Document ID: SEC-2017-0904-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2017-06-01T04:00Z

[Federal Register Volume 82, Number 104 (Thursday, June 1, 2017)]
[Notices]
[Pages 25423-25429]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-11359]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80783; File No. SR-FINRA-2017-013]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Eliminate 
Requirements That Will Be Duplicative of CAT

May 26, 2017.
    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 May 15, 2017, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc. 
(``NASD'')) 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. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to eliminate the Order Audit Trail System 
(``OATS'') rules in the FINRA Rule 7400 Series and to amend FINRA's 
electronic blue sheet (``EBS'') rules, Rules 8211 and 8213, to reflect 
changes to these rules once members are effectively reporting to the 
consolidated audit trail (``CAT'') and the CAT's accuracy and 
reliability meet certain standards as described below.
    The text of the proposed rule change is available on FINRA's Web 
site 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
(1) Background
    Bats BYX Exchange, Inc.; Bats BZX Exchange, Inc.; Bats EDGA 
Exchange, Inc.; Bats EDGX Exchange, Inc.; BOX Options Exchange LLC; C2 
Options Exchange, Incorporated; Chicago Board Options Exchange, 
Incorporated; Chicago Stock Exchange, Inc.; FINRA; International 
Securities Exchange, LLC; Investors' Exchange LLC; ISE Gemini, LLC; ISE 
Mercury, LLC; Miami International Securities Exchange LLC; MIAX PEARL, 
LLC; NASDAQ BX, Inc.; NASDAQ PHLX LLC; The NASDAQ Stock Market LLC; 
National Stock Exchange, Inc.; New York Stock Exchange LLC; NYSE MKT 
LLC; and NYSE Arca, Inc. (collectively, the ``Participants'') filed 
with the Commission, pursuant to Section 11A of the Exchange Act \3\ 
and Rule 608 of Regulation NMS thereunder,\4\ the National Market 
System Plan Governing the Consolidated Audit Trail (the ``CAT NMS 
Plan'' or ``Plan'').\5\ The Participants filed the Plan to comply with 
Rule 613 of Regulation NMS under the Exchange Act.\6\ The Plan was 
published for comment in the Federal Register on May 17, 2016,\7\ and 
approved by the Commission, as modified, on November 15, 2016.\8\ On 
March 15, 2017, the Commission approved the new FINRA Rule 6800 Series 
to implement provisions of the CAT NMS Plan that are applicable to 
FINRA members.\9\
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    \3\ 15 U.S.C. 78k-1.
    \4\ 17 CFR 242.608.
    \5\ See Letter from the Participants to Brent J. Fields, 
Secretary, Commission, dated September 30, 2014; and Letter from 
Participants to Brent J. Fields, Secretary, Commission, dated 
February 27, 2015. On December 24, 2015, the Participants submitted 
an amendment to the CAT NMS Plan. See Letter from Participants to 
Brent J. Fields, Secretary, Commission, dated December 23, 2015. 
Unless otherwise specified, capitalized terms used in this rule 
filing are defined as set forth herein, or in the CAT Compliance 
Rule Series or in the CAT NMS Plan.
    \6\ 17 CFR 242.613.
    \7\ Securities Exchange Act Rel. No. 77724 (April 27, 2016), 81 
FR 30614 (May 17, 2016).
    \8\ Securities Exchange Act Rel. No. 79318 (November 15, 2016), 
81 FR 84696 (November 23, 2016) (``Approval Order'').
    \9\ Securities Exchange Act Rel. No. 80255 (March 15, 2017), 82 
FR 14563 (March 21, 2017).
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    The CAT NMS Plan is designed to create, implement, and maintain a 
consolidated audit trail that will capture in a single consolidated 
data source customer and order event information for orders in NMS 
Securities and OTC Equity Securities, across all markets, from the time 
of order inception through routing, cancellation, modification, or 
execution. Among other things, Section C.9. of Appendix C to the Plan, 
as modified by the Commission, requires each Participant to ``file with 
the SEC the relevant rule change filing to eliminate or modify its 
duplicative rules within six (6) months of the SEC's approval of the 
CAT NMS Plan.'' \10\ The Plan notes that ``the elimination of such 
rules and the retirement of such systems [will] be effective at such 
time as CAT Data meets minimum standards of accuracy and reliability.'' 
\11\ Finally, the Plan requires the rule filing to discuss the 
following:
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    \10\ CAT NMS Plan, Appendix C, Section C.9.
    \11\ See id.
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    (i) Specific accuracy and reliability standards that will determine 
when duplicative systems will be retired, including, but not limited 
to, whether the attainment of a certain Error Rate should determine 
when a system duplicative of the CAT can be retired;
    (ii) whether the availability of certain data from Small Industry 
Members two years after the Effective Date would facilitate a more 
expeditious retirement of duplicative systems; and
    (iii) whether individual Industry Members can be exempted from 
reporting to duplicative systems once their CAT reporting meets 
specified accuracy and reliability standards, including, but not 
limited to, ways in which establishing cross-system regulatory 
functionality or integrating data from existing systems and the CAT 
would facilitate such Individual Industry Member exemptions.\12\
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    \12\ See id.
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    In response to these requirements, the proposed rule change deletes 
the Rule 7400 Series (the ``OATS Rules'') \13\ and Rule 4554 from the 
FINRA rulebook and adds new Supplementary Material to FINRA's EBS 
rules, Rules 8211 and 8213, once the CAT achieves the

[[Page 25424]]

specific accuracy and reliability standards described below and FINRA 
has determined that its usage of the CAT Data has not revealed material 
issues that have not been corrected, confirmed that the CAT includes 
all data necessary to allow FINRA to continue to meet its surveillance 
obligations,\14\ and confirmed that the Plan Processor is sufficiently 
meeting all of its obligations under the CAT NMS Plan.\15\
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    \13\ FINRA notes that there are multiple rules throughout the 
FINRA Rulebook that cross-reference or otherwise incorporate some or 
all of the OATS Rules. If the Commission approves the proposed rule 
change, FINRA will file a subsequent proposed rule change to 
eliminate or amend, as applicable, the references to the OATS Rules 
before the amendments in the current proposed rule change are 
implemented.
    \14\ As noted in the Participants' September 23, 2016 response 
to comment letters on the Plan, the Participants ``worked to keep 
[the CAT] gap analyses up-to-date by including newly-added data 
fields in these duplicative systems, such as the new OATS data 
fields related to the tick size pilot and ATS order book changes, in 
the gap analyses.'' Letter from Participants to Brent J. Fields, 
Secretary, Commission, dated September 23, 2016, at 21. The 
Participants noted that they ``will work with the Plan Processor and 
the industry to develop detailed Technical Specifications to ensure 
that by the time Industry Members are required to report to the CAT, 
the CAT will include all data elements necessary to facilitate the 
rapid retirement of duplicative systems.'' Id.
    \15\ FINRA notes that the OATS Rules were 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 the NASD for failure to adequately enforce its rules. See 
Securities Exchange Act Release No. 39729 (March 6, 1998), 63 FR 
12559 (March 13, 1998) (``OATS Approval Order''); see also 
Securities Exchange Act Release No. 37538 (August 8, 1996); 
Administrative Proceeding File No. 3-9056 (``SEC Order''). In 
approving the OATS Rules, the Commission concluded that OATS 
satisfied the conditions of the SEC Order and was consistent with 
the Exchange Act. See OATS Approval Order, supra, at 12566-67. As 
noted, the Plan is designed to create, implement, and maintain a CAT 
that would capture customer and order event information for orders 
in NMS Securities and OTC Equity Securities, across all markets, 
from the time of order inception through routing, cancellation, 
modification, or execution in a single consolidated data source. 
FINRA has already adopted rules to enforce compliance by its 
Industry Members, as applicable, with the provisions of the Plan. 
See Rule 6800 Series. Once the CAT can replace the OATS Rules, FINRA 
believes it will be appropriate to delete the OATS Rules that were 
implemented to comply with the SEC Order. Accordingly, FINRA 
believes that it would continue to be in compliance with the 
requirements of the SEC Order once the OATS Rules are deleted.
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(2) Specific Accuracy and Reliability Standards
    The first issue the Plan requires the proposed rule change to 
discuss is ``specific accuracy and reliability standards that will 
determine when duplicative systems will be retired, including, but not 
limited to, whether the attainment of a certain Error Rate should 
determine when a system duplicative of the CAT can be retired.'' \16\ 
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 and requests for trading information pursuant to Rule 8211 or 
8213 can be amended to account for information being available in the 
CAT.
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    \16\ See CAT NMS Plan, Appendix C, Section C.9.
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    As discussed in Section A.3.(b) of Appendix C to the CAT NMS Plan, 
the Participants established an initial Error Rate, as defined in the 
Plan, of 5% on initially submitted data (i.e., data as submitted by a 
CAT Reporter before any required corrections are performed). The 
Participants noted in the Plan that their expectation was that ``error 
rates after reprocessing of error corrections will be de minimis.'' 
\17\ The Participants based this Error Rate on their consideration of 
``current and historical OATS Error Rates, the magnitude of new 
reporting requirements on the CAT Reporters and the fact that many CAT 
Reporters may have never been obligated to report data to an audit 
trail.'' \18\
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    \17\ See CAT NMS Plan, Appendix C, Section A.3(b), at n.102.
    \18\ See CAT NMS Plan, Appendix C, Section A.3(b).
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    FINRA agrees with the Participants' conclusion that a 5% pre-
correction threshold ``strikes the balance of 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, as well as having a sufficient level of accuracy to 
facilitate the retirement of existing regulatory reports and systems 
where possible.'' \19\ However, FINRA believes that, when assessing the 
accuracy and reliability of the data for the purposes of retiring OATS, 
the error thresholds should be measured in more granular ways and 
should also include minimum error rates of post-correction data, which 
represents the data most likely to be used by FINRA to conduct 
surveillance. Although FINRA is proposing to measure the appropriate 
error rates in the aggregate, rather than firm-by-firm, FINRA believes 
that the error rates for equity securities should be measured 
separately from options since options orders are not currently reported 
regularly or included in OATS.
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    \19\ Id.
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    To ensure the CAT's accuracy and reliability, FINRA is proposing 
that, before OATS could be retired, the CAT would generally need to 
achieve a sustained error rate for Industry Member reporting in each of 
the categories below 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).\20\ FINRA is proposing to 
measure the 5% pre-correction and 2% post-correction thresholds by 
averaging the error rate across the period, not require a 5% pre-
correction and 2% post-correction maximum each day for 180 consecutive 
days. FINRA believes that measuring each of the thresholds over the 
course of 180 days will ensure that the CAT consistently meets minimum 
accuracy and reliability thresholds for Industry Member reporting while 
also ensuring that single-day measurements do not unduly affect the 
overall measurements.
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    \20\ The Plan requires that the Plan Processor must ensure that 
regulators have access to corrected and linked order and Customer 
data by 8:00 a.m. Eastern Time on T+5. See CAT NMS Plan, Appendix C, 
Section A.2(a).
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    FINRA is proposing to use error rates in each the following 
categories, measured separately for options and for equities, to assess 
whether the threshold pre- and post-correction error rates are being 
met:
     Rejection Rates and Data Validations. Data validations for 
the CAT, while not expected to be designed the same as OATS, must be 
functionally equivalent to OATS in accordance with the CAT NMS Plan 
(i.e., the same types of basic data validations must be performed by 
the Plan Processor to comply with the CAT NMS Plan requirements). 
Appendix D of the Plan, for example, requires that certain file 
validations \21\ and syntax and context checks be performed on all 
submitted records.\22\ 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.\23\ The specific validations can be 
determined only after the Plan Processor has finalized the Industry 
Member Technical Specifications; however, the Plan also requires the 
Plan Processor to provide daily statistics on rejection rates after the 
data has been processed, including the number of files rejected and 
accepted, the number of

[[Page 25425]]

order events accepted and rejected, and the number of each type of 
report rejected.\24\ FINRA is proposing that, over the 180-day period, 
aggregate rejection rates (measured separately for equities and 
options) must be no more than 5% pre-correction or 2% post-correction 
across all CAT Reporters.
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    \21\ See CAT NMS Plan, Appendix D, Section 7.2. The Plan 
requires the Plan Processor to confirm that file transmission and 
receipt are in the correct formats, including validation of header 
and trailers on the submitted report, confirmation of a valid SRO-
Assigned Market Participant Identifier, and verification of the 
number of records in the file. Id.
    \22\ See id. The Plan notes that syntax and context checks would 
include format checks (i.e., that data is entered in the specified 
format); data type checks (i.e., that the data type of each 
attribute conforms to the specifications); consistency checks (i.e., 
that all attributes for a record of a specified type are 
consistent); range/logic checks (i.e., that each attribute for every 
record has a value within specified limits and the values provided 
are associated with the event type they represent); data validity 
checks (i.e., that each attribute for every record has an acceptable 
value); completeness checks (i.e., that each mandatory attribute for 
every record is not null); and timeliness checks (i.e., that the 
records were submitted within the submission timelines). Id.
    \23\ See id.
    \24\ See id.
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     Intra-Firm Linkages. The Plan requires that ``the Plan 
Processor must be able to link all related order events from all CAT 
Reporters involved in the lifecycle of an order.'' \25\ At a minimum, 
this requirement includes the creation of an order lifecycle between 
``[a]ll order events handled within an individual CAT Reporter, 
including orders routed to internal desks or departments with different 
functions (e.g., an internal ATS).'' \26\ FINRA is proposing that 
aggregate intra-firm linkage rates across all Industry Member Reporters 
must be at least 95% pre-correction and 98% post-correction.
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    \25\ CAT NMS Plan, Appendix D, Section 3.
    \26\ Id.
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     Inter-Firm Linkages. The order linkage requirements in the 
Plan also require that the Plan Processor be able to create the 
lifecycle between orders routed between broker-dealers.\27\ FINRA is 
proposing that at least a 95% pre-correction and 98% post-correction 
aggregate match rate be achieved for orders routed between two Industry 
Member Reporters.\28\
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    \27\ Id.
    \28\ This assumes linkage statistics will include both unlinked 
route reports and new orders where no related route report could be 
found.
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     Order Linkage Rates. In addition to creating linkages 
within and between broker-dealers, the Plan also includes requirements 
that the Plan Processor be able to create lifecycles to link various 
pieces of related orders.\29\ For example, the Plan requires linkages 
between customer orders and ``representative'' orders created in firm 
accounts for the purpose of facilitating a customer order, various legs 
of option/equity complex orders, riskless principal orders, and orders 
worked through average price accounts.\30\ FINRA is proposing that 
there be at least a 95% pre-correction and 98% post-correction linkage 
rate for multi-legged orders (e.g., related equity/options orders, VWAP 
orders, riskless principal transactions).
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    \29\ See CAT NMS Plan, Appendix D, Section 3.
    \30\ See id.
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     Exchange and TRF/ORF Match Rates. The Plan requires that 
an order lifecycle be created to link ``[o]rders routed from broker-
dealers to exchanges'' and ``[e]xecuted orders and trade reports.'' 
\31\ FINRA is proposing at least a 95% pre-correction and 98% post-
correction aggregate match rate to each equity exchange 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.
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    \31\ Id.
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    In addition to these minimum error rates and matching thresholds 
that generally must be met before OATS can be retired, FINRA believes 
that during the minimum 180-day period during which the thresholds are 
calculated, FINRA's use of the data in the CAT must confirm that (i) 
usage over that time period has not revealed 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 all of its obligations under the 
CAT NMS Plan. FINRA believes this time period to use the CAT Data is 
necessary to reveal any errors that may manifest themselves only after 
surveillance patterns and other queries have been run and to confirm 
that the Plan Processor is meeting its obligations and performing its 
functions adequately.
(3) Small Industry Member Data Availability
    The second issue the Plan requires the proposed rule change to 
address is ``whether the availability of certain data from Small 
Industry Members two years after the Effective Date would facilitate a 
more expeditious retirement of duplicative systems.''
    FINRA believes that there is no effective way to retire OATS until 
all current OATS reporters are reporting to the CAT. Although Technical 
Specifications for Industry Members are not yet available, FINRA 
believes it would be inefficient, less reliable, and more costly to 
attempt to marry the OATS and CAT databases for a temporary period to 
allow some FINRA members to report to CAT while others continue to 
report to OATS. Consequently, FINRA has concluded at this time that 
having data from those Small Industry Members currently reporting to 
OATS available two years after the Effective Date would substantially 
facilitate a more expeditious retirement of OATS. For this reason, 
FINRA supports an amendment to the Plan that would require current OATS 
Reporters that are ``Small Industry Members'' to report two years after 
the Effective Date (instead of three). FINRA intends to work with the 
other Participants to submit a proposed amendment to the Plan to 
require Small Industry Members that are OATS Reporters to report two 
years after the Effective Date.\32\
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    \32\ The 180-day timeframes discussed above with respect to 
usage of the data and calculation of error rates would apply to data 
reported to the CAT by Small Industry Members that are reporting to 
OATS. If an amendment to the Plan to accelerate the reporting 
requirement for those firms is not approved, the retirement of OATS 
could not be accomplished until at least 180 days after Small 
Industry Members begin reporting, which is scheduled to begin in 
November 2019.
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    FINRA has identified approximately 300 member firms that currently 
report to OATS and meet the definition of ``Small Industry Member;'' 
however, only ten of these firms submit information to OATS on their 
own behalf, and eight of the ten firms report very few orders to 
OATS.\33\ The vast majority of these 300 firms use third parties to 
fulfill their reporting obligations, and many of these third parties 
will begin reporting to CAT in November 2018. Consequently, FINRA 
believes that the burden on current OATS Reporters that are ``Small 
Industry Members'' would not be significant if those firms are required 
to report to CAT beginning in November 2018 rather than November 2019. 
The burdens, however, are significantly greater for those firms that 
are not reporting to OATS currently; therefore, FINRA does not believe 
it would be necessary or appropriate to accelerate CAT reporting for 
``Small Industry Members'' that are not currently reporting to OATS, 
and FINRA would not support an amendment to the Plan to accelerate CAT 
reporting for ``Small Industry Members'' that are not currently OATS 
Reporters.
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    \33\ For example, in one recent month, eight of the ten firms 
submitted fewer than 100 reports during the month, with four firms 
submitting fewer than 50.
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(4) Individual Industry Member Exemptions
    The final issue the Plan requires the proposed rule change to 
address is ``whether individual Industry Members can be exempted from 
reporting to duplicative systems once their CAT reporting meets 
specified accuracy and reliability standards, including, but not 
limited to, ways in which establishing cross-system regulatory 
functionality or integrating data from existing systems and the CAT 
would facilitate such Individual Industry Member exemptions.''
    As described above, FINRA believes that a single cut-over from OATS 
to CAT is highly preferable to a firm-by-firm approach and is not 
proposing to exempt members from the OATS requirements on a firm-by-
firm basis. The primary benefit to a firm-by-firm

[[Page 25426]]

exemptive approach would be to reduce the amount of time an individual 
firm is required to report to a legacy system (e.g., OATS) if it is 
also accurately and reliably reporting to the CAT. FINRA believes that 
the overall accuracy and reliability thresholds for the CAT described 
above would need to be met under any conditions before firms could stop 
reporting to OATS. Moreover, as discussed above, FINRA supports 
amending the Plan to accelerate the reporting requirements for Small 
Industry Members that are OATS Reporters to report on the same 
timeframe as all other OATS Reporters. If such an amendment were 
approved by the Commission, there would be no need to exempt members 
from OATS requirements on a firm-by-firm basis.
(5) Automated Submission of Trading Data
    In addition to the OATS rules, Rules 8211 and 8213 (the ``EBS 
Rules'') will also be affected by the implementation of the CAT. The 
EBS Rules are FINRA's rules regarding the automated submission of 
specific trading data to FINRA upon request using the EBS system.
    Once broker-dealer reporting to the CAT has begun, the CAT will 
contain much of the data the Participants would otherwise have 
requested via the EBS system for purposes of NMS Securities and OTC 
Equity Securities. Consequently, FINRA will not need to use the EBS 
system or request information pursuant to the EBS Rules for NMS 
Securities and OTC Equity Securities for time periods after CAT 
reporting has begun if the appropriate accuracy and reliability 
thresholds are achieved, including an acceptable accuracy rate for 
customer and account information. However, the EBS Rules cannot be 
completely removed from the FINRA Rulebook immediately upon the CAT 
achieving the appropriate thresholds because FINRA may still need to 
request information pursuant to these rules for trading activity 
occurring before a member was reporting to the CAT.\34\ In addition, 
the EBS Rules apply to information regarding transactions involving 
securities that will not be reportable to the CAT initially, such as 
fixed-income securities; thus, the rules must remain in effect with 
respect to those transactions indefinitely or until those transactions 
are captured in the CAT.
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    \34\ Firms are required to maintain the trade information for 
pre-CAT transactions in equities and options pursuant to applicable 
rules, such as books and records retention requirements, for the 
relevant time period, which is generally three or six years, 
depending upon the record. See 17 CFR 240.17a-3(a), 240.17a-4.
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    The proposed rule change adds new Supplementary Material to the EBS 
Rules to clarify how FINRA will request data under these rules after 
members are reporting to the CAT. Specifically, the proposed 
Supplementary Material to each rule will note that FINRA will request 
information under the rules only if the information is not available in 
the CAT because, for example, the transactions in question occurred 
before the firm was reporting information to the CAT or involved 
securities that are not reportable to the CAT. In essence, under the 
new Supplementary Material, FINRA will make requests under these rules 
if and only if the information is not otherwise available through the 
CAT.
    However, as noted above, FINRA believes that the CAT must meet 
certain minimum accuracy and reliability standards before FINRA could 
rely on the CAT Data to replace existing regulatory tools, including 
EBS. Consequently, the proposed Supplementary Material will be 
implemented only after the CAT achieves the thresholds set forth above 
with respect to OATS and an accuracy rate for customer and account 
information of 95% for pre-corrected data and 98% for post-correction 
data. In addition, as discussed above, FINRA can rely on CAT Data to 
replace EBS requests only after FINRA has determined that its usage of 
the CAT Data over a 180-day period has not revealed material issues 
that have not been corrected, confirmed that the CAT includes all data 
necessary to allow FINRA to continue to meet its surveillance 
obligations, and confirmed that the CAT Plan Processor is fulfilling 
its obligations under the CAT NMS Plan.
    If the Commission approves the proposed rule change, the rule text 
will be effective; however, the amendments will not be implemented 
until FINRA has determined the accuracy and reliability standards set 
forth in the proposed rule change have been met. FINRA will announce 
the implementation date of the proposed rule change in a Regulatory 
Notice that will be published once FINRA concludes the thresholds for 
accuracy and reliability described herein have been met and that the 
CAT Plan Processor is sufficiently meeting all of its obligations.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\35\ 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. FINRA believes that the proposed rule change fulfills 
the obligation in the CAT NMS Plan for FINRA to submit a proposed rule 
change to eliminate or modify duplicative rules. FINRA believes that 
the approach set forth in the proposed rule change strikes the 
appropriate balance between ensuring that FINRA is able to continue to 
fulfill its statutory obligation to protect investors and the public 
interest by ensuring its surveillance of market activity remains 
accurate and effective while also establishing a reasonable timeframe 
for elimination or modification of its rules that will be rendered 
duplicative after implementation of the CAT.
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    \35\ 15 U.S.C. 78o-3(b)(6).
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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.
(a) Economic Impact Assessment--Retirement of OATS and Amendments to 
the EBS Rules Following the Implementation of CAT
    Currently all FINRA members that do business in equity securities 
are required to report equity audit trail information to OATS and make 
transaction information available through the EBS system. As stated in 
the CAT NMS Plan, all large broker-dealers that are also FINRA members 
will be required to report order information in NMS Securities and OTC 
Equity Securities to both OATS and CAT beginning in November 2018 and 
Small Industry Members beginning in November 2019 as part of the 
broader CAT NMS Plan to implement the CAT and retire other systems. 
Further, clearing firms will be required to continue to make equity and 
option transaction data available through EBS requests until the 
proposed Supplementary Material is implemented. The proposed rule 
change lays out a plan by which FINRA will retire OATS and amend its 
rules for EBS to eventually eliminate the need for duplicative 
reporting and records maintenance.
    Costs and benefits associated with establishing the CAT, including 
the

[[Page 25427]]

economic impacts associated with retiring existing systems, have been 
established as a part of the Plan approved by the SEC. Significant 
economic impacts of OATS retirement as described in this proposed rule 
change include amending the Plan to require that Small Industry Members 
who currently report to OATS would be required to begin reporting to 
the CAT in 2018 rather than 2019 and a single cut-over from OATS to CAT 
for all firms provided that (1) average error rate thresholds over a 
180-day period are met, (2) no material issues related to market 
surveillance needs have been identified but are uncorrected, (3) the 
CAT not [sic] contain material issues that would negatively impact 
market surveillance, and (4) the plan processor is sufficiently meeting 
all of its obligations under the CAT NMS Plan. The key aspect to the 
proposed amendments to FINRA's rules for EBS include a provision that 
FINRA would no longer request data that is available in CAT through 
EBS, once the accuracy and reliability thresholds are achieved. The EBS 
Rules would continue to apply for securities that are not included 
within the CAT and for transactions that occurred before the CAT's 
accuracy and reliability are confirmed.
(b) Economic Impact
    In creating the proposal to retire OATS and amend the EBS Rules, 
FINRA is seeking to carefully balance the additional costs incurred by 
member firms associated with continuing to maintain duplicate systems 
and records created by the CAT NMS Plan and existing rules with the 
risks to effective and efficient surveillance that could arise from 
eliminating access to existing data systems before a high-quality 
alternative has been tested and verified. The costs of maintaining 
duplicate systems and records include, among other things, system 
maintenance, quality control oversight, and staff to maintain the 
systems and records. Because the CAT NMS Plan created the need to have 
duplicate systems and required a plan for the retirement of duplicate 
systems and processes, the Economic Impact Assessment will focus on the 
proposed choices made by FINRA in implementing the retirement plan.
(1) OATS Retirement
    The proposed rule change will impact all OATS-reporting firms. 
Currently all but 299 medium and large broker-dealers and 300 of 630 
small broker-dealers report to OATS. Of the 300 Small Industry Members 
that report to OATS, all but 10 of them currently report through other 
firms or service providers.\36\ Of the 10 that self-report, eight of 
them report very few orders to OATS as described above in Footnote 33. 
The approximately 629 broker dealers that are currently exempt or 
excluded from OATS reporting are not impacted by this proposed rule 
change. The EIA focuses on the impact of the proposed plan for retiring 
OATS on all OATS-reporting firms.
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    \36\ All of the clearing firms that report to OATS on behalf of 
Small Industry Members are required to begin reporting to CAT in 
2018. In addition, the service providers that report to OATS on 
behalf of Small Industry Members have a mix of small and large 
clients for whom they provide this service and, therefore, would be 
prepared to begin CAT reporting on behalf of their clients in 2018.
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    First, FINRA's proposed plan recommends a requirement that there be 
a single cut-over from OATS to CAT rather than a firm-by-firm cut-over. 
The primary beneficiary of this proposal will be the investing public. 
This approach eliminates the need to merge OATS and CAT data in order 
to execute surveillance in accordance with SEC rules and SRO 
obligations. The integration process would be technologically costly 
and difficult and could introduce errors into the data being surveilled 
that did not exist prior to integration. Conducting market surveillance 
from a single audit trail system increases the efficiency and 
effectiveness of the process and improves the integrity of the markets. 
In addition, there are direct benefits of this approach to firms. 
Specifically, other than during the time period during which the 
accuracy and reliability of CAT data is validated, a single cut-over 
approach would eliminate the need for firms that report on other firms' 
behalf to create a technological solution for receiving and reporting 
on data structured for both OATS and CAT simultaneously. Such a 
practice would increase costs to ensure compliance with the proper 
reporting mechanism. These costs would likely be incorporated into the 
fees for the service charged to introducing firms and could eventually 
be borne by customers through higher fees based on the price elasticity 
for brokerage services.
    The potential costs associated with the single cut-over approach 
will be borne by firms that could meet the maximum error thresholds for 
reporting to CAT earlier than the single cut-over approach would allow. 
These firms would bear the technology and compliance costs associated 
with dual reporting for a longer period than they might otherwise.
    Another potential cost of the single cut-over method is that there 
will likely be firms reporting to CAT that do not meet the maximum 
error rate thresholds, leading to lower quality data available for 
surveillance. If firms were individually permitted to end OATS 
reporting only when meeting a maximum error rate, every firm's 
reporting would meet the minimum criterion. Requiring an aggregate 
error rate may permit individual firms to end OATS reporting even while 
their CAT reporting does not meet the specified error rate as long as 
the error rate is low enough for the industry. Thus, surveillance of 
market activity for those firms may not be as efficient or effective 
due to the higher error rates. Taken further, it is possible that a 
single cut-over may reduce the incentives for any one firm to put 
significant effort and costs into meeting or beating the threshold 
error rates because the benefits are shared among all firms while 
greater cost is borne by the firms whose compliance rates satisfy the 
minimum error rate thresholds. This disincentive is likely to be small 
for firms with significant reporting obligations, who would seek to end 
duplicative reporting as quickly as possible and who represent the vast 
majority of OATS reports, but may, at the margin, extend the time 
necessary to meet the error reporting threshold. However, significant 
error rates could constitute a rule violation and subject firms to 
possible disciplinary action.\37\ Thus, firms that delay reducing error 
rates to threshold levels would over time incur higher costs through 
enforcement actions and be incentivized to improve their compliance 
rates.
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    \37\ See CAT NMS Plan, Appendix C, Section 3(b) (discussing 
firm-specific compliance thresholds).
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    FINRA supports an amendment to the Plan to require that all firms 
that report to OATS begin CAT reporting in November 2018. This 
requirement would accelerate by one year the CAT reporting obligations 
for 300 Small Industry Members. The primary benefit of this approach is 
that it allows the OATS system to be retired up to a year earlier, 
saving firms the costs of maintaining duplicate reporting systems. Of 
the estimated 300 firms who would be impacted by this proposal, 290 
report to OATS through clearing firms or other third party providers, 
all of whom will begin CAT reporting in 2018 either by the requirement 
in the Plan or on behalf of clients who are required to in the Plan. 
Thus, there should be limited additional technical requirements or 
costs to facilitate accelerated reporting for these firms. In fact, the 
accelerated reporting will likely allow the introducing and clearing 
firms

[[Page 25428]]

to avoid the costs associated with maintaining two systems for 
reporting during the additional transition year. The other 10 small 
firms will be required to incur costs associated with the changeover to 
CAT a year earlier. The magnitude of these costs is dependent on 
several factors, including the volume of trades expected to be reported 
to CAT as well as the technological differences between the OATS system 
specifications and the as yet unknown CAT system specifications.
    Third, FINRA proposes that the official retirement of OATS occurs 
only once CAT has met minimum accuracy and reliability standards 
defined as (1) a maximum of a 5% pre-correction error rate and 2% post-
correction error for all CAT submissions averaged over a 180-day period 
in applicable categories, (2) no material data issues not captured in 
the error rates that would negatively impact FINRA's ability to conduct 
effective market surveillance, (3) the CAT including all data necessary 
to allow FINRA to continue to meet its surveillance obligations, and 
(4) the plan processor is sufficiently meeting all of its obligations 
under the CAT NMS Plan. FINRA believes that a minimum of 180 days is 
required to provide sufficient time to ensure that future error rates 
below the maximum thresholds are able to be maintained and that the CAT 
data can otherwise be relied upon for conducting effective market 
surveillance. The trade-offs of lengthening or shortening the phase-in 
period and raising or lowering error rate thresholds are increased 
costs to member firms for maintaining duplicate reporting systems and 
records versus increased assurance for FINRA that the data will 
continue to meet maximum error thresholds and not contain material 
issues that would negatively impact market surveillance. Note that the 
current OATS error rates are significantly lower than 2%; however, OATS 
reporting errors have decreased over time with additional experience by 
firms, and CAT reporting is anticipated to be more complex and new to 
some firms and therefore more likely to contain errors when initially 
reported.
(2) Electronic Blue Sheet System Rule Amendments
    Once broker-dealer reporting to the CAT has begun, the CAT will 
contain much of the data that otherwise would have been requested via 
the EBS system for purposes of equities and options. Consequently, 
FINRA will no longer need to rely on the EBS system or request new 
information pursuant to the EBS Rules for equities or options for time 
periods after CAT has met the minimum accuracy and reliability 
standards defined above. Supplementary Material to the EBS Rules 
detailing the changes in how FINRA requests equity and options data 
will be implemented once the appropriate accuracy and reliability 
thresholds are achieved. The EBS Rules will remain applicable for 
historical equity and options data prior to CAT implementation and for 
record keeping purposes, three to seven years depending on the record. 
The EBS Rules will also remain in effect for reporting data for 
securities not reported in CAT.
    The proposed changes to the EBS Rules will impact clearing firms 
differently depending on the amount of automation already built into 
each firm's EBS system. As described in the Economic Impact Assessment 
for OATS retirement, there are economic trade-offs for loosening or 
tightening the requirements under which the new Supplementary Material 
outlined in the EBS Rule amendments would become effective. Loosening 
the requirements would hasten the effective date but could increase the 
risk that the quality of the data received would hamper FINRA's efforts 
to conduct market surveillance and investigate trading violations, 
potentially increasing risks to investors. Alternatively, tightening 
the requirements could decrease the risk that the data will be low 
quality but will increase the costs to member firms for maintaining 
duplicate reporting and data delivery systems. These costs to continue 
using the EBS system will have a differential impact on clearing firms, 
depending on the level of automation in each firm's EBS response 
process. Firms that have a fully automated EBS response system incur 
lower variable costs to responding to any individual request, but have 
higher fixed costs stemming from maintenance of a more complex system. 
Alternatively firms where more of the response process is manual incur 
higher variable costs to EBS requests due to data collection and 
validation but do not have the more sophisticated systems to maintain 
and therefore incur low fixed costs. So, when the Supplementary 
Material is implemented and clearing firms begin receiving fewer Blue 
Sheet requests, firms with highly manual processes will incur lower 
variable and therefore lower overall costs while firms with highly 
automated systems will likely see more modest cost decline. Firms with 
semi- or fully-automated EBS response systems may decide to phase out 
their automated systems and gradually replace them with more manual 
processes as the number of requests declines. Because clearing firms 
use different processes and systems to collect and submit EBS requests, 
there is ambiguity as to whether any individual firm's costs will be 
affected by the transition to CAT for transaction data requests and at 
what point firms may choose to move toward manual processes.

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

    Although written comments on the proposed rule change were not 
solicited, two commenters, the Financial Information Forum (``FIF'') 
and the Securities Industry and Financial Markets Association 
(``SIFMA''), submitted letters to the Participants regarding the 
retirement of systems related to the CAT.\38\ In its comment letter, 
with regard to the retirement of duplicative systems more generally, 
FIF recommends that the Participants continue the effort to incorporate 
current reporting obligations into the CAT in order to replace existing 
reportable systems with the CAT. In addition, FIF further recommends 
that, once a CAT Reporter achieves satisfactory reporting data quality, 
the CAT Reporter should be exempt from reporting to any duplicative 
reporting systems. FIF believes that these recommendations ``would 
serve both an underlying regulatory objective of more immediate and 
accurate access to data as well as an industry objective of reduced 
costs and burdens of regulatory oversight.'' \39\ In its comments about 
EBS specifically, FIF states that the retirement of the EBS 
requirements should be a high priority, and that the CAT should be 
designed to include the requisite data elements to permit the rapid 
retirement of the EBS system.\40\ Similarly, SIFMA states that ``the 
establishment of the CAT must be accompanied by the prompt elimination 
of duplicative systems,'' and ``recommend[ed] that the initial 
technical specifications be designed to facilitate the immediate 
retirement of . . . duplicative reporting systems.'' \41\
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    \38\ Letter from William H. Hebert, FIF, to Participants re: 
Milestone for Participants' rule change filings to eliminate/modify 
duplicative rules, dated April 12, 2017 (``FIF Letter''); Letter 
from Kenneth E. Bentsen, Jr., SIFMA, to Participants re: Selection 
of Thesys as CAT Processor, dated April 4, 2017, at 2 (``SIFMA 
Letter'').
    \39\ FIF Letter at 2.
    \40\ Id.
    \41\ SIFMA Letter at 2.
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    As discussed above, FINRA agrees with the commenters that the OATS

[[Page 25429]]

reporting requirements should be replaced by the CAT reporting 
requirements as soon as accurate and reliable CAT Data is available. To 
this end, FINRA anticipates that the CAT will be designed to collect 
the data necessary to permit the retirement of OATS. As discussed 
above, FINRA disagrees with the recommendation to provide individual 
exemptions to those CAT Reporters who obtain satisfactory data 
reporting quality; however, FINRA supports amendments to the CAT NMS 
Plan that would accelerate reporting for Small Industry Members that 
are currently reporting to OATS to facilitate the retirement of OATS.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be 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-2017-013 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-2017-013. 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 Web site (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 Web site 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 such filing also will be available 
for inspection and copying at the principal office of FINRA. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2017-013 and should be 
submitted on or before June 22, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
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    \42\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-11359 Filed 5-31-17; 8:45 am]
 BILLING CODE 8011-01-P