[Federal Register Volume 88, Number 120 (Friday, June 23, 2023)]
[Notices]
[Pages 41142-41161]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-13340]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97750; File No. 4-698]


Joint Industry Plan; Order Instituting Proceedings To Determine 
Whether To Approve or Disapprove an Amendment to the National Market 
System Plan Governing the Consolidated Audit Trail

June 16, 2023.

I. Introduction

    On March 13, 2023, the Consolidated Audit Trail, LLC (``CAT LLC''), 
on behalf of the Participants \1\ to the National Market System Plan 
Governing the Consolidated Audit Trail (``CAT NMS Plan'' or 
``Plan''),\2\ filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 11A of the Exchange Act \3\ and 
Rule 608 of Regulation National Market System (``Regulation NMS'') 
thereunder,\4\ a proposed amendment to the CAT NMS Plan (``Proposed 
Amendment'') to implement a revised funding model (``Executed Share 
Model'') for the consolidated audit trail (``CAT'') and to establish a 
fee schedule for Participant CAT fees in accordance with the Executed 
Share Model (``Proposed Participant Fee Schedule'').\5\ The Proposed 
Amendment was published for comment in the Federal Register on March 
21, 2023.\6\
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    \1\ The Participants are: 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., The 
Financial Industry Regulatory Authority, Inc. (``FINRA''), Investors 
Exchange LLC, Long-Term Stock Exchange, Inc., MEMX LLC, 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,'' ``self-regulatory organizations,'' or ``SROs'').
    \2\ The CAT NMS Plan is a national market system plan approved 
by the Commission pursuant to Section 11A of the Securities Exchange 
Act of 1934 (``Exchange Act'') and the rules and regulations 
thereunder. See Securities Exchange Act Release No. 78318 (Nov. 15, 
2016), 81 FR 84696 (Nov. 23, 2016) (``CAT NMS Plan Approval 
Order''). The CAT NMS Plan is Exhibit A to the CAT NMS Plan Approval 
Order. See CAT NMS Plan Approval Order, 81 FR at 84943-85034. 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 the activities of 
the CAT (``Company''). Each Participant is a member of the Company 
and jointly owns the Company on an equal basis. The Participants 
submitted to the Commission a proposed amendment to the CAT NMS Plan 
on August 29, 2019, which they designated as effective on filing. On 
August 29, 2019, the Participants replaced the CAT NMS Plan in its 
entirety with the limited liability company agreement of a new 
limited liability company, CAT LLC, which became the Company. See 
Securities Exchange Act Release No. 87149 (Sept. 27, 2019), 84 FR 
52905 (Oct. 3, 2019). The latest version of the CAT NMS Plan is 
available at https://catnmsplan.com/about-cat/cat-nms-plan.
    \3\ 15 U.S.C. 78k-1.
    \4\ 17 CFR 242.608.
    \5\ See Letter from Brandon Becker, Chair, CAT NMS Plan 
Operating Committee, to Vanessa Countryman, Secretary, Commission 
(Mar. 13, 2023) (``Transmittal Letter'').
    \6\ See Securities Exchange Act Release No. 97151 (Mar. 15, 
2023), 88 FR 17086 (Mar. 21, 2023) (``Notice''). Comments received 
in response to the Notice can be found on the Commission's website 
at https://www.sec.gov/comments/4-698/4-698-a.htm.
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    This order institutes proceedings, under Rule 608(b)(2)(i) of 
Regulation NMS,\7\ to determine whether to disapprove the Proposed 
Amendment or to approve the Proposed Amendment with any changes or 
subject to any conditions the Commission deems necessary or 
appropriate.\8\
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    \7\ 17 CFR 242.608(b)(2)(i).
    \8\ On June 15, 2023, the Participants submitted a letter 
consenting to a 30-day extension (until July 20, 2023) of the date 
by which the Commission shall, by order, approve or disapprove the 
Proposed Amendment, or institute proceedings to determine whether 
the Proposed Amendment should be disapproved. See Letter from 
Brandon Becker, Chair, CAT NMS Plan Operating Committee, to Vanessa 
Countryman, Secretary, Commission (Jun. 15, 2023). Nevertheless, the 
Commission believes it is appropriate for the reasons stated herein 
to institute proceedings under Rule 608(b)(2)(i) of Regulation NMS 
and Rules 700 and 701 of the Commission's Rules of Practice.
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II. Background

    On July 11, 2012, the Commission adopted Rule 613 of Regulation 
NMS, which required the SROs to submit a national market system 
(``NMS'') plan to create, implement and maintain a consolidated audit 
trail that would capture customer and order event information for 
orders in NMS securities.\9\ On November 15, 2016, the Commission 
approved the CAT NMS Plan.\10\ Under the CAT NMS Plan, the Operating 
Committee of the Company, of which each Participant is a member,

[[Page 41143]]

has the discretion (subject to the funding principles set forth in the 
Plan) to establish funding for the Company to operate the CAT, 
including establishing fees to be paid by the Participants and Industry 
Members.\11\
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    \9\ 17 CFR 242.613.
    \10\ See CAT NMS Plan, supra note 2.
    \11\ The CAT NMS Plan defines ``Industry Member'' as ``a member 
of a national securities exchange or a member of a national 
securities association.'' See CAT NMS Plan, supra note 2, at Section 
1.1. See also id. at Section 11.1(b).
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    Under the CAT NMS Plan, CAT fees are to be implemented in 
accordance with various funding principles, including an ``allocation 
of the Company's related costs among Participants and Industry Members 
that is consistent with the Exchange Act taking into account . . . 
distinctions in the securities trading operations of Participants and 
Industry Members and their relative impact upon the Company resources 
and operations'' and the ``avoid[ance of] any disincentives such as 
placing an inappropriate burden on competition and reduction in market 
quality.'' \12\ The Plan specifies that, in establishing the funding of 
the Company, the Operating Committee shall establish ``a tiered fee 
structure in which the fees charged to: (1) CAT Reporters \13\ that are 
Execution Venues,\14\ including ATSs,\15\ are based upon the level of 
market share; (2) Industry Members' non-ATS activities are based upon 
message traffic; and (3) the CAT Reporters with the most CAT-related 
activity (measured by market share and/or message traffic, as 
applicable) are generally comparable (where, for these comparability 
purposes, the tiered fee structure takes into consideration 
affiliations between or among CAT Reporters, whether Execution Venues 
and/or Industry Members).'' \16\
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    \12\ Id. at Section 11.2(b) and (e).
    \13\ The CAT NMS Plan defines ``CAT Reporter'' as ``each 
national securities exchange, national securities association and 
Industry Member that is required to record and report information to 
the Central Repository pursuant to SEC Rule 613(c).'' Id. at Section 
1.1.
    \14\ The CAT NMS Plan defines ``Execution Venue'' as ``a 
Participant or an alternative trading system (`ATS') (as defined in 
Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of 
Regulation ATS (excluding any such ATS that does not execute 
orders).'' Id.
    \15\ Id.
    \16\ CAT NMS Plan, supra note 2, at Section 11.2(c). See id. at 
Article XI for additional detail.
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    On May 15, 2020, the Commission adopted amendments to the CAT NMS 
Plan designed to increase the Participants' financial accountability 
for the timely completion of the CAT (``Financial Accountability 
Amendments'').\17\ The Financial Accountability Amendments added 
Section 11.6 to the CAT NMS Plan to govern the recovery from Industry 
Members of any fees, costs, and expenses (including legal and 
consulting fees, costs and expenses) incurred by or for the Company in 
connection with the development, implementation and operation of the 
CAT from June 22, 2020 until such time that the Participants have 
completed Full Implementation of CAT NMS Plan Requirements \18\ 
(``Post-Amendment Expenses''). Section 11.6 establishes target 
deadlines for four Financial Accountability Milestones (Periods 1, 2, 3 
and 4) \19\ and reduces the amount of fee recovery available to the 
Participants if these deadlines are missed.\20\
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    \17\ See Securities Exchange Act Release No. 88890, 85 FR 31322 
(May 22, 2020).
    \18\ ``Full Implementation of CAT NMS Plan Requirements'' means 
``the point at which the Participants have satisfied all of their 
obligations to build and implement the CAT, such that all CAT system 
functionality required by Rule 613 and the CAT NMS Plan has been 
developed, successfully tested, and fully implemented at the initial 
Error Rates specified by Section 6.5(d)(i) or less, including 
functionality that efficiently permits the Participants and the 
Commission to access all CAT Data required to be stored in the 
Central Repository pursuant to Section 6.5(a), including Customer 
Account Information, Customer-ID, Customer Identifying Information, 
and Allocation Reports, and to analyze the full lifecycle of an 
order across the national market system, from order origination 
through order execution or order cancellation, including any related 
allocation information provided in an Allocation Report. This 
Financial Accountability Milestone shall be considered complete as 
of the date identified in a Quarterly Progress Report meeting the 
requirements of Section 6.6(c).'' CAT NMS Plan, supra note 2, at 
Section 1.1.
    \19\ Id. at Section 11.6(a)(i).
    \20\ Id. at Section 11.6(a)(ii) and (iii).
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III. Summary of Proposal 21
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    \21\ This section summarizes the proposed changes to the CAT NMS 
Plan. For a full discussion of the Proposed Amendment, including the 
Participants' justifications for the Proposed Amendment, such as 
comparability to existing fees, alternatives considered, fee pass-
throughs, treatment of FINRA, cost transparency (including the 
Historical CAT Costs prior to 2022) and satisfaction of the Exchange 
Act and CAT NMS Plan requirements, see Notice, supra note 6.
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    CAT LLC proposes to replace the funding model set forth in Article 
XI of the CAT NMS Plan (``Original Funding Model'') with the Executed 
Share Model. The Original Funding Model involved a bifurcated approach, 
where costs associated with building and operating the CAT would be 
borne by (1) Industry Members (other than alternative trading systems 
(``ATSs'') that execute transactions in Eligible Securities 
(``Execution Venue ATSs'')) through fixed tiered fees based on message 
traffic for Eligible Securities, and (2) Participants and Industry 
Members that are Execution Venue ATSs for Eligible Securities through 
fixed tiered fees based on market share.\22\ In contrast, the Executed 
Share Model would charge fees based on the executed equivalent share 
volume of transactions in Eligible Securities rather than based on 
market share and message traffic.\23\ In addition, instead of charging 
fees to Industry Members, under the Executed Share Model, fees would be 
charged to each Industry Member that is a CAT Executing Broker \24\ for 
the buyer in a transaction in Eligible Securities (``CAT Executing 
Broker for the Buyer'' or ``CEBB'') and each Industry Member that is 
the CAT Executing Broker for the seller in a transaction in Eligible 
Securities (``CAT Executing Broker for the Seller'' or ``CEBS'').\25\
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    \22\ See CAT NMS Plan, supra note 2, at Section 11.3(a) and (b).
    \23\ See Notice, supra note 6, 88 FR at 17086.
    \24\ See infra Section III.A.1. for the definition of CAT 
Executing Broker.
    \25\ See Notice, supra note 6, 88 FR at 17087.
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    Under the Executed Share Model, CAT LLC proposes to establish two 
categories of CAT fees. The first category of CAT fees would be fees 
(``CAT Fees'') payable by Participants and Industry Members that are 
CAT Executing Brokers for the Buyer and for the Seller with regard to 
CAT costs not previously paid by the Participants (``Prospective CAT 
Costs'').\26\ The second category of CAT fees would be fees 
(``Historical CAT Assessments'') to be payable by Industry Members that 
are CAT Executing Brokers for the Buyer and for the Seller with regard 
to CAT costs previously paid by the Participants (``Past CAT 
Costs'').\27\ Each Historical CAT Assessment will recover an amount of 
``Historical CAT Costs'', which will be Past CAT Costs minus Past CAT 
Costs reasonably excluded from Historical CAT Costs by the Operating 
Committee.\28\
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    \26\ Id. at 17086; see also proposed Section 11.3(a). The 
defined term ``CAT Fees'' applies specifically to CAT fees related 
to Prospective CAT Costs. Id.
    \27\ See Notice, supra note 6, 88 FR at 17086; see also proposed 
Section 11.3(b).
    \28\ See Notice, supra note 6, 88 FR at 17096; see also proposed 
Section 11.3(b)(i)(C).
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    For each category of fees, each CEBB and each CEBS will be required 
to pay a CAT fee for each such transaction in Eligible Securities in 
the prior month based on CAT Data.\29\ The CEBB's CAT fee or CEBS's CAT 
fee (as applicable) for each transaction in Eligible Securities will be 
calculated by multiplying the number of executed equivalent shares in 
the transaction by one-third and by the reasonably determined Fee 
Rate,\30\ as

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described below.\31\ Participants would incur CAT Fees only for 
Prospective CAT Costs and the Participant CAT Fee will be calculated by 
multiplying the number of executed equivalent shares in the transaction 
by one-third and by the reasonably determined Fee Rate.\32\ The 
Participants' one-third share of Historical CAT Costs and such other 
additional Past CAT Costs as reasonably determined by the Operating 
Committee will be paid by the cancellation of loans made to the Company 
on a pro rata basis based on the outstanding loan amounts due under the 
loans.\33\
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    \29\ See Notice, supra note 6, 88 FR at 17093; see also proposed 
Section 11.3(a)(iii), proposed Section 11.3(b)(iii).
    \30\ See Notice, supra note 6, 88 FR at 17124 for the definition 
and description of the calculation of the Fee Rate.
    \31\ Id. at 17095; see also proposed Section 11.3(a)(iii), 
proposed Section 11.3(b)(iii).
    \32\ See Notice, supra note 6, 88 FR at 17094; see also proposed 
Section 11.3(a)(ii).
    \33\ See proposed Section 11.3(b)(ii).
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    As Plan Processor, FINRA CAT would be responsible for calculating 
the CAT fees and submitting invoices to the CAT Executing Brokers based 
on this CAT Data.\34\ All data used to calculate the fees under the 
Executed Share Model would be CAT Data, and, therefore, it would be 
available through the CAT for calculating CAT fees.\35\
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    \34\ See Notice, supra note 6, 88 FR at 17088.
    \35\ Id.
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    Once the Proposed Amendment has been approved by the Commission, 
the Participants would separately file proposed rule changes pursuant 
to Section 19(b) of the Exchange Act \36\ to establish the amounts of 
the proposed CAT Fees and Historical CAT Assessments to be charged to 
Industry Members, subject to the satisfaction of applicable Financial 
Accountability Milestones as set forth in Section 11.6 of the CAT NMS 
Plan and the implementation of the billing and collection system for 
the CAT fees.\37\ In each proposed rule change, if the Participants 
seek to recover amounts under the Financial Accountability Milestones, 
they would need to discuss their completion of the applicable 
milestone.\38\
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    \36\ 15 U.S.C. 78s(b).
    \37\ See Notice, supra note 6, 88 FR at 17086, 17122.
    \38\ Proposed Section 11.3(b)(iii)(B)(III) would prohibit any 
Participant from filing proposed rule changes pursuant to Section 
19(b) of the Exchange Act regarding any Historical CAT Assessment 
until any applicable Financial Accountability Milestone in Section 
11.6 of the CAT NMS Plan has been satisfied.
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A. Description of Amendments

1. Definition of CAT Executing Broker
    The Executed Share Model would define ``CAT Executing Broker'' in 
Section 1.1 of the CAT NMS Plan as:

    (a) with respect to a transaction in an Eligible Security that 
is executed on an exchange, the Industry Member identified as the 
Industry Member responsible for the order on the buy-side of the 
transaction and the Industry Member responsible for the sell-side of 
the transaction in the equity order trade event and option trade 
event in the CAT Data submitted to the CAT by the relevant exchange 
pursuant to the Participant Technical Specifications; and (b) with 
respect to a transaction in an Eligible Security that is executed 
otherwise than on an exchange and required to be reported to an 
equity trade reporting facility of a registered national securities 
association, the Industry Member identified as the executing broker 
and the Industry Member identified as the contra-side executing 
broker in the TRF/ORF/ADF transaction data event in the CAT Data 
submitted to the CAT by FINRA pursuant to the Participant Technical 
Specifications; provided, however, in those circumstances where 
there is a non-Industry Member identified as the contra-side 
executing broker in the TRF/ORF/ADF transaction data event or no 
contra-side executing broker is identified in the TRF/ORF/ADF 
transaction data event, then the Industry Member identified as the 
executing broker in the TRF/ORF/ADF transaction data event would be 
treated as CAT Executing Broker for the Buyer and for the Seller.

    Under the Participant Technical Specifications, for transactions 
occurring on a Participant exchange, there is a field for the exchange 
to report the market participant identifier (``MPID'') of ``the member 
firm that is responsible for the order on this side of the trade.'' 
\39\ The Industry Members identified in these fields for the 
transaction reports would be the CAT Executing Brokers for transactions 
executed on an exchange.
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    \39\ See Section 4.7 (Order Trade Event) and Section 5.2.5.1 
(Simple Option Trade Event: Side Details) of the CAT Reporting 
Technical Specifications for Plan Participants, Version 4.1.0-r17 
(Feb. 21, 2023), https://www.catnmsplan.com/sites/default/files/2023-02/02.21.2023-CAT-Reporting-Technical-Specifications-for-Participants-4.1.0-r17.pdf.
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    FINRA is required to report to the CAT transactions in Eligible 
Securities reported to a FINRA trade reporting facility (i.e., the 
FINRA Trade Reporting Facilities (``TRF''), Over-the Counter Reporting 
Facility (``ORF'') and Alternative Display Facility (``ADF'')).\40\ 
Under the Participant Technical Specifications, for such transactions 
reported to a FINRA trade reporting facility, FINRA is required to 
report the MPID of the executing party as well as the MPID of the 
contra-side executing party. The Industry Members identified in these 
two fields for the transaction reports would be the CAT Executing 
Brokers for over-the-counter transactions.
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    \40\ See Section 6.1 of the CAT Reporting Technical 
Specifications for Plan Participants (Feb. 21, 2023).
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    CAT LLC states that a CAT Executing Broker in over-the-counter 
transactions identified on the TRF/ORF/ADF Transaction Data Event is 
determined based on the tape or media report, that is, a trade report 
that is submitted to a FINRA trade reporting facility and reported to 
and publicly disseminated by the appropriate exclusive Securities 
Information Processor. A CAT Executing Broker for over-the-counter 
transactions is not determined based on a non-tape report (e.g., a 
regulatory report or a clearing report), which are not publicly 
disseminated.\41\
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    \41\ There is an exception to this statement for away-from-
market trades. These are non-media trades reported to the TRF with 
an ``SRO Required Modifier Code'' of ``R''.
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    Therefore, with respect to transactions on an exchange and over-
the-counter transactions, CAT LLC would use transaction reports 
reported to the CAT by FINRA or the exchanges to identify the 
transaction, as well as the CAT Executing Broker for each transaction, 
for purposes of calculating the CAT fees. Accordingly, all data used to 
calculate the fees under the Executed Share Model would be CAT Data, 
and, therefore, it would be available through the CAT for calculating 
CAT fees. FINRA CAT would be responsible for calculating the CAT fees 
\42\ and submitting invoices to the CAT Executing Brokers \43\ based on 
this CAT Data.
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    \42\ According to CAT LLC, because CAT fees would be charged 
based on the Equity Order Trade Events, Options Trade Events and the 
ADF/ORF/TRF Transaction Data Events in the Participant Technical 
Specifications and none of these transaction reports provide for 
fractional quantities, CAT fees would be calculated without 
reference to fractional shares or fractional share components of 
executed orders. To the extent that FINRA's equity transaction 
reporting facilities or the exchanges report transactions in 
fractional shares in the future, then the calculation of CAT fees 
would reflect fractional shares as well.
    \43\ CAT LLC states that each CAT Executing Broker could 
determine, but would not be required, to pass their CAT fees through 
to their clients, who, in turn, could pass their CAT fees to their 
clients, until the fee is imposed on the ultimate participant in the 
transaction.
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a. Treatment of ATSs
    The definition of a ``CAT Executing Broker'' as proposed above 
would determine the CAT Executing Brokers for transactions executed on 
an ATS. Specifically, if an ATS is identified as the executing party 
and/or the contra-side executing party in the TRF/ORF/ADF Transaction 
Data Event, then the ATS would be a CAT Executing Broker for purposes 
of the Executed Share Model. If the ATS is identified as the executing 
party for the buyer in such transaction reports, then the ATS would be 
the CAT Executing Broker for the Buyer. If the ATS is identified as the 
executing party for the seller in such

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transaction reports, then the ATS would be the CAT Executing Broker for 
the Seller. An ATS also could be identified as both the CAT Executing 
Broker for the Buyer and the CAT Executing Broker for the Seller. ATSs 
would determine the executing party and the contra-side executing party 
reported to FINRA's equity trading facilities in accordance with the 
transaction reporting requirements for FINRA's equity trading 
facilities.
b. Non-Industry Members on Transaction Reports
    The Executed Share Model also would address how transactions that 
involve a non-Industry Member would be treated (e.g., for internalized 
trades or trades with a non-FINRA member). The FINRA trade reporting 
requirements state that ``[w]hen reporting a trade with a broker-dealer 
that is not a FINRA member, the non-member should not be identified on 
the trade report as the contra party to the trade.'' \44\ Accordingly, 
when the transaction in these cases is reported to CAT via the TRF/ORF/
ADF Transaction Data Event, the field for the reportingExecutingMpid 
would be populated with the MPID of the executing broker and the field 
for the contraExecutingMpid would be blank or null. As noted above, the 
reportingExecutingMpid is a required field (include key = `R') that 
must be entered on all CAT reports, but the contraExecutingMpid field 
is conditional; it does not need to be populated, specifically to 
account for cases like those at issue here (e.g., transactions with a 
non-FINRA member). Therefore, in those scenarios where the 
contraExecutingMpid is blank, the FINRA member identified in the 
reportingExecutingMpid field would be treated as the CAT Executing 
Broker for both the buy-side and the sell-side of the transaction, that 
is, as the CEBS and CEBB.
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    \44\ FINRA Trade Reporting FAQ 202.1.
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    In addition, under the FINRA trade reporting requirements, there is 
a limited exception to the general rule about not reporting a non-
member as the contra party to the trade. Specifically, pursuant to 
FINRA Trade Reporting FAQ 202.1, ``[t]here is a limited exception where 
a Canadian non-member firm uses the FINRA/NASDAQ TRF or ORF for 
purposes of comparing trades pursuant to a valid Non-Member Addendum to 
the NASDAQ Services Agreement. In that instance, however, the Canadian 
non-member must appear on the trade report as the contra party to the 
trade and not as the reporting party. For any trade report on which a 
Canadian non-member appears as a party to the trade, the FINRA member 
must appear as the reporting party.'' In this case involving the 
Canadian non-member firm exception, the executing broker identified in 
the reportingExecutingMpid field would be billed for both sides of the 
transaction.
    CAT LLC proposes to include language in the definition of ``CAT 
Executing Broker'' to address these scenarios. Specifically, CAT LLC 
proposes to state the following in the definition of ``CAT Executing 
Broker: ``in those circumstances where there is a non-Industry Member 
identified as the contra-side executing broker in the TRF/ORF/ADF 
transaction data event or no contra-side executing broker is identified 
in the TRF/ORF/ADF transaction data event, then the Industry Member 
identified as the executing broker in the TRF/ORF/ADF transaction data 
event would be treated as CAT Executing Broker for the Buyer and for 
the Seller.''
c. Cancellations and Corrections
    The Executed Share Model also would provide for cancellations and 
corrections. CAT LLC expects to determine CAT fees based on the 
transaction reports for a month as of a particular day. To the extent 
that changes are made to the transaction reports on or before the day 
the CAT fees are determined for the given month, the changes will be 
reflected in the monthly bill. To the extent that changes are made to 
the transaction reports after the day the CAT fees are determined for 
that month, subsequent bills will reflect any changes via debits or 
credits, as applicable. As CAT LLC is required by Section 11.1(d) of 
the CAT NMS Plan to adopt policies, procedures, and practices regarding 
the billing and collection of fees, CAT LLC will establish specific 
policies and procedures regarding the treatment of such adjustments as 
those related to cancellations and corrections. Furthermore, CAT LLC 
will inform Industry Members and other market participants of these 
policies and procedures via FAQs, CAT Alerts and/or other appropriate 
methods.
2. CAT Budget
    Section 11.1(a) of the CAT NMS Plan describes the requirement for 
the Operating Committee to approve an operating budget for CAT LLC on 
an annual basis. It requires the budget to ``include the projected 
costs of the Company, including the costs of developing and operating 
the CAT for the upcoming year, and the sources of all revenues to cover 
such costs, as well as the funding of any reserve that the Operating 
Committee reasonably deems appropriate for prudent operation of the 
Company.'' CAT LLC proposes to provide additional detail regarding the 
CAT LLC operating budget by adding proposed subparagraphs (i) and (ii) 
to Section 11.1(a) of the CAT NMS Plan.
a. Budgeted CAT Costs
    CAT LLC proposes to add subparagraph (i) to Section 11.1(a) of the 
CAT NMS Plan to list the types of CAT costs to be included in the 
budget. Specifically, proposed Section 11.1(a)(i) of the CAT NMS Plan 
would state that ``[w]ithout limiting the foregoing, the reasonably 
budgeted CAT costs shall include technology (including cloud hosting 
services, operating fees, CAIS operating fees, change request fees and 
capitalized developed technology costs), legal, consulting, insurance, 
professional and administration, and public relations costs, a reserve, 
and such other categories as reasonably determined by the Operating 
Committee to be included in the budget.''
    CAT LLC proposes to require the inclusion of five subcategories of 
technology costs in the budget: (1) cloud hosting services, (2) 
operating fees, (3) Customer and Account Information System (``CAIS'') 
operating fees, (4) change request fees, and (5) capitalized developed 
technology costs.\45\ CAT LLC states that it will consider the need to 
provide additional cost disclosure going forward.\46\
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    \45\ CAT LLC states that breaking out technology costs in this 
manner is consistent with how such costs are broken out in the CAT 
budgets available on the CAT website. The CAT LLC budgets are 
available on the CAT website at https://www.catnmsplan.com/cat-financial-and-operating-budget. CAT LLC states that it currently 
does not propose to require the disclosure of additional 
subcategories of cost information, such as a further breakdown of 
the category of cloud hosting services into production costs, 
including linker costs and storage costs. Additionally, CAT LLC 
notes that the CAT NMS Plan requires that detailed cost information 
be made available to the Commission upon request, and detailed 
information on CAT costs and operations is regularly made available 
to the Commission staff and the Advisory Committee on a confidential 
basis. See Notice, supra note 6, 88 FR at 17090.
    \46\ Id.
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    CAT LLC proposes to amend Section 11.1(a) of the CAT NMS Plan to 
require CAT LLC to determine costs for the operating budget for the CAT 
in a reasonable manner. Specifically, the first sentence of Section 
11.1(a) of the CAT NMS Plan would be revised to read: ``On an annual 
basis the Operating Committee shall approve a reasonable operating 
budget for the Company.'' Similarly, CAT LLC proposes to include the 
term ``reasonably'' in proposed paragraph (a)(i) of Section 11.1 of the

[[Page 41146]]

CAT NMS Plan. Specifically, that section would read: ``Without limiting 
the foregoing, the reasonably budgeted CAT costs shall include 
technology (including cloud hosting services, operating fees, CAIS 
operating fees, change request fees, and capitalized developed 
technology costs), legal, consulting, insurance, professional and 
administration, and public relations costs, a reserve and such other 
cost categories as reasonably determined by the Operating Committee to 
be included in the budget.''
    Finally, CAT LLC proposes to amend Section 11.1(b) of the CAT NMS 
Plan. Currently, Section 11.1(b) of the CAT NMS Plan states that:

    Subject to Section 11.2, the Operating Committee shall have 
discretion to establish funding for the Company, including: (i) 
establishing fees that the Participants shall pay; and (ii) 
establishing fees for Industry Members that shall be implemented by 
Participants. The Participants shall file with the SEC under Section 
19(b) of the Exchange Act any such fees on Industry Members that the 
Operating Committee approves, and such fees shall be labeled as 
``Consolidated Audit Trail Funding Fees.''

    CAT LLC proposes to amend Section 11.1(b) to include a reference to 
Section 11.1 as well as Section 11.2 in the ``subject to'' clause at 
the beginning of the provision.
b. Reserve
    Section 11.1(a) of the CAT NMS Plan states that the budget shall 
include ``the funding of any reserve that the Operating Committee 
reasonably deems appropriate for prudent operation of the Company.'' In 
addition, proposed Section 11.1(a)(i) of the CAT NMS Plan would state 
that the budgeted CAT costs shall include a reserve. Section 11.1(c) of 
the CAT NMS Plan states that ``[a]ny surplus of the Company's revenues 
over its expenses shall be treated as an operational reserve to offset 
future fees.''
    CAT LLC proposes to add paragraph (ii) to Section 11.1(a) of the 
CAT NMS Plan to set forth the parameters for the size of the reserve. 
Proposed Section 11.1(a)(ii) of the CAT NMS Plan would state that 
``[f]or the reserve referenced in paragraph (a)(i) of this Section, the 
budget will include an amount reasonably necessary to allow the Company 
to maintain a reserve of not more than 25% of the annual budget.'' In 
addition, proposed Section 11.1(a)(ii) of the CAT NMS Plan would state 
that ``[f]or the avoidance of doubt, the calculation of the amount of 
the reserve would exclude the amount of the reserve from the budget.''
    CAT LLC proposes to provide additional information as to how budget 
surpluses would be treated for purposes of the reserve. Specifically, 
proposed subparagraph (ii) of Section 11.1(a) of the CAT NMS Plan would 
state that ``[t]o the extent collected CAT fees exceed CAT costs, 
including the reserve of 25% of the annual budget, such surplus will be 
used to offset future fees.'' In addition, CAT LLC further proposes to 
state in proposed Section 11.1(a)(ii) of the CAT NMS Plan that ``[f]or 
the avoidance of doubt, the Company will only include an amount for the 
reserve in the annual budget if the Company does not have a sufficient 
reserve (which shall be up to but not more than 25% of the annual 
budget).''
3. CAT Fees Related to Prospective CAT Costs
    CAT LLC proposes to revise the introductory statement in proposed 
Section 11.3(a) of the CAT NMS Plan to state that the Operating 
Committee will establish the CAT Fees to be payable by Participants and 
Industry Members with regard to Prospective CAT Costs.
a. Fee Rate for CAT Fees
    CAT LLC proposes to describe the timing and method for calculating 
the Fee Rate for the CAT Fees related to Prospective CAT Costs in 
proposed Section 11.3(a)(i) of the CAT NMS Plan, and to provide 
additional detail regarding the Fee Rate in that provision. Proposed 
Section 11.3(a)(i) of the CAT NMS Plan would state that CAT Fees 
related to Prospective CAT Costs would be calculated twice a year, once 
at the beginning of the year and once during the year.
    Proposed Section 11.3(a)(i)(A)(I) of the CAT NMS Plan would provide 
that at the beginning of each year, the Operating Committee will 
calculate the Fee Rate by dividing the reasonably budgeted CAT costs 
for the year by the reasonably projected total executed equivalent 
share volume of all transactions in Eligible Securities for the year. 
Once the Operating Committee has approved such Fee Rate, the 
Participants shall be required to file with the Commission pursuant to 
Section 19(b) of the Exchange Act CAT Fees to be charged to Industry 
Members calculated using such Fee Rate. Participants and Industry 
Members will be required to pay CAT Fees calculated using this Fee Rate 
once such CAT Fees are in effect with regard to Industry Members in 
accordance with Section 19(b) of the Exchange Act.
    Proposed Section 11.3(a)(i)(A)(II) of the CAT NMS provides that 
during each year, the Operating Committee will calculate a new Fee Rate 
by dividing the reasonably budgeted CAT costs for the remainder of the 
year by the reasonably projected total executed equivalent share volume 
of all transactions in Eligible Securities for the remainder of the 
year. Once the Operating Committee has approved the new Fee Rate, the 
Participants shall be required to file with the Commission pursuant to 
Section 19(b) of the Exchange Act CAT Fees to be charged to Industry 
Members calculated using the new Fee Rate. Participants and Industry 
Members will be required to pay CAT Fees calculated using this new Fee 
Rate once such CAT Fees are in effect with regard to Industry Members 
in accordance with Section 19(b) of the Exchange Act. CAT LLC also 
proposes to add Section 11.3(a)(i)(A)(III) to the CAT NMS Plan to state 
that CAT Fees related to Prospective CAT Costs do not sunset 
automatically; such CAT Fees would remain in place until new CAT Fees 
are in place with a new Fee Rate. The Executed Share Model is designed 
to collect CAT fees continuously to provide uninterrupted revenue to 
pay CAT bills.\47\
---------------------------------------------------------------------------

    \47\ CAT LLC proposes to add proposed Section 11.3(a)(i)(A)(IV) 
to the CAT NMS Plan. This provision would state that ``[f]or the 
avoidance of doubt, the first CAT Fee may commence at the beginning 
of the year or during the year. If it were to commence during the 
year, the CAT Fee would be calculated as described in paragraph (II) 
of this Section.''
---------------------------------------------------------------------------

b. Executed Equivalent Shares
    CAT LLC proposes to describe in proposed Section 11.3(a)(i)(B) of 
the CAT NMS Plan how executed equivalent shares would be counted for 
purposes of calculating CAT Fees. The Executed Share Model uses the 
concept of executed equivalent shares as the transactions subject to a 
CAT Fee involve NMS Stocks, Listed Options and OTC Equity Securities, 
each of which have different trading characteristics.
    NMS Stocks. Under the Executed Share Model, each executed share for 
a transaction in NMS Stocks would be counted as one executed equivalent 
share.
    Listed Options. Recognizing that Listed Options trade in contracts 
rather than shares, each executed contract for a transaction in Listed 
Options will be counted using the contract multiplier applicable to the 
specific Listed Option in the relevant transaction. Typically, a Listed 
Option contract represents 100 shares; however, it may also represent 
another designated number of shares.
    OTC Equity Securities. Similarly, in recognition of the different 
trading characteristics of OTC Equity Securities as compared to NMS 
Stocks, the Executed Share Model would discount

[[Page 41147]]

the share volume of OTC Equity Securities when calculating CAT Fees. To 
address this potential concern, the Executed Share Model would count 
each executed share for a transaction in OTC Equity Securities as 0.01 
executed equivalent shares.
c. Budgeted CAT Costs
    The calculation of the Fee Rate for CAT Fees related to Prospective 
CAT Costs requires the determination of the budgeted CAT costs for the 
year or other relevant period. Proposed Section 11.3(a)(i)(C) of the 
CAT NMS Plan would state that the budgeted CAT costs for the year shall 
be comprised of all reasonable fees, costs and expenses reasonably 
budgeted to be incurred by or for the Company in connection with the 
development, implementation and operation of the CAT as set forth in 
the annual operating budget approved by the Operating Committee 
pursuant to Section 11.1(a) of the CAT NMS Plan, or as adjusted during 
the year by the Operating Committee.
    In addition, proposed Section 11.3(a)(i)(C) of the CAT NMS Plan 
would provide that the budgeted CAT costs for the year shall be 
comprised of all reasonable fees, costs and expenses reasonably 
budgeted to be incurred by or for the Company in connection with the 
development, implementation and operation of the CAT as set forth in 
the annual operating budget approved by the Operating Committee 
pursuant to Section 11.1(a) of the CAT NMS Plan, or as adjusted during 
the year by the Operating Committee.
d. Projected Total Executed Equivalent Share Volume
    The calculation of the Fee Rate for CAT Fees also requires the 
determination of the projected total executed equivalent share volume 
of transactions in Eligible Securities for each relevant period. 
Pursuant to proposed Section 11.3(a)(i)(D) of the CAT NMS Plan, each 
year, the Operating Committee would reasonably determine this 
projection based on the total executed equivalent share volume of 
transactions in Eligible Securities from the prior twelve months. As 
set forth in proposed Section 11.3(a)(iii)(B), Participants will be 
required to provide a description of the calculation of the projection 
in their fee filings pursuant to Section 19(b) of the Exchange Act. 
Furthermore, CAT LLC intends to calculate the CAT Fees based on a 
reasonable determination of the projected total executed equivalent 
share volume of transactions in Eligible Securities.
e. Participant CAT Fees for Prospective CAT Costs
    CAT LLC proposes to add paragraph (A) to proposed Section 
11.3(a)(ii) of the CAT NMS Plan to describe the CAT Fee obligation of 
the Participants. Each Participant that is a national securities 
exchange will be required to pay the CAT Fee for each transaction in 
Eligible Securities executed on the exchange in the prior month based 
on CAT Data. Each Participant that is a national securities association 
will be required to pay the CAT Fee for each transaction in Eligible 
Securities executed otherwise than on an exchange in the prior month 
based on CAT Data. The CAT Fee for each transaction in Eligible 
Securities will be calculated by multiplying the number of executed 
equivalent shares in the transaction by one-third and by the Fee Rate 
determined pursuant to paragraph (a)(i) of Section 11.3.
    CAT LLC also proposes to include proposed paragraph (B) of proposed 
Section 11.3(a)(ii) of the CAT NMS Plan to clarify that Participants 
would only be required to pay CAT Fees when Industry Members are 
required to pay CAT Fees. Under the Executed Share Model, CAT Fees are 
designed to cover 100% of CAT costs by allocating costs between and 
among Participants and Industry Members. However, the CAT Fees charged 
to Participants are implemented via a different process than CAT Fees 
charged to Industry Members. CAT Fees charged to Participants are 
implemented via an approval of the CAT Fees by the Operating Committee 
in accordance with the requirements of the CAT NMS Plan. In contrast, 
CAT Fees charged to Industry Members may only become effective in 
accordance with the requirements of Section 19(b) of the Exchange Act.
f. Industry Member CAT Fees for Prospective CAT Costs
    CAT LLC proposes to describe the CAT Fees related to Prospective 
CAT Costs that would be charged to Industry Members in proposed Section 
11.3(a)(iii)(A) of the CAT NMS Plan. Each Industry Member that is the 
CEBB in a transaction in Eligible Securities and each Industry Member 
that is the CEBS in a transaction in Eligible Securities) will be 
required to pay a CAT Fee for each such transaction in Eligible 
Securities in the prior month based on CAT Data. The CEBB's CAT Fee or 
CEBS's CAT Fee (as applicable) for each transaction in Eligible 
Securities will be calculated by multiplying the number of executed 
equivalent shares in the transaction by one-third and by the Fee Rate 
reasonably determined pursuant to paragraph (a)(i) of this Section 
11.3.
    Proposed paragraph (B) of proposed Section 11.3(a)(iii) of the CAT 
NMS Plan would require the fee filings to be made pursuant to Section 
19(b) of the Exchange Act and Rule 19b-4 thereunder \48\ for Industry 
Member CAT Fees to include with regard to the CAT Fee: (A) the Fee 
Rate; (B) the budget for the upcoming year (or remainder of the year, 
as applicable), including a brief description of each line item in the 
budget, including (1) technology line items of cloud hosting services, 
operating fees, CAIS operating fees, change request fees and 
capitalized developed technology costs, (2) legal, (3) consulting, (4) 
insurance, (5) professional and administration, and (6) public 
relations costs, a reserve and/or such other categories as reasonably 
determined by the Operating Committee to be included in the budget and 
the reason for changes in each such line item from the prior CAT Fee 
filing; \49\ (C) a discussion of how the budget is reconciled to the 
collected fees; and (D) the projected total executed equivalent share 
volume of all transactions in Eligible Securities for the year (or 
remainder of the year, as applicable), and a description of the 
calculation of the projection. This detail would describe how the Fee 
Rate is calculated and explain how the budget used in the calculation 
is reconciled to the collected fees.\50\
---------------------------------------------------------------------------

    \48\ CAT LLC expects the fee filings required to be made by the 
Participants pursuant to Section 19(b) of the Exchange Act with 
regard to CAT Fees to be filed pursuant to Section 19(b)(3)(A) of 
the Exchange Act and Rule 19b-(f)(2) thereunder. In accordance with 
Section 19(b)(3)(A) of the Exchange Act and Rule 19b-4(f)(2) 
thereunder, such fee filings would be effective upon filing.
    \49\ CAT LLC intends to include any other categories as 
reasonably determined by the Operation Committee. Accordingly, this 
provision refers to ``such other categories as reasonably determined 
by the Operating Committee to be included in the budget.''
    \50\ As a practical matter, the fee filing would provide the 
exact fee per executed equivalent share to be paid for the CAT Fees, 
by multiplying the Fee Rate by one-third and describing the relevant 
number of decimal places for the fee.
---------------------------------------------------------------------------

    In addition, in proposed Section 11.3(a)(iii)(B), CAT LLC proposes 
to state that the budgeted CAT costs described in the fee filings must 
provide sufficient detail to demonstrate that the CAT budget used in 
calculating the CAT Fees is reasonable and appropriate.
    The collection of CAT Fees from Industry Members is subject to 
Section 11.6 of the CAT NMS Plan regarding the Financial Accountability 
Milestones. Accordingly, CAT LLC proposes to state in proposed 
paragraph (C) to proposed

[[Page 41148]]

Section 11.3(a)(iii) that Participants will not make fee filings 
pursuant to Section 19(b) of the Exchange Act regarding CAT Fees until 
the Financial Accountability Milestone related to Period 4 described in 
Section 11.6 of the CAT NMS Plan has been satisfied.
g. CAT Fee Details
    CAT LLC proposes to add proposed Section 11.3(a)(iv)(A) to the CAT 
NMS Plan to state that details regarding the calculation of a 
Participant or CAT Executing Broker's CAT Fees will be provided upon 
request to such Participant or CAT Executing Broker. At a minimum, such 
details would include each Participant or CAT Executing Broker's 
executed equivalent share volume and corresponding fee by (1) Listed 
Options, NMS Stocks and OTC Equity Securities, (2) by transactions 
executed on each exchange and transactions executed otherwise than on 
an exchange, and (3) by buy-side transactions and sell-side 
transactions.''
    In addition, CAT LLC proposes to make certain aggregate statistics 
regarding the CAT Fees publicly available, which would include, at a 
minimum, the aggregate executed equivalent share volume and 
corresponding aggregate fee by (1) Listed Options, NMS Stocks and OTC 
Equity Securities, (2) by transactions executed on each exchange and 
transactions executed otherwise than on an exchange, and (3) by buy-
side transactions and sell-side transactions.\51\
---------------------------------------------------------------------------

    \51\ See proposed Section 11.3(a)(iv)(B) of the CAT NMS Plan.
---------------------------------------------------------------------------

4. Historical CAT Assessment
    CAT LLC proposes to revise Section 11.3(b) of the CAT NMS Plan to 
provide that the Operating Committee will establish one or more 
Historical CAT Assessments to be payable by Industry Members with 
regard to Past CAT Costs.\52\
---------------------------------------------------------------------------

    \52\ There may be one or more Historical CAT Assessments, 
depending upon the timing of any approval of the amendment to the 
CAT NMS Plan and the completion of the Financial Accountability 
Milestones. For a discussion of the Financial Accountability 
Milestones, see Section 11.6 of the CAT NMS Plan.
---------------------------------------------------------------------------

a. Historical Fee Rate for Historical CAT Assessments
    Proposed paragraph (A) of proposed Section 11.3(b)(i) of the CAT 
NMS Plan would state that the Operating Committee will calculate the 
Historical Fee Rate for each Historical CAT Assessment by dividing the 
Historical CAT Costs for each Historical CAT Assessment by the 
reasonably projected total executed equivalent share volume of all 
transactions in Eligible Securities for the Historical Recovery Period 
for each Historical CAT Assessment. Once the Operating Committee has 
approved such Historical Fee Rate, the Participants shall be required 
to file with the Commission pursuant to Section 19(b) of the Exchange 
Act such Historical CAT Assessment to be charged Industry Members 
calculated using such Historical Fee Rate. Industry Members will be 
required to pay such Historical CAT Assessment calculated using such 
Historical Fee Rate once such Historical CAT Assessment is in effect in 
accordance with Section 19(b) of the Exchange Act.
b. Executed Equivalent Shares
    Proposed Section 11.3(b)(i)(B) of the CAT NMS Plan would state that 
the Historical CAT Assessment would be calculated based on the same 
executed equivalent share calculation as CAT Fees related to 
Prospective CAT Costs.
c. Historical CAT Costs
    Proposed Section 11.3(b)(i)(C) of the CAT NMS Plan would describe 
the Historical CAT Costs for calculating Historical CAT Assessments and 
would state that ``[t]he Operating Committee will reasonably determine 
the Historical CAT Costs sought to be recovered by each Historical CAT 
Assessment, where the Historical CAT Costs will be Past CAT Costs minus 
Past CAT Costs reasonably excluded from Historical CAT Costs by the 
Operating Committee.''
    CAT LLC proposes to further clarify the amount to be collected by 
the Historical CAT Assessments by adding a clarifying statement in 
proposed Section 11.3(b)(i)(C) that ``[e]ach Historical CAT Assessment 
will seek to recover from CAT Executing Brokers two-thirds of 
Historical CAT Costs incurred during the period covered by the 
Historical CAT Assessment.'' Each CEBS and CEBB pays one-third, and, 
therefore, two-thirds of the Historical CAT Costs would be collected 
from CAT Executing Brokers.
    CAT LLC also proposes to add the term ``reasonably'' to the 
following sentence in Section 11.1(c) of the CAT NMS Plan before the 
word ``incurred'': ``In determining fees on Participants and Industry 
Members the Operating Committee shall take into account fees, costs and 
expenses (including legal and consulting fees) reasonably incurred by 
the Participants on behalf of the Company prior to the Effective Date 
in connection with the creation and implementation of the CAT.''
d. Historical Recovery Period
    Proposed Section 11.3(b)(i)(D)(I) of the CAT NMS Plan would 
describe the Historical Recovery Period used in calculating the 
Historical Fee Rate. This proposed provision would state that ``[t]he 
length of the Historical Recovery Period used in calculating each 
Historical Fee Rate will be reasonably established by the Operating 
Committee based upon the amount of the Historical CAT Costs to be 
recovered by the Historical CAT Assessment.'' This proposed provision, 
however, would state that ``no Historical Recovery Period used in 
calculating the Historical Fee Rate shall be less than 24 months or 
more than five years.''
    Proposed Section 11.3(b)(i)(D)(II) of the CAT NMS Plan would 
describe the length of the time that the Historical CAT Assessment 
would be in effect, which may be greater than or less than the 
Historical Recovery Period, depending on the amount of the Historical 
CAT Assessments collected based on the actual volume during the time 
that the Historical Assessment is in effect. Any Historical CAT 
Assessment would remain in effect until the relevant Historical CAT 
Costs are collected, whether that time is shorter or longer than the 
Historical Recovery Period used in calculating the Historical Fee Rate.
e. Projected Total Executed Equivalent Share Volume
    The Historical Fee Rate for a Historical CAT Assessment would be 
calculated by using the projected total executed equivalent share 
volume of all transactions in Eligible Securities for the Historical 
Recovery Period for such Historical CAT Assessment. As set forth in 
proposed Section 11.3(b)(i)(E) of the CAT NMS Plan, ``[t]he Operating 
Committee shall reasonably determine the projected total executed 
equivalent share volume of all transactions in Eligible Securities for 
each Historical Recovery Period based on the executed equivalent share 
volume of all transactions in Eligible Securities for the prior twelve 
months.'' In addition, CAT LLC proposes to allow the Operating 
Committee to base its projection on the prior twelve months, but to use 
its discretion to analyze the likely volume for the upcoming year. As 
set forth in proposed Section 11.3(b)(iii)(B)(II) of the CAT NMS Plan, 
Participants will be required to provide a description of the 
calculation of the projection in their fee filings pursuant to Section 
19(b) of the Exchange Act for Historical CAT Assessments.

[[Page 41149]]

f. Past CAT Costs and Participants
    Proposed Section 11.3(b)(ii) of the CAT NMS Plan would clarify that 
the Participants would not be required to pay the Historical CAT 
Assessment as the Participants previously have paid all Past CAT Costs. 
In addition, proposed Section 11.3(b)(ii) of the CAT NMS Plan would 
state that ``[i]n lieu of a Historical CAT Assessment, the 
Participants' one-third share of Historical CAT Costs and such other 
additional Past CAT Costs as reasonably determined by the Operating 
Committee will be paid by the cancellation of loans made to the Company 
on a pro rata basis based on the outstanding loan amounts due under the 
loans.'' Furthermore, proposed Section 11.3(b)(ii) of the CAT NMS Plan 
would emphasize that ``[t]he Historical CAT Assessment is designed to 
recover two-thirds of the Historical CAT Costs.''
g. Historical CAT Assessment for Industry Members
    CAT LLC proposes to describe the Historical CAT Assessment charged 
to Industry Members in proposed Section 11.3(b)(iii)(A) of the CAT NMS 
Plan. Each month in which a Historical CAT Assessment is in effect, 
each CEBB and each CEBS shall pay a fee for each transaction in 
Eligible Securities executed by the CEBB or CEBS from the prior month 
as set forth in CAT Data, where the Historical CAT Assessment for each 
transaction will be calculated by multiplying the number of executed 
equivalent shares in the transaction by one-third and by the Historical 
Fee Rate reasonably determined pursuant to paragraph (b)(i) of this 
Section 11.3.
    CAT LLC proposes to provide additional details regarding the fee 
filings to be filed by the Participants regarding each Historical CAT 
Assessment pursuant to Section 19(b) of the Exchange Act in proposed 
Section 11.3(b)(iii)(B) of the CAT NMS Plan.\53\ Specifically, CAT LLC 
proposes to state that each Participant will be required to file a fee 
filing pursuant to Section 19(b) of the Exchange Act to describe each 
Historical CAT Assessment.\54\
---------------------------------------------------------------------------

    \53\ CAT LLC expects the fee filings required to be made by the 
Participants pursuant to Section 19(b) of the Exchange Act with 
regard to Historical CAT Assessments to be filed pursuant to Section 
19(b)(3)(A) of the Exchange Act. In accordance with Section 
19(b)(3)(A) of the Exchange Act, fee filings made pursuant to 
Section 19(b)(3)(A) of the Exchange Act would be effective upon 
filing.
    \54\ See proposed Section 11.3(b)(iii)(B)(I).
---------------------------------------------------------------------------

    CAT LLC also proposes to provide additional detail about the 
information that Participants would be required to include in their fee 
filings to be made pursuant to Section 19(b) of the Exchange and Rule 
19b-4(f)(2) for Historical CAT Assessments in proposed paragraph 
(b)(iii)(B)(II) of proposed Section 11.3 of the CAT NMS Plan. 
Specifically, such filings would be required to include: (A) the 
Historical Fee Rate; (B) a brief description of the amount and type of 
Historical CAT Costs, including (1) the technology line items of cloud 
hosting services, operating fees, CAIS operating fees, change request 
fees and capitalized developed technology costs, (2) legal, (3) 
consulting, (4) insurance, (5) professional and administration, and (6) 
public relations costs; (C) the Historical Recovery Period and the 
reasons for its length; and (D) the projected total executed equivalent 
share volume of all transactions in Eligible Securities for the 
Historical Recovery Period, and a description of the calculation of the 
projection.\55\
---------------------------------------------------------------------------

    \55\ As a practical matter, the fee filing would provide the 
exact fee per executed equivalent share to be paid for the 
Historical CAT Assessment, by multiplying the Historical Fee Rate by 
one-third and describing the relevant number of decimal places for 
the fee.
---------------------------------------------------------------------------

    In addition, CAT LLC proposes to clarify in proposed Section 
11.3(b)(iii)(B)(II) that the Historical CAT Costs described in the fee 
filings must provide sufficient detail to demonstrate that such costs 
are reasonable and appropriate.
    The collection of Historical CAT Assessments from Industry Members 
is subject to Section 11.6 of the CAT NMS Plan regarding the Financial 
Accountability Milestones. Accordingly, CAT LLC proposes to clarify in 
proposed Section 11.3(b)(iii)(B)(III) that Participants will not make 
CAT fee filings pursuant to Section 19(b) of the Exchange Act regarding 
a Historical CAT Assessment until any applicable Financial 
Accountability Milestone has been satisfied.
h. Historical CAT Assessment Details
    CAT LLC proposes to add proposed Section 11.3(b)(iv)(A) to the CAT 
NMS Plan to state that details regarding the calculation of a CAT 
Executing Broker's Historical CAT Assessments will be provided upon 
request to such CAT Executing Broker. At a minimum, such details would 
include each CAT Executing Broker's executed equivalent share volume 
and corresponding fee by (1) Listed Options, NMS Stocks and OTC Equity 
Securities, (2) by transactions executed on each exchange and 
transactions executed otherwise than on an exchange, and (3) by buy-
side transactions and sell-side transactions.
    In addition, CAT LLC proposes to make certain aggregate statistics 
regarding Historical CAT Assessments publicly available, which would 
include, at a minimum, the aggregate executed equivalent share volume 
and corresponding aggregate fee by (1) Listed Options, NMS Stocks and 
OTC Equity Securities, (2) by transactions executed on each exchange 
and transactions executed otherwise than on an exchange, and (3) by 
buy-side transactions and sell-side transactions.\56\
---------------------------------------------------------------------------

    \56\ See proposed Section 11.3(b)(iv)(B) of the CAT NMS Plan.
---------------------------------------------------------------------------

5. Additional Changes From Original Funding Model
    CAT LLC proposes certain revisions to Article XI of the CAT NMS 
Plan to implement the Executed Share Model. CAT LLC proposes to make 
the following changes to the CAT NMS Plan in addition to the proposed 
changes to the CAT NMS Plan discussed above.
a. Elimination of Definition of ``Execution Venue''
    Section 1.1 of the CAT NMS Plan defines the term ``Execution 
Venue'' to mean ``a Participant or an alternative trading system 
(`ATS') (as defined in Rule 300 of Regulation ATS) that operates 
pursuant to Rule 301 of Regulation ATS (excluding any such ATS that 
does not execute orders).'' Currently, the term ``Execution Venue'' is 
used in Sections 11.2 and 11.3 of the CAT NMS Plan to describe how CAT 
costs would be allocated among CAT Reporters under the Original Funding 
Model. The Original Funding Model would have imposed fees based on 
market share to CAT Reporters that are Execution Venues, including 
ATSs, and fees based on message traffic for Industry Members' non-ATS 
activities. In contrast, the Executed Share Model would impose fees 
based on the executed equivalent shares of transactions in Eligible 
Securities for three categories of CAT Reporters: Participants, CEBBs 
and CEBSs. Accordingly, as the concept for an ``Execution Venue'' would 
not be relevant for the Executed Share Model, CAT LLC proposes to 
delete this term and its definition from Section 1.1 of the CAT NMS 
Plan.
b. Use of Executed Equivalent Share Volume Under Executed Share Model
    The Original Funding Model set forth in the CAT NMS Plan requires 
Participants and Execution Venue ATSs to pay CAT fees based on market 
share and Industry Members (other than Execution Venue ATSs) to pay CAT 
fees based on message traffic. The CAT NMS Plan also describes how the 
market

[[Page 41150]]

share-based fee would be calculated for Participants and other 
Execution Venue ATSs and how the message traffic-based fee would be 
calculated for Industry Members (other than Execution Venue ATSs). CAT 
LLC proposes to amend the CAT NMS Plan to require Participants, CEBBs 
and CEBSs to pay CAT fees based on the number of executed equivalent 
shares in a transaction in Eligible Securities, rather than based on 
market share and message traffic. Accordingly, the Operating Committee 
proposes to amend Section 11.2(b) and (c) and Section 11.3(a) and (b) 
of the CAT NMS Plan to reflect the proposed use of the number of 
executed equivalent shares in transactions in Eligible Securities in 
calculating CAT fees.
    Section 11.2(b) of the CAT NMS Plan states that ``[i]n establishing 
the funding of the Company, the Operating Committee shall seek . . . 
(b) to establish an allocation of the Company's related costs among 
Participants and Industry Members that is consistent with the Exchange 
Act, taking into account the timeline for implementation of the CAT and 
distinctions in the securities trading operations of Participants and 
Industry Members and their relative impact upon Company resources and 
operations.'' CAT LLC proposes to delete the requirement to take into 
account ``distinctions in the securities trading operations of 
Participants and Industry Members and their relative impact upon 
Company resources and operations.'' CAT LLC represents that this 
requirement related to using message traffic and market share in the 
calculation of CAT fees, as message traffic and market share were 
metrics related to the impact of a CAT Reporter on the Company's 
resources and operations. CAT LLC represents that with the proposed 
move to the use of the executed equivalent shares metric instead of 
message traffic and market share, the requirement is no longer 
relevant.
    Section 11.2(c) of the CAT NMS Plan states that ``[i]n establishing 
the funding of the Company, the Operating Committee shall seek . . . 
(c) to establish a tiered fee structure in which the fees charged to: 
(i) CAT Reporters that are Execution Venues, including ATSs, are based 
upon the level of market share; (ii) Industry Members' non-ATS 
activities are based upon message traffic.'' CAT LLC proposes to delete 
subparagraphs (i) and (ii) and replace these subparagraphs with the 
requirement that the fee structure in which the fees charged to 
``Participants and Industry Members are based upon the executed 
equivalent share volume of transactions in Eligible Securities.''
    In addition, CAT LLC proposes to amend the CAT funding principles 
to clarify that CAT Fees and the Historical CAT Assessments are 
intended to be cost-based fees--that is, the fees are designed to 
recover the cost of the creation, implementation and operation of the 
CAT. CAT LLC proposes to amend the funding principle set forth in 
Section 11.2(c) by making a specific reference to the costs of the CAT.
    CAT LLC proposes to delete Section 11.3(a) of the CAT NMS Plan, 
which provides additional detail regarding the market share-based fees 
to be paid by Participants and Execution Venue ATSs under the Original 
Funding Model, and replace it with a description of the CAT Fees 
related to Prospective CAT Costs, as described above.
    CAT LLC proposes to delete Section 11.3(b) of the CAT NMS Plan, 
which provides additional detail regarding the message traffic-based 
CAT fees to be paid by Industry Members (other than Execution Venue 
ATSs) under the Original Funding Model, and replace it with a 
description of the Historical CAT Assessments, as described above.
c. Elimination of Tiered Fees
    CAT LLC proposes to eliminate the use of tiered fees that were 
included in the Original Funding Model. Instead, under the Executed 
Share Model, each Participant, CEBB or CEBS would pay a fee based 
solely on its transactions in Eligible Securities. The Operating 
Committee therefore proposes to amend Sections 11.1(d), 11.2(c), 
11.3(a) and 11.3(b) of the CAT NMS Plan to eliminate tiered fees and 
related concepts.
    Section 11.1(d) of the CAT NMS Plan states that ``[c]onsistent with 
this Article XI, the Operating Committee shall adopt policies, 
procedures, and practices regarding the budget and budgeting process, 
assignment of tiers, resolution of disputes, billing and collection of 
fees, and other related matters.'' With the elimination of tiered fees, 
the reference to the ``assignment of tiers'' would no longer be 
relevant for the Executed Share Model. Therefore, CAT LLC proposes to 
delete the reference to ``assignment of tiers'' from Section 11.1(d). 
Similarly, CAT LLC also proposes to delete the following sentences from 
Section 11.1(d) because the Executed Share Model would not use tiered 
fees:

    For the avoidance of doubt, as part of its regular review of 
fees for the CAT, the Operating Committee shall have the right to 
change the tier assigned to any particular Person in accordance with 
fee schedules previously filed with the Commission that are 
reasonable, equitable and not unfairly discriminatory and subject to 
public notice and comment, pursuant to this Article XI. Any such 
changes will be effective upon reasonable notice to such Person.

    CAT LLC also proposes to delete the references to ``tiered'' fees 
from Section 11.2(c) of the CAT NMS Plan and paragraph (iii) of Section 
11.2(c) of the CAT NMS Plan, which relates to the establishment of a 
tiered fee structure.
    As discussed above, the Operating Committee proposes to replace the 
language in Sections 11.3(a) and (b) of the CAT NMS Plan with language 
implementing the Executed Share Model. These proposed changes would 
remove the references to tiers in Sections 11.3(a)(i) and (ii) and 
11.3(b) of the CAT NMS Plan, along with the other proposed changes.
d. No Fixed Fees
    As discussed above, CAT LLC proposes to replace the language in 
Sections 11.3(a) and (b) of the CAT NMS Plan with language implementing 
the Executed Share Model. These proposed changes also would remove the 
references to ``fixed fees'' in Sections 11.3(a), 11.3(a)(i), 
11.3(a)(ii) and 11.3(b) and replaced them with references to ``fees.'' 
Under the Executed Share Model, the CAT fees to be paid by 
Participants, CEBBs and CEBSs will vary in accordance with their 
executed equivalent share volume of transactions in Eligible 
Securities, although the Fee Rate will be fixed for a relevant period.
6. Plan Amendment Process for Fee Rate Changes
    Under the Executed Share Model, once any Fee Rate has been 
established by a majority vote of the Operating Committee in accordance 
with the Executed Share Model set forth in the CAT NMS Plan,\57\ each 
Participant would be required to pay the applicable CAT Fee calculated 
in accordance with the requirements set forth in the CAT NMS Plan 
(subject to the requirement for the Industry Member CAT Fee to be in 
effect). CAT LLC does not plan to submit an amendment to the CAT NMS 
Plan each time that the Fee Rate for the CAT Fee is established or 
adjusted because of the length of time and burden required to amend the 
CAT NMS Plan for each adjustment to the Fee Rate.
---------------------------------------------------------------------------

    \57\ Participants would be required to pay the CAT Fee once the 
CAT Fee is in effect with regard to Industry Members in accordance 
with Section 19(b) of the Exchange Act.

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[[Page 41151]]

B. CAT Fee Schedule for Participants

    To implement the Participant CAT fees, CAT LLC proposes to add a 
fee schedule, entitled ``Consolidated Audit Trail Funding Fees,'' to 
Appendix B of the CAT NMS Plan. Proposed paragraph (a) of the fee 
schedule would describe the CAT Fees to be paid by the Participants 
under the Executed Share Model. Specifically, paragraph (a) of the 
Participant fee schedule would state that ``[e]ach Participant shall 
pay the CAT Fee set forth in Section 11.3(a) of the CAT NMS Plan to 
Consolidated Audit Trail, LLC in the manner prescribed by Consolidated 
Audit Trail, LLC on a monthly basis based on the Participant's 
transactions in Eligible Securities in the prior month.''

IV. Summary of Comments

A. Allocation of Fee Among Participants and Industry Members

    Under the Executed Share Model, CAT fees would be allocated one-
third to the applicable Participant, one-third to the CEBS and one-
third to the CEBB of a transaction. Two commenters opposed the proposed 
allocation.\58\ One commenter stated that, while the Proposed Amendment 
justified the fairness of the Executed Share Model because it would 
operate like other fees, like FINRA's TAF, Section 31 fees, and the 
options regulatory fee,\59\ the Proposed Amendment did not support why 
those fee frameworks should be used as a model in this context.\60\ For 
example, the commenter stated that the TAF is designed to recover the 
costs of FINRA's regulatory activities, while the CAT fees are intended 
to align with the costs to build, operate and administer the CAT.\61\ 
Further, the commenter stated that the Proposed Amendment has 
insufficiently explained the connection between the TAF and CAT fees, 
merely stating that they are similar fees because they are transaction-
based fees to provide funding for regulatory costs.\62\ The commenter 
stated that ``CAT LLC's observations superficially focus on the fact 
that these fees also use transaction-based metrics (and may be assessed 
on members) and neglects other factors relevant to the analysis 
including, for example, that these fees are used in combination with 
other funding mechanisms and metrics to support an overall funding 
framework.'' \63\
---------------------------------------------------------------------------

    \58\ See Letters to Vanessa Countryman, Secretary, Commission, 
from Marcia E. Asquith, Corporate Secretary, EVP, Board and External 
Relations, FINRA, dated May 25, 2023 (``FINRA May 2023 Letter''); 
April 11, 2023 (``FINRA April 2023 Letter''); and June 22, 2022 
(``FINRA June 2022 Letter'') (the FINRA June 2022 Letter was 
submitted in response to the prior funding proposal and was attached 
and incorporated by reference in the FINRA April 2023 Letter); 
Letters to Vanessa Countryman, Secretary, Commission, from Ellen 
Greene, Managing Director, Equities & Options Market Structure, and 
Joseph Corcoran, Managing Director, Associate General Counsel, 
SIFMA, dated June 5, 2023 (``SIFMA June 2023 Letter''); May 2, 2023 
(``SIFMA May 2023 Letter''); January 12, 2023 (``SIFMA January 2023 
Letter''); December 14, 2022 (``SIFMA December 2022 Letter''); 
October 7, 2022 (``SIFMA October 2022 Letter''); and June 22, 2022 
(``SIFMA June 2022 Letter'') (the SIFMA June 2022 Letter, SIFMA 
October 2022 Letter, SIFMA December 2022 Letter and SIFMA January 
2023 Letter were submitted in response to the prior funding proposal 
and incorporated by reference in the SIFMA May 2023 Letter).
    \59\ See Notice, supra note 6, 88 FR at 17122.
    \60\ See FINRA June 2022 Letter at 4.
    \61\ See FINRA April 2023 Letter at 8.
    \62\ Id. The commenter also stated that ``it is unclear how 
assessing on FINRA the largest allocation of the SRO portion of CAT 
expenses `provides funding for regulatory costs' in any reasonable 
and equitable sense comparable to the TAF . . .'' Id.
    \63\ FINRA May 2023 Letter at 3.
---------------------------------------------------------------------------

    Another commenter disagreed with the Participants' statement that 
the Executed Share Model's similarity to other transaction-based fees 
approved by the Commission is adequate justification for consistency 
with the Exchange Act.\64\ The commenter stated that similarity to 
other transaction-based fees is not an adequate basis to show that the 
Executed Share Model is consistent with relevant standards; each 
proposed fee must be individually supported.\65\
---------------------------------------------------------------------------

    \64\ See SIFMA June 2022 Letter at 4.
    \65\ Id.
---------------------------------------------------------------------------

    Commenters also questioned the Participants' justifications for the 
one-third allocation methodology. One commenter argued that the 
Proposed Amendment did not justify why the proposed allocation by 
thirds to the Participant, buy-side and sell-side is equitable in the 
context of the CAT NMS Plan.\66\ The commenter also argued that the 
Proposed Amendment did not consider alternatives suggested by 
commenters on a prior proposed funding model,\67\ such as a model 
similar to Section 31 fees and a CAT funding model based on the ``Cost 
Recovery Principle'' and the ``Benefits Received Principle.'' \68\ The 
commenter urged that the Commission require those alternatives to be 
analyzed.\69\
---------------------------------------------------------------------------

    \66\ See FINRA June 2022 Letter at 3.
    \67\ See Securities Exchange Act Release Nos. 94984 (May 25, 
2022), 87 FR 33226 (June 1, 2022); 96394 (Nov. 28, 2022), 87 FR 
74183 (Dec. 2, 2022); and Letter from Michael Simon, Chair Emeritus, 
CAT NMS Plan Operating Committee, to Vanessa Countryman, Secretary, 
Commission (Feb. 15, 2023).
    \68\ See FINRA April 2023 Letter at 5.
    \69\ Id.
---------------------------------------------------------------------------

    One commenter stated that the Participants have not met their 
burden to demonstrate the proposed allocation is consistent with the 
Exchange Act fee standards and not arbitrary.\70\ The commenter stated 
that because FINRA is funded by Industry Members, Industry Members 
would pay over 80% of CAT costs since they must pay not only their own 
share but FINRA's as well; therefore, the Commission should disapprove 
the proposal.\71\ The commenter also argued that the Proposed Amendment 
fails to explain how allocating 80% of total CAT costs to the industry 
in perpetuity without a mechanism to limit the budget \72\ is 
consistent with the Exchange Act and guidance on SRO filings related to 
fees when the industry has no role in the governance, oversight or 
design of CAT and does not benefit from the CAT.\73\ The commenter 
quoted a Commission release stating that the Participants are 
potentially conflicted in allocating CAT fees to themselves and the 
Industry Members.\74\
---------------------------------------------------------------------------

    \70\ See SIFMA May 2023 Letter at 6; SIFMA June 2023 Letter at 
1-2. The commenter also stated that the Proposed Amendment provides 
unsupported conclusory statements that it meets the requirements of 
the Exchange Act. See SIFMA June 2023 Letter at 2; see also id. at n 
11.
    \71\ See SIFMA May 2023 Letter at 2. See also SIFMA June 2022 
Letter at 1-2 (stating that the proposed cost allocation methodology 
is inconsistent with Exchange Act fee standards because most costs 
would be imposed on Industry Members).
    \72\ The commenter noted that the CAT annual budget increased 
over 30% in the last year. See SIFMA June 2023 Letter at 4.
    \73\ SIFMA June 2023 Letter at 3, 4. The commenter also stated 
that approving such a proposal would ``directly threaten[ ] 
efficiency, competition, and capital formation in U.S. securities 
markets.'' Id.
    \74\ Id. at 4. See also Securities Exchange Act Release No. 
89618 (Aug. 19, 2020), 85 FR 65470, 65482 (Oct. 15, 2020).
---------------------------------------------------------------------------

    Additionally, this commenter stated that the Participants do not 
account for ``the time and expense Industry Members have devoted to 
developing and maintaining internal systems to be able to report the 
[sic] CAT, as well as the time and expense Industry Members have 
devoted to assisting the Operating Committee with its job of developing 
reporting specifications that allow the CAT to achieve its regulatory 
purpose.'' \75\ The commenter stated that the Participants have not 
taken Industry Members' time and expenses into account when deciding to 
allocate two-thirds of the CAT costs to Industry Members and that 
``this omission is a flaw with the Participants' decision to allocate 
two-thirds of the CAT costs to Industry Members and its inclusion would 
demonstrate that the Participants' Executed Share Model

[[Page 41152]]

does not provide for the equitable allocation of reasonable fees.'' 
\76\
---------------------------------------------------------------------------

    \75\ SIFMA June 2022 Letter at 4. See also SIFMA January 2023 
Letter at 4.
    \76\ SIFMA June 2022 Letter at 4-5. See also SIFMA January 2023 
Letter at 5.
---------------------------------------------------------------------------

    The commenter also objected to statements made in the Proposed 
Amendment that the complexity of Industry Member business models 
contributes substantially to the costs of the CAT.\77\ The commenter 
stated that the proposed allocation of two-thirds of CAT costs to 
Industry Members is unfair, unreasonable and arbitrary because the 
Participants are equally responsible for the complexity of trading 
activity in the markets.\78\ The commenter contested the Participants' 
argument that the allocation satisfies Exchange Act fee standards 
because Industry Members and the complexity of their business models 
drive the costs of the CAT, by stating that the examples provided of 
complexities were developed to address order types, activities and fee 
structures (such as the maker-taker fee structure) established by the 
Participant exchanges.\79\ The commenter argued that the Participants 
are just as responsible for such cost-driving complex trading activity 
in the equity and options markets as Industry Members due to the 
``large number of equity and options exchanges established by the 
exchange families with fundamentally different execution models and 
order types.'' \80\ The commenter argued that the Participant exchanges 
have not analyzed how their own business decisions have resulted in the 
complexity of Industry Member order routing practices and CAT 
costs.\81\ The commenter also dismissed other justifications made in 
the Proposed Amendment for the proposed allocation; specifically, that 
there are more Industry Members than Participants and that Industry 
Members receive more in revenue than the Participants,\82\ stating that 
these assertions are not relevant in demonstrating that the proposed 
allocation is fair and reasonable.\83\ The commenter argued that the 
Participants are justifying the allocation based on the ability to pay 
rather than cost generation, which the commenter believes is 
inconsistent ``with the Participant Exchanges' proposed approach. . . 
of allocating CAT costs based on approximate responsibility for 
generating them. . .'' and ``with the historical CAT decision to 
allocate costs to the parties responsible for generating them.'' \84\ 
The commenter suggested an alternative allocation that would equally 
split CAT costs between Participant exchanges and Industry Members, 
while FINRA would be subject only to a nominal regulatory user fee to 
access CAT Data.\85\
---------------------------------------------------------------------------

    \77\ See Notice, supra note 6, 88 FR at 17104.
    \78\ See SIFMA May 2023 Letter at 3. See also SIFMA January 2023 
Letter at 2, 3-4.
    \79\ See SIFMA May 2023 Letter at 6-7. See also SIFMA January 
2023 Letter at 3; Notice, supra note 6, 88 FR at 17104.
    \80\ SIFMA January 2023 Letter at 3.
    \81\ See SIFMA May 2023 Letter at 7.
    \82\ Id. See also Notice, supra note 6, 88 FR at 17104.
    \83\ See SIFMA May 2023 Letter at 7. See also SIFMA January 2023 
Letter at 4.
    \84\ See SIFMA May 2023 Letter at 7. The commenter cited to the 
funding principles in Section 11.2 of the CAT NMS Plan.
    \85\ See SIFMA January 2023 Letter at 4. See also SIFMA May 2023 
Letter at 8; SIFMA June 2022 Letter at 5; SIFMA October 2022 Letter 
at 4. This commenter also suggested another alternative allocation 
in which costs would be allocated to those Participants and Industry 
Members most directly responsible for the costs. Under this 
alternative, Industry Members would be responsible for the cost 
associated with initial ingestion of the data into the CAT system. 
The commenter explained that Participants would be responsible for 
the costs associated with the stages after the data is initially 
ingested into the CAT system because the regulators directly control 
and benefit from these stages of the CAT system after ingestion. See 
SIFMA June 2022 Letter at 5-6.
---------------------------------------------------------------------------

    Commenters also argued against statements in the Proposed Amendment 
that CAT costs would be passed on to investors.\86\ One commenter 
stated, ``[s]uch an assertion is inaccurate because it is almost 
certain that there will be scenarios faced by Industry Members in which 
they will not be able to figure out who was responsible for generating 
certain Historical CAT Costs.'' \87\ The commenter warned that such 
assertions would minimize the Participants' obligation to allocate fees 
consistent with Exchange Act fee standards and could result in the 
inequitable allocation of CAT fees to Industry Members under the 
assumption that such fees would be passed down to investors.\88\ 
Another commenter objected to statements in the Proposed Amendment that 
Industry Members can pass through to their customers their CAT cost 
allocation and additional costs resulting from an increase in FINRA 
fees.\89\ The commenter stated that ``[s]ummarily stating that 
investors can be made to bear the costs resulting from the Funding 
Model without a detailed description of and transparency into how these 
fees would be determined or passed on to customers is inadequate, and 
does not provide interested parties sufficient information to consider 
the costs and benefits related to the Fee Proposal.'' \90\
---------------------------------------------------------------------------

    \86\ See SIFMA May 2023 Letter at 8; FINRA April 2023 Letter at 
6-7.
    \87\ See SIFMA May 2023 Letter at 8.
    \88\ Id.
    \89\ See FINRA April 2023 Letter at 6-7.
    \90\ Id. at 7.
---------------------------------------------------------------------------

    In response to the comment noting that the Participants had not 
analyzed a suggested Section 31-style approach to a funding model,\91\ 
CAT LLC stated that the CAT fee approach is similar to the Section 31 
fee approach in how an exchange would be obligated to pay a transaction 
fee based on transactions occurring on that exchange, and that FINRA 
would be obligated to pay a transaction fee based on transactions in 
the over-the-counter market.\92\ CAT LLC argued that the approaches are 
also similar because, in both, an exchange would be able to determine 
to pass the fee onto its members, as would FINRA.\93\ CAT LLC stated 
that if the Section 31 approach would comply with the Exchange Act, 
then the proposed CAT fee approach should also comply with the Exchange 
Act and CEBBs and CEBSs could determine whether to pass such fees onto 
their clients.\94\
---------------------------------------------------------------------------

    \91\ Id. at 5.
    \92\ See Letter to Vanessa Countryman, Secretary, Commission, 
from Brandon Becker, Chair, CAT NMS Plan Operating Committee, dated 
May 18, 2023 (``CAT LLC Response Letter''), at 9.
    \93\ Id.
    \94\ Id.
---------------------------------------------------------------------------

    In response, the commenter stated that the CAT LLC Response Letter 
misrepresented the commenter's letter by incorrectly stating that the 
commenter's letter recommended an approach similar to Section 31 
fees.\95\ The commenter clarified that it was noting that the 
Commission had received comments suggesting a model like the Section 31 
fees, that the Participants had not ``meaningfully analyzed'' the 
suggested alternatives in the Proposed Amendment, and that the 
Commission should require the Participants to analyze the 
alternatives.\96\
---------------------------------------------------------------------------

    \95\ See FINRA May 2023 Letter at 3, n.8.
    \96\ Id.
---------------------------------------------------------------------------

    In response to the comments on whether Participants' models are 
equally to blame for the complexity of the markets,\97\ CAT LLC stated 
that its analysis of the complexity of the industry's business models 
is based on the effects of those models on the costs of the CAT, which 
it stated are more profound than those of Participants, not on 
complexity of the market in general.\98\ CAT LLC explained that the 
complexity of the Industry Members' business models results in 
significant data processing and storage costs, which Participants do 
not contribute to as they do not originate market activity or

[[Page 41153]]

orders.\99\ CAT LLC also stated that the Participants would pay the 
same amount as the CEBB and CEBS in each transaction.\100\
---------------------------------------------------------------------------

    \97\ See SIFMA May 2023 Letter at 3. See also SIFMA January 2023 
Letter at 2, 3-4.
    \98\ See CAT LLC Response Letter at 6.
    \99\ Id. at 7.
    \100\ Id. at 6.
---------------------------------------------------------------------------

    CAT LLC also disagreed with one commenter's dismissal of CAT LLC's 
consideration of the Industry Members' relative ability to pay,\101\ 
stating that the Exchange Act specifically requires that the fees be 
fair and reasonable, which necessitates consideration of the relative 
ability to pay.\102\ Additionally, CAT LLC objected to the commenter's 
statement that the proposed allocation is ``inconsistent with the 
historical CAT decision to allocate costs to the parties responsible 
for generating them.'' \103\ CAT LLC stated that, while the CAT NMS 
Plan does not require CAT costs to be allocated to the parties 
responsible for generating such costs, the proposed allocation 
addresses cost burden on the CAT by (i) taking into account the impact 
of Industry Member activity on CAT costs, and (ii) using trading 
activity, which CAT LLC believes is a ``reasonable proxy for cost 
burden on the CAT,'' \104\ as the metric for cost allocation.\105\
---------------------------------------------------------------------------

    \101\ See SIFMA May 2023 Letter at 7. See also SIFMA January 
2023 Letter at 4.
    \102\ CAT LLC Response Letter at 7.
    \103\ Id.; SIFMA May 2023 Letter at 7.
    \104\ CAT LLC Response Letter at 7.
    \105\ Id.
---------------------------------------------------------------------------

    Additionally, CAT LLC responded to the commenter's suggested 
alternative proposal that would equally allocate CAT costs to 
Participant exchanges and Industry Members, stating that the commenter 
did not explain why the alternative would satisfy the Exchange Act 
standards, and noting that CAT LLC had previously considered such an 
allocation but believed that it would not result in a fair and 
equitable allocation due to the greater number of Industry Members than 
Participants, the greater financial resources of Industry Members, and 
the failure of the suggested allocation to take into account how the 
complexity of Industry Member business models contributes substantially 
to CAT costs.\106\
---------------------------------------------------------------------------

    \106\ Id.
---------------------------------------------------------------------------

    In response, the commenter stated that the CAT LLC Response Letter 
did not meaningfully address the concerns it raised about the 
allocation of CAT costs between Participants and Industry Members.\107\
---------------------------------------------------------------------------

    \107\ See SIFMA June 2023 Letter at 2.
---------------------------------------------------------------------------

B. Executed Equivalent Shares

a. Executed Equivalent Share Volume
    One commenter stated that the Participants failed to justify why 
the Executed Share Model would appropriately treat high-volume trades 
in low-priced stocks, arguing that Section 31 fees are charged only on 
the sell-side of a transaction and are based on the notional value of a 
trade.\108\
---------------------------------------------------------------------------

    \108\ See SIFMA October 2022 Letter at 7.
---------------------------------------------------------------------------

    Another commenter argued that the Proposed Amendment does not 
explain why the use of executed share volume as the basis of the cost 
allocation methodology, instead of message traffic, is equitable.\109\ 
The commenter explained that in prior models, message traffic was the 
key proxy for cost generation used to align CAT fees with CAT costs, 
but the Executed Share Model would base its cost allocation methodology 
entirely on executed share volume.\110\ The commenter stated that the 
Participants' argument that executed share volume is related to cost 
generation is not enough to demonstrate that its use is reasonable and 
equitable.\111\ This commenter further stated that the Executed Share 
Model is inconsistent with the ``cost alignment'' funding principle in 
Section 11.2(b) of the CAT NMS Plan, which requires the Participants to 
seek to establish an allocation of costs that takes into account 
distinctions in the securities trading operations of Participants and 
Industry Members and their relative impact upon Company resources and 
operations.\112\ The commenter stated that ``the Proposal fails to 
establish a sufficient nexus between executed share volume and the 
technology burdens that generate CAT costs and fails to relate each 
reporter group's allocation to the burden that each reporter group 
imposes on CAT.'' \113\
---------------------------------------------------------------------------

    \109\ See FINRA June 2022 Letter at 3.
    \110\ Id.
    \111\ Id. at 4.
    \112\ Id. See also FINRA April 2023 Letter at 7-9.
    \113\ FINRA June 2022 Letter at 4.
---------------------------------------------------------------------------

    CAT LLC responded to the commenter's statement that the proposed 
allocation is inconsistent with the cost alignment principles of the 
CAT NMS Plan by noting that the Proposed Amendment incorporates the 
concept of cost burden in at least two ways.\114\ Specifically, CAT LLC 
stated that it does so because ``the allocation of CAT costs 
contemplates the effect of Industry Member activity on the cost of the 
CAT. . . and because trading activity provides a reasonable proxy for 
cost burden on the CAT, trading activity is an appropriate metric for 
allocating CAT costs among CAT Reporters.'' \115\ CAT LLC added that 
because there are other examples of trading activity-based fees, the 
Executed Share Model would not be novel or unique.\116\
---------------------------------------------------------------------------

    \114\ CAT LLC Response Letter at 7.
    \115\ Id.
    \116\ Id.
---------------------------------------------------------------------------

    With respect to the deletion in Section 11.2(b) of the requirement 
that, when establishing the funding of the CAT, the Operating Committee 
must take into account ``distinctions in the securities trading 
operations of Participants and Industry Members and their relative 
impact upon Company resources and operations,'' the same commenter 
argued that the Participants have proposed to delete the language in 
Section 11.2(b) because the proposed Executed Share Model is 
inconsistent with the language.\117\ This commenter stated that the 
Proposed Amendment ``seeks to amend the core funding principles to 
align with an unjustified allocation methodology.'' \118\ The commenter 
stated that any changes to the funding principles ``must be well-
reasoned and transparent and must continue to support the achievement 
of a fair and equitable outcome.'' \119\
---------------------------------------------------------------------------

    \117\ See FINRA June 2022 Letter at 4; see also FINRA April 2023 
Letter at 7.
    \118\ FINRA June 2022 Letter at 4. The commenter states that the 
Executed Share Model instead places the greatest emphasis on the 
funding principle relating to the ``ease of billing and other 
administrative functions,'' favoring that principle over cost 
alignment. Id. at 5.
    \119\ Id.; FINRA April 2023 Letter at 8-9.
---------------------------------------------------------------------------

    Additionally, the commenter objected to the statement in the 
Proposed Amendment that ``trading activity provides a reasonable proxy 
for cost burden on the CAT, and therefore is an appropriate metric for 
allocating CAT costs among CAT Reporters.'' \120\ The commenter stated 
that this statement is inconsistent with information that demonstrates 
that volume from FINRA trading facilities (``TRF'') contributes ``a 
very small percentage of annual CAT compute and storage costs.'' \121\ 
The commenter stated, ``. . . despite the minimal data compute and 
storage costs for transactions reported to the TRF, FINRA would be 
assessed an estimated 34% of the total CAT costs to be borne amongst 
the 25 Participants, and more than all options exchanges combined.'' 
\122\ The commenter stated that as a result, it cannot support the 
Participants' assertion that trading activity is a reasonable proxy for 
cost burden.\123\ The commenter stated that the Proposed Amendment 
``fails to provide for reasonable fees that are equitably allocated and 
not unfairly discriminatory, does not reflect a reasonable approach to 
allocating costs

[[Page 41154]]

amongst the Participants, nor does it transparently or accurately 
present information regarding the true sources of cost burdens on the 
CAT.'' \124\
---------------------------------------------------------------------------

    \120\ Notice, supra note 6, 88 FR at 17103.
    \121\ FINRA May 2023 Letter at 2.
    \122\ Id.
    \123\ See id. See also FINRA April 2023 Letter at 8.
    \124\ FINRA May 2023 Letter at 4.
---------------------------------------------------------------------------

b. FINRA Allocation
    Two commenters objected to the proposed allocation of Participant 
CAT fees to FINRA.\125\ Both commenters objected to the allocation to 
FINRA of 34% of the total CAT costs \126\ to be borne by the 
Participants.\127\ One commenter argued that this amount was a 
``disproportionate share of CAT costs,'' \128\ especially as FINRA does 
not operate a market,\129\ and that the Proposed Amendment would place 
an undue burden on FINRA.\130\ The commenter stated that FINRA's share 
was ``more than double that of the next highest Participant and $4 
million more than all option exchanges combined.'' \131\ The commenter 
also stated that FINRA's allocation would largely be based on 
transaction volume reported to the TRF; however, the commenter stated 
that TRF transactions generate fewer costs for the CAT,\132\ as opposed 
to options activity, but that only 25% of total Participant CAT fees 
would be assessed for options activity, while the remaining 75% would 
be assessed for equities activity.\133\ The commenter stated that ``. . 
. FINRA would be assessed an estimated 34% of the total CAT costs to be 
borne amongst the 25 Participants, and more than all options exchanges 
combined.'' \134\
---------------------------------------------------------------------------

    \125\ See FINRA May 2023 Letter; FINRA April 2023 Letter; FINRA 
June 2022 Letter; SIFMA May 2023 Letter; SIFMA June 2022 Letter; 
SIFMA October 2022 Letter. One of the commenters supported the 
points raised in the FINRA April 2023 Letter that argued that the 
Proposed Amendment would result in the inequitable allocation of 
fees and should be disapproved. See SIFMA May 2023 Letter at 2.
    \126\ One commenter stated that this estimate is based on 2021 
data and urged the Commission to require the Participants to amend 
the Proposed Amendment to include the 2022 data and fee allocation 
estimates, stating that the CAT budget has grown significantly from 
2021. See FINRA April 2023 Letter at 3, 4-5. In its response to 
comments, CAT LLC provided the Historical CAT Costs for 2022. See 
Notice, supra note 6, 88 FR at 17111; CAT LLC Response Letter at 13.
    \127\ See FINRA May 2023 Letter at 2; FINRA April 2023 Letter at 
3; SIFMA May 2023 Letter at 2.
    \128\ FINRA April 2023 Letter at 3.
    \129\ Id.
    \130\ FINRA June 2022 Letter at 6.
    \131\ FINRA April 2023 Letter at 4; see also FINRA June 2022 
Letter at 5.
    \132\ See FINRA April 2023 Letter at 8, n.23.
    \133\ Id.; FINRA May 2023 Letter at 2.
    \134\ FINRA May 2023 Letter at 2.
---------------------------------------------------------------------------

    The commenter argued that, unlike the exchange Participants, 
transactions are not executed on a FINRA marketplace and FINRA does not 
receive commercial revenue for those transactions.\135\ The commenter 
explained that ``while the NMS stock allocation to FINRA under the 
Funding Model is based on transactions that are reported to FINRA 
[TRFs], these transactions are not executed on a FINRA marketplace and 
FINRA does not retain commercial revenues from those transactions'' 
\136\ unlike the exchanges that operate each FINRA TRF, which retain 
the market data and trade reporting revenue of the TRF.\137\ The 
commenter stated that, unlike FINRA, these exchanges would thus have a 
revenue stream related to the transactions that would be assessed a CAT 
fee, and that also, unlike FINRA, exchanges generate revenue from 
listings and proprietary data feeds in NMS securities.\138\ The 
commenter also stated that FINRA members can report over-the-counter 
transactions in listed stocks to the FINRA Alternative Display 
Facility, although most transactions are reported to a TRF.\139\
---------------------------------------------------------------------------

    \135\ See FINRA April 2023 Letter at 3.
    \136\ Id.
    \137\ Id.
    \138\ Id. at 4.
    \139\ Id. at 3, n.8.
---------------------------------------------------------------------------

    The commenter further stated that FINRA cannot necessarily recoup 
its costs through regulatory services agreements (``RSAs'') that it has 
entered into with certain exchanges \140\ because the exchanges must 
first agree to be charged CAT costs under the RSAs; therefore, RSAs 
would not be a reliable source of CAT funding for FINRA.\141\ 
Additionally, the commenter questioned CAT LLC's statement that the 
Proposed Amendment ``reflects a reasonable effort to allocate costs 
based on the extent to which different CAT Reporters participate in and 
benefit from the equities and options markets.'' \142\ Specifically, 
the commenter asked how CAT LLC's statement explains the size of 
FINRA's allocation \143\ and noted that this statement ``conflates the 
costs to create and operate the CAT with the usage of CAT data.'' \144\
---------------------------------------------------------------------------

    \140\ This statement was made in response to a statement in the 
Proposed Amendment that FINRA, like the exchange Participants, has 
revenue sources other than membership fees, giving as an example the 
RSAs. See Notice, supra note 6, 88 FR at 17107.
    \141\ See FINRA April 2023 Letter at 4.
    \142\ Id. at 7.
    \143\ Id.
    \144\ Id.; see also FINRA June 2022 Letter at 6.
---------------------------------------------------------------------------

    Two commenters expressed concern about alleged arbitrary treatment 
of FINRA by the other Participants of the CAT NMS Plan.\145\ One 
commenter believes that FINRA's ``outsized allocation'' \146\ was 
because of its limited voting power, only having one out of 25 votes on 
the Operating Committee as it does not control, nor is under common 
control with, any other Participant.\147\ Another commenter stated that 
the current CAT NMS Plan voting structure results in the unfair and 
inequitable treatment of FINRA.\148\ Both commenters believe that the 
exchange Participants treat FINRA arbitrarily to benefit themselves, 
treating FINRA as a market center in the CAT NMS Plan while not as a 
market center under the National Market System Plan Regarding 
Consolidated Equity Market Data (``CT Plan''),\149\ which governs the 
public dissemination of real-time consolidated market data for national 
market system stocks.\150\ One commenter argued that the Participants 
do not treat FINRA as a market center under the CT Plan in order to 
limit FINRA's voting power and therefore its ability to decide how to 
allocate market data revenue.\151\ The commenter stated that this 
example demonstrates the ``. . . inherent conflicts of interest that 
for-profit exchanges have in operating as SROs . . .'' \152\ The 
commenter suggested that the Commission issue an order soliciting 
comment on whether the Operating Committee should be reorganized 
consistent with the CT

[[Page 41155]]

Plan.\153\ This commenter further stated, ``[w]e believe such a 
governance structure for the CAT would help facilitate a fairer 
structure for the views of the SROs and industry to be heard and 
incorporated into any further CAT funding proposal by reducing the 
ability of the largest exchange groups to dictate the terms of any CAT 
funding proposal over the objections of other SRO Participants and the 
industry.'' \154\
---------------------------------------------------------------------------

    \145\ See FINRA April 2023 Letter at 6, n.16; SIFMA October 2022 
Letter at 3. See also SIFMA May 2023 Letter at 6, n.11.
    \146\ FINRA April 2023 Letter at 7; FINRA June 2022 Letter at 6.
    \147\ FINRA April 2023 Letter at 4, 8. See also FINRA June 2022 
Letter at 8.
    \148\ See SIFMA January 2023 Letter at 3, n.7.
    \149\ See Joint Industry Plan; Order Approving, as Modified, a 
National Market System Plan Regarding Consolidated Equity Market 
Data; Securities Exchange Act Release No. 92586 (Aug. 6, 2021), 86 
FR 44142 (Aug. 11, 2021) (File No. 4-757) (``Order Approving the CT 
Plan''). The Order Approving the CT Plan was vacated by the D.C. 
Circuit on July 5, 2022. See The NASDAQ Stock Market LLC et al. v. 
SEC, Case No. 21-1167, D.C. Cir. (July 5, 2022). See also Securities 
Exchange Act Release No. 88827; File No. 4-757 (May 6, 2020), 85 FR 
28702 (May 13, 2020) (Order Directing the Exchanges and the 
Financial Industry Regulatory Authority to Submit a New National 
Market System Plan Regarding Consolidated Equity Market Data).
    \150\ See FINRA April 2023 Letter at 6; SIFMA October 2022 
Letter at 3. See also SIFMA May 2023 Letter at 6, n.11. One 
commenter argued that the Participants treat FINRA in ways that are 
financially beneficial to them without considering FINRA's role in 
the marketplace ``. . . as the not-for-profit self-regulator for the 
entire brokerage industry . . .'' SIFMA October 2022 Letter at 3. 
See also SIFMA January 2023 Letter at 4; SIFMA October 2022 Letter 
at 4; SIFMA May 2023 Letter at 8 (recommending that FINRA be treated 
differently from the Participant exchanges due to its unique role).
    \151\ See SIFMA October 2022 Letter at 3-4. See also SIFMA May 
2023 Letter at 6, n.11.
    \152\ SIFMA October 2022 Letter at 3. See also SIFMA June 2023 
Letter at 4 (quoting a Commission release stating that the 
Participants are potentially conflicted in allocating CAT fees to 
themselves and the Industry Members); supra note 74.
    \153\ SIFMA October 2022 Letter at 2.
    \154\ Id. The commenter also argued that the Industry Members 
are not voting members of the Operating Committee and have no way to 
direct the cost control efforts of the Participants or change their 
course if the cost control efforts prove to be unsuccessful. See 
SIFMA June 2022 Letter at 8.
---------------------------------------------------------------------------

    Both commenters also believe the allocation to FINRA would increase 
the allocation to Industry Members.\155\ One commenter stated that 
FINRA, which relies on regulatory fees from its members for funding, 
must increase its member fees in order to fund CAT costs that it cannot 
recover from contractual arrangements with TRF business members.\156\ 
The commenter stated that the Proposed Amendment does not adequately 
analyze the allocation's impact, including whether the allocation would 
increase Industry Members' allocation of total costs beyond two-
thirds.\157\ The commenter dismissed as inadequate the Participants' 
argument that Industry Members can pass through their costs, stating 
that the Proposed Amendment lacks a detailed description of and 
transparency into how the fees may be passed on to customers.\158\ 
Another commenter argued that the Participants ``do not address the 
fact that the Executed Share Model for Prospective CAT Costs allocates 
two-thirds of CAT costs to Industry Members for exchange transactions 
and more for off-exchange transactions'' \159\ because they cannot 
demonstrate that the proposed allocation results in an equitable 
allocation of reasonable fees.\160\ The commenter stated that Industry 
Members, who would be subject to two-thirds of Prospective CAT Costs 
under the Executed Share Model, already pay FINRA's operating costs 
through regulatory fines and fees; therefore, Industry Members would 
additionally be indirectly assessed FINRA's one-third CAT fee for off-
exchange transactions.\161\ The commenter suggested an alternative 
allocation \162\ that would subject FINRA only to a nominal regulatory 
user fee to access CAT Data.\163\
---------------------------------------------------------------------------

    \155\ See FINRA April 2023 Letter at 5-7; SIFMA June 2022 Letter 
at 4. See also SIFMA October 2022 Letter at 2, 3.
    \156\ See FINRA April 2023 Letter at 5-6; see also FINRA June 
2022 Letter at 7.
    \157\ See FINRA April 2023 Letter at 6.
    \158\ Id. at 6-7.
    \159\ SIFMA June 2022 Letter at 4. See also SIFMA October 2022 
Letter at 3 (``. . . we believe the proposal is flawed because it 
fails to appropriately consider that Industry Members pay the full 
costs of operating FINRA.'').
    \160\ See SIFMA June 2022 Letter at 4.
    \161\ Id. The commenter also stated that the proposed allocation 
would result in two-thirds of CAT costs for exchange transactions 
being imposed on Industry Members, and that this amount would be 
higher for off-exchange transactions as FINRA would be assessed one-
third as the venue fee and Industry Members would be indirectly 
assessed FINRA's portion of CAT costs as they pay the entire costs 
of operating FINRA. Id. See also SIFMA October 2022 Letter at 2.
    \162\ See supra notes 84-85 and accompanying text.
    \163\ See SIFMA January 2023 Letter at 4. See also SIFMA May 
2023 Letter at 8; SIFMA June 2022 Letter at 5; SIFMA October 2022 
Letter at 4.
---------------------------------------------------------------------------

    One commenter requested that if the Commission were to approve the 
Proposed Amendment, that it acknowledge ``FINRA's need and ability to 
cover CAT costs that are not recovered through contractual arrangements 
through member fee increases, so as not to jeopardize FINRA's ability 
to carry out its critical regulatory mission.'' \164\ The commenter 
stated that FINRA would file a rule change to increase its member fees 
with the filing of any proposed rule change to effectuate the Funding 
Model.\165\
---------------------------------------------------------------------------

    \164\ FINRA April 2023 Letter at 7.
    \165\ Id.
---------------------------------------------------------------------------

    CAT LLC disagreed with one commenter's proposal to charge FINRA 
only a nominal regulatory fee.\166\ CAT LLC stated that the proposed 
transaction-based CAT fee is purposely agnostic as to the location of 
where a trade occurs, and an intent of this design is to avoid 
influencing whether or where any trading activity would take place. 
Moreover, CAT LLC stated that FINRA is no different from the exchanges 
in terms of its regulatory obligations regarding the CAT.\167\
---------------------------------------------------------------------------

    \166\ See CAT LLC Response Letter at 8.
    \167\ Id.
---------------------------------------------------------------------------

C. CAT Executing Broker

    Two commenters objected to the proposed definition of ``CAT 
Executing Broker.'' \168\ One commenter argued that the term ``CAT 
Executing Broker'' ``does not appear to be universally defined or 
accepted by Option Industry Members or Participants'' and that such 
lack of acceptance ``present[s] a challenge when firms try to assess 
the impact the `Funding Proposal' will have on their respective 
businesses.'' \169\ Accordingly, the commenter advocated that the 
Executed Share Model follow the ``structure already in place for 
[collecting] Regulatory Fees,'' such as charging Clearing Brokers.\170\
---------------------------------------------------------------------------

    \168\ See SIFMA May 2023 Letter; Letter from Timothy Miller, 
Chief Operating Officer, DASH Financial Technologies, LLC to Vanessa 
Countryman, Secretary, Commission (April 11, 2023) (``DASH April 
2023 Letter''), at 1-2. The DASH April 2023 Letter also incorporated 
by reference a separate letter submitted by the commenter on the 
prior funding proposal (stating that the concerns expressed in the 
prior letter concerning the operating and competitive burdens of the 
proposed funding model are unchanged). See Letter from Timothy 
Miller, Chief Operating Officer, DASH Financial Technologies LLC, to 
Vanessa Countryman, Secretary, Commission (Jan. 3, 2023) (``DASH 
January 2023 Letter'').
    \169\ DASH April 2023 Letter at 1.
    \170\ Id. at 2.
---------------------------------------------------------------------------

    Another commenter argued that the proposed definition of executing 
broker would result in the inequitable allocation of fees.\171\ While 
the commenter supported the change from having clearing firms be 
assessed Industry Member CAT fees to executing brokers having this 
obligation,\172\ because clearing firms would have been unfairly 
burdened with CAT costs and could have been placed in situations in 
which they would have been unable to identify the client responsible 
for the costs,\173\ the commenter expressed concerns with how the 
Participants determined which entities would be considered executing 
brokers.\174\ In comment letters on the prior proposal, which was 
amended to require executing brokers instead of clearing firms to be 
assessed CAT fees, the commenter requested additional detail on how an 
executing broker would be defined.\175\ The commenter subsequently 
stated that the definition in the current Proposed Amendment suffers 
from the same problems as the prior proposal in which CAT fees were 
allocated to clearing firms and would result in the inequitable 
allocation of CAT fees among Industry Members.\176\
---------------------------------------------------------------------------

    \171\ See SIFMA May 2023 Letter at 3.
    \172\ Id. See also SIFMA January 2023 Letter at 7-8.
    \173\ See SIFMA May 2023 Letter at 3-4. See also SIFMA October 
2022 Letter at 5. The commenter also argued against the assessment 
of CAT fees on clearing firms because clearing firms would be 
required to collect fees and thus would have to develop new systems 
and processes under the Executed Share Model, and because a clearing 
firm for a buyer or seller would not always be a party to a trade as 
it could be the clearer of a trade on behalf of an executing broker. 
See SIFMA June 2022 Letter at 9; SIFMA October 2022 Letter at 7.
    \174\ See SIFMA May 2023 Letter at 4.
    \175\ See SIFMA January 2023 Letter at 2, 8; SIFMA December 2022 
Letter at 3. See also SIFMA May 2023 Letter at 4.
    \176\ See SIFMA May 2023 Letter at 4. See also SIFMA June 2022 
Letter at 9-10; SIFMA October 2022 Letter at 5.
---------------------------------------------------------------------------

    The commenter explained that CAT operates on a cost-recovery basis, 
with costs resulting from the number of messages that Participants and 
Industry Members report to the CAT, the processing and linking of such

[[Page 41156]]

messages, and the costs of providing tools to regulators to analyze CAT 
data.\177\ The commenter stated that the use of message traffic as the 
basis of fees, in the Original Funding Model, would have ensured that 
all CAT Reporters would contribute to CAT's funding.\178\ However, the 
commenter stated that, since the Proposed Amendment would not impose 
fees on all CAT Reporters, instead imposing fees on executing brokers, 
it would result in an inequitable allocation of fees as the executing 
brokers would be the last broker among many other brokers handling an 
order.\179\ The commenter stated that any analysis of such a funding 
model must evaluate whether (i) the executing brokers would pass-
through or absorb the CAT fees and any negative impacts on competition, 
noting that the Proposed Amendment would require executing brokers to 
incur expenses that other Industry Members would not incur since they 
would be required to collect the Industry Member portion of CAT fees on 
behalf of the Participants,\180\ and (ii) Industry Members that 
executed trades for introducing brokers and acting as order 
consolidators and ATSs would be responsible for CAT fees for 
transactions they did not originate and would have to either pay the 
fee for their clients or develop software and processes to collect the 
fees from their clients as they often are not capable of passing 
through fees to the clients that sent them the orders.\181\ The 
commenter stated that the Proposed Amendment would subject executing 
brokers to unfair burdens and require them to ``shoulder CAT costs in 
scenarios in which they could not determine which client firm was 
responsible for creating the CAT costs by initiating the transaction.'' 
\182\
---------------------------------------------------------------------------

    \177\ See SIFMA May 2023 Letter at 4.
    \178\ Id.
    \179\ Id. at 4-5.
    \180\ Id. at 5.
    \181\ Id.
    \182\ Id.
---------------------------------------------------------------------------

    The commenter argued instead in favor of an allocation in which the 
Industry Member that originated an order would be treated as an 
``executing broker'' and therefore be responsible for Industry Member 
CAT fees.\183\ Under this alternative, ``the Industry Member who 
originates a new principal order or the Industry Member who initially 
receives and routes a customer order for execution on an agency basis 
would be directly assessed CAT Fees.'' \184\ The commenter stated that 
this would be the most reasonable way to allocate CAT costs among 
Industry Members \185\ and that it would be ``relatively easy to 
accommodate this approach.'' \186\
---------------------------------------------------------------------------

    \183\ See SIFMA May 2023 Letter at 5.
    \184\ Id. at 6.
    \185\ Id. at 5.
    \186\ Id. at 6.
---------------------------------------------------------------------------

    One commenter expressed concerns about the imposition of CAT fees 
on CAT Executing Brokers.\187\ The commenter argued that charging CAT 
Executing Brokers ``inordinately burdens Broker Dealers, especially 
small to medium-sized firms.'' \188\ This commenter recommended using 
instead the existing structure for regulatory fees, including ``the 
efficiencies afforded by the current structure, and the resulting 
alleviation of risk.'' \189\ In this regard, the commenter stated that 
``Clearing Firms are best suited to process the collection of fees as 
it can occur at trade settlement and the cost is ultimately borne by 
the end beneficiary of each transaction.'' \190\ The commenter also 
stated that small and medium-sized executing brokers could expect a 
significant negative impact on their net capital as a result of the 
proposal, stating, ``. . . the firms will be forced to recoup these 
costs by passing them on to their clients, either in the form of higher 
commission rates or as a separate transactional fee. Using [Clearing 
Member Trade Agreement] commission invoicing and/or SEC 31(b) fees in a 
broker-to-broker relationship as a proxy, these invoices are generally 
paid well after the 60-day milestone to qualify the receivable as `good 
capital.' '' \191\
---------------------------------------------------------------------------

    \187\ See DASH April 2023 Letter.
    \188\ Id. at 1; see also DASH January 2023 Letter at 1.
    \189\ DASH January 2023 Letter at 3; see also DASH April 2023 
Letter at 1-2.
    \190\ DASH April 2023 Letter at 1; see also DASH January 2023 
Letter at 1.
    \191\ DASH January 2023 Letter at 2.
---------------------------------------------------------------------------

    In response to the comment about the definition of CAT Executing 
Broker and the billing and collection process being better suited for 
clearing firms, CAT LLC stated that the proposed assessment of CAT fees 
on CAT Executing Brokers only addresses the party obligated to pay the 
CAT fee.\192\ CAT LLC stated that a CAT Executing Broker can decide to 
enter into an arrangement with its clearing broker for the clearing 
broker to collect and pass-through the CAT fees like it does in other 
contexts.\193\ With respect to alternatives to the proposed definition 
of the CAT Executing Broker, CAT LLC stated that the ``originating 
broker'' suggestion was from a commenter who had previously recommended 
charging executing brokers in comment letters on the prior proposed 
funding model.\194\ CAT LLC stated that the commenter's objection to 
charging executing brokers in the Executed Share Model was an attempt 
to further delay the approval of a funding model and the resultant 
payment of CAT fees by its members, rather than expressing a concern 
about the merits of charging executing brokers.\195\
---------------------------------------------------------------------------

    \192\ See CAT LLC Response Letter at 12.
    \193\ Id.
    \194\ Id. at 2.
    \195\ Id. at 3.
---------------------------------------------------------------------------

    In response, the commenter stated that the CAT Operating Committee 
mischaracterized the commenter's position on the assessment of CAT fees 
to executing brokers by stating in the CAT LLC Response Letter that the 
commenter changed its position on this proposed change to delay 
adoption of a CAT funding model.\196\ The commenter represented that it 
stated in comment letters it submitted on the prior funding model that 
initially proposed the use of executing brokers that (1) the 
Participants did not define who would be an executing broker in a 
transaction, (2) a clear definition is necessary for Industry Members 
to understand when they would be assessed costs under the Executed 
Share Model, and (3) its understanding was that the concept of 
executing broker generally refers to the Industry Member that initiates 
an order.\197\ The commenter stated that the Participants only provided 
a definition of executing broker in the Proposed Amendment.\198\ The 
commenter stated that it provided concerns about the proposed 
definition in its May 2023 comment letter which the commenter argued 
were mischaracterized by the CAT Operating Committee in the CAT LLC 
Response Letter.\199\ The commenter stated that the CAT Operating 
Committee mischaracterized the commenter's position to rush the 
Commission to a decision on the Proposed Amendment.\200\
---------------------------------------------------------------------------

    \196\ See SIFMA June 2023 Letter at 5.
    \197\ Id.
    \198\ Id.
    \199\ Id. at 5-6.
    \200\ Id. at 6.
---------------------------------------------------------------------------

    In response to the comment that imposing fees on executing brokers 
would result in an inequitable allocation of fees and the suggestion 
that the use of message traffic as the basis of fees would have ensured 
that all CAT Reporters would contribute to CAT's funding, CAT LLC 
disagreed and stated that because the message traffic is separate from 
whether or not a transaction occurs, fees based on message traffic may 
not correlate with common revenue or fee models.\201\ CAT

[[Page 41157]]

LLC stated that, as a result, CAT fees based on message traffic could 
impose an outsized adverse financial impact on certain Industry 
Members, raising this same issue of an inequitable allocation of 
fees.\202\ Further, in response to the commenter's criticism that in 
charging executing brokers, the fee would be charged to a subset of 
Industry Members and, as a result, that subset of Industry Members 
would incur expenses that other Industry Members would not incur, CAT 
LLC stated that it continues to believe that charging CAT Executing 
Brokers would satisfy the requirements of the Exchange Act.\203\ CAT 
LLC stated that in the past, the Commission has approved fees that are 
charged to some, but not all, broker-dealers.\204\ CAT LLC noted that, 
for example, FINRA's trading activity fee is assessed to a subset of 
FINRA members--that is, it is assessed on the sell side of member 
transactions.\205\ CAT LLC also stated that the options exchanges 
charge options regulatory fees per executed contract side, and, for 
both options and equities, Section 31-related fees are charged to the 
sell-side in a transaction.\206\ CAT LLC recognized that, under the 
proposal to charge CAT Executing Brokers, the CAT Executing Broker, but 
not other Industry Members involved in a given order lifecycle, would 
be required to pay the CAT fees, and that Industry Members that sought 
to recoup such fees would have to develop processes to collect such 
fees from their clients.\207\ CAT LLC stated that this regulatory 
requirement would have a similar effect as other types of regulatory 
fees, such as the FINRA trading activity fee, the options regulatory 
fee and Section 31-related sales value pass-through fees because, 
``[i]n each such case, a subset of broker-dealers is required to pay a 
transaction-based regulatory fee, and those broker-dealers seeking to 
recover such fees from other broker-dealers or non-broker-dealers have 
established processes with regard to the pass-through of such fees.'' 
\208\
---------------------------------------------------------------------------

    \201\ See CAT LLC Response Letter at 4.
    \202\ Id.
    \203\ Id. at 3.
    \204\ Id.
    \205\ Id.
    \206\ See CAT LLC Response Letter at 3.
    \207\ Id. at 4.
    \208\ Id.
---------------------------------------------------------------------------

    CAT LLC further stated that it disagrees with charging an 
originating broker instead of an executing broker because there are 
already several existing examples of transaction-based fees being 
assessed to executing brokers as opposed to the originating broker, and 
it disagrees with the assertion that charging originating brokers would 
be easier.\209\ CAT LLC stated that charging the originating Industry 
Member would be difficult to implement and would increase the costs of 
implementing CAT fees, whereas charging CAT Executing Brokers is 
simple, straightforward and in line with existing fee and business 
models because for any given trade (buy or sell), there is only one CAT 
Executing Broker to which shares can be allocated.\210\ As such, CAT 
LLC stated that ``charging the CAT Executing Broker is simple and 
straightforward, and leverages a one-to-one relationship between 
billable events (trades) and billable parties.'' \211\ CAT LLC argued 
that, for a single trade event, there may be many originating brokers, 
and each trade must be broken down on a pro-rata basis to ``account[] 
for one or more layers of aggregation, disaggregation, and 
representation of the underlying orders.'' \212\ Therefore, CAT LLC 
stated that the commenter's ``suggestion of a model that begins the 
funding analysis with new order events (e.g., MENO or MONO events) and 
then looks for any execution or fulfillment that is directly associated 
with that event does not reduce or mitigate the complexity associated 
with aggregation.'' \213\ Further, CAT LLC argued that the commenter's 
recommendation would not work with the design of the CAT system, 
stating that ``[w]hile CAT is indeed designed to capture and unwind 
complex aggregation scenarios, the data and linkages are structured to 
facilitate regulatory use, and not a billing mechanism that assesses 
fees on a distinct set of executed trades; it is not simply a matter of 
using existing CAT linkages.'' \214\ Finally, CAT LLC stated that 
charging originating brokers would implicate issues related to 
lifecycle linkage rates, and issues related to corrections, 
cancellations and allocations, but charging CAT Executing Brokers would 
avoid such complications.\215\
---------------------------------------------------------------------------

    \209\ Id. at 5.
    \210\ Id.
    \211\ Id.
    \212\ See CAT LLC Response Letter at 5.
    \213\ Id.
    \214\ Id.
    \215\ Id.
---------------------------------------------------------------------------

D. Prospective CAT Fees

a. Budgeted CAT Costs
    One commenter argued that the budget line item categories are too 
high level.\216\ The commenter urged the inclusion of much greater 
detail and specificity on the budget spending choices, especially in 
technology,\217\ to allow Industry Members and the public to understand 
and evaluate CAT spending decisions.\218\
---------------------------------------------------------------------------

    \216\ See SIFMA January 2023 Letter at 6.
    \217\ The commenter stated that CAT spending on technology 
should be broken into further refined cost breakdowns of the 
following categories: cloud hosting services, operating fees, CAIS 
operating fees and change request fees. Id.
    \218\ Id.
---------------------------------------------------------------------------

    The commenter also stated that an independent cost review mechanism 
is necessary to ensure future CAT fees are fair and reasonable and to 
safeguard against unchecked spending.\219\ The commenter urged the 
inclusion of a mechanism to allow the public to review the annual CAT 
budget before it is finalized, since, as proposed, the public would 
only have the opportunity to review the CAT budget when the 
Participants submit proposed rule changes, pursuant to Section 19(b) of 
the Exchange Act,\220\ to implement CAT fees on Industry Members.\221\ 
The commenter also stated that it is unlikely that the Commission would 
decide that a proposed CAT fee does not meet Exchange Act fee standards 
and require the Participants to modify the CAT budget because it would 
be a lengthy, time-consuming process and due to ``the regulatory value 
of CAT data and the CAT system to the Commission.'' \222\ The commenter 
stated that the Commission is ``directly conflicted in its role as the 
user and beneficiary of the CAT system for regulatory functions and its 
role as the reviewer of the CAT budget and fee filings, a conflict that 
is only heightened due to a lack of a Commission funding obligation for 
CAT.'' \223\ As a result, the commenter urged the adoption of an 
independent cost review mechanism to ensure that CAT spending will be 
appropriate and consistent with the Exchange Act.\224\ The commenter 
also requested that ``the Participants' proposed budget include as a 
separate line-item projected usage costs and system change costs 
related to the Commission's use and design of the CAT system.'' \225\
---------------------------------------------------------------------------

    \219\ See SIFMA May 2023 Letter at 3, 8-10. See also SIFMA 
October 2022 Letter at 5-6; SIFMA January 2023 Letter at 2, 5-6; 
SIFMA June 2023 Letter at 2, n.10, 4.
    \220\ 15 U.S.C. 78s(b).
    \221\ See SIFMA May 2023 Letter at 8-9. See also SIFMA June 2022 
Letter at 8-9; SIFMA October 2022 Letter at 6; SIFMA January 2023 
Letter at 5, 6.
    \222\ SIFMA May 2023 Letter at 9.
    \223\ Id. at 9-10.
    \224\ Id. at 10.
    \225\ Id. See also SIFMA January 2023 Letter at 6.
---------------------------------------------------------------------------

    In response, CAT LLC stated that such an independent cost review is 
not necessary, because such a review process would go beyond what is 
required by either Rule 613 or the CAT

[[Page 41158]]

NMS Plan, and would be superfluous since any CAT fees must, prior to 
being implemented, undergo the review process detailed in Rule 608 and 
Section 19(b) of the Exchange Act.\226\ CAT LLC also noted that the 
Commission is entitled to request additional budget or cost information 
it views as necessary to better evaluate those fees.\227\ CAT LLC also 
stated that it already provides significant cost transparency through 
the public disclosure of its quarterly budget information and its 
financials, and that it is already actively engaged in cost discipline 
efforts, including through a designated cost-management working 
group.\228\ CAT LLC further explained that Participants are subject to 
regulatory requirements to implement CAT and oversee their members and 
cannot have their compliance subject to a third party without such 
restrictions.\229\ CAT LLC added that the Commission itself could have 
its ability to oversee the securities markets undermined if CAT is 
subject to review by a third party without regulatory 
restrictions.\230\
---------------------------------------------------------------------------

    \226\ CAT LLC Response Letter at 10.
    \227\ Id.
    \228\ Id.
    \229\ Id.
    \230\ Id.
---------------------------------------------------------------------------

    In response, the commenter stated that the CAT LLC Response Letter 
did not meaningfully address its concerns about the lack of a cost 
control mechanism.\231\
---------------------------------------------------------------------------

    \231\ See SIFMA June 2023 Letter at 2.
---------------------------------------------------------------------------

    In response to the suggested inclusion of the Commission's line 
item costs associated with its usage and design of the CAT in the 
budget,\232\ CAT LLC responded that, because all costs related to CAT 
are a result of the Commission's adoption of Rule 613 and the total 
costs are reflected in the budget, it would be impractical to break out 
Commission-specific costs and would not be useful as a practical 
matter.\233\
---------------------------------------------------------------------------

    \232\ See SIFMA May 2023 Letter at 10.
    \233\ CAT LLC Response Letter at 11.
---------------------------------------------------------------------------

b. Reserve
    One commenter argued that the proposed reserve of not more than 25% 
of the CAT budget is excessive.\234\ The commenter noted that the 
support provided for the proposed change was the Participants' 
difficulty in forecasting CAT costs, which the commenter stated 
demonstrates a need for an independent cost review mechanism.\235\
---------------------------------------------------------------------------

    \234\ See SIFMA January 2023 Letter at 6, n.15.
    \235\ Id.
---------------------------------------------------------------------------

E. Historical CAT Assessment

    One commenter disagreed with the proposed method of calculating the 
Historical CAT Assessment using current transaction activity ``due to 
difficulty of using current volumes and trading activity by individual 
Industry Members as a mechanism for assessing costs in the past where 
the trading volumes and individual Industry Member trading activity 
likely were different.'' \236\ The commenter also argued that the 
proposed assessment of Past CAT Costs on current Industry Members based 
on their current trading activity is not fair or reasonable because new 
Industry Members would be assessed a share of Past CAT Costs even if 
they were not in operation when those costs were incurred, and that 
such costs would be attributable to Industry Members that are no longer 
in business.\237\ The commenter added that the Proposed Amendment has 
not explained how allocating ``approximately $350 million in historical 
costs . . . to a small group of executing broker firms based on current 
market volumes'' is consistent with the Exchange Act or how it would 
impact liquidity and competition.\238\ The commenter stated that since 
the proposed allocation would be based on current market share and 
unrelated to the firms or activity that contributed to historical 
costs, there would be little ability for executing brokers to pass on 
such costs.\239\ The commenter also stated that the assessment of 
``retroactive liability for monies spent that private parties had no 
control over'' for public purposes would violate the Fifth Amendment 
Takings Clause.\240\
---------------------------------------------------------------------------

    \236\ SIFMA October 2022 Letter at 5.
    \237\ See SIFMA January 2023 Letter at 7.
    \238\ SIFMA June 2023 Letter at 4.
    \239\ See id.
    \240\ Id. at 8.
---------------------------------------------------------------------------

    The commenter recommended a reevaluation of the use of transaction 
fees to assess Past CAT Costs,\241\ and suggested an alternative 
approach in which Past CAT Costs would be assigned to Industry Members 
``based on the lesser of (i) the CAT Fees that would be assessed on an 
Industry Member under the Participants' proposed approach of using 
current trading activity or (ii) the CAT Fees that would be assessed on 
such member based on their prior trading activity in the years since 
2016 when the CAT was being built and then operationalized . . .'' 
\242\ The commenter stated that the share of Past CAT Costs belonging 
to Industry Members that are no longer in business could be calculated 
using this approach and then divided equally among the current Industry 
Members, while Industry Members that entered into business after 
certain Past CAT Costs were incurred would be assessed Past CAT Costs 
starting in the year after which they started operating based on the 
above approach.\243\ The commenter acknowledged that, while this 
approach would require more effort by the Participants, it would be 
``significantly closer to the fair and reasonable standard in the 
Exchange Act than the approach set forth by the Participants in the 
Executed Share Model.'' \244\
---------------------------------------------------------------------------

    \241\ See SIFMA October 2022 Letter at 5.
    \242\ SIFMA January 2023 Letter at 7.
    \243\ Id.
    \244\ Id.
---------------------------------------------------------------------------

    Additionally, the commenter stated that the Participants have 
failed to justify the allocation of Past CAT Costs to Industry Members 
during the period when only Participants were reporting to the 
CAT.\245\ The commenter argued that Industry Members should not be 
assessed any fees related to the decision to employ Thesys 
Technologies, LLC as the Plan Processor or legal or consulting fees 
incurred by the Participants in the creation of the CAT NMS Plan.\246\ 
The commenter stated that the Proposed Amendment fails to provide how 
of much of the allocation to Industry Members is related to Thesys 
Technologies, LLC, and, therefore, the Participants have not 
demonstrated how the Executed Share Model is consistent with the 
Exchange Act.\247\ The commenter also argued that Industry Members were 
not subject to CAT obligations before the CAT NMS Plan's approval, had 
no input into the selection of the service providers, and that ``it is 
difficult to envision how the Participants could demonstrate that such 
an allocation provides for the equitable allocation of reasonable fees 
due to the fact that the CAT NMS Plan did not exist during the period 
prior to its approval.'' \248\
---------------------------------------------------------------------------

    \245\ See SIFMA October 2022 Letter at 7.
    \246\ See SIFMA June 2022 Letter at 7; SIFMA January 2023 Letter 
at 6-7.
    \247\ See SIFMA June 2022 Letter at 7.
    \248\ Id.
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    The commenter also argued that the Participants have not analyzed 
different alternatives to collecting Past CAT Costs and the costs 
associated with such alternatives or the costs associated with the 
proposed approach.\249\ The commenter urged collaboration between the 
Participants and Industry Members on the allocation of Past CAT 
Costs.\250\
---------------------------------------------------------------------------

    \249\ See SIFMA October 2022 Letter at 5.
    \250\ Id. See also SIFMA October 2022 Letter at 2 (``[w]e also 
reiterate our call for the Participants to work with SIFMA and the 
industry in a collaborative manner to establish a viable CAT funding 
model.'').

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[[Page 41159]]

    With respect to the commenter's criticisms of the calculation and 
assessment of the Historical CAT Assessment,\251\ CAT LLC stated that 
the commenter had a ``persistent misunderstanding'' of the Historical 
CAT Assessment, explaining that, contrary to the commenter's assertions 
in its comment letters, the Historical CAT Assessment would be assessed 
based on current market activity, not past market activity.\252\ While 
the fee rate would be calculated based on Historical CAT Costs, the fee 
rate would be applied to current market transactions.\253\ CAT LLC 
stated that the process of assessing fees for the Historical CAT 
Assessment would be exactly the same as with CAT Fees related to 
Prospective CAT Costs, and could be passed through in the same manner 
if a CEBB or CEBS so chooses.\254\ CAT LLC also stated that it would 
provide CAT Executing Brokers with details of their CAT fees to 
facilitate this process.\255\
---------------------------------------------------------------------------

    \251\ See SIFMA May 2023 Letter at 8; SIFMA October 2022 Letter 
at 4-5; supra notes 87-88 and accompanying text.
    \252\ See CAT LLC Response Letter at 9.
    \253\ Id.
    \254\ Id.
    \255\ Id.
---------------------------------------------------------------------------

    In response, the commenter stated that the CAT LLC Response Letter 
did not meaningfully address the concerns it raised about ``the 
inability of firms defined as `executing brokers' to transfer fees to 
those who may be more appropriate to bear certain historical CAT costs 
in the first place.'' \256\
---------------------------------------------------------------------------

    \256\ See SIFMA June 2023 Letter at 2.
---------------------------------------------------------------------------

F. Other Comments

a. Lack of Industry Input
    Two commenters argued that the Proposed Amendment lacks input from 
the industry.\257\ One commenter stated that the Participants did not 
meaningfully solicit input from the industry when developing the 
Executed Share Model.\258\ Another commenter stated that the Proposed 
Amendment reflects a lack of representation by executing brokers and 
offered its participation in future discussions and advisory committees 
on the topic of CAT funding.\259\
---------------------------------------------------------------------------

    \257\ See DASH April 2023 Letter at 2; DASH January 2023 Letter 
at 3; SIFMA June 2023 Letter at 4; SIFMA May 2023 Letter at 2; SIFMA 
June 2022 Letter at 2; SIFMA January 2023 Letter at 2. See also 
FINRA June 2022 Letter at 8, 9 (advocating for a more inclusive 
development process that would include input from the industry).
    \258\ See SIFMA May 2023 Letter at 2; see also SIFMA June 2023 
Letter at 4, 5; SIFMA June 2022 Letter at 2; SIFMA January 2023 
Letter at 2.
    \259\ See DASH April 2023 Letter at 2; DASH January 2023 Letter 
at 3.
---------------------------------------------------------------------------

    In response, CAT LLC stated that it has engaged with the industry 
on the funding model over the past seven years, explaining that it has 
discussed funding model issues with the CAT Advisory Committee, which 
includes representation from the industry, as well as with industry 
associations such as SIFMA and the Financial Information Forum, and 
with individual Industry Members; analyzed and responded to comment 
letters on the prior proposals; and hosted webinars for the industry on 
funding issues.\260\ CAT LLC stated that it welcomes industry input on 
the funding model but believes a decision on the model is overdue.\261\
---------------------------------------------------------------------------

    \260\ See CAT LLC Response Letter at 12.
    \261\ Id.
---------------------------------------------------------------------------

    In response, one commenter stated that Industry Members are willing 
to work with the Commission and the Participants to develop a CAT 
funding model.\262\ The commenter urged collaboration and dialogue 
between the Participants and the Industry Members before the filing of 
a formal proposal with the Commission.\263\ The commenter stated that 
limiting industry input to the notice and comment process for NMS plan 
amendments is an inefficient process resulting in significant 
delays.\264\
---------------------------------------------------------------------------

    \262\ See SIFMA June 2023 Letter at 4.
    \263\ Id.
    \264\ Id. at 4-5.
---------------------------------------------------------------------------

b. Implementation
    One commenter suggested that upon approval of any CAT funding 
model, Industry Members should be given at least a year ``to implement 
any necessary changes to systems and processes for them to be able to 
capture their portion of CAT costs.'' \265\ CAT LLC responded that it 
was unlikely to take Industry Members a year to implement any needed 
changes, particularly given the relatively small fees likely to be 
incurred by most small Industry Members that would not require 
extensive new processes to pay.\266\
---------------------------------------------------------------------------

    \265\ SIFMA May 2023 Letter at 2.
    \266\ See CAT LLC Response Letter at 12.
---------------------------------------------------------------------------

c. Rule 613 and the CAT NMS Plan
    One commenter stated that the Proposed Amendment is not what was 
originally envisioned by the Commission in Rule 613 of Regulation NMS 
and in the CAT NMS Plan as approved in 2016,\267\ and recommended that 
the Commission come up with a new structure for the CAT.\268\ The 
commenter argued that Rule 613 and the 2016 CAT NMS Plan do not support 
CAT as it is currently structured \269\ and provided examples where it 
believes that subsequent changes to the CAT requested by the Commission 
have caused the CAT to become inconsistent with the requirements of 
Rule 613 and the 2016 CAT NMS Plan.\270\ The commenter stated that the 
changes resulted from discussions between the Commission and the 
Participants, that such changes ``significantly increased CAT costs,'' 
and that Industry Members with ``no voice and little transparency'' 
into the building of the CAT system would be allocated most of the 
increased CAT costs.\271\ The commenter stated that the Commission 
cannot approve a funding proposal for a system that is not consistent 
with Rule 613 and the CAT NMS Plan, stating that this would be 
arbitrary and capricious action.\272\
---------------------------------------------------------------------------

    \267\ See SIFMA June 2023 Letter at 2, 6.
    \268\ Id. at 6.
    \269\ Id. at 6-7.
    \270\ Id. at 6.
    \271\ Id. at 7.
    \272\ Id.
---------------------------------------------------------------------------

d. Funding in the Appropriation Process
    The commenter stated that the Proposed Amendment would ``evade'' 
\273\ the separation of powers established by the Constitution, arguing 
that since the CAT is a ``Commission system used for enforcement'' 
\274\ and that law enforcement ``is an executive prerogative,'' \275\ 
Congress must approve public funds to build the CAT through the 
appropriations process.\276\ The commenter stated ``[t]he Constitution 
does not permit the Commission to fund its own enforcement apparatus 
through the backdoor--to require the SROs to raise and spend hundreds 
of millions of dollars to build a new law enforcement tool for the 
Commission.'' \277\
---------------------------------------------------------------------------

    \273\ See SIFMA June 2023 Letter at 8.
    \274\ Id.
    \275\ Id.
    \276\ Id.
    \277\ Id.
---------------------------------------------------------------------------

e. Rule 608 of Regulation NMS and Rule 19b-4
    One commenter preliminarily believes the assessment of CAT fees 
through filings submitted by each exchange under Rule 19b-4 is likely 
inconsistent with Rule 608.\278\ The commenter stated that the 
Commission amended Rule 608 in 2020 to remove the effective-upon-filing 
procedure for NMS plan fees by requiring that NMS plan fees be subject 
to notice and comment and Commission approval

[[Page 41160]]

prior to becoming effective.\279\ The commenter stated that Rule 608 
was amended by the Commission due to concerns about the assessment of 
SIP market data fees by the SROs without a meaningful review 
opportunity.\280\ The commenter also stated that the 2020 amendment 
specifically contemplates that CAT fees would be subject to Rule 
608.\281\ The commenter stated that the Commission was considering 
approving a process for CAT fees that would not permit a meaningful 
review opportunity, contrary to the Rule 608 amendment.\282\ The 
commenter acknowledged that the CAT NMS Plan provides for Section 19(b) 
fee filings but also stated that the CAT NMS Plan is silent about 
whether Section 19(b) fee filings would need to be made after the CAT 
Operating Committee receives approval to assess the fees under Rule 
608.\283\ The commenter suggested that the CAT Operating Committee 
create a new funding process consistent with Rule 608 and stated that 
the Commission cannot find that the Proposed Amendment is consistent 
with the Exchange Act.\284\
---------------------------------------------------------------------------

    \278\ Id. at 4, 9.
    \279\ See SIFMA June 2023 Letter at 9.
    \280\ Id.
    \281\ Id.
    \282\ Id.
    \283\ Id. at 9, n.45.
    \284\ Id.
---------------------------------------------------------------------------

f. Miscellaneous
    One commenter stated that the Commission failed to address data 
security concerns associated with the CAT,\285\ and that the Commission 
is rushing to approve the Proposed Amendment without careful 
consideration.\286\ The commenter also argued that the Commission is 
prematurely moving forward with the Proposed Amendment while 
simultaneously considering revisions of the rules governing equity and 
options market structure and proceeding with other proposals that will 
impose costs on Industry Members.\287\ The commenter stated that 
``[t]he unequitable distribution of CAT costs contemplated by the 
Funding Proposal will exacerbate these problems, harming the 
functioning of U.S. securities markets.'' \288\ The commenter argued 
that the Commission cannot determine whether the proposed allocation of 
costs is equitable without assessing the distribution of costs and 
benefits under the other pending proposals.\289\
---------------------------------------------------------------------------

    \285\ See SIFMA June 2023 Letter at 2.
    \286\ Id. at 3.
    \287\ Id.
    \288\ Id.
    \289\ Id.
---------------------------------------------------------------------------

V. Proceedings to Determine Whether To Approve or Disapprove the 
Proposed Amendment

    The Commission is instituting proceedings pursuant to Rule 
608(b)(2)(i) of Regulation NMS,\290\ and Rules 700 and 701 of the 
Commission's Rules of Practice,\291\ to determine whether to disapprove 
the Proposed Amendment or to approve the Proposed Amendment with any 
changes or subject to any conditions the Commission deems necessary or 
appropriate. The Commission is instituting proceedings to have 
sufficient time to consider the complex issues raised by Proposed 
Amendment, including comments received. Institution of proceedings does 
not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, the Commission seeks and 
encourages interested persons to provide additional comment on the 
Proposed Amendment to inform the Commission's analysis.
---------------------------------------------------------------------------

    \290\ 17 CFR 242.608.
    \291\ 17 CFR 201.700; 17 CFR 201.701.
---------------------------------------------------------------------------

    Rule 608(b)(2) of Regulation NMS provides that the Commission 
``shall approve a national market system plan or proposed amendment to 
an effective national market system plan, with such changes or subject 
to such conditions as the Commission may deem necessary or appropriate, 
if it finds that such plan or amendment is necessary or appropriate in 
the public interest, for the protection of investors and the 
maintenance of fair and orderly markets, to remove impediments to, and 
perfect the mechanisms of, a national market system, or otherwise in 
furtherance of the purposes of the Exchange Act.'' \292\ Rule 608(b)(2) 
further provides that the Commission shall disapprove a national market 
system plan or proposed amendment if it does not make such a 
finding.\293\ In the Notice, the Commission sought comment on the 
Proposed Amendment, including whether the Proposed Amendment is 
consistent with the Exchange Act.\294\ In this order, pursuant to Rule 
608(b)(2)(i) of Regulation NMS,\295\ the Commission is providing notice 
of the grounds for disapproval under consideration:
---------------------------------------------------------------------------

    \292\ 17 CFR 242.608(b)(2).
    \293\ Id.
    \294\ See Notice, supra note 6.
    \295\ 17 CFR 242.608(b)(2)(i).
---------------------------------------------------------------------------

     Whether, consistent with Rule 608 of Regulation NMS, the 
Participants have demonstrated how the Proposed Amendment is necessary 
or appropriate in the public interest, for the protection of investors 
and the maintenance of fair and orderly markets, to remove impediments 
to, and perfect the mechanisms of, a national market system, or 
otherwise in furtherance of the purposes of the Exchange Act; \296\
---------------------------------------------------------------------------

    \296\ 17 CFR 242.608(b)(2).
---------------------------------------------------------------------------

     Whether the Participants have demonstrated how the 
Proposed Amendment is consistent with Section 6(b)(4) \297\ and Section 
15A(b)(5),\298\ of the Exchange Act, which require that the rules of a 
national securities exchange ``provide for the equitable allocation of 
reasonable dues, fees, and other charges among its members and issuers 
and other persons using its facilities'' and that the rules of a 
national securities association ``provide for the equitable allocation 
of reasonable dues, fees, and other charges among members and issuers 
and other persons using any facility or system which the association 
operates or controls;''
---------------------------------------------------------------------------

    \297\ 15 U.S.C. 78f(b)(4).
    \298\ 15 U.S.C. 78o-3(b)(5).
---------------------------------------------------------------------------

     Whether the Participants have demonstrated how the 
Proposed Amendment is consistent with Section 6(b)(5) \299\ and Section 
15A(b)(6),\300\ of the Exchange Act, which require that the rules of a 
national securities exchange or national securities association 
``promote just and equitable principles of trade. . . protect investors 
and the public interest; and [to be] not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers;''
---------------------------------------------------------------------------

    \299\ 15 U.S.C. 78f(b)(5).
    \300\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

     Whether the Participants have demonstrated how the 
Proposed Amendment is consistent with Section 6(b)(8) \301\ and Section 
15A(b)(9) \302\ of the Exchange Act, which require that the rules of a 
national securities exchange or national securities association ``do 
not impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of [the Exchange Act];'' and
---------------------------------------------------------------------------

    \301\ 15 U.S.C. 78f(b)(8).
    \302\ 15 U.S.C. 78o-3(b)(9).
---------------------------------------------------------------------------

     Whether the Participants have demonstrated how the 
Proposed Amendment is consistent with the funding principles of the CAT 
NMS Plan that are not proposed to be amended by the Proposed Amendment, 
which principles state that the Operating Committee shall seek, among 
other things, ``to create transparent, predictable revenue streams for 
the Company that are aligned with the anticipated costs to build, 
operate and administer the CAT and the other costs of the Company,'' 
\303\ ``to provide for ease of billing and other administrative

[[Page 41161]]

functions,'' \304\ ``to avoid any disincentives such as placing an 
inappropriate burden on competition and a reduction in market 
quality,'' \305\ and ``to build financial stability to support the 
Company as a going concern.'' \306\
---------------------------------------------------------------------------

    \303\ See CAT NMS Plan, supra note 1, at Section 11.2(a).
    \304\ Id. at Section 11.2(d).
    \305\ Id. at Section 11.2(e).
    \306\ Id. at Section 11.2(f).
---------------------------------------------------------------------------

    Under the Commission's Rules of Practice, the ``burden to 
demonstrate that a NMS plan filing is consistent with the Exchange Act 
and the rules and regulations issued thereunder. . . is on the plan 
participants that filed the NMS plan filing.'' \307\ The description of 
the NMS plan filing, its purpose and operation, its effect, and a legal 
analysis of its consistency with applicable requirements must all be 
sufficiently detailed and specific to support an affirmative Commission 
finding.\308\ Any failure of the plan participants that filed the NMS 
plan filing to provide such detail and specificity may result in the 
Commission not having a sufficient basis to make an affirmative finding 
that the NMS plan filing is consistent with the Exchange Act and the 
applicable rules and regulations thereunder.\309\
---------------------------------------------------------------------------

    \307\ 17 CFR 201.701(b)(3)(ii).
    \308\ Id.
    \309\ Id.
---------------------------------------------------------------------------

VI. Commission's Solicitation of Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the Proposed Amendment. In particular, the Commission invites the 
written views of interested persons concerning whether the Proposed 
Amendment is consistent with Section 11A, Section 6(b)(4), Section 
6(b)(5), Section 6(b)(8), Section 15A(b)(5), Section 15A(b)(6), Section 
15A(b)(9), or any other provision of the Exchange Act, or the rules and 
regulations thereunder, or the funding principles of the CAT NMS Plan. 
Although there do not appear to be any issues relevant to approval or 
disapproval that would be facilitated by an oral presentation of views, 
data, and arguments, the Commission will consider, pursuant to Rule 
608(b)(2)(i) of Regulation NMS,\310\ any request for an opportunity to 
make an oral presentation.\311\ The Commission asks that commenters 
address the sufficiency and merit of the Participants' statements in 
support of the Proposed Amendment,\312\ in addition to any other 
comments they may wish to submit about the proposed rule changes. In 
addition, the Commission seeks comment on the following:
---------------------------------------------------------------------------

    \310\ 17 CFR 242.608(b)(2)(i).
    \311\ Rule 700(c)(ii) of the Commission's Rules of Practice 
provides that ``[t]he Commission, in its sole discretion, may 
determine whether any issues relevant to approval or disapproval 
would be facilitated by the opportunity for an oral presentation of 
views.'' 17 CFR 201.700(c)(ii).
    \312\ See Notice, supra note 6.
---------------------------------------------------------------------------

    1. Commenters' views on any questions in the Solicitation of 
Comments Section of the Order Instituting Proceedings related to a 
prior funding model amendment that are relevant to the Proposed 
Amendment; \313\
---------------------------------------------------------------------------

    \313\ See Securities Exchange Act Release No. 95634 (Aug. 30, 
2022), 87 FR 54558, 54577-79 (Sept. 6, 2022).
---------------------------------------------------------------------------

    2. Commenters' views on whether the proposed definition of ``CAT 
Executing Broker'' is clear and whether identification of those brokers 
who meet the definition is easily available through CAT Data; and
    3. Commenters' views on the incentives of the Participants to 
control Prospective CAT Costs.
    The Commission also requests that commenters provide analysis to 
support their views, if possible.
    Interested persons are invited to submit written data, views, and 
arguments regarding whether the Proposed Amendment should be approved 
or disapproved by July 14, 2023. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
July 28, 2023. 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 [email protected]. Please include 
file number 4-698 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 4-698. 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 (https://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 a.m. and 3 
p.m. Copies of the filing also will be available for inspection and 
copying at the principal office of the Exchange. Do not include 
personal identifiable information in submissions; you should submit 
only information that you wish to make available publicly. We may 
redact in part or withhold entirely from publication submitted material 
that is obscene or subject to copyright protection. All submissions 
should refer to file number 4-698 and should be submitted on or before 
July 14, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\314\
---------------------------------------------------------------------------

    \314\ 17 CFR 200.30-3(a)(85).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-13340 Filed 6-22-23; 8:45 am]
BILLING CODE 8011-01-P


