Amendments to the National Market System Plan Governing the Consolidated Audit Trail

Federal RegisterMay 22, 2020

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88890; File No. S7-13-19]

RIN 3235-AM60

Amendments to the National Market System Plan Governing the Consolidated Audit Trail

AGENCY:

Securities and Exchange Commission.

ACTION:

Amendments to national market system plan.

SUMMARY:

The Securities and Exchange Commission is adopting amendments to the national market system plan governing the consolidated audit trail. The amendments impose public transparency requirements on the self-regulatory organizations that are participants in the plan. Under the amendments, plan participants are required to publish and file with the Securities and Exchange Commission a complete implementation plan for the consolidated audit trail and quarterly progress reports. The amendments also establish financial accountability provisions.

DATES:

June 22, 2020.

FOR FURTHER INFORMATION CONTACT:

Erika Berg, Special Counsel, at (202) 551-5925, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

The Commission is adopting amendments to the national market system plan governing the consolidated audit trail.

Table of Contents

I. Background

II. Discussion of the Amendments to the CAT NMS Plan

A. Amendments To Increase Operational Transparency

1. Implementation Plan

2. Quarterly Progress Reports

3. Additional Reports

B. Amendments To Increase Financial Accountability

1. Description of the Proposed Amendments

2. Modifications to the Proposed Amendments

3. Discussion of the Comments

III. Paperwork Reduction Act

A. Summary of Collection of Information

1. Implementation Plan

2. Quarterly Progress Reports

B. Proposed Use of Information

1. Implementation Plan

2. Quarterly Progress Reports

C. Respondents

D. Total Initial and Annual Reporting and Recordkeeping Burdens

1. Implementation Plan

2. Quarterly Progress Reports

E. Collection of Information Is Mandatory

F. Confidentiality of Responses to Collection of Information

G. Retention Period for Recordkeeping Requirements

IV. Economic Analysis

A. Baseline

1. Transparency of CAT Implementation Status

2. Status of Implementation

B. Benefits

C. Costs

D. Impact on Efficiency, Competition, and Capital Formation

1. Efficiency

2. Competition

3. Capital Formation

E. Alternatives

1. Fixed versus Relative Financial Accountability Milestone Dates

2. Different Timelines for Onset of RFRRs

3. Alternate Magnitudes of RFRRs

4. Requiring Error Rates for Manual and Complex Options Transactions, as Well as Allocation Information for all Options Transactions To Conform to Standards Set in the CAT NMS Plan on December 31, 2021

V. Regulatory Flexibility Act Certification

VI. Other Matters

VII. Statutory Authority and Text of the Amendments to the CAT NMS Plan

I. Background

On September 9, 2019, the Securities and Exchange Commission (“Commission” or “SEC”) proposed to amend the national market system plan governing the consolidated audit trail (the “CAT NMS Plan”)

to include provisions designed to increase operational transparency surrounding the implementation process and the Participants' financial accountability for the timely completion of the consolidated audit trail (the “CAT”).

Specifically, the Commission proposed to amend the CAT NMS Plan to require the Participants to develop a complete implementation plan containing a detailed timeline with objective milestones to achieve full CAT implementation (the “Implementation Plan”). The proposed amendments would require the Implementation Plan to be filed with the Commission and made publicly available after approval by a Supermajority Vote

of the Operating Committee.

Prior to the Operating Committee's vote, the proposal would require the Operating Committee to submit the Implementation Plan to the Chief Executive Officer (“CEO”), President, or an equivalently situated senior officer of each Participant. The proposed amendments would also require the Participants to file with the Commission

and publicly publish quarterly progress reports (“Quarterly Progress Reports” or “Reports”) approved by at least a Supermajority Vote of the Operating Committee. Again, prior to the Operating Committee's vote, the proposal would require the Operating Committee to submit each Report to the CEO, President, or an equivalently situated senior officer of each Participant. Finally, the proposed amendments would establish target deadlines for four important implementation milestones and reduce the amount of fee recovery available to the Participants if those target deadlines are missed.

As required by Rule 613, the CAT NMS Plan was filed with the Commission by the national securities exchanges and national securities associations (the “Participants”), who include BATS Exchange, Inc. (n/k/a Cboe BZX Exchange, Inc.), BATS-Y Exchange, Inc. (n/k/a Cboe BYX Exchange, Inc.), BOX Exchange LLC, C2 Options Exchange, Incorporated (n/k/a Cboe C2 Exchange, Inc.), Chicago Board Options Exchange, Incorporated (n/k/a Cboe Exchange, Inc.), Chicago Stock Exchange, Inc. (n/k/a NYSE Chicago, Inc.), EDGA Exchange, Inc. (n/k/a Cboe EDGA Exchange, Inc.), EDGX Exchange, Inc. (n/k/a Cboe EDGX Exchange, Inc.), Financial Industry Regulatory Authority, Inc. (“FINRA”), International Securities Exchange, LLC (n/k/a Nasdaq ISE, LLC), ISE Gemini, LLC (n/k/a Nasdaq GEMX, LLC), Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc. (n/k/a Nasdaq BX, Inc.), NASDAQ OMX PHLX LLC (n/k/a Nasdaq PHLX LLC), The Nasdaq Stock Market LLC, National Stock Exchange, Inc. (n/k/a NYSE National, Inc.), New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc.

See

17 CFR 242.613; Securities Exchange Act Release No. 78318 (November 15, 2016), 81 FR 84696, (November 23, 2016) (“CAT NMS Plan Approval Order”). The CAT NMS Plan is Exhibit A to the CAT NMS Plan Approval Order.

See

CAT NMS Plan Approval Order, at 84943-85034. In approving the CAT NMS Plan, the Commission added ISE Mercury, LLC (n/k/a Nasdaq MRX, LLC) and Investors' Exchange LLC as Participants to the CAT NMS Plan.

See id.

at 84728. On January 30, 2017, and March 1, 2019, the Commission noticed for immediate effectiveness amendments to the CAT NMS Plan to add MIAX PEARL, LLC and MIAX Emerald, LLC, respectively, as Participants.

See

Securities Exchange Act Release Nos. 79898 (January 30, 2017), 82 FR 9250 (February 3, 2017), and 85230 (March 1, 2019), 84 FR 8356 (March 7, 2019). The CAT NMS Plan functions as the limited liability company agreement of the jointly owned limited liability company formed under Delaware state law through which the Participants conduct the activities of the CAT (the “Company”). Each Participant is a member of the Company and jointly owns the Company on an equal basis. The Participants submitted to the Commission a proposed amendment to the CAT NMS Plan on August 29, 2019, which they designated as effective on filing. Under the amendment, the limited liability company agreement of a new limited liability company named Consolidated Audit Trail, LLC serves as the CAT NMS Plan, replacing in its entirety the CAT NMS Plan.

See

Securities Exchange Act Release No. 87149 (September 27, 2019), 84 FR 52905 (October 3, 2019). On November 27, 2019, the Commission noticed for immediate effectiveness amendments to the CAT NMS Plan to add Long-Term Stock Exchange, Inc. as a Participant.

See

Securities Exchange Act Release No. 87595 (November 22, 2019), 84 FR 65447 (November 27, 2019).

See

Securities Exchange Act Release No. 86901 (September 9, 2019), 84 FR 48458 (September 13, 2019) (“Proposing Release”).

A “Supermajority Vote” is an “affirmative vote of at least two-thirds of all of the members of the Operating Committee or any Subcommittee, as applicable, authorized to cast a vote with respect to a matter presented for a vote (whether or not such a member is present at any meeting at which a vote is taken) by the Operating Committee or any Subcommittee, as applicable (excluding, for the avoidance of doubt, any member of the Operating Committee or any Subcommittee, as applicable, that is recused or subject to a vote to recuse from such matter pursuant to Section 4.3(d));

provided

that if two-thirds of all such members authorized to cast a vote is not a whole number than that number shall be rounded up to the nearest whole number.”

See

CAT NMS Plan,

supra

note 1, at Section 1.1.

“Operating Committee” means “the governing body of the Company designated as such and described in Article IV” of the CAT NMS Plan.

See id.

at Section 1.1.

See

Proposing Release,

supra

note 2, at 48461-74, for a more complete description of the proposed amendments.

In proposing the amendments to the CAT NMS Plan, the Commission stated that the Participants had neither met the deadlines set forth in the CAT NMS Plan nor their own proposed extensions of those deadlines.

The Commission also stated that the Participants had published a timeline with extended deadlines on the

www.catnmsplan.com

website.

Recently, the Commission granted the Participants exemptive relief to allow for the implementation of phased reporting to the CAT for Industry Members,

in place of the reporting schedule set forth for Industry Members in the CAT NMS Plan.

This exemptive relief is largely consistent with the timeline previously published by the Participants on the CAT NMS Plan website, with two modifications to deadlines for equities and options reporting. The Participants proposed, in their timeline and in their request for exemptive relief, that core equity reporting for Industry Members would begin on April 20, 2020 and that core options reporting for Industry Members would begin on May 18, 2020.

In light of impacts on market participants from COVID-19 and a subsequent no-action request submitted by the Participants,

the Commission provided exemptive relief authorizing the Participants' Compliance Rules

to allow core equity reporting for Industry Members to begin on June 22, 2020 and core options reporting for Industry Members to begin on July 20, 2020.

While the Commission believes that the Participants' timeline for Industry Member reporting now reflects reasonable and feasible deadlines, the continued potential for delays to the implementation of the CAT persists. The CAT is a long-awaited tool that the Commission believes will provide regulators with more timely access to a reasonably comprehensive set of trading data, thereby enabling regulators to more efficiently and effectively reconstruct market events, monitor market behavior, and investigate misconduct. Trade and order data sources currently utilized by regulators are inadequate to perform these tasks, in part because it is difficult to compile and use data that is not aggregated in one, directly accessible consolidated audit trail system. Moreover, repeated delays in CAT implementation have resulted in uncertainty and—potentially—increased costs for Industry Members and other market participants.

The CAT NMS Plan established deadlines related to the implementation of critical CAT functionality, including (1) the requirement that the Participants begin recording and reporting data by November 15, 2017, and (2) the requirement that each Participant require Industry Members and Small Industry Members to begin reporting data by November 15, 2018, and November 15, 2019, respectively.

See

CAT NMS Plan,

supra

note 1, at Section 6.7(a). The Participants requested an exemption extending these deadlines. The Commission did not grant this request.

See, e.g.,

Statement on Status of the Consolidated Audit Trail (August 27, 2018),

available at

https://www.sec.gov/news/public-statement/tm-status-consolidated-audit-trail

(stating that the Participants requested an exemption to commence Participant reporting on November 15, 2018, and Industry Member reporting on November 15, 2019). Although the Participants began reporting some transaction data to the Central Repository on November 15, 2018, the Participants acknowledged that not all of the required functionality had been implemented.

See

CAT NMS Announces Initiation of Reporting to the Consolidated Audit Trail (November 16, 2018),

available at

https://www.catnmsplan.com/wp-content/uploads/2018/11/Press-Release-CAT-Launch-final.pdf. See

Proposing Release,

supra

note 2, at 48458-461 for additional discussion of the various deadlines missed by the Participants.

See https://catnmsplan.com/timelines/

(stating that the Participants' timeline provides for commencement of reporting by Large Industry Members and Small Industry Members that are reporters to the Order Audit Trail System (“OATS”) on April 20, 2020) (as viewed on March 12, 2020).

See

Securities Exchange Act Release No. 88702 (April 20, 2020), 85 FR 23075 (April 24, 2020) (“Exemptive Relief Order”).

See

CAT NMS Plan,

supra

note 1, at 6.7(a).

See

note 8

supra.

See id.

at 23082 n.105.

The CAT NMS Plan requires the Participants to “endeavor to promulgate consistent rules (after taking into account circumstances and considerations that may impact Participants differently) requiring compliance by their respective Industry Members with the provisions of SEC Rule 613 and [the CAT NMS Plan].”

See

CAT NMS Plan,

supra

note 1, at Section 3.11. “Compliance Rule” is a defined term under the CAT NMS Plan and means “the rule(s) promulgated by such Participant as contemplated by Section 3.11.”

See id.

at Section 1.1.

See id.

at 23082. The Participants stated that they plan to file revisions to their Compliance Rules consistent with their exemptive relief request.

See id.

at 23076 n.13.

II. Discussion of the Amendments to the CAT NMS Plan

After careful review and consideration of the comments received,

the Commission continues to believe that the proposed amendments to the CAT NMS Plan, with some limited modifications, are necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanisms of, a national market system. The proposed amendments also will help to ensure that the Participants fulfill their obligations to deliver a functional CAT on a reasonably achievable timeframe. The Commission is therefore adopting the proposed amendments with the modifications specified herein.

See https://www.sec.gov/comments/s7-13-19/s71319.htm.

Some of these letters included comments beyond the scope of the proposed amendments, suggesting changes to the CAT's governance, to the CAT's technical requirements, or to the CAT's collection of sensitive personal information (“PII”).

See

Letter from Thomas Tesauro, President, Fidelity Capital Markets, to Vanessa Countryman, Secretary, Commission, dated October 28, 2019 (“Fidelity Letter”), at 5,

available at

https://www.sec.gov/comments/s7-13-19/s71319-6357608-196387.pdf;

Letter from Dennis M. Kelleher, President & CEO, and Lev Bagramian, Senior Securities Policy Advisor, Better Markets, Inc., to Vanessa Countryman, Secretary, Commission, dated October 28, 2019 (“Better Markets Letter”), at 3, 6, 9-12,

available at

https://www.sec.gov/comments/s7-13-19/s71319-6355349-196250.pdf;

Letter from Christopher A. Iacovella, Chief Executive Officer, American Securities Association, to Vanessa Countryman, Secretary, Commission, dated October 28, 2019 (“ASA Letter”), at 2,

available at

https://www.sec.gov/comments/s7-13-19/s71319-6381876-197754.pdf.

Because these subjects are not directly related to the proposed amendments, they are not addressed in this rulemaking.

A. Amendments To Increase Operational Transparency

Currently, the CAT NMS Plan does not contain disclosure provisions that require the Participants to provide public updates regarding the CAT implementation process. The proposed amendments were designed to increase operational transparency by requiring the Participants to file with the Commission and make publicly available an Implementation Plan and Quarterly Progress Reports that would provide the Commission and other market participants with detailed and up-to-date information about the status of CAT implementation. Commenters were broadly supportive of these provisions, but some commenters requested that the Commission modify certain aspects of the proposed amendments. After considering these comments, and as described more fully below, the Commission is adopting the operational transparency amendments

as proposed, with certain modifications.

See

Part II.A.1.-2.

infra,

for a discussion of the modifications to the proposed amendments.

1. Implementation Plan

As proposed, Section 6.6(c)(i) of the CAT NMS Plan would require the Participants to file with the Commission and make publicly available on each of the Participant websites (or collectively on the CAT NMS Plan website) a complete Implementation Plan.

The proposed Implementation Plan would set forth how and when the Participants will achieve full CAT implementation, including the Participants' timeline for achieving both the objective milestones that are set forth in Section C.10 of Appendix C of the CAT NMS Plan to assess the progress of CAT implementation

(“Objective Milestones”) and the CAT implementation milestones associated with the proposed financial accountability provisions discussed below (“Financial Accountability Milestones”)

(collectively, the “Implementation Milestones”).

Proposed Section 6.6(c)(i) would require the Implementation Plan to be filed with the Commission and published on each Participant website or the CAT NMS Plan website no later than thirty calendar days following the effective date of the proposed amendments.

See

proposed Section 6.6(c)(i).

See

CAT NMS Plan,

supra

note 1, at Appendix C, Section C.10.

The Financial Accountability Milestones, and their relation to the financial accountability provisions, are described in more detail in Part II.B.

infra.

The timeline required by proposed Section 6.6(c)(i) would include the completion date and a description of the status for each Implementation Milestone. If the Participants decide to complete any of the Implementation Milestones by releasing functionality in a phased approach, proposed Section 6.6(c)(i) would further require the Implementation Plan to describe with specificity each phased release necessary to achieve the completion of the relevant Implementation Milestone and to provide completion dates for each such release.

See

Proposing Release,

supra

note 2, at 48461-62, for additional discussion of the proposed Implementation Plan.

See

proposed Section 6.6(c)(i).

Before the Implementation Plan can be filed with the Commission or made publicly available via a website, proposed Section 6.6(c)(iii) would require that the Implementation Plan be approved by at least a Supermajority Vote of the Operating Committee. However, if the Implementation Plan is approved only by a Supermajority Vote of the Operating Committee, and not by a unanimous vote of the Operating Committee (including, for the avoidance of doubt, all members of the Operating Committee, whether or not present or recused), the proposed amendments would require each Participant whose Operating Committee member did not vote to approve the Implementation Plan to separately file with the Commission and make publicly available on each of the Participant websites, or collectively on the CAT NMS Plan website, a statement identifying itself and explaining why the member did not vote to approve the Implementation Plan.

In addition, the proposed amendments would require the Operating Committee to submit the Implementation Plan to the CEO, President, or an equivalently situated senior officer of each Participant prior to the Operating Committee's vote.

The Commission anticipates that the Participants will provide the Implementation Plan to the CEO, President, or an equivalently situated senior officer of each Participant sufficiently in advance of the Operating Committee vote to permit review.

See

proposed Section 6.6(c)(iii). The proposed amendments do not require this statement to include any confidential or sensitive information related to the security of the CAT, the security of CAT Data, or the operation of the CAT. The Participants must comply with the security plan developed by the Plan Processor pursuant to Appendix D, Section 4.1 of the CAT NMS Plan and any security-related policies and procedures developed pursuant to Regulation SCI.

See

CAT NMS Plan,

supra

note 1, at Appendix D, Section 4.1 (requiring the Plan Processor to provide to the Operating Committee a comprehensive security plan, including a process for responding to security incidents and reporting of such incidents); 17 CFR 242.1001 (requiring each SCI entity to establish, maintain, and enforce written policies and procedures reasonably designed to ensure that its SCI systems have levels of security adequate to maintain operational capabilities and promote the maintenance of fair and orderly markets).

See id.;

see also

Proposing Release,

supra

note 2, at 48464, for additional discussion of these requirements. No commenters objected to these requirements, and one commenter stated that there was no need to “go further to require such CEOs, Presidents and equivalent officers to certify” the Implementation Plan, “an issue raised for comment in the Proposing Release.”

See

Letter from Michael Simon, CAT NMS Plan Operating Committee Chair, to Vanessa Countryman, Secretary, Commission, dated October 28, 2019 (“Participant Letter”), at 7,

available at

https://www.sec.gov/comments/s7-13-19/s71319-6357609-196389.pdf; see

also

Proposing Release,

supra

note 2, at 48465. The Commission is not adopting a certification requirement for the Implementation Plan.

See, e.g.,

Proposing Release,

supra

note 2, at 48476 n.143.

The Commission believes that requiring public disclosure regarding the progress of CAT implementation through the Implementation Plan will help to ensure that the CAT is developed on a reasonable timeline. Several commenters expressed general support for the increased operational transparency that would be provided by the Implementation Plan. One commenter, for example, stated that “the proposed Implementation Plan is appropriate to facilitate public transparency of the development and implementation milestones required to be achieved by the Participants and industry members tasked with CAT implementation” and asserted that “the filing of an Implementation Plan with the Commission may inject additional accountability and transparency into the Participants['] CAT milestone delivery targets.”

Another commenter “agree[d] with the Commission that requiring the CAT NMS to create and publicize a detailed timeline with concrete deadlines (as set in the Proposal) would prod the [CAT NMS, LLC] consortium and the new Plan Processor, FINRA CAT, to progress towards implementation.”

See

Letter from Christopher Bok, Director, Financial Information Forum, to Vanessa Countryman, Secretary, Commission, dated October 28, 2019 (“FIF Letter”), at 4-5

available at

https://www.sec.gov/comments/s7-13-19/s71319-6355358-196251.pdf. See

also, e.g.,

Letter from Theodore R. Lazo, Managing Director & Associate General Counsel, and Ellen Greene, Managing Director, Financial Services Operations, Securities Industry and Financial Markets Association, to Vanessa Countryman, Secretary, Commission, dated October 28, 2019 (“SIFMA Letter”), at 1,

available at

https://www.sec.gov/comments/s7-13-19/s71319-6366765-195937.pdf

(supporting the “Commission'[s] actions to . . . increase transparency around [the] CAT implementation process”); Fidelity Letter, at 3 (supporting “the Proposal's operational transparency requirements to formalize and publicly document CAT implementation progress”).

See

Better Markets Letter, at 6. “Plan Processor” means “the Initial Plan Processor or any other Person selected by the Operating Committee pursuant to SEC Rule 613 and Sections 4.3(b)(i) and 6.1, and with regard to the Initial Plan Processor, the Selection Plan, to perform the CAT processing functions required by SEC Rule 613 and set forth in this Agreement.”

See

CAT NMS Plan,

supra

note 1, at Section 1.1. As explained in the Proposing Release, Thesys Technologies LLC (or “Thesys CAT LLC”) was initially selected as the Plan Processor, but was replaced by FINRA (“FINRA CAT LLC”) on February 26, 2019.

See

Proposing Release,

supra

note 2, at 48459-460.

Some commenters had more specific comments regarding the proposed provisions relating to the Implementation Plan. For instance, regarding the deadline for submitting the Implementation Plan, the Participants stated that they had already “developed a timeline for the completion of the CAT, and therefore believe[d] that 30 days is sufficient to file with the Commission and publish the Implementation Plan.”

No other commenters addressed this issue. Consistent with the Proposing Release and the views expressed by the Participants, the Commission continues to believe that thirty calendar days is a sufficient amount of time for the

Participants to develop, file, and publish the Implementation Plan.

See

Participant Letter, at 6.

Regarding the Objective Milestones, the Participants “confirm[ed]” that the Objective Milestones “effectively formalize the status updates and other informal reports that are in the Updated Master Plan” submitted to the Commission on May 16, 2019.

The Participants further stated that “basing the objective milestones on the Updated Master Plan is more appropriate than basing them on arbitrary milestones or milestones that have not been vetted by the Participants.”

However, the Objective Milestones are not based on the Updated Master Plan. Rather, the Objective Milestones are set forth in the CAT NMS Plan and provide details and required completion dates for a series of objective CAT implementation milestones, including implementation milestones relating to technical specifications, testing, and production.

See

Participant Letter, at 5.

See id.

See

CAT NMS Plan,

supra

note 1, at Appendix C, Section C.10.

Another commenter suggested that the Commission should require the Implementation Plan to be “prominently publicized on the CAT NMS's website.”

The Commission agrees that the CAT NMS Plan website would be a logical place to publish the Implementation Plan, and this is a permissible approach under proposed Section 6.6(c)(i).

However, the information contained in the Implementation Plan will be just as accessible to the public if published on each Participants' website—another approach permitted by proposed Section 6.6(c)(i) as long as the required information is published by the timeframe set forth in the rule, and one that provides each Participant with more flexibility and control over how and when it complies with the proposed amendments.

See

Better Markets Letter, at 7. This commenter also thought it “would be beneficial if the SEC also creates a `Spotlight' web page . . . and host this timeline along with all other CAT related filings, notices, and Commission actions,” because a “one-stop web page should enable investors, market participants, journalists, Members of Congress, and all other interested parties, to remain informed of the progress, or lack thereof, of the CAT's implementation.”

See id.

The Commission notes that such a page already exists:

https://www.sec.gov/divisions/marketreg/rule613-info.htm.

As appropriate, the Commission will continue to update this page as the information required by the amendments is published by the Participants.

See

proposed Section 6.6(c)(i).

For these reasons, and the reasons set forth in the Proposing Release,

the Commission is adopting the provisions related to the Implementation Plan substantially as proposed. However, the Commission believes it is appropriate to make two modifications to clarify the intended operation of the amendments.

See

Proposing Release,

supra

note 2, at 48461-62, 48464.

First, the Commission is modifying language in proposed Section 6.6(c)(i) to clarify the public disclosure requirements of the operational transparency amendments. In the Proposing Release, the Commission indicated that the Participants would be required to make the Implementation Plan available either individually on “each of the Participant websites” or collectively on the CAT NMS Plan website. To the extent that the Participants choose to publish the Implementation Plan and Quarterly Progress Reports individually, each Participant is responsible for posting these materials on its own website, and each Participant is responsible for posting the materials in a timely manner. Accordingly, the Commission is modifying the phrasing of proposed Section 6.6(c)(i) to state that the Participants shall make the Implementation Plan publicly available on “each of their websites” or collectively on the CAT NMS Plan website.

Second, the Commission is modifying proposed Section 6.6(c)(iii) to clarify which Participants are required to publish statements that explain why a particular member of the Operating Committee did not vote to approve the Implementation Plan or Quarterly Progress Reports. As proposed, Section 6.6(c)(iii) stated that “each Participant whose Operating Committee member did not vote to approve the Implementation Plan or Quarterly Progress Report shall separately file with the Commission and make publicly available on each of the Participant websites, or collectively on the CAT NMS Plan website, a statement identifying itself and explaining why the member did not vote to approve the Implementation Plan or Quarterly Progress Report.”

The Commission is modifying this language to clarify that each Participant who dissents is not required to make publicly available its explanatory statements on other Participants' websites. If the Participants choose to not publish such explanatory statements collectively on the CAT NMS Plan website, the Participants with dissenting members will only be required to publish such statements on their own websites. Accordingly, the Commission is modifying the amendments to specify that “each Participant whose Operating Committee member did not vote to approve the Implementation Plan or Quarterly Progress Report shall separately file with the Commission a statement identifying itself and explaining why the member did not vote to approve the Implementation Plan or Quarterly Progress Report. These statements shall be made publicly available by each dissenting Participant on its website or collectively by all Participants on the CAT NMS Plan website.”

See

proposed Section 6.6(c)(iii).

2. Quarterly Progress Reports

As proposed, Section 6.6(c)(ii) of the CAT NMS Plan would require the Participants to file with the Commission and make publicly available on each of the Participant websites (or collectively on the CAT NMS Plan website) complete Quarterly Progress Reports providing a detailed description of the progress made by the Participants toward achieving each of the Implementation Milestones set forth in the Implementation Plan.

The proposed amendments describe the information that would be required to be included in the Quarterly Progress Reports.

See

proposed Section 6.6(c)(ii). If, subsequent to the publication of the Implementation Plan, the Participants decide to complete any of the Implementation Milestones by releasing functionality in a phased approach, the proposed amendments would require each Quarterly Progress Report to reflect this change by describing the phases necessary to achieve the completion of the relevant milestone and providing the information specified by proposed Section 6.6(c)(ii) for each phase.

See id.

Specifically, for Implementation Milestones that have been completed by the end of a given calendar quarter, the proposed amendments would require the inclusion of the following information: (1) The completion date provided in the Implementation Plan, (2) the date on which the Implementation Milestone was actually completed, and (3) a description of any variance from the Implementation Plan.

For Implementation Milestones that are in progress at the end of a given calendar quarter, the proposed amendments would require the inclusion of the following information: (1) The completion date provided in the Implementation Plan, (2) the currently targeted completion date, and (3) a description of (a) the current status of the Implementation Milestone, (b) any difference between the Implementation Plan completion date and the currently targeted completion date, including the basis for making the adjustment and the impact of this adjustment on any other Implementation Milestone, and (c) any

other factual indicators that demonstrate the current level of completion with respect to the Implementation Milestone.

For Implementation Milestones that have not yet been initiated by the end of a given calendar quarter, the proposed amendments would require the inclusion of the following information: (1) The completion date provided in the Implementation Plan, (2) the currently targeted completion date, and (3) a description of (a) the current status of the Implementation Milestone, and (b) any difference between the Implementation Plan completion date and the currently targeted completion date, including the basis for making the adjustment and the impact of this adjustment on any other Implementation Milestone.

See

proposed Section 6.6(c)(ii)(A).

See

proposed Section 6.6(c)(ii)(B);

see also

Proposing Release,

supra

note 2, at 48463, for examples of factual indicators that would satisfy this requirement. As noted below, the Commission does not believe that the inclusion of factual indicators requires the Participants to publicly disclose any confidential or sensitive information related to the security of the CAT, the security of CAT Data, or the operation of the CAT.

See

notes 54-61 and associated text

infra,

for further discussion.

See

proposed Section 6.6(c)(ii)(C);

see also

Proposing Release,

supra

note 2, at 48462-64, for additional discussion of these requirements.

Proposed Section 6.6(c)(ii) would require the initial Quarterly Progress Report to be filed and made public no later than fifteen business days following the end of the calendar quarter in which the Implementation Plan was filed and made public. Subsequent Reports would be required to be filed and made public no later than fifteen business days following the end of each calendar quarter.

Before any Quarterly Progress Report can be filed with the Commission or made publicly available via a website, proposed Section 6.6(c)(iii) would require that the Report be approved by at least a Supermajority Vote of the Operating Committee. However, if the Report is approved only by a Supermajority Vote of the Operating Committee, and not by a unanimous vote of the Operating Committee (including, for the avoidance of doubt, all members of the Operating Committee, whether or not present or recused), the proposed amendments would require each Participant whose Operating Committee member did not vote to approve the Report to separately file with the Commission and make publicly available on each of the Participant websites, or collectively on the CAT NMS Plan website, a statement identifying itself and explaining why the member did not vote to approve the Report.

In addition, the proposed amendments would require the Operating Committee to submit the Quarterly Progress Report to the CEO, President, or an equivalently situated senior officer of each Participant prior to the Operating Committee's vote.

The Commission anticipates that the Participants will provide the Quarterly Progress Report to the CEO, President, or an equivalently situated senior officer of each Participant sufficiently in advance of the Operating Committee vote to permit review.

See

proposed Section 6.6(c)(ii).

See

proposed Section 6.6(c)(iii). The proposed amendments do not require this statement to include any confidential or sensitive information related to the security of the CAT, the security of CAT Data, or the operation of the CAT. Moreover, the Participants must comply with the security plan developed by the Plan Processor pursuant to Appendix D, Section 4.1 of the CAT NMS Plan and any security-related policies and procedures developed pursuant to Regulation SCI.

See

note 21

supra.

See id.;

see also

Proposing Release,

supra

note 2, at 48464, for additional discussion of these requirements. No commenters objected to these requirements, and one commenter asserted that there was no need to “go further to require such CEOs, Presidents and equivalent officers to certify” the Reports, “an issue raised for comment in the Proposing Release.”

See

Participant Letter, at 7;

see also

Proposing Release,

supra

note 2, at 48465. The Commission is not adopting a certification requirement for the Reports.

See

Proposing Release,

supra

note 2, at 48477 n.159.

The Commission believes that requiring detailed and up-to-date public disclosure through the proposed Quarterly Progress Reports will furnish the Commission and market participants with a better understanding of the progress made by the Participants towards CAT implementation.

The Participants stated in their comment letter that the proposed Reports “would impose requirements that are . . . unnecessary,” because “CAT LLC and FINRA CAT currently provide and will continue to provide Industry Members and the general public with extensive and appropriate information related to the progress of the CAT System build” and because “the Commission and its staff . . . have continued access to extensive information regarding the CAT.”

As discussed above, some commenters suggested that requiring the Participants to publish the Implementation Plan would increase the Participants' accountability for meeting the deadlines specified in that document.

See

notes 24-25 and associated text

supra.

The Commission agrees and anticipates that requiring the Participants to publish Quarterly Progress Reports will have a similar effect.

See

Participant Letter, at 6-7.

The Commission, however, disagrees. While the Participants have provided information regarding CAT implementation to the Commission, much of the information provided by the Participants to the Commission has not been shared widely with the public. One commenter asserted that “not much is publicly known [about] why the CAT is still not up and running,” due to the “secrecy of the CAT NMS consortium” and the current lack of transparency.

This commenter “agree[d] with the Commission that quarterly detailed reporting is appropriate and would provide useful information to all interested parties,” including “an early-warning to the Commission and interested-parties about possible upcoming failures to meet any of the regulatory milestones . . . . ”

Another Industry Member commenter similarly believed that the Quarterly Progress Reports would “provide us more information on the timing of our CAT reporting obligations, which should help us more efficiently develop and implement regulatory data collection systems, adjusting as needed, as well as monitor and better understand the progress of overall CAT implementation.”

The Commission agrees with these comments, and, consistent with the Proposing Release, continues to believe that the Quarterly Progress Reports will provide useful information to market participants and other members of the public.

See

Better Markets Letter, at 4.

See id.

at 7.

See

Fidelity Letter, at 3.

See also

FIF Letter, at 3 (stating that “additional transparency will better inform all stakeholders of the status of CAT implementation objectives and milestones, will reduce uncertainty, and will provide industry members with further assurances that full CAT implementation will occur on specified milestones”).

In addition to providing market participants with information regarding Industry Member reporting deadlines, the Quarterly Progress Reports will also include the disclosure of information regarding the implementation of Participant reporting to the CAT and the availability of functionality for regulatory users, which the Participants have not made publicly available up to this point.

One Industry Member commenter not only supported the disclosures required by the proposed Quarterly Progress Reports, but also recommended expanding the Reports to include “financial information detailing the fees, costs and expenses that the Participants have incurred to build and implement the CAT,” which should be “clearly tied to the relevant Financial Accountability Milestone” in the Reports.

The commenter believed that such information would “help Industry Members better understand the universe of costs they might be asked to pay at

a future date as well as how those costs relate to each Financial Accountability Milestone,” as well as help Industry Members to “review and comment on individual CAT fee proposals submitted by the Plan Participants.”

To the extent that the Participants seek to recover the fees, costs, and expenses incurred in connection with the development, implementation, and operation of the CAT, the Commission believes that relevant information would be included in fee filings.

Also, fee filings relating to fees incurred after the effective date of these amendments must clearly indicate to which Financial Accountability Milestone the fees are related.

All fee filings with this information would be filed with and published by the Commission to provide notice to Industry Members and to solicit comments from market participants.

In addition, the CAT NMS Plan requires the Participants to publish annual audited financial statements,

which should also provide more detailed financial information to market participants. Therefore, the Commission does not believe that expanding the Quarterly Progress Reports to require this additional information is necessary.

See

Fidelity Letter, at 3-4. The commenter suggested that such information could be “disclosed on a one quarter lagging basis.”

See id.

at 3 n.4.

See id.

at 4.

See

Proposing Release,

supra

note 2, at 48465, for a discussion of the fee filings that the Participants are required to submit in order to recover CAT-related fees, costs, and expenses from Industry Members.

See also

15 U.S.C. 78s(b).

See

note 88 and associated text

infra,

for a discussion of the information that the Participants would be required to include in these fee filings under the amendments.

See, e.g.,

15 U.S.C. 78s; 17 CFR 242.608.

See

CAT NMS Plan,

supra

note 1, at Section 9.2(a).

See also https://catnmsplan.com/announcements/audited-financial-statements

(noting that audited financial statements for the Company from inception through 2018 are available upon request).

The Participants also objected to some of the specific disclosures required by the proposed Quarterly Progress Report, claiming that the proposed Reports would “impose requirements that are . . . at odds with maintaining the security of the CAT.”

For example, the Participants stated that “requiring the broad publication of detailed explanations related to connectivity and acceptance testing . . . might provide information to unscrupulous persons set on finding a way to access and exploit information in the CAT.” Similarly, they expressed concern that “[p]ublishing pass/fail percentages of test cases and information with respect to defects remediated in connection with reporting milestones, and the reasons that certain documentation under development has not been completed,” was inappropriate for security reasons, although they did concede that it was “appropriate to provide such information to the Commission and the staff . . . .”

See

Participant Letter, at 6.

See id.

The Commission takes concerns regarding the security of the CAT very seriously and agrees that the Participants should not include details in the Quarterly Progress Reports that would reveal any sensitive security information related to the CAT.

However, the Commission does not believe that the proposed amendments, or the examples raised by the Participants in their comment letter, implicate any such concerns. The examples raised by the Participants as presenting security concerns are examples provided by the Commission in the Proposing Release of factual indicators that could be used to demonstrate the current status of CAT implementation.

These factual indicators focused on functional requirements (

e.g.,

enabling Industry Member reporting), as opposed to security requirements, that would capture the scope and quality of the Participants' progress in implementing the CAT. The Commission does not believe that the factual indicators suggested in the Proposing Release require the disclosure of information that will affect the security of the CAT.

See

notes 21, 39

supra.

See

Proposing Release,

supra

note 2, at 48463.

For example, the Commission suggested in the Proposing Release that factual indicators for milestones related to connectivity and acceptance testing could include: “the status of the publication of test plans; statistics on the amount of expected or actual activity in the test environment (

e.g.,

number of testers, number of reportable events, error rates/trends observed); the number of Plan Processor functional requirements for which defects were found categorized by criticality; [and] progress remediating defects . . . .”

These factual indicators speak solely to the Participants' progress in developing a usable data reporting system. The inclusion of such factual indicators in a Quarterly Progress Report would not require the Participants to specifically identify each defect and explain what steps have been taken to remedy that particular defect; rather, the amendments permit data regarding defects to be disclosed in an aggregated form with a non-specific explanation of progress made towards remediating defects.

The Commission does not believe that such disclosures present a security concern, because they will only provide information regarding the progress made towards implementing required CAT functionality without revealing any security-related information.

See id.

For the same reasons, the Commission does not believe that publication of aggregated pass/fail percentages for test cases associated with reporting milestones, or disclosure of the aggregated number and percentage of functional reporting requirements that have completed internal testing with all defects remediated, presents a security risk to the CAT. These factual indicators do not require the Participants to disclose details regarding the vulnerabilities or flaws of the CAT that could be exploited by bad actors. Likewise, the Commission does not believe that the publication of the “reasons that certain documentation under development has not been completed” presents a security concern. This suggested factual indicator relates solely to the development of technical specifications—documentation that is already public and that does not relate to any security policies or procedures. The Commission therefore does not believe this factual indicator raises any security concerns.

Moreover, the Plan Processor has already begun to release similar information to the public, which demonstrates that the factual indicators suggested by the Commission can be published without implicating security concerns.

See, e.g.,

Industry Test Release Status,

available at

https://www.catnmsplan.com/wp-content/uploads/2020/01/1.21.20-Industry-Webinar-Industry-Test-Release-Checkpoint.pdf.

As stated in the Proposing Release, the Commission does not believe that the proposed amendments require the Participants to publicly disclose any confidential or sensitive information related to the security of the CAT, the security of CAT Data, or the operation of the CAT.

Rather, the proposed amendments require only the disclosure of information related to and demonstrating the progress of the Participants in developing CAT functionality (

e.g.,

pass/fail percentages of test cases relating to reporting functionality, not pass/fail rates relating to the development of security tools and security-related test cases), and the Commission does not believe that such disclosures impact the security of the CAT. The Commission is therefore adopting the disclosure requirements for the Quarterly Progress Reports as proposed.

See

Proposing Release,

supra

note 2, at 48461 n.42.

Finally, the Participants stated that the proposed “fifteen day-turnaround period” was too brief and suggested “modifying the proposal to require the filing and posting of the Quarterly Progress Report[s] no later than 30 days after the end of each quarter.”

To respond to this comment, the Commission is modifying its proposed rule to require: (1) That the initial Quarterly Progress Report be filed with

the Commission and made publicly available no later than thirty calendar days after the end of the calendar quarter in which the Implementation Plan was filed and made publicly available;

and (2) that each subsequent Quarterly Progress Report be filed with the Commission and made publicly available no later than thirty calendar days after the end of each calendar quarter (

e.g.,

October 30, 2020; January 30, 2021; April 30, 2021; or July 30, 2021).

The Commission believes this change will help to ensure that the Participants have sufficient time to prepare, file, and publish high-quality Reports, while still providing the Commission and market participants with timely and up-to-date disclosures regarding the process of CAT implementation.

See

Participant Letter, at 7.

For example, if the Participants filed and made public the Implementation Plan on August 15, 2020, the initial Quarterly Progress Report would have to be filed no later than October 30, 2020.

See

Proposing Release,

supra

note 2, at 48462 n.57.

This change will provide the Participants with approximately eight or nine additional days, on average, to prepare, file, and publish each Report.

See id.

at 48462.

For these reasons, and the reasons set forth in the Proposing Release,

the Commission is adopting the provisions related to the Quarterly Progress Reports substantially as proposed, except that proposed Section 6.6(c)(ii) will provide the Participants with additional time to prepare, file, and publish the Quarterly Progress Reports as described above. In addition, the Commission is adopting three modifications to proposed Section 6.6(c) to clarify the intended operation of the amendments.

See

Proposing Release,

supra

note 2, at 48462-64.

First, the Commission is modifying language in proposed Section 6.6(c)(ii) to clarify the public disclosure requirements of the operational transparency amendments. In the Proposing Release, the Commission indicated that the Participants would be required to make the Quarterly Progress Reports available either individually on “each of the Participant websites” or collectively on the CAT NMS Plan website. To the extent that the Participants choose to publish the Quarterly Progress Reports individually, each Participant is responsible for posting these materials on its own website, and each Participant is responsible for posting the materials in a timely manner. Accordingly, the Commission is modifying the phrasing of proposed Section 6.6(c)(ii) to state that the Participants shall make the Quarterly Progress Reports publicly available on “each of their websites” or collectively on the CAT NMS Plan website.

Second, the Commission is modifying proposed Section 6.6(c)(iii) to specify that “each Participant whose Operating Committee member did not vote to approve the Implementation Plan or Quarterly Progress Report shall separately file with the Commission a statement identifying itself and explaining why the member did not vote to approve the Implementation Plan or Quarterly Progress Report. These statements shall be made publicly available by each dissenting Participant on its website or collectively by all Participants on the CAT NMS Plan website.”

See

Part II.A.1.

supra,

for further discussion of this modification.

Finally, the Commission is modifying the final sentence of proposed Section 6.6(c)(ii) to clarify which parties are obligated to file and make publicly available the Quarterly Progress Reports. The proposed amendments stated that the “first of such reports shall be filed and made publicly available within 30 calendar days after the end of the calendar quarter in which the Implementation Plan was filed and made publicly available.”

The Commission is not changing this obligation, but is modifying the language to state that the “Participants shall file and make publicly available the first of such reports within 30 calendar days after the end of the calendar quarter in which the Participants filed and made publicly available the Implementation Plan.”

See

proposed Section 6.6(c)(ii).

These three modifications do not affect the cost estimates put forward by the Commission in the Proposing Release.

See, e.g.,

Proposing Release,

supra

note 2, at 48475-77.

3. Additional Reports

The proposed amendments require that the Participants prepare, file, and publish an Implementation Plan for the completion of CAT implementation

and that the Quarterly Progress Reports provide up-to-date information regarding the Implementation Milestones set forth in the Implementation Plan. By these terms, the proposed amendments do not require the Participants to continue any reporting after the CAT has been implemented.

Specifically, proposed Section 6.6(c)(i) requires that the Implementation Plan include a timeline for achieving Full Implementation of CAT NMS Plan Requirements, which is a Financial Accountability Milestone that requires the Participants to “have satisfied all of their obligations to build and implement the CAT, such that all CAT system functionality required by Rule 613 and the CAT NMS Plan has been developed, successfully tested, and fully implemented at the initial Error Rates specified by Section 6.5(d)(i) or less . . . .”

See

proposed Section 1.1, “Full Implementation of CAT NMS Plan Requirements.” “Error Rate” is a defined term in the CAT NMS Plan and has the same definition in this release.

One commenter “urge[d] the Commission to require the same timeline publication and quarterly reports on progress to apply beyond just the implementation phase.”

This commenter believed that “[t]he same transparency requirements would be useful when the CAT NMS establishes upgrades schedules.”

The Commission believes that requiring additional reporting is unnecessary at this point. Once the CAT is fully implemented, market participants will continue to receive information regarding the operation of the CAT through audited financial statements published by the Participants

and CAT-related proposals filed with and published by the Commission.

The Commission is not requiring additional reporting, but encourages the Participants to communicate fully with affected market participants regarding any “upgrades schedules.”

See

Better Markets Letter, at 7.

See id.

See

CAT NMS Plan,

supra

note 1, at Section 9.2(a).

See

15 U.S.C. 78s; 17 CFR 242.608.

B. Amendments To Increase Financial Accountability

Currently, the CAT NMS Plan contemplates that the Operating Committee will establish, and the Participants will implement, fees for both Participants and Industry Members to recover the costs and expenses incurred by the Participants in connection with the development and implementation of the CAT.

The proposed amendments were designed to increase the financial accountability of the Participants by establishing target deadlines for four critical implementation milestones and reducing the amount of fee recovery that would be available to the Participants if those target deadlines are missed. Some commenters agreed that the proposed amendments would reduce the likelihood of further delays to CAT implementation, but all commenters urged the Commission to incorporate certain modifications to the proposal. After considering these comments, and as described more fully below, the Commission is adopting the financial accountability amendments with certain modifications from the amendments as proposed.

See, e.g.,

CAT NMS Plan,

supra

note 1, at Section 11.1(c).

1. Description of the Proposed Amendments

Proposals for any fees established by the Operating Committee, and implemented by the Participants, to recover from Industry Members the costs and expenses incurred by the Participants in connection with the development and implementation of the CAT must be filed with the Commission and are subject to Commission review for consistency with the Exchange Act and Article XI of the CAT NMS Plan.

Specifically, each Participant must demonstrate, under Sections 6(b)(4) and 15A(b)(5) of the Exchange Act, that such fees result in an equitable allocation of reasonable dues, fees, and other charges among its members and other persons using its facilities.

The proposed amendments would not alter this basic structure, but add a new Section 11.6 to the CAT NMS Plan to govern the recovery of any fees, costs, and expenses (including legal and consulting fees, costs, and expenses) incurred by or for the Company in connection with the development, implementation, and operation of the CAT, from the effective date of this amendment, until such time that the Participants have completed Full Implementation of CAT NMS Plan Requirements

(collectively, the “Post-Amendment Expenses”).

15 U.S.C. 78s(b); 17 CFR 242.608.

See also

CAT NMS Plan,

supra

note 1, at Section 11.1(b) (stating that the Participants must file proposed fees for Industry Members with the Commission);

id.

at Section 11.2(a) (stating that the Operating Committee shall seek to create transparent, predictable revenue streams for the Company that are aligned with the anticipated costs to build, operate, and administer the CAT and the other costs of the Company).

See

15 U.S.C. 78f(b)(4) (applicable to the national securities exchanges); 15 U.S.C. 78

-3(b)(5) (applicable to FINRA, a national securities association).

See

note 69

supra.

Proposed Section 11.6 would require the Participants to meet four Financial Accountability Milestones by certain dates in order to collect the full amount of any fees established by the Operating Committee, or implemented by the Participants, to recover Post-Amendment Expenses from Industry Members (“Post-Amendment Industry Member Fees”). Specifically, the proposed Financial Accountability Milestones and target deadlines were: (1) Initial Industry Member Core Equity Reporting, April 30, 2020

; (2) Full Implementation of Core Equity Reporting, December 31, 2020

; (3) Full Availability and Regulatory Utilization of Transactional Database Functionality

; and (4) Full Implementation of CAT NMS Plan Requirements.

Under the proposed amendments, each Financial Accountability Milestone would be considered complete as of the date identified in a published Quarterly Progress Report meeting the requirements of proposed Section 6.6(c).

Under the proposed amendments, Initial Industry Member Core Equity Reporting was defined as “the point at which Industry Members (excluding Small Industry Members that are not OATS reporters) have begun to report equities transaction data, excluding Customer Account Information, Customer-ID, and Customer Identifying Information, to the CAT.”

Under the proposed amendments, Full Implementation of Core Equity Reporting was defined as “the point at which: (a) Industry Member reporting (excluding reporting by Small Industry Members that are not OATS reporters) for equities transactions, excluding Customer Account Information, Customer-ID, and Customer Identifying Information, is developed, tested, and implemented at a 5 [percent] Error Rate or less and with sufficient intra-firm linkage, inter-firm linkage, national securities exchange linkage, and trade reporting facilities linkage to permit the Participants and the Commission to analyze the full lifecycle of an order across the national market system, excluding linkage of representative orders, from order origination through order execution or order cancellation; and (b) the query tool functionality required by Section 6.10(c)(i)(A) and Appendix D, Sections 8.1.1 [through] 8.1.3 and Section 8.2.1 incorporates the Industry Member equities transaction data described in condition (a) and is available to the Participants and to the Commission.”

Under the proposed amendments, Full Availability and Regulatory Utilization of Transactional Database Functionality was defined as “the point at which: (a) Reporting to the Order Audit Trail System is no longer required for new orders; (b) Industry Member reporting for equities transactions, simple electronic options transactions, manual options transactions, and complex options transactions, including Allocation Reports, but excluding Customer Account Information, Customer-ID, and Customer Identifying Information, is developed, tested, and implemented; (c) representative order linkages, as well as intra-firm linkages, inter-firm linkages, national securities exchange linkages, and trade reporting facilities linkages, are developed, tested, and implemented in a manner that permits the Participants and the Commission to analyze the full lifecycle of an order across the national market system, from order origination through order execution or order cancellation, including any related allocation information provided in an Allocation Report; (d) CAT Error Rates satisfy the threshold specified by Section 6.5(d)(i); (e) the query tool functionality required by Section 6.10(c)(i)(A) and Appendix D, Sections 8.1.1 [through] 8.1.3, Section 8.2.1, and Section 8.5 incorporates the data described in conditions (b) and (c) and is available to the Participants and to the Commission; and (f) the requirements of Section 6.10(a) are met.”

Under the proposed amendments, Full Implementation of CAT NMS Plan Requirements was defined as “the point at which the Participants have satisfied all of their obligations to build and implement the CAT, such that all CAT system functionality required by Rule 613 and the CAT NMS Plan has been developed, successfully tested, and fully implemented at the initial Error Rates specified by Section 6.5(d)(i) or less, including functionality that efficiently permits the Participants and the Commission to access all CAT Data required to be stored in the Central Repository pursuant to Section 6.5(a), including Customer Account Information, Customer-ID, Customer Identifying Information, and Allocation Reports, and to analyze the full lifecycle of an order across the national market system, from order origination through order execution or order cancellation, including any related allocation information provided in an Allocation Report.”

See also

Proposing Release,

supra

note 2, at 48466-470, for additional discussion of the Financial Accountability Milestones and the associated target deadlines.

See

proposed Section 1.1; proposed Section 6.6(c)(ii)-(iii).

If the Participants meet the target deadline specified for each Financial Accountability Milestone, the terms of the proposed amendments would entitle them to collect the full amount

of any related Post-Amendment Industry Member Fees.

However, if the Participants do not meet the date specified for each Financial Accountability Milestone, the proposed amendments would reduce the amount of related Post-Amendment Industry Member Fees that the Participants may recover.

The proposed amendments set forth one recovery schedule for Initial Industry Member Core Equity Reporting and another recovery schedule for the remaining three Financial Accountability Milestones. Specifically, if the Participants miss the target deadline for Initial Industry Member Core Equity Reporting, the amount of related Post-Amendment Industry Member Fees that the Participants will be entitled to recover will immediately be reduced by 25 percent and then further reduced by 25 percent for every 60 days by which the Participants miss the target deadline.

If the Participants miss the target deadlines for the remaining three Financial Accountability Milestones, the amount of related Post-Amendment Industry Member Fees that the Participants will be entitled to recover for each Financial Accountability Milestone will immediately be reduced by 25 percent and then further reduced by 25 percent for every 90 days by which the Participants miss the target deadline.

“Full amount” in this context does not mean that the Participants may collect all of their Post-Amendment Expenses from Industry Members. Rather, to recover any Post-Amendment Expenses from Industry Members, the Participants must file with the Commission proposed rule changes. The Commission will then review the proposed rule changes for consistency with the Exchange Act and the CAT NMS Plan.

See

proposed Section 11.6(a)(i).

See

proposed Section 11.6(a)(ii) through (iii).

See

proposed Section 11.6(a)(ii).

See

proposed Section 11.6(a)(iii).

See

Proposing Release,

supra

note 2, at 48470-72, for additional discussion of these provisions. The proposed amendments also provide that the Participants will only be permitted to collect any Post-Amendment Industry Member Fees at the end of the period associated with each respective Financial Accountability Milestone.

See

proposed Section 11.6(a)(iv);

see also

Proposing Release,

supra

note 2, at 48471-72, for additional discussion of this provision.

Finally, the proposed amendments include a provision that would require the Participants to clearly indicate, in all proposals filed with the Commission to establish or implement Post-Amendment Industry Member Fees, whether such fees are related to Post-Amendment Expenses and how the Post-Amendment Expenses are related to a particular Financial Accountability Milestone.

See

proposed Section 11.6(b);

see also

Proposing Release,

supra

note 2, at 48472, for additional discussion of this provision.

2. Modifications to the Proposed Amendments

The Commission believes that applying the above-described conditions, with the modifications set forth below,

to the Participants' collection of Post-Amendment Industry Member Fees is appropriate. As explained above, proposals for any fees established by the Operating Committee, and implemented by the Participants, to recover the fees, costs, and expenses incurred by the Participants in connection with the development, implementation, and operation of the CAT must be filed with the Commission. These fee proposals are then subject to Commission review for consistency with Article XI of the CAT NMS Plan and the Exchange Act

—including Sections 6(b)(4) and 15A(b)(5) of the Exchange Act, which require that each Participant make an equitable allocation of reasonable dues, fees, and other charges among its members and other persons using its facilities.

In light of the Participants' delays in implementation of the CAT NMS Plan, the Commission does not believe it would be reasonable for the Participants to exercise their funding authority under the CAT NMS Plan or the Exchange Act if the Participants do not meet the target deadlines specified by the amendments.

See

notes 93-109

infra,

for a discussion of the modifications to the proposed amendments.

15 U.S.C. 78s(b); 17 CFR 242.608.

See

15 U.S.C. 78f(b)(4) (applicable to the national securities exchanges); 15 U.S.C. 78

-3(b)(5) (applicable to FINRA, a national securities association).

See

Proposing Release,

supra

note 2, at 48466, 48472, for additional discussion.

The amendments, as proposed, were designed to prevent further delays to CAT implementation, but the Commission is adopting three modifications to the proposed amendments to address certain practical concerns that were identified by the Commission following the publication of the Proposing Release.

First, the Commission is modifying the first Financial Accountability Milestone, Initial Industry Member Core Equity Reporting, and the fee recovery schedule associated with that Financial Accountability Milestone. The Commission believes that this proposed Financial Accountability Milestone should be updated. The proposed target deadline for this Financial Accountability Milestone—April 30, 2020—has passed. Moreover, as noted above, the Commission granted exemptive relief allowing the Participants' Compliance Rules for Industry Member reporting to the CAT to extend the deadline for core equity reporting to June 22, 2020.

The targeted deadline for the proposed Initial Industry Member Core Equity Reporting milestone is therefore no longer appropriate, but the Commission still believes that it is important to include an initial Financial Accountability Milestone that requires the Participants to develop, test, and implement the essential infrastructure needed to support Industry Member reporting—one of the major goals identified by the CAT NMS Plan.

See

notes 8-13 and associated text

supra,

for a discussion of the Exemptive Relief Order.

See

CAT NMS Plan,

supra

note 1, at Section 6.7(a)(v).

Accordingly, the Commission is modifying the first Financial Accountability Milestone. Section 1.1 of the CAT NMS Plan will now define “Initial Industry Member Core Equity and Option Reporting” as the reporting by Industry Members (excluding Small Industry Members

that do not report to the Order Audit Trail System (“OATS”)) of both: (a) Equities transaction data, excluding Customer Account Information, Customer-ID, and Customer Identifying Information,

to the CAT;

and (b) options transaction data, excluding Customer Account Information, Customer-ID, and Customer Identifying Information, to the CAT.

This Financial Accountability Milestone shall be considered complete as of the date identified in a published Quarterly Progress Report meeting the requirements of proposed Section 6.6(c). The Commission is also modifying proposed Section 11.6(a)(i)(A) to provide that the target deadline for the Initial Industry Member Core Equity and Option Reporting milestone is July 31, 2020.

“Small Industry Member” is a defined term in Section 1.1 of the CAT NMS Plan and has the same definition in the context of this adopting release.

Customer Account Information, Customer-ID, and Customer Identifying Information are defined terms in Section 1.1 of the CAT NMS Plan and have the same definitions in the context of this adopting release.

The equities transaction data required at this stage is consistent with the functionality that the Participants describe on the CAT NMS Plan website as “Production Go-Live for Equities 2a file submission and data integrity validations.”

See https://catnmsplan.com/timeline/phase.

The options transaction data required at this stage is consistent with the functionality that the Participants describe on the CAT NMS Plan website as “Production Go-Live for Options 2b file submission and data integrity validations.”

See id.

The target deadline for this Financial Accountability Milestone falls between scheduled Quarterly Progress Reports. If the Participants wait to submit the Quarterly Progress Report to the Commission, it may delay their ability to begin recovering any Post-Amendment Industry Member Fees to which they may be entitled. In order to expedite their recovery of Post-Amendment Industry Member Fees, the Participants may file an interim Quarterly Progress Report, if they so choose, on the day they achieve this Financial Accountability Milestone (or any other Financial Accountability Milestone).

See

Proposing Release,

supra

note 2, at 48466 n.79.

The Commission believes that this Financial Accountability Milestone is appropriate because it is designed to achieve the goals of the proposed Initial Industry Member Core Equity Reporting milestone. As the Commission noted in the Proposing Release, before Industry Members may begin reporting data to the CAT, the Participants must develop, and Industry Members must thoroughly test, file submission tools, data integrity controls, and various security measures to ensure that the CAT can safely receive and process this data, as well as identify data that may not be accurate. These are core operations that are fundamental to the success of the CAT.

100

By requiring Industry Members—excluding Small Industry Members that are not OATS reporters

101

—to report the first phase of equities and simple electronic options data to the CAT, the Initial Industry Member Core Equity and Option Reporting milestone will continue to require the Participants to demonstrate that they have made significant progress towards implementing foundational CAT functionality.

100

See

Proposing Release,

supra

note 2, at 48466.

101

The Commission continues to believe that it is appropriate to exclude Small Industry Members that do not report to OATS from this Financial Accountability Milestone in order to mirror the exemptive relief granted to the Participants.

See, e.g.,

Exemptive Relief Order,

supra

note 8, at 23082.

Moreover, the Commission believes that this Financial Accountability Milestone, as modified, accounts for the additional amount of time that the Participants will now be given to achieve the first Financial Accountability Milestone. The Participants will now have to begin Industry Member reporting of the first phase of simple electronic options data to the CAT, in addition to satisfying the previous requirements of the proposed Initial Industry Member Core Equity

Reporting milestone. Recent timelines published by the Participants indicate that the production environment for Industry Member equities transaction reporting went live on April 13, 2020,

102

and the Participants have indicated that Industry Member reporting for the first phase of simple electronic options data will begin on July 20, 2020.

103

The Commission therefore believes that the modified target deadline of July 31, 2020, for the Initial Industry Member Core Equity and Option Reporting milestone is reasonable and feasible.

102

See https://www.catnmsplan.com/announcements/cat-now-open-reporting-broker-dealers.

103

See id.

Second, the Commission is also modifying the fee recovery schedule associated with the first Financial Accountability Milestone to reflect the new target deadline.

104

Accordingly, if the Participants do not meet the specified date for the achievement of Initial Industry Member Core Equity and Option Reporting, Section 11.6(a)(ii) will provide that the Participants' recovery of Post-Amendment Industry Member Fees will be reduced according to the following schedule:

104

In addition, the Commission is modifying the text of proposed Sections 11.6(a)(ii) and (iii) to add more granular citations and text that will further clarify which fee recovery schedule applies to which Financial Accountability Milestone. The Commission is not modifying the fee recovery schedule for the Full Implementation of Core Equity Reporting milestone, the Full Availability and Regulatory Utilization of Transactional Database Functionality milestone, or the Full Implementation of CAT NMS Plan Requirements milestone.

• By 25 percent if the Participants miss the deadline set forth in Section 11.6(a)(i)(A) by less than 45 days;

• By 50 percent if the Participants miss the deadline set forth in Section 11.6(a)(i)(A) by more than 45 days, but less than 90 days;

• By 75 percent if the Participants miss the deadline set forth in Section 11.6(a)(i)(A) by more than 90 days, but less than 135 days; and

• By 100 percent if the Participants miss the deadline set forth in Section 11.6(a)(i)(A) by more than 135 days.

The Commission believes this fee recovery schedule is appropriate due to the new target deadline of July 31, 2020. It is critically important that the Participants remain on schedule to achieve the first Financial Accountability Milestone, in order to minimize the possibility that the deadlines for subsequent Financial Accountability Milestones will be missed.

105

Moreover, as explained above, the Commission believes that the Participants should be able to meet the target deadline.

105

See also

Proposing Release,

supra

note 2, at 48470-72, for further discussion of the fee recovery schedules.

Third, the Commission is modifying the Full Availability and Regulatory Utilization of Transaction Database Functionality milestone to eliminate certain error rate requirements. The proposed amendments would have required the Participants to achieve the initial error rates specified by the CAT NMS Plan for Industry Member reporting of manual and complex options transactions, as well as any options allocation information, by December 31, 2021,

106

in order to satisfy the Full Availability and Regulatory Utilization of Transaction Database Functionality milestone. However, the Participants estimate that these functionalities will not be fully implemented until December 13, 2021.

107

Because these functionalities are estimated to be implemented within the same month as the targeted date for satisfying the Full Availability and Regulatory Utilization of Transaction Database Functionality milestone, upon review, the Commission believes it is not appropriate to require such error rates for purposes of financial recovery.

108

The Commission is not modifying any other aspects of this Financial Accountability Milestone; the Participants will still be required to implement the functionality as proposed—namely, reporting of manual and complex options transactions and options allocation information—but they will not be required to satisfy any error rate requirement for these functionalities. The Participants will also still be required to achieve the initial error rate specified by the CAT NMS Plan for Industry Member reporting of equities and simple electronic options transactions, excluding Customer Account Information, Customer-ID, and Customer Identifying Information, with all required linkages (including representative order linkages and equities allocation information) to permit the Participants and the Commission to analyze the full lifecycle of an order across the national market system, from order origination through order execution or order cancellation.

109

106

See id.; see also

Proposing Release,

supra

note 2, at 48468-69, for additional discussion of the proposed Financial Accountability Milestone.

107

See

note 97

supra; see also

Securities Exchange Act Release No. 87990 (January 16, 2020), 85 FR 3963 (January 23, 2020) (pending proposed rule change that indicates, among other things, that such functionality will not be implemented until December 13, 2021). The Commission does not believe that this modification will significantly impact the Commission's goals for this Financial Accountability Milestone. When the Participants achieve this milestone, regulators will still have access to sufficiently accurate and reliable equities and simple electronic options transactional data and order linkages that will enable regulators to analyze the full lifecycle of an order and conduct new and sophisticated analyses of the markets, including options market reconstruction and cross-market analyses across full order lifecycles.

See

Proposing Release,

supra

note 2, at 48468-69.

108

The CAT NMS Plan, however, still requires an initial error rate of 5 percent.

See

CAT NMS Plan,

supra

note 1, at Section 6.5(d)(i).

109

See

Section 1.1, “Full Availability and Regulatory Utilization of Transactional Database Functionality.”

3. Discussion of the Comments

Most commenters agreed with the Commission that increasing the financial accountability of the Participants will help to prevent further delays to CAT implementation. One commenter, for example, “support[ed] the Commission'[s] actions to . . . have formal deadlines to assist member firms' [CAT] implementation planning . . . and set financial incentives to avoid further delays.”

110

Another commenter “agree[d] with the Commission that additional Participant Accountability Milestones should facilitate the completion of the implementation phase(s) of CAT in an efficient, expeditious and risk-averse manner, thereby reducing the risk of further delay.”

111

Finally, one commenter stated that “imposing financial accountability measures on CAT NMS should increase the likelihood of the CAT's implementation.”

112

110

See

SIFMA Letter, at 1.

111

See

FIF Letter, at 2.

112

See

Better Markets Letter, at 3 (stating that the “key milestones outlined in the Proposed Amendment are good measures that the Participants are making progress toward delivering a completed CAT”).

However, commenters raised concerns regarding aspects of the proposed amendments. These concerns generally fell into four categories: (a) Threshold questions regarding the CAT funding model; (b) the potential negative impact of the proposed amendments; (c) the fairness of the proposed amendments; and (d) the possibility of unforeseen, but reasonable, delays. As discussed in more detail below, the Commission does not believe that it is necessary to modify the proposed amendments to address these concerns. Nevertheless, as discussed above, the Commission is adopting two modifications to the proposed amendments to account for certain practical issues that were separately identified by the Commission,

113

and it is possible that these modifications may also alleviate some of the concerns expressed by commenters.

113

See

Part II.B.2.

supra.

a. Comments on the CAT Funding Model

Commenters raised threshold questions regarding the Participants' ability to recover from Industry Members a portion of the fees, expenses, and costs incurred by the Participants in connection with the development, implementation, and operation of the CAT. For instance, one commenter stated that the “Plan Participants have not provided justification for imposing fees on broker-dealers for the CAT[] that will be in addition to fees the Plan Participants already charge broker-dealers for regulatory funding.”

114

Another commenter observed that “broker-dealers already provide the [Participant]s a significant amount of regulatory funding” and suggested that “there should be no new fee for the CAT until member firms are provided with a fully-documented account of how regulatory fees are currently allocated, how the CAT fee fits into the existing regulatory framework, and why assessing broker-dealers an additive regulatory fee is necessary to fund the creation and operation of the CAT.”

115

This commenter further asserted that “broker-dealers should not be required to reimburse the [Participant]s for any part of the costs or expenses of the CAT other than the direct costs to build and operate the system itself,” such as “third-party support fees (historical legal fees, consulting fees, and audit fees), operational reserve, and insurance costs,” or for “any payments made to Thesys in connection with the CAT.”

116

114

See

Fidelity Letter, at 5.

115

See

SIFMA Letter, at 2.

116

See id.

at 3.

These concerns were raised by commenters and addressed by the Commission when it approved the CAT NMS Plan,

117

which explicitly permits the Participants to recover from Industry Members a portion of the fees, expenses, and costs incurred to build, operate, and administer the CAT and the other costs of the Company.

118

After considering these concerns, the Commission approved the funding model set forth in the CAT NMS Plan because the Commission believed that it reflected a “reasonable exercise of the Participants' funding authority . . .”

119

The Commission stated that the CAT was a “regulatory facility jointly owned by the Participants,” that the “Exchange Act specifically permits the Participants to charge members fees to fund their self-regulatory obligations,” and that the funding model was “designed to impose fees reasonably related to the Participants' self-regulatory obligations because the fees would be directly associated with the costs of establishing and maintaining the CAT, and not unrelated . . . services.”

120

117

See, e.g.,

CAT NMS Plan Approval Order,

supra

note 1, at 84793-95.

118

See

CAT NMS Plan,

supra

note 1, at Article XI.

119

See

CAT NMS Plan Approval Order,

supra

note 1, at 84794.

120

See id.

Even though the amendments reflect the Commission's view as to how the Participants may reasonably exercise their funding authority under the Exchange Act and the CAT NMS Plan,

121

the Commission still believes that the overall structure of the CAT funding model is appropriate. The CAT continues to be a “regulatory facility jointly owned by the Participants,” the Exchange Act continues to “permit[] the Participants to charge members fees to fund their self-regulatory obligations” if those fees are reasonable, and the funding model continues to be “designed to impose fees reasonably related to the Participants' self-regulatory obligations because the fees would be directly associated with the costs of establishing and maintaining the CAT, and not unrelated . . . services.”

122

The Commission therefore is not modifying the proposed amendments (or the CAT NMS Plan) on these grounds. However, the Commission stresses that it is not hereby approving any specific Post-Amendment Industry Member Fees; rather, such fee proposals must be filed with the Commission by the Participants, published for public comment, and assessed by the Commission for consistency with the Exchange Act and the CAT NMS Plan.

123

121

See

notes 89-92 and associated text

supra.

122

See id.

123

See id.

b. Comments on the Potential Negative Impact of the Proposed Amendments

A few commenters believed that “strict adherence to the Participants' delivery of specified target milestone[s] on or before particular dates (and sanctions imposed as a result of not meeting those dates) are likely to result in lower quality deliverables and an incomplete CAT Repository.”

124

One commenter specifically identified a “subset” of the number of potential negative consequences of this approach, including: “1) Reduced dialogue between industry member CAT Reporters and the Participants; 2) lower quality CAT IM Tech Specs; 3) reduced emphasis on the development and publication of vital industry member guidance . . .; 4) a less effective issue resolution process; and 5) the implementation of Phase 2a prior to the full development of the CAT system.”

125

In short, the commenter believed that the “financial penalty structure outlined in the Proposed Amendments has the clear potential to limit and short circuit the required cooperative analysis, feedback, and iterative update process that would result in the reduced quality of deliverables and place at risk CAT's key regulatory goals.”

126

Accordingly, this commenter suggested that the Commission should essentially delete the target deadlines, but retain the requirement to complete such milestones.

127

Specifically, this commenter stated that the Commission should perform a “holistic assessment of the Participants['] management of CAT implementation . . . based upon: 1) the successful completion of milestones; 2) detail contained in Participant Quarterly Progress Reports; . . . 3) industry member feedback [to supplement the information obtained from Quarterly Progress Reports],” and 4) “engagement with the Operating Committee and Plan Processor to better gauge whether the Participants are meeting the obligations delegated to them by the Commission,” instead of “strict adherence to enumerated milestone target dates.”

128

In the alternative, “[s]hould the Commission

approve and adopt the proposed Plan Amendment to incorporate Financial Accountability Milestones,” the commenter believed that the Commission and the Participants should “take measures to

ensure

that the high degree of collaboration between the industry, Participants, and the Plan Processor remains in place.”

129

124

See

FIF Letter, at 3.

See also

Participant Letter, at 10 (“Faced with financial penalties for missed deadlines, the Participants may not be able to fully address legitimate industry concerns or accommodate requests for delays with respect to future deadlines.”); Fidelity Letter, at 5 (“We also recognize that despite best efforts, unforeseen circumstances may occur where it may be in the collective best interest to extend a target deadline. In these circumstances, we believe that financial penalties will create a degree of friction in the development process that is not conducive to the overall success of the CAT and that may prioritize rushing to complete a target deadline over a long-term view of the CAT.”).

125

See

FIF Letter, at 3, 7. This commenter also recommended adjusting interim deadlines set by the Participants for certain phases of CAT implementation.

See id.

at 5-6 and Appendix B. The Commission does not believe such adjustments are necessary, as the Commission believes the current timeline is appropriate and feasible. However, because such changes could be made without impacting the target deadlines for the Financial Accountability Milestones, the Participants can decide to make the recommended changes.

126

See id.

at 7-8.

127

See id.

at 4.

See also

Participant Letter, at 9 (arguing that the Financial Accountability Milestones “should be revised so that CAT LLC may collect Post-Amendment Industry Member Fees so long as CAT LLC and the Participants have completed development and testing and made available to Industry Members and the SEC the CAT functionality applicable to a particular Milestone”).

128

See

FIF Letter, at 6, 8.

129

See id.

at 7.

The Commission does not believe that it is appropriate or necessary to eliminate the target deadlines from the proposed amendments, as suggested by some commenters. The proposed amendments were not designed only to achieve CAT implementation, but, more specifically, to achieve CAT implementation in a timely manner. It has been over three years since the Commission approved the CAT NMS Plan, and the need for a better audit trail system remains urgent. Accordingly, the Commission included target deadlines in the proposed amendments as one measure to reduce the likelihood of additional delays to CAT implementation. To remove these target deadlines from the proposed amendments, or to eliminate the financial incentives associated with the target deadlines, would fundamentally undercut the goal of the Commission in promulgating the proposed amendments—namely, the implementation of the CAT in a reasonable time frame.

Although the Commission is sensitive to commenters' concerns regarding the potential for “lower quality deliverables” due to any perceived possibility of reduced collaboration,

130

the proposed amendments do not alter the fundamental obligations of the Participants, Industry Members, and Plan Processor to deliver CAT functionality in a manner that complies with the CAT NMS Plan.

131

Nor do the proposed amendments alter or weaken requirements set forth in the CAT NMS Plan to facilitate collaboration and communication between the Participants and Industry Members.

132

The Commission therefore does not expect the quality of CAT implementation to be adversely affected by the proposed amendments. Accordingly, the Commission is not modifying the proposed financial accountability amendments.

130

One commenter also expressed concern that the proposed amendments might result in “the implementation of Phase 2a prior to the full development of the CAT system.”

See id.

at 3. The Participants are already pursuing an implementation plan that implements the CAT in phases and that will result in “Phase 2a” being implemented “prior to the full development of the CAT system.” The amendments have no effect on this plan.

131

See

note 145 and associated text

infra,

for a discussion of the Industry Members' obligations to comply with the CAT NMS Plan.

132

See, e.g.,

CAT NMS Plan,

supra

note 1, at Appendix D, Section 10.1 through 10.3 (detailing the support to be provided by the Plan Processor to CAT reporters and CAT users). Many of these measures have already been implemented by the Participants.

See, e.g.,

notes 142-144 and associated text

supra.

c. Comments on the Fairness of the Proposed Amendments

Commenters expressed views regarding the fairness of the proposed amendments' conditions on financial recovery. “If the Participants miss a proposed target deadline,” one Industry Member commenter “generally [did] not believe that it [would be] reasonable for the Plan Participants to fully recover fees, costs, and expenses from Industry Members, because further delays by Plan Participants will impose additional costs on Industry Members.”

133

See

Fidelity Letter, at 5.

The Participants, on the other hand, believed that the proposed amendments were “inappropriate and unfair,” because the “ability of CAT LLC and the Participants to collect Post-Amendment Industry Member Fees should turn only on the timely completion of those tasks that are within their control.”

134

For instance, the Participants objected to the fact that several of the proposed Financial Accountability Milestones require the achievement of the initial error rates specified by the CAT NMS Plan. The Participants stated that “achieving an error rate of five percent or less involves factors that are beyond their control,” because the “ability and willingness of Industry Members to devote sufficient resources to accurately and timely report CAT events . . . will impact initial and subsequent error rates.”

135

Similarly, the Participants stated that the requirements contained in several of the proposed Financial Accountability Milestones regarding intrafirm and interfirm linkages “rel[y], in part, on the quality of the data reported to CAT by Industry Members.”

136

The Participants expressed concern that, “by conditioning the ability of CAT LLC and the Participants to collect Post-Amendment Industry Member Fees on factors dependent on the efforts of Industry Members, the Commission's proposals inadvertently establish a perverse incentive for Industry Members to devote less than maximum efforts to comply with their obligations related to the CAT as they will pay less fees in such instances.”

137

134

See

Participant Letter, at 8-9.

135

See id.

at 9.

136

See id.

137

See id.

Another commenter also expressed concern that the proposed amendments “would be subject to gaming by Industry Members who stand to benefit from delays, but [who] would not suffer the consequences of the delays they cause.”

See

Better Markets Letter, at 8. This commenter suggested that the proposed financial accountability amendments be “equally applied to Plan Participants as well as those Industry Members who contribute to any delay” and specifically recommended the adoption of a reporting mechanism that would enable the Commission to determine which parties were responsible for causing or contributing to a delay.

See id.

at 3, 8-9. The Commission continues to believe that it is appropriate to impose the obligations of the financial accountability amendments solely on the Participants for the reasons discussed below.

See

the discussion at notes 142-148 and associated text

infra.

Accordingly, the Commission is not adopting the reporting mechanism proposed by this commenter.

The Participants stated that the proposed Full Availability and Regulatory Utilization of Transactional Database Functionality milestone could not be met unless OATS reporting was no longer required for new orders, which was another example of how the proposed amendments were “inappropriate and unfair.”

138

The Participants asserted that achieving this requirement “depends upon a variety of factors outside the control of the Participants, including accurate reporting by Industry Members and FINRA's determination to retire OATS.”

139

According to the Participants, FINRA has indicated that “the CAT would generally need to achieve a sustained error rate for Industry Member reporting in a number of categories for a period of at least 180 days of 5[ percent] or lower, measured on a pre-correction or as-submitted basis, and 2[ percent] or lower on a post-correction basis” before OATS could be safely retired, because a minimum of 180 days was necessary “to confirm that the Plan Processor is meeting its obligations and performing its functions adequately” and material issues “may manifest themselves only after surveillance patterns and other queries have been run and analyzed . . . .”

140

Insofar as the “premature cessation of OATS before CAT data quality levels are acceptable . . . would expose the market to unnecessary risks because market surveillance would be compromised,” the Participants believed that no “hard and fast

deadline” should be set for the retirement of OATS.

141

138

See

Participant Letter, at 9;

see also

proposed Section 1.1, “Full Availability and Regulatory Utilization of Transactional Database Functionality.”

139

See

Participant Letter, at 9.

140

See id.

at 10-11.

141

See id.

at 11.

Despite their concerns, the Participants have the ability to shape the reporting behavior of Industry Members, including the quality of data reported by Industry Members, through various mechanisms, including through the development of CAT technical specifications with Industry Members via the Technical Specifications Working Group,

142

through the creation of a help desk for Industry Members to provide assistance with any technical issues that may arise,

143

through the production of tools that will enable Industry Members to identify and correct errors,

144

and through general industry outreach, provided in the form of FAQs, webinars, or other additional training for Industry Members. In addition, while the Commission expects Industry Members to comply with their reporting obligations under the CAT NMS Plan, the Participants have tools to require such compliance—including Compliance Rules that will set forth a phased reporting schedule according to the timeline detailed in the Exemptive Relief Order.

145

Industry Members should have a strong economic incentive to cooperate with the Participants' efforts.

146

Until the CAT is sufficiently developed so as to permit the retirement of OATS, most Industry Members will have to report both to OATS and to the CAT, and prolonging the implementation of the CAT would expand the dual reporting costs that these Industry Members will have to bear.

147

For these reasons, and for the reasons set forth in the Proposing Release,

148

the Commission continues to believe that it is appropriate to impose the conditions of the amendments solely on the Participants.

142

See

Event Materials, including recorded Q&A sessions with the Technical Specifications Working Group and market participants,

available at https://catnmsplan.com/events/materials. See also

Participant Letter, at 2 (detailing efforts made to liaise with Industry Members on “Industry Member reporting, CAT onboarding, connectivity, security and other topics related to the CAT”).

143

See

Participant Letter, at 2. Contact information for the help desk can be found at

https://catnmsplan.com/contact.

144

See, e.g.,

CAT NMS Plan,

supra

note 1, at Appendix D, Section 10.1 (requiring the Plan Processor to develop tools to allow each CAT reporter to identify and correct errors and to provide daily reporting statistics to each CAT reporter).

145

See, e.g.,

CAT NMS Plan,

supra

note 1, at Section 3.11 (requiring the Participants to enforce compliance with the CAT NMS Plan by promulgating compliance rules for Industry Members);

id.

at Section 6.4 (indicating that data reporting requirements for Industry Members will be enforced through the Participants' compliance rules);

id.

at Section 6.7 (indicating that Industry Member data reporting deadlines will be enforced through the Participants' compliance rules). With respect to these compliance tools, one commenter expressed concern that, “if there are legitimate reasons that broker-dealers have not been able to deliver a 5[ percent] error rate, and the [Participants] believe they will be financially penalized for a too-high error rate, then the [Participants] will be incentivized to bring enforcement actions against broker-dealers solely for the purpose of recouping the lost funding.”

See

SIFMA Letter, at 2. However, any enforcement action brought by the Participants must comply with the Exchange Act, the rules promulgated thereunder, and their own rules.

146

See, e.g.,

SIFMA Letter, at 2 (stating that Industry Members are “committed to a timely implementation of CAT reporting”).

147

See

note 286 and associated text

infra.

148

See, e.g.,

Proposing Release,

supra

note 2, at 48459-460.

The Participants' comment letter was particularly focused on proposed conditions related to error rates, but the Commission believes that these conditions are appropriate. The proposed Financial Accountability Milestones that include error rate requirements do not impose any requirements that are more onerous than initial error rate requirements already set forth in the CAT NMS Plan.

149

The Participants have, in the past, indicated that these initial error rate requirements are appropriate, because they “strike[] the balance of making allowances for adapting to a new reporting regime while ensuring that the data provided to regulators will be capable of being used to conduct surveillance and market reconstruction.”

150

Furthermore, because the Participants have chosen to implement Industry Member reporting in phases,

151

the Commission generally believes it is appropriate to require the Participants to satisfy the initial error rates set by the CAT NMS Plan for each phase that has been completed. This approach, reflected in the proposed amendments, as modified, only requires the Participants to focus on data quality for functionality that has been fully implemented for some time, not on those elements of the CAT that may still be in development or that have been newly implemented.

149

Cf., e.g.,

CAT NMS Plan,

supra

note 1, at Section 6.5(d)(i) (“The initial maximum Error Rate shall be set to 5[ percent].”), and proposed Section 1.1, “Full Implementation of CAT NMS Plan Requirements” (requiring the CAT to be “fully implemented at the initial Error Rates specified Section 6.5(d)(i) or less”).

150

See

CAT NMS Plan Approval Order,

supra

note 1, at 84717.

151

See, e.g.,

Exemptive Relief Order,

supra

note 8.

Moreover, the Commission believes that the amendments, as modified, give the Participants ample time to achieve the required error rates. With respect to the Full Implementation of Core Equity Reporting Requirements milestone, the Participants are currently estimating, and the Commission believes, that the required Industry Member reporting and linkages will be fully implemented by October 26, 2020.

152

The Participants will therefore have more than two months to achieve the required error rate by the target deadline for this Financial Accountability Milestone, which is December 31, 2020.

153

The next Financial Accountability Milestone, the Full Availability and Regulatory Utilization of Transactional Database Functionality milestone, as modified, requires the Participants to sustain the error rates achieved for the previous milestone and to achieve the same requirements for simple electronic options transaction data, representative order linkages, and equities allocation information by December 31, 2021. The Participants are currently estimating that the required options functionality will be implemented by January 4, 2021

154

and that the representative order linkage and allocation information functionality will be implemented by April 26, 2021.

155

Therefore, the Commission believes that the Participants should have sufficient time to satisfy those error rate requirements. Likewise, the Commission believes the target deadline for the Full Implementation of CAT NMS Plan Requirements milestone provides the Participants with sufficient time to achieve the required error rates. The Participants currently estimate that the CAT will be fully implemented by July 11, 2022.

156

The amendments, as modified, therefore give the Participants approximately five months to achieve the required error rates,

157

which the Commission believes is an appropriate amount of time to address any issues with the final phases of CAT implementation.

158

152

See

note 97

supra.

153

See also

Proposing Release,

supra

note 2, at 48468.

154

See

note 97

supra.

155

See

Exemptive Relief Order,

supra

note 8, at 23081.

156

See id.

157

The Participants should have more than a year to achieve some of the required error rates, as the modified Full Availability and Regulatory Utilization of Transactional Database Functionality milestone would require the Participants to implement Industry Member reporting of manual and complex options transaction data, with options allocation information, by December 31, 2021, consistent with the Participants' current projections.

See id.

158

See

Proposing Release,

supra

note 2, at 48470. The Participants will be required to implement Industry Member reporting of Customer Account Information, Customer-ID, and Customer Identifying Information to achieve Full

Implementation of CAT NMS Plan Requirements.

See

CAT NMS Plan,

supra

note 1, at Section 1.1 for definitions of these terms. The Participants' CAT Reporting Customer and Account Technical Specifications indicates that they began implementing the customer and account information database in December 2019,

see https://www.catnmsplan.com/specifications/im,

so the Commission believes that the Participants should have ample time to achieve the required error rates for these aspects of CAT implementation.

The Commission also does not believe that it is necessary to modify the proposed amendments to address the Participants' concerns regarding OATS retirement. The Participants have stated that Industry Member reporting for equities data inclusive of OATS reporting will be fully implemented by October 26, 2020.

159

Consequently, the modified amendments will give the Participants approximately fourteen months to meet the required error rate for equities data and retire OATS. The Commission believes that this is a sufficient amount of time to achieve these goals, based on FINRA's representations regarding the amount of time it would take to retire OATS.

160

If the Participants complete the Full Implementation of Core Equity Reporting Requirements milestone by the target deadline for that Financial Accountability Milestone, the Participants will already have achieved the 5 percent error rates required for equities transaction data reported by Industry Members by December 31, 2020.

161

The Participants will then have far more than 180 days in which to achieve the “5[ percent] or lower, measured on a pre-correction or as-submitted basis, and 2[ percent] or lower on a post-correction basis,” error rates that may be required by FINRA to retire OATS.

162

Accordingly, the Commission does not believe any further modifications to these amendments are appropriate or necessary.

159

See

note 97

supra.

160

See, e.g.,

Participant Letter, at 8-11. Although FINRA is the only Participant that may determine whether to retire OATS, the Commission continues to believe that it is appropriate to apply this condition to all Participants. All of the Participants are jointly responsible for creating a CAT that is capable of replacing OATS, and all of the Participants are regulators that will benefit from the full implementation of the CAT.

See

Proposing Release,

supra

note 2, at 48469 n.106. Moreover, FINRA has developed, and communicated to the Participants, a plan governing the retirement of OATS—

see, e.g.,

Participant Letter, at 10-11—and the Commission expects that such advance planning could make it more likely that OATS will be retired by the target deadline of December 31, 2021. Nevertheless, the Commission will continue to monitor the progress of CAT implementation closely and could consider exempting the Participants from compliance with this condition at a later date, if appropriate.

See

note 147 and associated text

infra,

noting the Commission's ability to grant exemptive relief from any requirement associated with a Financial Accountability Milestone.

161

See

proposed Section 1.1, “Full Availability and Regulatory Utilization of Transactional Database Functionality.”

162

See

Participant Letter, at 10-11. The Commission does not believe that its involvement in approving the retirement of OATS and OATS-related rules should unduly delay the achievement of Full Availability and Regulatory Utilization of Transactional Database Functionality. FINRA and the Participants with rules relating to OATS may submit filings to the Commission at any point to identify the conditions under which OATS would be retired and OATS-related provisions removed from the Participants' rulebooks. The Commission could consider and act on these retirement filings well before the December 31, 2021 deadline and, if approved, would permit FINRA and the Participants to subsequently issue a notice indicating when the conditions identified in the filings are met, thus ensuring that this condition is fulfilled in a timely manner.

d. Comments on the Possibility of Unforeseen, But Reasonable, Delays

Several commenters recommended that the Commission adopt a more flexible approach that could account for the possibility of reasonable delays to CAT implementation. For example, one commenter stated that the “completion of current and upcoming CAT implementation milestones are all contingent on several challenging and aggressive deliverables, many of which will impact the development, testing, and roll-out of complex technology . . . .”

163

This commenter believed that “factors outside of the Participants' and/or Plan Processor's control may require the regulators to revisit the reasonableness and viability of implementation milestones to preserve the ultimate delivery of a useable CAT in a reasonable timeframe.”

164

Accordingly, this commenter recommended that the Commission “include provisions to the Proposed Amendments that allow, after the holistic assessment of all factors impacting the Participants' ability to meet a particular milestone date, flexibility to extend milestone dates without holding Participants directly accountable (financially or otherwise).”

165

163

See

FIF Letter, at 4.

164

See id.

165

See id.;

see also

Fidelity Letter, at 5 (“We recommend that the SEC allow for some flexibility or reasonable delays in target deadlines, particularly in matters that may impact data quality.”).

Another commenter requested that “the amendments to the CAT NMS Plan include a formal mechanism to address potential delays in CAT implementation that may arise for legitimate reasons,” “due to a reasonable need for delay or to factors beyond anyone's control.”

166

This commenter suggested that the “mechanism could be a similar process to the proposed publications of the implementation plan—approval from each [Participant]'s senior officer and vote by the Operating Committee,” as such a mechanism “would serve the purpose of completing the CAT in a timely manner while taking into account the operational complexity of the CAT implementation process.”

167

This commenter also “recommended that the Commission take reasonable delays into account in imposing the proposed financial penalties,” perhaps by “suspending the proposed financial penalties based on the cause, foreseeability and attempts to mitigate the impact of the delay.”

168

166

See

SIFMA Letter, at 2.

See also

Participant Letter, at 9 (“[U]nanticipated issues invariably arise on large technology projects and CAT is no exception.”).

167

See

SIFMA Letter, at 2.

168

See id.

Similarly, the Participants stated that “the Commission and all market participants would benefit from a more flexible approach in which the Commission would assess the appropriateness of the recovery of Post-Amendment Industry Member Fees in the context of particular facts and circumstances in the event of a delay in meeting such a Milestone.”

See

Participant Letter, at 10.

Although it is sensitive to the concerns expressed by commenters, the Commission is adopting a mechanism that would not allow further delays to occur without consequence. The Participants have already missed the Commission-approved deadlines set forth in the CAT NMS Plan.

169

The Participants are responsible for timely CAT implementation, including selecting and managing the Plan Processor, and the process is fundamentally within their control.

170

Delays to CAT implementation have serious consequences; they prevent regulators and market participants from reaping the regulatory benefits of the CAT, as well as potentially increase costs for Industry Members attempting to comply with the Participants' projected timelines.

171

However, the Commission has the authority to grant exemptive relief from any requirement associated with a particular Financial Accountability Milestone.

172

The Commission believes that this ability, in particular, should alleviate the Participants' concerns regarding the potential impact of unforeseeable or reasonable delays.

169

See, e.g.,

note 6

supra; see

also

Proposing Release,

supra

note 7, at 48458-461.

170

See

Part II.B.2.c.

supra,

for further discussion of these arguments.

see also

infra

Part IV.B.

172

See

15 U.S.C. 78mm; 17 CFR 242.608(e).

III. Paperwork Reduction Act

Certain provisions of the amendments adopted by the Commission contain “collection of information requirements” within the meaning of the Paperwork Reduction Act of 1995 (“PRA”).

173

The Commission published a notice requesting comment on the collection of information requirements in the Proposing Release

174

and submitted relevant information to the Office of Management and Budget (“OMB”) for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11.

175

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the agency displays a currently valid control number,

176

and the Commission has applied for an OMB control number for this collection of information. The title of the new collection of information is “CAT NMS Plan Reports.”

173

44 U.S.C. 3501

et seq.

174

See

Proposing Release,

supra

note 2, at 48474-78.

175

44 U.S.C. 3507; 5 CFR 1320.11.

176

5 CFR 1320.11(l).

The Commission requested comment on the proposed collection of information requirements, but no commenters addressed these issues. The Commission continues to believe its estimates of the burdens involved with this collection of information are reasonable, but it has adjusted some of its estimates to account for the fact that Long Term Stock Exchange, LLC has been added as a Participant.

177

Accordingly, there are now 24 Participants instead of the 23 Participants accounted for in the Proposing Release.

178

177

See

note 1

supra.

178

See

Proposing Release,

supra

note 2, at 48474-78.

A. Summary of Collection of Information

The modified amendments require two new categories of information collection: (1) The Implementation Plan and (2) the Quarterly Progress Reports.

1. Implementation Plan

Section 6.6(c)(i) requires the Participants, within 30 calendar days following the effective date of this amendment, to file with the Commission and make publicly available on a website a complete Implementation Plan that includes the Participants' timeline for achieving Implementation Milestones setting forth how and when the Participants will facilitate the achievement of Full Implementation of CAT NMS Plan Requirements. The Operating Committee must submit the Implementation Plan to the CEO, President, or an equivalently situated senior officer of each Participant. A Supermajority Vote of the Operating Committee will then be required to approve the Implementation Report. However, if the Implementation Plan is approved only by a Supermajority Vote of the Operating Committee, and not by a unanimous vote of the Operating Committee, each Participant whose Operating Committee member did not vote to approve the Implementation Plan shall separately file with the Commission a statement identifying itself and explaining why the member did not vote to approve the Implementation Plan. These statements shall be made publicly available by each dissenting Participant on its website or collectively by all Participants on the CAT NMS Plan website.

2. Quarterly Progress Reports

Section 6.6(c)(ii) requires the Participants, within 30 calendar days after the end of each calendar quarter, to file with the Commission and make publicly available on a website a complete Report that provides a detailed description of the progress made by the Participants towards each of the Implementation Milestones. The Participants must provide specified information regarding Implementation Milestones that have been completed, Implementation Milestones that are in progress, and Implementation Milestones that have not yet been initiated, such as updated information on currently targeted completion dates and descriptions of the current status of the Implementation Milestone, any adjustments to the targeted completion date, and supporting information demonstrating the current level of completion. The Operating Committee must submit each Quarterly Progress Report to the CEO, President, or an equivalently situated senior officer of each Participant. A Supermajority Vote of the Operating Committee shall be required to approve each Quarterly Progress Report. However, if a Quarterly Progress Report is approved only by a Supermajority Vote of the Operating Committee, and not by a unanimous vote of the Operating Committee, each Participant whose Operating Committee member did not vote to approve that Quarterly Progress Report shall separately file with the Commission a statement identifying itself and explaining why the member did not vote to approve the Report. These statements shall be made publicly available by each dissenting Participant on its website or collectively by all Participants on the CAT NMS Plan website.

B. Proposed Use of Information

1. Implementation Plan

The Commission believes that the publication of the Implementation Plan will make available critical information to the Commission, other regulators, and market participants regarding the intended goals and deadlines of the Participants. Access to this information will help the Commission and market participants to monitor the progress of CAT implementation, thereby reducing uncertainty surrounding this process. The Commission also anticipates that requiring the Participants to make public target dates submitted to senior management of each Participant and approved by a Supermajority Vote of the Operating Committee in the Implementation Plan will increase the Participants' accountability to their intended timeline. In addition, the Commission believes that requiring any Participants whose Operating Committee members do not vote to approve the Implementation Plan to disclose the basis for that decision may aid the Commission and the public to better monitor the progress of CAT implementation, because such an explanation may reveal critical information regarding whether currently targeted completion dates are realistic, whether milestones are being or have been completed in accordance with the requirements of the CAT NMS Plan, and/or whether potential risks or delays may impede the progress of CAT implementation.

2. Quarterly Progress Reports

The Commission believes that the publication of the Quarterly Progress Reports will make available critical information to the Commission, other regulators, and market participants regarding the intended goals and deadlines of the Participants. Access to this information will help the Commission and market participants to monitor the progress of CAT implementation. The Commission also anticipates that requiring the Participants to make public their accomplishments in the Quarterly Progress Reports will keep the Participants accountable to their intended timeline. Finally, the Commission expects that the provision of updated quarterly information in a Report, submitted to senior management of each Participant and approved by a Supermajority Vote of the Operating Committee, regarding the Participants' progress towards CAT implementation,

as well as any explanatory statements by Participants whose Operating Committee members do not vote to approve the Report, may reduce uncertainty regarding CAT's implementation deadlines and flag any concerns regarding the implementation process for the Commission and market participants.

C. Respondents

The respondents to all collections of information are the Participants.

D. Total Initial and Annual Reporting and Recordkeeping Burdens

The estimated burdens associated with the modified amendments are described fully below, but this table briefly summarizes the relevant burdens.

Category

Annual ongoing burden per participant

(burden hours/external costs)

One-time burden

per participant

(burden hours/external costs)

Implementation Plan

N/A

75/$8,333.33

Quarterly Progress Reports

300/$33,333.33

N/A

1. Implementation Plan

The Commission believes that each Participant will incur, on average, a one-time burden of approximately 50 hours

179

to confer with other Participants, to draft an Implementation Plan, and to vote as to whether to approve the Implementation Plan, as required by Section 6.6(c)(iii). In the CAT NMS Plan Approval Order, the Commission stated that the Participants had estimated that approximately 20 full-time employees took approximately 30 months to develop the CAT NMS Plan, including “staff time contributed by each Participant to, among other things, determine the technological requirements for the Central Repository, develop the RFP, evaluate Bids received, design and collect the data necessary to evaluate costs and other economic impacts, meet with Industry Members to solicit feedback, and complete the CAT NMS Plan submitted to the Commission for consideration.”

180

The Commission then used this information to estimate that the development of the CAT NMS Plan would require, in aggregate, 14,407 burden hours for 12 months.

181

179

See

note 184

infra,

for an explanation of the difference in the estimated burden from the Proposing Release to this release.

180

See

CAT NMS Plan Approval Order,

supra

note 1, at n.3285.

181

See id.

This estimate, based on information provided by the Participants about the burdens they actually incurred in developing a related project, reflects the best data available to the Commission in estimating the number of initial burden hours required to develop the Implementation Plan. Developing the CAT NMS Plan was a far more complex project than the development of the Implementation Plan and that the burdens incurred in developing the CAT NMS Plan may be different in nature than the costs that the Participants would incur in developing the Implementation Plan. In this instance, for example, the Participants will only have 30 calendar days from the effective date of this amendment to prepare the Implementation Plan, and the Participants have already created an Updated Master Plan that contains much of the information required by Section 6.6(c)(i). In addition, the Commission believes that the Participants should already have gathered much of the information needed to create the Implementation Plan.

182

For these reasons, the Commission believes that the estimated burden for preparing the Implementation Plan should be one-twelfth the amount of the burden estimated for the development of the CAT NMS Plan,

183

or, on average, 50 initial, one-time burden hours for each Participant.

184

182

See, e.g.,

Participant Letter, at 6.

183

Because the proposed amendment gives the Participants approximately one month to prepare and publish the Implementation Plan, the Commission has used an estimate that mirrors the one-month burden that was incurred by the Participants in developing the CAT NMS Plan.

184

14,407 CAT NMS Plan burden hours/12 months = 1,200.6 burden hours for all Participants. 1,200.6 aggregate burden hours/24 Participants = 50 burden hours per Participant for the Implementation Plan. Although the Commission estimated this burden as 52.2 hours per Participant in the Proposing Release,

see

note 2

supra,

at 48475, this number was reached by dividing the aggregate burden of 1,200.6 hours by only 23 Participants; now that there are 24 Participants, the burden per Participant has been slightly reduced. For the same reason, the Commission's estimated breakdown of this burden has also been revised. The Commission now estimates that each Participant will spend, on average, 50 internal burden hours = (Attorney at 7 hours) + (Systems Analyst at 21.5 hours) + (Compliance Manager at 21.5 hours). All estimates in this section represent an average; the Commission expects that some Participants may incur greater costs and some lesser costs due to variances in economies of scale for Participants who share a common corporate parent.

See, e.g.,

infra

note 257.

In addition, the Commission estimates that it will take each Participant approximately 10 hours, on average, for its member of the Operating Committee to ensure that the Operating Committee submits the Implementation Plan to the CEO, President, or equivalently situated senior officer of each Participant, for each Participant to review the information contained in the Implementation Plan and for senior management consultations as needed, and to vote on approving the Implementation Plan.

185

The Commission expects each member of the Operating Committee to be familiar with the process of CAT implementation, which should ease the task of determining whether to vote in favor of the Implementation Plan. Accordingly, the Commission estimates that each Participant will incur, on average, a one-time burden of 60 hours to prepare the Implementation Plan and to vote as to whether to approve it,

186

for a one-time aggregate burden of approximately 1,440 hours.

187

185

For the purposes of the Paperwork Reduction Act, the Commission is assuming that the member of the Operating Committee is a Chief Regulatory Officer or a Chief Compliance Officer and will spend 5 hours on these tasks. However, this task could be performed by any person designated by the Participant to serve as its representative on the Operating Committee.

See

Section 4.2(a) of the CAT NMS Plan. In addition, the Commission estimates that senior management who receive the Implementation Plan from the Operating Committee will spend 5 hours in consultations, including with their member of the Operating Committee regarding the Implementation Plan. Because one individual may serve as the representative for multiple affiliated Participants, the Commission expects that some Participants may incur greater costs and some lesser costs due to variances in economies of scale for Participants who share a common corporate parent.

186

50 burden hours + 10 burden hours = 60 burden hours.

187

60 burden hours × 24 Participants = 1,440 burden hours. This estimate has increased because there are now 24 Participants.

If the Implementation Plan is approved only by a Supermajority Vote, and not by a unanimous vote, the modified amendments require each Participant whose Operating Committee member did not vote to approve the Implementation Plan to separately file with the Commission an explanatory statement identifying itself and

explaining why it did not vote to approve the Implementation Plan.

188

These statements shall be made publicly available by each dissenting Participant on its website or collectively by all Participants on the CAT NMS Plan website. Because there are currently 24 Participants, an Implementation Plan would need to be approved by at least 16 members of the Operating Committee to satisfy the Supermajority Vote provisions of the CAT NMS Plan.

189

At maximum, then, only eight Participants would file an explanatory statement in connection with an Implementation Plan approved only by Supermajority Vote.

190

The Commission estimates that each of the eight Participants submitting an explanatory statement will incur, on average, an initial, one-time burden of 15 hours to draft such statement.

191

When this aggregate burden is averaged across all Participants, it amounts to approximately 5 hours per Participant or 120 hours in aggregate.

192

188

For the purposes of the Paperwork Reduction Act, the Commission is assuming that this task will be performed by a Chief Regulatory Officer or a Chief Compliance Officer.

See

note 185

supra.

189

24 Participants ×

2/3

Participants = 16 Participants.

190

24 Participants − 16 Participants = 8 Participants.

191

The Commission bases this estimate on a full-time Compliance Manager and the Chief Regulatory Officer or Chief Compliance Officer each spending 7.5 hours to prepare the explanatory statement.

192

8 Participants * 15 burden hours = 120 burden hours in aggregate. 120 burden hours/24 Participants = 5 burden hours. This estimate has increased because there are now 24 Participants.

Finally, the Commission estimates that each Participant will incur, on average, a one-time burden of approximately 10 hours to ensure that the Implementation Plan, and any explanatory statement (if applicable), is filed with the Commission and made publicly available on a website.

193

The Commission therefore estimates an aggregate burden of approximately 240 hours for the Participants to publicly post and submit to the Commission the Implementation Plan.

194

193

The Commission bases this estimate on a full-time Compliance Manager and Programmer Analyst each spending approximately 5 hours, for a combined total of approximately 10 hours, to prepare and publicly post the relevant documents.

194

10 burden hours per Participant × 24 Participants = 240 burden hours.

In total, therefore, the Commission estimates that each Participant will incur, on average, a one-time burden of approximately 75 hours

195

and approximately 1,800 hours in aggregate to comply with the provisions of the proposed amendments that relate to the Implementation Plan.

196

195

50 hours + 10 hours + 5 hours + 10 hours = 75 burden hours.

196

75 hours × 24 Participants = 1,800 burden hours. This estimate has increased because there are now 24 Participants.

See

Part IV.C.

infra

for a dollar cost estimate of this burden.

The Commission further estimates that each Participant will expend approximately $8,333.33, on average, in external public relations, legal, and consulting costs related to the development of the Implementation Plan. In the CAT NMS Plan Approval Order, the Commission estimated, based on information provided by the Participants, that the Participants had collectively spent approximately $2,400,000 in preparation of the CAT NMS Plan on external public relations, legal, and consulting costs.

197

The Commission believes that the estimated burden for the Implementation Plan should be one-twelfth the amount estimated for the development of the CAT NMS Plan, because the Participants will only have 30 calendar days from the effective date of this amendment to prepare the Implementation Plan and because preparation of the Implementation Plan is a much less complex project. Accordingly, the Commission estimates that the Participants will expend approximately $200,000 in aggregate, and $8,333.33 per Participant, in external public relations, legal, and consulting costs related to the preparation of the Implementation Plan.

198

197

See

CAT NMS Plan Approval Order,

supra

note 1, at n.3287.

198

$2,400,000 CAT NMS Plan costs/12 months = $200,000 for all Participants. $200,000/24 Participants = $8,333.33 per Participant for the Implementation Plan. Although the Commission estimated this burden as $8,695.65 per Participant in the Proposing Release,

see

note 2

supra,

at 48476, this number was reached by dividing the aggregate burden of $200,000 by only 23 Participants; now that there are 24 Participants, the burden per Participant has been slightly reduced.

2. Quarterly Progress Reports

The Commission believes that each Participant will incur, on average, an ongoing quarterly burden of approximately 60 hours to confer with other Participants, to draft a Quarterly Progress Report, to ensure that the Operating Committee submits each Quarterly Progress Report to the CEO, President, or equivalently situated senior officer of each Participant, and to vote as to whether to approve each Quarterly Progress Report, as required by proposed Section 6.6(c)(iii).

199

This estimate is approximately the same as the burden related to the development and approval of the Implementation Plan, because the Quarterly Progress Reports require the Participants to prepare a detailed description explaining, quantifying, and voting to approve the description of their progress towards the Implementation Milestones laid out in the Implementation Plan, including the impact that any such progress might have on the target completion dates for Implementation Milestones that have not yet been achieved. The Commission believes this estimate is appropriate because the Participants are likely already tracking some of the information required to be included in the Quarterly Progress Reports.

200

Accordingly, the Commission estimates, on average, an ongoing quarterly burden of approximately 60 hours for each Participant,

201

an ongoing annual burden of approximately 240 hours for each Participant,

202

and an aggregate annual burden of approximately 5,760 hours.

203

199

All estimates in this section represent an average; the Commission expects that some exchanges may incur greater costs and some lesser costs due to variances in economies of scale for Participants who share a common corporate parent.

See infra

note 257.

200

See, e.g.,

Proposing Release,

supra

note 2, at 48462 n.53 and associated text.

201

The Commission estimates that each Participant will spend, on average, 50 internal burden hours to confer with other Participants and to compile the Quarterly Progress Report = (Attorney at 7 hours) + (Systems Analyst at 21.5 hours) + (Compliance Manager at 21.5 hours). In addition the Commission estimates, for the purposes of the Paperwork Reduction Act, that the chief Compliance Officer or Chief Regulatory Officer of each Participant will spend 5 hours, on average, to submit the Quarterly Progress Report to the CEO, President, or equivalently situated senior officer of each Participant, to review the information contained in each Quarterly Progress Report and for senior management consultations as needed, and to vote on approving the Quarterly Progress Report. In addition, the Commission estimates that the CEO, President, or equivalently situated senior officer of each Participant will spend 5 hours in consultations, including with their member of the Operating Committee regarding each Quarterly Progress Report. 50 hours + 5 hours + 5 hours = 60 hours. Because one individual may serve as the representative for multiple affiliated Participants, the Commission expects that some Participants may incur greater costs and some lesser costs due to variances in economies of scale for Participants who share a common corporate parent. Although the Commission estimated this burden as 62.2 hours per Participant in the Proposing Release,

see

note 2

supra,

at 48476-77, this estimate was partially based on the fact that there were only 23 Participants; now that there are 24 Participants, the burden per Participant has been slightly reduced.

202

60 burden hours per Participant per Quarterly Progress Report * 4 Quarterly Progress Reports = 240 annual burden hours per Participant for the Quarterly Progress Reports.

203

240 annual burden hours per Participant * 24 Participants = 5,760 aggregate annual burden hours. This estimate has increased because there are now 24 Participants.

If any Quarterly Progress Report is approved only by a Supermajority Vote, and not by a unanimous vote, the proposed amendments require each

Participant whose Operating Committee member did not vote to approve that Quarterly Progress Report to separately file with the Commission an explanatory statement identifying itself and explaining why it did not vote to approve the Report.

204

These statements shall be made publicly available by each dissenting Participant on its website or collectively by all Participants on the CAT NMS Plan website. Because there are currently 24 Participants, each Quarterly Progress Report would need to be approved by at least 16 members of the Operating Committee to satisfy the Supermajority Vote provisions of the CAT NMS Plan.

205

At maximum, then, only eight Participants would file an explanatory statement in connection with a Quarterly Progress Report approved only by Supermajority Vote.

206

The Commission estimates that each of the eight Participants submitting an explanatory statement will incur, on average, an ongoing burden of 15 hours to draft such statement.

207

When this aggregate burden is averaged across all Participants, it amounts to an ongoing quarterly burden of approximately 5 hours per Participant,

208

an ongoing annual burden of approximately 20 hours per Participant,

209

and an aggregate annual burden of approximately 420 hours.

210

204

For the purposes of the Paperwork Reduction Act, the Commission is assuming that this task will be performed by a Chief Regulatory Officer or a Chief Compliance Officer.

See

note 185

supra.

205

See

note 189

supra.

206

See

note 190

supra.

207

See

note 191

supra.

208

8 Participants * 15 burden hours = 120 burden hours in aggregate. 120 burden hours/24 Participants = 5 burden hours. This estimate has increased because there are now 24 Participants.

209

5 burden hours × 4 Quarterly Progress Reports = 20 burden hours. This estimate has increased because there are now 24 Participants.

210

20 annual burden hours × 24 Participants = 480 burden hours. This estimate has increased because there are now 24 Participants.

Additionally, the Commission estimates that each Participant will incur an ongoing quarterly burden, on average, of approximately 10 hours to ensure that each Quarterly Progress Report, and any explanatory statement (if applicable), is filed with the Commission and made publicly available on a website.

211

The Commission therefore estimates an annual burden, on average, of approximately 40 hours for each Participant,

212

and an aggregate annual burden of 960 hours for all Participants,

213

to publicly post and submit to the Commission the Reports.

211

212

10 burden hours per Quarterly Progress Report × 4 quarters = 40 annual burden hours per Participant.

213

40 annual burden hours per Participant × 24 Participants = 960 aggregate annual burden. This estimate has increased because there are now 24 Participants.

In total, therefore, the Commission estimates that each Participant will incur, on average, an ongoing burden of approximately 75 hours per Quarterly Progress Report,

214

for an annual average estimated burden of 300 hours

215

and approximately 7,200 hours in aggregate.

216

214

60 hours + 5 hours + 10 hours = 75 burden hours.

215

75 hours × 4 Quarterly Progress Report = 300 hours.

216

300 hours × 24 Participants = 7,200 burden hours.

See

Part IV.C.

infra

for a dollar cost estimate of this burden. This estimate has increased because there are now 24 Participants.

Similarly, the Commission estimates that each Participant will expend, on an ongoing basis, approximately the same amount of external public relations, legal, and consulting costs associated with the Implementation Plan on each Quarterly Progress Report. Accordingly, the Commission estimates, on average, an ongoing quarterly cost of approximately $8,333.33 for each Participant, an ongoing annual cost of $33,333.33 for each Participant,

217

and an aggregate annual cost of approximately $800,000.

218

A portion of these costs may be recoverable from Industry Members, if consistent with the Exchange Act and the CAT NMS Plan.

219

217

$8,333.33 per Participant per Quarterly Progress Report * 4 Quarterly Progress Reports = $33,333.33 per Participant per year for the Quarterly Progress Reports. Although the Commission estimated this burden as $34,782.60 per Participant in the Proposing Release,

see supra

note 2, at 48477, this estimate was partially based on the fact that there were only 23 Participants; now that there are 24 Participants, the burden per Participant has been slightly reduced.

218

$33,333.33 per Participant * 24 Participants = $800,000 aggregate annual cost.

219

See, e.g.,

Article XI of the CAT NMS Plan.

E. Collection of Information Is Mandatory

Each collection of information discussed above is mandatory.

F. Confidentiality of Responses to Collection of Information

Neither the Implementation Plan nor the Quarterly Progress Reports will be confidential. Rather, each will be publicly posted by the Participants on a website.

G. Retention Period for Recordkeeping Requirements

National securities exchanges and national securities associations are required to retain records and information pursuant to Rule 17a-1 under the Exchange Act.

220

17 CFR 240.17a-1.

IV. Economic Analysis

Section 3(f) of the Exchange Act requires the Commission, whenever it engages in rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest, to consider, in addition to the protection of investors, whether the action would promote efficiency, competition, and capital formation.

221

In addition, Section 23(a)(2) of the Exchange Act requires the Commission, when making rules under the Exchange Act, to consider the impact such rules would have on competition.

222

Exchange Act Section 23(a)(2) prohibits the Commission from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. The discussion below addresses the likely economic effects of the rule, including the likely effect of the rule on efficiency, competition, and capital formation.

221

15 U.S.C. 78c(f).

222

15 U.S.C. 78w(a)(2).

As discussed above and in the Proposing Release, since the adoption of Rule 613 in 2012, CAT implementation has experienced recurrent delays.

223

These implementation delays have postponed the benefits of the CAT NMS Plan to investors

224

and may have resulted in additional costs to Industry Members.

225

The Commission believes that modifying the CAT NMS Plan to require operational transparency and provide financial accountability for meeting implementation milestones will impose more structure on the process and is appropriate to prevent any further delays to CAT implementation.

223

See supra

Part I; Proposing Release,

supra

note 2 at Part IV.A.2.

224

See

CAT NMS Plan Approval Order,

supra

note 1, at Section V.E.

225

See infra

Part IV.B.

The amendments increase operational transparency by requiring Participants to publish a complete CAT implementation plan, and to publish a progress report quarterly, both of which require approval by a Supermajority Vote of the Operating Committee.

226

The amendments also establish Financial Accountability Milestones and Reduced Fee Recovery Rates (“RFRRs”) that take effect and increase in magnitude in response to delays in meeting certain Financial

Accountability Milestones.

227

Thus, the amendments would shift some costs from Industry Members to Participants if the Participants fail to meet certain Financial Accountability Milestones.

226

See supra

Part II.A. and

infra

Part IV.B.

227

The Plan allows Participants to recover a percentage of certain CAT costs from Industry Members. In the event that RFRRs are triggered, the amendments would reduce the amount of fees that the Participants are allowed to recover from Industry Members according to the fee schedule described in Part II.B below.

The Commission is making minor changes to the economic analysis it made in the Proposing Release.

228

These changes address the modifications the Commission is making to the amendments, which include: providing the Participants with additional time to prepare, file, and publish the Quarterly Progress Reports; eliminating the requirement that manual and complex options transactions, as well as allocation information for options transactions reported by Industry Members, satisfy the initial error rates specified by Section 6.5(d)(i) of the CAT NMS Plan by December 31, 2021; and modifying the first Financial Accountability Milestone, Initial Industry Member Core Equity Reporting, and the fee recovery schedule associated with that Financial Accountability Milestone. These changes to the Commission's analysis also address comments related to its economic analysis in the Proposing Release.

228

See

Proposing Release,

supra

note 2, at Part IV.

A. Baseline

Based on comments received, the Commission is updating its Baseline analysis. The Commission's analysis of the Baseline from the Proposing Release and changes to this analysis are discussed below.

1. Transparency of CAT Implementation Status

In the Proposing Release, the Commission discussed how Industry Members obtain information about the implementation status of the CAT NMS Plan through several mechanisms.

229

A few representatives of Industry Members are privy to information through their participation on the CAT Advisory Committee, but this information is not widely available. In addition, the Commission discussed that the Operating Committee provides a website with information on the CAT NMS Plan, but that there is no requirement in the CAT NMS Plan to keep it current. Furthermore, the Operating Committee provides occasional updates to Industry Members on the state of implementation. Finally, the Commission stated that Industry Members gain information about CAT implementation through the Industry Technical Specifications Working Group.

229

See

Proposing Release,

supra

note 2, at Part IV.A.

In their letter, the Participants detailed additional sources of public information about CAT implementation. They noted that “FINRA CAT and the Participants also hold bi-weekly Industry meetings to communicate schedule and implementation updates and answer questions. Industry Member framing calls and deep dive sessions are regularly held so that Industry Members have input into technical specifications related to the CAT. As noted above, CAT LLC also conducts regular webinars and publishes CAT alerts on issues material to the industry such as connectivity methods, onboarding, and FDID reporting among others.”

230

The Commission is updating its analysis to acknowledge these additional sources of public information. However, as discussed above, the Commission continues to believe that additional disclosures required by the amendments will improve transparency around CAT implementation.

231

230

See

Participant Letter, at 6.

231

See supra

Part II.A.

2. Status of Implementation

As discussed above and in the Proposing Release, there have been repeated delays to implementation and it remains uncertain when CAT will be fully implemented.

232

The Commission stated in the Proposing Release and continues to believe that the multiple missed deadlines in the CAT NMS Plan have led to uncertainty for Industry Members surrounding the timeline for CAT implementation.

232

See supra

Part I.

;

Proposing Release, note 2

supra,

at Part IV.A.2., for a detailed discussion of Plan implementation status.

Although the Participants “acknowledge[d] the concerns underlying the Proposed Amendments to the CAT NMS Plan,” they noted recent progress with respect to the CAT and stated that “[t]hese and other factors suggest that there will be continued progress toward the expeditious development and implementation of the CAT.”

233

The Participants further stated that the successor Plan Processor “has made substantial and rapid progress in building the CAT,” and detailed this progress in their letter. The Commission acknowledges this progress,

234

but remains concerned about the possibility for additional delays to CAT implementation. The recent steps toward implementation have likely decreased industry uncertainty

235

about the timeline of CAT implementation, but the Commission believes that remaining uncertainty about the implementation timeline is likely to be reduced by adoption of the amendments.

233

See

Participant Letter, at 2.

234

Another commenter acknowledged the improvement to the pace of CAT implementation.

See

Fidelity Letter, at 5.

235

See infra

Part IV.B., for further discussion of industry uncertainty.

Recently, the Commission granted the Participants exemptive relief to allow for the implementation of phased reporting to the CAT for Industry Members, in place of the reporting schedule set forth for Industry Members in the CAT NMS Plan.

236

Further, in light of COVID-19 and a subsequent no-action request submitted by the Participants, the Commission recently granted exemptive relief such that the Compliance Rules formulated by Participants may require core equity reporting for Industry Members to begin on June 22, 2020 and core options reporting for Industry Members to begin on July 20, 2020.

237

236

See supra

Part I.

237

See supra

Part I.

B. Benefits

In the Proposing Release, the Commission stated its preliminarily belief that the proposed amendments offer two primary benefits.

238

First, because the amendments include financial accountability provisions that may cause the CAT to be implemented more expeditiously and efficiently,

239

investors could realize the benefits of the CAT sooner than they would otherwise be realized without the proposed amendments. Second, the Commission preliminarily believed that Industry Members would have more certainty surrounding the implementation timeline for CAT, and the timeline for retirement of OATS, reducing possible associated and unnecessary implementation and maintenance costs.

240

However, the Commission recognized that if the Participants continue to miss deadlines under the amendments, it would result in more uncertainty for Industry Members about whether and when the Participants are capable of achieving CAT implementation, particularly if the Participants are unable to make progress

notwithstanding the amendment's financial accountability measures.

241

238

See

Proposing Release,

supra

note 2, at Part IV.B.

239

See infra

Part IV.D.1., for comments on the Commission's analysis of efficiency.

240

See infra

Part IV.D.1., for discussion of impacts on efficiency of Industry Member CAT implementation.

241

See

Proposing Release,

supra

note 2, at Part IV.B.

Finally, the Commission stated that the requirement that the Implementation Plan and Quarterly Progress Reports be submitted to the CEO, President, or an equivalently situated senior officer of each Participant prior to the Operating Committee approval vote, is intended to promote senior management attention and promote accountability with respect to CAT implementation.

242

Id.

One comment from an Industry Member expressed support for the Commission's belief that uncertainty about the CAT implementation timeline and implementation delays are potentially costly to Industry Members.

243

Fidelity Letter, at 3.

See infra

Part IV.D.1. for further discussion.

Commenters discussed the potential benefits of increased operational transparency. One commenter stated that information sharing and good communication are key to the success of CAT.

244

Another commenter stated that “quarterly detailed reporting is appropriate and would provide useful information to all interested parties.”

245

However, the Participants stated that “the proposed Quarterly Progress Reports would impose requirements that are both unnecessary and, in many instances, at odds with maintaining the security of the CAT.”

246

However, as discussed above, while the Participants have provided information regarding CAT implementation to the Commission, much of the information provided by the Participants to the Commission has not been shared widely with the public.

247

In addition, the Commission takes concerns regarding the security of the CAT very seriously, but for the reasons discussed above it does not believe that the proposed amendments, or the examples raised by the Participants in their comment letter, implicate any such concerns.

248

The Commission continues to believe that the amendments will provide the benefits identified in the Proposing Release.

249

As discussed above, the Commission is making three limited modifications to the amendments, but believes these modifications are unlikely to significantly change the benefits of the amendments.

244

See

Fidelity Letter, at 3.

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