[Federal Register Volume 84, Number 178 (Friday, September 13, 2019)]
[Notices]
[Pages 48458-48494]
[FR Doc No: 2019-19852]

Vol. 84

Friday,

No. 178

September 13, 2019

Part III

Securities and Exchange Commission

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Proposed Amendments to the National Market System Plan Governing the
Consolidated Audit Trail; Notice

Federal Register / Vol. 84 , No. 178 / Friday, September 13, 2019 /
Notices

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86901; File No. S7-13-19]
RIN 3235-AM60

Proposed Amendments to the National Market System Plan Governing
the Consolidated Audit Trail

AGENCY: Securities and Exchange Commission.

ACTION: Proposed amendments to national market system plan.

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SUMMARY: The Securities and Exchange Commission (``Commission'' or
``SEC'') is proposing amendments to the National Market System Plan
Governing the Consolidated Audit Trail (``CAT NMS Plan''). The proposed
amendments impose public transparency requirements on the self-
regulatory organizations that are participants to the CAT NMS Plan
(each, a ``Participant'' and collectively, the ``Participants''). The
Participants would be required to file with the Commission and publish
a complete implementation plan for the Consolidated Audit Trail
(``CAT'') and quarterly progress reports, each of which must be
approved by a supermajority vote of the Operating Committee of CAT NMS,
LLC. The proposed amendments also establish financial accountability
provisions.

DATES: Comments should be received on or before October 28, 2019.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File No. S7-13-19 on the subject line.

Paper Comments

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

All submissions should refer to File No. S7-13-19. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
internet website (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for website viewing and printing in the Commission's
Public Reference Room, 100 F Street NE, Washington, DC 20549 on
official business days between the hours of 10:00 a.m. and 3:00 p.m.
All comments received will be posted without change. Persons submitting
comments are cautioned that the Commission does not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly.
    Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Erika Berg, Special Counsel, at (202)
551-5925; Leigh Duffy, Special Counsel, at<PHONE_NUMBER>; or Susan
Poklemba, Attorney-Advisor, at<PHONE_NUMBER>, Division of Trading and
Markets, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to
the CAT NMS Plan.\1\
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    \1\ See Securities Exchange Act Release No. 78318 (November 15,
2016), 81 FR 84696 (November 23, 2016), at 84943.
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Table of Contents

I. Background
II. Description of Proposed Amendments
    A. Amendments To Increase Operational Transparency
    B. Financial Accountability Amendments for Implementation of the
CAT
    1. Financial Accountability Milestones and Target Deadlines
    2. Collection of Post Amendment Industry Member Fees
    3. Identification of Post-Amendment Expenses in Submissions to
the Commission
III. Paperwork Reduction Act
    A. Summary of Collection of Information
    1. Implementation Plan
    2. Quarterly Progress Reports
    B. Proposed Use of Information
    1. Implementation Plan
    2. Quarterly Progress Reports
    C. Respondents
    D. Total Initial and Annual Reporting and Recordkeeping Burdens
    1. Implementation Plan
    2. Quarterly Progress Reports
    E. Collection of Information is Mandatory
    F. Confidentiality of Responses to Collection of Information
    G. Retention Period for Recordkeeping Requirements
    H. Request for Comments
IV. Economic Analysis
    A. Baseline
    1. Transparency of CAT Implementation Status
    2. Status of Implementation
    B. Benefits
    C. Costs
    D. Impact on Efficiency, Competition, and Capital Formation
    1. Efficiency
    2. Competition
    3. Capital Formation
    E. Alternatives
    1. Fixed versus Relative Financial Accountability Milestone
Dates
    2. Different Timelines for Onset of RFRRs
    3. Alternate Magnitudes of RFRRs
    F. Request for Comment on the Economic Analysis
V. Consideration of Impact on the Economy
VI. Regulatory Flexibility Act Certification
VII. Statutory Authority and Text of the Proposed Amendments to the
CAT NMS Plan

I. Background

    In July 2012, the Commission adopted Rule 613 of Regulation NMS,
which requires the national securities exchanges and national
securities associations (``self-regulatory organizations'') to jointly
develop and submit to the Commission a national market system plan to
create, implement and maintain a consolidated audit trail (``CAT'').\2\
Back then, and even today, trading data was and is inconsistent across
the self-regulatory organizations and certain market activity is
difficult to compile because it is not aggregated in one, directly
accessible consolidated audit trail system. The goal of Rule 613 was to
create a system that provides regulators with more timely access to a
sufficiently comprehensive set of trading data, enabling regulators to
more efficiently and effectively reconstruct market events, monitor
market behavior, and identify and investigate misconduct. Rule 613 thus
aims to modernize a reporting infrastructure to oversee the trading
activity generated across numerous markets in today's national market
system.
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    \2\ See Securities Exchange Act Release No. 67457 (July 18,
2012), 77 FR 45722 (August 1, 2012) (``Rule 613 Adopting Release'').
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    On November 15, 2016, the Commission approved the national market
system plan required by Rule 613 (``CAT NMS Plan'' or ``Plan'') that
was submitted by the self-regulatory organizations (the
``Participants'').\3\ In

the CAT NMS Plan,\4\ the Participants described the numerous elements
they proposed to include in the CAT, including (1) requirements for the
plan processor responsible for building, operating and maintaining the
Central Repository (``Plan Processor''),\5\ (2) requirements for the
creation and functioning of the Central Repository, (3) requirements
applicable to the reporting of CAT Data \6\ by Participants and their
members (``Industry Members''),\7\ (4) requirements relating to the
security and confidentiality of CAT Data, (5) governance principles for
CAT NMS LLC (``Company''),\8\ and (6) provisions for the establishment
of funding to pay for the operation of the CAT, including the
establishment of fees that the Participants and Industry Members will
pay.\9\
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    \3\ The National Market System Plan Governing the Consolidated
Audit Trail was filed with the Commission by the Participants who
include BATS Exchange, Inc. (n/k/a Cboe BZX Exchange, Inc.), BATS-Y
Exchange, Inc. (n/k/a Cboe BYX Exchange, Inc.), BOX Options Exchange
LLC, C2 Options Exchange, Incorporated (n/k/a Cboe C2 Exchange,
Inc.), Chicago Board Options Exchange, Incorporated (n/k/a Cboe
Exchange, Inc.), Chicago Stock Exchange, Inc. (n/k/a NYSE Chicago,
Inc.), EDGA Exchange, Inc. (n/k/a Cboe EDGA Exchange, Inc.), EDGX
Exchange, Inc. (n/k/a Cboe EDGX Exchange, Inc.), Financial Industry
Regulatory Authority, Inc. (``FINRA''), International Securities
Exchange, LLC (n/k/a NASDAQ ISE, LLC), ISE Gemini, LLC (n/k/a NASDAQ
GEMX, LLC), Miami International Securities Exchange LLC, NASDAQ OMX
BX, Inc. (n/k/a NASDAQ BX, Inc.), NASDAQ OMX PHLX LLC (n/k/a NASDAQ
PHLX LLC), The NASDAQ Stock Market LLC, National Stock Exchange,
Inc. (n/k/a NYSE National, Inc.), New York Stock Exchange LLC, NYSE
MKT LLC, and NYSE Arca, Inc.
    \4\ See Securities Exchange Act Release No. 78318 (November 15,
2016), 81 FR 84696, (November 23, 2016) (``CAT NMS Plan Approval
Order''). The CAT NMS Plan is Exhibit A to the CAT NMS Plan Approval
Order. See CAT NMS Plan Approval Order, at 84943-85034. In approving
the CAT NMS Plan, the Commission added ISE Mercury, LLC (n/k/a
Nasdaq MRX, LLC) and Investors Exchange LLC as Participants to the
CAT NMS Plan. See id. at 84728. On January 30, 2017 and March 1,
2019, the Commission noticed for immediate effectiveness amendments
to the Plan to add MIAX Pearl, LLC and MIAX Emerald, LLC,
respectively, as Participants. See Securities Exchange Act Release
Nos. 79898 (January 30, 2017), 82 FR 9250 (February 3, 2017), and
85230 (March 1, 2019), 84 FR 8356 (March 7, 2019). Unless otherwise
noted, capitalized terms are used as defined in Rule 613, in the CAT
NMS Plan, or in this release.
    \5\ The Central Repository is the repository responsible for the
receipt, consolidation, and retention of all information reported to
the CAT. See CAT NMS Plan, supra note 4, at Section 1.1.
    \6\ ``CAT Data'' is defined in the CAT NMS Plan as ``data
derived from Participant Data, Industry Member Data, SIP Data, and
such other data as the Operating Committee [of the Company] may
designate as `CAT Data' from time to time.'' See id. The Operating
Committee is the governing body of the Company. See id.
    \7\ ``Industry Member'' is defined in the CAT NMS Plan as ``a
member of a national securities exchange or a member of a national
securities association.'' See id.
    \8\ The CAT NMS Plan is the limited liability company agreement
of the Company, a jointly owned limited liability company formed
under Delaware state law, through which the Participants conduct the
activities of the CAT. Each Participant is a member of the Company
and jointly owns the Company on an equal basis. The Participants
submitted to the Commission a proposed amendment to the CAT NMS Plan
on August 29, 2019, which they designated as effective on filing.
With the proposed amendment, the limited liability company agreement
of a new limited liability company named Consolidated Audit Trail,
LLC would serve as the CAT NMS Plan, replacing in its entirety the
CAT NMS Plan. See Notice of Filing of Amendment to the National
Market System Governing the Consolidated Audit Trail, available at
https://catnmsplan.com/wp-content/uploads/2019/09/CAT-2.0-Plan-Amendment(as-filed-with-SEC-8.29.19)_(175663431)_(1).pdf.
    \9\ See CAT NMS Plan, supra note 4, at Section 11.1. The CAT NMS
Plan notes that the Participants shall file with the Commission
under Section 19(b) of the Act any such fees on Industry Members
that the Operating Committee of the Company approves. See id. at
Section 11.1(b).
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    The Participants also set forth, in the CAT NMS Plan, deadlines
related to the implementation of the CAT, including (1) the requirement
that the Participants select a Plan Processor within two months
following approval of the CAT NMS Plan,\10\ (2) the requirement that
the Participants begin recording and reporting data to the Central
Repository by November 15, 2017,\11\ and (3) the requirement that each
Participant require Industry Members and Small Industry Members \12\ to
begin reporting information to the Central Repository by November 15,
2018,\13\ and November 15, 2019, respectively.\14\
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    \10\ 17 CFR 242.613(a)(3)(i). See also CAT NMS Plan, supra note
4, at Section 6.1(a). Two months following approval of the CAT NMS
Plan was January 15, 2017 (a Sunday).
    \11\ See CAT NMS Plan, supra note 4, at Section 6.7(a)(iii).
    \12\ The CAT NMS Plan defines Small Industry Member as ``an
Industry Member that qualifies as a small broker-dealer as defined
in SEC Rule 613.'' See id. at Section 1.1. Rule 613(a)(3)(vi) uses
the definition of small broker-dealer as defined in Rule 0-10(c),
which defines such a broker-dealer as (1) having had total capital
(net worth plus subordinated liabilities) of less than $500,000 on
the date in the prior fiscal year as of which its audited financial
statements were prepared pursuant to Rule 17a-5(d) or, if not
required to file such statements, a broker or dealer that had total
capital (net worth plus subordinated liabilities) of less than
$500,000 on the last business day of the preceding fiscal year (or
in the time that it has been in business, if shorter); and (2) is
not affiliated with any person (other than a natural person) that is
not a small business or small organization as defined in Rule 0-10.
See Rule 613 Adopting Release, supra note 2, at 45804; 17 CFR
242.613(a)(3)(vi); 17 CFR 240.0-10(c).
    \13\ See CAT NMS Plan, supra note 4, at Section 6.7(a)(v).
    \14\ See id. at Section 6.7(a)(vi).
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    On January 18, 2017, the Participants filed with the Commission
notice of their selection of the Plan Processor.\15\ On January 17,
2017, the Participants selected Thesys Technologies LLC to build the
CAT system, pending execution of a Plan Processor Agreement between
Thesys Technologies LLC and the Participants.\16\ The Plan Processor
Agreement was executed on April 6, 2017, after which Thesys CAT LLC
(``Thesys CAT''), a wholly owned subsidiary of Thesys Technologies LLC,
became the Plan Processor for the CAT.
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    \15\ See Letter from Participants to Brent J. Fields, Secretary,
Commission, dated January 18, 2017, available at https://www.sec.gov/divisions/marketreg/rule613-info-notice-of-plan-processor-selection.pdf.
    \16\ Id.
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    The next critical deadline required by the CAT NMS Plan was for the
Participants to begin recording and reporting data to the Central
Repository by November 15, 2017.\17\ The Participants, however, did not
begin reporting data by that deadline. On November 13, 2017, two days
before the deadline for Participant reporting, and having previously
provided assurances as late as the summer of 2017 that initial data
reporting would commence on schedule and in accordance with the CAT NMS
Plan, the Participants filed a request for exemptive relief in which
they sought, among other things, to delay the deadline by which they
must report to the CAT for one year, and to extend the deadlines by
which Industry Members and Small Industry Members must report by 17
months.\18\ The Commission did not grant this request.\19\ SEC Chairman
Clayton instead issued a statement on November 14, 2017 noting that he
would not support extensions of the CAT deadlines on the terms proposed
by the Participants.\20\ Chairman Clayton stated the importance of the
CAT in enhancing the protection of investors and the markets by
providing regulators with consolidated oversight of the securities
markets. Chairman Clayton also instructed Commission staff to engage
with the Participants as necessary and appropriate.\21\
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    \17\ See supra note 11.
    \18\ See Letter from the Participants to Brent J. Fields,
Secretary, Commission, dated November 13, 2017 (``November 2017
Exemption Request'').
    \19\ See Statement on Status of the Consolidated Audit Trail
(November 14, 2017), available at https://www.sec.gov/news/public-statement/statement-status-consolidated-audit-trail-chairman-jay-clayton.
    \20\ Id.
    \21\ Id.
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    Since then, Commission staff has engaged with the Participants with
a focus on trying to ensure that project management, resource, and
governance deficiencies are addressed, including development of a
credible and comprehensive work plan with verifiable milestones.\22\
Among other things, Commission staff has encouraged the Participants to
enhance their focus on project management and accountability.\23\ As
sophisticated market participants with vast experience related to
various data systems and data management protocols, the Participants
are capable of

managing--and uniquely situated to manage--the implementation of the
CAT.
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    \22\ See Statement on Status of the Consolidated Audit Trail
(August 27, 2018), available at https://www.sec.gov/news/public-statement/tm-status-consolidated-audit-trail.
    \23\ Id.
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    On May 1, 2018, the SEC's Division of Trading and Markets
(``Division'') sent a letter to the Participants expressing concern
about the lack of progress on CAT implementation. The Division called
on senior personnel at each Participant to focus on completing the CAT
as soon as practicable with all of the functionality required by the
CAT NMS Plan. The Division also requested a master plan (``Master
Plan'') for completing the CAT,\24\ including a timeline with
development and completion milestones.\25\ The Division requested that
the Master Plan detail all material steps to fully implement both
Participant and Industry Member reporting, and describe how the
Participants will better manage the Plan Processor's performance. The
Participants submitted the requested Master Plan on May 25, 2018. The
Master Plan stated that Participant reporting would begin on November
15, 2018, one year past the deadline in the CAT NMS Plan.\26\
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    \24\ The Division of Trading and Markets also requested that the
Participants streamline their decision-making and governance
processes to ensure more timely implementation. See Letter from
Brett Redfearn, Director, Division of Trading and Markets,
Commission, to Michael J. Simon, Chair, CAT NMS Plan Operating
Committee, dated May 1, 2018. See also note 22.
    \25\ The Master Plan projects Industry Member reporting will
commence in phases, with equities reporting beginning in November
2019 and simple options reporting beginning in May 2020, with final
implementation of the CAT through Small Industry Member reporting
occurring by November 2022. See Industry Update on the Consolidated
Audit Trail (June 28, 2018), at 4, available at https://www.catnmsplan.com/wp-content/uploads/2018/06/CAT-Industry-Webcast-6.28.18.pdf.
    \26\ See supra note 22.
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    On November 15, 2018, the Participants began reporting quote,
order, trade and other transaction data to the Central Repository;
however, as the Participants acknowledge, the CAT system did not
include all of the functionality required by the CAT NMS Plan, such as
linkages between reported events and regulators' query
functionality.\27\ On November 16, 2018, the Participants stated that
Thesys CAT would complete all of the required functionality by March
31, 2019.\28\ But on February 1, 2019, the Company announced that it
would be transitioning from Thesys CAT to a new Plan Processor,\29\ and
on February 26, 2019, the Operating Committee voted to select FINRA as
the successor Plan Processor to Thesys CAT.\30\ As a result of this and
various other factors, the functionality the Participants represented
Thesys CAT would complete by March 31, 2019 was not delivered.
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    \27\ See CAT NMS Announces Initiation of Reporting to the
Consolidated Audit Trail (November 16, 2018), available at https://www.catnmsplan.com/wp-content/uploads/2018/11/Press-Release-CAT-Launch-final.pdf.
    \28\ Id.
    \29\ See News, available at https://www.catnmsplan.com/news-page/index.html (February 1, 2019).
    \30\ See Letter from Michael J. Simon, Chair, CAT NMS, LLC
Operating Committee, to Brent J. Fields, Secretary, Commission,
dated April 9, 2019, available at https://www.sec.gov/divisions/marketreg/rule613-info-notice-of-plan-processor-selection-040919.pdf.
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    The Participants are responsible for their selection of a Plan
Processor, for the management of the Plan Processor, and for compliance
with the CAT NMS Plan. The Participants and the Plan Processor failed
to comply with the following deadlines in the CAT NMS Plan and missed
the following milestone completion dates:
     The November 15, 2017 milestone completion date for the
Plan Processor publishing final technical specifications for the
submission of order data for Industry Members; \31\
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    \31\ See CAT NMS Plan, supra note 4, at Appendix C, Section
C.10(b).
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     the May 15, 2018 milestone completion date for the Plan
Processor publishing technical specifications for Industry Member
submission of customer data; \32\
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    \32\ See id. at Appendix C, Section C.10(a).
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     the May 15, 2018 milestone completion date for the Plan
Processor making the testing environment available on a voluntary basis
and beginning connectivity testing and accepting order data from
Industry Members for testing purposes; \33\
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    \33\ See id. at Appendix C, Section C.10(b).
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     the August 15, 2018 milestone completion date for Industry
Member order submission testing; \34\
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    \34\ See id. at Appendix C, Section C.10(a); id. at Appendix C,
Section C.10(b).
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     the October 15, 2018 milestone completion date for
Industry Member reporting of customer information to the Central
Repository; \35\ and
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    \35\ See id. at Appendix C, Section C.10(a).
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     the November 15, 2018 deadline for full Industry Member
reporting.\36\
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    \36\ See id. at Section 6.4; Section 6.7(a)(v).
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    In light of these missed deadlines and milestone completion dates,
Chairman Clayton determined that it was necessary to dedicate
additional oversight resources to this project. Accordingly, Chairman
Clayton appointed a staff person to coordinate the Commission's efforts
to monitor the Participants' development of the CAT.\37\
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    \37\ See SEC Names Manisha Kimmel as Senior Policy Advisor to
the Chairman on the Consolidated Audit Trail (January 29, 2019),
available at https://www.sec.gov/news/press-release/2019-5.
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    The Commission is concerned by the continued potential for delays
to the implementation of the CAT. In an April 3, 2019 Industry Update
presentation, the Operating Committee presented a revised
implementation timeline for Industry Member reporting with deadlines
that extend even further beyond those previously shared with Industry
Members.\38\ The revised deadline for Industry Member reporting of all
transaction data to the CAT is December 2021, with the exception of
customer and account information which the Participants will require
the reporting of by July 2022.\39\ These deadlines further extend the
initially established November 15, 2018 Industry Member reporting
deadline in the CAT NMS Plan,\40\ the phased deadlines for Industry
Member reporting in the Master Plan, and the April 13, 2020 and the
April 20, 2021 deadlines for Industry Member and Small Industry Member
reporting proposed in the November 2017 Exemptive Request. The
Commission has not approved these implementation deadlines.
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    \38\ See Consolidated Audit Trail: CAT Reporting Technical
Specifications for Industry Members Draft 2 Version 1.1 Key Changes
(April 3, 2019), available at https://www.catnmsplan.com/wp-content/uploads/2019/04/CAT_Industry_Call_04032019_Presentation.pdf. See
also CAT Reporting Timelines, available at https://www.catnmsplan.com/timelines/. The Commission notes that it has not
approved these dates.
    \39\ See Consolidated Audit Trail: CAT Reporting Technical
Specifications for Industry Members Draft 2 Version 1.1 Key Changes
(April 3, 2019), available at https://www.catnmsplan.com/wp-content/uploads/2019/04/CAT_Industry_Call_04032019_Presentation.pdf, at 3,
4.
    \40\ See CAT NMS Plan, supra note 4, at Section 6.7(a)(v).
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    The Commission preliminarily believes that amendments to the CAT
NMS Plan are appropriate and necessary to help ensure the Participants'
fulfillment of their obligations to deliver a functional CAT in a
reasonable time frame. While the Commission believes that the
Commission staff's continued engagement with the Participants is
important to the effort to deliver a functional CAT, the Commission
also preliminarily believes that increased transparency through
formalized and public documentation of the Participants' implementation
progress will increase the Participants' accountability for the
efficient completion of CAT. The Commission also preliminarily believes
that modifying the CAT NMS Plan to require

additional financial accountability to meet implementation deadlines is
appropriate to achieve the CAT's timely completion.
    The Commission therefore proposes to amend the CAT NMS Plan to
require the Participants to develop a complete implementation plan
containing a detailed timeline with objective milestones to achieve
full CAT implementation (the ``Implementation Plan''). This
Implementation Plan would be filed with the Commission and made
publicly available after approval by a Supermajority Vote \41\ of the
Operating Committee. The Implementation Plan must be submitted by the
Operating Committee to the Chief Executive Officer (``CEO''),
President, or an equivalently situated senior officer of each
Participant, prior to being voted on by the Operating Committee.
Additionally, to further improve implementation transparency, the
Commission proposes requiring the Participants to provide the
Commission and the public with quarterly progress reports (``Quarterly
Progress Reports'' or ``Reports'') approved by at least a Supermajority
Vote of the Operating Committee.\42\ The Quarterly Progress Reports
must also be submitted by the Operating Committee to the CEO,
President, or an equivalently situated senior officer of each
Participant, prior to being voted on by the Operating Committee. The
proposed amendments also include provisions regarding financial
accountability to facilitate implementation of the CAT in an
expeditious and efficient manner.
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    \41\ Section 1.1 of the CAT NMS Plan defines a ``Supermajority
Vote'' as an ``affirmative vote of at least two-thirds of all of the
members of the Operating Committee or any Subcommittee, as
applicable, authorized to cast a vote with respect to a matter
presented for a vote (whether or not such a member is present at any
meeting at which a vote is taken) by the Operating Committee or any
Subcommittee, as applicable (excluding, for the avoidance of doubt,
any member of the Operating Committee or any Subcommittee, as
applicable, that is recused or subject to a vote to recuse from such
matter pursuant to Section 4.3(d)); provided that if two-thirds of
all such members authorized to cast a vote is not a whole number
then that number shall be rounded up to the nearest whole number.''
    \42\ The Commission does not believe, on a preliminary basis,
that the requirements of the Implementation Plan or the Quarterly
Progress Reports, discussed below in Part II.A., require the
Participants to disclose any confidential or sensitive information
related to the security of the CAT, the security of CAT Data, or the
operation of the CAT.
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II. Description of Proposed Amendments

    In order to address shortcomings in the completeness, accuracy,
accessibility, and timeliness of existing audit trail systems, the
Commission adopted Rule 613 in 2012 to direct the Participants to
create and file the CAT NMS Plan.\43\ The CAT was intended not only to
replace an existing regulatory data infrastructure that was ``outdated
and inadequate to effectively oversee a complex, dispersed, and highly
automated national market system,'' \44\ but also to provide benefits
to market participants in the form of improved market surveillance and
related analyses.\45\ Today, almost seven years after the adoption of
Rule 613, the need for a better audit trail system is no less pressing.
Yet, as described above,\46\ the Participants' progress towards
implementing the CAT has suffered multiple setbacks, and the
Participants have repeatedly missed relevant deadlines.\47\ These
delays to CAT implementation have left the Commission and the
Participants without access to a comprehensive database to help
facilitate analyses of market events and other matters. Moreover, the
repeated delays in CAT implementation have resulted in uncertainty for
Industry Members and other market participants.\48\
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    \43\ See supra note 2.
    \44\ Id. at 45723.
    \45\ Id. at 45730-33.
    \46\ See Part I supra.
    \47\ See, e.g., Industry Update on the Consolidated Audit Trail
9/7/2017 (August 25, 2017), available at https://catnmsplan.com/news-page/industry-update-on-the-consolidated-audit-trail/index.html
(stating that ``the implementation timelines for establishing the
CAT are in effect''); Industry Update on the Consolidated Audit
Trail (September 7, 2017), available at https://catnmsplan.com/wp-content/uploads/2017/09/Industry-Update-on-the-Consolidated-Audit-Trail-090817.pdf (indicating that the Participants were implementing
the CAT according to the timeline set forth in the CAT NMS Plan).
    \48\ See, e.g., Part IV.A.2.
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A. Amendments To Increase Operational Transparency

    Public disclosure of information about CAT implementation would
furnish a better understanding of progress on the CAT to market
participants and members of the investing public, all of whom stand to
benefit from the improved efficiencies and regulatory capabilities of
the CAT. Moreover, CAT implementation also affects Industry Members,
who are required to report data to the CAT and are therefore keenly
interested in the details and timing of CAT implementation. Currently,
the CAT NMS Plan does not contain disclosure provisions that require
the Participants to provide public updates on implementation progress
and developments.
    To address concerns about insufficient transparency and
accountability regarding the CAT's implementation, the Commission
proposes to amend Section 6.6 of the CAT NMS Plan. Specifically, the
Commission proposes to amend the CAT NMS Plan by adding a new Section
6.6(c) to require the Participants to file with the Commission and
publish on their own websites (or, if the Participants wish to publish
collectively, on the CAT NMS Plan website) the Implementation Plan
setting forth how and when the Participants will achieve full CAT
implementation, including the Participants' timeline for achieving both
(1) the objective milestones that are set forth in Section C.10 of
Appendix C of the CAT NMS Plan to assess the progress of CAT
implementation \49\ (``Objective Milestones'') and (2) the CAT
implementation milestones associated with the proposed financial
accountability provisions discussed below (``Financial Accountability
Milestones'') \50\ (collectively, the ``Implementation
Milestones'').\51\
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    \49\ See CAT NMS Plan, supra note 4, at Appendix C Section C.10.
    \50\ The Financial Accountability Milestones, and their relation
to proposed financial accountability provisions, are described in
more detail in Part II.B. infra.
    \51\ The Participants would be free to include, as may be
appropriate, additional Implementation Milestones not otherwise
required by the proposed plan amendment. For example, the
Participants may choose to add Implementation Milestones regarding
system security or external testing with CAT Reporters.
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    If the Participants decide to complete any of the Implementation
Milestones by releasing functionality in a phased approach, the
proposed rule would require the Implementation Plan to also describe
each phased release necessary to achieve the completion of the relevant
Implementation Milestone and to provide completion dates for each such
release.\52\ The proposed rule also requires the Participants to
include the completion date and a description of the status for each
Implementation Milestone identified in the Implementation Plan, which,
for example, could include discussion about the extent to which an

Implementation Milestone has been successfully completed. The
Implementation Plan would be required to be filed with the Commission
and published on each Participant website or the CAT NMS Plan website
no later than 30 calendar days following the effective date of this
amendment.
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    \52\ For example, the CAT NMS Plan identifies ``Industry Members
(other than Small Industry Members) begin reporting customer/
institutional/firm account information to the Central Repository for
processing'' as one of the Objective Milestones. See CAT NMS Plan,
supra note 4, at Appendix C, Section 10. Recent timelines published
by the Participants indicate, however, that the Participants have
decided to complete this milestone by releasing functionality in a
phased approach--first implementing Industry Member reporting for
equities transactions and then implementing Industry Member
reporting for options in a separate phase. See, e.g., CAT Reporting
Timelines, available at https://catnmsplan.com/timelines/. The
proposed amendment would therefore require the Implementation Plan
to provide completion dates for each of these phases.
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    The Commission preliminarily believes that requiring the proposed
Implementation Plan is appropriate to facilitate public transparency of
the CAT's development. The Commission believes 30 calendar days is a
sufficient amount of time to create the Implementation Plan because the
Participants have previously engaged in the exercise of considering and
developing timelines and milestones for implementation purposes when
developing the Master Plan, and many of the Participants are active in
data systems development and operation.
    The Commission further believes that requiring this added
transparency will aid the public in more easily monitoring the status
of the implementation of the CAT. The CAT NMS Plan currently requires
the Chief Compliance Officer of the Company to appropriately document
objective milestones to the Commission. The Commission understands from
the Participants' status update calls and discussions that the
Participants are already engaged in documenting their progress toward
CAT implementation for the Objective Milestones.\53\ Therefore, the
proposed amendment is requiring the incremental step that the
information related to this documentation be made public via the
Implementation Plan. The Commission does not expect that this
incremental step would be unduly burdensome. The proposed amendment
also requires the Participants to provide information regarding
progress toward and completion of the Financial Accountability
Milestones. Requiring the Participants to disclose their progress
toward and completion of Financial Accountability Milestones will
provide information not contained in the Objective Milestones regarding
the development and availability of critical regulatory tools. The
Commission believes that it is important to provide this information in
a comprehensive timeline. Information related to the production of
critical regulatory tools is also of interest to market participants,
who will benefit from the increased regulatory capabilities of the
CAT.\54\
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    \53\ See also CAT NMS Plan, supra note 4, at Section 6.7(b).
    \54\ Moreover, inclusion of the Financial Accountability
Milestones in the Implementation Plan will provide the Commission
and the public with more information regarding the implementation
deadlines. See Part II.B. infra for additional discussion of the
financial accountability provisions.
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    Moreover, the Commission preliminarily believes it is appropriate
to require the Participants to disclose whether they intend to complete
any of the Implementation Milestones in phases and any related
completion dates, because recent timelines published by the
Participants indicate that the Participants intend to release certain
functionality in phases. For example, while the CAT NMS Plan identifies
only one implementation date for Industry Member reporting, the
Participants have indicated that Industry Member reporting will be
implemented in several phases that each have a different implementation
deadline.\55\ The Implementation Plan should reflect the current,
phased approach to CAT implementation for this milestone, not the
approach to CAT implementation that was contemplated at the time the
CAT NMS Plan was approved. By requiring phasing to be addressed, the
Implementation Plan will both furnish a common understanding of the
status of CAT implementation at the time the Implementation Plan is
made public, as well as indicate how completing the Implementation
Milestones will lead to the achievement of full CAT implementation.
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    \55\ See note 52 supra.
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    The Commission also believes that, to the extent the Participants
meet the dates specified in the timeline, the publication of such
timeline will reduce uncertainty as to the expected implementation
timeline for Industry Members, which would aid Industry Members in
staging their resources and otherwise managing implementation planning,
which should reduce the risk of additional delays. The Commission
further believes that the Implementation Plan's timeline, paired with
Implementation Milestones, will serve to clarify what level of CAT
system functionality will be delivered on a given date. Finally, the
Commission anticipates that requiring the Participants to disclose
their deadlines and the status of Implementation Milestones to the
public through the Implementation Plan will provide accountability both
to the Commission and to Industry Members regarding the Participants'
progress toward CAT implementation.
    The Commission also proposes to amend the CAT NMS Plan to add
proposed Section 6.6(c)(ii) to require Participants to file with the
Commission and publish on each Participant website, or collectively on
the CAT NMS Plan website, complete Quarterly Progress Reports. These
Reports would be filed and made public no later than fifteen business
days following the end of each calendar quarter (e.g., by April 21,
2020; July 22, 2020; October 22, 2020; or January 25, 2021) and would
describe in detail the progress made by the Participants during the
prior calendar quarter toward achieving each of the Implementation
Milestones set forth in the Implementation Plan.\56\ The initial Report
to be filed by the Participants would be filed and made public no later
than fifteen business days following the end of the calendar quarter in
which the Implementation Plan was filed and made public.\57\ The
Reports would divide the Implementation Milestones into the following
three categories: (1) Implementation Milestones that have been
completed, (2) Implementation Milestones that are still in progress and
(3) Implementation Milestones that have not yet been initiated.
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    \56\ If, subsequent to the publication of the Implementation
Plan, the Participants decide to complete any of the Implementation
Milestones by releasing functionality in a phased approach, the
proposed amendment requires the Participants to reflect this change
in the Quarterly Progress Reports by describing the phases necessary
to achieve the completion of the relevant milestones and providing
specified information on the progress made for each release.
    \57\ For example, if the Participants filed and made public the
Implementation Plan on March 18, 2020 the initial Report would have
to be filed no later than April 21, 2020.
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    For each Implementation Milestone completed by the end of a given
calendar quarter, the Report would include the following: (1) The
completion date provided in the Implementation Plan, (2) the date on
which the Implementation Milestone was actually completed, and (3) a
description of any variance from the Implementation Plan.\58\
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    \58\ For example, a description of any variance from the
Implementation Plan could explain why the completion of a given
Implementation Milestone was delayed from the date set forth in the
Implementation Plan or, if the Implementation Milestone was broken
out into multiple phases, the extent to which the completed
Implementation Milestone satisfied the functionality required by the
Implementation Plan for that milestone.
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    For each Implementation Milestone in progress at the end of a given
calendar quarter, the Report would include the following: (1) The
completion date provided in the Implementation Plan, (2) the currently
targeted completion date, and (3) a description of (a) the current
status of the Implementation Milestone, (b) any difference between the
Implementation Plan completion date and the currently targeted
completion date, including the basis for

making the adjustment and the impact of this adjustment on any other
Implementation Milestone, and (c) any other factual indicators that
demonstrate the current level of completion with respect to the
Implementation Milestone.\59\ Factual indicators could include any data
relevant to the Objective Milestone (e.g., (1) for milestones related
to the publication of documentation: The current version of the
documentation under development or published; the number of and
explanation for any open issues not yet resolved; (2) for milestones
related to connectivity and acceptance testing: The status of the
publication of test plans; statistics on the amount of expected or
actual activity in the test environment (e.g., number of testers,
number of reportable events, error rates/trends observed), the number
of Plan Processor functional requirements \60\ for which defects were
found categorized by criticality; progress remediating defects; (3) for
milestones related to reporting: Development progress as defined by the
number of functional requirements not yet started, in progress, or
complete; the number and percentage of functional requirements for
which internal testing is in progress and the related pass/fail
percentages of associated test cases; the number and percentage of
functional requirements that have completed internal testing with all
defects remediated; the number of Plan requirements met or outstanding;
a list of Plan requirements met or outstanding).
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    \59\ For example, if an Implementation Milestone is the
publication of Industry Member technical specifications, a
description of the status could state: That the Plan Processor
produced a draft that was circulated to Industry Members on [insert
date]; that the Participants are reviewing feedback and expect to
issue final technical specifications by [insert date]; and that the
draft is complete except for a [specified topic], because of a
[specified reason]. As an example of a description identifying any
difference between the Implementation Plan completion date and the
current targeted completion date, including the basis for making the
adjustment and the impact of this adjustment on any other
Implementation Milestone, the Participants could state: That the
Implementation Plan completion date was [insert date], but the
Participants are revising such date to [insert new targeted
completion date], because [insert topic] proved to be more
complicated than anticipated due to [insert reason]. The description
could continue to state that the Participants believe the new
targeted completion date is appropriate because, for example, they
have designed a new approach to deliver the required functionality
to address the issue in the technical specifications that is
currently under development as of [insert date].
    \60\ Appendix D outlines minimum functional and technical
requirements established by the Participants of the CAT NMS Plan for
the Plan Processor. See CAT NMS Plan, supra note 4, Appendix D-1.
Examples of such functional requirements for the CAT system include
the ability to provide feedback on the reasons for errors in data
submissions, and the ingestion of data submitted to the Central
Repository by Industry Members. See id. at Appendix D, Sections 7.4,
7.5.
---------------------------------------------------------------------------

    For each Implementation Milestone that has not yet been initiated
by the end of a given calendar quarter, the Report would include the
following: (1) The completion date provided in the Implementation Plan,
(2) the currently targeted completion date, and (3) a description of
(a) the current status of the Implementation Milestone, and (b) any
difference between the Implementation Plan completion date and the
currently targeted completion date, including the basis for making the
adjustment and the impact of this adjustment on any other
Implementation Milestone.
    The Commission preliminarily believes that the Quarterly Progress
Reports will facilitate transparency by ensuring that current and
comprehensive information about the CAT's state of development is
regularly communicated to the Commission, Industry Members, and the
public at large.\61\ Moreover, the Commission preliminarily believes
that the requirements set forth for the proposed Quarterly Progress
Reports are appropriate. Because the Participants should already be
actively monitoring their progress on the implementation of the CAT,
the Commission believes 15 business days is a reasonable amount of time
in which to prepare Reports based on the information the Participants
have already gathered.\62\
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    \61\ For example, the Commission expects that the Quarterly
Progress Reports will provide the Commission and the public with
more granular and up-to-date information regarding the likelihood
that the Participants will meet the target deadlines associated with
the Financial Accountability Milestones and/or the likelihood that
the Participants will be permitted to recover related fees, costs,
or expenses from Industry Members. The Financial Accountability
Milestones, and their related financial accountability provisions,
are discussed in Part II.B. infra.
    \62\ See, e.g., note 53 supra.
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    The Participants are required to provide both the Implementation
Plan completion date and the actual or currently targeted completion
date for each Implementation Milestone so that the original completion
date will serve as a baseline against which to measure progress if
there is a difference between the two dates, as supplemented by the
information provided in the commentary. The Commission preliminarily
believes that progress can be effectively evaluated based upon whether
the Implementation Plan completion dates are being met.
    The Commission also preliminarily believes that information
provided in the required descriptions for the Implementation Milestones
will yield valuable insights into the progress of CAT implementation,
for example by providing an early indication of the potential for
delays. The Commission also preliminarily believes that requiring the
disclosure of the information provided in the descriptions would
encourage the Participants to consider whether resources need to be
realigned, so that adjustments can be made to the implementation
process. In regard to the Implementation Milestones completed by the
end of a given calendar quarter, the proposed amendments would require
the Participants to describe any variance from the Implementation Plan.
The Commission preliminarily believes that such information could
reflect whether the Participants have only partially achieved the
functionality required by certain Implementation Milestones. In regard
to the Implementation Milestones in progress at the end of a given
calendar quarter, the proposed amendments would require the
Participants to describe the status of the Implementation Milestone,
any difference between the completion dates provided, including the
basis for making the adjustment and the impact such adjustment might
have on any other Implementation Milestone, and other factual
indicators that demonstrate the current level of completion with
respect to the milestone. The Commission preliminarily believes that
such information could reveal if there is an increasingly negative
variance between the Implementation Plan completion date and the
targeted completion date, as well as the cause for such variance. The
required information could also provide an indication of whether
corrections are needed to get the implementation process back on track
and whether the currently targeted completion dates provided in a
Report are realistic. In regard to the Implementation Milestones that
have not yet been initiated by the end of a given calendar quarter, the
proposed amendments would require the Participants to describe the
current status for the Implementation Milestone and any difference
between the completion dates provided, including the basis for making
the adjustment.
    The Commission expects that quarterly communication of this
information will aid Industry Members by providing more information on
the timing of their CAT reporting obligations, which, correspondingly,
should aid them in efficiently developing and implementing their
regulatory data collection systems and allow them to make their own

adjustments as needed. In addition, the Commission anticipates that the
Quarterly Progress Reports will aid the Commission, Industry Members
and others in monitoring and better understanding the progress of CAT
implementation.
    The Commission also proposes to amend the CAT NMS Plan to add
proposed Section 6.6(c)(iii) to require that the Implementation Plan
and each Quarterly Progress Report be approved by at least a
Supermajority Vote of the Operating Committee before such documents are
filed with the Commission or made publicly available on each of the
Participant websites or collectively on the CAT NMS Plan website.
However, if the Implementation Plan or any Quarterly Progress Report is
approved only by a Supermajority Vote of the Operating Committee, and
not by a unanimous vote of the Operating Committee (including, for the
avoidance of doubt, all members of the Operating Committee, whether or
not present and whether or not recused), proposed Section 6.6(c)(iii)
would require each Participant whose Operating Committee member did not
vote to approve the Implementation Plan or Quarterly Progress Report
separately file with the Commission and make publicly available on each
of the Participant websites, or collectively on the CAT NMS Plan
website, a statement identifying itself and explaining why the member
did not vote to approve the Implementation Plan or Quarterly Progress
Report. Prior to the Operating Committee's vote, the Implementation
Plan and Quarterly Progress Reports shall also be submitted by the
Operating Committee to the CEO, President, or an equivalently situated
senior officer (or, ``senior management'') of each Participant.\63\
---------------------------------------------------------------------------

    \63\ In addition to the senior management personnel who will
receive the Implementation Plan and Quarterly Progress Reports under
the proposed amendment, each Participant has a voting member (and an
alternate voting member) representing it on the Operating Committee
who will receive these documents. One individual may serve as the
voting member of the Operating Committee for multiple affiliated
Participants. See CAT NMS Plan, supra note 4, at Section 4.2(a).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the Operating Committee
should vote on the Implementation Plan and each Quarterly Report
because the Operating Committee, as the manager of the Company, already
votes on all actions for which a vote is required under the CAT NMS
Plan.\64\ The Commission further preliminarily believes that
specifically requiring the approval of the Operating Committee by at
least a Supermajority Vote will lend credibility to the timelines
presented by Participants in the Implementation Plan and Reports, which
may otherwise be lacking given that the timelines for Industry Member
CAT implementation have been revised multiple times.\65\ In addition,
the requirement that the Implementation Plan and Quarterly Progress
Reports be submitted to the CEO, President, or an equivalently situated
senior officer of each Participant, prior to the Operating Committee's
vote, is intended to promote senior management attention and promote
accountability with respect to CAT implementation.
---------------------------------------------------------------------------

    \64\ See CAT NMS Plan, supra note 4, at Sections 4.1 and 4.3.
    \65\ See Part I supra.
---------------------------------------------------------------------------

    If the Operating Committee does not unanimously vote to approve the
Implementation Plan or any Quarterly Progress Report, the proposed
amendments require each Participant whose Operating Committee member
did not vote to approve the Implementation Plan or Quarterly Progress
Report to separately file with the Commission and make publicly
available on each of the Participant websites, or collectively on the
CAT NMS Plan website, a statement identifying itself and explaining why
the member did not vote to approve the Implementation Plan or Quarterly
Progress Report. The Commission preliminarily believes that the
requirement may aid the Commission and the public to better monitor the
progress of CAT implementation, because such an explanation may reveal
critical information regarding whether currently targeted completion
dates are realistic, whether milestones are being or have been
completed in accordance with the requirements of the CAT NMS Plan, and/
or whether potential risks or delays may impede the progress of CAT
implementation.
    The Commission requests comment on the amendments to increase
operational transparency. Specifically, the Commission solicits comment
on the following:
    1. Are the Implementation Plan and the Quarterly Progress Report
effective mechanisms for providing the Commission and Industry Members
with transparency into CAT implementation? Why or why not?
    2. Are the details and requirements of the Implementation Plan
appropriate and reasonable? Why or why not? Would additional details or
requirements for the Implementation Plan be beneficial?
    3. The proposed amendment requires the Participants to file and
publish the Implementation Plan within 30 calendar days following the
effective date of proposed Section 6.6(c). Is 30 calendar days a
reasonable period of time in which to file and publish such a document?
Why or why not? Does this timeline give the Operating Committee a
sufficient amount of time to approve the Implementation Plan? Why or
why not? Would a longer or shorter period of time, such as 45 calendar
days or 15 calendar days, be more appropriate?
    4. The proposed Amendment requires the Participants to file and
publish a Quarterly Progress Report each calendar quarter on each
Participant website or collectively on the CAT NMS Plan website. Is a
quarterly interval the right interval? Would a longer or shorter
interval be more effective?
    5. The proposed amendment requires the Participants to file and
publish the Quarterly Progress Report no later than fifteen business
days following the end of each calendar quarter. Is fifteen business
days a reasonable period of time in which to file and publish such a
report? Why or why not? Does this timeline give the Operating Committee
a sufficient amount of time to approve the Quarterly Progress Reports?
Why or why not? Would a longer or shorter period of time, such as
thirty business days or five business days, be more appropriate?
    6. The proposed amendment establishes the deadline for filing and
publishing the Quarterly Progress Report on the basis of business days.
Are business days an appropriate measure by which to establish this
deadline? Or would calendar days be more appropriate? Why or why not?
    7. Are the details and requirements of the Quarterly Progress
Report appropriate and reasonable? Why or why not? Would additional
details or requirements for the report be beneficial? For example,
should the Quarterly Progress Reports include financial information
detailing the fees, costs, and expenses that the Participants have
incurred to build and implement the CAT? If so, should these fees,
costs, and expenses be clearly tied to the relevant Financial
Accountability Milestone? Why or why not?
    8. The proposed amendment requires the Operating Committee to
approve the Implementation Plan and each Quarterly Progress Report by
at least a Supermajority Vote. Is it appropriate to require a
Supermajority Vote, or should the Commission require a majority vote or
a unanimous vote of the Operating Committee? Why or why not? Is it
appropriate to require that the Operating Committee vote on this
matter? Why or why not? If this matter should be

delegated to a Subcommittee, please explain which Subcommittee should
vote to approve the Implementation Plan and Quarterly Progress Report
and why.
    9. If the Implementation Plan or any Quarterly Progress Report is
not approved by a unanimous vote of the Operating Committee, the
proposed amendment requires each Participant whose Operating Committee
member did not vote to approve the Implementation Plan or Quarterly
Progress Report separately file with the Commission and make publicly
available on each of the Participant websites, or collectively on the
CAT NMS Plan website, a statement identifying itself and explaining why
the member did not vote to approve the Implementation Plan or Quarterly
Progress Report. Is this an appropriate requirement? Why or why not?
Should the Commission require the Implementation Plan or the Quarterly
Progress Reports, or the members who did not vote to approve the
Implementation Plan or a Quarterly Report, as the case may be, to
provide any additional information? If so, what information should be
provided, and why?
    10. The proposed amendment requires that the Implementation Plan
and each Quarterly Progress Report be submitted to the CEO, President,
or an equivalently situated senior officer of each Participant, prior
to being voted on by the Operating Committee. Is this an appropriate
requirement to promote senior management attention and promote
accountability with respect to CAT implementation? Why or why not?
Should the Commission specify when the Implementation Plan and
Quarterly Progress Reports should be submitted to the CEO, President,
or equivalently situated senior officer of each Participant? If so, how
many days prior to the Operating Committee vote should the
Implementation Plan and Quarterly Progress Reports be submitted to
senior management? To the extent that the Commission implements such a
requirement, would the deadlines set forth in the proposed amendment
for the submission of the Implementation Plan and Quarterly Progress
Reports to the Commission need to be adjusted? Why or why not? By how
many days should they be adjusted? Please explain your responses.
    11. Please identify any alternative means to promote senior
management attention and promote accountability with respect to CAT
implementation. For example, should the Commission require the senior
management of each Participant (e.g., the CEO, President, or an
equivalently situated senior officer) to certify that the contents of
the Implementation Plan and each Quarterly Progress Report are accurate
and complete in all material respects? What should qualify as material?
Should the certification be made to the best of an officer's knowledge
and reasonable belief after reasonable investigation? Is the CEO or
President the appropriate person to make the certification? If not,
please explain why. If the CEO or President is not the appropriate
person, which equivalently situated senior officer would be
appropriate? Would additional details or requirements for such
certifications be beneficial? If so, what are those details or
requirements? Please explain your responses.
    12. Are there other factors that impact the ability of the
Participants to implement the CAT NMS Plan that would not be addressed
by further disclosure that the Commission should address?

B. Financial Accountability Amendments for Implementation of the CAT

    As discussed above, there have been multiple delays in CAT
implementation since the adoption of Rule 613. To prevent additional
delays, the Commission proposes to amend the CAT NMS Plan to include
financial accountability provisions that are designed to align
financial accountability with regulatory obligations and contribute to
an expeditious implementation of the CAT.
    Currently, Section 11.1 of the CAT NMS Plan contemplates that the
Operating Committee will establish, and the Participants will
implement, fees for Participants and Industry Members to recover the
costs and expenses incurred by the Participants in connection with the
development, implementation, and operation of the CAT.\66\ Proposals
for any such fees must be filed with the Commission pursuant to Section
19(b) of the Exchange Act and are subject to Commission review for
consistency with the Exchange Act and Article XI of the CAT NMS
Plan.\67\ Specifically, each Participant must demonstrate, under
Sections 6(b)(4) and 15A(b)(5) of the Exchange Act, that such fee
filings provide for the equitable allocation of reasonable dues, fees,
and other charges among its members and other persons using its
facilities.\68\ The proposed amendment would not alter this basic
structure, but would add a new Section 11.6 to govern the recovery of
any fees, costs, and expenses (including legal and consulting fees,
costs, and expenses) incurred \69\ by or for the Company in connection
with the development, implementation, and operation of the CAT,\70\
from the effective date of this amendment, if adopted by the
Commission, until such time that the Participants have completed Full
Implementation of CAT NMS Plan Requirements \71\ (collectively, the
``Post-Amendment Expenses'').
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    \66\ See, e.g., CAT NMS Plan, supra note 4, at Section 11.1(c).
    \67\ Section 19(b) of the Exchange Act requires the Participants
to submit proposed rule changes to the Commission. 15 U.S.C. 78s(b);
see also CAT NMS Plan, supra note 4, at Section 11.1(b) (noting that
the Participants must file proposed fees for Industry Members with
the Commission).
    \68\ See 15 U.S.C. 78f(b)(4) (applicable to the national
securities exchanges); 15 U.S.C. 78o-3(b)(5) (applicable to FINRA, a
national securities association).
    \69\ For the purposes of proposed Section 11.6, determination of
when a fee, cost, or expense is considered ``incurred'' shall be
based on Generally Accepted Accounting Principles (``GAAP''), as
those principles must also be applied to all accounting or financial
statements prepared by the Operating Committee under Section 9.2 of
the CAT NMS Plan. See note 4 supra. For example, a fee, cost, or
expense related to a good or service would generally be considered
incurred upon acquisition of the good or service in accordance with
GAAP.
    \70\ See, CAT NMS Plan, supra note 4, at Section 11.1(b)-(c),
Section 11.2(a)-(b), and Section 11.3(c) (relating to the funding of
the development, implementation and operating costs of the Company).
    \71\ As part of the proposed amendment, Section 1.1 of the CAT
NMS Plan will be amended to include a definition of ``Full
Implementation of CAT NMS Plan Requirements.'' This term will mean
``the point at which: (a) The Participants have satisfied all of
their obligations to build and implement the CAT, such that all CAT
system functionality required by Rule 613 and the CAT NMS Plan has
been developed, successfully tested, and fully implemented with the
initial Error Rates specified by Section 6.5(d)(i) of the CAT NMS
Plan, including, but not limited to, functionality that efficiently
permits the Participants and the Commission to access all CAT Data
required to be stored in the Central Repository pursuant to Section
6.5(a) of the CAT NMS Plan and to analyze the full lifecycle of an
order, from order origination through order execution or order
cancellation, across the national market system. This Financial
Accountability Milestone shall be considered complete as of the date
identified in a Quarterly Progress Report meeting the requirements
of Section 6.6(c).'' This definition is discussed further below. See
Part II.B.1.d. infra.
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    Proposed Section 11.6 would apply new conditions to the collection
of any fees established by the Operating Committee, or implemented by
the Participants, to recover a portion of Post-Amendment Expenses from
Industry Members (``Post-Amendment Industry Member Fees'').
Specifically, proposed Section 11.6 would require the Participants to
meet four critical CAT implementation milestones--the Financial
Accountability Milestones--by certain dates in order to collect the
full amount of any related Post-Amendment Industry Member Fees

established by the Operating Committee or implemented by the
Participants. If the Participants fail to meet the target deadlines set
forth in proposed Section 11.6, they would only be entitled to collect
a portion of the amount of the relevant Post-Amendment Industry Member
Fees, as determined by the amount of time by which the Participants
have missed the target deadlines.
    The Commission preliminarily believes applying these new conditions
to the Post-Amendment Industry Member Fees is appropriate. At the time
the Commission approved the CAT NMS Plan, the Commission believed it
was reasonable, in accordance with Section 6(b)(4) of the Exchange
Act,\72\ for the Participants to recover a portion of the fees, costs,
and expenses associated with the development and implementation of the
CAT from Industry Members.\73\ This belief, however, was based on the
Commission's expectation that the Participants would be complying with
the CAT NMS Plan, which required the implementation of certain CAT
functionality by the dates set forth in the CAT NMS Plan. As noted
above, the Participants have missed multiple dates codified in the CAT
NMS Plan.\74\ Accordingly, the regulatory aims of the CAT NMS Plan have
yet to be achieved. Accordingly, the Commission is proposing financial
accountability rules that address the Commission's view of what it
would consider to be ``reasonable fees'' and a reasonable exercise of
the Participants' funding authority under the CAT NMS Plan in the
context of CAT implementation going forward.
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    \72\ 15 U.S.C. 78f(b)(4) (requiring the rules of a national
securities exchange to provide for ``equitable allocation of
reasonable dues, fees, and other charges among its members and
issuers and other persons using its facilities'').
    \73\ See, e.g., CAT NMS Plan Approval Order, supra note 4, at
84794.
    \74\ See Part I supra.
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    The specific terms of the proposed amendment are discussed in more
detail below.
1. Financial Accountability Milestones and Target Deadlines
    Proposed Section 11.6 identifies four critical CAT implementation
milestones: (1) Initial Industry Member Core Equity Reporting, (2) Full
Implementation of Core Equity Reporting Requirements, (3) Full
Availability and Regulatory Utilization of Transactional Database
Functionality, and (4) Full Implementation of CAT NMS Plan Requirements
(collectively, the ``Financial Accountability Milestones'' \75\). For
each Financial Accountability Milestone, the Commission has also
identified a target deadline for completion.
---------------------------------------------------------------------------

    \75\ This term is defined at proposed Section 1.1.
---------------------------------------------------------------------------

a. Initial Industry Member Core Equity Reporting
    The Commission proposes to amend Section 1.1 of the CAT NMS Plan to
define ``Initial Industry Member Core Equity Reporting'' as the point
at which Industry Members (excluding Small Industry Members \76\ that
are do not report to the Order Audit Trail System (``OATS'')) have
begun to report equities transaction data, excluding Customer Account
Information, Customer-ID, and Customer Identifying Information,\77\ to
the CAT.\78\ This Financial Accountability Milestone shall be
considered complete as of the date identified in a published Quarterly
Progress Report meeting the requirements of proposed Section
6.6(c).\79\ The Commission also proposes to add Section 11.6(a)(i)(A)
to provide that the Participants will be entitled to collect the full
amount of any Post-Amendment Industry Member Fees established or
implemented to recover Post-Amendment Expenses incurred from the date
of this amendment's adoption by the Commission\80\ to the date of
Initial Industry Member Core Equity Reporting (``Period 1''), so long
as such date is no later than April 30, 2020.\81\
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    \76\ As defined by Section 1.1 of the CAT NMS Plan, and for the
purposes of this proposing release, ``Small Industry Member'' an
Industry Member that qualifies as a small broker-dealer as defined
in SEC Rule 613. See also 17 CFR 242.613(a)(3)(vi) (defining small
broker-dealers by reference to 17 CFR 240.0-10(c), which defines a
small broker dealer as one with ``total capital . . . of less than
$500,000 on the date in the prior fiscal year as of which its
audited financial statements were prepared or, if not required to
file such statements, a broker or dealer that had total capital . .
. of less than $500,000 on the last business day of the preceding
fiscal year'' and one that is ``not affiliated with any person . . .
that is not a small business or small organization'').
    \77\ Customer Account Information, Customer-ID, and Customer
Identifying Information are defined terms in Section 1.1 of the CAT
NMS Plan and are the same definitions in the context of this
proposing release.
    \78\ The Commission notes that the equities transaction data
required at this stage is consistent with the functionality that the
Participants currently plan to implement at ``Phase 2a'' in the
latest draft of the Technical Specifications. See CAT Reporting
Technical Specifications for Industry Members, Version 2.2 (June 24,
2019), at vii, available at https://www.catnmsplan.com/wp-content/uploads/2019/06/Industry-Member-Tech-Specs-v2.2-Clean.pdf.
    \79\ The target deadline for Initial Industry Member Core Equity
Reporting falls on April 30, 2020--between scheduled Quarterly
Progress Reports. If the Participants wait to submit the Quarterly
Progress Report to the Commission, it may delay their ability to
begin recovering any Post-Amendment Industry Member Fees to which
they may be entitled. Accordingly, the Commission notes that the
Participants may file an interim Quarterly Progress Report, if they
so choose, on the day they achieve this Financial Accountability
Milestone (or any other Financial Accountability Milestone) in order
to expedite their recovery of Post-Amendment Industry Member Fees.
    \80\ The proposed amendment will not affect the Participants'
ability to collect CAT-related fees, costs, or expenses incurred up
to the date that proposed Section 11.6 is adopted. See proposed
Section 11.6.
    \81\ See proposed Section 11.6(a)(i)(A). To the extent that the
Initial Industry Member Core Equity Reporting milestone is achieved
at some later date, the Participants will only be entitled to
collect a portion of the amount of the Post-Amendment Industry
Member Fees established or implemented for Period 1. See proposed
Section 11.6(a)(ii); see also Part II.B.2. infra for additional
discussion regarding the conditions attached to Post-Amendment
Industry Member Fee collection.
---------------------------------------------------------------------------

    The Commission preliminarily believes that Initial Industry Member
Core Equity Reporting is an appropriate Financial Accountability
Milestone, because this milestone requires the Participants to develop,
test, and implement essential infrastructure needed to support Industry
Member reporting--one of the major goals identified by the CAT NMS
Plan.\82\ Before Industry Members may begin reporting any equities
transaction data to the CAT, the Participants must develop, and
Industry Members must thoroughly test, file submission tools, data
integrity controls, and various security measures to ensure that the
CAT can safely receive and process this data, as well as identify data
that may not be accurate. These are core operations that are
fundamental to the success of the CAT. By requiring Industry Members--
excluding Small Industry Members that are not OATS reporters \83\--to
begin reporting the first phase of equities transaction data to the
CAT, the Participants will demonstrate that they have made significant
progress towards implementing foundational CAT functionality.
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    \82\ See CAT NMS Plan, supra note 4, at Section 6.7(a)(v).
    \83\ The Commission preliminarily believes that it is
appropriate to exclude Small Industry Members that do not report to
OATS from this Financial Accountability Milestone in order to mirror
the timelines projected by the Participants. See, e.g., Industry
Update on CAT Reporting Technical Specifications for Industry
Members (April 3, 2019), available at https://www.catnmsplan.com/wp-content/uploads/2019/04/CAT_Industry_Call_04032019_Presentation.pdf;
see also CAT Reporting Timelines, available at https://www.catnmsplan.com/timelines/.
---------------------------------------------------------------------------

    Furthermore, the Commission preliminarily believes that it is
appropriate to require the Participants to achieve Initial Industry
Member Core Equity Reporting by April 30, 2020 in order to recover the
full amount of any related Post-Amendment Industry

Member Fees, because the Participants have indicated that they plan to
implement basic equities transaction reporting for Industry Members
(excluding Small Industry Members that are not OATS reporters) by that
date. Recent timelines published by the Participants indicate that the
production environment for Industry Member equities reporting will go
live in April 2020.\84\ Based on this representation, the Commission
preliminarily believes the proposed deadline of April 30, 2020 for
Initial Industry Member Core Equity Reporting is both reasonable and
feasible.
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    \84\ See, e.g., id. The Participants have also released
finalized technical specifications for Industry Member reporting, as
well as a symbol list providing the scope of securities for which
Industry Member reporting will be required, which the Commission
believes are critical steps towards achieving Initial Industry
Member Core Equity Reporting by April 30, 2020. With this
information, the Industry Members should be able to make meaningful
progress towards developing the internal infrastructure needed to
report to the CAT. See note 78 supra. See also, e.g., Industry
Update on the Consolidated Audit Trail (February 20, 2019),
available at https://www.catnmsplan.com/wp-content/uploads/2019/02/CAT_Industry_Webcast_02.20.2019_vF.pdf (stating that there will be
no material design changes to the technical specifications for
Industry Member reporting and instructing Industry Members to
continue as planned with development efforts); CAT Reportable Equity
Securities Symbol Master, available at https://www.catnmsplan.com/symbol-master/index.html.
---------------------------------------------------------------------------

b. Full Implementation of Core Equity Reporting Requirements
    The Commission proposes to amend Section 1.1 of the CAT NMS Plan to
define ``Full Implementation of Core Equity Reporting Requirements'' as
the point at which: (a) Industry Member reporting (excluding reporting
by Small Industry Members that are not OATS reporters) for equities
transactions, excluding Customer Account Information, Customer-ID, and
Customer Identifying Information,\85\ is developed, tested, and fully
implemented at a 5% Error Rate \86\ or less and with sufficient intra-
firm linkage, inter-firm linkage, national securities exchange linkage,
and trade reporting facilities linkage to permit the Participants and
the Commission to analyze the full lifecycle of an order across the
national market system, excluding linkage of representative orders,
from order origination through order execution or order cancellation;
\87\ and (b) the query tool functionality required by Section
6.10(c)(i)(A) and Appendix D, Sections 8.1.1-8.1.3 and Section 8.2.1 of
the CAT NMS Plan incorporates the Industry Member equity transaction
data described in condition (a) and is available to the Participants
and to the Commission. This Financial Accountability Milestone shall be
considered complete as of the date identified in a Quarterly Progress
Report meeting the requirements of Section 6.6(c).\88\ The Commission
also proposes to add Section 11.6(a)(i)(B) to provide that the
Participants will be entitled to collect the full amount of any Post-
Amendment Industry Member Fees established or implemented to recover
Post-Amendment Expenses incurred from the date immediately following
the achievement of Initial Industry Member Core Equity Reporting to the
date of Full Implementation of Core Equity Reporting Requirements
(``Period 2''), so long as such date is no later than December 31,
2020.\89\
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    \85\ See note 77 supra.
    \86\ ``Error Rate'' is a term defined in Section 1.1 of the CAT
NMS Plan to mean ``the percentage of reportable events collected by
the central repository in which the data reported does not fully and
accurately reflect the order even that occurred in the market.'' See
also 17 CFR 242.613(j)(6).
    \87\ The equities transaction data required at this stage is
consistent with the functionality that the Participants currently
plan to implement at ``Phase 2a'' in the latest draft of the
Technical Specifications. See note 78 supra.
    \88\ See also note 79 supra.
    \89\ See proposed Section 11.6(a)(i)(B). To the extent that the
Full Implementation of Core Equity Reporting Requirements milestone
is achieved at some later date, the Participants will only be
entitled to collect a portion of the amount of the Post-Amendment
Industry Member Fees established or implemented for Period 2. See
proposed Section 11.6(a)(iii); see also Part II.B.2. infra for
additional discussion regarding the conditions attached to Post-
Amendment Industry Member Fee collection.
---------------------------------------------------------------------------

    The Commission preliminarily believes that Full Implementation of
Core Equity Reporting Requirements is an appropriate Financial
Accountability Milestone, because this milestone requires the
Participants to show that they have taken significant steps towards
achieving one of the primary goals identified in the CAT NMS Plan--
Industry Member reporting.\90\ Whereas the previous Financial
Accountability Milestone only required that the Participants
sufficiently develop and test the CAT so as to allow Industry Members
(excluding Small Industry Members that are not OATS reporters) to begin
reporting equities transaction data, this Financial Accountability
Milestone requires Participants to have fully implemented the first
phase of equities transaction reporting for Industry Members (excluding
Small Industry Members that are not OATS reporters) at an Error Rate
that is consistent with the initial Error Rate threshold set forth in
the CAT NMS Plan.\91\ Equities transaction data produced by the CAT at
this stage must also be sufficiently interlinked so as to permit full
analysis of an order's lifecycle across the national market, excluding
full linkage of representative orders.\92\ These requirements are
designed to ensure that the Participants have developed, tested, and
implemented an audit trail system that produces meaningful and accurate
equities transaction data, including data that can be used to evaluate
the full lifecycle of an equities order.\93\ The achievement of such
benchmarks would demonstrate that the Participants have made
significant progress towards full implementation of Industry Member
reporting.\94\
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    \90\ See CAT NMS Plan, supra note 4, at Section 6.7(a)(v).
    \91\ See, e.g., CAT NMS Plan, supra note 4, at Section 6.5(d)(i)
of the CAT NMS Plan (specifying that the ``initial maximum Error
Rate shall be set to 5%'').
    \92\ Although full linkage of representative orders is not
required by this milestone, the technical specifications provided to
Industry Members indicate that, by April 2020, linkage ``between the
representative street side order and the order being represented
when the representative order was originated specifically to
represent a single order . . . and there is: (1) an existing direct
electronic link in the firm's system between the order being
represented and the representative order, and (2) any resulting
executions are immediately and automatically applied to the
represented order in the firm's system[.]'' See CAT Reporting
Technical Specifications for Industry Members, Version 2.2 (June 24,
2019), available at https://www.catnmsplan.com/wp-content/uploads/2019/06/Industry-Member-Tech-Specs-v2.2-Clean.pdf.
    \93\ See, e.g., id. at 6, 154 (setting forth specifications for
a firm-designated ID and representative order flag, which are
examples of two fields not available through OATS).
    \94\ The Commission preliminarily believes that it is
appropriate to exclude Small Industry Members that do not report to
OATS from this Financial Accountability Milestone, in order to
mirror the timelines projected by the Participants. See, e.g.,
Industry Update on CAT Reporting Technical Specifications for
Industry Members (April 3, 2019), available at https://www.catnmsplan.com/wp-content/uploads/2019/04/CAT_Industry_Call_04032019_Presentation.pdf; see also CAT Reporting
Timelines, available at https://www.catnmsplan.com/timelines/.
---------------------------------------------------------------------------

    The second prong of this Financial Accountability Milestone
requires that the equities transaction data collected by the CAT at
this stage be made available to regulators through two basic query
tools required by the CAT NMS Plan--a targeted query tool that will
enable regulators to retrieve data via an online query screen with a
variety of predefined selection criteria, and a user-defined direct
query tool that will provide regulators with the ability to query data
using all available attributes and data sources.\95\ These query tools

should enable regulators to access and use the provided data to perform
essential analyses of the equities markets, including equity market
reconstruction, and to pursue data-driven policy-making. By requiring
the Participants to develop these tools and make them available to the
Commission and other regulators at this stage, the second prong of this
Financial Accountability Milestone is designed to ensure that the CAT
is built in a manner that will allow regulators to access CAT Data in
order to realize the regulatory benefits associated with the CAT.
---------------------------------------------------------------------------

    \95\ See, e.g., CAT NMS Plan, supra note 4, at Section
6.10(c)(i)(A)-(B); see id. at Appendix D, Sections 8.1.1-8.1.3, and
Section 8.2.1. Section 6.10(c)(i)(A) of the CAT NMS Plan requires
the Plan Processor to ``provide Participants and the SEC with access
to all CAT Data stored in the Central Repository'' via an ``online
targeted query tool.'' Appendix D, Section 8.1.1-8.1.3 of the CAT
NMS Plan describes the required functionality associated with this
regulatory tool. Appendix D, Section 8.2.1 describes the required
functionality associated with a user-defined direct query tool that
will ``deliver large sets of data that can then be used in internal
surveillance or market analysis applications.'' See id. at Sections
8.2. This tool is also described at Section 6.10(c)(i)(B) of the CAT
NMS Plan.
---------------------------------------------------------------------------

    The Commission preliminarily believes that it is appropriate to
require the Participants to achieve Full Implementation of Core Equity
Reporting Requirements by December 31, 2020 in order to receive the
full amount of any related Post-Amendment Industry Member Fees. This
deadline is consistent with the Participants' most recent projections--
for example, the most recent timelines published by the Participants
indicate that the Participants intend to substantially complete
implementation of equities reporting for Industry Member (excluding
Small Industry Members that do not report to OATS) by October 2020,\96\
and the Commission understands that the relevant query tool
functionality should go live into production on a timeline that is
generally consistent with the proposed deadline of December 31, 2020.
Accordingly, the Commission preliminarily believes the target deadline
of December 31, 2020 for Full Implementation of Core Equity Reporting
Requirements is both reasonable and feasible.
---------------------------------------------------------------------------

    \96\ See, e.g., Industry Update on CAT Reporting Technical
Specifications for Industry Members (April 3, 2019), available at
https://www.catnmsplan.com/wp-content/uploads/2019/04/CAT_Industry_Call_04032019_Presentation.pdf; see also CAT Reporting
Timelines, available at https://www.catnmsplan.com/timelines/.
---------------------------------------------------------------------------

c. Full Availability and Regulatory Utilization of Transactional
Database Functionality
    The Commission proposes to amend Section 1.1 of the CAT NMS Plan to
define ``Full Availability and Regulatory Utilization of Transactional
Database Functionality'' as the point at which: (a) reporting to the
Order Audit Trail System (``OATS'') is no longer required for new
orders; (b) Industry Member reporting for equities transactions, simple
electronic options transactions, manual options transactions, and
complex options transactions, including Allocation Reports,\97\ but
excluding Customer Account Information, Customer-ID, and Customer
Identifying Information, is developed, tested, and fully implemented;
(c) representative order linkages, as well as intra-firm linkages,
inter-firm linkages, national securities exchange linkages, and trade
reporting facilities linkages, are developed, tested, and fully
implemented in a manner that permits the Participants and the
Commission to analyze the full lifecycle of an order across the
national market system, from order origination through order execution
or order cancellation, including any related allocation information
provided in an Allocation Report; \98\ (d) CAT Error Rates satisfy the
threshold specified by Section 6.5(d)(i); (e) the query tool
functionality required by Section 6.10(c)(i)(A) and Appendix D,
Sections 8.1.1-8.1.3, Section 8.2.1, and Section 8.5 incorporates the
data described in conditions (b) and (c) and is available to the
Participants and to the Commission; and (f) the requirements of Section
6.10(a) are met. This Financial Accountability Milestone shall be
considered complete as of the date identified in a Quarterly Progress
Report published meeting the requirements of Section 6.6(c).\99\
---------------------------------------------------------------------------

    \97\ ``Allocation Report'' is defined term in Section 1.1 of the
CAT NMS Plan and carries the same meaning in the context of this
proposing release.
    \98\ The allocation information provided in an Allocation Report
will be linked to person(s) having the authority to trade on behalf
of the account using Firm Designated ID--a unique identifier for
each trading account designated by Industry Members for purposes of
providing data to the Central Repository, where each such identifier
is unique among all identifiers from any given Industry Member for
each business date. See CAT NMS Plan, supra note 4, at Section 1.1.
Allocations are not required to be directly linked to orders or
executions. See id.
    \99\ See also note 79 supra.
---------------------------------------------------------------------------

    The Commission also proposes Section 11.6(a)(i)(C) to provide that
the Participants will be entitled to collect the full amount of any
Post-Amendment Industry Member Fees established or implemented to
recover Post-Amendment Expenses incurred from the date immediately
following the achievement of Full Implementation of Core Equity
Reporting Requirements to the date of Full Availability and Regulatory
Utilization of Transactional Database Functionality (``Period 3''), so
long as such date is no later than December 31, 2021.\100\
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    \100\ See proposed Section 11.6(a)(i)(C). To the extent that
Full Availability and Regulatory Utilization of Transactional
Database Functionality is achieved at some later date, the
Participants will only be entitled to collect a portion of the
amount of the Post-Amendment Industry Member Fees established or
implemented for Period 3. See proposed Section 11.6(a)(iii); see
also Part II.B.2. infra for additional discussion regarding the
conditions attached to Post-Amendment Industry Member Fee
collection.
---------------------------------------------------------------------------

    The Commission preliminarily believes that Full Availability and
Regulatory Utilization of Transactional Database Functionality is an
appropriate Financial Accountability Milestone, because this milestone
will require the Participants to demonstrate substantial completion of
CAT implementation. Whereas the previous Financial Accountability
Milestone focused only on the implementation of basic equities
transaction reporting for Industry Members (excluding Small Industry
Members that are not OATS reporters), this Financial Accountability
Milestone requires the Participants to have fully implemented the first
phase of reporting for equities, simple options, manual options, and
complex options. This Financial Accountability Milestone also requires
the Participants to implement representative order linkages, in
addition to intra-firm linkages, inter-firm linkages, national
securities exchange linkages, and trade reporting linkages, including
any related allocation information included in an Allocation Report.
Therefore, at this stage, the CAT should contain sufficient equities
and options transactional data and order linkages to enable regulators
to analyze the full lifecycle of an order, from order origination
through order execution or order cancellation, including any related
allocation information provided in an Allocation Report, as well as
conduct other sophisticated analyses of the markets. For instance, the
CAT should give regulators access to an options audit trail system
that, for the first time, makes possible options market reconstruction
and cross-market analyses across full order lifecycles.\101\
---------------------------------------------------------------------------

    \101\ Although the Consolidated Options Audit Trail System
(``COATS'') provides an audit trail for options, CAT will contain
broker-dealer data and order data not currently available through
COATS, enabling regulators to perform more sophisticated analyses on
options data. Moreover, CAT will contain equities data as well as
options data, which will enable regulators to conduct cross-market
analyses and surveillances.
---------------------------------------------------------------------------

    Full Availability and Regulatory Utilization of Transactional
Database Functionality further requires that core elements of the CAT
are reasonably accurate, reliable, and accessible to regulators. For
instance, this Financial Accountability Milestone requires that CAT
Error Rates satisfy the 5% initial maximum Error Rate set forth in
Section

6.5(d)(i) of the CAT NMS Plan.\102\ The Commission preliminarily
believes this is appropriate because the Participants have, in the
past, expressed the belief that an initial Error Rate of 5% ``strikes
the balance of making allowances for adapting to a new reporting regime
while ensuring that the data provided to regulators will be capable of
being used to conduct surveillance and market reconstruction.'' \103\
This Financial Accountability Milestone also requires that certain
regulatory tools incorporate Industry Member data, are available to
regulators, and have been implemented pursuant to the provisions of the
CAT NMS Plan, including not only the online targeted query tool and the
user-defined direct query tool discussed above,\104\ but also
surveillance systems reasonably designed to make use of CAT data.\105\
Moreover, achievement of Full Availability and Regulatory Utilization
of Transactional Database Functionality requires the Participants to
demonstrate, through retirement of the existing OATS system,\106\ that
the CAT is sufficiently accurate, reliable, and accessible to
regulators to be adopted as the audit trail system for equities
transactions. The Commission believes that all of these requirements
should ensure that regulators are able to use and rely on the CAT at
this stage to conduct the kind of improved market surveillance that the
Commission envisioned when it adopted Rule 613.\107\
---------------------------------------------------------------------------

    \102\ See proposed Section 1.1, ``Full Availability and
Regulatory Utilization of Transactional Database Functionality,'' at
(b). See also CAT NMS Plan, supra note 4, at Section 6.5(d)(i).
    \103\ See CAT NMS Plan Approval Order, supra note 4, at 84717.
    \104\ See Section II.B.1.b. supra.
    \105\ Full Availability and Regulatory Utilization of
Transactional Database Functionality requires that the requirements
of Appendix D, Section 8.1.1-8.1.3, Section 8.2.1, and Section 8.5
of the CAT NMS Plan, which describe the performance requirements and
service level agreements for necessary regulatory tools, have been
met for any data contained in the CAT. The ``surveillance systems''
required by Section 6.10(a) and the query tool functionality
required by Section 6.10(c)(i)(A) of the CAT NMS Plan must also be
implemented. See proposed Section 1.1, ``Full Availability and
Regulatory Utilization of Transaction Database Functionality,'' at
(e)-(f).
    \106\ To achieve this Financial Accountability Milestone, OATS
reporting must no longer be required for new orders. This prong can
only be accomplished by retiring OATS. Although FINRA is the only
Participant in direct control of OATS retirement, the Commission
still believes it is appropriate to apply this milestone to all
Participants. All of the Participants are jointly responsible for
creating a CAT that is capable of replacing OATS. All Participants
are regulators that will benefit from the full implementation of the
CAT. See, e.g., CAT NMS Plan, supra note 4, at Appendix C, Section
C.9. (discussing retirement of OATS).
    \107\ See Rule 613 Adopting Release, supra note 2, at 45788.
---------------------------------------------------------------------------

    The Commission preliminarily believes that it is appropriate to
require the Participants to achieve Full Availability and Regulatory
Utilization of Transactional Database Functionality by December 31,
2021 in order to recover the full amount of any related Post-Amendment
Industry Member Fees. This deadline is consistent with the
Participants' most recent projections for completion of Industry Member
reporting, representative order linkages, and the development of
regulatory query tools for options and equities. The most recent
timelines issued by the Participants suggest that Industry Member
reporting and representative order linkages will be implemented by
December 2021,\108\ and the Commission further understands that the
online targeted query tool and user-directed direct query tool for both
options and equities should go live into production on a timeline that
is generally consistent with the proposed deadline of December 31,
2021. Therefore, the Commission's proposed deadline of December 31,
2021 is consistent with the Participants' timeline for these items.
---------------------------------------------------------------------------

    \108\ See, e.g., note 96 supra.
---------------------------------------------------------------------------

    Moreover, so long as the Participants diligently work towards
building the CAT according to the requirements of the CAT NMS Plan, the
Commission preliminarily believes that the Participants should
reasonably be able to demonstrate, by December 31, 2021, both that the
CAT is fully and effectively functional for equities data such that the
CAT is capable of replacing OATS such that reporting to OATS will no
longer be required for new orders. The Participants' timelines indicate
that, by December 31, 2021, Industry Members and Small Industry Members
that report to OATS will have been reporting equities transaction data
to CAT for approximately 20 months,\109\ which should give the
Participants and other CAT Reporters a reasonable opportunity to
address or correct any material data quality issues. The Commission
further notes that the conditions of Full Availability and Regulatory
Utilization of Transactional Database Functionality are designed to
ensure that regulators are able to perform at least their normal range
of regulatory tasks using CAT Data instead of OATS data. The Commission
therefore preliminarily believes that it is reasonable and feasible to
establish December 31, 2021 as the deadline for this Financial
Accountability Milestone.\110\
---------------------------------------------------------------------------

    \109\ See supra note 96 and associated text. The Participants do
not currently intend to implement transaction reporting for Small
Industry Members that do not report to OATS until December 2021.
However, because these Industry Members do not report to OATS, the
Commission preliminarily believes that this should not impact the
ability of the Participants to retire OATS by the target deadline of
December 31, 2021.
    \110\ The Commission also believes that tying full recovery of
CAT-related expenses to this Financial Accountability Milestone will
increase the likelihood that OATS will be retired by the proposed
date, thereby reducing uncertainty amongst Industry Members and,
potentially, compressing the period of duplicative reporting to
which Industry Members might otherwise be subjected.
---------------------------------------------------------------------------

    With respect to the additional requirements designed to ensure that
the CAT Data provided by Industry Members will be reasonably accurate,
reliable, and accessible to regulators, the Commission also
preliminarily believes that the Participants should be able to meet
these requirements by December 31, 2021. For example, proposed Section
11.6(a)(i)(C) and proposed Section 1.1 would provide the Participants
with approximately two years from the date of this amendment's adoption
to develop, test, and implement the surveillance systems required by
Section 6.10(a) of the CAT NMS Plan,\111\ whereas the CAT NMS Plan
indicates that a shorter span of fourteen months would be a sufficient
period of time to accomplish that task.\112\ The Commission therefore
preliminarily believes the target deadline of December 31, 2021 for
Full Availability and Regulatory Utilization of Transactional Database
Functionality is both reasonable and feasible.
---------------------------------------------------------------------------

    \111\ Section 6.10(a) of the CAT NMS Plan requires the
Participants to use the tools described in Appendix D to ``develop
and implement a surveillance system, or enhance existing
surveillance systems, reasonably designed to make use of the
consolidated information contained in the Central Repository.'' See
note 4 supra.
    \112\ See CAT NMS Plan, supra note 4, at Section 6.7(a)(iv); see
also id. at Section 6.10(a).
---------------------------------------------------------------------------

d. Full Implementation of CAT NMS Plan Requirements
    The Commission proposes to amend Section 1.1 of the CAT NMS Plan to
define ``Full Implementation of CAT NMS Plan Requirements'' as the
point at which the Participants have satisfied all of their obligations
to build and implement the CAT, such that all CAT system functionality
required by Rule 613 and the CAT NMS Plan has been developed,
successfully tested, and fully implemented at the initial Error Rates
specified by Section 6.5(d)(i) of the CAT NMS Plan or less, including
functionality that efficiently permits the Participants and the
Commission to access all CAT Data required to be stored in the Central
Repository pursuant to Section 6.5(a) of the CAT NMS Plan, including
Customer Account

Information, Customer-ID, Customer Identifying Information, and
Allocation Reports, and to analyze the full lifecycle of an order
across the national market system, from order origination through order
execution or order cancellation, including any related allocation
information provided in an Allocation Report.\113\ This Financial
Accountability Milestone shall be considered complete as of the date
identified in a Quarterly Progress Report meeting the requirements of
Section 6.6(c).\114\ The Commission also proposes to add Section
11.6(a)(i)(D) to provide that the Participants will be entitled to
collect the full amount of any Post-Amendment Industry Member Fees
established or implemented to recover Post-Amendment Expenses incurred
from the date immediately following the achievement of Full
Availability and Regulatory Utilization of Transactional Database
Functionality to the date of Full Implementation of CAT NMS Plan
Requirements (``Period 4''), so long as such date is no later than
December 30, 2022.\115\
---------------------------------------------------------------------------

    \113\ See notes 97-98 supra.
    \114\ See also note 79 supra.
    \115\ See proposed Section 11.6(a)(i)(D). To the extent that
Full CAT NMS Plan Requirements is achieved at some later date, the
Participants will only be entitled to collect a portion of the
amount of the Post-Amendment Industry Member Fees established or
implemented for Period 4. See proposed Section 11.6(a)(iii); see
also Part II.B.2. infra for additional discussion regarding the
conditions attached to Post-Amendment Industry Member Fee
collection.
---------------------------------------------------------------------------

    The Commission preliminarily believes that Full Implementation of
CAT NMS Plan Requirements is appropriate as the final Financial
Accountability Milestone.\116\ This Financial Accountability Milestone
will require the Participants to show that they have satisfied all of
their obligations to build and implement the CAT system functionality
required by Rule 613, including functionality that would allow the
Participants and the Commission to efficiently access all transactional
data and, for the first time, customer information stored in the
Central Repository. Whereas the previous Financial Accountability
Milestones do not require the Participants to provide customer
information like Customer Account Information, Customer-ID, and
Customer Identifying Information, the Participants must have developed,
tested, and implemented reporting functionality for these elements to
satisfy the parameters of Full Implementation of CAT NMS Plan
Requirements.
---------------------------------------------------------------------------

    \116\ Because the provisions of proposed Section 11.6 are meant
to incentivize full CAT implementation, under the proposal, these
provisions will not apply once Full Implementation of CAT NMS Plan
Requirements is achieved.
---------------------------------------------------------------------------

    The creation of a unique Customer-ID under the CAT NMS Plan, is
critical to achieving the full regulatory benefit of the CAT.\117\ In
the Commission's experience, it is now common for individuals and
entities to trade through multiple broker-dealer accounts and for
individuals engaged in wrongdoing to execute trades through multiple
broker-dealers. A Customer-ID will be the key that ties all of the
trading by one Customer together and as such, will facilitate the
ability of regulators to identify all the orders and actions
attributable to a specific Customer regardless of where that Customer
routes orders or executes trades--a linkage which does not exist now.
---------------------------------------------------------------------------

    \117\ See, e.g., Rule 613 Adopting Release, supra note 2, at
45756.
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    Moreover, currently available audit trail data does not directly
identify the customer associated with trading activity, so regulators
conducting market surveillance must undertake multiple steps to request
additional information after identifying suspect trades in order to
link those trades with specific individuals. The inclusion of Customer-
IDs in the CAT, at Full Implementation of CAT NMS Plan Requirements,
would therefore significantly improve the capabilities of regulators
because the CAT will be able to connect suspicious trading activity
directly to a particular Customer through the Customer-ID. In addition,
the Customer-ID will also enable a regulator to surveil the trading
activity of market participants in both equity and options markets by
Customer-ID, and thus a Customer-ID will improve regulators' efficiency
in conducting cross-market and cross-product surveillance, which could
in turn reduce violative behavior and protect investors from harm.
    Accordingly, the Commission believes that it is important to
require the Participants to demonstrate that the Participants have
developed, tested, and fully implemented functionality that efficiently
permits the Commission and other regulators to access Customer-IDs,
along with other Customer and Account information.
    In addition to providing this integral customer information,
achievement of Full Implementation of CAT NMS Requirements would also
mean that the Participants have created an audit trail system that
provides reasonably accurate, reliable and useful information. Full
Implementation of CAT NMS Requirements mandates that the CAT produce
data at the initial Error Rate specified by the CAT NMS Plan,\118\ as
well as functionality that would efficiently permit the Participants
and the Commission to analyze the full lifecycle of an order, including
any subsequent allocation, across the national market system. These
requirements are designed to help facilitate the implementation of the
CAT functions in a manner that enables the Commission and other
regulators to conduct the improved market surveillance envisioned by
the Commission when it adopted Rule 613--the ultimate goal of this
project.
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    \118\ See CAT NMS Plan, supra note 4, at Section 6.5(d)(i). See
also note 103 supra.
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    Furthermore, the Commission preliminarily believes that it is
appropriate to require the Participants to achieve Full Implementation
of CAT NMS Plan Requirements by December 30, 2022 in order to recover
the full amount of any Post-Amendment Industry Member Fees. This
deadline is consistent with the Participants' most recent projections,
which indicate that the Participants intend to achieve full CAT
implementation by July 2022.\119\ In fact, the Commission's target
deadline of December 30, 2022 gives the Participants an additional five
months to achieve Full Implementation of CAT NMS Plan Requirements.
Accordingly, the Commission preliminarily believes that the proposed
target deadline of December 30, 2022 for Full Implementation of CAT NMS
Plan Requirements is both reasonable and feasible.
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    \119\ See, e.g., note 96 supra.
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2. Collection of Post Amendment Industry Member Fees
    As noted above, the Commission is proposing that the Participants
will be entitled to collect the full amount \120\ of any Post-Amendment
Industry Member Fees related to the achievement of the Financial
Accountability Milestones described above so long as they meet
specified dates, which dates are consistent with the timelines most
recently published by the Participants.\121\ If the Participants do

not meet the specified date for the achievement of Initial Industry
Member Core Equity Reporting, proposed Section 11.6(a)(ii) will provide
that the Participants' recovery of Post-Amendment Industry Member Fees
will be reduced according to the following schedule:
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    \120\ ``Full amount'' in this context does not mean that the
Participants may collect all of their Post-Amendment Expenses from
Industry Members. Rather, pursuant to the provisions of Article XI
of the CAT NMS Plan, the Participants may recover an appropriate
portion of these fees from Industry Members. Specifically, to
recover any Post-Amendment Expenses from Industry Members, the
Participants must file with the Commission proposed rule changes
under Section 19(b) of the Act, setting for their proposed
allocation and justifying why the proposed allocation is consistent
with the Act. The Commission would then review the proposed rule
changes for consistency with the Exchange Act and the CAT NMS Plan.
    \121\ See proposed Section 11.6(a)(i).
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     By 25% if the Participants miss the deadline set forth in
proposed Section 11.6(a)(i)(A) by less than 60 days;
     By 50% if the Participants miss the deadline set forth in
proposed Section 11.6(a)(i)(A) by 60 days or more, but less than 120
days;
     By 75% if the Participants miss the deadline set forth in
proposed Section 11.6(a)(i)(A) by 120 days or more, but less than 180
days;
     By 100% if the Participants miss the deadline set forth in
proposed Section 11.6(a)(i)(A) by 180 days or more.
    If the Participants do not meet the specified dates for the
achievement of Full Implementation of Core Equity Reporting
Requirements, Full Availability and Regulatory Utilization of
Transactional Database Functionality, or Full Implementation of CAT NMS
Plan Requirements, proposed Section 11.6(a)(iii) will provide that the
Participants' recovery of Post-Amendment Industry Member Fees will be
reduced according to the following schedule:
     By 25% if the Participants miss the deadline set forth in
proposed Section 11.6(a)(i) by less than 90 days;
     By 50% if the Participants miss the deadline set forth in
proposed Section 11.6(a)(i) by 90 days or more, but less than 180 days;
     By 75% if the Participants miss the deadline set forth in
proposed Section 11.6(a)(i) by 180 days or more, but less than 270
days; and
     By 100% if the Participants miss the deadline set forth in
proposed Section 11.6(a)(i) by 270 days or more.

Proposed Section 11.6(a)(iv) provides that the Participants will only
be entitled to collect Post-Amendment Industry Member Fees for Period
1, Period 2, Period 3, or Period 4 at the end of each respective
Period.
    The Commission preliminarily believes these conditions on CAT
funding are appropriate. It has been almost three years since the
Commission approved the CAT NMS Plan, but insufficient progress has
been made towards the implementation of CAT, and the Participants have
repeatedly missed deadlines set forth by the CAT NMS Plan. The
Commission preliminarily believes that the proposed rules will provide
accountability to facilitate implementation of the CAT in an
expeditious and efficient manner, and according to a schedule that is
consistent with the most recent timelines published by the
Participants.\122\
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    \122\ See Part II.B.1. for more discussion of the deadlines
established by the proposed amendments.
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    As explained above, the Commission has identified four meaningful
Financial Accountability Milestones and paired those Financial
Accountability Milestones with reasonable and feasible target deadlines
set approximately eight months to one year apart. The Participants will
be able to recover the full amount of any Post-Amendment Industry
Member Fees if the Participants achieve the Financial Accountability
Milestones identified in the proposed rule amendment by the specified
dates. However, the Commission preliminarily believes that it is
appropriate to impose financial accountability on the Participants by
incrementally reducing the amount of CAT funding that Participants may
recover from Industry Members, according to the schedules set forth
above.
    Fee recovery for most of the Financial Accountability Milestones--
Full Implementation of Core Equity Reporting Requirements, Full
Availability and Regulatory Utilization of Transactional Database
Functionality, and Full Implementation of CAT NMS Plan Requirements--
will be governed by a fee schedule that gradually reduces the amount of
recovery that the Participants are entitled to by 25% for each quarter
by which the Participants miss the target deadline. The Commission
preliminarily believes this structure will appropriately balance the
need to keep Participants on a firm implementation schedule with the
need to incentivize the Participants to continue their progress towards
implementation even if the target deadlines identified in the proposed
amendment are missed. As discussed above,\123\ the Commission believes
that the target deadlines identified for these three milestones are
reasonable and feasible, because these deadlines are consistent with
recent timelines provided by the Participants. The Commission therefore
does not believe that it is necessary to allow for a grace period
before reducing the Participants' recovery. However, by providing a
full quarter before each subsequent, and additional, reduction to fee
recovery, the proposed schedule gives the Participants an ample amount
of time to achieve each milestone before further reductions are
imposed. Moreover, the Commission believes that the proposed amount of
the reduction--25% per quarter--is appropriate, because it is
sufficiently large to incentivize prompt implementation, but not so
large as to be unnecessarily punitive.
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    \123\ See Part II.B.1.b.-d. supra.
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    A slightly different schedule is proposed for Initial Industry
Member Core Equity Reporting. For that milestone, the proposal would
reduce the initial recovery by 25% if the Participants miss the
proposed deadline by less than 60 days and by an additional 25% for
every additional 60 days by which the Participants miss the proposed
deadline. While the Commission is imposing the same 25% fee reduction
in this instance, the proposed fee recovery schedule for Initial
Industry Member Core Equity Reporting is tighter than the schedule for
the other three Financial Accountability Milestones. The Commission
preliminarily believes that this is an appropriate schedule because
this Financial Accountability Milestone should be the easiest for the
Participants to achieve. Industry Members have developed relevant
experience in reporting equities transaction data to OATS, and the
Participants have made significant progress towards development of the
necessary technical specifications, suggesting that the Participants
remain on track with their own projections. In addition, the Commission
believes it is critically important that the Participants remain on
schedule to achieve the first Financial Accountability Milestone, in
order to minimize the possibility that the deadlines for subsequent
Financial Accountability Milestones will be missed.\124\ For those
reasons, the Commission believes the fee recovery schedule for Initial
Industry Member Core Equity Reporting is appropriate.
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    \124\ See, e.g., Part IV.E.1.
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    The Commission preliminarily believes that the incremental approach
followed by both fee recovery schedules, which provide the Participants
with a considerable amount of recovery unless the Participants miss the
target deadline by a considerable amount of time, will also promote
implementation of the CAT in accordance with the deadlines outlined by
this proposed amendment. The sooner the Participants achieve each
Financial Accountability Milestone, the sooner the Participants will be
able to begin recovering any related Post-Amendment Industry Member
Fees.\125\

Moreover, so long as the Participants complete each particular
Financial Accountability Milestone substantially before the target
deadline for the next Financial Accountability Milestone arrives, the
Participants should be able to recover a portion of their fees, costs,
and expenses from Industry Members, subject to the Exchange Act and the
provisions of the CAT NMS Plan. Although failing to meet one target
deadline might make it more difficult to comply with the next target
deadline, the proposed amendment does not preclude the possibility that
the Participants may be entitled to some measure of recovery going
forward.\126\ The Commission preliminarily believes that the
Participants will continue to make progress towards full CAT
implementation even if one target deadline is missed because they still
will have the opportunity to recover fees, costs, and expenses from
Industry Members, albeit a smaller portion of those fees, costs, and
expenses.\127\
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    \125\ See, e.g., proposed Section 11.6(a)(iv) (providing that
the Participants may only collect relevant Post-Amendment Industry
Member Fees at the end of Period 1, 2, 3 and/or 4).
    \126\ For example, suppose the Participants missed the deadline
for Initial Industry Member Core Equity Reporting by 180 days or
more and were therefore not entitled to any recovery for Period 1.
In this scenario, the Participants might still be able to meet the
deadline for the next Financial Accountability Milestone, Full
Implementation of Core Equity Reporting Requirements, or achieve
that Financial Accountability Milestone within 270 days of the
proposed deadline, thus entitling them to partial recovery under the
proposed amendment. As another example, suppose the Participants did
not achieve Full Implementation of Core Equity Reporting
Requirements until January 1, 2021, but were able to meet the target
deadline for the next Financial Accountability Milestone--Full
Availability and Regulatory Utilization of Transactional Database
Functionality. Because the Participants did not achieve Full
Implementation of Core Equity Reporting Requirements on schedule,
but were less than 90 days late, the Participants would be entitled
to collect 75% of the Post-Amendment Industry Member Fees
established for Period 2 upon achievement of Full Implementation of
Core Equity Reporting Requirements and the full amount of Post-
Amendment Industry Member Fees for Period 3 upon achievement of Full
Availability and Regulatory Utilization of Transactional Database
Functionality.
    \127\ See, e.g., note 191 infra.
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    As noted above, the Commission must review fee filings submitted by
the Participants pursuant to Section 19(b) of the Exchange Act to
implement fees to recover the costs and expenses incurred by the
Participants in connection with the development, implementation, and
operation of the CAT.\128\ These filings must specify the percentage of
the costs and expenses that will be allocated to the Participants on
the one hand and the Industry Members on the other hand, as well as
explain how costs and expenses will be allocated within each group.
Each Participant must also demonstrate, under Sections 6(b)(4) and
15A(b)(5), that such fee filings provide for the equitable allocation
of reasonable dues, fees, and other charges among its members and other
persons using its facilities.\129\ In light of the continued delays to
CAT implementation, the Commission preliminarily believes that it is
appropriate, at this time, to set forth the circumstances under which
the full recovery of fees, costs, and expenses from Industry Members
would not be reasonable under Sections 6(b)(4) or 15A(b)(5) of the
Exchange Act or reasonably related to the Participants' self-regulatory
obligations under the CAT NMS Plan.\130\ The Commission preliminarily
believes that it would not be a reasonable exercise of the
Participants' funding authority under the CAT NMS Plan to fully recover
fees, costs, and expenses from Industry Members if the Participants