Document ID: SEC-2022-1683-0001
Agency: sec
Document Type: Notice
Title: Joint Industry Plan: National Market System Plan Governing the Consolidated Audit Trail
Posted Date: 2022-12-29T05:00Z

[Federal Register Volume 87, Number 249 (Thursday, December 29, 2022)]
[Notices]
[Pages 80204-80207]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-28296]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96568; File No. 4-698]

Joint Industry Plan; Order Instituting Proceedings To Determine 
Whether To Approve or Disapprove an Amendment to the National Market 
System Plan Governing the Consolidated Audit Trail

Dated: December 22, 2022.

I. Introduction

    On September 8, 2022, the Operating Committee for Consolidated 
Audit Trail, LLC (``CAT LLC''), on behalf of the following parties to 
the National Market System Plan Governing the Consolidated Audit Trail 
(the ``CAT NMS Plan''): \1\ 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., Investors Exchange LLC, Long-Term Stock 
Exchange, Inc., Miami International Securities Exchange LLC, MEMX 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'' or ``SROs'') filed with the Securities and Exchange 
Commission (``Commission'') pursuant to Section 11A(a)(3) of the 
Exchange Act,\2\ and Rule 608 thereunder,\3\ a proposed amendment 
(``Proposed Amendment'') to the CAT NMS Plan that would authorize CAT 
LLC to revise the Consolidated Audit Trail Reporter Agreement 
(``Reporter Agreement'') and the Consolidated Audit Trail Reporter 
Agent Agreement (collectively with the Reporter Agreement, the 
``Reporter Agreements'') by: (1) removing the arbitration provision 
from each agreement and replacing it with a forum selection provision 
(the ``Forum Selection Provision'') which would require that any 
dispute regarding CAT reporting be filed in a United States District 
Court for the Southern District of New York (the ``SDNY''), or, in the 
absence of federal subject matter jurisdiction, a New York State 
Supreme Court within the First Judicial Department; and (2) revising 
the existing choice of law clause to provide that any dispute will be 
governed by federal law (in addition to New York law).\4\ The proposed 
plan amendment was published for comment in the Federal Register on 
September 28, 2022.\5\
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    \1\ The CAT NMS Plan is a national market system plan approved 
by the Commission pursuant to Section 11A of the Securities Exchange 
Act of 1934 (``Exchange Act'') and the rules and regulations 
thereunder. See Securities Exchange Act Release No. 79318 (Nov. 15, 
2016), 81 FR 84696 (Nov. 23, 2016). The CAT NMS Plan functions as 
the limited liability company agreement of the jointly owned limited 
liability company (``CAT LLC'') formed under Delaware state law 
through which the Participants conduct the activities of the 
consolidated audit trail. On August 29, 2019, the Participants 
replaced the CAT NMS Plan in its entirety with the limited liability 
company agreement of a new limited liability company named 
Consolidated Audit Trail, LLC. The latest version of the CAT NMS 
Plan is available at https://catnmsplan.com/about-cat/cat-nms-plan.
    \2\ 15 U.S.C 78k-1(a)(3).
    \3\ 17 CFR 242.608.
    \4\ See Letter from Michael Simon, Chair, CAT NMS Plan Operating 
Committee, to Vanessa Countryman, Secretary, Commission (Sept. 8, 
2022).
    \5\ See Securities Exchange Act Release No. 95874 (Sept. 22, 
2022), 87 FR 58876 (Sept. 28, 2022) (``Notice''). The Commission 
received no comments on the Proposed Amendment.
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    This order institutes proceedings, under Rule 608(b)(2)(i) of 
Regulation NMS,\6\ to determine whether to disapprove the Proposed 
Amendment or to approve the Proposed Amendment with any changes or 
subject to any conditions the Commission deems necessary or 
appropriate.
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    \6\ 17 CFR 242.608(b)(2)(i).

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[[Page 80205]]

II. Background

    On July 11, 2012, the Commission adopted Rule 613 of Regulation 
NMS, which required the SROs to submit a national market system 
(``NMS'') plan to create, implement and maintain a consolidated audit 
trail (the ``CAT'' or ``CAT System'') that would capture customer and 
order event information for orders in NMS securities.\7\ On November 
15, 2016, the Commission approved the CAT NMS Plan.\8\ On August 29, 
2019, the Operating Committee for CAT LLC approved Reporter Agreements 
that would limit the total liability of CAT LLC, the Participants and 
the Plan Processor \9\ to a CAT Reporter \10\ for any calendar year to 
the lesser of the total of fees paid by the CAT Reporter to CAT LLC for 
the calendar year in which the claim arose or five hundred dollars. The 
Reporter Agreements also included a mandatory arbitration provision. 
The Participants required each Industry Member \11\ to execute a CAT 
Reporter Agreement prior to reporting data to the CAT.
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    \7\ 17 CFR 242.613.
    \8\ See supra note 1.
    \9\ Plan Processor means the Initial Plan Processor or any other 
Person selected by the Operating Committee pursuant to SEC Rule 613 
and CAT NMS Plan, Article IV, Section 4.3(b)(i) and Article VI, 
Section 6.1, and with regard to the Initial Plan Processor, the 
Selection Plan, to perform the CAT processing functions required by 
SEC Rule 613 and set forth in this Agreement. See CAT NMS Plan, 
supra note 1, at Section 1.1.
    \10\ CAT Reporter means each national securities exchange, 
national securities association and Industry Member that is required 
to record and report information to the Central Repository pursuant 
to SEC Rule 613(c). See id., at Section 1.1.
    \11\ Industry Member means a member of a national securities 
exchange or a member of a national securities association. See id., 
at Section 1.1.
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    On April 22, 2020, prior to the commencement of initial equities 
reporting for Industry Members, the Securities Industry and Financial 
Markets Association (``SIFMA'') filed, pursuant to Sections 19(d) and 
19(f) of the Exchange Act, an application for review of actions taken 
by CAT LLC and the Participants (the ``Administrative Proceedings''). 
SIFMA alleged that by requiring Industry Members to execute the 
Reporter Agreement as a prerequisite to submitting data to the CAT, the 
Participants improperly prohibited or limited SIFMA members with 
respect to access to the CAT System in violation of the Exchange Act. 
On May 13, 2020, the Participants and SIFMA reached a settlement and 
terminated the Administrative Proceedings, allowing Industry Members to 
report data to the CAT pursuant to Reporter Agreements that do not 
contain a limitation of liability provision. Since that time, Industry 
Members have been transmitting data to the CAT.\12\
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    \12\ For a more detailed description of the background for the 
Proposed Amendment, see Notice, supra note 5, at 58876-78.
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    On December 18, 2020, the Participants proposed to amend the CAT 
NMS Plan to authorize CAT LLC to revise the Reporter Agreements to 
insert limitation of liability provisions that would: (1) provide that 
CAT Reporters and CAT reporting agents accept sole responsibility for 
their access to and use of the CAT System, and that CAT LLC makes no 
representations or warranties regarding the CAT System or any other 
matter; (2) limit the liability of CAT LLC, the Participants, and their 
respective representatives to any individual CAT Reporter or CAT 
reporting agent to the lesser of the fees actually paid to CAT for the 
calendar year or five hundred dollars; (3) exclude all direct and 
indirect damages; and (4) provide that CAT LLC, the Participants, and 
their respective representatives shall not be liable for the loss or 
corruption of any data submitted by a CAT Reporter or CAT reporting 
agent to the CAT System.\13\ On October 29, 2021, the Commission 
disapproved the Limitation of Liability Amendment.\14\
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    \13\ See Securities Exchange Act Release No. 90826 (Dec. 30, 
2020), 86 FR 591, 593 (Jan. 6, 2021) (``Limitation of Liability 
Amendment'').
    \14\ See Securities Exchange Act Release No. 93484 (Oct. 29, 
2021), 86 FR 60933 (Nov. 4, 2021).
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    On May 20, 2022, the Participants proposed to amend the CAT NMS 
Plan to authorize CAT LLC to revise the Reporter Agreements to: (1) 
replace the arbitration provisions in the agreement with a forum 
selection provision, which would require the parties to the Reporter 
Agreements to bring any action in the SDNY, or, if there is no basis 
for federal subject matter jurisdiction, in the New York State Supreme 
Court within the First Judicial Department and, if it is permitted, 
seek assignment to the Commercial Division; (2) revise the governing 
law provision to set the governing law for all disputes as United 
States federal law or the laws of the state of New York; (3) include a 
provision requiring the parties to the Reporter Agreements to waive 
their right to a jury trial, with no exception; and (4) include a 
provision stating that CAT LLC and the Plan Processor disclaim any, and 
make no, representations or warranties, regarding the CAT System or any 
other matter pertaining to the Reporter Agreements, including any 
representation or warranty relating to merchantability, quality, 
fitness for a particular purpose, compliance with applicable laws, non-
infringement, title, sequencing, timeliness, accuracy or completeness 
of information.\15\ On September 6, 2022, the Participants withdrew 
that proposed amendment.\16\
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    \15\ See Securities Exchange Act Release No. 95031 (June 3, 
2022), 87 FR 35273 (June 9, 2022).
    \16\ See Letter from Michael Simon, Chair, CAT NMS Plan 
Operating Committee, to Vanessa Countryman, Secretary, Commission 
(Sept. 6, 2022); see also Securities Exchange Act Release No. 96102 
(Oct. 19, 2022), 87 FR 64294 (Oct. 24, 2022) (providing notice of 
withdrawal of the proposed amendment).
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III. Summary of Proposal

    The Participants now propose to amend the CAT NMS Plan to authorize 
CAT LLC to revise the Reporter Agreements to: (1) remove the 
arbitration provision from each agreement and replace it with the Forum 
Selection Provision, which would require that any dispute regarding CAT 
reporting be filed in the SDNY, or, in the absence of federal subject 
matter jurisdiction, a New York State Supreme Court within the First 
Judicial Department; and (2) revise the existing choice of law clause 
to provide that any dispute will be governed by federal law (in 
addition to New York law).
    In support of the Forum Selection Provision, the Participants 
believe that a court is the proper forum to resolve claims concerning 
CAT reporting, including claims relating to potential technical issues, 
system failures, and data breaches.\17\ The Participants state that 
litigating in court is appropriate to address claims, which likely will 
involve regulatory issues, including the doctrine of regulatory 
immunity,\18\ and complex legal and factual issues involved in cyber 
litigation.\19\ The Participants state that litigating in court would 
allow parties to rely on precedent that has been developed to address 
those issues when resolving disputes that could potentially involve 
parties seeking substantial damages.\20\
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    \17\ See Notice at 58878. The Participants explain that in the 
aftermath of high-profile data breaches, plaintiffs have brought 
common law claims of breach of contract and negligence as well as 
claims based on various federal statutes including the Stored 
Communications Act, the Federal Wiretap Act, and the Computer Fraud 
and Abuse Act. Id.
    \18\ Id. at 58879. The Participants state that comments letters 
in connection with the Limitation of Liability Amendment 
``demonstrated an assumption and understanding that'' assessments of 
immunity would be decided by the courts. Id.
    \19\ See id. at 58879. The Participants state that assessing 
potential defenses will likely require a tribunal to resolve complex 
issues that implicate the Participants' status as self-regulatory 
organizations and the Commission's oversight of the CAT. Id. at 
58878.
    \20\ Id. at 58879. The Participants also state that litigating 
disputes in court would promote the development of precedent to 
guide Industry Members' and Participants' conduct. Id.

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[[Page 80206]]

    The Participants state that courts offer important procedural 
mechanisms that would help resolve claims related to CAT reporting 
fairly and efficiently.\21\ According to the Participants, adjudicating 
disputes in the courts would permit consolidation and joinder of 
claims, as federal and New York State rules of civil procedure provide 
mechanisms for consolidation and joinder, as well as permit the use of 
class actions for certain disputes.\22\ The Participants state that in 
arbitration, in contrast, the ultimate decision on consolidation is 
made by the arbitrator.\23\ Further, the Participants state that the 
AAA Commercial Arbitration rules are silent on joinder, and parties 
have faced complications in joining parties to an arbitration claim 
when they are non-signatories, which could be significant since claims 
arising out of CAT reporting might be related incidents that impact 
Industry Members and other market participants (e.g., retail 
investors).\24\ The Participants state that for those reasons, if the 
arbitration provisions remain in the Reporter Agreements, cases arising 
out of the same facts or involving the same legal issues might result 
in different outcomes and damage awards, and potentially create 
inconsistent rules.\25\
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    \21\ See id. at 58876.
    \22\ Id. at 58878-79.
    \23\ Id. at 58879.
    \24\ Id.
    \25\ Id.
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    The Participants further state that adjudicating claims related to 
CAT in court provides parties with appellate rights and rules governing 
the discovery process and admissibility of evidence.\26\ They state 
that direct appellate review is largely absent in arbitration and that 
the rules relating to discovery and evidence are more limited.\27\
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    \26\ Id. at 58879-80.
    \27\ Id.
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    As for the forum itself, the Participants state that the SDNY and 
the New York State Supreme Court are venues with extensive experience 
adjudicating matters involving federal securities laws, market 
structure, and cybersecurity.\28\ The Participants state that the 
Second Circuit, and the SDNY, have experience with securities and 
financial regulation matters, data breaches and cybersecurity 
incidents, and have authored opinions regarding the scope of regulatory 
immunity.\29\ The Participants also state that New York State courts 
also focus on complex cases and have addressed the scope of regulatory 
immunity.\30\ They state that New York is a convenient venue for the 
parties since the two largest securities exchanges, several 
Participants, and the most prominent Industry Members by trading volume 
are located in New York.\31\
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    \28\ Id. at 58880-81.
    \29\ Id.
    \30\ Id.
    \31\ Id.
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    The Participants state that they are proposing to modify the 
governing law provision, which currently provides that New York State 
law will govern disputes arising out of the Reporter Agreements, to 
provide that both federal law and New York State law will govern such 
disputes.\32\ The Participants state that the reason for this change is 
that such claims could involve issues of federal law because CAT LLC 
was created pursuant to federal law and is subject to a federal 
regulatory regime.\33\
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    \32\ Id. at 58881.
    \33\ Id.
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IV. Proceedings To Determine Whether To Approve or Disapprove the 
Proposed Amendment

    The Commission is instituting proceedings pursuant to Rule 
608(b)(2)(i) of Regulation NMS,\34\ and Rules 700 and 701 of the 
Commission's Rules of Practice,\35\ to determine whether to disapprove 
the Proposed Amendment or to approve the Proposed Amendment with any 
changes or subject to any conditions the Commission deems necessary or 
appropriate. Institution of proceedings does not indicate that the 
Commission has reached any conclusions with respect to any of the 
issues involved. Rather, the Commission seeks and encourages interested 
persons to provide additional comment on the Proposed Amendment to 
inform the Commission's analysis.
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    \34\ 17 CFR 242.608.
    \35\ 17 CFR 201.700; 17 CFR 201.701.
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    Rule 608(b)(2) of Regulation NMS provides that the Commission 
``shall approve a national market system plan or proposed amendment to 
an effective national market system plan, with such changes or subject 
to such conditions as the Commission may deem necessary or appropriate, 
if it finds that such plan or amendment is necessary or appropriate in 
the public interest, for the protection of investors and the 
maintenance of fair and orderly markets, to remove impediments to, and 
perfect the mechanisms of, a national market system, or otherwise in 
furtherance of the purposes of the Act.'' \36\ Rule 608(b)(2) further 
provides that the Commission shall disapprove a national market system 
plan or proposed amendment if it does not make such a finding.\37\ In 
the Notice, the Commission sought comment on the Proposed Amendment, 
including whether the amendment is consistent with the Exchange 
Act.\38\ In this order, pursuant to Rule 608(b)(2)(i) of Regulation 
NMS,\39\ the Commission is providing notice of the grounds for 
disapproval under consideration:
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    \36\ 17 CFR 242.608(b)(2).
    \37\ See id.
    \38\ See Notice, supra note 5, 87 FR at 35279.
    \39\ 17 CFR 242.608(b)(2)(i). See also 17 CFR 201.700(b)(2).
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     whether, consistent with Rule 608 of Regulation NMS, the 
Proposed Amendment is necessary or appropriate in the public interest, 
for the protection of investors and the maintenance of fair and orderly 
markets, to remove impediments to, and perfect the mechanisms of, a 
national market system, or otherwise in furtherance of the purposes of 
the Exchange Act; and
     whether, and if so how, the Proposed Amendment would 
affect efficiency, competition or capital formation.

V. Commission's Solicitation of Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the Proposed Amendment. In particular, the Commission invites the 
written views of interested persons concerning whether the Proposed 
Amendment is necessary or appropriate in the public interest, for the 
protection of investors and the maintenance of fair and orderly 
markets, to remove impediments to, and perfect the mechanisms of, a 
national market system, or otherwise in furtherance of the purposes of 
the Exchange Act. Although there do not appear to be any issues 
relevant to approval or disapproval that would be facilitated by an 
oral presentation of views, data, and arguments, the Commission will 
consider, pursuant to Rule 608(b)(2)(i) of Regulation NMS,\40\ any 
request for an opportunity to make an oral presentation.\41\ The 
Commission asks that commenters address the sufficiency and merit of 
the Participants' statements in support of the Proposed Amendment, in 
addition to any other comments they

[[Page 80207]]

may wish to submit about the proposed rule changes.
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    \40\ 17 CFR 242.608(b)(2)(i).
    \41\ Rule 700(c)(ii) of the Commission's Rules of Practice 
provides that ``[t]he Commission, in its sole discretion, may 
determine whether any issues relevant to approval or disapproval 
would be facilitated by the opportunity for an oral presentation of 
views.'' 17 CFR 201.700(c)(ii).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the Proposed Amendment should be approved 
or disapproved by January 19, 2023. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
February 2, 2023. Comments may be submitted by any of the following 
methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number 4-698 on the subject line.

Paper Comments

     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 4-698. 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 Participants' principal offices. 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 4-698 and should be submitted on or before 
January 19, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
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    \42\ 17 CFR 200.30-3(a)(85).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022-28296 Filed 12-28-22; 8:45 am]
BILLING CODE 8011-01-P