Document ID: SEC-2021-0910-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2021-06-29T04:00Z

[Federal Register Volume 86, Number 122 (Tuesday, June 29, 2021)]
[Notices]
[Pages 34293-34298]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-13784]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92239; File No. SR-FINRA-2021-017]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to the Retirement of FINRA's Order Audit 
Trail System

June 23, 2021.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 17, 2021, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. FINRA has 
filed the proposal under paragraph (f)(6) of Rule 19b-4 under the 
Act,\3\ which renders the proposal effective upon receipt of this 
filing by the Commission. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is filing a proposed rule change setting forth the basis for 
its determination that the accuracy and reliability of the Consolidated 
Audit Trail (``CAT'') meet the standards approved by the Commission in 
SR-FINRA-2020-024 for purposes of eliminating the Order Audit Trail 
System (``OATS'') rules in the FINRA Rule 7400 Series and FINRA Rule 
4554 (Alternative Trading Systems--Recording and Reporting Requirements 
of Order and Execution Information for NMS Stocks) (collectively 
referred to herein as the ``OATS Rules''). The proposed rule change 
also updates cross-references within FINRA rules to reflect the 
elimination of the OATS Rules.
    The text of the proposed rule change is available on FINRA's 
website at http://www.finra.org, at the principal office of FINRA and 
at the Commission's Public Reference Room.

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

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

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

1. Purpose
    On August 14, 2020, FINRA filed with the Commission a proposed rule 
change to delete the OATS Rules once members are effectively reporting 
to the CAT (the ``OATS Retirement Filing'').\4\ On October 29, 2020, 
FINRA filed Amendment No. 1 to the proposed rule change (``Amendment 
No. 1'') and a response to the comments that were submitted on the 
original filing (``Response to Comments'').\5\ On November 30, 2020, 
the Commission approved the proposed rule change, as modified by 
Amendment No. 1, on an accelerated basis.\6\
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    \4\ See Securities Exchange Act Release No. 89679 (August 26, 
2020), 85 FR 54461 (September 1, 2020) (Notice of Filing of File No. 
SR-FINRA-2020-024).
    \5\ See Letter from Lisa C. Horrigan, Associate General Counsel, 
FINRA, to Vanessa Countryman, Secretary, Commission, dated October 
29, 2020.
    \6\ See Securities Exchange Act Release No. 90535 (November 30, 
2020), 85 FR 78395 (December 4, 2020) (Notice of Filing of Amendment 
No. 1 and Order Granting Accelerated Approval of SR-FINRA-2020-024).
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    In the OATS Retirement Filing, FINRA proposed to eliminate the OATS 
Rules once members are effectively reporting to the CAT and the CAT's 
accuracy and reliability meet certain standards. Specifically, FINRA 
proposed that before OATS could be retired, the CAT generally must 
achieve a sustained error rate for Industry Member \7\ reporting in 
five categories for a period of at least 180 days of 5% or lower on a 
pre-correction basis, and 2% or lower on a post-correction basis 
(measured at T+5). In addition to the maximum error rates and matching 
thresholds, FINRA's use of CAT Data must confirm that (i) there are no 
material issues that have not been corrected, (ii) the CAT includes all 
data necessary to allow FINRA to continue to meet its surveillance 
obligations, and (iii) the Plan Processor is sufficiently meeting its 
obligations under the CAT NMS Plan relating to the reporting and 
linkage of Phase 2a Industry Member Data.
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    \7\ Unless otherwise specified, capitalized terms used in this 
rule filing are defined as set forth in the CAT Compliance Rule 
Series or in the National Market System Plan Governing the 
Consolidated Audit Trail (the ``CAT NMS Plan'' or ``Plan'') that 
FINRA and the national securities exchanges (collectively, the 
``Participants'') filed with the Commission, pursuant to Section 11A 
of the Exchange Act and Rule 608 of Regulation NMS thereunder. See 
Securities Exchange Act Release No. 79318 (November 15, 2016), 81 FR 
84696 (November 23, 2016) (``Approval Order'').
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    In the OATS Retirement Filing, FINRA explained that its review of 
CAT Data and error rates would be based on data and linkages in the 
initial phase of reporting (or ``Phase 2a''), which replicate the data 
in OATS today and thus are most relevant for OATS retirement purposes. 
Phase 2a Data includes all events and scenarios covered by OATS and 
applies only to equities. FINRA will not consider options order events 
or Phase 2c data and validations, which are not in OATS today, for 
purposes of OATS retirement.
    As described below, FINRA has determined that the CAT meets the 
accuracy and reliability standards approved by the Commission in the 
OATS Retirement Filing.
(A) Maximum Error Rates
    As discussed in the OATS Retirement Filing, FINRA believes that 
relevant error rates are the primary, but not the sole, metric by which 
to determine the CAT's accuracy and reliability and will serve as the 
baseline requirement needed before OATS can be retired. FINRA proposed 
that, before OATS could be retired, the CAT would generally need to 
achieve a sustained error rate for Industry Member reporting in five 
categories for a period of at least 180 days of 5% or lower, measured 
on a pre-correction or as-submitted basis, and 2% or lower on a post-
correction basis (measured at T+5).\8\ FINRA proposed to average the 
error rates across the period, rather than require a 5% pre-correction 
and 2% post-correction maximum each day for 180

[[Page 34294]]

consecutive days. FINRA also proposed to measure the error rates in the 
aggregate, rather than on a firm-by-firm basis. Finally, FINRA proposed 
to measure the error rates separately for each of the five categories, 
rather than evaluate all categories in the aggregate. As noted above, 
FINRA's assessment of the error rates for Industry Member reporting is 
based solely on Phase 2a CAT reporting for equity events since options 
orders are not included in OATS today.
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    \8\ As clarified in the OATS Retirement Filing, although FINRA 
does not believe that post-correction errors need to be de minimis 
before OATS can be retired, FINRA was not suggesting, with the 
proposal, that 2% would meet the ultimate objective of de minimis 
error rates for CAT. See CAT NMS Plan, Appendix C, note 102 (error 
rates after reprocessing of error corrections are ultimately 
expected to be de minimis for the CAT).
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    FINRA measured the error rates in each of the five categories 
discussed below during the period from October 26, 2020 through April 
26, 2021 (the ``applicable period''). FINRA commenced this period on 
October 26, 2020, which was the date that Industry Members were 
required to begin correcting all errors for inter-firm linkages and 
exchange/TRF/ORF match validations. As discussed in the Response to 
Comments, although the production environment for inter-firm linkage 
and exchange/TRF/ORF match validations was open for testing as of 
September 28, 2020, FINRA does not believe it would be appropriate for 
the 180-day period to commence prior to the October 26, 2020 compliance 
date.\9\
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    \9\ See FINRA's Response to Comments, supra note 5.
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    Rejection Rates and Data Validations. As described in the OATS 
Retirement Filing, the Plan Processor must perform certain basic data 
validations,\10\ and if a record does not pass these basic data 
validations, it must be rejected and returned to the CAT Reporter to be 
corrected and resubmitted. FINRA proposed that over the 180-day period, 
aggregate rejection rates must be no more than 5% pre-correction or 2% 
post-correction across all Industry Member Reporters. FINRA has 
determined that, over the applicable period, aggregate rejection rates 
across all Industry Member Reporters were 0.03% pre-correction and 
0.01% post-correction.
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    \10\ Appendix D of the CAT NMS Plan, Section 7.2, for example, 
requires that certain file validations (e.g., file transmission and 
receipt are in the correct formats, confirmation of a valid SRO-
Assigned Market Participant Identifier, etc.), and syntax and 
context checks (e.g., format checks, data type checks, consistency 
checks, etc.) be performed on all submitted records.
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    Intra-Firm Linkages. As described in the OATS Retirement Filing, 
the Plan Processor must be able to link all related order events from 
all CAT Reporters involved in the lifecycle of an order. At a minimum, 
this requirement includes the creation of an order lifecycle between 
all order events handled within an individual CAT Reporter, including 
orders routed to internal desks or departments with different functions 
(e.g., an internal ATS). FINRA proposed that aggregate intra-firm 
linkage rates across all Industry Member Reporters must be at least 95% 
pre-correction and 98% post-correction. FINRA has determined that, over 
the applicable period, aggregate intra-firm linkage rates across all 
Industry Member Reporters were 99.97% pre-correction and 99.99% post-
correction.
    Inter-Firm Linkages. As described in the OATS Retirement Filing, 
the Plan Processor must be able to create the lifecycle between orders 
routed between broker-dealers. FINRA proposed that at least a 95% pre-
correction and 98% post-correction aggregate match rate be achieved for 
orders routed between two Industry Member Reporters. FINRA has 
determined that during the applicable period there was a 99.08% pre-
correction and 99.84% post-correction aggregate match rate for orders 
routed between two Industry Member Reporters.
    Order Linkage Rates. As described in the OATS Retirement Filing, in 
addition to creating linkages within and between broker-dealers, the 
Plan Processor must be able to create lifecycles to link various pieces 
of related orders. For example, the Plan requires linkages of order 
information to create an order lifecycle from origination or receipt to 
cancellation or execution. This category essentially combines all of 
the order-related linkages to capture an overall snapshot of order 
linkages in the CAT.\11\ FINRA proposed that there be at least a 95% 
pre-correction and 98% post-correction rate for order linkages that are 
required in Phase 2a. FINRA has determined that during the applicable 
period there was a 99.66% pre-correction and 99.93% post-correction 
rate for order linkages required in Phase 2a.\12\
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    \11\ See FINRA's Response to Comments, supra note 5.
    \12\ FINRA notes that in Phase 2a, linkage is required between 
the representative street side order and the order being represented 
when the representative order was originated specifically to 
represent a single order (received either from a customer or another 
broker-dealer) 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. As set forth in the OATS Retirement Filing, while 
such linkages are not required in OATS, FINRA believes that it is 
appropriate to evaluate them for purposes of retiring OATS because 
they represent a significant enhancement to the data currently 
available in OATS and will enhance the quality of the equity audit 
trail. However, FINRA also explained in the Response to Comments 
that if all other proposed criteria have been met, FINRA would not 
anticipate delaying OATS retirement based on Phase 2a representative 
order linkage error rates alone.
    In evaluating whether the standards for OATS retirement have 
been met, FINRA has determined that the error rates for the Phase 2a 
representative order linkages did not have a significant negative 
impact on the overall error rates for order linkages. Accordingly, 
FINRA did not need to separately evaluate or exclude Phase 2a 
representative order linkage rates in measuring the error rates over 
the applicable period. For example, if the intra-firm linkage error 
rate had been above 5% over the applicable period, FINRA would have 
evaluated whether the error rate was the result of unlinked 
representative orders to create an apples-to-apples comparison to 
OATS.
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    Exchange and TRF/ORF Match Rates. As described in the OATS 
Retirement Filing, an order lifecycle must be created to link orders 
routed from broker-dealers to exchanges and executed orders and trade 
reports. FINRA proposed at least a 95% pre-correction and 98% post-
correction aggregate match rate across all equity exchanges \13\ for 
orders routed from Industry Members to an exchange and, for over-the-
counter executions, the same match rate for orders linked to trade 
reports. FINRA has determined that, during the applicable period, there 
was a 99.51% pre-correction and 99.87% post-correction aggregate match 
rate across all equity exchanges for orders routed from Industry 
Members to an exchange and, for over-the-counter executions, there was 
a 99.34% pre-correction and 99.53% post-correction rate for orders 
linked to trade reports submitted to the FINRA Trade Reporting 
Facilities and OTC Reporting Facility.
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    \13\ See Amendment No. 1.
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    As set forth above, the error rates for Industry Member reporting 
over the applicable period were well below the maximum rates 
established in the OATS Retirement Filing. FINRA also notes that the 
overall post-correction error rate for Phase 2a Industry Member 
reporting of 1.01% is comparable to the current overall OATS post-
correction error rate, which generally is at or slightly below 1%. 
Therefore, FINRA has determined that, based on the error rates for 
Industry Member reporting, the CAT Data meets the accuracy and 
reliability baseline standards required for OATS retirement.
(B) FINRA's Use of CAT Data
    In the OATS Retirement Filing, FINRA stated that while error rates 
are a key standardized measure in determining whether OATS retirement 
is appropriate, FINRA's use of the data in the CAT also must confirm 
that (i) there are no material issues that have not been corrected 
(e.g., delays in the processing of data, issues with query functions, 
etc.), (ii) the CAT includes all data necessary to allow FINRA to

[[Page 34295]]

continue to meet its surveillance obligations, and (iii) the Plan 
Processor is sufficiently meeting its obligations under the CAT NMS 
Plan relating to the reporting and linkage of Phase 2a Data.
    FINRA has been planning for OATS retirement for several years and 
the necessary development work has been underway for some time. FINRA 
also has been analyzing and testing production CAT Data for purposes of 
transitioning its automated equity surveillance patterns since the 
commencement of Phase 2a Industry Member reporting in June 2020 and 
through subsequent CAT milestone releases. For example, in addition to 
quantitative reviews, such as the error rate statistics discussed 
above, FINRA has conducted a series of qualitative reviews of Industry 
Member CAT Data. Such reviews include, among other things, comparing 
the count and distribution of Industry Member event reporting through 
CAT versus OATS (e.g., new order and execution events, and data 
elements such as buy/sell/sell short codes), and reviewing results of 
examinations, alert reviews, and investigations relating to the 
timeliness and accuracy of Industry Member reporting. Based on such 
qualitative data reviews, FINRA has concluded that Industry Member CAT 
Data, in the aggregate, is a sufficient replacement for OATS for 
purposes of FINRA's surveillance program.
    Today, FINRA's surveillance patterns rely on the cross-market data 
model (``CMDM''), which comprises linked OATS data, equity exchange 
data feeds from each of the exchanges with which FINRA has entered into 
a regulatory service agreement (``RSA''), and transactions reported to 
FINRA's equity trade reporting facilities. The CMDM will be retired and 
replaced by a newly created surveillance data mart, the Pattern 
Optimized Datamart (``POD''), which incorporates both equities and 
options data. At that point, FINRA's patterns will rely on CAT Data in 
POD, i.e., Plan Participant and Industry Member data reported in CAT 
format and linked by CAT.\14\ FINRA notes that the Plan Participants 
transitioned to reporting via the CAT technical specification as of 
April 26, 2021, and full Plan Participant equities reporting and 
linkage validations in accordance with the CAT specification commenced 
on June 1, 2021.\15\ Successful completion of the transition to the CAT 
specification for Plan Participants is a prerequisite for FINRA to 
retire the CMDM and leverage CAT Data and linkages in POD for its 
surveillance patterns. As of the date of this filing, FINRA has 
completed all planned activities on schedule, including substantially 
completing the process of integrating CAT Data into POD and 
successfully running large amounts of production CAT Data for the month 
of May through POD.\16\ FINRA anticipates completing additional 
activities before the proposed OATS retirement date of September 1, 
2021, including, e.g., planned user acceptance testing.\17\
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    \14\ FINRA's Response to Comments noted this dependency, stating 
that the process of transitioning FINRA's surveillance patterns to 
CAT Data necessarily includes, among other things, ingestion of all 
Industry Member and Plan Participant data and linkages in CAT 
format. See Response to Comments, supra note 5, at 4. The Response 
to Comments further noted that the Plan Participants would be 
reporting to CAT via another mechanism until April 2021.
    \15\ For example, according to the CAT Reporting Technical 
Specification for Plan Participants (version 4.0.0-r4 dated April 
20, 2021), additional linkage error feedback for off-exchange trade 
reports was effective as of June 1, 2021. The Technical 
Specifications can be found on the CAT NMS Plan website at 
www.catnmsplan.com/sites/default/files/2021-04/04.20.2021-CAT-Reporting-Technical-Specifications-for-Participants-4.0.0-r4.pdf.
    \16\ FINRA notes that additional POD releases are scheduled; 
however, these releases introduce minor enhancements to POD, as 
opposed to significant changes that would impact the way data is 
ingested or processed in POD.
    \17\ FINRA notes that user acceptance testing is the final stage 
of any software development life cycle and enables actual users to 
test the system to confirm that it is able to carry out the required 
tasks it was designed to address in real-world situations.
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    FINRA has performed broad analysis of its equity surveillance 
patterns and has determined that all of the data required to support 
the transition is available in CAT. By mapping OATS data to Industry 
Member CAT Data in POD, FINRA has confirmed that CAT Data has 
equivalent analogs to all data elements in OATS. In that regard, FINRA 
notes that, as a Plan Participant, FINRA has been involved in CAT 
development efforts to ensure that the scope and features of Industry 
Member data and processed output are sufficient for FINRA's 
surveillance program. These efforts include, for example, developing 
and updating the Industry Member Technical Specifications and Reporting 
Scenarios, conducting OATS-CAT gap analyses and validating that all 
such gaps have been properly addressed, and performing OATS-to-CAT 
field-level mappings.
    With respect to Plan Participant data, FINRA notes that the test 
environment for Plan Participant reporting in accordance with the CAT 
specification opened on February 15, 2021.\18\ Plan Participant equity 
reporting in accordance with the CAT specification in the test 
environment had a very high compliance rate for data ingestion and 
validation, and compliance in the production environment is comparable. 
In addition, starting on April 26, 2021, CAT began linking copies of 
Industry Member and Plan Participant data reported via the CAT 
specification in a test environment, and at that point, FINRA began its 
evaluation of the quality of these linkages. Based on this review and 
evaluation, FINRA believes that the linkages between Plan Participant 
data and Industry Member data in CAT are comparable to the linkages 
between RSA exchange data and OATS data in the CMDM today.\19\ FINRA 
CAT and the Plan Participants have now met the necessary criteria for a 
full cutover from the RSA specification to the CAT specification, 
including, e.g., achieving comparable data ingestion validation and 
inter-venue linkage rates (within a variance of under one percent) 
between RSA and CAT specification submissions. Accordingly, the 
Operating Committee approved the cutover from the RSA specification to 
the CAT specification as the official source of Plan Participant data 
as of June 1, 2021, and today, all Industry Member and Plan Participant 
equities data reported via the CAT specification is linked in the CAT 
production environment.
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    \18\ See, e.g., CAT Q1 2021 Quarterly Progress Report dated 
April 30, 2021, available at www.catnmsplan.com/sites/default/files/2021-05/CAT-Q1-2021-QPR.pdf.
    \19\ FINRA notes that the CAT uses the same code in both the 
test and production environments. Thus, FINRA believes that linkages 
in the test environment are reliable indicators of linkages in the 
production environment.
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    FINRA continues to evaluate CAT Data quality, and in particular, 
linkages between Industy Member and Plan Participant data, and to test 
its surveillance patterns to run on CAT Data in POD. In that regard, 
FINRA notes that it has followed established and time-tested processes 
and protocols throughout the development process to ensure that its 
patterns will perform as expected and produce the necessary output 
using CAT Data following the retirement of OATS. For example, FINRA's 
Software Development Lifecycle (``SDLC'') procedures govern systems 
design, changes, testing and controls. The SDLC procedures are an 
essential component of FINRA's operations and have been developed to 
serve FINRA's unique regulatory needs and structure. Additionally, 
consistent with SEC Regulation SCI, FINRA procedures include a plan of 
coordination and communication with regulatory staff. By relying on 
these established processes and protocols, FINRA has confidence that 
the CAT Data and linkages are reliable and

[[Page 34296]]

sufficient to run FINRA's surveillance patterns.
    As an added measure, FINRA ran a sample of its pattern portfolio 
using both OATS and production CAT Data for a short period following 
implementation of additional Plan Participant linkage validations and 
compared the pattern outputs. Specifically, FINRA ran several 
surveillance patterns and processes against legacy-sourced data (OATS/
RSA) and against CAT-sourced data. The patterns processed end-to-end 
with significant alignment and no unexplained anomalous results. Any 
differences in output between a pattern run with legacy data versus CAT 
Data were appropriate, given differences in pattern logic as well as 
enhanced data available through CAT, e.g., representative order 
linkages. FINRA believes that this sample has provided sufficient 
evidence that FINRA will be able to integrate all surveillance patterns 
to run on CAT Data. Based on these results, as well as the results of 
its quantitative and qualitative reviews of CAT Data and successful 
efforts integrating CAT Data into POD, FINRA believes that the complete 
portfolio of equity surveillance patterns will be capable of consuming 
CAT Data and achieving comparable (or better) output results.
    Thus, FINRA proposes to retire OATS in accordance with the schedule 
set forth herein. FINRA will run its surveillance patterns for review 
periods through the end of the second quarter of 2021 using OATS data 
and begin using--and be fully reliant on--CAT Data for its surveillance 
patterns for review periods beginning in the third quarter of 2021. 
Following the retirement of OATS, FINRA expects to maintain the current 
established cadence of its monthly, quarterly and semi-annual 
surveillance patterns. In addition, FINRA's analytics platforms will 
have access to CAT Data as soon as such data is made available to 
regulators. Thus, outside of regularly scheduled surveillance pattern 
runs, FINRA can perform expedited analytics, as required by market 
events.
    FINRA is finalizing the development and certification of its 
surveillance patterns to run on CAT Data on a rolling basis and, in 
accordance with its existing SDLC procedures, will run a month's worth 
of data and compare the output before certifying each pattern. For 
those equity patterns that will be subject to certification after OATS 
retirement, FINRA anticipates that there would be sufficient time to 
identify and remediate any issues prior to running the patterns in 
accordance with the current established cadence. FINRA does not 
anticipate significant issues arising from additional scheduled POD 
releases or in the final stages of its pattern development and 
certification efforts. FINRA bases this belief on years of experience 
with other large technology rollouts that have been executed in 
accordance with FINRA's SDLC procedures. In such instances, recourse to 
the legacy system was neither available nor required.
    On an ongoing basis following the retirement of OATS, FINRA will 
conduct regular reviews to ensure confidence in the completeness and 
accuracy of Industry Member reporting, along with the ability to 
remediate any issues in a timely manner. Among other things, FINRA has 
a robust mechanism for detecting data issues, determining which issues 
are material for purposes of its surveillance program, and requesting 
resubmission and/or reprocessing of data, as necessary. FINRA also (1) 
performs a suite of data quality checks against data sourced from CAT 
to POD and against data processed by POD for use in surveillance 
patterns; (2) oversees a robust surveillance and examination compliance 
program that evaluates Industry Member reporting timeliness, data 
quality, and other issues and trends; (3) reviews CAT compliance 
program alerts using a rapid remediation process and formal reviews, as 
necessary; and (4) reviews Industry Member self-reporting and error 
correction trends. FINRA believes that these practices are sufficient 
for identification and timely resolution of Industry Member reporting 
and data issues after OATS has been retired.
    Specifically with regard to the additional standards approved in 
the OATS Retirement Filing, through its use of CAT Data to date, as 
described above, FINRA believes that these standards have been 
satisfied. With respect to the first factor, FINRA does not believe 
that there are any material issues that have not been corrected (or 
could not be corrected in the course of operation of CAT, as approved 
by the Operating Committee) \20\ that would impact FINRA's ability to 
incorporate and use CAT Data in FINRA's surveillance program. For 
example, the Plan requires that raw unprocessed data that has been 
ingested by the Plan Processor must be available to Participant 
regulatory staff and the SEC prior to 12:00 p.m. Eastern Time on T+1, 
and access to all iterations of processed data must be available to 
Participant regulatory staff and the SEC between 12:00 p.m. Eastern 
Time on T+1 and T+5.\21\ The Plan Processor also must ensure that 
regulators have access to corrected and linked order data by 8:00 a.m. 
Eastern Time on T+5.\22\ Additionally, after ingestion by the Central 
Repository, the raw unprocessed data must be transformed into a format 
appropriate for data querying and regulatory output.\23\ The user-
defined direct queries and bulk extracts must provide authorized users 
with the ability to retrieve CAT Data via a query tool or language that 
allows users to query all available attributes and data sources.\24\ 
FINRA's use of the CAT Data has not uncovered any processing delays or 
other material issues impacting the availability of, and FINRA's access 
to, the data.
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    \20\ FINRA notes that FINRA CAT tracks known issues relating to 
Industry Member and Plan Participant reporting. See, e.g., 
catnmsplan.com/CAT-Transaction-Known-Issues-List. FINRA regularly 
reviews and analyzes FINRA CAT's list of current and resolved issues 
and does not believe that any of these issues would impact its 
ability to incorporate and use CAT Data in its surveillance program.
    \21\ See CAT NMS Plan, Appendix D, Section 6.2.
    \22\ See CAT NMS Plan, Appendix C, Section A.2(a).
    \23\ See CAT NMS Plan, Appendix C, Section A.1(b).
    \24\ See CAT NMS Plan, Section 6.10(c).
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    With respect to the second factor, FINRA believes that the CAT 
includes all data necessary for FINRA to meet its surveillance 
obligations after the retirement of OATS. FINRA must ensure that the 
CAT, as the single source of order and trade data, can enable FINRA to 
conduct accurate and effective market surveillance in accordance with 
its regulatory obligations.\25\ As noted above, Phase 2a Data includes 
all events and scenarios covered by OATS and is the most relevant for 
OATS retirement purposes. FINRA Rule 7440 describes the OATS 
requirements for recording information, which includes information 
related to the receipt or origination of orders, order transmittal, and 
order modifications, cancellations and executions. Large Industry 
Members and Small Industry Members that currently are reporting to OATS 
were

[[Page 34297]]

required to submit data to the CAT for these same events and scenarios 
commencing in Phase 2a. FINRA's testing, analysis and use of the CAT 
Data (including integration into POD), as described above, has 
confirmed that the CAT includes all data necessary for FINRA to meet 
its surveillance obligations and that CAT is a reliable substitute for 
OATS. In addition, based on its qualitative data reviews, FINRA has 
concluded that Industry Member CAT Data, in the aggregate, is a 
sufficient replacement for OATS for purposes of FINRA's surveillance 
program.
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    \25\ As discussed in the OATS Retirement Filing, OATS was 
originally proposed to fulfill one of the undertakings contained in 
an order issued by the Commission relating to the settlement of an 
enforcement action against FINRA (f/k/a National Association of 
Securities Dealers, Inc. (``NASD'')) for failure to adequately 
enforce its rules. See Securities Exchange Act Release No. 39729 
(March 6, 1998), 63 FR 12559 (March 13, 1998) (Order Approving File 
No SR-NASD-97-56) (``OATS Approval Order''); see also Securities 
Exchange Act Release No. 37538 (August 8, 1996); Administrative 
Proceeding File No. 3-9056 (``SEC Order''). In the OATS Approval 
Order, the Commission concluded that OATS satisfied the conditions 
of the SEC Order and was consistent with the Exchange Act. See 63 FR 
12559, 12566-67. FINRA believes that it will continue to be in 
compliance with the requirements of the SEC Order once the OATS 
Rules are deleted.
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    With respect to the third factor, FINRA believes that the Plan 
Processor is sufficiently meeting its obligations under the CAT NMS 
Plan relating to the reporting and linkage of Phase 2a Data. As 
detailed in the Implementation Plan and Quarterly Progress Reports 
submitted by the Plan Participants, the Plan Processor has met its 
targeted completion dates for the milestones for Phase 2a, including, 
for example, production Go-Live for Equities 2a file submission and 
data integrity validation (Large Industry Members and Small OATS 
Reporters) on June 22, 2020; Production Go-Live for Equities 2a 
Intrafirm Linkage validations on July 27, 2020; and production go-live 
for firm-to-firm linkage validations for equities (Large Industry 
Members and Small OATS Reporters) and exchange and TRF/ORF linkage 
validations for equities (Large Industry Members and Small OATS 
Reporters) on October 26, 2020.\26\
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    \26\ The Implementation Plan and Quarterly Progress Reports are 
available at www.catnmsplan.com/implementation-plan.
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    Based on the foregoing, FINRA has determined that the CAT meets the 
accuracy and reliability standards approved by the Commission in the 
OATS Retirement Filing for purposes of eliminating the OATS Rules. 
FINRA has determined to retire OATS effective September 1, 2021. Firms 
must continue to report to OATS all order events that occur on or prior 
to August 31, 2021. Reports submitted to OATS for order events that 
occur after August 31, 2021 will be rejected. In other words, August 
31, 2021 will be the last ``OATS Business Day,'' as defined under Rule 
7450(b)(3), for which OATS will accept order events and perform routine 
processing (including incorporation of corrections and repairs of 
rejections) occurring within the normal OATS timeframe for such 
activities. OATS will continue to accept reports for order events that 
occur on or prior to August 31, 2021 (including, but not limited to, 
late and corrected reports for such order events) through September 16, 
2021. Firms must ensure that their OATS reporting is accurate and 
complete for all order events that occur on or prior to August 31, 
2021. The OATS Rules will be deleted from the FINRA rulebook effective 
September 1, 2021.\27\
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    \27\ Pursuant to the OATS Retirement Filing, the Commission 
approved the deletion of the OATS Rules and the adoption of new 
introductory language in Rule 4554 and the Rule 7400 Series to help 
alert members of the status of the OATS Rules. The Exhibit 5 
attached to this filing is marked to show the deletion of this 
introductory language (but is not marked to show the previously 
approved deletion of the OATS Rules).
    In addition, there are multiple rules throughout the FINRA 
rulebook that cross-reference or otherwise incorporate some or all 
of the OATS Rules. In this filing, FINRA also is proposing non-
substantive technical changes to delete or amend, as applicable, 
such references to the OATS Rules.
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    Finally, FINRA notes that as requested by the industry, FINRA has 
provided transparency into the process of retiring OATS. For example, 
FINRA has provided the industry with monthly status updates \28\ on (1) 
the error rates in the categories discussed above, (2) FINRA's 
evaluation of the non-error rate factors, (3) a general timeframe for 
OATS retirement, and (4) steps for Industry Members to consider in 
preparation for the retirement of OATS. Materials for these events are 
available on the CAT NMS Plan website.\29\
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    \28\ On March 18, 2021, FINRA conducted an industry webinar 
addressing OATS retirement issues and informed the industry that 
although a formal OATS retirement date had not yet been established, 
it would be no earlier than the end of June 2021. Additional monthly 
updates were held on April 15, 2021 and May 20, 2021.
    \29\ See www.catnmsplan.com/events. FINRA CAT also provides 
regular updates to Industry Members regarding CAT implementation and 
compliance during FINRA CAT's Weekly Industry Checkpoint and Monthly 
Implementation calls. The statistics provided by FINRA CAT have also 
served as a good proxy for progress toward achieving the requisite 
error rates for purposes of OATS retirement.
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    In light of the foregoing, FINRA believes that retiring OATS as of 
September 1, 2021 is appropriate, particularly given the potential 
risks of continuing to run OATS and CAT in parallel for an additional 
period of time. Such potential risks may include, for example, on an 
industry-wide basis: (1) Processing and storage capacity issues from 
operating two systems (particularly in the event of extraordinary 
market volume); (2) cybersecurity risks from having data flow through 
two separate systems for a longer time period; (3) systems issues from 
reporting infrastructure that is near end-of-life; and (4) the expense 
and burden on CAT Reporters of dual reporting, particularly in the 
event of systems issues requiring correction and/or resubmission of 
data and competing resource priorities between OATS and CAT reporting 
and repair activities.
    FINRA has filed the proposed rule change for immediate 
effectiveness and has determined to retire OATS effective September 1, 
2021. The implementation date of SR-FINRA-2020-024, pursuant to which 
the Commission approved the deletion of the OATS Rules, and of this 
proposed rule change will be September 1, 2021. FINRA will publish a 
Regulatory Notice announcing this implementation date.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\30\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest, and Section 15A(b)(9) of the Act,\31\ which requires 
that FINRA rules not impose any burden on competition that is not 
necessary or appropriate.
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    \30\ 15 U.S.C. 78o-3(b)(6).
    \31\ 15 U.S.C. 78o-3(b)(9).
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    FINRA has determined that the CAT accuracy and reliability 
standards approved by the Commission in SR-FINRA-2020-024 have been 
satisfied and it is appropriate to retire OATS, which is duplicative in 
light of the implementation of CAT. Based on its testing, analysis and 
use of CAT Data (including integration of CAT Data into POD), as 
described above, FINRA has determined that its surveillance of market 
activity will remain accurate and effective and FINRA will be able to 
continue to fulfill its statutory obligation to protect investors and 
the public interest after the retirement of OATS. Among other things, 
FINRA has performed broad analysis of its equity surveillance patterns 
and has determined that all of the data required to support the 
transition is available in CAT. In addition, based on its qualitative 
data reviews, FINRA has concluded that Industry Member CAT Data, in the 
aggregate, is a sufficient replacement for OATS for purposes of FINRA's 
surveillance program. FINRA also ran a sample of its pattern portfolio 
using both OATS and production CAT Data and compared the pattern 
outputs. Based on these results, as well as the results of its 
quantitative and qualitative reviews of CAT Data and efforts to 
integrate CAT Data into POD, FINRA believes that the complete portfolio 
of equity surveillance patterns will be capable of consuming CAT Data 
and

[[Page 34298]]

achieving comparable (or better) output results.

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

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. As set forth in the OATS 
Retirement Filing, FINRA undertook an economic impact assessment to 
analyze the regulatory need for the proposed rule change, its potential 
economic impacts, including anticipated costs and benefits, and the 
alternatives considered in assessing how to best meet regulatory 
objectives. The economic impact assessment discussed the potential 
costs and benefits associated with OATS retirement assuming that the 
accuracy and reliability standards delineated in the filing were met. 
As FINRA has determined that CAT meets or exceeds these standards, 
FINRA does not anticipate any additional impacts from retiring OATS.

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

    The OATS Retirement Filing, pursuant to which FINRA proposed the 
above-discussed accuracy and reliability standards the CAT would need 
to achieve before FINRA could retire OATS, was published for comment on 
September 1, 2020.\32\ Three comment letters were submitted in 
response,\33\ and on October 29, 2020, FINRA responded to the comment 
letters.\34\ The comment letters, as well as FINRA's response to 
comments, are available on the Commission's website.
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    \32\ See supra note 4.
    \33\ See Letters from Howard Meyerson, Managing Director, 
Financial Information Forum, to Vanessa Countryman, Secretary, 
Commission, dated September 22, 2020; William J. Leahey, Head of 
Regulatory Compliance, Refinitiv Wealth Management, to Vanessa 
Countryman, Secretary, Commission, dated September 22, 2020; and 
Ellen Greene, Managing Director, Securities Industry and Financial 
Markets Association, to Vanessa Countryman, Secretary, Commission, 
dated September 24, 2020 (``SIFMA'').
    \34\ See supra note 5.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \35\ and Rule 19b-
4(f)(6) thereunder.\36\
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    \35\ 15 U.S.C. 78s(b)(3)(A).
    \36\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2021-017 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2021-017. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of FINRA. All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-FINRA-2021-017, and should be submitted 
on or before July 20, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
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    \37\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-13784 Filed 6-28-21; 8:45 am]
BILLING CODE 8011-01-P