Document ID: SEC-2020-0937-0001
Agency: sec
Document Type: Notice
Title: Order Granting Conditional Exemptive Relief
Posted Date: 2020-06-17T04:00Z

[Federal Register Volume 85, Number 117 (Wednesday, June 17, 2020)]
[Notices]
[Pages 36631-36633]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-12998]

[[Page 36631]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89051]

Order Granting Conditional Exemptive Relief, Pursuant to Section 
36 of the Securities Exchange Act of 1934 (``Exchange Act'') and Rule 
608(e) of Regulation NMS Under the Exchange Act, From Sections 
6.4(d)(ii)(A)(2) and (B) of the National Market System Plan Governing 
the Consolidated Audit Trail

June 11, 2020.

I. Introduction

    By letter dated June 5, 2020 (``Participant Letter''), BOX 
Exchange, LLC, Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe 
C2 Exchange, Inc., Cboe EDGA Exchange Inc., Cboe EDGX Exchange, Inc., 
Cboe Exchange, Inc., Financial Industry Regulatory Authority, Inc. 
(``FINRA''), Investors Exchange LLC, Long Term Stock Exchange, Inc., 
Miami International Securities Exchange LLC, MIAX Emerald, LLC, MIAX 
PEARL, LLC, NASDAQ BX, Inc., Nasdaq GEMX, LLC, Nasdaq ISE, LLC, Nasdaq 
MRX, LLC, NASDAQ PHLX LLC, The NASDAQ Stock Market LLC, New York Stock 
Exchange LLC, NYSE American LLC, NYSE Arca, Inc., NYSE Chicago, Inc., 
and NYSE National, Inc. (collectively, the ``Participants'') request 
that the Securities and Exchange Commission (the ``Commission'' or the 
``SEC''), pursuant to the Commission's authority under Section 36 of 
the Exchange Act \1\ and Rule 608(e) of Regulation NMS under the 
Exchange Act,\2\ grant exemptive relief from Sections 6.4(d)(ii)(A)(2) 
and (B) of the national market system plan governing the consolidated 
audit trail (the ``CAT NMS Plan'').\3\ Specifically, the Participants 
request that the Commission provide exemptive relief from Section 
6.4(d)(ii)(A)(2) and (B) of the CAT NMS Plan, which state that each 
Participant, through its Compliance Rule,\4\ must require its Industry 
Members \5\ to record and report to the Central Repository \6\ the 
following information: (1) The SRO-Assigned Market Participant 
Identifier \7\ of the clearing broker or prime broker, if applicable, 
for orders that are executed in whole or in part; \8\ and (2) a 
cancelled trade indicator for trades that are cancelled.\9\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78mm.
    \2\ 17 CFR 242.608(e).
    \3\ The Commission approved the CAT NMS Plan, as modified, on 
November 15, 2016. See Securities Exchange Act Release Nos. 79318 
(November 15, 2016), 81 FR 84696 (November 23, 2016) (``CAT NMS Plan 
Approval Order''). The CAT NMS Plan functions as the limited 
liability company agreement of the jointly owned limited liability 
company formed under Delaware state law through which the 
Participants conduct activities related to the consolidated audit 
trail (the ``Company'').
    \4\ The CAT NMS Plan defines ``Compliance Rule'' as ``the 
rule(s) promulgated by such Participant as contemplated by Section 
3.11.'' See id., at Section 1.1.
    \5\ The CAT NMS Plan defines ``Industry Member'' as a ``member 
of a national securities exchange or a member of a national 
securities association.'' See id.
    \6\ The CAT NMS Plan defines ``Central Repository'' as ``a 
repository responsible for the receipt, consolidation, and retention 
of all information reported to the CAT pursuant to SEC Rule 613 and 
this Agreement.'' See id.
    \7\ The CAT NMS Plan defines ``SRO-Assigned Market Participant 
Identifier'' as ``an identifier assigned to an Industry Member by a[ 
self-regulatory organization or ``SRO''] or an identifier used by a 
Participant.'' See id.
    \8\ See id. at Section 6.4(d)(ii)(A)(2).
    \9\ See id. at Section 6.4(d)(ii)(B). See also Letter from Mike 
Simon, CAT NMS Plan Operating Committee Chair, to Vanessa 
Countryman, Secretary, Commission, dated June 5, 2020, available at 
https://catnmsplan.com/sites/default/files/2020-06/06.05.20-Exemptive-Request-RE-TRF-Facility.pdf (``Participant Letter'').
---------------------------------------------------------------------------

    For the reasons set forth below, this Order grants the 
Participants' request for exemptive relief from the above-described 
provisions of the CAT NMS Plan, subject to certain conditions.

II. Description

    As described in the Participant Letter, FINRA's Trade Reporting 
Facilities, FINRA's OTC Reporting Facility, and FINRA's Alternative 
Display Facility (collectively, ``FINRA Facility'') already collect and 
are required to report to the Central Repository, among other data, the 
clearing number of the clearing broker and the cancelled trade 
indicator in order to clear and publish trades (``FINRA Facility 
Data'').\10\ The Participants propose an approach wherein the FINRA 
Facility Data submitted to the Central Repository would be used as the 
source for the clearing number of the clearing broker \11\ instead of 
requiring Industry Members to record and report the SRO-Assigned Market 
Participant Identifier of the clearing broker (if applicable) for 
orders that are executed in whole or in part.\12\ Likewise, instead of 
requiring Industry Members to record and report a cancelled trade 
indicator for trades that are cancelled, FINRA Facility Data submitted 
to the Central Repository would be the source of the cancelled trade 
indicator.\13\
---------------------------------------------------------------------------

    \10\ See Participant Letter, at 2. FINRA Rules 6380A, 6380B, 
6622, and 6282 require participants of a FINRA Facility to report 
transactional data. See FINRA Rules, available at https://www.finra.org/rules-guidance/rulebooks/finra-rules.
    \11\ Although Section 6.4(d)(ii)(A)(2) of the CAT NMS Plan also 
states that the Participants must require, through their Compliance 
Rules, that Industry Members record and report the SRO-Assigned 
Market Participant Identifier of the prime broker (if applicable) 
for orders that are executed in whole or in part, the Participants 
have not requested exemptive relief from that requirement.
    \12\ The Participants state that the clearing number of the 
clearing broker is an SRO-Assigned Market Participant Identifier 
under the CAT NMS Plan, because it is assigned by The Depository 
Trust Company, which is an SRO under the Exchange Act. See 
Participant Letter, at 3 n.10.
    \13\ See id. at 3.
---------------------------------------------------------------------------

    The Participants explain that FINRA Facility Data would still be 
reported to the Central Repository in each instance currently required 
under the CAT NMS Plan. Industry Members would continue to be required 
to submit either a trade report or a trade cancellation with the 
requisite information to a FINRA Facility, in accordance with existing 
rules set by each Participant for its members.\14\ For cancelled 
trades, Industry Members would continue to be required to submit a 
trade cancellation to a FINRA Facility. The Compliance Rules would 
further require Large Industry Members \15\ and Small Industry Members 
that report to the Order Audit Trail System (``Small OATS Reporters'') 
that are unable to submit a cancelled trade indicator to a FINRA 
Facility to record and report directly to the Central Repository a 
cancelled trade indicator, as well as a cancelled trade timestamp, 
beginning on June 22, 2020.\16\ Similarly, for orders executed in part 
or in whole, Industry Members would continue to be required to submit a 
trade report with the clearing number of the clearing broker to a FINRA 
Facility. The Compliance Rules would further require Large Industry 
Members and Small OATS Reporters that are unable to submit the clearing 
number of the clearing broker to a FINRA Facility to record and report 
directly to the Central Repository the clearing number for the order, 
as well as contra party

[[Page 36632]]

information, beginning on April 26, 2021.\17\
---------------------------------------------------------------------------

    \14\ See id. at 6.
    \15\ For the purposes of this exemptive relief, the term ``Large 
Industry Members'' shall mean all Industry Members other than Small 
Industry Members. The CAT NMS Plan defines ``Small Industry Member'' 
as ``an Industry Member that qualifies as a small broker-dealer as 
defined in SEC Rule 613.'' See CAT NMS Plan, supra note 3, at 
Section 1.1. Small Industry Members that do not report to the Order 
Audit Trail System are not scheduled to begin reporting to the 
Central Repository until December 13, 2021, see Participant Letter, 
at 6 n.19, but they would be subject to the same Compliance Rules 
that would already be in place for Large Industry Members and Small 
OATS Reporters.
    \16\ See Participant Letter, at 3, 6. If the cancellation is 
rejected by the FINRA Facility and is not successfully re-entered by 
the Industry Member, then the Industry Member would be required to 
report to the Central Repository a cancelled trade indicator, as 
well as a cancelled trade timestamp. If the cancellation is rejected 
but successfully re-entered by the Industry Member, the Industry 
Member would not be required to separately report the cancellation 
to the Central Repository. See id. at 3 n.10.
    \17\ See id. at 6-7.
---------------------------------------------------------------------------

    In the Participant Letter, the Participants state that they would 
require the Plan Processor \18\ to link FINRA Facility Data to Industry 
Member execution reports submitted to the Central Repository beginning 
on October 26, 2020.\19\ The Participants explain that the Compliance 
Rules would require Industry Members to submit to the Central 
Repository an execution report submitted to a FINRA Facility for the 
corresponding trade report or trade cancellation, beginning on June 22, 
2020.\20\ Industry Members would be required to report a unique trade 
identifier, beginning on October 26, 2020, that would be used by the 
Plan Processor to link the FINRA Facility Data, including the number of 
the clearing broker and cancelled trade information, with the Industry 
Member's execution report.\21\ Specifically, if an Industry Member 
submits a trade report to a FINRA Facility pursuant to applicable 
Participant rules and reports the corresponding execution to the 
Central Repository, the Industry Member would also be required to 
report to the Central Repository the unique trade identifier reported 
by the Industry Member to such FINRA Facility for the trade.\22\
---------------------------------------------------------------------------

    \18\ The CAT NMS Plan defines ``Plan Processor'' as ``the 
Initial Plan Processor or any other Person selected by the Operating 
Committee pursuant to SEC Rule 613 and Sections 4.3(b)(i) and 6.1, 
and with regard to the Initial Plan Processor, the Selection Plan, 
to perform the CAT processing functions required by SEC Rule 613 and 
set forth in this Agreement.'' See CAT NMS Plan, supra note 3, at 
Section 1.1.
    \19\ See Participant Letter, at 6. The Company has entered into 
an agreement with FINRA CAT LLC that obligates FINRA CAT LLC to act 
as the Plan Processor and to perform the functions and duties 
contemplated by the CAT NMS Plan. The Company may further obligate 
the Plan Processor to perform the necessary linkage through this 
agreement.
    \20\ See id. The Participants clarify that ``the unique trade 
identifier for the OTC Reporting Facility and the Alternative 
Display Facility would be the Compliance ID, for the FINRA/Nasdaq 
Trade Reporting Facilities would be the Branch Sequence Number, and 
for the FINRA/NYSE Trade Reporting Facility would be the FINRA 
Compliance Number.'' See id.
    \21\ The Participants clarify that ``the unique trade identifier 
for the OTC Reporting Facility and the Alternative Display Facility 
would be the Compliance ID, for the FINRA/Nasdaq Trade Reporting 
Facilities would be the Branch Sequence Number, and for the FINRA/
NYSE Trade Reporting Facility would be the FINRA Compliance 
Number.'' See id.
    \22\ See id.
---------------------------------------------------------------------------

    The Participants state that there are four limited instances in 
which an Industry Member would be unable to provide a link between the 
execution reported to the Central Repository and the related FINRA 
Facility trade report. The first scenario involves the circumstances in 
which an Industry Member executes a trade between two desks or 
departments involving proprietary accounts. Because there is no change 
in beneficial ownership, no trade is reported to a FINRA Facility.\23\ 
The second scenario involves the circumstances in which an Industry 
Member executes a trade and must report the trade via Form T instead of 
to a FINRA Facility, such as where the security symbol is no longer 
available or the firm's market participant identifier is no longer 
active.\24\ The third scenario involves the circumstances in which a 
trade is executed by a non-FINRA member firm that has no FINRA Facility 
reporting obligation and was reported to the FINRA Facility by the 
FINRA member counterparty.\25\ The fourth scenario involves the 
circumstances in which an Industry Member is on the contra side of a 
negotiated trade reported to a FINRA Facility via a Qualified Service 
Representative Agreement or Automatic Give-up Agreement, such that the 
trade was automatically submitted to a FINRA Facility without the 
Industry Member taking any action on the trade.\26\ The Participants 
represented to the Commission that these scenarios are rare and do not 
involve a large number of trades. In these instances, the Participants 
stated that the Compliance Rules would require an Industry Member to 
record and report the relevant data directly to the Central Repository 
by June 22, 2020 for cancelled trades and by April 26, 2021 for orders 
executed in whole or in part.\27\
---------------------------------------------------------------------------

    \23\ See id. at 3. According to the Participants, these types of 
trade represented approximately 0.3 percent of the trades captured 
in FINRA's Order Audit Trail System in the fourth quarter of 2019. 
See id. at 3-4.
    \24\ See id. at 4. According to the Participants, in 2019, there 
were only 1,640 trades reported on Form T. See id.
    \25\ See id. The Participants do not provide statistics for this 
scenario, but stated that it did not implicate a large number of 
trades. See id.
    \26\ See id. According to the Participants, only 2 percent of 
the executions in the fourth quarter of 2019 were negotiated trades 
and only approximately 0.1 percent of executions were the above-
described type of negotiated trades. Id.
    \27\ See id. at 6-7. See also notes 14-17 and associated text 
supra, for a discussion of the data that the Compliance Rules would 
require an Industry Member to record and report to the Central 
Repository.
---------------------------------------------------------------------------

    Noting the current difference in the timestamp granularity 
requirements for Industry Member reporting to a FINRA Facility and 
Industry Member reporting to the Central Repository,\28\ the 
Participants further state that FINRA will seek to amend its FINRA 
Facility rules and technical specifications to accept timestamps up to 
the granularity required by the CAT NMS Plan and to implement such 
changes by December 15, 2021 for FINRA's Trade Reporting Facilities and 
FINRA's Alternative Display Facility and by December 15, 2022 for 
FINRA's OTC Reporting Facility.\29\
---------------------------------------------------------------------------

    \28\ The CAT NMS Plan states that Participants shall, through 
their Compliance Rules, require Industry Members to report 
transaction data to the Central Repository in milliseconds or in 
finer increments if Industry Members utilize such finer increments 
in their order handling or execution systems. See CAT NMS Plan, 
supra note 3, at Section 6.8(b); see also Securities Exchange Act 
Release No. 88608 (April 8, 2020), 85 FR 20743 (April 14, 2020) 
(granting time-limited exemptive relief allowing the Participants to 
require Industry Members using timestamps finer than the minimum 
required by the CAT NMS Plan to truncate such timestamps after the 
nanosecond level). A FINRA Facility, by contrast, only collects data 
using timestamps up to milliseconds. See Participant Letter, at 5.
    \29\ See Participant Letter, at 7.
---------------------------------------------------------------------------

III. Request for Relief

    The Participants request that the Commission grant each Participant 
exemptive relief from Section 6.4(d)(ii)(A)(2) and (B) of the CAT NMS 
Plan, which state that the Participants must require, through their 
Compliance Rules, that Industry Members record and report to the 
Central Repository the SRO-Assigned Market Participant Identifier of 
the clearing broker, if applicable, for orders that are executed in 
whole or in part, and a cancelled trade indicator for trades that are 
cancelled, when such data is reported by FINRA to the Central 
Repository as part of the FINRA Facility Data and subject to the above-
described conditions.\30\
---------------------------------------------------------------------------

    \30\ See Participant Letter, at 5-7. See notes 14-22, 27-29 and 
associated text supra for a discussion of these conditions.
---------------------------------------------------------------------------

    Once the alternative approach described above is fully implemented, 
the Participants believe that the FINRA Facility Data would be an 
equivalent and more reliable source for the clearing and cancellation 
data required by the CAT NMS Plan than similar data provided separately 
by each Industry Member.\31\ The FINRA Facility Data is already used 
for clearing and publishing trades.\32\ Inadvertent errors reported to 
a FINRA Facility may also result in a trade break.\33\ In addition, the 
Participants state that their proposed alternative approach would avoid 
burdening Industry Members with the cost and effort of reporting data 
regarding clearing brokers and cancelled

[[Page 36633]]

trades pursuant to two reporting regimes.\34\
---------------------------------------------------------------------------

    \31\ See Participant Letter, at 5.
    \32\ See id.
    \33\ See id. at 2 n.9.
    \34\ See id. at 5.
---------------------------------------------------------------------------

IV. Discussion

    Section 36 of the Exchange Act grants the Commission the authority, 
with certain limitations, to ``conditionally or unconditionally exempt 
any person, security, or transaction . . . from any provision or 
provisions of [the Exchange Act] or of any rule or regulation 
thereunder, to the extent that such exemption is necessary or 
appropriate in the public interest, and is consistent with the 
protection of investors.'' \35\ Rule 608(e) of Regulation NMS under the 
Exchange Act authorizes the Commission to exempt, either 
unconditionally or on specified terms and conditions, any self-
regulatory organization, member thereof, or specified security, from 
the provisions of the rule if the Commission determines that such 
exemption is consistent with the public interest, the protection of 
investors, the maintenance of fair and orderly markets and the removal 
of impediments to, and perfection of the mechanisms of, a national 
market system.\36\
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 78mm(a)(1).
    \36\ 17 CFR 242.608(e).
---------------------------------------------------------------------------

    The Commission believes that, pursuant to Section 36 of the 
Exchange Act, exemptive relief is appropriate in the public interest 
and consistent with the protection of investors, and that, pursuant to 
Rule 608(e) under the Exchange Act, exemptive relief is consistent with 
the public interest, the protection of investors, the maintenance of 
fair and orderly markets and the removal of impediments to, and the 
perfection of the mechanisms of, a national market system. Relying on 
FINRA Facility Data in lieu of requiring Industry Members to report the 
SRO-Assigned Market Participant Identifier of the clearing broker, if 
applicable, and a cancelled trade indicator will be more efficient and 
more cost-effective for Industry Members, because this proposed 
alternative approach will avoid burdening Industry Members with 
reporting data regarding clearing brokers and cancelled trades pursuant 
to two reporting regimes. Moreover, once the alternative approach is 
fully implemented, FINRA Facility Data provided to the CAT would be 
equivalent to the data required by Sections 6.4(d)(ii)(A)(2) and (B).
    The Commission believes that the conditions proposed by the 
Participants in their request for exemptive relief are also 
appropriate, including the condition that FINRA will continue to report 
FINRA Facility Data to the Central Repository, the condition that the 
Participants will require the Plan Processor to link FINRA Facility 
Data to Industry Member execution reports submitted to the Central 
Repository, conditions specifying that the Participants' Compliance 
Rules will require Industry Members to report directly to the Central 
Repository if they do not submit the required information to a FINRA 
Facility or are unable to provide a link between the execution reported 
to the Central Repository and the corresponding FINRA Facility trade 
report or trade cancellation, and the condition that FINRA would seek 
to amend its FINRA Facility rules and technical specifications to 
permit each FINRA Facility to accept timestamps up to the granularity 
required by the CAT NMS Plan.\37\ The Commission believes that such 
conditions will help to ensure the collection of relevant and 
equivalent data regarding cancelled trades and clearing brokers.
---------------------------------------------------------------------------

    \37\ See notes 14-22, 27-29 and associated text supra for a 
discussion of these conditions. The Participants have an obligation 
to enforce Industry Member compliance with their own rules, 
including the Compliance Rules and FINRA's rules relating to its 
trade reporting facilities. See, e.g., note 10 supra.
---------------------------------------------------------------------------

    The Commission also believes that the phased implementation of the 
Participants' alternative approach is appropriate. Although some 
elements of the Participants' alternative approach will not be fully 
implemented until 2021 or 2022, including direct reporting by Industry 
Members of clearing numbers and contra party information in certain 
circumstances, the Participants have indicated that these elements 
would only affect a limited or de minimis amount of data.\38\ The 
Commission therefore believes that granting the requested exemptive 
relief according to the timeline proposed by the Participants is 
unlikely to have a significant impact on regulators' short-term ability 
to use the transactional data reported to the Central Repository. 
Moreover, the Commission believes that granting exemptive relief 
according to the timeline proposed by the Participants will 
simultaneously provide Industry Members with immediate relief from 
incurring duplicative costs and encourage progress towards full 
implementation of the alternative approach on a reasonable and feasible 
schedule.
---------------------------------------------------------------------------

    \38\ See, e.g., notes 23-26 and associated text supra.
---------------------------------------------------------------------------

    To the extent that the Participants are availing themselves of 
exemptive relief from a CAT NMS Plan requirement, such requirement 
shall not be included in the requirements for a Financial 
Accountability Milestone, provided that the conditions of the exemption 
are satisfied.\39\
---------------------------------------------------------------------------

    \39\ See Securities Exchange Act Release No. 88890 (May 15, 
2020), 85 FR 31322, 31335 (May 22, 2020). If the Participants do not 
meet the conditions set forth herein, on the schedule set forth 
herein, their ability to recover fees from Industry Members could be 
impacted pursuant to the terms of Section 11.6 of the CAT NMS Plan. 
See CAT NMS Plan, supra note 3, at Section 11.6 (effective June 22, 
2020). Specifically, linkage of execution reports submitted to the 
Central Repository by Industry Members to corresponding FINRA trade 
reports and Industry Member reporting of unique trade identifiers, 
scheduled to begin on October 26, 2020, along with any related 
changes to the Compliance Rules, will now be relevant to the Full 
Implementation of Core Equity Reporting milestone (Period 2), which 
must be satisfied no later than December 31, 2020. Functionality 
enabling Industry Members to report clearing numbers and contra 
party information directly to the Central Repository, scheduled to 
begin on April 26, 2021 for Large Industry Members and Small OATS 
Reporters, along with any related changes to the Compliance Rules 
and FINRA's Trade Reporting Facilities and FINRA's Alternative 
Display Facility acceptance of timestamps up to the granularity 
required by the CAT NMS Plan, scheduled to begin by December 15, 
2021, will now be relevant to the Full Availability and Regulatory 
Utilization of Transactional Database Functionality milestone 
(Period 3), which must be satisfied no later than December 31, 2021. 
FINRA's OTC Reporting Facility acceptance of timestamps up to the 
granularity required by the CAT NMS Plan, scheduled to begin by 
December 15, 2022, will now be relevant to the Full Implementation 
of CAT NMS Plan Requirements milestone (Period 4), which must be 
satisfied no later than December 30, 2022.
---------------------------------------------------------------------------

    Accordingly, it is hereby ordered, pursuant to Section 36(a)(1) of 
the Exchange Act \40\ and Rule 608(e) under the Exchange Act,\41\ that 
the Commission grants the Participants' request for exemptive relief, 
as set forth in the Participant Letter, from the requirements in 
Section 6.4(d)(ii)(A)(2) and (B) of the CAT NMS Plan, subject to the 
conditions described by the Participants and in this Order.
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 78mm(a)(1).
    \41\ 17 CFR 242.608(e).

    By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-12998 Filed 6-16-20; 8:45 am]
BILLING CODE 8011-01-P