[Federal Register Volume 85, Number 234 (Friday, December 4, 2020)]
[Notices]
[Pages 78395-78401]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-26677]



[[Page 78395]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90535; File No. SR-FINRA-2020-024]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting 
Accelerated Approval of a Proposed Rule Change, as Modified by 
Amendment No. 1 To Delete the FINRA Order Audit Trail System (OATS)

November 30, 2020.

I. Introduction

    On August 14, 2020, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ 
proposed rule changes to delete the Order Audit Trail System (``OATS'') 
rules in the FINRA Rule 7400 Series and FINRA Rule 4554 (the ``OATS 
Rules'') once members are effectively reporting to the Consolidated 
Audit Trail (``CAT''). On September 1, 2020, the proposed rule change 
was published for comment in the Federal Register.\3\ On October 8, 
2020, the Commission extended the time period for Commission action on 
the proposed rule change to November 30, 2020.\4\ The Commission 
received three comment letters on the Notice.\5\ On October 29, 2020, 
FINRA responded to the comment letters,\6\ and filed Amendment No. 1 to 
the proposed rule change (``Amendment No. 1''). The Commission is 
publishing this notice to solicit comments on Amendment No. 1 to the 
proposed rule change from interested parties and is approving the 
proposed rule change, as modified by Amendment No. 1, on an accelerated 
basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 89679 (August 26, 
2020), 85 FR 54461 (the ``Notice'').
    \4\ See Securities Exchange Act Release No. 90129, 85 FR 65113 
(October 14, 2020).
    \5\ See Letters from William J. Leahey, Head of Regulatory 
Compliance, Refinitiv, to Vanessa Countryman, Secretary, Commission, 
dated September 22, 2020 (``Refinitiv Letter''); Howard Meyerson, 
Managing Director, Financial Information Forum, to Vanessa 
Countryman, Secretary, Commission, dated September 22, 2020 (``FIF 
Letter''); Ellen Greene, Managing Director, Equity & Options Market 
Structure, to Vanessa Countryman, Secretary, Commission, dated 
September 24, 2020.
    \6\ See Letter from Lisa C. Horrigan, Associate General Counsel, 
FINRA, to Vanessa Countryman, Secretary, Commission, dated October 
29, 2020 (``Response Letter''). In Amendment No. 1, FINRA proposes 
to modify the proposal to provide that it will calculate the match 
rate in the aggregate across all equity exchanges instead of 
calculating the equity exchange match rate on a per exchange basis.
---------------------------------------------------------------------------

II. Background

    Pursuant to Section 11A of the Exchange Act \7\ and Rule 608 of 
Regulation NMS thereunder,\8\ FINRA and other self-regulatory 
organizations filed with the Commission a National Market System Plan 
Governing the Consolidated Audit Trail (the ``CAT NMS Plan'' or 
``Plan'') \9\ to comply with Rule 613 of Regulation NMS under the 
Exchange Act.\10\ The Plan was published for comment in the Federal 
Register on May 17, 2016,\11\ and approved by the Commission, as 
modified, on November 15, 2016.\12\ On March 15, 2017, the Commission 
approved rule change proposals submitted by the by all the national 
securities exchanges and association that are party to the CAT NMS Plan 
(``Participants'') that implement provisions of the CAT NMS Plan 
applicable to their members (the ``CAT Compliance Rules'').\13\
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78k-1.
    \8\ 17 CFR 242.608.
    \9\ See Letter from Participants to Brent J. Fields, Secretary, 
Commission, dated February 8, 2016. Prior versions of the CAT NMS 
Plan were submitted to the Commission on September 30, 2014; 
February 27, 2015; and December 23, 2015.
    \10\ 17 CFR 242.613.
    \11\ Securities Exchange Act Release No. 77724 (April 27, 2016), 
81 FR 30614 (May 17, 2016).
    \12\ Securities Exchange Act Release No. 79318 (November 15, 
2016), 81 FR 84696 (November 23, 2016) (``CAT Approval Order'').
    \13\ Securities Exchange Act Release Nos. 80255 (March 15, 
2017), 82 FR 14563 (March 21, 2017); 80256 (March 15, 2017), 82 FR 
14526 (March 21, 2017).
---------------------------------------------------------------------------

    The CAT NMS Plan is designed to create, implement, and maintain a 
consolidated audit trail that will capture in a single consolidated 
data source customer and order event information for orders in NMS 
Securities and OTC Equity Securities (together, ``CAT-Eligible 
Securities''), across all markets, from the time of order inception 
through routing, cancellation, modification, or execution. Section C.9 
of Appendix C to the Plan requires each Participant to ``file with the 
SEC the relevant rule change filing to eliminate or modify its 
duplicative rules within six (6) months of the SEC's approval of the 
CAT NMS Plan'' and states that ``the elimination of such rules and the 
retirement of such systems [will] be effective at such time as CAT Data 
meets minimum standards of accuracy and reliability.'' FINRA submitted 
a proposed rule change that was substantively similar to the instant 
filing on May 15, 2017.\14\ FINRA subsequently withdrew the filing on 
January 12, 2018.\15\
---------------------------------------------------------------------------

    \14\ See Securities Exchange Act 80783 (May 26, 2017), 82 FR 
25423 (June 1, 2017)(SR-FINRA-2017-13).
    \15\ See Securities Exchange Act Release No. 82524 (January 17, 
2018), 83 FR 3230 (January 23, 2018).
---------------------------------------------------------------------------

    Section C.9 of Appendix C to the Plan also requires these rule 
filings to discuss the following:
    (i) Specific accuracy and reliability standards that will determine 
when duplicative systems will be retired, including, but not limited 
to, whether the attainment of a certain Error Rate should determine 
when a system duplicative of the CAT can be retired;
    (ii) whether the availability of certain data from Small Industry 
Members would facilitate a more expeditious retirement of duplicative 
systems; and
    (iii) whether individual Industry Members can be exempted from 
reporting to duplicative systems once their CAT reporting meets 
specified accuracy and reliability standards, including, but not 
limited to, ways in which establishing cross-system regulatory 
functionality or integrating data from existing systems and the CAT 
would facilitate such Individual Industry Member exemptions.\16\
---------------------------------------------------------------------------

    \16\ See id.
---------------------------------------------------------------------------

    In response to these requirements, FINRA submitted the instant 
filing (the ``Proposal''), which is described below.

III. Description of the Proposed Rule Changes

    As required by the CAT NMS Plan, the Proposal discusses: (1) The 
specific standards that will govern when OATS will be eliminated; (2) 
whether the availability of data from Small Industry Members would 
facilitate duplicative systems retirement; and (3) the feasibility of 
granting exemptions from reporting to duplicative systems to individual 
Industry Members whose CAT reporting meets certain accuracy and 
reliability thresholds.

A. Specific Accuracy and Reliability Standards

1. OATS
    The OATS rules require certain FINRA members to report a variety of 
data regarding transactions in OTC equity securities and NMS stocks to 
OATS on a daily basis.\17\ In the proposal, FINRA proposes to delete 
its OATS rules from its rulebook once CAT Data achieves certain pre- 
and post-correction error rates and certain qualitative criteria have 
been met.
---------------------------------------------------------------------------

    \17\ See FINRA Rule 7400.
---------------------------------------------------------------------------

    FINRA stated that it believes that relevant error rates are the 
primary, but not the sole, metric by which to determine the CAT's 
accuracy and reliability and will serve as the baseline

[[Page 78396]]

requirement needed for OATS to be retired.\18\ FINRA stated that the 
Participants established an initial Error Rate, as defined in the Plan, 
of 5% on initially submitted data (i.e., data as submitted by a CAT 
Reporter before any required corrections are performed).\19\ The 
Participants based this Error Rate on their consideration of ``current 
and historical OATS Error Rates, the magnitude of new reporting 
requirements on the CAT Reporters and the fact that many CAT Reporters 
may have never been obligated to report data to an audit trail.'' \20\
---------------------------------------------------------------------------

    \18\ See Notice, supra note 3 at 54463.
    \19\ See CAT NMS Plan, Appendix B, Section A.3(b).
    \20\ See CAT NMS Plan, Appendix C, Section A.3(b).
---------------------------------------------------------------------------

    In the Proposal, FINRA expressed agreement with the Participants' 
conclusion that a 5% pre-correction threshold ``strikes the balance of 
adapting to a new reporting regime, while ensuring that the data 
provided to regulators will be capable of being used to conduct 
surveillance and market reconstruction, as well as having a sufficient 
level of accuracy to facilitate the retirement of existing regulatory 
reports and systems where possible.'' \21\ However, FINRA believed 
that, when assessing the accuracy and reliability of the data for the 
purposes of retiring OATS, the error thresholds should be measured in 
more granular ways and should also include minimum error rates of post-
correction data, which represents the data most likely to be used by 
FINRA to conduct surveillance. Although FINRA is proposing to measure 
the appropriate error rates in the aggregate rather than firm-by-firm, 
FINRA expressed the belief that the error rates for equity securities 
should be measured separately from options since options orders are not 
currently reported regularly or included in OATS.\22\
---------------------------------------------------------------------------

    \21\ Id.
    \22\ See Notice, supra note 3 at 54463.
---------------------------------------------------------------------------

    FINRA also proposes that, before OATS is retired, the CAT would 
generally need to achieve a sustained error rate for Industry Member 
reporting in each of the categories below:
    <bullet> Rejection Rates and Data Validations. FINRA has reviewed 
the data validations for the CAT, which are set forth in the Industry 
Member Technical Specifications published by the Plan Processor,\23\ 
and confirmed that they are substantially similar to OATS. While not 
required to be designed the same as OATS, data validations must be 
functionally equivalent to OATS in accordance with the CAT NMS Plan 
(i.e., the same types of basic data validations must be performed by 
the Plan Processor to comply with the CAT NMS Plan requirements). 
Appendix D of the Plan, for example, requires that certain file 
validations \24\ and syntax and context checks be performed on all 
submitted records.\25\ If a record does not pass these basic data 
validations, it must be rejected and returned to the CAT Reporter to be 
corrected and resubmitted.\26\ The Plan also requires the Plan 
Processor to provide daily statistics on rejection rates after the data 
has been processed, including the number of files rejected and 
accepted, the number of order events accepted and rejected, and the 
number of each type of report rejected.\27\ FINRA is proposing that, 
over the 180-day period, aggregate rejection rates (measured separately 
for equities and options) must be no more than 5% pre-correction or 2% 
post-correction across all CAT Reporters.\28\
---------------------------------------------------------------------------

    \23\ See, e.g., Industry Member Technical Specifications (2a/2b) 
version 2.2.1 r6, dated June 22, 2020, available at 
www.catnmsplan.com/sites/default/files/2020-06/CAT_Reporting_Technical_Specifications_for_Industry%20Members_v2.2.1r6_CLEAN.pdf.
    \24\ See CAT NMS Plan, Appendix D, Section 7.2. The Plan 
requires the Plan Processor to confirm that file transmission and 
receipt are in the correct formats, including validation of header 
and trailers on the submitted report, confirmation of a valid SRO-
Assigned Market Participant Identifier, and verification of the 
number of records in the file. Id.
    \25\ See id. The Plan provides that syntax and context checks 
would include format checks (i.e., that data is entered in the 
specified format); data type checks (i.e., that the data type of 
each attribute conforms to the specifications); consistency checks 
(i.e., that all attributes for a record of a specified type are 
consistent); range/logic checks (i.e., that each attribute for every 
record has a value within specified limits and the values provided 
are associated with the event type they represent); data validity 
checks (i.e., that each attribute for every record has an acceptable 
value); completeness checks (i.e., that each mandatory attribute for 
every record is not null); and timeliness checks (i.e., that the 
records were submitted within the submission timelines). Id.
    \26\ See id.
    \27\ See id.
    \28\ CAT NMS Plan, Appendix C, Section A.3(b), at n. 102. FINRA 
stated that while error rates after reprocessing of error 
corrections are ultimately expected to be de minimis for the CAT, it 
does not believe that post-correction errors need to be de minimis 
before OATS can be retired and is not suggesting, with this 
proposal, that 2% would meet the ultimate objective of de minimis 
error rates for CAT. In other words, the Proposal does not change 
the standard under the CAT NMS Plan that post-correction errors must 
be de minimis. See Notice, supra note 3 at n. 24.
---------------------------------------------------------------------------

    <bullet> Intra-Firm Linkages. The Plan requires that ``the Plan 
Processor must be able to link all related order events from all CAT 
Reporters involved in the lifecycle of an order.'' \29\ At a minimum, 
this requirement includes the creation of an order lifecycle between 
``[a]ll order events handled within an individual CAT Reporter, 
including orders routed to internal desks or departments with different 
functions (e.g., an internal ATS).'' \30\ FINRA is proposing that 
aggregate intra-firm linkage rates across all Industry Member Reporters 
must be at least 95% pre-correction and 98% post-correction.
---------------------------------------------------------------------------

    \29\ CAT NMS Plan, Appendix D, Section 3.
    \30\ Id.
---------------------------------------------------------------------------

    <bullet> Inter-Firm Linkages. The order linkage requirements in the 
Plan also require that the Plan Processor be able to create the 
lifecycle between orders routed between broker-dealers.\31\ FINRA is 
proposing that at least a 95% pre-correction and 98% post-correction 
aggregate match rate be achieved for orders routed between two Industry 
Member Reporters.\32\
---------------------------------------------------------------------------

    \31\ Id.
    \32\ This assumes linkage statistics will include both unlinked 
route reports and new orders where no related route report could be 
found.
---------------------------------------------------------------------------

    <bullet> Order Linkage Rates. In addition to creating linkages 
within and between broker-dealers, the Plan also includes requirements 
that the Plan Processor be able to create lifecycles to link various 
pieces of related orders.\33\ For example, the Plan requires linkages 
between customer orders and ``representative'' orders created in firm 
accounts for the purpose of facilitating a customer order, riskless 
principal orders, and orders worked through average price accounts.\34\ 
Pursuant to the phased approach for Industry Member reporting certain 
of these order linkages will not be required in the initial phase of 
reporting (or ``Phase 2a''), which commenced on June 22, 2020.\35\ 
FINRA is proposing that there be at least a 95% pre-correction and 98% 
post-correction linkage rate for orders that are required in Phase 2a.
---------------------------------------------------------------------------

    \33\ See CAT NMS Plan, Appendix D, Section 3.
    \34\ See id.
    \35\ See CAT Reporting Timelines at www.catnmsplan.com/timelines/. See also Securities Exchange Act Release No. 88702 
(April 20, 2020), 85 FR 23075 (April 24, 2020) (Order Granting 
Conditional Exemptive Relief from Sections 6.4, 6.7(a)(v) and 
6.7(a)(vi) of the CAT NMS Plan) (``Phased Industry Member Reporting 
Exemptive Order'') and FINRA Rule 6895. Linkages for representative 
order scenarios involving agency average price trades, net trades 
and aggregated orders will not be required until the third phase of 
reporting (or ``Phase 2c'') is implemented in April 2021; such 
linkages are not required in OATS today.
---------------------------------------------------------------------------

    While such linkages are not required in OATS today, FINRA believes 
that it is appropriate to evaluate them for purposes of retiring OATS. 
These linkages represent a significant enhancement to the data 
currently available in OATS and will enhance the quality of the equity 
audit trail. FINRA does not anticipate that the error rates for the 
Phase 2a representative order

[[Page 78397]]

linkages in CAT would be significantly higher than the order linkages 
available in OATS today. Nonetheless, in evaluating whether the 
standards for OATS retirement have been met, FINRA has stated that it 
will take into consideration if the error rates for the Phase 2a 
representative order linkages have a significant negative impact on the 
overall error rates for order linkages.
    <bullet> Exchange and TRF/ORF Match Rates. The Plan requires that 
an order lifecycle be created to link ``[o]rders routed from broker-
dealers to exchanges'' and ``[e]xecuted orders and trade reports.'' 
\36\ FINRA is proposing at least a 95% pre-correction and 98% post-
correction aggregate match rate across all equity exchange for orders 
routed from Industry Members to an exchange and, for over-the-counter 
executions, the same match rate for orders linked to trade reports.\37\
---------------------------------------------------------------------------

    \36\ Id.
    \37\ See Amendment No. 1, supra note 6.
---------------------------------------------------------------------------

    FINRA has stated that it intends to commence its review of CAT data 
and error rates based on Phase 2a data and linkages, which would 
replicate the data in OATS today, and will not wait for implementation 
of Phase 2c reporting (and the attendant linkages) to do so. Large 
Industry Members and Small Industry Members that currently are 
reporting to OATS (``Small Industry OATS Reporters'') are required to 
submit data to the CAT for these same events and scenarios during Phase 
2a. Accordingly, FINRA believes that Phase 2a Industry Member Data is 
the most relevant for OATS retirement purposes. FINRA anticipates that 
it will retire OATS based solely on Phase 2a reporting, assuming the 
threshold pre- and post-correction error rates are achieved and FINRA's 
use of the data confirms that the data is accurate and reliable, as 
discussed below.
    Once these error rate thresholds are met, FINRA has stated that it 
must also evaluate and confirm through incorporation of CAT Data into 
its automated surveillance program that the data is accurate and 
reliable.\38\ Thus, in addition to the maximum error rates and matching 
thresholds proposed above, FINRA's proposal requires that use of CAT 
Data must confirm that (i) there are no material issues that have not 
been corrected (e.g., delays in the processing of data, issues with 
query functions, etc.), (ii) the CAT includes all data necessary to 
allow FINRA to continue to meet its surveillance obligations and (iii) 
the Plan Processor is sufficiently meeting its obligations under the 
CAT NMS Plan relating to the reporting and linkage of Phase 2a Industry 
Member Data. FINRA believes that any errors in the CAT Data may 
manifest themselves only after surveillance patterns and other queries 
have been run. Thus, FINRA believes that while error rate thresholds 
may be met over a 180-day period, additional time may be required to 
reliably establish that usage of the CAT has not revealed material 
issues that have not been corrected and allow contextual analysis of 
the data to take place to uncover errors in reporting or processing 
that may not be apparent from more standardized data processes.
---------------------------------------------------------------------------

    \38\ For example, FINRA will need to transition all or 
substantially all of its automated surveillance patterns to CAT Data 
in order to evaluate the accuracy and reliability of the data.
---------------------------------------------------------------------------

    In order to alert members of the status of the OATS Rules, if the 
Commission approves the proposed rule change, FINRA is proposing to add 
introductory language to Rule 4554 and the Rule 7400 Series that will 
state that the SEC has approved a proposed rule change (SR-FINRA-2020-
024) to remove Rule 4554 and the Rule 7400 Series from the FINRA 
rulebook; however, by its terms, SR-FINRA-2020-024 will not be 
implemented until FINRA has determined that the CAT has achieved a 
level of accuracy and reliability sufficient to replace OATS. FINRA has 
stated that once it has determined that such standards have been met, 
FINRA will file for immediate effectiveness a rule filing setting forth 
the basis for its determination and will publish a Regulatory Notice 
announcing the implementation date of SR-FINRA-2020-024.
2. Small Industry Member Data Availability
    The second issue the Plan requires the proposed rule change to 
address is ``whether the availability of certain data from Small 
Industry Members two years after the Effective Date would facilitate a 
more expeditious retirement of duplicative systems.'' \39\ FINRA 
believes that there is no effective way to retire OATS until all 
current OATS reporters are reporting to the CAT. Pursuant to the phased 
reporting approach, Small Industry OATS Reporters and Large Industry 
Members were required to begin reporting to the CAT on the same date, 
June 22, 2020. Thus, at this time, all current OATS reporters are 
required to report to the CAT.\40\ Small Industry Members that are not 
currently required to record and report information to OATS are 
required to begin reporting to the CAT in December 2021.\41\
---------------------------------------------------------------------------

    \39\ See CAT NMS Plan, Appendix C, Section C.9.
    \40\ The 180-day timeframes discussed above with respect to 
usage of the data and calculation of error rates will apply to data 
reported to the CAT by Small Industry OATS Reporters.
    \41\ See supra note 36.
---------------------------------------------------------------------------

3. Individual Industry Member Exemptions
    The final issue the Plan requires the proposed rule change to 
address is ``whether individual Industry Members can be exempted from 
reporting to duplicative systems once their CAT reporting meets 
specified accuracy and reliability standards, including, but not 
limited to, ways in which establishing cross-system regulatory 
functionality or integrating data from existing systems and the CAT 
would facilitate such Individual Industry Member exemptions.'' \42\
---------------------------------------------------------------------------

    \42\ See CAT NMS Plan, Appendix C, Section C.9.
---------------------------------------------------------------------------

    FINRA has stated that it believes that a single cut-over from OATS 
to CAT is highly preferable to a firm-by-firm approach and is not 
proposing to exempt members from the OATS requirements on a firm-by-
firm basis.\43\ FINRA explained that the primary benefit to a firm-by-
firm exemptive approach would be to reduce the amount of time an 
individual firm is required to report to a legacy system (e.g., OATS) 
if it is also accurately and reliably reporting to the CAT. FINRA 
believes that the overall accuracy and reliability thresholds for the 
CAT described above would need to be met under any conditions before 
firms could stop reporting to OATS. In addition, a firm-by-firm 
approach would require that OATS and CAT data be combined and 
integrated in order for FINRA to conduct surveillance in accordance 
with SEC rules and SRO obligations. Moreover, as discussed above, Small 
Industry OATS Reporters are required to report to the CAT on the same 
timeframe as all other OATS Reporters (i.e., Large Industry Members). 
Thus, FINRA believes there is no need to exempt members from OATS 
requirements on a firm-by-firm basis.
---------------------------------------------------------------------------

    \43\ See Notice, supra note 3, at 54465.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    After carefully considering the Proposal, the comments submitted, 
and FINRA's response to the comments, the Commission finds that the 
proposed rule change, as modified by Amendment No., 1 is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to national securities exchanges and 
associations.\44\ Specifically, the

[[Page 78398]]

Commission finds that the Proposal is consistent with Section 15A(b)(6) 
of the Act,\45\ which requires, among other things, that the rules of 
an association be designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest, and are not designed to permit 
unfair discrimination between customers, issuers, brokers or dealers. 
In addition, the Commission finds the Proposal is consistent with 
Section 15A(b)(9) of the Act,\46\ which requires that the rules of an 
association not impose any burden on competition that is not necessary 
or appropriate in furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \44\ In approving these proposed rule changes, the Commission 
has considered the proposed rules' impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \45\ 15 U.S.C. 78o-3(b)(6).
    \46\ 15 U.S.C. 78o-3(b)(9).
---------------------------------------------------------------------------

    The Commission also finds that the proposed rule change is 
consistent with Section 11A of the Act,\47\ and the CAT NMS Plan. 
Section 11A of the Act directs the Commission, with due regard for the 
public interest, the protection of investors, and the maintenance of 
fair and orderly markets, to use its authority to facilitate the 
establishment of a national market system for securities, including by 
authorizing or requiring SROs to act jointly to plan, develop, operate, 
or regulate a national market system. As discussed above, the Plan 
requires the proposal to discuss the specific accuracy and reliability 
standards that would determine when duplicative systems would be 
retired, whether the availability of certain data from Small Industry 
Members would facilitate a more expeditious retirement of duplicative 
systems, and whether individual Industry Members could be exempted from 
reporting to duplicative systems once their CAT reporting meets 
specified accuracy and reliability standards.\48\ Accordingly, FINRA 
filed the Proposal to indicate when the OATS Rules would be eliminated 
once CAT is sufficiently accurate and reliable and to explain how they 
intend to assess CAT's accuracy and reliability. As discussed below, 
the Commission believes that the Proposal is consistent with the above-
noted provisions of the CAT NMS Plan and consistent with the Act 
because it is reasonably designed to assist the SROs in meeting their 
regulatory obligations pursuant to Rule 613 and the Plan.
---------------------------------------------------------------------------

    \47\ 15 U.S.C. 78k-1.
    \48\ See CAT NMS Plan, Appendix C, Section C.9. See Phased 
Industry Member Reporting Exemptive Order, supra note 34.
---------------------------------------------------------------------------

    The Commission finds that FINRA's proposal to delete its OATS rules 
is consistent with the Act. While OATS has provided an important 
resource for surveillance of the OTC market for equity securities, CAT 
is designed to be a more robust tool for market surveillance. Unlike 
OATS, the CAT will include order and transaction information from the 
Exchanges and will enable regulators to trace the complete life cycle 
of every order, regardless of whether it is routed or executed OTC or 
on an exchange.
    FINRA's proposed approach to the timing of retiring OATS is 
appropriate. Three commenters stated the need for the ``urgent 
decommissioning of OATS'',\49\ and for the retirement of OATS in ``an 
efficient and timely manner'' \50\ and on an ``expedited basis'' \51\ 
to address the current duplication of firm resources. In its Response 
Letter, FINRA stated that it understands the technology costs and 
resources firms have dedicated and continue to dedicate to OATS, and 
that FINRA is committed to retiring OATS as efficiently and 
expeditiously as possible. The commenters also believed that OATS could 
be retired prior to the commencement of Phase 2c reporting on April 26, 
2021. They expressed concern that Phase 2c error rate reporting would 
negatively impact the timing for the retirement of OATS.\52\ However, 
the retirement of OATS is independent of Phase 2c reporting. The 
earliest OATS can be retired is April 26, 2021 because error rate 
thresholds must be met over a 180-day period. In addition, as discussed 
in greater detail below, Phase 2c error rates are not part of the OATS 
retirement error rate calculation and therefore should not delay the 
retirement of OATS. In finding that the proposed timing for retiring 
OATS, after commencement of Phase 2c reporting on April 26, 2021, is 
consistent with the Act, the Commission considered FINRA's 
representation that it will not take Phase 2c error rates into account 
in determining whether the proposed standards for the retirement of 
OATS have been met. Thus, the Commission believes that the commencement 
of Phase 2c reporting does not impact the timing of OATS retirement.
---------------------------------------------------------------------------

    \49\ See Refinitiv Letter, supra note 5.
    \50\ See SIFMA Letter, supra note 5.
    \51\ See FIF Letter, supra note 5.
    \52\ See FIF Letter, Refinitiv Letter, and SIFMA Letter, supra 
note 5.
---------------------------------------------------------------------------

    All three commenters commented on FINRA's proposal to evaluate and 
confirm, through incorporation of CAT Data into its automated 
surveillance program, that CAT Data is accurate and reliable.\53\ One 
of these commenters argued that the process for incorporating CAT Data 
into FINRA's surveillance program should begin as soon as possible and 
asked FINRA to clarify that it will not wait for industry reporting to 
achieve the applicable error rates for 180 days before beginning to 
test its systems.\54\ Another commenter stated that while it agrees 
with FINRA's goal of operationalizing CAT Data in its automated 
surveillances with the confidence necessary for FINRA to eliminate 
OATS, this is dependent on factors outside the control of Industry 
Members.\55\ In addition, the third stated that the ``open-ended 
nature'' of the non-error-rate conditions should not extend the 
retirement of OATS beyond the 180-day period.\56\ The Commission 
believes that the proposed conditions relating to FINRA's use of the 
CAT Data are consistent with the CAT NMS Plan. The CAT NMS Plan 
provides that FINRA must be able to verify that the data is of 
``sufficient quality for surveillance purposes.''
---------------------------------------------------------------------------

    \53\ See FIF Letter, Refinitiv Letter, and SIFMA Letter, supra 
note 5.
    \54\ See SIFMA Letter, supra note 5.
    \55\ See Refinitiv Letter, supra note 5.
    \56\ See FIF Letter, supra note 5.
---------------------------------------------------------------------------

    In any event, FINRA stated that it has already begun the process of 
transitioning its automated surveillance patterns and testing the CAT 
Data, addressing commenters' concerns that FINRA is not waiting for 
industry reporting to achieve the applicable error rates for a 180-day 
period before commencing this process. However, as FINRA explained, the 
errors in the CAT Data may not be apparent until surveillance patterns 
and other queries have been run.\57\ Error rate thresholds may be met 
over a 180-day period, however, additional time may be required to 
reliably allow contextual analysis of the data to take place to uncover 
errors in reporting or processing that may not be apparent from more 
standardized data validation processes. For these reasons, the 
Commission concludes that FINRA's proposal to evaluate and confirm that 
CAT Data is accurate and reliable is reasonable.
---------------------------------------------------------------------------

    \57\ See Response Letter, supra note 6, at 4.
---------------------------------------------------------------------------

    The Commission concludes that FINRA's proposed approach to review 
CAT data and error rates to determine if the OATS Rules can be deleted 
based on Phase 2a Industry Member data and linkages is appropriate as 
this is the data reported in OATS today, and thus is the most relevant 
for determining if OATS

[[Page 78399]]

should be retired.\58\ Two commenters objected to FINRA including error 
rates for Phase 2a representative order linkages, arguing that such 
linkages are not required in OATS and therefore should be not 
considered in determining whether OATS can be retired.\59\ The 
representative order linkages required in Phase 2a are ``simple'' 
linkages,\60\ and do not include more complex representative order 
scenarios, such as those involving agency average price trades, net 
trades and aggregated orders, which will not be required until Phase 
2c. Statistics provided by FINRA CAT show that firms are performing 
these linkages with error rates well under those FINRA is proposing to 
require for retirement of OATS.\61\ Based on these statistics, the 
Phase 2a representative order linkages should not significantly impact 
linkage error rates for OATS retirement purposes.\62\ In addition, in 
evaluating whether the standards for OATS retirement have been met, 
FINRA will evaluate whether the error rate is the result of unlinked 
representative orders to create an apples-to-apples comparison to 
OATS.\63\
---------------------------------------------------------------------------

    \58\ All Industry Members that currently are reporting to OATS 
are required to the submit data to the CAT during Phase 2a. See 
Phased Industry Member Reporting Exemptive Order, supra note 35.
    \59\ See Refinitiv Letter and SIFMA Letter, supra note 5.
    \60\ In Phase 2a, linkage is required between the representative 
street side order and the order being represented when the 
representative order was originated specifically to represent a 
single order (received either from a customer or another broker-
dealer) and there is: (1) An existing direct electronic link in the 
firm's system between the order being represented and the 
representative order, and (2) any resulting executions are 
immediately and automatically applied to the represented order in 
the firm's system. See Response Letter, supra note 6, at n. 7.
    \61\ See https://catnmsplan.com/sites/default/files/2020-11/11.19.20-Monthly-CAT-Implementation-Update.pdf, at p. 5.
    \62\ See Response Letter, supra note 6, at 6.
    \63\ Id. at 7.
---------------------------------------------------------------------------

    FINRA has committed to retiring OATS as soon as reasonably 
practicable,\64\ and has stated that if all other proposed criteria 
have been met, it does not anticipate delaying OATS retirement based on 
Phase 2a representative order linkage error rates alone.\65\ The 
Commission believes that including error rates for Phase 2a 
representative order linkages is reasonable, as they will be included 
by FINRA's automated surveillance program and are not impacting error 
rates to date.\66\ Actual data provided by FINRA CAT is consistent with 
FINRA's representation in its Response Letter that it is unlikely that 
the error rates for the Phase 2a representative order linkages in CAT 
will be significantly higher than the order linkages available in OATS 
today,\67\ and FINRA does not anticipate delaying OATS retirement based 
solely on Phase 2a representative order linkage error rates.\68\
---------------------------------------------------------------------------

    \64\ Id. at 5.
    \65\ Id. at 6-7.
    \66\ See supra note 61.
    \67\ Id.
    \68\ See Response Letter, supra note 3, at 6-7.
---------------------------------------------------------------------------

    The Commission also finds that FINRA's proposed framework for 
assessing the accuracy and reliability of CAT Data for purposes of 
retiring OATS--including the ``single cut-over'' approach; and the 
scope, commencement, timeframe, and methodology of the assessment--is 
consistent with the Act. The Plan states that the elimination or 
modification of the SROs' duplicative rules and the retirement of the 
related systems will be ``effective at such time as CAT Data meets 
minimum standards of accuracy and reliability.'' \69\ ``CAT Data'' is 
defined broadly \70\ and includes customer information and order and 
transaction records pertaining to NMS stocks, OTC Equity Securities, 
and listed options submitted by both Participants and Industry Members. 
The Commission finds that the assessment mechanism proposed by FINRA is 
consistent with both the Act and the CAT NMS Plan, because it is 
reasonably designed to ensure that, before OATS is retired and OATS 
reporting requirements are eliminated, CAT is operating with sufficient 
accuracy and reliability for regulatory purposes, including by 
assessing whether compliance with key requirements of the CAT NMS Plan 
has been attained.
---------------------------------------------------------------------------

    \69\ CAT NMS Plan, Appendix C, Section C.9.
    \70\ See CAT NMS Plan, Section 1.1.
---------------------------------------------------------------------------

    Although FINRA generally intends to limit its assessment of error 
rates to Industry Member Data and to focus its assessment on fields and 
securities that are currently in OATS, some information that is outside 
the scope of OATS could be relevant to the consideration of the overall 
accuracy and reliability of the CAT and the performance of the Plan 
Processor. The Commission believes that while consideration must be 
given to the overall accuracy and reliability of CAT Data more broadly, 
it is appropriate for FINRA to focus their assessment of whether CAT is 
performing with a sufficient degree of accuracy and reliability to 
permit OATS retirement on data related to OATS-eligible securities by 
the same types of entities (i.e., broker-dealers) that are required to 
submit OATS reports. An assessment of the quality of broker-dealer 
reporting to CAT could be skewed by consideration of Participant 
reporting, particularly considering that Participants are required to 
report one year sooner than Industry Members and, all things being 
equal, can be expected to attain higher level of accuracy before 
Industry Members. Furthermore, focusing on Industry Member records will 
help identify any issues specific to this class of CAT Reporters and 
facilitate quicker improvements. This in turn could provide regulators 
with better oversight capability more quickly and help minimize the 
costs associated with duplicative reporting.
    In addition, the Commission believes that FINRA's assessment of the 
data quality of specific categories of errors--i.e., rejection rates, 
intra-firm linkages, inter-firm linkages, order linkage rates, exchange 
and TRF/ORF match rates--are appropriate. The categories identified by 
FINRA are categories of errors calculated by OATS today and reflect key 
aspects of data quality that affect the ability of regulators to 
effectively access and use CAT Data to perform their regulatory 
functions. Thus, Commission believes it is reasonable for FINRA to 
examine these aspects of the data to confirm that they are exhibiting 
accuracy levels consistent with the required pre- and post-correction 
accuracy levels of CAT Data overall. In particular one of the 
significant limitations of existing audit trail systems is the 
deficiency of linkages between the various events in the order life 
cycle--and the lack of linkage to specific customers--which results in 
regulators attempting to link these events together themselves from 
various sources through ad hoc and cumbersome processes that can 
introduce errors.\71\ Therefore, the Commission concludes that it is 
appropriate for FINRA's assessment to include various aspects of order 
and transaction linkages.
---------------------------------------------------------------------------

    \71\ See, e.g., CAT Approval Order, 81 FR at 84814-15 (``cross-
market examinations require the cumbersome and time-consuming task 
of linking many different data sources . . . regulators that are 
determining whether rule violations have occurred will combine 
trading data from sources such as public feeds, SRO audit trails, 
EBS data, and trade blotters''); Securities Exchange Act Release No. 
77724 (April 27, 2016), 81 FR 30614, 30685 (May 17, 2016) (notice of 
CAT NMS Plan) (``data is currently stored in multiple formats, is 
difficult to merge, and results in errors during the merging 
process'').
---------------------------------------------------------------------------

    Moreover, the Commission concludes that it is appropriate for FINRA 
to allow retirement of OATS only when the 5% pre-correction and 2% 
post-correction thresholds are met in each category. The 5% pre-
correction threshold is the same as the initial maximum pre-correction

[[Page 78400]]

error rate set forth in the CAT NMS Plan, and the 2% post-correction 
threshold is a reasonable quantification of the ``de minimis'' post-
correction error rate contemplated by the CAT NMS Plan for the purposes 
of OATS retirement.\72\ Thus, the Commission believes it is reasonable 
to not require accuracy rates in CAT to equal or surpass the accuracy 
rates in OATS before allowing for OATS retirement.
---------------------------------------------------------------------------

    \72\ See CAT NMS Plan, Section 6.5(d)(i); Appendix C, Section 
A.3(b); Appendix C, Section A.3(b), n. 102.
---------------------------------------------------------------------------

    The Commission also concludes that the calculation methodologies 
proposed by FINRA for these metrics--specifically that the inter-firm 
linkage quality metric will be measured in the aggregate across all 
Industry Members rather than on a per-firm basis and that post-
correction error rates will be measured as the number of errors in a 
particular category divided by the total number of records received in 
that category--are appropriate as this is how the CAT NMS Plan defines 
the calculation of these error rates.\73\ Further, the Commission 
concludes that FINRA's approach of measuring post-correction error 
rates at T+5 is appropriate, as this is consistent with the 
requirements of the CAT NMS Plan.\74\ It is appropriate to apply the 
data processing cycles and standards set forth in the CAT NMS Plan--
such as regulatory access to corrected data on T+5--rather than 
standards associated with OATS or other existing systems to ensure that 
FINRA CAT's surveillances are adequate based on the data that will be 
reported. An assessment of the adequacy of FINRA CAT's processing based 
on OATS' or other systems' standards would not provide assurance that 
these systems would be sufficient under the applicable CAT NMS Plan 
requirements.
---------------------------------------------------------------------------

    \73\ See CAT NMS Plan, Section 1.1. See also 17 CFR 
242.613(j)(6). ``The term error rate shall mean the percentage of 
reportable events collected by the central repository in which the 
data reported does not fully and accurately reflect the order event 
that occurred in the market.'' Id.
    \74\ See CAT NMS Plan, Appendix C, Section A.2(a); Appendix D, 
Section 6.
---------------------------------------------------------------------------

    In addition to these assessment criteria and error rates, under 
FINRA's proposal, it must be able to confirm that (1) usage over the 
assessment period has not revealed material issues that have not been 
corrected; (2) the CAT includes all data necessary to allow FINRA to 
continue to meet its surveillance obligations; and (3) the Plan 
Processor is sufficiently meeting all of its obligations under the CAT 
NMS Plan. One commenter argued that these qualitative factors, which 
they referred to as ``non-error-rate conditions,'' appear to go beyond 
the conditions set forth in the CAT NMS Plan, and they have concerns 
about the open-ended nature of the non-error-rate conditions.\75\ The 
CAT NMS Plan requires that a system retirement proposal discuss 
``specific accuracy and reliability standards that will determine when 
duplicative systems will be retired, including, but not limited to, 
whether the attainment of a certain Error Rate should determine when a 
system duplicative of CAT can be retired'' (emphasis added).\76\ The 
Commission believes that the qualitative factors identified by FINRA in 
addition to quantitative metrics such as error rates are consistent 
with this requirement. For example, even if CAT Reporters are reporting 
accurate data to the Central Repository, as measured by error rates, 
regulators might not be able to use CAT as intended if the Plan 
Processor is not adequately performing its functions, such as linking 
reportable events together to create a complete order life cycle and 
providing access and querying functionality to regulators. The 
Commission therefore concludes that it is appropriate for FINRA to 
consider these qualitative factors.
---------------------------------------------------------------------------

    \75\ See FIF Letter, supra note 5.
    \76\ CAT NMS Plan, Appendix C, Section C.9.
---------------------------------------------------------------------------

    The transparency regarding the assessment process and communication 
with Industry Members regarding any issues identified during that 
process will be beneficial. FINRA has committed to provide the industry 
with information and updates directly and through FINRA CAT regarding 
CAT implementation issues by holding periodic industry outreach 
events.\77\ These opportunities for regular and ongoing feedback about 
any issues identified will facilitate the correction of such issues and 
reduce the potential for delays in systems retirement.
---------------------------------------------------------------------------

    \77\ FINRA hosts a number of industry outreach events. For the 
list of upcoming FINRA events, see https://www.finra.org/events-training. Separately, FINRA CAT also hosts a number of industry 
update calls and events. For a list of upcoming industry outreach 
events, see https://catnmsplan.com/events.
---------------------------------------------------------------------------

    The Commission finds that FINRA's proposal with respect to the 
length of the assessment are consistent with the Act. Before a crucial 
regulatory tool such as OATS can be retired, it is prudent to ensure 
that error rates in the replacement audit trail system have reached 
stabile, consistent levels. FINRA has represented that, based on past 
experience, 180 days represents the minimum time needed to fully test 
the accuracy and reliability of trade and order data and system 
functionality to ensure that FINRA is able to carry out its 
surveillances and other regulatory functions without a loss of quality. 
The Commission concludes that a 180-day period strikes a reasonable 
balance between ensuring that high accuracy and reliability levels are 
sustainable and minimizing the duplicative reporting period as much as 
practicable.
    Two commenters requested that FINRA provide transparency and 
sufficient notice once the date for the retirement of OATS has been 
set.\78\ As an initial matter, the process for retiring OATS is 
outlined in the Proposal. And, the Commission believes that FINRA is 
incented to make the requisite filing as far in advance as practicable 
in order to provide firms with sufficient notice and opportunity to 
prepare for the retirement of OATS to promote an orderly retirement of 
OATS. In addition, FINRA will provide as much transparency into the 
process as possible regarding issues relating to OATS retirement in its 
communications with firms.\79\ The Plan Processor is required to 
provide a variety of error rate data to CAT Reporters and the Operating 
Committee under the CAT NMS Plan including daily statistics on 
rejection rates after the data has been processed.\80\ During the 180-
day assessment period, the Commission believes that it is appropriate 
for the SROs and the Plan Processor to provide this error rate data, as 
it will help Industry Members identify any problem areas and improve 
the accuracy of their CAT reporting. FINRA CAT currently provides 
regular updates to Industry Members regarding CAT implementation and 
compliance during FINRA CAT's Weekly Industry Testing Checkpoint and 
Monthly Implementation calls.\81\ Also, the statistics provided by 
FINRA CAT will serve as a good proxy for progress toward achieving the 
requisite error rates for the purposes of OATS retirement.\82\ Further, 
once FINRA has determined that such standards have been met, it has 
committed to file a rule filing for immediate effectiveness setting 
forth the basis for its determination and to publish a Regulatory 
Notice announcing the implementation date of SR-FINRA-2020-024.
---------------------------------------------------------------------------

    \78\ See FIF Letter and Refinitiv Letter, supra note 5.
    \79\ See Response Letter, supra note 6.
    \80\ See CAT NMS Plan, Section 6.1(o)(v); CAT NMS Plan, Appendix 
C, Section A.3(b); CAT NMS Plan, Appendix D, Section 10.4.
    \81\ See Response Letter, supra note 6.
    \82\ Id.
---------------------------------------------------------------------------

V. Solicitation of Comments on Amendment No. 1

    Interested persons are invited to submit written data, views, and

[[Page 78401]]

arguments concerning the foregoing, including whether Amendment No. 1 
is consistent with the Act. Comments may be submitted by any of the 
following methods:

Electronic Comments

    <bullet> Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#7200071e175f111d1f1f171c0601320117115c151d04"><span class="__cf_email__" data-cfemail="acded9c0c981cfc3c1c1c9c2d8dfecdfc9cf82cbc3da">[email protected]</span></a>. Please include 
File Number SR-FINRA-2020-024 on the subject line.

Paper Comments

    <bullet> Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2020-024. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange and on its internet 
website. All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2020-024 and should be 
submitted on or before December 28, 2020.

VI. Accelerated Approval of Proposed Rule Change As Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the 30th day after the 
date of publication of notice of the filing of Amendment No. 1 in the 
Federal Register. As discussed above, the proposed rule change, as 
modified by Amendment No. 1, would eliminate the OATS Rules as 
duplicative systems of the CAT, after Industry Members and able to 
demonstrate reliable and accurate reporting to the CAT with a 
reasonable rate of errors, and after FINRA is able to ascertain that 
(1) usage of CAT Data over the assessment period has not revealed 
material issues that have not been corrected; (2) the CAT includes all 
data necessary to allow FINRA to continue to meet its surveillance 
obligations; and (3) the Plan Processor is sufficiently meeting all of 
its obligations under the CAT NMS Plan. The Commission believes that 
the proposal is consistent with these provisions of the CAT NMS Plan 
and consistent with the Act because they are reasonably designed to 
assist the SROs in meeting their regulatory obligations pursuant to 
Rule 613 and the Plan.
    In Amendment No. 1, FINRA modified the method by which the equity 
exchange match rate would be calculated. Specifically, FINRA proposed 
that instead of calculating the equity exchange match rate on a per 
exchange basis, it would calculate the match rate in the aggregate 
across all exchanges. The Commission believes that such a calculation 
is consistent with the current reporting published by FINRA CAT and as 
such will be easier for industry members to understand. The Commission 
believes Amendment No. 1 does not materially modify the substance of 
the proposed rule change as it was initially filed, but merely provides 
for a more straightforward method for calculating the equity exchange 
match rates.
    Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) of the Act, to approve the proposed rule change, SR-FINRA-
2020-024, as modified by Amendment No. 1, on an accelerated basis.\83\
---------------------------------------------------------------------------

    \83\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-FINRA-2020-024), as modified by 
Amendment No. 1, be and hereby is, approved on an accelerated basis.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\84\
---------------------------------------------------------------------------

    \84\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-26677 Filed 12-3-20; 8:45 am]
BILLING CODE 8011-01-P


</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>