Document ID: SEC-2020-1203-0001
Agency: sec
Document Type: Notice
Title: Joint Industry Plan: Order Approving Amendment to the National Market System Plan Governing the Consolidated Audit Trail
Posted Date: 2020-07-30T04:00Z

[Federal Register Volume 85, Number 147 (Thursday, July 30, 2020)]
[Notices]
[Pages 45941-45943]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-16476]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89397; File No. 4-698]

Joint Industry Plan; Order Approving Amendment to the National 
Market System Plan Governing the Consolidated Audit Trail

July 24, 2020.

I. Introduction

    On April 14, 2020, the Operating Committee for Consolidated Audit 
Trail, LLC, on behalf of the Participants \1\ to the National Market 
System Plan Governing the Consolidated Audit Trail (the ``CAT NMS 
Plan'' or ``Plan'') \2\ filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') pursuant to Section 11A(a)(3) of 
the Securities Exchange Act of 1934 (``Exchange Act''),\3\ and Rule 608 
thereunder,\4\ a proposed amendment (``Amendment'') to the CAT NMS Plan 
to revise data reporting requirements for Firm Designated ID.\5\ The 
Amendment was published for comment in the Federal Register on June 17, 
2020.\6\ No comment letters were received. This order approves the 
Amendment to the Plan.
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    \1\ The Participants are: BOX Options Exchange LLC, Cboe BYX 
Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., 
Cboe EDGX Exchange, Inc., Cboe C2 Options Exchange, Inc., Cboe 
Exchange, Inc., Financial Industry Regulatory Authority, Inc., Long-
Term Stock Exchange LLC, Investors' Exchange, LLC, Miami 
International Securities Exchange, LLC, MEMX LLC, MIAX EMERALD, LLC, 
MIAX PEARL, LLC, Nasdaq GEMX, LLC, Nasdaq ISE, LLC, Nasdaq MRX, LLC, 
Nasdaq BX, Inc., Nasdaq PHLX LLC, The NASDAQ Stock Market LLC, New 
York Stock Exchange LLC, NYSE Arca, Inc., NYSE Chicago, Inc., NYSE 
American, LLC and NYSE National, Inc. (collectively, the 
``Participants,'' ``self-regulatory organizations,'' or ``SROs'').
    \2\ The CAT NMS Plan was approved by the Commission, 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'').
    \3\ 15 U.S.C. 78k-1(a)(3).
    \4\ 17 CFR 242.608.
    \5\ See Letter from Michael Simon, CAT NMS Plan Operating 
Committee Chair, to Vanessa Countryman, Secretary, Commission, dated 
April 14, 2020.
    \6\ See Securities Exchange Act Release No. 89052 (June 11, 
2020), 85 FR 36623 (``Notice'').
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II. Description of the Amendment

    In the Amendment, the Participants propose to amend the definition 
of ``Firm Designated ID'' to: (1) To prohibit the use of account 
numbers as Firm Designated IDs for trading accounts that are not 
proprietary accounts; (2) to require that the Firm Designated ID for a 
trading account be persistent over time for each Industry Member so 
that a single account may be tracked across time within a single 
Industry Member; (3) to permit the use of relationship identifiers as 
Firm Designated IDs in certain circumstances; and (4) to permit the use 
of entity identifiers as Firm Designated IDs in certain 
circumstances.\7\
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    \7\ See Notice, supra note 6, at 36626. Prior to this amendment, 
``Firm Designated ID'' was defined as ``a unique identifier for each 
trading account designated by Industry Members for purposes of 
providing data to the Central Repository, where each such identifier 
is unique among all identifiers from any given Industry Member for 
each business date.''
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A. Prohibition on Use of Account Numbers

    The Participants propose to amend the definition of Firm Designated 
ID to prohibit the use of account numbers as Firm Designated IDs for 
accounts that are not proprietary accounts. After discussions with the 
industry, the Participants have concluded that each Industry Member 
must make its own risk determination as to whether it believes it is 
necessary to mask the actual account number for any proprietary account 
of the Industry Member when reporting the Firm Designated ID to CAT.

B. Persistent Firm Designated IDs

    The Participants propose to amend the definition of Firm Designated 
ID to specify that Firm Designated IDs must be unique and persistent 
over time, rather than unique for each account for each business date. 
Specifically, the Participants propose to amend the definition of 
``Firm Designated ID'' in Section 1.1 of the CAT NMS Plan so that the 
definition of ``Firm Designated ID'' would read, in relevant part, as 
follows: ``a unique and persistent identifier for each trading account 
designated by Industry Members for purposes of providing data to the 
Central Repository . . . where each such identifier is unique among all 
identifiers from any given Industry Member.'' \8\ The Participants 
state that with this change, a single account (or relationship or 
entity identifier as described below) can be tracked across time within 
a single Industry Member using the Firm Designated ID, without 
requiring a regulator to use Customer information.\9\
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    \8\ The Participants state that if an Industry Member assigns a 
new account number or entity identifier to a client or customer due 
to a merger, acquisition or some other corporate action, then the 
Industry Member should create a new Firm Designated ID to identify 
the new account identifier/relationship identifier/entity identifier 
in use at the Industry Member for the entity. In addition, if a 
previously assigned Firm Designated ID is no longer in use by an 
Industry Member (e.g., if the trading account associated with the 
Firm Designated ID has been closed), then an Industry Member may 
reuse the Firm Designated ID for another trading account. The 
Participants represent that the Plan Processor will maintain a 
history of the use of each Firm Designated ID, including, for 
example, the effective dates of the Firm Designated ID with respect 
to each associated trading account. See Notice, supra note 6, at 
36625 n.9.
    \9\ ``Customer information'' is Customer Account Information and 
Customer Identifying Information that will be captured by CAT and 
stored in a secure database physically separated from the 
transactional database. See CAT NMS Plan at Section 1.1, and 
Appendix D, Section 9.1.
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C. Relationship Identifiers

    The Participants propose to amend the definition of Firm Designated 
ID so that Industry Members would be able to provide a ``relationship 
identifier'' as the Firm Designated ID when they do not have an account 
number available to their order handling and/or execution system at the 
time of order receipt, but can provide an identifier representing the 
client's trading relationship. Specifically, the Participants propose 
to amend the definition of a ``Firm Designated ID'' in Section 1.1 of 
the CAT NMS Plan to state that a Firm Designated ID means, in part, ``a 
unique and persistent relationship identifier when an Industry Member 
does not have an account number available to its order handling and/or 
execution system at the time of order receipt, provided, however, such 
identifier must be masked.''
    The Participants state that relationship identifiers are used by a 
broker-dealer when it establishes the parent relationship for a client 
using a relationship identifier as opposed to an actual parent account. 
The Participants further state that a relationship identifier is 
established prior to any trading for a client and could be any of a 
variety of identifiers, such as a short name for a relevant individual 
or institution. The proposed amendment would allow Industry Members to 
use relationship identifiers in circumstances in which the account 
structure is not available to an Industry Member's trading system at 
the time of order placement. When a relationship identifier is used 
instead of a parent account, and an Industry Member places an order on 
behalf of the client, any executed trades will be kept in a firm

[[Page 45942]]

account until they are allocated to the proper subaccount(s) associated 
with the relationship identifier.
    The relationship identifier would be required to be persistent over 
time and unique among all identifiers from any given Industry Member, 
similar to all Firm Designated IDs as proposed by the amendment. In 
addition, the relationship identifier would have to be masked, so that 
the relationship identifier could not be a name or otherwise indicate 
the identity of the relationship, and the relationship identifier could 
not be used alone to reveal the identity of the relationship.\10\
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    \10\ The Participants have issued guidance stating that an 
acceptable Firm Designated ID can be, without limitation, a newly 
created unique identifier or an internal only identifier used by a 
broker-dealer that cannot be used to effect a transaction. In 
addition, Industry Members could employ a masking methodology to 
mask the actual account number prior to the submission to CAT. See 
CAT NMS Plan FAQ M2, available at: https://www.catnmsplan.com/faq.
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D. Entity Identifiers

    The Participants propose to amend the definition of Firm Designated 
ID so that Industry Members could submit an ``entity identifier'' as a 
Firm Designated ID when an employee of an Industry Member with 
discretion over multiple client accounts creates an aggregated order 
for which a trading account number of the Industry Member is not 
available at the time of order origination.\11\ Specifically, the 
Participants propose to amend the definition of Firm Designated ID by 
stating that a Firm Designated ID means, in part, ``a unique and 
persistent entity identifier when an employee of an Industry Member is 
exercising discretion over multiple client accounts and creates an 
aggregated order for which a trading account number of the Industry 
Member is not available at the time of order origination.''
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    \11\ The Participants provided an example of the use of an 
entity identifier as a Firm Designated ID in the Notice. See Notice, 
supra note 6, at 36625.
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    The proposed amendment would allow Industry Members to use entity 
identifiers in circumstances in which an account number is not 
available to an Industry Member's trading system at the time of order 
placement. Entity identifiers are comparable to relationship 
identifiers described above, except the entity identifier represents a 
firm's discretionary relationship with the client rather than a firm 
trading account or the client. The entity identifier would be required 
to be persistent over time and unique among all identifiers from any 
given Industry Member, similar to all Firm Designated IDs as proposed 
by the amendment. Unlike the relationship identifier, the entity 
identifier would not have to be masked.

III. Discussion and Commission Findings

    After careful review, and for the reasons discussed below, the 
Commission finds that the Amendment is appropriate in the public 
interest, for the protection of investors and the maintenance of fair 
and orderly markets, and to remove impediments to, and perfect the 
mechanisms of, a national market system or otherwise in furtherance of 
the purposes of the Act.\12\
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    \12\ 17 CFR 242.608.
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A. Prohibition on Use of Account Numbers

    The Commission believes that amending the definition of Firm 
Designated ID to prohibit the use of account numbers as the Firm 
Designated IDs for accounts that are not proprietary accounts could 
reduce security risks related to CAT Data by limiting the capture of 
sensitive data that could be used to effect an unauthorized transaction 
in an account. With respect to proprietary accounts, however, the 
Commission believes it is appropriate to allow Industry Members to 
continue to have the option of using account numbers for such accounts. 
The Commission understands that the Participants have previously 
published guidance stating that acceptable Firm Designated IDs for non-
proprietary accounts may include, ``without limitation, a newly created 
unique identifier or an internal only identifier used by a broker-
dealer that cannot be used to effect a transaction.'' \13\ The 
Commission believes it is appropriate to continue to allow Industry 
Members to determine whether or not to use account numbers of 
proprietary accounts as Firm Designated IDs because the risks 
associated with using proprietary account numbers do not affect 
customers, and the Industry Member can determine for itself whether the 
benefits of masking such account numbers outweigh potential drawbacks.
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    \13\ See supra note 10.
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B. Requirement for Persistent Firm Designated IDs

    The Commission believes that the proposed requirement that Firm 
Designated IDs be unique and persistent over time for each Industry 
Member is appropriate because without such persistence, the ability to 
analyze trading activity for specific accounts (or relationship or 
entity identifiers) across time using only CAT transaction data could 
be difficult or impossible, reducing the utility of such data to 
regulators. The Participants represent and the Commission agrees that 
requiring Firm Designated IDs would allow a single account (or 
relationship or entity identifier) to be tracked across time within a 
single Industry Member without accessing Customer information, which is 
stored and maintained separately from order and transaction data in the 
CAT.

C. Relationship Identifiers and Entity Identifiers

    The Commission believes that the proposed amendment to the 
definition of Firm Designated ID that would permit the use of 
relationship and entity identifiers is appropriate because it allows 
Industry Members to report relationship and entity identifiers in a 
manner consistent with existing business practices and workflows, 
rather than requiring Industry Members to build new systems and 
business processes necessary to report Firm Designated IDs based on 
individual accounts.\14\ The Participants represent that relevant 
clients that will receive an allocation of the execution have 
established accounts prior to the trade that satisfy relevant 
regulatory obligations for opening accounts, such as Know Your Customer 
and other customer obligations.\15\ The Commission believes that the 
use of relationship and entity identifiers, because they must 
persistent over time and be unique, is designed to allow regulatory 
users to track clients and entities across time within a single 
Industry Member.
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    \14\ See also Notice, supra note 6, at 35525.
    \15\ See id. at 35524-25.
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    For the reasons noted above, the Commission finds that the 
Amendment to the CAT NMS Plan is appropriate in the public interest, 
for the protection of investors and the maintenance of fair and orderly 
markets, and to remove impediments to, and perfect the mechanisms of, a 
national market system or otherwise in furtherance of the purposes of 
the Act.\16\
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    \16\ 17 CFR 242.608.
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IV. Impact on Efficiency, Competition, and Capital Formation

    In determining whether to approve a CAT NMS Plan amendment, and 
whether such amendment is in the public interest, Rule 613 requires the 
Commission to consider the impact of the amendment on efficiency, 
competition, and capital formation.\17\

[[Page 45943]]

The Commission received no comment letters addressing the impact of the 
Amendment on efficiency, competition, and capital formation.
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    \17\ See 17 CFR 242.613(a)(5); see also 15 U.S.C. 78c(f).
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    The Commission believes that the Amendment would improve the 
efficiency of regulatory activities by providing regulators with an 
identifier that is time-persistent for each account (or relationship or 
entity identifier) within a broker-dealer. Under the Plan prior to the 
Amendment, broker-dealers are required to provide a Firm Designated ID 
that is unique for each account for each business date, but this 
identifier could change over time. The Amendment would allow regulators 
to track an account's (or relationship or entity identifier's) activity 
over time using only transaction data.
    The Commission believes that the Amendment would not impact 
competition in the market for broker-dealer services.\18\ Because the 
proposed Amendment does not require Industry Members to alter their 
existing workflows, the Commission believes individual broker-dealers 
will not incur additional costs or realize cost savings that would 
affect the availability or prices of services in this market.
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    \18\ See also Securities Exchange Act Release No. 77724 (April 
27, 2016), 81 FR 30614, 30742 (May 17, 2016) (discussing the 
baseline of competition in the market for broker-dealer services).
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    Because the Amendment concerns the security of data used by 
regulators to monitor market behavior and investigate misconduct, and 
the processes by which broker-dealers report such data, the Commission 
does not anticipate that the Amendment would encourage or discourage 
assets being invested in the capital markets and thus does not expect 
the Amendment will significantly affect capital formation.

V. Conclusion

    It is therefore ordered, pursuant to Section 11A of the Act,\19\ 
and Rule 608 thereunder,\20\ that the Amendment to the Plan (File No. 
4-698) be, and it hereby is, approved.
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    \19\ 15 U.S.C. 78k-1.
    \20\ 17 CFR 242.608.

    By the Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-16476 Filed 7-29-20; 8:45 am]
BILLING CODE 8011-01-P