Document ID: SEC-2020-0652-0001
Agency: sec
Document Type: Notice
Title: Order: Granting Limited Exemptive Relief Related to Certain Introducing Brokers, from the Requirements of the National Market System Plan Governing the Consolidated Audit Trail
Posted Date: 2020-04-24T04:00Z

[Federal Register Volume 85, Number 80 (Friday, April 24, 2020)]
[Notices]
[Pages 23115-23117]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-08704]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88703]

Order Granting Limited Exemptive Relief, Pursuant to Section 36 
of the Securities Exchange Act of 1934 (``Exchange Act'') and Rule 
608(e) of Regulation NMS Under the Exchange Act, Related to Certain 
Introducing Brokers, From the Requirements of the National Market 
System Plan Governing the Consolidated Audit Trail

April 20, 2020.
    By letter dated February 3, 2020, BOX Exchange LLC; Cboe BYX 
Exchange, Inc.; Cboe BZX Exchange, Inc.; Cboe EDGA Exchange, Inc.; Cboe 
EDGX Exchange, Inc.; Cboe C2 Exchange, Inc.; Cboe Exchange, Inc.; 
Financial Industry Regulatory Authority, Inc. (``FINRA''); Investors 
Exchange LLC; Long-Term Stock Exchange, Inc.; 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'' to the National 
Market System (``NMS'') Plan Governing the Consolidated Audit Trail 
(``CAT NMS Plan'')) \1\ requested that the Securities and Exchange 
Commission (``Commission'' or ``SEC''), pursuant to its authority under 
Section 36 of the Securities Exchange Act of 1934 (``Exchange Act'') 
\2\ and Rule 608(e) of Regulation NMS under the Exchange Act,\3\ grant 
exemptive relief from certain provisions of the CAT NMS Plan related to 
broker-dealers that do not qualify as Small Industry Members solely 
because such broker-dealers satisfy Rule 0-10(i)(2) under the Exchange 
Act \4\ in that they introduce transactions on a fully disclosed basis 
to clearing firms that are not small businesses or small organizations 
(for purposes of this order, such broker-dealers are referred to as 
``Introducing Brokers'' or ``Introducing Industry Members'').\5\ 
Specifically, the Participants request that the Commission provide 
exemptive relief from requiring Introducing Industry Members to comply 
with the requirements of the CAT NMS Plan that apply to Industry 
Members other than Small Industry Members (``Large Industry Members''), 
provided that the Participants require such Introducing Industry 
Members to comply with the requirements of the CAT NMS Plan that apply 
to Small Industry Members.\6\ The Participants state that the CAT NMS 
Plan permits Small Industry Members to begin reporting to the CAT later 
than Large Industry Members.\7\
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    \1\ The Commission approved the CAT NMS Plan, as modified, on 
November 15, 2016. See Securities Exchange Act Release No. 79318 
(November 15, 2016), 81 FR 84696 (November 23, 2016) (``CAT NMS Plan 
Approval Order'').
    \2\ 15 U.S.C. 78mm(a)(1).
    \3\ 17 CFR 242.608(e).
    \4\ 17 CFR 240.0-10(i)(2).
    \5\ See letter from Mike Simon, CAT NMS Plan Operating Committee 
Chair, to Vanessa Countryman, Secretary, U.S. Securities and 
Exchange Commission, dated February 3, 2020 (``Exemption Request''). 
Unless otherwise noted, capitalized terms are used as defined in 
Rule 613 of Regulation NMS, in the CAT NMS Plan, or in this letter. 
``Industry Member'' means ``a member of a national securities 
exchange or a member of a national securities association.'' ``Small 
Industry Member'' means ``an Industry Member that qualifies as a 
small broker-dealer as defined in SEC Rule 613.'' See CAT NMS Plan 
at Section 1.1.
    \6\ See Exemption Request.
    \7\ See id. at 2.
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    Under the CAT NMS Plan, a Small Industry Member is an Industry 
Member that qualifies as a small broker-dealer as defined in Rule 613 
under the Exchange Act.\8\ Rule 613 incorporates the definition of 
small broker-dealer in Rule 0-10(c) under the Exchange Act.\9\ Exchange 
Act Rule 0-10(c) defines a small broker or dealer to mean a broker or 
dealer that:
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    \8\ 17 CFR 242.613. See CAT NMS Plan at Section 1.1.
    \9\ 17 CFR 240.0-10(c).

    (1) Had total capital (net worth plus subordinated liabilities) 
of less than $500,000 on the date in the prior fiscal year as of 
which its audited financial statements were prepared pursuant to 
Sec.  240.17a-5(d) or, if not required to file such statements, a 
broker or dealer that had total capital (net worth plus subordinated 
liabilities) of less than $500,000 on the last business day of the 
preceding fiscal year (or in the time that it has been in business, 
if shorter); and
    (2) Is not affiliated with any person (other than a natural 
person) that is not a small business or small organization as 
defined in this section.

    Under Exchange Act Rule 0-10(i),\10\ a broker or dealer is 
affiliated with another person for purposes of Exchange Act Rule 0-
10(c) if:
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    \10\ 17 CFR 240.0-10(i).

    (1) Such broker or dealer controls, is controlled by, or is 
under common control with such other person; a person shall be 
deemed to control another person if that person has the right to 
vote 25 percent or more of the voting securities of such other 
person or is entitled to receive 25 percent or more of the net 
profits of such other person or is otherwise able to direct or cause 
the direction of the management or policies of such other person; or
    (2) Such broker or dealer introduces transactions in securities, 
other than registered investment company securities or interests or 
participations in insurance company separate accounts, to such other 
person, or introduces accounts of customers or other brokers or 
dealers, other than accounts that hold only registered investment 
company securities or interests or participations in insurance 
company separate accounts, to such other person that carries such 
accounts on a fully disclosed basis.

    In the CAT NMS Plan Approval Order, the Commission stated that the 
CAT NMS Plan provides a capital level-based definition of Small 
Industry Members for purposes of the CAT NMS Plan implementation 
schedule.\11\ The Commission further stated that the definition is 
derived from Exchange Act Rule 0-10, which defines small entities under 
the Exchange Act for purposes of the Regulatory Flexibility Act, and 
reflects an ``existing regulatory standard that is an indication of 
small entities for which regulators should be sensitive when imposing 
regulatory burdens.'' \12\ The Commission stated that the definition of 
Small Industry Member is a reasonable means to identify market 
participants for which it would be appropriate to provide, and that 
would benefit from, an additional year to prepare for CAT reporting due 
to their relatively limited resources.\13\
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    \11\ See CAT NMS Plan Approval Order, 81 FR at 84771.
    \12\ See id. (citing Securities Exchange Act Release No. 67457 
(July 18, 2012), 77 FR 45722, 45804 (August 1, 2012) (``Rule 613 
Adopting Release'')).
    \13\ See CAT NMS Plan Approval Order, 81 FR at 84771.
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    Under Exchange Act Rule 0-10(i)(2), an Introducing Broker would not 
be a small broker-dealer as defined in Exchange Act Rule 0-10(c) if the

[[Page 23116]]

Introducing Broker introduced transactions in securities on a fully 
disclosed basis to a clearing firm that was not a small broker-dealer, 
regardless of the Introducing Broker's capital level.\14\ The 
Participants believe that excluding Introducing Brokers from the 
definition of a small broker-dealer based on the introducing 
relationship described in Exchange Act Rule 0-10(i)(2) is not 
consistent with the intention to provide small broker-dealers with 
additional time to comply with the CAT NMS Plan.\15\ The Participants 
state that Introducing Brokers, as defined herein, are excluded from 
the definition of a small broker-dealer solely because of their 
introducing relationship with a clearing firm, and that Introducing 
Brokers otherwise satisfy the capital threshold in Exchange Act Rule 0-
10(c)(1) for small broker-dealers.\16\ Accordingly, the Participants 
request exemptive relief for Introducing Industry Members from the 
requirements in the CAT NMS Plan applicable to Large Industry 
Members.\17\
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    \14\ Only broker-dealers that perform their own trading and 
either self-clear or clear on an omnibus basis, rather than on a 
fully disclosed basis, would be a small broker-dealer under Exchange 
Act Rule 0-10(i)(2). See Exemption Request at 3.
    \15\ See id.
    \16\ See id.
    \17\ See id. at 4.
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    The Participants state that the CAT NMS Plan permits Small Industry 
Members to commence reporting to the CAT later than Large Industry 
Members.\18\ As a condition to the exemption, the Participants would 
require Introducing Industry Members to comply with the provisions of 
the CAT NMS Plan applicable to Small Industry Members.\19\ As a result, 
Introducing Industry Members would report information pursuant to the 
CAT NMS Plan when Small Industry Members begin reporting.\20\ The 
Participants state that the requested exemptive relief would affect 
only the timing for when data would be reported, but not the type or 
amount of data that would be reported.\21\
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    \18\ See id. at 2.
    \19\ See id. Each Participant would be required to require 
through its Compliance Rule that an Introducing Industry Member 
comply with the requirements of the CAT NMS Plan applicable to Small 
Industry Members. ``Compliance Rule'' means, ``with respect to a 
Participant, the rule(s) promulgated by such Participant as 
contemplated by Section 3.11.'' See CAT NMS Plan at Section 1.1.
    \20\ See id.
    \21\ See id.
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    In a separate order, the Commission granted the Participants' 
request for exemptive relief from certain requirements in the CAT NMS 
Plan related to Industry Member reporting of Industry Member Data to 
the Central Repository to allow for the implementation of phased 
reporting for Industry Members to the CAT.\22\ The reporting schedule 
in the Phased Reporting Order addresses Large Industry Members, Small 
Industry Members that are required to record and report information to 
FINRA's Order Audit Trail System pursuant to applicable self-regulatory 
organization (``SRO'') rules (``Small Industry OATS Reporters''), and 
Small Industry Members that are not required to record and report 
information to FINRA's OATS pursuant to applicable SRO rules (``Small 
Industry Non-OATS Reporters''). Under the relief requested herein, the 
Participants would be exempt from requiring Introducing Brokers to 
comply with the requirements of the Plan applicable to Large Industry 
Members and the Participants would require Introducing Brokers to 
comply with the requirements of the Plan applicable to Small Industry 
Members. The implementation schedule that an Introducing Broker would 
follow would depend upon whether the Introducing Broker was an OATS 
Reporter or a Non-OATS Reporter. Specifically, by providing this 
relief, Introducing Brokers who are OATS Reporters would follow the 
schedule established for Small Industry OATS Reporters and Introducing 
Brokers who are Non-OATS Reporters would follow the schedule for Small 
Industry Non-OATS Reporters, as described in more detail in the Phased 
Reporting Order.\23\
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    \22\ See Securities Exchange Act Release No. 88702 (April 20, 
2020) (Order Granting Conditional Exemptive Relief, Pursuant to Rule 
608(e) of the Securities Exchange Act of 1934, from Sections 6.4, 
6.7(a)(v) and 6.7(a)(vi) of the National Market System Plan 
Governing the Consolidated Audit Trail) (``Phased Reporting 
Order'').
    \23\ See id.
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    Section 36 of the Exchange Act grants the Commission the authority, 
with certain limitations, to ``conditionally or unconditionally exempt 
any person, security, or transaction . . . from any provision or 
provisions of [the Exchange Act] or of 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.'' \24\ Rule 608(e) of Regulation NMS under the 
Exchange Act provides that the Commission may exempt from the 
provisions of an NMS plan, either unconditionally or on specified terms 
and conditions, any self-regulatory organization or its members, 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.
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    \24\ 15 U.S.C. 78mm(a)(1).
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    The Commission believes that, pursuant to Exchange Act Section 36, 
this exemption is appropriate in the public interest and consistent 
with the protection of investors, and that pursuant to Rule 608(e), 
this 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 the perfection of the mechanisms of, a 
national market system. This relief will provide Introducing Industry 
Members that meet the capital standard in Exchange Act Rule 0-10(c)(1) 
with additional time to prepare effectively for certain CAT reporting 
phases depending on whether they are OATS Reporters, as described in 
more detail in the Phased Reporting Order. The Commission believes that 
the introducing relationship described in Exchange Act Rule 0-10(i)(2) 
should not prevent an Introducing Broker that meets the capital 
standard in Exchange Act Rule 0-10(c)(1) from being considered a Small 
Industry Member. The Commission understands that despite their clearing 
relationships, these Introducing Industry Members have the same 
resource limitations as other small broker-dealers that are similarly 
capitalized. Additionally, although an Introducing Broker may rely on 
its clearing firm to meet its regulatory obligations, an Introducing 
Broker is not obligated to choose its clearing firm as its CAT 
reporting agent. As the Commission stated in adopting Rule 613, 
providing small broker-dealers with a longer implementation time would 
assist small broker-dealers in identifying the most cost-effective and 
the most efficient manner to comply with Rule 613.\25\ The Commission 
believes that this rationale applies equally to all broker-dealers that 
meet the capital threshold required to be considered a Small Industry 
Member, including Introducing Brokers. This relief affects only the 
time when certain Introducing Industry Members begin CAT reporting, but 
not the type or amount of information that they will be required to 
report. Accordingly, the Commission believes that the Participants 
should be exempt from requiring Introducing Industry Members that meet 
the capital standard in Exchange Act Rule 0-10(c)(1) to comply with the 
requirements of the CAT NMS Plan applicable to Large Industry

[[Page 23117]]

Members, provided that such Introducing Industry Members comply with 
the requirements of the CAT NMS Plan applicable to Small Industry OATS 
Reporters and Small Industry Non-OATS Reporters, as applicable.
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    \25\ See Rule 613 Adopting Release, 77 FR at 45804.
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    Accordingly, it is hereby ordered, pursuant to Section 36(a)(1) of 
the Exchange Act,\26\ and Rule 608(e) of the Exchange Act,\27\ that the 
Participants are exempt from requiring Introducing Industry Members to 
comply with the requirements of the CAT NMS Plan that apply to Large 
Industry Members, provided that each Participant, through its 
Compliance Rule, requires such Introducing Industry Members to comply 
with the requirements of the CAT NMS Plan applicable to Small Industry 
Members.
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    \26\ 15 U.S.C. 78mm(a)(1).
    \27\ 17 CFR 242.608(e).

    By the Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-08704 Filed 4-23-20; 8:45 am]
BILLING CODE 8011-01-P