[Federal Register Volume 88, Number 175 (Tuesday, September 12, 2023)]
[Notices]
[Pages 62628-62686]
[FR Doc No: 2023-19525]

Vol. 88

Tuesday,

No. 175

September 12, 2023

Part II

Securities and Exchange Commission

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Joint Industry Plan; Order Approving an Amendment to the National
Market System Plan Governing the Consolidated Audit Trail; Notice

Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 /
Notices

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98290; File No. 4-698]

Joint Industry Plan; Order Approving an Amendment to the National
Market System Plan Governing the Consolidated Audit Trail; Notice

September 6, 2023.

I. Introduction

    On March 13, 2023, the Consolidated Audit Trail, LLC (``CAT LLC''),
on behalf of the Participants \1\ to the National Market System Plan
Governing the Consolidated Audit Trail (``CAT NMS Plan'' or
``Plan''),\2\ filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 11A of the Exchange Act \3\ and
Rule 608 of Regulation National Market System (``Regulation NMS'')
thereunder,\4\ a proposed amendment to the CAT NMS Plan (``Proposed
Amendment'') to implement a revised funding model (``Executed Share
Model'') for the consolidated audit trail (``CAT'') \5\ and to
establish a fee schedule for Participant CAT fees in accordance with
the Executed Share Model (``Proposed Participant Fee Schedule'').\6\
The Proposed Amendment was published for comment in the Federal
Register on March 21, 2023.\7\
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    \1\ The Participants are: BOX Exchange LLC, Cboe BYX Exchange,
Inc., Cboe BZX Exchange, Inc., Cboe C2 Exchange, Inc., Cboe EDGA
Exchange, Inc., Cboe EDGX Exchange, Inc., Cboe Exchange, Inc., The
Financial Industry Regulatory Authority, Inc. (``FINRA''), Investors
Exchange LLC, Long-Term Stock Exchange, Inc., MEMX LLC, Miami
International Securities Exchange, LLC, MIAX Emerald, LLC, MIAX
PEARL, LLC, Nasdaq BX, Inc., Nasdaq GEMX, LLC, Nasdaq ISE, LLC,
Nasdaq MRX, LLC, Nasdaq PHLX LLC, The Nasdaq Stock Market LLC, New
York Stock Exchange LLC, NYSE American LLC, NYSE Arca, Inc., NYSE
Chicago, Inc., and NYSE National, Inc. (collectively, the
``Participants,'' ``self-regulatory organizations,'' or ``SROs'').
    \2\ The CAT NMS Plan is a national market system plan approved
by the Commission pursuant to Section 11A of the Securities Exchange
Act of 1934 (``Exchange Act'') and the rules and regulations
thereunder. See Securities Exchange Act Release No. 78318 (Nov. 15,
2016), 81 FR 84696 (Nov. 23, 2016) (``CAT NMS Plan Approval
Order''). The CAT NMS Plan is Exhibit A to the CAT NMS Plan Approval
Order. See CAT NMS Plan Approval Order, 81 FR at 84943-85034. The
CAT NMS Plan functions as the limited liability company agreement of
the jointly owned limited liability company formed under Delaware
state law through which the Participants conduct the activities of
the CAT (``Company''). Each Participant is a member of the Company
and jointly owns the Company on an equal basis. The Participants
submitted to the Commission a proposed amendment to the CAT NMS Plan
on August 29, 2019, which they designated as effective on filing. On
August 29, 2019, the Participants replaced the CAT NMS Plan in its
entirety with the limited liability company agreement of a new
limited liability company, CAT LLC, which became the Company. See
Securities Exchange Act Release No. 87149 (Sept. 27, 2019), 84 FR
52905 (Oct. 3, 2019). The latest version of the CAT NMS Plan is
available at https://catnmsplan.com/about-cat/cat-nms-plan.
    \3\ 15 U.S.C. 78k-1.
    \4\ 17 CFR 242.608.
    \5\ The Proposed Amendment modifies the existing funding model
in Article XI. of the CAT NMS Plan.
    \6\ See Letter from Brandon Becker, Chair, CAT NMS Plan
Operating Committee, to Vanessa Countryman, Secretary, Commission
(Mar. 13, 2023) (``Transmittal Letter'').
    \7\ See Securities Exchange Act Release No. 97151 (Mar. 15,
2023), 88 FR 17086 (Mar. 21, 2023) (``Notice''). Comments received
in response to the Notice can be found on the Commission's website
at https://www.sec.gov/comments/4-698/4-698-a.htm.
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    On June 16, 2023, the Commission instituted proceedings pursuant to
Rule 608(b)(2)(i) of Regulation NMS \8\ to determine whether to
disapprove the Proposed Amendment or to approve the Proposed Amendment
with any changes or subject to any conditions the Commission deems
necessary or appropriate after considering public comment (``OIP'').\9\
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    \8\ 17 CFR 242.608(b)(2)(i).
    \9\ See Securities Exchange Act Release No. 97750 (June 16,
2023), 88 FR 41142 (June 23, 2023). Comments received in response to
the OIP can be found on the Commission's website at https://www.sec.gov/comments/4-698/4-698-a.htm.
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    This order approves the Proposed Amendment.

II. Background

    On July 11, 2012, the Commission adopted Rule 613 of Regulation
NMS, which required the SROs to submit a national market system
(``NMS'') plan to create, implement and maintain a consolidated audit
trail that would capture customer and order event information for
orders in NMS securities.\10\ On November 15, 2016, the Commission
approved the CAT NMS Plan.\11\ Under the CAT NMS Plan, the Operating
Committee of the Company, of which each Participant is a member, has
the discretion (subject to the funding principles set forth in the
Plan) to establish funding for the Company to operate the CAT,
including establishing fees to be paid by the Participants and Industry
Members.\12\
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    \10\ 17 CFR 242.613.
    \11\ See CAT NMS Plan, supra note 2.
    \12\ The CAT NMS Plan defines ``Industry Member'' as ``a member
of a national securities exchange or a member of a national
securities association.'' See CAT NMS Plan, supra note 2, at Section
1.1. See also id. at Section 11.1(b).
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    Under the CAT NMS Plan, CAT fees are to be implemented in
accordance with various funding principles, including an ``allocation
of the Company's related costs among Participants and Industry Members
that is consistent with the Exchange Act taking into account . . .
distinctions in the securities trading operations of Participants and
Industry Members and their relative impact upon the Company resources
and operations'' and the ``avoid[ance of] any disincentives such as
placing an inappropriate burden on competition and reduction in market
quality.'' \13\ The Plan specifies that, in establishing the funding of
the Company, the Operating Committee shall establish ``a tiered fee
structure in which the fees charged to: (1) CAT Reporters \14\ that are
Execution Venues,\15\ including ATSs,\16\ are based upon the level of
market share; (2) Industry Members' non-ATS activities are based upon
message traffic; and (3) the CAT Reporters with the most CAT-related
activity (measured by market share and/or message traffic, as
applicable) are generally comparable (where, for these comparability
purposes, the tiered fee structure takes into consideration
affiliations between or among CAT Reporters, whether Execution Venues
and/or Industry Members).'' \17\
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    \13\ Id. at Section 11.2(b) and (e).
    \14\ The CAT NMS Plan defines ``CAT Reporter'' as ``each
national securities exchange, national securities association and
Industry Member that is required to record and report information to
the Central Repository pursuant to SEC Rule 613(c).'' Id. at Section
1.1.
    \15\ The CAT NMS Plan defines ``Execution Venue'' as ``a
Participant or an alternative trading system (`ATS') (as defined in
Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of
Regulation ATS (excluding any such ATS that does not execute
orders).'' Id.
    \16\ Id.
    \17\ CAT NMS Plan, supra note 2, at Section 11.2(c). See id. at
Article XI for additional detail.
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    On May 15, 2020, the Commission adopted amendments to the CAT NMS
Plan designed to increase the Participants' financial accountability
for the timely completion of the CAT (``Financial Accountability
Amendments'').\18\ The Financial Accountability Amendments added
Section 11.6 to the CAT NMS Plan to govern the recovery from Industry
Members of any fees, costs, and expenses (including legal and
consulting fees, costs and expenses) incurred by or for the Company in
connection with the development, implementation and operation of the
CAT from June 22, 2020 until such time that the Participants have
completed Full Implementation of CAT NMS Plan Requirements \19\
(``Post-Amendment

Expenses''). Section 11.6 establishes target deadlines for four
Financial Accountability Milestones (Periods 1, 2, 3 and 4) \20\ and
reduces the amount of fee recovery available to the Participants if
these deadlines are missed.\21\
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    \18\ See Securities Exchange Act Release No. 88890, 85 FR 31322
(May 22, 2020).
    \19\ ``Full Implementation of CAT NMS Plan Requirements'' means
``the point at which the Participants have satisfied all of their
obligations to build and implement the CAT, such that all CAT system
functionality required by Rule 613 and the CAT NMS Plan has been
developed, successfully tested, and fully implemented at the initial
Error Rates specified by Section 6.5(d)(i) or less, including
functionality that efficiently permits the Participants and the
Commission to access all CAT Data required to be stored in the
Central Repository pursuant to Section 6.5(a), including Customer
Account Information, Customer-ID, Customer Identifying Information,
and Allocation Reports, and to analyze the full lifecycle of an
order across the national market system, from order origination
through order execution or order cancellation, including any related
allocation information provided in an Allocation Report. This
Financial Accountability Milestone shall be considered complete as
of the date identified in a Quarterly Progress Report meeting the
requirements of Section 6.6(c).'' CAT NMS Plan, supra note 2, at
Section 1.1.
    \20\ See CAT NMS Plan, supra note 2, at Section 11.6(a)(i).
    \21\ Id. at Section 11.6(a)(ii) and (iii).
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III. Discussion and Commission Findings

    After careful review, the Commission, pursuant to Section 11A of
the Exchange Act,\22\ and Rule 608(b)(2) \23\ thereunder, is approving
the Proposed Amendment. Section 11A of the Exchange Act authorizes the
Commission, by rule or order, to authorize or require the self-
regulatory organizations to act jointly with respect to matters as to
which they share authority under the Exchange Act in planning,
developing, operating, or regulating a facility of the national market
system.\24\ Rule 608 of Regulation NMS authorizes two or more SROs,
acting jointly, to file with the Commission proposed amendments to an
effective NMS plan,\25\ and further provides that the Commission shall
approve an amendment to an effective NMS plan if it finds that the
amendment is necessary or appropriate in the public interest, for the
protection of investors and the maintenance of fair and orderly
markets, to remove impediments to, and perfect the mechanisms of, a
national market system, or otherwise in furtherance of the purposes of
the Exchange Act.\26\
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    \22\ 15 U.S.C. 78k-1.
    \23\ 17 CFR 242.608(b)(2).
    \24\ See 15 U.S.C. 78k-1(a)(3)(B).
    \25\ See 17 CFR 242.608.
    \26\ See 17 CFR 242.608(b)(2).
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    The Participants have sufficiently demonstrated that the proposed
allocation of fees is reasonable. There are a number of potential
approaches to allocating the costs of operating the CAT, all of which
have relative strengths and weaknesses. In adopting Rule 613 and
approving the CAT NMS Plan, the Commission determined that the CAT was
appropriate in order to enable the SROs and the Commission to fulfill
their responsibilities to oversee the equities and options markets. The
CAT NMS Plan requires both Execution Venues (which include the
Participants) and Industry Members (which include CAT Executing
Brokers) to fund the CAT. The proposed one-third allocation of CAT fees
to the applicable Participant in a transaction, the CAT Executing
Broker for the buyer in a transaction and the CAT Executing Broker for
the seller in a transaction, assesses an equal fee to the three primary
roles in a transaction: the buyer, seller and market regulator. In our
view, allocating the costs for the CAT among the three parties who play
significant roles in transactions reportable to the CAT in this manner
represents a reasonable method of allocating costs among the parties
who participate in and benefit from those markets.
    Commenters expressed concern that the Participant exchanges and
FINRA would pass their share of costs on to Industry Members. But the
Exchange Act expressly contemplates the ability of the Participants to
recoup the costs of fulfilling their statutory obligations under the
Exchange Act. And, as we explained in adopting Rule 613 and approving
the CAT NMS Plan, the CAT is important to the performance of these
regulatory activities in modern, interconnected markets, to the
ultimate benefit of investors and market participants. Moreover, these
costs will not be unchecked. The Participants must file their proposed
rule changes relating to fees with the Commission. Those proposed rule
changes are published by the Commission and there is an opportunity for
public comment. CAT fees, like any fees the Participants collect from
their members to fund their SRO responsibilities in market and member
regulation, must be consistent with applicable statutory standards
under the Exchange Act, including being reasonable, equitable and not
unfairly discriminatory.
    We also conclude that the use of executed equivalent share volume
provides a reasonable basis for the calculation of these fees. Executed
equivalent share volume is readily determinable and--because it is
based on trading activity, which impacts CAT costs--provides a
reasonable proxy for the costs to CAT, allowing CAT Reporters to be
assessed fees corresponding to the cost burden they impose on the CAT.
The use of CAT Executing Brokers is also appropriate because the
proposed Executed Share Model is based on executed equivalent shares
(emphasis added). Therefore, charging the CAT Executing Brokers would
reflect their executing role in each transaction, which is already
recorded in transaction reports from the exchanges and FINRA's equity
trade reporting facilities for calculating the CAT fees. Because such
entities are already identified and their CAT fees are known, this
method could streamline the billing process and allow such entities to
calculate their own fees. We also conclude that the division of fees
into Prospective CAT Fees and the Historical CAT Assessment provides a
reasonable method of allowing Participants to recoup their significant
expenditures on the development of CAT to date while ensuring funding
for future operations of the system. And the provision of fee
calculation information, approach to billing and collection of fees,
conforming changes and the Proposed Participant Fee Schedule are all
reasonable. The Commission is therefore approving the Proposed
Amendment.\27\
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    \27\ Id.
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A. Funding Model

1. Overview
    CAT LLC proposes to replace the funding model set forth in Article
XI of the CAT NMS Plan (``Original Funding Model'') with the Executed
Share Model. The Original Funding Model involved a bifurcated approach,
where costs associated with building and operating the CAT would be
borne by (1) Industry Members (other than alternative trading systems
(``ATSs'') that execute transactions in Eligible Securities
(``Execution Venue ATSs'')) through fixed tiered fees based on message
traffic for Eligible Securities, and (2) Participants and Industry
Members that are Execution Venue ATSs for Eligible Securities through
fixed tiered fees based on market share.\28\ In contrast, the Executed
Share Model would charge fees based on the executed equivalent share
volume of transactions in Eligible Securities.\29\ In addition, instead
of charging fees to Industry Members, under the Executed Share Model,
fees would be charged to each Industry Member that is a CAT Executing
Broker \30\ for the buyer in a transaction in Eligible Securities
(``CAT Executing Broker for the Buyer'' or ``CEBB'') and each Industry
Member that is the CAT Executing Broker for the seller in a transaction
in Eligible

Securities (``CAT Executing Broker for the Seller'' or ``CEBS'').\31\
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    \28\ See CAT NMS Plan, supra note 2, at Section 11.3(a) and (b).
    \29\ See Notice, supra note 7, 88 FR at 17086.
    \30\ See infra Section III.A.4. for the definition of CAT
Executing Broker.
    \31\ See Notice, supra note 7, 88 FR at 17087.
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    Under the Executed Share Model, CAT LLC proposes to establish two
categories of CAT fees. The first category of CAT fees would be fees
(``CAT Fees'') payable by Participants and Industry Members that are
CAT Executing Brokers for the Buyer and for the Seller with regard to
CAT costs not previously paid by the Participants (``Prospective CAT
Costs'').\32\ The second category of CAT fees would be fees
(``Historical CAT Assessments'') to be payable by Industry Members that
are CAT Executing Brokers for the Buyer and for the Seller with regard
to CAT costs previously paid by the Participants (``Past CAT
Costs'').\33\
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    \32\ Id. at 17086; see also proposed Section 11.3(a). The
defined term ``CAT Fees'' applies specifically to CAT fees related
to Prospective CAT Costs. Id.
    \33\ See Notice, supra note 7, 88 FR at 17086; see also proposed
Section 11.3(b).
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    For each category of fees, each CEBB and each CEBS will be required
to pay a CAT fee for each such transaction in Eligible Securities in
the prior month based on CAT Data.\34\ The CEBB's CAT fee or CEBS's CAT
fee (as applicable) for each transaction in Eligible Securities will be
calculated by multiplying the number of executed equivalent shares in
the transaction by one-third and by the reasonably determined Fee
Rate,\35\ as described below.\36\ Participants would incur CAT Fees
only for Prospective CAT Costs and the Participant CAT Fee will be
calculated by multiplying the number of executed equivalent shares in
the transaction by one-third and by the reasonably determined Fee
Rate.\37\ The Participants' one-third share of Historical CAT Costs
\38\ and such other additional Past CAT Costs as reasonably determined
by the Operating Committee will be paid by the cancellation of loans
made to the Company on a pro rata basis based on the outstanding loan
amounts due under the loans.\39\
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    \34\ See Notice, supra note 7, 88 FR at 17093; see also proposed
Section 11.3(a)(iii), proposed Section 11.3(b)(iii).
    \35\ See infra Section III.A.5.a. (Prospective CAT Fees--Fee
Rate Formula) for the definition and description of the calculation
of the Fee Rate. See also infra notes 1100-1102 and accompanying
text (stating that the anticipated CAT Fee Rate and the fee rate for
Historical CAT Assessments are expected to be relatively small).
    \36\ See Notice, supra note 7, 88 FR at 17095; see also proposed
Section 11.3(a)(iii), proposed Section 11.3(b)(iii).
    \37\ See Notice, supra note 7, 88 FR at 17094; see also proposed
Section 11.3(a)(ii).
    \38\ The actual amount of Past CAT Costs to be recovered through
the Historical CAT Assessments would be reduced by an amount of
``Excluded Costs.'' The resulting amount would be defined as
``Historical CAT Costs'' in proposed Section 11.3(b)(i)(C) of the
CAT NMS Plan. See infra Section III.A.6.a. for a discussion of
Historical CAT Costs.
    \39\ See proposed Section 11.3(b)(ii).
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    FINRA CAT would be responsible for calculating the CAT fees and
submitting invoices to the CAT Executing Brokers based on this CAT
Data.\40\ All data used to calculate the fees under the Executed Share
Model would be CAT Data, and, therefore, it would be directly available
through the CAT to FINRA CAT for calculating CAT fees.\41\
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    \40\ See Notice, supra note 7, 88 FR at 17088.
    \41\ Id.
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    Once the Proposed Amendment has been approved by the Commission,
the Participants would separately file proposed rule filings pursuant
to Section 19(b) of the Exchange Act \42\ to establish the amounts of
the proposed CAT Fees and Historical CAT Assessments to be charged to
Industry Members, subject to the satisfaction of applicable Financial
Accountability Milestones as set forth in Section 11.6 of the CAT NMS
Plan and the implementation of the billing and collection system for
the CAT fees.\43\ In each proposed rule filing, if the Participants
seek to recover amounts under the Financial Accountability Milestones,
they would need to discuss their completion of the applicable
milestone.\44\
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    \42\ 15 U.S.C. 78s(b).
    \43\ See Notice, supra note 7, 88 FR at 17086, 17122.
    \44\ Proposed Section 11.3(b)(iii)(B)(III) would prohibit any
Participant from filing proposed rule filings pursuant to Section
19(b) of the Exchange Act regarding any Historical CAT Assessment
until any applicable Financial Accountability Milestone in Section
11.6 of the CAT NMS Plan has been satisfied.
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2. Allocation of Fee Among Participants and Industry Members
    Under the Executed Share Model, CAT fees would be allocated one-
third to the applicable Participant, one-third to the CEBS and one-
third to the CEBB of a transaction. Certain commenters opposed the
proposed allocation.\45\
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    \45\ See Letters to Vanessa Countryman, Secretary, Commission,
from Stephen John Berger, Managing Director, Global Head of
Government and Regulatory Policy, Citadel Securities, dated July 14,
2023 (``Citadel July Letter''); August 22, 2023 (``Citadel August
Letter''); Marcia E. Asquith, Corporate Secretary, EVP, Board and
External Relations, FINRA, dated May 25, 2023 (``FINRA May 2023
Letter''); April 11, 2023 (``FINRA April 2023 Letter''); and June
22, 2022 (``FINRA June 2022 Letter'') (the FINRA June 2022 Letter
was submitted in response to the prior funding proposal and was
attached and incorporated by reference in the FINRA April 2023
Letter); Ellen Greene, Managing Director, Equities & Options Market
Structure, and Joseph Corcoran, Managing Director, Associate General
Counsel, SIFMA, dated July 13, 2023 (``SIFMA July 2023 Letter'');
June 5, 2023 (``SIFMA June 2023 Letter''); May 2, 2023 (``SIFMA May
2023 Letter''); January 12, 2023 (``SIFMA January 2023 Letter'');
December 14, 2022 (``SIFMA December 2022 Letter''); October 7, 2022
(``SIFMA October 2022 Letter''); and June 22, 2022 (``SIFMA June
2022 Letter'') (the SIFMA June 2022 Letter, SIFMA October 2022
Letter, SIFMA December 2022 Letter and SIFMA January 2023 Letter
were submitted in response to the prior funding proposal and
incorporated by reference in the SIFMA May 2023 Letter); Joanna
Mallers, Secretary, FIA Principal Traders Group, dated July 14, 2023
(``FIA Letter''); Douglas A. Cifu, Chief Executive Officer, Virtu
Financial, dated July 13, 2023 (``Virtu Letter''). See infra note
58.
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    FINRA stated that, while the Proposed Amendment justified the
fairness of the Executed Share Model because it would operate like
other fees, like FINRA's Trading Activity Fee (``TAF''), Section 31
fees, and the options regulatory fee,\46\ the Proposed Amendment did
not support why those fee frameworks should be used as a model in this
context.\47\ For example, FINRA stated that the TAF is designed to
recover the costs of FINRA's regulatory activities, while the CAT fees
are intended to align with the costs to build, operate and administer
the CAT.\48\ Further, FINRA stated that the Proposed Amendment has
insufficiently explained the connection between the TAF and CAT fees,
merely stating that they are similar fees because they are transaction-
based fees used to provide funding for regulatory costs.\49\ FINRA
stated that ``CAT LLC's observations superficially focus on the fact
that these fees also use transaction-based metrics (and may be assessed
on members) and neglects other factors relevant to the analysis
including, for example, that these fees are used in combination with
other funding mechanisms and metrics to support an overall funding
framework.'' \50\
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    \46\ See Notice, supra note 7, 88 FR at 17122.
    \47\ See FINRA June 2022 Letter at 4.
    \48\ See FINRA April 2023 Letter at 8.
    \49\ Id. The commenter also stated that ``it is unclear how
assessing on FINRA the largest allocation of the SRO portion of CAT
expenses `provides funding for regulatory costs' in any reasonable
and equitable sense comparable to the TAF . . .'' Id.
    \50\ FINRA May 2023 Letter at 3.
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    Another commenter stated that the proposed CAT funding model cannot
be compared to Section 31 fees, the TAF, or the options regulatory fee
because the commenter believes that CAT fees appear to be unconstrained
and out of the industry's control.\51\ The commenter explained that,
unlike the proposed CAT fees, Section 31 fees are based on an annual
budget set by Congress and the options regulatory fee is only applied
to customer transactions and thus can be easily passed-on to other
market participants (unlike CAT fees for market making activity).\52\
Additionally,

the commenter stated that there is no precedent for fees to be
allocated to Industry Members in perpetuity, stating that this would
contravene the Exchange Act.\53\
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    \51\ Citadel July Letter at 27.
    \52\ Id. The commenter also stated that FINRA has sought to
avoid increases in the TAF. Id.
    \53\ Id. This commenter stated that it is inequitable to require
Industry Members to fund CAT costs in perpetuity when they lack
representation on the Operating Committee and therefore have little
transparency into the drivers of the costs, and there is no plan to
contain the costs. See id. at 2.
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    One commenter disagreed with the Participants' statement that the
Executed Share Model's similarity to other transaction-based fees
approved by the Commission is adequate justification for consistency
with the Exchange Act.\54\ The commenter stated that similarity to
other transaction-based fees is not an adequate basis to show that the
Executed Share Model is consistent with relevant standards; each
proposed fee must be individually supported.\55\ For example, the
commenter stated that the Participants compared the Executed Share
Model to Section 31 fees as justification for the Executed Share Model,
but failed to address the differences between the Executed Share Model
and Section 31 fees, such as the Executed Share Model's treatment of
high-volume trades in low-priced stocks while Section 31 fees are based
on the notional value of a trade.\56\
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    \54\ See SIFMA June 2022 Letter at 4.
    \55\ Id.
    \56\ See SIFMA October 2022 Letter at 7. See also Citadel August
Letter at 5.
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    Commenters also questioned the Participants' justifications for the
one-third allocation methodology. FINRA stated that the Proposed
Amendment did not justify why the proposed allocation by thirds to the
Participant, buy-side and sell-side is equitable in the context of the
CAT NMS Plan.\57\ FINRA also stated that the Proposed Amendment did not
consider alternatives suggested by commenters on a prior proposed
funding model,\58\ such as a model similar to Section 31 fees and a CAT
funding model based on the ``Cost Recovery Principle'' and the
``Benefits Received Principle.'' \59\ FINRA urged the Commission to
require those alternatives to be analyzed.\60\
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    \57\ See FINRA June 2022 Letter at 3.
    \58\ See Securities Exchange Act Release Nos. 94984 (May 25,
2022), 87 FR 33226 (June 1, 2022); 96394 (Nov. 28, 2022), 87 FR
74183 (Dec. 2, 2022); and Letter from Michael Simon, Chair Emeritus,
CAT NMS Plan Operating Committee, to Vanessa Countryman, Secretary,
Commission (Feb. 15, 2023).
    \59\ See FINRA April 2023 Letter at 5 (citing Letter to Vanessa
Countryman, Secretary, Commission, from Lawrence Harris, Fred V.
Keenan Chair in Finance, Professor of Finance and Business and
Economics, U.S.C. Marshall School of Business, dated June 21, 2022).
    \60\ Id. Another commenter suggested a review of alternative
approaches to funding, such as the extent to which CAT could be
funded by Section 31 fees. See Letter to Vanessa Countryman,
Secretary, Commission, from Kirsten Wegner, Chief Executive Officer,
Modern Markets Initiative, dated July 13, 2023 (``MMI July
Letter''), at 4.
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    One commenter stated that the Participants have not met their
burden to demonstrate the proposed allocation is consistent with the
Exchange Act fee standards and not arbitrary.\61\ The commenter stated
that because FINRA is funded by Industry Members, Industry Members
would pay over 80% of CAT costs since they must pay not only their own
share but FINRA's as well; therefore, the Commission should disapprove
the proposal.\62\ The commenter stated that the Proposed Amendment does
not explain how allocating 80% of total CAT costs to the industry in
perpetuity without a mechanism to limit the budget \63\ is consistent
with the Exchange Act and guidance on SRO filings related to fees
because the industry has no role in the governance, oversight or design
of CAT and does not benefit from the CAT.\64\ Another commenter stated
that Industry Members will bear significantly more costs than the
Proposal suggests if the Participants decide to charge their members to
fund their share of CAT fees.\65\ The commenter stated that ``[i]f the
Participants were to do this, it would render the entire Funding Model
meaningless, with Industry Members bearing 100% of CAT costs.'' \66\
Another commenter also stated that it was inappropriate to place
responsibility for funding the CAT ``on industry members that do not
stand to benefit from it.'' \67\
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    \61\ See SIFMA May 2023 Letter at 6; SIFMA June 2023 Letter at
1-2. The commenter also stated that the Proposed Amendment provides
unsupported conclusory statements that it meets the requirements of
the Exchange Act. See SIFMA June 2023 Letter at 2. See also id. at n
11; FIA Letter at 2.
    \62\ See SIFMA May 2023 Letter at 2. See also SIFMA June 2022
Letter at 1-2 (stating that the proposed cost allocation methodology
is inconsistent with Exchange Act fee standards because most costs
would be imposed on Industry Members).
    \63\ The commenter stated that the CAT annual budget increased
over 30% in the last year. See SIFMA June 2023 Letter at 4. See also
Virtu Letter at 4 (stating that the budget increase indicated that
the Industry Members could be subject to ever-increasing fees with
no say on the budget). See also FIA Letter at 3 (stating that
``[w]ith little to no skin-in-the-game, the Participants will not be
incentivized to control costs.''). See infra Section III.A.5.b
(discussing budgeted CAT costs and comments suggesting a review
mechanism to control costs).
    \64\ See SIFMA June 2023 Letter at 3, 4. The commenter stated
that approving such a proposal would ``directly threaten[ ]
efficiency, competition, and capital formation in U.S. securities
markets.'' Id. at 4. The commenter also quoted a Commission release
stating that the Participants are potentially conflicted in
allocating CAT fees to themselves and the Industry Members. See
Securities Exchange Act Release No. 89618 (Aug. 19, 2020), 85 FR
65470, 65482 (Oct. 15, 2020). Another commenter stated that the
allocation of 80% to the industry was unfair. See Virtu Letter at 4.
    \65\ See FIA Letter at 2.
    \66\ Id.
    \67\ See Virtu Letter at 2.
---------------------------------------------------------------------------

    One commenter stated that the Proposed Amendment does not
demonstrate that it is equitable, as required by Section 6(b)(4),\68\
or rational, as required by the Administrative Procedure Act,\69\ to
allocate two-thirds of CAT costs to Industry Members, stating that
``there is no suggestion that Industry Members somehow receive 67% of
the benefits from CAT.'' \70\ Furthermore, the commenter stated that
the Proposed Amendment would result in an inequitable allocation to a
small number of Industry Members.\71\
---------------------------------------------------------------------------

    \68\ 15 U.S.C. 78f(b)(4).
    \69\ 5 U.S.C. 551 et seq.
    \70\ See Citadel July Letter at 17.
    \71\ Id.
---------------------------------------------------------------------------

    The commenter also stated that the Proposed Amendment would result
in the allocation of all of the costs to build and operate the CAT to
Industry Members and would therefore be inconsistent with Section
6(b)(4) to equitably allocate reasonable fees.\72\ The commenter stated
that, in addition to the proposed allocation to Industry Members,
FINRA's 11% cost allocation would be passed-on to Industry Members and
that exchanges would also pass-on their 22% cost allocation.\73\ The
commenter stated that, with FINRA's allocation, 78% of the costs to
build and operate the CAT would be allocated to Industry Members under
the Proposed Amendment.\74\ The commenter stated that 78% is the same
amount allocated to Industry Members in a prior CAT funding model
proposal from 2021, and stated that in the Proposed Amendment, the
Operating Committee concedes that the 2021 allocation ``may have an
adverse effect on competition, liquidity or other aspects of market
structure,'' \75\ however the Proposed Amendment does not explain why
using a different metric--executed share volume rather than message
traffic--to create the same allocation would not result in similar
consequences.\76\
---------------------------------------------------------------------------

    \72\ Id. at 1, 16, 22.
    \73\ Id. at 1, 21, 22.
    \74\ Id. at 21.
    \75\ Id.
    \76\ See Citadel July Letter at 21.
---------------------------------------------------------------------------

    Further, the commenter stated that Industry Members may also be
required

to pay the exchange cost allocation,\77\ citing a statement in the
Proposed Amendment that ``each Participant may determine to charge
their members fees to fund their share of the CAT fees.'' \78\ The
commenter stated that if exchanges choose to do this, then Industry
Members would be responsible for 100% of CAT costs, which would
``distort incentives and hinder the prioritization of critical cost-
control measures, as the firms governing CAT are not bearing any of the
associated costs.'' \79\ The commenter requested that the Commission
prohibit exchanges from passing-on their CAT costs.\80\ The commenter
also stated that even after restructuring the funding model to base
allocation on share volume instead of message traffic, as in prior
funding model proposals, the allocation to exchanges stayed the same,
arguing that the exchanges are unwilling to allocate themselves more
than 22% of total costs.\81\ The commenter stated that the proposed
allocation methodology is inconsistent with the Exchange Act because of
the excessive percentage of total costs proposed to be allocated to
Industry Members and the unfair method of allocating costs among
Industry Members,\82\ stating, ``[t]he allocation methodology will have
a direct and negative impact on market efficiency, competition, and
capital formation, and the Commission must comprehensively assess those
impacts before approving this filing.'' \83\
---------------------------------------------------------------------------

    \77\ Id. at 22. See also Citadel August Letter at 2.
    \78\ See Citadel July Letter at 22. See also Notice, supra note
7, 88 FR at 17107. The commenter also stated that while the Proposed
Amendment describes the funding model as ``neutral as to location
and manner of execution,'' counterparties to off-exchange
transactions would receive higher fees than on-exchange transactions
if exchanges choose not to pass-on their cost allocation to Industry
Members. See Citadel July Letter at 21. See also Notice, supra note
7, 88 FR at 17087.
    \79\ Citadel July Letter at 22. See also id. at 16. See also
Citadel August Letter at 2 (stating that an allocation of 100% of
CAT costs to Industry Members cannot be lawful).
    \80\ Citadel July Letter at 22.
    \81\ Id. at 10.
    \82\ Id. at 15.
    \83\ Id.
---------------------------------------------------------------------------

    The commenter stated that the Proposed Amendment does not provide
the percentage of total costs to build and operate the CAT that will be
borne by Industry Members in practice.\84\ The commenter stated that it
is necessary to determine the ultimate allocation of CAT costs to
evaluate whether the proposed allocation is consistent with the
Exchange Act, arguing that the statements made in support of the
allocation were premised on the Participants being responsible for one-
third of total CAT costs, and that if this is untrue, ``the filing must
be completely reconsidered, taking into account (a) the impact on
market efficiency, competition and capital formation of allocating this
magnitude of additional costs to Industry Members, (b) whether such a
lopsided allocation is fair and equitable, and (c) the implications for
CAT governance and budget control if the firms governing CAT do not
have any skin-in-the-game.'' \85\
---------------------------------------------------------------------------

    \84\ See Citadel August Letter at 2.
    \85\ Id.
---------------------------------------------------------------------------

    One commenter stated that the Participants do not account for ``the
time and expense Industry Members have devoted to developing and
maintaining internal systems to be able to report the [sic] CAT, as
well as the time and expense Industry Members have devoted to assisting
the Operating Committee with its job of developing reporting
specifications that allow the CAT to achieve its regulatory purpose''
in the proposed allocation \86\ and that ``this omission is a flaw with
the Participants' decision to allocate two-thirds of the CAT costs to
Industry Members and its inclusion would demonstrate that the
Participants' Executed Share Model does not provide for the equitable
allocation of reasonable fees.'' \87\
---------------------------------------------------------------------------

    \86\ SIFMA June 2022 Letter at 4. See also SIFMA January 2023
Letter at 4.
    \87\ SIFMA June 2022 Letter at 4-5. See also SIFMA January 2023
Letter at 5; Virtu Letter at 3.
---------------------------------------------------------------------------

    Similarly, one commenter stated that the allocation does not take
into account fees currently paid by the industry and implementation
costs incurred by Industry Members to comply with CAT reporting
requirements.\88\ The commenter stated that Industry Members already
provide funding for regulatory matters to exchanges through regulatory
fees, membership fees, market data fees, and registration fees, and
that these fees must be factored into any equitable or rational
allocation of CAT costs.\89\ The commenter stated that although the
Proposed Amendment argues that there is no precedent for regulatory
fees to be determined based on the cost of compliance of a regulated
entity, it is necessary to take into account all CAT-related costs
including those already allocated to Industry Members to assess whether
the Proposed Amendment is equitable.\90\
---------------------------------------------------------------------------

    \88\ See Citadel July Letter at 17. See also Virtu Letter at 2
(noting that Industry Members ``already provide the Plan
Participants with a very substantial level of funding through
membership fees, registration and licensing fees, dedicated
regulatory fees, and options regulatory fees'').
    \89\ See Citadel July Letter at 17 (further stating, ``Industry
Members are already bearing nearly all of the total CAT-related
costs, at a rate much higher than the Commission estimated in its
approval of the 2016 CAT NMS Plan.'' Id. at 18).
    \90\ Id.
---------------------------------------------------------------------------

    Commenters also objected to statements made in the Proposed
Amendment that the complexity of Industry Member business models
contributes substantially to the costs of the CAT.\91\ One commenter
stated that the proposed allocation of two-thirds of CAT costs to
Industry Members is unfair, unreasonable and arbitrary because the
Participants are equally responsible for the complexity of trading
activity in the markets.\92\ The commenter disagreed with the
Participants' argument that the allocation satisfies Exchange Act fee
standards because Industry Members and the complexity of their business
models drive the costs of the CAT, by stating that the examples of
complexities provided were developed to address order types, activities
and fee structures (such as the maker-taker fee structure) established
by the Participant exchanges.\93\ The commenter stated that the
Participants are just as responsible for such cost-driving complex
trading activity in the equity and options markets as Industry Members
due to the ``large number of equity and options exchanges established
by the exchange families with fundamentally different execution models
and order types.'' \94\ The commenter stated that the Participant
exchanges have not analyzed how their own business decisions have
resulted in the complexity of Industry Member order routing practices
and CAT costs.\95\ Another commenter stated that the complexity
arguments in the Proposed Amendment contradict statements from the
Operating Committee that stringent performance and other requirements
for processing CAT data are significant drivers of CAT costs,\96\ and
that the complexity arguments suggest that costs should be allocated
evenly among Industry Members, not just a small group of Industry
Members based on volume.\97\
---------------------------------------------------------------------------

    \91\ See Notice, supra note 7, 88 FR at 17104.
    \92\ See SIFMA May 2023 Letter at 3. See also SIFMA January 2023
Letter at 2, 3-4.
    \93\ See SIFMA May 2023 Letter at 6-7. See also SIFMA January
2023 Letter at 3; Notice, supra note 7, 88 FR at 17104.
    \94\ SIFMA January 2023 Letter at 3.
    \95\ See SIFMA May 2023 Letter at 7.
    \96\ See Citadel July Letter at 17-18.
    \97\ Id. at 18.
---------------------------------------------------------------------------

    Commenters also disagreed with other justifications made in the
Proposed Amendment for the proposed allocation; specifically, that
there are more Industry Members than Participants and that Industry
Members receive more in

revenue than the Participants.\98\ One commenter stated that these
assertions are not relevant in demonstrating that the proposed
allocation is fair and reasonable.\99\ The commenter stated that the
Participants are justifying the allocation based on the ability to pay
rather than cost generation, which the commenter believes is
inconsistent ``with the Participant Exchanges' proposed approach . . .
of allocating CAT costs based on approximate responsibility for
generating them . . .'' and ``with the historical CAT decision to
allocate costs to the parties responsible for generating them.'' \100\
The commenter suggested an alternative allocation that would equally
split CAT costs between Participant exchanges and Industry Members,
while FINRA would be subject only to a nominal regulatory user fee to
access CAT Data.\101\ Another commenter stated that, while most
Industry Members will pay little to no CAT costs, 20 Industry Members
will be responsible for 75% of the costs allocated to Industry
Members.\102\ The commenter said this would contradict the Proposed
Amendment's arguments that there are more Industry Members than
Participants and that Industry Members have greater financial resources
than Participants because the Operating Committee would outnumber the
Industry Members that would be paying the most in costs.\103\
---------------------------------------------------------------------------

    \98\ See Notice, supra note 7, 88 FR at 17104.
    \99\ See SIFMA May 2023 Letter at 7. See also SIFMA January 2023
Letter at 4.
    \100\ See SIFMA May 2023 Letter at 7. The commenter cited to the
funding principles in Section 11.2 of the CAT NMS Plan.
    \101\ See SIFMA January 2023 Letter at 4. See also SIFMA May
2023 Letter at 8; SIFMA June 2022 Letter at 5; SIFMA October 2022
Letter at 4. This commenter also suggested another alternative
allocation in which costs would be allocated to those Participants
and Industry Members most directly responsible for the costs. Under
this alternative, Industry Members would be responsible for the cost
associated with initial ingestion of the data into the CAT system.
The commenter explained that Participants would be responsible for
the costs associated with the stages after the data is initially
ingested into the CAT system because the regulators directly control
and benefit from these stages of the CAT system after ingestion. See
SIFMA June 2022 Letter at 5-6.
    \102\ See Citadel July Letter at 17. The commenter also stated
that the Proposed Amendment does not explain why it would be
equitable to allocate 50% of total CAT costs to 20 Industry Members
and 22% of total CAT costs to 24 exchanges. Id.
    \103\ Id.
---------------------------------------------------------------------------

    The commenter also stated that the Proposed Amendment lacks support
for the proposed allocation.\104\ The commenter stated that the
Operating Committee has not met its burden to demonstrate that the
proposed allocation is consistent with the Exchange Act.\105\ The
commenter also stated that the Proposed Amendment does not consider the
impact of the proposed allocation to Industry Members on market
efficiency, competition and capital formation, particularly with
respect to the costs the industry will incur to build systems to pass-
through their CAT fees, the expected impact on volumes, the expected
impact on retail investors, and the expected impact on market
makers.\106\
---------------------------------------------------------------------------

    \104\ Id. at 13. See also Citadel August Letter at 2.
    \105\ See Citadel July Letter at 13.
    \106\ Id. at 2, 16, 19, 20. The commenter further stated that
the Proposed Amendment is inconsistent with the Exchange Act because
it cannot equitably allocate fees and will harm market efficiency,
competition and capital formation. Id. at 16.
---------------------------------------------------------------------------

    The commenter suggested alternatives to the proposed allocation
methodology.\107\ The commenter stated that Industry Members should not
be allocated more than 50% of ongoing CAT costs (including FINRA's
allocation) due to their lack of industry voting representation and
because they already bear nearly all of the total CAT-related
costs.\108\ The commenter also suggested that exchanges should be
prohibited from passing-on their CAT cost allocation to market
participants,\109\ and that the Participants consider allocating costs
to the Commission ``to align incentives.'' \110\ The commenter
recommended a consistent methodology for allocating costs to both
Industry Members and exchanges.\111\ The commenter also recommended an
allocation methodology that would ensure that ``a small group of firms
are not disproportionately bearing costs given that CAT is designed to
facilitate market-wide surveillance across all market participants,''
\112\ and would not inequitably allocate costs to specific market
segments (such as ``retail trading activity in NMS stocks'').\113\ The
commenter suggested that the approach could have ``(I) minimum and
maximum fee levels, (II) appropriate calibrations for liquidity
provision, (III) a volume component based on notional (instead of
executed shares), and (IV) consideration of additional metrics that
could achieve a more equitable outcome (e.g., broker-dealer capital).''
\114\
---------------------------------------------------------------------------

    \107\ Id. at 3, 30, 31. The commenter stated that the Commission
must consider reasonable alternatives and that the proposal should
be rejected and replaced by a proposal incorporating the commenter's
recommendations. Id. at 30, 2.
    \108\ Id. at 3, 30, 31.
    \109\ See Citadel July Letter at 3, 30, 31.
    \110\ Id. at 3, 31. In response, CAT LLC stated that the
Commission is not a party to the CAT NMS Plan, or subject to Rule
608 of Regulation NMS or Section 19(b) of the Exchange Act. See
Letter to Vanessa Countryman, Secretary, Commission, from Brandon
Becker, CAT NMS Plan Operating Committee Chair, dated July 28, 2023
(``CAT LLC July 2023 Response Letter''), at 31, n.144.
    \111\ See Citadel July Letter at 30-31.
    \112\ Id. at 30.
    \113\ Id. at 3, 30.
    \114\ See id. at 30. See also Citadel August Letter at 5.
---------------------------------------------------------------------------

    Commenters also raised concerns about statements in the Proposed
Amendment that CAT costs would be passed on to investors.\115\ One
commenter stated, ``[s]uch an assertion is inaccurate because it is
almost certain that there will be scenarios faced by Industry Members
in which they will not be able to figure out who was responsible for
generating certain Historical CAT Costs.'' \116\ The commenter stated
that such assertions would minimize the Participants' obligation to
allocate fees consistent with Exchange Act fee standards and could
result in the inequitable allocation of CAT fees to Industry Members
under the mistaken belief that such fees would be passed down to
investors.\117\ FINRA objected to statements in the Proposed Amendment
that Industry Members can pass through to their customers their CAT
cost allocation and additional costs resulting from an increase in
FINRA fees.\118\ FINRA stated that ``[s]ummarily stating that investors
can be made to bear the costs resulting from the Funding Model without
a detailed description of and transparency into how these fees would be
determined or passed on to customers is inadequate, and does not
provide interested parties sufficient information to consider the costs
and benefits related to the Fee Proposal.'' \119\ Another commenter
expressed concern that CAT costs will be passed-through to investors
directly or indirectly by affecting the transaction prices of equities,
stating that this could negatively impact the investment returns of
long-term investors (including retail investors).\120\ The commenter
stated that the Participants have failed to analyze how passing-through
CAT costs to investors is consistent with Exchange Act fee standards,
and that the Commission has not fully considered

these economic effects on clients and other end investors.\121\
---------------------------------------------------------------------------

    \115\ See SIFMA May 2023 Letter at 8; FINRA April 2023 Letter at
6-7; Citadel July Letter at 20; Citadel August Letter at 3; Letter
to Vanessa Countryman, Secretary, Commission, from Lindsey Weber
Keljo, Head--Asset Management Group, SIFMA, dated September 5, 2023
(``SIFMA AMG Letter''). See also Virtu Letter at 4 (noting the
inherent difficulties in implementing systems and processes to track
and pass through fees to the appropriate client firms and stating
that executing brokers would likely end up absorbing the fees
themselves).
    \116\ See SIFMA May 2023 Letter at 8; see also Virtu Letter at
4.
    \117\ See SIFMA May 2023 Letter at 8.
    \118\ See FINRA April 2023 Letter at 6-7.
    \119\ Id. at 7.
    \120\ See SIFMA AMG Letter at 2.
    \121\ Id. at 2, 3. The commenter stated that, ``[u]nder the
Exchange Act, the Participants are required to demonstrate that the
Proposed Amendment: (1) provides `for the equitable allocation of
reasonable dues, fees, and other charges,' (2) is `not designed to
permit unfair discrimination between customers, issuers, brokers or
dealers' and (3) does not `impose any burden on competition not
necessary or appropriate in furtherance of the purposes' of the
Exchange Act.'' Id. at 1, n.4 (citing to Sections 6 and 15A of the
Exchange Act and Rule 700(b)(3)(iii) of the Commission's Rules of
Practice. 15 U.S.C. 78s; 15 U.S.C. 15o-3; 17 CFR
201.700(b)(3)(iii)). Approval of the Proposed Amendment, however, is
governed by Rule 608 of Regulation NMS. That rule requires the
Commission to approve a proposed amendment to an effective national
market system plan if it finds that the amendment is necessary or
appropriate in the public interest, for the protection of investors
and the maintenance of fair and orderly markets, to remove
impediments to, and perfect the mechanisms of, a national market
system, or otherwise in furtherance of the purposes of the Act. 17
CFR 242.608(b)(2).
---------------------------------------------------------------------------

    One commenter stated that many of the largest Industry Members
would be allocated CAT fees based on proprietary trading activity, so
they would not be able to pass through their fees to investors.\122\
The commenter urged an analysis of proprietary executed volume compared
to customer executed volume in order to evaluate how CAT costs will be
allocated among Industry Members and whether the allocation methodology
is fair, equitable and not unfairly discriminatory.\123\ The commenter
also stated that the Proposed Amendment is inconsistent with Section
6(b)(5) by imposing a new and increasing expense on investors, which
would negatively impact liquidity and efficiency, and that the proposed
allocation to Industry Members would disproportionately impact market
makers (because 20 firms would have to pay most of the costs) and
retail investors (due to their trading in sub-dollar NMS stocks that
increase executed share volume), in violation of Section 6(b)(8).\124\
---------------------------------------------------------------------------

    \122\ See Citadel July Letter at 20. See also Citadel August
Letter at 3.
    \123\ See Citadel August Letter at 3. The commenter said that
such an analysis is feasible and should account for aggregate costs
to be borne by affiliated entities, stating that this is required in
Section 11.2(c) of the 2016 CAT NMS Plan. Id.
    \124\ See Citadel July Letter at 2. See also infra notes 260-
265.
---------------------------------------------------------------------------

    In response to the comment stating that the Participants had not
analyzed a suggested Section 31-style approach to a funding model,\125\
CAT LLC stated that the CAT fee approach is similar to the Section 31
fee approach in how an exchange would be obligated to pay a transaction
fee based on transactions occurring on that exchange, and that FINRA
would be obligated to pay a transaction fee based on transactions in
the over-the-counter market.\126\ CAT LLC stated that the approaches
are also similar because, in both, an exchange would be able to
determine to pass the fee onto its members, as would FINRA.\127\ CAT
LLC stated that if the Section 31 approach would comply with the
Exchange Act, then the proposed CAT fee approach should also comply
with the Exchange Act and CEBBs and CEBSs could determine whether to
pass such fees onto their clients.\128\
---------------------------------------------------------------------------

    \125\ See FINRA April 2023 Letter at 5.
    \126\ See Letter to Vanessa Countryman, Secretary, Commission,
from Brandon Becker, Chair, CAT NMS Plan Operating Committee, dated
May 18, 2023 (``CAT LLC May 2023 Response Letter''), at 9.
    \127\ Id.
    \128\ Id.
---------------------------------------------------------------------------

    In response, FINRA stated that the CAT LLC May 2023 Response Letter
misrepresented the commenter's letter by incorrectly stating that the
commenter's letter recommended an approach similar to Section 31
fees.\129\ FINRA clarified that it was noting that the Commission had
received comments suggesting a model like the Section 31 fees, that the
Participants had not ``meaningfully analyzed'' the suggested
alternatives in the Proposed Amendment, and that the Commission should
require the Participants to analyze the alternatives.\130\
---------------------------------------------------------------------------

    \129\ See FINRA May 2023 Letter at 3, n.8.
    \130\ Id.
---------------------------------------------------------------------------

    CAT LLC further responded to FINRA's objections to the use of the
TAF as precedent for CAT fees--specifically, FINRA's statement that
unlike the proposed CAT fees, the TAF recovers the costs of FINRA's
regulatory activities, while the Proposed Amendment is designed to
align with the costs to build, operate and administer the CAT.\131\ CAT
LLC stated that there is no distinction between the two points raised
by the commenter because CAT only has a regulatory purpose; therefore,
costs to build, operate and administer the CAT are inherently
regulatory costs.\132\ CAT LLC also noted that FINRA distinguished the
TAF from the proposed CAT fees by describing the TAF as being used in
combination with other funding mechanisms to support a funding
framework, but CAT LLC stated that ``this does not change the general
conclusion that a transaction-based fee complies with the Exchange
Act.'' \133\
---------------------------------------------------------------------------

    \131\ See FINRA May 2023 Letter at 3.
    \132\ See CAT LLC July 2023 Response Letter at 35.
    \133\ Id.
---------------------------------------------------------------------------

    In response to a commenter that stated that there is no precedent
for CAT fees to be allocated to Industry Members in perpetuity, and
that the Exchange Act would not allow CAT LLC to require Industry
Members to fund unlimited costs in perpetuity,\134\ CAT LLC stated that
the proposed allocation would not require Industry Members to fund all
costs since it would divide CAT costs such that one-third would be paid
each by the Participant, CEBB and CEBS in a transaction.\135\
Furthermore, CAT LLC stated that fees would not be paid in perpetuity,
as the Fee Rate set by the Operating Committee at the beginning of each
year would be based on reasonably budgeted CAT costs and projected
total executed equivalent share volume for the year and would be
adjusted mid-year, and that to implement the Fee Rates, the
Participants would need to file fee filings pursuant to Rule 19b-4 with
the Commission that must be consistent with the Exchange Act and allow
the public the opportunity to comment on the fees.\136\ CAT LLC added
that the Executed Share Model would operate similarly to other fees
that the Commission has determined are consistent with the Exchange
Act, such as Participants' sales value fees related to Section 31, the
TAF and the options regulatory fee, and that the comment did not
recognize that Industry Members can choose to pass-through CAT fees to
their customers like they do the Section 31-related sales value
fees.\137\
---------------------------------------------------------------------------

    \134\ See Citadel July Letter at 27.
    \135\ See CAT LLC July 2023 Response Letter at 14.
    \136\ Id.
    \137\ Id.
---------------------------------------------------------------------------

    In response to comments that objected to the proposed allocation to
Industry Members because Industry Members would not benefit from the
CAT,\138\ CAT LLC stated allocating costs based on who benefits from
the CAT is ``not appropriate or practical.'' \139\ CAT LLC stated that
the CAT is intended to benefit all market participants, explaining how
it would benefit Industry Members, and stated that it would be
``impractical to determine a model that allocates a measurable amount
of benefit that each market participant receives from the CAT.'' \140\
In response to a commenter that suggested that Industry Members should
not be allocated any ``costs for matters that primarily benefit the CAT
Operating Committee or the SROs,'' \141\ and a commenter that stated
that the industry does not benefit from the CAT,\142\ CAT LLC disagreed
that Industry Members do not benefit from the CAT because CAT is
critical for the

protection of investors and because CAT supports fair and efficient
markets.\143\ CAT LLC also stated that it was not ``reasonable or
practical to attempt to parse CAT costs by who `primarily benefits'
from those costs.'' \144\
---------------------------------------------------------------------------

    \138\ See Citadel July Letter at 17; Virtu Letter at 2.
    \139\ CAT LLC July 2023 Response Letter at 10.
    \140\ Id. at 11.
    \141\ Citadel July Letter at 32.
    \142\ See Virtu Letter at 4.
    \143\ See CAT LLC July 2023 Response Letter at 13.
    \144\ Id. at 12. See also id. at 13.
---------------------------------------------------------------------------

    In response to comments that state that Industry Members could bear
100% of CAT costs if Participants decide to pass-through their costs to
them,\145\ CAT LLC stated that Industry Members can pass through their
own CAT fees to their customers, like broker-dealers do for
transaction-based fees.\146\ CAT LLC stated that this may result in
Industry Members not having any funding burden if they decide to
entirely pass-through their allocation to investors.\147\ In response
to commenters that requested that Participant be prohibited from
passing-on their CAT costs to their members,\148\ CAT LLC stated that
Participants are permitted by the Exchange Act to charge their members
fees to fund the Participants' share of CAT fees, as long as they
submit fee filings that demonstrate that any proposed fee is consistent
with the Exchange Act.\149\
---------------------------------------------------------------------------

    \145\ See Citadel July Letter at 16, 22; FIA Letter at 2.
    \146\ See CAT LLC July 2023 Response Letter at 8.
    \147\ Id.
    \148\ See Citadel July Letter at 3, 22, 30; FIA Letter at 2-3.
    \149\ See CAT LLC July 2023 Response Letter at 9.
---------------------------------------------------------------------------

    In response to comments objecting to the proposed allocation to
Industry Members for not taking into account regulatory fees currently
paid by Industry Members,\150\ CAT LLC stated that the Proposed
Amendment is intended to assess fees ``directly associated with the
costs of establishing and maintaining the CAT, and not unrelated SRO
services.'' \151\
---------------------------------------------------------------------------

    \150\ See Citadel July Letter at 17; Virtu Letter at 2. CAT LLC
also objected to one commenter's description of the CAT as an
exchange ``revenue generator,'' stating that CAT LLC is a business
league under Section 501(c)(6) of the Internal Revenue Code, and
that enforcement activity obtains restitution for investors and
deters future misconduct rather than generating revenue. See CAT LLC
July 2023 Response Letter at 13-14 (responding to Citadel July
Letter at 17).
    \151\ CAT LLC July 2023 Response Letter at 13.
---------------------------------------------------------------------------

    In response to comments on whether Participants' models are equally
to blame for the complexity of the markets,\152\ CAT LLC stated that
its analysis of the complexity of the industry's business models is
based on the effects of those models on the costs of the CAT, which it
stated are more profound than those of Participants, not on complexity
of the market in general.\153\ CAT LLC explained that the complexity of
the Industry Members' business models results in significant data
processing and storage costs, which Participants do not contribute to
as they do not originate market activity or orders.\154\ CAT LLC
explained that (1) the complexity and diversity of Industry Members'
business models and order handling practices require processing and
storage of hundreds of reporting scenarios for Industry Members,
resulting in significant data processing and storage costs; \155\ (2)
Industry Members have more late data and corrections than Participants,
resulting in significant linker costs; \156\ and (3) Industry Members
have customers, which results in CAT costs related to customer account
information (FDID, CCID and CAIS) and customer investment
strategies.\157\ CAT LLC also stated that Participants would pay the
same amount as the CEBBs and CEBSs in each transaction.\158\ In
response to one commenter that stated that Industry Members implemented
complex routing strategies to optimize exchange fees and rebates
because exchange business decisions resulted in these and other
exchange fee structures,\159\ CAT LLC stated that the commenter did not
demonstrate a causal connection between exchange fee structures and CAT
costs.\160\ CAT LLC stated that it was not involved in these Industry
Member business decisions and a substantial amount of CAT costs result
from such business decisions.\161\ CAT LLC also stated that Participant
activity does not contribute as much to CAT costs as complex Industry
Member activity.\162\
---------------------------------------------------------------------------

    \152\ See SIFMA May 2023 Letter at 3; 6-7. See also SIFMA
January 2023 Letter at 2, 3-4.
    \153\ See CAT LLC May 2023 Response Letter at 6; CAT LLC July
2023 Response Letter at 6.
    \154\ See CAT LLC May 2023 Response Letter at 7; CAT LLC July
2023 Response Letter at 7.
    \155\ See CAT LLC July 2023 Response Letter at 7.
    \156\ Id.
    \157\ Id.
    \158\ Id. at 6.
    \159\ See SIFMA May 2023 Letter at 7.
    \160\ See CAT LLC July 2023 Response Letter at 6.
    \161\ Id.
    \162\ Id.
---------------------------------------------------------------------------

    CAT LLC also disagreed with one commenter's dismissal of CAT LLC's
consideration of Industry Members' relative ability to pay,\163\
stating that the Exchange Act specifically requires that the fees be
fair and reasonable, which necessitates consideration of the relative
ability to pay.\164\ CAT LLC stated that fairness issues require the
Participants to consider the greater financial resources of Industry
Members in the creation of a funding model. CAT LLC also stated that
the commenter's position runs contrary to its comments that an Industry
Member's ability to pay is an important consideration in the context of
CAT fees.\165\
---------------------------------------------------------------------------

    \163\ See SIFMA May 2023 Letter at 7. See also SIFMA January
2023 Letter at 4.
    \164\ See CAT LLC May 2023 Response Letter at 7; CAT LLC July
2023 Response Letter at 7.
    \165\ See CAT LLC July 2023 Response Letter at 7-8.
---------------------------------------------------------------------------

    Additionally, CAT LLC objected to the commenter's statement that
the proposed allocation is ``inconsistent with the historical CAT
decision to allocate costs to the parties responsible for generating
them.'' \166\ CAT LLC stated that, while the CAT NMS Plan does not
require CAT costs to be allocated to parties responsible for generating
such costs, the proposed allocation addresses cost burden on the CAT by
(i) taking into account the impact of Industry Member activity on CAT
costs, and (ii) using trading activity, which CAT LLC believes is a
``reasonable proxy for cost burden on the CAT,'' \167\ as the metric
for cost allocation.\168\ CAT LLC also stated that there are other
examples of trading activity-based fees so the funding model would not
be novel or unique.\169\
---------------------------------------------------------------------------

    \166\ See CAT LLC May 2023 Response Letter at 7; CAT LLC July
2023 Response Letter at 8; SIFMA May 2023 Letter at 7.
    \167\ See CAT LLC May 2023 Response Letter at 7; CAT LLC July
2023 Response Letter at 8.
    \168\ See CAT LLC May 2023 Response Letter at 7; CAT LLC July
2023 Response Letter at 8.
    \169\ See CAT LLC July 2023 Response Letter at 8.
---------------------------------------------------------------------------

    Additionally, CAT LLC responded to the commenter's suggested
alternative proposal that would equally allocate CAT costs to
Participant exchanges and Industry Members, stating that the commenter
did not explain why the alternative would satisfy the Exchange Act
standards, and noting that CAT LLC had previously considered such an
allocation but believed that it would not result in a fair and
equitable allocation due to the greater number of Industry Members than
Participants, the greater financial resources of Industry Members, and
the failure of the suggested allocation to take into account how the
complexity of Industry Member business models contributes substantially
to CAT costs.\170\
---------------------------------------------------------------------------

    \170\ See CAT LLC May 2023 Response Letter at 7.
---------------------------------------------------------------------------

    In response, the commenter stated that the CAT LLC Response Letter
did not meaningfully address the concerns it raised about the
allocation of CAT costs between Participants and Industry Members.\171\
CAT LLC further responded, stating that it has responded to the
commenter's comments several times and that just because CAT LLC did
not adopt the commenter's viewpoints does not mean that CAT LLC

did not consider or respond to the commenter's comments.\172\
---------------------------------------------------------------------------

    \171\ See SIFMA June 2023 Letter at 2.
    \172\ See CAT LLC July 2023 Response Letter at 27.
---------------------------------------------------------------------------

    In response to a commenter that recommended allocating no more than
50% of CAT costs to Industry Members, including the FINRA
allocation,\173\ CAT LLC stated that the commenter did not offer a
reasoned basis why such an allocation would be consistent with the
Exchange Act.\174\ CAT LLC also stated that such an allocation would
raise fairness concerns because, as compared to Participants, Industry
Members have greater financial resources, and their complex business
models ``contribute substantially to the costs of the CAT.'' \175\
Furthermore, in response to the commenter's other suggested allocation
methodology which the commenter believed would ensure that a small
group of firms and specific market segments would not be subject to
inequitable cost burdens,\176\ CAT LLC stated that the commenter did
not explain how the suggested methodology would fit into a funding
model or how such a funding model would be consistent with the Exchange
Act.\177\ CAT LLC stated that it evaluated various other funding models
over the past seven years and concluded that ``the Executed Share Model
provides a variety of advantages in comparison to the alternatives, and
satisfies the requirements of the Exchange Act. . .'' \178\
---------------------------------------------------------------------------

    \173\ See Citadel July Letter at 31.
    \174\ See CAT LLC July 2023 Response Letter at 10.
    \175\ Id.
    \176\ See Citadel July Letter at 30.
    \177\ See CAT LLC July 2023 Response Letter at 10.
    \178\ Id. at 11-12.
---------------------------------------------------------------------------

    In response, the commenter stated that its suggestions, which
included minimum and maximum fee levels, calibrations for liquidity
provision, and consideration of additional metrics,\179\ were included
in prior funding model proposals.\180\ The commenter stated that the
CAT Operating Committee should explain why it changed its position on
``the importance of these elements as part of a fair and equitable
funding proposal that is consistent with the Exchange Act.'' \181\
---------------------------------------------------------------------------

    \179\ See Citadel August Letter at 5.
    \180\ Id. (citing the minimum and maximum fees and market making
discounts proposed in a funding model proposal from the CAT
Operating Committee that was filed in 2021. See Securities Exchange
Act Release No. 91555 (Apr. 14, 2021), 86 FR 21050 (Apr. 21, 2021)).
    \181\ Id.
---------------------------------------------------------------------------

    The Executed Share Model reflects a reasonable approach to funding
the building and operation of the CAT.\182\ The CAT NMS Plan requires
both Participants \183\ and Industry Members (which would include CAT
Executing Brokers) to fund the CAT.\184\ The costs of CAT therefore
must be allocated in some fashion between Participants and Industry
Members, and how to do so is a question of judgment for which there may
be multiple reasonable approaches. CAT LLC has proposed to allocate CAT
fees equitably among the three parties who have primary roles related
to the transaction: the buyer, seller, and market regulator. In
response to one commenter that stated that the proposed allocation
methodology is inconsistent with the Exchange Act because of an
excessive percentage of total costs proposed to be allocated to
Industry Members and an unfair method of allocating costs among
Industry Members,\185\ the Commission believes that the proposed
allocation is reasonable as discussed below.\186\
---------------------------------------------------------------------------

    \182\ See 17 CFR 242.608(b)(2).
    \183\ The CAT NMS Plan requires Execution Venues and Industry
Members to fund the CAT. The definition of ``Execution Venue''
includes Participants. See supra note 15.
    \184\ See CAT NMS Plan, supra note 2, at Section 11.1(b),
11.3(a) and (b). Section 11.1(b) of the CAT NMS Plan authorizes the
Operating Committee to establish fees for Execution Venues (which
include Participants) and Industry Members to fund the CAT and
Sections 11.3(a) and (b) of the CAT NMS Plan set forth how these
fees would be calculated. See also Rule 613(a)(1)(vii)(D) discussing
how the CAT NMS Plan shall discuss the proposed allocation of
estimated costs among the plan sponsors, and between the plan
sponsors and members of the plan sponsors. 17 CFR
242.613(a)(1)(vii)(D).
    \185\ See Citadel July Letter at 15.
    \186\ See infra notes 189-201 and accompanying text.
---------------------------------------------------------------------------

    While a commenter said the Proposed Amendment did not justify why
the TAF, options regulatory fee, and Section 31 fees should be used as
a model in the context of the Executed Share Model,\187\ CAT was
created to serve regulatory purposes. Moreover, CAT Data can only be
used by SROs and the Commission for regulatory and surveillance
purposes.\188\ Therefore, the costs incurred by the Participants to
build, operate and administer the CAT similarly are regulatory costs,
which here the Participants are seeking to recover through the CAT
fees.
---------------------------------------------------------------------------

    \187\ See FINRA June 2022 Letter at 4; FINRA April 2023 Letter
at 8.
    \188\ See 17 CFR 242.613(e)(4)(i)(A); CAT NMS Plan Sections
6.5(c) and 6.5(g) and Appendix D, Section 8.1.
---------------------------------------------------------------------------

    Commenters expressed concerns that the Participants may impose fees
on their members to recoup costs relating to CAT, making Industry
Members responsible for CAT funding costs beyond those to which they
will be directly assessed pursuant to the Executed Share Model,\189\
that CAT costs will be passed-through to investors and that this aspect
of the Proposed Amendment lacks information needed to demonstrate that
it meets the approval standard and to allow the Commission and other
interested parties to consider the resulting economic effects.\190\ In
response to the comments, the Commission acknowledges the concerns but
also emphasizes that, as discussed above, the CAT provides important
benefits in facilitating effective market surveillance and the Exchange
Act expressly contemplates the ability of the Participants to recoup
their costs to fulfill their statutory obligations under the Exchange
Act.\191\ To that end, the CAT NMS Plan expressly contemplates the
allocation of the costs associated with operating the CAT among the
Participants and the Industry Members. The use of the Executed Share
Model is a reasonable method, among a number of potential approaches to
do so.
---------------------------------------------------------------------------

    \189\ See SIFMA May 2023 Letter at 2; Citadel July Letter at 16,
17, 21, 22; Citadel August Letter at 2.
    \190\ See SIFMA AMG Letter at 2; FINRA April 2023 Letter at 6-7.
    \191\ Sections 6(b)(1) and 15A(b)(2) of the Exchange Act require
that a national securities exchange or national securities
association have the capacity to be able to carry out the purposes
of the Exchange Act, the rules and regulations thereunder, and the
rules of the exchange or association. 15 U.S.C. 78f(b)(1); 15 U.S.C.
78o-3(b)(2).
---------------------------------------------------------------------------

    The Commission recognizes that these operational costs may be
passed on in other ways, including by both the Participants and
Industry Members, who each may elect to pass on such operational costs
as fees to customers indirectly through their charges for services to
customers. That would be true regardless of how the Proposed Amendment
chose to set the initial allocation. Even if the Participants decide to
pass-through the costs of CAT to Industry Members, however, in our
view, the rule filing process under Section 19(b) and Rule 19b-4 will
still incentivize the Participants to control costs. Any effort to
pass-through costs will be subject to that process and, if the
Participants fail to control costs, their ability to demonstrate that a
proposed fee is reasonable and consistent with the Exchange Act may be
compromised. After the Participants file their proposed rule changes
relating to fees with the Commission, those proposed rule changes are
published by the Commission and there is an opportunity for public
comment.\192\ Although the proposed rule changes could likely take
effect upon filing,\193\ the Commission

can temporarily suspend immediately effective rule changes if such
action is necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the purposes of
the Exchange Act.\194\ If the Commission takes such action, the
Commission will institute proceedings under Section 19(b)(2)(B) to
determine whether the proposed rule changes should be approved or
disapproved.\195\ Those fees, like any fees the Participants collect
from their members to fund their SRO responsibilities in market and
member regulation, must be consistent with applicable statutory
standards under the Exchange Act, including being reasonable, equitable
and not unfairly discriminatory.\196\ Additionally, as stated by CAT
LLC, Industry Members may be able to offset fees that FINRA assesses
them by passing their CAT fees through to their customers,\197\ and as
discussed further below, the Commission believes that the additional
costs borne by investors are likely small relative to current
transaction costs.\198\ The Commission recognizes that not all Industry
Members currently pass through fees and cannot determine in advance the
extent to which Industry Members can or will pass-through their CAT
fees to investors or would determine to do so in the future. But we
believe that many are able to and that at least some will do so. For
all of these reasons, contrary to the view of some commenters,\199\ the
Commission does not believe that the inability to determine the amount
of the CAT costs that will be passed along to investors precludes a
finding that the allocation model set forth in the Proposed Amendment
meets the approval standard.
---------------------------------------------------------------------------

    \192\ 15 U.S.C. 78s(b).
    \193\ 15 U.S.C. 78s(b)(3)(A); 17 CFR 240.19b-4(f)(2). Pursuant
to Exchange Act Rule 19b-4, a proposed rule change may take effect
upon filing with the Commission pursuant to Section 19(b)(3)(A) of
the Exchange Act if properly designated by the self-regulatory
organization as: (1) constituting a stated policy, practice, or
interpretation with respect to the meaning, administration, or
enforcement of an existing rule; (2) establishing or changing a due,
fee, or other charge applicable only to a member; (3) concerned
solely with the administration of the self-regulatory organization.
    \194\ 15 U.S.C. 78s(b)(3)(C).
    \195\ 15 U.S.C. 78s(b)(2)(B).
    \196\ See Section 6(b)(4); Section 15A(b)(5); Section 6(b)(5);
Section 15A(b)(6). 15 U.S.C. 78f(b)(4); 15 U.S.C. 78f(b)(6); 15
U.S.C. 78o-3(b)(5); 15 U.S.C. 78o-3(b)(6). See also e.g., Schedule A
to the By-Laws of FINRA, Section 1(a) (stating ``FINRA shall, in
accordance with this section, collect member regulatory fees that
are designed to recover the costs to FINRA of the supervision and
regulation of members, including performing examinations, financial
monitoring, and policy, rulemaking, interpretive, and enforcement
activities'').
    \197\ See Notice, supra note 7, 88 FR at 17108; see also CAT LLC
July Response Letter at 8-9; cf. SIFMA May 2023 Letter at 8; Citadel
July Letter at 20.
    \198\ Any efforts to recoup CAT costs will be subject to
statutory and regulatory oversight as appropriate. Under the federal
securities laws and FINRA rules, prices for securities and broker-
dealer compensation are required to be fair and reasonable, taking
into consideration all relevant circumstances. See, e.g., Exchange
Act Sections 10(b) and 15(c); FINRA Rules 2121 (Fair Prices and
Commissions), 2122 (Charges for Services Performed), and 2341
(Investment Company Securities). See also FINRA Rule 3221 (Non-Cash
Compensation). Broker-dealers are also required to disclose the fees
they charge related to a transaction pursuant to Exchange Act Rule
10b-10. See 17 CFR 240.10b-10.
    \199\ See SIFMA AMG Letter at 2; FINRA April 2023 Letter at 6-7.
---------------------------------------------------------------------------

    In response to the commenter stating that proprietary trading firms
cannot pass-through fees to investors and suggesting that an analysis
of proprietary executed volume compared to customer executed volume is
necessary to determine if the allocation is fair, equitable, and
unfairly discriminatory,\200\ the Commission believes it is reasonable
to charge executing brokers regardless of whether they are trading for
their own account or for a customer's account. The Commission
acknowledges that there is not a customer per se for proprietary trades
and therefore, proprietary trading firms would not be able to pass-
through their CAT fees to customers. However, regardless of whether a
firm trades for its own account or for a customer account, in both
instances, the firm engages in trading activity to earn a profit. In
the Commission's view, it is reasonable to allow a firm to incur CAT
fees for its profit-making business activities, such as proprietary
activity. The Commission recognizes that Industry Members may pass-
through CAT fees for customer executed volume but in the case of
proprietary trades where a firm is trading for its own account, there
is no customer to which the firm can pass-through fees, as the firm
itself is the ultimate investor, and thus it is reasonable for the firm
to be responsible for payment of CAT fees for those trades. Further,
the Commission believes it is reasonable to allow a firm to incur CAT
fees for its profit-making activity, which in this case is proprietary
activity. CAT is a regulatory tool that will be used by the
Participants and the Commission to oversee the activities for which
Industry Members earn profits and therefore it is reasonable for fees
to be charged for that profit-making activity, even if those fees
cannot be passed on to customers.
---------------------------------------------------------------------------

    \200\ See Citadel July Letter at 20; Citadel August Letter at 3.
---------------------------------------------------------------------------

    While comments raised concerns that the industry would be allocated
most of the CAT costs in perpetuity without a mechanism to limit the
budget,\201\ there is a statutory process for notice and comment and
Commission review of proposed rule changes relating to fees, under
Section 19(b) and Rule 19b-4.\202\ In addition, the Proposed Amendment
requires that the Fee Rate calculated by the Operating Committee twice
per year be based on ``reasonably budgeted CAT costs'' \203\ and that
such budgeted CAT costs be composed of ``all reasonable fees, costs and
expenses reasonably budgeted to be incurred by or for the Company in
connection with the development, implementation and operation of the
CAT.'' \204\ The Operating Committee must demonstrate that their
proposed budget and associated fees are reasonable, and the
Participants must provide support for such reasonableness in their
associated fee filings. If a Participant cannot demonstrate that their
budgeted CAT costs are reasonable in a particular filing, following
notice and public comment, then that would provide the Commission with
grounds to suspend the filing and ultimately disapprove it, which
should impose discipline or constraints on the fee setting process.
---------------------------------------------------------------------------

    \201\ See SIFMA June 2023 Letter at 3, 4; Citadel July Letter at
2; FIA Letter at 2-5.
    \202\ See supra notes 192-196 and accompanying text.
    \203\ See proposed Section 11.3(a)(i)(A)(I) and proposed Section
11.3(a)(i)(A)(II).
    \204\ See proposed Section 11.3(a)(i)(C).
---------------------------------------------------------------------------

    Further, the concerns expressed that the proposed allocation did
not account for the costs already incurred by Industry Members to
comply with the CAT or other fees paid by Industry Members to exchanges
for other regulatory matters do not render that allocation
unreasonable. Both Participants and Industry Members have incurred
costs in adapting their operations to report to CAT as is required to
achieve the benefits anticipated from the CAT. But the purpose of the
funding model is to provide a framework for the recovery of a different
set of costs--those incurred by the Participants' in developing and
maintaining the CAT system. Section 11.1(c) of the CAT NMS Plan
explicitly permits the Operating Committee to recover those costs,
allowing it to ``take into account fees, costs and expenses . . .
incurred by the Participants on behalf of the Company . . . and such
fees, costs and expenses shall be fairly and reasonably shared among
the Participants and Industry Members.'' \205\ The decision to exclude
the costs of compliance from this funding model is thus a reasonable
one.
---------------------------------------------------------------------------

    \205\ CAT NMS Plan, supra note 2, at Section 11.1(c).
---------------------------------------------------------------------------

    Further, the Commission does not base its finding with respect to
the proposed allocation of costs between Participant and Industry
Members on their respective responsibility for any

complexity in the markets. Regardless of the origin of that complexity,
its existence contributes to the costs of CAT and the purpose of the
funding model is to account for those current and future costs, not
assess responsibility for the market structure. The Participants'
decision to divide the costs evenly among the three parties who have
primary roles related to the transaction is reasonable.
    As explained below, the Commission agrees with CAT LLC's statements
that, ``[t]he Executed Share Model . . . reflects a reasonable effort
to allocate costs based on the extent to which different CAT Reporters
participate in and benefit from the equities and options markets,''
\206\ and is ``transparent, would be relatively easy to calculate and
administer, and is designed not to have an impact on market activity
because it is neutral as to the location and manner of execution.''
\207\ The Participants considered, and have previously proposed,
alternative allocations and funding models.\208\ And the Commission
acknowledges the alternative funding models and allocations suggested
by commenters.\209\ Each of those alternatives, as well as those
suggested by commenters, has relative strengths and weaknesses.
Similarly, the alternatives suggested by a commenter,\210\ including
maximum and minimum fees, appropriate calibrations for liquidity
provision and consideration of additional provisions (e.g., broker-
dealer capital), have strengths and weaknesses. For example, imposing
maximum and minimum fees would transfer costs from the largest members
to the smallest members, distorting the economic incentives of the
Executed Share Model. A similar distortion could arise to the extent
market maker volume is discounted or otherwise calibrated or to the
extent considering other metrics that are not necessarily correlated
with the cost drivers of the CAT. Given the potential distortions that
could occur with these alternatives, the Commission does not believe
that the existence of those alternatives, or the remaining concerns
identified by commenters individually or collectively, call into
question the Proposed Amendment's satisfaction of the approval standard
in Rule 608(b)(2),\211\ or otherwise warrant a departure from the
policy choices made by the Participants.
---------------------------------------------------------------------------

    \206\ See Notice, supra note 7, 88 FR at 17087.
    \207\ Id.
    \208\ In the Proposed Amendment, CAT LLC stated that it
considered but rejected a number of alternative approaches to the
CAT funding model; specifically, an approach based on a CAT
Reporter's cost burden on the CAT, a 50%-50% allocation of costs
between Industry Members and Participant exchanges, a revenue-based
funding model in which CAT Reporters would pay fees based on their
revenue, a message traffic model in which both Industry Members and
Participants would be assessed fees based on message traffic in the
CAT, a sales value model in which fees would be calculated based on
transaction sales models, an alternative allocation in which fees
would only be allocated to the CEBS, and the 2018 and 2021 Fee
Proposals, a model in which CAT LLC would allocate all costs among
the Participants and permit each Participant to charge its own
members as it deems appropriate, and a cost allocation based on a
strict pro-rata distribution regardless of the type or size of CAT
Reporters. Id. at 17105-06, 17117-19. See also CAT LLC May 2023
Response Letter at 8, where CAT LLC responded that SIFMA did not
offer a reasoned basis for why a 50-50 allocation would satisfy the
standards set forth in the Exchange Act. While alternative models
have been suggested and considered, the proposed Executed Share
Model meets the approval standard in Rule 608(b)(2).
    \209\ See FINRA April 2023 Letter at 5; SIFMA January 2023
Letter at 4. See also SIFMA May 2023 Letter at 8; SIFMA June 2022
Letter at 5-6; SIFMA October 2022 Letter at 4; Citadel July Letter
at 3, 30, 31, 32.
    \210\ See Citadel August Letter at 5.
    \211\ 17 CFR 242.608(b)(2).
---------------------------------------------------------------------------

3. Executed Equivalent Shares
    Under the Executed Share Model, a CAT fee would be charged with
regard to each transaction in Eligible Securities \212\ as reported in
CAT Data based on executed equivalent shares.\213\ A CAT Fee would be
imposed with regard to transactions in Eligible Securities in the CAT
Data regardless of whether the trade is executed on an exchange or
otherwise than on an exchange.\214\
---------------------------------------------------------------------------

    \212\ The CAT NMS Plan defines an ``Eligible Security'' as
including all NMS Securities and all OTC Equity Securities. See CAT
NMS Plan, supra note 2, at Section 1.1. ``NMS Security'' is defined
as ``any security or class of securities for which transaction
reports are collected, processed, and made available pursuant to an
effective transaction reporting plan, or an effective national
market system plan for reporting transactions in Listed Options.''
Id. ``OTC Equity Security'' is defined by the CAT NMS Plan as ``any
equity security, other than an NMS Security, subject to prompt last
sale reporting rules of a registered national securities association
and reported to one of such association's equity trade reporting
facilities.'' Id.
    \213\ See Notice, supra note 7, 88 FR at 17086.
    \214\ Id. at 17093.
---------------------------------------------------------------------------

    Proposed Section 11.3(a)(i)(B) of the CAT NMS Plan describes how
executed equivalent shares would be counted for purposes of calculating
CAT fees. Specifically, the Executed Share Model uses the concept of
executed equivalent shares as the transactions subject to a CAT Fee
involve NMS Stocks, Listed Options and OTC Equity Securities, each of
which have different trading characteristics.\215\ Proposed Section
11.3(a)(i)(B) would require the shares to be reasonably counted for
each type of Eligible Securities in the following manner:
---------------------------------------------------------------------------

    \215\ Id.
---------------------------------------------------------------------------

    NMS Stocks. Under the Executed Share Model, each executed share for
a transaction in NMS Stocks would be counted as one executed equivalent
share.\216\ Accordingly, proposed Section 11.3(a)(i)(B)(I) of the CAT
NMS Plan would state that ``[f]or purposes of calculating CAT Fees,
executed equivalent shares in a transaction in Eligible Securities will
be reasonably counted as follows: (I) each executed share for a
transaction in NMS Stocks will be counted as one executed equivalent
share.'' \217\
---------------------------------------------------------------------------

    \216\ Id.
    \217\ Proposed Section 11.3(a)(i)(B)(I).
---------------------------------------------------------------------------

    Listed Options. Recognizing that Listed Options trade in contracts
rather than shares, each executed contract for a transaction in Listed
Options will be counted using the contract multiplier applicable to the
specific Listed Option in the relevant transaction.\218\ Typically, a
Listed Option contract represents 100 shares; however, it may also
represent another designated number of shares.\219\
---------------------------------------------------------------------------

    \218\ See Notice, supra note 7, 88 FR at 17093.
    \219\ Id. See also proposed Section 11.3(a)(i)(B)(II).
---------------------------------------------------------------------------

    OTC Equity Securities. Similarly, in recognition of the different
trading characteristics of OTC Equity Securities as compared to NMS
Stocks, the Executed Share Model would discount the share volume of OTC
Equity Securities when calculating CAT Fees.\220\ CAT LLC explained
that many OTC Equity Securities are priced at less than one dollar--and
a significant number are priced at less than one penny--per share and
low-priced shares tend to trade in larger quantities.\221\ Accordingly,
a disproportionately large number of shares are involved in
transactions involving OTC Equity Securities versus NMS Stocks.\222\
Because the Executed Share Model would calculate CAT Fees based on
executed share volume, CAT Reporters trading OTC Equity Securities
would likely be subject to higher fees than their market activity may
warrant.\223\ To address this potential concern, CAT LLC proposed that
the Executed Share Model would count each executed share for a

transaction in OTC Equity Securities as 0.01 executed equivalent
shares.\224\
---------------------------------------------------------------------------

    \220\ See Notice, supra note 7, 88 FR at 17093.
    \221\ Id.
    \222\ In an example provided by CAT LLC, based on data from
2021, (1) the average price per executed share of OTC Equity
Securities was $0.072 and the average price per executed share for
NMS Stocks was $49.51; and (2) the average trade size for OTC Equity
Securities was 63,474 and the average trade size for NMS Stocks was
166 shares. Trades in OTC Equity Securities accounted for 77% of the
number of all equity shares traded, but only 0.51% of the notional
value of all equity shares traded. Id. at 17093, n.36.
    \223\ Id. at 17093.
    \224\ See proposed Section 11.3(a)(i)(B)(III).
---------------------------------------------------------------------------

a. Executed Equivalent Share Volume
    CAT LLC had represented that a disproportionately large number of
shares are involved in transactions involving OTC Equity Securities
versus NMS Stocks,\225\ that trades in OTC Equity Securities accounted
for 77% of the number of all equity shares traded, but only 0.51% of
the notional value of all equity shares traded,\226\ and that under the
Executed Share Model, CAT Reporters trading OTC Equity Securities would
likely be subject to higher fees than their market activity may
warrant.\227\ CAT LLC also explained the analysis it undertook to
determine to count each executed share for a transaction in OTC Equity
Securities as 0.01 executed equivalent shares, stating the discount was
the result of an analysis of several different metrics comparing the
markets for OTC Equity Securities and NMS Stocks. CAT LLC stated that
``(1) the ratio of total notional dollar value traded for OTC Equity
Securities to OTC Equity Securities and NMS Stocks was 0.051%; (2) the
ratio of total trades in OTC Equity Securities to total trades in OTC
Equity Securities and NMS Stocks was 0.90%; and (3) the ratio of
average share price per trade of OTC Equity Securities to average share
price per trade for OTC Equity Securities and NMS Stocks was 0.065%.''
\228\ For ease of application and because the calculations involve
averages, CAT LLC decided to round the metrics to 1%.\229\
---------------------------------------------------------------------------

    \225\ See Notice, supra note 7, 88 FR at 17093.
    \226\ Id. at 17093, n.36.
    \227\ Id. at 17093.
    \228\ Id.
    \229\ Id.
---------------------------------------------------------------------------

    In support of the use of executed equivalent shares to allocate
costs under the Executed Share Model, CAT LLC explained that ``trading
activity provides a reasonable proxy for cost burden on the CAT, and
therefore is an appropriate metric for allocating CAT costs among CAT
Reporters.'' \230\ CAT LLC stated that it is not feasible to determine
the specific cost burden of each CAT Reporter on the CAT, explaining
that ``[t]he computation of a specific CAT Reporter's burden on the CAT
is complicated by the many inter-related factors that contribute to CAT
costs, including message traffic, data processing, storage, the
complexity of reporting requirements, reporting timelines,
infrastructure, connectivity and more.'' \231\ CAT LLC added that
increased trading activity correlates with an increased cost burden on
the CAT and Industry Members are generally engaged in effecting
transactions in the market, so executed share volume would be an
appropriate metric for the allocation of CAT costs.\232\ CAT LLC stated
that this conclusion is consistent with the Commission's prior
recognition of the use of transaction volume to set regulatory
fees.\233\ Additionally, CAT LLC stated that technology costs dominate
all CAT costs, with compute costs comprising more than half of all
technology costs, and ``[w]hile [compute costs] are related in part to
message traffic, they are driven by the stringent performance
timelines, data complexity and operational requirements in the CAT NMS
Plan.'' \234\ This was one of the reasons CAT LLC decided to change
from using message traffic to calculate CAT fees using executed
equivalent share volume.\235\
---------------------------------------------------------------------------

    \230\ See Notice, supra note 7, 88 FR at 17103.
    \231\ Id. at 17105; see also id. at 17103.
    \232\ Id. at 17105.
    \233\ Id.
    \234\ Id.
    \235\ See Notice, supra note 7, 88 FR at 17105.
---------------------------------------------------------------------------

    Commenters questioned the support for the use of executed share
volume instead of message traffic, which was previously proposed in
prior funding models.\236\ FINRA stated that the Proposed Amendment
does not explain why the use of executed share volume as the basis of
the cost allocation methodology, instead of message traffic, is
equitable.\237\ FINRA explained that in prior models, message traffic
was the key proxy for cost generation used to align CAT fees with CAT
costs, but the Executed Share Model would base its cost allocation
methodology entirely on executed share volume.\238\ FINRA stated that
the Participants' argument that executed share volume is related to
cost generation is not enough to demonstrate that its use is reasonable
and equitable.\239\
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    \236\ See FINRA June 2022 Letter at 3, 4; Citadel July Letter at
10.
    \237\ See FINRA June 2022 Letter at 3.
    \238\ Id.
    \239\ Id. at 4.
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    Another commenter stated that the Operating Committee cannot
explain why the proposed allocation to Industry Members is equitable,
noting that it previously stated that charging Industry Members based
on message traffic was the most equitable means of establishing
fees.\240\ The commenter stated that allocating costs among Industry
Members based on share volume is inconsistent with the Exchange
Act.\241\ The commenter stated that there is no evidence to support the
Operating Committee's assertion that trading activity is a reasonable
proxy for cost burden on the CAT, explaining that the Operating
Committee has stated before that CAT Data processing requirements and
message traffic are significant drivers of CAT costs. The same
commenter stated that, according to one Participant, options activity
creates a greater cost burden than equities trading volume and that the
Proposed Amendment does not accurately describe the sources of CAT's
cost burdens.\242\ The commenter stated that the CAT Operating
Committee must demonstrate how the proposed allocation would not
unfairly discriminate against equities market participants and compare
equities and options activity with respect to (i) their cost burden on
the CAT and (ii) the allocation of CAT costs to Industry Members.\243\
The commenter stated that if the equities markets are subsidizing
options activity, this could have broad impacts on equity market
liquidity, competition and efficiency that must be assessed under the
Exchange Act.\244\
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    \240\ See Citadel July Letter at 10.
    \241\ Id. at 19.
    \242\ Id. at 18, 19. See also Citadel August Letter at 4.
    \243\ See Citadel August Letter at 4.
    \244\ Id.
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    Further, the commenter stated that allocating costs based on volume
would result in costs being mostly allocated to ``an extremely small
group of broker-dealers,'' which would unduly burden competition.\245\
The commenter stated that the Proposed Amendment also lacks a
discussion of the impact of this allocation on market competition,
efficiency and liquidity, but that the Operating Committee recognized
in the Proposed Amendment that prior proposals, where message traffic
was a metric used for fee allocation, could impose an outsized
financial impact on certain Industry Members.\246\
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    \245\ Citadel July Letter at 19.
    \246\ Id. See also Citadel August Letter at 2-3.
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    Additionally, FINRA objected to the statement in the Proposed
Amendment that ``trading activity provides a reasonable proxy for cost
burden on the CAT, and therefore is an appropriate metric for
allocating CAT costs among CAT Reporters.'' \247\ The commenter stated
that this statement is inconsistent with information that demonstrates
that volume from FINRA's trade reporting facilities (``TRFs'')
contributes ``a very small percentage of annual CAT compute and storage
costs.'' \248\ FINRA stated, ``. . . despite the minimal data compute
and storage costs for

transactions reported to the TRF, FINRA would be assessed an estimated
34% of the total CAT costs to be borne amongst the 25 Participants, and
more than all options exchanges combined,'' therefore it cannot support
the Participants' assertion that trading activity is a reasonable proxy
for cost burden.\249\ FINRA stated that the Proposed Amendment ``fails
to provide for reasonable fees that are equitably allocated and not
unfairly discriminatory, does not reflect a reasonable approach to
allocating costs amongst the Participants, nor does it transparently or
accurately present information regarding the true sources of cost
burdens on the CAT.'' \250\
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    \247\ FINRA May 2023 Letter at 2 (quoting Notice, supra note 7,
88 FR at 17103.)
    \248\ FINRA May 2023 Letter at 2.
    \249\ Id. See also FINRA April 2023 Letter at 8.
    \250\ FINRA May 2023 Letter at 4.
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    FINRA further stated that the Executed Share Model is inconsistent
with the ``cost alignment'' funding principle in Section 11.2(b) of the
CAT NMS Plan, which requires the Participants to seek to establish an
allocation of costs that takes into account distinctions in the
securities trading operations of Participants and Industry Members and
their relative impact upon Company resources and operations.\251\ FINRA
stated that ``the Proposal fails to establish a sufficient nexus
between executed share volume and the technology burdens that generate
CAT costs and fails to relate each reporter group's allocation to the
burden that each reporter group imposes on CAT.'' \252\
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    \251\ Id. See also FINRA April 2023 Letter at 7-9; Section
11.2(b) of the CAT NMS Plan. The Proposed Amendment would amend
Section 11.2(b). See proposed Section 11.2(b); see also infra
Section III.A.8 (Additional Changes from Original Funding Model).
    \252\ FINRA June 2022 Letter at 4.
---------------------------------------------------------------------------

    In response to FINRA's comment raising concerns about the use of
trading activity as a proxy for costs,\253\ CAT LLC stated that the
Proposed Amendment would provide an appropriate approach for allocating
CAT costs because Industry Member activity is generally for the purpose
of effecting transactions, and trading activity impacts various factors
driving CAT costs, such as storage, data processing and message
traffic.\254\ CAT LLC also stated that the Exchange Act does not
require fees to be directly correlated with the costs created by the
person charged the fee.\255\ CAT LLC stated that it is difficult to
determine the precise cost burden created by each CAT Reporter on the
CAT, and believes trading activity is a reasonable proxy for cost
burden on the CAT.\256\
---------------------------------------------------------------------------

    \253\ See FINRA May 2023 Letter at 2.
    \254\ See CAT LLC July 2023 Response Letter at 34.
    \255\ Id.
    \256\ Id.
---------------------------------------------------------------------------

    CAT LLC responded to the commenter's statement that the proposed
allocation is inconsistent with the cost alignment principles of the
CAT NMS Plan by noting that the Proposed Amendment incorporates the
concept of cost burden in at least two ways.\257\ Specifically, CAT LLC
stated that it does so because ``the allocation of CAT costs
contemplates the effect of Industry Member activity on the cost of the
CAT. . . and because trading activity provides a reasonable proxy for
cost burden on the CAT, trading activity is an appropriate metric for
allocating CAT costs among CAT Reporters.'' \258\ CAT LLC added that
because there are other examples of trading activity-based fees, the
Executed Share Model would not be novel or unique.\259\
---------------------------------------------------------------------------

    \257\ CAT LLC May 2023 Response Letter at 7.
    \258\ Id.
    \259\ Id.
---------------------------------------------------------------------------

    One commenter also stated that the Proposed Amendment made no
adjustments for sub-dollar trading activity in NMS stocks, when
adjustments were made to volume in OTC Equity Securities to adjust for
the large number of shares transacted in sub-dollar securities.\260\
The commenter also stated that it is arbitrary, capricious, and
unfairly discriminatory for the CAT Operating Committee to
significantly adjust executed share volumes for sub-dollar OTC Equity
Securities but not to do the same for sub-dollar NMS stocks, as retail
investor transactions will be allocated a disproportionate percentage
of total CAT costs simply due to the securities traded.\261\ The
commenter stated that the CAT Operating Committee must explain why it
proposes to treat these securities differently and analyze the impact
on retail investors.\262\ The commenter also stated that since
fractional shares would be rounded up to one share, the result would
overstate volume.\263\ The commenter stated that the Proposed Amendment
thus discriminates against Industry Members that handle retail orders
because of the amount of retail activity in sub-dollar stocks and
fractional share trading.\264\ The commenter stated that the Proposed
Amendment does not explain why volume by shares was chosen over
notional volume, or address its impact on specific Industry Members,
investors, or overall market competition, efficiency and
liquidity.\265\
---------------------------------------------------------------------------

    \260\ See Citadel July Letter at 20.
    \261\ See Citadel August Letter at 4-5.
    \262\ Id. at 5.
    \263\ See Citadel July Letter at 20.
    \264\ Id. See also Citadel August Letter at 4-5.
    \265\ See Citadel July Letter at 20. See also Citadel August
Letter at 5.
---------------------------------------------------------------------------

    CAT LLC proposed to delete the requirement in existing Section
11.2(b) of the CAT NMS Plan to take into account ``distinctions in the
securities trading operations of Participants and Industry Members and
their relative impact upon Company resources and operations'' in
establishing the funding of the Company.\266\ CAT LLC explained that
this requirement is related to using message traffic and market share
in the calculation of CAT fees, as message traffic and market share
were metrics related to the impact of a CAT Reporter on the Company's
resources and operations.\267\ CAT LLC explained that the requirement
is no longer relevant because the proposed Executed Share Model uses
the executed equivalent shares metric instead of message traffic and
market share.\268\
---------------------------------------------------------------------------

    \266\ See proposed Section 11.2(b).
    \267\ See Notice, supra note 7, 88 FR at 17099.
    \268\ Id.
---------------------------------------------------------------------------

    With respect to the deletion in Section 11.2(b) of the requirement
that, when establishing the funding of the CAT, the Operating Committee
must take into account ``distinctions in the securities trading
operations of Participants and Industry Members and their relative
impact upon Company resources and operations,'' FINRA stated that the
Participants have proposed to delete the language in Section 11.2(b)
because the proposed Executed Share Model is inconsistent with the
language.\269\ FINRA stated that the Proposed Amendment ``seeks to
amend the core funding principles to align with an unjustified
allocation methodology.'' \270\ FINRA stated that any changes to the
funding principles ``must be well-reasoned and transparent and must
continue to support the achievement of a fair and equitable outcome.''
\271\
---------------------------------------------------------------------------

    \269\ See FINRA June 2022 Letter at 4; see also FINRA April 2023
Letter at 7.
    \270\ FINRA June 2022 Letter at 4. The commenter states that the
Executed Share Model instead places the greatest emphasis on the
funding principle relating to the ``ease of billing and other
administrative functions,'' favoring that principle over cost
alignment. Id. at 5.
    \271\ Id.; FINRA April 2023 Letter at 8-9.
---------------------------------------------------------------------------

    In the Commission's view, the use of executed equivalent share
volume as the basis of the proposed cost allocation methodology is
reasonable and consistent with the approach taken by the funding
principles of the CAT NMS Plan.\272\ The proposed use of executed
equivalent shares would continue to incorporate the concept of cost

alignment because trading activity, as reflected through executed
equivalent share volume, would, as CAT LLC explained, correlate with
the cost burden on the CAT.\273\ It may not be possible to directly
calculate each CAT Reporter's cost burden on the CAT due to the many
factors impacting CAT costs, such as data processing, storage,
reporting timelines and requirements, and connectivity. But executed
equivalent share volume is a reasonable proxy for those costs because
it is a result of trading activity, which CAT LLC explained impacts
various CAT cost drivers, such as storage, data processing and message
traffic.\274\ In addition, because the proposed use of executed
equivalent share volume would preserve the cost alignment principle,
while no longer relying on message traffic, the deletion of the
requirement in Section 11.2(b) of the CAT NMS Plan that the Operating
Committee, in allocating costs, take into account ``distinctions in the
securities trading operations of Participants and Industry Members and
their relative impact upon Company resources and operations'' \275\ is
reasonable.
---------------------------------------------------------------------------

    \272\ See Section 11.2(b) of the CAT NMS Plan.
    \273\ CAT LLC May 2023 Response Letter at 7.
    \274\ Id. See also Notice, supra note 7, 88 FR at 17105; see
also id. at 17103.
    \275\ See Notice, supra note 7, 88 FR at 17105; see also id. at
17103.
---------------------------------------------------------------------------

    In response to the commenter that urged the CAT Operating Committee
to demonstrate how the proposed allocation would not unfairly
discriminate against equities market participants by subsidizing CAT
costs related to options market activity,\276\ the Commission believes
that subsidization of options market activity likely is reduced due to
other CAT cost burdens, such as those relating to data processing (such
as equity linkage processing, which the Commission understands is more
complex than options order linkage processing, and thus more
costly),\277\ imposed on the CAT by equity market activity. The
Commission, however, does not believe the failure to eliminate the
potential subsidization of options market activity (and any potential
attendant impacts on liquidity, competition and efficiency) renders the
Participants' Funding Model proposal inconsistent with the Exchange
Act. The Commission does not believe it is possible for the
Participants to predict with certainty how the magnitude of each driver
of CAT costs will change over time. To the extent the other costs noted
above exceed, for example, the subsidy accorded to options market
participants when calculating their executed equivalent shares, there
may be no subsidy or even a reverse subsidy from options to equities
markets. When the relative magnitudes of these cost drivers change, the
amount of any subsidy changes. In light of the potential for the cost
drivers to change over time, the Commission believes that the
Participants' proposal is reasonable.
---------------------------------------------------------------------------

    \276\ See Citadel August Letter at 4.
    \277\ See infra notes 1075-1082 and accompanying text.
---------------------------------------------------------------------------

    The Proposed Amendment's treatment of sub-dollar NMS stocks and
fractional shares is appropriate. The Commission does not believe that
the Participants' failure to discount sub-dollar NMS stocks renders the
Proposed Amendment inconsistent with the Exchange Act. The Commission
acknowledges one commenter's statement that retail investors could be
allocated a disproportionate percentage of total CAT costs due to the
lack of a discount for sub-penny NMS stocks.\278\ However, treating a
subset of NMS stocks differently from NMS securities could introduce
unnecessary complexity or administrative burdens to the extent an NMS
stock price falls or rises above a dollar. It is therefore reasonable
for the Proposed Amendment to treat all NMS stocks the same, even
though certain sub-dollar NMS stocks and fractional shares might have
characteristics similar to OTC Equity Securities. Additionally, in
response to the commenter's statement that since fractional shares
would be rounded up to one share, the result would overstate
volume,\279\ the Commission notes that CAT fees will be based on the
data contained in the transaction reports and transaction reports do
not provide for fractional quantities; therefore, CAT fees cannot be
calculated using fractional shares or fractional share components of
executed orders at this time.\280\ CAT LLC stated that if FINRA's
equity transaction reporting facilities or the exchanges report
transactions in fractional shares in the future, then the calculation
of CAT fees would also reflect fractional shares.\281\ In response to
the comment that stated that the Proposed Amendment does not explain
why volume by shares was chosen over notional volume,\282\ calculating
the notional value of stock introduces additional complexity as the
notional value would have to be calculated and would depend on the
value of the execution or trade, whereas the number of executed shares
is reported and, in the cases of options for example, is based on a
known multiplier (1/100). While the Commission does not disagree that
using executed notional shares may offer advantages and may lessen any
discrimination, the Commission believes that the Proposed Amendment's
use of executed shares is administratively easier, less prone to error,
and thus for these reasons and the reasons set forth above,\283\ is a
reasonable proxy for allocating the cost of the CAT.
---------------------------------------------------------------------------

    \278\ See Citadel August Letter at 4-5.
    \279\ See Citadel July Letter at 20.
    \280\ See Notice, supra note 7, 88 FR at 17089.
    \281\ Id. at 17089, n.23.
    \282\ See Citadel July Letter at 20. See also Citadel August
Letter at 5.
    \283\ See supra notes 272-275 and accompanying text.
---------------------------------------------------------------------------

    The Commission also believes that CAT LLC's explanation that
increased trading activity correlates with an increased cost burden on
the CAT is reasonable and that executed share volume is a reasonable
proxy for a CAT Reporter's cost burden on the CAT \284\ because
increased trading activity impacts message traffic, but also data
processing and storage costs.\285\ The Original Funding Model would
have used message traffic and market share to assess CAT fees on
Industry Members and Execution Venues, respectively.\286\ CAT LLC
expressed its belief that the use of executed equivalent share volume
would be an improvement on the Original Funding Model's use of message
traffic,\287\ explaining that the use of executed equivalent share
volume would result in fees tied to transactions (which CAT LLC stated
is the ``traditional source of revenue for Industry Members'' \288\),
that the resulting CAT fees would not adversely impact market makers,
and that the Executed Share Model is simple to understand and to
implement.\289\ CAT LLC stated that Industry Member revenue is often
driven by transactions, but ``[b]ecause message traffic is separate
from whether or not a transaction occurs, fees based on message traffic
may not correlate with common revenue or fee models,'' \290\ which
could negatively impact certain Industry Members in a significant
way.\291\ CAT LLC stated that use of message traffic to calculate fees
for Industry Members could adversely impact market makers because they

generally create high levels of message traffic.\292\ We agree with CAT
LLC regarding the benefits of the Executed Share Model and the
drawbacks of the Original Funding Model, and thus believe that the
decision to replace the use of message traffic to calculate CAT fees
with executed equivalent share volume in the Executed Share Model is
reasonable.
---------------------------------------------------------------------------

    \284\ See Notice, supra note 7, 88 FR at 17105; id. at 17101-03.
    \285\ Id. at 17105.
    \286\ See CAT NMS Plan, supra note 2, at Section 11.3(a) and
(b).
    \287\ See Notice, supra note 7, 88 FR at 17102-03. The Original
Funding Model uses message traffic as the basis of Industry Member
CAT fees. See CAT NMS Plan, supra note 2, at Section 11.3(b).
    \288\ Notice, supra note 7, 88 FR at 17103.
    \289\ Id.
    \290\ Id. at 17102.
    \291\ Id.
    \292\ Id. at 17103.
---------------------------------------------------------------------------

    The Commission acknowledges that executions do not take place on
FINRA; however, the CAT NMS Plan already categorizes FINRA as an
Execution Venue because it has trades reported by its members to its
TRFs for reporting transactions effected otherwise than on an exchange.
Thus, treatment of FINRA as an Execution Venue is not a change to the
existing CAT NMS Plan.\293\ Additionally, this allocation of fees to
FINRA is similar to how Section 31 fees are assessed on FINRA.\294\
---------------------------------------------------------------------------

    \293\ See CAT NMS Plan Approval Order, supra note 2, 81 FR at
84793; CAT NMS Plan, supra note 2, at Section 1.1. (defining
``Executing Venues'').
    \294\ 15 U.S.C. 78ee; Section 31 of the Securities Exchange Act
requires each national securities exchange and national securities
association to pay transaction fees to the Commission. Specifically,
Section 31(c) requires each national securities association to pay
to the Commission fees based on the aggregate dollar amount of
covered sales transacted by or through any member of the association
other than on an exchange. 15 U.S.C. 78ee(c). Section 31(a) permits