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Pursuant to Section 19(b)(1) under the Securities Exchange Act of 1934 (the “Act”) and Rule 19b-4 thereunder, notice is hereby given that on August 26, 2024, the Financial Industry Regulatory Authority, Inc. (“FINRA”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) the proposed rule change as described in Items I and II below, which Items have been prepared by FINRA. FINRA has designated the proposed rule change as “establishing or changing a due, fee or other charge” under Section 19(b)(3)(A)(ii) of the Act and Rule 19b-4(f)(2) thereunder, which renders the proposal effective upon receipt of this filing by the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
FINRA is proposing to adopt FINRA Rule 6897(b) (CAT Cost Recovery Fees) to implement a Consolidated Audit Trail (“CAT”) cost recovery fee designed to permit FINRA substantially to recoup its designated portion of the reasonably budgeted CAT costs of the National Market System Plan Governing the Consolidated Audit Trail (the “CAT NMS Plan” or “Plan”) for the period of July 16, 2024 through December 31, 2024.
Pursuant to Section 11.3(a) of the CAT NMS Plan, FINRA filed a separate proposed rule change to establish fees assessed to Industry Members, payable to Consolidated Audit Trail, LLC, related to reasonably budgeted CAT costs for the period of July 16, 2024 through December 31, 2024. See File No. SR-FINRA-2024-011. Unless otherwise specified, capitalized terms used in this rule filing are defined as set forth in the CAT NMS Plan and FINRA Rule 6800 Series (Consolidated Audit Trail Compliance Rule).
The text of the proposed rule change is available on FINRA's website at http://www.finra.org, at the principal office of FINRA and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. FINRA has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
On July 11, 2012, the Commission adopted Rule 613 of Regulation NMS, which required the self-regulatory organizations 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 across all markets, from the time of order inception through routing, cancellation, modification, or execution. On November 15, 2016, the Commission approved the CAT NMS Plan. Under the CAT NMS Plan, the Operating Committee has the discretion to establish funding for Consolidated Audit Trail, LLC (“CAT LLC”) to operate the CAT, including establishing fees for Industry Members to be assessed by CAT LLC that would be implemented on behalf of CAT LLC by the Participants. The Operating Committee adopted a revised funding model to fund the CAT (“CAT Funding Model”) and, on September 6, 2023, the Commission approved the CAT Funding Model, after concluding that the model was reasonable and that it satisfied the requirements of Section 11A of the Exchange Act and Rule 608 thereunder.
See Securities Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722 (August 1, 2012).
See Securities Exchange Act Release No. 79318 (November 15, 2016), 81 FR 84696 (November 23, 2016) (“CAT NMS Plan Approval Order”).
See Section 11.1(b) of the CAT NMS Plan.
See Securities Exchange Act Release No. 98290 (September 6, 2023), 88 FR 62628 (September 12, 2023) (“CAT Funding Model Approval Order”).
The CAT Funding Model provides a framework for the recovery of the costs to create, develop, and maintain the CAT, including providing a method for allocating costs to fund the CAT among Participants and Industry Members. The CAT Funding Model establishes two categories of fees: (1) CAT fees assessed by CAT LLC and payable by certain Industry Members to recover a portion of historical CAT costs previously paid by the Participants; and (2) CAT fees assessed by CAT LLC and payable by Participants and Industry Members to fund Prospective CAT Costs, i.e., costs not previously paid by the Participants.
See Section 11.3(b) of the CAT NMS Plan.
See Section 11.3(a) of the CAT NMS Plan.
With respect to CAT fees implemented to fund Prospective CAT Costs, to date, the CAT Operating Committee has established CAT Fee 2024-1 to implement fees payable by Industry Members regarding reasonably budgeted Prospective CAT Costs for the period July 16, 2024 through December 31, 2024 (“Budgeted CAT Costs 2024-1”). Consistent with the Plan, the Operating Committee has also established fees payable to CAT LLC by the Participants to collect the Participants' designated portion of Budgeted CAT Costs 2024-1. Participants would only be required to pay such fees once CAT Fee 2024-1 is in effect with regard to Industry Members in accordance with Section 19(b) of the Exchange Act.
As detailed in File No. SR-FINRA-2024-011, Budgeted CAT Costs 2024-1 would be $138,476,925. Industry Members would be collectively responsible for two-thirds of those costs or $92,317,950, and Participants would be collectively responsible for one-third or $46,158,975. See also Sections 11.3(a)(ii)(A) and 11.3(a)(iii)(A) of the CAT NMS Plan.
See Section 11.3(a)(ii) and Appendix B of the CAT NMS Plan; see also CAT Funding Model Approval Order, 88 FR 62628, 62660 (“The CAT Fees charged to Participants would be implemented through an approval of the CAT Fees by the Operating Committee and not through a plan amendment submitted each time the Fee Rate changes, while CAT Fees charged to Industry Members may only become effective in accordance with the requirements of Section 19(b) of the Exchange Act.”).
See Section 11.3(a)(ii)(B) of the CAT NMS Plan; see also CAT Funding Model Approval Order, 88 FR 62628, 62660 (“The Commission also believes it is reasonable that proposed Section 11.3(a)(ii)(B) provides that the Participants would be required to pay CAT Fees only when Industry Members are required to pay CAT Fees.”).
In light of the filing of File No. SR-FINRA-2024-011, which implements CAT Fee 2024-1 with regard to Industry Members, FINRA is filing the instant proposed rule change to establish a fee that would allow FINRA substantially to recover the monthly fees it is required to pay to CAT LLC towards Budgeted CAT Costs 2024-1 (“Prospective CAT Cost Recovery Fee 2024-1”). In the Approval Order, the Commission acknowledged that “the Exchange Act expressly contemplates the ability of the Participants to recoup their costs to fulfill their statutory obligations under the Exchange Act.” The Commission also noted FINRA's statement “that it would file a rule change to increase its member fees with the filing of any proposed rule change to effectuate the Funding Model.” Given the approval of the CAT Funding Model and FINRA's proposed rule change to establish CAT Fee 2024-1 to effectuate the CAT Funding Model, FINRA is submitting this filing to implement Prospective CAT Cost Recovery Fee 2024-1.
CAT Funding Model Approval Order, 88 FR 62628, 62636-37.
FINRA has consistently made clear its intention to file a rule change to implement member CAT fees simultaneous with the filing of any proposed rule change to effectuate the CAT Funding Model. See Letter from Marcia E. Asquith, Corporate Secretary, EVP, Board and External Relations, FINRA, to Vanessa Countryman, Secretary, Commission, dated April 11, 2023 (“FINRA April 2023 Letter”) at 7 (“If the Funding Model is approved by the Commission, FINRA intends to file a rule change to increase member fees simultaneous with the filing of any proposed rule change to effectuate the Funding Model.”); see also Letter from Marcia E. Asquith, Corporate Secretary, EVP, Board and External Relations, FINRA, to Vanessa Countryman, Secretary, Commission, dated June 22, 2022 (“FINRA June 2022 Letter”) at 6 (“[G]iven FINRA's unique nature, FINRA necessarily must seek recovery in turn for the costs it is allocated.”). FINRA also requested that, if the Commission were to approve the CAT Funding Model, it acknowledge “FINRA's need and ability to cover CAT costs that are not recovered through contractual arrangements through member fee increases, so as not to jeopardize FINRA's ability to carry out its critical regulatory mission.” See CAT Funding Model Approval Order, 88 FR 62628, 62645.
See File No. SR-FINRA-2024-011.
The CAT NMS Plan states that “[n]o Participant will make a filing with the SEC pursuant to Section 19(b) of the Exchange Act regarding any CAT Fee related to Prospective CAT Costs until the Financial Accountability Milestone related to Period 4 described in Section 11.6 has been satisfied.” See Section 11.3(a)(iii)(C) of the CAT NMS Plan. As discussed in File No. SR-FINRA-2024-011, the substantive requirements of the Financial Accountability Milestones related to Period 4 have been satisfied, as the CAT has completed the requirements for the Full Implementation of CAT NMS Plan Requirements. Under Section 1.1 of the CAT NMS Plan, this Financial Accountability Milestone is considered complete as of the date identified in the Participants' Quarterly Progress Reports. As indicated by the Participants' Quarterly Progress Report for the second and third quarter of 2024, Full Implementation of CAT NMS Plan Requirements was completed on July 15, 2024. See CAT Q2 & Q3 2024 Quarterly Progress Report (July 29, 2024), https://www.catnmsplan.com/sites/default/files/2024-07/CAT_Q2-and-Q3-2024-QPR.pdf.
FINRA's Designated Portion of Budgeted CAT Costs 2024-1
As discussed in File No. SR-FINRA-2024-011, the Operating Committee has established CAT Fee 2024-1, payable to CAT LLC by Industry Members, to contribute toward the recovery of two-thirds of the $138,476,925 in Budgeted CAT Costs 2024-1 over the July 16, 2024 through December 31, 2024 period. The Operating Committee further determined that the fee rate for CAT Fee 2024-1 is $0.0001043598251997246 per executed equivalent share, and, under the CAT Funding Model, each of the CAT Executing Broker for the Buyer (“CEBB”), the CAT Executing Broker for the Seller (“CEBS”), and the relevant Participant for a given transaction in an Eligible Security would be responsible for one-third of that rate, or $0.000035 per executed equivalent share. Consequently, CEBBs collectively, CEBSs collectively, and the Participants collectively will each be responsible for $46,158,975, which is one-third of Budged CAT Costs 2024-1 during the September 1, 2024 through December 31, 2024 CAT Fee 2024-1 period.
Consistent with Section 11.3(a)(iii)(B) of the CAT NMS Plan, Budgeted CAT Costs 2024-1 include reasonably budgeted (1) technology line items (including cloud hosting services, operating fees, CAIS operating fees, change request fees, and capitalized developed technology costs), (2) legal fees, (3) consulting fees, (4) insurance, (5) professional and administration expenses, (6) public relations costs, and (7) a reserve. A detailed description (including the amounts) of all such costs budgeted during the July 16, 2024 through December 31, 2024 period is provided in File No. SR-FINRA-2024-011.
In approving the CAT Funding Model, the Commission concluded that “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.” See CAT Funding Model Approval Order, 88 FR 62628, 62640. Under the CAT NMS Plan, executed equivalent shares in a transaction in Eligible Securities are reasonably counted as follows: (1) each executed share for a transaction in NMS Stocks will be counted as one executed equivalent share; (2) each executed contract for a transaction in Listed Options will be counted based on the multiplier applicable to the specific Listed Options ( i.e., 100 executed equivalent shares or such other applicable multiplier); and (3) each executed share for a transaction in OTC Equity Securities shall be counted as 0.01 executed equivalent share. See Section 11.3(a)(i)(B) and 11.3(b)(i)(B) of the CAT NMS Plan.
Dividing $0.0001043598251997246 by three and rounding to six decimal places equals $0.000035.
See File No. SR-FINRA-2024-011.
For the twelve months from June 1, 2023 through May 31, 2024, the average monthly executed equivalent share volume in Eligible Securities where FINRA was the relevant Participant ( i.e., off-exchange transactions) was approximately 104.7 billion shares. Assuming similar monthly executed equivalent share volume for off-exchange transactions in Eligible Securities for the period of September 1, 2024 through December 31, 2024, FINRA would be responsible for paying approximately $3.7 million per month and approximately $14.7 million in total to CAT LLC toward the Participants' $46,158,975 designated portion of Budgeted CAT Costs 2024-1 (or approximately 31.8% of the total).
FINRA's recovery of its designated portion of Budgeted CAT Costs 2024-1 is reasonable and consistent with the Exchange Act. As discussed herein and in File No. SR-FINRA-2024-011, Budgeted CAT Costs 2024-1 are reasonable, appropriate and necessary for the creation, implementation, and maintenance of the CAT. And the portion of Budgeted CAT Costs 2024-1 designated to FINRA has been established under the SEC-approved CAT Funding Model. As stated by FINRA and permitted under the Exchange Act, FINRA will seek to recover its designated portion of the Participants' share of CAT costs to ensure that FINRA can fulfill its regulatory mandate and responsibilities.
See supra note 16.
Prospective CAT Cost Recovery Fee 2024-1
FINRA is proposing to adopt Rule 6897(b) (CAT Cost Recovery Fees) to implement Prospective CAT Cost Recovery Fee 2024-1 to allow FINRA substantially to recover its designated portion of Budgeted CAT Costs 2024-1. FINRA intends that the fee framework for the Prospective CAT Cost Recovery Fee 2024-1 would generally correspond to the framework put in place by CAT LLC with respect to CAT Fee 2024-1, as provided for in File No. SR-FINRA-2024-011, as further discussed below. FINRA also intends that the timing and commencement of payment for Prospective CAT Cost Recovery Fee 2024-1 would correspond with that established by CAT LLC with respect to CAT Fee 2024-1, as provided for in File No. SR-FINRA-2024-011. Thus, as with CAT Fee 2024-1, FINRA proposes that each member CAT Executing Broker shall receive its first invoice for Prospective CAT Cost Recovery Fee 2024-1 in October 2024, setting forth fees calculated based on September 2024 transactions in Eligible Securities executed otherwise than on an exchange, as reflected in CAT Data.
In approving the CAT Funding Model, the Commission noted that it “believe[d] that FINRA's allocation of CAT fees likely will be passed through to Industry Members.” See CAT Funding Model Approval Order, 88 FR 62628, 62684.
The following fields of the Participant Technical Specifications indicate the CAT Executing Brokers for transactions executed otherwise than on an exchange.
As per Section 1.1 of the Plan, for a transaction in an Eligible Security executed otherwise than on an exchange and required to be reported to an equity trade reporting facility of a registered national securities association, i.e., one of FINRA's Trade Reporting Facilities (each a “TRF”), OTC Reporting Facility (“ORF”) or Alternative Display Facility (“ADF”), the CEBB and CEBS are the Industry Members identified as the executing broker and the contra-side executing broker in the TRF/ORF/ADF transaction data event in CAT Data. In those circumstances where there is a non-Industry Member identified as the contra-side executing broker in the TRF/ORF/ADF transaction data event or no contra-side executing broker is identified in the TRF/ORF/ADF transaction data event, then the Industry Member identified as the executing broker in the TRF/ORF/ADF transaction data event would be treated as, and be required to pay the fee assessed to, both the CEBB and CEBS.
TRF/ORF/ADF Transaction Data Event
See Table 61, Section 6.1 (TRF/ORF/ADF Transaction Data Event) of the CAT Reporting Technical Specifications for Plan Participants.
| No. | Field name | Data type | Description | Include key |
|---|---|---|---|---|
| 26 | reportingExecutingMpid | Member Alias | MPID of the executing party | R |
| 28 | contraExecutingMpid | Member Alias | MPID of the contra-side executing party | C |