Document ID: SEC-2019-0621-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2019-05-08T04:00Z

[Federal Register Volume 84, Number 89 (Wednesday, May 8, 2019)]
[Notices]
[Pages 20173-20176]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-09375]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85764; File No. SR-FINRA-2019-015]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Update the FINRA Manual To Reflect FINRA's New 
Subsidiary, FINRA CAT, LLC

May 2, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 24, 2019, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. FINRA has 
designated the proposed rule change as concerned solely with the 
administration of the self-regulatory organization under Section 
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(3) thereunder,\4\ 
which renders the proposal effective upon receipt of this filing by the 
Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(3).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to update the FINRA Manual to reflect FINRA's 
new subsidiary, FINRA CAT, LLC. Specifically, the proposed rule change 
would codify the delegation of specific responsibilities and functions 
to FINRA CAT, LLC under the Plan of Allocation and Delegation of 
Functions by FINRA (``Delegation Plan''); make conforming amendments to 
the Delegation Plan to reflect FINRA CAT, LLC; amend the By-Laws of 
FINRA Regulation, Inc. (``FINRA Regulation By-Laws'') to make relevant 
conforming amendments; and make conforming amendments to FINRA rules.
    The text of the proposed rule change is available on FINRA's 
website at http://www.finra.org, at the principal office of FINRA and 
at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Background
    FINRA and the national securities exchanges (collectively, the 
``Participants'') \5\ filed with the Commission, pursuant to Section 
11A of the Exchange Act \6\ and Rule 608 of Regulation NMS 
thereunder,\7\ the National Market System Plan Governing the 
Consolidated Audit Trail (the ``CAT NMS Plan'' or ``Plan'').\8\ The 
Participants filed the Plan to comply with Rule 613 of Regulation NMS 
under the Exchange Act.\9\ The Plan was published for comment in the 
Federal Register on May 17, 2016,\10\ and approved by the Commission, 
as modified, on November 15, 2016.\11\
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    \5\ Specifically, the Participants are 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., FINRA, Investors Exchange LLC, Miami International 
Securities Exchange, LLC, MIAX Emerald, LLC, MIAX PEARL, LLC, Nasdaq 
BX, Inc., Nasdaq GEMX, LLC, Nasdaq ISE, LLC, Nasdaq MRX, LLC, Nasdaq 
PHLX LLC, The Nasdaq Stock Market LLC, New York Stock Exchange LLC, 
NYSE American LLC, NYSE Arca, Inc., NYSE Chicago, Inc. and NYSE 
National, Inc.
    \6\ 15 U.S.C. 78k-1.
    \7\ 17 CFR 242.608.
    \8\ See Letter from the Participants to Brent J. Fields, 
Secretary, Commission, dated September 30, 2014; and Letter from 
Participants to Brent J. Fields, Secretary, Commission, dated 
February 27, 2015. On December 23, 2015, the Participants submitted 
an amendment to the CAT NMS Plan. See Letter from Participants to 
Brent J. Fields, Secretary, Commission, dated December 23, 2015.
    Unless otherwise specified, capitalized terms used in this rule 
filing are defined as set forth herein or in the CAT NMS Plan.
    \9\ 17 CFR 242.613.
    \10\ See Securities Exchange Act Release No. 77724 (April 27, 
2016), 81 FR 30614 (May 17, 2016).
    \11\ See Securities Exchange Act Release No. 79318 (November 15, 
2016), 81 FR 84696 (November 23, 2016) (``Approval Order'').
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    The Participants jointly own and operate CAT NMS, LLC, a company 
formed by the Participants to arrange for and oversee the creation, 
implementation, and maintenance of the consolidated audit trail 
(``CAT'') as required under Rule 613, and the CAT is a facility of each 
Participant.\12\ The CAT is intended to capture in a single 
consolidated data source customer and order event information for 
orders in NMS Securities and OTC Equity Securities, across all markets, 
from the time of order inception through routing, cancellation, 
modification, or execution.\13\
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    \12\ See Securities Exchange Act Release No. 67457 (July 18, 
2012), 77 FR 45722, 45775 (August 1, 2012) (``Rule 613 Adopting 
Release'').
    \13\ See e.g., id., at 45722.
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    The Plan requires the Participants to select a Plan Processor to 
perform the CAT processing functions required by SEC Rule 613 and as 
set forth in the Plan.\14\ On February 1, 2019, CAT NMS, LLC confirmed 
that it would be transitioning the CAT project to a new Plan Processor, 
and on February 27, 2019, announced that it had selected FINRA as the 
Plan Processor.\15\ In its capacity as Plan Processor, FINRA is 
responsible for the development and

[[Page 20174]]

operation of the CAT in accordance with the terms of the Plan.
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    \14\ However, while the Participants select a Plan Processor to 
perform these functions, each Participant also remains responsible 
for compliance with the terms of the Plan. See SEC Rule 608(c) and 
SEC Rule 613(h).
    \15\ See announcements dated February 1, 2019 and February 27, 
2019 on the News Page at www.catnmsplan.com/news-page/index.html.
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    In addition to serving in its capacity as Plan Processor of the 
CAT, FINRA is required to fulfill its obligations as a Participant of 
the Plan. To that end, FINRA CAT, LLC will further FINRA's compliance 
with its regulatory obligations under SEC Rule 613 with respect to the 
creation, operation and maintenance of a central repository. FINRA will 
fulfill its obligations as a Participant of the Plan, including among 
others, enforcing FINRA rules requiring its members to comply with the 
CAT NMS Plan, through FINRA (and FINRA Regulation, Inc.) and not 
through FINRA CAT, LLC.
    FINRA believes that significant resources are required in order to 
meet its obligations as Plan Processor of the CAT. For example, FINRA 
has dedicated staff and financial resources in connection with serving 
as the Plan Processor and believes that it will be required to continue 
to allot resources to the CAT in this capacity. In addition, certain 
functions of the Plan Processor require consultation with or are 
subject to approval by the CAT NMS Plan Operating Committee. FINRA 
created FINRA CAT, LLC as a subsidiary of FINRA in order to dedicate 
resources solely to carrying out its obligations as Plan Processor and 
to underscore that FINRA CAT, LLC, while part of the self-regulatory 
organization (``SRO''), is separate and distinct from the other FINRA 
entities.
    FINRA notes that as a subsidiary of FINRA, FINRA CAT, LLC is part 
of the registered securities association. As such, for purposes of SEC 
Regulation Systems Compliance and Integrity (``Regulation SCI''), FINRA 
CAT, LLC is an SCI SRO and therefore an SCI entity.\16\
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    \16\ 17 CFR 242.1000 through 242.1007. Under Regulation SCI, the 
term ``SCI entity'' means an SCI self-regulatory organization, SCI 
alternative trading system, plan processor, or exempt clearing 
agency subject to ARP. The term ``SCI self-regulatory organization'' 
or ``SCI SRO'' includes national securities exchanges registered 
under Section 6(b) of the Exchange Act, registered securities 
associations, registered clearing agencies, and the Municipal 
Securities Rulemaking Board. 17 CFR 242.1000.
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Proposed Amendments
    To account for the new subsidiary and codify the delegation by 
FINRA of certain regulatory responsibilities and functions to it, FINRA 
is proposing to make conforming amendments to the Delegation Plan to 
include FINRA CAT, LLC in the Delegation Plan; amend FINRA Regulation 
By-Laws to make relevant conforming amendments; and make conforming 
amendments to FINRA rules.
(1) Conforming Amendments to the Delegation Plan
    FINRA is proposing to rename the Delegation Plan as the ``Plan of 
Allocation and Delegation of Functions by FINRA to Subsidiaries.'' 
FINRA also is proposing to make conforming amendments throughout the 
Delegation Plan to replace references to ``FINRA Regulation'' with 
references to ``the Subsidiaries'' or ``Subsidiary'' to indicate that 
both FINRA Regulation, Inc. and FINRA CAT, LLC are subsidiaries of 
FINRA. In addition, the proposed rule change would reference FINRA 
Regulation, Inc. and FINRA CAT, LLC individually and define them 
collectively as ``the Subsidiaries.'' Finally, FINRA is proposing to 
amend Section I.B of the Delegation Plan to include a reference to new 
Section III pertaining to FINRA CAT, LLC.
Section I--FINRA, Inc.
    Section I of the Delegation Plan provides that FINRA shall have 
responsibility for the rules and regulations of the Association 
(defined in the FINRA Manual as FINRA and its Subsidiaries) and its 
operation and administration. Under Section I.B, the proposed rule 
change would include subsection 10 to provide that FINRA expressly 
retains authority and functions to resolve any disputes among the 
Subsidiaries. This subsection was included in the Delegation Plan prior 
to the merger of FINRA Dispute Regulation, Inc. into and with FINRA 
Regulation, Inc.,\17\ but was removed as it refers to disputes among 
the subsidiaries, and only FINRA Regulation, Inc. remained as a result 
of the merger of the two subsidiaries. In addition, in subsection 
three, FINRA proposes to add reference to selection of a Board of 
Managers, because FINRA CAT, LLC is governed by a Board of Managers. In 
subsection five, FINRA proposes to add the word ``common'' as FINRA 
Regulation, Inc. may now share overhead (including, for example, such 
back-office services as payroll and human resources) and technology 
with FINRA CAT, LLC as separate subsidiaries. Finally, FINRA is 
proposing to amend subsection nine to provide for delegation to FINRA 
CAT, LLC, which, as discussed below, would be located in Section III of 
the Delegation Plan.
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    \17\ See Securities Exchange Act Release No. 76670 (December 16, 
2015) 80 FR 79632 (December 22, 2015) (Order Approving File No. SR-
FINRA-2015-034).
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    FINRA is proposing to expressly provide in amended Section I.E of 
the Delegation Plan that, notwithstanding the delegation of authority 
to FINRA CAT, LLC, the staff, books, records, and premises of FINRA 
CAT, LLC are the staff, books, records, and premises of FINRA subject 
to oversight pursuant to the Act, and all officers, directors, 
employees, and agents of FINRA CAT, LLC are officers, directors, 
employees, and agents of FINRA for purposes of the Act, subject to 
applicable provisions of the CAT NMS Plan.\18\ For example, the CAT NMS 
Plan expressly provides that the Plan Processor shall designate 
employees of the Plan Processor to serve, subject to the approval of 
the CAT NMS Plan Operating Committee, as the Chief Compliance Officer 
(``CCO'') and as the Chief Information Security Officer (``CISO''),\19\ 
and that the CCO and CISO shall be officers of CAT NMS, LLC.\20\ The 
Plan further requires the Plan Processor to acknowledge that the 
officers of CAT NMS, LLC owe fiduciary duties to CAT NMS, LLC, and 
that, to the extent that the duties owed to CAT NMS, LLC conflict with 
any duties owed to the Plan Processor, the duties to CAT NMS, LLC will 
control.\21\ In addition, the Plan provides that all CAT Data and other 
books and records of CAT NMS, LLC shall be the property of CAT NMS, 
LLC, rather than the Plan Processor, and, to the extent in the 
possession or control of the Plan Processor, shall be made available by 
the Plan Processor to the Commission upon request.\22\ The proposed 
rule change would not modify such provisions of the CAT NMS Plan.\23\
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    \18\ Thus, the books and records and management and staff of 
FINRA CAT, LLC are deemed to be the books and records and management 
and staff of FINRA for purposes of the jurisdiction and oversight by 
the SEC of FINRA CAT, LLC as part of the registered securities 
association. Notwithstanding this provision, FINRA and FINRA CAT, 
LLC are separate legal entities under Delaware corporate law.
    \19\ See Section 6.2 of the CAT NMS Plan.
    \20\ See Section 4.6 of the CAT NMS Plan.
    \21\ Id.
    \22\ See Section 9.1 of the CAT NMS Plan.
    \23\ FINRA is proposing a conforming amendment to FINRA Rule 
0170 (Delegation, Authority and Access).
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Section III--FINRA CAT, LLC
    FINRA is proposing to amend the Delegation Plan to include Section 
III of the Delegation Plan to delegate responsibilities and functions 
to FINRA CAT, LLC. Specifically, FINRA is proposing to delegate to 
FINRA CAT, LLC the following responsibilities and functions: (1) To act 
as a Plan Processor under the CAT NMS Plan in accordance with SEC Rule 
613 and the provisions

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of the Plan; (2) to create, operate and maintain the CAT and central 
repository pursuant to Rule 613 and the provisions of the Plan; (3) to 
develop and implement policies, procedures, and control structures 
related to the CAT System; (4) to ensure the effective management and 
operation of the CAT; and (5) to ensure the accuracy of the 
consolidation of the CAT Data reported to the Central Repository.
    FINRA also proposes to provide that the responsibilities and 
functions delegated by FINRA to FINRA CAT, LLC in Section III include, 
but are not limited to, those specified above. FINRA notes that the 
specific responsibilities and functions of the Plan Processor are set 
forth in Section 6.1 of the CAT NMS Plan, many of which require 
consultation with or approval by the CAT NMS Plan Operating Committee. 
As such, FINRA is proposing to expressly provide that all action taken 
by FINRA CAT, LLC pursuant to authority delegated pursuant to the 
Delegation Plan shall be taken in accordance with the terms of the Plan 
and SEC Rule 613, and in consultation with the CAT NMS Plan Operating 
Committee, as applicable.
    Finally, FINRA is proposing to include language providing that 
capitalized terms that are not defined in Section III shall have the 
meanings ascribed to them in the Plan.
(2) Conforming Amendments to the FINRA Regulation By-Laws
    FINRA is proposing to make conforming amendments to the FINRA 
Regulation By-Laws. Specifically, FINRA is proposing to amend the 
definition of ``Delegation Plan'' in section (i) of Article I to 
replace ``FINRA Regulation'' with ``Subsidiaries'' to account for the 
fact that pursuant to the proposed rule change, the Delegation Plan 
also would pertain to FINRA CAT, LLC. In addition, FINRA is proposing 
to include reference to FINRA CAT, LLC in the last sentence of Section 
4.14(b) (Conflicts of Interest; Contracts and Transactions Involving 
Directors) to indicate that the provisions in that subsection shall not 
apply to contracts or transactions between FINRA Regulation, Inc. and 
FINRA CAT, LLC.
(3) Conforming Amendments to FINRA Rules
    FINRA also is proposing to amend several FINRA rules to reflect 
FINRA CAT, LLC as a FINRA subsidiary. The proposed rule change would 
amend Rule 0160 (Definitions) to include FINRA CAT, LLC in the 
definition of FINRA. In addition, FINRA is proposing a conforming 
amendment to Rule 0170 (Delegation, Authority and Access) to replace 
references to ``FINRA Regulation'' with the ``Subsidiaries.''
    FINRA notes that the proposed rule change would not amend the Rule 
6800 Series (Consolidated Audit Trail Compliance Rule), pursuant to 
which FINRA requires its members to comply with the provisions of the 
CAT NMS Plan. FINRA is not delegating any of its responsibilities or 
functions pertaining to the Rule 6800 Series to FINRA CAT, LLC.
    FINRA has filed the proposed rule change for immediate 
effectiveness. The effective date will be the date of filing.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\24\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest.
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    \24\ 15 U.S.C. 78o-3(b)(6).
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    FINRA believes that the proposed amendments to include its 
subsidiary, FINRA CAT, LLC, in the FINRA Manual would reflect and bring 
transparency to FINRA's corporate organizational structure, and, in the 
process, would make the organization more efficient. In addition, FINRA 
believes that delegating regulatory responsibilities and functions to 
FINRA CAT, LLC to meet its CAT-related obligations enables FINRA to 
efficiently direct resources to ensure that it properly carries out its 
contractual obligations in its capacity as Plan Processor and its 
regulatory obligations under SEC Rule 613.
    FINRA notes that the proposed rule change would not affect public 
investors, the goals of the Plan or fees associated with the CAT. FINRA 
believes that the proposed rule change reflects its commitment to serve 
as Plan Processor of the CAT and to comply with the provisions of the 
Plan. Thus, FINRA believes that the creation of FINRA CAT, LLC and 
inclusion of FINRA CAT, LLC in the FINRA Manual would ensure that FINRA 
continues to protect investors and the public interest in an efficient 
manner.

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. FINRA believes that the 
proposed amendments account for FINRA's subsidiary, FINRA CAT, LLC, and 
would align FINRA's corporate organizational structure with its 
organizational practice. The proposed rule change would allow FINRA to 
update its Manual to include FINRA CAT, LLC and make changes to its 
Manual to reflect the current corporate structure. Further, FINRA 
intends to allocate staff and financial resources directly to FINRA 
CAT, LLC to meet its obligations as Plan Processor. FINRA notes that 
the proposed rule change would not alter member and industry 
obligations related to the Plan, including regarding fees. FINRA 
believes that the proposed rule change demonstrates its commitment to 
fulfilling its contractual obligations in its capacity as Plan 
Processor and its regulatory obligations under SEC Rule 613.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \25\ and paragraph (f)(3) of Rule 19b-4 
thereunder.\26\ At any time within 60 days of the filing of the 
proposed rule change, the Commission summarily may temporarily suspend 
such rule change if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act. If 
the Commission takes such action, the Commission shall institute 
proceedings to determine whether the proposed rule should be approved 
or disapproved.
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    \25\ 15 U.S.C. 78s(b)(3)(A).
    \26\ 17 CFR 240.19b-4(f)(3).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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 rule-comments@sec.gov. Please include 
File Number SR-FINRA-2019-015 on the subject line.

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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 SR-FINRA-2019-015. 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 a.m. and 3 
p.m. Copies of such filing also will be available for inspection and 
copying at the principal office of FINRA. 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-2019-015 and should be submitted on or before May 29, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-09375 Filed 5-7-19; 8:45 am]
BILLING CODE 8011-01-P