the Commission to collect transaction fees and assessments designed
to recover the costs to the Government of the annual appropriation
to the Commission by Congress. 15 U.S.C. 78ee(a).
---------------------------------------------------------------------------

    Moreover, the Executed Share Model does not change the criteria
used to charge Execution Venues (market share).\295\ While there are
differences in how the CAT fees would be allocated among the
Participants under the Executed Share Model and the existing Original
Funding Model, under the Executed Funding Model, as in the Original
Funding Model, the fees charged to Participants will continue to be
based upon the level of market share of each Participant.\296\ The
Original Funding Model approved by the Commission would have assessed
CAT fees on Execution Venues (which would include the Participants)
\297\ based on market share determined by the share volume for a
national securities exchange and determined by reported share volume of
trades for a national securities association (i.e., FINRA) that had
trades reported by its members to its trade reporting facility or
facilities for reporting transactions effected otherwise than on an
exchange in NMS Stocks or OTC Equity Securities.\298\ Additionally,
this allocation is similar to how Section 31 fees are assessed on the
exchanges and FINRA. FINRA's allocation of CAT fees under the Executed
Share Model will continue to be based on its off-exchange market share.
---------------------------------------------------------------------------

    \295\ See CAT NMS Plan Approval Order, supra note 2, 81 FR at
84793-97; CAT NMS Plan, supra note 2, at Section 11.2, Section 11.3.
    \296\ Id.
    \297\ See supra note 15.
    \298\ See CAT NMS Plan, supra note 2, at Section 11.3(a)(i).
---------------------------------------------------------------------------

    The Commission recognizes that the proposed use of executed
equivalent share volume is not a perfect proxy for CAT costs, but
believes it is nonetheless a reasonable proxy. The costs of CAT are
attributable to a number of factors, such as message traffic, storage,
and data processing costs, and that for these reasons, the Commission
understands that it is difficult to calculate each CAT Reporter's
individual cost burden on the CAT. Additionally, there are other
operational costs of the CAT that cannot be easily attributed to a
particular CAT Reporter and that need to be funded, such as costs for
CAT NMS Plan requirements related to intake capacity,\299\ data search
tools \300\ and data security.\301\ Based on the breadth of CAT costs,
it is not feasible to calculate the cost burden on CAT of each CAT
Reporter. A reasonable proxy for CAT cost burden must therefore be
used. As discussed above, the Commission believes the proposed use of
executed equivalent share volume is a reasonable method of
approximating the cost burden of CAT.\302\ Additionally, CAT LLC stated
that the proposed Executed Share Model would not unfairly burden or
favor a product or product type because the model would recognize the
different types of securities by counting executed equivalent share
volume differently for NMS Stocks, Listed Options and OTC Equity
Securities.\303\ The proposed treatment of these different types of
securities would result in the equitable allocation of reasonable CAT
fees across these securities. The Executed Share Model would count each
executed contract for a transaction in Listed Options using the
contract multiplier applicable to the specific Listed Option in the
relevant transaction,\304\ which is appropriate because a Listed Option
contract typically represents 100 shares, or it could represent another
designated number of shares, and since Listed Options trade in
contracts instead of shares, they would need to be converted into
shares for purposes of calculating the executed equivalent share volume
of a transaction in Listed Options. For OTC Equity Securities, the
Executed Share Model would count each executed share for a transaction
in OTC Equity Securities as 0.01 executed equivalent shares,\305\ which
is appropriate because CAT LLC represented that this amount was a
result of an analysis it conducted of several different metrics
comparing the markets for OTC Equity Securities and NMS Stocks,
specifically total notional dollar value, total trades, and average
share price per trade.\306\ Additionally, since transactions in OTC
Equity Securities typically are priced below one dollar, or even one
penny, and tend to trade in larger quantities, this treatment is
appropriate to prevent CAT Reporters trading OTC Equity Securities from
being assessed higher CAT fees than their activity would deserve.
---------------------------------------------------------------------------

    \299\ In the CAT NMS Plan Notice, the Commission said that it
preliminarily believed that intake capacity level is likely to be a
primary cost driver for the Central Repository. See Securities
Exchange Act Release No. 77724 (Apr. 27, 2016), 81 FR 30614 (May 17,
2016), 81 FR at 30770.
    \300\ See CAT NMS Plan, supra note 2, at Appendix C, Section
8.1-8.2.
    \301\ Id. at Appendix D, Section 4.
    \302\ See supra notes 271-274 and accompanying text.
    \303\ See Notice, supra note 7, 88 FR at 17116.
    \304\ Id. at 17093. A Listed Option contract typically
represents 100 shares, or it could represent another designated
number of shares. Id.
    \305\ See proposed Section 11.3(a)(i)(B)(III).
    \306\ See supra notes 227-229 and accompanying text.
---------------------------------------------------------------------------

b. Options vs. Equities
    The equal allocation of Participant CAT fees to Participants,
regardless of whether they are transacting in options or in equities,
is reasonable. The Original Funding Model would have divided
Participant CAT fees by Execution Venues that execute transactions (or
in the case of a national securities association, has trades reported
by its members to its trade reporting facility or facilities for
reporting transactions effected otherwise than on an exchange) in NMS
Stocks or OTC Equity Securities and by Execution Venues that execute
transactions in Listed Options.\307\ The Executed Share Model instead
assesses a CAT fee based purely on executed equivalent share
volume.\308\ CAT LLC explained that the use of equivalent executed
share volume is designed to

normalize options and equities in the calculation of fees, and to
recognize and address the different trading characteristics of
different types of securities by counting executed equivalent share
volume differently for Listed Options and for equities.\309\ The use of
executed equivalent share volume and, in particular, the different
weights assigned to equities versus options, are designed to result in
an equitable treatment of the equities and options markets. The
proposed treatment of these different types of securities reasonably
equalizes the CAT fees across these securities. The Executed Share
Model would count each executed contract for a transaction in Listed
Options using the contract multiplier applicable to the specific Listed
Option in the relevant transaction,\310\ which is appropriate because
one options contract typically represents 100 shares.
---------------------------------------------------------------------------

    \307\ See CAT NMS Plan, supra note 2, at Section 11.3(a)(i),
(ii).
    \308\ The Executed Share Model would count executed equivalent
share volume differently for NMS Stocks, OTC Equity Securities and
Listed Options for purposes of calculating a CAT fee. CAT LLC
explains that the proposed approach ``would not favor or unfairly
burden any one type of product or product type.'' See Notice, supra
note 7, at 17116. See also supra Section III.A.3.
    \309\ See Notice, supra note 7, 88 FR at 17108.
    \310\ Id. at 17093.
---------------------------------------------------------------------------

c. FINRA Allocation
    Under the Executed Share Model, because FINRA is the Participant
primarily responsible for oversight of off-exchange securities trading
activity,\311\ FINRA will likely have greater executed equivalent share
volume than other Participants \312\ and thus will be responsible for a
significant portion of total CAT fees. In the Proposed Amendment, CAT
LLC stated that the size of FINRA's fee is calculated based on the
activity in the over-the-counter market.\313\ CAT LLC stated that the
executed equivalent share volume for over-the-counter trades in
Eligible Securities in 2021 was 1,361,484,729,008 out of a total volume
of 3,963,697,612,395 executed equivalent shares for trades in Eligible
Securities.\314\ CAT LLC stated that approximately 34% of the executed
equivalent share volume in Eligible Securities took place in the over-
the-counter market.\315\
---------------------------------------------------------------------------

    \311\ See Securities Exchange Act Release No. 95388 (July 29,
2022), 87 FR 49930 (Aug. 12, 2022), at 49931 (stating that FINRA
historically has overseen off-exchange securities trading activity
and that ``the Exchange Act's statutory framework places SRO
oversight responsibility with a [national securities association]
for trading that occurs elsewhere than an exchange to which a broker
or dealer belongs as a member.''), 49932 (stating that an exchange
would primarily have SRO oversight responsibility of its members and
their trading on the exchange, while SRO oversight of other trading
activity, such as off-exchange trading, is primarily the
responsibility of a national securities association).
    \312\ See Notice, supra note 7, 88 FR at 17107.
    \313\ Id.
    \314\ Id.
    \315\ Id.
---------------------------------------------------------------------------

    CAT LLC stated that the assessment of a CAT fee on FINRA in the
same manner as the other Participants would not result in a burden on
competition for FINRA or for Industry Members engaging in off-exchange
activity.\316\ CAT LLC also stated that FINRA and the exchanges should
not be evaluated differently based upon the potential for a particular
Participant to recoup its CAT fees through charging fees to its members
or through revenue-generating activity other than passing its fees
through to its members.\317\ CAT LLC stated that each Participant,
including FINRA, can choose to charge its members fees to fund the
Participant's CAT fees.\318\ Additionally, CAT LLC stated that FINRA,
just like the exchange Participants, has revenue sources other than
membership fees,\319\ explaining that FINRA generates significant
revenues via Regulatory Services Agreements (``RSAs'') with the
exchanges, among other sources.\320\ According to CAT LLC, these other
revenue sources may be used to pay CAT fees, and, if they are used,
would not lead to an increase in fees for Industry Members.\321\
---------------------------------------------------------------------------

    \316\ Id.
    \317\ Id. See also CAT LLC May 2023 Response Letter at 9.
    \318\ See Notice, supra note 7, 88 FR at 17107.
    \319\ Id. at 17108.
    \320\ Id.
    \321\ Id.
---------------------------------------------------------------------------

    Certain commenters objected to the proposed allocation of
Participant CAT fees to FINRA.\322\ A subset of these commenters
objected to the allocation to FINRA of 34% of the total CAT costs \323\
to be borne by the Participants.\324\ FINRA stated that this amount was
a ``disproportionate share of CAT costs,'' \325\ especially as FINRA
does not operate a market,\326\ and that the Proposed Amendment would
place an undue burden on FINRA.\327\ FINRA stated that its share was
``more than double that of the next highest Participant and $4 million
more than all option exchanges combined.'' \328\ FINRA also stated that
its allocation would largely be based on transaction volume reported to
the TRF; however, FINRA stated that TRF transactions generate fewer
costs for the CAT,\329\ 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.\330\ FINRA 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.'' \331\
---------------------------------------------------------------------------

    \322\ 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 stated that the
Proposed Amendment would result in the inequitable allocation of
fees and should be disapproved. See SIFMA May 2023 Letter at 2.
Another commenter supported these points and stated that the fact
that one of the biggest Participants was so strongly opposed to the
plan was evidence that it should be disapproved. See Virtu Letter at
3.
    \323\ 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. The
total operating expenses increased from $144,415,268 in 2021 to
$181,107,294 for 2022. See Notice, supra note 7, 88 FR at 17111; CAT
LLC May 2023 Response Letter at 13.
    \324\ See FINRA May 2023 Letter at 2; FINRA April 2023 Letter at
3; SIFMA May 2023 Letter at 2.
    \325\ FINRA April 2023 Letter at 3.
    \326\ Id.
    \327\ See FINRA June 2022 Letter at 6.
    \328\ FINRA April 2023 Letter at 4; see also FINRA June 2022
Letter at 5.
    \329\ See FINRA April 2023 Letter at 8, n.23. The commenter also
stated that ``TRF volume contributes to only a very small percentage
of annual CAT compute and storage costs.'' FINRA May 2023 Letter at
2.
    \330\ See FINRA April 2023 Letter at 8, n.23; FINRA May 2023
Letter at 2.
    \331\ FINRA May 2023 Letter at 2.
---------------------------------------------------------------------------

    FINRA stated that, unlike the exchange Participants, transactions
are not executed on a FINRA marketplace and FINRA does not receive
commercial revenue for those transactions.\332\ FINRA 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'' \333\ unlike the
exchanges that operate each FINRA TRF, which retain the market data and
trade reporting revenue of the TRF.\334\ FINRA stated that, unlike
itself, 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.\335\ FINRA 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.\336\
---------------------------------------------------------------------------

    \332\ See FINRA April 2023 Letter at 3.
    \333\ Id.
    \334\ Id.
    \335\ Id. at 4.
    \336\ Id. at 3, n.8.
---------------------------------------------------------------------------

    FINRA further stated that it cannot necessarily recoup its costs
through RSAs that it has entered into with

certain exchanges \337\ 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.\338\ Additionally, FINRA
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.'' \339\ Specifically, FINRA asked how this
explains the size of its allocation \340\ and noted that this statement
``conflates the costs to create and operate the CAT with the usage of
CAT data.'' \341\
---------------------------------------------------------------------------

    \337\ 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 7, 88 FR at 17107.
    \338\ See FINRA April 2023 Letter at 4.
    \339\ Id. at 7.
    \340\ Id.
    \341\ Id.; see also FINRA June 2022 Letter at 6.
---------------------------------------------------------------------------

    In the Proposed Amendment, CAT LLC contested the view that FINRA
should not be treated as a market center for CAT funding purposes
merely because FINRA is not treated as a market center for governance
purposes under the National Market System Plan Regarding Consolidated
Equity Market Data (``CT Plan'').\342\ CAT LLC explained that the
purpose and implementation of the CT Plan and the CAT NMS Plan are
different.\343\ CAT LLC stated that while the CAT NMS Plan explicitly
contemplates charging fees to all Participants, including FINRA,\344\
and that the CAT is solely for regulatory purposes, providing a
regulatory system to facilitate the performance of the self-regulatory
obligations of all of the Participants, including the exchanges and
FINRA,\345\ ``[i]n contrast, the CT Plan governs the public
dissemination of real-time consolidated equity market data for NMS
stocks.'' \346\
---------------------------------------------------------------------------

    \342\ See Notice, supra note 7, 88 FR at 17108. See also 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).
    \343\ See Notice, supra note 7, 88 FR at 17108.
    \344\ See CAT NMS Plan, supra note 2, at Sections 11.2 and 11.3.
    \345\ See Notice, supra note 7, 88 FR at 17108.
    \346\ Id.
---------------------------------------------------------------------------

    Certain commenters expressed concern about alleged arbitrary
treatment of FINRA by the other Participants of the CAT NMS Plan.\347\
FINRA believes that its ``outsized allocation'' \348\ 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.\349\ Another commenter stated that the
current CAT NMS Plan voting structure results in the unfair and
inequitable treatment of FINRA.\350\ 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 CT Plan, which governs the public dissemination
of real-time consolidated market data for national market system
stocks.\351\ One commenter stated 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.\352\ The commenter stated that this example demonstrates
the ``. . . inherent conflicts of interest that for-profit exchanges
have in operating as SROs. . .'' \353\
---------------------------------------------------------------------------

    \347\ See FINRA April 2023 Letter at 6; SIFMA October 2022
Letter at 3. See also SIFMA May 2023 Letter at 6, n.11.
    \348\ FINRA April 2023 Letter at 7; FINRA June 2022 Letter at 6.
    \349\ FINRA April 2023 Letter at 4, 8. See also FINRA June 2022
Letter at 8.
    \350\ See SIFMA January 2023 Letter at 3, n.7.
    \351\ 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. One
commenter stated 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).
    \352\ See SIFMA October 2022 Letter at 3-4. See also SIFMA May
2023 Letter at 6, n.11.
    \353\ 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 64.
---------------------------------------------------------------------------

    Certain commenters suggested that the Commission issue an order
soliciting comment on whether the Operating Committee should be
reorganized consistent with the CT Plan.\354\ One commenter 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.'' \355\
---------------------------------------------------------------------------

    \354\ SIFMA October 2022 Letter at 2. See also infra Section
III.A.9.f. (suggesting changes to the governance structure of the
CAT NMS Plan); see also MMI July Letter at 1-3. The latter commenter
also felt that there should be a disclosure of the conflicts of
interest the commenter believes are inherent in having the funding
model determined by the Participants.).
    \355\ SIFMA October 2022 Letter at 2. The commenter also stated
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.
---------------------------------------------------------------------------

    Commenters also believe the allocation to FINRA would increase the
allocation to Industry Members.\356\ FINRA stated that because it
relies on regulatory fees from its members for funding, it must
increase its member fees in order to fund CAT costs that it cannot
recover from contractual arrangements with TRF business members.\357\
FINRA 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.\358\ FINRA 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.\359\ Another commenter
stated 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'' \360\ because they cannot demonstrate that
the proposed allocation results in an equitable allocation of
reasonable fees.\361\ 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.\362\ The
commenter suggested an alternative allocation \363\ that would subject
FINRA only to a nominal regulatory user fee to access CAT Data.\364\
---------------------------------------------------------------------------

    \356\ See FINRA April 2023 Letter at 5-7; SIFMA June 2022 Letter
at 4; Citadel July Letter at 2, 16, 21, supra notes 73-74 and
accompanying text. See also SIFMA October 2022 Letter at 2, 3.
    \357\ See FINRA April 2023 Letter at 5-6. See also FINRA June
2022 Letter at 7.
    \358\ See FINRA April 2023 Letter at 6.
    \359\ Id. at 6-7.
    \360\ 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.'').
    \361\ See SIFMA June 2022 Letter at 4.
    \362\ 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.
    \363\ See supra notes 100-101 and accompanying text.
    \364\ 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; supra notes 100-101 and accompanying text.
---------------------------------------------------------------------------

    CAT LLC disagreed with the commenter's proposal to charge FINRA
only a nominal regulatory fee.\365\ 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.\366\ CAT LLC
also stated that FINRA's allocation is ``fair and reasonable as FINRA
is currently, and is expected to continue to be, one of the largest
regulatory users of the CAT, and it is responsible for the oversight of
the very large over-the-counter securities market.'' \367\
---------------------------------------------------------------------------

    \365\ See CAT LLC May 2023 Response Letter at 8.
    \366\ Id.
    \367\ See CAT LLC July 2023 Response Letter at 35.
---------------------------------------------------------------------------

    FINRA 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.'' \368\ FINRA also stated that it
would file a rule change to increase its member fees with the filing of
any proposed rule change to effectuate the Funding Model.\369\
---------------------------------------------------------------------------

    \368\ FINRA April 2023 Letter at 7.
    \369\ Id.
---------------------------------------------------------------------------

    The Commission acknowledges the comments objecting to the
allocation to FINRA of 34% of the total CAT costs to be borne by
Participants,\370\ but believes that it is reasonable for the Proposed
Amendment to assess fees to FINRA based on executed equivalent share
volume like the other Participants for purposes of CAT funding. FINRA
is a Participant of the CAT NMS Plan. All Participants are mandated
under the CAT NMS Plan to fund the CAT.\371\ The Executed Share Model
would assess CAT fees based on executed equivalent share volume. Under
the Executed Share Model, CAT fees would be allocated among the buyer,
seller, and the market regulator in each transaction. FINRA would pay
the Participant CAT fee based on off-exchange trades reported by its
members to its trade reporting facilities because FINRA is the market
regulator responsible for the market in which the TRF transactions
occur. The Executed Share Model, like the current funding model, is
designed to allocate CAT fees among the Participants based on market
share. Since FINRA is generally the market regulator for the over-the-
counter markets, its CAT fees, and thus market share, will be based on
the trading activity in the over-the-counter markets reported to it by
its members. The trading volume of the over-the-counter markets is
greater than that on the exchanges; consequently, FINRA will likely be
allocated a greater executed equivalent share volume than the other
Participants. However, trading volume generates costs for CAT,
therefore, given its role overseeing the over-the-counter market, it is
reasonable for FINRA to incur a greater share of CAT fees based on the
over-the-counter market's trading volume. As discussed above, it is
difficult to calculate each CAT Reporter's individual cost burden on
the CAT, and a reasonable proxy for CAT cost burden must be used. The
proposed use of executed equivalent share volume is a reasonable method
of allocating costs because it is readily determinable and equitable
since executed share volume is based on trading activity, which impacts
CAT costs. In practice, CAT Reporters will be assessed fees
corresponding to the cost burden they impose on the CAT through their
trading activity, or in FINRA's case, trading activity in the over-the-
counter markets reported to it by its members.
---------------------------------------------------------------------------

    \370\ Id. at 3; SIFMA May 2023 Letter at 2.
    \371\ See CAT NMS Plan, supra note 2, at Section 11.1(b);
Section 11.3(a).
---------------------------------------------------------------------------

    The Commission recognizes that there could be other methodologies
for allocating costs among CAT Reporters, such as allocations that take
into account the manner in which each Participant earns revenue, but
these other methodologies may be significantly more complex and would
not necessarily more accurately reflect the cost burden of each CAT
Reporter. CAT LLC chose to propose the use of executed equivalent share
volume, explaining why trading activity is a reasonable proxy for cost
burden and an appropriate metric for allocating CAT costs.\372\
Although there may be multiple permissible approaches to cost
allocation, the proposed allocation of Participant CAT fees based on
executed equivalent share volume is reasonable and meets the Rule 608
approval standard.\373\
---------------------------------------------------------------------------

    \372\ See Notice, supra note 7, 88 FR at 17103.
    \373\ See 17 CFR 242.608(b)(2).
---------------------------------------------------------------------------

    The Commission agrees with CAT LLC that the Executed Share Model
reasonably assesses fees to FINRA in the same manner based on
transaction volume as other Participants. The Executed Share Model is
reasonably designed to be neutral as to the manner of execution and
place of execution.\374\ All Participants are self-regulatory
organizations that have the same regulatory obligations under the
Exchange Act, regardless of whether they operate as a for-profit or
not-for-profit entity. Their regulatory responsibilities for the
operations of CAT are the same.\375\
---------------------------------------------------------------------------

    \374\ See Notice, supra note 7, 88 FR at 17107.
    \375\ Id.
---------------------------------------------------------------------------

    The Commission acknowledges the concerns expressed by commenters
that FINRA's allocation could indirectly increase the allocation of CAT
fees to Industry Members since Industry Members contribute to FINRA's
funding.\376\ As discussed above, however, the costs of CAT must be
allocated between the Participants and Industry Members according to
some formula. Although the Participants and Industry Members have
different means of potentially recovering from others some of the costs
allocated to them (e.g., the Participants from Industry Members and
Industry Members from customers), it is reasonable to allocate costs
evenly among the three parties who have primary roles related to the
transaction. The Commission agrees with CAT LLC that Industry Members
may be able to offset any fees that FINRA assesses them by passing
their CAT fees through to their customers, just as they may do with
Section 31-related fees and other fees. The Commission recognizes,
however, that not all Industry Members currently pass through fees or
would determine to do so in the future.
---------------------------------------------------------------------------

    \376\ See FINRA April 2023 Letter at 5-7; SIFMA June 2022 Letter
at 4; Citadel July Letter at 2, 16, 21, supra notes 73-74 and
accompanying text. See also SIFMA October 2022 Letter at 2, 3; FINRA
June 2022 Letter at 4.
---------------------------------------------------------------------------

    Finally, the Commission does not agree that the Participants'
treatment of FINRA is arbitrary because FINRA is treated as a market
center for purposes

of determining its CAT funding obligations while the CT Plan, which
governs the public dissemination of consolidated market data, would not
have counted FINRA's market activity for purposes of determining the
allocation of votes on the Operating Committee.\377\ The different
treatment of FINRA in these NMS plans reasonably reflects the very
different roles that a market center is used for in these contexts. The
CT Plan provisions discussed by the commenters involve the
determination of which Participant(s) could be eligible for a second
vote on the Operating Committee,\378\ while the Executed Share Model
proposes to assess FINRA a Participant CAT Fee based on its role as the
regulator for the over-the-counter market in which such trades
occur.\379\ The commenter's request that the Commission issue an order
soliciting comment on whether the Operating Committee should be
reorganized consistent with the CT Plan \380\ would be better addressed
in the context of a separate plan amendment.
---------------------------------------------------------------------------

    \377\ The CT Plan provided that an exchange group or independent
exchange that has more than 15 percent of consolidated equity market
share during four of the six calendar months preceding a vote of the
operating committee would be authorized to cast two votes. The CT
Plan stated that FINRA is not considered a market center for
purposes of determining consolidated equity market share solely by
virtue of facilitating trades through any TRF that FINRA operates in
affiliation with a national securities exchange designed to report
transactions otherwise than on an exchange. See supra note 342.
    \378\ See FINRA April 2023 Letter at 6; 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.
    \379\ See supra notes 371-372 and accompanying text.
    \380\ See SIFMA October 2022 Letter at 2.
---------------------------------------------------------------------------

4. CAT Executing Broker
    As noted above, CAT Executing Brokers will be charged CAT
fees.\381\ CAT LLC proposed to add a definition of ``CAT Executing
Broker'' to Section 1.1 of the CAT NMS Plan. The definition would
explain which party would be identified as a CAT Executing Broker in a
transaction.
---------------------------------------------------------------------------

    \381\ See Notice, supra note 7, 88 FR at 17087.
---------------------------------------------------------------------------

    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.\382\ 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.'' \383\ The Industry Members identified in these fields for the
transaction reports would be the CAT Executing Brokers for transactions
executed on an exchange.\384\ FINRA is required to report to the CAT
transactions in Eligible Securities reported to a FINRA trade reporting
facility (i.e., the TRF, Over-the Counter Reporting Facility (``ORF'')
and Alternative Display Facility (``ADF'')).\385\ 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.\386\ The Industry Members identified in these two fields for the
transaction reports would be the CAT Executing Brokers for over-the-
counter transactions.\387\
---------------------------------------------------------------------------

    \382\ Id. at 17088. The transaction reports used to identify
transactions and CAT Executing Brokers do not provide for fractional
quantities; therefore, CAT fees would not be calculated using
fractional shares or fractional share components of executed orders.
Id. at 17089. See supra notes 280-266 and accompanying text.
    \383\ Section 4.7 (Order Trade Event) and Section <IP_ADDRESS>
(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.
    \384\ See Notice, supra note 7, 88 FR at 17087-88.
    \385\ See Section 6.1 of the CAT Reporting Technical
Specifications for Plan Participants (Feb. 21, 2023). 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 is not publicly disseminated.
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''.
    \386\ See Notice, supra note 7, 88 FR at 17087-88.
    \387\ Id. at 17088.
---------------------------------------------------------------------------

    For transactions on ATSs, 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.\388\ If the ATS is identified
as the executing party for the buyer in such transaction reports, then
the ATS would be the CEBB.\389\ If the ATS is identified as the
executing party for the seller in such transaction reports, then the
ATS would be the CEBS.\390\ If the ATS is identified as both the
executing party and contra-side executing party, the ATS would be both
the CEBB and the CEBS.\391\ 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.\392\
---------------------------------------------------------------------------

    \388\ Id. at 17088-89.
    \389\ Id. at 17089.
    \390\ Id.
    \391\ Id. See also FINRA, Trade Reporting Frequently Asked
Questions at Section 203, available at https://www.finra.org/filing-reporting/market-transparency-reporting/trade-reporting-faq#203;
FINRA Regulatory Notice 09-08, available at https://www.finra.org/rules-guidance/notices/09-08.
    \392\ See Notice, supra note 7, 88 FR at 17089.
---------------------------------------------------------------------------

    For transactions that do not occur on an exchange and there is only
a FINRA member identified for one side of the trade, that FINRA member
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.\393\
Additionally, ``[f]or 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.'' \394\ In this situation, the executing broker
identified in the ``reportingExecutingMpid'' field would be billed for
both sides of the transaction.\395\
---------------------------------------------------------------------------

    \393\ See proposed Section 1.1. (definition of ``CAT Executing
Broker'').
    \394\ Notice, supra note 7, 88 FR at 17089.
    \395\ Id.
---------------------------------------------------------------------------

    The Executed Share Model also provides for cancellations and
corrections.\396\ CAT LLC stated that it expects to determine CAT fees
based on the transaction reports for a month as of a particular
day.\397\ 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.\398\ 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.\399\ CAT LLC
represented that it will establish specific policies and procedures
regarding the treatment of such adjustments as those related to
cancellations and corrections, as is required under the CAT NMS Plan to
adopt policies, procedures, and practices regarding the billing and
collection of fees.\400\ Furthermore, CAT LLC stated that it will
inform Industry Members and other market participants

of these policies and procedures via FAQs, CAT Alerts and/or other
appropriate methods.\401\
---------------------------------------------------------------------------

    \396\ Id.
    \397\ Id.
    \398\ Id.
    \399\ Id.
    \400\ See CAT NMS Plan, supra note 2, at Section 11.1(d).
    \401\ See Notice, supra note 7, 88 FR at 17089.
---------------------------------------------------------------------------

    Certain commenters objected to the proposed definition of ``CAT
Executing Broker.'' \402\ One commenter stated 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.'' \403\ Accordingly, the commenter advocated that the
Executed Share Model follow the ``structure already in place for
[collecting] Regulatory Fees,'' such as charging Clearing Brokers.\404\
---------------------------------------------------------------------------

    \402\ See SIFMA May 2023 Letter; Letter from Timothy Miller,
Chief Operating Officer, DASH Financial Technologies, LLC to Vanessa
Countryman, Secretary, Commission (July 13, 2023) (``DASH July 2023
Letter''), at 1-2; 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. Both the DASH July 2023 Letter and the DASH April 2023
Letter 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'').
    \403\ DASH April 2023 Letter at 1. See also DASH July 2023
Letter at 1-2.
    \404\ DASH April 2023 Letter at 2. See also DASH July 2023
Letter at 1-2. The commenter reiterated that it believes clearing
firms are still best suited to process the collection of fees, as
this can occur at trade settlement and the cost is ultimately borne
by the end beneficiary of each transaction. The commenter further
stated that ``there is precedent to follow with other Regulatory
Fees, such as ORF and OCC, to streamline the workflow and reduce the
number of counterparties involved in the payment/collection
process,'' and ``that in the options industry, ORF and Section 31
fees are not consistently billed to the exchange facing member; but,
most of the time, these fees follow the clearing firm associated
with the order.''
---------------------------------------------------------------------------

    Another commenter stated that the proposed definition of executing
broker would result in the inequitable allocation of fees.\405\ While
the commenter supported the change from having clearing firms be
assessed Industry Member CAT fees to executing brokers having this
obligation,\406\ 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,\407\ the commenter expressed concerns with how the
Participants determined which entities would be considered executing
brokers.\408\ In comment letters on the prior funding model
proposal,\409\ which was amended to require executing brokers instead
of clearing firms to be assessed CAT fees,\410\ the commenter requested
additional detail on how an executing broker would be defined.\411\ 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.\412\
---------------------------------------------------------------------------

    \405\ See SIFMA May 2023 Letter at 3.
    \406\ Id. See also SIFMA January 2023 Letter at 7-8.
    \407\ See SIFMA May 2023 Letter at 3-4. See also SIFMA October
2022 Letter at 5. The commenter also expressed concerns about 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.
    \408\ See SIFMA May 2023 Letter at 4.
    \409\ See Securities Exchange Act Release No. 94984 (May 25,
2022), 87 FR 33226 (June 1, 2022) (``Prior Funding Model
Proposal'').
    \410\ Two partial amendments were submitted on the Prior Funding
Model Proposal. The first partial amendment initially proposed the
use of executing brokers. See Securities Exchange Act Release No.
96394 (Nov. 28, 2022), 87 FR 74183 (Dec. 3, 2022). The Prior Funding
Model Proposal, as modified by the two partial amendments, was
withdrawn by the Participants on March 1, 2023. See Securities
Exchange Act Release No. 97212 (Mar. 28, 2023), 88 FR 19693 (Apr. 3,
2023).
    \411\ See SIFMA January 2023 Letter at 2, 8; SIFMA December 2022
Letter at 3. See also SIFMA May 2023 Letter at 4.
    \412\ 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
messages, and the costs of providing tools to regulators to analyze CAT
data.\413\ 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.\414\ 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.\415\ 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,\416\ and (ii) Industry Members that
executed trades for introducing brokers and acted 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.\417\ 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.''
\418\
---------------------------------------------------------------------------

    \413\ See SIFMA May 2023 Letter at 4.
    \414\ Id.
    \415\ Id. at 4-5.
    \416\ Id. at 5. See also Virtu Letter at 5 (stating that it is
``highly likely'' that executing brokers would end up absorbing the
fees themselves, as they would not have the systems in place to
trace to whom the fees were properly allocable).
    \417\ See SIFMA May 2023 Letter at 5.
    \418\ Id. Another commenter similarly objected to the imposition
of CAT fees on Executing Brokers. This commenter, a major wholesaler
who also serves as the Executing Broker on many transactions, stated
it was unjust to disproportionately burden Executing Brokers in this
manner, and noted that the cost of designing processes and systems
to route the fees to the appropriate parties could be prohibitive to
smaller brokers. See Virtu Letter at 4-5.
---------------------------------------------------------------------------

    The commenter suggested instead 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.\419\ 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.'' \420\ The commenter stated that this
would be the most reasonable way to allocate CAT costs among Industry
Members \421\ and that it would be ``relatively easy to accommodate
this approach.'' \422\ One other commenter also suggested allocating
costs to the party originating an order, stating that this would

``streamline the process and more accurately allocate costs . . .''
\423\
---------------------------------------------------------------------------

    \419\ See SIFMA May 2023 Letter at 5.
    \420\ Id. at 6.
    \421\ Id. at 5.
    \422\ Id. at 6.
    \423\ See Citadel July Letter at 20. See also id. at 3, 30, 31.
---------------------------------------------------------------------------

    One commenter expressed concerns about the imposition of CAT fees
on CAT Executing Brokers.\424\ The commenter stated that charging CAT
Executing Brokers ``inordinately burdens Broker Dealers, especially
small to medium-sized firms.'' \425\ 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.'' \426\ 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.'' \427\ 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.' '' \428\
---------------------------------------------------------------------------

    \424\ See DASH April 2023 Letter. See also DASH July 2023 Letter
at 1-2.
    \425\ See DASH April 2023 Letter at 1. See also DASH January
2023 Letter at 1; DASH July 2023 Letter at 1.
    \426\ DASH January 2023 Letter at 3. See also DASH April 2023
Letter at 1-2; DASH July 2023 Letter at 1-2.
    \427\ DASH April 2023 Letter at 1. See also DASH January 2023
Letter at 1; DASH July 2023 Letter at 1.
    \428\ DASH January 2023 Letter at 2; DASH July 2023 Letter at 1-
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.\429\ CAT LLC stated that a CAT Executing Broker would not be
required to follow a particular process for paying CAT fees, as it
could pay the fees itself, or require a clearing firm or other third
party to pay CAT fees on its behalf.\430\ For example, 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.\431\
---------------------------------------------------------------------------

    \429\ See CAT LLC May 2023 Response Letter at 12; CAT LLC July
2023 Response Letter at 3.
    \430\ See CAT LLC July 2023 Response Letter at 3.
    \431\ CAT LLC May 2023 Response Letter at 12.
---------------------------------------------------------------------------

    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 Funding Model
Proposal.\432\ 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.\433\
---------------------------------------------------------------------------

    \432\ Id. at 2. See also supra note 409.
    \433\ CAT LLC May 2023 Response Letter at 3.
---------------------------------------------------------------------------

    In response, the commenter stated that the 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.\434\ The commenter represented that it
stated in comment letters it submitted on the Prior Funding Model
Proposal \435\ that initially proposed the use of executing brokers
\436\ 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.\437\ The commenter stated that the
Participants only provided a definition of executing broker in the
Proposed Amendment.\438\ The commenter stated that it provided concerns
about the proposed definition in its May 2023 comment letter, which the
commenter stated were mischaracterized by the Operating Committee in
the CAT LLC Response Letter in an attempt to rush the Commission to a
decision on the Proposed Amendment.\439\
---------------------------------------------------------------------------

    \434\ See SIFMA June 2023 Letter at 5.
    \435\ See supra note 409.
    \436\ See supra note 410.
    \437\ See SIFMA June 2023 Letter at 5.
    \438\ Id.
    \439\ Id. at 5-6.
---------------------------------------------------------------------------

    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.\440\ CAT 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.\441\ 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.\442\ CAT LLC stated that in the
past, the Commission has approved fees that are charged to some, but
not all, broker-dealers.\443\ CAT LLC noted that, for example, FINRA's
TAF is assessed to a subset of FINRA members--that is, it is assessed
on the sell side of member transactions.\444\ 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.\445\ 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.\446\ CAT LLC stated
that this regulatory requirement would have a similar effect as other
types of regulatory fees, such as the FINRA TAF, 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.''
\447\
---------------------------------------------------------------------------

    \440\ See CAT LLC May 2023 Response Letter at 4.
    \441\ Id.
    \442\ Id. at 3.
    \443\ Id.
    \444\ Id.
    \445\ Id.
    \446\ See CAT LLC May 2023 Response Letter at 4.
    \447\ 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 (e.g., TAF, Section 31
fees, ORF fees), and it disagrees with the assertion that charging
originating brokers would be easier.\448\ 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.\449\ 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.'' \450\ CAT LLC stated 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.'' \451\
Therefore, CAT LLC stated that one commenter's \452\ ``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.'' \453\ Further, CAT LLC
stated 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.'' \454\ CAT LLC
also 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.\455\ CAT LLC also stated that allocating to
the originating broker would not include Industry Members that were
only involved in routing and execution, which would include ``some of
the largest Industry Members,'' \456\ and that these Industry Members
``are not involved in the origination of orders or originate few orders
in relation to their overall market activity.'' \457\ Furthermore, CAT
LLC stated that originating brokers would also need to establish
processes for paying CAT fees, just as CAT Executing Brokers
would.\458\
---------------------------------------------------------------------------

    \448\ Id. at 5. See also CAT LLC July 2023 Response Letter at 3-
4, 4 (detailing challenges of allocating CAT costs to originating
brokers).
    \449\ See CAT LLC May 2023 Response Letter at 5. See also CAT
LLC July 2023 Response Letter at 3.
    \450\ CAT LLC May 2023 Response Letter at 5. See also CAT LLC
July 2023 Response Letter at 4.
    \451\ CAT LLC May 2023 Response Letter at 5. See also CAT LLC
July 2023 Response Letter at 3.
    \452\ See SIFMA May 2023 Letter at 5.
    \453\ See CAT LLC May 2023 Response Letter at 5.
    \454\ Id.
    \455\ Id.
    \456\ See CAT LLC July 2023 Response Letter at 3.
    \457\ Id.
    \458\ Id.
---------------------------------------------------------------------------

    One commenter expressed uncertainty about CAT LLC's response that
some of the largest Industry Members are not involved in order
origination or originate few orders relative to their market activity,
stating that it is unclear to whom the statement is referring since the
executing broker and the originating broker would be the same firm in
the case of proprietary trading activity.\459\ Additionally, the
commenter stated that the originating broker model should be pursued if
it dramatically reduces market-wide implementation costs with a
marginal increase in CAT costs, noting that Industry Members could bear
most, if not all, CAT costs to implement the originating broker
model.\460\ The commenter stated that, before proceeding, the CAT
Operating Committee must publish an analysis of the costs and benefits
of the executing broker and originating broker models including any
differences in CAT implementation costs and Industry Member
implementation costs.\461\
---------------------------------------------------------------------------

    \459\ See Citadel August Letter at 6.
    \460\ Id.
    \461\ Id.
---------------------------------------------------------------------------

    In response to a comment stating that executing brokers lacked
systems and processes to recover costs from their clients and would
either choose to absorb the CAT fees or exit the business because of
the investments necessary for the cost-recovery process,\462\ CAT LLC
stated that those Industry Members that pass-through CAT fees will
accordingly need to develop processes to recover the fees from their
clients, like they do for other regulatory-related fees, like the TAF,
the options regulatory fee and Section 31-related fees.\463\ CAT LLC
also stated that CAT Executing Brokers would ``have full discretion as
to whether and the manner and extent to which they pass on their CAT
fees, if at all,'' noting that ``a CAT Executing Broker could round up
its fees to the nearest cent, or decide to charge for, or not charge
for certain transactions, or assess a specific fee or incorporate the
costs into other fee programs.'' \464\ CAT LLC stated that assessing a
transaction-based fee to an executing broker and the executing broker
deciding whether and how to pass-through its costs to clients is ``not
new or novel.'' \465\ Finally, CAT LLC noted that the Plan Processor
would provide trade-by-trade data to CAT Executing Brokers, and will
offer a training program for CAT Executing Brokers to help them
understand their CAT bills.\466\
---------------------------------------------------------------------------

    \462\ See Virtu Letter at 5.
    \463\ See CAT LLC July 2023 Response Letter at 9. See also id.
at 5.
    \464\ CAT LLC July 2023 Response Letter at 10. See also id. at 5
(adding that broker-dealers pass-through fees to customers related
to Section 31 fees).
    \465\ Id.
    \466\ Id. at 10. See also id. at 5.
---------------------------------------------------------------------------

    In the Commission's view, CAT LLC's definition of ``CAT Executing
Broker'' is reasonable given that the Executed Share Model is based
upon the calculation of executed equivalent shares (emphasis
added),\467\ and the executing brokers are reasonably suited to know
their own volume and plan for future volume of executed equivalent
shares to pay the CAT fees. One commenter's suggested approach would
also result in the assessment of fees on a subset of Industry Members
--originating brokers--and thus could raise similar allocation concerns
as those raised by the commenter about the proposed approach.\468\ In
addition, as discussed below, the Commission agrees with the
Participants that the ease of administration in using the transaction
reports to identify the executing broker is an advantage of the
Proposed Amendment. Given the similar issues with either approach--
either charging the fees to a subset of Industry Members based on
whether they are the ``CAT Executing Broker'' or the originating
broker--it is reasonable to choose the less administratively burdensome
of the two options. Accordingly, the assessment of CAT fees on CAT
Executing Brokers is reasonable.\469\
---------------------------------------------------------------------------

    \467\ See Notice, supra note 7, 88 FR at 17086.
    \468\ See SIFMA May 2023 Letter at 5, 6.
    \469\ See 17 CFR 242.608(b)(2).
---------------------------------------------------------------------------

    In response to the commenter that questioned CAT LLC's response
that some of the largest Industry Members are not involved in order
origination or originate few orders relative to their market
activity,\470\ the Commission is not relying on this statement by CAT
LLC and understands that the executing broker and the originating
broker would be the same in the case of proprietary

trading activity. Although one commenter suggested that the originating
broker model should be pursued if it dramatically reduces market-wide
implementation costs with a marginal increase in CAT costs,\471\ the
Commission believes that the executing broker model is reasonable. The
Commission understands the argument that charging originating brokers
instead of executing brokers would be easier and more cost effective
for the executing brokers, but it would be at the expense of the
originating brokers. The Commission also understands that charging
executing brokers instead of originating brokers is easier and more
cost effective for the CAT Plan Processor. Using CAT Data, the CAT Plan
Processor can more easily determine which executing broker to charge.
On the other hand, if the CAT Plan Processor were to charge originating
brokers, the Commission believes the CAT Plan Processor would have to
rely on linkages, which may not be one-for-one in all circumstances, to
determine which originating broker to charge for an execution. And this
difficulty not only would add to the costs of the CAT but also would
impact transparency and potentially the relative simplicity of the CAT
Fees. Moreover, the Proposed Amendment does not address how executing
brokers pass-through CAT fees to their customers.
---------------------------------------------------------------------------

    \470\ See Citadel August Letter at 6.
    \471\ Id.
---------------------------------------------------------------------------

    Using transaction reports to identify the transaction for purposes
of calculating the CAT fees as well as the CAT Executing Broker for
each transaction for purposes of calculating the CAT fees is a
straightforward and more objective method of identifying executing
brokers than other methods, such as identifying an originating broker
through an evaluation of CAT linkages. Although the definition of ``CAT
Executing Broker'' may not be used by the industry or universally
accepted, CAT Executing Brokers will be able review their transactions
reports and request details regarding the calculation of their fees,
which should allow them to better assess the impact of the Executed
Share Model on their business models.\472\ It is appropriate for CAT
LLC to establish policies and procedures on the treatment of
adjustments related to cancellations and corrections. CAT LLC stated
that to the extent 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.\473\ 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.\474\ It is appropriate to
adjust an Industry Member's or Participant's CAT fees for cancellations
and corrections when such adjustments are made to the transaction
reports that are used for calculate CAT fees for that month.
Additionally, under Section 11.1(d) of the CAT NMS Plan, the Operating
Committee is required to adopt policies and procedures regarding the
billing and collection of fees.\475\
---------------------------------------------------------------------------

    \472\ See proposed Section 11.3(a)(iv)(A) and 11.3(b)(iv)(A).
See also infra Section III.A.7. (Calculation Information; Billing
and Collection of CAT Fees).
    \473\ See Notice, supra note 7, 88 FR at 17089.
    \474\ Id.
    \475\ See CAT NMS Plan, supra note 2, at Section 11.1(d).
---------------------------------------------------------------------------

    It is the Commission's view that charging CEBBs and CEBSs is
reasonable. The Executed Share Model recognizes that there are three
parties who play significant roles in transactions reportable to the
CAT: the Participant, the buy-side and the sell-side.\476\ The Proposed
Amendment also is based on executed equivalent shares (emphasis
added).\477\ As such, CAT LLC stated that charging the CEBBs and CEBSs
would reflect the executing role the CEBB and CEBS have in each
transaction.\478\ Additionally, charging CEBBs and CEBSs is in line
with the use of transaction reports from the exchanges and FINRA's
equity trading reporting facilities for calculating the CAT fees.\479\
Specifically, these transaction reports identify CEBBs and CEBSs, so
charging such entities potentially streamlines the fee charging
process.\480\ CAT LLC also explained that charging both the buy-side
and the sell-side of a transaction would be consistent with other fees,
such as the options regulation fee.\481\
---------------------------------------------------------------------------

    \476\ See Notice, supra note 7, 88 FR at 17104.
    \477\ Id. at 17086.
    \478\ Id. at 17103.
    \479\ Id.
    \480\ Id.
    \481\ Id. at 17108.
---------------------------------------------------------------------------

    In Rule 613, the Commission made the determination that the costs
of the CAT should be shared by the Participants and Industry Members.
Charging CAT Executing Brokers, clearing firms or ``originating
brokers'' all would impose the costs initially on a subset of Industry
Members. As discussed above, given that the charges are based on
executed equivalent shares, it makes sense to use the CAT Executing
Brokers as the immediate recipients of the charge. Accordingly, the
Commission agrees with CAT LLC that it is reasonable to impose the
charge on CAT Executing Brokers. The Commission acknowledges that
charging CEBBs and CEBSs would impose a burden on such firms, which
could potentially have an effect on their net capital. However,
currently, such firms regularly pay transaction-based fees to the
Participants, which they may pass-through to their customers who, in
turn, could pass their CAT fees to their customers, until the fee is
imposed on the ultimate participant in the transaction.\482\
Additionally, unlike clearing firms that may simply clear a trade on
behalf of the executing broker, executing brokers are always parties to
a transaction, including instances that may result in CAT costs but not
in actual trades, such as unexecuted orders. The Commission therefore
agrees with CAT LLC that assessing Industry Members CAT fees on CEBBs
and CEBSs would be reasonable for their ``executing role'' in each
transaction.\483\
---------------------------------------------------------------------------

    \482\ See Notice, supra note 7, 88 FR at 17103.
    \483\ Id.
---------------------------------------------------------------------------

5. Prospective CAT Fees
a. Fee Rate Formula
    Under the Executed Share Model, Participants, CEBSs and CEBBs would
be subject to fees designed to cover the ongoing budgeted costs of the
CAT, as determined by the Operating Committee.\484\ Each Participant
and CAT Executing Broker would be required to pay a CAT Fee related to
Prospective CAT Costs for each transaction in Eligible Securities in
the prior month based on CAT Data.\485\ CAT Fees would be calculated by
multiplying the executed equivalent shares in the transaction by one-
third and the applicable ``Fee Rate.'' \486\ The Commission received no
comments on the Fee Rate Formula.
---------------------------------------------------------------------------

    \484\ See proposed Section 11.3(a)(i)(A)(I) and (II); proposed
Section 11.3(a)(iii)(A).
    \485\ See proposed Section 11.3(a)(ii)(A) and (iii)(A).
    \486\ Id.
---------------------------------------------------------------------------

    At the beginning of each year, the Operating Committee would set
the Fee Rate to be used to determine CAT Fees.\487\ To calculate the
Fee Rate for Prospective CAT Costs, the Operating Committee would
divide the reasonably budgeted CAT costs by the reasonably projected
total executed equivalent share volume of all transactions in Eligible
Securities for that year.\488\ The Operating Committee would base the
projected total executed equivalent

share volume on the total executed equivalent share volume of
transactions in Eligible Securities from the prior twelve months.\489\
Additionally, CAT LLC would permit the Operating Committee to use its
discretion to analyze likely volume for the upcoming year \490\ and
Participants would be required to describe the calculation of the
projection in their fee filings submitted to the Commission pursuant to
Section 19(b) to implement the CAT Fee for Industry Members.\491\ The
Operating Committee also would be required to perform a mid-year
adjustment of the Fee Rate for CAT Fees related to Prospective CAT
Costs.\492\
---------------------------------------------------------------------------

    \487\ See proposed Section 11.3(a)(i)(A)(I). The Fee Rate would
be established through a majority vote of the Operating Committee.
See Notice, supra note 7, 88 FR at 17108.
    \488\ See proposed Section 11.3(a)(i)(A)(I).
    \489\ See proposed Section 11.3(a)(i)(D).
    \490\ See Notice, supra note 7, 88 FR at 17094.
    \491\ See proposed Section 11.3(a)(iii)(B); 15 U.S.C. 78s(b).
    \492\ See proposed Section 11.3(a)(i)(A)(II).
---------------------------------------------------------------------------

    CAT LLC proposed Section 11.3(a)(i)(A)(I) of the CAT NMS Plan to
describe the annual calculation of the Fee Rate and the requirement for
Participants to file a fee filing for CAT Fees to be charged to
Industry Members calculated using the Fee Rate. Under the Executed
Share Model, 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.\493\ Should the
budgeted costs be higher than actual costs, any budget surplus will be
credited against the fees for the following year, as CAT LLC cannot
hold higher than a 25% reserve.\494\
---------------------------------------------------------------------------

    \493\ See proposed Section 11.3(a)(i)(A)(I).
    \494\ See infra Section III.A.5.c (Reserves).
---------------------------------------------------------------------------

    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,\495\ CAT Fees to be charged to
Industry Members calculated using such Fee Rate.\496\ 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.\497\
---------------------------------------------------------------------------

    \495\ 15 U.S.C. 78s(b).
    \496\ See proposed Section 11.3(a)(i)(A)(I).
    \497\ Id.
---------------------------------------------------------------------------

    Proposed Section 11.3(a)(i)(A)(II) of the CAT NMS Plan describes
the mandatory mid-year calculation of the Fee Rate and the requirement
for Participants to file a fee filing for CAT Fees to be charged
Industry Members calculated using the Fee Rate. Under the Executed
Share Model, the Operating Committee will adjust the Fee Rate once mid-
year \498\ 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.\499\ 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.\500\ 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.\501\
---------------------------------------------------------------------------

    \498\ See proposed Section 11.3(a)(i)(A)(II).
    \499\ Id.
    \500\ Id.
    \501\ Id.
---------------------------------------------------------------------------

    CAT LLC proposed 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.\502\
---------------------------------------------------------------------------

    \502\ See proposed Section 11.3(a)(i)(A)(III).
---------------------------------------------------------------------------

    CAT LLC proposed to add Section 11.3(a)(i)(A)(IV) to the CAT NMS
Plan to provide that 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 if it were a mid-year
calculation.\503\
---------------------------------------------------------------------------

    \503\ See proposed Section 11.3(a)(i)(A)(IV).
---------------------------------------------------------------------------

    The proposed recovery of Prospective CAT Costs is appropriate. It
is appropriate to require that each Participant, CEBB and CEBS pay a
CAT Fee related to Prospective CAT Costs for each transaction in the
prior month based on CAT Data.\504\ Basing the CAT Fee on transaction
data from the prior month is appropriate as it is recent in time and
therefore more reflective of current market data, and the Commission
did not receive any comments on this issue.
---------------------------------------------------------------------------

    \504\ See proposed Section 11.3(a)(ii)(A) and (iii)(A).
---------------------------------------------------------------------------

    The manner in which the Fee Rate for Prospective CAT Costs will be
calculated (i.e., by dividing the CAT costs reasonably budgeted for the
upcoming year by the reasonably projected total executed equivalent
share volume of all transactions in Eligible Securities for the year)
is reasonable.\505\ The use of projected executed equivalent share
volume in determining the Fee Rate is appropriate because it would
provide the likely volume for the year to be used as the denominator.
It is reasonable to use the prior twelve months to determine the
projected total executed equivalent share volume of all transactions in
Eligible Securities for the year \506\ because it would be the most
recent data available to use to make a projection needed to calculate
the Fee Rate, and the most recent data is on balance more likely to
resemble the near future. Additionally, as noted above, that the
Commission agrees with CAT LLC's analysis 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.'' \507\ Further, requiring that the CAT costs be
``reasonably budgeted'' and projected total executed equivalent share
volume be ``reasonably projected'' is designed to help impose some
discipline or constraints in the fee setting process. It is reasonable
for CAT LLC to permit the Operating Committee to project the upcoming
volume for the upcoming year.\508\ It is not possible to know exactly
what the volume will be before the year begins, so a projection will be
necessary. If the volume turns out to be higher than projected, then
CAT LLC will be able to use its reserve to cover any shortage. If it is
lower, resulting in a budget surplus, the CAT fees for the following
year would be lower.\509\ Furthermore, since the Participants would be
required to describe the calculation of the projected total executed
equivalent share volume in the fee filings submitted to the Commission,
pursuant to Section 19(b) of the Exchange Act, to implement CAT Fees
for Industry Members, the public will have an opportunity to review the
projection and provide comment.\510\
---------------------------------------------------------------------------

    \505\ See proposed Section 11.3(a)(i)(A)(I).
    \506\ See proposed Section 11.3(a)(i)(D).
    \507\ See Notice, supra note 7, 88 FR at 17103.
    \508\ Id. at 17094.
    \509\ See infra Section III.A.5.c (Reserves).
    \510\ See proposed Section 11.3(a)(iii)(B).

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

    The annual and mid-year adjustments of the Fee Rate for Prospective
CAT Costs \511\ are appropriate because they would ensure that CAT Fees
related to Prospective CAT Costs would stay aligned with changes to the
budget and projected volume occurring as the year progresses with
contemporaneous data. Additionally, calculating a CAT Fee that starts
mid-year as if it were a mid-year Fee Rate calculation is appropriate
because calculating it that way would base the CAT Fee on the budgeted
CAT costs and projected total executed equivalent share volume of all
transactions in Eligible Securities for the remainder of the year,
rather than for the entire year. This is an appropriate treatment of a
CAT Fee that would commence mid-year, not at the beginning of the year.
---------------------------------------------------------------------------

    \511\ See proposed Section 11.3(a)(i)(A)(I) and (II).
---------------------------------------------------------------------------

b. 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.\512\ Proposed Section 11.3(a)(i)(C) of
the CAT NMS Plan provides 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.\513\
---------------------------------------------------------------------------

    \512\ See proposed Section 11.3(a)(i)(A)(I).
    \513\ CAT LLC proposed to use budgeted CAT costs in calculating
CAT Fees rather than costs incurred. CAT LLC explained that using
budgeted CAT costs is necessary to build financial stability to
support the Company as a going concern, in accordance with the
funding principle in Section 11.2(f) of the CAT NMS Plan, because it
would allow CAT LLC to collect fees before bills become payable. CAT
LLC stated that if CAT Fees were only collected after bills become
payable, Participants would have to continue to fund the CAT for all
CAT costs to pay bills as they are due. See Notice, supra note 7, 88
FR at 17114.
---------------------------------------------------------------------------

    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.'' \514\ CAT LLC proposed to amend Section 11.1(a) to require
the Operating Committee to approve a reasonable operating budget for
CAT LLC on an annual basis.\515\
---------------------------------------------------------------------------

    \514\ See CAT NMS Plan, supra note 2, at Section 11.1(a).
    \515\ See proposed Section 11.1(a).
---------------------------------------------------------------------------

    CAT LLC also proposed to amend Section 11.1(b) of the CAT NMS Plan
to add a reference to Section 11.1. Currently, Section 11.1(b) states
that ``[s]ubject to Section 11.2, the Operating Committee shall have
the discretion to establish funding for the Company'' including
establishing fees to be paid by the Participants and Industry Members
(that shall be implemented by the Participants) . . .'' \516\ CAT LLC
proposed to add a reference to Section 11.1 so that ``[s]ubject to
Section 11.1 and Section 11.2'' the Operating Committee would have the
discretion to establish funding for the Company.\517\ CAT LLC explained
that this proposed change is relevant because Section 11.1 relates to
the budget and the budget is used to calculate fees.\518\
---------------------------------------------------------------------------

    \516\ See CAT NMS Plan, supra note 2, at Section 11.1(b).
    \517\ See Notice, supra note 6, 88 FR at 17090.
    \518\ Id.
---------------------------------------------------------------------------

    CAT LLC also proposed 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, CAT LLC proposed to 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.'' \519\
---------------------------------------------------------------------------

    \519\ Id. CAT LLC has stated that it will consider providing
additional detailed subcategories regarding technology costs, but
notes that what it is currently providing is consistent with what is
made publicly available on its website. CAT LLC has stated that it
will consider the need to provide additional detailed subcategories
for any area besides technology, both because technology costs
account for the majority of the budget and because it is not
considered ``best practices'' to disclose detailed legal or
insurance information, as these are particularly sensitive. Id.
Detailed information is always available to the Commission for
review upon request. Id.
---------------------------------------------------------------------------

    Certain commenters noted a lack of detail provided on the cost
categories.\520\ One commenter stated that the budget line item
categories are too high level.\521\ The commenter urged the inclusion
of much greater detail and specificity on the budget spending choices,
especially in technology,\522\ to allow Industry Members and the public
to understand and evaluate CAT spending decisions.\523\ Similarly,
other commenters requested more transparency into the drivers of CAT
costs, in particular, technology costs, which they stated is the
largest expense item.\524\ One commenter stated that their ``concerns
are exacerbated by the general lack of transparency coming from the CAT
Operating Committee. Despite continued requests for information about
key drivers of the rapidly growing CAT costs, the CAT Operating
Committee points to high-level financial and operating budgets
published by the Committee that merely provide broad categories of
costs and expenses. Likewise, in the current structure, the SEC staff
also have no incentive to control costs . . . This process does not
afford industry members with appropriate notice of, and opportunity to
comment on, material changes to the CAT. Nor does it adhere to the
requirements under the Exchange Act to weigh the costs and benefits of
proposed changes to the NMS plan.'' \525\ Another commenter stated that
the Operating Committee refuses to provide cost transparency, such as
more details on the broad expense categories provided in the operating
expenses (as well as the Historical CAT Costs) provided in the Proposed
Amendment.\526\ The

commenter believes that the lack of transparency into costs would
prevent the Commission from finding that the proposed allocation
methodology is reasonable \527\ and would raise concerns that
inappropriate expenses would be allocated to Industry Members, like
litigation expenses incurred by the Operating Committee against the
Commission, and expenses prohibited by the Financial Accountability
Amendments from being recovered by the Operating Committee.\528\ The
commenter also stated that the Proposed Amendment lacks sufficient
detail for the Commission to perform the required economic
analysis.\529\
---------------------------------------------------------------------------

    \520\ See SIFMA January 2023 Letter at 6; Citadel July Letter at
13-14; FIA Letter at 2-5; Letter to Vanessa Countryman, Secretary,
Commission, from Joseph Corcoran, Managing Director, Associate
General Counsel and Ellen Greene, Managing Director, Equities and
Options Market Structure, SIFMA, and Howard Meyerson, Managing
Director, Financial Information Forum, dated July 31, 2023 (``FIF
and SIFMA Letter''), at 8.
    \521\ See SIFMA January 2023 Letter at 6.
    \522\ Id. (stating 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). The proposed breakdown is consistent
with what is currently provided to the public. See Notice, supra
note 6, 88 FR at 17090. See also FIF and SIFMA Letter at 8.
    \523\ See SIFMA January 2023 Letter at 6.
    \524\ See FIF and SIFMA Letter at 8. The commenter stated that
the 2023 budget divides technology costs, estimated to be $222.5
million and 95.3% of total operating costs, into four categories
with cloud hosting services represents 75.5% of estimated CAT costs
for 2023. Id. The commenter requested the Commission and the
Participants to make publicly available the financial terms of the
contract between the Participants and Amazon Web Services (``AWS''),
the cloud hosting services provider, and publish all invoices from
AWS. Id. The Commission declines to mandate the publication of a
contract between private parties. Similarly, the Commission declines
to mandate the publication of AWS invoices. The Participants can
choose to publish this information if they believe it is
appropriate.
    \525\ See FIA Letter at 2-5.
    \526\ See Citadel July Letter at 13-14. See also id. at 23.
    \527\ Id. at 2, 15, 26.
    \528\ Id. at 2.
    \529\ Id. at 11. Rule 613(a)(5) of Regulation NMS requires the
Commission to conduct an assessment of the Proposed Amendment's
impact on efficiency, competition and capital formation, which is
not the same economic analysis as the Commission conducts when
engaged in a rulemaking. 17 CFR 242.613(a)(5). The Proposed
Amendment contains the information needed for the Commission to
conduct this assessment. See infra Section IV. See also infra note
1044.
---------------------------------------------------------------------------

    The commenter suggested enhancements to improve budget
transparency.\530\ The commenter suggested that all CAT operating
budgets should remain published on the CAT website \531\ and that any
material change to the CAT system, related technology contracts or
implementation scope should require the filing of an NMS plan amendment
explaining the necessity of the change and include a robust cost-
benefit analysis.\532\
---------------------------------------------------------------------------

    \530\ See Citadel July Letter at 33-35.
    \531\ Id. at 3, 34.
    \532\ Id. See also FIF and SIFMA Letter at 13.
---------------------------------------------------------------------------

    In addition, the commenter suggested that exchanges be responsible
for costs that exceed the budget in order to incentivize cost
control,\533\ and that Industry Members should not be allocated costs
for matters specifically for the benefit of the Operating Committee or
the Commission (such as costs related to litigation ``or filings that
are inconsistent with the Exchange Act'' \534\), stating that
``Industry Members should also not be allocated costs relating to how
data is presented to, and used by, regulatory Staff at the SROs or the
Commission.'' \535\ Furthermore, the commenter suggested that change
requests that do not involve specific NMS Plan requirements should be
allocated to the requestor, including the Commission.\536\
---------------------------------------------------------------------------

    \533\ See Citadel July Letter at 3, 32.
    \534\ Id. at 32.
    \535\ Id.
    \536\ Id.
---------------------------------------------------------------------------

    Commenters also discussed a need for a cost review mechanism,\537\
with several commenters citing to high operating costs as evidence for
the need of one.\538\ One commenter stated that CAT costs are
increasing at an unsustainable level and need to be controlled.\539\
The commenter stated that the Commission lacks a process to manage CAT
costs as CAT operating costs are not part of the Commission's budget
and do not require an appropriation.\540\ The commenter urged that
there is a need to allow the public, the Commission and industry to
have a better understanding of the drivers of CAT operating costs,\541\
why they have exceeded the operating costs estimated in the CAT NMS
Plan,\542\ and why they are projected to increase 27% from 2022 to
2023.\543\ The commenter requested that the Commission direct the
Participants to analyze the increase in CAT operating costs and to
evaluate future expected annual CAT operating cost increases,\544\ and
also advised the Commission not to mandate any new processing or
reporting requirements until such analysis has concluded.\545\
---------------------------------------------------------------------------

    \537\ See SIFMA May 2023 Letter at 3, 8-10; Citadel July Letter
at 8, 26, 27; FIF and SIFMA Letter at 8-9; SIFMA AMG Letter at 3.
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; Virtu Letter at 4;
MMI July Letter at 3-4; FIA Letter at 3, 5.
    \538\ See, e.g., MMI July Letter at 3; Virtu Letter at 4, FIF
and SIFMA Letter at 2, 5-9; SIFMA AMG Letter at 3.
    \539\ FIF and SIFMA Letter at 2, 5. The commenter stated that
internal costs and costs associated with trading workflow changes to
comply with certain CAT reporting requirements should also be
considered, arguing that these costs would significantly exceed CAT
operating costs are 100% paid for by broker-dealers and exchanges.
Id. at 2, 5, 6.
    \540\ Id. at 8.
    \541\ Id.
    \542\ Id. at 7, 9.
    \543\ Id. at 9.
    \544\ FIF and SIFMA Letter at 4.
    \545\ Id.
---------------------------------------------------------------------------

    One commenter stated that asset managers were concerned about the
lack of an independent cost review mechanism for the CAT budget to
ensure that future fees are fair and reasonable and spending will be
appropriate and cost-effective.\546\ Similarly, another commenter
stated that an independent cost review mechanism is necessary to ensure
future CAT fees are fair and reasonable and to safeguard against
unchecked spending.\547\ 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,\548\ to implement CAT fees on Industry Members.\549\ 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.'' \550\ 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.'' \551\ 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.'' \552\ Similarly, another commenter suggested that an
independent expert committee assess whether cost levels and third party
arrangements are reasonable, and whether more cost-control measures are
warranted,\553\ and that the Commission formally approve the CAT budget
on an annual basis.\554\ The commenter further stated that the Proposed
Amendment made no attempt to specify the key drivers of costs, such as
explaining the requirements that resulted in significant cost
increases, or the design alternatives the Operating Committee
previously considered.\555\ The commenter added that Industry Members
must fund a 25% reserve above budgeted amounts, and ad-hoc discussions
between the Operating Committee and the

Commission could result in higher costs.\556\
---------------------------------------------------------------------------

    \546\ See SIFMA AMG Letter at 3.
    \547\ 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; Citadel July Letter at 2, 26
(stating that that ``the trajectory of annual operating expenses is
unconstrained,'' and that the ``magnitude and trajectory'' of the
costs are not reasonable since Industry Members have borne nearly
all CAT-related costs''); Citadel August Letter at 7.
    \548\ 15 U.S.C. 78s(b).
    \549\ 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.
    \550\ SIFMA May 2023 Letter at 9.
    \551\ Id. at 9-10.
    \552\ Id. See also SIFMA January 2023 Letter at 6.
    \553\ See Citadel July Letter at 3, 33.
    \554\ Id.
    \555\ Id. at 14.
    \556\ Id. at 26.
---------------------------------------------------------------------------

    The commenter also suggested enhancements to reduce overall CAT
operating costs.\557\ Specifically, the commenter suggested that the
Operating Committee and the Commission stop making changes to the CAT
to stabilize operating costs, stating that there are changes slated for
development that are currently subject to exemptive relief, and other
requirements the commenter believes are outside the scope of the CAT
NMS Plan that would result in costs that outweigh benefits.\558\ The
commenter suggested that the Operating Committee file an updated NMS
plan to reflect the status quo,\559\ and work with the Commission and
industry to identify technical requirements that could be modified to
reduce costs without sacrificing the key benefits of the CAT system,
like moving timelines from T+1 to T+2.\560\ The commenter also
suggested that steps should be taken to streamline the CAT submission
process to minimize reporting errors and to reduce industry
implementation costs, like implementing further data validation.\561\
One commenter stated that if the Participants ``determine to charge
their members fees to fund their share of CAT fees,'' then Industry
Members would bear 100% of CAT costs, and thus,''[w]ith little to no
skin-in-the-game, the Participants will not be incentivized to control
costs.'' \562\ The commenter further stated that they join other
commenters in calling for an ``independent cost review mechanism.''
\563\
---------------------------------------------------------------------------

    \557\ See Citadel July Letter at 33-35.
    \558\ Id. at 3, 32-33. One other commenter echoed some of these
same considerations. See MMI July Letter at 4.
    \559\ See Citadel July Letter at 3, 33.
    \560\ Id.
    \561\ Id.
    \562\ See FIA Letter at 3. See also Citadel August Letter at 2.
    \563\ FIA Letter at 5.
---------------------------------------------------------------------------

    In response to the comment that suggested that all CAT operating
budgets should remain published on the CAT website,\564\ CAT LLC stated
that it publishes its annual financial statements from 2017-on and
voluntarily publishes its annual operating budget and updates to the
budget occurring during the year.\565\ CAT LLC stated that, in response
to the comment, it intends that prior CAT operating budgets will stay
available on the CAT website.\566\
---------------------------------------------------------------------------

    \564\ See Citadel July Letter at 3, 34.
    \565\ See CAT LLC July 2023 Response Letter at 26.
    \566\ Id.
---------------------------------------------------------------------------

    In response to a commenter suggesting that the exchanges be
responsible for any costs that exceeded the approved budget,\567\ CAT
LLC stated that this suggestion would not result in a fair and
equitable allocation consistent with the Exchange Act because Industry
Member trading activity ``contributes significantly'' \568\ to CAT
costs and it would not be fair for Participants to bear CAT costs
exceeding the budget if unexpected increases in trading volume resulted
in the increased CAT costs.\569\ CAT LLC also stated that this
suggestion could incentivize the Participants to base the budget on
``the most conservative projections for future Industry Member data
volume'' \570\ to not be responsible for costs that go over the
budget.\571\ In addition, CAT LLC noted that the Proposed Amendment
would include both a requirement to adjust the Fee Rate during the year
to address any changes in projected or actual transaction volume or
budgeted or actual CAT costs, and an operational reserve to address
shortfalls in collected fees versus actual CAT costs.\572\
---------------------------------------------------------------------------

    \567\ See Citadel July Letter at 32.
    \568\ See CAT LLC July 2023 Response Letter at 12.
    \569\ Id.
    \570\ Id.
    \571\ Id.
    \572\ Id.
---------------------------------------------------------------------------

    In response to suggestions to use an independent cost review
mechanism,\573\ CAT LLC stated that such a review process is
unnecessary because it would go beyond what is required by either Rule
613 or the CAT 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.\574\ 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.\575\ 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.\576\ 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.\577\ 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.\578\ In response, one commenter stated that
the CAT LLC Response Letter did not meaningfully address its concerns
about the lack of a cost control mechanism.\579\
---------------------------------------------------------------------------

    \573\ 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; Citadel July Letter at 3, 33;
FIA Letter at 5.
    \574\ See CAT LLC May 2023 Response Letter at 10.
    \575\ Id.
    \576\ Id.
    \577\ Id.
    \578\ Id.
    \579\ See SIFMA June 2023 Letter at 2.
---------------------------------------------------------------------------

    CAT LLC provided a further response to commenters that recommended
the adoption of an independent cost review mechanism for CAT
costs,\580\ stating that a review process is not necessary or
appropriate.\581\ CAT LLC explained that it is already actively
involved in cost discipline efforts, such as through a designated cost
management working group, and already provides ``significant cost
transparency'' by publishing its quarterly budget information and
financial information.\582\ CAT LLC also stated that such a review
process would go beyond the requirements of Rule 613 and would be
unnecessary because changes to the funding model would be filed as a
plan amendment under Rule 608 of Regulation NMS and CAT fees for
Industry Members would be filed pursuant to Section 19(b) of the
Exchange Act, and both processes would permit the public to comment on
such proposals.\583\ CAT LLC further stated that providing a third-
party that does not have regulatory obligations control over the annual
budget could ``impermissibly restrict the Participants from discharging
their regulatory obligations'' and undermine the Commission's ability
to oversee the securities markets.\584\ CAT LLC also responded to the
commenter that urged the Commission to annually approve the CAT budget
\585\ by stating that such an approval process would not be necessary
or appropriate as CAT LLC is a private entity subject to the
requirements of the Exchange Act, not a governmental entity, and CAT
fees would be filed with the Commission under Rule 608 of Regulation
NMS and Section 19(b) of the Exchange Act and subject to the
Commission's review for consistency with the Exchange Act.\586\

Furthermore, CAT LLC stated that the Commission can request budget and
financial information from CAT LLC if necessary for the evaluation of
CAT fee filings.\587\
---------------------------------------------------------------------------

    \580\ See Citadel July Letter at 33; FIA Letter at 5; MMI July
Letter at 2; SIFMA June 2023 Letter at 2; id. at n.10; Virtu Letter
at 4.
    \581\ See CAT LLC July 2023 Response Letter at 19.
    \582\ Id. at 20.
    \583\ Id. at 19-20.
    \584\ Id. at 20.
    \585\ See Citadel July Letter at 33.
    \586\ See CAT LLC July 2023 Response Letter at 20-21.
    \587\ Id. at 21.
---------------------------------------------------------------------------

    In response to the commenter that asked whether the Participants
would have an incentive to manage costs because they proposed to
allocate most costs to Industry Members,\588\ CAT LLC stated that it
``strongly disagrees with the suggestion that the Participants would
not be incentivized to control CAT costs if they are only responsible
for one-third of the CAT costs going forward.'' \589\ CAT LLC stated
that the Participants have been focused on cost management when paying
100% of CAT costs and will continue this focus since they will be
paying one-third of CAT costs, a ``significant incentive to keep costs
at an appropriate level.'' \590\
---------------------------------------------------------------------------

    \588\ See FIA Letter at 4-5.
    \589\ See CAT LLC July 2023 Response Letter at 26.
    \590\ Id.
---------------------------------------------------------------------------

    In response to comments expressing concern about increasing CAT
operating costs,\591\ CAT LLC described its commitment to cost
management,\592\ stating that cost management is a top priority and
that it works to reduce costs in a number of ways, including through
the Cost Management Working Group comprised of senior members of the
Participants that works to find and address cost management needs.\593\
CAT LLC also noted that Rule 613 and the CAT NMS Plan ``impose
significant regulatory obligations on the Participants regarding how to
design, build and operate the CAT System'' and that the Commission
could compel the Participants to comply with Rule 613 or the CAT NMS
Plan through enforcement actions if CAT LLC and the Participants ever
fail to do so.\594\ CAT LLC stated that its largest cost driver is the
processing and storage of CAT data in the cloud, representing 75% of
all CAT costs.\595\ CAT LLC stated that CAT NMS Plan requirements ``do
not allow for any material flexibility in cloud architecture design
choices, processing timelines (e.g., the use of non-peak processing
windows), or lower-cost storage costs,'' limiting CAT LLC's cost
management efforts, and provided examples where CAT LLC and the Plan
Processor worked to optimize cloud cost savings despite regulatory
constraints.\596\ CAT LLC described other steps it has taken to save
costs, such as through requests to the Commission for exemptive relief
and litigation challenging the Commission's interpretation of specific
requirements of the CAT NMS Plan,\597\ as well as identification of
other changes that could substantially lower costs but would require
exemptive relief or the filing of a Plan amendment.\598\
---------------------------------------------------------------------------

    \591\ See Citadel July Letter at 7-9, MMI July Letter at 1, 4,
SIFMA June 2023 Letter at 4; Virtu Letter at 4.
    \592\ See CAT LLC July 2023 Response Letter at 22-25.
    \593\ Id. at 22.
    \594\ Id.
    \595\ Id.
    \596\ Id. at 23.
    \597\ Id. at 24.
    \598\ See CAT LLC July 2023 Response Letter at 25.
---------------------------------------------------------------------------

    In response to one commenter's recommendation that CAT LLC work
with the Commission to identify technical requirements that could be
modified to reduce costs without sacrificing the key benefits of the
CAT system,\599\ CAT LLC stated that both it and the Plan Processor
work to identify and raise with Commission staff potential fundamental
changes to the CAT NMS Plan that would limit costs without compromising
on regulatory goals, and provided examples of such changes.\600\
---------------------------------------------------------------------------

    \599\ See Citadel July Letter at 33.
    \600\ See CAT LLC July 2023 Response Letter at 25-26.
---------------------------------------------------------------------------

    The Commission acknowledges the comments expressing concern about
increases to the CAT operating budget, particularly why it is now five
times the amount estimated in the CAT NMS Plan Approval Order,\601\ and
the comments urging the need for a cost review mechanism,\602\ but
believes the Participants have reasonably explained why they chose not
to include an independent cost review mechanism for budgeted CAT costs
for the reasons stated above and in the Notice. Given the transparency
of the budget and Rule 19b-4 process, the one-third allocation of costs
to Participants, which provides them with at least some incentive to
control costs, and the pre-existing requirement for an independent
audit of all fees, costs and expenses incurred by the Participants
prior to filing this amendment,\603\ it is reasonable not to have an
additional independent cost-review mechanism for the reasons set forth
above. The Commission believes that the incentive to control costs
still exists even if the Participants pass-through to Industry Members
some or most of the costs of the CAT. This is because, in order to
pass-through CAT costs, the Participants would have to submit rule
filings under the Section 19(b) fee filing process. To the extent the
Participants fail to control costs, their ability to demonstrate that a
proposed fee is reasonable and consistent with the Exchange Act may be
compromised. While the above obligations and controls are sufficient,
other cost discipline mechanisms proposed by CAT LLC would provide
beneficial cost transparency, which would help keep fees and costs
reasonable.\604\ For example, (1) Section 9.2(a) of the CAT NMS Plan
requires CAT LLC to make public an audited balance sheet, income
statement, statement of cash flows and statement of changes in equity,
and requires the Operating Committee to maintain a system of accounting
established and administered in accordance with GAAP and to prepare
financial statements or information supplied to the Participants in
accordance with GAAP; \605\ (2) CAT LLC publicly provides the annual
operating budget and updates to the budget on the CAT NMS Plan website
and also has held webinars about CAT costs and alternative funding
models; (3) involvement by CAT LLC and FINRA CAT in efforts to reduce
CAT costs through CAT working groups and review of options to lower
costly needs and obtain services in a cost-effective manner; and (4)
Commission oversight of CAT funding through attendance at Operating
Committee, Subcommittee and working group meetings and review of the
Proposed Amendment and any associated CAT fees.\606\ Additionally, the
specification of the items required to be included in the operating
budget is

appropriate in that it will help the Commission, Industry Members and
others evaluate CAT costs for purposes of commenting on CAT fees when
they are proposed under Section 19(b) of the Exchange Act.\607\ This
additional detail should provide sufficient information about the
budget for the Commission to determine whether such proposed fees are
reasonable, and obviate the need for a separate Commission approval of
the CAT budget, as suggested by commenters.\608\ Additionally, the
Commission understands that technology costs account for more than 90%
of the CAT budget \609\ and thus believes that it is appropriate for
the CAT NMS Plan to require the Participants to separate such costs
into costs for cloud hosting services, operating fees, CAIS operating
fees, change request fees and capitalized developed technology
costs.\610\
---------------------------------------------------------------------------

    \601\ See, e.g., Citadel August Letter at 8; Citadel July Letter
at 2, 5. The Commission acknowledges a commenter's suggestion that
the Commission perform its own analysis of the budget increases.
Under the Proposed Amendment, the Participants must submit Rule 19b-
4 filings that include a discussion of the budget that was used to
calculate the Fee Rate. At such time the Commission, Industry
Members and the public will have an opportunity analyze the budget.
This Order, which approves the Funding Model, does not weigh-in on
the budgets or the resulting Fee Rates.
    \602\ See SIFMA May 2023 Letter at 3, 8-10; Citadel July Letter
at 8, 26, 27; FIF and SIFMA Letter at 2, 5-9; SIFMA AMG Letter at 3.
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; Virtu Letter at 4;
MMI July Letter at 3-4; FIA Letter at 3, 5.
    \603\ See CAT NMS Plan, supra note 2 at Section 6.2(a)(v)(B).
    \604\ See Notice, supra note 7, 88 FR at 17117.
    \605\ See CAT NMS Plan, supra note 2, at Section 9.2(a). Section
9.2(a) states that unaudited statements shall be subject to year-end
adjustments and may not include footnotes.
    \606\ See Notice, supra note 7, 88 FR at 17117. CAT LLC also
lists the following as cost-control mechanisms: (1) CAT LLC must
operate on a break-even basis, in which fees would be used to
recover costs and a reserve, and a surplus would be treated as an
operational reserve to offset future fees (see CAT NMS Plan, supra
note 2, at Section 11.1(c)); (2) CAT LLC qualifies as a Section
501(c)(6) business league, which means it is not organized for
profit and no part of its net earnings can inure to the benefit of
any private shareholder or individual (26 U.S.C. 501(c)(6)).
    \607\ 15 U.S.C. 78s(b).
    \608\ See proposed Section 11.1(a)(i); proposed Section
11.3(a)(iii)(B) (requiring the information to be provided in the
Industry Member CAT Fee filings submitted by the Participants to be
of sufficient detail to demonstrate that the budget for the upcoming
year, or part of year as applicable, is reasonable and appropriate).
    \609\ See Notice, supra note 7, 88 FR at 17090.
    \610\ Id. at 17117.
---------------------------------------------------------------------------

    One commenter requested further information to be provided on
technology costs.\611\ The Participants would be required to describe
each line item (including such technology costs) in the fee filings for
Industry Member CAT Fees and the Historical CAT Assessment, including
the reasons for changes in each line item from the prior CAT fee
filing, and that this information would be provided with sufficient
detail to demonstrate the budget or Historical CAT Costs (as
applicable) is reasonable and appropriate.\612\ Because the
Participants are also assessed CAT fees, they have at least some
incentive similar to that of the Industry Members to keep costs down.
As discussed above, the Commission believes that this incentive still
exists even if the Participants pass-through to Industry Members some
or most of the costs of the CAT, because any effort to pass on costs
would require Participants to submit filings under the Section 19(b)(2)
rule filing process. Moreover, to the extent the Industry Members have
concerns about the amounts allocated for each category in a particular
budget, those concerns can be raised when the fee filings are submitted
for Prospective CAT fees. The Section 19(b)(2) rule filing process
provides an opportunity for public comments and will allow commenters
to raise concerns if they believe fees, including CAT Fees, are not
reasonable and equitably allocated, would result in unfair
discrimination, or would impose any burden on competition that is not
necessary or appropriate in furtherance of the purposes of the Exchange
Act. While a commenter stated that the Commission is a conflicted party
due to its use of the CAT and its responsibility to review CAT fee
filings,\613\ the Commission is not a party to the Plan.\614\ Moreover,
as regulator of the Participants, the Commission oversees and enforces
compliance with the Plan, as well as consistency of any fees with
statutory and regulatory standards.\615\
---------------------------------------------------------------------------

    \611\ See supra note 522.
    \612\ See proposed Section 11.3(a)(iii)(B); proposed Section
11.3(b)(iii)(B)(II).
    \613\ See SIFMA May 2023 Letter at 9-10.
    \614\ See 17 CFR 242.608(a)(1) (stating that NMS plans are filed
by two or more SROs).
    \615\ See 17 CFR 242.608(b)(2), (c), (d); 17 CFR 242.613(h).
---------------------------------------------------------------------------

    Additionally, one commenter recommended the inclusion of the
Commission's line item costs associated with its usage and design of
the CAT in the budget.\616\ In response,\617\ 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.\618\ The Commission agrees
that it would be impractical to add a Commission-specific line item in
the budget, in part because it would be difficult to separate costs
associated with Commission use of the CAT system from costs associated
with Participant use of the CAT system.\619\ Moreover, the
implementation of the CAT--while mandated by the Commission through
Rule 613--has been managed by the Participants and the Plan Processor;
the Commission does not believe that any changes to its design have
been made that are inconsistent with the CAT NMS Plan as approved in
2016, such that the inclusion of a line item in the budget attributing
certain design costs to the Commission would be inaccurate and
misleading.\620\
---------------------------------------------------------------------------

    \616\ See SIFMA May 2023 Letter at 10. CAT LLC May 2023 Response
Letter at 11.
    \617\ See SIFMA May 2023 Letter at 10.
    \618\ See CAT LLC May 2023 Response Letter at 11.
    \619\ All Participants are required to use the CAT in their
surveillance programs. See CAT NMS Plan, supra note 2, at Section
6.10.
    \620\ For further discussion, see infra Section III.A.9.c.-d.
---------------------------------------------------------------------------

    The Commission acknowledges the enhancements a commenter suggested
to reduce CAT operating costs by modifying the technical specifications
(e.g., by moving certain timelines to T+2 from T+1) and streamlining
the reporting submission process (e.g., implementing further data
validation),\621\ but such suggestions are better addressed in the
context of a separate plan amendment. The commenter also suggested that
the CAT Operating Committee and the Commission stop making any changes
to the CAT and noted that there are several changes that are currently