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[Federal Register Volume 90, Number 14 (Thursday, January 23, 2025)]
[Notices]
[Pages 8078-8080]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-01613]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-102234]

Order Granting Temporary Conditional Exemptive Relief, Pursuant 
to Section 36(a)(1) of the Securities Exchange Act of 1934 and Rule 
608(e) of Regulation NMS Thereunder, From Certain Requirements of 
Appendix D, Section 3 of the National Market System Plan Governing the 
Consolidated Audit Trail

January 17, 2025.

I. Introduction

    On December 9, 2024,\1\ Financial Information Forum (``FIF'') 
requested that the Securities and Exchange Commission (``Commission'' 
or ``SEC'') extend temporary conditional exemptive relief, pursuant to 
its authority under section 36(a)(1) of the Securities Exchange Act of 
1934 (``Exchange Act'') \2\ and Rule 608(e) of Regulation NMS under the 
Exchange Act,\3\ related to the requirement set forth in Appendix D, 
section 3 of the national market system plan governing the consolidated 
audit trail (``CAT NMS Plan'') \4\ that the consolidated audit trail 
(``CAT'') ``must be able to create the lifecycle between . . . 
[c]ustomer orders to `representative' orders created in firm accounts 
for the purpose of facilitating a customer order (e.g., linking a 
customer order handled on a riskless principal basis to the street-side 
proprietary order).'' \5\ For the reasons set forth below, the 
Commission has determined to grant FIF's request for a six-month 
extension of the temporary conditional exemptive relief previously 
provided by the Commission with respect to the above-described 
requirement set forth in Appendix D, section 3 of the CAT NMS Plan for 
representative order scenarios in which Industry Members do not have a 
systematic or direct link between their order management systems and 
execution management systems.
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    \1\ See Letter from Howard Meyerson, Managing Director, 
Financial Information Forum, to Commission, dated Dec. 9, 2024, 
available at https://fif.com/index.php/working-groups/category/271-comment-letters?download=3057:fif-request-to-the-commission-for-a-six-month-extension-of-the-current-exemption-relating-to-cat-representative-order-linkage&view=category (``Request'').
    \2\ 15 U.S.C. 78mm(a)(1).
    \3\ 17 CFR 242.608(e).
    \4\ See Securities Exchange Act Release No. 79318 (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 id. 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 (the ``Company''). 
Each Participant is a member of the Company and jointly owns the 
Company on an equal basis. The Participants submitted to the 
Commission a proposed amendment to the CAT NMS Plan on Aug. 29, 
2019, which they designated as effective on filing. Under the 
amendment, the limited liability company agreement of a new limited 
liability company named Consolidated Audit Trail, LLC serves as the 
CAT NMS Plan, replacing in its entirety the CAT NMS Plan. See 
Securities Exchange Act Release No. 87149 (Sept. 27, 2019), 84 FR 
52905 (Oct. 3, 2019).
    \5\ See id. at Appendix D, section 3. A representative order is 
an order originated in a firm-owned or -controlled account, 
including principal, agency average price and omnibus accounts, by 
an industry member for the purpose of working one or more customer 
or client orders. See, e.g., Securities Exchange Act Release No. 
88702 (Apr. 20, 2020), 85 FR 23075, 23076 n.26 (Apr. 24, 2020). FIF 
states in the Request that ``the term `representative order' is a 
concept created by CAT (it is not a concept that exists in actual 
trading), and that all of the linkage requirements covered in [the] 
July 2024 FIF exemption request involve linkage either from or to a 
representative order.'' See Request, supra note 1.
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II. Discussion of the Request for Relief

    On July 18, 2012, the Commission adopted Rule 613 of Regulation 
NMS, which required national securities exchanges and national 
securities associations (``Participants'') \6\ to jointly develop and 
submit to the Commission a national market system plan to create, 
implement, and maintain the CAT.\7\ The goal of Rule 613 was to create 
a modernized audit trail system that would provide regulators with 
timely access to a comprehensive set of trading data, thus enabling 
regulators to more efficiently and effectively analyze and reconstruct 
market events, monitor market behavior, conduct market analysis to 
support regulatory decisions, and perform surveillance, investigation, 
and enforcement activities. On November 15, 2016, the Commission 
approved the national market system plan required by Rule 613--the CAT 
NMS Plan.\8\
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    \6\ The Participants include 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., Financial Industry Regulatory Authority, Inc., Investors' 
Exchange LLC, Long-Term Stock Exchange, Inc., MEMX LLC, Miami 
International Securities Exchange LLC, MIAX Emerald, LLC, MIAX 
PEARL, LLC, MIAX Sapphire, 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.
    \7\ See Securities Exchange Act Release No. 67457 (July 18, 
2012), 77 FR 45722 (Aug. 1, 2012); 17 CFR 242.613.
    \8\ See CAT NMS Plan Approval Order, supra note 4.
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    On December 16, 2020, the Commission issued an exemptive relief 
order regarding the implementation of the CAT NMS Plan (``First 
Order'').\9\ This order granted temporary

[[Page 8079]]

conditional exemptive relief from several requirements set forth in the 
CAT NMS Plan, including the requirement set forth in Appendix D, 
section 3 of the CAT NMS Plan that the CAT ``must be able to create the 
lifecycle between . . . [c]ustomer orders to `representative' orders 
created in firm accounts for the purpose of facilitating a customer 
order (e.g., linking a customer order handled on a riskless principal 
basis to the street-side proprietary order).'' \10\ This relief was 
initially granted until July 31, 2023.\11\
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    \9\ See Securities Exchange Act Release No. 90688 (Dec. 16, 
2020), 85 FR 83634 (Dec. 22, 2020).
    \10\ See id. at 83636. The Commission stated its understanding 
that ``the Participants do not currently have the ability to create 
lifecycles in certain representative order scenarios, particularly 
because of the difficulty of linking representative orders for 
Industry Members with separate order management systems and 
execution management systems that do not currently have a systematic 
or direct link between them.'' Id.
    \11\ Id.
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    On July 8, 2022, the Commission issued a new exemptive relief order 
(``Second Order''),\12\ which superseded the First Order and modified 
and/or clarified certain aspects of the First Order. The Second Order 
granted temporary conditional exemptive relief until July 31, 2024, 
from the above-described linkage requirement set forth in Appendix D, 
section 3, ``for representative order scenarios in which Industry 
Members do not have a systematic or direct link between their order 
management systems and execution management systems.'' \13\ The 
Commission subsequently issued an order (``Third Order''), on May 19, 
2023, further extending such exemptive relief until January 31, 
2025.\14\ This relief was superseded by a new order issued by the 
Commission on November 2, 2023 (``Fourth Order''),\15\ which was 
intended to mirror the temporary conditional exemptive relief granted 
by the Third Order (and the Second Order) with respect to the 
requirements set forth in Appendix D, section 3 of the CAT NMS Plan 
regarding lifecycle linkages between customer orders and representative 
orders for scenarios in which Industry Members do not have a systematic 
or direct link between their order management systems and execution 
management systems.\16\ The Fourth Order did not extend the temporary 
conditional exemptive relief beyond the time period provided by the 
Third Order.\17\
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    \12\ See Securities Exchange Act Release No. 95234 (July 8, 
2022), 87 FR 42247 (July 14, 2022).
    \13\ Id. at 42255-56. The term ``Industry Member'' is defined as 
``a member of a national securities exchange or a member of a 
national securities association.'' See CAT NMS Plan, supra note 4, 
at section 1.1.
    \14\ See Securities Exchange Act Release No. 97530 (May 19, 
2023), 88 FR 33655 (May 24, 2023).
    \15\ See Securities Exchange Act Release No. 98848 (Nov. 2, 
2023), 88 FR 77128 (Nov. 8, 2023).
    \16\ Id. at 77132.
    \17\ Id.
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    FIF requests that the Commission extend the previously granted 
temporary conditional exemptive relief until July 31, 2025.\18\
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    \18\ See Request, supra note 1, at 1.
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    FIF states that the Participants, at the direction of the 
Commission, will ``remove from the CAT system the ability for industry 
members to report certain flags on Order Fulfillment events 
(specifically, the `YE' and `YP' flags) in lieu of reporting linkage to 
specific representative orders'' after January 31, 2025.\19\ FIF states 
that FIF and its members have demonstrated the ``ongoing focus of 
industry members in complying with their CAT reporting obligations'' 
and have devoted ``significant resources . . . over many years towards 
such compliance.'' \20\ Nevertheless, FIF suggests that it may be 
difficult or impossible for Industry Members to comply with the 
requirement to report linkages for certain scenarios, which it states 
will be required as of February 1, 2025.\21\ ``In some scenarios,'' FIF 
states that ``no representative order exists, and thus it is not 
possible for industry members to provide the linkage to specific 
representative orders that will be required as of February 1, 2025.'' 
\22\ In other scenarios, FIF states that ``industry members do not 
maintain this linkage in their books and records.'' \23\ Finally, FIF 
states that there are scenarios in which ``the CAT system does not 
provide a method to provide linkage to a specific order.'' \24\
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    \19\ See Request, supra note 1, at 1-2 (citing CAT Reporting 
Technical Specifications for Industry Members, version 4.1.0 r4, 
dated Oct. 18, 2024, at 367-69, available at https://catnmsplan.com/sites/default/files/2024-10/10.18.24_CAT_Reporting_Technical_Specifications_for_Industry_Members_v4.1.0r4_CLEAN.pdf). Contrary to the assertion made by FIF, the 
Commission has not directed the Participants to remove the ``YE'' or 
``YP'' flags from the CAT Reporting Technical Specifications for 
Industry Members by any specific date. Furthermore, and also 
contrary to the assertion made by FIF in its request, the Commission 
understands that the ``YE'' and ``YP'' flags would continue to be 
available after Jan. 31, 2025, even in the absence of the temporary 
conditional exemptive relief granted by the Commission herein.
    \20\ See Request, supra note 1, at 3.
    \21\ But see supra note 19.
    \22\ See Request, supra note 1, at 2.
    \23\ Id.
    \24\ Id. FIF states that these scenarios are more fully 
described in a previous request for exemptive relief submitted to 
the Commission. See id.; see also Letter from Howard Meyerson, 
Managing Director, FIF, to Commission, dated July 2, 2024, available 
at https://fif.com/index.php/working-groups/category/271-comment-letters?download=2962:fif-exemptive-request-letter-to-the-sec-on-representative-order-linkage&start=10&view=category.
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    If Industry Members cannot use the ``YE'' and ``YP'' flags to 
report certain trading scenarios and/or must report the information 
necessary for FINRA CAT to create lifecycle linkages between customer 
orders and representative orders, FIF states that Industry Members 
``will be faced with the choice of either (i) submitting large numbers 
of Order Fulfillment events that the CAT system will reject and that 
will not be repairable, or (ii) abandoning certain common existing 
trading workflows.'' \25\ FIF further states its view of the potential 
harms that could flow from the expiration of the existing exemptive 
relief:
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    \25\ See Request, supra note 1, at 2. These outcomes could occur 
even if the ``YE'' and ``YP'' flags remain available after Jan. 31, 
2025, because Industry Members would be required to report the 
information necessary for FINRA CAT to create lifecycle linkages 
between customer orders and representative orders in the absence of 
the temporary conditional exemptive relief granted by the Commission 
in the past and herein. See supra note 19.

    For example, it is a common workflow for industry members to 
trade as a principal against customer orders without the industry 
member creating a firm order. This workflow will no longer be 
possible if the flags referenced above are removed from CAT because 
a firm will not be able to report Order Fulfillments to CAT when the 
firm fulfills is `Manning' obligation for this workflow. Conversely, 
if industry members submit large numbers of Order Fulfillments that 
the CAT system will reject, this will present a significant 
processing and workflow challenge for the CAT system, the regulators 
and industry members as large numbers of rejected and unsubmitted 
CAT events pile-up.\26\
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    \26\ See id. at 2-3.

    FIF states that its members have further identified for Commission 
staff, the Participants, and FINRA CAT the ``significant challenges 
with implementing certain CAT linkage requirements relating to 
representative orders and order fulfilments'' in presentations \27\ and 
previous exemptive relief requests that were submitted to the 
Commission in March 2024 and July 2024.\28\ FIF therefore requests an 
extension of the current exemptive relief to identify long-term 
reporting solutions for the specific trading scenarios set forth in 
previous exemptive relief requests.\29\
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    \27\ See Request, supra note 1, at 3 n.10-11 and associated 
text.
    \28\ See id. at 3-4 n.13-14 and associated text.
    \29\ Id. at 2, 4.
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    Section 36(a)(1) of the Exchange Act grants the Commission the 
authority to ``conditionally or unconditionally exempt any person, 
security, or transaction . . . from any provision or provisions of [the 
Exchange Act] or of

[[Page 8080]]

any rule or regulation thereunder, to the extent that such exemption is 
necessary or appropriate in the public interest, and is consistent with 
the protection of investors.'' \30\ Rule 608(e) of Regulation NMS 
similarly grants the Commission the authority to ``exempt from [Rule 
608], either unconditionally or on specified terms and conditions, any 
self-regulatory organization, member thereof, or specified security, if 
the Commission determines that such exemption is consistent with the 
public interest, the protection of investors, the maintenance of fair 
and orderly markets and the removal of impediments to, and perfection 
of the mechanisms of, a national market system.'' \31\
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    \30\ 15 U.S.C. 78mm(a)(1).
    \31\ 17 CFR 242.608(e).
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    The Commission agrees that additional time is needed to identify 
and evaluate appropriate long-term solutions for certain trading 
scenarios. In developing those solutions, the Commission emphasizes its 
willingness to consider alternative solutions that achieve the 
regulatory goals of Rule 613 and the CAT NMS Plan. The Commission 
therefore determines that the requested extension of the existing 
exemptive relief is appropriate in the public interest and consistent 
with the protection of investors under section 36(a)(1) of the Exchange 
Act, as well as consistent with the public interest, the protection of 
investors, the maintenance of fair and orderly markets, and the 
perfection of the mechanisms of a national market system under Rule 
608(e) of Regulation NMS.
    Specifically, the Commission grants temporary conditional exemptive 
relief from the requirements set forth in Appendix D, section 3 of the 
CAT NMS Plan related to lifecycle linkages between customer orders and 
representative orders,\32\ for representative order scenarios in which 
Industry Members do not have a systematic or direct link between their 
order management systems and execution management systems, until July 
31, 2025. Such relief is intended to mirror the exemptive relief 
provided by the Second Order, the Third Order, and the Fourth Order.
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    \32\ The requirements related to lifecycle linkages between 
customer orders and representative orders set forth in Appendix D, 
section 3 of the CAT NMS Plan are described in the Second Order. See 
Second Order, supra note 12, at 42255-56.
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III. Conclusion

    Accordingly, it is hereby ordered, pursuant to Section 36(a)(1) of 
the Exchange Act \33\ and Rule 608(e) under the Exchange Act,\34\ that 
the above-described temporary conditional exemptive relief be granted.
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    \33\ 15 U.S.C. 78mm(a)(1).
    \34\ 17 CFR 242.608(e).

    By the Commission.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-01613 Filed 1-22-25; 8:45 am]
BILLING CODE 8011-01-P
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