requirements, would therefore significantly improve the capabilities of regulators because the CAT will be able to connect suspicious trading activity directly to a particular Customer through the Customer-ID. In addition, the Customer-ID will also enable a regulator to surveil the trading activity of market participants in both equity and options markets by Customer-ID, and thus a Customer-ID will improve regulators' efficiency in conducting cross-market and cross-product surveillance, which could in turn reduce violative behavior and protect investors from harm. Accordingly, the Commission believes that it is important to require the Participants to demonstrate that the Participants have developed, tested, and fully implemented functionality that efficiently permits the Commission and other regulators to access Customer-IDs, along with other Customer and Account information. In addition to providing this integral customer information, achievement of Full Implementation of CAT NMS Requirements would also mean that the Participants have created an audit trail system that provides reasonably accurate, reliable and useful information. Full Implementation of CAT NMS Requirements mandates that the CAT produce data at the initial Error Rate specified by the CAT NMS Plan, 118 as well as functionality that would efficiently permit the Participants and the Commission to analyze the full lifecycle of an order, including any subsequent allocation, across the national market system. These requirements are designed to help facilitate the implementation of the CAT functions in a manner that enables the Commission and other regulators to conduct the improved market surveillance envisioned by the Commission when it adopted Rule 613—the ultimate goal of this project. 118 See CAT NMS Plan, supra note 4, at Section 6.5(d)(i). See also note 103 supra. Furthermore, the Commission preliminarily believes that it is appropriate to require the Participants to achieve Full Implementation of CAT NMS Plan Requirements by December 30, 2022 in order to recover the full amount of any Post-Amendment Industry Member Fees. This deadline is consistent with the Participants' most recent projections, which indicate that the Participants intend to achieve full CAT implementation by July 2022. 119 In fact, the Commission's target deadline of December 30, 2022 gives the Participants an additional five months to achieve Full Implementation of CAT NMS Plan Requirements. Accordingly, the Commission preliminarily believes that the proposed target deadline of December 30, 2022 for Full Implementation of CAT NMS Plan Requirements is both reasonable and feasible. 119 See, e.g., note 96 supra. 2. Collection of Post Amendment Industry Member Fees As noted above, the Commission is proposing that the Participants will be entitled to collect the full amount 120 of any Post-Amendment Industry Member Fees related to the achievement of the Financial Accountability Milestones described above so long as they meet specified dates, which dates are consistent with the timelines most recently published by the Participants. 121 If the Participants do not meet the specified date for the achievement of Initial Industry Member Core Equity Reporting, proposed Section 11.6(a)(ii) will provide that the Participants' recovery of Post-Amendment Industry Member Fees will be reduced according to the following schedule: 120 “Full amount” in this context does not mean that the Participants may collect all of their Post-Amendment Expenses from Industry Members. Rather, pursuant to the provisions of Article XI of the CAT NMS Plan, the Participants may recover an appropriate portion of these fees from Industry Members. Specifically, to recover any Post-Amendment Expenses from Industry Members, the Participants must file with the Commission proposed rule changes under Section 19(b) of the Act, setting for their proposed allocation and justifying why the proposed allocation is consistent with the Act. The Commission would then review the proposed rule changes for consistency with the Exchange Act and the CAT NMS Plan. 121 See proposed Section 11.6(a)(i). • By 25% if the Participants miss the deadline set forth in proposed Section 11.6(a)(i)(A) by less than 60 days; • By 50% if the Participants miss the deadline set forth in proposed Section 11.6(a)(i)(A) by 60 days or more, but less than 120 days; • By 75% if the Participants miss the deadline set forth in proposed Section 11.6(a)(i)(A) by 120 days or more, but less than 180 days; • By 100% if the Participants miss the deadline set forth in proposed Section 11.6(a)(i)(A) by 180 days or more. If the Participants do not meet the specified dates for the achievement of Full Implementation of Core Equity Reporting Requirements, Full Availability and Regulatory Utilization of Transactional Database Functionality, or Full Implementation of CAT NMS Plan Requirements, proposed Section 11.6(a)(iii) will provide that the Participants' recovery of Post-Amendment Industry Member Fees will be reduced according to the following schedule: • By 25% if the Participants miss the deadline set forth in proposed Section 11.6(a)(i) by less than 90 days; • By 50% if the Participants miss the deadline set forth in proposed Section 11.6(a)(i) by 90 days or more, but less than 180 days; • By 75% if the Participants miss the deadline set forth in proposed Section 11.6(a)(i) by 180 days or more, but less than 270 days; and • By 100% if the Participants miss the deadline set forth in proposed Section 11.6(a)(i) by 270 days or more. Proposed Section 11.6(a)(iv) provides that the Participants will only be entitled to collect Post-Amendment Industry Member Fees for Period 1, Period 2, Period 3, or Period 4 at the end of each respective Period. The Commission preliminarily believes these conditions on CAT funding are appropriate. It has been almost three years since the Commission approved the CAT NMS Plan, but insufficient progress has been made towards the implementation of CAT, and the Participants have repeatedly missed deadlines set forth by the CAT NMS Plan. The Commission preliminarily believes that the proposed rules will provide accountability to facilitate implementation of the CAT in an expeditious and efficient manner, and according to a schedule that is consistent with the most recent timelines published by the Participants. 122 122 See Part II.B.1. for more discussion of the deadlines established by the proposed amendments. As explained above, the Commission has identified four meaningful Financial Accountability Milestones and paired those Financial Accountability Milestones with reasonable and feasible target deadlines set approximately eight months to one year apart. The Participants will be able to recover the full amount of any Post-Amendment Industry Member Fees if the Participants achieve the Financial Accountability Milestones identified in the proposed rule amendment by the specified dates. However, the Commission preliminarily believes that it is appropriate to impose financial accountability on the Participants by incrementally reducing the amount of CAT funding that Participants may recover from Industry Members, according to the schedules set forth above. Fee recovery for most of the Financial Accountability Milestones—Full Implementation of Core Equity Reporting Requirements, Full Availability and Regulatory Utilization of Transactional Database Functionality, and Full Implementation of CAT NMS Plan Requirements—will be governed by a fee schedule that gradually reduces the amount of recovery that the Participants are entitled to by 25% for each quarter by which the Participants miss the target deadline. The Commission preliminarily believes this structure will appropriately balance the need to keep Participants on a firm implementation schedule with the need to incentivize the Participants to continue their progress towards implementation even if the target deadlines identified in the proposed amendment are missed. As discussed above, 123 the Commission believes that the target deadlines identified for these three milestones are reasonable and feasible, because these deadlines are consistent with recent timelines provided by the Participants. The Commission therefore does not believe that it is necessary to allow for a grace period before reducing the Participants' recovery. However, by providing a full quarter before each subsequent, and additional, reduction to fee recovery, the proposed schedule gives the Participants an ample amount of time to achieve each milestone before further reductions are imposed. Moreover, the Commission believes that the proposed amount of the reduction—25% per quarter—is appropriate, because it is sufficiently large to incentivize prompt implementation, but not so large as to be unnecessarily punitive. 123 See Part II.B.1.b.-d. supra. A slightly different schedule is proposed for Initial Industry Member Core Equity Reporting. For that milestone, the proposal would reduce the initial recovery by 25% if the Participants miss the proposed deadline by less than 60 days and by an additional 25% for every additional 60 days by which the Participants miss the proposed deadline. While the Commission is imposing the same 25% fee reduction in this instance, the proposed fee recovery schedule for Initial Industry Member Core Equity Reporting is tighter than the schedule for the other three Financial Accountability Milestones. The Commission preliminarily believes that this is an appropriate schedule because this Financial Accountability Milestone should be the easiest for the Participants to achieve. Industry Members have developed relevant experience in reporting equities transaction data to OATS, and the Participants have made significant progress towards development of the necessary technical specifications, suggesting that the Participants remain on track with their own projections. In addition, the Commission believes it is critically important that the Participants remain on schedule to achieve the first Financial Accountability Milestone, in order to minimize the possibility that the deadlines for subsequent Financial Accountability Milestones will be missed. 124 For those reasons, the Commission believes the fee recovery schedule for Initial Industry Member Core Equity Reporting is appropriate. 124 See, e.g., Part IV.E.1. The Commission preliminarily believes that the incremental approach followed by both fee recovery schedules, which provide the Participants with a considerable amount of recovery unless the Participants miss the target deadline by a considerable amount of time, will also promote implementation of the CAT in accordance with the deadlines outlined by this proposed amendment. The sooner the Participants achieve each Financial Accountability Milestone, the sooner the Participants will be able to begin recovering any related Post-Amendment Industry Member Fees. 125 Moreover, so long as the Participants complete each particular Financial Accountability Milestone substantially before the target deadline for the next Financial Accountability Milestone arrives, the Participants should be able to recover a portion of their fees, costs, and expenses from Industry Members, subject to the Exchange Act and the provisions of the CAT NMS Plan. Although failing to meet one target deadline might make it more difficult to comply with the next target deadline, the proposed amendment does not preclude the possibility that the Participants may be entitled to some measure of recovery going forward. 126 The Commission preliminarily believes that the Participants will continue to make progress towards full CAT implementation even if one target deadline is missed because they still will have the opportunity to recover fees, costs, and expenses from Industry Members, albeit a smaller portion of those fees, costs, and expenses. 127 125 See, e.g., proposed Section 11.6(a)(iv) (providing that the Participants may only collect relevant Post-Amendment Industry Member Fees at the end of Period 1, 2, 3 and/or 4). 126 For example, suppose the Participants missed the deadline for Initial Industry Member Core Equity Reporting by 180 days or more and were therefore not entitled to any recovery for Period 1. In this scenario, the Participants might still be able to meet the deadline for the next Financial Accountability Milestone, Full Implementation of Core Equity Reporting Requirements, or achieve that Financial Accountability Milestone within 270 days of the proposed deadline, thus entitling them to partial recovery under the proposed amendment. As another example, suppose the Participants did not achieve Full Implementation of Core Equity Reporting Requirements until January 1, 2021, but were able to meet the target deadline for the next Financial Accountability Milestone—Full Availability and Regulatory Utilization of Transactional Database Functionality. Because the Participants did not achieve Full Implementation of Core Equity Reporting Requirements on schedule, but were less than 90 days late, the Participants would be entitled to collect 75% of the Post-Amendment Industry Member Fees established for Period 2 upon achievement of Full Implementation of Core Equity Reporting Requirements and the full amount of Post-Amendment Industry Member Fees for Period 3 upon achievement of Full Availability and Regulatory Utilization of Transactional Database Functionality. 127 See, e.g., note 191 infra. As noted above, the Commission must review fee filings submitted by the Participants pursuant to Section 19(b) of the Exchange Act to implement fees to recover the costs and expenses incurred by the Participants in connection with the development, implementation, and operation of the CAT. 128 These filings must specify the percentage of the costs and expenses that will be allocated to the Participants on the one hand and the Industry Members on the other hand, as well as explain how costs and expenses will be allocated within each group. Each Participant must also demonstrate, under Sections 6(b)(4) and 15A(b)(5), that such fee filings provide for the equitable allocation of reasonable dues, fees, and other charges among its members and other persons using its facilities. 129 In light of the continued delays to CAT implementation, the Commission preliminarily believes that it is appropriate, at this time, to set forth the circumstances under which the full recovery of fees, costs, and expenses from Industry Members would not be reasonable under Sections 6(b)(4) or 15A(b)(5) of the Exchange Act or reasonably related to the Participants' self-regulatory obligations under the CAT NMS Plan. 130 The Commission preliminarily believes that it would not be a reasonable exercise of the Participants' funding authority under the CAT NMS Plan to fully recover fees, costs, and expenses from Industry Members if the Participants miss the target deadlines specified in the proposed amendment, because any delays by the Participants could increase uncertainty for and, potentially, impose additional costs on Industry Members. 131 In addition, the proposed amendments will increase transparency for Industry Members by setting forth the circumstances under which the full recovery of fees, costs, and expenses from Industry Members would not be reasonable. 128 See notes 66-68 supra. 129 See note 68 supra. 130 See notes 72-73 and associated text supra. 131 See, e.g., Section IV.B. infra. 3. Identification of Post-Amendment Expenses in Submissions to the Commission Under proposed Section 11.6(b), all CAT NMS Plan amendments submitted by the Operating Committee to the Commission pursuant to Rule 608(b)(3)(i), 132 and all filings submitted by the Participants to the Commission under Section 19(b) of the Exchange Act, 133 to establish or implement Post-Amendment Industry Member Fees pursuant to Article XI of the CAT NMS Plan, must clearly indicate whether such fees are related to Post-Amendment Expenses incurred during Period 1, Period 2, Period 3, or Period 4. Requiring the Participants to specify whether any proposed fees are related to Post-Amendment Expenses, and the Period to which they are related, will help the Commission to determine whether it must consider the provisions of proposed Section 11.6 in evaluating the proposed fees. 132 17 CFR 242.608(b)(3)(i). 133 15 U.S.C. 78s(b). The Commission requests comment on these proposed financial accountability provisions. To the extent possible, please provide specific data, analyses, or studies for support. The Commission particularly solicits comment on the following issues: 13. Is it appropriate for the Commission to apply the financial accountability provisions of proposed Section 11.6 to Post-Amendment Expenses? Why or why not? Should the financial accountability provisions of proposed Section 11.6 be applied to fees, costs, or expenses incurred by the Company in connection with the development, implementation, and operation of the CAT, or to some other set of fees, costs, or expenses? Why or why not? Would it be appropriate to limit Section 11.6 to apply only to fees, costs, or expenses incurred by the Company in connection with the development or implementation of the CAT? Why or why not? Should the Commission further define what it means to “incur” an expense? If so, how? Can the current definition of “incurred” in the proposing release be used to avoid the application of proposed Section 11.6? If so, please explain and describe how the Commission should address this. 14. Is it appropriate for the Commission to tie CAT funding to the achievement of Financial Accountability Milestones? Why or why not? Please explain your response. 15. With respect to Period 1: a. Is the proposed Financial Accountability Milestone of Initial Industry Member Core Equity Reporting appropriate? Why or why not? What other milestone should be used to end Period 1? Why? b. Is the definition of Initial Industry Member Core Equity Reporting appropriate? Why or why not? Please explain your response. i. Should the definition of Initial Industry Member Core Equity Reporting be amended to include additional types of reporting or data? Should it be amended to remove some of the reporting or data requirements currently identified? Why or why not? Please explain your response. ii. If the definition is amended, should the target deadline for Period 1 be amended? Why or why not? Please explain your response. c. Is the target deadline of April 30, 2020 appropriate? Why or why not? What alternative deadline would be more appropriate? Why? Please explain your response. 16. With respect to Period 2: a. Is the proposed Financial Accountability Milestone of Full Implementation of Core Equity Reporting Requirements appropriate? Why or why not? What other milestone should b [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2019-19852. Public record. Not legal advice.