Notice2023-05690
Joint Industry Plan; Notice of Filing of Amendment to the National Market System Plan Governing the Consolidated Audit Trail
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Published
March 21, 2023
Issuing agencies
Securities and Exchange Commission
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<title>Federal Register, Volume 88 Issue 54 (Tuesday, March 21, 2023)</title>
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[Federal Register Volume 88, Number 54 (Tuesday, March 21, 2023)]
[Notices]
[Pages 17086-17141]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-05690]
[[Page 17085]]
Vol. 88
Tuesday,
No. 54
March 21, 2023
Part II
Securities and Exchange Commission
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Joint Industry Plan; Notice of Filing of Amendment to the National
Market System Plan Governing the Consolidated Audit Trail; Notice
Federal Register / Vol. 88 , No. 54 / Tuesday, March 21, 2023 /
Notices
[[Page 17086]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97151; File No. 4-698]
Joint Industry Plan; Notice of Filing of Amendment to the
National Market System Plan Governing the Consolidated Audit Trail
I. Introduction
On March 13, 2023, the 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'' or
``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., 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'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
pursuant to section 11A(a)(3) of the Securities Exchange Act of 1934
(``Exchange Act''),\2\ and Rule 608 thereunder,\3\ a proposed amendment
to the CAT NMS Plan to implement a revised funding model (the ``Funding
Proposal'') for the consolidated audit trail (``CAT'') and to establish
a fee schedule for Participant CAT fees in accordance with the Funding
Proposal.\4\ Exhibit A, attached hereto, contains proposed revisions to
Articles I and XI of the CAT NMS Plan as well as proposed Appendix B to
the Plan containing the fee schedule. Exhibit B, attached hereto,
contains a comparison of the Funding Proposal to the executed share
funding proposal filed by CAT LLC on May 13, 2022,\5\ as amended in two
partial amendments,\6\ and later withdrawn on March 1, 2023.\7\ In
addition, CAT LLC provided an example of how a Historical CAT
Assessment would be calculated pursuant to the Funding Proposal, for
illustrative purposes only, as attached hereto as Exhibit C. The
Commission is publishing this notice to solicit comments from
interested persons on the amendment.\8\
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\1\ The CAT NMS Plan is a national market system plan approved
by the Commission pursuant to Section 11A of the Exchange Act and
the rules and regulations thereunder. See Securities Exchange Act
Release No. 79318 (November 15, 2016), 81 FR 84696 (November 23,
2016).
\2\ 15 U.S.C. 78k-1(a)(3).
\3\ 17 CFR 242.608.
\4\ See Letter from Brandon Becker, CAT NMS Plan Operating
Committee Chair, to Vanessa Countryman, Secretary, Commission, dated
March 13, 2023 (``Transmittal Letter'').
\5\ See Securities Exchange Act Release No. 94984 (May 25,
2022), 87 FR 33226 (June 1, 2022). Comments received can be found on
the Commission's website at <a href="https://www.sec.gov/comments/4-698/4-698-a.htm">https://www.sec.gov/comments/4-698/4-698-a.htm</a>.
\6\ See Securities Exchange Act Release No. 96394 (Nov. 28,
2022), 87 FR 74183 (Dec. 2, 2022). Comments received can be found on
the Commission's website at <a href="https://www.sec.gov/comments/4-698/4-698-a.htm">https://www.sec.gov/comments/4-698/4-698-a.htm</a>. See also Letter from Michael Simon, CAT NMS Plan
Operating Committee Chair, to Vanessa Countryman, Secretary,
Commission (Feb. 15, 2023).
\7\ See Letter from Brandon Becker, CAT NMS Plan Operating
Committee Chair, to Vanessa Countryman, Secretary, Commission (Mar.
1, 2023).
\8\ 17 CFR 242.608.
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II. Description of the Plan
Set forth in this Section II is an executive summary of the Funding
Proposal, along with information required by Rule 608(a) under the
Exchange Act,\9\ and a description of the proposed revisions to the CAT
NMS Plan, substantially as prepared and submitted by the Participants
to the Commission.\10\
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\9\ See 17 CFR 242.608(a).
\10\ See Transmittal Letter, supra note 4. Unless otherwise
defined herein, capitalized terms used herein are defined as set
forth in the CAT NMS Plan.
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Executive Summary
CAT LLC proposes to replace the funding model set forth in Article
XI of the CAT NMS Plan (the ``Original Funding Model'') with the
Funding Proposal. The Original Funding Model involves 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. In contrast, the Funding
Proposal would charge fees based on executed equivalent share volume of
transactions in Eligible Securities rather than based on market share
and message traffic.
Under the Funding Proposal, 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''). The CAT Fee for each transaction would be calculated by
multiplying the executed equivalent shares in the transaction by one-
third and the applicable ``Fee Rate.'' The Funding Proposal would
describe in detail each aspect relevant to the CAT Fees, including a
description of the Prospective CAT Costs, the calculation of the Fee
Rate, the definition of ``CAT Executing Broker,'' the fee filings made
pursuant to section 19(b) of the Exchange Act for CAT Fees, and
information available related to CAT Fees, both publicly and upon
request.
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''). The
Historical CAT Assessment for each transaction would be calculated by
multiplying the number of executed equivalent shares in the transaction
by one-third and the applicable ``Historical Fee Rate.'' Like with the
CAT Fees related to Prospective CAT Costs, the Funding Proposal would
describe in detail each aspect relevant to Historical CAT Assessments,
including a description of Historical CAT Costs, the calculation of the
Historical Fee Rate, the definition of ``CAT Executing Broker,'' the
fee filings made pursuant to section 19(b) of the Exchange Act for
Historical CAT Assessments, and information available related to
Historical CAT Assessments, both publicly and upon request.
The Participants separately intend to file rule filings under
section 19(b) of the Exchange Act and Rule 19b-4(f)(2) thereunder to
establish the CAT Fees and Historical CAT Assessments to be charged to
Industry Members based on the Funding Proposal set forth in the CAT NMS
Plan.
CAT LLC has gone through an extensive process of evaluating and
seeking comment on various funding models since the inception of CAT.
In addition to the variety of alternative models considered by CAT LLC
(as described in Section A.10 of this filing), the proposed CAT funding
model has been subject to substantial public review and comment via the
proposed amendment to the CAT NMS Plan published by the SEC on May 25,
2022
[[Page 17087]]
(the ``2022 Funding Proposal''),\11\ the subsequent order instituting
proceedings related to the 2022 Funding Proposal \12\ and two partial
amendments regarding the 2022 Funding Proposal.\13\ Thirteen comment
letters were submitted in response to the 2022 Funding Proposal, as
amended, and CAT LLC submitted three detailed responses to
comments.\14\ CAT LLC withdrew the 2022 Funding Proposal on March 1,
2023.\15\ Subject to certain minor revisions, the Funding Proposal set
forth herein is the same proposal as the 2022 Funding Proposal, as
amended in the two partial amendments. The minor changes made to the
2022 Funding Proposal are noted in this filing, and separately
identified in Exhibit B to this filing.
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\11\ Securities Exchange Act Rel. No. 94984 (May 25, 2022), 87
FR 33226 (June 1, 2022) (``2022 Funding Proposal Release'').
\12\ Securities Exchange Act Rel. No. 95634 (Aug. 30, 2022), 87
FR 54558 (Sept. 6, 2022).
\13\ Securities Exchange Act Rel. No. 96394 (Nov. 28, 2022), 87
FR 74183 (Dec. 2, 2022) (``Partial Amendment I''), and Letter from
Michael Simon, CAT NMS Plan Operating Committee Chair, to Vanessa
Countryman, Secretary, Commission (Feb. 15, 2023) (``February 2023
Proposed Partial Amendment'').
\14\ Letter from Michael Simon, CAT NMS Plan Operating Committee
Chair, to Vanessa Countryman, Secretary, Commission (Aug. 16, 2022);
Letter from Michael Simon, CAT NMS Plan Operating Committee Chair,
to Vanessa Countryman, Secretary, Commission (Nov. 15, 2022); and
February 2023 Proposed Partial Amendment.
\15\ Letter from Brandon Becker, CAT NMS Plan Operating
Committee Chair, to Vanessa Countryman, Secretary, Commission (Mar.
1, 2023).
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The Funding Proposal would provide reasonable fees that are
equitably allocated, not unfairly discriminatory, and do not impose an
undue burden on competition, in that the proposal 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. Moreover, the Funding Proposal would be consistent with past
fee structures that have been approved by the Commission. It also 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. The Exchange Act
does not require CAT LLC to demonstrate that the Funding Proposal is
superior to any other potential proposal. Instead, CAT LLC must
demonstrate that the Funding Proposal is consistent with the Exchange
Act and the rules and regulations thereunder. CAT LLC believes that the
Funding Proposal satisfies the requirements of the Exchange Act and
should be approved by the Commission.
Requirements Pursuant to Rule 608(a)
A. Description of the Proposed Amendments to the CAT NMS Plan
CAT LLC describes in detail the Funding Proposal in this Section A:
<bullet> Definition of CAT Executing Broker: CAT LLC describes the
definition of a ``CAT Executing Broker'' in Section A.1 of this filing.
<bullet> CAT Budget: Budgeted CAT costs are described in Section
A.2 of this filing.
<bullet> CAT Fees related to Prospective CAT Costs: CAT LLC
discusses CAT Fees related to Prospective CAT Costs in Section A.3 of
this filing.
<bullet> Historical CAT Assessments: CAT LLC discusses Historical
CAT Assessments related to Historical CAT Costs in Section A.4 of this
filing.
<bullet> CAT Fee Schedule for Participants: To implement the CAT
fees to be paid by the Participants under the Funding Proposal, CAT LLC
proposes to add a fee schedule, entitled ``Consolidated Audit Trail
Funding Fees,'' to Appendix B of the CAT NMS Plan. This fee schedule is
discussed in Section A.5 of this filing.
<bullet> Additional Changes from Original Funding Model: CAT LLC
discusses additional proposed revisions to Article XI of the CAT NMS
Plan to implement the change from the Original Funding Model to the
Funding Proposal in Section A.6 of this filing.
<bullet> Billing and Collection of CAT Fees: The billing and
collection of CAT fees are discussed in Section A.7 of this filing.
<bullet> Illustrative Example of Funding Proposal: CAT LLC provides
an illustrative example of how a Historical CAT Assessment would be
calculated pursuant to the Funding Proposal in Section A.8 of this
filing. The illustrative example is set forth in detail in Exhibit C to
this filing.
<bullet> Advantages of and Support for Funding Proposal: CAT LLC
proposes to adopt the Funding Proposal as it provides a variety of
advantages over the Original Funding Model. CAT LLC discusses the
advantages of the Funding Proposal in Section A.9 of this filing.
<bullet> Alternative Funding Models Considered: CAT LLC discusses
the advantages and disadvantages of a variety of alternative funding
models to the Funding Proposal in Section A.10 of this filing.
<bullet> Satisfaction of Exchange Act and CAT NMS Plan
Requirements: CAT LLC discusses how the Funding Proposal satisfies each
of the funding principles and other requirements of the CAT NMS Plan,
as proposed to be revised herein, as well as the applicable
requirements of the Exchange Act in Section A.11 of this filing.
1. Definition of CAT Executing Broker
Under the Funding Proposal, each Industry Member that is a CAT
Executing Broker 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'') would be required to pay CAT Fees and Historical CAT
Assessments. Accordingly, CAT LLC proposes to add a definition of the
term ``CAT Executing Broker'' to Section 1.1 of the CAT NMS Plan. CAT
LLC would define ``CAT Executing Broker'' to mean:
(a) with respect to a transaction in an Eligible Security that
is executed on an exchange, the Industry Member identified as the
Industry Member responsible for the order on the buy-side of the
transaction and the Industry Member responsible for the sell-side of
the transaction in the equity order trade event and option trade
event in the CAT Data submitted to the CAT by the relevant exchange
pursuant to the Participant Technical Specifications; and (b) with
respect to a transaction in an Eligible Security that is executed
otherwise than on an exchange and required to be reported to an
equity trade reporting facility of a registered national securities
association, the Industry Member identified as the executing broker
and the Industry Member identified as the contra-side executing
broker in the TRF/ORF/ADF transaction data event in the CAT Data
submitted to the CAT by FINRA pursuant to the Participant Technical
Specifications; provided, however, 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 CAT Executing Broker for the Buyer and for the Seller.
Under the Participant Technical Specifications, for transactions
occurring on a Participant exchange, there is a field for the exchange
to report the market participant identifier (``MPID'') of ``the member
firm that is responsible for the order on this side of the trade.''
\16\ The Industry Members
[[Page 17088]]
identified in these fields for the transaction reports would be the CAT
Executing Brokers for transactions executed on an exchange.
Specifically, the following fields of the Participant Technical
Specifications would indicate the CAT Executing Brokers for the
transactions executed on an exchange.
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\16\ See Section 4.7 (Order Trade Event) and Section 5.2.5.1
(Simple Option Trade Event: Side Details) of the CAT Reporting
Technical Specifications for Plan Participants, Version 4.1.0-r17
(Feb. 21, 2023), <a href="https://www.catnmsplan.com/sites/default/files/2023-02/02.21.2023-CAT-Reporting-Technical-Specifications-for-Participants-4.1.0-r17.pdf">https://www.catnmsplan.com/sites/default/files/2023-02/02.21.2023-CAT-Reporting-Technical-Specifications-for-Participants-4.1.0-r17.pdf</a>.
Equity Order Trade (EOT) \17\
----------------------------------------------------------------------------------------------------------------
Include
No. Field name Data type Description key
----------------------------------------------------------------------------------------------------------------
12.n.8/13.n.8............... member................. Member Alias.......... The identifier for the C
member firm that is
responsible for the
order on this side of
the trade.
Not required if there
is no order for the
side as indicated by
the NOBUYID/NOSELLID
instruction.
This must be provided
if orderID is
provided..
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Option Trade (OT) \18\
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Include
No. Field name Data type Description key
----------------------------------------------------------------------------------------------------------------
16.n.13/17.n.13............. member................. Member Alias.......... The identifier for the R
member firm that is
responsible for the
order.
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FINRA is required to report to the CAT transactions in Eligible
Securities reported to a FINRA trade reporting facility (i.e., the
FINRA Trade Reporting Facilities (``TRF''), Over-the Counter Reporting
Facility (``ORF'') and Alternative Display Facility (``ADF'')).\19\
Under the Participant Technical Specifications, for such transactions
reported to a FINRA trade reporting facility, FINRA is required to
report the MPID of the executing party as well as the MPID of the
contra-side executing party. The Industry Members identified in these
two fields for the transaction reports would be the CAT Executing
Brokers for over-the-counter transactions. Specifically, the following
fields of the Participant Technical Specifications will indicate the
CAT Executing Brokers for the transactions executed otherwise than on
an exchange.
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\17\ See Table 23, Section 4.7 (Order Trade Event) of the CAT
Reporting Technical Specifications for Plan Participants, Version
4.1.0-r17 (Feb. 21, 2023), <a href="https://www.catnmsplan.com/sites/default/files/2023-02/02.21.2023-CAT-Reporting-Technical-Specifications-for-Participants-4.1.0-r17.pdf">https://www.catnmsplan.com/sites/default/files/2023-02/02.21.2023-CAT-Reporting-Technical-Specifications-for-Participants-4.1.0-r17.pdf</a>.
\18\ See Table 51, Section 5.2.5.1 (Simple Option Trade Event)
of the CAT Reporting Technical Specifications for Plan Participants
(Feb. 21, 2023).
\19\ See Section 6.1 of the CAT Reporting Technical
Specifications for Plan Participants (Feb. 21, 2023).
TRF/ORF/ADF Transaction Data Event (TRF) \20\
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Include
No. Field name Data type Description key
----------------------------------------------------------------------------------------------------------------
26.......................... reportingExecutingMpid. Member Alias.......... MPID of the executing R
party.
28.......................... contraExecutingMpid.... Member Alias.......... MPID of the contra- C
side executing party.
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Note that a CAT Executing Broker in over-the-counter transactions
identified on the TRF/ORF/ADF Transaction Data Event is determined
based on the tape or media report, that is, a trade report that is
submitted to a FINRA trade reporting facility and reported to and
publicly disseminated by the appropriate exclusive Securities
Information Processor. A CAT Executing Broker for over-the-counter
transactions is not determined based on a non-tape report (e.g., a
regulatory report or a clearing report), which are not publicly
disseminated.\21\
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\20\ See Table 61, Section 6.1 (TRF/ORF/ADF Transaction Data
Event) of the CAT Reporting Technical Specifications for Plan
Participants (Feb. 21, 2023).
\21\ There is an exception to this statement for away-from-
market trades. These are non-media trades reported to the TRF with
an ``SRO Required Modifier Code'' of ``R''.
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Therefore, with respect to transactions on an exchange and over-
the-counter transactions, CAT LLC would use transaction reports
reported to the CAT by FINRA or the exchanges to identify the
transaction for purposes of calculating the CAT fees as well as the CAT
Executing Broker for each transaction for purposes of calculating the
CAT fees. Accordingly, all data used to calculate the fees under the
Funding Proposal would be CAT Data, and, therefore, it would be
available through the CAT for calculating CAT fees. FINRA CAT would be
responsible for calculating the CAT fees and submitting invoices to the
CAT Executing Brokers based on this CAT Data. Moreover, defining a
``CAT Executing Broker'' in this way is a simpler analytical approach
than other potential approaches for defining the relevant executing
broker, such as identifying the originating broker for the order via an
evaluation of CAT linkages.\22\
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\22\ Each CAT Executing Broker could determine, but would not be
required, to pass their CAT fees through to their clients, who, in
turn, could pass their CAT fees to their clients, until the fee is
imposed on the ultimate participant in the transaction.
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CAT LLC proposes to make use of the defined term ``CAT Executing
Broker'' in Proposed Section 11.3 in describing the Funding Proposal.
CAT LLC believes the proposed definition of CAT Executing Broker and
the use of the defined term in Article XI would set forth clearly when
and in what situations an Industry Member would be considered a CAT
Executing Broker for purposes of the Funding Proposal.
a. Treatment of ATSs
The Funding Proposal would describe how CAT fees would be assessed
with
[[Page 17089]]
regard to transactions executed on ATSs, including clarification as to
which party to an ATS transaction would be treated as the CAT Executing
Broker for purposes of the Funding Proposal. The definition of a ``CAT
Executing Broker'' as proposed above would determine the CAT Executing
Brokers for transactions executed on an ATS. Specifically, if an ATS is
identified as the executing party and/or the contra-side executing
party in the TRF/ORF/ADF Transaction Data Event, then the ATS would be
a CAT Executing Broker for purposes of the Funding Proposal. If the ATS
is identified as the executing party for the buyer in such transaction
reports, then the ATS would be the CAT Executing Broker for the Buyer,
and if the ATS is identified as the executing party for the seller in
such transaction reports, then the ATS would be the CAT Executing
Broker for the Seller. An ATS also could be identified as both the CAT
Executing Broker for the Buyer and the CAT Executing Broker for the
Seller. ATSs would determine the executing party and the contra-side
executing party reported to FINRA's equity trading facilities in
accordance with the transaction reporting requirements for FINRA's
equity trading facilities.
b. Treatment of Fractional Shares
The Funding Proposal also would address how transactions in
fractional shares would be treated. As described above, CAT fees would
be charged based on the Equity Order Trade Events, Options Trade Events
and the ADF/ORF/TRF Transaction Data Events in the Participant
Technical Specifications. None of these transaction reports provide for
fractional quantities; the transaction reports must reflect whole
shares/contracts. Therefore, under the Funding Proposal, CAT fees would
be calculated without reference to fractional shares or fractional
share components of executed orders.\23\
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\23\ To the extent that FINRA's equity transaction reporting
facilities or the exchanges report transactions in fractional shares
in the future, then the calculation of CAT fees would reflect
fractional shares as well.
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c. Non-Industry Members on Transaction Reports
The Funding Proposal also would address how transactions that
involve a non-Industry Member would be treated under the Funding
Proposal (e.g., for internalized trades or trades with a non-FINRA
member). The FINRA trade reporting requirements state that ``[w]hen
reporting a trade with a broker-dealer that is not a FINRA member, the
non-member should not be identified on the trade report as the contra
party to the trade.'' \24\ Accordingly, when the transaction in these
cases is reported to CAT via the TRF/ORF/ADF Transaction Data Event,
the field for the reportingExecutingMpid would be populated with the
MPID of the executing broker and the field for the contraExecutingMpid
would be blank or null. As noted above, the reportingExecutingMpid is a
required field (include key = `R') that must be entered on all CAT
reports, but the contraExecutingMpid field is conditional; it does not
need to be populated, specifically to account for cases like those at
issue here (e.g., transactions with a non-FINRA member). Therefore, in
those scenarios where the contraExecutingMpid is blank, the FINRA
member identified in the reportingExecutingMpid field would be treated
as the CAT Executing Broker for both the buy-side and the sell-side of
the transaction, that is, as the CEBS and CEBB.
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\24\ FINRA Trade Reporting FAQ 202.1.
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In addition, under the FINRA trade reporting requirements, there is
a limited exception to the general rule about not reporting a non-
member as the contra party to the trade. Specifically, pursuant to
FINRA Trade Reporting FAQ 202.1, ``[t]here is a limited exception where
a Canadian non-member firm uses the FINRA/NASDAQ TRF or ORF for
purposes of comparing trades pursuant to a valid Non-Member Addendum to
the NASDAQ Services Agreement. In that instance, however, the Canadian
non-member must appear on the trade report as the contra party to the
trade and not as the reporting party. For any trade report on which a
Canadian non-member appears as a party to the trade, the FINRA member
must appear as the reporting party.'' In this case involving the
Canadian non-member firm exception, the executing broker identified in
the reportingExecutingMpid field would be billed for both sides of the
transaction.
CAT LLC proposes to include language in the definition of ``CAT
Executing Broker'' to address these scenarios. Specifically, CAT LLC
proposes to state the following in the definition of ``CAT Executing
Broker: ``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 CAT Executing Broker for the Buyer and for
the Seller.''
d. Cancellations and Corrections
The Funding Proposal also would provide for cancellations and
corrections. CAT LLC expects to determine CAT fees based on the
transaction reports for a month as of a particular day. To the extent
that changes are made to the transaction reports on or before the day
the CAT fees are determined for the given month, the changes will be
reflected in the monthly bill. To the extent that changes are made to
the transaction reports after the day the CAT fees are determined for
that month, subsequent bills will reflect any changes via debits or
credits, as applicable. As CAT LLC is required under the CAT NMS Plan
to adopt policies, procedures, and practices regarding the billing and
collection of fees,\25\ CAT LLC will establish specific policies and
procedures regarding the treatment of such adjustments as those related
to cancellations and corrections. Furthermore, CAT LLC will inform
Industry Members and other market participants of these policies and
procedures via FAQs, CAT Alerts and/or other appropriate methods.
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\25\ Section 11.1(d) of the CAT NMS Plan.
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2. CAT Budget
Section 11.1(a) of the CAT NMS Plan describes the requirement for
the Operating Committee to approve an operating budget for CAT LLC on
an annual basis. It requires the budget to ``include the projected
costs of the Company, including the costs of developing and operating
the CAT for the upcoming year, and the sources of all revenues to cover
such costs, as well as the funding of any reserve that the Operating
Committee reasonably deems appropriate for prudent operation of the
Company.'' CAT LLC proposes to provide additional detail regarding the
CAT LLC operating budget by adding proposed subparagraphs (i) and (ii)
to Section 11.1(a) of the CAT NMS Plan. Such detailed information would
provide Participants, Industry Members and other interested parties
with a clear understanding of the CAT budget, and, in turn, the
calculation of the CAT Fees.
a. Budgeted CAT Costs
CAT LLC proposes to add subparagraph (i) to Section 11.1(a) of the
CAT NMS Plan to provide additional clarity regarding the costs to be
included in the CAT budget. This proposed provision would list the
types of CAT costs to be included in the budget. Specifically, Proposed
Section
[[Page 17090]]
11.1(a)(i) of the CAT NMS Plan would state that ``[w]ithout limiting
the foregoing, the reasonably budgeted CAT costs shall include
technology (including cloud hosting services, operating fees, CAIS
operating fees, change request fees and capitalized developed
technology costs), legal, consulting, insurance, professional and
administration, and public relations costs, a reserve, and such other
categories as reasonably determined by the Operating Committee to be
included in the budget.''
Because technology costs account for more than 90% of CAT costs,
CAT LLC proposes to provide more granular information about such costs.
Specifically, CAT LLC proposes to require the inclusion of five
subcategories of technology costs in the budget: (1) cloud hosting
services, (2) operating fees, (3) Customer and Account Information
System (``CAIS'') operating fees, (4) change request fees, and (5)
capitalized developed technology costs. Breaking out technology costs
in this manner is consistent with how such costs are broken out in the
CAT budgets available on the CAT website.\26\ CAT LLC currently does
not propose to require the disclosure of additional subcategories of
cost information, such as a further breakdown of the category of cloud
hosting services into production costs, including linker costs and
storage costs. However, CAT LLC will consider the need to provide
additional cost disclosure going forward.
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\26\ The CAT LLC budgets are available on the CAT website at
<a href="https://www.catnmsplan.com/cat-financial-and-operating-budget">https://www.catnmsplan.com/cat-financial-and-operating-budget</a>.
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Furthermore, CAT LLC has determined not to provide more detailed
subcategories for the other cost categories (that is, legal,
consulting, insurance, professional and administration, and public
relations costs) at this time. Breaking out these costs into further
subcategories would establish new subcategories that are not set forth
in the budgets. In addition, these costs in the aggregate represent
less than seven percent (7%) of total CAT costs, with professional and
administration costs and public relations costs, in particular, each
representing less than one percent (1%) of overall CAT costs.
Therefore, CAT LLC does not believe that these costs warrant additional
subcategory disclosure. CAT LLC further notes that it is not considered
a best practice to publicly disclose detailed legal or insurance
information, which is particularly sensitive. Nevertheless, CAT LLC
notes that the CAT NMS Plan requires that detailed cost information be
made available to the Commission upon request, and detailed information
on CAT costs and operations is regularly made available to the
Commission staff and the Advisory Committee on a confidential basis.
CAT LLC also intends to determine costs for the operating budget
for the CAT in a reasonable manner. Accordingly, CAT LLC proposes to
amend Section 11.1(a) of the CAT NMS Plan to refer to a ``reasonable''
operating budget for CAT LLC.\27\ Specifically, the first sentence of
Section 11.1(a) of the CAT NMS Plan would be revised to read: ``On an
annual basis the Operating Committee shall approve a reasonable
operating budget for the Company.'' In addition, CAT LLC proposes to
include the term ``reasonably'' in proposed paragraph (a)(i) of Section
11.1 of the CAT NMS Plan. Specifically, CAT proposes to introduce the
term ``reasonably'' to the following proposed provision of the CAT NMS
Plan: ``Without limiting the foregoing, the reasonably budgeted CAT
costs shall include technology (including cloud hosting services,
operating fees, CAIS operating fees, change request fees, and
capitalized developed technology costs), legal, consulting, insurance,
professional and administration, and public relations costs, a reserve
and such other cost categories as reasonably determined by the
Operating Committee to be included in the budget.''
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\27\ As highlighted in Exhibit B, this proposed revision of
Section 11.1(a) of the CAT NMS Plan was not included in the proposed
revisions related to the 2022 Funding Proposal.
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Finally, CAT LLC proposes to amend Section 11.1(b) of the CAT NMS
Plan. Currently, Section 11.1(b) of the CAT NMS Plan states that:
Subject to Section 11.2, the Operating Committee shall have
discretion to establish funding for the Company, including: (i)
establishing fees that the Participants shall pay; and (ii)
establishing fees for Industry Members that shall be implemented by
Participants. The Participants shall file with the SEC under Section
19(b) of the Exchange Act any such fees on Industry Members that the
Operating Committee approves, and such fees shall be labeled as
``Consolidated Audit Trail Funding Fees.''
CAT LLC proposes to amend Section 11.1(b) to include a reference to
Section 11.1 as well as Section 11.2 in the ``subject to'' clause at
the beginning of the provision.\28\ CAT LLC believes this reference is
relevant because Section 11.1 sets forth requirements related to the
budget, and the budget is used in calculating CAT Fees.
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\28\ As highlighted in Exhibit B, this proposed revision to
Section 11.1(b) of the CAT NMS Plan was not included in the proposed
revisions related to the 2022 Funding Proposal.
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b. Reserve
Section 11.1(a) of the CAT NMS Plan states that the budget shall
include ``the funding of any reserve that the Operating Committee
reasonably deems appropriate for prudent operation of the Company.'' In
addition, Proposed Section 11.1(a)(i) of the CAT NMS Plan would state
that the budgeted CAT costs shall include a reserve. Section 11.1(c) of
the CAT NMS Plan states that ``[a]ny surplus of the Company's revenues
over its expenses shall be treated as an operational reserve to offset
future fees.'' CAT LLC proposes to add subparagraph (ii) to Section
11.1(a) of the CAT NMS Plan to provide additional details regarding the
size and use of the reserve.
To provide additional clarity regarding the size of the reserve,
CAT LLC proposes to add proposed paragraph (ii) to Section 11.1(a) of
the CAT NMS Plan to set forth the parameters for the size of the
reserve. An analysis of budgeted CAT costs and actual CAT costs for
2020, 2021 and the first nine months of 2022 demonstrates that actual
CAT costs were approximately 20% higher than budgeted amounts over this
period on a cumulative average basis. Based on the magnitude of
historical budget to actual variances as well as the difficulty in
accurately predicting various variable CAT costs, CAT LLC believes that
a 25% reserve would appear to be reasonable. Accordingly, Proposed
Section 11.1(a)(ii) of the CAT NMS Plan would state that ``[f]or the
reserve referenced in paragraph (a)(i) of this Section, the budget will
include an amount reasonably necessary to allow the Company to maintain
a reserve of not more than 25% of the annual budget.'' CAT LLC also
intends to include a reserve in the CAT budget that is reasonably
necessary to allow the CAT LLC to maintain a reserve of not more than
25% of the annual budget. Accordingly, CAT LLC proposes to include the
term ``reasonably'' in this sentence. Moreover, CAT LLC would calculate
the reserve based on the amount of the budget other than the reserve,
as the reserve is intended to provide funds for CAT LLC to pay its
bills if necessary. Accordingly, Proposed Section 11.1(a)(ii) of the
CAT NMS Plan would state that ``[f]or the avoidance of doubt, the
calculation of the amount of the reserve would
[[Page 17091]]
exclude the amount of the reserve from the budget.'' \29\
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\29\ As highlighted in Exhibit B, this proposed revision to
Section 11.1(a)(ii) of the CAT NMS Plan was not included in the
proposed revisions related to the 2022 Funding Proposal.
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CAT LLC also believes that it is reasonable to base the reserve on
a percentage of the budget. First, CAT LLC believes that setting the
reserve at 25% of the budget is appropriate in light of the timeline
for the collection of CAT fees.\30\ Many of CAT LLC's bills must be
paid on a monthly basis. However, CAT fees will be collected
approximately three months after the activity on which a CAT fee is
based--that is, 25% of the year. For example, activity in January would
be subject to a bill in February, which would be required to be paid
within 30 days,\31\ which would be in March. Accordingly, the reserve
would be available to address the funding needs related to the delay in
CAT LLC's receipt of the CAT fees.
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\30\ For a discussion of the billing and collection of CAT fees,
see Section A.7 of this filing.
\31\ See Sections 3.7(b) and 11.4 of the CAT NMS Plan.
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Second, CAT LLC has established a number of measures for
establishing a reasonable budget for the CAT, thereby providing a
reasonable starting point for the reserve calculation. For example, the
CAT NMS Plan would require the budget to be ``reasonable.'' \32\ The
Fee Rate established at the beginning of the year would be adjusted
mid-year to address changes in the actual or budgeted costs or changes
in the actual or projected executed equivalent share volume. CAT LLC
has established a variety of cost management measures, as discussed in
detail in Section A.9.bb of this filing, and has and would provide
substantial cost transparency as discussed in detail in Section A.9.l
of this filing. The CAT fee filings pursuant to section 19(b) of the
Exchange Act would provide a description how the budget is reconciled
to the collected fees.
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\32\ See Proposed Section 11.1(a) of the CAT NMS Plan.
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CAT LLC proposes to provide additional clarification regarding the
collection of the reserve by providing additional information as to how
budget surpluses would be treated for purposes of the reserve. CAT LLC
proposes to clarify how CAT fees collected in excess of CAT costs,
including the reserve, would be used. Specifically, proposed
subparagraph (ii) of Section 11.1(a) of the CAT NMS Plan would state
that ``[t]o the extent collected CAT fees exceed CAT costs, including
the reserve of 25% of the annual budget, such surplus will be used to
offset future fees.'' In addition, CAT LLC further proposes to state in
Proposed Section 11.1(a)(ii) of the CAT NMS Plan that ``[f]or the
avoidance of doubt, the Company will only include an amount for the
reserve in the annual budget if the Company does not have a sufficient
reserve (which shall be up to but not more than 25% of the annual
budget).''
The following examples explain the circumstances under which a
reserve would be included in the budget:
(1) Suppose that the Operating Committee had approved a budget of
$100 million for CAT costs for Year X, and a reserve of $25 million,
for a total budget of $125 million for Year X. Suppose that CAT Fees of
$125 million were collected during Year X, and that actual CAT costs
for Year X were $100 million. Therefore, CAT ended Year X with $25
million in reserve. Suppose further that the Operating Committee had
approved a budget of $100 million for CAT costs and a reserve of $25
million, for a total budget of $125 million for Year X+1. Because CAT
LLC had collected $25 million in excess of costs for the reserve in
Year X, and the excess was not necessary to cover additional costs in
Year X, CAT LLC would not include any additional amount in the budget
for a reserve for Year X+1. CAT LLC would use the excess fees collected
for the reserve.
(2) Suppose that the Operating Committee had approved a budget of
$100 million for CAT costs for Year Y, and a reserve of $25 million,
for a total budget of $125 million for Year Y. Suppose that CAT Fees of
$110 million were collected during Year Y, and that actual CAT costs
for Year Y were $100 million. Therefore, CAT ended Year Y with $10
million in reserve. Suppose further that the Operating Committee had
approved a budget of $100 million for CAT costs, and a reserve of $25
million, for a total budget of $125 million for Year Y+1. Because CAT
LLC had collected $10 million in excess of costs for the reserve in
Year Y, and the entire reserve was not necessary to cover additional
costs in Year Y, CAT LLC would only need to collect an additional $15
million for the reserve in Year Y+1, not $25 million.
c. Publicly Available Budgets
CAT LLC publicly provides the annual operating budget for the
Company as well as updates to the budget that occur during the
year.\33\ This publicly available budget information describes in
detail the budget for the Company. For example, among other things, the
budget provides specific budgeted technology costs (including cloud
hosting services, operating fees, CAIS operating fees and change
request fees) and general and administrative costs (including legal,
consulting, insurance, professional and administration, and public
relations). The Company provides such budget information on a dedicated
web page on the CAT NMS Plan website to make it readily accessible to
CAT Reporters and others.
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\33\ To address potential changes related to the CAT during the
year, the Operating Committee may adjust the budgeted CAT costs for
the year as it reasonably deems appropriate for the prudent
operation of the Company. For example, the Operating Committee may
determine that an adjustment to the budget is necessary if actual
costs during the year are more or less than the budget, or if
unanticipated expenditures are necessary. To the extent that the
Operating Committee adjusts the budgeted CAT costs during the year
and determines to adjust the Fee Rate, the adjusted budgeted CAT
costs would be used in calculating the new Fee Rate for the
remaining months of the year.
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3. CAT Fees Related to Prospective CAT Costs
CAT LLC proposes to describe CAT Fees related to Prospective CAT
Costs in Section 11.3(a) of the CAT NMS Plan. Proposed Section 11.3(a)
of the CAT NMS Plan would describe that the CAT Fees related to
Prospective CAT Costs apply to both Participants and Industry Members,
the manner of calculating the Fee Rate for CAT Fees, the description of
the calculation of the Participant CAT Fees, a description of the
calculation of the Industry Member CAT Fees, a description of the fee
filings under section 19(b) of the Exchange Act for Industry Member CAT
Fees, and details regarding the calculation of the CAT Fees that are
available upon request or publicly available. The following describes
Proposed Section 11.3(a) of the CAT NMS Plan in detail.
a. Introductory Statement
CAT LLC proposes to revise Section 11.3(a) of the CAT NMS Plan to
address CAT Fees related to Prospective CAT Costs for both Participants
and Industry Members. Accordingly, CAT LLC proposes to revise the
introductory statement in Proposed Section 11.3(a) of the CAT NMS Plan
to state that ``[t]he Operating Committee will establish fees (``CAT
Fees) to be payable by Participants and Industry Members with regard to
CAT costs not previously paid by the Participants (``Prospective CAT
Costs'') as follows:''.
b. Fee Rate for CAT Fees
CAT LLC proposes to describe the timing and method for calculating
the Fee Rate for the CAT Fees related to Prospective CAT Costs in
Proposed
[[Page 17092]]
Section 11.3(a)(i) of the CAT NMS Plan, and to provide additional
detail regarding the Fee Rate in that provision. Proposed Section
11.3(a)(i) of the CAT NMS Plan would state that CAT Fees related to
Prospective CAT Costs would be calculated twice a year. Specifically,
this proposed provision would state that ``[t]he Operating Committee
will calculate the Fee Rate for the CAT Fee twice per year, once at the
beginning of the year and once during the year as follows.'' CAT LLC
recognizes the need to align CAT Fees with CAT costs. Requiring the
adjustment of the Fee Rate both at the beginning of the year and once
mid-year in response to changes in the budgeted or actual costs or
projected or actual total executed equivalent share volume during the
year would likely lead to the greater alignment of CAT Fees and CAT
costs, thereby potentially avoiding the collection of CAT Fees in
excess of CAT costs or CAT Fees that are insufficient to cover CAT
costs. Accordingly, CAT LLC proposes to require both an annual and a
mid-year adjustment of the Fee Rate for the CAT Fee.
i. General
CAT LLC proposes to provide details regarding the calculation of
the Fee Rate for the CAT Fees in Proposed Section 11.3(a)(i) of the CAT
NMS Plan. The detail provided in Proposed Section 11.3(a)(i) of the CAT
NMS Plan would include a description of the calculation of the Fee Rate
at the beginning of the year and during the year, the counting method
for executed equivalent shares, the budgeted CAT costs, and the
projected total executed equivalent share volume of transactions in
Eligible Securities for the relevant period. Each of these aspects of
the CAT Fees are discussed in more detail below.
A. Annual Calculation of Fee Rate
Proposed Section 11.3(a)(i)(A)(I) of the CAT NMS Plan would
describe the annual calculation of the Fee Rate and the requirement for
Participants to file a fee filing for CAT Fees to be charged Industry
Members calculated using the Fee Rate. This proposed provision also
would state that Participants and Industry Members would be required to
pay such CAT Fees once the CAT Fees are in effect with regard to
Industry Members. Specifically, this proposed provision would state:
For the beginning of each year, the Operating Committee will
calculate the Fee Rate by dividing the reasonably budgeted CAT costs
for the year by the reasonably projected total executed equivalent
share volume of all transactions in Eligible Securities for the
year. Once the Operating Committee has approved such Fee Rate, the
Participants shall be required to file with the SEC pursuant to
section 19(b) of the Exchange Act CAT Fees to be charged to Industry
Members calculated using such Fee Rate. Participants and Industry
Members will be required to pay CAT Fees calculated using this Fee
Rate once such CAT Fees are in effect with regard to Industry
Members in accordance with section 19(b) of the Exchange Act.
CAT LLC proposes to clarify that the annual calculation of CAT Fees
would be performed using reasonably budgeted CAT costs and reasonably
projected total executed equivalent share volume.\34\ Accordingly, CAT
LLC proposes to use the term ``reasonably'' twice in the following
sentence: ``For the beginning of each year, the Operating Committee
will calculate the Fee Rate by dividing the reasonably budgeted CAT
costs for the year by the reasonably projected total executed
equivalent share volume of all transactions in Eligible Securities for
the year.''
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\34\ As highlighted in Exhibit B, this proposed revision to add
the term ``reasonably'' before ``projected total executed equivalent
share volume'' in Proposed Section 11.3(a)(i)(A)(I) of the CAT NMS
Plan was not included in the proposed revisions related to the 2022
Funding Proposal.
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B. Mid-Year Calculation of Fee Rate
Proposed Section 11.3(a)(i)(A)(II) of the CAT NMS Plan describes
the mandatory mid-year calculation of a new Fee Rate. This proposed
provision would describe the mid-year calculation of the Fee Rate and
the requirement for Participants to file a fee filing for CAT Fees to
be charged Industry Members calculated using the Fee Rate. This
proposed provision also would state that Participants and Industry
Members would be required to pay such CAT Fees once the CAT Fees are in
effect with regard to Industry Members. Specifically, this proposed
provision would state:
During each year, the Operating Committee will calculate a new
Fee Rate by dividing the reasonably budgeted CAT costs for the
remainder of the year by the reasonably projected total executed
equivalent share volume of all transactions in Eligible Securities
for the remainder of the year. Once the Operating Committee has
approved the new Fee Rate, the Participants shall be required to
file with the SEC pursuant to section 19(b) of the Exchange Act CAT
Fees to be charged to Industry Members calculated using the new Fee
Rate. Participants and Industry Members will be required to pay CAT
Fees calculated using this new Fee Rate once such CAT Fees are in
effect with regard to Industry Members in accordance with section
19(b) of the Exchange Act.
CAT LLC proposes to clarify that CAT Fees would be calculated
during the year using reasonably budgeted CAT costs and reasonably
projected total executed equivalent share volume.\35\ Accordingly, CAT
LLC proposes to use the term ``reasonably'' twice in the following
sentence: ``During each year, the Operating Committee will calculate a
new Fee Rate by dividing the reasonably budgeted CAT costs for the
remainder of the year by the reasonably projected total executed
equivalent share volume of all transactions in Eligible Securities for
the remainder of the year.''
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\35\ As highlighted in Exhibit B, this proposed revision to add
the term ``reasonably'' before ``projected total executed equivalent
share volume'' in Proposed Section 11.3(a)(i)(A)(II) of the CAT NMS
Plan was not included in the proposed revisions related to the 2022
Funding Proposal.
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C. Continuing CAT Fee
CAT LLC also proposes to add Section 11.3(a)(i)(A)(III) to the CAT
NMS Plan to clarify that CAT Fees related to Prospective CAT Costs do
not sunset automatically; such CAT Fees would remain in place until new
CAT Fees are in place with a new Fee Rate. The Funding Proposal is
designed to collect CAT fees continuously so as to provide
uninterrupted revenue to pay CAT bills. Specifically, this proposed
provision would state:
For the avoidance of doubt, CAT Fees with a Fee Rate calculated
as set forth in this paragraph (a)(i) shall remain in effect until
the Operating Committee approves a new Fee Rate as described in this
paragraph (a)(i) and CAT Fees with the new Fee Rate are in effect
with regard to Industry Members in accordance with section 19(b) of
the Exchange Act.
D. Commencement of CAT Fee
CAT LLC believes that it would be appropriate to commence the first
CAT Fee either at the beginning of the year or during the year (due to,
for example, mid-year approval of the CAT Fee by the SEC), whichever is
closest to the time that such a CAT Fee could become effective, so as
to seek prompt recovery of CAT costs. If the CAT Fee were to commence
during the year, the first CAT Fee would be calculated in the same way
that a mid-year CAT Fee would be calculated. To clarify this approach,
CAT LLC proposes to add Proposed Section 11.3(a)(i)(A)(IV) to the CAT
NMS Plan. This provision would state that ``[f]or the avoidance of
doubt, the first CAT Fee may commence at the beginning of the year or
during the year. If it were to commence during the year, the CAT Fee
would be calculated as described in paragraph (II) of this Section.''
[[Page 17093]]
ii. Executed Equivalent Shares
CAT LLC proposes to describe in Proposed Section 11.3(a)(i)(B) of
the CAT NMS Plan how executed equivalent shares would be counted for
purposes of calculating CAT Fees. Under the Funding Proposal, a CAT Fee
would be charged with regard to each transaction in Eligible Securities
as reported in CAT Data. As set forth in Section 1.1 of the CAT NMS
Plan, ``Eligible Securities'' are defined to include all NMS Securities
and all OTC Equity Securities. Section 1.1 of the CAT NMS Plan, in
turn, defines an ``NMS Security'' 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.'' In addition, Section 1.1 of the CAT NMS Plan defines
an ``OTC Equity Security'' 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.'' 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.
The Funding Proposal 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.
NMS Stocks. Under the Funding Proposal, each executed share for a
transaction in NMS Stocks would be counted as one executed equivalent
share. 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.''
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. Typically, a Listed
Option contract represents 100 shares; however, it may also represent
another designated number of shares. Accordingly, Proposed Section
11.3(a)(i)(B)(II) 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: . . . (II)
each executed contract for a transaction in Listed Options will be
counted based on the multiplier applicable to the specific Listed
Option (i.e., 100 executed equivalent shares or such other applicable
multiplier).''
OTC Equity Securities. Similarly, in recognition of the different
trading characteristics of OTC Equity Securities as compared to NMS
Stocks, the Funding Proposal would discount the share volume of OTC
Equity Securities when calculating CAT Fees. 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. Accordingly, a disproportionately large number of
shares are involved in transactions involving OTC Equity Securities
versus NMS Stocks.\36\ Because the Funding Proposal 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. To address this potential concern, the Funding
Proposal would count each executed share for a transaction in OTC
Equity Securities as 0.01 executed equivalent shares. Accordingly,
Proposed Section 11.3(a)(i)(B)(III) 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: . . . (III) each executed share for a transaction
in OTC Equity Securities shall be counted as 0.01 executed equivalent
share.''
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\36\ For example, 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.
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The discount to 1% was selected based on a reasoned analysis of a
variety of different metrics for comparing the markets for OTC Equity
Securities and NMS Stocks, rather than a simple calculation. For
example, using 2021 data, the Operating Committee calculated the
following metrics: (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%. In recognition of the fact that these calculations involve
averages and for ease of application, the Operating Committee
determined to round these metrics to 1%.
In calculating CAT Fees, CAT LLC intends for executed equivalent
shares in a transaction in Eligible Securities to be reasonably
counted. Accordingly, CAT LLC proposes to include the term
``reasonably'' in the following sentence in Proposed Section
11.3(a)(i)(B) of the CAT NMS Plan: ``For purposes of calculating CAT
Fees, executed equivalent shares in a transaction in Eligible
Securities will be reasonably counted as follows:''.
iii. Budgeted CAT Costs
The calculation of the Fee Rate for CAT Fees related to Prospective
CAT Costs requires the determination of the budgeted CAT costs for the
year or other relevant period. Proposed Section 11.3(a)(i)(C) of the
CAT NMS Plan would describe the budgeted CAT costs for calculating CAT
Fees. It would state the following:
The budgeted CAT costs for the year shall be comprised 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 as set forth in the annual
operating budget approved by the Operating Committee pursuant to
Section 11.1(a) of the CAT NMS Plan, or as adjusted during the year
by the Operating Committee.
As discussed above, CAT LLC also proposes to provide additional
details regarding what is included in the annual operating budget
approved by the Operating Committee pursuant to Section 11.1(a) of the
CAT NMS Plan in proposed paragraphs (i) and (ii) of Section 11.1(a) of
the CAT NMS Plan.
Moreover, CAT LLC proposes to clarify that CAT Fees must be
calculated using reasonably budgeted CAT costs.\37\ Accordingly, CAT
proposes to include the terms ``reasonably'' and ``reasonable'' the
following sentence: ``The budgeted CAT costs for the year shall be
comprised of all reasonable fees, costs and expenses reasonably
budgeted to be incurred by or for the Company in connection with the
development, implementation and
[[Page 17094]]
operation of the CAT as set forth in the annual operating budget
approved by the Operating Committee pursuant to Section 11.1(a) of the
CAT NMS Plan, or as adjusted during the year by the Operating
Committee.''
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\37\ As highlighted in Exhibit B, this proposed revision to add
the term ``reasonable'' before ``fees, cost and expenses'' in
Proposed Section 11.3(a)(i)(C) of the CAT NMS Plan was not included
in the proposed revisions related to the 2022 Funding Proposal.
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iv. Projected Total Executed Equivalent Share Volume
The calculation of the Fee Rate for CAT Fees also requires the
determination of the projected total executed equivalent share volume
of transactions in Eligible Securities for each relevant period. Each
year, the Operating Committee would determine this projection based on
the total executed equivalent share volume of transactions in Eligible
Securities from the prior twelve months. Therefore, Proposed Section
11.3(a)(i)(D) of the CAT NMS Plan would state that ``[t]he Operating
Committee shall reasonably determine the projected total executed
equivalent share volume of all transactions in Eligible Securities for
each relevant period based on the executed equivalent share volume of
all transactions in Eligible Securities for the prior twelve months.''
CAT LLC determined that the use of the data from the prior twelve
months provides an appropriate balance between using data from a period
that is sufficiently long to avoid short term fluctuations while
providing data close in time to the upcoming relevant period. In
addition, CAT LLC proposes to allow the Operating Committee to base its
projection on the prior twelve months, but to use it discretion to
analyze the likely volume for the upcoming year. As set forth in
Proposed Section 11.3(a)(iii)(B), Participants will be required to
provide a description of the calculation of the projection in their fee
filings pursuant to section 19(b) of the Exchange Act. Furthermore, CAT
LLC intends to calculate the CAT Fees based on a reasonable
determination of the projected total executed equivalent share volume
of transactions in Eligible Securities. Accordingly, CAT LLC propose to
include the term ``reasonably'' in the Proposed Section 11.3(a)(i)(D)
of the CAT NMS Plan to indicate that the Operating Committee will
``reasonably determine the projected total executed equivalent share
volume.''
c. Participant CAT Fees for Prospective CAT Costs
CAT LLC proposes to describe the Participant CAT Fees related to
Prospective CAT Costs in Proposed Section 11.3(a)(ii) of the CAT NMS
Plan. Proposed Section 11.3(a)(ii) of the CAT NMS Plan would have two
paragraphs (A) and (B), where paragraph (A) would describe the CAT Fee
obligation for Participants and paragraph (B) would clarify that
Participants would only be required to pay CAT Fees when Industry
Members are required to pay CAT Fees.
i. CAT Fee Obligation of the Participants
CAT LLC proposes to add paragraph (A) to Proposed Section
11.3(a)(ii) of the CAT NMS Plan to describe the CAT Fee obligation of
the Participants. Specifically, proposed paragraph (A) of Proposed
Section 11.3(a)(ii) of the CAT NMS Plan would state the following:
Each Participant that is a national securities exchange will be
required to pay the CAT Fee for each transaction in Eligible
Securities executed on the exchange in the prior month based on CAT
Data. Each Participant that is a national securities association
will be required to pay the CAT Fee for each transaction in Eligible
Securities executed otherwise than on an exchange in the prior month
based on CAT Data. The CAT Fee 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 Fee
Rate determined pursuant to paragraph (a)(i) of this Section 11.3.
CAT LLC intends for the Participant CAT Fee to be calculated using
the Fee Rate reasonably determined pursuant to Proposed Section
11.3(a)(i) of the CAT NMS Plan. Accordingly, CAT LLC proposes to
include the term ``reasonably'' in the following sentence: ``[t]he CAT
Fee 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 Fee Rate reasonably determined pursuant to
paragraph (a)(i) of this Section 11.3.''
ii. Effectiveness of Participant CAT Fees
CAT LLC also proposes to include proposed paragraph (B) of Proposed
Section 11.3(a)(ii) of the CAT NMS Plan to clarify that Participants
would only be required to pay CAT Fees when Industry Members are
required to pay CAT Fees. Under the Funding Proposal, CAT Fees are
designed to cover 100% of CAT costs by allocating costs between and
among Participants and Industry Members. However, the CAT Fees charged
to Participants are implemented via a different process than CAT Fees
charged to Industry Members. CAT Fees charged to Participants are
implemented via an approval of the CAT Fees by the Operating Committee
in accordance with the requirements of the CAT NMS Plan. In contrast,
CAT Fees charged to Industry Members may only become effective in
accordance with the requirements of section 19(b) of the Exchange Act.
Accordingly, proposed paragraph (B) of Proposed Section 11.3(a)(ii) of
the CAT NMS Plan would state that ``[e]ach Participant will be required
to pay the CAT Fee calculated using the Fee Rate reasonably determined
pursuant to paragraph (a)(i) of this Section 11.3 and approved by the
Operating Committee only if such CAT Fees are in effect with regard to
Industry Members in accordance with section 19(b) of the Exchange
Act.'' CAT LLC intends for the Participant CAT Fee to be calculated
using the Fee Rate reasonably determined pursuant to Proposed Section
11.3(a)(i) of the CAT NMS Plan. Accordingly, CAT LLC proposes to
include the term ``reasonably'' in the phrase ``the Fee Rate reasonably
determined'' in this provision.
d. Industry Member CAT Fees for Prospective CAT Costs
CAT LLC proposes to describe the Industry Member CAT Fees related
to Prospective CAT Costs in Proposed Section 11.3(a)(iii) of the CAT
NMS Plan. Proposed Section 11.3(a)(iii) of the CAT NMS Plan would have
three paragraphs, (A), (B) and (C), where paragraph (A) would describe
the CAT Fee obligation for Industry Members, paragraph (B) would
described the required content of the fee filings required to be filed
pursuant to section 19(b) of the Exchange Act regarding the CAT Fees
for Industry Members, and paragraph (C) would clarify that Participants
would not make CAT fee filings regarding CAT Fees until the Financial
Accountability Milestone related to Period 4 as described in Section
11.6 of the CAT NMS Plan has been satisfied.
i. Industry Member CAT Fee Obligation
CAT LLC proposes to describe the CAT Fees related to Prospective
CAT Costs that would be charged to Industry Members in Proposed Section
11.3(a)(iii)(A) of the CAT NMS Plan. Accordingly, Proposed Section
11.3(a)(iii)(A) of the CAT NMS Plan would state the following:
Each Industry Member that is the CAT Executing broker 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'')
will be required to pay a CAT Fee for each such transaction in
Eligible Securities in the prior month based on CAT Data. 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
[[Page 17095]]
by one-third and by the Fee Rate reasonably determined pursuant to
paragraph (a)(i) of this Section 11.3.
CAT LLC intends for the Participant CAT Fee to be calculated using
the Fee Rate reasonably determined pursuant to Proposed Section
11.3(a)(i) of the CAT NMS Plan. Accordingly, CAT LLC proposes to
include the phrase ``the Fee Rate reasonably determined pursuant to
paragraph (a)(i) of this Section 11.3'' in this provision.
ii. Fee Filings Under Section 19(b) of the Exchange Act for Industry
Member CAT Fees
CAT LLC proposes to describe the information that Participants
would be required to include in their fee filings to be made pursuant
to section 19(b) of the Exchange and Rule 19b-4 thereunder for Industry
Member CAT Fees in proposed paragraph (B) of Proposed Section
11.3(a)(iii) of the CAT NMS Plan.\38\ Specifically, such filings would
be required to include with regard to the CAT Fee: (A) the Fee Rate;
(B) the budget for the upcoming year (or remainder of the year, as
applicable), including a brief description of each line item in the
budget, including (1) technology line items of cloud hosting services,
operating fees, CAIS operating fees, change request fees and
capitalized developed technology costs, (2) legal, (3) consulting, (4)
insurance, (5) professional and administration, and (6) public
relations costs, a reserve and/or such other categories as reasonably
determined by the Operating Committee to be included in the budget and
the reason for changes in each such line item from the prior CAT Fee
filing; \39\ (C) a discussion of how the budget is reconciled to the
collected fees; and (D) the projected total executed equivalent share
volume of all transactions in Eligible Securities for the year (or
remainder of the year, as applicable), and a description of the
calculation of the projection. This detail would describe how the Fee
Rate is calculated, and explain how the budget used in the calculation
is reconciled to the collected fees. Such detailed information would
provide Industry Members and other interested parties with a clear
understanding of the calculation of the CAT Fees and their relationship
to CAT costs.\40\
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\38\ CAT LLC expects the fee filings required to be made by the
Participants pursuant to Section 19(b) of the Exchange Act with
regard to CAT Fees to be filed pursuant to Section 19(b)(3)(A) of
the Exchange Act and Rule 19b-(f)(2) thereunder. In accordance with
Section 19(b)(3)(A) of the Exchange Act and Rule 19b-4(f)(2)
thereunder, such fee filings would be effective upon filing.
\39\ CAT LLC intends to include any other categories as
reasonably determined by the Operation Committee. Accordingly, this
provision refers to ``such other categories as reasonably determined
by the Operating Committee to be included in the budget.''
\40\ As a practical matter, the fee filing would provide the
exact fee per executed equivalent share to be paid for the CAT Fees,
by multiplying the Fee Rate by one-third and describing the relevant
number of decimal places for the fee.
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In addition, CAT LLC proposes to clarify that the budgeted CAT
costs described in the fee filings must provide sufficient detail to
demonstrate that the CAT budget used in calculating the CAT Fees is
reasonable and appropriate. Therefore, CAT LLC proposes to add the
following sentence to Proposed Section 11.3(a)(iii)(B) of the CAT NMS
Plan: ``The information provided in this Section would be provided with
sufficient detail to demonstrate that the budget for the upcoming year,
or part of year, as applicable, is reasonable and appropriate.''
iii. Financial Accountability Milestone
CAT LLC recognizes that the collection of CAT Fees from Industry
Members is subject to Section 11.6 of the CAT NMS Plan regarding the
Financial Accountability Milestones. Accordingly, CAT LLC proposes to
clarify that Participants will not make fee filings pursuant to Section
19(b) of the Exchange Act regarding CAT Fees until the Financial
Accountability Milestone related to Period 4 described in Section 11.6
of the CAT NMS Plan has been satisfied. Specifically, CAT LLC proposes
to add proposed paragraph (C) to Proposed Section 11.3(a)(iii) to the
CAT NMS Plan to address the Financial Accountability Milestone. This
provision would state 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.''
e. CAT Fee Details
CAT LLC proposes to provide Participants and CAT Executing Brokers
with details regarding the calculation of their CAT Fees upon request.
Specifically, CAT LLC proposes to add Proposed Section 11.3(a)(iv)(A)
to the CAT NMS Plan to describe this disclosure. This provision would
state that ``[d]etails regarding the calculation of a Participant or
CAT Executing Brokers' CAT Fees will be provided upon request to such
Participant or CAT Executing Broker. At a minimum, such details would
include each Participant or CAT Executing Broker's executed equivalent
share volume and corresponding fee by (1) Listed Options, NMS Stocks
and OTC Equity Securities, (2) by transactions executed on each
exchange and transactions executed otherwise than on an exchange, and
(3) by buy-side transactions and sell-side transactions.'' \41\ Such
information would provide Participants and CAT Executing Brokers with
the ability to understand the details regarding the calculation of
their CAT Fees.
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\41\ As highlighted in Exhibit B, this second sentence in
Proposed Section 11.3(a)(iv)(A) of the CAT NMS Plan was not included
in the proposed revisions related to the 2022 Funding Proposal.
---------------------------------------------------------------------------
In addition, CAT LLC proposes to make certain aggregate statistics
regarding the CAT Fees publicly available. Specifically, CAT LLC
proposes to add Proposed Section 11.3(a)(iv)(B) to the CAT NMS Plan to
describe this public disclosure. This provision would state that
``[f]or each CAT Fee, at a minimum, CAT LLC will make publicly
available the aggregate executed equivalent share volume and
corresponding aggregate fee by (1) Listed Options, NMS Stocks and OTC
Equity Securities, (2) by transactions executed on each exchange and
transactions executed otherwise than on an exchange, and (3) by buy-
side transactions and sell-side transactions.'' \42\
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\42\ As highlighted in Exhibit B, Proposed Section
11.3(a)(iv)(B) of the CAT NMS Plan was not included in the proposed
revisions related to the 2022 Funding Proposal.
---------------------------------------------------------------------------
4. Historical CAT Assessment
CAT LLC proposes to describe Historical CAT Assessments related to
Historical CAT Costs in Proposed Section 11.3(b) of the CAT NMS Plan.
Proposed Section 11.3(b) of the CAT NMS Plan would describe that
Historical CAT Assessments apply only to Industry Members (not to
Participants), the manner of calculating the Historical Fee Rate for
the Historical CAT Assessment, a description of the calculation of the
Industry Member CAT Fees, a description of the fee filings under
section 19(b) of the Exchange Act for Historical CAT Assessments, and
details regarding the calculation of the Historical CAT Assessments
that are available upon request or publicly available. The following
describes in detail Section 11.3(b) of the CAT NMS Plan.
a. Introductory Statement
CAT LLC proposes to revise Section 11.3(b) of the CAT NMS Plan to
address Historical CAT Assessments related to Historical CAT Costs to
be charged to Industry Members. Accordingly, CAT LLC proposes to revise
the introductory
[[Page 17096]]
statement in Proposed Section 11.3(b) of the CAT NMS Plan to state that
``[t]he Operating Committee will establish one or more fees (each a
``Historical CAT Assessment'') to be payable by Industry Members with
regard to CAT costs previously paid by the Participants (``Past CAT
Costs'') as follows:''.\43\ With the reference to ``one or more''
Historical CAT Fees, this provision also clarifies that there may be
one or more Historical CAT Assessments.
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\43\ Note that there may be one or more Historical CAT
Assessments, depending upon the timing of any approval of the
amendment to the CAT NMS Plan and the completion of the Financial
Accountability Milestones. For a discussion of the Financial
Accountability Milestones, see Section 11.6 of the CAT NMS Plan.
---------------------------------------------------------------------------
b. Calculation of Historical Fee Rate
CAT LLC proposes to provide details regarding the calculation of
the Historical CAT Assessment in Proposed Section 11.3(b)(i) of the CAT
NMS Plan. These details would include a description of the calculation
of the Historical Fee Rate, the counting method for executed equivalent
shares, the Historical CAT Costs, the Historical Recovery Period, and
the projected total executed equivalent share volume of transactions in
Eligible Securities for the Historical Recovery Period.
i. General
Proposed paragraph (a) of Proposed Section 11.3(b)(i) of the CAT
NMS Plan would describe the calculation of the Historical Fee Rate for
each Historical CAT Assessment and the requirement for Participants to
file a fee filing for each Historical CAT Assessment. This proposed
provision also would state that Industry Members would be required to
pay each Historical CAT Assessment once such Historical CAT Assessment
is in effect in accordance with section 19(b) of the Exchange Act.
Specifically, this proposed provision would state that:
The Operating Committee will calculate the Historical Fee Rate
for each Historical CAT Assessment by dividing the Historical CAT
Costs for each Historical CAT Assessment by the reasonably projected
total executed equivalent share volume of all transactions in
Eligible Securities for the Historical Recovery Period for each
Historical CAT Assessment. Once the Operating Committee has approved
such Historical Fee Rate, the Participants shall be required to file
with the SEC pursuant to section 19(b) of the Exchange Act such
Historical CAT Assessment to be charged Industry Members calculated
using such Historical Fee Rate. Industry Members will be required to
pay such Historical CAT Assessment calculated using such Historical
Fee Rate once such Historical CAT Assessment is in effect in
accordance with section 19(b) of the Exchange Act.
CAT LLC proposes to clarify that the calculation of each Historical
Fee Rate would be performed using reasonably projected total executed
equivalent share volume.\44\ Accordingly, CAT LLC proposes to use the
term ``reasonably'' to the describe ``projected total executed
equivalent share volume'' in this provision.
---------------------------------------------------------------------------
\44\ As highlighted in Exhibit B, this proposed revision to add
the term ``reasonably'' before ``projected total executed equivalent
share volume'' in Proposed Section 11.3(b)(i)(A) of the CAT NMS Plan
was not included in the proposed revisions related to the 2022
Funding Proposal.
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ii. Executed Equivalent Shares
The Historical CAT Assessment would be calculated based on the same
executed equivalent share calculation as CAT Fees related to
Prospective CAT Costs. Accordingly, Proposed Section 11.3(b)(i)(B) of
the CAT NMS Plan would make it clear that the calculation is the same
for both types of fees. Specifically, Proposed Section 11.3(b)(i)(B) of
the CAT NMS Plan would state that ``[f]or purposes of calculating each
Historical CAT Assessment, executed equivalent shares in a transaction
in Eligible Securities will be reasonably counted in the same manner as
set forth in paragraph (a)(i)(B) of this Section 11.3.''
iii. Historical CAT Costs
The calculation of the Historical CAT Assessment depends upon the
determination of the Historical CAT Costs. Proposed Section
11.3(b)(i)(C) of the CAT NMS Plan would describe the Historical CAT
Costs for calculating Historical CAT Assessments. The Operating
Committee will reasonably determine the Past CAT Costs sought to be
recovered through the Historical CAT Assessment. CAT LLC proposes to
make this approach clear in the language of the CAT NMS Plan by adding
Proposed Section 11.3(b)(i)(C) of the CAT NMS Plan, which would state
that ``[t]he Operating Committee will reasonably determine the
Historical CAT Costs sought to be recovered by each Historical CAT
Assessment, where the Historical CAT Costs will be Past CAT Costs minus
Past CAT Costs reasonably excluded from Historical CAT Costs by the
Operating Committee.'' \45\
---------------------------------------------------------------------------
\45\ As highlighted in Exhibit B, this proposed revision to add
the term ``reasonably'' before ``excluded'' in Proposed Section
11.3(b)(i)(C) of the CAT NMS Plan was not included in the proposed
revisions related to the 2022 Funding Proposal.
---------------------------------------------------------------------------
CAT LLC proposes to further clarify the amount to be collected via
the Historical CAT Assessments in Proposed Section 11.3(b)(i)(C) of the
CAT NMS Plan. Specifically, CAT LLC proposes to add the clarifying
statement that ``[e]ach Historical CAT Assessment will seek to recover
from CAT Executing Brokers two-thirds of Historical CAT Costs incurred
during the period covered by the Historical CAT Assessment.'' This
statement reiterates the requirement set forth in Proposed Section
11.3(b)(iii)(A) of the CAT NMS Plan regarding the calculation of the
Historical CAT Assessment, which requires the multiplication of the
number of executed equivalent shares in the transaction by one-third
and by the Historical Fee Rate. Each CEBS and CEBB pays one-third, and,
therefore, two-thirds of the Historical CAT Costs would be collected
from CAT Executing Brokers.
CAT LLC also proposes to add the term ``reasonably'' to the
following sentence in Section 11.1(c) of the CAT NMS Plan before the
word ``incurred'': ``In determining fees on Participants and Industry
Members the Operating Committee shall take into account fees, costs and
expenses (including legal and consulting fees) reasonably incurred by
the Participants on behalf of the Company prior to the Effective Date
in connection with the creation and implementation of the CAT.'' \46\
The addition of the term ``reasonably'' would require such fees, costs
and expenses to be reasonable.
---------------------------------------------------------------------------
\46\ As highlighted in Exhibit B, this proposed revision to
Section 11.1(c) of the CAT NMS Plan was not included in the proposed
revisions related to the 2022 Funding Proposal.
---------------------------------------------------------------------------
iv. Historical Recovery Period
The calculation of the Historical CAT Assessment also depends upon
the determination of the Historical Recovery Period. As the total
amount of the Historical CAT Costs have not yet been determined because
the CAT fee model has not yet been approved and CAT LLC continues to
incur costs, CAT LLC has not determined the specific recovery period
for any particular Historical CAT Assessment. Based on CAT costs
incurred to date, however, CAT LLC believes that the Historical
Recovery Period should not be less than 24 months or more than five
years. In analyzing the potential Historical Recovery Periods, CAT LLC
sought to weigh the need for a reasonable Historical Fee Rate that
spreads the Historical CAT Costs over an appropriate amount of time and
the need to repay the loan notes to the Participants in a timely
fashion. CAT LLC analyzed potential recovery periods using the
Historical CAT Costs through 2022 and the total executed equivalent
[[Page 17097]]
share volume of transactions in Eligible Securities for 2021 to
calculate the projected total executed equivalent share volume of
transactions. Based on the variables in this analysis, CAT LLC
determined that the Historical Fee Rate calculated using a Historical
Recovery Period of two to five years would establish a reasonable
Historical Fee Rate even if Industry Members were required to pay a
Historical CAT Assessment and the ongoing CAT Fee at the same time. CAT
LLC notes, however, that the actual Historical CAT Assessment would be
calculated using up-to-date Historical CAT Costs and executed
equivalent share volume.
Proposed Section 11.3(b)(i)(D)(I) of the CAT NMS Plan would
describe the Historical Recovery Period used in calculating the
Historical Fee Rate. This proposed provision would state that ``[t]he
length of the Historical Recovery Period used in calculating each
Historical Fee Rate will be reasonably established by the Operating
Committee based upon the amount of the Historical CAT Costs to be
recovered by the Historical CAT Assessment.'' \47\ This proposed
provision, however, would state that ``no Historical Recovery Period
used in calculating the Historical Fee Rate shall be less than 24
months or more than five years.'' As discussed below, the Historical
Recovery Period is used to calculate the Historical Fee Rate. The
actual recovery period may be longer or shorter than the Historical
Recovery Period depending on the actual executed equivalent share
volumes during the time that the Historical CAT Assessment is in
effect. Any Historical CAT Assessment would remain in effect until the
relevant Historical CAT Costs are recovered, whether that time is
shorter or longer than the Historical Recovery Period used in
calculating the Historical Fee Rate.
---------------------------------------------------------------------------
\47\ This provision would require that the Historical Recovery
Period be ``reasonably'' established by the Operating Committee.
---------------------------------------------------------------------------
Proposed Section 11.3(b)(i)(D)(II) of the CAT NMS Plan would
describe the length of the time that the Historical CAT Assessment
would be in effect, which may be greater than or less than the
Historical Recovery Period, depending on the amount of the Historical
CAT Assessments collected based on the actual volume during the time
that the Historical Assessment is in effect. Any Historical CAT
Assessment would remain in effect until the relevant Historical CAT
Costs are collected, whether that time is shorter or longer than the
Historical Recovery Period used in calculating the Historical Fee Rate.
Accordingly, this provision states that ``[n]otwithstanding the length
of the Historical Recovery Period used in calculating the Historical
Fee Rate, each Historical CAT Assessment calculated using the
Historical Fee Rate will remain in effect until all Historical CAT
Costs for the Historical CAT Assessment are collected.''
v. Projected Total Executed Equivalent Share Volume
The Historical Fee Rate for a Historical CAT Assessment would be
calculated by using the projected total executed equivalent share
volume of all transactions in Eligible Securities for the Historical
Recovery Period for such Historical CAT Assessment. CAT LLC proposes to
clarify the manner of calculating the projected total executed
equivalent share volume for each Historical CAT Assessment in Proposed
Section 11.3(b)(i)(E) to the CAT NMS Plan. CAT LLC proposes to state in
this provision that the projection will be determined based on
transactions in Eligible Securities for the prior twelve months.
Accordingly, Proposed Section 11.3(b)(i)(E) of the CAT NMS Plan would
state that ``[t]he Operating Committee shall reasonably determine the
projected total executed equivalent share volume of all transactions in
Eligible Securities for each Historical Recovery Period based on the
executed equivalent share volume of all transactions in Eligible
Securities for the prior twelve months.'' As with the calculation of
the projections for CAT Fees, CAT LLC determined that the use of the
data from the prior twelve months provides an appropriate balance
between using data from a period that is sufficiently long to avoid
short term fluctuations while providing data close in time to the
upcoming relevant period. In addition, CAT LLC proposes to allow the
Operating Committee to base its projection on the prior twelve months,
but to use its discretion to analyze the likely volume for the upcoming
year. As set forth in Proposed Section 11.3(b)(iii)(B)(II) of the CAT
NMS Plan, Participants will be required to provide a description of the
calculation of the projection in their fee filings pursuant to section
19(b) of the Exchange Act for Historical CAT Assessments. As noted,
this provision would require the Operating Committee to ``reasonably''
determine the projected total executed equivalent share volume.
c. Past CAT Costs and Participants
Proposed Section 11.3(b)(ii) of the CAT NMS Plan would clarify that
the Participants would not be required to pay the Historical CAT
Assessment as the Participants previously have paid all Past CAT Costs.
It would state that, ``[b]ecause Participants previously have paid Past
CAT Costs via loans to the Company, Participants would not be required
to pay any Historical CAT Assessment.'' In addition, Proposed Section
11.3(b)(ii) of the CAT NMS Plan would clarify that the Historical CAT
fees collected from Industry Members would be allocated to Participants
for repayment of the outstanding loan notes of the Participants to the
Company on a pro rata basis; such fees would not be allocated to
Participants based on the executed equivalent share volume of
transactions in Eligible Securities. Specifically, Proposed Section
11.3(b)(ii) of the CAT NMS Plan would state that ``[i]n lieu of a
Historical CAT Assessment, the Participants' one-third share of
Historical CAT Costs 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.'' Furthermore,
Proposed Section 11.3(b)(ii) of the CAT NMS Plan would emphasize that
``[t]he Historical CAT Assessment is designed to recover two-thirds of
the Historical CAT Costs.'' \48\
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\48\ As highlighted in Exhibit B, the sentence ``In lieu of a
Historical CAT Assessment, the Participants' one-third share of
Historical CAT Costs 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'' has been
revised from the 2022 Funding Proposal. CAT LLC proposes to revise
the phrase ``cancellation of the loans made by the Company'' to
``cancellation of the loans made to the Company'' as the loans were
made to the Company, not by the Company. In addition, CAT LLC
proposes to revise the sentence to clarify that Participants will
remain responsible via the loan cancellations for one-third of
Historical CAT Costs as well as 100% of certain other Past CAT Costs
(e.g., the Excluded Costs discussed below).
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d. Historical CAT Assessment for Industry Members
CAT LLC proposes to describe the Historical CAT Assessment for
Industry Members in Proposed Section 11.3(b)(iii) of the CAT NMS Plan.
Proposed Section 11.3(b)(iii) of the CAT NMS Plan would have two
paragraphs, (A) and (B), where paragraph (A) would describe the
Historical CAT Assessment for Industry Member, and paragraph (B) would
describe the fee filings required to be filed pursuant to section 19(b)
of the Exchange Act regarding the Historical CAT Assessments.
[[Page 17098]]
i. Industry Member Obligation for Historical CAT Assessment
CAT LLC proposes to describe the Historical CAT Assessment charged
to Industry Members in Proposed Section 11.3(b)(iii)(A) of the CAT NMS
Plan. Specifically, this proposed paragraph would state that:
Each month in which a Historical CAT Assessment is in effect,
each CEBB and each CEBS shall pay a fee for each transaction in
Eligible Securities executed by the CEBB or CEBS from the prior
month as set forth in CAT Data, where the Historical CAT Assessment
for each transaction will be calculated by multiplying the number of
executed equivalent shares in the transaction by one-third and by
the Historical Fee Rate reasonably determined pursuant to paragraph
(b)(i) of this Section 11.3.
As noted, this provision would require the Operating Committee to
``reasonably'' determine the Historical Fee Rate pursuant to Proposed
Section 11.3(b)(i) of the CAT NMS Plan.
ii. Historical CAT Assessment Fee Filings
CAT LLC proposes to provide additional details regarding the fee
filings to be filed by the Participants regarding each Historical CAT
Assessment pursuant to section 19(b) of the Exchange Act in Proposed
Section 11.3(b)(iii)(B) of the CAT NMS Plan.\49\ Specifically, this
provision would describe that fee filings would be required for each
Historical CAT Assessment, the content of such fee filings, and the
effect of the Financial Accountability Milestones described in Section
11.6 of the CAT NMS Plan on the fee filings.
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\49\ CAT LLC expects the fee filings required to be made by the
Participants pursuant to Section 19(b) of the Exchange Act with
regard to Historical CAT Assessments to be filed pursuant to Section
19(b)(3)(A) of the Exchange Act. In accordance with Section
19(b)(3)(A) of the Exchange Act, fee filings made pursuant to
Section 19(b)(3)(A) of the Exchange Act would be effective upon
filing.
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A. Number of Fee Filings for Historical CAT Assessments
CAT LLC proposes to clarify how many fee filings pursuant to
section 19(b) of the Exchange Act Participants would be required to
make with regard to Historical CAT Assessments. CAT LLC proposes to
clarify that each Participant will be required to file a fee filing
pursuant to section 19(b) of the Exchange Act to describe each
Historical CAT Assessment. Accordingly, CAT LLC proposes to describe
this requirement in Proposed Section 11.3(b)(iii)(B)(I) of the CAT NMS
Plan, which would state that ``Participants will be required to file
with the SEC pursuant to section 19(b) of the Exchange Act a filing for
each Historical CAT Assessment.''
B. Content of Fee Filings for Historical CAT Assessments
CAT LLC proposes to provide additional detail as to the information
that Participants would be required to include in their fee filings to
be made pursuant to section 19(b) of the Exchange and Rule 19b-4(f)(2)
for Historical CAT Assessments in proposed paragraph (b)(iii)(B)(II) of
Proposed Section 11.3 of the CAT NMS Plan. The proposed paragraph sets
forth the information about the Historical CAT Assessments that should
be included in the fee filings required to be made by the Participants
pursuant to section 19(b) of the Exchange Act. Specifically, such
filings would be required to include: (A) the Historical Fee Rate; (B)
a brief description of the amount and type of Historical CAT Costs,
including (1) the technology line items of cloud hosting services,
operating fees, CAIS operating fees, change request fees and
capitalized developed technology costs, (2) legal, (3) consulting, (4)
insurance, (5) professional and administration, and (6) public
relations costs; (C) the Historical Recovery Period and the reasons for
its length; and (D) the projected total executed equivalent share
volume of all transactions in Eligible Securities for the Historical
Recovery Period, and a description of the calculation of the
projection. Such detailed information would provide Industry Members
and other interested parties with a clear understanding of the
calculation of each Historical CAT Assessment and its relationship to
Historical CAT Costs.\50\
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\50\ As a practical matter, the fee filing would provide the
exact fee per executed equivalent share to be paid for the
Historical CAT Assessment, by multiplying the Historical Fee Rate by
one-third and describing the relevant number of decimal places for
the fee.
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In addition, CAT LLC proposes to clarify that the Historical CAT
Costs described in the fee filings must provide sufficient detail to
demonstrate that such costs are reasonable and appropriate. Therefore,
CAT LLC proposes to add the following sentence to Proposed Section
11.3(b)(iii)(B)(II) of the CAT NMS Plan: ``The information provided in
this Section would be provided with sufficient detail to demonstrate
that the Historical CAT Costs are reasonable and appropriate.''
C. Financial Accountability Milestones
CAT LLC recognizes that the collection of Historical CAT
Assessments from Industry Members is subject to Section 11.6 of the CAT
NMS Plan regarding the Financial Accountability Milestones.
Accordingly, CAT LLC proposes to clarify that Participants will not
make CAT fee filings pursuant to section 19(b) of the Exchange Act
regarding a Historical CAT Assessment until any applicable Financial
Accountability Milestone has been satisfied. Specifically, CAT LLC
proposes to add Proposed Section 11.3(b)(iii)(B)(III) to the CAT NMS
Plan. This provision would state 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.''
e. Historical CAT Assessment Details
CAT LLC proposes to provide CAT Executing Brokers with details
regarding the calculation of their Historical CAT Assessments upon
request. Specifically, CAT LLC proposes to add Proposed Section
11.3(b)(iv)(A) to the CAT NMS Plan, which would state that ``[d]etails
regarding the calculation of a CAT Executing Broker's Historical CAT
Assessment will be provided upon request to such CAT Executing Broker.
At a minimum, such details would include each CAT Executing Broker's
executed equivalent share volume and corresponding fee by (1) Listed
Options, NMS Stocks and OTC Equity Securities, (2) by transactions
executed on each exchange and transactions executed otherwise than on
an exchange, and (3) by buy-side transactions and sell-side
transactions.'' \51\ Such information would provide CAT Executing
Brokers with the ability to understand the details regarding the
calculation of their Historical CAT Assessments.
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\51\ As highlighted in Exhibit B, the second sentence of
Proposed Section 11.3(b)(iv)(A) of the CAT NMS Plan was not included
in the proposed revisions related to the 2022 Funding Proposal.
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In addition, CAT LLC proposes to make certain aggregate statistics
regarding Historical CAT Assessments publicly available. Specifically,
CAT LLC proposes to add Proposed Section 11.3(b)(iv)(B) to the CAT NMS
Plan. This provision would state that ``[f]or each Historical CAT
Assessment, at a minimum, CAT LLC will make publicly available the
aggregate executed equivalent share volume and corresponding aggregate
fee by (1) Listed Options, NMS Stocks and OTC Equity Securities, (2) by
transactions executed on each exchange and transactions executed
otherwise than on an exchange, and (3) by buy-side
[[Page 17099]]
transactions and sell-side transactions.'' \52\
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\52\ As highlighted in Exhibit B, Section 11.3(b)(iv)(B) of the
CAT NMS Plan was not included in the proposed revisions related to
the 2022 Funding Proposal.
---------------------------------------------------------------------------
5. CAT Fee Schedule for Participants
To implement the Participant CAT fees, CAT LLC proposes to add a
fee schedule, entitled ``Consolidated Audit Trail Funding Fees,'' to
Appendix B of the CAT NMS Plan. Proposed paragraph (a) of the fee
schedule would describe the CAT Fees to be paid by the Participants
under the Funding Proposal. Specifically, paragraph (a) of the
Participant fee schedule would state that ``[e]ach Participant shall
pay the CAT Fee set forth in Section 11.3(a) of the CAT NMS Plan to
Consolidated Audit Trail, LLC in the manner prescribed by Consolidated
Audit Trail, LLC on a monthly basis based on the Participant's
transactions in Eligible Securities in the prior month.''
6. Additional Changes From Original Funding Model
CAT LLC proposes certain revisions to Article XI of the CAT NMS
Plan to implement the Funding Proposal. CAT LLC proposes to make the
following changes to the CAT NMS Plan in addition to the proposed
changes to the CAT NMS Plan discussed above.
a. Elimination of Definition of ``Execution Venue''
Section 1.1 of the CAT NMS Plan defines the term ``Execution
Venue'' to mean ``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).'' Currently, the term ``Execution Venue'' is
used in Sections 11.2 and 11.3 of the CAT NMS Plan to describe how CAT
costs would be allocated among CAT Reporters under the Original Funding
Model. The Original Funding Model would have imposed fees based on
market share to CAT Reporters that are Execution Venues, including
ATSs, and fees based on message traffic for Industry Members' non-ATS
activities. In contrast, the Funding Proposal would impose fees based
on the executed equivalent shares of transactions in Eligible
Securities for three categories of CAT Reporters: Participants, CEBBs
and CEBSs. Accordingly, as the concept for an ``Execution Venue'' would
not be relevant for the Funding Proposal, CAT LLC proposes to delete
this term and its definition from Section 1.1 of the CAT NMS Plan.
b. Use of Executed Equivalent Share Volume Under Funding Proposal
The Original Funding Model set forth in the CAT NMS Plan requires
Participants and Execution Venue ATSs to pay CAT fees based on market
share and Industry Members (other than Execution Venue ATSs) to pay CAT
fees based on message traffic. The CAT NMS Plan also describes how the
market share-based fee would be calculated for Participants and other
Execution Venue ATSs and how the message traffic-based fee would be
calculated for Industry Members (other than Execution Venue ATSs). CAT
LLC proposes to amend the CAT NMS Plan to require Participants, CEBBs
and CEBSs to pay CAT fees based on the number of executed equivalent
shares in a transaction in Eligible Securities, rather than based on
market share and message traffic. Accordingly, the Operating Committee
proposes to amend Section 11.2(b) and (c) and Section 11.3(a) and (b)
of the CAT NMS Plan to reflect the proposed use of the number of
executed equivalent shares in transactions in Eligible Securities in
calculating CAT fees.
Section 11.2(b) of the CAT NMS Plan states that ``[i]n establishing
the funding of the Company, the Operating Committee shall seek . . .
(b) to establish an allocation of the Company's related costs among
Participants and Industry Members that is consistent with the Exchange
Act, taking into account the timeline for implementation of the CAT and
distinctions in the securities trading operations of Participants and
Industry Members and their relative impact upon Company resources and
operations.'' CAT LLC proposes to delete the requirement to take into
account ``distinctions in the securities trading operations of
Participants and Industry Members and their relative impact upon
Company resources and operations.'' This requirement 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. With the
proposed move to the use of the executed equivalent shares metric
instead of message traffic and market share, the requirement is no
longer relevant.
Section 11.2(c) of the CAT NMS Plan states that ``[i]n establishing
the funding of the Company, the Operating Committee shall seek . . .
(c) to establish a tiered fee structure in which the fees charged to:
(i) CAT Reporters that are Execution Venues, including ATSs, are based
upon the level of market share; (ii) Industry Members' non-ATS
activities are based upon message traffic.'' CAT LLC proposes to delete
subparagraphs (i) and (ii) and replace these subparagraphs with the
requirement that the fee structure in which the fees charged to
``Participants and Industry Members are based upon the executed
equivalent share volume of transactions in Eligible Securities.'' \53\
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\53\ As discussed in the next section, the Operating Committee
also proposes to delete the reference to a ``tiered'' fee structure.
---------------------------------------------------------------------------
In addition, CAT LLC proposes to amend the CAT funding principles
to clarify that CAT Fees and the Historical CAT Assessments are
intended to be cost-based fees--that is, the fees are designed to
recover the cost of the creation, implementation and operation of the
CAT. CAT LLC proposes to amend the funding principle set forth in
Section 11.2(c) by making a specific reference to the costs of the CAT.
With this proposed change, Proposed Section 11.2(c) would state that
``[i]n establishing the funding of the Company, the Operating Committee
shall seek: . . . to establish a fee structure in which the fees
charged to Participants and Industry Members are based upon the
executed equivalent share volume of transactions in Eligible
Securities, and the costs of the CAT.''
Section 11.3(a) of the CAT NMS Plan provides additional detail
regarding the market share-based fees to be paid by Participants and
Execution Venue ATSs under the Original Funding Model. Specifically,
Section 11.3(a) of the CAT NMS Plan states:
(a) The Operating Committee will establish fixed fees to be
payable by Execution Venues as provided in this Section 11.3(a):
(i) Each Execution Venue that: (A) executes transactions; or (B)
in the case of a national securities association, has trades
reported by its members to its trade reporting facility or
facilities for reporting transactions effected otherwise than on an
exchange, in NMS Stocks or OTC Equity Securities will pay a fixed
fee depending on the market share of that Execution Venue in NMS
Stocks and OTC Equity Securities, with the Operating Committee
establishing at least two and no more than five tiers of fixed fees,
based on an Execution Venue's NMS Stocks and OTC Equity Securities
market share. For these purposes, market share for Execution Venues
that execute transactions will be calculated by share volume, and
market share for a national securities association that has trades
reported by its members to its trade reporting facility or
facilities for reporting transactions effected otherwise than on an
exchange in NMS Stocks or OTC Equity Securities will be calculated
based on share volume of trades reported, provided, however, that
the share volume reported to such national securities association by
an Execution Venue shall not
[[Page 17100]]
be included in the calculation of such national security
association's market share.
(ii) Each Execution Venue that executes transactions in Listed
Options will pay a fixed fee depending on the Listed Options market
share of that Execution Venue, with the Operating Committee
establishing at least two and no more than five tiers of fixed fees,
based on an Execution Venue's Listed Options market share. For these
purposes, market share will be calculated by contract volume.
CAT LLC proposes to delete Section 11.3(a) of the CAT NMS Plan and
replace this paragraph with a description of the CAT Fees related to
Prospective CAT Costs, as described above.
Section 11.3(b) of the CAT NMS Plan provides additional detail
regarding the message traffic-based CAT fees to be paid by Industry
Members (other than Execution Venue ATSs) under the Original Funding
Model. Specifically, Section 11.3(b) of the CAT NMS Plan states:
The Operating Committee will establish fixed fees to be payable
by Industry Members, based on the message traffic generated by such
Industry Member, with the Operating Committee establishing at least
five and no more than nine tiers of fixed fees, based on message
traffic. For the avoidance of doubt, the fixed fees payable by
Industry Members pursuant to this paragraph shall, in addition to
any other applicable message traffic, include message traffic
generated by: (i) an ATS that does not execute orders that is
sponsored by such Industry Member; and (ii) routing orders to and
from any ATS sponsored by such Industry Member.
CAT LLC proposes to delete Section 11.3(b) of the CAT NMS Plan and
replace this paragraph with a description of the Historical CAT
Assessments, as described above.
c. Elimination of Tiered Fees
CAT LLC proposes to eliminate the use of tiered fees that were
included in the Original Funding Model. Instead, under the Funding
Proposal, each Participant, CEBB or CEBS would pay a fee based solely
on its transactions in Eligible Securities. The Operating Committee
therefore proposes to amend Sections 11.1(d), 11.2(c), 11.3(a) and
11.3(b) of the CAT NMS Plan to eliminate tiered fees and related
concepts.
Utilizing a tiered fee structure, by its nature, would create
certain inequities among the CAT fees paid by CAT Reporters. For
example, two CAT Reporters with comparable executed equivalent share
volume may pay notably different fees if one falls in a higher tier and
the other falls within a lower tier. Correspondingly, a tiered fee
structure generally would reduce fees for CAT Reporters with higher
executed share volume in one tier, while increasing fees for Industry
Members with lower executed share volume in the same tier, as compared
to a non-tiered fee. Furthermore, CAT Reporters in lower tiers
potentially pay more than they would without the use of tiers. While
tiering appropriately exists in various other self-regulatory fee
programs, CAT LLC proposes to eliminate the tiering concept for the
Funding Proposal.
By charging each Participant, CEBB and CEBS a CAT fee directly
based on its own executed equivalent share volume, rather than charging
a tiered fee, the Funding Proposal would result in a CAT fee being tied
more directly to the CAT Reporter's executed share volume. In contrast,
with a tiered fee, CAT Reporters with different levels of executed
equivalent share volume that are placed in the same tier would all pay
the same CAT fee, thereby limiting the correlation between a CAT
Reporter's activity and its CAT fee.
The proposed non-tiering approach is simpler and more objective to
administer than the tiering approach. With a tiering approach, the
number of tiers for Participants, CEBBs and CEBSs, the boundaries for
each tier and the fees assigned to each tier must be established. In
the absence of clear groupings of CAT Reporters, selecting the number
of, boundaries for, and the fees associated with each tier would be
subject to some level of subjectivity. Furthermore, the establishment
of tiers would need to be continually reassessed based on changes in
the executed equivalent share volume of transactions in Eligible
Securities, thereby requiring regular subjective assessments.
Accordingly, the removal of tiering from the Funding Proposal
eliminates a variety of subjective analyses and judgments from the
model and simplifies the determination of CAT fees.
Section 11.1(d) of the CAT NMS Plan states that ``[c]onsistent with
this Article XI, the Operating Committee shall adopt policies,
procedures, and practices regarding the budget and budgeting process,
assignment of tiers, resolution of disputes, billing and collection of
fees, and other related matters.'' With the elimination of tiered fees,
the reference to the ``assignment of tiers'' would no longer be
relevant for the Funding Proposal. Therefore, CAT LLC proposes to
delete the reference to ``assignment of tiers'' from Section 11.1(d).
Section 11.1(d) of the CAT NMS Plan also states that:
For the avoidance of doubt, as part of its regular review of
fees for the CAT, the Operating Committee shall have the right to
change the tier assigned to any particular Person in accordance with
fee schedules previously filed with the Commission that are
reasonable, equitable and not unfairly discriminatory and subject to
public notice and comment, pursuant to this Article XI. Any such
changes will be effective upon reasonable notice to such Person.
As noted above, unlike the Original Funding Model, the Funding
Proposal would not utilize tiered fees. Accordingly, these two
sentences would not be applicable to the Funding Proposal. Therefore,
CAT LLC proposes to delete these two sentences from Section 11.1(d) of
the CAT NMS Plan.
CAT LLC proposes to delete the reference to ``tiered'' fees from
Section 11.2(c) of the CAT NMS Plan. Section 11.2(c) of the CAT NMS
Plan states that ``[i]n establishing the funding of the Company, the
Operating Committee shall seek: . . . (c) to establish a tiered fee
structure . . .'' CAT LLC propose to delete the word ``tiered'' from
this provision as the CAT fees would not be tiered under the Funding
Proposal.
CAT LLC also proposes to delete paragraph (iii) of Section 11.2(c)
of the CAT NMS Plan. Paragraph (iii) of Section 11.2(c) of the CAT NMS
Plan states that the Operating Committee shall seek to establish a
tiered fee structure in which fees charged to:
the CAT Reporters with the most CAT-related activity (measured by
market share and/or message traffic, as applicable) be 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).
Under the Original Funding Model, the comparability provision was
an important factor in determining the tiers for Industry Members and
Execution Venues. In determining the tiers, the Operating Committee
sought to establish comparable fees among the CAT Reporters with the
most Reportable Events.\54\ Under the Funding Proposal, however, the
comparability provision is no longer necessary, as a tiered fee
structure would not be used for Industry Members or Participants.
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\54\ See, e.g., Securities Exchange Act Rel. No. 82451 (Jan. 5,
2018), 83 FR 1399, 1406-07 (Jan. 11, 2018) (``2018 Fee Proposal
Release'').
---------------------------------------------------------------------------
As discussed above, the Operating Committee proposes to replace the
language in Sections 11.3(a) and (b) of the CAT NMS Plan with language
implementing the Funding Proposal. These proposed changes would remove
the references to tiers in Sections 11.3(a)(i) and (ii) and 11.3(b) of
the CAT
[[Page 17101]]
NMS Plan, along with the other proposed changes. Specifically, Section
11.3(a)(i) of the CAT NMS Plan states that the Operating Committee,
when establishing fees for Execution Venues for NMS Stocks and OTC
Equity Securities, will establish ``at least two and no more than five
tiers of fixed fees, based on an Execution Venue's NMS Stocks and OTC
Equity Securities market share.'' Similarly, Section 11.3(a)(ii) of the
CAT NMS Plan states that the Operating Committee, when establishing
fees for Execution Venues that execute transactions in Listed Options,
will establish ``at least two and no more than five tiers of fixed
fees, based on an Execution Venue's Listed Options market share.''
Section 11.3(b) of the CAT NMS Plan states that the Operating
Committee, when establishing fees to be payable by Industry Members,
will establish ``at least five and no more than nine tiers of fixed
fees, based on message traffic.'' CAT LLC proposes to delete each of
these references to tiers from the CAT NMS Plan.
d. No Fixed Fees
As discussed above, CAT LLC proposes to replace the language in
Sections 11.3(a) and (b) of the CAT NMS Plan with language implementing
the Funding Proposal. These proposed changes also would remove the
references to ``fixed fees'' in Sections 11.3(a), 11.3(a)(i),
11.3(a)(ii) and 11.3(b) and replaced them with references to ``fees.''
Under the Funding Proposal, the CAT fees to be paid by Participants,
CEBBs and CEBSs will vary in accordance with their executed equivalent
share volume of transactions in Eligible Securities, although the Fee
Rate will be fixed for a relevant period. Therefore, the concept of a
fixed fee--that is, a fee that does not vary depending on
circumstances--is not relevant under the Funding Proposal.
7. Billing and Collection of CAT Fees
Consistent with Section 11.1(d) of the CAT NMS Plan, CAT LLC will
adopt policies, procedures and practices regarding the billing and
collection of fees. In addition, pursuant to Section 11.4 of the CAT
NMS Plan, CAT LLC will establish a system for the collection of CAT
fees from Participants and Industry Members. As set forth in Section
11.4 of the CAT NMS Plan, each Participant would be required to pay its
CAT fees authorized under the CAT NMS Plan as required by Section
3.7(b) of the CAT NMS Plan.\55\ Section 3.7(b) of the CAT NMS Plan
provides the following:
---------------------------------------------------------------------------
\55\ Participants and CAT Executing Brokers would be responsible
for a fee each month in which they are a CAT Reporter. If a
Participant or CAT Executing Broker ceases to the meet the
definition of a CAT Reporter during a month, the Participant or CAT
Executing Broker would still be responsible for CAT fees associated
with its transactions during that month.
Each Participant shall pay all fees or other amounts required to
be paid under this Agreement within thirty (30) days after receipt
of an invoice or other notice indicating payment is due (unless a
longer payment period is otherwise indicated) (the ``Payment
Date''). The Participant shall pay interest on the outstanding
balance from the Payment Date until such fee or amount is paid at a
per annum rate equal to the lesser of: (i) the Prime Rate plus 300
basis points; or (ii) the maximum rate permitted by applicable law.
If any such remaining outstanding balance is not paid within thirty
(30) days after the Payment Date, the Participants shall file an
amendment to this Agreement requesting the termination of the
participation in the Company of such Participant, and its right to
any Company Interest, with the SEC. Such amendment shall be
effective only when it is approved by the SEC in accordance with SEC
---------------------------------------------------------------------------
Rule 608 or otherwise becomes effective pursuant to SEC Rule 608.
Section 11.4 of the CAT NMS Plan also addresses the payment of CAT
fees by Industry Members. Section 11.4 of the CAT NMS Plan states:
Participants shall require each Industry Member to pay all
applicable fees authorized under this Article XI within thirty (30)
days after receipt of an invoice or other notice indicating payment
is due (unless a longer payment period is otherwise indicated). If
an Industry Member fails to pay any such fee when due (as determined
in accordance with the preceding sentence), such Industry Member
shall pay interest on the outstanding balance from such due date
until such fee is paid at a per annum rate equal to the lesser of:
(a) the Prime Rate plus 300 basis points; or (b) the maximum rate
permitted by applicable law.
8. Illustrative Example of the Funding Proposal
CAT LLC has prepared an example of how a Historical CAT Assessment
would be calculated pursuant to the Funding Proposal for illustrative
purposes only. The illustrative example is set forth in Exhibit C to
this filing. Note that the calculation of any actual Historical CAT
Assessment for Historical CAT Costs would differ from this example in
various ways, as described in more detail in Exhibit C.
9. Advantages of and Support for the Funding Proposal
CAT LLC proposes to adopt the Funding Proposal as it provides a
variety of advantages over the Original Funding Model. CAT LLC
discusses these advantages in this section of the filing.
a. Comparable to Existing Fee Precedent
The Funding Proposal would operate in a manner similar to other
funding models employed by the SEC and the Participants, including the
SEC's Section 31 fees, FINRA's trading activity fee (``FINRA TAF'') and
the options regulatory fee (``ORF'') utilized by options exchanges. The
SEC previously has determined that the Participants' sales value fees
related to Section 31, the FINRA TAF and the ORF are consistent with
the Exchange Act.
i. Section 31 Fees
Pursuant to section 31 of the Exchange Act, a national securities
exchange must pay the Commission a fee based on the aggregate dollar
amount of sales of securities transacted on the exchange, and a
national securities association must pay the Commission a fee based on
the aggregate dollar amount of sales of securities transacted by or
through any member of the association otherwise than on a national
securities exchange (collectively, ``covered sales''). The SEC
calculates the amount of section 31 fees due from each exchange or
FINRA by multiplying the aggregate dollar amount of its covered sales
by the fee rate set by the Commission in a procedure set forth in
section 31(j) of the Exchange Act. These fees are designed to recover
the costs related to the government's supervision and regulation of the
securities markets and securities professionals. Section 31 requires
the SEC to make annual and, in some cases, mid-year adjustments to the
fee rate. These adjustments are necessary to make the SEC's total
collection of transaction fees in a given year as close as possible to
the amount of the regular appropriation to the Commission by Congress
for that fiscal year.
To recover the costs of their section 31 fee obligations, each of
the national securities exchanges and FINRA have adopted, and the SEC
has approved, rules assessing a regulatory transaction fee on their
members, the amount of which is set in accordance with section 31 of
the Exchange Act.\56\ Broker-dealers, in turn, often impose fees on
their customers that provide the funds to pay the fees owed to the
exchanges and FINRA.
---------------------------------------------------------------------------
\56\ See, e.g., Section 3 of Schedule A of FINRA's By-Laws.
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Like the well-known, longstanding and accepted section 31-related
fee model, the Funding Proposal would use
[[Page 17102]]
a predetermined fee rate for the calculation of the fees, seek to
recover designated regulatory costs (as CAT provides a solely
regulatory function), and allow for the adjustment of the fee rate
during the year to seek to match regulatory costs with fees collected.
The Funding Proposal, however, would impose fees based on executed
equivalent share volume rather than the sales values of certain
transactions. Despite the different calculation metric, the Funding
Proposal is similar to a model well known, long accepted and justified
under the Exchange Act the purpose of which is also to cover costs
associated with the regulation of securities markets and securities
professionals.
ii. FINRA Trading Activity Fee
The transaction-based fees charged under the Funding Proposal also
would be similar to FINRA's transaction-based trading activity fee,\57\
which was modeled on the Commission's section 31 fee.\58\ Although the
FINRA TAF is designed to cover a subset of the costs of FINRA services
(e.g., costs to FINRA of the supervision and regulation of members,
including performing examinations, financial monitoring, and policy,
rulemaking, interpretive, and enforcement activities) rather than all
of FINRA's costs like the CAT, the transaction-based calculation of the
FINRA TAF and the proposed CAT fees are similar. With the FINRA TAF,
FINRA members on the sell-side of a transaction are required to pay a
per share fee for each sale of covered securities, which includes
exchange registered securities, equity securities traded otherwise than
on an exchange, security futures, TRACE-Eligible Securities and
municipal securities, subject to certain exceptions. In approving the
FINRA TAF, the SEC stated that the implementation of the FINRA TAF ``is
consistent with section 15A(b)(5) of the Act, in that the proposal is
reasonably designed to recover NASD costs related to regulation and
oversight of its members.'' \59\ The SEC further stated that ``[t]he
Commission recognizes the difficulties inherent in restructuring the
NASD's regulatory fees, and believes that the NASD has done so in a
manner that is fair and reasonable.'' \60\ The CAT fees calculated
under the Funding Proposal would be similar to the FINRA TAF in that
they would be transaction-based fees intended to provide funding for
regulatory costs.
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\57\ Section 1 of Schedule A of FINRA's By-Laws.
\58\ See Securities Exchange Act Rel. No. 46416 (Aug. 23, 2002),
67 FR 55901 (Aug. 30, 2002).
\59\ Securities Exchange Act Rel. No. 47946 (May 30, 2003), 68
FR 34021, 34023 (June 6, 2003) (``TAF Release'').
\60\ Id.
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iii. Options Regulatory Fee
The fees charged under the Funding Proposal also would be similar
to the ORF charged by the options exchanges.\61\ The ORF is a per
contract fee charged by an options exchange for certain options
transactions to options members of the relevant exchange. The ORF is
collected indirectly from exchange members through their clearing firms
by the Options Clearing Corporation on behalf of the Exchange. Revenue
generated from the ORF is designed to recover a material portion of an
options exchange's regulatory costs related to the supervision and
regulation of its members' options business, including performing
routine surveillance, investigations, examinations and financial
monitoring as well as policy, rulemaking, interpretive, and enforcement
activities. Exchange members generally pass-through the ORF to their
customers in the same manner that firms pass-through to their customers
the fees charged by self-regulatory organizations (``SROs'') to help
the SROs meet their obligations under section 31 of the Exchange
Act.\62\ The CAT fees calculated under the Funding Proposal would be
similar to the ORF in that they would be transaction-based fees
intended to provide funding for regulatory costs.
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\61\ See, e.g., Cboe Fee Schedule, MIAX Fee Schedule, and NYSE
Arca Fee Schedule.
\62\ See, e.g., Securities Exchange Act Rel. No. 58817 (Oct. 20,
2008), 73 FR 63744, 63745 (Oct. 27, 2008).
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b. Fee Metric: Executed Equivalent Share Volume
CAT LLC proposes to use the executed equivalent share volume of
transactions in Eligible Securities as the means for allocating CAT
costs among Participants and Industry Members. The use of executed
equivalent share volume would replace the use of message traffic for
allocating costs among Industry Members and the use of market share for
allocating costs among Participants as set forth in the Original
Funding Model. The use of executed equivalent share volume is a
reasonable and equitable method for allocating costs for a variety of
reasons, and CAT LLC believes it improves upon the use of message
traffic.
The proposed use of CAT-reported message traffic as set forth in
the Original Funding Model raised a variety of issues for allocating
CAT costs. First, based on a subsequent study of cost drivers for the
CAT, it was determined that message traffic may be a factor in the CAT
costs, but it is not the primary factor. CAT costs are dominated by
technology costs, and the predominant technology costs are data
processing (e.g., linker) and storage costs.\63\ The data processing
and storage costs are related to the level of message traffic, but such
costs also relate to other factors. The data processing and storage
costs also are directly related to the complexity of the reporting
requirements for the market activity. For example, in light of the
complexity of market activity, the CAT's order reporting and linkage
scenarios document for Industry Members is over 800 pages in length,
addressing nearly 200 scenarios.\64\ The processing and storage of such
a large number of complex reporting scenarios requires very complex
algorithms, which, in turn, lead to significant data processing and
storage costs. The data processing and storage costs also are driven by
the stringent performance, timelines and operational requirements for
processing CAT Data. For example, the CAT NMS Plan requires that CAT
order events be processed within established timeframes to ensure data
can be made available to Participants' regulatory staff and the SEC in
a timely manner. Accordingly, a CAT Reporter's message traffic may be a
factor, but not a primary factor, in terms of the costs of the CAT.
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\63\ For a detailed discussion of cost drivers of the CAT, see
CAT LLC Webinar, CAT Costs (Sept. 21, 2021), <a href="https://www.catnmsplan.com/events/cat-costs-september-21-2021">https://www.catnmsplan.com/events/cat-costs-september-21-2021</a>.
\64\ CAT Industry Member Reporting Scenarios, Version 4.10 (Oct.
21, 2022), <a href="https://www.catnmsplan.com/sites/default/files/2022-10/10.21.22_Industry_Member_Tech_Specs_Reporting_Scenarios_v4.10_CLEAN.pdf">https://www.catnmsplan.com/sites/default/files/2022-10/10.21.22_Industry_Member_Tech_Specs_Reporting_Scenarios_v4.10_CLEAN.pdf</a>.
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Second, in general, Industry Member revenue, including revenue
derived from fees Industry Members charge their clients, is often
driven by transactions. Because 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. As a result, CAT fees
based on message traffic could impose an outsized adverse financial
impact on certain Industry Members.
Third, imposing CAT fees on each CAT Reporter based on its message
traffic may have an adverse effect on competition, liquidity or other
aspects of market structure, and may increase model complexity. For
example, the number of messages for any given order, whether or not
ultimately executed, could vary depending on how a given order is
processed, leading to a lack of predictability on the applicable cost
to
[[Page 17103]]
process any given order or executions for broker-dealers or non-broker-
dealer customers.\65\ As one example, discussed in the context of the
previously proposed funding models,\66\ market makers in Eligible
Securities may have very high levels of message traffic due to their
quoting obligations. Such high levels of message traffic may lead to
outsized fees for market makers in comparison to their transaction
activity, thereby placing an excessive financial burden on market
makers. This, in turn, may lead to a decrease in the number of market
makers, resulting in a decrease in liquidity and a reduction in market
quality. To address this effect on market makers, CAT LLC proposed to
discount the fees that market makers would need to pay. However, such a
discount adds complexity to the message traffic approach, as the model
must determine when a discount is necessary and how much the discount
should be.
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\65\ The predictability of fees is discussed further below in
Section A.9.u of this filing.
\66\ See 2018 Fee Proposal Release.
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The use of executed equivalent share volume to allocate CAT costs
addresses each of these concerns. The fees are not divorced from
transactions, the traditional source of revenue for Industry Members;
fees based on executed equivalent share volume would not adversely
impact certain market participants to the detriment of the markets, and
the model is simple to understand and implement. Moreover, in addition
to these benefits, the executed equivalent share volume is related to,
but not precisely linked to, the CAT Reporter's burden on the CAT. In
light of the many inter-related cost drivers of the CAT (e.g., storage,
message traffic, processing), determining the precise cost burden
imposed by each individual CAT Reporter on the CAT is not feasible.
Accordingly, CAT LLC has determined 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. This
conclusion is consistent with the SEC's prior recognition of the use of
transaction volume in setting regulatory fees. For example, in
approving the FINRA TAF, the SEC recognized that transaction volume was
closely enough connected to FINRA's regulatory responsibilities to
satisfy the statutory standard in the Exchange Act.\67\
---------------------------------------------------------------------------
\67\ TAF Release at 34024.
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c. CAT Executing Brokers
i. Charging CAT Executing Brokers
CAT LLC proposes to charge CAT fees to CAT Executing Brokers. CAT
LLC believes that such an approach is consistent with the requirements
of the Exchange Act for a variety of reasons, including the following
reasons.
First, the proposal to charge executing brokers is broadly
supported by the industry.\68\ For example, SIFMA has supported
charging executing brokers, and continues to support charging executing
brokers, rather than clearing brokers.\69\ In one of its comment
letters on the 2022 Funding Proposal, SIFMA stated that ``we support
the Participants' decision to allocate CAT costs to executing brokers
rather than clearing brokers.'' \70\
---------------------------------------------------------------------------
\68\ See Partial Amendment I at 74185; February 2023 Proposed
Partial Amendment at 5.
\69\ See Letter from Ellen Greene, Managing Director, Equities
and Options Market Structure, SIFMA, to Vanessa Countryman,
Secretary, SEC (Dec. 14, 2022) (``December 2022 SIFMA Letter'') at
2; Letter from Ellen Greene, Managing Director, Equities and Options
Market Structure, SIFMA, to Vanessa Countryman, Secretary, SEC (Oct.
7, 2022) at 4-5.
\70\ Letter from Ellen Greene, Managing Director, Equities and
Options Market Structure, and Joseph Corcoran, Managing Director,
Associate General Counsel, SIFMA, to Vanessa Countryman, Secretary,
SEC (Jan. 12, 2023) at 7. See also December 2022 SIFMA Letter at 2
(``[W]e support changing the payment obligation to executing
brokers.'').
---------------------------------------------------------------------------
Second, the proposal to rely on executing brokers, rather than
clearing brokers, was proposed in direct response to comments raised by
SIFMA and other commenters on the 2022 Funding Proposal regarding the
cost burden that clearing firms may experience if clearing brokers were
charged CAT fees.\71\ As noted by commenters, imposing the fee payment
obligation on clearing brokers, rather than on executing brokers more
generally, potentially may impose a significant financial burden on
clearing firms if the fees imposed on clearing firms are not passed
through to their clients.
---------------------------------------------------------------------------
\71\ See Partial Amendment I at 74185; February 2023 Proposed
Partial Amendment at 5.
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Third, charging the CEBBs and CEBSs would reflect the executing
role the CEBB and CEBS have in each transaction. Such a fee model is
currently used and well-known in the securities markets. For example,
SRO members regularly pay transaction-based fees. As a result, the CAT
fees could be paid by Industry Members without requiring significant
and potentially costly changes.
Fourth, charging CEBBs and CEBSs is in line with the use of
transaction reports from the exchanges and FINRA's equity trading
reporting facilities for calculating the CAT fees. The CEBBs and CEBSs
are identified on the transaction reports, thereby streamlining the CAT
collection process.
Fifth, CAT LLC does not believe that the proposal would burden CAT
Executing Brokers. The CEBBs and CEBSs could determine, but would not
be required, to pass their CAT fees through to their clients, who, in
turn, could pass their CAT fees to their clients, until the fee is
imposed on the ultimate participant in the transaction. With such a
pass-through, the CEBBs and CEBSs would not ultimately incur the cost
of all CAT fees related to their transactions. It is common practice in
the industry for broker-dealers to pass transaction-based fees through
to their clients, and CAT fees would introduce no unique issues for
passing the CAT fee on to clients.
Finally, the proposal to charge CAT Executing Brokers CAT fees as
set forth in the Funding Proposal only addresses the party responsible
for the payment of the CAT fee. As an administrative matter regarding
the method of payment, each CAT Executing Broker may seek to enter into
a bilateral arrangement with its clearing broker for the clearing
broker to collect and pass-through the CAT fees as it does in other
contexts.
ii. Effect on Net Capital of CAT Executing Brokers
CAT fees do not raise new or different issues for CAT Executing
Brokers with respect to net capital requirements than other
transaction-based fees charged to executing brokers. CAT fees will be
billed on a monthly basis, and Section 11.4 of the CAT NMS Plan states
that ``Participants shall require each Industry Member to pay all
applicable fees authorized under this Article XI within thirty (30)
days after receipt of an invoice or other notice indicating payment is
due (unless a longer payment period is otherwise indicated).'' With
respect to net capital requirements, CAT Executing Brokers may
determine whether to establish arrangements with their brokerage
clients to account for costs incurred by the CAT Executing Broker on
the client's behalf, including setting the terms under which they must
be repaid by their broker-dealer clients such that receivables need not
extend beyond 30 days.
[[Page 17104]]
d. Cost Allocation
i. One-Third/One-Third/One-Third Allocation of Prospective CAT Costs
Between CEBS, CEBB and Participant
When calculating the CAT Fees related to Prospective CAT Costs
under the Funding Proposal, CAT LLC proposes to allocate one-third of
Prospective CAT Costs to Participants, one-third of Prospective CAT
Costs to CEBSs and one-third of Prospective CAT Costs to CEBBs. CAT LLC
believes that this proposed allocation satisfies the requirements of
the Exchange Act and Rule 608 of Regulation NMS under the Exchange Act.
The proposed \1/3\, \1/3\, \1/3\ allocation of Prospective CAT
Costs recognizes the three primary roles in each transaction: the
buyer, the seller and the market regulator, and assigns an equal one-
third share of the fee per transaction to each of these three roles.
The Exchange Act itself recognizes the importance of these three roles
in a transaction by imposing registration and other regulatory
obligations on the broker-dealers and regulator involved in a
transaction. This allocation is similar to the approach taken with the
FINRA TAF, ORF and section 31 sales value fees, and also recognizes the
role of the market regulator and the buyer in the transaction as well
as the seller.
Furthermore, the allocation of two-thirds of the CAT costs to
Industry Members and only one-third to Participants recognizes that a
substantial portion of CAT costs originates from Industry Members. CAT
costs are dominated by technology costs, and the predominant technology
costs are data processing (e.g., linker) and storage costs. The data
processing and storage costs are related to message traffic and the
complexity of the reporting requirements for CAT, which, in turn, are
determined by market activity. Industry Members are responsible for
originating trading activity that necessitates message traffic to the
CAT, and the complexity of Industry Members' chosen business models
contributes substantially to the costs of the CAT.
One of the factors driving CAT costs is the complexity of the
Industry Members' CAT reporting requirements, which are driven by the
inherent complexity of Industry Members' chosen business models. For
example, in light of the complexity of market activity, the CAT's
reporting scenarios document for Industry Members is over 800 pages in
length, addressing almost 200 scenarios, including, for example,
scenarios related to representative orders, internal routing, order
modification, order cancellation, ATS scenarios, OTC scenarios, foreign
scenarios, child orders, proprietary orders, fractional shares, stop
and conditional orders, RFQs, floor activity and more.\72\ The
processing and storage of such a large number of complex reporting
scenarios requires very complex algorithms, which, in turn, lead to
significant data processing and storage costs. In contrast, the
Participants do not originate market activity or orders or otherwise
bring this level of complexity to the markets. As a result, the
technical specifications for the Participants are far less complex than
for Industry Members. For example, the technical specifications for
Participants have 13 reporting events for stock exchanges compared to
36 equity reporting events in the technical specifications for Industry
Members, and the technical specifications for Participants have 14
reporting events for options exchanges compared to 43 reporting options
events in the technical specifications for Industry Members.\73\ Since
the complexity of Industry Members' chosen business models contribute
substantially to the costs of the CAT, it is reasonable and equitable
to require that Industry Members pay a substantial portion of those
costs.
---------------------------------------------------------------------------
\72\ CAT Industry Member Reporting Scenarios, Version 4.10 (Oct.
21, 2022), <a href="https://www.catnmsplan.com/sites/default/files/2022-10/10.21.22_Industry_Member_Tech_Specs_Reporting_Scenarios_v4.10_CLEAN.pdf">https://www.catnmsplan.com/sites/default/files/2022-10/10.21.22_Industry_Member_Tech_Specs_Reporting_Scenarios_v4.10_CLEAN.pdf</a>.
\73\ Compare CAT Reporting Technical Specifications for Plan
Participants, Version 4.1.0-r17 (Feb. 21, 2023), <a href="https://www.catnmsplan.com/sites/default/files/2023-02/02.21.2023-CAT-Reporting-Technical-Specifications-for-Participants-4.1.0-r17.pdf">https://www.catnmsplan.com/sites/default/files/2023-02/02.21.2023-CAT-Reporting-Technical-Specifications-for-Participants-4.1.0-r17.pdf</a>,
with CAT Reporting Technical Specifications for Industry Members,
Version 4.0.0 r18 (Dec. 16, 2022), <a href="https://www.catnmsplan.com/sites/default/files/2022-12/12.16.2022_CAT_Reporting_Technical_Specifications_for_Industry_Members_v4.0.0r18_CLEAN.pdf">https://www.catnmsplan.com/sites/default/files/2022-12/12.16.2022_CAT_Reporting_Technical_Specifications_for_Industry_Members_v4.0.0r18_CLEAN.pdf</a>.
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Participant activity does not impact CAT costs in the same way that
Industry Member activity impacts CAT costs. The analysis regarding the
complexity of Industry Member activity is based on the effects of the
business models on the costs of the CAT, not on the complexity of the
market generally. The complexity of Industry Member activity adds
significantly to the cost of the CAT in a way that Participant activity
does not.
Moreover, allocating a greater percentage of the CAT costs to
Participants would raise fairness issues in light of the greater
financial resources of Industry Members. There are only 25 Participants
and approximately 1,100 Industry Members.\74\ Moreover, based upon an
analysis of available CAT Reporter revenue, Participants only
represented approximately 4% of the total CAT Reporter revenue while
Industry Members represented 96% of the total CAT Reporter revenue.\75\
In addition, various individual Industry Members have revenue in excess
of some or all of the Participants. Accordingly, CAT LLC determined
that allocating a higher percentage of the total CAT costs to the
Participants was not a fair and equitable approach.
---------------------------------------------------------------------------
\74\ An average of 1,124 unique CAT Reporters sent transaction
data to the CAT from July 1, 2022 to August 8, 2022.
\75\ See Securities Exchange Act Rel. No. 91555 (Apr. 14, 2021),
86 FR 21050, 20155 (Apr. 21, 2021) (``2021 Fee Proposal Release'').
Industry Member revenue was calculated based on the total revenue
reported in the Industry Member's FOCUS reports. Participant revenue
was calculated based on revenue information provided in Form 1
amendments and/or publicly reported figures. Participants are not
required to file uniform FOCUS-type reports regarding revenue like
Industry Members. Accordingly, the revenue calculation for
Participants is not as straightforward as for Industry Members.
---------------------------------------------------------------------------
Finally, CAT LLC analyzed a variety of alternative allocations of
CAT costs and continues to support the proposed one-third, one-third,
one-third allocation as consistent with the requirements of the
Exchange Act and the CAT NMS Plan. Alternative allocations considered
by CAT LLC are discussed in detail below in Section A.10 of this
filing.
ii. \1/3\, \1/3\ Allocation for Historical CAT Assessment
Under the Funding Proposal, the CEBS and the CEBB would each pay
one-third of the fee obligation for each transaction related to
Historical CAT Costs. Because the Participants have already paid for
Past CAT Costs via loans to CAT LLC, the Participants would not be
required to pay any Historical CAT Assessment. As stated in Proposed
Section 11.3(b)(ii) of the CAT NMS Plan, ``[i]n lieu of a Historical
CAT Assessment, the Participants' one-third share of Historical CAT
Costs 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.'' Furthermore, Proposed Section
11.3(b)(ii) of the CAT NMS Plan would emphasize that ``[t]he Historical
CAT Assessment is designed to recover two-thirds of the Historical CAT
Costs.'' Like with the allocation of Prospective CAT Costs discussed
above, CAT LLC believes that the proposed allocation of the Historical
CAT Costs is consistent with the requirements of the Exchange Act and
the CAT NMS Plan,
[[Page 17105]]
iii. Internal Cost of Compliance by Industry Members
CAT LLC does not propose to take into consideration the internal
costs incurred by Industry Members in complying with CAT requirements
in determining how to allocate costs between Industry Members and
Participants. There is no precedent for regulatory fees to be
determined based on the cost of compliance of the regulated entity.
Regulatory fees are intended to cover the regulatory costs of the
entity providing the regulation. In the case of the CAT, the Funding
Proposal is intended to charge fees to pay for the direct costs of the
CAT, not for ancillary compliance costs of Industry Members.\76\
Moreover, as a practical matter, accurately determining an Industry
Member's compliance costs, without recordkeeping requirements and
appropriate standards to determine expenses accurately, would be
infeasible.
---------------------------------------------------------------------------
\76\ See CAT NMS Plan Approval Order at 84795, n.1749 (``The
Participants stated that the funding model provides a framework for
the recovery of the costs to create, develop and maintain the CAT,
and is not meant to address the cost of compliance for Industry
Members and Participants with the reporting requirements of Rule
613.'').
---------------------------------------------------------------------------
Likewise, the substantial internal compliance costs of the
Participants are not taken into consideration in the Funding Proposal.
Each Participant incurs its own internal costs to comply with the
requirements of the CAT NMS Plan, including, among other things,
updating its systems for CAT reporting. Additionally, Participants have
expended countless internal hours on the creation, implementation and
operation of the CAT. These costs are not included in the cost
allocation under the Funding Proposal.
iv. Alternative Approach Based on Individualized CAT Reporter Cost to
CAT
CAT LLC has determined not to propose a funding approach for the
CAT in which a CAT Reporter's fees would be based on each CAT
Reporter's exact cost burden on the CAT. In light of the many inter-
related cost drivers of the CAT (e.g., storage, message traffic,
processing), determining the precise cost burden imposed by each
individual CAT Reporter on the CAT is not feasible. Moreover, 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. CAT LLC emphasizes that the Exchange Act requires CAT fees
to be fair, reasonable and equitably allocated, and CAT LLC believes
that the use of executed equivalent share volume satisfies these
requirements. The Exchange Act does not require each CAT Reporter's
fees to be a proxy for that CAT Reporter's cost burden on the CAT, let
alone an exact proxy.
A. Difficulty in Determining Individual CAT Reporter Costs Due to
Inter-Related Cost Drivers
CAT LLC has analyzed the cost drivers for the CAT, and has
concluded that determining the precise cost burden imposed by each
individual CAT Reporter on the CAT is not feasible. The 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. The use of executed equivalent share volume as the metric for the
funding model is an improvement over the message traffic model. CAT LLC
analyzed the cost drivers of CAT and determined that, although message
traffic is one factor in CAT costs, it is not the primary factor. CAT
costs are dominated by technology costs, and the predominant technology
costs are data processing (e.g., linker) and storage costs. Compute
costs represent more than half of all technology costs. While such
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. The Plan requires that order events
be processed, corrected, and made available to regulatory users within
established timeframes, including a four-hour window for initial
linkage processing. For this reason, among other issues with the
message traffic model and other considerations discussed herein, CAT
LLC determined to shift its focus to the new metric of executed
equivalent share volume from the message traffic and market share
metrics set forth in the CAT NMS Plan as approved.
B. Trading Activity as Reasonable Proxy for Cost Burden
CAT LLC determined 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. CAT LLC analyzed
reasonable metrics for determining CAT fees, and determined that,
although executed equivalent share volume is not an exact proxy for the
cost burden (nor need it be), trading activity provides a reasonable
proxy for cost burden on the CAT. Increased trading activity impacts
message traffic, data processing, storage and other factors, and thus
necessarily correlates with increased cost burden on the CAT. Moreover,
Industry Member activity in the market generally is engaged in for the
purpose of effecting transactions, and, as a result, it is common for
Participants to use transaction-based fees. Therefore, executed share
volume is an appropriate metric for allocating CAT costs among CAT
Reporters.
This conclusion is consistent with the SEC's prior recognition of
the use of transaction volume in setting regulatory fees. For example,
in approving FINRA's TAF, the SEC recognized that transaction volume
was closely enough connected to FINRA's broad regulatory
responsibilities to satisfy the statutory standard in the Exchange
Act.\77\ FINRA proposed a transaction-based TAF to fund its member
regulatory activities in a variety of areas such as ``sales practices,
routine examinations, financial and operational reviews, new member
applications, enforcement * * * . . . wherever such member activity
occurs.'' \78\ The SEC noted that ``[a]ssessing fees in relation to
transactions correlates to heightened NASD responsibilities regarding
firms that engage in the trading,'' but the fees were not an exact
proxy for the costs of such regulatory responsibilities.\79\ The SEC
noted this lack of a precise correlation:
---------------------------------------------------------------------------
\77\ TAF Release at 34023.
\78\ Id.
\79\ Id.
In most cases, the NASD has direct responsibility to oversee the
firm's dealing with the public in effecting the transactions; the
NASD may also have responsibility to oversee the impact of the
trading on the firm's financial condition. In most cases, where
responsibility for certain member activities has been allocated to
other SROs, the NASD retains responsibility for other member
functions.\80\
---------------------------------------------------------------------------
\80\ Id.
Nevertheless, the SEC concluded that ``while trading activity is
not wholly correlated to the full range of NASD responsibility for
members in all instances, the Commission believes that they are closely
enough connected to satisfy the statutory standard.'' \81\ CAT LLC
believes that this same logic is applicable to the Funding Proposal.
---------------------------------------------------------------------------
\81\ Id. at 34024.
---------------------------------------------------------------------------
v. Alternative Approach: 50-50 Allocation Between Industry Members and
Participant Exchanges
CAT LLC has considered and rejected allocating 50% of CAT costs to
the
[[Page 17106]]
Participants and 50% to Industry Members under the Funding Proposal.
Although a 50-50 allocation between Industry Members and Participants
would provide a mathematically equal split between two groups, it would
not provide an equitable allocation between and among Industry Members
and Participants. Such an allocation raises fairness issues as Industry
Members have far greater financial resources than the Participants, and
the complexity of Industry Members' chosen business models contribute
substantially to the costs of the CAT.
e. Fee Pass-Throughs
i. General
CAT LLC acknowledges that CAT Executing Brokers may choose to pass
the CAT fees through to their clients, who, in turn, may pass their CAT
fees through to their clients, until the fees are imposed on the
account that executed the transaction. Although the Funding Proposal
does not require such fee pass-throughs, CAT LLC continues to support
the concept of the potential pass-through of fees for various reasons.
First, the SEC specifically contemplated and accepted the concept
of cost pass-throughs from Participants to their members when it
adopted Rule 613:
There also would be costs associated with establishing and
operating the central repository that will be jointly owned by the
plan sponsors. The Commission believes it is important to understand
how the plan sponsors plan to allocate such costs among themselves
to help inform the Commission's decision regarding the possible
economic or competitive impact of the NMS plan amongst the SROs. In
addition, although the plan sponsors likely would initially incur
the costs to establish and fund the central repository directly,
they may seek to recover some or all of these costs from their
members. If the plan sponsors seek to recover costs from their
members, the Commission believes that it is important to understand
the plan sponsors' plans to allocate costs between themselves and
their members, to help inform the Commission's decision regarding
the possible economic or competitive impact of the NMS plan.\82\
---------------------------------------------------------------------------
\82\ See generally Securities Exchange Act Rel. No. 67457 (Jul.
18, 2012), 77 FR 45722, 45795 (Aug. 1, 2012) (``Rule 613 Adopting
Release'') (emphasis added).
Second, CAT LLC does not take a position on whether Industry
Members, in turn, should pass CAT fees on to their clients. However, in
adopting the CAT NMS Plan, the Commission specifically contemplated and
accepted that ``broker-dealers may seek to pass on to investors their
costs to build and maintain the CAT, which may include their own costs
and any costs passed on to them by Participants,'' noting that the
``extent to which these costs are passed on to investors depends on the
materiality of the costs and the ease with which investors can
substitute away from any given broker-dealer.'' \83\
---------------------------------------------------------------------------
\83\ CAT NMS Plan Approval Order at 84992.
---------------------------------------------------------------------------
Third, CAT LLC notes that the use of pass-through fees is a
commonly accepted practice that has been approved by the SEC in the
securities markets in some cases. For example, the practice of passing
through fees to broker-dealers and their customers is used in the
context of section 31 fees. Section 31 of the Exchange Act places
obligations only on national securities exchanges, national securities
associations, and the Commission. National securities exchanges and
national securities associations must pay certain fees and assessments
to the Commission. The Commission is required by section 31 of the
Exchange Act to collect such fees and assessments. Section 31 of the
Exchange Act, however, does not address the manner or extent to which
covered SROs may seek to recover the costs of their section 31
obligations from their members. Nor does section 31 of the Exchange Act
address the manner or extent to which members of covered SROs may seek
to pass any such charges on to their customers. However, as the SEC
noted, ``[i]n practice, the covered SROs obtain the funds for these
fees and assessments by assessing charges on their members, and the
members in turn pass these charges to their customers.'' \84\ Likewise,
in adopting the CAT NMS Plan, the Commission explained that under
section 31, ``Participants are required to pay transaction fees and
assessments to the Commission,'' that ``Participants, in turn, may
collect their section 31 fees and assessments from their broker-dealer
members,'' and, that ``broker-dealers may pass on regulatory charges
that support Participant supervision, such as with respect to section
31 fees.'' \85\
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\84\ Securities Exchange Act Rel. No. 49928 (June 28, 2004), 69
FR 41060, 41072 (July 7, 2004). See also SEC, Section 31 Transaction
Fees, Fast Answers, <a href="https://www.sec.gov/fast-answers/answerssec31htm.html">https://www.sec.gov/fast-answers/answerssec31htm.html</a> (noting that the ``[t]he SROs have adopted
rules that require their broker-dealer members to pay a share of
these fees. Broker-dealers, in turn, impose fees on their customers
that provide the funds to pay the fees owed to their SROs.)''
\85\ CAT NMS Plan Approval Order at 84992.
---------------------------------------------------------------------------
Indeed, the language of certain exchange rules regarding section 31
specifically describe the pass-through process related to section 31
fees.\86\ For example, NYSE Arca Rule 2.18.01 states the following:
---------------------------------------------------------------------------
\86\ See, e.g., NYSE American Rule 393.01; and NYSE Rule
440H.03.
Pursuant to Rule 2.18, the Exchange makes an assessment on ETP
Holders that the Exchange uses to pay fees owing to the SEC in
accordance with section 31 of the Exchange Act (``the Rule 2.18
assessment''). The section 31 fees payable by the Exchange to the
SEC is determined based on the aggregate dollar amount of ``covered
sales,'' as defined by SEC Rule 31, effected on the Exchange by or
through any ETP Holder. ETP Holders, in some cases, have passed
along the Rule 2.18 assessment on a trade-by-trade basis to their
---------------------------------------------------------------------------
customers or correspondent firms.''
The pass-through concept also is applied in the context of other
SRO regulatory fees applicable to the SROs' members. For example, ``it
is regular practice among some clearing and trading firms to `pass
through' the TAF to the underlying firm executing the trade. Further,
FINRA understands that the executing firms commonly pass the TAF
directly on to their customers. Typically, TAF fees are reflected on
the confirmation statement received by customers.'' \87\ Similarly, the
pass-through process is used for ORFs as well. ORFs are collected
indirectly from members through their clearing firms by OCC on behalf
of the respective options exchange. As noted in rule filings related to
ORFs, ``[t]he Exchange expects that [members] will pass through the ORF
to their customers in the same manner that firms pass-through to their
customers the fees charged by Self-Regulatory Organizations (`SROs') to
help the SROs meet their obligations under section 31 of the Exchange
Act.'' \88\
---------------------------------------------------------------------------
\87\ Securities Exchange Act Rel. No. 90176 (Oct. 14, 2020), 85
FR 66592, 66603 (Oct. 20, 2020).
\88\ Securities Exchange Act Rel. No. 67596 (Aug. 6, 2012), 77
FR 47902, 47903 (Aug. 10, 2012). See also Securities Exchange Act
Rel. No. 61133 (Dec. 9, 2009), 74 FR 66715, 66716 (Dec. 16, 2009)
(noting that ``[t]he Exchange expects that member firms will pass-
through the ORF to their customers in the same manner that firms
pass-through to their customers the fees charged by SROs to help the
SROs meet their obligation under Section 31 of the Exchange Act'');
Securities Exchange Act Rel. No. 83878 (Aug. 17, 2018), 83 FR 42715,
42717 (Aug. 23, 2018) (noting that ``by collecting the ORF in this
manner Members and non-Members could more easily pass-through the
ORF to their customers'').
---------------------------------------------------------------------------
Fourth, commenters on prior CAT funding proposals have commented in
favor of a model similar to the section 31 fees in which the fee could
be passed through to Industry Members and ultimate customers.\89\ For
example, one commenter noted the benefits of a
[[Page 17107]]
model similar to the section 31 fees, arguing that ``[i]t would also
provide transparency into the fees which seek to recoup costs and a
vehicle to pass-thru fees to the ultimate beneficiary of each trade.''
\90\ Another commenter similarly advocated for a section 31-type model,
noting that ``SROs already have a well-established model for recouping
their section 31 fees by passing them through to their members.'' \91\
---------------------------------------------------------------------------
\89\ See, e.g., Letter from Michael Blaugrund, Chief Operating
Officer, NYSE, to Vanessa Countryman, Secretary, SEC (May 10, 2021)
at 3; Letter from Andrew Stevens, General Counsel, IMC Chicago, LLC,
to Vanessa Countryman, Secretary, SEC (May 20, 2021) at 3.
\90\ Letter from James Toes, President and CEO, and Andre
D'Amore, Chairman of the Board, Securities Trader Association, to
Vanessa Countryman, Secretary, SEC (June 10, 2021) at 4.
\91\ Letter from Joanna Mallers, Secretary, FIA Principal
Traders Group, to Vanessa Countryman, Secretary, SEC (May 12, 2021)
at 4.
---------------------------------------------------------------------------
Finally, the proposed pass-through process for CAT fees, like the
pass-through process for other regulatory fees, recognizes the reality
that regulatory costs incurred to maintain and enhance the quality of
the markets will necessarily increase costs for all market
participants, including the ultimate investor. Even if such pass-
throughs were limited or prohibited, CAT costs would be distributed in
other ways. A member of the Advisory Committee for the CAT and the
former Chief Economist of the Commission, emphasized that ``[b]ecause
the markets for exchange, dealing, and brokerage services are all
highly competitive in the long run, any fees imposed on any of these
groups will ultimately pass through to the retail and institutional
traders who use the markets.'' \92\ This commenter reasoned that:
---------------------------------------------------------------------------
\92\ Letter from Larry Harris, Fred V. Keenan Chair in Finance,
USC Marshal School of Business, to Vanessa Countryman, Secretary,
SEC (June 21, 2022) (``Harris Letter'') at 2.
In highly competitive markets, prices reflect the costs of doing
business in the long run. If those costs rise, they ultimately pass
through to the customers. For example, if the Participants
(primarily exchanges) were required to fund CAT NMS fully, they will
raise their fees (or fail to lower them when costs are falling) to
recover their funding costs. And if brokers' business models require
that they pay exchange fees on behalf of their clients, the brokers
will raise their commission rates to the customers. And if their
business models require zero commissions, brokers will provide fewer
services or charge more for non-transaction services to cover their
increased costs.\93\
---------------------------------------------------------------------------
\93\ Id.
---------------------------------------------------------------------------
ii. Effect of Allocation on Fee Pass-Throughs
CAT LLC determined not to allocate all CAT costs to Participants
under the Funding Proposal. Under the Funding Proposal, CEBBs would be
allocated one-third of the CAT costs, CEBSs would be allocated one-
third of the CAT costs and Participants would be allocated one-third of
the CAT costs. Under the Funding Proposal, Industry Members may
determine to pass their CAT fees on to their clients at their
discretion. Participants also may determine to pass their CAT fees on
to their members, or to pay the CAT fees charged to the Participant
through other means. If Participants were to determine to pass CAT fees
on to their members, they may choose to adopt a CAT-specific fee that
directly passes the CAT fee through to their members, in whole or in
part, or they may choose to increase other fees charged to members
(e.g., transaction fees). Participants would need to file any such fee
proposals with the SEC in accordance with section 19(b) of the Exchange
Act.
If all CAT costs were allocated to Participants, however,
Participants would have the same options for covering the costs of the
CAT fees. They may choose to adopt a CAT-specific fee that directly
passes through the CAT fee through to their members, in whole or in
part, or they may choose to increase other fees charged to members
(e.g., transaction fees). Participants would need to file any such fee
proposals with the SEC in accordance with section 19(b) of the Exchange
Act. For any fee charged to Industry Members, Industry Members may
determine to pass their CAT fees on to their clients at their
discretion, as with the CAT fees under the Funding Proposal.
f. FINRA Fee
Under the Funding Proposal, for each transaction in Eligible
Securities based on CAT Data, the CEBS, the CEBB and the applicable
Participant for the transaction each would pay a CAT Fee calculated by
multiplying the number of executed equivalent shares in the transaction
and the applicable Fee Rate and dividing the product by three. The
applicable Participant for the transaction would be the national
securities exchange on which the transaction was executed, or FINRA for
each transaction executed otherwise than on an exchange. CAT LLC
believes that the proposed CAT fees for FINRA are consistent with the
Exchange Act and the CAT NMS Plan. CAT LLC does not believe that the
assessment of a CAT fee on FINRA in the same manner as other
Participants would result in a burden on competition for FINRA or for
Industry Members engaging in activity otherwise than on an exchange.
The Funding Proposal is designed to be neutral as to the manner of
execution and place of execution. The CAT fees would be the same
regardless of whether the transaction is executed on an exchange or in
the over-the-counter market. All Participants are self-regulatory
organizations that have the same regulatory obligations under the
Exchange Act, regardless of whether they operate as a for-profit or
not-for-profit entity. Their usage of CAT Data, either directly or
indirectly through regulatory services agreements, would be for the
same regulatory purposes in accordance with those obligations. By
treating each Participant the same, the CAT fees would not become a
competitive issue by and among the Participants.
In addition, the size of FINRA's fee is calculated based on the
activity in the over-the-counter market, which is substantial. For
example, the executed equivalent share volume for over-the-counter
trades in Eligible Securities in 2021 was 1,361,484,729,008 out of a
total volume of 3,963,697,612,395 executed equivalent shares for trades
in Eligible Securities.\94\ Accordingly, approximately 34% of the
executed equivalent share volume in Eligible Securities took place in
the over-the-counter market.
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\94\ These figures for executed equivalent share volume for 2021
are set forth in the illustrative example in the notice of the 2022
Funding Proposal. See 2022 Funding Proposal Release at 33246.
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Moreover, FINRA and the exchanges should not be evaluated
differently based upon the potential for any particular Participant to
pass its CAT fees onto its members through regulatory, trading or other
fees. Each Participant will need to determine for itself how it will
obtain the funds to pay for its CAT fees. Because each Participant, not
just FINRA, is using CAT Data to satisfy the same self-regulatory
obligations, each Participant may determine to charge their members
fees to fund their share of the CAT fees, and the Exchange Act
specifically permits self-regulatory organizations to do so, provided
the fee filing requirements of the Exchange Act are satisfied. Indeed,
in approving the CAT NMS Plan, the SEC stated that ``the Exchange Act
specifically permits the Participants to charge members fees to fund
their self-regulatory obligations.'' \95\
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\95\ CAT NMS Plan Approval Order at 84794.
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Furthermore, FINRA and the exchanges should not be evaluated
differently based upon the potential for a particular Participant to
recoup its fees through revenue-generating activity other than fees
imposed on its members. FINRA, just like the exchange Participants, has
revenue sources other than membership fees. For example, FINRA
generates significant revenues via regulatory services agreements with
[[Page 17108]]
the exchanges, among other sources.\96\ These sources, too, may be used
to pay CAT fees, and, if they are used, it would not lead to an
increase in fees for Industry Members, but rather the exchange
Participants. Any review of how the Participants obtain their funds to
pay CAT fees is beyond the scope of the CAT fee filing.
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\96\ See 2021 FINRA Annual Financial Report at 43.
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The issues raised regarding the possibility of passing FINRA's
allocation to Industry Members also fail to recognize the basic fact
that Industry Members themselves face the same issue that they raise
with regard to FINRA. Industry Members may determine to pass their CAT
fees through to their customers, just as they may do with section 31-
related fees and other fees. Accordingly, the two-thirds allocation of
CAT costs to Industry Members may be entirely passed through to
investors, thereby alleviating Industry Members of any burden of
funding the CAT. As one commenter on the 2022 Funding Proposal, a
former member of the Advisory Committee for the CAT and the former
Chief Economist of the Commission, noted, ``[b]ecause the markets for
exchange, dealing, and brokerage services are all highly competitive in
the long run, any fees imposed on any of these groups will ultimately
pass through to the retail and institutional traders who use the
markets.'' \97\
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\97\ Harris Letter at 2.
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Finally, CAT LLC does not believe that FINRA should not be treated
as a market center for CAT funding purposes merely because FINRA is not
treated as a market center for governance purposes under the National
Market System Plan Regarding Consolidated Equity Market Data (``CT
Plan''). Although the CT Plan and the CAT Plan are both national market
system plans, their purpose and implementation are different. The CAT
NMS Plan, as approved by the Commission, explicitly contemplates
charging fees to all Participants, including FINRA. For example,
Section 11.1(b) of the CAT NMS Plan states that ``[s]ubject to Section
11.2, the Operating Committee shall have discretion to establish
funding for the Company, including: (i) establishing fees that the
Participants shall pay.'' \98\ In addition, the purpose of the CAT is
solely for regulatory purposes; it provides a regulatory system to
facilitate the performance of the self-regulatory obligations of all
the Participants, including the exchanges and FINRA. In contrast, the
CT Plan governs the public dissemination of real-time consolidated
equity market data for NMS stocks.
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\98\ See also Sections 11.2 and 11.3 of the CAT NMS Plan.
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g. Impact on Options Versus Equities
CAT LLC believes that the Funding Proposal provides for a fair,
reasonable and equitable treatment of the equities and options markets.
CAT LLC does not believe that the Funding Proposal would burden
inappropriately efficiency, competition or capital formation in how it
treats equities and options. As a preliminary matter, unlike other
previously proposed fee models,\99\ the Funding Proposal does not
allocate costs between the equities and options markets; instead, the
fee attributable to a transaction in an equity or option security
depends on equivalent executed share volume. In addition, the use of
equivalent executed share volume is designed to normalize options and
equities in the calculation of fees, and to recognize and address the
different trading characteristics of different types of securities.
Recognizing that Listed Options trade in contracts rather than shares,
the Funding Proposal would count executed equivalent share volume
differently for Listed Options. Specifically, each executed contract
for a transaction in Listed Options would be counted based on the
multiplier applicable to the specific Listed Option contract in the
relevant transaction (e.g., 100 executed equivalent shares or such
other applicable equivalency).
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\99\ See, e.g., 2018 Fee Proposal Release at 1400.
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h. Sell-Side and Buy-Side
CAT LLC proposes to charge both the buy-side and sell-side of a
transaction in Eligible Securities a CAT fee. The proposal to charge
both the buy-side and the sell-side of a transaction is consistent with
other types of fees charged to both the buyer and the seller that are
common in the industry. As such, CAT LLC believes that the proposal
would comply with the requirements of the Exchange Act. For example,
the ORF, a fee common to the options exchanges, is one example of a
regulatory fee charged to both the buy-side and sell-side of the
transaction. For example, the MIAX fee schedule lists the options
regulatory fee as applying ``per executed contract side.'' \100\
Similarly, under its pricing schedule, Nasdaq PHLX charges an options
regulatory fee ``per contract side.'' \101\ As set forth in its fee
schedule, CBOE EDGX also charges an options regulatory fee to each side
of the contract.\102\ In addition, the industry is familiar with
transaction-based fees charged to both the buyer and the seller by the
exchanges and FINRA.\103\
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\100\ MIAX Options Exchange, Fee Schedule, as of Mar. 3, 2023.
\101\ Nasdaq PHLX Rules, Options 7, Section 6(D).
\102\ Cboe EDGX Fee Schedule, effective Mar. 1, 2023.
\103\ See, e.g., NYSE Price List 2023 for fees charged to both
sides.
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i. Fee Rate Changes Twice per Year for CAT Fees Related to Prospective
CAT Costs
CAT LLC proposes to require the calculation of the Fee Rate for CAT
Fees related to Prospective CAT Costs twice a year. CAT LLC believes
that the proposal to adjust the Fee Rate twice a year, once at the
beginning of the year and once during the year, appropriately balances
the need to coordinate the Fee Rate with potential changes in the costs
and projections with the cost and effort to the industry related to
more frequent fee changes.
CAT LLC believes its proposal is in keeping with views expressed by
the industry in other contexts regarding the appropriate frequency of
regulatory rate changes. For example, in the ORF context, the industry
requested that rate changes be limited to twice per year. SIFMA stated
in a comment letter on one of the ORF fee proposals that ``[r]ates
should only be changed two times per year to reduce operational
complexity and reduce risk.'' \104\ The exchanges with ORF fees noted
that the possibility for fee rate changes only twice per year would
also ``better enable [their members] to properly account for ORF
charges among their customers.'' \105\ In light of these views on the
frequency of the rate changes, exchanges with an ORF have limited the
fee rate changes to twice a year.\106\
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\104\ See, e.g., Letter from Ellen Greene, Managing Director,
SIFMA to Vanessa Countryman, Secretary, SEC, re: SIFMA Comment
Letter on the Options Regulatory Fee Filings by SR-EMERALD-2019-01
(Apr. 10, 2019) at 5, <a href="https://www.sifma.org/wp-content/uploads/2019/04/MIAX-Emerald-ORF.pdf">https://www.sifma.org/wp-content/uploads/2019/04/MIAX-Emerald-ORF.pdf</a>.
\105\ See, e.g., Securities Exchange Act Rel. 93667 (Oct. 15,
2021).
\106\ See, e.g., Cboe BZX Fee Schedule (``The Exchange may only
increase or decrease the ORF semi-annually''); MIAX Fee Schedule
(The Exchange may only increase or decrease the ORF semi-annually);
and BOX Fee Schedule (``The Exchange may only increase or decrease
the ORF semi-annually'').
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j. Plan Amendment Process for Fee Rate Changes
Under the Funding Proposal, once any Fee Rate has been established
by a majority vote of the Operating Committee in accordance with the
Funding Proposal set forth in the CAT NMS Plan,\107\ each Participant
would be required to pay the applicable CAT Fee
[[Page 17109]]
calculated in accordance with the requirements set forth in the CAT NMS
Plan (subject to the requirement for the Industry Member CAT Fee to be
in effect). CAT LLC does not plan to submit an amendment to the CAT NMS
Plan each time that the Fee Rate for the CAT Fee is established or
adjusted because of the length of time and burden required to amend the
CAT NMS Plan for each adjustment to the Fee Rate. Moreover, CAT LLC
believes that it is unnecessary to file a new separate amendment for
the Participant CAT Fees each time a new Fee Rate is approved because
the CAT NMS Plan would set forth in detail the manner in which the CAT
fees are established and the inputs for calculating the specific CAT
Fees would be published on the CAT website and included in the
Participant fee filings under section 19(b) of the Exchange Act for
Industry Member CAT fees. Therefore, the amendments to the Plan for a
fee rate change would be redundant and impractical in terms of timing.
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\107\ Participants would be required to pay the CAT Fee once the
CAT Fee is in effect with regard to Industry Members in accordance
with Section 19(b) of the Exchange Act.
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CAT LLC proposes to amend the CAT NMS Plan to describe in detail
how CAT Fees would be calculated, including the formula for the
calculation and the methods for determining the inputs for the
calculation (i.e., the budget, projected executed equivalent share
volume, executed equivalent shares per transaction). As such, the
Participants would be required to calculate the Fee Rate and the
related CAT Fees using the proposed formula; this process would be
mandatory, including the mid-year Fee Rate change. Moreover, the
budgetary and projection inputs to the calculation would be public,
including in public fee filings pursuant to section 19(b) of the
Exchange. Accordingly, CAT LLC does not believe that a Plan amendment
would be necessary each time a new Fee Rate is calculated in accordance
with the Plan.
The CAT NMS Plan would require each Participant to pay the proposed
CAT Fees determined in accordance with the Funding Proposal. Proposed
Section 11.3(a)(ii)(A) sets forth the requirement for Participants to
pay the CAT fees. It states that ``[e]ach Participant that is a
national securities exchange will be required to pay the CAT Fee for
each transaction in Eligible Securities executed on the exchange in the
prior month based on CAT Data,'' and that ``[e]ach Participant that is
a national securities association will be required to pay the CAT Fee
for each transaction in Eligible Securities executed otherwise than on
an exchange in the prior month based on CAT Data.'' It further states
that ``[t]he CAT Fee 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 Fee Rate reasonably
determined pursuant to paragraph (a)(i) of this Section 11.3.'' In
addition, proposed paragraph (a) of the Participant fee schedule would
state that ``[e]ach Participant shall pay the CAT Fee set forth in
Section 11.3(a) of the CAT NMS Plan to Consolidated Audit Trail, LLC in
the manner prescribed by Consolidated Audit Trail, LLC on a monthly
basis based on the Participant's transactions in the prior month.''
The Participants would be required to follow the requirements set
forth in the CAT NMS Plan for establishing and calculating CAT Fees and
requiring the payment of the CAT Fees as both a regulatory and
contractual matter. Rule 613(h)(1) of Regulation NMS under the Exchange
Act states that ``[e]ach national securities exchange and national
securities association shall comply with the provisions of the national
market system plan approved by the Commission,'' that is, the CAT NMS
Plan. Rule 613(h)(2) of Regulation NMS under the Exchange Act states
that ``[a]ny failure by a national securities exchange or national
securities association to comply with the provisions of the national
market system plan approved by the Commission shall be considered a
violation of this section.'' Similarly, Rule 608(c) of Regulation NMS
under the Exchange Act states that ``[e]ach self-regulatory
organization shall comply with the terms of any effective national
market system plan of which it is a sponsor or a participant.'' Section
3.11 of the CAT NMS Plan reiterates this requirement, stating that
``[e]ach Participant shall comply with . . . the provisions of SEC Rule
613 and of this Agreement, as applicable, to the Participant.'' In
addition, each Participant is a signatory to the CAT NMS Plan as a
member of the limited liability company. Accordingly, a failure to
comply with the requirements of the CAT NMS Plan related to the CAT
fees would be a violation of the regulatory obligation to comply with
the CAT NMS Plan and a breach of contractual requirements of the CAT
NMS Plan.
k. Executed Equivalent Shares for NMS Stocks, Listed Options and OTC
Equity Securities
The Funding Proposal uses the concept of executed equivalent shares
as the metric for calculating CAT fees for transactions in NMS Stocks,
Listed Options and OTC Equity Securities, each of which have different
trading characteristics. Under the Funding Proposal, each executed
share for a transaction in NMS Stocks would be counted as one executed
equivalent share, each executed contract for a transaction in Listed
Options would be counted using the contract multiplier applicable to
the specific Listed Option in the relevant transaction, and each
executed share for a transaction in OTC Equity Securities would be
counted as 0.01 executed equivalent shares. CAT LLC believes that the
proposed counting methods for each category of security are
appropriate, as discussed in detail above in Section A.3.b.ii of this
filing.
l. Cost Transparency
i. Cost Transparency and Level of Detail of CAT Costs
CAT LLC provides substantial cost transparency for Past CAT Costs
and Prospective CAT Costs, including transparency above and beyond what
is required under the CAT NMS Plan, and more than other national market
system plans. Such transparency would include cost descriptions in the
fee filings made pursuant to section 19(b) of the Exchange Act and Rule
19b-4(f)(2) thereunder, as well as the public availability of CAT
financial and budget information.
CAT LLC proposes to require substantial transparency for CAT costs
in the fee filings to be made pursuant to section 19(b) of the Exchange
Act. For example, Proposed Section 11.3(a)(iii)(B) of the CAT NMS Plan
would require such filings for CAT Fees to include, among other things,
the budget for the upcoming year (or remainder of the year, as
applicable), including a brief description of each line item in the
budget, including (1) technology line items of cloud hosting services,
operating fees, CAIS operating fees, change request fees and
capitalized developed technology costs, (2) legal, (3) consulting, (4)
insurance, (5) professional and administration, and (6) public
relations costs, a reserve and/or such other categories as reasonably
determined by the Operating Committee to be included in the budget and
the reason for changes in each such line item from the prior CAT Fee
filing; and a discussion of how the budget is reconciled to the
collected fees. Similarly, Proposed Section 11.3(b)(iii)(B)(II) of the
CAT NMS Plan would require such filings for Historical CAT Assessments
to include, among other things, a brief description of the amount and
type of Historical CAT Costs, including (1) technology line items of
cloud hosting services, operating fees, CAIS operating fees,
[[Page 17110]]
change request fees and capitalized developed technology costs, (2)
legal, (3) consulting, (4) insurance, (5) professional and
administration, and (6) public relations costs.
CAT LLC provides substantial additional financial information
regarding the operation of the CAT as required by the CAT NMS Plan. For
example, CAT LLC currently makes detailed financial information about
the CAT publicly available. Section 9.2(a) of the CAT NMS Plan requires
CAT LLC to maintain a system of accounting established and administered
in accordance with GAAP and requires ``all financial statements or
information that may be supplied to the Participants shall be prepared
in accordance with GAAP (except that unaudited statements shall be
subject to year-end adjustments and need not include footnotes).''
Section 9.2(a) of the CAT NMS Plan also requires the Company to prepare
and provide to each Participant ``as soon as practicable after the end
of each Fiscal Year, a balance sheet, income statement, statement of
cash flows and statement of changes in equity for, or as of the end of,
such year, audited by an independent public accounting firm.'' The CAT
NMS Plan requires that this audited balance sheet, income statement,
statement of cash flows and statement of changes in equity be made
publicly available. Among other things, these financial statements
provide operating expenses, including technology, legal, consulting,
insurance, professional and administration and public relations costs.
CAT LLC also maintains a dedicated web page on the CAT NMS Plan website
that consolidates its annual financial statements in a public and
readily accessible place.\108\ The Company's annual financial
statements from inception in 2017 through 2021 are currently available
on the CAT website.
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[…truncated; see source link]Indexed from Federal Register on March 21, 2023.
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.