Exchange Act. The Commission also understands that some broker-dealer
operators offer their NMS Stock ATSs along with other execution and
routing services. We believe that requests on Form ATS-N are
appropriately designed, and provide narrative flexibility, to elicit
information about the varying NMS Stock ATS models, including those of
multi-service broker-dealers.\184\
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    \184\ See, e.g., infra Section V.D.11 (describing Part III, Item
11 of Form ATS-N, which asks NMS Stock ATSs to provide a summary of
their marketplaces and the means and facilities for bringing
together the orders of multiple buyers and sellers on the NMS Stock
ATS).
---------------------------------------------------------------------------

c. Comments on Effectiveness Requirement
    We proposed that to qualify for the exemption from the definition
of ``exchange,'' an NMS Stock ATS's Form ATS-N must be declared
effective by the Commission; as adopted, a Form ATS-N must be effective
for the ATS to qualify for the exemption.\185\ Several commenters
express their support for requiring that Form ATS-N be subject to
Commission review,\186\ and some commenters support the proposed
requirement that Form ATS-N be declared effective by the
Commission,\187\ while other commenters raise concerns about requiring
that Form ATS-N be declared effective by the Commission.\188\ One
commenter states that the proposed effective/ineffective process is
``unnecessary'' and ``will have a chilling effect'' on, or stifle
innovation of, ATS operations.\189\ Another commenter similarly
questions the need for the Commission to make a determination of
effectiveness for Form ATS-N, and expresses concern that such a process
would increase the regulatory risk for new NMS Stock ATSs and stifle
innovation in the ATS marketplace by delaying the effectiveness of NMS
Stock ATSs whose features, while meeting regulatory requirements, do
not meet industry norms.\190\
---------------------------------------------------------------------------

    \185\ See infra Section IV.A.1. As adopted, the Commission will
not declare initial Form ATS-N filings effective under Rule 304.
    \186\ See Citadel Letter at 3; HMA Letter at 7-8; and Investor
Advocate Letter at 11-12.
    \187\ See MFA/AIMA Letter at 4; CFA Institute Letter at 4; and
PDQ Letter at 2. Two commenters do not object to the effectiveness
process. See Liquidnet Letter at 3 and STANY Letter at 2.
    \188\ See Luminex Letter at 1; Fidelity Letter at 8-9.
    \189\ See Luminex Letter at 1.
    \190\ See Fidelity Letter at 8-9.
---------------------------------------------------------------------------

    We do not believe that requiring Form ATS-N to become effective
after Commission review is ``unnecessary;'' \191\ rather, the review
process will facilitate the Commission's oversight of NMS Stock ATSs
and help ensure that information required by the form is disclosed in a
complete and comprehensible manner. We have modified the proposed
effectiveness process for initial Form ATS-N so that the Commission
will not declare initial Form ATS-N effective; instead, initial Form
ATS-N, as amended, will become effective, unless declared ineffective,
upon the earlier of: (1) The completion of review by the Commission and
publication pursuant to Rule 304(b)(2), or (2) the expiration of the
Commission review period, or, if applicable, the extended review
period.\192\ Form ATS-N will nevertheless be subject to Commission
review, and, as proposed, the Commission may declare a Form ATS-N
ineffective if it finds, after notice and opportunity for hearing, that
such action is necessary or appropriate in the public interest, and is
consistent with the protection of investors.\193\ We believe that
requiring Form ATS-N to be effective, which would occur only after
being subject to Commission review, could incentivize NMS Stock ATSs to
make more detailed and informative disclosures than under current Form
ATS. While requiring Form ATS-N to be effective may have some impact on
innovation,\194\ our review of Form ATS-N is designed to mitigate any
effect on innovation, and accordingly would focus on, for example, the
completeness and comprehensibility of the Form ATS-N disclosures and
not include a review of the merits of the disclosures or whether such
trading functionalities meet industry norms.\195\ We do not believe
that requiring Form ATS-N to be effective will unduly increase the
``regulatory risk'' of launching a new NMS Stock ATS as one commenter
suggests.\196\ We understand that the Commission review process will
generate some uncertainty for NMS Stock ATSs as a Form ATS-N could be
declared ineffective, which is not currently the case with respect to
Form ATS.\197\ The Commission review process, however, will not be
merit based, and determinations of ineffectiveness will require the
Commission to make certain findings after notice to the NMS Stock ATS
and opportunity for hearing.\198\ In addition, the rule provides that
if the Commission does not declare the Form ineffective before the end
of a fixed time period, the Form ATS-N will become effective. We
believe that these factors will provide NMS Stock ATSs with greater
regulatory certainty regarding the effectiveness process.
---------------------------------------------------------------------------

    \191\ See supra note 189 and accompanying text.
    \192\ See infra Sections IV.A.3.c and IV.A.4.a.
    \193\ See id.
    \194\ See infra Section X.C.
    \195\ See supra note 190 and accompanying text. See also infra
Section IV.A.3.d.
    \196\ See supra note 190 and accompanying text.
    \197\ See infra Section X.C.4.
    \198\ See infra Section IV.A.3.
---------------------------------------------------------------------------

2. Comments on Extending Rule 304 to Non-NMS Stock ATSs
    Rule 304 of Regulation ATS, as proposed and adopted, would apply
only to NMS Stock ATSs, as defined in Rule 300(k) of Regulation ATS. We
are concerned that, given the significance of NMS Stock ATSs in equity
market structure and their operational complexities, the lack of
transparency around NMS Stock ATSs operations could inhibit market
participants' ability to evaluate NMS Stock ATSs as potential routing
destinations for their orders in NMS stocks. As discussed in the
Proposal, we did not propose to apply Rule 304 to non-NMS Stock ATSs,
which would include ATSs that trade corporate or municipal fixed income
securities (``Fixed Income ATSs''), U.S. Government securities
(``Government Securities ATSs''),\199\ or OTC Equity securities (``OTC
Equity Securities ATSs'').\200\ We sought comment on whether Rule 304,
in whole or in part, should apply to Fixed Income ATSs, Government
Securities ATSs, and OTC Equity Securities ATSs.\201\ We also did not
propose to apply Rule 304 to any other type of trading center besides
NMS Stock ATSs,\202\ such as non-ATS OTC trading centers \203\ or
national securities exchanges.
---------------------------------------------------------------------------

    \199\ The term ``U.S. Government securities'' is defined under
Section 3(a)(42) of the Exchange Act. See 15 U.S.C. 78c(a)(42)
(defining ``government securities'' as, among other things,
``securities which are direct obligations of, or obligations
guaranteed as to principal or interest by, the United States'').
    \200\ For purposes of this discussion, we are using the term
``OTC Equity Security'' as it is defined in FINRA's 6400 rule series
for quoting and trading in OTC Equity Securities. FINRA defines OTC
Equity Security as ``any equity security that is not an `NMS stock'
as that term is defined in Rule 600(b)(47) of SEC Regulation NMS;
provided, however, that the term `OTC Equity Security' shall not
include any Restricted Equity Security,'' which FINRA defines as
``any equity security that meets the definition of `restricted
security' as contained in Securities Act Rule 144(a)(3).'' See FINRA
Rules 6420(f), (k).
    \201\ See Proposal, supra note 1, at 81018.
    \202\ See Proposal, supra note 2. See also infra note 668 and
accompanying text (discussing the term ``trading center'').
    \203\ For purposes of this discussion, references to non-ATS OTC
trading centers, as used herein, encompass all executions that occur
off a national securities exchange and outside an ATS, including
when a broker-dealer is acting as an OTC market maker, block
positioner (i.e., any broker-dealer in the business of executing, as
principal or agent, block size trades for its customers), or
operation of an internal broker-dealer system. See 17 CFR
242.600(b)(52) (defining ``OTC market maker'' as any dealer that
holds itself out as being willing to buy and sell to its customers,
or others, in the United States, an NMS stock for its own account on
a regular or continuous basis otherwise than on a national
securities exchange in amounts of less than block size); 17 CFR
242.600(b)(9) (defining ``block size'' as an order of at least
10,000 shares or for a quantity of stock having a market value of at
least $200,000); and 17 CFR 240.17a-3(a)(16)(ii)(A) (defining
``internal broker-dealer system'' as any facility, other than a
national securities exchange, an exchange exempt from registration
based on limited volume, or an alternative trading system as defined
in Regulation ATS that provides a mechanism, automated in full or in
part, for collecting, receiving, disseminating, or displaying system
orders and facilitating agreement to the basic terms of a purchase
or sale of a security between a customer and the sponsor, or between
two customers of the sponsor, through use of the internal broker-
dealer system or through the broker or dealer sponsor of such
system). See also 2010 Equity Market Structure Release, supra note
13, at 3599-3600.

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

    We received several comments generally supporting operational
transparency and about whether or not to apply Rule 304 to non-NMS
Stock ATSs.\204\ Of the commenters generally supporting enhanced
operational transparency, several encourage the Commission to make the
current Form ATS public for all ATSs.\205\ Some commenters urge the
Commission to amend Regulation ATS to apply Rule 304 to all ATSs.\206\
Two commenters explicitly support applying the Proposal solely to NMS
Stock ATSs.\207\
---------------------------------------------------------------------------

    \204\ See Better Markets Letter at 3, 8; CFA Institute Letter;
Citadel Letter; Consumer Federation of America Letter at 6-7;
Fidelity Letter at 6-7; HMA Letter at 5-6, 10, 12; ICI Letter at 11;
Investor Advocate Letter at 2, 12-15; KCG Letter at 12-13; Liquidnet
Letter at 3; Luminex Letter at 2, 4; MarketAxess Letter; Markit
Letter at 2, 4, 9; MFA/AIMA Letter 2-4; MFA Letter 2 at 30; Morgan
Stanley Letter at 5-6; PDQ Letter at 2; SIFMA Letter at 3, 5; STANY
Letter at 5; T. Rowe Price Letter at 2; Virtu Letter at 2.
    \205\ See Fidelity Letter at 7; ICI Letter at 11; Luminex Letter
at 2; Morgan Stanley Letter 2, 5; Investor Advocate Letter at 2-3;
PDQ Letter at 2; STANY Letter at 3; SIFMA Letter at 3-4.
    \206\ See Better Markets Letter at 3, 8; CFA Institute Letter at
3-4; Consumer Federation of America Letter at 6-7; HMA Letter 5-6,
10, 12.
    \207\ See ICI Letter at 11; Liquidnet Letter at 3.
---------------------------------------------------------------------------

    Several commenters specifically argue for extending Rule 304,
including Form ATS-N, to Fixed Income ATSs.\208\ Several commenters,
however, recommend against extending the Proposal requirements for NMS
Stock ATSs to Fixed Income ATSs.\209\ Several commenters suggest that
the Commission require Fixed Income ATSs to make their Forms ATS
public.\210\
---------------------------------------------------------------------------

    \208\ See Consumer Federation of America Letter at 6; Better
Markets Letter at 8; CFA Institute Letter at 3-4; HMA Letter at 10;
MFA/AIMA Letter at 2-3.
    \209\ See Fidelity Letter at 6-7; KCG Letter at 12-13; Liquidnet
Letter at 3; MarketAxess Letter at 3-4 ; Markit Letter at 9; SIFMA
Letter at 3.
    \210\ See Fidelity Letter at 6; SIFMA Letter at 34-35; Markit
Letter at 9; Investor Advocate Letter at 12-16; ICI Letter at 11.
See also Luminex Letter at 4.
---------------------------------------------------------------------------

    We also received several comments that specifically address
enhancing operational transparency for, or extending Rule 304 to,
Government Securities ATSs.\211\ Several commenters support applying
Rule 304 requirements to Government Securities ATSs,\212\ while several
state that Regulation ATS should be amended to include electronic
platforms for U.S. Government securities.\213\ Other commenters believe
that the Commission should gather additional information on fixed
income markets, which include U.S. Government securities markets, and
as an interim step, make the Form ATS filings for these ATSs
public.\214\ We also received comments that specifically oppose
applying the Proposal requirements to Government Securities ATSs,\215\
or more generally oppose expanding Rule 304 to non-NMS Stock ATSs.\216\
---------------------------------------------------------------------------

    \211\ See Better Markets Letter at 8; CFA Institute Letter at 3-
4; Citadel Letter at 4-5; Investor Advocate Letter at 16-17; KCG
Letter; Liquidnet Letter at 3; MFA/AIMA Letter at 2-7; SIFMA Letter
at 3, 5, 35-36; Virtu Letter at 2.
    \212\ Some commenters specifically support operational
transparency and enhanced monitoring of trading activity for
Government Securities ATSs. See Virtu Letter at 2; Better Markets
Letter at 8; CFA Institute Letter at 3-4; Citadel Letter at 4-5;
MFA/AIMA Letter at 2-7. See also Liquidnet Letter at 3 (stating that
it does ``not object'' to the requirements of Regulation ATS
applying to systems that cross trades in U.S. Government
securities).
    \213\ See Citadel Letter at 4-5; Liquidnet Letter at 3; Investor
Advocate Letter at 16-19; Virtu Letter at 2. One commenter combined
its support for transparency of ATSs that trade U.S. Government
securities and Fixed Income ATSs. See MFA/AIMA Letter at 3-4
    \214\ See SIFMA Letter at 34-35; Markit Letter at 9; Investor
Advocate Letter, at 14. See also Fidelity Letter at 6.
    \215\ See KCG Letter at 13; SIFMA Letter at 3, 5, 36.
    \216\ See supra note 209 accompanying text.
---------------------------------------------------------------------------

    We also received comments regarding enhancing operational
transparency for other non-ATS OTC trading centers--namely broker-
dealers that internalize order flow.\217\ In general, these commenters
point out the discrepancy in disclosure obligations that would result
from the Proposal, or the possibility that broker-dealers would route
order flow to non-ATS trading centers as a result.\218\
---------------------------------------------------------------------------

    \217\ See ICI Letter at 12; Morgan Stanley Letter at 2-3.
    \218\ See id. See also Fidelity Letter at 11-12. Another
commenter recommends that the Commission be required to conduct a
review within a designated time-period to assess the effectiveness
of the new rules and determine if any refinements should be
proposed. See T. Rowe Price Letter at 3. In addition, one commenter
suggests that regulators periodically monitor the development of the
market and technological developments, and take appropriate action
as needed. See Barnard Letter at 3. In addition to the Commission's
ongoing oversight responsibilities under the Exchange Act, Rule 304
provides a process for the Commission to review disclosures filed on
Form ATS-N, either through an initial Form ATS-N, Form ATS-N
amendment, or cessation of operations.
---------------------------------------------------------------------------

    Given the range of commenter views on these questions and our
belief that it is appropriate to take an incremental approach by first
applying the amended regime to NMS Stock ATSs before considering a
further step, we are not amending Rule 3a1-1(a) and Regulation ATS for
non-NMS Stock ATSs. We intend to monitor the implementation and
effectiveness of Rule 304 to NMS Stock ATSs, and should we decide to
take further action with respect to non-NMS Stock ATSs, we would do so
in a separate rulemaking and take into account our experience with Rule
304 and NMS Stock ATSs.
    The Commission notes that the Fixed Income Market Structure
Advisory Committee (``FIMSAC'') was formed in 2017 pursuant to the
Commission's authority under the Federal Advisory Committee Act to
provide the Commission with diverse perspectives on the structure and
operations of the U.S. fixed income markets, as well as advice and
recommendations on matters related to fixed income market
structure.\219\ The FIMSAC recently issued recommendations for the
Commission to review the framework for the oversight of electronic
trading platforms for municipal securities and corporate bonds.
Specifically, the FIMSAC recommended that the Commission form, together
with FINRA and the MSRB, a joint working group to review the regulatory
framework for oversight of electronic trading platforms used in the
municipal securities and corporate bond markets.\220\ In light of
recent recommendations of the FIMSAC, and comments received, we will
review the regulatory framework for fixed income electronic trading
platforms, including to consider whether we should propose amendments
to Regulation ATS (and any other applicable rules) to account for
operational and regulatory differences among electronic trading

platforms for municipal securities and corporate bonds.
---------------------------------------------------------------------------

    \219\ See 5 U.S.C.--App; Securities Exchange Act Release No.
81958 (October 26, 2017), 82 FR 50460 (October 31, 2017) (Notice of
Federal Advisory Committee Establishment).
    \220\ See Recommendation for the SEC to Review the Framework for
the Oversight of Electronic Trading Platforms for Corporate and
Municipal Bonds (July 16, 2018) available on the Commission's
website at https://www.sec.gov/spotlight/fixed-income-advisory-committee/fimsac-electronic-trading-platforms-recommendation.pdf.
---------------------------------------------------------------------------

B. Amendments to Existing Regulation ATS Rules for NMS Stock ATSs

    To operate pursuant to the Exchange Act Rule 3a1-1a(2) exemption,
NMS Stock ATSs will be required to comply with new Rule 304, in
addition to the applicable existing Rules 300 through 303 of Regulation
ATS. In light of the new requirements of Rule 304, we are adopting,
with modifications discussed below, amendments to several existing
rules of Regulation ATS.
1. Rule 300(k): Definition of NMS Stock ATS
    Proposed Rule 300(k) of Regulation ATS defined ``NMS Stock ATS'' in
new paragraph (k) as ``an alternative trading system, as defined in
Sec.  242.300(a), that facilitates transactions in NMS stocks, as
defined in Sec.  242.300(g).'' We received no comments on the proposed
definition of NMS Stock ATS and are adopting Rule 300(k) with
modifications. We are replacing ``facilitates transactions in'' with
``trades.'' The term ``trades'' is well understood in the context
Regulation ATS \221\ and the term ``facilitates'' is not used in the
definition of an ATS. This change is non-substantive and will clarify
the rule text.\222\ Accordingly, Rule 300(k), as adopted, defines an
``NMS Stock ATS'' as ``an alternative trading system, as defined in
paragraph (a) of [Rule 300], that trades NMS stocks, as defined in
paragraph (g) of [Rule 300].''
---------------------------------------------------------------------------

    \221\ We believe that the concept of NMS Stock ATSs ``trading''
or ``transacting'' in NMS stocks, should be familiar to existing NMS
Stock ATSs as Form ATS requires disclosure regarding, among other
things ``the types of securities the [ATS] trades'' and ``the name
of any entity, other than the [ATS] that will be involved in the
operation of the [ATS], including the execution, trading, clearing,
and settling of transactions on behalf of the [ATS].'' See Form ATS.
Additionally, Form ATS requires disclosure regarding ``[t]he
procedures governing execution, reporting, clearance and settlement
of transactions effected through the [ATS]''; and Form ATS-R
requires NMS Stock ATSs to ``[p]rovide the total unit and dollar
volume of transactions'' in specified securities categories. See
Form ATS and Form ATS-R.
    \222\ As proposed, an NMS Stock ATS would include any ATS that
effects transactions in securities that are listed on a national
securities exchange (other than options, debt or convertible debt).
See Proposal, supra note 2, at 81015-81016.
---------------------------------------------------------------------------

2. Rule 301(a): Exemption From Compliance With Regulation ATS
    We made explicit in proposed Rule 304(a) that NMS Stock ATSs must
comply with Rules 300 through 304, unless not required to comply with
Regulation ATS pursuant to Rule 301(a). Pursuant to Rule 301(a),
certain ATSs that are subject to other appropriate regulations are not
required to comply with Regulation ATS.\223\ To the extent that an NMS
Stock ATS meets the criteria of the Rule 301(a) exemption, such ATS
would not be required to comply with Rules 300 through 304 of
Regulation ATS. We received no comments on the application of Rule
301(a) to NMS Stock ATSs and are adopting as proposed this language in
Rule 304(a) to make clear that Rules 300 through 303 of Regulation ATS,
including Rule 301(a) continue to apply to NMS Stock ATSs, unless
otherwise provided by Rule 301(a).
---------------------------------------------------------------------------

    \223\ ATSs that are not subject to Rule 301(a) include those
that are: Registered as an exchange under Section 6 of the Exchange
Act; exempt from national securities exchange registration based on
limited volume; operated by a national securities association;
registered as a broker-dealer, under Sections 15(b) or 15C of the
Exchange Act, or that are banks, and that limit their securities
activities to certain instruments; or exempted, conditionally or
unconditionally, by Commission order, after application by such ATS
from one or more of the requirements of Rule 301(b). See 17 CFR
242.301(a). See also Regulation ATS Adopting Release, supra note 3,
at 70859-63.
---------------------------------------------------------------------------

3. Rule 301(a)(5): Exemptions From Certain Requirements of Regulation
ATS Pursuant to Application to the Commission
    Rule 301(a)(5) of Regulation provides that an ATS shall comply with
the requirements of Rule 301(b) unless such ATS is exempted,
conditionally or unconditionally, by Commission order after application
by such ATS, from one or more of the requirements of Rule 301(b), and
that the Commission will grant such exemption only after determining
that such an order is consistent with the public interest, the
protection of investors, and the removal of impediments to, and
perfection of, a national market system.\224\
---------------------------------------------------------------------------

    \224\ See 17 CFR 242.301(a)(5).
---------------------------------------------------------------------------

    When adopting Rule 301(a)(5), we stated that while the requirements
of Regulation ATS are appropriate for all ATSs, a system may develop in
the future for which these requirements may not be appropriate. The
Commission expected to issue such an order only under unusual
circumstances, and only after making the applicable determination.\225\
The requirements of Rule 304 were not part of Regulation ATS at the
time the Commission adopted Rule 301(a)(5). We believe that, given the
amendments to Regulation ATS that will require NMS Stock ATSs to comply
with the filing requirements of Rule 304, including filing Form ATS-N,
instead of the Form ATS filing requirements of Rules 301(b)(2)(i)-
(vii), it may be appropriate under certain limited, unusual facts and
circumstances for the Commission to exempt an NMS Stock ATS,
conditionally or unconditionally, by Commission order, from one or more
requirements of Rule 304. As such, we are amending Rule 301(a)(5) to
include exemptions from the requirements of Rule 304.\226\
---------------------------------------------------------------------------

    \225\ Regulation ATS Adopting Release, supra note 3, at 70863.
    \226\ The Commission continues to also have general exemptive
authority pursuant to Section 36(a) of the Exchange Act to grant
both conditional and unconditional exemptions from any provisions or
provisions of the Exchange Act, or any rule or regulation thereunder
(including Rule 304 and any other provision of Rule 3a1-1 and
Regulation ATS), to the extent necessary or appropriate in the
public interest and consistent with the protection of investors. See
15 U.S.C. 78mm(a).
---------------------------------------------------------------------------

    In response to the Proposal, we received one comment regarding
possible use of the Commission Section 36 exemptive authority in
connection with the requirements of Rule 304.\227\ This commenter
states that instead of modifying the requirements under the Proposal in
such a way that could result in less relevant information being
provided to the Commission and to the public, certain concerns of other
commenters could be addressed through use of the Commission's Section
36 exemptive authority. Specifically, this commenter observes that an
NMS Stock ATS could seek relief tailored to its unique facts and
circumstances pursuant to Section 36(a)(1) of the Exchange Act, and
that Section 36(a)(1) permits the Commission to grant both conditional
and unconditional exemptions from any provisions of a rule, to the
extent necessary or appropriate in the public interest and consistent
with the protection of investors.\228\ This commenter also states that
using Section 36 exemptive authority would be consistent with the
manner in which the Commission generally treats requests it receives
from regulated entities, and encourages the Commission to consider
providing guidance as to what factors it might consider when evaluating
a request for specific exemptive relief.\229\ We believe that
amendments made to Rule 301(a)(5) make clear that the Commission could

exempt an NMS Stock ATS, conditionally or unconditionally, by order,
after application by the ATS from one or more of the requirements of
Rule 304 of Regulation ATS provided that the Commission determines that
such an exemption is consistent with the public interest, the
protection of investors, and removal of impediments to, and perfection
of the mechanisms of, a national market system.
---------------------------------------------------------------------------

    \227\ See Investor Advocate Letter at 8.
    \228\ See id. See also infra notes 723-725 and accompanying text
(discussing this comment in the specific context of disclosures
regarding affiliates of the broker-dealer operator).
    \229\ See Investor Advocate Letter at 9. For example, in the
context of any exemptions from the requirements applicable to
disclosures regarding affiliates of the broker-dealer operator of an
NMS Stock ATS, the commenter encouraged the Commission to consider
providing guidance as to what facts and circumstances it might
consider when evaluating a broker-dealer operator's request for
exemptive relief. See id. See also infra notes 723-725 and
accompanying text.
---------------------------------------------------------------------------

    We also received other comments regarding specific exceptions from
the proposed requirements of Rule 304. Specifically, three commenters
suggest providing an exception to the 30-calendar day advance notice
requirement for material changes in case of exigent circumstances.\230\
One commenter states that unless the Commission narrows the materiality
standard for material amendments, the 30-calendar day advance notice
requirement could affect an ATS operator's ability to take ``decisive
action.'' \231\ This commenter further believes that NMS Stock ATS
operators often must take decisive action without time for a lengthy
review and approval process, given that the speed of response to
technical or operational issues (including cybersecurity) often is
measured in seconds. This commenter believes there should be a carve-
out for exigent circumstances when an NMS Stock ATS must act
swiftly.\232\ Another commenter states that there could be situations
in which it would be difficult for an NMS Stock ATS to meet the 30-
calendar day advance notice requirement based on ongoing business
changes, and that the Commission should clarify that certain Form ATS-N
disclosures may be subject to immediate change without notice.\233\
Another commenter states that the Commission should allow for more
rapid action (than the 30-day advance notice requirement) in the event
of an ``external emergency,'' such as an extreme market event, but that
such circumstances should be rare and only granted upon express
approval of the Commission, upon a finding that such action is
necessary to protect investors and promote fair and efficient
markets.\234\
---------------------------------------------------------------------------

    \230\ See HMA Letter at 10; SIFMA Letter at 31; KCG Letter at
10.
    \231\ See SIFMA Letter at 31.
    \232\ See id.
    \233\ See KCG Letter at 10. The commenter states that, for
example, if a broker-dealer operator provides a disclosure that it
routes orders to the ATS from its algorithmic business, and the data
center from which the algorithmic business operates subsequently
experiences systems issues that force it to stop routing orders to
the ATS, the disclosure would no longer be accurate and the broker-
dealer operator would not be in position to provide 30-calendar day
advance notice of the change.
    \234\ See HMA Letter at 10.
---------------------------------------------------------------------------

    We believe that there may be unusual circumstances under which an
NMS Stock ATS may need to seek an exemption from the requirements of
Rule 304 or the disclosure requirements of Form ATS-N. For example,
under exceptionally rare occasions, an NMS Stock ATS may need to make a
material change to its operations on an expedited basis to prevent
substantial harm to market participants, such as in response to a
significant operational or market-wide event. The amendments to Rule
301(a)(5) are designed to address these concerns.\235\ Applications for
relief from a requirement of Rule 304 generally should explain why the
applicant believes the relief sought is consistent with the public
interest, the protection of investors, and the removal and impediments
to, and perfection of the mechanism of, a national market system.\236\
---------------------------------------------------------------------------

    \235\ As amended, Rule 301(a)(5) will apply to ATSs that have
received exemptive relief from one or more requirements of Rule 304.
See Rule 301(a)(5).
    \236\ Applications for exemptive relief from the 30-calendar day
advance notice requirement of Rule 304(a)(2)(i)(A) generally should,
for example, contain a description of the circumstances that
necessitate the implementation of the material change on an
expedited basis, and why, in the view of the NMS Stock ATS,
expedited implementation is necessary or appropriate in the public
interest, and consistent with the protection of investors, such as
why the expedited implementation is necessary to prevent substantial
harm to investors. The Commission will not consider hypothetical or
anonymous requests for exemptive relief.
---------------------------------------------------------------------------

    As noted by commenters, circumstances may necessitate the
implementation of a material change to the operations of an NMS Stock
ATS on an expedited basis. We believe that, based on particular facts
and circumstances, it may be appropriate to grant such an exemption
from the 30-day advance notice requirement of Rule 304(a)(2)(i)(A), for
example, in the event of extraordinary, unforeseen circumstances, and
if delaying implementation pursuant to the 30-calendar day advance
notice requirement would cause substantial harm to subscribers or other
markets trading NMS stocks. By comparison, to the extent that an NMS
Stock ATS may need to change its operations in response to an
operational problem, as suggested by one commenter, an NMS Stock ATS
could proactively develop and disclose in the relevant Form ATS-N Item
alternative procedures that the ATS would apply if the ATS experiences
a systems problem that causes it to be unable to perform a particular
function. For example, an NMS Stock ATS that routes orders and trading
interest resting in the ATS to destinations outside the ATS could
state, for example, that the NMS Stock ATS will either execute or
cancel orders and trading interest submitted to the ATS if the ATS is
unable to route orders and trading interest away from the ATS due to a
systems problem.
4. Rule 301(b)(2): Form ATS Reporting Requirements No Longer Apply to
NMS Stock ATSs
    We proposed in Rule 304 to except NMS Stock ATSs from complying
with Rule 301(b)(2) of Regulation ATS. Existing Rule 301(b)(2) requires
an ATS to file with the Commission a Form ATS initial operation report,
amendments to the Form ATS initial operation report, and cessation of
operations reports on Form ATS, all of which are ``deemed confidential
when filed.'' \237\ We proposed this exception to make clear that NMS
Stock ATSs would not be required to comply with the Form ATS reporting
requirements provided in Rule 301(b)(2) because the NMS Stock ATS would
file a Form ATS-N pursuant to Rule 304. We also proposed Rule
301(b)(2)(viii) to make clear that NMS Stock ATSs must file with the
Commission the reports and amendments required by Rule 304 and that NMS
Stock ATSs were not subject to Rule 301(b)(2) of Regulation ATS. We
also proposed that ATSs that effect transactions in both NMS stocks and
non-NMS stocks would be subject to the requirements of proposed Rule
304, with respect to NMS stocks, and Rule 301(b)(2), with respect to
non-NMS stocks.
---------------------------------------------------------------------------

    \237\ See Rule 301(b)(2)(vii).
---------------------------------------------------------------------------

    We received one comment regarding proposed Rule
301(b)(2)(viii).\238\ The commenter states that requiring an ATS that
transacts in both NMS stocks and non-NMS Stocks to file reports on Form
ATS-N with respect to NMS stocks but also file reports on Form ATS with
respect to non-NMS stocks could be unduly burdensome.\239\ The
commenter states that an ATS should have the option to file reports on
Form ATS-N

for all U.S. equities that it trades, whether listed or unlisted
because an ATS operator would otherwise have the burden of maintaining
two separate ATS filings for what the commenter believes is essentially
the same functionality.\240\
    We do not believe that requiring an ATS that trades both NMS stocks
and non-NMS stocks to file reports on Form ATS-N with respect to NMS
stocks, but also file reports on Form ATS with respect to non-NMS
stocks, will be unduly burdensome. We recognize the additional burdens
for NMS Stock ATSs resulting from the requirement to file disclosures
on new Form ATS-N; however, we estimate that the burden for these ATSs
to maintain their Forms ATS will decrease, because they will no longer
be required to disclose information about their NMS stock operations on
Form ATS.\241\ We also believe that allowing a broker-dealer operator
to choose to disclose information on Form ATS-N about trading in non-
NMS stocks, as suggested by the commenter,\242\ would likely result in
incomplete disclosures about the ATS's non-NMS stock operations that
may be confusing or not useful to market participants. Form ATS-N was
specifically designed to solicit information about trading in NMS
stocks on an ATS to allow market participants to understand the ATS's
NMS stock operations and readily compare the ATS against other ATSs and
national securities exchanges that trade NMS stocks.\243\ While many of
the requests on Form ATS-N could apply to Fixed Income ATSs or
Government Securities ATSs, the requests are not fully tailored to
solicit information about trading in those types of securities and the
systems that trade them. For example, transactions in NMS stocks are,
in some cases, subject to different federal securities laws and
Commission rules than transactions in other securities, such as fixed
income securities.\244\ Because Form ATS-N is specifically designed for
NMS Stock ATSs, subscribers relying on Form ATS-N disclosures to assess
a non-NMS Stock ATS, such as one that trades fixed income securities,
as a potential trading venue may not receive a complete or
comprehensible understanding of the ATS's fixed income operations, or
fixed income activities of the broker-dealer operator and its
affiliates as such activities relate to the ATS, because Form ATS-N
does not solicit such information. We believe that allowing NMS Stock
ATSs to choose whether to integrate information about trading in non-
NMS stocks on a Form ATS-N could make the disclosures confusing for
users and make it difficult for them to compare the operations of an
NMS Stock ATS against other NMS Stock ATSs.
---------------------------------------------------------------------------

    \238\ See Liquidnet Letter at 3. We received two comments
regarding the application of Rule 301(b)(2)(i) through (vii) to
Legacy NMS Stock ATSs that have filed a Form ATS-N that has not yet
become effective. See Liquidnet Letter at 3; BIDS Letter at 2-3. We
are adopting a transitional rule that will not require a Legacy NMS
Stock ATS to amend its Form ATS under Rule 301(b)(2) if it has filed
a Form ATS-N with the Commission that has not yet become effective.
We are instead requiring such Legacy NMS Stock ATS to file
amendments on Form ATS-N pursuant to the requirements of Rule
304(a)(2)(i)(A) through (C). Rule 304(a)(1)(v)(C) is discussed below
in greater detail. See infra Section IV.A.4.c.
    \239\ See Liquidnet Letter at 3.
    \240\ See id.
    \241\ An ATS that trades both NMS stocks and non-NMS stocks will
be required to amend its Form ATS, after the ATS files Form ATS-N,
by removing information that pertains solely to the ATS's NMS stock
operations. Amending Form ATS in this manner should help ensure that
the Form ATS accurately describes the ATS's non-NMS stock
operations.
    \242\ See Liquidnet Letter at 3.
    \243\ See supra Section III.A.
    \244\ For example, Rule 611 of Regulation NMS, which requires a
trading center to establish, maintain, and enforce written policies
and procedures that are reasonably designed to prevent trade-
throughs on that trading center, subject to certain exceptions,
applies only to protected quotations in NMS stocks, and not to non-
NMS stocks. See 17 CFR 242.611.
---------------------------------------------------------------------------

    Because we are adopting rules that require NMS Stock ATSs to file
Form ATS-N pursuant to Rule 304, we are adopting Rule 304(a) with
modifications to provide that an NMS Stock ATS would specifically be
excepted from compliance with Rules 301(b)(2)(i) through (vii) of
Regulation ATS, which govern the filing of Form ATS.\245\ An NMS Stock
ATS that is operating pursuant to an initial operation report on Form
ATS as of January 7, 2019 (``Legacy NMS Stock ATS'') will be required
to file a Form ATS-N no earlier than January 7, 2019 and no later than
February 8, 2019.\246\
---------------------------------------------------------------------------

    \245\ See supra Section III.A.
    \246\ See infra Section IV.A.4.
---------------------------------------------------------------------------

    We are also adopting Rule 301(b)(2)(viii) to provide for how Legacy
NMS Stock ATSs transition from filing a Form ATS to filing a Form ATS-
N. We are defining the term ``Legacy NMS Stock ATS'' to mean an NMS
Stock ATS that is operating pursuant to an initial operation report on
Form ATS as of January 7, 2019. We are also replacing proposed language
that stated that an NMS Stock ATS would not be subject to the
requirements of Rule 301(b)(2) with language stating that a Legacy NMS
Stock ATS shall be subject to the Form ATS filing requirements of Rule
301(b)(2)(i) through (vii) until the Legacy NMS Stock ATS files an
initial Form ATS-N with the Commission pursuant to Rule
304(a)(1)(iv)(A), and that thereafter, the Legacy NMS Stock ATS shall
file reports \247\ pursuant to Rule 304(a)(1)(iv)(A). We intended in
the Proposal to except a Legacy NMS Stock ATS from compliance with Rule
301(b)(2)(i) through (vii) after it filed Form ATS-N, but also intended
that a Legacy NMS Stock ATSs be subject to Rule 301(b)(2)(viii), which
requires NMS Stock ATSs to file reports required by Rule 304.\248\ We
believe that this modification will make clear that, until a Legacy NMS
Stock ATS files its Form ATS-N with the Commission, the Legacy NMS
Stock ATS must amend Form ATS in compliance with Rule 301(b)(2) of
Regulation ATS.
---------------------------------------------------------------------------

    \247\ To reduce redundancy, we are revising the proposed rule
text to state that the Legacy NMS Stock ATS must file ``reports''
(rather than ``the reports and amendments'') required by Rule 304.
Rule 304(b)(1) provides that every Form ATS-N, which will include
every amendment filed on Form ATS-N, shall constitute a ``report''
within the meaning of sections 11A, 17(a), 18(a), and 32(a) (15
U.S.C. 78k-1, 78q(a), 78r(a), and 78ff(a)), and any other applicable
provisions of the Exchange Act.
    \248\ See Proposal, supra note 2, at 81022-24, 81027-31. Without
this modification, Rule 301(b)(2)(viii) could be interpreted,
contrary to the Commission's intention, to except an NMS Stock ATS
from compliance with all of Rule 301(b)(2), including Rule
301(b)(2)(viii) itself.
---------------------------------------------------------------------------

    We are also including language in Rule 301(b)(2)(viii) stating that
as of January 7, 2019, an entity seeking to operate as an NMS Stock ATS
shall not be subject to the ATS filing requirements of Rule
301(b)(2)(i) through (vii) and shall file reports pursuant to Rule
304.\249\ Rule 301(b)(2)(viii) describes the reporting obligations of
Legacy NMS Stock ATSs, and we believe that this additional language
will make clear that NMS Stock ATSs must file an initial Form ATS-N,
and that they do not need to comply with Rule 301(b)(2)(i) through
(vii) and therefore should not file Form ATS.\250\
---------------------------------------------------------------------------

    \249\ EDGAR will be ready to accept Form ATS-N filings on
January 7, 2019, and we have conformed Rule 301(b)(2)(iii) to be
consistent with the EDGAR ability to accept Form ATS-N filings.
    \250\ See infra Section IV.A.1 (discussing the filing
requirements for new NMS Stock ATSs).
---------------------------------------------------------------------------

    We recognize that an entity may wish to start operating as an NMS
Stock ATS between the time the final rule is adopted and January 7,
2019. During that time, an entity must file an initial operation report
on Form ATS and comply with Rule 301(b)(2); after January 7, 2019, the
ATS, which would operate as a Legacy NMS Stock ATS, must file an
initial Form ATS-N between January 7, 2019 and February 8, 2019
pursuant to Rule 304(a)(1)(iv)(A).\251\ As of January 7, 2019, an
entity that seeks to operate as an NMS Stock ATS must comply with Rule
304 (and not with Rules 301(b)(2)(i) through (vii)) and file an initial
Form ATS-N with the Commission.
---------------------------------------------------------------------------

    \251\ See infra Section IV.A.4.a.
---------------------------------------------------------------------------

    We are adopting, with a non-substantive modification, the proposed
Rule 301(b)(2)(viii) requirement that an ATS that effects transactions
in both NMS stocks and non-NMS stocks be subject to the requirements of
new Rule 304 with respect to NMS stocks and

Rule 301(b)(2) with respect to non-NMS stocks. We are modifying the
requirement to replace ``effects transactions in'' with ``trades.'' As
adopted, Rule 301(b)(2)(viii) requires that an ATS that trades both NMS
stocks and non-NMS stocks be subject to the requirements of new Rule
304 with respect to NMS stocks and Rule 301(b)(2) with respect to non-
NMS stocks.\252\ By adopting Rule 304 and Form ATS-N, we believe it has
addressed concerns raised by NMS Stock ATSs, as discussed above and in
the Proposal, but that applying Rule 304 to the non-NMS Stock ATS
operations of ATSs that trade both NMS stocks and non-NMS stocks would
impose unequal regulatory burdens across ATSs that transact in non-NMS
stocks. Finally, we are adopting as proposed non-substantive amendments
to Rule 301(b)(2)(i) and Rule 301(b)(2)(vii) to delete outdated
references to dates for phased-in compliance with Regulation ATS for
ATSs that were operational as of April 21, 1999, and to update the name
of the Division of Trading and Markets, respectively.\253\
---------------------------------------------------------------------------

    \252\ This modification is being made for clarity and
consistency with the Rule 300(k) definition of NMS Stock ATS. See
supra Section III.B.1.
    \253\ See 17 CFR 242.301(b)(2)(i) and (vii), respectively.
---------------------------------------------------------------------------

5. Rule 301(b)(9): Form ATS-R Quarterly Reports
    We also proposed to amend Rule 301(b)(9) of Regulation ATS,\254\
which provides that an ATS shall report transaction volume on Form ATS-
R on a quarterly basis and within 10 calendar days after it ceases
operation,\255\ to require an ATS that trades both NMS stocks and non-
NMS stocks to separately report its transactions in NMS stocks on one
Form ATS-R, and its transactions in non-NMS stocks on another Form ATS-
R.\256\
---------------------------------------------------------------------------

    \254\ See 17 CFR 242.301(b)(9).
    \255\ See Regulation ATS Adopting Release, supra note 3, at
70878. The information filed on Form ATS-R permits the Commission to
monitor trading on an ATS.
    \256\ We did not propose any other changes to Rule 301(b)(9).
Form ATS-R would continue to be deemed confidential.
---------------------------------------------------------------------------

    We received two comments regarding Form ATS-R. One commenter states
that in light of information on FINRA's website regarding ATSs,\257\
and the detailed disclosures in periodic disclosures required by Form
ATS-N, the Commission should no longer require an NMS Stock ATS to file
Form ATS-R.\258\ We are not amending Regulation ATS at this time to
remove the requirement for NMS Stock ATSs to file Form ATS-R.
Notwithstanding the disclosure on FINRA's website of certain volume
information for ATSs that trade NMS stocks, we continue to believe that
the form helps the Commission oversee and monitor the trading activity
of NMS Stock ATSs, because Form ATS-R provides the Commission with
information that is unavailable on the FINRA website.\259\ Another
commenter states that to alleviate burdens on ATSs and promote more
meaningful comparisons across firms and venues, the Commission should
significantly revise reporting obligations on Form ATS-R.\260\ The
commenter does not specify how Form ATS-R should be revised; however,
we believe that the role Form ATS-R plays in helping the Commission to
oversee and monitor the trading activities of NMS Stock ATSs justifies
the burden on NMS Stock ATSs to file Form ATS-R.\261\
---------------------------------------------------------------------------

    \257\ See supra note 15.
    \258\ See SIFMA Letter at 8 n.16.
    \259\ Form ATS-R requires ATSs to provide, among other things,
trading volumes, a list of all subscribers that were participants of
the ATS, and a list of all securities traded. The information on
Form ATS-R permits the Commission to monitor ATSs for compliance
with the fair access requirements of Rule 301(b)(5), as ATSs subject
to those requirements must report quarterly on Form ATS-R the
persons to whom they grant, deny, or limit access to the ATS, as
well as the date of the action, the effective date of the action,
and the nature of the denials of limitations of access. See Form
ATS-R; see also Regulation ATS Adopting Release, supra note 3, at
70878.
    \260\ See HMA Letter at 11 n.64.
    \261\ See supra Section X.D.6.
---------------------------------------------------------------------------

6. Rule 303: Recordkeeping Requirements for Form ATS-N
    We proposed amending Rules 303(a)(1) and 303(a)(2) of Regulation
ATS to reflect the proposed amendments to Rule 301(b)(2) \262\ and the
addition of Rule 304.\263\ In addition, the proposed rules would make
minor technical amendments to Rule 303. We received no comments on the
proposed amendments to Rule 303 and are adopting these requirements as
proposed.
---------------------------------------------------------------------------

    \262\ See supra Section III.B.4.
    \263\ See infra Section IV.
---------------------------------------------------------------------------

    Unless not required to comply with Regulation ATS pursuant to Rule
301(a) \264\ of Regulation ATS, an ATS must comply with the
recordkeeping requirements of Regulation ATS.\265\ Specifically, Rule
301(b)(8) \266\ requires an ATS to make and keep current the records
specified in Rule 302 \267\ and to preserve the records specified in
Rule 303.\268\ Before the adoption of the amendments to Rule 303, Rule
303(a)(1) required an ATS to preserve certain records for at least
three years, the first two years in an easily accessible place.\269\
Specifically, Rule 303(a)(1) \270\ required an ATS to preserve: (1) All
records required to be made pursuant to Rule 302; (2) all notices
provided to subscribers, including notices addressing hours of
operations, system malfunctions, changes to system procedures,
maintenance of hardware and software, and instructions pertaining to
access to and denials of, or limitations on, access to the ATS; (3)
documents made or received in the course of complying with the system
capacity, integrity, and security standards in Rule 301(b)(6), if
applicable; \271\ and (4) if the ATS is subject to the fair access
requirements under Rule 301(b)(5),\272\ a record of its access
standards. Rule 303(a)(2) \273\ requires that certain other records
must be kept for the life of the ATS and any successor enterprise,
including partnership articles or articles of incorporation (as
applicable), and copies of reports filed pursuant to Rule
301(b)(2),\274\ which includes current Form ATS, and records made
pursuant to Rule 301(b)(5).\275\ In particular, reports required to be
maintained for the life of the ATS, or any successor enterprise,
include initial operation reports, amendments, and cessation of
operations reports, filed on Form ATS.\276\
---------------------------------------------------------------------------

    \264\ 17 CFR 242.301(a).
    \265\ See Proposal, supra note 2, at 81087.
    \266\ See 17 CFR 242.301(b)(8).
    \267\ See 17 CFR 242.302.
    \268\ See 17 CFR 242.303.
    \269\ See 17 CFR 242.303(a)(1).
    \270\ See id.
    \271\ See supra notes 77-81 and accompanying text.
    \272\ See supra notes 72-75 and accompanying text.
    \273\ See 17 CFR 242.303(a)(2).
    \274\ See 17 CFR 242.301(b)(2).
    \275\ See supra notes 72-75 and accompanying text.
    \276\ See 17 CFR 242.301(b)(2).
---------------------------------------------------------------------------

    We are amending the record preservation requirements of Rule 303 to
incorporate the preservation of records that would be created pursuant
to the requirements that NMS Stock ATSs file initial Form ATS-N, Form
ATS-N amendments, and notices of cessation on Form ATS-N, instead of
Form ATS. Specifically, we are amending Rule 303(a)(2)(ii) to require
that an ATS shall preserve, for the life of the enterprise and of any
successor enterprise, copies of reports filed pursuant to Rule
301(b)(2) or--in the case of an NMS Stock ATS--Rule 304, and records
made pursuant to Rule 301(b)(5).\277\ As a result, because an NMS Stock
ATS will be required to file initial Form ATS-N, Form ATS-N amendments,
and notices of cessation on Form ATS-N pursuant to Rule 304,

instead of on Form ATS pursuant to Rule 301(b)(2), the NMS Stock ATS
must preserve those reports for the life of the enterprise and of any
successor enterprise pursuant to Rule 303(a)(2) as amended.\278\ We are
not amending the recordkeeping requirements of Rule 302, or any other
amendments to the record preservation requirements of Rule 303(a)(2).
---------------------------------------------------------------------------

    \277\ See 17 CFR 242.303(a)(2)(ii).
    \278\ NMS Stock ATSs that had previously made filings on Form
ATS must preserve those filings for the life of the enterprise, as
well as filings made going forward on Form ATS-N. See id. We believe
that the amendments to Rule 303 are necessary to create a meaningful
audit trail of an ATS's current and previous written safeguards and
procedures pursuant to Rule 301(b)(2) and permit surveillance and
examination staff to help ensure fair and orderly markets without
imposing any undue burden on ATSs.
---------------------------------------------------------------------------

    We are also adopting a minor technical amendment to Rule 303(a).
Currently, Rule 303(a) references ``paragraph (b)(9) of Sec.  242.301''
when setting forth the record preservation requirements for ATSs; this
reference is incorrect, as Rule 301(b)(9) describes the filing
requirements, rather than the recordkeeping requirements, for ATSs. We
are therefore adopting a change to correct the above reference to
``paragraph (b)(8) of Sec.  242.301.'' In addition, we are adopting an
amendment to Rule 303(a)(1) to incorporate amendments to Rule
301(b)(10).\279\
---------------------------------------------------------------------------

    \279\ See infra Section VI.
---------------------------------------------------------------------------

7. Comments Recommending Changes to Other Existing Regulation ATS Rules
    In the Proposal, we requested comment on other potential changes to
Regulation ATS rules, including the order display and execution access
requirement in Rule 301(b)(3) and the fair access requirement in Rule
301(b)(5).\280\ We received two comments recommending changes to Rule
301(b)(3) of Regulation ATS.\281\ One commenter urges the Commission to
consider lowering or eliminating the threshold for the order display
requirement.\282\ Another commenter states that lowering the threshold
for the order display requirement would result in reduced choice and
higher trading costs for long-term investors, and urges the Commission
to provide a block exemption from the order display requirement.\283\
---------------------------------------------------------------------------

    \280\ See Proposal, supra note 2, at 81058, 81083.
    \281\ See Citadel Letter at 3; Liquidnet Letter at 14-15; see
also supra Section II.C (discussing the order display and execution
access requirements under Rule 301(b)(3) of Regulation ATS).
    \282\ See Citadel Letter at 3.
    \283\ The commenter believes that the threshold for the order
display requirement may prevent it from offering functionalities
that may provide market participants flexibility in how they display
block orders. See Liquidnet Letter at 14-15.
---------------------------------------------------------------------------

    In addition, the Commission received two comments recommending
changes to the fair access requirements in Rule 301(b)(5).\284\ One
commenter urges the Commission to eliminate the 5% trading volume fair
access threshold, in light of the importance of NMS Stock ATSs to
equity markets today.\285\ Another commenter states that rather than
lowering the trading volume threshold that triggers the fair access
requirement of Rule 301(b)(5), the Commission should exclude block
executions from counting towards the fair access threshold.\286\ In
addition, one commenter believes that, in connection with Rule
301(b)(3) of Regulation ATS (order display and execution access), it is
not appropriate to include actionable indications of interest in the
definitions of ``bid'' and ``offer'' under Regulation NMS.\287\ Another
commenter states that actionable indications of interest should be
treated as quotes and should be transparent to the public.\288\
---------------------------------------------------------------------------

    \284\ See Citadel Letter at 2-3; Liquidnet Letter at 9-12; see
also supra Section II.C (discussing the fair access requirements
under Rule 301(b)(5) of Regulation ATS).
    \285\ See Citadel Letter at 2.
    \286\ See Liquidnet Letter at 10.
    \287\ See UBS Letter at 8. In 2009, the Commission published a
proposal to address certain practices with respect to undisplayed
liquidity, which is trading interest that is available for execution
at a trading center, but is not included in the consolidated
quotation data that is widely disseminated to the public. See
Regulation of Non-Public Trading Interest at 61209 (proposal to
amend, among other things, Rule 301(b)(3) of Regulation ATS).
    \288\ See Barnard Letter at 2.
---------------------------------------------------------------------------

    We are not adopting changes to the order display and execution
requirement or the fair access requirement at this time. We believe
that it is appropriate to take an incremental approach by first
applying the amended regime to NMS Stock ATSs before considering a
further step and we intend to monitor the effectiveness of Rule
301(b)(3) and Rule 301(b)(5) requirements. Should the Commission decide
to take further action with regard to these requirements, such as
proposing to amend Regulation ATS, the Commission would do so in a
separate rulemaking and take into account its experience with Rule 304
and NMS Stock ATSs.

IV. Form ATS-N Filing Process; Effectiveness Review

A. Initial Form ATS-N

1. Rule 304(a)(1)(i): Filing and Effectiveness Requirement
    Rule 304(a)(1)(i) requires that an NMS Stock ATS operate pursuant
to an effective initial Form ATS-N to be exempt from the definition of
``exchange.'' Proposed Rule 304(a)(1)(i) (``Filing'') provided that no
exemption from the definition of ``exchange'' is available to an NMS
Stock ATS pursuant to Sec.  240.3a1-1(a)(2) unless the NMS Stock ATS
files with the Commission a Form ATS-N, in accordance with the
Instructions therein, and the Commission declares the Form ATS-N
effective. Proposed Rule 304(a)(1)(i) also included transitional
provisions for Legacy NMS Stock ATSs to file Form ATS-N and operate
under Rule 304. These provided that if an NMS Stock ATS is operating
pursuant to a previously-filed initial operation report on Form ATS as
of the effective date of the final rule, such NMS Stock ATS shall file
with the Commission a Form ATS-N, in accordance with the Instructions
therein, no later than 120 calendar days after the effective date of
the final rule. Further, proposed Rule 304(a)(1)(i) would have provided
that an NMS Stock ATS operating as of the effective date of the final
rule may continue to operate pursuant to a previously-filed initial
operation report on Form ATS pending the Commission's review of the
filed Form ATS-N. We are adopting Rule 304(a)(1)(i) (``Filing and
Effectiveness Requirement'') with modifications and relocating the
provisions applicable to Legacy NMS Stock ATSs to another provision
within Rule 304(a)(1). Rule 304(a)(1)(i) sets forth two principal
conditions of the Exchange Act Rule 3a1-1(a)(2) exemption for NMS Stock
ATSs: (1) The NMS Stock ATS must file an initial Form ATS-N, and (2)
the initial Form ATS-N must be effective.\289\
---------------------------------------------------------------------------

    \289\ See supra Section III.A.1. See also Rule 301(a)(1)(i).
---------------------------------------------------------------------------

    We are relocating the provisions of proposed Rule 304(a)(1)(i)
regarding the filing of Form ATS-N by Legacy NMS Stock ATSs during the
Commission review period to Rule 304(a)(1)(iv) to better organize the
rule text, particularly in light of other changes we are making to the
proposed rule in response to comments. In addition, we are making
other, non-substantive modifications that we believe will not impact
NMS Stock ATSs and will result in a more readable rule text for the
public.\290\
---------------------------------------------------------------------------

    \290\ We are making the following non-substantive modifications
to Rule 304(a)(1)(i): (1) Deleting the phrase ``from the definition
of `exchange';'' (2) changing the phrase ``in accordance with the
instructions therein'' to ``in accordance with the conditions of
this section;'' and (3) adding the term ``initial'' before ``Form
ATS-N.''
---------------------------------------------------------------------------

    We are also changing Rule 304(a)(1)(i) to state that the exemption
for NMS Stock ATSs will not be available unless ``the initial Form ATS-
N is effective

pursuant to paragraph (a)(1)(iii) or (a)(1)(iv)(A) of [Rule 304]''
rather than the proposed rule text, which stated that the exemption is
available only if ``the Commission declares the Form ATS-N effective.''
This change is made in connection with adopted Rule 304(a)(1)(iii) and
Rule 304(a)(1)(iv)(A), which, in response to comments, provide that an
initial Form ATS-N for both a non-Legacy NMS Stock ATS and Legacy NMS
Stock ATS, as amended, becomes effective, unless declared ineffective,
upon the earlier of: (1) The completion of review by the Commission and
publication pursuant to Rule 304(b)(2) or (2) the expiration of the
Commission review period, or, if applicable, the end of the extended
review period. Accordingly, we are adopting Rule 304(a)(1)(i), which
provides that no exemption is available to an NMS Stock ATS pursuant to
Rule 3a1-1(a)(2) unless the NMS Stock ATS files with the Commission an
initial Form ATS-N, in accordance with the conditions of Rule 304 and
the initial Form ATS-N is effective pursuant to Rule 304(a)(1)(iii) or
Rule 304(a)(1)(iv)(A). Consequently, an NMS Stock ATS that is not a
Legacy NMS Stock ATS operating pursuant to an initial operation report
on Form ATS as of January 7, 2019, will be required to comply with the
requirements of Rule 304 as of that date. \291\
---------------------------------------------------------------------------

    \291\ See Rule 301(b)(1). An entity seeking to operate as an NMS
Stock ATS that has filed an initial operation report on Form ATS
prior to January 7, 2019, but has not yet become operational
pursuant to Rule 301(b)(2)(i), must file an initial operation report
on Form ATS-N, in accordance with the conditions of Rule 304, and
the initial Form ATS-N must become effective before the new NMS
Stock ATS may commence operations.
---------------------------------------------------------------------------

2. Rule 304(a)(1)(ii): Commission Review Period
    Rule 304(a)(1)(ii) describes the timing for the Commission's review
of initial Form ATS-N for Legacy NMS Stock ATSs. Proposed Rule
304(a)(1)(ii) provided the timing for the Commission's review of
initial Form ATS-N as adopted for both Legacy NMS Stock ATSs and non-
Legacy NMS Stock ATSs. The timing for the Commission's review of
initial Form ATS-N for Legacy NMS Stock ATSs is provided by Rule
304(a)(1)(iv)(B).\292\
---------------------------------------------------------------------------

    \292\ See infra Section IV.A.4.b.
---------------------------------------------------------------------------

    Proposed Rule 304(a)(1)(ii)(A) (``Review period and extension of
the 120-day review period'') provided that the Commission would declare
a Form ATS-N filed by a Legacy NMS Stock ATS effective or ineffective
no later than 120 calendar days from filing with the Commission.
Proposed Rule 304(a)(1)(ii)(A) also provided that the Commission could
extend the review period for Forms ATS-N filed by Legacy NMS Stock
ATSs: (1) An additional 120 calendar days if the Form ATS-N is
unusually lengthy or raises novel or complex issues that require
additional time for review, in which case the Commission will notify
the NMS Stock ATS in writing within the initial 120-calendar day review
period and will briefly describe the reason for the determination for
which additional time for review is required; or (2) any extended
review period to which a duly-authorized representative of the NMS
Stock ATS agrees in writing.
    Proposed Rule 304(a)(1)(ii)(B) would have provided that the
Commission would declare a Form ATS-N filed by an non-Legacy NMS Stock
ATS effective or ineffective no later than 120 calendar days from
filing with the Commission. The proposed rule also would have provided
that the Commission may extend the Form ATS-N review period for: (1) An
additional 90 days, if the Form ATS-N is unusually lengthy or raises
novel or complex issues that require additional time for review, in
which case the Commission will notify the NMS Stock ATS in writing
within the initial 120-calendar day review period and will briefly
describe the reason for the determination for which additional time for
review is required; or (2) any extended review period to which a duly-
authorized representative of the NMS Stock ATS agrees in writing. We
received three comments regarding the length of the Commission review
period and extended review period for Form ATS-N filings.\293\ One
commenter states that the 120-calendar day period for the Commission to
review Form ATS-N filings is a reasonable amount of time for the
Commission to process each filing, and the 120-day extension of the
review period for Form ATS-N filings by Legacy NMS Stock ATSs that are
particularly novel or complex is agreeable.\294\ Another commenter does
not object to the proposed period for reviewing Form ATS-N.\295\ We
continue to believe that an initial review period of 120 calendar days
for Form ATS-N filings would provide the Commission adequate time to
carry out its oversight functions with respect to its review of Forms
ATS-N filed by both Legacy NMS Stock ATSs and non-Legacy NMS Stock
ATSs, including its responsibilities to protect investors and maintain
fair, orderly, and efficient markets.\296\ We also continue to believe
that extended review periods of 120 calendar days for Form ATS-N
filings by Legacy NMS Stock ATSs, and 90 calendar days for filings by
non-Legacy NMS Stock ATSs, that are unusually lengthy or raise novel or
complex issues, are appropriate. As discussed in the Proposal, these
time periods will allow the Commission and its staff to conduct a
thorough review of certain lengthy, novel, or complex Form ATS-N
filings and provide sufficient opportunity to discuss a filing with an
NMS Stock ATS if necessary.\297\
---------------------------------------------------------------------------

    \293\ See CFA Institute Letter at 4; Liquidnet Letter at 3; PDQ
Letter at 2. See also infra note 435.
    \294\ See CFA Institute Letter at 4.
    \295\ See Liquidnet Letter at 3. See also PDQ Letter at 2.
    \296\ See Proposal, supra note 2, at 81023-81024. See infra
Section IV.A.4.b for a description of Rule 304(a)(1)(iv)(B), which
provides the Commission review period for Legacy NMS Stock ATSs.
    \297\ See Proposal, supra note 2, at 81024.
---------------------------------------------------------------------------

    One commenter worries the review process may devolve into other
market centers seeking to have the Commission preserve their market
positions, and urges the Commission to promptly evaluate and act on
initial Form ATS-N filings.\298\ We believe that the proposed time
periods for review of Form ATS-N filings are appropriate. The
Commission could, depending on the length and complexity of a Form ATS-
N filing, complete the review prior to the expiration of the review
period; thus, the Form ATS-N would become effective upon publication,
pursuant to Rule 304(b)(2).\299\ The review periods and extended review
periods combined cannot exceed 240 calendar days for a Legacy NMS Stock
ATS or 210 calendar days for a non-Legacy NMS Stock ATS unless the NMS
Stock ATS agrees, in writing, to a longer review period.\300\
---------------------------------------------------------------------------

    \298\ See HMA Letter at 7-8.
    \299\ See Rule 304(a)(1)(iii); Rule 304(a)(1)(iv)(A). See also
Section IV.A.4.b.
    \300\ See Rule 304(a)(1)(ii)(A); 304(a)(1)(iv)(B). See also
infra Section IV.A.4.b.
---------------------------------------------------------------------------

    In addition, one commenter states that the proposed process for
determining whether an NMS Stock ATS qualifies for the exemption from
the definition of ``exchange'' could, in light of the Commission's SRO
rule filing review responsibilities, overwhelm staff by adding
potentially hundreds of new NMS Stock ATS filings.\301\ This commenter
expresses concern that Commission staff may spend too much time
reviewing whether an NMS Stock ATS meets its procedural obligations
rather than trying to better understand the ``substance, merits, and
potential misconduct of ATSs' trading operations and activities, and
how they fit into the broader market structure,'' and worries that
Commission staff ``might get caught in a procedural morass and miss the

forest for the trees.'' \302\ This commenter compares the proposed
review process for Form ATS-N filings to the review and approval
process for SRO rule changes, and states that unless the Commission is
more willing than it has previously been to challenge applications, the
proposed process for reviewing Form ATS-N filings will devolve into an
``unreasonably burdensome exercise for Commission staff while providing
little benefit to market integrity or investor protection.'' \303\ We
do not believe that the review process would be unreasonably burdensome
to the Commission or its staff. The Commission's review will not be
merit-based; instead, it will focus on the completeness and
comprehensibility of disclosures. In addition, under the adopted rules,
a Form ATS-N, as amended, will become effective, unless declared
ineffective, upon the earlier of the completion of Commission review or
the end of the Commission review period. This streamlined process will
facilitate efficient Commission review, which is designed to protect
investors by allowing the Commission to review disclosures on Form ATS-
N for potential deficiencies that might otherwise confuse or mislead
market participants about the operations of the NMS Stock ATS or the
ATS-related activities of the broker-dealer operator and its
affiliates.
---------------------------------------------------------------------------

    \301\ See Consumer Federation of America Letter at 10.
    \302\ See id.
    \303\ See id. at 2, 10.
---------------------------------------------------------------------------

    We are adopting proposed Rule 304(a)(1)(ii)(B) with modifications,
renumbering the proposed rule as Rule 304(a)(1)(ii) (``Commission
review period''), and relocating Rule 304(a)(1)(ii)(A), which relates
to Legacy NMS Stock ATSs, to Rule 304(a)(1)(iv)(B). We are modifying
proposed Rule 304(a)(1)(ii) to state that the Commission ``may,'' ``by
order,'' \304\ as provided in Rule 304(a)(1)(iii), declare an initial
Form ATS-N filed by an NMS Stock ATS ineffective no later than 120
calendar days from the date of filing with the Commission or, if
applicable, the end of the extended review period.\305\ Proposed Rule
304(a)(1)(iv) (``Order regarding effectiveness'') would have required
the Commission to issue an order to declare a Form ATS-N effective or
ineffective. We are not adopting the proposed requirement \306\ that
the Commission issue an order to declare a Form ATS-N effective
because, as described below, the Commission will only issue orders of
ineffectiveness. In addition, to improve readability, the adopted rule
references the ineffectiveness process in Rule 304(a)(1)(iii). The
Commission will make public, on its website, any effective initial Form
ATS-N, as amended.\307\
---------------------------------------------------------------------------

    \304\ We are: (1) Deleting proposed Rule 304(a)(1)(iv), which
stated that the Commission would issue an order declaring a Form
ATS-N effective or ineffective and (2) adding the words ``by order''
to adopted Rule 304(a)(1)(ii). These changes simplify the rule text
without changing the Commission's proposal to inform the public
about the ineffectiveness of Form ATS-N by issuing an order.
    \305\ We are deleting text that states that this provision
applies to ``an NMS Stock ATS that was not operating as of
[effective date of the final rule]'' as it will be clear that the
provisions of Rule 304(a)(1)(ii) apply to the filing of initial Form
ATS-N by non-Legacy NMS Stock ATSs and that the provisions of Rule
304(a)(1)(iv) will apply to filings by Legacy NMS Stock ATSs.
    \306\ See proposed Rule 304(a)(1)(iv).
    \307\ See Rule 304(b)(2)(i).
---------------------------------------------------------------------------

    We are modifying Rule 304(a)(1)(ii) to add a provision that will
allow NMS Stock ATSs to amend their initial Forms ATS-N during the
Commission review period. We discussed in the Proposal that during the
Commission's review, the Commission staff may provide comments to the
entity, and may request that the entity supplement information in the
Form ATS-N or revise its disclosures on Form ATS-N.\308\ In addition,
an NMS Stock ATS may need to update disclosures on its initial Form
ATS-N to otherwise reflect changes during the Commission review period.
To allow an NMS Stock ATS to correct or update its disclosures on an
initial Form ATS-N during the review period, we are modifying Rule
304(a)(1)(ii) to provide that during the review period of the initial
Form ATS-N, the NMS Stock ATS shall amend its initial Form ATS-N
pursuant to the requirements of Rules 304(a)(2)(i)(B) and (C), which
are discussed further below.\309\ We believe that updates or
corrections to an NMS Stock ATS's disclosures about its intended
operations would be properly filed as updating or correcting amendments
pursuant to Rules 304(a)(2)(i)(B) and (C).\310\ We believe allowing an
entity seeking to operate as an NMS Stock ATS to amend its initial Form
ATS-N during the Commission review period will promote transparency and
facilitate complete and comprehensible disclosures. Once an initial
Form ATS-N becomes effective, the Commission will make public the
initial Form ATS-N, as amended, which will incorporate any amendments
that were filed during the Commission review period. An NMS Stock ATS
(other than a Legacy NMS Stock ATS),\311\ however, seeking to amend its
initial Form ATS-N to make a material change to its Form ATS-N
disclosures during the Commission review period must withdraw its
initial Form ATS-N and may refile a new, initial Form ATS-N pursuant to
Rule 304(a)(1). We believe a material change to the disclosures on an
initial Form ATS-N would necessitate a full review period.\312\ In
addition, we have made several technical, non-substantive modifications
to Rule 304(a)(1)(ii) that are designed to improve the readability of
the rule, reduce potential ambiguity, or both.\313\
---------------------------------------------------------------------------

    \308\ See Proposal supra note 2, at 81026.
    \309\ See infra Sections IV.B.1.b and IV.B.1.c. Amendments will
be subject to Commission review under Rule 304(a)(2)(ii), which
states that the Commission will, by order, declare ineffective any
Form ATS-N amendment no later than 30 calendar days from filing of
such amendment with the Commission if the Commission finds that such
action is necessary or appropriate in the public interest, and is
consistent with the protection of investors.
    \310\ See id.
    \311\ Unlike non-Legacy NMS Stock ATSs, Legacy NMS Stock ATSs
will operate during the Commission review period pursuant to a
filed, but not yet effective, initial Form ATS-N. Accordingly,
Legacy NMS Stock ATSs may file amendments to their Form ATS-N during
the Commission review period to make material changes to their
operations and introduce new functionalities. See infra Section
IV.A.4.c.
    \312\ The Commission could, however, complete its review of a
refiled initial Form ATS-N in less than 120 calendar days from the
date of filing, and the Form ATS-N would become effective upon
publication. See Rules 304(a)(1)(ii)-(iii) and 304(b).
    \313\ We are making additional changes from proposed Rule
304(a)(1)(ii) to: (1) Rename the paragraph from ``Review period and
extension of the 120-day review period'' to ``Commission review
period;'' (2) add to the end of the first sentence that the
Commission may declare an initial Form ATS-N ineffective no later
than 120 calendar days from the date of filing with the Commission
``or, if applicable, the end of the extended review period;'' (3)
specify that the Commission will declare an initial Form ATS-N
ineffective no later than 120 calendar days from ``the date of''
filing with the Commission; (4) add the word ``initial'' before Form
ATS-N; and (5) add the word ``calendar'' before ``day'' in the
description of the 90-day extension period.
---------------------------------------------------------------------------

3. Rule 304(a)(1)(iii): Effectiveness; Ineffectiveness Determination
    Rule 304(a)(1)(iii) describes the process by which an initial Form
ATS-N would become effective, or be declared ineffective by the
Commission. Proposed Rule 304(a)(1)(iii) (``Effectiveness'') provided
that the Commission will declare effective a Form ATS-N if the NMS
Stock ATS qualifies for the Rule 3a1-1(a)(2) exemption and that the
Commission will declare ineffective a Form ATS-N if it finds, after
notice and opportunity for hearing, that such action is necessary or
appropriate in the public interest, and is consistent with the
protection of investors.\314\ Proposed Rule 304(a)(1)(iv) (``Order
regarding effectiveness'')

provided that the Commission will issue an order to declare a Form ATS-
N effective or ineffective. Proposed Rule 304(a)(1)(iv) also provided
that upon the effectiveness of the Form ATS-N, the NMS Stock ATS may
operate pursuant to the conditions of Rule 304, and if the Commission
declares a Form ATS-N ineffective, the NMS Stock ATS shall be
prohibited from operating as an NMS Stock ATS. Proposed Rule
304(a)(1)(iv) further provided that a Form ATS-N declared ineffective
would not prevent the NMS Stock ATS from subsequently filing a new Form
ATS-N. We also discussed in the Proposal our preliminary beliefs
regarding when it would be necessary or appropriate in the public
interest to declare ineffective a Form ATS-N.\315\ We received several
comments related to proposed Rule 304(a)(1)(iii), proposed Rule
304(a)(1)(iv), and the standard of review for declaring Form ATS-N
filings effective or ineffective, which are summarized below.
---------------------------------------------------------------------------

    \314\ See proposed Rule 304(a)(1)(iii).
    \315\ See Proposal, supra note 2, at 81024-81026.
---------------------------------------------------------------------------

    Pursuant to Rule 304 and Form ATS-N, as adopted and as discussed
below, an NMS Stock ATS must provide all the information required by
the form and respond to each item, as applicable, and disclose
information that is accurate, current, and complete. A Form ATS-N
filing that is defective may be rejected. If the filing is accepted for
review, it will become effective unless the Commission finds, after
notice and opportunity for hearing, that it is necessary or appropriate
in the public interest, and consistent with the protection of
investors, to declare the filing ineffective. Responsibility for
current, complete, and accurate disclosures rests with the NMS Stock
ATS.\316\ The Commission will consider whether it is necessary or
appropriate in the public interest, and consistent with the protection
of investors, to declare an initial Form ATS-N filing ineffective
because, for example, the Form ATS-N was filed by an entity that does
not meet the proposed definition of NMS Stock ATS; one or more
disclosures reveal non-compliance with federal securities laws, or the
rules or regulations thereunder, including Regulation ATS; or the
disclosures are materially deficient with respect to completeness or
comprehensibility.
---------------------------------------------------------------------------

    \316\ See Rule 304(c); Instructions to Form ATS-N. The
Commission's staff may become aware of information, as a result of
discussions with the NMS Stock ATS or otherwise, that calls into
question, for example, the currency or accuracy of the disclosures
on a Form ATS-N, which may result in a determination to begin the
process to declare the Form ATS-N ineffective. See infra Section
IV.A.3.d.
---------------------------------------------------------------------------

a. Comments on the Standard of Review To Accept Filings of Form ATS-N
    The determination of whether to reject a Form ATS-N filing is
separate from the Commission's determination to declare a filed Form
ATS-N ineffective after Commission review. We received one comment
regarding the process pursuant to which a Form ATS-N would be accepted
for Commission review.\317\ The commenter states that the Commission
should not review a Form ATS-N filing for accuracy and completeness in
connection with accepting a Form ATS-N filing, but rather that such
review should be conducted when the Commission is considering whether
to declare the Form ATS-N effective or ineffective.\318\ The commenter
states that the Commission's standards for accepting a Form ATS-N
should be clear and objective, and Form ATS-N should be rejected only
for purely ``technical deficiencies.'' \319\
---------------------------------------------------------------------------

    \317\ See SIFMA Letter at 28.
    \318\ See id.
    \319\ See id.
---------------------------------------------------------------------------

    As proposed, the Instructions to Form ATS-N required that ``[a]n
NMS Stock ATS must respond to each item, as applicable, in detail and
disclose information that is accurate, current, and complete. An NMS
Stock ATS must provide all the information required by the form,
including the exhibits, and must present the information in a clear and
comprehensible manner. A filing that is incomplete or similarly
deficient may be returned to the NMS Stock ATS.'' \320\ In the
Proposal, we stated that ``a Form ATS-N that contains technical
deficiencies, such as missing pages or one in which the entity does not
respond to all questions, including sub-questions, would not be
complete and would be returned to the NMS Stock ATS.'' \321\
---------------------------------------------------------------------------

    \320\ See proposed Instructions to Form ATS-N. As adopted, the
Instructions to Form ATS-N state that: ``An NMS Stock ATS must
provide all the information required by Form ATS-N, including
responses to each Item, as applicable, and the Exhibits, and
disclose information that is accurate, current and complete. . . . A
filing that is defective may be rejected and not accepted by the
EDGAR system. Any filing so rejected shall be deemed not to have
been filed.'' The Instructions to Form ATS-N replace the proposed
cite to 17 CFR 240.0-3 under the Exchange Act, which applies to
paper filings, with a cite to Regulation S-T, which applies to
electronic filings, because the form will be electronically filed
via EDGAR. See Instructions to Form ATS-N. Because Form ATS-N will
be electronically filed, we do not believe it is necessary to return
a copy of Form ATS-N filings and are therefore replacing the word
``returned'' with ``rejected'' to specify this.
     We are also modifying the Instructions to Form ATS-N to delete
the phrase: ``and must present the information in a clear and
comprehensible manner.'' See Instructions to Form ATS-N. This
modification to the Instructions to Form ATS-N will streamline the
instructions by removing confusing language relating to the
Commission's standard of review, but will not modify an NMS Stock
ATS's obligations with respect to Form ATS-N. Additionally, the
Commission has reorganized the Instructions to differentiate between
an NMS Stock ATS's filing obligations, and the consequences of
incompleteness or similar deficiency.
     We are modifying our guidance and the rule text for
determinations of ineffectiveness, and believe these modifications
to the Instructions to Form ATS-N better align them with that
guidance and adopted rule text and reduce any potential confusion
about the difference between an NMS Stock ATS's obligations with
respect to completing Form ATS-N and the standard of review that the
Commission will apply when determining whether to declare a Form
ATS-N ineffective. See infra Section IV.A.3.d. See also infra
Section V.A.1 (discussing the Form ATS-N disclosure requirements).
    \321\ See Proposal, supra note 2, at 81024 n.284.
---------------------------------------------------------------------------

    We believe that it would be appropriate to reject a Form ATS-N if
the filing is defective.\322\ For example, a Form ATS-N is defective if
it is missing sections or missing responses to any questions, including
sub-questions, or does not comply with the electronic-filing
requirements. A decision to reject a Form ATS-N filing, and not accept
it for review, would be for reasons distinct from Commission review
pursuant to Rule 304(a)(1)(iii), as discussed below. The rejection of a
Form ATS-N would not prejudice any decision by the Commission regarding
ineffectiveness should the NMS Stock ATS resubmit a Form ATS-N.\323\ An
NMS Stock ATS also may choose to withdraw a filed Form ATS-N.\324\ The
Commission will apply the same standard when determining whether to
accept an amendment to Form ATS-N for review or reject the filing.
---------------------------------------------------------------------------

    \322\ See 17 CFR part 232.
    \323\ Proposal, supra note 2, at 81024 n.284.
    \324\ See id.
---------------------------------------------------------------------------

b. Comments on the Review for Declarations of Ineffectiveness
    We proposed that the Commission will declare effective a Form ATS-N
if the NMS Stock ATS qualifies for the Rule 3a1-1(a)(2) exemption, and
will declare it ineffective if it finds, after notice and opportunity
for hearing, that such action is necessary or appropriate in the public
interest, and is consistent with the protection of investors.\325\ We
discussed in the Proposal that the Commission would use Form ATS-N to
evaluate whether an entity qualifies for the exemption, and would
evaluate, among other things, whether the entity satisfies the
definition of NMS Stock ATS.\326\ We also discussed our preliminary
beliefs regarding when it would be necessary or appropriate in the
public interest to declare ineffective

a Form ATS-N, and provided examples.\327\ We stated that it would be
necessary and appropriate in the public interest to declare a Form ATS-
N ineffective if the Commission finds, after notice and opportunity for
hearing, that: An entity does not meet the definition of NMS Stock ATS;
one or more disclosures on Form ATS-N are materially deficient with
respect to their accuracy, currency or completeness; or one or more
disclosures reveal non-compliance with federal securities laws, or the
rules and regulations thereunder, including Regulation ATS.\328\ We
also stated that a declaration of effectiveness would not constitute a
finding that the NMS Stock ATS's operations are consistent with the
Exchange Act, but rather only address the issue of whether the NMS
Stock ATS had complied with the requirements of Form ATS-N.\329\
---------------------------------------------------------------------------

    \325\ See proposed Rule 303(a)(1)(iii).
    \326\ See Proposal, supra note 2, at 81024.
    \327\ See id. at 81024-81026.
    \328\ See id.
    \329\ See id. at 81026. With respect to compliance with federal
securities laws, we stated that the Commission's evaluation would
involve a ``red-flag'' review of the Form ATS-N disclosures. See id.
at 81025. With respect to whether an entity meets the definition of
NMS Stock ATS, we stated our preliminary belief that proper
classification of an entity would clearly indicate to market
participants, as well as the Commission, the functions that entity
performs and the regulatory framework and attendant obligations that
attach to that entity. See id. at 81024 n.288 and accompanying text.
---------------------------------------------------------------------------

    We received several comments regarding the standard that the
Commission would apply to declare a Form ATS-N effective or
ineffective. One commenter asserts that it would be helpful to have the
Commission review initial Forms ATS-N for completeness and accuracy,
and legal and regulatory compliance, and to help standardize the level
of disclosure across NMS Stock ATSs.\330\ Another commenter urges the
Commission to move forward with the effectiveness determination as
proposed.\331\ This commenter states that market participants will use
the information disclosed on Form ATS-N to evaluate whether a
particular NMS Stock ATS would be a desirable venue to which to route
their orders, and that it is important that the detailed information be
accurate, current, and complete.\332\ This commenter also states that
the Commission should be able to conduct a ``red flag'' review of the
disclosures for apparent non-compliance with the federal securities
laws, and avoid having a noncompliant NMS Stock ATS begin operation
with inadequate system operations; this commenter states that while not
affording complete certainty, this review process would be an
improvement over the review process for Form ATS.\333\ Further, the
commenter states that the notice and hearing process will furnish the
industry with useful information regarding specific regulatory concerns
and questions.\334\ One commenter expresses concern that the Commission
would lack objective standards to evaluate initial Forms ATS-N and
amendments.\335\ Another commenter believes that in the Proposal, the
Commission did not articulate a ``consistent standard of review'' for
declaring a Form ATS-N or Form ATS-N amendment effective or
ineffective.\336\ The commenter expresses its view that the standard
for declaring a Form ATS-N ineffective should be only if the Form ATS-N
is ``materially deficient with respect to completeness,'' \337\
asserting that criteria such as currency, accuracy, and fair
presentation are subjective standards that could make it difficult for
NMS Stock ATSs to understand the level of disclosure necessary to
satisfy the Commission's review requirements, and therefore require
extended discussion with the Commission.\338\ Further, the commenter
believes that such subjective standards would be difficult to
standardize in application from firm to firm, would complicate the
Commission's review of Form ATS-N, and are unnecessary to increase the
operational transparency of NMS Stock ATSs and to ensure a consistent
level of information regarding NMS Stock ATSs is available to market
participants.\339\ The commenter believes that the rule's directives to
consider whether to declare a Form ATS-N ineffective would provide the
Commission with flexibility to determine whether declaring a Form ATS-N
ineffective is ``necessary or appropriate in the public interest'' and
``consistent with the protection of investors,'' and therefore that
including additional subjectivity in the Commission's standard is
unnecessary.\340\ The commenter believes that NMS Stock ATSs would have
other incentives to ensure the accuracy of their Forms ATS-N.\341\
---------------------------------------------------------------------------

    \330\ See MFA/AIMA Letter at 4.
    \331\ See Investor Advocate Letter at 11.
    \332\ See id.
    \333\ See id.
    \334\ See id. We agree with the commenter and intend to help
market participants understand the reason the Form ATS-N was
declared ineffective by explaining the Commission's reasoning for
the ineffective declaration in the Commission order. See supra
Section IV.A.3.d.
    \335\ See LeveL ATS Letter at 8-9.
    \336\ See SIFMA Letter at 32.
    \337\ See id.
    \338\ See id. at 33.
    \339\ See id.
    \340\ See id.
    \341\ See id.
---------------------------------------------------------------------------

    This commenter also states that the Commission should only find a
disclosure to be ``materially deficient'' with respect to the accuracy,
currency, and completeness in an ``extreme situation, not a
circumstance where additional color or language might be viewed as
preferable to a disclosure as filed,'' and asserts that a response that
is facially responsive to a question on Form ATS-N should be deemed
sufficient.\342\ This commenter agrees with the examples of
``materially deficient'' disclosures that the Commission provided in
the Proposal, but also requests that the Commission provide examples of
``disclosures that would not be viewed as materially deficient.'' \343\
Additionally, this commenter states that if the Commission declares an
initial Form ATS-N or amendment ineffective, it should provide the NMS
Stock ATS with a clear written statement of the reasons for the
declaration.\344\ The commenter urges the Commission to provide clarity
and practical guidance around its expectations on declaring Form ATS-N
filings effective.\345\ Another commenter raises concerns that the
process for declaring Form ATS-N effective or ineffective may result in
the Commission staff undertaking merit-based reviews of the disclosures
on Form ATS-N that could be used to delay the effectiveness of NMS
Stock ATSs whose features, ``while meeting regulatory requirements, do
not meet current industry norms.'' \346\
---------------------------------------------------------------------------

    \342\ See id. at 30.
    \343\ See id. at 30 (emphasis in original). See also Proposal,
supra note 2, at 81025. Another commenter states that it recognizes
the difficulty associated with identifying every potential scenario
that might cause a Form ATS-N to be declared ineffective, but
requests that the Commission provide additional guidance to ensure
that NMS Stock ATS operators understand the standard to be applied.
See LeveL ATS Letter at 9.
    \344\ See SIFMA Letter at 30.
    \345\ See id.
    \346\ See Fidelity Letter at 2, 9. This commenter requests that
the Commission implement a ``completeness review'' under which the
Commission would review responses to Form ATS-N for completeness and
consistency without considering the merits of each answer. The
commenter also requests that the Commission provide additional
guidance with respect to the process by which it could declare a
Form ATS-N ineffective, and questions how review by Commission staff
of initial filings will be undertaken to ensure consistency across
Form ATS-N filings. See id. at 9.
---------------------------------------------------------------------------

    We believe that it would be necessary or appropriate in the public
interest, and consistent with the protection of investors, to declare
ineffective a Form ATS-N if, for example, the Commission finds, after
notice and opportunity for hearing, the Form ATS-N was filed by an
entity that does not meet the definition of NMS Stock ATS; one or more
disclosures reveal non-compliance

with federal securities laws, or the rules or regulations thereunder,
including Regulation ATS; or one or more disclosures on Form ATS-N are
materially deficient with respect to their completeness or
comprehensibility.\347\ We are providing additional examples of when,
depending on the facts and circumstances, the Commission may make such
a finding.\348\ In response to comments regarding the scope of the
Commission's review of initial Form ATS-N filings and the standard to
be applied for declarations of ineffectiveness, we are making clear
that the Commission will not be conducting a merit-based review.\349\
---------------------------------------------------------------------------

    \347\ See infra Section IV.A.3.d.
    \348\ See id.
    \349\ See infra notes 404-407 and accompanying text.
---------------------------------------------------------------------------

c. Effectiveness, Ineffectiveness Process
    The Commission received comments about the proposed process by
which a Form ATS-N would become effective or ineffective, including the
potential implications of the proposed process. One commenter expresses
concern that a declaration of effectiveness may give market
participants a false sense of security that the Commission's deeming an
NMS Stock ATS's Form ATS-N ``effective'' will be tantamount to the
Commission's approval of an ATS's operations on the merits, as market
participants may not fully understand that a declaration of
effectiveness only implies that the NMS Stock ATS has met the Form ATS-
N filing requirements, and that the Commission is not approving the
merits of the NMS Stock ATS's operations or conflicts of interest.
\350\ The commenter believes that such mistaken belief could cause
market participants to route orders to venues that are not in their
best interests.\351\ Another commenter states that there is the danger
that the Commission review process would encourage market complacency,
and that the Commission, through guidance in this adopting release and
continuing investor education, should help to ensure that: (1)
Investors understand that such a determination would not constitute a
finding that the NMS Stock ATS's operations are necessarily consistent
with the Exchange Act; and (2) operators of NMS Stock ATSs understand
that the determination would not preclude the Commission from later
determining that an NMS Stock ATS has violated federal securities
laws.\352\
---------------------------------------------------------------------------

    \350\ See Consumer Federation of America Letter at 2, 10-11.
    \351\ See id. at 11.
    \352\ See Investor Advocate Letter at 12. See also supra note
340 and accompanying text. Pursuant to Rule 304(a)(1)(iii) the
Commission will issue an order declaring an initial Form ATS-N
filing ineffective if it finds, after notice and opportunity for
hearing, that such action is necessary or appropriate in the public
interest, and is consistent with the protection of investors if, for
example, the Form ATS-N was filed by an entity that does not meet
the definition of NMS Stock ATS; one or more disclosures reveal non-
compliance with federal securities laws, or the rules or regulations
thereunder, including Regulation ATS; or the disclosures are
materially deficient with respect to completeness or
comprehensibility.
---------------------------------------------------------------------------

    We also received two comments about an NMS Stock ATS potentially
using a declaration of effectiveness to shield itself from potential
liability.\353\ Both express concern that, although the Proposal
explains that a declaration of effectiveness is not an ``approval'' of
Form ATS-N, the process could be used to inappropriately inoculate NMS
Stock ATS operators from liability.\354\ One of these commenters states
that its concern is heightened by a recent court decision in which the
court found that the Commission's review and approval of exchanges'
activities made the activities legal.\355\ One commenter believes that
a declaration of ineffectiveness will ``sound the death knell'' for an
NMS Stock ATS and that the opportunity to file a new Form ATS-N would
be of no practical value because the marketplace would not use the
ATS.\356\
---------------------------------------------------------------------------

    \353\ See HMA Letter at 8; Consumer Federation of America Letter
at 11.
    \354\ See id.
    \355\ See HMA Letter at 8.
    \356\ See Fidelity Letter at 9.
---------------------------------------------------------------------------

    While we do not believe that providing a process by which Form ATS-
N filings will become effective or ineffective \357\ would risk
misleading market participants about the kind of review that will be
undertaken by the Commission,\358\ we are modifying the process for
initial Form ATS-N filings to become effective, to mitigate any such
risk. Accordingly, the Commission will not declare initial Form ATS-N
filings effective pursuant to Rule 304(a)(1)(iii). Further, the
Commission will only declare ineffective an initial Form ATS-N if it
finds, after notice and opportunity for hearing, that such action is
necessary or appropriate in the public interest, and is consistent with
the protection of investors. An initial Form ATS-N, as amended, will
become effective, unless declared ineffective, upon the earlier of
completion of review by the Commission and publication pursuant to Rule
304(b)(2), or the expiration of the review period, or, if applicable,
the extended review period. Unlike proposed rule changes filed by
national securities exchanges, the Commission will not make affirmative
findings about Form ATS-N filings with regard to consistency with the
Exchange Act in the general course of the review of Form ATS-N
filings.\359\ As discussed below, the Commission's review will not
focus on the merits of the Form ATS-N disclosures, such as determining
the strengths and weaknesses of the trading platform or a protocol
offered by the NMS Stock ATS, nor is the Commission making findings
regarding whether the means by which orders will interact on the
trading platform are consistent with certain provisions of the Exchange
Act.\360\ If disclosures on Form ATS-N reveal non-compliance with
federal securities laws or the rules and regulations thereunder,
however, the Commission may find that it is appropriate to declare the
filing ineffective. We believe that the scope of the Commission's
review is clear and that the benefits of the Commission review process
for Form ATS-N filings justify any risk that market participants
misunderstand that the Commission is not performing a merit review of
Form ATS-N. We further believe that adopting a process for initial Form
ATS-N filings to become effective without the Commission affirmatively
declaring them effective by order will help signal to market
participants that the Commission is not passing on the merits of the
NMS Stock ATSs' disclosures regarding their operations. Even if we
assume that a declaration of ineffectiveness will ``sound the death
knell,'' as suggested by a commenter,\361\ or result in reputational
harm to an NMS Stock ATS, the process for declaring a Form ATS-N filing
ineffective will be consistent with the Commission's objective to
protect investors and the public interest and will provide NMS Stock
ATSs with opportunities to avoid or mitigate such a declaration. An NMS
Stock ATS would be given notice and an opportunity for hearing to
respond to the Commission's concerns. A non-Legacy NMS Stock ATS would
also have the option of withdrawing and subsequently refiling its Form
ATS-N. In addition, during the Commission review period, both non-
Legacy NMS Stock ATSs and Legacy NMS Stock ATSs can amend their initial
Form ATS-N to cure potential deficiencies. Additionally, if the
Commission does

declare an initial Form ATS-N ineffective, the NMS Stock ATS will have
an opportunity to revise its disclosures, or change its operations, and
subsequently file a new initial Form ATS-N, and such filing could
become effective.
---------------------------------------------------------------------------

    \357\ See Rule 304(a)(1)(iii).
    \358\ See Consumer Federation of America Letter at 2, 10.
    \359\ See supra note 405.
    \360\ See infra notes 404-407 and accompanying text.
    \361\ See supra note 356.
---------------------------------------------------------------------------

    In addition, one commenter argues that a Form ATS-N should be
considered ineffective upon filing until the Commission affirmatively
declares it effective or ineffective.\362\ However, this commenter also
recommends that if the Commission fails to declare a Form ATS-N
effective or ineffective within the 120-calendar day review period, or
does not extend the review period, the ``default decision'' should be
that the Form ATS-N is declared effective.\363\ We believe that it
would be appropriate for an initial Form ATS-N to become effective if
the Commission does not declare, by order, the filing ineffective
during the initial review period, or in the case of an extended review
period, during the extended period, to provide certainty about timing
of the Commission's review to the NMS Stock ATS and to market
participants. Providing for an initial Form ATS-N filed by a Legacy NMS
Stock ATS to become effective in this manner will allow the Legacy NMS
Stock ATS to continue to operate without disruption to its subscribers
(provided the Commission does not declare the Form ATS-N
ineffective).\364\ Considering an initial Form ATS-N ineffective upon
filing, before the Commission has completed the review, as suggested by
a commenter, would cause a Legacy NMS Stock ATS to stop operating,
which may harm the market participants that currently use the services
on the Legacy NMS Stock ATS. Once an initial Form ATS-N is effective,
Rule 304(a)(4) provides a process for the Commission to suspend, limit,
or revoke the exemption for the NMS Stock ATS. Given this change in the
effectiveness determination process, we do not believe that requiring
that an initial Form ATS-N filing be considered ineffective upon filing
would provide any additional benefit, because an NMS Stock ATS (except
for a Legacy NMS Stock ATS) may not operate pursuant to the conditions
of the Rule 3a1-1(a)(2) exemption unless its Form ATS-N has become
effective, pursuant to Rule 304(a)(1)(iii).
---------------------------------------------------------------------------

    \362\ See CFA Institute Letter at 5.
    \363\ See id. at 4.
    \364\ See Rule 304(a)(1)(iv)(A). See also infra Section IV.A.4.a
(discussing the initial Form ATS-N requirements for Legacy NMS Stock
ATSs).
---------------------------------------------------------------------------

d. Effectiveness; Ineffectiveness Determinations Under Rule
301(a)(1)(iii)
    We are adopting Rule 304(a)(1)(iii) with modifications, and
relocating most of proposed Rule 304(a)(1)(iv), with
modifications,\365\ to adopted Rule 304(a)(1)(iii) (``Effectiveness;
Ineffectiveness determination''). For the reasons described above, we
are modifying Rule 304(a)(1)(iii) to provide that an initial Form ATS-N
filed by an NMS Stock ATS, as amended,\366\ will become effective,
unless declared ineffective, upon the earlier of: (1) The completion of
review by the Commission and publication pursuant to Rule 304(b)(2)(i),
or (2) the expiration of the review period, or, if applicable, the end
of the extended review period, pursuant to Rule 304(a)(1)(ii). Rule
304(a)(1)(iii) will further provide that the Commission will, by order,
declare ineffective an initial Form ATS-N if it finds, after notice and
opportunity for hearing, that such action is necessary or appropriate
in the public interest, and is consistent with the protection of
investors.\367\
---------------------------------------------------------------------------

    \365\ See infra note 368 and accompanying text.
    \366\ We are adopting a process that allows NMS Stock ATSs to
file an updating and correcting amendment to an initial Form ATS-N
during the Commission review period. See supra Section IV.A.2. We
are adding to Rule 304(a)(1)(iii) that an initial Form ATS-N ``as
amended'' will become effective, which includes any amendments filed
to the initial Form ATS-N during the Commission review period.
Amendments filed by an NMS Stock ATS to an initial Form ATS-N during
the Commission review period are subject to Rule 304(a)(2)(ii),
which provides that the Commission will, by order, declare
ineffective any Form ATS-N amendment no later than 30 calendar days
from filing with the Commission. The Commission will have 30
calendar days to declare any amendments ineffective, including
amendments to Form ATS-N that are filed during the Commission review
period. For example, if an NMS Stock ATS files an updating or
correcting amendment to an initial Form ATS-N on calendar day 110 of
the Commission review period, and the initial Form ATS-N becomes
effective on calendar day 120, the updating or correcting amendment
could be declared ineffective by the Commission up to an additional
20 calendar days after the initial Form ATS-N becomes effective--
until the Commission's 30-calendar day review period has expired.
    \367\ We are also making technical changes to the proposed text
of Rule 304(a)(1)(iii) by adding to Rule 304(a)(1)(iii) the word
``initial'' before Form ATS-N and renaming the paragraph as
``Effectiveness; Ineffectiveness determination.''
     In the Proposal, we stated that it would be necessary or
appropriate in the public interest, and consistent with the
protection of investors, to declare ineffective a Form ATS-N if it
finds, after notice and opportunity for hearing, that one or more
disclosures on Form ATS-N are materially deficient with respect to
their accuracy, currency, or completeness. See Proposal, supra note
2, at 81025. As discussed further below, we are modifying the
proposed guidance regarding when it may be necessary or appropriate
to declare a Form ATS-N ineffective.
     We are also modifying the Instructions to Form ATS-N to better
align them with that guidance, and to reduce any potential confusion
about the difference between an NMS Stock ATS's obligations with
respect to completing Form ATS-N and the standard of review that the
Commission will apply when determining whether to declare a Form
ATS-N ineffective. See supra note 320.
     The same standard for declarations of ineffectiveness will
apply to filings of both initial Form ATS-N and Form ATS-N
amendments. See infra Section IV.B.2.
---------------------------------------------------------------------------

    We are also relocating two provisions of proposed Rule
304(a)(1)(iv), with non-substantive modifications,\368\ to adopted Rule
304(a)(1)(iii). As a result, Rule 304(a)(1)(iii) states that if the
Commission declares an initial Form ATS-N ineffective, the NMS Stock
ATS shall be prohibited from operating as an NMS Stock ATS pursuant to
Sec.  240.3a1-1(a)(2); and that an initial Form ATS-N declared
ineffective does not prevent the NMS Stock ATS from subsequently filing
a new Form ATS-N. We believe Rule 304(a)(1)(iii), as modified, clearly
explains when an initial Form ATS-N will become effective or declared
ineffective, and the consequences of an order of ineffectiveness.
Accordingly, an NMS Stock ATS whose initial Form ATS-N has become
effective may commence operations and will be required to comply with
Rule 304 as well as applicable provisions of Rules 300 through 303 of
Regulation ATS. An NMS Stock ATS whose initial Form ATS-N was declared
ineffective would be prohibited from operating pursuant

to the Rule 3a1-1(a)(2) exemption. Similarly, a Legacy NMS Stock ATS
whose initial Form ATS-N was declared ineffective would no longer be
eligible for the Rule 3a1-1(a)(2) exemption and would be required to
cease operations.\369\ If the Commission declares an initial Form ATS-N
ineffective, the NMS Stock ATS that filed the form could subsequently
file a new Form ATS-N for Commission consideration.
---------------------------------------------------------------------------

    \368\ We are deleting the following language, which was part of
proposed Rule 304(a)(1)(iv): ``The Commission will issue an order to
declare a Form ATS-N effective or ineffective.'' This is addressed
in the adopted rule text stating that ``[a]n initial Form ATS-N, as
amended, filed by an NMS Stock ATS will become effective, unless
declared ineffective, upon the earlier of: (1) [T]he completion of
review by the Commission and publication pursuant to paragraph
(b)(2)(i) of [Rule 304] or (2) [t]he expiration of the review
period, or, if applicable, the end of the extended review period,
pursuant to paragraph (a)(1)(ii) of [Rule 304]'' and that ``[t]he
Commission will, by order, declare an initial Form ATS-N ineffective
if it finds, after notice and opportunity for hearing, that such
action is necessary and appropriate in the public interest, and is
consistent with the protection of investors.'' See Rule
304(a)(1)(iii)(B). In addition, we are not adopting the language
that states ``[u]pon the effectiveness of the Form ATS-N, the NMS
Stock ATS may operate pursuant to the conditions of this section''
or language that states ``[i]f the Commission declares an initial
Form ATS-N effective, the NMS Stock ATS may operate pursuant to the
conditions of this section'' for purposes of clarity and
readability. Rule 304(a)(1)(i) provides that an initial Form ATS-N
must be effective for the NMS Stock ATS to avail itself of the Rule
3a1-1(a)(2) exemption (see supra Section IV.A.1), and Rule
304(a)(1)(iii) specifies when an initial Form ATS-N filing will
become effective. Rule 304(a)(1)(iii) also states that: (1) if the
Commission declares an initial Form ATS-N ineffective, the NMS Stock
ATS shall be prohibited from operating as an NMS Stock ATS
``pursuant to Sec.  240.3a1-1(a)(2);'' and (2) an initial Form ATS-N
declared ineffective ``does'' not (rather than ``would'' not)
prevent the NMS Stock ATS from subsequently filing a new Form ATS-N.
    \369\ The initial filing of Form ATS-N by Legacy NMS Stock ATSs
is discussed further below. See infra Section IV.A.4.a.
---------------------------------------------------------------------------

    In the Proposal, we provided certain examples of scenarios in which
we believed that it would be necessary or appropriate in the public
interest, and consistent with the protection of investors, to declare
ineffective a Form ATS-N, after notice and opportunity for
hearing.\370\ We continue to believe that the examples provided in the
Proposal are appropriate for the Commission to declare a Form ATS-N
ineffective and will provide NMS Stock ATSs and market participants
with clarity with respect to when the Commission could find, after
notice and opportunity for hearing, it necessary or appropriate in the
public interest, and consistent with the protection of investors, to
declare ineffective a Form ATS-N. We are also providing additional
clarity with respect to this guidance.
---------------------------------------------------------------------------

    \370\ See Proposal, supra note 2, at 81024-26.
---------------------------------------------------------------------------

    Several commenters request additional guidance and clarity
regarding the Commission's review of initial Form ATS-N filings and
Form ATS-N amendments and the circumstances under which the Commission
may declare a Form ATS-N ineffective.\371\ We believe that it would be
necessary or appropriate in the public interest, and consistent with
the protection of investors, to declare ineffective a Form ATS-N if the
Commission finds, for example, after notice and opportunity for
hearing, the Form ATS-N was filed by an entity that does not meet the
definition of NMS Stock ATS; one or more disclosures reveal non-
compliance with federal securities laws, or the rules or regulations
thereunder, including Regulation ATS; or one or more disclosures on
Form ATS-N are materially deficient with respect to their completeness
or comprehensibility. Given that the objective of Rule 304 is to
provide market participants with information about NMS Stock ATSs
through Form ATS-N disclosures, our review is designed to focus on the
Form ATS-N disclosures and is not a merit-based review of the
operations of the NMS Stock ATS or the ATS-related activities of the
broker-dealer operator.\372\
---------------------------------------------------------------------------

    \371\ See supra notes 343, 345, and 346 and accompanying text.
See also supra notes 335-340 and accompanying text discussing
commenter concerns regarding whether the Commission articulated an
objective or consistent standard of review.
    \372\ See infra notes 404-407 and accompanying text.
---------------------------------------------------------------------------

    We believe \373\ that it would be necessary to declare ineffective
a Form ATS-N if the Form ATS-N was filed by an entity that does not
satisfy the definition of ATS, and more specifically, the definition of
NMS Stock ATS.\374\ The proper classification of an entity would
clearly indicate to market participants, as well as the Commission, the
functions that entity performs and the regulatory framework and
attendant obligations that attach to that entity.\375\ We believe that
the review of Form ATS-N disclosures will help mitigate concerns that
market participants may be confused or misled about whether an entity
in fact meets the definition of an NMS Stock ATS. If an entity does not
meet the definition, market participants may hold false expectations
about how their orders may interact or be matched with other orders or
they may not fully understand whether the entity with which they are
doing business is required to comply with Regulation ATS.
---------------------------------------------------------------------------

    \373\ See Proposal, supra note 2, at 81024-81025.
    \374\ See Rule 300(k).
    \375\ For example, an ATS that is not an NMS Stock ATS would be
subject to different conditions under Regulation ATS to be eligible
for the Rule 3a1-1(a)(2) exemption. Similarly, depending on the
facts and circumstances, an entity that is not an ATS may be subject
to requirements as a broker-dealer, but not the conditions of
Regulation ATS, or may be required to register as a national
securities exchange. See Proposal, supra note 2, at 81024 n.288 and
accompanying text.
---------------------------------------------------------------------------

    We believe that it would be necessary to declare Form ATS-N
ineffective if one or more disclosures reveal non-compliance with
federal securities laws, including Regulation ATS. As discussed in the
Proposal,\376\ the Commission will conduct a ``red-flag'' review for
instances of non-compliance with federal securities laws that seem
apparent from the disclosures on Form ATS-N. For example, as a
condition to the Rule 3a1-1(a)(2) exemption, Rule 301(b)(1) of
Regulation ATS requires that an ATS register as a broker-dealer under
Section 15 of the Exchange Act.\377\ Section 15(b)(8) of the Exchange
Act \378\ prohibits a registered broker or dealer from effecting a
transaction unless the broker or dealer is a member of a securities
association registered pursuant to Section 15A of the Exchange Act
\379\ or effects transactions solely on a national securities exchange
of which it is a member. Therefore, to comply with Regulation ATS, and
thus qualify for the Rule 3a1-1(a)(2) exemption, an ATS must become a
member of an SRO and comply with the rules of the SRO, including
obtaining approval by the SRO to operate an ATS in accordance with
applicable SRO rules. If an entity were to file a Form ATS-N before
registering as a broker-dealer under Section 15 of the Exchange Act,
the entity would not be in compliance with Rule 301(b)(1) of Regulation
ATS.\380\ Moreover, if the entity were to file a Form ATS-N before
becoming a member of an SRO, the entity would not be in compliance with
Rule 301(b)(1) of Regulation ATS because Section 15(b)(1) of the
Exchange Act provides that a Commission order granting registration is
not effective until the broker-dealer has become a member of a national
securities association registered pursuant to Section 15A of the
Exchange Act,\381\ and the Commission's order granting broker-dealer
registration would not be effective.\382\ As another example, if the
Form ATS-N reveals non-compliance with Regulation NMS, including, among
other provisions, Rule 612, known as the ``Sub-Penny Rule,'' which
prohibits market participants, including ATSs, from displaying,
ranking, or accepting orders, quotations, or indications of interest in
NMS stock priced in an increment smaller than $0.01,\383\ the Form ATS-
N would not be consistent with Rule 304 because the NMS Stock ATS would
operate in a manner that may violate the federal securities laws.
---------------------------------------------------------------------------

    \376\ See Proposal at 81025-26.
    \377\ 17 CFR 242.301(b)(1).
    \378\ 15 U.S.C. 78o(b)(8).
    \379\ 15 U.S.C. 78o-3.
    \380\ See 17 CFR 301(b)(1). Rule 301(b)(1) of Regulation ATS
requires an ATS to register as a broker-dealer under Section 15 of
the Exchange Act.
    \381\ See 15 U.S.C. 78o(b)(1).
    \382\ See 17 CFR 242.301(b)(1).
    \383\ Specifically, Rule 612(a) of Regulation NMS provides that
``no national securities exchange, national securities association,
alternative trading system, vendor, or broker or dealer shall
display, rank, or accept from any person a bid or offer, an order,
or an indication of interest in any NMS stock priced in an increment
smaller than $0.01 if that bid or offer, order, or indication of
interest is priced equal to or greater than $1.00 per share.'' See
17 CFR 242.612(a).
---------------------------------------------------------------------------

    We believe that it would be necessary to declare Form ATS-N
ineffective if one or more disclosures are materially deficient with
respect to their completeness and comprehensibility. The following are
non-exhaustive examples of Form ATS-N disclosures that may be deficient
with respect to

their completeness: \384\ an NMS Stock ATS discloses an order type on
Form ATS-N but does not describe the key attributes of the order type,
such as time-in-force limitations that can be placed on the ability to
execute the order, the treatment of unfilled portions of orders, or
conditions for cancelling orders in whole or in part; \385\ an NMS
Stock ATS describes some of its priority rules, but fails to describe
conditions or exceptions to its priority rules, or fails to describe
any priority overlays; \386\ an NMS Stock ATS, in response to Part II,
Item 1 of adopted Form ATS-N, discloses that a principal trading desk
of the broker-dealer operator trades on the NMS Stock ATS, but does not
explain advantages the broker-dealer operator receives compared to
other subscribers; an NMS Stock ATS, in response to Part III, Item 19
of adopted Form ATS-N, fails to provide complete information about fees
and rebates charged for use of the NMS Stock ATS; an NMS Stock ATS
discloses that it has only one class of subscribers but the Commission
or its staff learns through discussions (during the review period) with
the NMS Stock ATS or otherwise that the ATS in fact has several classes
of subscribers; or an NMS Stock ATS discloses that it has two classes
of subscribers that are charged the same trading fees, but the
Commission or its staff learns through discussions with the ATS or
otherwise that in fact one class receives more favorable fees than the
other.\387\
---------------------------------------------------------------------------

    \384\ These are some, but not all, of the types of circumstances
that could result in the Commission declaring a Form ATS-N
ineffective due to being materially deficient with respect to
completeness. We also provided some of these examples in the
Proposal as examples of disclosures that could cause the Commission
to declare a Form ATS-N ineffective because it contains one or more
disclosures that appear to be materially deficient. See Proposal,
supra note 2, at 81025. Because we are modifying the standard of
review to focus on completeness and comprehensibility, some of the
examples discussed in the Proposal are also discussed below to show
application of the standard the Commission is adopting to the same
scenarios.
    \385\ This example was discussed in the Proposal as an example
of a disclosure that may be materially deficient because it may not
be sufficiently detailed. See Proposal, supra note 2, at 81025.
    \386\ See id. Another example would be if the NMS Stock ATS
fails to describe which order would receive priority where two or
more orders are otherwise on par, such as a situation in which a
customer and non-customer order are at the same price in a price
priority system.
    \387\ These examples were discussed in the Proposal as examples
of disclosures that may be materially deficient because they would
not be accurate. See Proposal, supra note 2, at 81025.
---------------------------------------------------------------------------

    The following are non-exhaustive examples of Form ATS-N disclosures
that may be deficient with respect to their comprehensibility: \388\
Form ATS-N includes inconsistent information among the disclosures,
such as a statement by the NMS Stock ATS in one part of the form that