[Federal Register Volume 84, Number 89 (Wednesday, May 8, 2019)]
[Notices]
[Pages 20173-20176]
[FR Doc No: 2019-09375]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85764; File No. SR-FINRA-2019-015]

Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Update the FINRA Manual To Reflect FINRA's New
Subsidiary, FINRA CAT, LLC

May 2, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 24, 2019, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by FINRA. FINRA has
designated the proposed rule change as concerned solely with the
administration of the self-regulatory organization under Section
19(b)(3)(A)(iii) of the Act \3\ and Rule 19b-4(f)(3) thereunder,\4\
which renders the proposal effective upon receipt of this filing by the
Commission. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(3).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    FINRA is proposing to update the FINRA Manual to reflect FINRA's
new subsidiary, FINRA CAT, LLC. Specifically, the proposed rule change
would codify the delegation of specific responsibilities and functions
to FINRA CAT, LLC under the Plan of Allocation and Delegation of
Functions by FINRA (``Delegation Plan''); make conforming amendments to
the Delegation Plan to reflect FINRA CAT, LLC; amend the By-Laws of
FINRA Regulation, Inc. (``FINRA Regulation By-Laws'') to make relevant
conforming amendments; and make conforming amendments to FINRA rules.
    The text of the proposed rule change is available on FINRA's
website at http://www.finra.org, at the principal office of FINRA and
at the Commission's Public Reference Room.

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

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

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

1. Purpose
Background
    FINRA and the national securities exchanges (collectively, the
``Participants'') \5\ filed with the Commission, pursuant to Section
11A of the Exchange Act \6\ and Rule 608 of Regulation NMS
thereunder,\7\ the National Market System Plan Governing the
Consolidated Audit Trail (the ``CAT NMS Plan'' or ``Plan'').\8\ The
Participants filed the Plan to comply with Rule 613 of Regulation NMS
under the Exchange Act.\9\ The Plan was published for comment in the
Federal Register on May 17, 2016,\10\ and approved by the Commission,
as modified, on November 15, 2016.\11\
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    \5\ Specifically, the Participants are BOX Exchange LLC, Cboe
BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange,
Inc., Cboe EDGX Exchange, Inc., Cboe C2 Exchange, Inc., Cboe
Exchange, Inc., FINRA, Investors Exchange 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.
    \6\ 15 U.S.C. 78k-1.
    \7\ 17 CFR 242.608.
    \8\ See Letter from the Participants to Brent J. Fields,
Secretary, Commission, dated September 30, 2014; and Letter from
Participants to Brent J. Fields, Secretary, Commission, dated
February 27, 2015. On December 23, 2015, the Participants submitted
an amendment to the CAT NMS Plan. See Letter from Participants to
Brent J. Fields, Secretary, Commission, dated December 23, 2015.
    Unless otherwise specified, capitalized terms used in this rule
filing are defined as set forth herein or in the CAT NMS Plan.
    \9\ 17 CFR 242.613.
    \10\ See Securities Exchange Act Release No. 77724 (April 27,
2016), 81 FR 30614 (May 17, 2016).
    \11\ See Securities Exchange Act Release No. 79318 (November 15,
2016), 81 FR 84696 (November 23, 2016) (``Approval Order'').
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    The Participants jointly own and operate CAT NMS, LLC, a company
formed by the Participants to arrange for and oversee the creation,
implementation, and maintenance of the consolidated audit trail
(``CAT'') as required under Rule 613, and the CAT is a facility of each
Participant.\12\ The CAT is intended to capture in a single
consolidated data source customer and order event information for
orders in NMS Securities and OTC Equity Securities, across all markets,
from the time of order inception through routing, cancellation,
modification, or execution.\13\
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    \12\ See Securities Exchange Act Release No. 67457 (July 18,
2012), 77 FR 45722, 45775 (August 1, 2012) (``Rule 613 Adopting
Release'').
    \13\ See e.g., id., at 45722.
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    The Plan requires the Participants to select a Plan Processor to
perform the CAT processing functions required by SEC Rule 613 and as
set forth in the Plan.\14\ On February 1, 2019, CAT NMS, LLC confirmed
that it would be transitioning the CAT project to a new Plan Processor,
and on February 27, 2019, announced that it had selected FINRA as the
Plan Processor.\15\ In its capacity as Plan Processor, FINRA is
responsible for the development and

operation of the CAT in accordance with the terms of the Plan.
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    \14\ However, while the Participants select a Plan Processor to
perform these functions, each Participant also remains responsible
for compliance with the terms of the Plan. See SEC Rule 608(c) and
SEC Rule 613(h).
    \15\ See announcements dated February 1, 2019 and February 27,
2019 on the News Page at www.catnmsplan.com/news-page/index.html.
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    In addition to serving in its capacity as Plan Processor of the
CAT, FINRA is required to fulfill its obligations as a Participant of
the Plan. To that end, FINRA CAT, LLC will further FINRA's compliance
with its regulatory obligations under SEC Rule 613 with respect to the
creation, operation and maintenance of a central repository. FINRA will
fulfill its obligations as a Participant of the Plan, including among
others, enforcing FINRA rules requiring its members to comply with the
CAT NMS Plan, through FINRA (and FINRA Regulation, Inc.) and not
through FINRA CAT, LLC.
    FINRA believes that significant resources are required in order to
meet its obligations as Plan Processor of the CAT. For example, FINRA
has dedicated staff and financial resources in connection with serving
as the Plan Processor and believes that it will be required to continue
to allot resources to the CAT in this capacity. In addition, certain
functions of the Plan Processor require consultation with or are
subject to approval by the CAT NMS Plan Operating Committee. FINRA
created FINRA CAT, LLC as a subsidiary of FINRA in order to dedicate
resources solely to carrying out its obligations as Plan Processor and
to underscore that FINRA CAT, LLC, while part of the self-regulatory
organization (``SRO''), is separate and distinct from the other FINRA
entities.
    FINRA notes that as a subsidiary of FINRA, FINRA CAT, LLC is part
of the registered securities association. As such, for purposes of SEC
Regulation Systems Compliance and Integrity (``Regulation SCI''), FINRA
CAT, LLC is an SCI SRO and therefore an SCI entity.\16\
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    \16\ 17 CFR 242.1000 through 242.1007. Under Regulation SCI, the
term ``SCI entity'' means an SCI self-regulatory organization, SCI
alternative trading system, plan processor, or exempt clearing
agency subject to ARP. The term ``SCI self-regulatory organization''
or ``SCI SRO'' includes national securities exchanges registered
under Section 6(b) of the Exchange Act, registered securities
associations, registered clearing agencies, and the Municipal
Securities Rulemaking Board. 17 CFR 242.1000.
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Proposed Amendments
    To account for the new subsidiary and codify the delegation by
FINRA of certain regulatory responsibilities and functions to it, FINRA
is proposing to make conforming amendments to the Delegation Plan to
include FINRA CAT, LLC in the Delegation Plan; amend FINRA Regulation
By-Laws to make relevant conforming amendments; and make conforming
amendments to FINRA rules.
(1) Conforming Amendments to the Delegation Plan
    FINRA is proposing to rename the Delegation Plan as the ``Plan of
Allocation and Delegation of Functions by FINRA to Subsidiaries.''
FINRA also is proposing to make conforming amendments throughout the
Delegation Plan to replace references to ``FINRA Regulation'' with
references to ``the Subsidiaries'' or ``Subsidiary'' to indicate that
both FINRA Regulation, Inc. and FINRA CAT, LLC are subsidiaries of
FINRA. In addition, the proposed rule change would reference FINRA
Regulation, Inc. and FINRA CAT, LLC individually and define them
collectively as ``the Subsidiaries.'' Finally, FINRA is proposing to
amend Section I.B of the Delegation Plan to include a reference to new
Section III pertaining to FINRA CAT, LLC.
Section I--FINRA, Inc.
    Section I of the Delegation Plan provides that FINRA shall have
responsibility for the rules and regulations of the Association
(defined in the FINRA Manual as FINRA and its Subsidiaries) and its
operation and administration. Under Section I.B, the proposed rule
change would include subsection 10 to provide that FINRA expressly
retains authority and functions to resolve any disputes among the
Subsidiaries. This subsection was included in the Delegation Plan prior
to the merger of FINRA Dispute Regulation, Inc. into and with FINRA
Regulation, Inc.,\17\ but was removed as it refers to disputes among
the subsidiaries, and only FINRA Regulation, Inc. remained as a result
of the merger of the two subsidiaries. In addition, in subsection
three, FINRA proposes to add reference to selection of a Board of
Managers, because FINRA CAT, LLC is governed by a Board of Managers. In
subsection five, FINRA proposes to add the word ``common'' as FINRA
Regulation, Inc. may now share overhead (including, for example, such
back-office services as payroll and human resources) and technology
with FINRA CAT, LLC as separate subsidiaries. Finally, FINRA is
proposing to amend subsection nine to provide for delegation to FINRA
CAT, LLC, which, as discussed below, would be located in Section III of
the Delegation Plan.
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    \17\ See Securities Exchange Act Release No. 76670 (December 16,
2015) 80 FR 79632 (December 22, 2015) (Order Approving File No. SR-
FINRA-2015-034).
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    FINRA is proposing to expressly provide in amended Section I.E of
the Delegation Plan that, notwithstanding the delegation of authority
to FINRA CAT, LLC, the staff, books, records, and premises of FINRA
CAT, LLC are the staff, books, records, and premises of FINRA subject
to oversight pursuant to the Act, and all officers, directors,
employees, and agents of FINRA CAT, LLC are officers, directors,
employees, and agents of FINRA for purposes of the Act, subject to
applicable provisions of the CAT NMS Plan.\18\ For example, the CAT NMS
Plan expressly provides that the Plan Processor shall designate
employees of the Plan Processor to serve, subject to the approval of
the CAT NMS Plan Operating Committee, as the Chief Compliance Officer
(``CCO'') and as the Chief Information Security Officer (``CISO''),\19\
and that the CCO and CISO shall be officers of CAT NMS, LLC.\20\ The
Plan further requires the Plan Processor to acknowledge that the
officers of CAT NMS, LLC owe fiduciary duties to CAT NMS, LLC, and
that, to the extent that the duties owed to CAT NMS, LLC conflict with
any duties owed to the Plan Processor, the duties to CAT NMS, LLC will
control.\21\ In addition, the Plan provides that all CAT Data and other
books and records of CAT NMS, LLC shall be the property of CAT NMS,
LLC, rather than the Plan Processor, and, to the extent in the
possession or control of the Plan Processor, shall be made available by
the Plan Processor to the Commission upon request.\22\ The proposed
rule change would not modify such provisions of the CAT NMS Plan.\23\
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    \18\ Thus, the books and records and management and staff of
FINRA CAT, LLC are deemed to be the books and records and management
and staff of FINRA for purposes of the jurisdiction and oversight by
the SEC of FINRA CAT, LLC as part of the registered securities
association. Notwithstanding this provision, FINRA and FINRA CAT,
LLC are separate legal entities under Delaware corporate law.
    \19\ See Section 6.2 of the CAT NMS Plan.
    \20\ See Section 4.6 of the CAT NMS Plan.
    \21\ Id.
    \22\ See Section 9.1 of the CAT NMS Plan.
    \23\ FINRA is proposing a conforming amendment to FINRA Rule
0170 (Delegation, Authority and Access).
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Section III--FINRA CAT, LLC
    FINRA is proposing to amend the Delegation Plan to include Section
III of the Delegation Plan to delegate responsibilities and functions
to FINRA CAT, LLC. Specifically, FINRA is proposing to delegate to
FINRA CAT, LLC the following responsibilities and functions: (1) To act
as a Plan Processor under the CAT NMS Plan in accordance with SEC Rule
613 and the provisions

of the Plan; (2) to create, operate and maintain the CAT and central
repository pursuant to Rule 613 and the provisions of the Plan; (3) to
develop and implement policies, procedures, and control structures
related to the CAT System; (4) to ensure the effective management and
operation of the CAT; and (5) to ensure the accuracy of the
consolidation of the CAT Data reported to the Central Repository.
    FINRA also proposes to provide that the responsibilities and
functions delegated by FINRA to FINRA CAT, LLC in Section III include,
but are not limited to, those specified above. FINRA notes that the
specific responsibilities and functions of the Plan Processor are set
forth in Section 6.1 of the CAT NMS Plan, many of which require
consultation with or approval by the CAT NMS Plan Operating Committee.
As such, FINRA is proposing to expressly provide that all action taken
by FINRA CAT, LLC pursuant to authority delegated pursuant to the
Delegation Plan shall be taken in accordance with the terms of the Plan
and SEC Rule 613, and in consultation with the CAT NMS Plan Operating
Committee, as applicable.
    Finally, FINRA is proposing to include language providing that
capitalized terms that are not defined in Section III shall have the
meanings ascribed to them in the Plan.
(2) Conforming Amendments to the FINRA Regulation By-Laws
    FINRA is proposing to make conforming amendments to the FINRA
Regulation By-Laws. Specifically, FINRA is proposing to amend the
definition of ``Delegation Plan'' in section (i) of Article I to
replace ``FINRA Regulation'' with ``Subsidiaries'' to account for the
fact that pursuant to the proposed rule change, the Delegation Plan
also would pertain to FINRA CAT, LLC. In addition, FINRA is proposing
to include reference to FINRA CAT, LLC in the last sentence of Section
4.14(b) (Conflicts of Interest; Contracts and Transactions Involving
Directors) to indicate that the provisions in that subsection shall not
apply to contracts or transactions between FINRA Regulation, Inc. and
FINRA CAT, LLC.
(3) Conforming Amendments to FINRA Rules
    FINRA also is proposing to amend several FINRA rules to reflect
FINRA CAT, LLC as a FINRA subsidiary. The proposed rule change would
amend Rule 0160 (Definitions) to include FINRA CAT, LLC in the
definition of FINRA. In addition, FINRA is proposing a conforming
amendment to Rule 0170 (Delegation, Authority and Access) to replace
references to ``FINRA Regulation'' with the ``Subsidiaries.''
    FINRA notes that the proposed rule change would not amend the Rule
6800 Series (Consolidated Audit Trail Compliance Rule), pursuant to
which FINRA requires its members to comply with the provisions of the
CAT NMS Plan. FINRA is not delegating any of its responsibilities or
functions pertaining to the Rule 6800 Series to FINRA CAT, LLC.
    FINRA has filed the proposed rule change for immediate
effectiveness. The effective date will be the date of filing.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\24\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest.
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    \24\ 15 U.S.C. 78o-3(b)(6).
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    FINRA believes that the proposed amendments to include its
subsidiary, FINRA CAT, LLC, in the FINRA Manual would reflect and bring
transparency to FINRA's corporate organizational structure, and, in the
process, would make the organization more efficient. In addition, FINRA
believes that delegating regulatory responsibilities and functions to
FINRA CAT, LLC to meet its CAT-related obligations enables FINRA to
efficiently direct resources to ensure that it properly carries out its
contractual obligations in its capacity as Plan Processor and its
regulatory obligations under SEC Rule 613.
    FINRA notes that the proposed rule change would not affect public
investors, the goals of the Plan or fees associated with the CAT. FINRA
believes that the proposed rule change reflects its commitment to serve
as Plan Processor of the CAT and to comply with the provisions of the
Plan. Thus, FINRA believes that the creation of FINRA CAT, LLC and
inclusion of FINRA CAT, LLC in the FINRA Manual would ensure that FINRA
continues to protect investors and the public interest in an efficient
manner.

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

    FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. FINRA believes that the
proposed amendments account for FINRA's subsidiary, FINRA CAT, LLC, and
would align FINRA's corporate organizational structure with its
organizational practice. The proposed rule change would allow FINRA to
update its Manual to include FINRA CAT, LLC and make changes to its
Manual to reflect the current corporate structure. Further, FINRA
intends to allocate staff and financial resources directly to FINRA
CAT, LLC to meet its obligations as Plan Processor. FINRA notes that
the proposed rule change would not alter member and industry
obligations related to the Plan, including regarding fees. FINRA
believes that the proposed rule change demonstrates its commitment to
fulfilling its contractual obligations in its capacity as Plan
Processor and its regulatory obligations under SEC Rule 613.

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

    Written comments were neither solicited nor received.

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

    The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \25\ and paragraph (f)(3) of Rule 19b-4
thereunder.\26\ At any time within 60 days of the filing of the
proposed rule change, the Commission summarily may temporarily suspend
such rule change if it appears to the Commission that such action is
necessary or appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of the Act. If
the Commission takes such action, the Commission shall institute
proceedings to determine whether the proposed rule should be approved
or disapproved.
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    \25\ 15 U.S.C. 78s(b)(3)(A).
    \26\ 17 CFR 240.19b-4(f)(3).
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IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-FINRA-2019-015 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2019-015. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. Copies of such filing also will be available for inspection and
copying at the principal office of FINRA. All comments received will be
posted without change. Persons submitting comments are cautioned that
we do not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-
FINRA-2019-015 and should be submitted on or before May 29, 2019.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-09375 Filed 5-7-19; 8:45 am]
BILLING CODE 8011-01-P