Order Granting Conditional Exemptive Relief, Pursuant to Section 36(a)(1) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 608(e) of Regulation NMS Under the Exchange Act, From Certain Requirements of the National Market System Plan Governing the Consolidated Audit Trail

I. Introduction

In July 2012, the Securities and Exchange Commission (the “Commission” or the “SEC”) adopted Rule 613 of Regulation NMS, which required national securities exchanges and national securities associations (the “Participants”) to jointly develop and submit to the Commission a national market system plan to create, implement, and maintain a consolidated audit trail (the “CAT”). The goal of Rule 613 was to create a modernized audit trail system that would provide regulators with timely access to a comprehensive set of trading data, thus enabling regulators to more efficiently and effectively analyze and reconstruct market events, monitor market behavior, conduct market analysis to support regulatory decisions, and perform surveillance, investigation, and enforcement activities. On November 15, 2016, the Commission approved the national market system plan required by Rule 613 (the “CAT NMS Plan”).

On December 16, 2020, the Commission issued two exemptive orders regarding the implementation of the CAT NMS Plan (collectively, the “2020 Orders”). The first order, in response to a request from the Participants, granted temporary conditional relief from certain performance requirements related to the online targeted query tool (“OTQT”). The second order granted temporary conditional relief from the following requirements: (1) requirements for lifecycle linkages timeframes; (2) requirements for re-processing of corrected data received after T+5; (3) linkage requirements for Securities Information Processor data (“SIP Data”); (4) reporting requirements for port-level settings; (5) requirements for lifecycle linkages between customer orders and “representative” orders; and (6) requirements for Participant reporting of rejected orders.

On February 14, 2021, several of the Participants filed motions requesting that the Commission stay the 2020 Orders, based on their concern that portions of the orders “interpret and apply the Plan in ways that will produce unintended adverse consequences, present implementation challenges, or both.” That same day, several of those same Participants filed corresponding petitions for judicial review with the U.S. Court of Appeals for the District of Columbia Circuit (the “D.C. Circuit”) seeking review of the 2020 Orders.

On July 8, 2022, the Commission issued a new order granting temporary exemptive relief (the “2022 Order”). The 2022 Order, which superseded the 2020 Orders, modified and/or clarified certain aspects of the 2020 Orders and gave the Participants until July 31, 2024 to either implement the functionality the Commission required for compliance with the relevant provisions of the CAT NMS Plan or to obtain Commission approval of alternative solutions that achieve the relevant regulatory objectives of Rule 613 and the CAT NMS Plan in a more cost-effective manner, including CAT NMS Plan amendments or exemptive relief. In addition, the Commission issued an order denying the Participants' stay motions, concluding that the administrative petitions to stay the 2020 Orders were “moot” because those orders were “no longer in force.” On August 3, 2022, the Commission and the Participants submitted a stipulation of voluntary dismissal to the D.C. Circuit, and, on August 5, 2022, the D.C. Circuit issued an order formally dismissing the lawsuits.

On September 6, 2022, in order to reserve their rights, a subset of the Participants filed a petition for review with the D.C. Circuit seeking review of the 2022 Order. The Commission understood that the Participants' concerns remained generally the same as expressed with respect to the 2020 Orders. The Commission subsequently issued an order, on May 18, 2023, extending the exemptive relief provided by the 2022 Order (the “2023 Order”) from July 31, 2024 to January 31, 2025, subject to the same conditions set forth in the 2022 Order. Since 2021, the Participants and Commission staff engaged in discussions with the goal of resolving their differences with respect to the issues raised by the 2020 Orders, the 2022 Order, and the 2023 Order (the “prior Orders”).

In light of further developments throughout this period and in connection with the parties' settlement of the pending litigation, the Commission has determined to issue a new order granting the Participants conditional exemptive relief from certain requirements of the CAT NMS Plan, which are described in more detail below. If and when it takes effect, the relief granted in this Order will supersede the relief granted in the 2022 Order and the 2023 Order. This relief is to take effect upon issuance of an order by the D.C. Circuit dismissing with prejudice the Participants' petition for review of the 2022 Order. Unless and until that occurs, the 2022 Order and the 2023 Order shall continue to govern. Should the Participants file a petition for review of this Order, the relief granted herein will be rescinded by its own terms and the 2022 Order and the 2023 Order will resume governing.

II. Discussion and Exemptive Relief

Section 36(a)(1) of the Exchange Act grants the Commission the authority to “conditionally or unconditionally exempt any person, security, or transaction . . . from any provision or provisions of [the Exchange Act] or of any rule or regulation thereunder, to the extent that such exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors.” Rule 608(e) of Regulation NMS similarly grants the Commission the authority to “exempt from [Rule 608], either unconditionally or on specified terms and conditions, any self-regulatory organization, member thereof, or specified security, if the Commission determines that such exemption is consistent with the public interest, the protection of investors, the maintenance of fair and orderly markets and the removal of impediments to, and perfection of the mechanisms of, a national market system.”

The Commission recognizes that the Participants have expended, and continue to expend, substantial resources and effort towards the development and implementation of the CAT. However, in the 2022 Order, the Commission stated that the current functionality of the CAT does not yet comply with CAT NMS Plan requirements for the above-described areas. The Participants have disagreed, and have further stated that, in many of these areas, strict compliance with the relevant CAT NMS Plan provisions would not be practical from a cost-benefit perspective. In light of that disagreement, the Commission stressed in the 2022 Order its willingness to consider alternative solutions that achieve the regulatory goals of Rule 613 and the CAT NMS Plan in a more cost-effective manner.

The Commission has determined that the exemptive relief granted herein—which is the product of multiple years of settlement discussions—is appropriate in the public interest and consistent with the protection of investors under section 36(a)(1) of the Exchange Act, as well as consistent with the public interest, the protection of investors, the maintenance of fair and orderly markets, and the perfection of the mechanisms of a national market system under Rule 608(e) of Regulation NMS. The Commission approved the CAT NMS Plan to help to protect investors and maintain fair and orderly markets by providing a sophisticated audit trail that improves regulators' ability to investigate potential misconduct, to reconstruct and to analyze market events, and to support regulatory decisions with detailed and accurate data, among other benefits. The conditional exemptive relief in this Order allows for the implementation of alternative regulatory solutions that continue to advance the regulatory goals that Rule 613 and the CAT NMS Plan were intended to promote, while reducing the implementation and operational costs, burdens, and/or difficulties that would otherwise be incurred by the Participants and Industry Members that must fund the CAT. It also resolves the continued impasse over implementation of these aspects of the CAT, which impeded and distracted from these regulatory goals.

A. OTQT Performance Requirements

The Commission grants conditional exemptive relief from the OTQT performance requirements related to query response times and parallel processing of queries set forth in appendix D, section 8.1.2 of the CAT NMS Plan. Such relief is subject to the following conditions:

• The OTQT must maintain or improve current functionality that enables requests for “all related lifecycles” to be made either prior to or after the generation of a parent query.

• The OTQT must further satisfy the performance parameters set forth in Exhibit A.

• The Plan Processor must continue to test the OTQT's performance with benchmark queries and evaluate the response times for actual queries on a monthly basis. Such tests and evaluations should contain at least the same content that is currently provided to Commission staff and should be provided to Commission staff and the Operating Committee within 30 days from the end of each month.

• The Plan Processor must conduct an annual concurrency test by launching 300 simultaneous query requests across the different query categories and measuring the response times against the applicable performance standards. The concurrency test shall be based on historical actual queries, and the mix of queries shall be based on the percentage of actual queries by category. The concurrency test attributes shall be provided in writing and reviewed in advance with Commission staff and the Operating Committee. The Participants must also provide the results of the annual concurrency testing performed by the Plan Processor on the OTQT to Commission staff within 30 days from the date of such testing. If the concurrency test response times do not satisfy the performance standards set forth in Exhibit A ( i.e., measured against a 90% compliance rate for each category, based on historical actual queries, with the mix of queries based on the percentage of actual queries by category), the Plan Processor shall promptly investigate and make recommendations to the Operating Committee for how to ensure adequate concurrency performance.

• The Plan Processor must establish policies and/or procedures requiring review of the OTQT's performance on a regular and ongoing basis and evaluation of opportunities for potential improvements to the OTQT's performance. The Participants must provide to Commission staff, on an annual basis, a written status update including information regarding any potential and actual implementation by the Plan Processor of improvements to the OTQT performance. The written status update shall also include an evaluation of (1) volume trends and projections; (2) usage patterns and types of queries performed; (3) response time statistics and trends; (4) outlier queries; (5) costs and benefits; and (6) regulatory need.

The Commission believes that this conditional exemptive relief reflects a reasonable compromise approach. The standards set forth in Exhibit A preserve, as a baseline, the OTQT functionality that is already in place, which should provide a measure of certainty for regulatory users regarding this query tool's expected performance. The other conditions set forth above enable better oversight of the OTQT's performance by the Participants and the Commission, which the Commission believes is in the public interest.

B. Requirements for Lifecycle Linkages Timeframes

The Commission grants conditional exemptive relief from the requirement set forth in appendix D, section 6.1 of the CAT NMS Plan that lifecycle linkages be created by T+1 at noon Eastern Time. Such relief is subject to the following conditions:

• The Plan Processor must maintain or improve the existing performance of functionality currently providing lifecycle linkages for all order events by T+1 at 9 p.m. Eastern Time, except an interim CAT Order ID will not be required for Options Quotes once the functionality described below is implemented.
• The Plan Processor must develop and implement the functionality to provide a final CAT Order ID and lifecycle linkage for Options Quotes by T+2 at 8 a.m. Eastern Time, including all enrichments currently provided for such order events at T+5 at 8 a.m. Eastern Time. The Plan Processor will no longer be required to provide an interim CAT Order ID for Options Quotes once this functionality has been implemented. When late or corrected data is received for Options Quotes between T+1 at 8 a.m. Eastern Time and T+4 at 8 a.m. Eastern Time, the Plan Processor must run, on an ad hoc basis, a second processing cycle such that lifecycle linkage and all enrichments currently provided for such order events are performed by T+5 at 8 a.m. Eastern Time.

The Commission believes that this conditional exemptive relief facilitates settlement of the issues raised in the Participants' challenge to the 2022 order while preserving existing functionality for most types of order events.

C. Requirements for Re-Processing of Corrected Data Received After T+5 ²²

The Commission grants conditional exemptive relief from the re-processing requirements for corrected data received after T+5 that are set forth in appendix D, section 3 and section 6.2 of the CAT NMS Plan. Such relief is subject to the following conditions:

• The Plan Processor must maintain its implementation of functionality related to late data lifecycle association that was approved by the Operating Committee on January 14, 2022 (the “Late to the Lifecycle process”) and on September 20, 2022 (the “Targeted Replay process”) (collectively, the “Enhanced Late to the Lifecycle process”). Prior to the implementation of this functionality, in the limited circumstances in which there was a missing link between two disjoined segments of an order lifecycle, new or corrected data would join only one of the pre-existing segments and would be assigned to only one of the relevant lifecycle CAT Order IDs for the disjoined segment and evaluated for further re-processing. Under the Enhanced Late to the Lifecycle process, all late records ( i.e., records received after T+5) include the date of the correction and, if applicable, the record identifier of the record being corrected as part of normal re-processing. In addition, the late record is now associated with all relevant lifecycles as part of normal re-processing, such that order event lifecycles may now be associated with more than one CAT Order ID.

• The Participants must approve a change order to adopt the below-described functionality no later than 30 days following the effective date of this Order:

○ Functionality that creates a lifecycle mapping which indicates all lifecycle associations made during the Enhanced Late to the Lifecycle process;

○ Functionality that presents to regulatory users post-T+5 data in a manner substantially similar to how such data would have been represented if it had been reported prior to T+5, including by replicating and replaying records with enrichments impacted by post-T+5 submissions, creating updated enrichments, and persisting the replicated records within the underlying data (the “Full Replay process”); and

○ Functionality that enhances the OTQT, including the ability to include or exclude any records that were created or replaced as a result of the Full Replay process.

Such functionality must be fully implemented and made available to regulatory users within twelve months of the change order's approval by the Participants.

• The Plan Processor must schedule the Enhanced Late to the Lifecycle process and the Full Replay process to run weekly, such that late reported data received through Friday of the prior week are available for regulatory users on the following business day at 8 a.m. Eastern Time, absent extraordinary circumstances, for data within the prior 18 months. For data outside of this 18-month window, the Participants must schedule the Enhanced Late to the Lifecycle process and the Full Replay process to run no less frequently than quarterly.

The Commission understands that this alternative technological solution, when fully implemented, will meaningfully advance the regulatory goals of Rule 613 and the CAT NMS Plan by enabling regulatory users to view corrected data that is submitted after T+5 as part of an order event lifecycle (which may be represented by more than one CAT Order ID) and in a manner that does not require such regulatory users to know whether late records were submitted and/or to perform additional query steps to obtain the most up-to-date records. The Commission believes this alternative technological solution will help regulatory users to better understand the impact of post-T+5 reports.

D. Requirements for SIP Data Linkage

The Commission grants conditional exemptive relief from the SIP Data linkage requirements that are set forth in section 6.5(b)(i) and appendix D, section 3 of the CAT NMS Plan. Such relief is subject to the following conditions:

• The Plan Processor must continue to provide regulatory users with the side-by-side view of SIP Data and other transactional data in the same format and manner that is currently available in the OTQT.

This functionality requires regulatory users to manually match SIP Data with other transactional data reported to the CAT. However, the Commission believes this is an acceptable alternative solution that will continue to make available SIP Data to regulatory users while facilitating settlement of the issues raised in the Participants' challenge to the 2022 Order.

E. Reporting Requirements for Port-Level Settings

The Commission grants conditional exemptive relief from the requirements as applied to port-level settings that are set forth in Rule 613(c)(7) and sections 6.3(d)(i)(F), 6.3(d)(ii)(G), 6.3(d)(iii)(F), 6.3(d)(iv)(E), and 6.4(d)(i) of the CAT NMS Plan for the following special handling instructions described in the current CAT Industry Member Technical Specifications that may be set by Industry Members at the various Participant exchanges via exchange ports (the “Exempted Port-Level Settings”):

Under the conditional exemptive relief granted herein, the Participants will not be required to obligate Industry Members to report these six special handling instructions when an Industry Member routes an order to a national securities exchange over an exchange port that is configured for one of these special handling instructions.

This conditional exemptive relief applies only when the Exempted Port-Level Settings are set at the port-level at a national securities exchange. Aside from the Exempted Port-Level Settings, this Order does not provide exemptive relief from the reporting requirements set forth in the CAT NMS Plan for any existing and/or new special handling instructions that may be set at the port-level at a national securities exchange and that may constitute Material Terms of the Order; likewise, this Order does not provide exemptive relief for any Material Terms of the Order that are set at the port-level on Industry Member alternative trading systems or broker-dealer port-level settings. To the extent that the Participants and/or Industry Members wish to receive similar exemptive relief related to other Material Terms of the Order set at the port-level, they must submit an exemptive relief request to the Commission for its consideration.

Such relief is subject to the following conditions:

• The Participants must report the Exempted Port-Level Settings in the order receipt record, regardless of whether such Exempted Port-Level Settings are “triggered” or “applied.”

• The Participants must maintain and communicate to Industry Members via a CAT Alert a mapping of each exchange-specific port-level setting related to the Exempted Port-Level Settings, substantially in the form of the draft mapping the Participants have provided to the Commission.

The Commission believes that this alternative technological solution, when fully implemented, reflects a reasonable compromise approach with respect to a limited set of data.

F. Requirements for Lifecycle Linkages Between Customer Orders and “Representative” Orders

The Commission grants temporary conditional exemptive relief from the requirements set forth in appendix D, section 3 of the CAT NMS Plan related to lifecycle linkages between customer orders and representative orders until January 31, 2025. Such relief is intended to mirror the exemptive relief provided by the 2023 Order and is subject to the following condition:

• The Participants must require Industry Members to report “representative” orders as currently described in FAQs F5–F7 and as described in other exemptive relief issued by the Commission by January 31, 2025.

The Commission believes that the relief provided in the 2023 Order gives Industry Members sufficient time to make any necessary systems changes to implement the required functionality, especially because the technical specifications and/or scenarios documents relating to the reporting and linkage of all “representative” orders have already been promulgated by the Participants. Therefore, the Commission does not believe it is necessary to issue any additional extension of exemptive relief in connection with these requirements.

G. Requirements for Participant Reporting of Rejected Orders

The Commission grants conditional exemptive relief from the requirements set forth in Rule 613(c)(7) and section 6.3(d)(i) and appendix D, section 3 of the CAT NMS Plan relating to Participant reporting of rejected orders and subsequent linkage of such orders. Such relief is subject to the following conditions:

• The Participants must maintain or improve their existing reporting of orders that are received and subsequently rejected, including maintenance by Participants of any existing reporting or linkage of the keys necessary for the linkage processing specified below. The Plan Processor must maintain its existing validations of such orders.
• The Participants must approve a change order to adopt the below-described functionality no later than 60 days following the effective date of this Order:

○ Functionality that will attempt “forward lifecycle linkage” processing, including all enrichments currently provided for other order events, of Industry Member MEOR, MOOR, and MEMR Order Route events containing a routeRejectedFlag populated as “true” with their corresponding Participant Reject Message events described in the Participant Technical Specifications in instances where the keys necessary for such linkage are available ( i.e., Symbol (or Option ID), RoutingParty, RoutedOrderID, Session).

Such functionality must be fully implemented and made available to regulatory users within twelve months of the change order's approval by the Participants.

The Commission understands that this alternative technological solution, when fully implemented, will meaningfully advance the regulatory goals of Rule 613 and the CAT NMS Plan by providing regulatory users with additional information about rejected orders.

III. Conclusion

Accordingly, it is hereby ordered, pursuant to section 36(a)(1) of the Exchange Act and Rule 608(e) under the Exchange Act, that the above-described conditional exemptive relief be granted, effective immediately upon the date of issuance of an order by the D.C. Circuit dismissing the Participants' petition for review of the 2022 Order.

Exhibit A

Online Targeted Query Tool Performance Parameters

1. General: Subject to the specific conditions described in this Exhibit A, OTQT performance must satisfy both (i) an operational completion rate (measuring the successful completion of all attempted queries), and (ii) a query compliance rate (measuring the response time performance of all successfully completed queries).

2. Operational Completion Rate: Queries will be subject to a 95% operational completion rate measured quarterly against all attempted queries in the aggregate. The operational completion rate will measure the successful completion of all attempted queries, excluding failed queries resulting from a service interruption experienced by the Plan Processor's cloud service provider.

3. Query Compliance Rate. Queries will be subject to a 90% query compliance rate measured monthly against all actual query results based on the categories and response times set forth below. The query compliance rate will measure the response time performance of all successfully completed queries for each category. Response times shall be measured from the time of query submission by the regulatory user to the time that the results are available to the regulatory user ( i.e., including the time required to formulate a data mart).

4. Reporting Requirements. The Plan Processor shall provide a monthly report noting (i) the operational completion rate for all attempted queries in the aggregate, and (ii) the query compliance rate for each category described above, to Commission staff within 30 days from the end of each month.

5. Reasonable Adjustment Period. In order to permit the Plan Processor to promptly scale up the OTQT to ensure adequate system capacity in the event of significant, unanticipated, or rapid changes in data volumes and/or user behavior that require application coding changes and/or changes to how historical data is stored, response times shall be subject to a reasonable adjustment period, (i) not to exceed 60 days for items requiring application coding changes, and (ii) not to exceed 120 days for items requiring changes to how a data object is stored and that may include changes impacting historical data in the object. These 60-day and 120-day periods shall be measured from the date on which the monthly compliance report is provided to Commission staff. For purposes of this condition:

• A significant, unanticipated, or rapid change in data volume shall be deemed to have occurred in the event of an average daily data volume increase of 30% in the applicable data object(s) from the lesser of: (i) the peak daily data volume observed in the prior month, or (ii) the peak daily data volume observed in the same month in the prior year.
• A significant, unanticipated, or rapid change in user behavior shall be deemed to have occurred in the event of an average daily OTQT query count increase of 30% from the lesser of: (i) the peak daily OTQT query count observed in the prior month, or (ii) the peak daily OTQT query count observed in the same month in the prior year.

Written notification of these determinations will be provided to and reviewed with Commission staff.