Document ID: SEC-2019-1314-0001
Agency: sec
Document Type: Notice
Title: Proposed Amendments to the National Market System Plan Governing the Consolidated Audit Trail
Posted Date: 2019-09-13T04:00Z

[Federal Register Volume 84, Number 178 (Friday, September 13, 2019)]
[Notices]
[Pages 48458-48494]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-19852]

[[Page 48457]]

Vol. 84

Friday,

No. 178

September 13, 2019

Part III

Securities and Exchange Commission

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Proposed Amendments to the National Market System Plan Governing the 
Consolidated Audit Trail; Notice

  Federal Register / Vol. 84 , No. 178 / Friday, September 13, 2019 / 
Notices  

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86901; File No. S7-13-19]
RIN 3235-AM60

Proposed Amendments to the National Market System Plan Governing 
the Consolidated Audit Trail

AGENCY: Securities and Exchange Commission.

ACTION: Proposed amendments to national market system plan.

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SUMMARY: The Securities and Exchange Commission (``Commission'' or 
``SEC'') is proposing amendments to the National Market System Plan 
Governing the Consolidated Audit Trail (``CAT NMS Plan''). The proposed 
amendments impose public transparency requirements on the self-
regulatory organizations that are participants to the CAT NMS Plan 
(each, a ``Participant'' and collectively, the ``Participants''). The 
Participants would be required to file with the Commission and publish 
a complete implementation plan for the Consolidated Audit Trail 
(``CAT'') and quarterly progress reports, each of which must be 
approved by a supermajority vote of the Operating Committee of CAT NMS, 
LLC. The proposed amendments also establish financial accountability 
provisions.

DATES: Comments should be received on or before October 28, 2019.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File No. S7-13-19 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 No. S7-13-19. This file number 
should be included on the subject line if email is used. To help us 
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/proposed.shtml). Comments 
are also 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. 
All comments received will be posted without change. Persons submitting 
comments are cautioned that the Commission does not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any such materials 
will be made available on the Commission's website. To ensure direct 
electronic receipt of such notifications, sign up through the ``Stay 
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Erika Berg, Special Counsel, at (202) 
551-5925; Leigh Duffy, Special Counsel, at (202) 551-5928; or Susan 
Poklemba, Attorney-Advisor, at (202) 551-3360, Division of Trading and 
Markets, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to 
the CAT NMS Plan.\1\
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    \1\ See Securities Exchange Act Release No. 78318 (November 15, 
2016), 81 FR 84696 (November 23, 2016), at 84943.
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Table of Contents

I. Background
II. Description of Proposed Amendments
    A. Amendments To Increase Operational Transparency
    B. Financial Accountability Amendments for Implementation of the 
CAT
    1. Financial Accountability Milestones and Target Deadlines
    2. Collection of Post Amendment Industry Member Fees
    3. Identification of Post-Amendment Expenses in Submissions to 
the Commission
III. Paperwork Reduction Act
    A. Summary of Collection of Information
    1. Implementation Plan
    2. Quarterly Progress Reports
    B. Proposed Use of Information
    1. Implementation Plan
    2. Quarterly Progress Reports
    C. Respondents
    D. Total Initial and Annual Reporting and Recordkeeping Burdens
    1. Implementation Plan
    2. Quarterly Progress Reports
    E. Collection of Information is Mandatory
    F. Confidentiality of Responses to Collection of Information
    G. Retention Period for Recordkeeping Requirements
    H. Request for Comments
IV. Economic Analysis
    A. Baseline
    1. Transparency of CAT Implementation Status
    2. Status of Implementation
    B. Benefits
    C. Costs
    D. Impact on Efficiency, Competition, and Capital Formation
    1. Efficiency
    2. Competition
    3. Capital Formation
    E. Alternatives
    1. Fixed versus Relative Financial Accountability Milestone 
Dates
    2. Different Timelines for Onset of RFRRs
    3. Alternate Magnitudes of RFRRs
    F. Request for Comment on the Economic Analysis
V. Consideration of Impact on the Economy
VI. Regulatory Flexibility Act Certification
VII. Statutory Authority and Text of the Proposed Amendments to the 
CAT NMS Plan

I. Background

    In July 2012, the Commission adopted Rule 613 of Regulation NMS, 
which requires the national securities exchanges and national 
securities associations (``self-regulatory organizations'') to jointly 
develop and submit to the Commission a national market system plan to 
create, implement and maintain a consolidated audit trail (``CAT'').\2\ 
Back then, and even today, trading data was and is inconsistent across 
the self-regulatory organizations and certain market activity is 
difficult to compile because it is not aggregated in one, directly 
accessible consolidated audit trail system. The goal of Rule 613 was to 
create a system that provides regulators with more timely access to a 
sufficiently comprehensive set of trading data, enabling regulators to 
more efficiently and effectively reconstruct market events, monitor 
market behavior, and identify and investigate misconduct. Rule 613 thus 
aims to modernize a reporting infrastructure to oversee the trading 
activity generated across numerous markets in today's national market 
system.
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    \2\ See Securities Exchange Act Release No. 67457 (July 18, 
2012), 77 FR 45722 (August 1, 2012) (``Rule 613 Adopting Release'').
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    On November 15, 2016, the Commission approved the national market 
system plan required by Rule 613 (``CAT NMS Plan'' or ``Plan'') that 
was submitted by the self-regulatory organizations (the 
``Participants'').\3\ In

[[Page 48459]]

the CAT NMS Plan,\4\ the Participants described the numerous elements 
they proposed to include in the CAT, including (1) requirements for the 
plan processor responsible for building, operating and maintaining the 
Central Repository (``Plan Processor''),\5\ (2) requirements for the 
creation and functioning of the Central Repository, (3) requirements 
applicable to the reporting of CAT Data \6\ by Participants and their 
members (``Industry Members''),\7\ (4) requirements relating to the 
security and confidentiality of CAT Data, (5) governance principles for 
CAT NMS LLC (``Company''),\8\ and (6) provisions for the establishment 
of funding to pay for the operation of the CAT, including the 
establishment of fees that the Participants and Industry Members will 
pay.\9\
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    \3\ The National Market System Plan Governing the Consolidated 
Audit Trail was filed with the Commission by the Participants who 
include BATS Exchange, Inc. (n/k/a Cboe BZX Exchange, Inc.), BATS-Y 
Exchange, Inc. (n/k/a Cboe BYX Exchange, Inc.), BOX Options Exchange 
LLC, C2 Options Exchange, Incorporated (n/k/a Cboe C2 Exchange, 
Inc.), Chicago Board Options Exchange, Incorporated (n/k/a Cboe 
Exchange, Inc.), Chicago Stock Exchange, Inc. (n/k/a NYSE Chicago, 
Inc.), EDGA Exchange, Inc. (n/k/a Cboe EDGA Exchange, Inc.), EDGX 
Exchange, Inc. (n/k/a Cboe EDGX Exchange, Inc.), Financial Industry 
Regulatory Authority, Inc. (``FINRA''), International Securities 
Exchange, LLC (n/k/a NASDAQ ISE, LLC), ISE Gemini, LLC (n/k/a NASDAQ 
GEMX, LLC), Miami International Securities Exchange LLC, NASDAQ OMX 
BX, Inc. (n/k/a NASDAQ BX, Inc.), NASDAQ OMX PHLX LLC (n/k/a NASDAQ 
PHLX LLC), The NASDAQ Stock Market LLC, National Stock Exchange, 
Inc. (n/k/a NYSE National, Inc.), New York Stock Exchange LLC, NYSE 
MKT LLC, and NYSE Arca, Inc.
    \4\ See Securities Exchange Act Release No. 78318 (November 15, 
2016), 81 FR 84696, (November 23, 2016) (``CAT NMS Plan Approval 
Order''). The CAT NMS Plan is Exhibit A to the CAT NMS Plan Approval 
Order. See CAT NMS Plan Approval Order, at 84943-85034. In approving 
the CAT NMS Plan, the Commission added ISE Mercury, LLC (n/k/a 
Nasdaq MRX, LLC) and Investors Exchange LLC as Participants to the 
CAT NMS Plan. See id. at 84728. On January 30, 2017 and March 1, 
2019, the Commission noticed for immediate effectiveness amendments 
to the Plan to add MIAX Pearl, LLC and MIAX Emerald, LLC, 
respectively, as Participants. See Securities Exchange Act Release 
Nos. 79898 (January 30, 2017), 82 FR 9250 (February 3, 2017), and 
85230 (March 1, 2019), 84 FR 8356 (March 7, 2019). Unless otherwise 
noted, capitalized terms are used as defined in Rule 613, in the CAT 
NMS Plan, or in this release.
    \5\ The Central Repository is the repository responsible for the 
receipt, consolidation, and retention of all information reported to 
the CAT. See CAT NMS Plan, supra note 4, at Section 1.1.
    \6\ ``CAT Data'' is defined in the CAT NMS Plan as ``data 
derived from Participant Data, Industry Member Data, SIP Data, and 
such other data as the Operating Committee [of the Company] may 
designate as `CAT Data' from time to time.'' See id. The Operating 
Committee is the governing body of the Company. See id.
    \7\ ``Industry Member'' is defined in the CAT NMS Plan as ``a 
member of a national securities exchange or a member of a national 
securities association.'' See id.
    \8\ The CAT NMS Plan is the limited liability company agreement 
of the Company, a jointly owned limited liability company formed 
under Delaware state law, through which the Participants conduct the 
activities of the CAT. 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 August 29, 2019, which they designated as effective on filing. 
With the proposed amendment, the limited liability company agreement 
of a new limited liability company named Consolidated Audit Trail, 
LLC would serve as the CAT NMS Plan, replacing in its entirety the 
CAT NMS Plan. See Notice of Filing of Amendment to the National 
Market System Governing the Consolidated Audit Trail, available at 
https://catnmsplan.com/wp-content/uploads/2019/09/CAT-2.0-Plan-Amendment(as-filed-with-SEC-8.29.19)_(175663431)_(1).pdf.
    \9\ See CAT NMS Plan, supra note 4, at Section 11.1. The CAT NMS 
Plan notes that the Participants shall file with the Commission 
under Section 19(b) of the Act any such fees on Industry Members 
that the Operating Committee of the Company approves. See id. at 
Section 11.1(b).
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    The Participants also set forth, in the CAT NMS Plan, deadlines 
related to the implementation of the CAT, including (1) the requirement 
that the Participants select a Plan Processor within two months 
following approval of the CAT NMS Plan,\10\ (2) the requirement that 
the Participants begin recording and reporting data to the Central 
Repository by November 15, 2017,\11\ and (3) the requirement that each 
Participant require Industry Members and Small Industry Members \12\ to 
begin reporting information to the Central Repository by November 15, 
2018,\13\ and November 15, 2019, respectively.\14\
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    \10\ 17 CFR 242.613(a)(3)(i). See also CAT NMS Plan, supra note 
4, at Section 6.1(a). Two months following approval of the CAT NMS 
Plan was January 15, 2017 (a Sunday).
    \11\ See CAT NMS Plan, supra note 4, at Section 6.7(a)(iii).
    \12\ The CAT NMS Plan defines Small Industry Member as ``an 
Industry Member that qualifies as a small broker-dealer as defined 
in SEC Rule 613.'' See id. at Section 1.1. Rule 613(a)(3)(vi) uses 
the definition of small broker-dealer as defined in Rule 0-10(c), 
which defines such a broker-dealer as (1) having 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 Rule 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 Rule 0-10. 
See Rule 613 Adopting Release, supra note 2, at 45804; 17 CFR 
242.613(a)(3)(vi); 17 CFR 240.0-10(c).
    \13\ See CAT NMS Plan, supra note 4, at Section 6.7(a)(v).
    \14\ See id. at Section 6.7(a)(vi).
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    On January 18, 2017, the Participants filed with the Commission 
notice of their selection of the Plan Processor.\15\ On January 17, 
2017, the Participants selected Thesys Technologies LLC to build the 
CAT system, pending execution of a Plan Processor Agreement between 
Thesys Technologies LLC and the Participants.\16\ The Plan Processor 
Agreement was executed on April 6, 2017, after which Thesys CAT LLC 
(``Thesys CAT''), a wholly owned subsidiary of Thesys Technologies LLC, 
became the Plan Processor for the CAT.
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    \15\ See Letter from Participants to Brent J. Fields, Secretary, 
Commission, dated January 18, 2017, available at https://www.sec.gov/divisions/marketreg/rule613-info-notice-of-plan-processor-selection.pdf.
    \16\ Id.
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    The next critical deadline required by the CAT NMS Plan was for the 
Participants to begin recording and reporting data to the Central 
Repository by November 15, 2017.\17\ The Participants, however, did not 
begin reporting data by that deadline. On November 13, 2017, two days 
before the deadline for Participant reporting, and having previously 
provided assurances as late as the summer of 2017 that initial data 
reporting would commence on schedule and in accordance with the CAT NMS 
Plan, the Participants filed a request for exemptive relief in which 
they sought, among other things, to delay the deadline by which they 
must report to the CAT for one year, and to extend the deadlines by 
which Industry Members and Small Industry Members must report by 17 
months.\18\ The Commission did not grant this request.\19\ SEC Chairman 
Clayton instead issued a statement on November 14, 2017 noting that he 
would not support extensions of the CAT deadlines on the terms proposed 
by the Participants.\20\ Chairman Clayton stated the importance of the 
CAT in enhancing the protection of investors and the markets by 
providing regulators with consolidated oversight of the securities 
markets. Chairman Clayton also instructed Commission staff to engage 
with the Participants as necessary and appropriate.\21\
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    \17\ See supra note 11.
    \18\ See Letter from the Participants to Brent J. Fields, 
Secretary, Commission, dated November 13, 2017 (``November 2017 
Exemption Request'').
    \19\ See Statement on Status of the Consolidated Audit Trail 
(November 14, 2017), available at https://www.sec.gov/news/public-statement/statement-status-consolidated-audit-trail-chairman-jay-clayton.
    \20\ Id.
    \21\ Id.
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    Since then, Commission staff has engaged with the Participants with 
a focus on trying to ensure that project management, resource, and 
governance deficiencies are addressed, including development of a 
credible and comprehensive work plan with verifiable milestones.\22\ 
Among other things, Commission staff has encouraged the Participants to 
enhance their focus on project management and accountability.\23\ As 
sophisticated market participants with vast experience related to 
various data systems and data management protocols, the Participants 
are capable of

[[Page 48460]]

managing--and uniquely situated to manage--the implementation of the 
CAT.
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    \22\ See Statement on Status of the Consolidated Audit Trail 
(August 27, 2018), available at https://www.sec.gov/news/public-statement/tm-status-consolidated-audit-trail.
    \23\ Id.
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    On May 1, 2018, the SEC's Division of Trading and Markets 
(``Division'') sent a letter to the Participants expressing concern 
about the lack of progress on CAT implementation. The Division called 
on senior personnel at each Participant to focus on completing the CAT 
as soon as practicable with all of the functionality required by the 
CAT NMS Plan. The Division also requested a master plan (``Master 
Plan'') for completing the CAT,\24\ including a timeline with 
development and completion milestones.\25\ The Division requested that 
the Master Plan detail all material steps to fully implement both 
Participant and Industry Member reporting, and describe how the 
Participants will better manage the Plan Processor's performance. The 
Participants submitted the requested Master Plan on May 25, 2018. The 
Master Plan stated that Participant reporting would begin on November 
15, 2018, one year past the deadline in the CAT NMS Plan.\26\
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    \24\ The Division of Trading and Markets also requested that the 
Participants streamline their decision-making and governance 
processes to ensure more timely implementation. See Letter from 
Brett Redfearn, Director, Division of Trading and Markets, 
Commission, to Michael J. Simon, Chair, CAT NMS Plan Operating 
Committee, dated May 1, 2018. See also note 22.
    \25\ The Master Plan projects Industry Member reporting will 
commence in phases, with equities reporting beginning in November 
2019 and simple options reporting beginning in May 2020, with final 
implementation of the CAT through Small Industry Member reporting 
occurring by November 2022. See Industry Update on the Consolidated 
Audit Trail (June 28, 2018), at 4, available at https://www.catnmsplan.com/wp-content/uploads/2018/06/CAT-Industry-Webcast-6.28.18.pdf.
    \26\ See supra note 22.
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    On November 15, 2018, the Participants began reporting quote, 
order, trade and other transaction data to the Central Repository; 
however, as the Participants acknowledge, the CAT system did not 
include all of the functionality required by the CAT NMS Plan, such as 
linkages between reported events and regulators' query 
functionality.\27\ On November 16, 2018, the Participants stated that 
Thesys CAT would complete all of the required functionality by March 
31, 2019.\28\ But on February 1, 2019, the Company announced that it 
would be transitioning from Thesys CAT to a new Plan Processor,\29\ and 
on February 26, 2019, the Operating Committee voted to select FINRA as 
the successor Plan Processor to Thesys CAT.\30\ As a result of this and 
various other factors, the functionality the Participants represented 
Thesys CAT would complete by March 31, 2019 was not delivered.
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    \27\ See CAT NMS Announces Initiation of Reporting to the 
Consolidated Audit Trail (November 16, 2018), available at https://www.catnmsplan.com/wp-content/uploads/2018/11/Press-Release-CAT-Launch-final.pdf.
    \28\ Id.
    \29\ See News, available at https://www.catnmsplan.com/news-page/index.html (February 1, 2019).
    \30\ See Letter from Michael J. Simon, Chair, CAT NMS, LLC 
Operating Committee, to Brent J. Fields, Secretary, Commission, 
dated April 9, 2019, available at https://www.sec.gov/divisions/marketreg/rule613-info-notice-of-plan-processor-selection-040919.pdf.
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    The Participants are responsible for their selection of a Plan 
Processor, for the management of the Plan Processor, and for compliance 
with the CAT NMS Plan. The Participants and the Plan Processor failed 
to comply with the following deadlines in the CAT NMS Plan and missed 
the following milestone completion dates:
     The November 15, 2017 milestone completion date for the 
Plan Processor publishing final technical specifications for the 
submission of order data for Industry Members; \31\
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    \31\ See CAT NMS Plan, supra note 4, at Appendix C, Section 
C.10(b).
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     the May 15, 2018 milestone completion date for the Plan 
Processor publishing technical specifications for Industry Member 
submission of customer data; \32\
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    \32\ See id. at Appendix C, Section C.10(a).
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     the May 15, 2018 milestone completion date for the Plan 
Processor making the testing environment available on a voluntary basis 
and beginning connectivity testing and accepting order data from 
Industry Members for testing purposes; \33\
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    \33\ See id. at Appendix C, Section C.10(b).
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     the August 15, 2018 milestone completion date for Industry 
Member order submission testing; \34\
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    \34\ See id. at Appendix C, Section C.10(a); id. at Appendix C, 
Section C.10(b).
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     the October 15, 2018 milestone completion date for 
Industry Member reporting of customer information to the Central 
Repository; \35\ and
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    \35\ See id. at Appendix C, Section C.10(a).
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     the November 15, 2018 deadline for full Industry Member 
reporting.\36\
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    \36\ See id. at Section 6.4; Section 6.7(a)(v).
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    In light of these missed deadlines and milestone completion dates, 
Chairman Clayton determined that it was necessary to dedicate 
additional oversight resources to this project. Accordingly, Chairman 
Clayton appointed a staff person to coordinate the Commission's efforts 
to monitor the Participants' development of the CAT.\37\
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    \37\ See SEC Names Manisha Kimmel as Senior Policy Advisor to 
the Chairman on the Consolidated Audit Trail (January 29, 2019), 
available at https://www.sec.gov/news/press-release/2019-5.
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    The Commission is concerned by the continued potential for delays 
to the implementation of the CAT. In an April 3, 2019 Industry Update 
presentation, the Operating Committee presented a revised 
implementation timeline for Industry Member reporting with deadlines 
that extend even further beyond those previously shared with Industry 
Members.\38\ The revised deadline for Industry Member reporting of all 
transaction data to the CAT is December 2021, with the exception of 
customer and account information which the Participants will require 
the reporting of by July 2022.\39\ These deadlines further extend the 
initially established November 15, 2018 Industry Member reporting 
deadline in the CAT NMS Plan,\40\ the phased deadlines for Industry 
Member reporting in the Master Plan, and the April 13, 2020 and the 
April 20, 2021 deadlines for Industry Member and Small Industry Member 
reporting proposed in the November 2017 Exemptive Request. The 
Commission has not approved these implementation deadlines.
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    \38\ See Consolidated Audit Trail: CAT Reporting Technical 
Specifications for Industry Members Draft 2 Version 1.1 Key Changes 
(April 3, 2019), available at https://www.catnmsplan.com/wp-content/uploads/2019/04/CAT_Industry_Call_04032019_Presentation.pdf. See 
also CAT Reporting Timelines, available at https://www.catnmsplan.com/timelines/. The Commission notes that it has not 
approved these dates.
    \39\ See Consolidated Audit Trail: CAT Reporting Technical 
Specifications for Industry Members Draft 2 Version 1.1 Key Changes 
(April 3, 2019), available at https://www.catnmsplan.com/wp-content/uploads/2019/04/CAT_Industry_Call_04032019_Presentation.pdf, at 3, 
4.
    \40\ See CAT NMS Plan, supra note 4, at Section 6.7(a)(v).
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    The Commission preliminarily believes that amendments to the CAT 
NMS Plan are appropriate and necessary to help ensure the Participants' 
fulfillment of their obligations to deliver a functional CAT in a 
reasonable time frame. While the Commission believes that the 
Commission staff's continued engagement with the Participants is 
important to the effort to deliver a functional CAT, the Commission 
also preliminarily believes that increased transparency through 
formalized and public documentation of the Participants' implementation 
progress will increase the Participants' accountability for the 
efficient completion of CAT. The Commission also preliminarily believes 
that modifying the CAT NMS Plan to require

[[Page 48461]]

additional financial accountability to meet implementation deadlines is 
appropriate to achieve the CAT's timely completion.
    The Commission therefore proposes to amend the CAT NMS Plan to 
require the Participants to develop a complete implementation plan 
containing a detailed timeline with objective milestones to achieve 
full CAT implementation (the ``Implementation Plan''). This 
Implementation Plan would be filed with the Commission and made 
publicly available after approval by a Supermajority Vote \41\ of the 
Operating Committee. The Implementation Plan must be submitted by the 
Operating Committee to the Chief Executive Officer (``CEO''), 
President, or an equivalently situated senior officer of each 
Participant, prior to being voted on by the Operating Committee. 
Additionally, to further improve implementation transparency, the 
Commission proposes requiring the Participants to provide the 
Commission and the public with quarterly progress reports (``Quarterly 
Progress Reports'' or ``Reports'') approved by at least a Supermajority 
Vote of the Operating Committee.\42\ The Quarterly Progress Reports 
must also be submitted by the Operating Committee to the CEO, 
President, or an equivalently situated senior officer of each 
Participant, prior to being voted on by the Operating Committee. The 
proposed amendments also include provisions regarding financial 
accountability to facilitate implementation of the CAT in an 
expeditious and efficient manner.
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    \41\ Section 1.1 of the CAT NMS Plan defines a ``Supermajority 
Vote'' as an ``affirmative vote of at least two-thirds of all of the 
members of the Operating Committee or any Subcommittee, as 
applicable, authorized to cast a vote with respect to a matter 
presented for a vote (whether or not such a member is present at any 
meeting at which a vote is taken) by the Operating Committee or any 
Subcommittee, as applicable (excluding, for the avoidance of doubt, 
any member of the Operating Committee or any Subcommittee, as 
applicable, that is recused or subject to a vote to recuse from such 
matter pursuant to Section 4.3(d)); provided that if two-thirds of 
all such members authorized to cast a vote is not a whole number 
then that number shall be rounded up to the nearest whole number.''
    \42\ The Commission does not believe, on a preliminary basis, 
that the requirements of the Implementation Plan or the Quarterly 
Progress Reports, discussed below in Part II.A., require the 
Participants to disclose any confidential or sensitive information 
related to the security of the CAT, the security of CAT Data, or the 
operation of the CAT.
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II. Description of Proposed Amendments

    In order to address shortcomings in the completeness, accuracy, 
accessibility, and timeliness of existing audit trail systems, the 
Commission adopted Rule 613 in 2012 to direct the Participants to 
create and file the CAT NMS Plan.\43\ The CAT was intended not only to 
replace an existing regulatory data infrastructure that was ``outdated 
and inadequate to effectively oversee a complex, dispersed, and highly 
automated national market system,'' \44\ but also to provide benefits 
to market participants in the form of improved market surveillance and 
related analyses.\45\ Today, almost seven years after the adoption of 
Rule 613, the need for a better audit trail system is no less pressing. 
Yet, as described above,\46\ the Participants' progress towards 
implementing the CAT has suffered multiple setbacks, and the 
Participants have repeatedly missed relevant deadlines.\47\ These 
delays to CAT implementation have left the Commission and the 
Participants without access to a comprehensive database to help 
facilitate analyses of market events and other matters. Moreover, the 
repeated delays in CAT implementation have resulted in uncertainty for 
Industry Members and other market participants.\48\
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    \43\ See supra note 2.
    \44\ Id. at 45723.
    \45\ Id. at 45730-33.
    \46\ See Part I supra.
    \47\ See, e.g., Industry Update on the Consolidated Audit Trail 
9/7/2017 (August 25, 2017), available at https://catnmsplan.com/news-page/industry-update-on-the-consolidated-audit-trail/index.html 
(stating that ``the implementation timelines for establishing the 
CAT are in effect''); Industry Update on the Consolidated Audit 
Trail (September 7, 2017), available at https://catnmsplan.com/wp-content/uploads/2017/09/Industry-Update-on-the-Consolidated-Audit-Trail-090817.pdf (indicating that the Participants were implementing 
the CAT according to the timeline set forth in the CAT NMS Plan).
    \48\ See, e.g., Part IV.A.2.
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A. Amendments To Increase Operational Transparency

    Public disclosure of information about CAT implementation would 
furnish a better understanding of progress on the CAT to market 
participants and members of the investing public, all of whom stand to 
benefit from the improved efficiencies and regulatory capabilities of 
the CAT. Moreover, CAT implementation also affects Industry Members, 
who are required to report data to the CAT and are therefore keenly 
interested in the details and timing of CAT implementation. Currently, 
the CAT NMS Plan does not contain disclosure provisions that require 
the Participants to provide public updates on implementation progress 
and developments.
    To address concerns about insufficient transparency and 
accountability regarding the CAT's implementation, the Commission 
proposes to amend Section 6.6 of the CAT NMS Plan. Specifically, the 
Commission proposes to amend the CAT NMS Plan by adding a new Section 
6.6(c) to require the Participants to file with the Commission and 
publish on their own websites (or, if the Participants wish to publish 
collectively, on the CAT NMS Plan website) the Implementation Plan 
setting forth how and when the Participants will achieve full CAT 
implementation, including the Participants' timeline for achieving both 
(1) the objective milestones that are set forth in Section C.10 of 
Appendix C of the CAT NMS Plan to assess the progress of CAT 
implementation \49\ (``Objective Milestones'') and (2) the CAT 
implementation milestones associated with the proposed financial 
accountability provisions discussed below (``Financial Accountability 
Milestones'') \50\ (collectively, the ``Implementation 
Milestones'').\51\
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    \49\ See CAT NMS Plan, supra note 4, at Appendix C Section C.10.
    \50\ The Financial Accountability Milestones, and their relation 
to proposed financial accountability provisions, are described in 
more detail in Part II.B. infra.
    \51\ The Participants would be free to include, as may be 
appropriate, additional Implementation Milestones not otherwise 
required by the proposed plan amendment. For example, the 
Participants may choose to add Implementation Milestones regarding 
system security or external testing with CAT Reporters.
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    If the Participants decide to complete any of the Implementation 
Milestones by releasing functionality in a phased approach, the 
proposed rule would require the Implementation Plan to also describe 
each phased release necessary to achieve the completion of the relevant 
Implementation Milestone and to provide completion dates for each such 
release.\52\ The proposed rule also requires the Participants to 
include the completion date and a description of the status for each 
Implementation Milestone identified in the Implementation Plan, which, 
for example, could include discussion about the extent to which an

[[Page 48462]]

Implementation Milestone has been successfully completed. The 
Implementation Plan would be required to be filed with the Commission 
and published on each Participant website or the CAT NMS Plan website 
no later than 30 calendar days following the effective date of this 
amendment.
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    \52\ For example, the CAT NMS Plan identifies ``Industry Members 
(other than Small Industry Members) begin reporting customer/
institutional/firm account information to the Central Repository for 
processing'' as one of the Objective Milestones. See CAT NMS Plan, 
supra note 4, at Appendix C, Section 10. Recent timelines published 
by the Participants indicate, however, that the Participants have 
decided to complete this milestone by releasing functionality in a 
phased approach--first implementing Industry Member reporting for 
equities transactions and then implementing Industry Member 
reporting for options in a separate phase. See, e.g., CAT Reporting 
Timelines, available at https://catnmsplan.com/timelines/. The 
proposed amendment would therefore require the Implementation Plan 
to provide completion dates for each of these phases.
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    The Commission preliminarily believes that requiring the proposed 
Implementation Plan is appropriate to facilitate public transparency of 
the CAT's development. The Commission believes 30 calendar days is a 
sufficient amount of time to create the Implementation Plan because the 
Participants have previously engaged in the exercise of considering and 
developing timelines and milestones for implementation purposes when 
developing the Master Plan, and many of the Participants are active in 
data systems development and operation.
    The Commission further believes that requiring this added 
transparency will aid the public in more easily monitoring the status 
of the implementation of the CAT. The CAT NMS Plan currently requires 
the Chief Compliance Officer of the Company to appropriately document 
objective milestones to the Commission. The Commission understands from 
the Participants' status update calls and discussions that the 
Participants are already engaged in documenting their progress toward 
CAT implementation for the Objective Milestones.\53\ Therefore, the 
proposed amendment is requiring the incremental step that the 
information related to this documentation be made public via the 
Implementation Plan. The Commission does not expect that this 
incremental step would be unduly burdensome. The proposed amendment 
also requires the Participants to provide information regarding 
progress toward and completion of the Financial Accountability 
Milestones. Requiring the Participants to disclose their progress 
toward and completion of Financial Accountability Milestones will 
provide information not contained in the Objective Milestones regarding 
the development and availability of critical regulatory tools. The 
Commission believes that it is important to provide this information in 
a comprehensive timeline. Information related to the production of 
critical regulatory tools is also of interest to market participants, 
who will benefit from the increased regulatory capabilities of the 
CAT.\54\
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    \53\ See also CAT NMS Plan, supra note 4, at Section 6.7(b).
    \54\ Moreover, inclusion of the Financial Accountability 
Milestones in the Implementation Plan will provide the Commission 
and the public with more information regarding the implementation 
deadlines. See Part II.B. infra for additional discussion of the 
financial accountability provisions.
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    Moreover, the Commission preliminarily believes it is appropriate 
to require the Participants to disclose whether they intend to complete 
any of the Implementation Milestones in phases and any related 
completion dates, because recent timelines published by the 
Participants indicate that the Participants intend to release certain 
functionality in phases. For example, while the CAT NMS Plan identifies 
only one implementation date for Industry Member reporting, the 
Participants have indicated that Industry Member reporting will be 
implemented in several phases that each have a different implementation 
deadline.\55\ The Implementation Plan should reflect the current, 
phased approach to CAT implementation for this milestone, not the 
approach to CAT implementation that was contemplated at the time the 
CAT NMS Plan was approved. By requiring phasing to be addressed, the 
Implementation Plan will both furnish a common understanding of the 
status of CAT implementation at the time the Implementation Plan is 
made public, as well as indicate how completing the Implementation 
Milestones will lead to the achievement of full CAT implementation.
---------------------------------------------------------------------------

    \55\ See note 52 supra.
---------------------------------------------------------------------------

    The Commission also believes that, to the extent the Participants 
meet the dates specified in the timeline, the publication of such 
timeline will reduce uncertainty as to the expected implementation 
timeline for Industry Members, which would aid Industry Members in 
staging their resources and otherwise managing implementation planning, 
which should reduce the risk of additional delays. The Commission 
further believes that the Implementation Plan's timeline, paired with 
Implementation Milestones, will serve to clarify what level of CAT 
system functionality will be delivered on a given date. Finally, the 
Commission anticipates that requiring the Participants to disclose 
their deadlines and the status of Implementation Milestones to the 
public through the Implementation Plan will provide accountability both 
to the Commission and to Industry Members regarding the Participants' 
progress toward CAT implementation.
    The Commission also proposes to amend the CAT NMS Plan to add 
proposed Section 6.6(c)(ii) to require Participants to file with the 
Commission and publish on each Participant website, or collectively on 
the CAT NMS Plan website, complete Quarterly Progress Reports. These 
Reports would be filed and made public no later than fifteen business 
days following the end of each calendar quarter (e.g., by April 21, 
2020; July 22, 2020; October 22, 2020; or January 25, 2021) and would 
describe in detail the progress made by the Participants during the 
prior calendar quarter toward achieving each of the Implementation 
Milestones set forth in the Implementation Plan.\56\ The initial Report 
to be filed by the Participants would be filed and made public no later 
than fifteen business days following the end of the calendar quarter in 
which the Implementation Plan was filed and made public.\57\ The 
Reports would divide the Implementation Milestones into the following 
three categories: (1) Implementation Milestones that have been 
completed, (2) Implementation Milestones that are still in progress and 
(3) Implementation Milestones that have not yet been initiated.
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    \56\ If, subsequent to the publication of the Implementation 
Plan, the Participants decide to complete any of the Implementation 
Milestones by releasing functionality in a phased approach, the 
proposed amendment requires the Participants to reflect this change 
in the Quarterly Progress Reports by describing the phases necessary 
to achieve the completion of the relevant milestones and providing 
specified information on the progress made for each release.
    \57\ For example, if the Participants filed and made public the 
Implementation Plan on March 18, 2020 the initial Report would have 
to be filed no later than April 21, 2020.
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    For each Implementation Milestone completed by the end of a given 
calendar quarter, the Report would include the following: (1) The 
completion date provided in the Implementation Plan, (2) the date on 
which the Implementation Milestone was actually completed, and (3) a 
description of any variance from the Implementation Plan.\58\
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    \58\ For example, a description of any variance from the 
Implementation Plan could explain why the completion of a given 
Implementation Milestone was delayed from the date set forth in the 
Implementation Plan or, if the Implementation Milestone was broken 
out into multiple phases, the extent to which the completed 
Implementation Milestone satisfied the functionality required by the 
Implementation Plan for that milestone.
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    For each Implementation Milestone in progress at the end of a given 
calendar quarter, the Report would include the following: (1) The 
completion date provided in the Implementation Plan, (2) the currently 
targeted completion date, and (3) a description of (a) the current 
status of the Implementation Milestone, (b) any difference between the 
Implementation Plan completion date and the currently targeted 
completion date, including the basis for

[[Page 48463]]

making the adjustment and the impact of this adjustment on any other 
Implementation Milestone, and (c) any other factual indicators that 
demonstrate the current level of completion with respect to the 
Implementation Milestone.\59\ Factual indicators could include any data 
relevant to the Objective Milestone (e.g., (1) for milestones related 
to the publication of documentation: The current version of the 
documentation under development or published; the number of and 
explanation for any open issues not yet resolved; (2) for milestones 
related to connectivity and acceptance testing: The status of the 
publication of test plans; statistics on the amount of expected or 
actual activity in the test environment (e.g., number of testers, 
number of reportable events, error rates/trends observed), the number 
of Plan Processor functional requirements \60\ for which defects were 
found categorized by criticality; progress remediating defects; (3) for 
milestones related to reporting: Development progress as defined by the 
number of functional requirements not yet started, in progress, or 
complete; the number and percentage of functional requirements for 
which internal testing is in progress and the related pass/fail 
percentages of associated test cases; the number and percentage of 
functional requirements that have completed internal testing with all 
defects remediated; the number of Plan requirements met or outstanding; 
a list of Plan requirements met or outstanding).
---------------------------------------------------------------------------

    \59\ For example, if an Implementation Milestone is the 
publication of Industry Member technical specifications, a 
description of the status could state: That the Plan Processor 
produced a draft that was circulated to Industry Members on [insert 
date]; that the Participants are reviewing feedback and expect to 
issue final technical specifications by [insert date]; and that the 
draft is complete except for a [specified topic], because of a 
[specified reason]. As an example of a description identifying any 
difference between the Implementation Plan completion date and the 
current targeted completion date, including the basis for making the 
adjustment and the impact of this adjustment on any other 
Implementation Milestone, the Participants could state: That the 
Implementation Plan completion date was [insert date], but the 
Participants are revising such date to [insert new targeted 
completion date], because [insert topic] proved to be more 
complicated than anticipated due to [insert reason]. The description 
could continue to state that the Participants believe the new 
targeted completion date is appropriate because, for example, they 
have designed a new approach to deliver the required functionality 
to address the issue in the technical specifications that is 
currently under development as of [insert date].
    \60\ Appendix D outlines minimum functional and technical 
requirements established by the Participants of the CAT NMS Plan for 
the Plan Processor. See CAT NMS Plan, supra note 4, Appendix D-1. 
Examples of such functional requirements for the CAT system include 
the ability to provide feedback on the reasons for errors in data 
submissions, and the ingestion of data submitted to the Central 
Repository by Industry Members. See id. at Appendix D, Sections 7.4, 
7.5.
---------------------------------------------------------------------------

    For each Implementation Milestone that has not yet been initiated 
by the end of a given calendar quarter, the Report would include the 
following: (1) The completion date provided in the Implementation Plan, 
(2) the currently targeted completion date, and (3) a description of 
(a) the current status of the Implementation Milestone, and (b) any 
difference between the Implementation Plan completion date and the 
currently targeted completion date, including the basis for making the 
adjustment and the impact of this adjustment on any other 
Implementation Milestone.
    The Commission preliminarily believes that the Quarterly Progress 
Reports will facilitate transparency by ensuring that current and 
comprehensive information about the CAT's state of development is 
regularly communicated to the Commission, Industry Members, and the 
public at large.\61\ Moreover, the Commission preliminarily believes 
that the requirements set forth for the proposed Quarterly Progress 
Reports are appropriate. Because the Participants should already be 
actively monitoring their progress on the implementation of the CAT, 
the Commission believes 15 business days is a reasonable amount of time 
in which to prepare Reports based on the information the Participants 
have already gathered.\62\
---------------------------------------------------------------------------

    \61\ For example, the Commission expects that the Quarterly 
Progress Reports will provide the Commission and the public with 
more granular and up-to-date information regarding the likelihood 
that the Participants will meet the target deadlines associated with 
the Financial Accountability Milestones and/or the likelihood that 
the Participants will be permitted to recover related fees, costs, 
or expenses from Industry Members. The Financial Accountability 
Milestones, and their related financial accountability provisions, 
are discussed in Part II.B. infra.
    \62\ See, e.g., note 53 supra.
---------------------------------------------------------------------------

    The Participants are required to provide both the Implementation 
Plan completion date and the actual or currently targeted completion 
date for each Implementation Milestone so that the original completion 
date will serve as a baseline against which to measure progress if 
there is a difference between the two dates, as supplemented by the 
information provided in the commentary. The Commission preliminarily 
believes that progress can be effectively evaluated based upon whether 
the Implementation Plan completion dates are being met.
    The Commission also preliminarily believes that information 
provided in the required descriptions for the Implementation Milestones 
will yield valuable insights into the progress of CAT implementation, 
for example by providing an early indication of the potential for 
delays. The Commission also preliminarily believes that requiring the 
disclosure of the information provided in the descriptions would 
encourage the Participants to consider whether resources need to be 
realigned, so that adjustments can be made to the implementation 
process. In regard to the Implementation Milestones completed by the 
end of a given calendar quarter, the proposed amendments would require 
the Participants to describe any variance from the Implementation Plan. 
The Commission preliminarily believes that such information could 
reflect whether the Participants have only partially achieved the 
functionality required by certain Implementation Milestones. In regard 
to the Implementation Milestones in progress at the end of a given 
calendar quarter, the proposed amendments would require the 
Participants to describe the status of the Implementation Milestone, 
any difference between the completion dates provided, including the 
basis for making the adjustment and the impact such adjustment might 
have on any other Implementation Milestone, and other factual 
indicators that demonstrate the current level of completion with 
respect to the milestone. The Commission preliminarily believes that 
such information could reveal if there is an increasingly negative 
variance between the Implementation Plan completion date and the 
targeted completion date, as well as the cause for such variance. The 
required information could also provide an indication of whether 
corrections are needed to get the implementation process back on track 
and whether the currently targeted completion dates provided in a 
Report are realistic. In regard to the Implementation Milestones that 
have not yet been initiated by the end of a given calendar quarter, the 
proposed amendments would require the Participants to describe the 
current status for the Implementation Milestone and any difference 
between the completion dates provided, including the basis for making 
the adjustment.
    The Commission expects that quarterly communication of this 
information will aid Industry Members by providing more information on 
the timing of their CAT reporting obligations, which, correspondingly, 
should aid them in efficiently developing and implementing their 
regulatory data collection systems and allow them to make their own

[[Page 48464]]

adjustments as needed. In addition, the Commission anticipates that the 
Quarterly Progress Reports will aid the Commission, Industry Members 
and others in monitoring and better understanding the progress of CAT 
implementation.
    The Commission also proposes to amend the CAT NMS Plan to add 
proposed Section 6.6(c)(iii) to require that the Implementation Plan 
and each Quarterly Progress Report be approved by at least a 
Supermajority Vote of the Operating Committee before such documents are 
filed with the Commission or made publicly available on each of the 
Participant websites or collectively on the CAT NMS Plan website. 
However, if the Implementation Plan or any Quarterly Progress Report is 
approved only by a Supermajority Vote of the Operating Committee, and 
not by a unanimous vote of the Operating Committee (including, for the 
avoidance of doubt, all members of the Operating Committee, whether or 
not present and whether or not recused), proposed Section 6.6(c)(iii) 
would require each Participant whose Operating Committee member did not 
vote to approve the Implementation Plan or Quarterly Progress Report 
separately file with the Commission and make publicly available on each 
of the Participant websites, or collectively on the CAT NMS Plan 
website, a statement identifying itself and explaining why the member 
did not vote to approve the Implementation Plan or Quarterly Progress 
Report. Prior to the Operating Committee's vote, the Implementation 
Plan and Quarterly Progress Reports shall also be submitted by the 
Operating Committee to the CEO, President, or an equivalently situated 
senior officer (or, ``senior management'') of each Participant.\63\
---------------------------------------------------------------------------

    \63\ In addition to the senior management personnel who will 
receive the Implementation Plan and Quarterly Progress Reports under 
the proposed amendment, each Participant has a voting member (and an 
alternate voting member) representing it on the Operating Committee 
who will receive these documents. One individual may serve as the 
voting member of the Operating Committee for multiple affiliated 
Participants. See CAT NMS Plan, supra note 4, at Section 4.2(a).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the Operating Committee 
should vote on the Implementation Plan and each Quarterly Report 
because the Operating Committee, as the manager of the Company, already 
votes on all actions for which a vote is required under the CAT NMS 
Plan.\64\ The Commission further preliminarily believes that 
specifically requiring the approval of the Operating Committee by at 
least a Supermajority Vote will lend credibility to the timelines 
presented by Participants in the Implementation Plan and Reports, which 
may otherwise be lacking given that the timelines for Industry Member 
CAT implementation have been revised multiple times.\65\ In addition, 
the requirement that the Implementation Plan and Quarterly Progress 
Reports be submitted to the CEO, President, or an equivalently situated 
senior officer of each Participant, prior to the Operating Committee's 
vote, is intended to promote senior management attention and promote 
accountability with respect to CAT implementation.
---------------------------------------------------------------------------

    \64\ See CAT NMS Plan, supra note 4, at Sections 4.1 and 4.3.
    \65\ See Part I supra.
---------------------------------------------------------------------------

    If the Operating Committee does not unanimously vote to approve the 
Implementation Plan or any Quarterly Progress Report, the proposed 
amendments require each Participant whose Operating Committee member 
did not vote to approve the Implementation Plan or Quarterly Progress 
Report to separately file with the Commission and make publicly 
available on each of the Participant websites, or collectively on the 
CAT NMS Plan website, a statement identifying itself and explaining why 
the member did not vote to approve the Implementation Plan or Quarterly 
Progress Report. The Commission preliminarily believes that the 
requirement may aid the Commission and the public to better monitor the 
progress of CAT implementation, because such an explanation may reveal 
critical information regarding whether currently targeted completion 
dates are realistic, whether milestones are being or have been 
completed in accordance with the requirements of the CAT NMS Plan, and/
or whether potential risks or delays may impede the progress of CAT 
implementation.
    The Commission requests comment on the amendments to increase 
operational transparency. Specifically, the Commission solicits comment 
on the following:
    1. Are the Implementation Plan and the Quarterly Progress Report 
effective mechanisms for providing the Commission and Industry Members 
with transparency into CAT implementation? Why or why not?
    2. Are the details and requirements of the Implementation Plan 
appropriate and reasonable? Why or why not? Would additional details or 
requirements for the Implementation Plan be beneficial?
    3. The proposed amendment requires the Participants to file and 
publish the Implementation Plan within 30 calendar days following the 
effective date of proposed Section 6.6(c). Is 30 calendar days a 
reasonable period of time in which to file and publish such a document? 
Why or why not? Does this timeline give the Operating Committee a 
sufficient amount of time to approve the Implementation Plan? Why or 
why not? Would a longer or shorter period of time, such as 45 calendar 
days or 15 calendar days, be more appropriate?
    4. The proposed Amendment requires the Participants to file and 
publish a Quarterly Progress Report each calendar quarter on each 
Participant website or collectively on the CAT NMS Plan website. Is a 
quarterly interval the right interval? Would a longer or shorter 
interval be more effective?
    5. The proposed amendment requires the Participants to file and 
publish the Quarterly Progress Report no later than fifteen business 
days following the end of each calendar quarter. Is fifteen business 
days a reasonable period of time in which to file and publish such a 
report? Why or why not? Does this timeline give the Operating Committee 
a sufficient amount of time to approve the Quarterly Progress Reports? 
Why or why not? Would a longer or shorter period of time, such as 
thirty business days or five business days, be more appropriate?
    6. The proposed amendment establishes the deadline for filing and 
publishing the Quarterly Progress Report on the basis of business days. 
Are business days an appropriate measure by which to establish this 
deadline? Or would calendar days be more appropriate? Why or why not?
    7. Are the details and requirements of the Quarterly Progress 
Report appropriate and reasonable? Why or why not? Would additional 
details or requirements for the report be beneficial? For example, 
should the Quarterly Progress Reports include financial information 
detailing the fees, costs, and expenses that the Participants have 
incurred to build and implement the CAT? If so, should these fees, 
costs, and expenses be clearly tied to the relevant Financial 
Accountability Milestone? Why or why not?
    8. The proposed amendment requires the Operating Committee to 
approve the Implementation Plan and each Quarterly Progress Report by 
at least a Supermajority Vote. Is it appropriate to require a 
Supermajority Vote, or should the Commission require a majority vote or 
a unanimous vote of the Operating Committee? Why or why not? Is it 
appropriate to require that the Operating Committee vote on this 
matter? Why or why not? If this matter should be

[[Page 48465]]

delegated to a Subcommittee, please explain which Subcommittee should 
vote to approve the Implementation Plan and Quarterly Progress Report 
and why.
    9. If the Implementation Plan or any Quarterly Progress Report is 
not approved by a unanimous vote of the Operating Committee, the 
proposed amendment requires each Participant whose Operating Committee 
member did not vote to approve the Implementation Plan or Quarterly 
Progress Report separately file with the Commission and make publicly 
available on each of the Participant websites, or collectively on the 
CAT NMS Plan website, a statement identifying itself and explaining why 
the member did not vote to approve the Implementation Plan or Quarterly 
Progress Report. Is this an appropriate requirement? Why or why not? 
Should the Commission require the Implementation Plan or the Quarterly 
Progress Reports, or the members who did not vote to approve the 
Implementation Plan or a Quarterly Report, as the case may be, to 
provide any additional information? If so, what information should be 
provided, and why?
    10. The proposed amendment requires that the Implementation Plan 
and each Quarterly Progress Report be submitted to the CEO, President, 
or an equivalently situated senior officer of each Participant, prior 
to being voted on by the Operating Committee. Is this an appropriate 
requirement to promote senior management attention and promote 
accountability with respect to CAT implementation? Why or why not? 
Should the Commission specify when the Implementation Plan and 
Quarterly Progress Reports should be submitted to the CEO, President, 
or equivalently situated senior officer of each Participant? If so, how 
many days prior to the Operating Committee vote should the 
Implementation Plan and Quarterly Progress Reports be submitted to 
senior management? To the extent that the Commission implements such a 
requirement, would the deadlines set forth in the proposed amendment 
for the submission of the Implementation Plan and Quarterly Progress 
Reports to the Commission need to be adjusted? Why or why not? By how 
many days should they be adjusted? Please explain your responses.
    11. Please identify any alternative means to promote senior 
management attention and promote accountability with respect to CAT 
implementation. For example, should the Commission require the senior 
management of each Participant (e.g., the CEO, President, or an 
equivalently situated senior officer) to certify that the contents of 
the Implementation Plan and each Quarterly Progress Report are accurate 
and complete in all material respects? What should qualify as material? 
Should the certification be made to the best of an officer's knowledge 
and reasonable belief after reasonable investigation? Is the CEO or 
President the appropriate person to make the certification? If not, 
please explain why. If the CEO or President is not the appropriate 
person, which equivalently situated senior officer would be 
appropriate? Would additional details or requirements for such 
certifications be beneficial? If so, what are those details or 
requirements? Please explain your responses.
    12. Are there other factors that impact the ability of the 
Participants to implement the CAT NMS Plan that would not be addressed 
by further disclosure that the Commission should address?

B. Financial Accountability Amendments for Implementation of the CAT

    As discussed above, there have been multiple delays in CAT 
implementation since the adoption of Rule 613. To prevent additional 
delays, the Commission proposes to amend the CAT NMS Plan to include 
financial accountability provisions that are designed to align 
financial accountability with regulatory obligations and contribute to 
an expeditious implementation of the CAT.
    Currently, Section 11.1 of the CAT NMS Plan contemplates that the 
Operating Committee will establish, and the Participants will 
implement, fees for Participants and Industry Members to recover the 
costs and expenses incurred by the Participants in connection with the 
development, implementation, and operation of the CAT.\66\ Proposals 
for any such fees must be filed with the Commission pursuant to Section 
19(b) of the Exchange Act and are subject to Commission review for 
consistency with the Exchange Act and Article XI of the CAT NMS 
Plan.\67\ Specifically, each Participant must demonstrate, under 
Sections 6(b)(4) and 15A(b)(5) of the Exchange Act, that such fee 
filings provide for the equitable allocation of reasonable dues, fees, 
and other charges among its members and other persons using its 
facilities.\68\ The proposed amendment would not alter this basic 
structure, but would add a new Section 11.6 to govern the recovery of 
any fees, costs, and expenses (including legal and consulting fees, 
costs, and expenses) incurred \69\ by or for the Company in connection 
with the development, implementation, and operation of the CAT,\70\ 
from the effective date of this amendment, if adopted by the 
Commission, until such time that the Participants have completed Full 
Implementation of CAT NMS Plan Requirements \71\ (collectively, the 
``Post-Amendment Expenses'').
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    \66\ See, e.g., CAT NMS Plan, supra note 4, at Section 11.1(c).
    \67\ Section 19(b) of the Exchange Act requires the Participants 
to submit proposed rule changes to the Commission. 15 U.S.C. 78s(b); 
see also CAT NMS Plan, supra note 4, at Section 11.1(b) (noting that 
the Participants must file proposed fees for Industry Members with 
the Commission).
    \68\ See 15 U.S.C. 78f(b)(4) (applicable to the national 
securities exchanges); 15 U.S.C. 78o-3(b)(5) (applicable to FINRA, a 
national securities association).
    \69\ For the purposes of proposed Section 11.6, determination of 
when a fee, cost, or expense is considered ``incurred'' shall be 
based on Generally Accepted Accounting Principles (``GAAP''), as 
those principles must also be applied to all accounting or financial 
statements prepared by the Operating Committee under Section 9.2 of 
the CAT NMS Plan. See note 4 supra. For example, a fee, cost, or 
expense related to a good or service would generally be considered 
incurred upon acquisition of the good or service in accordance with 
GAAP.
    \70\ See, CAT NMS Plan, supra note 4, at Section 11.1(b)-(c), 
Section 11.2(a)-(b), and Section 11.3(c) (relating to the funding of 
the development, implementation and operating costs of the Company).
    \71\ As part of the proposed amendment, Section 1.1 of the CAT 
NMS Plan will be amended to include a definition of ``Full 
Implementation of CAT NMS Plan Requirements.'' This term will mean 
``the point at which: (a) The Participants have satisfied all of 
their obligations to build and implement the CAT, such that all CAT 
system functionality required by Rule 613 and the CAT NMS Plan has 
been developed, successfully tested, and fully implemented with the 
initial Error Rates specified by Section 6.5(d)(i) of the CAT NMS 
Plan, including, but not limited to, functionality that efficiently 
permits the Participants and the Commission to access all CAT Data 
required to be stored in the Central Repository pursuant to Section 
6.5(a) of the CAT NMS Plan and to analyze the full lifecycle of an 
order, from order origination through order execution or order 
cancellation, across the national market system. This Financial 
Accountability Milestone shall be considered complete as of the date 
identified in a Quarterly Progress Report meeting the requirements 
of Section 6.6(c).'' This definition is discussed further below. See 
Part II.B.1.d. infra.
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    Proposed Section 11.6 would apply new conditions to the collection 
of any fees established by the Operating Committee, or implemented by 
the Participants, to recover a portion of Post-Amendment Expenses from 
Industry Members (``Post-Amendment Industry Member Fees''). 
Specifically, proposed Section 11.6 would require the Participants to 
meet four critical CAT implementation milestones--the Financial 
Accountability Milestones--by certain dates in order to collect the 
full amount of any related Post-Amendment Industry Member Fees

[[Page 48466]]

established by the Operating Committee or implemented by the 
Participants. If the Participants fail to meet the target deadlines set 
forth in proposed Section 11.6, they would only be entitled to collect 
a portion of the amount of the relevant Post-Amendment Industry Member 
Fees, as determined by the amount of time by which the Participants 
have missed the target deadlines.
    The Commission preliminarily believes applying these new conditions 
to the Post-Amendment Industry Member Fees is appropriate. At the time 
the Commission approved the CAT NMS Plan, the Commission believed it 
was reasonable, in accordance with Section 6(b)(4) of the Exchange 
Act,\72\ for the Participants to recover a portion of the fees, costs, 
and expenses associated with the development and implementation of the 
CAT from Industry Members.\73\ This belief, however, was based on the 
Commission's expectation that the Participants would be complying with 
the CAT NMS Plan, which required the implementation of certain CAT 
functionality by the dates set forth in the CAT NMS Plan. As noted 
above, the Participants have missed multiple dates codified in the CAT 
NMS Plan.\74\ Accordingly, the regulatory aims of the CAT NMS Plan have 
yet to be achieved. Accordingly, the Commission is proposing financial 
accountability rules that address the Commission's view of what it 
would consider to be ``reasonable fees'' and a reasonable exercise of 
the Participants' funding authority under the CAT NMS Plan in the 
context of CAT implementation going forward.
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    \72\ 15 U.S.C. 78f(b)(4) (requiring the rules of a national 
securities exchange to provide for ``equitable allocation of 
reasonable dues, fees, and other charges among its members and 
issuers and other persons using its facilities'').
    \73\ See, e.g., CAT NMS Plan Approval Order, supra note 4, at 
84794.
    \74\ See Part I supra.
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    The specific terms of the proposed amendment are discussed in more 
detail below.
1. Financial Accountability Milestones and Target Deadlines
    Proposed Section 11.6 identifies four critical CAT implementation 
milestones: (1) Initial Industry Member Core Equity Reporting, (2) Full 
Implementation of Core Equity Reporting Requirements, (3) Full 
Availability and Regulatory Utilization of Transactional Database 
Functionality, and (4) Full Implementation of CAT NMS Plan Requirements 
(collectively, the ``Financial Accountability Milestones'' \75\). For 
each Financial Accountability Milestone, the Commission has also 
identified a target deadline for completion.
---------------------------------------------------------------------------

    \75\ This term is defined at proposed Section 1.1.
---------------------------------------------------------------------------

a. Initial Industry Member Core Equity Reporting
    The Commission proposes to amend Section 1.1 of the CAT NMS Plan to 
define ``Initial Industry Member Core Equity Reporting'' as the point 
at which Industry Members (excluding Small Industry Members \76\ that 
are do not report to the Order Audit Trail System (``OATS'')) have 
begun to report equities transaction data, excluding Customer Account 
Information, Customer-ID, and Customer Identifying Information,\77\ to 
the CAT.\78\ This Financial Accountability Milestone shall be 
considered complete as of the date identified in a published Quarterly 
Progress Report meeting the requirements of proposed Section 
6.6(c).\79\ The Commission also proposes to add Section 11.6(a)(i)(A) 
to provide that the Participants will be entitled to collect the full 
amount of any Post-Amendment Industry Member Fees established or 
implemented to recover Post-Amendment Expenses incurred from the date 
of this amendment's adoption by the Commission\80\ to the date of 
Initial Industry Member Core Equity Reporting (``Period 1''), so long 
as such date is no later than April 30, 2020.\81\
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    \76\ As defined by Section 1.1 of the CAT NMS Plan, and for the 
purposes of this proposing release, ``Small Industry Member'' an 
Industry Member that qualifies as a small broker-dealer as defined 
in SEC Rule 613. See also 17 CFR 242.613(a)(3)(vi) (defining small 
broker-dealers by reference to 17 CFR 240.0-10(c), which defines a 
small broker dealer as one with ``total capital . . . of less than 
$500,000 on the date in the prior fiscal year as of which its 
audited financial statements were prepared or, if not required to 
file such statements, a broker or dealer that had total capital . . 
. of less than $500,000 on the last business day of the preceding 
fiscal year'' and one that is ``not affiliated with any person . . . 
that is not a small business or small organization'').
    \77\ Customer Account Information, Customer-ID, and Customer 
Identifying Information are defined terms in Section 1.1 of the CAT 
NMS Plan and are the same definitions in the context of this 
proposing release.
    \78\ The Commission notes that the equities transaction data 
required at this stage is consistent with the functionality that the 
Participants currently plan to implement at ``Phase 2a'' in the 
latest draft of the Technical Specifications. See CAT Reporting 
Technical Specifications for Industry Members, Version 2.2 (June 24, 
2019), at vii, available at https://www.catnmsplan.com/wp-content/uploads/2019/06/Industry-Member-Tech-Specs-v2.2-Clean.pdf.
    \79\ The target deadline for Initial Industry Member Core Equity 
Reporting falls on April 30, 2020--between scheduled Quarterly 
Progress Reports. If the Participants wait to submit the Quarterly 
Progress Report to the Commission, it may delay their ability to 
begin recovering any Post-Amendment Industry Member Fees to which 
they may be entitled. Accordingly, the Commission notes that the 
Participants may file an interim Quarterly Progress Report, if they 
so choose, on the day they achieve this Financial Accountability 
Milestone (or any other Financial Accountability Milestone) in order 
to expedite their recovery of Post-Amendment Industry Member Fees.
    \80\ The proposed amendment will not affect the Participants' 
ability to collect CAT-related fees, costs, or expenses incurred up 
to the date that proposed Section 11.6 is adopted. See proposed 
Section 11.6.
    \81\ See proposed Section 11.6(a)(i)(A). To the extent that the 
Initial Industry Member Core Equity Reporting milestone is achieved 
at some later date, the Participants will only be entitled to 
collect a portion of the amount of the Post-Amendment Industry 
Member Fees established or implemented for Period 1. See proposed 
Section 11.6(a)(ii); see also Part II.B.2. infra for additional 
discussion regarding the conditions attached to Post-Amendment 
Industry Member Fee collection.
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    The Commission preliminarily believes that Initial Industry Member 
Core Equity Reporting is an appropriate Financial Accountability 
Milestone, because this milestone requires the Participants to develop, 
test, and implement essential infrastructure needed to support Industry 
Member reporting--one of the major goals identified by the CAT NMS 
Plan.\82\ Before Industry Members may begin reporting any equities 
transaction data to the CAT, the Participants must develop, and 
Industry Members must thoroughly test, file submission tools, data 
integrity controls, and various security measures to ensure that the 
CAT can safely receive and process this data, as well as identify data 
that may not be accurate. These are core operations that are 
fundamental to the success of the CAT. By requiring Industry Members--
excluding Small Industry Members that are not OATS reporters \83\--to 
begin reporting the first phase of equities transaction data to the 
CAT, the Participants will demonstrate that they have made significant 
progress towards implementing foundational CAT functionality.
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    \82\ See CAT NMS Plan, supra note 4, at Section 6.7(a)(v).
    \83\ The Commission preliminarily believes that it is 
appropriate to exclude Small Industry Members that do not report to 
OATS from this Financial Accountability Milestone in order to mirror 
the timelines projected by the Participants. See, e.g., Industry 
Update on CAT Reporting Technical Specifications for Industry 
Members (April 3, 2019), available at https://www.catnmsplan.com/wp-content/uploads/2019/04/CAT_Industry_Call_04032019_Presentation.pdf; 
see also CAT Reporting Timelines, available at https://www.catnmsplan.com/timelines/.
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    Furthermore, the Commission preliminarily believes that it is 
appropriate to require the Participants to achieve Initial Industry 
Member Core Equity Reporting by April 30, 2020 in order to recover the 
full amount of any related Post-Amendment Industry

[[Page 48467]]

Member Fees, because the Participants have indicated that they plan to 
implement basic equities transaction reporting for Industry Members 
(excluding Small Industry Members that are not OATS reporters) by that 
date. Recent timelines published by the Participants indicate that the 
production environment for Industry Member equities reporting will go 
live in April 2020.\84\ Based on this representation, the Commission 
preliminarily believes the proposed deadline of April 30, 2020 for 
Initial Industry Member Core Equity Reporting is both reasonable and 
feasible.
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    \84\ See, e.g., id. The Participants have also released 
finalized technical specifications for Industry Member reporting, as 
well as a symbol list providing the scope of securities for which 
Industry Member reporting will be required, which the Commission 
believes are critical steps towards achieving Initial Industry 
Member Core Equity Reporting by April 30, 2020. With this 
information, the Industry Members should be able to make meaningful 
progress towards developing the internal infrastructure needed to 
report to the CAT. See note 78 supra. See also, e.g., Industry 
Update on the Consolidated Audit Trail (February 20, 2019), 
available at https://www.catnmsplan.com/wp-content/uploads/2019/02/CAT_Industry_Webcast_02.20.2019_vF.pdf (stating that there will be 
no material design changes to the technical specifications for 
Industry Member reporting and instructing Industry Members to 
continue as planned with development efforts); CAT Reportable Equity 
Securities Symbol Master, available at https://www.catnmsplan.com/symbol-master/index.html.
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b. Full Implementation of Core Equity Reporting Requirements
    The Commission proposes to amend Section 1.1 of the CAT NMS Plan to 
define ``Full Implementation of Core Equity Reporting Requirements'' as 
the point at which: (a) Industry Member reporting (excluding reporting 
by Small Industry Members that are not OATS reporters) for equities 
transactions, excluding Customer Account Information, Customer-ID, and 
Customer Identifying Information,\85\ is developed, tested, and fully 
implemented at a 5% Error Rate \86\ or less and with sufficient intra-
firm linkage, inter-firm linkage, national securities exchange linkage, 
and trade reporting facilities linkage to permit the Participants and 
the Commission to analyze the full lifecycle of an order across the 
national market system, excluding linkage of representative orders, 
from order origination through order execution or order cancellation; 
\87\ and (b) the query tool functionality required by Section 
6.10(c)(i)(A) and Appendix D, Sections 8.1.1-8.1.3 and Section 8.2.1 of 
the CAT NMS Plan incorporates the Industry Member equity transaction 
data described in condition (a) and is available to the Participants 
and to the Commission. This Financial Accountability Milestone shall be 
considered complete as of the date identified in a Quarterly Progress 
Report meeting the requirements of Section 6.6(c).\88\ The Commission 
also proposes to add Section 11.6(a)(i)(B) to provide that the 
Participants will be entitled to collect the full amount of any Post-
Amendment Industry Member Fees established or implemented to recover 
Post-Amendment Expenses incurred from the date immediately following 
the achievement of Initial Industry Member Core Equity Reporting to the 
date of Full Implementation of Core Equity Reporting Requirements 
(``Period 2''), so long as such date is no later than December 31, 
2020.\89\
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    \85\ See note 77 supra.
    \86\ ``Error Rate'' is a term defined in Section 1.1 of the CAT 
NMS Plan to mean ``the percentage of reportable events collected by 
the central repository in which the data reported does not fully and 
accurately reflect the order even that occurred in the market.'' See 
also 17 CFR 242.613(j)(6).
    \87\ The equities transaction data required at this stage is 
consistent with the functionality that the Participants currently 
plan to implement at ``Phase 2a'' in the latest draft of the 
Technical Specifications. See note 78 supra.
    \88\ See also note 79 supra.
    \89\ See proposed Section 11.6(a)(i)(B). To the extent that the 
Full Implementation of Core Equity Reporting Requirements milestone 
is achieved at some later date, the Participants will only be 
entitled to collect a portion of the amount of the Post-Amendment 
Industry Member Fees established or implemented for Period 2. See 
proposed Section 11.6(a)(iii); see also Part II.B.2. infra for 
additional discussion regarding the conditions attached to Post-
Amendment Industry Member Fee collection.
---------------------------------------------------------------------------

    The Commission preliminarily believes that Full Implementation of 
Core Equity Reporting Requirements is an appropriate Financial 
Accountability Milestone, because this milestone requires the 
Participants to show that they have taken significant steps towards 
achieving one of the primary goals identified in the CAT NMS Plan--
Industry Member reporting.\90\ Whereas the previous Financial 
Accountability Milestone only required that the Participants 
sufficiently develop and test the CAT so as to allow Industry Members 
(excluding Small Industry Members that are not OATS reporters) to begin 
reporting equities transaction data, this Financial Accountability 
Milestone requires Participants to have fully implemented the first 
phase of equities transaction reporting for Industry Members (excluding 
Small Industry Members that are not OATS reporters) at an Error Rate 
that is consistent with the initial Error Rate threshold set forth in 
the CAT NMS Plan.\91\ Equities transaction data produced by the CAT at 
this stage must also be sufficiently interlinked so as to permit full 
analysis of an order's lifecycle across the national market, excluding 
full linkage of representative orders.\92\ These requirements are 
designed to ensure that the Participants have developed, tested, and 
implemented an audit trail system that produces meaningful and accurate 
equities transaction data, including data that can be used to evaluate 
the full lifecycle of an equities order.\93\ The achievement of such 
benchmarks would demonstrate that the Participants have made 
significant progress towards full implementation of Industry Member 
reporting.\94\
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    \90\ See CAT NMS Plan, supra note 4, at Section 6.7(a)(v).
    \91\ See, e.g., CAT NMS Plan, supra note 4, at Section 6.5(d)(i) 
of the CAT NMS Plan (specifying that the ``initial maximum Error 
Rate shall be set to 5%'').
    \92\ Although full linkage of representative orders is not 
required by this milestone, the technical specifications provided to 
Industry Members indicate that, by April 2020, linkage ``between the 
representative street side order and the order being represented 
when the representative order was originated specifically to 
represent a single order . . . and there is: (1) an existing direct 
electronic link in the firm's system between the order being 
represented and the representative order, and (2) any resulting 
executions are immediately and automatically applied to the 
represented order in the firm's system[.]'' See CAT Reporting 
Technical Specifications for Industry Members, Version 2.2 (June 24, 
2019), available at https://www.catnmsplan.com/wp-content/uploads/2019/06/Industry-Member-Tech-Specs-v2.2-Clean.pdf.
    \93\ See, e.g., id. at 6, 154 (setting forth specifications for 
a firm-designated ID and representative order flag, which are 
examples of two fields not available through OATS).
    \94\ The Commission preliminarily believes that it is 
appropriate to exclude Small Industry Members that do not report to 
OATS from this Financial Accountability Milestone, in order to 
mirror the timelines projected by the Participants. See, e.g., 
Industry Update on CAT Reporting Technical Specifications for 
Industry Members (April 3, 2019), available at https://www.catnmsplan.com/wp-content/uploads/2019/04/CAT_Industry_Call_04032019_Presentation.pdf; see also CAT Reporting 
Timelines, available at https://www.catnmsplan.com/timelines/.
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    The second prong of this Financial Accountability Milestone 
requires that the equities transaction data collected by the CAT at 
this stage be made available to regulators through two basic query 
tools required by the CAT NMS Plan--a targeted query tool that will 
enable regulators to retrieve data via an online query screen with a 
variety of predefined selection criteria, and a user-defined direct 
query tool that will provide regulators with the ability to query data 
using all available attributes and data sources.\95\ These query tools

[[Page 48468]]

should enable regulators to access and use the provided data to perform 
essential analyses of the equities markets, including equity market 
reconstruction, and to pursue data-driven policy-making. By requiring 
the Participants to develop these tools and make them available to the 
Commission and other regulators at this stage, the second prong of this 
Financial Accountability Milestone is designed to ensure that the CAT 
is built in a manner that will allow regulators to access CAT Data in 
order to realize the regulatory benefits associated with the CAT.
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    \95\ See, e.g., CAT NMS Plan, supra note 4, at Section 
6.10(c)(i)(A)-(B); see id. at Appendix D, Sections 8.1.1-8.1.3, and 
Section 8.2.1. Section 6.10(c)(i)(A) of the CAT NMS Plan requires 
the Plan Processor to ``provide Participants and the SEC with access 
to all CAT Data stored in the Central Repository'' via an ``online 
targeted query tool.'' Appendix D, Section 8.1.1-8.1.3 of the CAT 
NMS Plan describes the required functionality associated with this 
regulatory tool. Appendix D, Section 8.2.1 describes the required 
functionality associated with a user-defined direct query tool that 
will ``deliver large sets of data that can then be used in internal 
surveillance or market analysis applications.'' See id. at Sections 
8.2. This tool is also described at Section 6.10(c)(i)(B) of the CAT 
NMS Plan.
---------------------------------------------------------------------------

    The Commission preliminarily believes that it is appropriate to 
require the Participants to achieve Full Implementation of Core Equity 
Reporting Requirements by December 31, 2020 in order to receive the 
full amount of any related Post-Amendment Industry Member Fees. This 
deadline is consistent with the Participants' most recent projections--
for example, the most recent timelines published by the Participants 
indicate that the Participants intend to substantially complete 
implementation of equities reporting for Industry Member (excluding 
Small Industry Members that do not report to OATS) by October 2020,\96\ 
and the Commission understands that the relevant query tool 
functionality should go live into production on a timeline that is 
generally consistent with the proposed deadline of December 31, 2020. 
Accordingly, the Commission preliminarily believes the target deadline 
of December 31, 2020 for Full Implementation of Core Equity Reporting 
Requirements is both reasonable and feasible.
---------------------------------------------------------------------------

    \96\ See, e.g., Industry Update on CAT Reporting Technical 
Specifications for Industry Members (April 3, 2019), available at 
https://www.catnmsplan.com/wp-content/uploads/2019/04/CAT_Industry_Call_04032019_Presentation.pdf; see also CAT Reporting 
Timelines, available at https://www.catnmsplan.com/timelines/.
---------------------------------------------------------------------------

c. Full Availability and Regulatory Utilization of Transactional 
Database Functionality
    The Commission proposes to amend Section 1.1 of the CAT NMS Plan to 
define ``Full Availability and Regulatory Utilization of Transactional 
Database Functionality'' as the point at which: (a) reporting to the 
Order Audit Trail System (``OATS'') is no longer required for new 
orders; (b) Industry Member reporting for equities transactions, simple 
electronic options transactions, manual options transactions, and 
complex options transactions, including Allocation Reports,\97\ but 
excluding Customer Account Information, Customer-ID, and Customer 
Identifying Information, is developed, tested, and fully implemented; 
(c) representative order linkages, as well as intra-firm linkages, 
inter-firm linkages, national securities exchange linkages, and trade 
reporting facilities linkages, are developed, tested, and fully 
implemented in a manner that permits the Participants and the 
Commission to analyze the full lifecycle of an order across the 
national market system, from order origination through order execution 
or order cancellation, including any related allocation information 
provided in an Allocation Report; \98\ (d) CAT Error Rates satisfy the 
threshold specified by Section 6.5(d)(i); (e) the query tool 
functionality required by Section 6.10(c)(i)(A) and Appendix D, 
Sections 8.1.1-8.1.3, Section 8.2.1, and Section 8.5 incorporates the 
data described in conditions (b) and (c) and is available to the 
Participants and to the Commission; and (f) the requirements of Section 
6.10(a) are met. This Financial Accountability Milestone shall be 
considered complete as of the date identified in a Quarterly Progress 
Report published meeting the requirements of Section 6.6(c).\99\
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    \97\ ``Allocation Report'' is defined term in Section 1.1 of the 
CAT NMS Plan and carries the same meaning in the context of this 
proposing release.
    \98\ The allocation information provided in an Allocation Report 
will be linked to person(s) having the authority to trade on behalf 
of the account using Firm Designated ID--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. See CAT NMS Plan, supra note 4, at Section 1.1. 
Allocations are not required to be directly linked to orders or 
executions. See id.
    \99\ See also note 79 supra.
---------------------------------------------------------------------------

    The Commission also proposes Section 11.6(a)(i)(C) to provide that 
the Participants will be entitled to collect the full amount of any 
Post-Amendment Industry Member Fees established or implemented to 
recover Post-Amendment Expenses incurred from the date immediately 
following the achievement of Full Implementation of Core Equity 
Reporting Requirements to the date of Full Availability and Regulatory 
Utilization of Transactional Database Functionality (``Period 3''), so 
long as such date is no later than December 31, 2021.\100\
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    \100\ See proposed Section 11.6(a)(i)(C). To the extent that 
Full Availability and Regulatory Utilization of Transactional 
Database Functionality is achieved at some later date, the 
Participants will only be entitled to collect a portion of the 
amount of the Post-Amendment Industry Member Fees established or 
implemented for Period 3. See proposed Section 11.6(a)(iii); see 
also Part II.B.2. infra for additional discussion regarding the 
conditions attached to Post-Amendment Industry Member Fee 
collection.
---------------------------------------------------------------------------

    The Commission preliminarily believes that Full Availability and 
Regulatory Utilization of Transactional Database Functionality is an 
appropriate Financial Accountability Milestone, because this milestone 
will require the Participants to demonstrate substantial completion of 
CAT implementation. Whereas the previous Financial Accountability 
Milestone focused only on the implementation of basic equities 
transaction reporting for Industry Members (excluding Small Industry 
Members that are not OATS reporters), this Financial Accountability 
Milestone requires the Participants to have fully implemented the first 
phase of reporting for equities, simple options, manual options, and 
complex options. This Financial Accountability Milestone also requires 
the Participants to implement representative order linkages, in 
addition to intra-firm linkages, inter-firm linkages, national 
securities exchange linkages, and trade reporting linkages, including 
any related allocation information included in an Allocation Report. 
Therefore, at this stage, the CAT should contain sufficient equities 
and options transactional data and order linkages to enable regulators 
to analyze the full lifecycle of an order, from order origination 
through order execution or order cancellation, including any related 
allocation information provided in an Allocation Report, as well as 
conduct other sophisticated analyses of the markets. For instance, the 
CAT should give regulators access to an options audit trail system 
that, for the first time, makes possible options market reconstruction 
and cross-market analyses across full order lifecycles.\101\
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    \101\ Although the Consolidated Options Audit Trail System 
(``COATS'') provides an audit trail for options, CAT will contain 
broker-dealer data and order data not currently available through 
COATS, enabling regulators to perform more sophisticated analyses on 
options data. Moreover, CAT will contain equities data as well as 
options data, which will enable regulators to conduct cross-market 
analyses and surveillances.
---------------------------------------------------------------------------

    Full Availability and Regulatory Utilization of Transactional 
Database Functionality further requires that core elements of the CAT 
are reasonably accurate, reliable, and accessible to regulators. For 
instance, this Financial Accountability Milestone requires that CAT 
Error Rates satisfy the 5% initial maximum Error Rate set forth in 
Section

[[Page 48469]]

6.5(d)(i) of the CAT NMS Plan.\102\ The Commission preliminarily 
believes this is appropriate because the Participants have, in the 
past, expressed the belief that an initial Error Rate of 5% ``strikes 
the balance of making allowances for adapting to a new reporting regime 
while ensuring that the data provided to regulators will be capable of 
being used to conduct surveillance and market reconstruction.'' \103\ 
This Financial Accountability Milestone also requires that certain 
regulatory tools incorporate Industry Member data, are available to 
regulators, and have been implemented pursuant to the provisions of the 
CAT NMS Plan, including not only the online targeted query tool and the 
user-defined direct query tool discussed above,\104\ but also 
surveillance systems reasonably designed to make use of CAT data.\105\ 
Moreover, achievement of Full Availability and Regulatory Utilization 
of Transactional Database Functionality requires the Participants to 
demonstrate, through retirement of the existing OATS system,\106\ that 
the CAT is sufficiently accurate, reliable, and accessible to 
regulators to be adopted as the audit trail system for equities 
transactions. The Commission believes that all of these requirements 
should ensure that regulators are able to use and rely on the CAT at 
this stage to conduct the kind of improved market surveillance that the 
Commission envisioned when it adopted Rule 613.\107\
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    \102\ See proposed Section 1.1, ``Full Availability and 
Regulatory Utilization of Transactional Database Functionality,'' at 
(b). See also CAT NMS Plan, supra note 4, at Section 6.5(d)(i).
    \103\ See CAT NMS Plan Approval Order, supra note 4, at 84717.
    \104\ See Section II.B.1.b. supra.
    \105\ Full Availability and Regulatory Utilization of 
Transactional Database Functionality requires that the requirements 
of Appendix D, Section 8.1.1-8.1.3, Section 8.2.1, and Section 8.5 
of the CAT NMS Plan, which describe the performance requirements and 
service level agreements for necessary regulatory tools, have been 
met for any data contained in the CAT. The ``surveillance systems'' 
required by Section 6.10(a) and the query tool functionality 
required by Section 6.10(c)(i)(A) of the CAT NMS Plan must also be 
implemented. See proposed Section 1.1, ``Full Availability and 
Regulatory Utilization of Transaction Database Functionality,'' at 
(e)-(f).
    \106\ To achieve this Financial Accountability Milestone, OATS 
reporting must no longer be required for new orders. This prong can 
only be accomplished by retiring OATS. Although FINRA is the only 
Participant in direct control of OATS retirement, the Commission 
still believes it is appropriate to apply this milestone to all 
Participants. All of the Participants are jointly responsible for 
creating a CAT that is capable of replacing OATS. All Participants 
are regulators that will benefit from the full implementation of the 
CAT. See, e.g., CAT NMS Plan, supra note 4, at Appendix C, Section 
C.9. (discussing retirement of OATS).
    \107\ See Rule 613 Adopting Release, supra note 2, at 45788.
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    The Commission preliminarily believes that it is appropriate to 
require the Participants to achieve Full Availability and Regulatory 
Utilization of Transactional Database Functionality by December 31, 
2021 in order to recover the full amount of any related Post-Amendment 
Industry Member Fees. This deadline is consistent with the 
Participants' most recent projections for completion of Industry Member 
reporting, representative order linkages, and the development of 
regulatory query tools for options and equities. The most recent 
timelines issued by the Participants suggest that Industry Member 
reporting and representative order linkages will be implemented by 
December 2021,\108\ and the Commission further understands that the 
online targeted query tool and user-directed direct query tool for both 
options and equities should go live into production on a timeline that 
is generally consistent with the proposed deadline of December 31, 
2021. Therefore, the Commission's proposed deadline of December 31, 
2021 is consistent with the Participants' timeline for these items.
---------------------------------------------------------------------------

    \108\ See, e.g., note 96 supra.
---------------------------------------------------------------------------

    Moreover, so long as the Participants diligently work towards 
building the CAT according to the requirements of the CAT NMS Plan, the 
Commission preliminarily believes that the Participants should 
reasonably be able to demonstrate, by December 31, 2021, both that the 
CAT is fully and effectively functional for equities data such that the 
CAT is capable of replacing OATS such that reporting to OATS will no 
longer be required for new orders. The Participants' timelines indicate 
that, by December 31, 2021, Industry Members and Small Industry Members 
that report to OATS will have been reporting equities transaction data 
to CAT for approximately 20 months,\109\ which should give the 
Participants and other CAT Reporters a reasonable opportunity to 
address or correct any material data quality issues. The Commission 
further notes that the conditions of Full Availability and Regulatory 
Utilization of Transactional Database Functionality are designed to 
ensure that regulators are able to perform at least their normal range 
of regulatory tasks using CAT Data instead of OATS data. The Commission 
therefore preliminarily believes that it is reasonable and feasible to 
establish December 31, 2021 as the deadline for this Financial 
Accountability Milestone.\110\
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    \109\ See supra note 96 and associated text. The Participants do 
not currently intend to implement transaction reporting for Small 
Industry Members that do not report to OATS until December 2021. 
However, because these Industry Members do not report to OATS, the 
Commission preliminarily believes that this should not impact the 
ability of the Participants to retire OATS by the target deadline of 
December 31, 2021.
    \110\ The Commission also believes that tying full recovery of 
CAT-related expenses to this Financial Accountability Milestone will 
increase the likelihood that OATS will be retired by the proposed 
date, thereby reducing uncertainty amongst Industry Members and, 
potentially, compressing the period of duplicative reporting to 
which Industry Members might otherwise be subjected.
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    With respect to the additional requirements designed to ensure that 
the CAT Data provided by Industry Members will be reasonably accurate, 
reliable, and accessible to regulators, the Commission also 
preliminarily believes that the Participants should be able to meet 
these requirements by December 31, 2021. For example, proposed Section 
11.6(a)(i)(C) and proposed Section 1.1 would provide the Participants 
with approximately two years from the date of this amendment's adoption 
to develop, test, and implement the surveillance systems required by 
Section 6.10(a) of the CAT NMS Plan,\111\ whereas the CAT NMS Plan 
indicates that a shorter span of fourteen months would be a sufficient 
period of time to accomplish that task.\112\ The Commission therefore 
preliminarily believes the target deadline of December 31, 2021 for 
Full Availability and Regulatory Utilization of Transactional Database 
Functionality is both reasonable and feasible.
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    \111\ Section 6.10(a) of the CAT NMS Plan requires the 
Participants to use the tools described in Appendix D to ``develop 
and implement a surveillance system, or enhance existing 
surveillance systems, reasonably designed to make use of the 
consolidated information contained in the Central Repository.'' See 
note 4 supra.
    \112\ See CAT NMS Plan, supra note 4, at Section 6.7(a)(iv); see 
also id. at Section 6.10(a).
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d. Full Implementation of CAT NMS Plan Requirements
    The Commission proposes to amend Section 1.1 of the CAT NMS Plan to 
define ``Full Implementation of CAT NMS Plan Requirements'' as the 
point at which the Participants have satisfied all of their obligations 
to build and implement the CAT, such that all CAT system functionality 
required by Rule 613 and the CAT NMS Plan has been developed, 
successfully tested, and fully implemented at the initial Error Rates 
specified by Section 6.5(d)(i) of the CAT NMS Plan or less, including 
functionality that efficiently permits the Participants and the 
Commission to access all CAT Data required to be stored in the Central 
Repository pursuant to Section 6.5(a) of the CAT NMS Plan, including 
Customer Account

[[Page 48470]]

Information, Customer-ID, Customer Identifying Information, and 
Allocation Reports, and to analyze the full lifecycle of an order 
across the national market system, from order origination through order 
execution or order cancellation, including any related allocation 
information provided in an Allocation Report.\113\ This Financial 
Accountability Milestone shall be considered complete as of the date 
identified in a Quarterly Progress Report meeting the requirements of 
Section 6.6(c).\114\ The Commission also proposes to add Section 
11.6(a)(i)(D) to provide that the Participants will be entitled to 
collect the full amount of any Post-Amendment Industry Member Fees 
established or implemented to recover Post-Amendment Expenses incurred 
from the date immediately following the achievement of Full 
Availability and Regulatory Utilization of Transactional Database 
Functionality to the date of Full Implementation of CAT NMS Plan 
Requirements (``Period 4''), so long as such date is no later than 
December 30, 2022.\115\
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    \113\ See notes 97-98 supra.
    \114\ See also note 79 supra.
    \115\ See proposed Section 11.6(a)(i)(D). To the extent that 
Full CAT NMS Plan Requirements is achieved at some later date, the 
Participants will only be entitled to collect a portion of the 
amount of the Post-Amendment Industry Member Fees established or 
implemented for Period 4. See proposed Section 11.6(a)(iii); see 
also Part II.B.2. infra for additional discussion regarding the 
conditions attached to Post-Amendment Industry Member Fee 
collection.
---------------------------------------------------------------------------

    The Commission preliminarily believes that Full Implementation of 
CAT NMS Plan Requirements is appropriate as the final Financial 
Accountability Milestone.\116\ This Financial Accountability Milestone 
will require the Participants to show that they have satisfied all of 
their obligations to build and implement the CAT system functionality 
required by Rule 613, including functionality that would allow the 
Participants and the Commission to efficiently access all transactional 
data and, for the first time, customer information stored in the 
Central Repository. Whereas the previous Financial Accountability 
Milestones do not require the Participants to provide customer 
information like Customer Account Information, Customer-ID, and 
Customer Identifying Information, the Participants must have developed, 
tested, and implemented reporting functionality for these elements to 
satisfy the parameters of Full Implementation of CAT NMS Plan 
Requirements.
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    \116\ Because the provisions of proposed Section 11.6 are meant 
to incentivize full CAT implementation, under the proposal, these 
provisions will not apply once Full Implementation of CAT NMS Plan 
Requirements is achieved.
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    The creation of a unique Customer-ID under the CAT NMS Plan, is 
critical to achieving the full regulatory benefit of the CAT.\117\ In 
the Commission's experience, it is now common for individuals and 
entities to trade through multiple broker-dealer accounts and for 
individuals engaged in wrongdoing to execute trades through multiple 
broker-dealers. A Customer-ID will be the key that ties all of the 
trading by one Customer together and as such, will facilitate the 
ability of regulators to identify all the orders and actions 
attributable to a specific Customer regardless of where that Customer 
routes orders or executes trades--a linkage which does not exist now.
---------------------------------------------------------------------------

    \117\ See, e.g., Rule 613 Adopting Release, supra note 2, at 
45756.
---------------------------------------------------------------------------

    Moreover, currently available audit trail data does not directly 
identify the customer associated with trading activity, so regulators 
conducting market surveillance must undertake multiple steps to request 
additional information after identifying suspect trades in order to 
link those trades with specific individuals. The inclusion of Customer-
IDs in the CAT, at Full Implementation of CAT NMS Plan Requirements, 
would therefore significantly improve the capabilities of regulators 
because the CAT will be able to connect suspicious trading activity 
directly to a particular Customer through the Customer-ID. In addition, 
the Customer-ID will also enable a regulator to surveil the trading 
activity of market participants in both equity and options markets by 
Customer-ID, and thus a Customer-ID will improve regulators' efficiency 
in conducting cross-market and cross-product surveillance, which could 
in turn reduce violative behavior and protect investors from harm.
    Accordingly, the Commission believes that it is important to 
require the Participants to demonstrate that the Participants have 
developed, tested, and fully implemented functionality that efficiently 
permits the Commission and other regulators to access Customer-IDs, 
along with other Customer and Account information.
    In addition to providing this integral customer information, 
achievement of Full Implementation of CAT NMS Requirements would also 
mean that the Participants have created an audit trail system that 
provides reasonably accurate, reliable and useful information. Full 
Implementation of CAT NMS Requirements mandates that the CAT produce 
data at the initial Error Rate specified by the CAT NMS Plan,\118\ as 
well as functionality that would efficiently permit the Participants 
and the Commission to analyze the full lifecycle of an order, including 
any subsequent allocation, across the national market system. These 
requirements are designed to help facilitate the implementation of the 
CAT functions in a manner that enables the Commission and other 
regulators to conduct the improved market surveillance envisioned by 
the Commission when it adopted Rule 613--the ultimate goal of this 
project.
---------------------------------------------------------------------------

    \118\ See CAT NMS Plan, supra note 4, at Section 6.5(d)(i). See 
also note 103 supra.
---------------------------------------------------------------------------

    Furthermore, the Commission preliminarily believes that it is 
appropriate to require the Participants to achieve Full Implementation 
of CAT NMS Plan Requirements by December 30, 2022 in order to recover 
the full amount of any Post-Amendment Industry Member Fees. This 
deadline is consistent with the Participants' most recent projections, 
which indicate that the Participants intend to achieve full CAT 
implementation by July 2022.\119\ In fact, the Commission's target 
deadline of December 30, 2022 gives the Participants an additional five 
months to achieve Full Implementation of CAT NMS Plan Requirements. 
Accordingly, the Commission preliminarily believes that the proposed 
target deadline of December 30, 2022 for Full Implementation of CAT NMS 
Plan Requirements is both reasonable and feasible.
---------------------------------------------------------------------------

    \119\ See, e.g., note 96 supra.
---------------------------------------------------------------------------

2. Collection of Post Amendment Industry Member Fees
    As noted above, the Commission is proposing that the Participants 
will be entitled to collect the full amount \120\ of any Post-Amendment 
Industry Member Fees related to the achievement of the Financial 
Accountability Milestones described above so long as they meet 
specified dates, which dates are consistent with the timelines most 
recently published by the Participants.\121\ If the Participants do

[[Page 48471]]

not meet the specified date for the achievement of Initial Industry 
Member Core Equity Reporting, proposed Section 11.6(a)(ii) will provide 
that the Participants' recovery of Post-Amendment Industry Member Fees 
will be reduced according to the following schedule:
---------------------------------------------------------------------------

    \120\ ``Full amount'' in this context does not mean that the 
Participants may collect all of their Post-Amendment Expenses from 
Industry Members. Rather, pursuant to the provisions of Article XI 
of the CAT NMS Plan, the Participants may recover an appropriate 
portion of these fees from Industry Members. Specifically, to 
recover any Post-Amendment Expenses from Industry Members, the 
Participants must file with the Commission proposed rule changes 
under Section 19(b) of the Act, setting for their proposed 
allocation and justifying why the proposed allocation is consistent 
with the Act. The Commission would then review the proposed rule 
changes for consistency with the Exchange Act and the CAT NMS Plan.
    \121\ See proposed Section 11.6(a)(i).
---------------------------------------------------------------------------

     By 25% if the Participants miss the deadline set forth in 
proposed Section 11.6(a)(i)(A) by less than 60 days;
     By 50% if the Participants miss the deadline set forth in 
proposed Section 11.6(a)(i)(A) by 60 days or more, but less than 120 
days;
     By 75% if the Participants miss the deadline set forth in 
proposed Section 11.6(a)(i)(A) by 120 days or more, but less than 180 
days;
     By 100% if the Participants miss the deadline set forth in 
proposed Section 11.6(a)(i)(A) by 180 days or more.
    If the Participants do not meet the specified dates for the 
achievement of Full Implementation of Core Equity Reporting 
Requirements, Full Availability and Regulatory Utilization of 
Transactional Database Functionality, or Full Implementation of CAT NMS 
Plan Requirements, proposed Section 11.6(a)(iii) will provide that the 
Participants' recovery of Post-Amendment Industry Member Fees will be 
reduced according to the following schedule:
     By 25% if the Participants miss the deadline set forth in 
proposed Section 11.6(a)(i) by less than 90 days;
     By 50% if the Participants miss the deadline set forth in 
proposed Section 11.6(a)(i) by 90 days or more, but less than 180 days;
     By 75% if the Participants miss the deadline set forth in 
proposed Section 11.6(a)(i) by 180 days or more, but less than 270 
days; and
     By 100% if the Participants miss the deadline set forth in 
proposed Section 11.6(a)(i) by 270 days or more.

Proposed Section 11.6(a)(iv) provides that the Participants will only 
be entitled to collect Post-Amendment Industry Member Fees for Period 
1, Period 2, Period 3, or Period 4 at the end of each respective 
Period.
    The Commission preliminarily believes these conditions on CAT 
funding are appropriate. It has been almost three years since the 
Commission approved the CAT NMS Plan, but insufficient progress has 
been made towards the implementation of CAT, and the Participants have 
repeatedly missed deadlines set forth by the CAT NMS Plan. The 
Commission preliminarily believes that the proposed rules will provide 
accountability to facilitate implementation of the CAT in an 
expeditious and efficient manner, and according to a schedule that is 
consistent with the most recent timelines published by the 
Participants.\122\
---------------------------------------------------------------------------

    \122\ See Part II.B.1. for more discussion of the deadlines 
established by the proposed amendments.
---------------------------------------------------------------------------

    As explained above, the Commission has identified four meaningful 
Financial Accountability Milestones and paired those Financial 
Accountability Milestones with reasonable and feasible target deadlines 
set approximately eight months to one year apart. The Participants will 
be able to recover the full amount of any Post-Amendment Industry 
Member Fees if the Participants achieve the Financial Accountability 
Milestones identified in the proposed rule amendment by the specified 
dates. However, the Commission preliminarily believes that it is 
appropriate to impose financial accountability on the Participants by 
incrementally reducing the amount of CAT funding that Participants may 
recover from Industry Members, according to the schedules set forth 
above.
    Fee recovery for most of the Financial Accountability Milestones--
Full Implementation of Core Equity Reporting Requirements, Full 
Availability and Regulatory Utilization of Transactional Database 
Functionality, and Full Implementation of CAT NMS Plan Requirements--
will be governed by a fee schedule that gradually reduces the amount of 
recovery that the Participants are entitled to by 25% for each quarter 
by which the Participants miss the target deadline. The Commission 
preliminarily believes this structure will appropriately balance the 
need to keep Participants on a firm implementation schedule with the 
need to incentivize the Participants to continue their progress towards 
implementation even if the target deadlines identified in the proposed 
amendment are missed. As discussed above,\123\ the Commission believes 
that the target deadlines identified for these three milestones are 
reasonable and feasible, because these deadlines are consistent with 
recent timelines provided by the Participants. The Commission therefore 
does not believe that it is necessary to allow for a grace period 
before reducing the Participants' recovery. However, by providing a 
full quarter before each subsequent, and additional, reduction to fee 
recovery, the proposed schedule gives the Participants an ample amount 
of time to achieve each milestone before further reductions are 
imposed. Moreover, the Commission believes that the proposed amount of 
the reduction--25% per quarter--is appropriate, because it is 
sufficiently large to incentivize prompt implementation, but not so 
large as to be unnecessarily punitive.
---------------------------------------------------------------------------

    \123\ See Part II.B.1.b.-d. supra.
---------------------------------------------------------------------------

    A slightly different schedule is proposed for Initial Industry 
Member Core Equity Reporting. For that milestone, the proposal would 
reduce the initial recovery by 25% if the Participants miss the 
proposed deadline by less than 60 days and by an additional 25% for 
every additional 60 days by which the Participants miss the proposed 
deadline. While the Commission is imposing the same 25% fee reduction 
in this instance, the proposed fee recovery schedule for Initial 
Industry Member Core Equity Reporting is tighter than the schedule for 
the other three Financial Accountability Milestones. The Commission 
preliminarily believes that this is an appropriate schedule because 
this Financial Accountability Milestone should be the easiest for the 
Participants to achieve. Industry Members have developed relevant 
experience in reporting equities transaction data to OATS, and the 
Participants have made significant progress towards development of the 
necessary technical specifications, suggesting that the Participants 
remain on track with their own projections. In addition, the Commission 
believes it is critically important that the Participants remain on 
schedule to achieve the first Financial Accountability Milestone, in 
order to minimize the possibility that the deadlines for subsequent 
Financial Accountability Milestones will be missed.\124\ For those 
reasons, the Commission believes the fee recovery schedule for Initial 
Industry Member Core Equity Reporting is appropriate.
---------------------------------------------------------------------------

    \124\ See, e.g., Part IV.E.1.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the incremental approach 
followed by both fee recovery schedules, which provide the Participants 
with a considerable amount of recovery unless the Participants miss the 
target deadline by a considerable amount of time, will also promote 
implementation of the CAT in accordance with the deadlines outlined by 
this proposed amendment. The sooner the Participants achieve each 
Financial Accountability Milestone, the sooner the Participants will be 
able to begin recovering any related Post-Amendment Industry Member 
Fees.\125\

[[Page 48472]]

Moreover, so long as the Participants complete each particular 
Financial Accountability Milestone substantially before the target 
deadline for the next Financial Accountability Milestone arrives, the 
Participants should be able to recover a portion of their fees, costs, 
and expenses from Industry Members, subject to the Exchange Act and the 
provisions of the CAT NMS Plan. Although failing to meet one target 
deadline might make it more difficult to comply with the next target 
deadline, the proposed amendment does not preclude the possibility that 
the Participants may be entitled to some measure of recovery going 
forward.\126\ The Commission preliminarily believes that the 
Participants will continue to make progress towards full CAT 
implementation even if one target deadline is missed because they still 
will have the opportunity to recover fees, costs, and expenses from 
Industry Members, albeit a smaller portion of those fees, costs, and 
expenses.\127\
---------------------------------------------------------------------------

    \125\ See, e.g., proposed Section 11.6(a)(iv) (providing that 
the Participants may only collect relevant Post-Amendment Industry 
Member Fees at the end of Period 1, 2, 3 and/or 4).
    \126\ For example, suppose the Participants missed the deadline 
for Initial Industry Member Core Equity Reporting by 180 days or 
more and were therefore not entitled to any recovery for Period 1. 
In this scenario, the Participants might still be able to meet the 
deadline for the next Financial Accountability Milestone, Full 
Implementation of Core Equity Reporting Requirements, or achieve 
that Financial Accountability Milestone within 270 days of the 
proposed deadline, thus entitling them to partial recovery under the 
proposed amendment. As another example, suppose the Participants did 
not achieve Full Implementation of Core Equity Reporting 
Requirements until January 1, 2021, but were able to meet the target 
deadline for the next Financial Accountability Milestone--Full 
Availability and Regulatory Utilization of Transactional Database 
Functionality. Because the Participants did not achieve Full 
Implementation of Core Equity Reporting Requirements on schedule, 
but were less than 90 days late, the Participants would be entitled 
to collect 75% of the Post-Amendment Industry Member Fees 
established for Period 2 upon achievement of Full Implementation of 
Core Equity Reporting Requirements and the full amount of Post-
Amendment Industry Member Fees for Period 3 upon achievement of Full 
Availability and Regulatory Utilization of Transactional Database 
Functionality.
    \127\ See, e.g., note 191 infra.
---------------------------------------------------------------------------

    As noted above, the Commission must review fee filings submitted by 
the Participants pursuant to Section 19(b) of the Exchange Act to 
implement fees to recover the costs and expenses incurred by the 
Participants in connection with the development, implementation, and 
operation of the CAT.\128\ These filings must specify the percentage of 
the costs and expenses that will be allocated to the Participants on 
the one hand and the Industry Members on the other hand, as well as 
explain how costs and expenses will be allocated within each group. 
Each Participant must also demonstrate, under Sections 6(b)(4) and 
15A(b)(5), that such fee filings provide for the equitable allocation 
of reasonable dues, fees, and other charges among its members and other 
persons using its facilities.\129\ In light of the continued delays to 
CAT implementation, the Commission preliminarily believes that it is 
appropriate, at this time, to set forth the circumstances under which 
the full recovery of fees, costs, and expenses from Industry Members 
would not be reasonable under Sections 6(b)(4) or 15A(b)(5) of the 
Exchange Act or reasonably related to the Participants' self-regulatory 
obligations under the CAT NMS Plan.\130\ The Commission preliminarily 
believes that it would not be a reasonable exercise of the 
Participants' funding authority under the CAT NMS Plan to fully recover 
fees, costs, and expenses from Industry Members if the Participants 
miss the target deadlines specified in the proposed amendment, because 
any delays by the Participants could increase uncertainty for and, 
potentially, impose additional costs on Industry Members.\131\ In 
addition, the proposed amendments will increase transparency for 
Industry Members by setting forth the circumstances under which the 
full recovery of fees, costs, and expenses from Industry Members would 
not be reasonable.
---------------------------------------------------------------------------

    \128\ See notes 66-68 supra.
    \129\ See note 68 supra.
    \130\ See notes 72-73 and associated text supra.
    \131\ See, e.g., Section IV.B. infra.
---------------------------------------------------------------------------

3. Identification of Post-Amendment Expenses in Submissions to the 
Commission
    Under proposed Section 11.6(b), all CAT NMS Plan amendments 
submitted by the Operating Committee to the Commission pursuant to Rule 
608(b)(3)(i),\132\ and all filings submitted by the Participants to the 
Commission under Section 19(b) of the Exchange Act,\133\ to establish 
or implement Post-Amendment Industry Member Fees pursuant to Article XI 
of the CAT NMS Plan, must clearly indicate whether such fees are 
related to Post-Amendment Expenses incurred during Period 1, Period 2, 
Period 3, or Period 4. Requiring the Participants to specify whether 
any proposed fees are related to Post-Amendment Expenses, and the 
Period to which they are related, will help the Commission to determine 
whether it must consider the provisions of proposed Section 11.6 in 
evaluating the proposed fees.
---------------------------------------------------------------------------

    \132\ 17 CFR 242.608(b)(3)(i).
    \133\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------

    The Commission requests comment on these proposed financial 
accountability provisions. To the extent possible, please provide 
specific data, analyses, or studies for support. The Commission 
particularly solicits comment on the following issues:
    13. Is it appropriate for the Commission to apply the financial 
accountability provisions of proposed Section 11.6 to Post-Amendment 
Expenses? Why or why not? Should the financial accountability 
provisions of proposed Section 11.6 be applied to fees, costs, or 
expenses incurred by the Company in connection with the development, 
implementation, and operation of the CAT, or to some other set of fees, 
costs, or expenses? Why or why not? Would it be appropriate to limit 
Section 11.6 to apply only to fees, costs, or expenses incurred by the 
Company in connection with the development or implementation of the 
CAT? Why or why not? Should the Commission further define what it means 
to ``incur'' an expense? If so, how? Can the current definition of 
``incurred'' in the proposing release be used to avoid the application 
of proposed Section 11.6? If so, please explain and describe how the 
Commission should address this.
    14. Is it appropriate for the Commission to tie CAT funding to the 
achievement of Financial Accountability Milestones? Why or why not? 
Please explain your response.
    15. With respect to Period 1:
    a. Is the proposed Financial Accountability Milestone of Initial 
Industry Member Core Equity Reporting appropriate? Why or why not? What 
other milestone should be used to end Period 1? Why?
    b. Is the definition of Initial Industry Member Core Equity 
Reporting appropriate? Why or why not? Please explain your response.
    i. Should the definition of Initial Industry Member Core Equity 
Reporting be amended to include additional types of reporting or data? 
Should it be amended to remove some of the reporting or data 
requirements currently identified? Why or why not? Please explain your 
response.
    ii. If the definition is amended, should the target deadline for 
Period 1 be amended? Why or why not? Please explain your response.
    c. Is the target deadline of April 30, 2020 appropriate? Why or why 
not? What alternative deadline would be more appropriate? Why? Please 
explain your response.
    16. With respect to Period 2:
    a. Is the proposed Financial Accountability Milestone of Full 
Implementation of Core Equity Reporting Requirements appropriate?

[[Page 48473]]

Why or why not? What other milestone should be used to end Period 2? 
Why? Please explain your response.
    b. Is the definition of Full Implementation of Core Equity 
Reporting Requirements appropriate? Why or why not? Please explain your 
response.
    i. Should the definition of Full Implementation of Core Equity 
Reporting Requirements be amended to include other kinds of Industry 
Member reporting or linkages? If so, which additional kinds of Industry 
Member reporting or linkages should be included and why? Please explain 
your response.
    ii. Should the definition of Full Implementation of Core Equity 
Reporting Requirements be amended to reduce or strike the reporting 
linkages requirement? If reduced, how should the requirements be 
reduced? Why? Please explain your response.
    iii. Should the definition of Full Implementation of Core Equity 
Reporting Requirements be amended to require a less stringent Error 
Rate? If so, what should the Error Rate be and why? Please explain your 
response.
    iv. Should the definition of Full Implementation of Core Equity 
Reporting Requirements amend the requirement that the query tool 
functionality required by Section 6.10(c)(i)(A) and Appendix D, 
Sections 8.1.1-8.1.3 and Section 8.2.1 incorporates Industry Member 
equities data or the requirement that the query tool functionality is 
available to the Participants and the Commission? How should the 
requirement be amended? Why? Please explain your response.
    v. If the definition is amended, should the target deadline for 
Period 2 be amended? Why or why not? Please explain your response.
    c. Is the start date for Period 2 appropriate? Why or why not? 
Please explain your response.
    d. Is the target deadline of December 31, 2020 appropriate? Why or 
why not? What alternative deadline would be more appropriate? Why? 
Please explain your response.
    17. With respect to Period 3:
    a. Is the proposed Financial Accountability Milestone of Full 
Availability and Regulatory Utilization of Transactional Database 
Functionality appropriate? Why or why not? What other milestone should 
be used to end Period 3? Why? Please explain your response.
    b. Is the definition of Full Availability and Regulatory 
Utilization of Transactional Database Functionality appropriate? Why or 
why not? Please explain your response.
    i. Should the definition of Full Availability and Regulatory 
Utilization of Transactional Database Functionality be amended to 
require that the Commission must have approved a filing from FINRA to 
retire OATS, as well as any filings from the Participants to remove 
OATS-related provisions from their rules, or to remove the requirement 
that OATS reporting is no longer required for new orders? Why or why 
not? Please explain your response.
    ii. Should the definition of Full Implementation of Core Equity 
Reporting Requirements be amended to include other kinds of Industry 
Member reporting or linkages? If so, which additional kinds of Industry 
Member reporting or linkages should be included and why? Please explain 
your response.
    iii. Should the definition of Full Availability and Regulatory 
Utilization of Transactional Database Functionality be amended to 
require a less stringent Error Rate? If so, what should the Error Rate 
be and why? Please explain your response. Should the Commission require 
the Participants to demonstrate that Error Rates are stable? If so, how 
would Participants do that? If the Participants are in compliance with 
Appendix C, Section 3 of the CAT NMS Plan, would that sufficient? How 
long should the Error Rate remain below the specified threshold in 
order to be considered ``stable''?
    iv. Should the Commission amend the requirement that the query tool 
functionality required by Section 6.10(c)(i)(A) and Appendix D, 
Sections 8.1.1-8.1.3, Section 8.2.1, and Section 8.5 incorporates the 
data required by conditions (b) and (c) or the requirement that the 
query tool functionality is available to the Participants and the 
Commission? How should the requirement be amended? Why? Please explain 
your response.
    v. Should the Commission amend the requirement that the 
requirements of Section 6.10(a) are met? How should the requirement be 
amended? Why? Please explain your response.
    vi. If the definition is amended, should the target deadline for 
Period 3 be amended? Why or why not? Please explain your response.
    c. Is the start date for Period 3 appropriate? Why or why not? 
Please explain your response.
    d. Is the target deadline of December 31, 2020 appropriate? Why or 
why not? What alternative deadline would be more appropriate? Why? 
Please explain your response.
    e. Are there any conditions that the Commission should consider in 
evaluating whether OATS can be retired? Please explain your response.
    18. With respect to Period 4:
    a. Is the proposed Financial Accountability Milestone of Full 
Implementation of CAT NMS Plan Requirements appropriate? Why or why 
not? What other milestone should be used to end Period 4? Why? Please 
explain your response.
    b. Is the definition of Full Implementation of CAT NMS Plan 
Requirements appropriate? Why or why not? Please explain your response.
    i. Is additional detail needed to describe the obligations of the 
Participants under Rule 613 and the CAT NMS Plan? If so, why, and what 
language would sufficiently describe these obligations? Please explain 
your response.
    ii. If the definition is amended, should the target deadline for 
Period 4 be amended? Why or why not? Please explain your response.
    c. Is the start date for Period 4 appropriate? Why or why not? 
Please explain your response.
    d. Is the target deadline of December 30, 2022 appropriate? Why or 
why not? What alternative deadline would be more appropriate? Why? 
Please explain your response.
    19. Are the selected Financial Accountability Milestones 
appropriate? If not, what other Financial Accountability Milestones 
should be included?
    20. Is it appropriate for the Commission to permit the Participants 
to submit updated, interim or addendum Quarterly Progress Reports for 
completed Financial Accountability Milestones? Why or why not? What 
information should be required in these interim or addendum Quarterly 
Progress Reports so that the Commission can rely on such reports? 
Should the Participants only be able to submit interim or addendum 
Quarterly Progress Reports in connection with certain Financial 
Accountability Milestones? If so, which ones? Please explain your 
response.
    21. Is it appropriate to end the application of proposed Section 
11.6 once Full Implementation of CAT NMS Requirements has been 
achieved? Why or why not? Please explain your response.
    22. Should the Commission establish more than 4 Periods and/or use 
more than 4 Financial Accountability Milestones? If so, how many 
Periods should the Commission establish? What should the other 
Financial Accountability Milestones be? Why? Please explain your 
response.
    23. Should the Commission establish fewer than 4 Periods and/or use 
fewer Financial Accountability Milestones? If so, how many Periods 
should the

[[Page 48474]]

Commission establish? What milestones should be removed, or how should 
the existing milestones be edited? Please explain your response.
    24. Is it appropriate for the Commission to incrementally reduce 
the amount of Post-Amendment Industry Member Fees that the Participants 
may recover if they miss the target deadlines specified in Period 1, 
Period 2, Period 3, or Period 4? Why or why not? Would a different 
percentage of recovery be more appropriate if target deadlines are 
missed? If so, what percentage and on what schedule? Why? Is it 
appropriate for the Commission to use different recovery schedules for 
Period 1 and for Periods 2-4? Why or why not? Should a different 
recovery schedule be used for Period 1? If so, how should the recovery 
schedule be amended? Why? Please explain your response.
    25. Is it appropriate that the Participants may only collect Post-
Amendment Industry Member Fees at the end of Period 1, Period 2, Period 
3, or Period 4? Why or why not? If not, at what other point(s) should 
the Participants be able to collect these fees, and how would the 
Commission determine whether and how the provisions of Section 11.6 
apply? Please explain your response.
    26. Do commenters believe that the proposed incentives will 
motivate the Participants to implement the CAT in an expeditious and 
efficient manner? Why or why not? Would an alternative methodology be 
more effective? If so, please describe this methodology and explain why 
it would be more effective.
    27. Is it appropriate for the Commission to require the Operating 
Committee or the Participants to clearly label any CAT NMS Plan 
amendments or fee filings submitted to establish or implement Post-
Amendment Industry Member Fees to indicate whether such fees are 
related to Post-Amendment Expenses incurred during Period 1, Period 2, 
Period 3, or Period 4? Why or why not? If not, how would the Commission 
determine whether and how the provisions of Section 11.6 apply? Please 
explain your response.
    28. Should the Commission require the Participants to provide an 
independent audit of the fees, costs, and expenses incurred from the 
effective date of this proposed amendment? Why or why not?

III. Paperwork Reduction Act

    Certain provisions of the proposed rule contain ``collection of 
information requirements'' within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\134\ The Commission is submitting 
these collections of information to the Office of Management and Budget 
(``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 
1320.11.\135\ An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless the agency 
displays a currently valid control number.\136\ The title of the new 
collection of information is ``CAT NMS Plan Reports.''
---------------------------------------------------------------------------

    \134\ 44 U.S.C. 3501 et seq.
    \135\ 44 U.S.C. 3507; 5 CFR 1320.11.
    \136\ 5 CFR 1320.11(l).
---------------------------------------------------------------------------

A. Summary of Collection of Information

    The proposed amendment would require two new categories of 
information collection: (1) The Implementation Plan and (2) the 
Quarterly Progress Reports.\137\ These categories are described more 
fully below.
---------------------------------------------------------------------------

    \137\ The proposed amendment also requires the Participants to 
include certain information in certain CAT NMS Plan amendments 
submitted by the Operating Committee to the Commission pursuant to 
Rule 608(b)(3) and all filings submitted by the Participants to the 
Commission under Section 19(b) of the Exchange Act to establish or 
implement Post-Amendment Industry Member Fees. However, the 
Commission does not expect the baseline number of CAT NMS Plan 
amendments or Section 19(b) filings, or the burdens associated with 
these submissions, to increase as a result of the proposed 
amendment. The Commission therefore believes that these burdens are 
already accounted for in the Paperwork Reduction Act Information 
Collection submissions for Form 19b-4 and Rule 11Aa3-2. See OMB 
Control No. 3235-0045 (Aug. 19, 2016), 81 FR 57946 (Aug. 24, 2016) 
(Request to OMB for Extension of Rule 19b-4 and Form 19b-4 PRA); OMB 
Control No. 3235-0500 (December 22, 2004), 70 FR 929 (January 5, 
2005) (Proposed Collection for Rule 11Aa3-2 and Request for 
Comment).
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1. Implementation Plan
    Proposed Section 6.6(c)(i) would require the Participants, within 
30 calendar days following the effective date of this amendment, to 
file with the Commission and make publicly available on a website a 
complete Implementation Plan that includes the Participants' timeline 
for achieving Implementation Milestones setting forth how and when the 
Participants will facilitate the achievement of Full Implementation of 
CAT NMS Plan Requirements. Under proposed Section 6.6(c)(iii), the 
Operating Committee shall be required to submit the Implementation Plan 
to the CEO, President, or an equivalently situated senior officer of 
each Participant. A Supermajority Vote of the Operating Committee shall 
then be required to approve the Implementation Report. However, if the 
Implementation Plan is approved only by a Supermajority Vote of the 
Operating Committee, and not by a unanimous vote of the Operating 
Committee, each Participant whose Operating Committee member did not 
vote to approve the Implementation Plan shall separately file with the 
Commission and make publicly available on a website a statement 
identifying itself and explaining why the member did not vote to 
approve the Implementation Plan.
2. Quarterly Progress Reports
    Proposed Section 6.6(c)(ii) would further require the Participants, 
within 15 business days after the end of each calendar quarter, to file 
with the Commission and make publicly available on a website a complete 
Report that provides a detailed description of the progress made by the 
Participants towards each of the Implementation Milestones. The 
Participants must provide specified information regarding 
Implementation Milestones that have been completed, Implementation 
Milestones that are in progress, and Implementation Milestones that 
have not yet been initiated, such as updated information on currently 
targeted completion dates and descriptions of the current status of the 
Implementation Milestone, any adjustments to the targeted completion 
date, and supporting information demonstrating the current level of 
completion. Under proposed Section 6.6(c)(iii), the Operating Committee 
shall be required to submit each Quarterly Progress Report to the CEO, 
President, or an equivalently situated senior officer of each 
Participant. A Supermajority Vote of the Operating Committee shall be 
required to approve each Quarterly Progress Report. However, if a 
Quarterly Progress Report is approved only by a Supermajority Vote of 
the Operating Committee, and not by a unanimous vote of the Operating 
Committee, each Participant whose Operating Committee member did not 
vote to approve that Quarterly Progress Report shall separately file 
with the Commission and make publicly available on a website a 
statement identifying itself and explaining why the member did not vote 
to approve the Report.

B. Proposed Use of Information

1. Implementation Plan
    The Commission believes that the publication of the proposed 
Implementation Plan will make available critical information to the 
Commission, other regulators, and market participants regarding the

[[Page 48475]]

intended goals and deadlines of the Participants. Access to this 
information will help the Commission and market participants to monitor 
the progress of CAT implementation, thereby reducing uncertainty 
surrounding this process. The Commission also anticipates that 
requiring the Participants to make public target dates submitted to 
senior management of each Participant and approved by a Supermajority 
Vote of the Operating Committee in the Implementation Plan will 
increase the Participants' accountability to their intended timeline. 
In addition, the Commission believes that requiring any Participants 
whose Operating Committee members do not vote to approve the 
Implementation Plan to disclose the basis for that decision may aid the 
Commission and the public to better monitor the progress of CAT 
implementation, because such an explanation may reveal critical 
information regarding whether currently targeted completion dates are 
realistic, whether milestones are being or have been completed in 
accordance with the requirements of the CAT NMS Plan, and/or whether 
potential risks or delays may impede the progress of CAT 
implementation.
2. Quarterly Progress Reports
    The Commission believes that the publication of the proposed 
Quarterly Progress Reports will make available critical information to 
the Commission, other regulators, and market participants regarding the 
intended goals and deadlines of the Participants. Access to this 
information will help the Commission and market participants to monitor 
the progress of CAT implementation. The Commission also anticipates 
that requiring the Participants to make public their accomplishments in 
the Quarterly Progress Reports will keep the Participants accountable 
to their intended timeline. Finally, the Commission expects that the 
provision of updated quarterly information in a Report, submitted to 
senior management of each Participant and approved by a Supermajority 
Vote of the Operating Committee, regarding the Participants' progress 
towards CAT implementation, as well as any explanatory statements by 
Participants whose Operating Committee members do not vote to approve 
the Report, may reduce uncertainty regarding CAT's implementation 
deadlines and flag any concerns regarding the implementation process 
for the Commission and market participants.

C. Respondents

    The respondents to all collections of information would be the 
Participants.

D. Total Initial and Annual Reporting and Recordkeeping Burdens

    The estimated burdens associated with the proposed amendments are 
described fully below, but the below table briefly summarizes the 
relevant burdens set forth in this Proposing Release.

----------------------------------------------------------------------------------------------------------------
                                                                 Annual ongoing burden     One-time burden per
                           Category                             per participant (burden    participant (burden
                                                                 hours/external costs)    hours/external costs)
----------------------------------------------------------------------------------------------------------------
Implementation Plan...........................................                      N/A           76.8/$8,695.65
Quarterly Progress Reports....................................         307.2/$34,782.60                      N/A
----------------------------------------------------------------------------------------------------------------

1. Implementation Plan
    The Commission preliminarily believes that each Participant will 
incur, on average, a one-time burden of approximately 57.2 hours to 
confer with other Participants, to draft an Implementation Plan, and to 
vote as to whether to approve the Implementation Plan, as required by 
proposed Section 6.6(c)(iii). In the CAT NMS Plan Approval Order, the 
Commission noted that the Participants had estimated that approximately 
20 full-time employees took approximately 30 months to develop the CAT 
NMS Plan, including ``staff time contributed by each Participant to, 
among other things, determine the technological requirements for the 
Central Repository, develop the RFP, evaluate Bids received, design and 
collect the data necessary to evaluate costs and other economic 
impacts, meet with Industry Members to solicit feedback, and complete 
the CAT NMS Plan submitted to the Commission for consideration.'' \138\ 
The Commission then used this information to estimate that the 
development of the CAT NMS Plan would require, in aggregate, 14,407 
burden hours for 12 months.\139\
---------------------------------------------------------------------------

    \138\ See CAT NMS Plan Approval Order, supra note 4, at n.3285.
    \139\ See id.
---------------------------------------------------------------------------

    This estimate, based on information provided by the Participants 
about the burdens they actually incurred in developing a related 
project, reflects the best data available to the Commission in 
estimating the number of initial burden hours required to develop the 
Implementation Plan. The Commission notes that developing the CAT NMS 
Plan was a far more complex project than the development of the 
Implementation Plan and that the burdens incurred in developing the CAT 
NMS Plan may be different in nature than the costs that the 
Participants would incur in developing the Implementation Plan. In this 
instance, for example, the Participants will only have 30 calendar days 
from the effective date of this amendment to prepare the Implementation 
Plan, and the Participants have already created a Master Plan that 
contains much of the information required by proposed Section 
6.6(c)(i). In addition, the Commission believes that the Participants 
should already have gathered much of the information needed to create 
the Implementation Plan.\140\ For these reasons, the Commission 
preliminarily believes that the estimated burden for preparing the 
Implementation Plan should be one-twelfth the amount of the burden 
estimated for the development of the CAT NMS Plan,\141\ or, on average, 
52.2 initial, one-time burden hours for each Participant.\142\
---------------------------------------------------------------------------

    \140\ See, e.g., note 53 supra.
    \141\ Because the proposed amendment gives the Participants 
approximately one month to prepare and publish the Implementation 
Plan, the Commission has preliminarily used an estimate that mirrors 
the one-month burden that was incurred by the Participants in 
developing the CAT NMS Plan.
    \142\ 14,407 CAT NMS Plan burden hours / 12 months = 1,200.6 
burden hours for all Participants. 1,200.6 aggregate burden hours / 
23 Participants = 52.2 burden hours per Participant for the 
Implementation Plan. The Commission preliminarily estimates that 
each Participant will spend, on average, 52.2 internal burden hours 
= (Attorney at 7 hours) + (Systems Analyst at 22.6 hours) + 
(Compliance Manager at 22.6 hours). As discussed further in Section 
IV.C., all estimates in this section represent an average; the 
Commission expects that some Participants may incur greater costs 
and some lesser costs due to variances in economies of scale for 
Participants who share a common corporate parent. See note 217 
infra.
---------------------------------------------------------------------------

    In addition, the Commission estimates that it will take each 
Participant approximately 10 hours, on average, for

[[Page 48476]]

its member of the Operating Committee to ensure that the Operating 
Committee submits the Implementation Plan to the CEO, President, or 
equivalently situated senior officer of each Participant, for each 
Participant to review the information contained in the Implementation 
Plan and for senior management consultations as needed, and to vote on 
approving the Implementation Plan.\143\ The Commission expects each 
member of the Operating Committee to be familiar with the process of 
CAT implementation, which should ease the task of determining whether 
to vote in favor of the Implementation Plan. Accordingly, the 
Commission estimates that each Participant will incur, on average, a 
one-time burden of 62.2 hours to prepare the Implementation Plan and to 
vote as to whether to approve it,\144\ for a one-time aggregate burden 
of approximately 1,430.6 hours.\145\
---------------------------------------------------------------------------

    \143\ For the purposes of the Paperwork Reduction Act, the 
Commission is assuming that the member of the Operating Committee is 
a Chief Regulatory Officer or a Chief Compliance Officer and will 
spend 5 hours on these tasks. However, the Commission notes that 
this task could be performed by any person designated by the 
Participant to serve as its representative on the Operating 
Committee. See Section 4.2(a) of the CAT NMS Plan. In addition, the 
Commission estimates that senior management who receive the 
Implementation Plan from the Operating Committee will spend 5 hours 
in consultations, including with their member of the Operating 
Committee regarding the Implementation Plan. Because one individual 
may serve as the representative for multiple affiliated 
Participants, the Commission expects that some Participants may 
incur greater costs and some lesser costs due to variances in 
economies of scale for Participants who share a common corporate 
parent.
    \144\ 52.2 burden hours + 10 burden hours = 62.2 burden hours.
    \145\ 62.2 burden hours x 23 Participants = 1,430.6 burden 
hours.
---------------------------------------------------------------------------

    If the Implementation Plan is approved only by a Supermajority 
Vote, and not by a unanimous vote, the proposed amendments require each 
Participant whose Operating Committee member did not vote to approve 
the Implementation Plan to separately file with the Commission and make 
available on a public website an explanatory statement identifying 
itself and explaining why it did not vote to approve the Implementation 
Plan.\146\ Because there are currently 23 Participants, an 
Implementation Plan would need to be approved by at least 16 members of 
the Operating Committee to satisfy the Supermajority Vote provisions of 
the CAT NMS Plan.\147\ At maximum, then, only seven Participants would 
file an explanatory statement in connection with an Implementation Plan 
approved only by Supermajority Vote.\148\ The Commission preliminarily 
estimates that each of the seven Participants submitting an explanatory 
statement will incur, on average, an initial, one-time burden of 15 
hours to draft such statement.\149\ When this aggregate burden is 
averaged across all Participants, it amounts to approximately 4.6 hours 
per Participant or 105 hours in aggregate.\150\
---------------------------------------------------------------------------

    \146\ For the purposes of the Paperwork Reduction Act, the 
Commission is assuming that this task will be performed by a Chief 
Regulatory Officer or a Chief Compliance Officer. See note 143 
supra.
    \147\ 23 Participants x \2/3\ Participants = 15.33 Participants. 
Section 1.1 of the CAT NMS Plan indicates that, ``if two-thirds of 
all . . . members authorized to cast a vote is not a whole number 
then that number shall be rounded up to the nearest whole number.''
    \148\ 23 Participants-16 Participants = 7 Participants.
    \149\ The Commission bases this estimate on a full-time 
Compliance Manager and the Chief Regulatory Officer or Chief 
Compliance Officer each spending 7.5 hours to prepare the 
explanatory statement.
    \150\ 7 Participants * 15 burden hours = 105 burden hours in 
aggregate. 105 burden hours / 23 Participants = 4.6 burden hours.
---------------------------------------------------------------------------

    Finally, the Commission estimates that each Participant will incur, 
on average, a one-time burden of approximately 10 hours to ensure that 
the Implementation Plan, and any explanatory statement (if applicable), 
is filed with the Commission and made publicly available on a 
website.\151\ The Commission therefore estimates an aggregate burden of 
approximately 230 hours for the Participants to publicly post and 
submit to the Commission the Implementation Plan.\152\
---------------------------------------------------------------------------

    \151\ The Commission bases this estimate on a full-time 
Compliance Manager and Programmer Analyst each spending 
approximately 5 hours, for a combined total of approximately 10 
hours, to prepare and publicly post the relevant documents.
    \152\ 10 burden hours per Participant x 23 Participants = 230 
burden hours.
---------------------------------------------------------------------------

    In total, therefore, the Commission estimates that each Participant 
will incur, on average, a one-time burden of approximately 76.8 hours 
\153\ and approximately 1,766.4 hours in aggregate to comply with the 
provisions of the proposed amendments that relate to the Implementation 
Plan.\154\
---------------------------------------------------------------------------

    \153\ 52.2 hours + 10 hours + 4.6 hours + 10 hours = 76.8 burden 
hours.
    \154\ 76.8 hours x 23 Participants = 1,766.4 burden hours. See 
Section IV.C. infra for a dollar cost estimate of this burden.
---------------------------------------------------------------------------

    The Commission further estimates that each Participant will expend 
approximately $8,695.65, on average, in external public relations, 
legal, and consulting costs related to the development of the 
Implementation Plan. In the CAT NMS Plan Approval Order, the Commission 
estimated, based on information provided by the Participants, that the 
Participants had collectively spent approximately $2,400,000 in 
preparation of the CAT NMS Plan on external public relations, legal, 
and consulting costs.\155\ The Commission preliminarily believes that 
the estimated burden for the Implementation Plan should be one-twelfth 
the amount estimated for the development of the CAT NMS Plan, because 
the Participants will only have 30 calendar days from the effective 
date of this amendment to prepare the Implementation Plan and because 
preparation of the Implementation Plan is a much less complex project. 
Accordingly, the Commission estimates that the Participants will expend 
approximately $200,000 in aggregate, and $8,695.65 per Participant, in 
external public relations, legal, and consulting costs related to the 
preparation of the Implementation Plan.\156\
---------------------------------------------------------------------------

    \155\ See CAT NMS Plan Approval Order, at n.3287, supra note 4.
    \156\ $2,400,000 CAT NMS Plan costs / 12 months = $200,000 for 
all Participants. $200,000 / 23 Participants = $8,695.65 per 
Participant for the Implementation Plan.
---------------------------------------------------------------------------

2. Quarterly Progress Reports
    The Commission preliminarily believes that each Participant will 
incur, on average, an ongoing quarterly burden of approximately 62.2 
hours to confer with other Participants, to draft a Quarterly Progress 
Report, to ensure that the Operating Committee submits each Quarterly 
Progress Report to the CEO, President, or equivalently situated senior 
officer of each Participant, and to vote as to whether to approve each 
Quarterly Progress Report, as required by proposed Section 
6.6(c)(iii).\157\ This estimate is approximately the same as the burden 
related to the development and approval of the Implementation Plan, 
because the Quarterly Progress Reports require the Participants to 
prepare a detailed description explaining, quantifying, and voting to 
approve the description of their progress towards the Implementation 
Milestones laid out in the Implementation Plan, including the impact 
that any such progress might have on the target completion dates for 
Implementation Milestones that have not yet been achieved. The 
Commission believes this estimate is appropriate because the 
Participants are likely already tracking some of the information 
required to be included in the Quarterly Progress Reports.\158\ 
Accordingly, the Commission estimates, on average, an

[[Page 48477]]

ongoing quarterly burden of approximately 62.2 hours for each 
Participant,\159\ an ongoing annual burden of approximately 248.8 hours 
for each Participant,\160\ and an aggregate annual burden of 
approximately 5,722.4 hours.\161\
---------------------------------------------------------------------------

    \157\ As discussed further in Section IV.C., all estimates in 
this section represent an average; the Commission expects that some 
exchanges may incur greater costs and some lesser costs due to 
variances in economies of scale for Participants who share a common 
corporate parent. See note 217 infra.
    \158\ See, e.g., note 53 supra.
    \159\ The Commission preliminarily estimates that each 
Participant will spend, on average, 52.2 internal burden hours to 
confer with other Participants and to compile the Quarterly Progress 
Report = (Attorney at 7 hours) + (Systems Analyst at 22.6 hours) + 
(Compliance Manager at 22.6 hours). In addition the Commission 
preliminarily estimates, for the purposes of the Paperwork Reduction 
Act, that the chief Compliance Officer or Chief Regulatory Officer 
of each Participant will spend 5 hours, on average, to submit the 
Quarterly Progress Report to the CEO, President, or equivalently 
situated senior officer of each Participant, to review the 
information contained in each Quarterly Progress Report and for 
senior management consultations as needed, and to vote on approving 
the Quarterly Progress Report. In addition, the Commission estimates 
that the CEO, President, or equivalently situated senior officer of 
each Participant will spend 5 hours in consultations, including with 
their member of the Operating Committee regarding each Quarterly 
Progress Report. 52.2 hours + 5 hours + 5 hours = 62.2 hours. 
Because one individual may serve as the representative for multiple 
affiliated Participants, the Commission expects that some 
Participants may incur greater costs and some lesser costs due to 
variances in economies of scale for Participants who share a common 
corporate parent.
    \160\ 62.2 burden hours per Participant per Quarterly Progress 
Report * 4 Quarterly Progress Reports = 248.8 annual burden hours 
per Participant for the Quarterly Progress Reports.
    \161\ 248.8 annual burden hours per Participant * 23 
Participants = 5,722.4 aggregate annual burden hours.
---------------------------------------------------------------------------

    If any Quarterly Progress Report is approved only by a 
Supermajority Vote, and not by a unanimous vote, the proposed 
amendments require each Participant whose Operating Committee member 
did not vote to approve that Quarterly Progress Report to separately 
file with the Commission and make available on a public website an 
explanatory statement identifying itself and explaining why it did not 
vote to approve the Report.\162\ Because there are currently 23 
Participants, each Quarterly Progress Report would need to be approved 
by at least 16 members of the Operating Committee to satisfy the 
Supermajority Vote provisions of the CAT NMS Plan.\163\ At maximum, 
then, only seven Participants would file an explanatory statement in 
connection with a Quarterly Progress Report approved only by 
Supermajority Vote.\164\ The Commission preliminarily estimates that 
each of the seven Participants submitting an explanatory statement will 
incur, on average, an ongoing burden of 15 hours to draft such 
statement.\165\ When this aggregate burden is averaged across all 
Participants, it amounts to an ongoing quarterly burden of 
approximately 4.6 hours per Participant,\166\ an ongoing annual burden 
of approximately 18.3 hours per Participant,\167\ and an aggregate 
annual burden of approximately 420 hours.\168\
---------------------------------------------------------------------------

    \162\ For the purposes of the Paperwork Reduction Act, the 
Commission is assuming that this task will be performed by a Chief 
Regulatory Officer or a Chief Compliance Officer. See note 143 
supra.
    \163\ See note 147 supra.
    \164\ See note 148 supra.
    \165\ See note 149 supra.
    \166\ 7 Participants * 15 burden hours = 105 burden hours in 
aggregate. 105 burden hours / 23 Participants = 4.6 burden hours.
    \167\ 4.6 burden hours x 4 Quarterly Progress Reports = 18.3 
burden hours.
    \168\ 18.3 annual burden hours x 23 Participants = 420 burden 
hours.
---------------------------------------------------------------------------

    Additionally, the Commission estimates that each Participant will 
incur an ongoing quarterly burden, on average, of approximately 10 
hours to ensure that each Quarterly Progress Report, and any 
explanatory statement (if applicable), is filed with the Commission and 
made publicly available on a website.\169\ The Commission therefore 
estimates an annual burden, on average, of approximately 40 hours for 
each Participant,\170\ and an aggregate annual burden of 920 hours for 
all Participants,\171\ to publicly post and submit to the Commission 
the Reports.
---------------------------------------------------------------------------

    \169\ The Commission bases this estimate on a full-time 
Compliance Manager and Programmer Analyst each spending 
approximately 5 hours, for a combined total of approximately 10 
hours, to prepare and publicly post the relevant documents.
    \170\ 10 burden hours per Quarterly Progress Report x 4 quarters 
= 40 annual burden hours per Participant.
    \171\ 40 annual burden hours per Participant x 23 Participants = 
920 aggregate annual burden.
---------------------------------------------------------------------------

    In total, therefore, the Commission estimates that each Participant 
will incur, on average, an ongoing burden of approximately 76.8 hours 
per Quarterly Progress Report,\172\ for an annual average estimated 
burden of 307.2 hours \173\ and approximately 7,065.6 hours in 
aggregate.\174\
---------------------------------------------------------------------------

    \172\ 62.2 hours + 4.6 hours + 10 hours = 76.8 burden hours.
    \173\ 76.8 hours x 4 Quarterly Progress Report = 307.2 hours.
    \174\ 307.2 hours x 23 Participants = 7,065.6 burden hours. See 
Section IV.C. infra for a dollar cost estimate of this burden.
---------------------------------------------------------------------------

    Similarly, the Commission estimates that each Participant will 
expend, on an ongoing basis, approximately the same amount of external 
public relations, legal, and consulting costs associated with the 
Implementation Plan on each Quarterly Progress Report. Accordingly, the 
Commission estimates, on average, an ongoing quarterly cost of 
approximately $8,695.65 for each Participant, an ongoing annual cost of 
$34,782.60 for each Participant,\175\ and an aggregate annual cost of 
approximately $799,999.80.\176\ The Commission notes that a portion of 
these costs may be recoverable from Industry Members, if consistent 
with the Exchange Act and the CAT NMS Plan.\177\
---------------------------------------------------------------------------

    \175\ $8,695.65 per Participant per Quarterly Progress Report * 
4 Quarterly Progress Reports = $34,782.60 per Participant per year 
for the Quarterly Progress Reports.
    \176\ $34,782.60 per Participant * 23 Participants = $799,999.80 
aggregate annual cost.
    \177\ See, e.g., Article XI of the CAT NMS Plan.
---------------------------------------------------------------------------

E. Collection of Information Is Mandatory

    Each collection of information discussed above would be a mandatory 
collection of information.

F. Confidentiality of Responses to Collection of Information

    Neither the Implementation Plan nor the Quarterly Progress Reports 
would be confidential. Rather, each would be publicly posted by the 
Participants on a website.

G. Retention Period for Recordkeeping Requirements

    National securities exchanges and national securities associations 
are required to retain records and information pursuant to Rule 17a-1 
under the Exchange Act.\178\
---------------------------------------------------------------------------

    \178\ 17 CFR 240.17a-1.
---------------------------------------------------------------------------

H. Request for Comments

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments to:
    29. Evaluate whether the proposed collections of information are 
necessary for the proper performance of the functions of the agency, 
including whether the information shall have practical utility;
    30. Evaluate the accuracy of our estimates of the burden of the 
proposed collection of information;
    31. Determine whether there are ways to enhance the quality, 
utility, and clarity of the information to be collected; and
    32. Evaluate whether there are ways to minimize the burden of 
collection of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology.
    Persons submitting comments on the collection of information 
requirements should direct them to the Office of Management and Budget, 
Attention: Desk Officer for the Securities and Exchange Commission, 
Office of Information and Regulatory Affairs, Washington, DC 20503, and 
should also

[[Page 48478]]

send a copy of their comments to Secretary, Securities and Exchange 
Commission, 100 F Street NE, Washington, DC 20549-1090, with reference 
to File Number 4-698. Requests for materials submitted to OMB by the 
Commission with regard to this collection of information should be in 
writing, with reference to File Number 4-698 and be submitted to the 
Securities and Exchange Commission, Office of FOIA/PA Services, 100 F 
Street NE, Washington, DC 20549-2736. As OMB is required to make a 
decision concerning the collection of information between 30 and 60 
days after publication, a comment to OMB is best assured of having its 
full effect if OMB receives it within 30 days of publication.

IV. Economic Analysis

    Section 3(f) of the Exchange Act requires the Commission, whenever 
it engages in rulemaking and is required to consider or determine 
whether an action is necessary or appropriate in the public interest, 
to consider, in addition to the protection of investors, whether the 
action would promote efficiency, competition, and capital 
formation.\179\ In addition, Section 23(a)(2) of the Exchange Act 
requires the Commission, when making rules under the Exchange Act, to 
consider the impact such rules would have on competition.\180\ Exchange 
Act Section 23(a)(2) prohibits the Commission from adopting any rule 
that would impose a burden on competition not necessary or appropriate 
in furtherance of the purposes of the Exchange Act. The discussion 
below addresses the likely economic effects of the proposed rule, 
including the likely effect of the proposed rule on efficiency, 
competition, and capital formation.
---------------------------------------------------------------------------

    \179\ 15 U.S.C. 78c(f).
    \180\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    As discussed above, since the adoption of Rule 613 in 2012, CAT 
implementation has experienced recurrent delays.\181\ These 
implementation delays postpone the benefits of the CAT NMS Plan to 
investors \182\ and may result in additional costs to Industry 
Members.\183\ In the Notice, the Commission discussed how the 
governance structure of the CAT NMS Plan could affect the costs and 
benefits of the CAT NMS Plan and noted that the Commission retains the 
ability to modify the CAT NMS Plan.\184\ The CAT NMS Plan does not 
require the Participants to provide transparency to industry or 
investors regarding implementation, nor does it create financial 
accountability for the Participants to complete the implementation 
process. The Commission preliminarily believes that modifying the CAT 
NMS Plan to require operational transparency and provide financial 
accountability for meeting implementation milestones will impose more 
structure on the process and is appropriate to achieve timely 
completion of the CAT. The proposed amendments would: (1) Provide more 
accountability and transparency by requiring the Operating Committee to 
approve by Supermajority Vote and file with the Commission and publish 
on a public website certain information, including the Implementation 
Plan as well as quarterly reports detailing progress made toward 
achieving the Implementation Milestones set forth in the Implementation 
Plan and (2) introduce financial accountability to the CAT NMS Plan by 
requiring the Participants to meet four critical CAT implementation 
milestones--the Financial Accountability Milestones--by certain dates 
in order to collect the full amount of any related Post-Amendment 
Industry Member Fees established by the Operating Committee or 
implemented by the Participants.\185\
---------------------------------------------------------------------------

    \181\ See Part I supra.
    \182\ See CAT NMS Plan Approval Order, supra note 4, at Section 
V.E.
    \183\ See Part IV.A. infra.
    \184\ See Securities Exchange Act Release No. 77724 (April 27, 
2016), 81 FR 30614 (May 17, 2016) (File No. 4-698) (``Notice''), at 
Section IV.E.3.d.1.
    \185\ See Part II supra.
---------------------------------------------------------------------------

    The proposed amendments would increase operational transparency by 
requiring Participants to publish a complete CAT implementation plan, 
and publish a complete progress report quarterly.\186\ Further, the 
proposed amendments require approval by a Supermajority Vote of the 
Operating Committee for both the implementation plan and the quarterly 
progress reports.\187\ These operational transparency provisions of the 
proposed amendments should provide Industry Members with more certainty 
surrounding the implementation timeline of CAT, reducing associated and 
unnecessary implementation costs.\188\
---------------------------------------------------------------------------

    \186\ See Part II.A. supra.
    \187\ See Part IV.B, infra for further discussion of this 
approval requirement.
    \188\ The Commission preliminarily believes that uncertainty in 
the CAT NMS Plan implementation timeline may potentially increase 
Industry Member implementation costs. See Part IV.B, infra for 
further discussion.
---------------------------------------------------------------------------

    The proposed amendments also establish Financial Accountability 
Milestones and Reduced Fee Recovery Rates (``RFRRs'') that take effect 
and increase in magnitude in response to delays in meeting certain 
Financial Accountability Milestones.\189\ Thus, the proposed amendments 
would shift some costs from Industry Members to Participants if the 
Participants fail to meet certain Financial Accountability 
Milestones.\190\ The Commission preliminarily believes this cost 
shifting would offset any Industry Member costs imposed by delays in 
implementation. The Commission further believes that the RFRRs 
incentivize the Participants to implement the CAT NMS Plan 
expeditiously and efficiently, which would result in investors 
realizing the benefits of the CAT NMS Plan sooner. If the Participants 
miss the deadline for Initial Industry Member Core Equity Reporting by 
more than 180 days, or the deadlines for the other three Financial 
Accountability Milestones by more than 270 days, the structure of the 
RFRRs would not allow them to recover expenses incurred during the 
Period. The Commission acknowledges that after 270 days or 180 days, as 
applicable, the amendments would no longer directly incentivize the 
Participants, because the 0% recovery rate cannot be further reduced by 
continued delays. However, the Participants would continue to incur and 
be solely responsible for the operating costs of the Central 
Repository, and could not share any ongoing operational costs incurred 
during the Period with Industry Members.\191\ Participants would only 
be

[[Page 48479]]

allowed to partially recover from Industry Members those expenses 
incurred after the Period ended, which could only be achieved by 
meeting the applicable Financial Accountability Milestones. 
Furthermore, to the extent that Financial Accountability Milestones are 
inherently sequential, Participants would continue to be incentivized 
to complete the current Period by achieving the Financial 
Accountability Milestones to avoid triggering RFRRs in the subsequent 
Period. Consequently, although incentives would be diminished, the 
Participants would continue to be incentivized to complete the Period 
by meeting the Financial Accountability Milestones.
---------------------------------------------------------------------------

    \189\ The Plan allows Participants to recover a percentage of 
certain CAT costs from Industry Members. The Plan anticipates that 
the Participants will submit a fee filing that establishes what 
percentage of CAT expenses will be passed on to Industry Members, 
and how CAT expenses will be shared among Participants and among 
Industry Members. Because no CAT fee filing has been approved, the 
proportion of CAT costs that will be borne by Industry Members is 
unknown. The magnitude of the incentives from RFRRs ultimately 
depends on the proportion of fees that Participants are permitted to 
recover from Industry Members.
    In the event that RFRRs are triggered, the Commission proposes 
to reduce the amount of fees that the Participants are allowed to 
recover from Industry Members according to the fee schedule 
described in Part II.B.2. supra.
    \190\ Although some Industry Members provide advice to the 
Participants through the actions of the CAT Advisory Committee, they 
do not have votes on the CAT Operating Committee and thus cannot 
initiate or control actions taken by the Operating Committee that 
might facilitate expeditious and efficient implementation of the 
Plan. Furthermore, in later stages of CAT implementation, in the 
event that Industry Members' actions might delay implementation of 
the Plan, the Participants have regulatory authority over Industry 
Members and can use that authority to address failures by Industry 
Members to comply with reporting requirements under the Plan.
    \191\ The Participants' Central Repository costs consist of both 
implementation costs and operating costs, as discussed below; see 
note 227 infra. If Participants missed a Financial Accountability 
Milestone by 270 days and triggered a 0% RFRR, none of the expenses 
the Participants incurred during the Period could be recovered from 
Industry Members. However, the Participants would continue to incur 
operating costs for the Central Repository, and the magnitude of 
those operating costs during the period would be a function of the 
duration of the Period. To minimize the financial impact of the 
RFRRs, the Participants would continue to be incentivized to meet 
the Financial Accountability Milestones and end the Period, so that 
they would no longer be solely responsible for the operating costs 
of the Central Repository and could again, potentially, resume 
sharing these costs with Industry Members.
---------------------------------------------------------------------------

    Wherever possible, the Commission has quantified the likely 
economic effects of the amendments, including the direct costs to the 
Participants. However, some of the costs, benefits, and other economic 
effects we discuss are inherently difficult to quantify, including the 
benefits of accelerating the realization of the improvements to 
investor protection that are expected to result from the implementation 
of the CAT, the benefits of transparency to industry members and the 
public, and the potential impact on competition among exchanges. 
Additionally, the Commission preliminarily believes costs caused by 
uncertainty in the timeline for CAT implementation and retirement of 
duplicative reporting systems may vary significantly across Industry 
Members because of the diversity of their approaches to regulatory data 
reporting. Therefore, much of our discussion is qualitative in nature. 
Our inability to quantify certain costs, benefits, and effects does not 
imply that such costs, benefits, or effects are less significant. We 
request that commenters provide relevant data and information to assist 
us in analyzing the economic consequences of the proposed amendments.

A. Baseline

1. Transparency of CAT Implementation Status
    Industry Members obtain information about the implementation status 
of the CAT NMS Plan through several mechanisms.\192\ These include 
information gleaned from participation in the CAT Advisory Committee; 
information provided on websites operated by the CAT Operating 
Committee; presentations to industry sponsored by the CAT Operating 
Committee; and information presented at meetings of the Industry 
Technical Specifications Working Group.
---------------------------------------------------------------------------

    \192\ The Plan requires that the Chief Compliance Officer shall 
appropriately document objective milestones to assess progress 
toward the implementation of the Plan, but has no requirement that 
this information be disseminated to industry or the Commission. See 
CAT NMS Plan, supra note 4, at Section 6.7(b).
---------------------------------------------------------------------------

    A few representatives of Industry Members are privy to information 
through their participation on the CAT Advisory Committee, but this 
information is not widely available to industry. These advisory 
committee members ``have the right to attend meetings of the Operating 
Committee or any Subcommittee, to receive information concerning the 
operation of the Central Repository,'' subject to certain limitations 
outlined in the CAT NMS Plan.\193\ Further, ``Members of the Advisory 
Committee shall receive the same information concerning the operation 
of the Central Repository as the Operating Committee; provided, 
however, that the Operating Committee may withhold information it 
reasonably determines requires confidential treatment. Any information 
received by members of the Advisory Committee in furtherance of the 
performance of their functions pursuant to this Agreement shall remain 
confidential unless otherwise specified by the Operating Committee.'' 
\194\ The Commission preliminarily believes that Industry Members of 
the CAT Advisory Committee may be provided with significant information 
regarding the status of implementation, but given the confidential 
treatment required by the CAT NMS Plan, the Industry Members on the 
Advisory Committee are not free to share it with other Industry 
Members. Consequently, the Commission preliminarily believes that most 
Industry Members obtain little information about CAT implementation 
through this mechanism.
---------------------------------------------------------------------------

    \193\ See CAT NMS Plan, supra note 4, at Section 4.13.
    \194\ See CAT NMS Plan Approval Order, supra note 4, at Section 
VI.D.1.a, note 3243.
---------------------------------------------------------------------------

    In addition, the Operating Committee provides a website with 
information on the CAT NMS Plan, but there is no requirement in the CAT 
NMS Plan to keep it current.\195\ The website provides access to the 
current CAT NMS Plan, current technical specifications, an archive of 
information presented at past industry events, and other information 
about the CAT of interest to industry.
---------------------------------------------------------------------------

    \195\ See https://www.catnmsplan.com/index.html. The public can 
also glean information about Plan implementation from this website.
---------------------------------------------------------------------------

    Furthermore, the Operating Committee provides occasional updates to 
industry on the state of implementation. These updates are documented 
on the CAT NMS Plan website. These updates include the April 3, 2019, 
Industry Outreach presentation in which the Operating Committee 
presented a revised implementation timeline for Industry Member 
reporting with deadlines that extend even further beyond those in the 
CAT NMS Plan.\196\ Subsequent to this presentation, the CAT NMS Plan 
website added a ``Timeline'' section. The CAT NMS Plan, however, has no 
requirement that this be updated.
---------------------------------------------------------------------------

    \196\ See note 47 supra.
---------------------------------------------------------------------------

    Another source of information about CAT implementation available to 
the industry is the Industry Technical Specifications Working Group. 
This working group, which makes recommendations on Industry Member-
specific implementation issues, is comprised of members of the Advisory 
Committee and additional industry organization representatives, with 
subject matter experts from the industry invited to lead or facilitate 
discussion of a particular issue. This working group is not bound by 
confidentiality agreements, so some information discussed in the 
working group is shared with members of the industry, primarily through 
outreach efforts by industry associations.
2. Status of Implementation
    As discussed previously, there have been repeated delays to 
implementation and it remains uncertain when CAT will be fully 
implemented.\197\ Although the Participants have not yet published a 
timeline detailing when full functionality of Participant reporting 
would be completed by the new plan processor, in a April 2019 Industry 
Outreach presentation, the Operating Committee presented a revised 
implementation timeline for Industry Member reporting with deadlines 
that extend even further beyond those in the CAT NMS Plan. The revised 
deadline

[[Page 48480]]

for Industry Member reporting to the CAT would require the reporting by 
Industry Members of equities data by April 2020 and simple options data 
by May 2020.\198\ These delays to implementation of the CAT NMS Plan 
delay the time at which investors will realize the significant benefits 
of the CAT contemplated in the CAT NMS Plan Approval Order.\199\ 
Specifically, delays in the implementation of the CAT have delayed 
improvements in regulatory activities such as market analysis and 
reconstruction, surveillance, and investigations, leading to delays in 
increased investor protection.\200\
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    \197\ See Part I supra for a detailed discussion of Plan 
implementation status.
    \198\ See note 47 supra.
    \199\ See CAT NMS Plan Approval Order, supra note 4, at Section 
V.E.
    \200\ See id. The Approval Order noted that, by providing 
regulators with more complete, accurate, accessible, and timely 
trade and order data, the CAT would improve regulatory activities 
such as market analysis and reconstruction, surveillance, and 
investigations, leading to increased investor protection.
---------------------------------------------------------------------------

    In addition, the Commission preliminarily believes that the 
multiple missed deadlines in the CAT NMS Plan has led to uncertainty 
for Industry Members surrounding the timeline of CAT 
implementation.\201\ In the CAT NMS Plan Approval Order, the Commission 
discussed the complexities of, and diversity of approaches to, Industry 
Member regulatory data reporting,\202\ and the costs that Industry 
Members face in implementing CAT reporting.\203\ The Commission 
understands that for many Industry Members, significant changes to 
regulatory data reporting systems require planning for the allocation 
of financial, technological, and human resources. The Commission lacks 
specific information on the status of Industry Member CAT reporting 
implementation efforts, but recognizes the possibility that some 
Industry Members, particularly those that self-report regulatory data, 
may already be incurring costs due to this uncertainty, as discussed 
further below.\204\ Therefore, the Commission recognizes that it is 
possible that Industry Members may be incurring additional costs, 
beyond those anticipated due to the delay.\205\ Finally, the Commission 
believes that any Industry Members that have begun implementation 
activities are likely incurring costs for tracking and planning for CAT 
implementation and notes that the length of the implementation period 
has extended longer than anticipated. This may increase costs to 
Industry Members.
---------------------------------------------------------------------------

    \201\ As discussed in the CAT NMS Plan Approval Order, many 
Industry Members rely on service bureaus to report their regulatory 
data. These service bureaus face the same uncertainty that is 
described here for Industry Members. Some but not all service 
bureaus are Industry Members. See CAT NMS Plan Approval Order, supra 
note 4, at Section V.F.1.c.(2).
    \202\ See id.
    \203\ See id. at Section V.F.2.
    \204\ In the case of the majority of Industry Members that rely 
on service providers for their regulatory data reporting, those 
service providers face significant CAT implementation costs and 
similar uncertainty as large self-reporting Industry Members, and 
any additional costs the service providers face in implementing CAT 
reporting due to this uncertainty are likely to be passed on to 
their Industry Member customers.
    \205\ See Part IV.B, infra.
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B. Benefits

    The Commission preliminarily believes the proposed amendments offer 
two primary benefits. First, because the amendments include financial 
accountability provisions that may cause the CAT to be implemented more 
expeditiously and efficiently, investors could realize the benefits of 
the CAT sooner than they would be realized without the proposed 
amendments. Second, the Commission preliminarily believes that Industry 
Members would have more certainty surrounding the implementation 
timeline of CAT, and the timeline for retirement of OATS,\206\ reducing 
possible associated and unnecessary implementation and maintenance 
costs.\207\
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    \206\ The Commission continues to believe that the period of 
duplicative reporting of OATS data will be less than 2-2.5 years, 
but recognizes that the multiple delays in CAT implementation has 
increased uncertainty about when the duplicative reporting period 
will commence and end. Neither the Plan nor the Participants' 
industry outreach materials currently offer guidance to Industry 
Members on when duplicative reporting systems are likely to be 
retired. Consequently, Industry Members cannot reasonably estimate 
the expected duration of the period of duplicative reporting, or 
when it might begin and/or end. In the CAT Approval Order, 
duplicative reporting was anticipated to cost Industry Members up to 
$1.4 billion annually between the time when Industry Members begin 
to report data to the CAT and when duplicative regulatory data 
reporting systems are retired. See CAT NMS Plan Approval Order, 
supra note 4, at Section V.F.2.b.
    \207\ See Part IV.D.1. infra for discussion of impacts on 
efficiency of Industry Member CAT implementation.
---------------------------------------------------------------------------

    The amendment's financial accountability provisions may cause the 
CAT to be implemented more expeditiously and efficiently, which could 
allow investors to realize the benefits of the CAT sooner than they 
would be realized without the proposed amendments. While the Commission 
continues to believe that implementation of CAT will allow the 
Participants to improve their regulatory activities to the benefit of 
investors,\208\ the Commission also notes that implementation of the 
proposed amendments may accelerate the Participants' realization of 
costs relative to the current state of development. These include costs 
to build and operate the Central Repository, report Participant data to 
CAT, and to update their regulatory surveillance to take advantage of 
data available in the Central Repository.\209\ Consequently, the 
Commission preliminarily believes that the Participants may have a 
financial disincentive to implement CAT expeditiously and efficiently 
because delays in CAT implementation delay realization of some of these 
costs, such as costs to update their regulatory surveillance. By 
amending the CAT NMS Plan to provide RFRRs to encourage implementation, 
the Commission preliminarily believes the Participants will be more 
likely to implement CAT expeditiously and efficiently to the benefit of 
investors.\210\
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    \208\ See CAT NMS Plan Approval Order, supra note 4, at Section 
V.E.2.
    \209\ See CAT NMS Plan Approval Order, supra note 4, at Section 
V.F.
    \210\ Missing Financial Accountability Milestones will result in 
Participants not being able to recoup certain costs from Industry 
Members. This will increase the costs for which Participants will 
ultimately be responsible, with those costs increasing as 
implementation delays persist.
---------------------------------------------------------------------------

    As discussed in more detail in the CAT NMS Plan Approval Order, by 
providing regulators with more complete, accurate, accessible, and 
timely trade and order data, the CAT is expected to improve regulatory 
activities such as market analysis and reconstruction, surveillance, 
and investigations, leading to increased investor protection.\211\ If 
the Participants complete the implementation of the CAT more 
expeditiously and efficiently as a result of the proposed amendments, 
these benefits will be realized more quickly.
---------------------------------------------------------------------------

    \211\ Id. at Section V.E.
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    The Commission preliminarily believes that the proposed amendments 
should provide Industry Members with more certainty surrounding the 
implementation timeline of CAT and the retirement schedule for OATS, 
which should help reduce any unnecessary implementation and maintenance 
costs associated with this uncertainty.\212\ As discussed previously, 
the Commission recognizes that there is significant uncertainty 
regarding the CAT implementation timeline. Further, based on 
discussions with Industry Members and staff expertise, the Commission 
preliminarily believes that this uncertainty may be causing Industry 
Members to incur costs they would not have incurred had the CAT been 
completed on its original

[[Page 48481]]

schedule.\213\ As noted above, for many Industry Members, significant 
changes to regulatory data reporting systems require planning for the 
allocation of financial, technological, and human resources, and the 
Commission preliminarily believes that uncertainty surrounding CAT 
implementation timelines may be hampering Industry Members' ability to 
efficiently perform that planning. The amendments may result in the 
Participants implementing CAT more expeditiously and efficiently and 
should reduce uncertainty because Industry Members will be aware of the 
financial accountability measures that Participants face if Financial 
Accountability Milestones are missed, and are likely to assume that the 
Participants will be incentivized to meet those milestones. Further, 
information in the Implementation Plan and Quarterly Progress Reports, 
and the associated requirement for approval by a Supermajority Vote of 
the Operating Committee, combined with any statement identifying 
Participants that did not vote to approve and explaining why the member 
did not vote to approve, would provide Industry Members with more 
complete and possibly more reliable information on implementation 
requirements and timing. This may allow them to implement CAT reporting 
more efficiently, particularly if the content of the disclosures 
provides sufficient information to provide greater certainty on 
implementation progress. However, the Commission preliminarily believes 
this benefit may be limited somewhat by the fact that Participants may 
be incentivized not to vote against approval of the Implementation Plan 
or Quarterly Progress Reports because doing so would cause them to 
incur costs associated with preparing, filing with the Commission and 
publishing an explanatory statement of their Operating Committee 
Member's vote. Consequently, in the event that a Participant is 
inclined to vote against approval of the Implementation Plan or a 
Quarterly Progress Report, in the absence of enough votes to prevent 
approval, the Participant may be incentivized to vote to approve the 
Implementation Plan or Quarterly Progress Report and thus not provide 
an explanatory statement that might contain information useful to 
Industry Members.
---------------------------------------------------------------------------

    \212\ See Part IV.A.2. supra for discussion of uncertainty 
surrounding CAT implementation timing.
    \213\ In the course of reviewing the CAT NMS Plan and preparing 
the Notice, Commission staff gathered information in conversations 
with Industry Members on how Industry Members implement changes in 
regulatory data reporting requirements and what factors drive 
Industry Member costs when those requirements change. See Notice, 
supra Note 184, at n880.
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    Based on staff expertise and discussions with Industry 
Members,\214\ the Commission preliminarily believes that potential 
reductions in cost due to uncertainty could be attributed to a number 
of factors. Less uncertainty about the CAT implementation timeline may 
allow Industry Members and service bureaus to make efficient decisions 
regarding when to commence implementation activities and how to 
implement in the most cost-efficient manner. More certainty may allow 
Industry Members to negotiate more favorable contracts with vendors 
because they will have more certainty about date ranges when vendor 
services would be required for CAT reporting implementation activities. 
Furthermore, as discussed in the CAT NMS Plan Approval Order, 
maintaining legacy data reporting systems like those used to report 
OATS is likely to entail allocation of technological and human 
resources. If Industry Members have more certainty regarding how long 
these resources are required, they may make more cost-efficient 
decisions regarding maintaining or replacing hardware and software used 
to report legacy regulatory data. Finally, the uncertainty surrounding 
the timeline of CAT implementation may impose significant opportunity 
costs on Industry Members. Because changes to regulatory data reporting 
systems can be significant IT projects for Industry Members, Industry 
Members may defer other large projects that might require an 
overlapping set of resources until the operational and financial 
requirements and timing for CAT implementation are better known. 
Decreasing uncertainty may allow Industry Members to better plan for 
and proceed with other projects that may have been deferred due to 
uncertainty in the CAT implementation timeline.
---------------------------------------------------------------------------

    \214\ See Notice, supra Note 184, at n880.
---------------------------------------------------------------------------

    The Commission recognizes that if the Participants continue to miss 
deadlines under the amendments, it would result in more uncertainty for 
Industry Members with respect to whether and when the Participants are 
capable of achieving CAT implementation, particularly if the 
Participants are unable to make progress with the financial 
accountability measures. The Commission preliminarily believes this 
uncertainty is mitigated by the increased transparency afforded by the 
Quarterly Progress Reports, which should allow Industry Members to see 
progress toward meeting Implementation Milestones.
    Finally, the requirement that the Implementation Plan and Quarterly 
Progress Reports be submitted to the CEO, President, or an equivalently 
situated senior officer of each Participant prior to the Operating 
Committee approval vote, is intended to promote senior management 
attention and promote accountability with respect to CAT 
implementation. The Commission preliminarily believes that this 
requirement may thereby facilitate the expeditious and efficient 
implementation of CAT.

C. Costs

    The Commission preliminarily believes the proposed amendments are 
likely to have both direct and indirect costs, detailed below. The 
Commission preliminarily estimates that the direct costs to the 
Participants from the proposed amendments include up to approximately 
$3.7 MM in ongoing annual costs and total one-time costs of up to 
approximately $932,000.\215\ If the RFRRs are triggered, during a one-
year period during implementation, up to $120MM in costs of CAT 
implementation and operation could be shifted from Industry Members to 
Participants, but this would not change total costs to industry as a 
whole from the CAT NMS Plan. The Commission expects, however, that the 
proposed amendments would have additional indirect costs. These consist 
of potentially accelerated implementation costs to Participants, 
Industry Members, and Service Bureaus; possible costs related to the 
potential for inefficient acceleration of the implementation of the 
CAT; and costs related to the possible market exit of exchanges if the 
RFRRs in the amendments are triggered. These costs are likely to be 
passed on to investors.
---------------------------------------------------------------------------

    \215\ These maximum totals assume that upon each approval vote, 
seven Participants incur costs to prepare and publish statements 
explaining why they did not vote to approve the document in 
question. These costs are discussed further below.
---------------------------------------------------------------------------

    For purposes of the PRA,\216\ the Commission preliminarily 
estimates that the direct costs to Participants from the proposed 
amendments \217\ include

[[Page 48482]]

up to approximately $3.7MM \218\ in annual costs and total one-time 
costs of up to approximately $932,000.\219\ The ongoing annual costs 
per Participant are comprised of approximate labor costs of up to 
$145,000 \220\ and external consulting costs of $35,000 \221\ to 
prepare, approve through Supermajority Vote of the Operating Committee, 
publish, and when applicable, for each Participant whose Operating 
Committee member did not vote to approve the Implementation Plan to 
separately file with the Commission and make available on a public 
website an explanatory statement identifying itself and explaining why 
it did not vote to approve the Quarterly Progress Report.\222\ The one-
time costs per Participant include up to $36,000 \223\ in labor costs 
and $8,700 \224\ in external consulting costs to prepare, approve 
through Supermajority Vote of the Operating Committee, publish, and 
when applicable, for each Participant whose Operating Committee member 
did not vote to approve the Implementation Plan to separately file with 
the Commission and make available on a public website an explanatory 
statement identifying itself and explaining why it did not vote to 
approve the Implementation Plan.
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    \216\ Direct costs cited in this paragraph are quantified from 
estimates in the PRA. See Part III supra. Discussion of other direct 
costs follows discussion of costs from the PRA.
    \217\ The PRA estimates cost represent an average; the 
Commission expects that some Participants will incur greater costs, 
some lesser. In calculating the costs to prepare, review, and vote 
on the Implementation Plan and Quarterly Progress Reports on a per 
Participant basis, the Commission recognizes that its estimates per 
Participant may be overstated to the extent that there are economies 
of scale for Participants who share a common corporate parent. 
Specifically, the voting representative for one Participant may 
serve as the voting representative on the Operating Committee for 
multiple affiliated Participants under Section 4.2(a) of the CAT NMS 
Plan. Once this representative conducts the necessary background 
work to vote on the Implementation Plan or a Quarterly Progress 
Report, and, if applicable, for the Participant to prepare an 
explanation of why this representative did not vote to approve the 
Implementation Plan or Quarterly Progress Report, the representative 
would not need to duplicate all of his or her efforts for another 
Participant. Thus, the Commission believes that its estimates may be 
overstated for some Participants in the sense that one 
representative reviewing and voting on the Implementation Plan or 
Quarterly Progress Reports might not require 5 hours for each 
exchange for which he or she is performing this task. On the other 
hand, the Commission believes that its estimates for Participants 
who are not affiliated with other Participants might be understated 
for some Participants because they are unable to benefit from 
economies of scale. Representatives for unaffiliated exchanges may 
require more than 5 hours to perform this same task. The Commission 
preliminarily believes that 5 hours is a reasonable estimate of 
average representative time required.
    \218\ Assuming that each Supermajority Vote has the minimum of 
16 Participants voting to approve each Quarterly Progress Report, 
total annual ongoing maximum cost is (23 Participants x $119,471 per 
Participant + 28 explanatory statements x $6,472.50 per statement = 
$2,747,838) in labor costs plus (23 Participants x $34,800 = 
$800,400) in external consulting costs = $3,729,468 in total costs. 
See Note 220, infra.
    \219\ Assuming that each Supermajority Vote has the minimum of 
16 Participants voting to approve the Implementation Plan, total 
one-time maximum cost is (23 Participants x $29,868 per Participant 
= $686,959) in labor costs plus (23 Participants x $8,700 = 
$200,100) in external consulting costs = $932,367 in total costs. 
See Note 223, infra.
    \220\ See Part III.D. supra. Annual labor costs per Participant 
assume preparation, approval through Supermajority Vote of the 
Operating Committee, and publication of four Quarterly Progress 
Reports and any accompanying statements explaining why a Participant 
did not vote to approve the Quarterly Progress Report. Preparation 
of each Quarterly Progress Report requires 7 hours of Attorney labor 
at $427 per hour; 22.6 hours of Systems Analyst labor at $270 per 
hour; 22.6 hours of Compliance Manager labor at $318 per hour. 4 x 
[($427 x 7) + ($270 x 22.6) + ($318 x 22.6)] = $65,111. Time for the 
Participant's Operating Committee Member to prepare for and vote on 
the Quarterly Progress Reports is assumed to be 5 hours at a rate of 
$545 per hour. 4 x ($545 x 5) = $10,900, using the hourly rate for a 
Chief Compliance Officer. Publication and filing of the Quarterly 
Progress Reports and any explanatory statements of the Operating 
Committee Member's vote is assumed to require 5 hours of Compliance 
Manager labor at $318 per hour and 5 hours of Programmer/Analyst 
labor at $220 per hour. 4 x ($318 x 5) + ($220 x 5) = $10,760. The 
Quarterly Progress Report shall be submitted to the President, CEO 
or equivalently situated senior officer of each Participant prior to 
the approval vote of the Operating Committee, and any subsequent 
consultation, including with their Operating Committee member, is 
assumed to require five hours of labor at $1,635 per hour. 4 x 
($1,635 x 5) = $32,700. See Note 225 infra, for discussion of this 
hourly rate. Total annual costs for each Participant are thus 
$65,111 + $10,900 + $10,760 + $32,700 = $119,471. If a Participant 
is required to prepare a statement explaining why it did not vote to 
approve a Quarterly Progress Report, preparation requires 7.5 hours 
of Compliance Manager Labor at $318 per hour and 7.5 hours of Chief 
Compliance Officer labor at $545 per hour. ($318 x 7.5) + ($545 x 
7.5) = $6472.5. For each Quarterly Progress Report, 23 Participants 
will incur costs to prepare the report, but no more than 7 will 
incur costs to prepare statements explaining why they did not vote 
to approve the Quarterly Progress Report. See Part III.D.2, supra. 
Consequently, there may be up to 28 such quarterly statements (4 x 
7) required annually. Thus, Quarterly Progress Report preparation, 
depending on the number of explanatory statements required, would 
have an annual aggregate maximum labor cost of (23 x $119,471) + (28 
x $6472.5) = $3,729,468 with a per Participant average labor cost of 
$3,729,468 / 23 = $127,351. Hourly rates are based on hourly rates 
for Attorneys, Systems Analysts, and Compliance Managers from 
SIFMA's Management & Professional Earnings in the Securities 
Industry 2013, modified by Commission staff to account for an 1800-
hour work-year and inflation, and multiplied by 5.35 to account for 
bonuses, firm size, employee benefits, and overhead. Salary 
information for voting representatives uses the Chief Compliance 
Officer rate of from SIFMA's Management & Professional Earnings in 
the Securities Industry 2013, modified as above to $545 per hour.
    \221\ See Part III.D. supra. External consulting costs assume 
four Quarterly Progress Reports. 4 x $8,696 = $34,784.
    \222\ These annual costs would be incurred until completion of 
the CAT Implementation Plan. See Part III.D.2. supra.
    \223\ See Part III.D.2. supra. Preparation and approval through 
Supermajority Vote of the Operating Committee of the Implementation 
Plan requires 7 hours of Attorney labor at $427 per hour; 22.6 hours 
of Systems Analyst labor at $270 per hour; 22.6 hours of Compliance 
Manager labor at $318 per hour. ($427 x 7) + ($270 x 22.6) + ($318 x 
22.6) = $16,278. Time for the Participant's Operating Committee 
Member to prepare for and vote on the Implementation plan is assumed 
to be 5 hours at a rate of $545 per hour. ($545 x 5) = $2,725, using 
the hourly rate for a Chief Compliance Officer. Publication and 
filing of the Implementation Plan and any explanatory statement of 
the Operating Committee Member's vote is assumed to require 5 hours 
of Compliance Manager labor at $318 per hour and 5 hours of 
Programmer/Analyst labor at $220 per hour. ($318 x 5) + ($220 x 5) = 
$2,690. The Implementation Plan shall be submitted to the President, 
CEO or equivalently situated senior officer of each Participant 
prior to the approval vote of the Operating Committee, and any 
subsequent consultation, including with their Operating Committee 
Member, is assumed to require five hours of labor at $1,635 per 
hour. ($1,635 x 5) = $8,175. See Note 225, infra, for discussion of 
this hourly rate. Total one time labor costs are $16,278 + $2,725 + 
$2,690 + $8,175 = $29,868. If an explanatory statement of the 
Operating Committee Member's vote needs to be prepared, this would 
require 7.5 hours of labor by a Compliance Manager at $318 per hour 
and 7.5 hours of labor by the Chief Compliance Officer at $545 per 
hour. ($318 x 7.5) + ($545 x 7.5) = $6,473. Thus, Implementation 
Plan preparation, depending on the number of explanatory statements 
required, would have an annual aggregate maximum labor cost of (23 x 
$29,868) + (7 x $6472.5) = $732,267 with a per Participant average 
labor cost of $732,267 / 23 = $31,838. Aggregate totals assume 23 
Participants and 7 explanatory statements.
    \224\ See Part III.D.2. supra.
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    The Proposed Amendments require that both the Implementation Plan 
and Quarterly Progress Reports be submitted to the President, CEO or 
equivalently situated senior officer of each Participant prior to the 
approval vote by the Operating Committee. In connection with this 
requirement, the Commission preliminarily estimates that each SRO will 
incur one-time consultation costs of $8,200 for the Implementation 
Plan, and ongoing annual costs of $33,000 for Quarterly Progress 
Reports until such time as CAT is fully implemented.\225\
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    \225\ The Commission estimates that the President, CEO or 
equivalently situated senior officer of each Participant will spend 
approximately five hours in consultations, including with the 
Participant's Operating Committee member, and estimates this will 
cause each Participant to incur labor costs of (5 x $1635) = $8,175 
for the Implementation Plan and (4 x $8,175) = $32,700 annually for 
Quarterly Progress Reports. Hourly rates are based on hourly rates 
for Chief Compliance Officers from SIFMA's Management & Professional 
Earnings in the Securities Industry 2013, modified by Commission 
staff to account for an 1,800-hour work-year and inflation, and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits and overhead. Salary information for CEO/presidents of 
exchanges are not generally publically available as they might be 
for CEO/presidents of exchange holding groups. The Commission 
estimates an hourly rate for the President, CEO or equivalently 
situated senior officer of an exchange by using the hourly rate for 
a Chief Compliance Officer of $545 and multiplying by 3 to account 
for the expected salary differential.
---------------------------------------------------------------------------

    If the RFRRs are triggered, during a one-year period during 
implementation, up to $120MM in costs of CAT implementation and 
operation could be shifted from Industry Members to Participants, but 
this would not change total costs to industry as a whole from the CAT 
NMS Plan.\226\ In the absence of

[[Page 48483]]

an approved fee filing, the Commission is unable to precisely estimate 
the magnitude of the costs associated with RFRRs that individual 
Participants would incur under such a scenario; however, the Commission 
believes RFRR costs during any one-year period for individual 
Participants are unlikely to exceed $46.4MM for the largest Participant 
and $0.4MM for the smallest Participant, and are likely to be 
significantly lower than these maximums.\227\ If RFRRs are triggered, 
there would be a reduction in exchange profitability and there might be 
transitory effects on exchange capital formation because the exchanges 
would face additional costs and may not be able to invest in projects 
or return profits to shareholders as they would have otherwise.\228\ In 
the case of FINRA, which is organized as a nonprofit member 
organization, costs from RFRRs could not be passed to FINRA's Industry 
Members.\229\ This may affect FINRA's ability to invest in other 
projects that could promote investor protection.
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    \226\ The Commission estimates a maximum cost during a Period of 
up to one year by making certain assumptions. First, in the CAT NMS 
Plan Approval Order, the Commission estimated maximum implementation 
costs and annual operating costs for the Central Repository of $65MM 
and $55MM respectively; see CAT NMS Plan Approval Order, supra note 
4, at Section V.F.1.a. If the Participants were allowed to recover 
100% of those costs from Industry Members, if milestones under these 
amendments were achieved, and if all implementation costs were 
incurred during a single Period, Central Repository costs for a 
Period of up to one year would likely be no higher than $65MM + 55MM 
= $120MM. In such a scenario, Participants could incur maximum RFRR 
costs during a single year of $120MM if they missed the Financial 
Accountability Milestone by more than 270 days. Because the first 
Period's duration is less than one year, its maximum would be lower 
because a full year's operating costs for the Central Repository 
would not be incurred.
    \227\ Assuming equity exchanges bore 100% of Participant fees 
and using widely reported equity trading volume for February 2019, 
and assuming fees were allocated by market share of equity trading 
volume, the largest equity venue would incur 38.7% x $120MM = 
$46.4MM and the smallest equity venue would incur 0.3% x $120MM = 
$0.4MM in RFRR costs. For an example of widely reported equity 
trading volume, see the CBOE's compilation of equity trading volume 
at http://markets.cboe.com/us/equities/market_statistics/historical_market_volume/. The actual RFRR costs would likely be 
significantly lower than these maximums. For example, it is unlikely 
that 100% of implementation costs that presumably cover expenses 
from pre-implementation through the entire implementation period 
would be incurred in a single year, and the Commission preliminarily 
believes that some of these costs have already been incurred. This 
is a maximum single one-year RFRR cost because the estimated Central 
Repository operating cost is an annual figure. During a one-year 
implementation Period, the Commission assumes the Central Repository 
would incur one year of operating costs. However, when a Financial 
Accountability Milestone is missed, the Period may exceed one year 
in duration and additional operating costs would be incurred. 
Consequently, the implementation Period RFRR cost incurred by the 
Participants would be a function of the length of the delay and the 
actual operating costs incurred by the Plan Processor during that 
implementation Period.
    \228\ See Part IV.D.3. infra.
    \229\ All of FINRA's members are Industry Members, while most 
but not all Industry Members are FINRA members.
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    The Commission preliminarily believes that the proposed amendments 
are likely to have indirect costs to some Participants, Industry 
Members, and service bureaus due to acceleration of CAT implementation 
costs relative to the current delayed timeline. In the CAT NMS Plan 
Approval Order, the Commission estimated CAT implementation costs for 
Participants, Industry Members, and service bureaus that provide 
certain order handling, connectivity, and clearing services to Industry 
Members.\230\ These three groups may have indirectly benefited from 
implementation delays as implementation costs were deferred, while the 
benefits to investors anticipated by the CAT NMS Plan Approval Order 
have likewise been deferred. To the extent that the proposed amendments 
reduce those delays, the unintended cost deferral to these groups will 
be ended.
---------------------------------------------------------------------------

    \230\ See CAT NMS Plan Approval Order, supra note 4, at Section 
V.F.1.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the amendments could 
result in an inefficiently accelerated implementation of the CAT, which 
could potentially increase overall CAT implementation costs to 
Participants, Industry Members, and ultimately to investors.\231\ 
Because the Participants would have financial accountability for 
meeting the Financial Accountability Milestones, the Participants might 
choose to incur additional and inefficient costs to avoid missing 
deadlines because the magnitude of the additional costs incurred to 
meet the Financial Accountability Milestone dates may be less than the 
magnitude of the reduction in expenses the Participants could recover 
due to the RFRRs outlined in these amendments.\232\ If the Participants 
do not exceed Financial Accountability Milestone dates by more than 180 
or 270 days, as applicable, Industry Members would share in funding 
some of those additional costs.\233\ Because the proposed amendments 
have provisions that improve transparency, these effects could be 
magnified to the extent that the Participants seek to avoid missing 
Implementation Milestones required in the amendments. Furthermore, 
accelerated implementation might result in inefficient implementation 
decisions. For example, Participants could deliver less help desk 
functionality, reporter portal features, or infrastructure design so 
that they can avoid missing a Financial Accountability Milestone 
deadline. While these reductions in functionality might still meet the 
requirements of the CAT NMS Plan, they might make the CAT less 
effective or efficient for reporters and users of CAT data than it 
would have been with greater functionality. The costs of such 
reductions in functionality may accrue primarily to Industry Members or 
users of CAT data.
---------------------------------------------------------------------------

    \231\ See CAT NMS Plan Approval Order, supra note 4, at Section 
V.F.2.a.
    \232\ For example, Participants might incur $50MM in additional 
costs to avoid missing a Financial Accountability Milestone date by 
a week and incurring resultant RFRR costs of $30MM. Because the 
$50MM cost would be partially funded by Industry Members, incurring 
this expense might be financially rational for the Participants. 
Such an acceleration may be inefficient in the sense that 
accelerating implementation by one week might not provide benefits 
to industry and investors that warrant an additional $50MM in 
investment in the CAT. Inefficient acceleration might also result in 
missed opportunities for value-added features of CAT. For example, 
inefficient acceleration of implementation might cause the 
Participants to delay implementing an effective Help Desk, or to 
defer improvements to the reporters' portal.
    \233\ The CAT NMS Plan Approval Order contemplated a fee 
structure in which costs of developing, implementing, and operating 
the Central Repository would be shared between Participants and 
Industry Members. See CAT NMS Plan Approval Order, supra note 4, at 
Section IV.F.1.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the likelihood of an 
inefficiently accelerated CAT implementation is low for two reasons. 
First, the deadlines for Financial Accountability Milestones are 
aligned with the most recent timelines published by Participants. 
Therefore the Commission preliminarily believes that the dates are 
feasible and thus are unlikely to pressure the Participants to 
inefficiently accelerate CAT implementation to avoid triggering RFRRs. 
Second, the financial accountability measures in the proposed 
amendments are designed in a manner that should mitigate this risk 
because RFRRs continue to increase as delays persist, until the fee 
recovery rate becomes zero. Specifically, the costs associated with 
missing a deadline for a Financial Accountability Milestone by a short 
period (for example, less than 90 days) would be less than the costs 
associated with missing a deadline for a Financial Accountability 
Milestone by a longer period (for example, more than 90 days). 
Consequently, Participants may be less likely to inefficiently 
accelerate implementation to avoid RFRRs because the RFRRs reduce 
rather than eliminate the Participants' ability to recoup costs from 
Industry Members

[[Page 48484]]

for delays of less than 270 (or in the case of Period 1,180) days.
    The Commission also notes that additional indirect costs may accrue 
to market participants due to exchanges leaving the market for trading 
services, which could result from the impact of the amendments on 
competition, as discussed further below.\234\ Market participants face 
certain fixed costs in establishing connectivity to exchanges and 
adapting their trading strategies for changes in available trading 
venues. Consequently, competitor exits from the market for exchange 
services may be costly to other market participants who must update 
trading strategies to reflect what trading venues are available. The 
Commission believes it is unlikely that such costs will accrue because 
the failure of exchanges due to the financial accountability provisions 
in the proposed amendments is unlikely. The Commission preliminarily 
believes that exchanges that might require additional capital to meet 
their financial obligations under the CAT NMS Plan could acquire it 
through financial markets because exchanges are generally profitable 
and investors in exchanges are likely to view costs from RFRRs as one-
time events that do not affect long-term exchange profitability. Also, 
in many cases, exchanges are part of a larger exchange group that could 
provide additional capital if needed.\235\
---------------------------------------------------------------------------

    \234\ See Part IV.D.2. infra.
    \235\ See Part IV.D.2. infra for a more in depth discussion of 
the competitive effects of the proposed amendments.
---------------------------------------------------------------------------

    Finally, while triggering the RFRRs in these amendments would cause 
Participants to accrue additional costs because they could not recover 
these costs from Industry Members, there would be a corresponding 
financial benefit to Industry Members because they would not have to 
pay those costs. Consequently, the cost transfers from the RFRRs in the 
proposed amendments do not impose a net cost on industry as a whole. 
The Participants could attempt to shift the costs to Industry Members 
through changes to their broader fee structures. However, changes to 
the Participants' fees would need to be filed with the Commission.

D. Impact on Efficiency, Competition, and Capital Formation

1. Efficiency
    The Commission preliminarily believes that the proposed amendments 
will have an effect on efficiency. In general, the Commission 
preliminarily believes that the proposed amendments will improve the 
efficiency of Plan implementation activities by Industry Members. 
However, the Commission preliminarily believes that the financial 
accountability provisions could also potentially reduce the efficiency 
of Plan implementation by the Participants by incentivizing them to 
delay certain later-period implementation activities if Participants 
believe there is a significant risk of missing a Financial 
Accountability Milestone date in an earlier period.
    The Commission preliminarily believes that the proposed amendments 
will improve the efficiency of Industry Member implementation of CAT 
reporting. As discussed previously, uncertainty and delays in CAT 
implementation and OATS retirement could have costs for broker-
dealers.\236\ The financial accountability and public disclosures 
required by the proposed amendments should provide more certainty to 
Industry Members regarding when they will be required to begin 
reporting data to CAT and when they will be able to retire duplicative 
reporting systems. This should aid Industry Members in efficiently 
developing and implementing their CAT data reporting systems, planning 
the maintenance and eventual retirement of duplicative systems, and 
allowing them to make adjustments to those plans as needed.
---------------------------------------------------------------------------

    \236\ See Part IV.A.1. supra.
---------------------------------------------------------------------------

    However, the Commission preliminarily believes that the financial 
accountability provisions could incentivize Participants to 
inefficiently delay certain later-period implementation activities if 
Participants believe there is a significant risk of missing a Financial 
Accountability Milestone date in an earlier Period. To illustrate, 
during Period 1, in the absence of the proposed amendments, it may be 
efficient for Participants to invest in activities that enable meeting 
Financial Accountability Milestones in Periods 2, 3, and 4. If, 
however, Participants believe that they likely will not meet the Period 
1 Financial Accountability Milestone and will thus likely trigger an 
RFRR during Period 1, Participants may defer investing in Period 2, 3, 
and 4 activities during Period 1 because investments that enable 
meeting later Period Financial Accountability Milestones would be 
subject to a Period 1 RFRR because the expenses were incurred during 
Period 1. Furthermore, some Participants might delay financial 
investment in some implementation activities if additional costs from 
triggering RFRRs provoke financial distress. The Commission 
preliminarily believes this outcome is unlikely because the Commission 
preliminarily believes that exchanges that might require additional 
capital to meet their financial obligations under the CAT NMS Plan 
could acquire it through financial markets. Exchanges are generally 
profitable, and investors in exchanges are likely to view costs from 
RFRRs as one-time events that do not affect long-term exchange 
profitability.\237\ The Commission preliminarily believes that the 
structure of the financial accountability provisions may attenuate the 
risk of inefficient delay of financial investment in later Period 
Financial Accountability Milestones to some degree because delaying 
such investment is likely to increase the risk of triggering an RFRR in 
a later Period. This would make it relatively more costly to delay 
later Period implementation investments when facing potential RFRRs for 
those periods.
---------------------------------------------------------------------------

    \237\ See Part IV.C.4. infra.
---------------------------------------------------------------------------

2. Competition
a. Competitive Baseline
    The Commission described the structure of the market for trading in 
NMS securities, as of that time, in the Notice and the CAT NMS Plan 
Approval Order.\238\ While the Commission's analysis of the state of 
competition in the Notice is fundamentally unchanged, the market for 
trading services in options and equities currently consists of 23 
national securities exchanges, all but one of which are Plan 
Participants,\239\ as well as off-exchange trading venues, including 
broker-dealer internalizers, and 31 ATSs,\240\ which are not Plan 
Participants. The exchanges are currently controlled by 7 separate 
entities; three of these operate a single exchange.\241\
---------------------------------------------------------------------------

    \238\ See CAT NMS Plan Approval Order, supra note 4, at Section 
V.G.1.
    \239\ LTSE is not yet a Participant to the CAT NMS Plan.
    \240\ As of 8/26/19 there are 31 NMS Stock ATSs operating 
pursuant to an initial Form ATS-N. A list of NMS Stock ATSs, 
including access to initial Form ATS-N filings that are effective, 
can be found on the Commission website at https://www.sec.gov/divisions/marketreg/form-ats-n-filings.htm.
    \241\ Cboe Global Markets, Inc. controls BYX, BZX, C2, EDGA, 
EDGX, and CBOE; Miami Internal Holdings, Inc. controls Miami 
International, MIAX Emerald, and MIAX PEARL; NASDAQ, Inc. controls 
BX, GEMX, ISE, MRX, PHLX, and Nasdaq; Intercontinental Exchange, 
Inc. controls NYSE, Arca, American, Chicago, and National. The three 
entities that control a single-exchange are IEX Group which controls 
IEX, a consortium of broker-dealers which controls BOX, and Long 
Term Stock Exchange, Inc. which controls LTSE.
---------------------------------------------------------------------------

b. Competitive Effects
    The Commission preliminarily believes that the proposed amendments 
might have competitive effects on the

[[Page 48485]]

market for NMS security trading services and the market for equity 
listings. In the case that RFRRs are triggered, one or more exchanges 
might exit these markets, although the Commission preliminarily 
believes this is unlikely.\242\ The Commission preliminarily believes 
that triggering an RFRR could also temporarily affect competition 
between exchanges and ATSs and broker-dealer internalizers, but does 
not believe the effects will be significant.
---------------------------------------------------------------------------

    \242\ A potential entrant to the market might be marginally more 
likely to delay entry due to the proposed amendments, but given that 
a new entrant's fee burden would be a function of its market share, 
presumably a new entrant would begin with a relatively low market 
share. The Commission, therefore, does not preliminarily believe 
that an entity considering forming an exchange would decline to do 
so because of additional uncertainty about CAT NMS Plan financial 
responsibilities. Consequently, the Commission preliminarily 
believes that the proposed amendments are unlikely to have effects 
on innovation by new entrants.
---------------------------------------------------------------------------

    The Commission preliminarily believes that is it unlikely that 
exchanges that are part of an exchange group would exit the market for 
NMS security trading services or equity listings if the RFRRs in the 
proposed amendments are triggered because the larger exchange group 
could provide additional capital to an exchange that would otherwise 
exit the market. Such costs are one-time events and are unlikely to 
change an exchange operator's assessment of the long-term economics of 
operating the exchange.\243\
---------------------------------------------------------------------------

    \243\ The Commission preliminarily believes that the license to 
operate an exchange is a valuable asset even when the extant 
exchange has low volume because exchange families and new entrants 
sometimes acquire both high and low volume exchanges. See, e.g., 
https://ir.theice.com/press/press-releases/all-categories/2018/07-18-2018-133237540 and http://cdn.batstrading.com/resources/press_releases/CBOE-Holdings-Announces-Close-of-Acquisition-of-Bats-Global-Markets-FINAL-3-1-17.pdf. As long as the RFRR-related costs 
incurred by an exchange are less than the cost of registering and 
implementing a new exchange from scratch, exchange families with 
adequate financial resources are likely to invest additional capital 
in an exchange that would otherwise fail due to the RFRRs.
    The Commission recognizes that under the proposed amendments, 
exchanges do not incur RFRR costs in isolation; if one exchange 
incurs RFRR costs, all exchanges incur RFRR costs. Consequently, an 
exchange family might need to further capitalize multiple exchanges. 
The Commission believes failure of entire exchange groups is 
unlikely because the Commission preliminarily believes that exchange 
groups that might require additional capital to meet their financial 
obligations under the Plan could acquire it through financial 
markets because exchanges are generally profitable and investors in 
exchanges are likely to view costs from RFRRs as one-time events 
that do not affect long-term exchange profitability.
---------------------------------------------------------------------------

    However, for smaller exchanges that are not part of a larger 
exchange family that could provide additional capital, the Commission 
recognizes that it is possible that such exchanges could be forced to 
exit the market, although the Commission believes this is unlikely to 
occur. Specifically, the Commission believes it is unlikely that 
exchanges would be forced to leave the market because the Commission 
preliminarily believes that exchanges that required additional capital 
to meet their financial obligations under the CAT NMS Plan would be 
able to secure it through financial markets.
    Even if an exchange were to exit, the Commission does not believe 
this would significantly impact competition in the market for exchange 
trading services or the market for equity listings because these 
markets are served by multiple competitors. Consequently, demand for 
these services in the event of the exit of a competitor is likely to be 
swiftly met by existing competitors. The Commission recognizes that 
small exchanges may have unique business models that are not currently 
offered by competitors to these independent exchanges, but the 
Commission preliminarily believes a competitor could create similar 
business models if demand were adequate, and if they did not do so, it 
seems likely new entrants would do so if the exiting exchange were 
otherwise profitable.
    If the RFRRs are triggered, the Commission preliminarily believes 
that it could temporarily affect competition between exchanges and ATSs 
and broker-dealer internalizers. However, the Commission preliminarily 
believes that these effects would not be significant. As discussed 
previously, in the event RFRRs are triggered, up to $120MM in costs 
could be shifted from Industry Members to Participants in a one-year 
Period.\244\ This increase in costs to Participants could have 
transient negative effects on Participants' ability to invest in their 
exchanges.\245\ The corresponding cost savings to Industry Members 
could have transient positive effects on Industry Members' abilities to 
invest in their ATSs or internalization operations, which could include 
temporarily reducing fees in order to attract order flow. Although this 
may temporarily provide ATSs and broker-dealer internalizers with a 
competitive advantage over exchanges in attracting order flow, the 
Commission preliminarily believes that these effects will not be 
significant because broker-dealers make strategic decisions to expose 
orders on exchanges or route orders to ATSs or internalizers based on 
other factors, such as order characteristics and temporary market 
conditions, that will not be impacted by the proposed amendments.
---------------------------------------------------------------------------

    \244\ See Part IV.C. supra.
    \245\ See Part IV.D.3. infra.
---------------------------------------------------------------------------

3. Capital Formation
    The Commission preliminarily believes the amendments will have 
negligible mixed effects on capital formation. The Commission 
preliminarily believes that it is possible the amendments' improvements 
to investor protections may allow improvements to capital formation 
anticipated in the CAT NMS Plan Approval Order to be realized sooner 
than they would be in the absence of the proposed amendments. As 
discussed previously, delays in implementation of the CAT NMS Plan have 
delayed investors' realization of improvements to investor protection 
anticipated in the CAT NMS Plan Approval Order. By incentivizing the 
Participants to implement the CAT NMS Plan expeditiously, the 
amendments may permit investors to realize these benefits sooner than 
they would otherwise. These improvements to investor protections may 
improve capital formation.\246\ However, some costs of the amendments--
particularly the direct costs--are likely to be passed on to 
investors.\247\ Because these are not ongoing costs, the Commission 
preliminarily believes any negative effects on capital formation will 
be transitory. If RFRRs are triggered, the exchanges could face 
significant costs associated with expenses that could not be shared 
with Industry Members. These additional costs to Participants would be 
offset by savings by Industry Members. The Commission preliminarily 
believes these transfers between Participants and Industry Members are 
unlikely to affect capital formation because while the costs to 
Participants might be passed on to investors through relatively higher 
prices to transact on exchanges for broker-dealers that would then pass 
these costs on to their customers, the savings to Industry Members 
might be passed on by broker-dealers to their customers as well, so the 
net impact to investors should be negligible.
---------------------------------------------------------------------------

    \246\ See CAT NMS Plan Approval Order, supra note 4, at Section 
V.G.1.
    \247\ Costs associated with triggering RFRRs would not increase 
the cost of the CAT, but rather constitute a transfer between 
Participants and Industry Members. The Commission preliminarily 
believes these costs are unlikely to be directly transferred to 
investors, but notes competitive effects of these transfers in Part 
IV.D.2. supra.
---------------------------------------------------------------------------

    If RFRRs are triggered, exchanges could experience short-term, 
transitory negative effects on exchange capital formation because the 
exchanges would

[[Page 48486]]

face additional costs and may not be able to invest in projects or 
return profits to shareholders that they would otherwise. However, the 
Commission preliminarily believes costs from RFRRs would be viewed as 
transitory by investors because they would end with full CAT 
implementation. Consequently, the Commission preliminarily believes 
that the amendments would not permanently affect investors' assessment 
of expected profitability for exchanges, and thus would not reduce this 
capital formation long-term.

E. Alternatives

1. Fixed versus Relative Financial Accountability Milestone Dates
    The Commission considered an alternative approach that would use 
relative Financial Accountability Milestone dates in a scenario when a 
Financial Accountability Milestone was not met on schedule. Under the 
proposed amendments, Financial Accountability Milestone dates are fixed 
calendar dates. Under this alternative approach, the duration of the 
time period between two Financial Accountability Milestone dates would 
be static but the Financial Accountability Milestone dates would be 
relative. Thus, if a Financial Accountability Milestone were not 
achieved on schedule, the next Financial Accountability Milestone date 
would be delayed such that the duration of Periods between Financial 
Accountability Milestone dates was unchanged.\248\ For example, if 
sequential Financial Accountability Milestone dates are April 30, 2020 
and December 31, 2020, achieving the first Financial Accountability 
Milestone on May 31, 2020 would automatically reset the next Financial 
Accountability Milestone date to January 31, 2021, leaving the duration 
of the period between the two dates unchanged.
---------------------------------------------------------------------------

    \248\ The alternative could be structured such that upon the end 
of a Period, the next Financial Accountability Milestone date would 
become the later of the Financial Accountability Milestone date in 
the amendments or the relative date from this alternative approach. 
This approach would prevent the subsequent relative Financial 
Accountability Milestone date from becoming earlier in the event 
that the Participants achieve a Financial Accountability Milestone 
ahead of schedule. This would avoid the problem of incentivizing the 
Participants to delay Financial Accountability Milestone achievement 
to avoid accelerating Financial Accountability Milestone dates, and 
would mitigate any risk Industry Members would have from 
accelerating Financial Accountability Milestone dates.
---------------------------------------------------------------------------

    The primary economic impact of this approach relative to the 
proposal is that it avoids a risk inherent in the fixed Financial 
Accountability Milestone date approach of the proposal. Under the fixed 
Financial Accountability Milestone date approach, if the Participants 
encounter a delay early in the implementation process that causes them 
to miss a Financial Accountability Milestone date by a significant 
margin, it may become more difficult for them to meet future Financial 
Accountability Milestone dates. Under such a scenario, the proposed 
amendments may lose some of their incentive value because the 
Participants may not be able to avoid triggering at least some of the 
RFRRs after missing an early Financial Accountability Milestone date. 
Under the alternative approach with relative Financial Accountability 
Milestone dates, if the Participants miss a deadline early in the 
implementation timeline and trigger the RFRRs, they would not 
necessarily find later deadlines so difficult to meet that they lose 
their economic incentive to meet the later Financial Accountability 
Milestone dates.
    This alternative approach has two significant costs relative to the 
proposed amendments. First, in a case where a significant delay arises 
in an early implementation Period such that financial RFRRs are 
triggered during that Period, the Participants may be incentivized to 
delay meeting the Period-ending requirement in order to give themselves 
more time to achieve later-Period Financial Accountability Milestones 
in order to decrease their risk of triggering RFRRs in later Periods. 
Such a scenario could significantly delay the retirement of OATS, which 
would be costly to Industry Members if it extended their period of 
duplicative reporting.\249\ Under both the proposed amendments and in 
this alternative, the structure of the financial accountability 
provisions might mitigate but not eliminate this risk because RFRRs 
increase over time; consequently, if a Financial Accountability 
Milestone is missed and an RFRR is triggered, Participants should 
remain incentivized to implement in an expeditious manner to avoid 
triggering a higher RFRR during the same Period of implementation. 
However, under the alternative approach, the Financial Accountability 
Milestone date for OATS retirement could be pushed back due to missing 
an earlier Financial Accountability Milestone, which could necessitate 
a longer period of costly duplicative reporting for Industry Members.
---------------------------------------------------------------------------

    \249\ See CAT NMS Plan Approval Order, supra note 4, at Section 
V.F.2.b.
---------------------------------------------------------------------------

    The second likely additional cost relative to the proposal is that 
the alternative approach would make the ultimate CAT implementation 
timeline less certain than in the proposal, because delays in early 
Periods would push back implementation dates for later Periods of 
implementation. However, under the proposed approach, missing an early-
Period Financial Accountability Milestone could also result in delays 
in meeting later Financial Accountability Milestones, and because the 
potential length of future delays would not be defined by the structure 
of the proposed amendments, they would be less transparent to Industry 
Members. However, under the proposed amendments, realized delays would 
be documented in Quarterly Progress Reports and thus should aid 
Industry Members in updating expectations on implementation timelines.
2. Different Timelines for Onset of RFRRs
    The Commission considered alternative approaches with different 
Financial Accountability Milestone dates. These approaches would have 
certain additional benefits and costs as compared to the proposal. For 
example, earlier Financial Accountability Milestones might accelerate 
the time at which investors realize the benefits of the CAT, but would 
increase the likelihood that the implementation of CAT would be 
accelerated to a degree that is inefficient.\250\ Alternatively, 
delaying Financial Accountability Milestone dates would increase the 
time that investors do not realize the benefits of CAT and that 
Industry Members experience uncertainty that increases their 
implementation costs, but might avoid the risk of inefficiently 
accelerating the implementation of CAT.\251\ The Commission further 
notes that alternative milestone dates that are not generally aligned 
with dates published by or discussed with the Participants are less 
likely to reflect realistic expectations for the Participants in 
implementing the CAT.\252\
---------------------------------------------------------------------------

    \250\ See Note 232, supra.
    \251\ See Part IV.C. supra.
    \252\ See Part II.B.1. supra.
---------------------------------------------------------------------------

3. Alternate Magnitudes of RFRRs
    The Commission considered alternative approaches with different 
levels of RFRRs. Under the proposed amendments, for each period of up 
to 90 days by which the Participants miss Financial Accountability 
Milestone dates, they would trigger RFRRs such that they would be 
allowed to recover 25% less of the CAT costs they would otherwise 
recover from Industry

[[Page 48487]]

Members. Alternative approaches could have higher or lower marginal 
RFRRs.
    The Commission preliminarily believes that alternative approaches 
with higher marginal RFRRs (allowing the Participants to recover a 
lower share of CAT costs from Industry Members when RFRRs are 
triggered) would potentially further incentivize the Participants to 
meet Financial Accountability Milestone deadlines, but would also 
increase the risk of inefficient acceleration of CAT 
implementation.\253\
---------------------------------------------------------------------------

    \253\ See Note 233, supra.
---------------------------------------------------------------------------

    The Commission preliminarily believes that alternative approaches 
with lower RFRRs (allowing the Participants to recover a higher share 
of CAT costs from Industry Members when RFRRs are triggered) would 
decrease the incentives Participants have to meet Financial 
Accountability Milestone deadlines, but would reduce the risk of 
inefficient acceleration of CAT implementation.

F. Request for Comment on the Economic Analysis

    The Commission is sensitive to the potential economic effects, 
including the costs and benefits, of the proposed amendments to the CAT 
NMS Plan. The Commission has identified above certain costs and 
benefits associated with the proposal and requests comment on all 
aspects of its preliminary economic analysis. The Commission encourages 
commenters to identify, discuss, analyze, and supply relevant data, 
information, or statistics regarding any such costs or benefits. In 
particular, the Commission seeks comment on the following:
    33. Do you believe the Commission's analysis of the potential 
effects of the proposed amendments to the CAT NMS Plan is reasonable? 
Why or why not? Please explain in detail.
    34. Do you believe the Commission's description of the state of 
implementation of the CAT NMS Plan is accurate? Why or why not? Please 
explain in detail.
    35. Do you believe that the multiple delays in implementation of 
the CAT NMS Plan has led to uncertainty surrounding CAT implementation 
that may be causing Industry Members to incur costs they would not have 
incurred had the CAT been completed on its original schedule? Why or 
why not? Please explain in detail.
    36. The structure of the RFRRs provides that after missing a 
Financial Accountability Milestone by 270 days (or 180 days as 
applicable), Participants would not be allowed to recover any 
implementation costs for the delayed implementation Period. For the 
remainder of the implementation Period, Participants would continue to 
incur expenses associated with the Plan Processor's operation of the 
Central Repository, and would not be able to share those expenses with 
Industry Members. Do you believe the Participants' inability to share 
those expenses with Industry Members will continue to incentivize the 
Participants to proceed with Plan implementation? Why or why not? 
Please explain in detail.
    37. Do you agree with the Commission's assessment of the 
transparency of Plan implementation? Why or why not? Please explain in 
detail.
    38. Do you agree with the Commission's assessment of the status of 
Plan implementation? Why or why not? Please explain in detail.
    39. The Commission requests that commenters provide relevant data 
and information to assist us in analyzing the economic consequences of 
the proposed amendments. In particular, the Commission requests data 
and information regarding the costs incurred by Industry Members 
because of uncertainty surrounding CAT implementation.
    40. Do you agree with the Commission's assessment of the benefits 
of the proposed amendments? Why or why not? Please explain in detail.
    41. Do you believe that the proposed amendments increase the 
likelihood that OATS will be retired by December 31, 2021? Do you 
believe that the amendments are likely to compress the period of 
duplicative reporting by Industry Members? Why or why not? Please 
explain in detail.
    42. Do you believe the proposed amendments will decrease 
uncertainty for Industry Members regarding the timing and requirements 
of Plan implementation? Why or why not? Please explain in detail.
    43. Do you believe this reduction in uncertainty will reduce costs 
of Plan Implementation by Industry Members? Why or why not? Please 
explain in detail.
    44. Do the Participants have economic disincentives to Plan 
implementation that the Commission has not recognized? What are they? 
Please describe in detail.
    45. Are there other economic incentives the Commission could 
propose to incentivize the Participants to implement the CAT NMS Plan 
expeditiously and efficiently? Please describe them in detail.
    46. Do you agree with the Commission's analysis of the direct costs 
of the proposed amendments? Why or why not?
    47. Do commenters agree that Participants' costs related to 
approval of the Implementation Plan and Quarterly Progress Reports are 
likely to have economies of scale, whereby the representatives of 
Participants that are members of exchange groups may spend less time 
per exchange on this task, while representatives of Participants that 
are not part of an exchange group may require more time to review and 
vote on the Implementation Plan and/or Quarterly Progress Reports, and 
prepare and publish on each of the Participant websites or collectively 
on the CAT NMS Plan website any statements identifying Participants 
that did not vote to approve and explaining why? Why or why not?
    48. Do commenters agree with the Commission's estimate for hourly 
costs for Operating Committee members performing activities necessary 
for approval by a Supermajority Vote under the amendments? If not, 
please provide alternate estimates if possible.
    49. Do commenters agree with the Commission's estimate for hourly 
costs associated with the President, CEO or equivalently situated 
senior officer of each Participant? If not, please provide alternative 
estimates of the hourly costs for the President, CEO or equivalently 
situated senior officer of each Participant to consult as needed with 
the Participant's Operating Committee member.
    50. Please provide estimates of the time required for a Participant 
and publish a statement identifying itself and explaining why it did 
not vote to approve the Implementation Plan or Quarterly Report. Also, 
please identify who (i.e. General Counsel, Chief Compliance Officer or 
other executive) would be involved in preparing such a statement.
    51. Please comment on the Commission's estimate of the maximum cost 
of RFRRs to the Participants. Are there alternative methodologies to 
estimate these costs? Please describe and provide detailed analysis if 
possible.
    52. Do you agree with the Commission's analysis of the indirect 
costs of the proposed amendments? Why or why not?
    53. Are the proposed amendments likely to cause an inefficient 
acceleration as described above of Plan implementation as described 
above? Why or why not?
    54. Do you believe the proposed amendments are likely to improve 
the

[[Page 48488]]

efficiency of Plan implementation? Why or why not?
    55. Do you believe the proposed amendments' incentive structure 
could potentially reduce the efficiency of Plan implementation by 
incentivizing Participants to delay certain later-Period implementation 
activities if Participants believe there is a significant risk of 
missing a Financial Accountability Milestone date in an earlier Period? 
Why or why not? Please describe how in detail.
    56. The Commission requests comment on all aspects of this analysis 
and, in particular, on whether the Proposed Amendments would place a 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Exchange Act, as well as the effect of the proposal 
on efficiency, competition, and capital formation.
    57. Do you agree with the Commission's assessment of the current 
state of competition in the market for trading services? Why or why 
not?
    58. Do you agree with the Commission's assessment of the current 
state of competition in the market for NMS stock listings? Why or why 
not?
    59. Do you believe that in the event that RFRRs are triggered, one 
or more exchanges might exit the market for trading services? Please 
explain in detail.
    60. If one or more exchanges were to exit the market for trading 
services, would competition in this market suffer? Why or why not? Are 
there exchanges that might leave this market that have business models 
that could not be copied by an existing competitor or new entrant? 
Would such business models be likely to be copied by an existing 
competitor or new entrant? Why or why not? Please explain in detail.
    61. Do you believe that some Participants might be motivated to 
trigger RFRRs to financially distress competitors? Why or why not? 
Please explain in detail.
    62. Do you believe the proposed amendments will have effects on 
capital formation that the Commission has not recognized? Please 
explain in detail.
    63. Do you agree that the proposed amendments may improve capital 
formation by accelerating the investor protection benefits anticipated 
by the CAT Approval Order? Why or why not?
    64. Would an alternative approach that used relative Financial 
Accountability Milestone dates rather than fixed Financial 
Accountability Milestone dates better incentivize the Participants to 
implement the CAT NMS Plan expeditiously and efficiently? Why or why 
not? Would such an approach have benefits or costs that the Commission 
has not recognized? Please explain in detail.
    65. Are there alternative Financial Accountability Milestone dates 
that the Commission should use? What economic benefits and costs would 
those alternative dates have? Please describe in detail.
    66. The Commission requests comment on alternative incentive 
structures. Is the proposed schedule for reducing the fee recovery 
levels by 25% for each period of up to 90 days that the Participants 
miss implementation Financial Accountability Milestone dates adequate 
to incentivize the Participants to implement CAT expeditiously and 
efficiently? Is there some other RFRR level that is more appropriate? 
Should the time period between reductions in RFRR levels be shorter or 
longer than 90 days? Please explain.

V. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (``SBREFA''),\254\ the Commission requests comment on the 
potential effect of this proposal on the United States economy on an 
annual basis. The Commission also requests comment on any potential 
increases in costs or prices for consumers or individual industries, 
and any potential effect on competition, investment, or innovation. 
Commenters are requested to provide empirical data and other factual 
support for their views, to the extent possible.
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    \254\ Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note 
to 5 U.S.C. 601).
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VI. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') \255\ requires Federal 
agencies, in promulgating rules, to consider the impact of those rules 
on small entities. Section 603(a) \256\ of the Administrative Procedure 
Act,\257\ as amended by the RFA, generally requires the Commission to 
undertake a regulatory flexibility analysis of all proposed rules, or 
proposed rule amendments, to determine the impact of such rulemaking on 
``small entities.'' \258\ Section 605(b) of the RFA states that this 
requirement shall not apply ``to any proposed or final rule if the head 
of the agency certifies that the rule will not, if promulgated, have a 
significant economic impact on a substantial number of small 
entities.'' \259\
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    \255\ 5 U.S.C. 601 et seq.
    \256\ 5 U.S.C. 603(a).
    \257\ 5 U.S.C. 551 et seq.
    \258\ The Commission has adopted definitions for the term 
``small entity'' for purposes of Commission rulemaking in accordance 
with the RFA. Those definitions, as relevant to this proposed 
rulemaking, are set forth in 17 CFR 240.0-10. See Securities 
Exchange Act Release No. 18451 (January 28, 1982), 47 FR 5215 
(February 4, 1982) (File No. AS-305).
    \259\ 5 U.S.C. 605(b).
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    The proposed rule amendments would only impose requirements on 
national securities exchanges registered with the Commission under 
Section 6 of the Exchange Act and FINRA. With respect to the national 
securities exchanges, the Commission's definition of a small entity is 
an exchange that has been exempt from the reporting requirements of 
Rule 601 of Regulation NMS, and is not affiliated with any person 
(other than a natural person) that is not a small business or small 
organization.\260\ None of the national securities exchanges registered 
under Section 6 of the Exchange Act that would be subject to the 
proposed rule are ``small entities'' for purposes of the RFA. In 
addition, FINRA is not a ``small entity.'' \261\ For these reasons, the 
proposed rule will not apply to any ``small entities.'' Therefore, for 
the purposes of the RFA, the Commission certifies that the proposed 
rule would not have a significant economic impact on a substantial 
number of small entities.
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    \260\ See 17 CFR 240.0-10(e).
    \261\ See 13 CFR 121.201
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    The Commission requests comment regarding this certification. In 
particular, the Commission solicits comment on the following:
    67. Do commenters agree with the Commission's certification that 
the proposed rule would not have a significant economic impact on a 
substantial number of small entities? If not, please describe the 
nature of any impact on small entities and provide empirical data to 
illustrate the extent of the impact.

VII. Statutory Authority and Text of the Proposed Amendments to the CAT 
NMS Plan

    Pursuant to the Exchange Act and, particularly, Sections 2, 3(b), 
5, 6, 11A, 15, 15A, 17(a) and (b), 19, and 23(a) thereof, 15 U.S.C. 
78b, 78c(b), 78e, 78f, 78k-1, 78o, 78o-3, 78q(a) and (b), 78s, 78w(a), 
and pursuant to Rule 608(a)(2) and (b)(2),\262\ the Commission proposes

[[Page 48489]]

to amend the CAT NMS Plan in the manner set forth below.
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    \262\ 17 CFR 242.608(a)(2) and (b)(2). These provisions enable 
the Commission to propose amendments to any effective NMS Plan by 
``publishing the text thereof, together with a statement of the 
purpose of such amendment,'' and providing ``interested persons an 
opportunity to submit written comments.''
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    Additions are underlined; deletions are [bracketed].
* * * * *
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    By the Commission.

    Dated: September 9, 2019.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2019-19852 Filed 9-12-19; 8:45 am]
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