Joint Industry Plan; Order Approving an Amendment to the National Market System Plan Governing the Consolidated Audit Trail; Notice

Federal RegisterSep 12, 2023

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98290; File No. 4-698]

Joint Industry Plan; Order Approving an Amendment to the National Market System Plan Governing the Consolidated Audit Trail; Notice

September 6, 2023.

I. Introduction

On March 13, 2023, the Consolidated Audit Trail, LLC (“CAT LLC”), on behalf of the Participants

to the National Market System Plan Governing the Consolidated Audit Trail (“CAT NMS Plan” or “Plan”),

filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 11A of the Exchange Act

and Rule 608 of Regulation National Market System (“Regulation NMS”) thereunder,

a proposed amendment to the CAT NMS Plan (“Proposed Amendment”) to implement a revised funding model (“Executed Share Model”) for the consolidated audit trail (“CAT”)

and to establish a fee schedule for Participant CAT fees in accordance with the Executed Share Model (“Proposed Participant Fee Schedule”).

The Proposed Amendment was published for comment in the

Federal Register

on March 21, 2023.

The Participants are: BOX Exchange LLC, Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe C2 Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., Cboe Exchange, Inc., The Financial Industry Regulatory Authority, Inc. (“FINRA”), Investors Exchange LLC, Long-Term Stock Exchange, Inc., MEMX LLC, Miami International Securities Exchange, LLC, MIAX Emerald, LLC, MIAX PEARL, LLC, Nasdaq BX, Inc., Nasdaq GEMX, LLC, Nasdaq ISE, LLC, Nasdaq MRX, LLC, Nasdaq PHLX LLC, The Nasdaq Stock Market LLC, New York Stock Exchange LLC, NYSE American LLC, NYSE Arca, Inc., NYSE Chicago, Inc., and NYSE National, Inc. (collectively, the “Participants,” “self-regulatory organizations,” or “SROs”).

The CAT NMS Plan is a national market system plan approved by the Commission pursuant to Section 11A of the Securities Exchange Act of 1934 (“Exchange Act”) and the rules and regulations thereunder.

See

Securities Exchange Act Release No. 78318 (Nov. 15, 2016), 81 FR 84696 (Nov. 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, 81 FR at 84943-85034. 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 (“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. On August 29, 2019, the Participants replaced the CAT NMS Plan in its entirety with the limited liability company agreement of a new limited liability company, CAT LLC, which became the Company.

See

Securities Exchange Act Release No. 87149 (Sept. 27, 2019), 84 FR 52905 (Oct. 3, 2019). The latest version of the CAT NMS Plan is available at

https://catnmsplan.com/about-cat/cat-nms-plan.

15 U.S.C. 78k-1.

17 CFR 242.608.

The Proposed Amendment modifies the existing funding model in Article XI. of the CAT NMS Plan.

See

Letter from Brandon Becker, Chair, CAT NMS Plan Operating Committee, to Vanessa Countryman, Secretary, Commission (Mar. 13, 2023) (“Transmittal Letter”).

See

Securities Exchange Act Release No. 97151 (Mar. 15, 2023), 88 FR 17086 (Mar. 21, 2023) (“Notice”). Comments received in response to the Notice can be found on the Commission's website at

https://www.sec.gov/comments/4-698/4-698-a.htm.

On June 16, 2023, the Commission instituted proceedings pursuant to Rule 608(b)(2)(i) of Regulation NMS

to determine whether to disapprove the Proposed Amendment or to approve the Proposed Amendment with any changes or subject to any conditions the Commission deems necessary or appropriate after considering public comment (“OIP”).

17 CFR 242.608(b)(2)(i).

See

Securities Exchange Act Release No. 97750 (June 16, 2023), 88 FR 41142 (June 23, 2023). Comments received in response to the OIP can be found on the Commission's website at

https://www.sec.gov/comments/4-698/4-698-a.htm.

This order approves the Proposed Amendment.

II. Background

On July 11, 2012, the Commission adopted Rule 613 of Regulation NMS, which required the SROs to submit a national market system (“NMS”) plan to create, implement and maintain a consolidated audit trail that would capture customer and order event information for orders in NMS securities.

On November 15, 2016, the Commission approved the CAT NMS Plan.

Under the CAT NMS Plan, the Operating Committee of the Company, of which each Participant is a member, has the discretion (subject to the funding principles set forth in the Plan) to establish funding for the Company to operate the CAT, including establishing fees to be paid by the Participants and Industry Members.

17 CFR 242.613.

See

CAT NMS Plan,

supra

note 2.

The CAT NMS Plan defines “Industry Member” as “a member of a national securities exchange or a member of a national securities association.”

See

CAT NMS Plan,

supra

note 2, at Section 1.1.

See also id.

at Section 11.1(b).

Under the CAT NMS Plan, CAT fees are to be implemented in accordance with various funding principles, including an “allocation of the Company's related costs among Participants and Industry Members that is consistent with the Exchange Act taking into account . . . distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon the Company resources and operations” and the “avoid[ance of] any disincentives such as placing an inappropriate burden on competition and reduction in market quality.”

The Plan specifies that, in establishing the funding of the Company, the Operating Committee shall establish “a tiered fee structure in which the fees charged to: (1) CAT Reporters

that are Execution Venues,

including ATSs,

are based upon the level of market share; (2) Industry Members' non-ATS activities are based upon message traffic; and (3) the CAT Reporters with the most CAT-related activity (measured by market share and/or message traffic, as applicable) are generally comparable (where, for these comparability purposes, the tiered fee structure takes into consideration affiliations between or among CAT Reporters, whether Execution Venues and/or Industry Members).”

Id.

at Section 11.2(b) and (e).

The CAT NMS Plan defines “CAT Reporter” as “each national securities exchange, national securities association and Industry Member that is required to record and report information to the Central Repository pursuant to SEC Rule 613(c).”

Id.

at Section 1.1.

The CAT NMS Plan defines “Execution Venue” as “a Participant or an alternative trading system (`ATS') (as defined in Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of Regulation ATS (excluding any such ATS that does not execute orders).”

Id.

CAT NMS Plan,

supra

note 2, at Section 11.2(c).

See id.

at Article XI for additional detail.

On May 15, 2020, the Commission adopted amendments to the CAT NMS Plan designed to increase the Participants' financial accountability for the timely completion of the CAT (“Financial Accountability Amendments”).

The Financial Accountability Amendments added Section 11.6 to the CAT NMS Plan to govern the recovery from Industry Members 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 June 22, 2020 until such time that the Participants have completed Full Implementation of CAT NMS Plan Requirements

(“Post-Amendment

Expenses”). Section 11.6 establishes target deadlines for four Financial Accountability Milestones (Periods 1, 2, 3 and 4)

and reduces the amount of fee recovery available to the Participants if these deadlines are missed.

See

Securities Exchange Act Release No. 88890, 85 FR 31322 (May 22, 2020).

“Full Implementation of CAT NMS Plan Requirements” means “the point at which the Participants have satisfied all of their obligations to build and implement the CAT, such that all CAT system functionality required by Rule 613 and the CAT NMS Plan has been developed, successfully tested, and fully implemented at the initial Error Rates specified by Section 6.5(d)(i) or less, including functionality that efficiently permits the

Participants and the Commission to access all CAT Data required to be stored in the Central Repository pursuant to Section 6.5(a), including Customer Account Information, Customer-ID, Customer Identifying Information, and Allocation Reports, and to analyze the full lifecycle of an order across the national market system, from order origination through order execution or order cancellation, including any related allocation information provided in an Allocation Report. This Financial Accountability Milestone shall be considered complete as of the date identified in a Quarterly Progress Report meeting the requirements of Section 6.6(c).” CAT NMS Plan,

supra

note 2, at Section 1.1.

See

CAT NMS Plan,

supra

note 2, at Section 11.6(a)(i).

Id.

at Section 11.6(a)(ii) and (iii).

III. Discussion and Commission Findings

After careful review, the Commission, pursuant to Section 11A of the Exchange Act,

and Rule 608(b)(2)

thereunder, is approving the Proposed Amendment. Section 11A of the Exchange Act authorizes the Commission, by rule or order, to authorize or require the self-regulatory organizations to act jointly with respect to matters as to which they share authority under the Exchange Act in planning, developing, operating, or regulating a facility of the national market system.

Rule 608 of Regulation NMS authorizes two or more SROs, acting jointly, to file with the Commission proposed amendments to an effective NMS plan,

and further provides that the Commission shall approve an amendment to an effective NMS plan if it finds that the amendment is necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanisms of, a national market system, or otherwise in furtherance of the purposes of the Exchange Act.

15 U.S.C. 78k-1.

17 CFR 242.608(b)(2).

See

15 U.S.C. 78k-1(a)(3)(B).

See

17 CFR 242.608.

See

17 CFR 242.608(b)(2).

The Participants have sufficiently demonstrated that the proposed allocation of fees is reasonable. There are a number of potential approaches to allocating the costs of operating the CAT, all of which have relative strengths and weaknesses. In adopting Rule 613 and approving the CAT NMS Plan, the Commission determined that the CAT was appropriate in order to enable the SROs and the Commission to fulfill their responsibilities to oversee the equities and options markets. The CAT NMS Plan requires both Execution Venues (which include the Participants) and Industry Members (which include CAT Executing Brokers) to fund the CAT. The proposed one-third allocation of CAT fees to the applicable Participant in a transaction, the CAT Executing Broker for the buyer in a transaction and the CAT Executing Broker for the seller in a transaction, assesses an equal fee to the three primary roles in a transaction: the buyer, seller and market regulator. In our view, allocating the costs for the CAT among the three parties who play significant roles in transactions reportable to the CAT in this manner represents a reasonable method of allocating costs among the parties who participate in and benefit from those markets.

Commenters expressed concern that the Participant exchanges and FINRA would pass their share of costs on to Industry Members. But the Exchange Act expressly contemplates the ability of the Participants to recoup the costs of fulfilling their statutory obligations under the Exchange Act. And, as we explained in adopting Rule 613 and approving the CAT NMS Plan, the CAT is important to the performance of these regulatory activities in modern, interconnected markets, to the ultimate benefit of investors and market participants. Moreover, these costs will not be unchecked. The Participants must file their proposed rule changes relating to fees with the Commission. Those proposed rule changes are published by the Commission and there is an opportunity for public comment. CAT fees, like any fees the Participants collect from their members to fund their SRO responsibilities in market and member regulation, must be consistent with applicable statutory standards under the Exchange Act, including being reasonable, equitable and not unfairly discriminatory.

We also conclude that the use of executed equivalent share volume provides a reasonable basis for the calculation of these fees. Executed equivalent share volume is readily determinable and—because it is based on trading activity, which impacts CAT costs—provides a reasonable proxy for the costs to CAT, allowing CAT Reporters to be assessed fees corresponding to the cost burden they impose on the CAT. The use of CAT Executing Brokers is also appropriate because the proposed Executed Share Model is based on

executed

equivalent shares (emphasis added). Therefore, charging the CAT Executing Brokers would reflect their executing role in each transaction, which is already recorded in transaction reports from the exchanges and FINRA's equity trade reporting facilities for calculating the CAT fees. Because such entities are already identified and their CAT fees are known, this method could streamline the billing process and allow such entities to calculate their own fees. We also conclude that the division of fees into Prospective CAT Fees and the Historical CAT Assessment provides a reasonable method of allowing Participants to recoup their significant expenditures on the development of CAT to date while ensuring funding for future operations of the system. And the provision of fee calculation information, approach to billing and collection of fees, conforming changes and the Proposed Participant Fee Schedule are all reasonable. The Commission is therefore approving the Proposed Amendment.

Id.

A. Funding Model

1. Overview

CAT LLC proposes to replace the funding model set forth in Article XI of the CAT NMS Plan (“Original Funding Model”) with the Executed Share Model. The Original Funding Model involved a bifurcated approach, where costs associated with building and operating the CAT would be borne by (1) Industry Members (other than alternative trading systems (“ATSs”) that execute transactions in Eligible Securities (“Execution Venue ATSs”)) through fixed tiered fees based on message traffic for Eligible Securities, and (2) Participants and Industry Members that are Execution Venue ATSs for Eligible Securities through fixed tiered fees based on market share.

In contrast, the Executed Share Model would charge fees based on the executed equivalent share volume of transactions in Eligible Securities.

In addition, instead of charging fees to Industry Members, under the Executed Share Model, fees would be charged to each Industry Member that is a CAT Executing Broker

for the buyer in a transaction in Eligible Securities (“CAT Executing Broker for the Buyer” or “CEBB”) and each Industry Member that is the CAT Executing Broker for the seller in a transaction in Eligible

Securities (“CAT Executing Broker for the Seller” or “CEBS”).

See

CAT NMS Plan,

supra

note 2, at Section 11.3(a) and (b).

See

Notice,

supra

note 7, 88 FR at 17086.

See infra

Section III.A.4. for the definition of CAT Executing Broker.

See

Notice,

supra

note 7, 88 FR at 17087.

Under the Executed Share Model, CAT LLC proposes to establish two categories of CAT fees. The first category of CAT fees would be fees (“CAT Fees”) payable by Participants and Industry Members that are CAT Executing Brokers for the Buyer and for the Seller with regard to CAT costs not previously paid by the Participants (“Prospective CAT Costs”).

The second category of CAT fees would be fees (“Historical CAT Assessments”) to be payable by Industry Members that are CAT Executing Brokers for the Buyer and for the Seller with regard to CAT costs previously paid by the Participants (“Past CAT Costs”).

Id.

at 17086;

see also

proposed Section 11.3(a). The defined term “CAT Fees” applies specifically to CAT fees related to Prospective CAT Costs.

Id.

See

Notice,

supra

note 7, 88 FR at 17086;

see also

proposed Section 11.3(b).

For each category of fees, each CEBB and each CEBS will be required to pay a CAT fee for each such transaction in Eligible Securities in the prior month based on CAT Data.

The CEBB's CAT fee or CEBS's CAT fee (as applicable) for each transaction in Eligible Securities will be calculated by multiplying the number of executed equivalent shares in the transaction by one-third and by the reasonably determined Fee Rate,

as described below.

Participants would incur CAT Fees only for Prospective CAT Costs and the Participant CAT Fee will be calculated by multiplying the number of executed equivalent shares in the transaction by one-third and by the reasonably determined Fee Rate.

The Participants' one-third share of Historical CAT Costs

and such other additional Past CAT Costs as reasonably determined by the Operating Committee will be paid by the cancellation of loans made to the Company on a pro rata basis based on the outstanding loan amounts due under the loans.

See

Notice,

supra

note 7, 88 FR at 17093;

see also

proposed Section 11.3(a)(iii), proposed Section 11.3(b)(iii).

See infra

Section III.A.5.a. (Prospective CAT Fees—Fee Rate Formula) for the definition and description of the calculation of the Fee Rate.

see also

proposed Section 11.3(a)(iii), proposed Section 11.3(b)(iii).

See

Notice,

supra

note 7, 88 FR at 17094;

see also

proposed Section 11.3(a)(ii).

The actual amount of Past CAT Costs to be recovered through the Historical CAT Assessments would be reduced by an amount of “Excluded Costs.” The resulting amount would be defined as “Historical CAT Costs” in proposed Section 11.3(b)(i)(C) of the CAT NMS Plan.

See infra

Section III.A.6.a. for a discussion of Historical CAT Costs.

See

proposed Section 11.3(b)(ii).

FINRA CAT would be responsible for calculating the CAT fees and submitting invoices to the CAT Executing Brokers based on this CAT Data.

All data used to calculate the fees under the Executed Share Model would be CAT Data, and, therefore, it would be directly available through the CAT to FINRA CAT for calculating CAT fees.

See

Notice,

supra

note 7, 88 FR at 17088.

Id.

Once the Proposed Amendment has been approved by the Commission, the Participants would separately file proposed rule filings pursuant to Section 19(b) of the Exchange Act

to establish the amounts of the proposed CAT Fees and Historical CAT Assessments to be charged to Industry Members, subject to the satisfaction of applicable Financial Accountability Milestones as set forth in Section 11.6 of the CAT NMS Plan and the implementation of the billing and collection system for the CAT fees.

In each proposed rule filing, if the Participants seek to recover amounts under the Financial Accountability Milestones, they would need to discuss their completion of the applicable milestone.

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

See

Notice,

supra

note 7, 88 FR at 17086, 17122.

Proposed Section 11.3(b)(iii)(B)(III) would prohibit any Participant from filing proposed rule filings pursuant to Section 19(b) of the Exchange Act regarding any Historical CAT Assessment until any applicable Financial Accountability Milestone in Section 11.6 of the CAT NMS Plan has been satisfied.

2. Allocation of Fee Among Participants and Industry Members

Under the Executed Share Model, CAT fees would be allocated one-third to the applicable Participant, one-third to the CEBS and one-third to the CEBB of a transaction. Certain commenters opposed the proposed allocation.

See

Letters to Vanessa Countryman, Secretary, Commission, from Stephen John Berger, Managing Director, Global Head of Government and Regulatory Policy, Citadel Securities, dated July 14, 2023 (“Citadel July Letter”); August 22, 2023 (“Citadel August Letter”); Marcia E. Asquith, Corporate Secretary, EVP, Board and External Relations, FINRA, dated May 25, 2023 (“FINRA May 2023 Letter”); April 11, 2023 (“FINRA April 2023 Letter”); and June 22, 2022 (“FINRA June 2022 Letter”) (the FINRA June 2022 Letter was submitted in response to the prior funding proposal and was attached and incorporated by reference in the FINRA April 2023 Letter); Ellen Greene, Managing Director, Equities & Options Market Structure, and Joseph Corcoran, Managing Director, Associate General Counsel, SIFMA, dated July 13, 2023 (“SIFMA July 2023 Letter”); June 5, 2023 (“SIFMA June 2023 Letter”); May 2, 2023 (“SIFMA May 2023 Letter”); January 12, 2023 (“SIFMA January 2023 Letter”); December 14, 2022 (“SIFMA December 2022 Letter”); October 7, 2022 (“SIFMA October 2022 Letter”); and June 22, 2022 (“SIFMA June 2022 Letter”) (the SIFMA June 2022 Letter, SIFMA October 2022 Letter, SIFMA December 2022 Letter and SIFMA January 2023 Letter were submitted in response to the prior funding proposal and incorporated by reference in the SIFMA May 2023 Letter); Joanna Mallers, Secretary, FIA Principal Traders Group, dated July 14, 2023 (“FIA Letter”); Douglas A. Cifu, Chief Executive Officer, Virtu Financial, dated July 13, 2023 (“Virtu Letter”).

See infra

note 58.

FINRA stated that, while the Proposed Amendment justified the fairness of the Executed Share Model because it would operate like other fees, like FINRA's Trading Activity Fee (“TAF”), Section 31 fees, and the options regulatory fee,

the Proposed Amendment did not support why those fee frameworks should be used as a model in this context.

For example, FINRA stated that the TAF is designed to recover the costs of FINRA's regulatory activities, while the CAT fees are intended to align with the costs to build, operate and administer the CAT.

Further, FINRA stated that the Proposed Amendment has insufficiently explained the connection between the TAF and CAT fees, merely stating that they are similar fees because they are transaction-based fees used to provide funding for regulatory costs.

FINRA stated that “CAT LLC's observations superficially focus on the fact that these fees also use transaction-based metrics (and may be assessed on members) and neglects other factors relevant to the analysis including, for example, that these fees are used in combination with other funding mechanisms and metrics to support an overall funding framework.”

See

Notice,

supra

note 7, 88 FR at 17122.

See

FINRA June 2022 Letter at 4.

See

FINRA April 2023 Letter at 8.

Id.

The commenter also stated that “it is unclear how assessing on FINRA the largest allocation of the SRO portion of CAT expenses `provides funding for regulatory costs' in any reasonable and equitable sense comparable to the TAF . . .”

Id.

FINRA May 2023 Letter at 3.

Another commenter stated that the proposed CAT funding model cannot be compared to Section 31 fees, the TAF, or the options regulatory fee because the commenter believes that CAT fees appear to be unconstrained and out of the industry's control.

The commenter explained that, unlike the proposed CAT fees, Section 31 fees are based on an annual budget set by Congress and the options regulatory fee is only applied to customer transactions and thus can be easily passed-on to other market participants (unlike CAT fees for market making activity).

Additionally,

the commenter stated that there is no precedent for fees to be allocated to Industry Members in perpetuity, stating that this would contravene the Exchange Act.

Citadel July Letter at 27.

Id.

The commenter also stated that FINRA has sought to avoid increases in the TAF.

Id.

This commenter stated that it is inequitable to require Industry Members to fund CAT costs in perpetuity when they lack representation on the Operating Committee and therefore have little transparency into the drivers of the costs, and there is no plan to contain the costs.

See id.

at 2.

One commenter disagreed with the Participants' statement that the Executed Share Model's similarity to other transaction-based fees approved by the Commission is adequate justification for consistency with the Exchange Act.

The commenter stated that similarity to other transaction-based fees is not an adequate basis to show that the Executed Share Model is consistent with relevant standards; each proposed fee must be individually supported.

For example, the commenter stated that the Participants compared the Executed Share Model to Section 31 fees as justification for the Executed Share Model, but failed to address the differences between the Executed Share Model and Section 31 fees, such as the Executed Share Model's treatment of high-volume trades in low-priced stocks while Section 31 fees are based on the notional value of a trade.

See

SIFMA June 2022 Letter at 4.

Id.

See

SIFMA October 2022 Letter at 7.

See also

Citadel August Letter at 5.

Commenters also questioned the Participants' justifications for the one-third allocation methodology. FINRA stated that the Proposed Amendment did not justify why the proposed allocation by thirds to the Participant, buy-side and sell-side is equitable in the context of the CAT NMS Plan.

FINRA also stated that the Proposed Amendment did not consider alternatives suggested by commenters on a prior proposed funding model,

such as a model similar to Section 31 fees and a CAT funding model based on the “Cost Recovery Principle” and the “Benefits Received Principle.”

FINRA urged the Commission to require those alternatives to be analyzed.

See

FINRA June 2022 Letter at 3.

See

Securities Exchange Act Release Nos. 94984 (May 25, 2022), 87 FR 33226 (June 1, 2022); 96394 (Nov. 28, 2022), 87 FR 74183 (Dec. 2, 2022); and Letter from Michael Simon, Chair Emeritus, CAT NMS Plan Operating Committee, to Vanessa Countryman, Secretary, Commission (Feb. 15, 2023).

See

FINRA April 2023 Letter at 5 (

citing

Letter to Vanessa Countryman, Secretary, Commission, from Lawrence Harris, Fred V. Keenan Chair in Finance, Professor of Finance and Business and Economics, U.S.C. Marshall School of Business, dated June 21, 2022).

Id.

Another commenter suggested a review of alternative approaches to funding, such as the extent to which CAT could be funded by Section 31 fees.

See

Letter to Vanessa Countryman, Secretary, Commission, from Kirsten Wegner, Chief Executive Officer, Modern Markets Initiative, dated July 13, 2023 (“MMI July Letter”), at 4.

One commenter stated that the Participants have not met their burden to demonstrate the proposed allocation is consistent with the Exchange Act fee standards and not arbitrary.

The commenter stated that because FINRA is funded by Industry Members, Industry Members would pay over 80% of CAT costs since they must pay not only their own share but FINRA's as well; therefore, the Commission should disapprove the proposal.

The commenter stated that the Proposed Amendment does not explain how allocating 80% of total CAT costs to the industry in perpetuity without a mechanism to limit the budget

is consistent with the Exchange Act and guidance on SRO filings related to fees because the industry has no role in the governance, oversight or design of CAT and does not benefit from the CAT.

Another commenter stated that Industry Members will bear significantly more costs than the Proposal suggests if the Participants decide to charge their members to fund their share of CAT fees.

The commenter stated that “[i]f the Participants were to do this, it would render the entire Funding Model meaningless, with Industry Members bearing 100% of CAT costs.”

Another commenter also stated that it was inappropriate to place responsibility for funding the CAT “on industry members that do not stand to benefit from it.”

See

SIFMA May 2023 Letter at 6; SIFMA June 2023 Letter at 1-2. The commenter also stated that the Proposed Amendment provides unsupported conclusory statements that it meets the requirements of the Exchange Act.

See

SIFMA June 2023 Letter at 2.

See also id.

at n 11; FIA Letter at 2.

See

SIFMA May 2023 Letter at 2.

See also

SIFMA June 2022 Letter at 1-2 (stating that the proposed cost allocation methodology is inconsistent with Exchange Act fee standards because most costs would be imposed on Industry Members).

The commenter stated that the CAT annual budget increased over 30% in the last year.

See

SIFMA June 2023 Letter at 4.

See also

Virtu Letter at 4 (stating that the budget increase indicated that the Industry Members could be subject to ever-increasing fees with no say on the budget).

See also

FIA Letter at 3 (stating that “[w]ith little to no skin-in-the-game, the Participants will not be incentivized to control costs.”).

See infra

Section III.A.5.b (discussing budgeted CAT costs and comments suggesting a review mechanism to control costs).

See

SIFMA June 2023 Letter at 3, 4. The commenter stated that approving such a proposal would “directly threaten[ ] efficiency, competition, and capital formation in U.S. securities markets.”

Id.

at 4. The commenter also quoted a Commission release stating that the Participants are potentially conflicted in allocating CAT fees to themselves and the Industry Members.

See

Securities Exchange Act Release No. 89618 (Aug. 19, 2020), 85 FR 65470, 65482 (Oct. 15, 2020). Another commenter stated that the allocation of 80% to the industry was unfair.

See

Virtu Letter at 4.

See

FIA Letter at 2.

Id.

See

Virtu Letter at 2.

One commenter stated that the Proposed Amendment does not demonstrate that it is equitable, as required by Section 6(b)(4),

or rational, as required by the Administrative Procedure Act,

to allocate two-thirds of CAT costs to Industry Members, stating that “there is no suggestion that Industry Members somehow receive 67% of the benefits from CAT.”

Furthermore, the commenter stated that the Proposed Amendment would result in an inequitable allocation to a small number of Industry Members.

15 U.S.C. 78f(b)(4).

5 U.S.C. 551

et seq.

See

Citadel July Letter at 17.

Id.

The commenter also stated that the Proposed Amendment would result in the allocation of all of the costs to build and operate the CAT to Industry Members and would therefore be inconsistent with Section 6(b)(4) to equitably allocate reasonable fees.

The commenter stated that, in addition to the proposed allocation to Industry Members, FINRA's 11% cost allocation would be passed-on to Industry Members and that exchanges would also pass-on their 22% cost allocation.

The commenter stated that, with FINRA's allocation, 78% of the costs to build and operate the CAT would be allocated to Industry Members under the Proposed Amendment.

The commenter stated that 78% is the same amount allocated to Industry Members in a prior CAT funding model proposal from 2021, and stated that in the Proposed Amendment, the Operating Committee concedes that the 2021 allocation “may have an adverse effect on competition, liquidity or other aspects of market structure,”

however the Proposed Amendment does not explain why using a different metric—executed share volume rather than message traffic—to create the same allocation would not result in similar consequences.

Id.

at 1, 16, 22.

Id.

at 1, 21, 22.

Id.

at 21.

Id.

See

Citadel July Letter at 21.

Further, the commenter stated that Industry Members may also be required

to pay the exchange cost allocation,

citing a statement in the Proposed Amendment that “each Participant may determine to charge their members fees to fund their share of the CAT fees.”

The commenter stated that if exchanges choose to do this, then Industry Members would be responsible for 100% of CAT costs, which would “distort incentives and hinder the prioritization of critical cost-control measures, as the firms governing CAT are not bearing any of the associated costs.”

The commenter requested that the Commission prohibit exchanges from passing-on their CAT costs.

The commenter also stated that even after restructuring the funding model to base allocation on share volume instead of message traffic, as in prior funding model proposals, the allocation to exchanges stayed the same, arguing that the exchanges are unwilling to allocate themselves more than 22% of total costs.

The commenter stated that the proposed allocation methodology is inconsistent with the Exchange Act because of the excessive percentage of total costs proposed to be allocated to Industry Members and the unfair method of allocating costs among Industry Members,

stating, “[t]he allocation methodology will have a direct and negative impact on market efficiency, competition, and capital formation, and the Commission must comprehensively assess those impacts before approving this filing.”

Id.

at 22.

See also

Citadel August Letter at 2.

See

Citadel July Letter at 22.

See also

Notice,

supra

note 7, 88 FR at 17107. The commenter also stated that while the Proposed Amendment describes the funding model as “neutral as to location and manner of execution,” counterparties to off-exchange transactions would receive higher fees than on-exchange transactions if exchanges choose not to pass-on their cost allocation to Industry Members.

See

Citadel July Letter at 21.

See also

Notice,

supra

note 7, 88 FR at 17087.

Citadel July Letter at 22.

See also id.

at 16.

See also

Citadel August Letter at 2 (stating that an allocation of 100% of CAT costs to Industry Members cannot be lawful).

Citadel July Letter at 22.

Id.

at 10.

Id.

at 15.

Id.

The commenter stated that the Proposed Amendment does not provide the percentage of total costs to build and operate the CAT that will be borne by Industry Members in practice.

The commenter stated that it is necessary to determine the ultimate allocation of CAT costs to evaluate whether the proposed allocation is consistent with the Exchange Act, arguing that the statements made in support of the allocation were premised on the Participants being responsible for one-third of total CAT costs, and that if this is untrue, “the filing must be completely reconsidered, taking into account (a) the impact on market efficiency, competition and capital formation of allocating this magnitude of additional costs to Industry Members, (b) whether such a lopsided allocation is fair and equitable, and (c) the implications for CAT governance and budget control if the firms governing CAT do not have any skin-in-the-game.”

See

Citadel August Letter at 2.

Id.

One commenter stated that the Participants do not account for “the time and expense Industry Members have devoted to developing and maintaining internal systems to be able to report the [sic] CAT, as well as the time and expense Industry Members have devoted to assisting the Operating Committee with its job of developing reporting specifications that allow the CAT to achieve its regulatory purpose” in the proposed allocation

and that “this omission is a flaw with the Participants' decision to allocate two-thirds of the CAT costs to Industry Members and its inclusion would demonstrate that the Participants' Executed Share Model does not provide for the equitable allocation of reasonable fees.”

SIFMA June 2022 Letter at 4.

See also

SIFMA January 2023 Letter at 4.

SIFMA June 2022 Letter at 4-5.

See also

SIFMA January 2023 Letter at 5; Virtu Letter at 3.

Similarly, one commenter stated that the allocation does not take into account fees currently paid by the industry and implementation costs incurred by Industry Members to comply with CAT reporting requirements.

The commenter stated that Industry Members already provide funding for regulatory matters to exchanges through regulatory fees, membership fees, market data fees, and registration fees, and that these fees must be factored into any equitable or rational allocation of CAT costs.

The commenter stated that although the Proposed Amendment argues that there is no precedent for regulatory fees to be determined based on the cost of compliance of a regulated entity, it is necessary to take into account all CAT-related costs including those already allocated to Industry Members to assess whether the Proposed Amendment is equitable.

See

Citadel July Letter at 17.

See also

Virtu Letter at 2 (noting that Industry Members “already provide the Plan Participants with a very substantial level of funding through membership fees, registration and licensing fees, dedicated regulatory fees, and options regulatory fees”).

See

Citadel July Letter at 17 (further stating, “Industry Members are already bearing nearly all of the total CAT-related costs, at a rate much higher than the Commission estimated in its approval of the 2016 CAT NMS Plan.”

Id.

at 18).

Id.

Commenters also objected to statements made in the Proposed Amendment that the complexity of Industry Member business models contributes substantially to the costs of the CAT.

One commenter stated that the proposed allocation of two-thirds of CAT costs to Industry Members is unfair, unreasonable and arbitrary because the Participants are equally responsible for the complexity of trading activity in the markets.

The commenter disagreed with the Participants' argument that the allocation satisfies Exchange Act fee standards because Industry Members and the complexity of their business models drive the costs of the CAT, by stating that the examples of complexities provided were developed to address order types, activities and fee structures (such as the maker-taker fee structure) established by the Participant exchanges.

The commenter stated that the Participants are just as responsible for such cost-driving complex trading activity in the equity and options markets as Industry Members due to the “large number of equity and options exchanges established by the exchange families with fundamentally different execution models and order types.”

The commenter stated that the Participant exchanges have not analyzed how their own business decisions have resulted in the complexity of Industry Member order routing practices and CAT costs.

Another commenter stated that the complexity arguments in the Proposed Amendment contradict statements from the Operating Committee that stringent performance and other requirements for processing CAT data are significant drivers of CAT costs,

and that the complexity arguments suggest that costs should be allocated evenly among Industry Members, not just a small group of Industry Members based on volume.

See

Notice,

supra

note 7, 88 FR at 17104.

See

SIFMA May 2023 Letter at 3.

See also

SIFMA January 2023 Letter at 2, 3-4.

See

SIFMA May 2023 Letter at 6-7.

See also

SIFMA January 2023 Letter at 3; Notice,

supra

note 7, 88 FR at 17104.

SIFMA January 2023 Letter at 3.

See

SIFMA May 2023 Letter at 7.

See

Citadel July Letter at 17-18.

Id.

at 18.

Commenters also disagreed with other justifications made in the Proposed Amendment for the proposed allocation; specifically, that there are more Industry Members than Participants and that Industry Members receive more in

revenue than the Participants.

One commenter stated that these assertions are not relevant in demonstrating that the proposed allocation is fair and reasonable.

The commenter stated that the Participants are justifying the allocation based on the ability to pay rather than cost generation, which the commenter believes is inconsistent “with the Participant Exchanges' proposed approach . . . of allocating CAT costs based on approximate responsibility for generating them . . .” and “with the historical CAT decision to allocate costs to the parties responsible for generating them.”

100

The commenter suggested an alternative allocation that would equally split CAT costs between Participant exchanges and Industry Members, while FINRA would be subject only to a nominal regulatory user fee to access CAT Data.

101

Another commenter stated that, while most Industry Members will pay little to no CAT costs, 20 Industry Members will be responsible for 75% of the costs allocated to Industry Members.

102

The commenter said this would contradict the Proposed Amendment's arguments that there are more Industry Members than Participants and that Industry Members have greater financial resources than Participants because the Operating Committee would outnumber the Industry Members that would be paying the most in costs.

103

See

Notice,

supra

note 7, 88 FR at 17104.

See

SIFMA May 2023 Letter at 7.

See also

SIFMA January 2023 Letter at 4.

100

See

SIFMA May 2023 Letter at 7. The commenter cited to the funding principles in Section 11.2 of the CAT NMS Plan.

101

See

SIFMA January 2023 Letter at 4.

See also

SIFMA May 2023 Letter at 8; SIFMA June 2022 Letter at 5; SIFMA October 2022 Letter at 4. This commenter also suggested another alternative allocation in which costs would be allocated to those Participants and Industry Members most directly responsible for the costs. Under this alternative, Industry Members would be responsible for the cost associated with initial ingestion of the data into the CAT system. The commenter explained that Participants would be responsible for the costs associated with the stages after the data is initially ingested into the CAT system because the regulators directly control and benefit from these stages of the CAT system after ingestion.

See

SIFMA June 2022 Letter at 5-6.

102

See

Citadel July Letter at 17. The commenter also stated that the Proposed Amendment does not explain why it would be equitable to allocate 50% of total CAT costs to 20 Industry Members and 22% of total CAT costs to 24 exchanges.

Id.

103

Id.

The commenter also stated that the Proposed Amendment lacks support for the proposed allocation.

104

The commenter stated that the Operating Committee has not met its burden to demonstrate that the proposed allocation is consistent with the Exchange Act.

105

The commenter also stated that the Proposed Amendment does not consider the impact of the proposed allocation to Industry Members on market efficiency, competition and capital formation, particularly with respect to the costs the industry will incur to build systems to pass-through their CAT fees, the expected impact on volumes, the expected impact on retail investors, and the expected impact on market makers.

106

104

Id.

at 13.

See also

Citadel August Letter at 2.

105

See

Citadel July Letter at 13.

106

Id.

at 2, 16, 19, 20. The commenter further stated that the Proposed Amendment is inconsistent with the Exchange Act because it cannot equitably allocate fees and will harm market efficiency, competition and capital formation.

Id.

at 16.

The commenter suggested alternatives to the proposed allocation methodology.

107

The commenter stated that Industry Members should not be allocated more than 50% of ongoing CAT costs (including FINRA's allocation) due to their lack of industry voting representation and because they already bear nearly all of the total CAT-related costs.

108

The commenter also suggested that exchanges should be prohibited from passing-on their CAT cost allocation to market participants,

109

and that the Participants consider allocating costs to the Commission “to align incentives.”

110

The commenter recommended a consistent methodology for allocating costs to both Industry Members and exchanges.

111

The commenter also recommended an allocation methodology that would ensure that “a small group of firms are not disproportionately bearing costs given that CAT is designed to facilitate market-wide surveillance across all market participants,”

112

and would not inequitably allocate costs to specific market segments (such as “retail trading activity in NMS stocks”).

113

The commenter suggested that the approach could have “(I) minimum and maximum fee levels, (II) appropriate calibrations for liquidity provision, (III) a volume component based on notional (instead of executed shares), and (IV) consideration of additional metrics that could achieve a more equitable outcome (

e.g.,

broker-dealer capital).”

114

107

Id.

at 3, 30, 31. The commenter stated that the Commission must consider reasonable alternatives and that the proposal should be rejected and replaced by a proposal incorporating the commenter's recommendations.

Id.

at 30, 2.

108

Id.

at 3, 30, 31.

109

See

Citadel July Letter at 3, 30, 31.

110

Id.

at 3, 31. In response, CAT LLC stated that the Commission is not a party to the CAT NMS Plan, or subject to Rule 608 of Regulation NMS or Section 19(b) of the Exchange Act.

See

Letter to Vanessa Countryman, Secretary, Commission, from Brandon Becker, CAT NMS Plan Operating Committee Chair, dated July 28, 2023 (“CAT LLC July 2023 Response Letter”), at 31, n.144.

111

See

Citadel July Letter at 30-31.

112

Id.

at 30.

113

Id.

at 3, 30.

114

See id.

at 30.

See also

Citadel August Letter at 5.

Commenters also raised concerns about statements in the Proposed Amendment that CAT costs would be passed on to investors.

115

One commenter stated, “[s]uch an assertion is inaccurate because it is almost certain that there will be scenarios faced by Industry Members in which they will not be able to figure out who was responsible for generating certain Historical CAT Costs.”

116

The commenter stated that such assertions would minimize the Participants' obligation to allocate fees consistent with Exchange Act fee standards and could result in the inequitable allocation of CAT fees to Industry Members under the mistaken belief that such fees would be passed down to investors.

117

FINRA objected to statements in the Proposed Amendment that Industry Members can pass through to their customers their CAT cost allocation and additional costs resulting from an increase in FINRA fees.

118

FINRA stated that “[s]ummarily stating that investors can be made to bear the costs resulting from the Funding Model without a detailed description of and transparency into how these fees would be determined or passed on to customers is inadequate, and does not provide interested parties sufficient information to consider the costs and benefits related to the Fee Proposal.”

119

Another commenter expressed concern that CAT costs will be passed-through to investors directly or indirectly by affecting the transaction prices of equities, stating that this could negatively impact the investment returns of long-term investors (including retail investors).

120

The commenter stated that the Participants have failed to analyze how passing-through CAT costs to investors is consistent with Exchange Act fee standards, and that the Commission has not fully considered

these economic effects on clients and other end investors.

121

115

See

SIFMA May 2023 Letter at 8; FINRA April 2023 Letter at 6-7; Citadel July Letter at 20; Citadel August Letter at 3; Letter to Vanessa Countryman, Secretary, Commission, from Lindsey Weber Keljo, Head—Asset Management Group, SIFMA, dated September 5, 2023 (“SIFMA AMG Letter”).

See also

Virtu Letter at 4 (noting the inherent difficulties in implementing systems and processes to track and pass through fees to the appropriate client firms and stating that executing brokers would likely end up absorbing the fees themselves).

116

See

SIFMA May 2023 Letter at 8;

see also

Virtu Letter at 4.

117

See

SIFMA May 2023 Letter at 8.

118

See

FINRA April 2023 Letter at 6-7.

119

Id.

at 7.

120

See

SIFMA AMG Letter at 2.

121

Id.

at 2, 3. The commenter stated that, “[u]nder the Exchange Act, the Participants are required to demonstrate that the Proposed Amendment: (1) provides `for the equitable allocation of reasonable dues, fees, and other charges,' (2) is `not designed to permit unfair discrimination between customers, issuers, brokers or dealers' and (3) does not `impose any burden on competition not necessary or appropriate in furtherance of the purposes' of the Exchange Act.”

Id.

at 1, n.4 (citing to Sections 6 and 15A of the Exchange Act and Rule 700(b)(3)(iii) of the Commission's Rules of Practice. 15 U.S.C. 78s; 15 U.S.C. 15o-3; 17 CFR 201.700(b)(3)(iii)). Approval of the Proposed Amendment, however, is governed by Rule 608 of Regulation NMS. That rule requires the Commission to approve a proposed amendment to an effective national market system plan if it finds that the amendment is necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanisms of, a national market system, or otherwise in furtherance of the purposes of the Act. 17 CFR 242.608(b)(2).

One commenter stated that many of the largest Industry Members would be allocated CAT fees based on proprietary trading activity, so they would not be able to pass through their fees to investors.

122

The commenter urged an analysis of proprietary executed volume compared to customer executed volume in order to evaluate how CAT costs will be allocated among Industry Members and whether the allocation methodology is fair, equitable and not unfairly discriminatory.

123

The commenter also stated that the Proposed Amendment is inconsistent with Section 6(b)(5) by imposing a new and increasing expense on investors, which would negatively impact liquidity and efficiency, and that the proposed allocation to Industry Members would disproportionately impact market makers (because 20 firms would have to pay most of the costs) and retail investors (due to their trading in sub-dollar NMS stocks that increase executed share volume), in violation of Section 6(b)(8).

124

122

See

Citadel July Letter at 20.

See also

Citadel August Letter at 3.

123

See

Citadel August Letter at 3. The commenter said that such an analysis is feasible and should account for aggregate costs to be borne by affiliated entities, stating that this is required in Section 11.2(c) of the 2016 CAT NMS Plan.

Id.

124

See

Citadel July Letter at 2.

See also id.

at 13.

In response to comments that state that Industry Members could bear 100% of CAT costs if Participants decide to pass-through their costs to them,

145

CAT LLC stated that Industry Members can pass through their own CAT fees to their customers, like broker-dealers do for transaction-based fees.

146

CAT LLC stated that this may result in Industry Members not having any funding burden if they decide to entirely pass-through their allocation to investors.

147

In response to commenters that requested that Participant be prohibited from passing-on their CAT costs to their members,

148

CAT LLC stated that Participants are permitted by the Exchange Act to charge their members fees to fund the Participants' share of CAT fees, as long as they submit fee filings that demonstrate that any proposed fee is consistent with the Exchange Act.

149

145

See

Citadel July Letter at 16, 22; FIA Letter at 2.

146

See

CAT LLC July 2023 Response Letter at 8.

147

Id.

148

See

Citadel July Letter at 3, 22, 30; FIA Letter at 2-3.

149

See

CAT LLC July 2023 Response Letter at 9.

In response to comments objecting to the proposed allocation to Industry Members for not taking into account regulatory fees currently paid by Industry Members,

150

CAT LLC stated that the Proposed Amendment is intended to assess fees “directly associated with the costs of establishing and maintaining the CAT, and not unrelated SRO services.”

151

150

See

Citadel July Letter at 17; Virtu Letter at 2. CAT LLC also objected to one commenter's description of the CAT as an exchange “revenue generator,” stating that CAT LLC is a business league under Section 501(c)(6) of the Internal Revenue Code, and that enforcement activity obtains restitution for investors and deters future misconduct rather than generating revenue.

See

CAT LLC July 2023 Response Letter at 13-14 (responding to Citadel July Letter at 17).

151

CAT LLC July 2023 Response Letter at 13.

In response to comments on whether Participants' models are equally to blame for the complexity of the markets,

152

CAT LLC stated that its analysis of the complexity of the industry's business models is based on the effects of those models on the costs of the CAT, which it stated are more profound than those of Participants, not on complexity of the market in general.

153

CAT LLC explained that the complexity of the Industry Members' business models results in significant data processing and storage costs, which Participants do not contribute to as they do not originate market activity or orders.

154

CAT LLC explained that (1) the complexity and diversity of Industry Members' business models and order handling practices require processing and storage of hundreds of reporting scenarios for Industry Members, resulting in significant data processing and storage costs;

155

(2) Industry Members have more late data and corrections than Participants, resulting in significant linker costs;

156

and (3) Industry Members have customers, which results in CAT costs related to customer account information (FDID, CCID and CAIS) and customer investment strategies.

157

CAT LLC also stated that Participants would pay the same amount as the CEBBs and CEBSs in each transaction.

158

In response to one commenter that stated that Industry Members implemented complex routing strategies to optimize exchange fees and rebates because exchange business decisions resulted in these and other exchange fee structures,

159

CAT LLC stated that the commenter did not demonstrate a causal connection between exchange fee structures and CAT costs.

160

CAT LLC stated that it was not involved in these Industry Member business decisions and a substantial amount of CAT costs result from such business decisions.

161

CAT LLC also stated that Participant activity does not contribute as much to CAT costs as complex Industry Member activity.

162

152

See

SIFMA May 2023 Letter at 3; 6-7.

See also

SIFMA January 2023 Letter at 2, 3-4.

153

See

CAT LLC May 2023 Response Letter at 6; CAT LLC July 2023 Response Letter at 6.

154

See

CAT LLC May 2023 Response Letter at 7; CAT LLC July 2023 Response Letter at 7.

155

See

CAT LLC July 2023 Response Letter at 7.

156

Id.

157

Id.

158

Id.

at 6.

159

See

SIFMA May 2023 Letter at 7.

160

See

CAT LLC July 2023 Response Letter at 6.

161

Id.

162

Id.

CAT LLC also disagreed with one commenter's dismissal of CAT LLC's consideration of Industry Members' relative ability to pay,

163

stating that the Exchange Act specifically requires that the fees be fair and reasonable, which necessitates consideration of the relative ability to pay.

164

CAT LLC stated that fairness issues require the Participants to consider the greater financial resources of Industry Members in the creation of a funding model. CAT LLC also stated that the commenter's position runs contrary to its comments that an Industry Member's ability to pay is an important consideration in the context of CAT fees.

165

163

See

SIFMA May 2023 Letter at 7.

See also

SIFMA January 2023 Letter at 4.

164

See

CAT LLC May 2023 Response Letter at 7; CAT LLC July 2023 Response Letter at 7.

165

See

CAT LLC July 2023 Response Letter at 7-8.

Additionally, CAT LLC objected to the commenter's statement that the proposed allocation is “inconsistent with the historical CAT decision to allocate costs to the parties responsible for generating them.”

166

CAT LLC stated that, while the CAT NMS Plan does not require CAT costs to be allocated to parties responsible for generating such costs, the proposed allocation addresses cost burden on the CAT by (i) taking into account the impact of Industry Member activity on CAT costs, and (ii) using trading activity, which CAT LLC believes is a “reasonable proxy for cost burden on the CAT,”

167

as the metric for cost allocation.

168

CAT LLC also stated that there are other examples of trading activity-based fees so the funding model would not be novel or unique.

169

166

See

CAT LLC May 2023 Response Letter at 7; CAT LLC July 2023 Response Letter at 8; SIFMA May 2023 Letter at 7.

167

See

CAT LLC May 2023 Response Letter at 7; CAT LLC July 2023 Response Letter at 8.

168

See

CAT LLC May 2023 Response Letter at 7; CAT LLC July 2023 Response Letter at 8.

169

See

CAT LLC July 2023 Response Letter at 8.

Additionally, CAT LLC responded to the commenter's suggested alternative proposal that would equally allocate CAT costs to Participant exchanges and Industry Members, stating that the commenter did not explain why the alternative would satisfy the Exchange Act standards, and noting that CAT LLC had previously considered such an allocation but believed that it would not result in a fair and equitable allocation due to the greater number of Industry Members than Participants, the greater financial resources of Industry Members, and the failure of the suggested allocation to take into account how the complexity of Industry Member business models contributes substantially to CAT costs.

170

See

CAT LLC May 2023 Response Letter at 7.

In response, the commenter stated that the CAT LLC Response Letter did not meaningfully address the concerns it raised about the allocation of CAT costs between Participants and Industry Members.

171

CAT LLC further responded, stating that it has responded to the commenter's comments several times and that just because CAT LLC did not adopt the commenter's viewpoints does not mean that CAT LLC

did not consider or respond to the commenter's comments.

172

171

See

SIFMA June 2023 Letter at 2.

172

See

CAT LLC July 2023 Response Letter at 27.

In response to a commenter that recommended allocating no more than 50% of CAT costs to Industry Members, including the FINRA allocation,

173

CAT LLC stated that the commenter did not offer a reasoned basis why such an allocation would be consistent with the Exchange Act.

174

CAT LLC also stated that such an allocation would raise fairness concerns because, as compared to Participants, Industry Members have greater financial resources, and their complex business models “contribute substantially to the costs of the CAT.”

175

Furthermore, in response to the commenter's other suggested allocation methodology which the commenter believed would ensure that a small group of firms and specific market segments would not be subject to inequitable cost burdens,

176

CAT LLC stated that the commenter did not explain how the suggested methodology would fit into a funding model or how such a funding model would be consistent with the Exchange Act.

177

CAT LLC stated that it evaluated various other funding models over the past seven years and concluded that “the Executed Share Model provides a variety of advantages in comparison to the alternatives, and satisfies the requirements of the Exchange Act. . .”

178

173

See

Citadel July Letter at 31.

174

See

CAT LLC July 2023 Response Letter at 10.

175

Id.

176

See

Citadel July Letter at 30.

177

See

CAT LLC July 2023 Response Letter at 10.

178

Id.

at 11-12.

In response, the commenter stated that its suggestions, which included minimum and maximum fee levels, calibrations for liquidity provision, and consideration of additional metrics,

179

were included in prior funding model proposals.

180

The commenter stated that the CAT Operating Committee should explain why it changed its position on “the importance of these elements as part of a fair and equitable funding proposal that is consistent with the Exchange Act.”

181

179

See

Citadel August Letter at 5.

180

Id.

(citing the minimum and maximum fees and market making discounts proposed in a funding model proposal from the CAT Operating Committee that was filed in 2021.

See

Securities Exchange Act Release No. 91555 (Apr. 14, 2021), 86 FR 21050 (Apr. 21, 2021)).

181

Id.

The Executed Share Model reflects a reasonable approach to funding the building and operation of the CAT.

182

The CAT NMS Plan requires both Participants

183

and Industry Members (which would include CAT Executing Brokers) to fund the CAT.

184

The costs of CAT therefore must be allocated in some fashion between Participants and Industry Members, and how to do so is a question of judgment for which there may be multiple reasonable approaches. CAT LLC has proposed to allocate CAT fees equitably among the three parties who have primary roles related to the transaction: the buyer, seller, and market regulator. In response to one commenter that stated that the proposed allocation methodology is inconsistent with the Exchange Act because of an excessive percentage of total costs proposed to be allocated to Industry Members and an unfair method of allocating costs among Industry Members,

185

the Commission believes that the proposed allocation is reasonable as discussed below.

186

182

See

17 CFR 242.608(b)(2).

183

The CAT NMS Plan requires Execution Venues and Industry Members to fund the CAT. The definition of “Execution Venue” includes Participants.

See supra

note 15.

184

See

CAT NMS Plan,

supra

note 2, at Section 11.1(b), 11.3(a) and (b). Section 11.1(b) of the CAT NMS Plan authorizes the Operating Committee to establish fees for Execution Venues (which include Participants) and Industry Members to fund the CAT and Sections 11.3(a) and (b) of the CAT NMS Plan set forth how these fees would be calculated.

See also

Rule 613(a)(1)(vii)(D) discussing how the CAT NMS Plan shall discuss the proposed allocation of estimated costs among the plan sponsors, and between the plan sponsors and members of the plan sponsors. 17 CFR 242.613(a)(1)(vii)(D).

185

See

Citadel July Letter at 15.

186

See infra

notes 189-201 and accompanying text.

While a commenter said the Proposed Amendment did not justify why the TAF, options regulatory fee, and Section 31 fees should be used as a model in the context of the Executed Share Model,

187

CAT was created to serve regulatory purposes. Moreover, CAT Data can only be used by SROs and the Commission for regulatory and surveillance purposes.

188

Therefore, the costs incurred by the Participants to build, operate and administer the CAT similarly are regulatory costs, which here the Participants are seeking to recover through the CAT fees.

187

See

FINRA June 2022 Letter at 4; FINRA April 2023 Letter at 8.

188

See

17 CFR 242.613(e)(4)(i)(A); CAT NMS Plan Sections 6.5(c) and 6.5(g) and Appendix D, Section 8.1.

Commenters expressed concerns that the Participants may impose fees on their members to recoup costs relating to CAT, making Industry Members responsible for CAT funding costs beyond those to which they will be directly assessed pursuant to the Executed Share Model,

189

that CAT costs will be passed-through to investors and that this aspect of the Proposed Amendment lacks information needed to demonstrate that it meets the approval standard and to allow the Commission and other interested parties to consider the resulting economic effects.

190

In response to the comments, the Commission acknowledges the concerns but also emphasizes that, as discussed above, the CAT provides important benefits in facilitating effective market surveillance and the Exchange Act expressly contemplates the ability of the Participants to recoup their costs to fulfill their statutory obligations under the Exchange Act.

191

To that end, the CAT NMS Plan expressly contemplates the allocation of the costs associated with operating the CAT among the Participants and the Industry Members. The use of the Executed Share Model is a reasonable method, among a number of potential approaches to do so.

189

See

SIFMA May 2023 Letter at 2; Citadel July Letter at 16, 17, 21, 22; Citadel August Letter at 2.

190

See

SIFMA AMG Letter at 2; FINRA April 2023 Letter at 6-7.

191

Sections 6(b)(1) and 15A(b)(2) of the Exchange Act require that a national securities exchange or national securities association have the capacity to be able to carry out the purposes of the Exchange Act, the rules and regulations thereunder, and the rules of the exchange or association. 15 U.S.C. 78f(b)(1); 15 U.S.C. 78o-3(b)(2).

The Commission recognizes that these operational costs may be passed on in other ways, including by both the Participants and Industry Members, who each may elect to pass on such operational costs as fees to customers indirectly through their charges for services to customers. That would be true regardless of how the Proposed Amendment chose to set the initial allocation. Even if the Participants decide to pass-through the costs of CAT to Industry Members, however, in our view, the rule filing process under Section 19(b) and Rule 19b-4 will still incentivize the Participants to control costs. Any effort to pass-through costs will be subject to that process and, if the Participants fail to control costs, their ability to demonstrate that a proposed fee is reasonable and consistent with the Exchange Act may be compromised. After the Participants file their proposed rule changes relating to fees with the Commission, those proposed rule changes are published by the Commission and there is an opportunity for public comment.

192

Although the proposed rule changes could likely take effect upon filing,

193

the Commission

can temporarily suspend immediately effective rule changes if such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act.

194

If the Commission takes such action, the Commission will institute proceedings under Section 19(b)(2)(B) to determine whether the proposed rule changes should be approved or disapproved.

195

Those fees, like any fees the Participants collect from their members to fund their SRO responsibilities in market and member regulation, must be consistent with applicable statutory standards under the Exchange Act, including being reasonable, equitable and not unfairly discriminatory.

196

Additionally, as stated by CAT LLC, Industry Members may be able to offset fees that FINRA assesses them by passing their CAT fees through to their customers,

197

and as discussed further below, the Commission believes that the additional costs borne by investors are likely small relative to current transaction costs.

198

The Commission recognizes that not all Industry Members currently pass through fees and cannot determine in advance the extent to which Industry Members can or will pass-through their CAT fees to investors or would determine to do so in the future. But we believe that many are able to and that at least some will do so. For all of these reasons, contrary to the view of some commenters,

199

the Commission does not believe that the inability to determine the amount of the CAT costs that will be passed along to investors precludes a finding that the allocation model set forth in the Proposed Amendment meets the approval standard.

192

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

193

15 U.S.C. 78s(b)(3)(A); 17 CFR 240.19b-4(f)(2). Pursuant to Exchange Act Rule 19b-4, a proposed rule change may take effect upon filing with the Commission pursuant to Section 19(b)(3)(A) of the Exchange Act if properly designated by the self-

regulatory organization as: (1) constituting a stated policy, practice, or interpretation with respect to the meaning, administration, or enforcement of an existing rule; (2) establishing or changing a due, fee, or other charge applicable only to a member; (3) concerned solely with the administration of the self-regulatory organization.

194

15 U.S.C. 78s(b)(3)(C).

195

15 U.S.C. 78s(b)(2)(B).

196

See

Section 6(b)(4); Section 15A(b)(5); Section 6(b)(5); Section 15A(b)(6). 15 U.S.C. 78f(b)(4); 15 U.S.C. 78f(b)(6); 15 U.S.C. 78o-3(b)(5); 15 U.S.C. 78o-3(b)(6).

see also

CAT LLC July Response Letter at 8-9;

cf.

SIFMA May 2023 Letter at 8; Citadel July Letter at 20.

198

Any efforts to recoup CAT costs will be subject to statutory and regulatory oversight as appropriate. Under the federal securities laws and FINRA rules, prices for securities and broker-dealer compensation are required to be fair and reasonable, taking into consideration all relevant circumstances.

See, e.g.,

Exchange Act Sections 10(b) and 15(c); FINRA Rules 2121 (Fair Prices and Commissions), 2122 (Charges for Services Performed), and 2341 (Investment Company Securities).

See also

FINRA Rule 3221 (Non-Cash Compensation). Broker-dealers are also required to disclose the fees they charge related to a transaction pursuant to Exchange Act Rule 10b-10.

See

17 CFR 240.10b-10.

199

See

SIFMA AMG Letter at 2; FINRA April 2023 Letter at 6-7.

In response to the commenter stating that proprietary trading firms cannot pass-through fees to investors and suggesting that an analysis of proprietary executed volume compared to customer executed volume is necessary to determine if the allocation is fair, equitable, and unfairly discriminatory,

200

the Commission believes it is reasonable to charge executing brokers regardless of whether they are trading for their own account or for a customer's account. The Commission acknowledges that there is not a customer

per se

for proprietary trades and therefore, proprietary trading firms would not be able to pass-through their CAT fees to customers. However, regardless of whether a firm trades for its own account or for a customer account, in both instances, the firm engages in trading activity to earn a profit. In the Commission's view, it is reasonable to allow a firm to incur CAT fees for its profit-making business activities, such as proprietary activity. The Commission recognizes that Industry Members may pass-through CAT fees for customer executed volume but in the case of proprietary trades where a firm is trading for its own account, there is no customer to which the firm can pass-through fees, as the firm itself is the ultimate investor, and thus it is reasonable for the firm to be responsible for payment of CAT fees for those trades. Further, the Commission believes it is reasonable to allow a firm to incur CAT fees for its profit-making activity, which in this case is proprietary activity. CAT is a regulatory tool that will be used by the Participants and the Commission to oversee the activities for which Industry Members earn profits and therefore it is reasonable for fees to be charged for that profit-making activity, even if those fees cannot be passed on to customers.

200

See

Citadel July Letter at 20; Citadel August Letter at 3.

While comments raised concerns that the industry would be allocated most of the CAT costs in perpetuity without a mechanism to limit the budget,

201

there is a statutory process for notice and comment and Commission review of proposed rule changes relating to fees, under Section 19(b) and Rule 19b-4.

202

In addition, the Proposed Amendment requires that the Fee Rate calculated by the Operating Committee twice per year be based on “reasonably budgeted CAT costs”

203

and that such budgeted CAT costs be composed of “all reasonable fees, costs and expenses reasonably budgeted to be incurred by or for the Company in connection with the development, implementation and operation of the CAT.”

204

The Operating Committee must demonstrate that their proposed budget and associated fees are reasonable, and the Participants must provide support for such reasonableness in their associated fee filings. If a Participant cannot demonstrate that their budgeted CAT costs are reasonable in a particular filing, following notice and public comment, then that would provide the Commission with grounds to suspend the filing and ultimately disapprove it, which should impose discipline or constraints on the fee setting process.

201

See

SIFMA June 2023 Letter at 3, 4; Citadel July Letter at 2; FIA Letter at 2-5.

202

See supra

notes 192-196 and accompanying text.

203

See

proposed Section 11.3(a)(i)(A)(I) and proposed Section 11.3(a)(i)(A)(II).

204

See

proposed Section 11.3(a)(i)(C).

Further, the concerns expressed that the proposed allocation did not account for the costs already incurred by Industry Members to comply with the CAT or other fees paid by Industry Members to exchanges for other regulatory matters do not render that allocation unreasonable. Both Participants and Industry Members have incurred costs in adapting their operations to report to CAT as is required to achieve the benefits anticipated from the CAT. But the purpose of the funding model is to provide a framework for the recovery of a different set of costs—those incurred by the Participants' in developing and maintaining the CAT system. Section 11.1(c) of the CAT NMS Plan explicitly permits the Operating Committee to recover those costs, allowing it to “take into account fees, costs and expenses . . . incurred by the Participants on behalf of the Company . . . and such fees, costs and expenses shall be fairly and reasonably shared among the Participants and Industry Members.”

205

The decision to exclude the costs of compliance from this funding model is thus a reasonable one.

205

CAT NMS Plan,

supra

note 2, at Section 11.1(c).

Further, the Commission does not base its finding with respect to the proposed allocation of costs between Participant and Industry Members on their respective responsibility for any

complexity in the markets. Regardless of the origin of that complexity, its existence contributes to the costs of CAT and the purpose of the funding model is to account for those current and future costs, not assess responsibility for the market structure. The Participants' decision to divide the costs evenly among the three parties who have primary roles related to the transaction is reasonable.

As explained below, the Commission agrees with CAT LLC's statements that, “[t]he Executed Share Model . . . reflects a reasonable effort to allocate costs based on the extent to which different CAT Reporters participate in and benefit from the equities and options markets,”

206

and is “transparent, would be relatively easy to calculate and administer, and is designed not to have an impact on market activity because it is neutral as to the location and manner of execution.”

207

The Participants considered, and have previously proposed, alternative allocations and funding models.

208

And the Commission acknowledges the alternative funding models and allocations suggested by commenters.

209

Each of those alternatives, as well as those suggested by commenters, has relative strengths and weaknesses. Similarly, the alternatives suggested by a commenter,

210

including maximum and minimum fees, appropriate calibrations for liquidity provision and consideration of additional provisions (

e.g.,

broker-dealer capital), have strengths and weaknesses. For example, imposing maximum and minimum fees would transfer costs from the largest members to the smallest members, distorting the economic incentives of the Executed Share Model. A similar distortion could arise to the extent market maker volume is discounted or otherwise calibrated or to the extent considering other metrics that are not necessarily correlated with the cost drivers of the CAT. Given the potential distortions that could occur with these alternatives, the Commission does not believe that the existence of those alternatives, or the remaining concerns identified by commenters individually or collectively, call into question the Proposed Amendment's satisfaction of the approval standard in Rule 608(b)(2),

211

or otherwise warrant a departure from the policy choices made by the Participants.

206

See

Notice,

supra

note 7, 88 FR at 17087.

207

Id.

208

In the Proposed Amendment, CAT LLC stated that it considered but rejected a number of alternative approaches to the CAT funding model; specifically, an approach based on a CAT Reporter's cost burden on the CAT, a 50%-50% allocation of costs between Industry Members and Participant exchanges, a revenue-based funding model in which CAT Reporters would pay fees based on their revenue, a message traffic model in which both Industry Members and Participants would be assessed fees based on message traffic in the CAT, a sales value model in which fees would be calculated based on transaction sales models, an alternative allocation in which fees would only be allocated to the CEBS, and the 2018 and 2021 Fee Proposals, a model in which CAT LLC would allocate all costs among the Participants and permit each Participant to charge its own members as it deems appropriate, and a cost allocation based on a strict pro-rata distribution regardless of the type or size of CAT Reporters.

Id.

at 17105-06, 17117-19.

See also

CAT LLC May 2023 Response Letter at 8, where CAT LLC responded that SIFMA did not offer a reasoned basis for why a 50-50 allocation would satisfy the standards set forth in the Exchange Act. While alternative models have been suggested and considered, the proposed Executed Share Model meets the approval standard in Rule 608(b)(2).

209

See

FINRA April 2023 Letter at 5; SIFMA January 2023 Letter at 4.

See also

SIFMA May 2023 Letter at 8; SIFMA June 2022 Letter at 5-6; SIFMA October 2022 Letter at 4; Citadel July Letter at 3, 30, 31, 32.

210

See

Citadel August Letter at 5.

211

17 CFR 242.608(b)(2).

3. Executed Equivalent Shares

Under the Executed Share Model, a CAT fee would be charged with regard to each transaction in Eligible Securities

212

as reported in CAT Data based on executed equivalent shares.

213

A CAT Fee would be imposed with regard to transactions in Eligible Securities in the CAT Data regardless of whether the trade is executed on an exchange or otherwise than on an exchange.

214

212

The CAT NMS Plan defines an “Eligible Security” as including all NMS Securities and all OTC Equity Securities.

See

CAT NMS Plan,

supra

note 2, at Section 1.1. “NMS Security” is defined as “any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in Listed Options.”

Id.

“OTC Equity Security” is defined by the CAT NMS Plan as “any equity security, other than an NMS Security, subject to prompt last sale reporting rules of a registered national securities association and reported to one of such association's equity trade reporting facilities.”

Id.

213

See

Notice,

supra

note 7, 88 FR at 17086.

214

Id.

at 17093.

Proposed Section 11.3(a)(i)(B) of the CAT NMS Plan describes how executed equivalent shares would be counted for purposes of calculating CAT fees. Specifically, the Executed Share Model uses the concept of executed equivalent shares as the transactions subject to a CAT Fee involve NMS Stocks, Listed Options and OTC Equity Securities, each of which have different trading characteristics.

215

Proposed Section 11.3(a)(i)(B) would require the shares to be reasonably counted for each type of Eligible Securities in the following manner:

215

Id.

NMS Stocks.

Under the Executed Share Model, each executed share for a transaction in NMS Stocks would be counted as one executed equivalent share.

216

Accordingly, proposed Section 11.3(a)(i)(B)(I) of the CAT NMS Plan would state that “[f]or purposes of calculating CAT Fees, executed equivalent shares in a transaction in Eligible Securities will be reasonably counted as follows: (I) each executed share for a transaction in NMS Stocks will be counted as one executed equivalent share.”

217

216

Id.

217

Proposed Section 11.3(a)(i)(B)(I).

Listed Options.

Recognizing that Listed Options trade in contracts rather than shares, each executed contract for a transaction in Listed Options will be counted using the contract multiplier applicable to the specific Listed Option in the relevant transaction.

218

Typically, a Listed Option contract represents 100 shares; however, it may also represent another designated number of shares.

219

218

See

Notice,

supra

note 7, 88 FR at 17093.

219

Id. See also

proposed Section 11.3(a)(i)(B)(II).

OTC Equity Securities.

Similarly, in recognition of the different trading characteristics of OTC Equity Securities as compared to NMS Stocks, the Executed Share Model would discount the share volume of OTC Equity Securities when calculating CAT Fees.

220

CAT LLC explained that many OTC Equity Securities are priced at less than one dollar—and a significant number are priced at less than one penny—per share and low-priced shares tend to trade in larger quantities.

221

Accordingly, a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks.

222

Because the Executed Share Model would calculate CAT Fees based on executed share volume, CAT Reporters trading OTC Equity Securities would likely be subject to higher fees than their market activity may warrant.

223

To address this potential concern, CAT LLC proposed that the Executed Share Model would count each executed share for a

transaction in OTC Equity Securities as 0.01 executed equivalent shares.

224

220

See

Notice,

supra

note 7, 88 FR at 17093.

221

Id.

222

In an example provided by CAT LLC, based on data from 2021, (1) the average price per executed share of OTC Equity Securities was $0.072 and the average price per executed share for NMS Stocks was $49.51; and (2) the average trade size for OTC Equity Securities was 63,474 and the average trade size for NMS Stocks was 166 shares. Trades in OTC Equity Securities accounted for 77% of the number of all equity shares traded, but only 0.51% of the notional value of all equity shares traded.

Id.

at 17093, n.36.

223

Id.

at 17093.

224

See

proposed Section 11.3(a)(i)(B)(III).

a. Executed Equivalent Share Volume

CAT LLC had represented that a disproportionately large number of shares are involved in transactions involving OTC Equity Securities versus NMS Stocks,

225

that trades in OTC Equity Securities accounted for 77% of the number of all equity shares traded, but only 0.51% of the notional value of all equity shares traded,

226

and that under the Executed Share Model, CAT Reporters trading OTC Equity Securities would likely be subject to higher fees than their market activity may warrant.

227

CAT LLC also explained the analysis it undertook to determine to count each executed share for a transaction in OTC Equity Securities as 0.01 executed equivalent shares, stating the discount was the result of an analysis of several different metrics comparing the markets for OTC Equity Securities and NMS Stocks. CAT LLC stated that “(1) the ratio of total notional dollar value traded for OTC Equity Securities to OTC Equity Securities and NMS Stocks was 0.051%; (2) the ratio of total trades in OTC Equity Securities to total trades in OTC Equity Securities and NMS Stocks was 0.90%; and (3) the ratio of average share price per trade of OTC Equity Securities to average share price per trade for OTC Equity Securities and NMS Stocks was 0.065%.”

228

For ease of application and because the calculations involve averages, CAT LLC decided to round the metrics to 1%.

229

225

See

Notice,

supra

note 7, 88 FR at 17093.

226

Id.

at 17093, n.36.

227

Id.

at 17093.

228

Id.

229

Id.

In support of the use of executed equivalent shares to allocate costs under the Executed Share Model, CAT LLC explained that “trading activity provides a reasonable proxy for cost burden on the CAT, and therefore is an appropriate metric for allocating CAT costs among CAT Reporters.”

230

CAT LLC stated that it is not feasible to determine the specific cost burden of each CAT Reporter on the CAT, explaining that “[t]he computation of a specific CAT Reporter's burden on the CAT is complicated by the many inter-related factors that contribute to CAT costs, including message traffic, data processing, storage, the complexity of reporting requirements, reporting timelines, infrastructure, connectivity and more.”

231

CAT LLC added that increased trading activity correlates with an increased cost burden on the CAT and Industry Members are generally engaged in effecting transactions in the market, so executed share volume would be an appropriate metric for the allocation of CAT costs.

232

CAT LLC stated that this conclusion is consistent with the Commission's prior recognition of the use of transaction volume to set regulatory fees.

233

Additionally, CAT LLC stated that technology costs dominate all CAT costs, with compute costs comprising more than half of all technology costs, and “[w]hile [compute costs] are related in part to message traffic, they are driven by the stringent performance timelines, data complexity and operational requirements in the CAT NMS Plan.”

234

This was one of the reasons CAT LLC decided to change from using message traffic to calculate CAT fees using executed equivalent share volume.

235

230

See

Notice,

supra

note 7, 88 FR at 17103.

231

Id.

at 17105;

See also

Citadel August Letter at 4.

243

See

Citadel August Letter at 4.

244

Id.

Further, the commenter stated that allocating costs based on volume would result in costs being mostly allocated to “an extremely small group of broker-dealers,” which would unduly burden competition.

245

The commenter stated that the Proposed Amendment also lacks a discussion of the impact of this allocation on market competition, efficiency and liquidity, but that the Operating Committee recognized in the Proposed Amendment that prior proposals, where message traffic was a metric used for fee allocation, could impose an outsized financial impact on certain Industry Members.

246

245

Citadel July Letter at 19.

246

Id. See also

Citadel August Letter at 2-3.

Additionally, FINRA objected to the statement in the Proposed Amendment that “trading activity provides a reasonable proxy for cost burden on the CAT, and therefore is an appropriate metric for allocating CAT costs among CAT Reporters.”

247

The commenter stated that this statement is inconsistent with information that demonstrates that volume from FINRA's trade reporting facilities (“TRFs”) contributes “a very small percentage of annual CAT compute and storage costs.”

248

FINRA stated, “. . . despite the minimal data compute and storage costs for

transactions reported to the TRF, FINRA would be assessed an estimated 34% of the total CAT costs to be borne amongst the 25 Participants, and more than all options exchanges combined,” therefore it cannot support the Participants' assertion that trading activity is a reasonable proxy for cost burden.

249

FINRA stated that the Proposed Amendment “fails to provide for reasonable fees that are equitably allocated and not unfairly discriminatory, does not reflect a reasonable approach to allocating costs amongst the Participants, nor does it transparently or accurately present information regarding the true sources of cost burdens on the CAT.”

250

247

FINRA May 2023 Letter at 2 (quoting Notice,

supra

note 7, 88 FR at 17103.)

248

FINRA May 2023 Letter at 2.

249

Id. See also

FINRA April 2023 Letter at 8.

250

FINRA May 2023 Letter at 4.

FINRA further stated that the Executed Share Model is inconsistent with the “cost alignment” funding principle in Section 11.2(b) of the CAT NMS Plan, which requires the Participants to seek to establish an allocation of costs that takes into account distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon Company resources and operations.

251

FINRA stated that “the Proposal fails to establish a sufficient nexus between executed share volume and the technology burdens that generate CAT costs and fails to relate each reporter group's allocation to the burden that each reporter group imposes on CAT.”

252

251

Id. See also

FINRA April 2023 Letter at 7-9; Section 11.2(b) of the CAT NMS Plan. The Proposed Amendment would amend Section 11.2(b).

See

proposed Section 11.2(b);

See also

Citadel August Letter at 5.

CAT LLC proposed to delete the requirement in existing Section 11.2(b) of the CAT NMS Plan to take into account “distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon Company resources and operations” in establishing the funding of the Company.

266

CAT LLC explained that this requirement is related to using message traffic and market share in the calculation of CAT fees, as message traffic and market share were metrics related to the impact of a CAT Reporter on the Company's resources and operations.

267

CAT LLC explained that the requirement is no longer relevant because the proposed Executed Share Model uses the executed equivalent shares metric instead of message traffic and market share.

268

266

See

proposed Section 11.2(b).

267

See

Notice,

supra

note 7, 88 FR at 17099.

268

Id.

With respect to the deletion in Section 11.2(b) of the requirement that, when establishing the funding of the CAT, the Operating Committee must take into account “distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon Company resources and operations,” FINRA stated that the Participants have proposed to delete the language in Section 11.2(b) because the proposed Executed Share Model is inconsistent with the language.

269

FINRA stated that the Proposed Amendment “seeks to amend the core funding principles to align with an unjustified allocation methodology.”

270

FINRA stated that any changes to the funding principles “must be well-reasoned and transparent and must continue to support the achievement of a fair and equitable outcome.”

271

269

See

FINRA June 2022 Letter at 4;

see also

FINRA April 2023 Letter at 7.

270

FINRA June 2022 Letter at 4. The commenter states that the Executed Share Model instead places the greatest emphasis on the funding principle relating to the “ease of billing and other administrative functions,” favoring that principle over cost alignment.

Id.

at 5.

271

Id.;

FINRA April 2023 Letter at 8-9.

In the Commission's view, the use of executed equivalent share volume as the basis of the proposed cost allocation methodology is reasonable and consistent with the approach taken by the funding principles of the CAT NMS Plan.

272

The proposed use of executed equivalent shares would continue to incorporate the concept of cost

alignment because trading activity, as reflected through executed equivalent share volume, would, as CAT LLC explained, correlate with the cost burden on the CAT.

273

It may not be possible to directly calculate each CAT Reporter's cost burden on the CAT due to the many factors impacting CAT costs, such as data processing, storage, reporting timelines and requirements, and connectivity. But executed equivalent share volume is a reasonable proxy for those costs because it is a result of trading activity, which CAT LLC explained impacts various CAT cost drivers, such as storage, data processing and message traffic.

274

In addition, because the proposed use of executed equivalent share volume would preserve the cost alignment principle, while no longer relying on message traffic, the deletion of the requirement in Section 11.2(b) of the CAT NMS Plan that the Operating Committee, in allocating costs, take into account “distinctions in the securities trading operations of Participants and Industry Members and their relative impact upon Company resources and operations”

275

is reasonable.

272

See

Section 11.2(b) of the CAT NMS Plan.

273

CAT LLC May 2023 Response Letter at 7.

274

Id. See also

Notice,

supra

note 7, 88 FR at 17105;

See also

Citadel August Letter at 5.

283

See supra

notes 272-275 and accompanying text.

The Commission also believes that CAT LLC's explanation that increased trading activity correlates with an increased cost burden on the CAT is reasonable and that executed share volume is a reasonable proxy for a CAT Reporter's cost burden on the CAT

284

because increased trading activity impacts message traffic, but also data processing and storage costs.

285

The Original Funding Model would have used message traffic and market share to assess CAT fees on Industry Members and Execution Venues, respectively.

286

CAT LLC expressed its belief that the use of executed equivalent share volume would be an improvement on the Original Funding Model's use of message traffic,

287

explaining that the use of executed equivalent share volume would result in fees tied to transactions (which CAT LLC stated is the “traditional source of revenue for Industry Members”

288

), that the resulting CAT fees would not adversely impact market makers, and that the Executed Share Model is simple to understand and to implement.

289

CAT LLC stated that Industry Member revenue is often driven by transactions, but “[b]ecause message traffic is separate from whether or not a transaction occurs, fees based on message traffic may not correlate with common revenue or fee models,”

290

which could negatively impact certain Industry Members in a significant way.

291

CAT LLC stated that use of message traffic to calculate fees for Industry Members could adversely impact market makers because they

generally create high levels of message traffic.

292

We agree with CAT LLC regarding the benefits of the Executed Share Model and the drawbacks of the Original Funding Model, and thus believe that the decision to replace the use of message traffic to calculate CAT fees with executed equivalent share volume in the Executed Share Model is reasonable.

284

See

Notice,

supra

note 7, 88 FR at 17105;

id.

at 17101-03.

285

Id.

at 17105.

286

See

CAT NMS Plan,

supra

note 2, at Section 11.3(a) and (b).

287

See

Notice,

supra

note 7, 88 FR at 17102-03. The Original Funding Model uses message traffic as the basis of Industry Member CAT fees.

See

CAT NMS Plan,

supra

note 2, at Section 11.3(b).

288

Notice,

supra

note 7, 88 FR at 17103.

289

Id.

290

Id.

at 17102.

291

Id.

292

Id.

at 17103.

The Commission acknowledges that executions do not take place on FINRA; however, the CAT NMS Plan already categorizes FINRA as an Execution Venue because it has trades reported by its members to its TRFs for reporting transactions effected otherwise than on an exchange. Thus, treatment of FINRA as an Execution Venue is not a change to the existing CAT NMS Plan.

293

Additionally, this allocation of fees to FINRA is similar to how Section 31 fees are assessed on FINRA.

294

293

See

CAT NMS Plan Approval Order,

supra

note 2, 81 FR at 84793; CAT NMS Plan,

supra

note 2, at Section 1.1. (defining “Executing Venues”).

294

15 U.S.C. 78ee; Section 31 of the Securities Exchange Act requires each national securities exchange and national securities association to pay transaction fees to the Commission. Specifically, Section 31(c) requires each national securities association to pay to the Commission fees based on the aggregate dollar amount of covered sales transacted by or through any member of the association other than on an exchange. 15 U.S.C. 78ee(c). Section 31(a) permits the Commission to collect transaction fees and assessments designed to recover the costs to the Government of the annual appropriation to the Commission by Congress. 15 U.S.C. 78ee(a).

Moreover, the Executed Share Model does not change the criteria used to charge Execution Venues (market share).

295

While there are differences in how the CAT fees would be allocated among the Participants under the Executed Share Model and the existing Original Funding Model, under the Executed Funding Model, as in the Original Funding Model, the fees charged to Participants will continue to be based upon the level of market share of each Participant.

296

The Original Funding Model approved by the Commission would have assessed CAT fees on Execution Venues (which would include the Participants)

297

based on market share determined by the share volume for a national securities exchange and determined by reported share volume of trades for a national securities association (

i.e.,

FINRA) that had trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange in NMS Stocks or OTC Equity Securities.

298

Additionally, this allocation is similar to how Section 31 fees are assessed on the exchanges and FINRA. FINRA's allocation of CAT fees under the Executed Share Model will continue to be based on its off-exchange market share.

295

See

CAT NMS Plan Approval Order,

supra

note 2, 81 FR at 84793-97; CAT NMS Plan,

supra

note 2, at Section 11.2, Section 11.3.

296

Id.

297

See supra

note 15.

298

See

CAT NMS Plan,

supra

note 2, at Section 11.3(a)(i).

The Commission recognizes that the proposed use of executed equivalent share volume is not a perfect proxy for CAT costs, but believes it is nonetheless a reasonable proxy. The costs of CAT are attributable to a number of factors, such as message traffic, storage, and data processing costs, and that for these reasons, the Commission understands that it is difficult to calculate each CAT Reporter's individual cost burden on the CAT. Additionally, there are other operational costs of the CAT that cannot be easily attributed to a particular CAT Reporter and that need to be funded, such as costs for CAT NMS Plan requirements related to intake capacity,

299

data search tools

300

and data security.

301

Based on the breadth of CAT costs, it is not feasible to calculate the cost burden on CAT of each CAT Reporter. A reasonable proxy for CAT cost burden must therefore be used. As discussed above, the Commission believes the proposed use of executed equivalent share volume is a reasonable method of approximating the cost burden of CAT.

302

Additionally, CAT LLC stated that the proposed Executed Share Model would not unfairly burden or favor a product or product type because the model would recognize the different types of securities by counting executed equivalent share volume differently for NMS Stocks, Listed Options and OTC Equity Securities.

303

The proposed treatment of these different types of securities would result in the equitable allocation of reasonable CAT fees across these securities. The Executed Share Model would count each executed contract for a transaction in Listed Options using the contract multiplier applicable to the specific Listed Option in the relevant transaction,

304

which is appropriate because a Listed Option contract typically represents 100 shares, or it could represent another designated number of shares, and since Listed Options trade in contracts instead of shares, they would need to be converted into shares for purposes of calculating the executed equivalent share volume of a transaction in Listed Options. For OTC Equity Securities, the Executed Share Model would count each executed share for a transaction in OTC Equity Securities as 0.01 executed equivalent shares,

305

which is appropriate because CAT LLC represented that this amount was a result of an analysis it conducted of several different metrics comparing the markets for OTC Equity Securities and NMS Stocks, specifically total notional dollar value, total trades, and average share price per trade.

306

Additionally, since transactions in OTC Equity Securities typically are priced below one dollar, or even one penny, and tend to trade in larger quantities, this treatment is appropriate to prevent CAT Reporters trading OTC Equity Securities from being assessed higher CAT fees than their activity would deserve.

299

In the CAT NMS Plan Notice, the Commission said that it preliminarily believed that intake capacity level is likely to be a primary cost driver for the Central Repository.

See

Securities Exchange Act Release No. 77724 (Apr. 27, 2016), 81 FR 30614 (May 17, 2016), 81 FR at 30770.

300

See

CAT NMS Plan,

supra

note 2, at Appendix C, Section 8.1-8.2.

301

Id.

at Appendix D, Section 4.

302

See supra

notes 271-274 and accompanying text.

303

See

Notice,

supra

note 7, 88 FR at 17116.

304

Id.

at 17093. A Listed Option contract typically represents 100 shares, or it could represent another designated number of shares.

Id.

305

See

proposed Section 11.3(a)(i)(B)(III).

306

See supra

notes 227-229 and accompanying text.

b. Options vs. Equities

The equal allocation of Participant CAT fees to Participants, regardless of whether they are transacting in options or in equities, is reasonable. The Original Funding Model would have divided Participant CAT fees by Execution Venues that execute transactions (or in the case of a national securities association, has trades reported by its members to its trade reporting facility or facilities for reporting transactions effected otherwise than on an exchange) in NMS Stocks or OTC Equity Securities and by Execution Venues that execute transactions in Listed Options.

307

The Executed Share Model instead assesses a CAT fee based purely on executed equivalent share volume.

308

CAT LLC explained that the use of equivalent executed share volume is designed to

normalize options and equities in the calculation of fees, and to recognize and address the different trading characteristics of different types of securities by counting executed equivalent share volume differently for Listed Options and for equities.

309

The use of executed equivalent share volume and, in particular, the different weights assigned to equities versus options, are designed to result in an equitable treatment of the equities and options markets. The proposed treatment of these different types of securities reasonably equalizes the CAT fees across these securities. The Executed Share Model would count each executed contract for a transaction in Listed Options using the contract multiplier applicable to the specific Listed Option in the relevant transaction,

310

which is appropriate because one options contract typically represents 100 shares.

307

See

CAT NMS Plan,

supra

note 2, at Section 11.3(a)(i), (ii).

308

The Executed Share Model would count executed equivalent share volume differently for NMS Stocks, OTC Equity Securities and Listed Options for purposes of calculating a CAT fee. CAT LLC explains that the proposed approach “would not favor or unfairly burden any one type of product or product type.”

See

Notice,

supra

note 7, at 17116.

see also

FINRA June 2022 Letter at 5.

329

See

FINRA April 2023 Letter at 8, n.23. The commenter also stated that “TRF volume contributes to only a very small percentage of annual CAT compute and storage costs.” FINRA May 2023 Letter at 2.

330

See

FINRA April 2023 Letter at 8, n.23; FINRA May 2023 Letter at 2.

331

FINRA May 2023 Letter at 2.

FINRA stated that, unlike the exchange Participants, transactions are not executed on a FINRA marketplace and FINRA does not receive commercial revenue for those transactions.

332

FINRA explained that “while the NMS stock allocation to FINRA under the Funding Model is based on transactions that are reported to FINRA [TRFs], these transactions are not executed on a FINRA marketplace and FINRA does not retain commercial revenues from those transactions”

333

unlike the exchanges that operate each FINRA TRF, which retain the market data and trade reporting revenue of the TRF.

334

FINRA stated that, unlike itself, these exchanges would thus have a revenue stream related to the transactions that would be assessed a CAT fee, and that also, unlike FINRA, exchanges generate revenue from listings and proprietary data feeds in NMS securities.

335

FINRA also stated that FINRA members can report over-the-counter transactions in listed stocks to the FINRA Alternative Display Facility, although most transactions are reported to a TRF.

336

332

See

FINRA April 2023 Letter at 3.

333

Id.

334

Id.

335

Id.

at 4.

336

Id.

at 3, n.8.

FINRA further stated that it cannot necessarily recoup its costs through RSAs that it has entered into with

certain exchanges

337

because the exchanges must first agree to be charged CAT costs under the RSAs; therefore, RSAs would not be a reliable source of CAT funding for FINRA.

338

Additionally, FINRA questioned CAT LLC's statement that the Proposed Amendment “reflects a reasonable effort to allocate costs based on the extent to which different CAT Reporters participate in and benefit from the equities and options markets.”

339

Specifically, FINRA asked how this explains the size of its allocation

340

and noted that this statement “conflates the costs to create and operate the CAT with the usage of CAT data.”

341

337

This statement was made in response to a statement in the Proposed Amendment that FINRA, like the exchange Participants, has revenue sources other than membership fees, giving as an example the RSAs.

See

Notice,

supra

note 7, 88 FR at 17107.

338

See

FINRA April 2023 Letter at 4.

339

Id.

at 7.

340

Id.

341

Id.; see also

FINRA June 2022 Letter at 6.

In the Proposed Amendment, CAT LLC contested the view that FINRA should not be treated as a market center for CAT funding purposes merely because FINRA is not treated as a market center for governance purposes under the National Market System Plan Regarding Consolidated Equity Market Data (“CT Plan”).

342

CAT LLC explained that the purpose and implementation of the CT Plan and the CAT NMS Plan are different.

343

CAT LLC stated that while the CAT NMS Plan explicitly contemplates charging fees to all Participants, including FINRA,

344

and that the CAT is solely for regulatory purposes, providing a regulatory system to facilitate the performance of the self-regulatory obligations of all of the Participants, including the exchanges and FINRA,

345

“[i]n contrast, the CT Plan governs the public dissemination of real-time consolidated equity market data for NMS stocks.”

346

342

See

Notice,

supra

note 7, 88 FR at 17108.

See also

Joint Industry Plan; Order Approving, as Modified, a National Market System Plan Regarding Consolidated Equity Market Data; Securities Exchange Act Release No. 92586 (Aug. 6, 2021), 86 FR 44142 (Aug. 11, 2021) (File No. 4-757) (“Order Approving the CT Plan”). The Order Approving the CT Plan was vacated by the D.C. Circuit on July 5, 2022.

See The NASDAQ Stock Market LLC et al.

SEC,

Case No. 21-1167, D.C. Cir. (July 5, 2022).

See also

Securities Exchange Act Release No. 88827; File No. 4-757 (May 6, 2020), 85 FR 28702 (May 13, 2020) (Order Directing the Exchanges and the Financial Industry Regulatory Authority to Submit a New National Market System Plan Regarding Consolidated Equity Market Data).

343

See

Notice,

supra

note 7, 88 FR at 17108.

344

See

CAT NMS Plan,

supra

note 2, at Sections 11.2 and 11.3.

345

See

Notice,

supra

note 7, 88 FR at 17108.

346

Id.

Certain commenters expressed concern about alleged arbitrary treatment of FINRA by the other Participants of the CAT NMS Plan.

347

FINRA believes that its “outsized allocation”

348

was because of its limited voting power, only having one out of 25 votes on the Operating Committee as it does not control, nor is under common control with, any other Participant.

349

Another commenter stated that the current CAT NMS Plan voting structure results in the unfair and inequitable treatment of FINRA.

350

Both commenters believe that the exchange Participants treat FINRA arbitrarily to benefit themselves, treating FINRA as a market center in the CAT NMS Plan while not as a market center under the CT Plan, which governs the public dissemination of real-time consolidated market data for national market system stocks.

351

One commenter stated that the Participants do not treat FINRA as a market center under the CT Plan in order to limit FINRA's voting power and therefore its ability to decide how to allocate market data revenue.

352

The commenter stated that this example demonstrates the “. . . inherent conflicts of interest that for-profit exchanges have in operating as SROs. . .”

353

347

See

FINRA April 2023 Letter at 6; SIFMA October 2022 Letter at 3.

See also

SIFMA May 2023 Letter at 6, n.11.

348

FINRA April 2023 Letter at 7; FINRA June 2022 Letter at 6.

349

FINRA April 2023 Letter at 4, 8.

See also

FINRA June 2022 Letter at 8.

350

See

SIFMA January 2023 Letter at 3, n.7.

351

See

FINRA April 2023 Letter at 6, n.16; SIFMA October 2022 Letter at 3.

See also

SIFMA May 2023 Letter at 6, n.11. One commenter stated that the Participants treat FINRA in ways that are financially beneficial to them without considering FINRA's role in the marketplace “. . . as the not-for-profit self-regulator for the entire brokerage industry. . .” SIFMA October 2022 Letter at 3.

See also

SIFMA January 2023 Letter at 4; SIFMA October 2022 Letter at 4; SIFMA May 2023 Letter at 8 (recommending that FINRA be treated differently from the Participant exchanges due to its unique role).

352

See

SIFMA October 2022 Letter at 3-4.

See also

SIFMA May 2023 Letter at 6, n.11.

353

SIFMA October 2022 Letter at 3.

See also

SIFMA June 2023 Letter at 4 (quoting a Commission release stating that the Participants are potentially conflicted in allocating CAT fees to themselves and the Industry Members);

supra

note 64.

Certain commenters suggested that the Commission issue an order soliciting comment on whether the Operating Committee should be reorganized consistent with the CT Plan.

354

One commenter stated, “[w]e believe such a governance structure for the CAT would help facilitate a fairer structure for the views of the SROs and industry to be heard and incorporated into any further CAT funding proposal by reducing the ability of the largest exchange groups to dictate the terms of any CAT funding proposal over the objections of other SRO Participants and the industry.”

355

354

SIFMA October 2022 Letter at 2.

see also

MMI July Letter at 1-3. The latter commenter also felt that there should be a disclosure of the conflicts of interest the commenter believes are inherent in having the funding model determined by the Participants.).

355

SIFMA October 2022 Letter at 2. The commenter also stated that the Industry Members are not voting members of the Operating Committee and have no way to direct the cost control efforts of the Participants or change their course if the cost control efforts prove to be unsuccessful.

See

SIFMA June 2022 Letter at 8.

Commenters also believe the allocation to FINRA would increase the allocation to Industry Members.

356

FINRA stated that because it relies on regulatory fees from its members for funding, it must increase its member fees in order to fund CAT costs that it cannot recover from contractual arrangements with TRF business members.

357

FINRA stated that the Proposed Amendment does not adequately analyze the allocation's impact, including whether the allocation would increase Industry Members' allocation of total costs beyond two-thirds.

358

FINRA dismissed as inadequate the Participants' argument that Industry Members can pass through their costs, stating that the Proposed Amendment lacks a detailed description of and transparency into how the fees may be passed on to customers.

359

Another commenter stated that the Participants “do not address the fact that the Executed Share Model for Prospective CAT Costs allocates two-thirds of CAT costs to Industry Members for exchange transactions and more for off-exchange transactions”

360

because they cannot demonstrate that the proposed allocation results in an equitable allocation of reasonable fees.

361

The commenter stated that Industry Members, who would be subject to two-thirds of Prospective CAT Costs under the Executed Share Model, already pay FINRA's operating costs through regulatory fines and fees;

therefore, Industry Members would additionally be indirectly assessed FINRA's one-third CAT fee for off-exchange transactions.

362

The commenter suggested an alternative allocation

363

that would subject FINRA only to a nominal regulatory user fee to access CAT Data.

364

356

See

FINRA April 2023 Letter at 5-7; SIFMA June 2022 Letter at 4; Citadel July Letter at 2, 16, 21,

supra

notes 73-74 and accompanying text.

See also

SIFMA October 2022 Letter at 2, 3.

357

See

FINRA April 2023 Letter at 5-6.

See also

FINRA June 2022 Letter at 7.

358

See

FINRA April 2023 Letter at 6.

359

Id.

at 6-7.

360

SIFMA June 2022 Letter at 4.

See also

SIFMA October 2022 Letter at 3 (“. . . we believe the proposal is flawed because it fails to appropriately consider that Industry Members pay the full costs of operating FINRA.”).

361

See

SIFMA June 2022 Letter at 4.

362

Id.

The commenter also stated that the proposed allocation would result in two-thirds of CAT costs for exchange transactions being imposed on Industry Members, and that this amount would be higher for off-exchange transactions as FINRA would be assessed one-third as the venue fee and Industry Members would be indirectly assessed FINRA's portion of CAT costs as they pay the entire costs of operating FINRA.

Id. See also

SIFMA October 2022 Letter at 2.

363

See supra

notes 100-101 and accompanying text.

364

See

SIFMA January 2023 Letter at 4.

See also

SIFMA May 2023 Letter at 8; SIFMA June 2022 Letter at 5; SIFMA October 2022 Letter at 4;

supra

notes 100-101 and accompanying text.

CAT LLC disagreed with the commenter's proposal to charge FINRA only a nominal regulatory fee.

365

CAT LLC stated that the proposed transaction-based CAT fee is purposely agnostic as to the location of where a trade occurs, and an intent of this design is to avoid influencing whether or where any trading activity would take place. Moreover, CAT LLC stated that FINRA is no different from the exchanges in terms of its regulatory obligations regarding the CAT.

366

CAT LLC also stated that FINRA's allocation is “fair and reasonable as FINRA is currently, and is expected to continue to be, one of the largest regulatory users of the CAT, and it is responsible for the oversight of the very large over-the-counter securities market.”

367

365

See

CAT LLC May 2023 Response Letter at 8.

366

Id.

367

See

CAT LLC July 2023 Response Letter at 35.

FINRA requested that if the Commission were to approve the Proposed Amendment, that it acknowledge “FINRA's need and ability to cover CAT costs that are not recovered through contractual arrangements through member fee increases, so as not to jeopardize FINRA's ability to carry out its critical regulatory mission.”

368

FINRA also stated that it would file a rule change to increase its member fees with the filing of any proposed rule change to effectuate the Funding Model.

369

368

FINRA April 2023 Letter at 7.

369

Id.

The Commission acknowledges the comments objecting to the allocation to FINRA of 34% of the total CAT costs to be borne by Participants,

370

but believes that it is reasonable for the Proposed Amendment to assess fees to FINRA based on executed equivalent share volume like the other Participants for purposes of CAT funding. FINRA is a Participant of the CAT NMS Plan. All Participants are mandated under the CAT NMS Plan to fund the CAT.

371

The Executed Share Model would assess CAT fees based on executed equivalent share volume. Under the Executed Share Model, CAT fees would be allocated among the buyer, seller, and the market regulator in each transaction. FINRA would pay the Participant CAT fee based on off-exchange trades reported by its members to its trade reporting facilities because FINRA is the market regulator responsible for the market in which the TRF transactions occur. The Executed Share Model, like the current funding model, is designed to allocate CAT fees among the Participants based on market share. Since FINRA is generally the market regulator for the over-the-counter markets, its CAT fees, and thus market share, will be based on the trading activity in the over-the-counter markets reported to it by its members. The trading volume of the over-the-counter markets is greater than that on the exchanges; consequently, FINRA will likely be allocated a greater executed equivalent share volume than the other Participants. However, trading volume generates costs for CAT, therefore, given its role overseeing the over-the-counter market, it is reasonable for FINRA to incur a greater share of CAT fees based on the over-the-counter market's trading volume. As discussed above, it is difficult to calculate each CAT Reporter's individual cost burden on the CAT, and a reasonable proxy for CAT cost burden must be used. The proposed use of executed equivalent share volume is a reasonable method of allocating costs because it is readily determinable and equitable since executed share volume is based on trading activity, which impacts CAT costs. In practice, CAT Reporters will be assessed fees corresponding to the cost burden they impose on the CAT through their trading activity, or in FINRA's case, trading activity in the over-the-counter markets reported to it by its members.

370

Id.

at 3; SIFMA May 2023 Letter at 2.

371

See

CAT NMS Plan,

supra

note 2, at Section 11.1(b); Section 11.3(a).

The Commission recognizes that there could be other methodologies for allocating costs among CAT Reporters, such as allocations that take into account the manner in which each Participant earns revenue, but these other methodologies may be significantly more complex and would not necessarily more accurately reflect the cost burden of each CAT Reporter. CAT LLC chose to propose the use of executed equivalent share volume, explaining why trading activity is a reasonable proxy for cost burden and an appropriate metric for allocating CAT costs.

372

Although there may be multiple permissible approaches to cost allocation, the proposed allocation of Participant CAT fees based on executed equivalent share volume is reasonable and meets the Rule 608 approval standard.

373

372

See

Notice,

supra

note 7, 88 FR at 17103.

373

See

17 CFR 242.608(b)(2).

The Commission agrees with CAT LLC that the Executed Share Model reasonably assesses fees to FINRA in the same manner based on transaction volume as other Participants. The Executed Share Model is reasonably designed to be neutral as to the manner of execution and place of execution.

374

All Participants are self-regulatory organizations that have the same regulatory obligations under the Exchange Act, regardless of whether they operate as a for-profit or not-for-profit entity. Their regulatory responsibilities for the operations of CAT are the same.

375

374

See

Notice,

supra

note 7, 88 FR at 17107.

375

Id.

The Commission acknowledges the concerns expressed by commenters that FINRA's allocation could indirectly increase the allocation of CAT fees to Industry Members since Industry Members contribute to FINRA's funding.

376

As discussed above, however, the costs of CAT must be allocated between the Participants and Industry Members according to some formula. Although the Participants and Industry Members have different means of potentially recovering from others some of the costs allocated to them (

e.g.,

the Participants from Industry Members and Industry Members from customers), it is reasonable to allocate costs evenly among the three parties who have primary roles related to the transaction. The Commission agrees with CAT LLC that Industry Members may be able to offset any fees that FINRA assesses them by passing their CAT fees through to their customers, just as they may do with Section 31-related fees and other fees. The Commission recognizes, however, that not all Industry Members currently pass through fees or would determine to do so in the future.

376

See

FINRA April 2023 Letter at 5-7; SIFMA June 2022 Letter at 4; Citadel July Letter at 2, 16, 21,

supra

notes 73-74 and accompanying text.

See also

SIFMA October 2022 Letter at 2, 3; FINRA June 2022 Letter at 4.

Finally, the Commission does not agree that the Participants' treatment of FINRA is arbitrary because FINRA is treated as a market center for purposes

of determining its CAT funding obligations while the CT Plan, which governs the public dissemination of consolidated market data, would not have counted FINRA's market activity for purposes of determining the allocation of votes on the Operating Committee.

377

The different treatment of FINRA in these NMS plans reasonably reflects the very different roles that a market center is used for in these contexts. The CT Plan provisions discussed by the commenters involve the determination of which Participant(s) could be eligible for a second vote on the Operating Committee,

378

while the Executed Share Model proposes to assess FINRA a Participant CAT Fee based on its role as the regulator for the over-the-counter market in which such trades occur.

379

The commenter's request that the Commission issue an order soliciting comment on whether the Operating Committee should be reorganized consistent with the CT Plan

380

would be better addressed in the context of a separate plan amendment.

377

The CT Plan provided that an exchange group or independent exchange that has more than 15 percent of consolidated equity market share during four of the six calendar months preceding a vote of the operating committee would be authorized to cast two votes. The CT Plan stated that FINRA is not considered a market center for purposes of determining consolidated equity market share solely by virtue of facilitating trades through any TRF that FINRA operates in affiliation with a national securities exchange designed to report transactions otherwise than on an exchange.

See supra

note 342.

378

See

FINRA April 2023 Letter at 6; SIFMA October 2022 Letter at 3.

See also

SIFMA January 2023 Letter at 4; SIFMA October 2022 Letter at 4; SIFMA May 2023 Letter at 8.

379

See supra

notes 371-372 and accompanying text.

380

See

SIFMA October 2022 Letter at 2.

4. CAT Executing Broker

As noted above, CAT Executing Brokers will be charged CAT fees.

381

CAT LLC proposed to add a definition of “CAT Executing Broker” to Section 1.1 of the CAT NMS Plan. The definition would explain which party would be identified as a CAT Executing Broker in a transaction.

381

See

Notice,

supra

note 7, 88 FR at 17087.

With respect to transactions on an exchange and over-the-counter transactions, CAT LLC would use transaction reports reported to the CAT by FINRA or the exchanges to identify the transaction, as well as the CAT Executing Broker for each transaction, for purposes of calculating the CAT fees.

382

Under the Participant Technical Specifications, for transactions occurring on a Participant exchange, there is a field for the exchange to report the market participant identifier (“MPID”) of “the member firm that is responsible for the order on this side of the trade.”

383

The Industry Members identified in these fields for the transaction reports would be the CAT Executing Brokers for transactions executed on an exchange.

384

FINRA is required to report to the CAT transactions in Eligible Securities reported to a FINRA trade reporting facility (

i.e.,

the TRF, Over-the Counter Reporting Facility (“ORF”) and Alternative Display Facility (“ADF”)).

385

Under the Participant Technical Specifications, for such transactions reported to a FINRA trade reporting facility, FINRA is required to report the MPID of the executing party as well as the MPID of the contra-side executing party.

386

The Industry Members identified in these two fields for the transaction reports would be the CAT Executing Brokers for over-the-counter transactions.

387

382

Id.

at 17088. The transaction reports used to identify transactions and CAT Executing Brokers do not provide for fractional quantities; therefore, CAT fees would not be calculated using fractional shares or fractional share components of executed orders.

Id.

at 17089.

See supra

notes 280-266 and accompanying text.

383

Section 4.7 (Order Trade Event) and Section 5.2.5.1 (Simple Option Trade Event: Side Details) of the CAT Reporting Technical Specifications for Plan Participants, Version 4.1.0-r17 (Feb. 21, 2023),

https://www.catnmsplan.com/sites/default/files/2023-02/02.21.2023-CAT-Reporting-Technical-Specifications-for-Participants-4.1.0-r17.pdf.

384

See

Notice,

supra

note 7, 88 FR at 17087-88.

385

See

Section 6.1 of the CAT Reporting Technical Specifications for Plan Participants (Feb. 21, 2023). A CAT Executing Broker in over-the-counter transactions identified on the TRF/ORF/ADF Transaction Data Event is determined based on the tape or media report, that is, a trade report that is submitted to a FINRA trade reporting facility and reported to and publicly disseminated by the appropriate exclusive Securities Information Processor. A CAT Executing Broker for over-the-counter transactions is

not

determined based on a non-tape report (

e.g.,

a regulatory report or a clearing report), which is not publicly disseminated. There is an exception to this statement for away-from-market trades. These are non-media trades reported to the TRF with an “SRO Required Modifier Code” of “R”.

386

See

Notice,

supra

note 7, 88 FR at 17087-88.

387

Id.

at 17088.

For transactions on ATSs, if an ATS is identified as the executing party and/or the contra-side executing party in the TRF/ORF/ADF Transaction Data Event, then the ATS would be a CAT Executing Broker for purposes of the Executed Share Model.

388

If the ATS is identified as the executing party for the buyer in such transaction reports, then the ATS would be the CEBB.

389

If the ATS is identified as the executing party for the seller in such transaction reports, then the ATS would be the CEBS.

390

If the ATS is identified as both the executing party and contra-side executing party, the ATS would be both the CEBB and the CEBS.

391

ATSs would determine the executing party and the contra-side executing party reported to FINRA's equity trading facilities in accordance with the transaction reporting requirements for FINRA's equity trading facilities.

392

388

Id.

at 17088-89.

389

Id.

at 17089.

390

Id.

391

Id. See also

FINRA, Trade Reporting Frequently Asked Questions at Section 203,

available at https://www.finra.org/filing-reporting/market-transparency-reporting/trade-reporting-faq#203;

FINRA Regulatory Notice 09-08,

available at https://www.finra.org/rules-guidance/notices/09-08.

392

See

Notice,

supra

note 7, 88 FR at 17089.

For transactions that do not occur on an exchange and there is only a FINRA member identified for one side of the trade, that FINRA member would be treated as the CAT Executing Broker for both the buy-side and the sell-side of the transaction, that is, as the CEBS and CEBB.

393

Additionally, “[f]or any trade report on which a Canadian non-member appears as a party to the trade, the FINRA member must appear as the reporting party.”

394

In this situation, the executing broker identified in the “reportingExecutingMpid” field would be billed for both sides of the transaction.

395

393

See

proposed Section 1.1. (definition of “CAT Executing Broker”).

394

Notice,

supra

note 7, 88 FR at 17089.

395

Id.

The Executed Share Model also provides for cancellations and corrections.

396

CAT LLC stated that it expects to determine CAT fees based on the transaction reports for a month as of a particular day.

397

To the extent that changes are made to the transaction reports on or before the day the CAT fees are determined for the given month, the changes will be reflected in the monthly bill.

398

To the extent that changes are made to the transaction reports after the day the CAT fees are determined for that month, subsequent bills will reflect any changes via debits or credits, as applicable.

399

CAT LLC represented that it will establish specific policies and procedures regarding the treatment of such adjustments as those related to cancellations and corrections, as is required under the CAT NMS Plan to adopt policies, procedures, and practices regarding the billing and collection of fees.

400

Furthermore, CAT LLC stated that it will inform Industry Members and other market participants

of these policies and procedures via FAQs, CAT Alerts and/or other appropriate methods.

401

396

Id.

397

Id.

398

Id.

399

Id.

400

See

CAT NMS Plan,

supra

note 2, at Section 11.1(d).

401

See

Notice,

supra

note 7, 88 FR at 17089.

Certain commenters objected to the proposed definition of “CAT Executing Broker.”

402

One commenter stated that the term “CAT Executing Broker” “does not appear to be universally defined or accepted by Option Industry Members or Participants” and that such lack of acceptance “present[s] a challenge when firms try to assess the impact the `Funding Proposal' will have on their respective businesses.”

403

Accordingly, the commenter advocated that the Executed Share Model follow the “structure already in place for

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