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Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) and Rule 19b-4 thereunder, notice is hereby given that on September 5, 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 amend FINRA Rule 6897(b) (CAT Cost Recovery Fees) to implement a historical Consolidated Audit Trail (“CAT”) recovery assessment designed to permit FINRA to recoup its contributions to recoverable historical costs of the National Market System Plan Governing the Consolidated Audit Trail incurred prior to January 1, 2022.
Pursuant to Section 11.3(b) 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 recoverable historical CAT costs incurred prior to January 1, 2022. See File No. SR-FINRA-2024-013. 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 (“Plan” or “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 (“Historical CAT Assessment” fees); and (2) CAT fees assessed by CAT LLC and payable by Participants and Industry Members to fund prospective CAT costs. With respect to Historical CAT Assessment fees, to date, the CAT Operating Committee has established Historical CAT Assessment 1 with regard to historical CAT costs incurred prior to January 1, 2022 (“Historical CAT Costs 1”).
See Section 11.3(b) of the CAT NMS Plan.
See Section 11.3(a) of the CAT NMS Plan.
See File No. SR-FINRA-2024-013.
In light of the filing of File No. SR-FINRA-2024-013, which implements Historical CAT Assessment 1 with regard to Industry Members, FINRA is filing the instant proposed rule change to establish a fee to allow FINRA to recoup its contributions to the Participants' assessed share of Historical CAT Costs 1 (“Historical CAT Cost Recovery Assessment 1”). Historical CAT Cost Recovery Assessment 1 is designed to allow FINRA to recover its designated portion of Historical CAT Costs 1—amounting to $4,391,414—in a manner consistent with the Exchange Act and the CAT Funding Model Approval Order. 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 Historical CAT Assessment 1 in accordance with the CAT Funding Model, FINRA is submitting this filing to implement Historical CAT Cost Recovery Assessment 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, SEC, 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, SEC, 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-2024-013.
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 Historical CAT Assessment until any applicable Financial Accountability Milestone described in Section 11.6 has been satisfied.” See Section 11.3(b)(iii)(B)(III) of the CAT NMS Plan. The CAT NMS Plan further states that “in all filings submitted by the Participants to the Commission under Section 19(b) of the Exchange Act, to establish or implement Post-Amendment Industry Member Fees pursuant to this Article, . . . the Participants shall clearly indicate whether such fees are related to Post-Amendment Expenses incurred during Period 1, Period 2, Period 3, or Period 4.” See Section 11.6(b) of the CAT NMS Plan. As discussed in File No. SR-FINRA-2024-013, all applicable Financial Accountability Milestones for Historical CAT Assessment 1 and, by extension, Historical CAT Cost Recovery Assessment 1—that is, Period 1, Period 2, and Period 3 of the Financial Accountability Milestones—have been satisfied. Furthermore, the costs sought to be recovered via both Historical CAT Assessment 1 and Historical CAT Cost Recovery Assessment 1 relate to Post-Amendment Expenses incurred during Periods 1, 2 and 3 of the Financial Accountability Milestones.
FINRA's Designated Portion of Historical CAT Costs 1
As discussed in File No. SR-FINRA-2024-013, which seeks to implement Historical CAT Assessment 1, to date, FINRA and the other Participants have agreed to pay all Past CAT Costs via loans to CAT LLC. Specifically, in the absence of an SEC-approved model establishing how the Participants were to fund the creation, implementation, and maintenance of the CAT, in 2017, FINRA and the other Participants unanimously agreed to apportion all CAT operational costs amongst the group and to fund the CAT through a series of interest-free loans. Through these loans, FINRA contributed $13,174,243 or roughly 4.14% toward the $318,059,819 in operating expenses composing Historical CAT Costs 1. Of that approximately $13 million expenditure, FINRA expects to recover $8,782,829 in loan repayments from CAT LLC following implementation of Historical CAT Assessment 1, and, under the CAT Funding Model, will forgive the remaining $4,391,414 in loan repayments, which FINRA now seeks to recover through the implementation of Historical CAT Cost Recovery Assessment 1.
Historical CAT Assessment 1 seeks to recover from CAT Executing Brokers two-thirds of Historical CAT Costs 1—the $318,059,819 in recoverable costs incurred by CAT LLC prior to January 1, 2022.
FINRA notes that, as is the case with respect to Historical CAT Assessment 1 discussed in File No. SR-FINRA-2024-013, FINRA's recovery under the instant proposed rule change also would not include any portion of Excluded Costs, i.e., $48,874,937 in CAT costs incurred from November 15, 2017 through November 15, 2018, $19,628,791 of costs paid to the the [ sic] Initial Plan Processor from November 16, 2018 through February 2019 when the relationship with the Initial Plan Processor was concluded, and $14,749,362 of costs related to the termination of the relationship with the Initial Plan Processor.
The following table illustrates FINRA's approximate contributions to the Plan Participants' collective one-third share of Historical CAT Costs 1 during each of the relevant periods.
A detailed description (including the amounts) of all costs incurred by the Participants during the pre-FAM period (prior to June 22, 2020) and during each relevant FAM period, i.e., FAM Period 1, FAM Period 2, and FAM Period 3, is provided in File No. SR-FINRA-2024-013.
| Period | Participants' collective share of historical CAT costs 1 | FINRA's share of historical CAT costs 1 |
|---|---|---|
| Pre-FAM Period (Prior to June 22, 2020) | $41,430,243 | $1,716,067 |
| FAM Period 1 | 2,125,781 | 88,051 |
| FAM Period 2 | 14,325,493 | 593,371 |
| FAM Period 3 | 48,138,423 | 1,993,925 |
| Total (through January 1, 2022) | 106,019,940 | 4,391,414 |
| No. | Field name | Data type | Description | Include key |
|---|---|---|---|---|
| 26 | reporting Executing Mpid | Member Alias | MPID of the executing party | R. |
| 28 | contra Executing Mpid | Member Alias | MPID of the contra-side executing party | C. |