Notice2022-28296
Joint Industry Plan; Order Instituting Proceedings To Determine Whether To Approve or Disapprove an Amendment to the National Market System Plan Governing the Consolidated Audit Trail
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
December 29, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 87 Issue 249 (Thursday, December 29, 2022)</title>
</head>
<body><pre>
[Federal Register Volume 87, Number 249 (Thursday, December 29, 2022)]
[Notices]
[Pages 80204-80207]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-28296]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96568; File No. 4-698]
Joint Industry Plan; Order Instituting Proceedings To Determine
Whether To Approve or Disapprove an Amendment to the National Market
System Plan Governing the Consolidated Audit Trail
Dated: December 22, 2022.
I. Introduction
On September 8, 2022, the Operating Committee for Consolidated
Audit Trail, LLC (``CAT LLC''), on behalf of the following parties to
the National Market System Plan Governing the Consolidated Audit Trail
(the ``CAT NMS Plan''): \1\ BOX Exchange LLC, Cboe BYX Exchange, Inc.,
Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange,
Inc., Cboe C2 Exchange, Inc., Cboe Exchange, Inc., Financial Industry
Regulatory Authority, Inc., Investors Exchange LLC, Long-Term Stock
Exchange, Inc., Miami International Securities Exchange LLC, MEMX 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'' or ``SROs'') filed with the Securities and Exchange
Commission (``Commission'') pursuant to Section 11A(a)(3) of the
Exchange Act,\2\ and Rule 608 thereunder,\3\ a proposed amendment
(``Proposed Amendment'') to the CAT NMS Plan that would authorize CAT
LLC to revise the Consolidated Audit Trail Reporter Agreement
(``Reporter Agreement'') and the Consolidated Audit Trail Reporter
Agent Agreement (collectively with the Reporter Agreement, the
``Reporter Agreements'') by: (1) removing the arbitration provision
from each agreement and replacing it with a forum selection provision
(the ``Forum Selection Provision'') which would require that any
dispute regarding CAT reporting be filed in a United States District
Court for the Southern District of New York (the ``SDNY''), or, in the
absence of federal subject matter jurisdiction, a New York State
Supreme Court within the First Judicial Department; and (2) revising
the existing choice of law clause to provide that any dispute will be
governed by federal law (in addition to New York law).\4\ The proposed
plan amendment was published for comment in the Federal Register on
September 28, 2022.\5\
---------------------------------------------------------------------------
\1\ 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. 79318 (Nov. 15,
2016), 81 FR 84696 (Nov. 23, 2016). The CAT NMS Plan functions as
the limited liability company agreement of the jointly owned limited
liability company (``CAT LLC'') formed under Delaware state law
through which the Participants conduct the activities of the
consolidated audit trail. 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 named
Consolidated Audit Trail, LLC. The latest version of the CAT NMS
Plan is available at <a href="https://catnmsplan.com/about-cat/cat-nms-plan">https://catnmsplan.com/about-cat/cat-nms-plan</a>.
\2\ 15 U.S.C 78k-1(a)(3).
\3\ 17 CFR 242.608.
\4\ See Letter from Michael Simon, Chair, CAT NMS Plan Operating
Committee, to Vanessa Countryman, Secretary, Commission (Sept. 8,
2022).
\5\ See Securities Exchange Act Release No. 95874 (Sept. 22,
2022), 87 FR 58876 (Sept. 28, 2022) (``Notice''). The Commission
received no comments on the Proposed Amendment.
---------------------------------------------------------------------------
This order institutes proceedings, under Rule 608(b)(2)(i) of
Regulation NMS,\6\ 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.
---------------------------------------------------------------------------
\6\ 17 CFR 242.608(b)(2)(i).
---------------------------------------------------------------------------
[[Page 80205]]
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 (the ``CAT'' or ``CAT System'') that would capture customer and
order event information for orders in NMS securities.\7\ On November
15, 2016, the Commission approved the CAT NMS Plan.\8\ On August 29,
2019, the Operating Committee for CAT LLC approved Reporter Agreements
that would limit the total liability of CAT LLC, the Participants and
the Plan Processor \9\ to a CAT Reporter \10\ for any calendar year to
the lesser of the total of fees paid by the CAT Reporter to CAT LLC for
the calendar year in which the claim arose or five hundred dollars. The
Reporter Agreements also included a mandatory arbitration provision.
The Participants required each Industry Member \11\ to execute a CAT
Reporter Agreement prior to reporting data to the CAT.
---------------------------------------------------------------------------
\7\ 17 CFR 242.613.
\8\ See supra note 1.
\9\ Plan Processor means the Initial Plan Processor or any other
Person selected by the Operating Committee pursuant to SEC Rule 613
and CAT NMS Plan, Article IV, Section 4.3(b)(i) and Article VI,
Section 6.1, and with regard to the Initial Plan Processor, the
Selection Plan, to perform the CAT processing functions required by
SEC Rule 613 and set forth in this Agreement. See CAT NMS Plan,
supra note 1, at Section 1.1.
\10\ CAT Reporter means 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). See id., at Section 1.1.
\11\ Industry Member means a member of a national securities
exchange or a member of a national securities association. See id.,
at Section 1.1.
---------------------------------------------------------------------------
On April 22, 2020, prior to the commencement of initial equities
reporting for Industry Members, the Securities Industry and Financial
Markets Association (``SIFMA'') filed, pursuant to Sections 19(d) and
19(f) of the Exchange Act, an application for review of actions taken
by CAT LLC and the Participants (the ``Administrative Proceedings'').
SIFMA alleged that by requiring Industry Members to execute the
Reporter Agreement as a prerequisite to submitting data to the CAT, the
Participants improperly prohibited or limited SIFMA members with
respect to access to the CAT System in violation of the Exchange Act.
On May 13, 2020, the Participants and SIFMA reached a settlement and
terminated the Administrative Proceedings, allowing Industry Members to
report data to the CAT pursuant to Reporter Agreements that do not
contain a limitation of liability provision. Since that time, Industry
Members have been transmitting data to the CAT.\12\
---------------------------------------------------------------------------
\12\ For a more detailed description of the background for the
Proposed Amendment, see Notice, supra note 5, at 58876-78.
---------------------------------------------------------------------------
On December 18, 2020, the Participants proposed to amend the CAT
NMS Plan to authorize CAT LLC to revise the Reporter Agreements to
insert limitation of liability provisions that would: (1) provide that
CAT Reporters and CAT reporting agents accept sole responsibility for
their access to and use of the CAT System, and that CAT LLC makes no
representations or warranties regarding the CAT System or any other
matter; (2) limit the liability of CAT LLC, the Participants, and their
respective representatives to any individual CAT Reporter or CAT
reporting agent to the lesser of the fees actually paid to CAT for the
calendar year or five hundred dollars; (3) exclude all direct and
indirect damages; and (4) provide that CAT LLC, the Participants, and
their respective representatives shall not be liable for the loss or
corruption of any data submitted by a CAT Reporter or CAT reporting
agent to the CAT System.\13\ On October 29, 2021, the Commission
disapproved the Limitation of Liability Amendment.\14\
---------------------------------------------------------------------------
\13\ See Securities Exchange Act Release No. 90826 (Dec. 30,
2020), 86 FR 591, 593 (Jan. 6, 2021) (``Limitation of Liability
Amendment'').
\14\ See Securities Exchange Act Release No. 93484 (Oct. 29,
2021), 86 FR 60933 (Nov. 4, 2021).
---------------------------------------------------------------------------
On May 20, 2022, the Participants proposed to amend the CAT NMS
Plan to authorize CAT LLC to revise the Reporter Agreements to: (1)
replace the arbitration provisions in the agreement with a forum
selection provision, which would require the parties to the Reporter
Agreements to bring any action in the SDNY, or, if there is no basis
for federal subject matter jurisdiction, in the New York State Supreme
Court within the First Judicial Department and, if it is permitted,
seek assignment to the Commercial Division; (2) revise the governing
law provision to set the governing law for all disputes as United
States federal law or the laws of the state of New York; (3) include a
provision requiring the parties to the Reporter Agreements to waive
their right to a jury trial, with no exception; and (4) include a
provision stating that CAT LLC and the Plan Processor disclaim any, and
make no, representations or warranties, regarding the CAT System or any
other matter pertaining to the Reporter Agreements, including any
representation or warranty relating to merchantability, quality,
fitness for a particular purpose, compliance with applicable laws, non-
infringement, title, sequencing, timeliness, accuracy or completeness
of information.\15\ On September 6, 2022, the Participants withdrew
that proposed amendment.\16\
---------------------------------------------------------------------------
\15\ See Securities Exchange Act Release No. 95031 (June 3,
2022), 87 FR 35273 (June 9, 2022).
\16\ See Letter from Michael Simon, Chair, CAT NMS Plan
Operating Committee, to Vanessa Countryman, Secretary, Commission
(Sept. 6, 2022); see also Securities Exchange Act Release No. 96102
(Oct. 19, 2022), 87 FR 64294 (Oct. 24, 2022) (providing notice of
withdrawal of the proposed amendment).
---------------------------------------------------------------------------
III. Summary of Proposal
The Participants now propose to amend the CAT NMS Plan to authorize
CAT LLC to revise the Reporter Agreements to: (1) remove the
arbitration provision from each agreement and replace it with the Forum
Selection Provision, which would require that any dispute regarding CAT
reporting be filed in the SDNY, or, in the absence of federal subject
matter jurisdiction, a New York State Supreme Court within the First
Judicial Department; and (2) revise the existing choice of law clause
to provide that any dispute will be governed by federal law (in
addition to New York law).
In support of the Forum Selection Provision, the Participants
believe that a court is the proper forum to resolve claims concerning
CAT reporting, including claims relating to potential technical issues,
system failures, and data breaches.\17\ The Participants state that
litigating in court is appropriate to address claims, which likely will
involve regulatory issues, including the doctrine of regulatory
immunity,\18\ and complex legal and factual issues involved in cyber
litigation.\19\ The Participants state that litigating in court would
allow parties to rely on precedent that has been developed to address
those issues when resolving disputes that could potentially involve
parties seeking substantial damages.\20\
---------------------------------------------------------------------------
\17\ See Notice at 58878. The Participants explain that in the
aftermath of high-profile data breaches, plaintiffs have brought
common law claims of breach of contract and negligence as well as
claims based on various federal statutes including the Stored
Communications Act, the Federal Wiretap Act, and the Computer Fraud
and Abuse Act. Id.
\18\ Id. at 58879. The Participants state that comments letters
in connection with the Limitation of Liability Amendment
``demonstrated an assumption and understanding that'' assessments of
immunity would be decided by the courts. Id.
\19\ See id. at 58879. The Participants state that assessing
potential defenses will likely require a tribunal to resolve complex
issues that implicate the Participants' status as self-regulatory
organizations and the Commission's oversight of the CAT. Id. at
58878.
\20\ Id. at 58879. The Participants also state that litigating
disputes in court would promote the development of precedent to
guide Industry Members' and Participants' conduct. Id.
---------------------------------------------------------------------------
[[Page 80206]]
The Participants state that courts offer important procedural
mechanisms that would help resolve claims related to CAT reporting
fairly and efficiently.\21\ According to the Participants, adjudicating
disputes in the courts would permit consolidation and joinder of
claims, as federal and New York State rules of civil procedure provide
mechanisms for consolidation and joinder, as well as permit the use of
class actions for certain disputes.\22\ The Participants state that in
arbitration, in contrast, the ultimate decision on consolidation is
made by the arbitrator.\23\ Further, the Participants state that the
AAA Commercial Arbitration rules are silent on joinder, and parties
have faced complications in joining parties to an arbitration claim
when they are non-signatories, which could be significant since claims
arising out of CAT reporting might be related incidents that impact
Industry Members and other market participants (e.g., retail
investors).\24\ The Participants state that for those reasons, if the
arbitration provisions remain in the Reporter Agreements, cases arising
out of the same facts or involving the same legal issues might result
in different outcomes and damage awards, and potentially create
inconsistent rules.\25\
---------------------------------------------------------------------------
\21\ See id. at 58876.
\22\ Id. at 58878-79.
\23\ Id. at 58879.
\24\ Id.
\25\ Id.
---------------------------------------------------------------------------
The Participants further state that adjudicating claims related to
CAT in court provides parties with appellate rights and rules governing
the discovery process and admissibility of evidence.\26\ They state
that direct appellate review is largely absent in arbitration and that
the rules relating to discovery and evidence are more limited.\27\
---------------------------------------------------------------------------
\26\ Id. at 58879-80.
\27\ Id.
---------------------------------------------------------------------------
As for the forum itself, the Participants state that the SDNY and
the New York State Supreme Court are venues with extensive experience
adjudicating matters involving federal securities laws, market
structure, and cybersecurity.\28\ The Participants state that the
Second Circuit, and the SDNY, have experience with securities and
financial regulation matters, data breaches and cybersecurity
incidents, and have authored opinions regarding the scope of regulatory
immunity.\29\ The Participants also state that New York State courts
also focus on complex cases and have addressed the scope of regulatory
immunity.\30\ They state that New York is a convenient venue for the
parties since the two largest securities exchanges, several
Participants, and the most prominent Industry Members by trading volume
are located in New York.\31\
---------------------------------------------------------------------------
\28\ Id. at 58880-81.
\29\ Id.
\30\ Id.
\31\ Id.
---------------------------------------------------------------------------
The Participants state that they are proposing to modify the
governing law provision, which currently provides that New York State
law will govern disputes arising out of the Reporter Agreements, to
provide that both federal law and New York State law will govern such
disputes.\32\ The Participants state that the reason for this change is
that such claims could involve issues of federal law because CAT LLC
was created pursuant to federal law and is subject to a federal
regulatory regime.\33\
---------------------------------------------------------------------------
\32\ Id. at 58881.
\33\ Id.
---------------------------------------------------------------------------
IV. Proceedings To Determine Whether To Approve or Disapprove the
Proposed Amendment
The Commission is instituting proceedings pursuant to Rule
608(b)(2)(i) of Regulation NMS,\34\ and Rules 700 and 701 of the
Commission's Rules of Practice,\35\ 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. Institution of proceedings does not indicate that the
Commission has reached any conclusions with respect to any of the
issues involved. Rather, the Commission seeks and encourages interested
persons to provide additional comment on the Proposed Amendment to
inform the Commission's analysis.
---------------------------------------------------------------------------
\34\ 17 CFR 242.608.
\35\ 17 CFR 201.700; 17 CFR 201.701.
---------------------------------------------------------------------------
Rule 608(b)(2) of Regulation NMS provides that the Commission
``shall approve a national market system plan or proposed amendment to
an effective national market system plan, with such changes or subject
to such conditions as the Commission may deem necessary or appropriate,
if it finds that such plan or 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.'' \36\ Rule 608(b)(2) further
provides that the Commission shall disapprove a national market system
plan or proposed amendment if it does not make such a finding.\37\ In
the Notice, the Commission sought comment on the Proposed Amendment,
including whether the amendment is consistent with the Exchange
Act.\38\ In this order, pursuant to Rule 608(b)(2)(i) of Regulation
NMS,\39\ the Commission is providing notice of the grounds for
disapproval under consideration:
---------------------------------------------------------------------------
\36\ 17 CFR 242.608(b)(2).
\37\ See id.
\38\ See Notice, supra note 5, 87 FR at 35279.
\39\ 17 CFR 242.608(b)(2)(i). See also 17 CFR 201.700(b)(2).
---------------------------------------------------------------------------
<bullet> whether, consistent with Rule 608 of Regulation NMS, the
Proposed 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; and
<bullet> whether, and if so how, the Proposed Amendment would
affect efficiency, competition or capital formation.
V. Commission's Solicitation of Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the Proposed Amendment. In particular, the Commission invites the
written views of interested persons concerning whether the Proposed
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. Although there do not appear to be any issues
relevant to approval or disapproval that would be facilitated by an
oral presentation of views, data, and arguments, the Commission will
consider, pursuant to Rule 608(b)(2)(i) of Regulation NMS,\40\ any
request for an opportunity to make an oral presentation.\41\ The
Commission asks that commenters address the sufficiency and merit of
the Participants' statements in support of the Proposed Amendment, in
addition to any other comments they
[[Page 80207]]
may wish to submit about the proposed rule changes.
---------------------------------------------------------------------------
\40\ 17 CFR 242.608(b)(2)(i).
\41\ Rule 700(c)(ii) of the Commission's Rules of Practice
provides that ``[t]he Commission, in its sole discretion, may
determine whether any issues relevant to approval or disapproval
would be facilitated by the opportunity for an oral presentation of
views.'' 17 CFR 201.700(c)(ii).
---------------------------------------------------------------------------
Interested persons are invited to submit written data, views, and
arguments regarding whether the Proposed Amendment should be approved
or disapproved by January 19, 2023. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
February 2, 2023. Comments may be submitted by any of the following
methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#d4a6a1b8b1f9b7bbb9b9b1baa0a794a7b1b7fab3bba2"><span class="__cf_email__" data-cfemail="aedcdbc2cb83cdc1c3c3cbc0daddeeddcbcd80c9c1d8">[email protected]</span></a>. Please include
File Number 4-698 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to: Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.
All submissions should refer to File Number 4-698. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's internet website (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street, NE, Washington,
DC 20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the Participants' principal offices. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number 4-698 and should be submitted on or before
January 19, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\42\
---------------------------------------------------------------------------
\42\ 17 CFR 200.30-3(a)(85).
---------------------------------------------------------------------------
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022-28296 Filed 12-28-22; 8:45 am]
BILLING CODE 8011-01-P
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on December 29, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.