Notice2024-20323
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Adopt FINRA Rule 6897(b) (CAT Cost Recovery Fees) Related to Reasonably Budgeted Costs of the National Market System Plan Governing the Consolidated Audit Trail for the Period From July 16, 2024 Through December 31, 2024
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
September 10, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 175 (Tuesday, September 10, 2024)</title>
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[Federal Register Volume 89, Number 175 (Tuesday, September 10, 2024)]
[Notices]
[Pages 73457-73463]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-20323]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100920; File No. SR-FINRA-2024-012]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Adopt FINRA Rule 6897(b) (CAT Cost Recovery
Fees) Related to Reasonably Budgeted Costs of the National Market
System Plan Governing the Consolidated Audit Trail for the Period From
July 16, 2024 Through December 31, 2024
September 4, 2024.
Pursuant to Section 19(b)(1) under the Securities Exchange Act of
1934 (the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby
given that on August 26, 2024, the Financial Industry Regulatory
Authority, Inc. (``FINRA'') filed with the Securities and Exchange
Commission (``SEC'' or ``Commission'') the proposed rule change as
described in Items I and II below, which Items have been prepared by
FINRA. FINRA has designated the proposed rule change as ``establishing
or changing a due, fee or other charge'' under Section 19(b)(3)(A)(ii)
of the Act \3\ and Rule 19b-4(f)(2) thereunder,\4\ which renders the
proposal effective upon receipt of this filing by the Commission. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(ii).
\4\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to adopt FINRA Rule 6897(b) (CAT Cost Recovery
Fees) to implement a Consolidated Audit Trail (``CAT'') cost recovery
fee designed to permit FINRA substantially to recoup its designated
portion of the reasonably budgeted CAT costs of the National Market
System Plan Governing the Consolidated Audit Trail (the ``CAT NMS
Plan'' or ``Plan'') for the period of July 16, 2024 through December
31, 2024.\5\
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\5\ Pursuant to Section 11.3(a) of the CAT NMS Plan, FINRA filed
a separate proposed rule change to establish fees assessed to
Industry Members, payable to Consolidated Audit Trail, LLC, related
to reasonably budgeted CAT costs for the period of July 16, 2024
through December 31, 2024. See File No. SR-FINRA-2024-011. Unless
otherwise specified, capitalized terms used in this rule filing are
defined as set forth in the CAT NMS Plan and FINRA Rule 6800 Series
(Consolidated Audit Trail Compliance Rule).
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The text of the proposed rule change is available on FINRA's
website at <a href="http://www.finra.org">http://www.finra.org</a>, at the principal office of FINRA and
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
On July 11, 2012, the Commission adopted Rule 613 of Regulation
NMS, which required the self-regulatory organizations to submit a
national market system (``NMS'') plan to create, implement and maintain
a consolidated audit trail that would capture customer and order event
information for orders in NMS securities across all markets, from the
time of order inception through routing, cancellation, modification, or
execution.\6\ On November 15, 2016, the Commission approved the CAT NMS
Plan.\7\ Under the CAT NMS Plan, the Operating Committee has the
discretion to establish funding for Consolidated Audit Trail, LLC
(``CAT LLC'') to operate the CAT, including establishing fees for
Industry Members to be assessed by CAT LLC that would be implemented on
behalf of CAT LLC by the Participants.\8\ The Operating Committee
adopted a revised funding model to fund the CAT (``CAT Funding Model'')
and, on September 6, 2023, the Commission approved the CAT Funding
Model, after concluding that the model was reasonable and that it
satisfied the requirements of Section 11A of the Exchange Act and Rule
608 thereunder.\9\
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\6\ See Securities Exchange Act Release No. 67457 (July 18,
2012), 77 FR 45722 (August 1, 2012).
\7\ See Securities Exchange Act Release No. 79318 (November 15,
2016), 81 FR 84696 (November 23, 2016) (``CAT NMS Plan Approval
Order'').
\8\ See Section 11.1(b) of the CAT NMS Plan.
\9\ See Securities Exchange Act Release No. 98290 (September 6,
2023), 88 FR 62628 (September 12, 2023) (``CAT Funding Model
Approval Order'').
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The CAT Funding Model provides a framework for the recovery of the
costs to create, develop, and maintain the CAT, including providing a
method for allocating costs to fund the CAT among Participants and
Industry Members. The CAT Funding Model establishes two categories of
fees: (1) CAT fees assessed by CAT LLC and payable by certain Industry
Members to recover a portion of historical CAT costs previously paid by
the Participants; \10\ and (2) CAT fees assessed by CAT LLC and payable
by Participants and Industry Members to fund Prospective CAT Costs,
i.e., costs not previously paid by the Participants.\11\
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\10\ See Section 11.3(b) of the CAT NMS Plan.
\11\ See Section 11.3(a) of the CAT NMS Plan.
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With respect to CAT fees implemented to fund Prospective CAT Costs,
to date, the CAT Operating Committee has established CAT Fee 2024-1 to
implement fees payable by Industry Members regarding reasonably
budgeted Prospective CAT Costs for the period July 16, 2024 through
December 31, 2024 (``Budgeted CAT Costs 2024-1'').\12\ Consistent with
the Plan, the Operating Committee has also established fees payable to
CAT LLC by the Participants to collect the Participants' designated
portion of Budgeted CAT Costs 2024-1.\13\
[[Page 73458]]
Participants would only be required to pay such fees once CAT Fee 2024-
1 is in effect with regard to Industry Members in accordance with
Section 19(b) of the Exchange Act.\14\
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\12\ As detailed in File No. SR-FINRA-2024-011, Budgeted CAT
Costs 2024-1 would be $138,476,925. Industry Members would be
collectively responsible for two-thirds of those costs or
$92,317,950, and Participants would be collectively responsible for
one-third or $46,158,975. See also Sections 11.3(a)(ii)(A) and
11.3(a)(iii)(A) of the CAT NMS Plan.
\13\ See Section 11.3(a)(ii) and Appendix B of the CAT NMS Plan;
see also CAT Funding Model Approval Order, 88 FR 62628, 62660 (``The
CAT Fees charged to Participants would be implemented through an
approval of the CAT Fees by the Operating Committee and not through
a plan amendment submitted each time the Fee Rate changes, while CAT
Fees charged to Industry Members may only become effective in
accordance with the requirements of Section 19(b) of the Exchange
Act.'').
\14\ See Section 11.3(a)(ii)(B) of the CAT NMS Plan; see also
CAT Funding Model Approval Order, 88 FR 62628, 62660 (``The
Commission also believes it is reasonable that proposed Section
11.3(a)(ii)(B) provides that the Participants would be required to
pay CAT Fees only when Industry Members are required to pay CAT
Fees.'').
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In light of the filing of File No. SR-FINRA-2024-011, which
implements CAT Fee 2024-1 with regard to Industry Members, FINRA is
filing the instant proposed rule change to establish a fee that would
allow FINRA substantially to recover the monthly fees it is required to
pay to CAT LLC towards Budgeted CAT Costs 2024-1 (``Prospective CAT
Cost Recovery Fee 2024-1''). In the Approval Order, the Commission
acknowledged that ``the Exchange Act expressly contemplates the ability
of the Participants to recoup their costs to fulfill their statutory
obligations under the Exchange Act.'' \15\ The Commission also noted
FINRA's statement ``that it would file a rule change to increase its
member fees with the filing of any proposed rule change to effectuate
the Funding Model.'' \16\ Given the approval of the CAT Funding Model
and FINRA's proposed rule change to establish CAT Fee 2024-1 to
effectuate the CAT Funding Model,\17\ FINRA is submitting this filing
to implement Prospective CAT Cost Recovery Fee 2024-1.\18\
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\15\ CAT Funding Model Approval Order, 88 FR 62628, 62636-37.
\16\ FINRA has consistently made clear its intention to file a
rule change to implement member CAT fees simultaneous with the
filing of any proposed rule change to effectuate the CAT Funding
Model. See Letter from Marcia E. Asquith, Corporate Secretary, EVP,
Board and External Relations, FINRA, to Vanessa Countryman,
Secretary, Commission, dated April 11, 2023 (``FINRA April 2023
Letter'') at 7 (``If the Funding Model is approved by the
Commission, FINRA intends to file a rule change to increase member
fees simultaneous with the filing of any proposed rule change to
effectuate the Funding Model.''); see also Letter from Marcia E.
Asquith, Corporate Secretary, EVP, Board and External Relations,
FINRA, to Vanessa Countryman, Secretary, Commission, dated June 22,
2022 (``FINRA June 2022 Letter'') at 6 (``[G]iven FINRA's unique
nature, FINRA necessarily must seek recovery in turn for the costs
it is allocated.''). FINRA also requested that, if the Commission
were to approve the CAT Funding Model, it acknowledge ``FINRA's need
and ability to cover CAT costs that are not recovered through
contractual arrangements through member fee increases, so as not to
jeopardize FINRA's ability to carry out its critical regulatory
mission.'' See CAT Funding Model Approval Order, 88 FR 62628, 62645.
\17\ See File No. SR-FINRA-2024-011.
\18\ The CAT NMS Plan states that ``[n]o Participant will make a
filing with the SEC pursuant to Section 19(b) of the Exchange Act
regarding any CAT Fee related to Prospective CAT Costs until the
Financial Accountability Milestone related to Period 4 described in
Section 11.6 has been satisfied.'' See Section 11.3(a)(iii)(C) of
the CAT NMS Plan. As discussed in File No. SR-FINRA-2024-011, the
substantive requirements of the Financial Accountability Milestones
related to Period 4 have been satisfied, as the CAT has completed
the requirements for the Full Implementation of CAT NMS Plan
Requirements. Under Section 1.1 of the CAT NMS Plan, this Financial
Accountability Milestone is considered complete as of the date
identified in the Participants' Quarterly Progress Reports. As
indicated by the Participants' Quarterly Progress Report for the
second and third quarter of 2024, Full Implementation of CAT NMS
Plan Requirements was completed on July 15, 2024. See CAT Q2 & Q3
2024 Quarterly Progress Report (July 29, 2024), <a href="https://www.catnmsplan.com/sites/default/files/2024-07/CAT_Q2-and-Q3-2024-QPR.pdf">https://www.catnmsplan.com/sites/default/files/2024-07/CAT_Q2-and-Q3-2024-QPR.pdf</a>.
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FINRA's Designated Portion of Budgeted CAT Costs 2024-1
As discussed in File No. SR-FINRA-2024-011, the Operating Committee
has established CAT Fee 2024-1, payable to CAT LLC by Industry Members,
to contribute toward the recovery of two-thirds of the $138,476,925 in
Budgeted CAT Costs 2024-1 over the July 16, 2024 through December 31,
2024 period.\19\ The Operating Committee further determined that the
fee rate for CAT Fee 2024-1 is $0.0001043598251997246 per executed
equivalent share,\20\ and, under the CAT Funding Model, each of the CAT
Executing Broker for the Buyer (``CEBB''), the CAT Executing Broker for
the Seller (``CEBS''), and the relevant Participant for a given
transaction in an Eligible Security would be responsible for one-third
of that rate, or $0.000035 per executed equivalent share.\21\
Consequently, CEBBs collectively, CEBSs collectively, and the
Participants collectively will each be responsible for $46,158,975,
which is one-third of Budged CAT Costs 2024-1 during the September 1,
2024 through December 31, 2024 CAT Fee 2024-1 period.\22\
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\19\ Consistent with Section 11.3(a)(iii)(B) of the CAT NMS
Plan, Budgeted CAT Costs 2024-1 include reasonably budgeted (1)
technology line items (including cloud hosting services, operating
fees, CAIS operating fees, change request fees, and capitalized
developed technology costs), (2) legal fees, (3) consulting fees,
(4) insurance, (5) professional and administration expenses, (6)
public relations costs, and (7) a reserve. A detailed description
(including the amounts) of all such costs budgeted during the July
16, 2024 through December 31, 2024 period is provided in File No.
SR-FINRA-2024-011.
\20\ In approving the CAT Funding Model, the Commission
concluded that ``the use of executed equivalent share volume as the
basis of the proposed cost allocation methodology is reasonable and
consistent with the approach taken by the funding principles of the
CAT NMS Plan.'' See CAT Funding Model Approval Order, 88 FR 62628,
62640. Under the CAT NMS Plan, executed equivalent shares in a
transaction in Eligible Securities are reasonably counted as
follows: (1) each executed share for a transaction in NMS Stocks
will be counted as one executed equivalent share; (2) each executed
contract for a transaction in Listed Options will be counted based
on the multiplier applicable to the specific Listed Options (i.e.,
100 executed equivalent shares or such other applicable multiplier);
and (3) each executed share for a transaction in OTC Equity
Securities shall be counted as 0.01 executed equivalent share. See
Section 11.3(a)(i)(B) and 11.3(b)(i)(B) of the CAT NMS Plan.
\21\ Dividing $0.0001043598251997246 by three and rounding to
six decimal places equals $0.000035.
\22\ See File No. SR-FINRA-2024-011.
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For the twelve months from June 1, 2023 through May 31, 2024, the
average monthly executed equivalent share volume in Eligible Securities
where FINRA was the relevant Participant (i.e., off-exchange
transactions) was approximately 104.7 billion shares. Assuming similar
monthly executed equivalent share volume for off-exchange transactions
in Eligible Securities for the period of September 1, 2024 through
December 31, 2024, FINRA would be responsible for paying approximately
$3.7 million per month and approximately $14.7 million in total to CAT
LLC toward the Participants' $46,158,975 designated portion of Budgeted
CAT Costs 2024-1 (or approximately 31.8% of the total).
FINRA's recovery of its designated portion of Budgeted CAT Costs
2024-1 is reasonable and consistent with the Exchange Act. As discussed
herein and in File No. SR-FINRA-2024-011, Budgeted CAT Costs 2024-1 are
reasonable, appropriate and necessary for the creation, implementation,
and maintenance of the CAT. And the portion of Budgeted CAT Costs 2024-
1 designated to FINRA has been established under the SEC-approved CAT
Funding Model. As stated by FINRA and permitted under the Exchange Act,
FINRA will seek to recover its designated portion of the Participants'
share of CAT costs to ensure that FINRA can fulfill its regulatory
mandate and responsibilities.\23\
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\23\ See supra note 16.
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Prospective CAT Cost Recovery Fee 2024-1
FINRA is proposing to adopt Rule 6897(b) (CAT Cost Recovery Fees)
to implement Prospective CAT Cost Recovery Fee 2024-1 to allow FINRA
substantially to recover its designated portion of Budgeted CAT Costs
2024-1.\24\ FINRA intends that the fee
[[Page 73459]]
framework for the Prospective CAT Cost Recovery Fee 2024-1 would
generally correspond to the framework put in place by CAT LLC with
respect to CAT Fee 2024-1, as provided for in File No. SR-FINRA-2024-
011, as further discussed below. FINRA also intends that the timing and
commencement of payment for Prospective CAT Cost Recovery Fee 2024-1
would correspond with that established by CAT LLC with respect to CAT
Fee 2024-1, as provided for in File No. SR-FINRA-2024-011. Thus, as
with CAT Fee 2024-1, FINRA proposes that each member CAT Executing
Broker shall receive its first invoice for Prospective CAT Cost
Recovery Fee 2024-1 in October 2024, setting forth fees calculated
based on September 2024 transactions in Eligible Securities executed
otherwise than on an exchange, as reflected in CAT Data.
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\24\ In approving the CAT Funding Model, the Commission noted
that it ``believe[d] that FINRA's allocation of CAT fees likely will
be passed through to Industry Members.'' See CAT Funding Model
Approval Order, 88 FR 62628, 62684.
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The following fields of the Participant Technical Specifications
indicate the CAT Executing Brokers for transactions executed otherwise
than on an exchange.\25\
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\25\ As per Section 1.1 of the Plan, for a transaction in an
Eligible Security executed otherwise than on an exchange and
required to be reported to an equity trade reporting facility of a
registered national securities association, i.e., one of FINRA's
Trade Reporting Facilities (each a ``TRF''), OTC Reporting Facility
(``ORF'') or Alternative Display Facility (``ADF''), the CEBB and
CEBS are the Industry Members identified as the executing broker and
the contra-side executing broker in the TRF/ORF/ADF transaction data
event in CAT Data. In those circumstances where there is a non-
Industry Member identified as the contra-side executing broker in
the TRF/ORF/ADF transaction data event or no contra-side executing
broker is identified in the TRF/ORF/ADF transaction data event, then
the Industry Member identified as the executing broker in the TRF/
ORF/ADF transaction data event would be treated as, and be required
to pay the fee assessed to, both the CEBB and CEBS.
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TRF/ORF/ADF Transaction Data Event <SUP>26</SUP>
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\26\ See Table 61, Section 6.1 (TRF/ORF/ADF Transaction Data
Event) of the CAT Reporting Technical Specifications for Plan
Participants.
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No. Field name Data type Description Include key
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26.................... reportingExecutingMpid............ Member Alias........ MPID of the R
executing party.
28.................... contraExecutingMpid............... Member Alias........ MPID of the C
contra-side
executing party.
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As discussed in File No. SR-FINRA-2024-011, consistent with the CAT
Funding Model, in implementing CAT Fee 2024-1, the Operating Committee
has determined that each of the CEBB, CEBS and relevant Participant for
a given transaction in an Eligible Security would be assessed a fee of
$0.000035 per executed equivalent share.\27\ In line with this
approach, FINRA is proposing, for Prospective CAT Cost Recovery Fee
2024-1, to split the fee rate that is assessed to FINRA under CAT Fee
2024-1 between each of the CEBB and CEBS for transactions where FINRA
is the relevant Participant, subject to truncation at six decimal
places. To maintain consistency with CAT LLC's use of six decimal
places,\28\ FINRA proposes to use six decimal places for Prospective
CAT Cost Recovery Fee 2024-1.\29\ FINRA proposes to limit Prospective
CAT Cost Recovery Fee 2024-1 to six decimal places by truncating the
halved CAT Fee 2024-1 fee rate such that each member CEBB and CEBS
would pay a fee of $0.000017 per executed equivalent share for each
transaction in Eligible Securities executed otherwise than on an
exchange.\30\
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\27\ As noted in File No. SR-FINRA-2024-011, CAT LLC determined
to use six decimal places for the CAT Fee 2024-1 fee rate (i.e.,
$0.000035 per executed equivalent share) to balance the accuracy of
the calculation with the potential systems and other
impracticalities of using additional decimal places in the
calculation.
\28\ See supra note 27.
\29\ FINRA believes that it is appropriate at this time to use
six decimal places to maintain consistency with the approach
determined by CAT LLC. FINRA notes that the billing system used for
both invoices in connection with CAT Fee 2024-1 and the Prospective
CAT Cost Recovery Fee 2024-1 is configured for up to six decimal
places, making extending the fee rate for Prospective CAT Cost
Recovery Fee 2024-1 to seven decimal places impracticable in the
near term.
\30\ Dividing $0.000035 by two equals $0.0000175.
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By truncating half of the CAT Fee 2024-1 fee rate in this manner,
FINRA would recover less per executed equivalent share under
Prospective CAT Cost Recovery Fee 2024-1 ($0.000034) than it will be
invoiced each month for CAT Fee 2024-1 ($0.000035), resulting in a
total deficit of approximately $400,000 during the September 1, 2024
through December 31, 2024 period, which FINRA is not seeking to
recover.\31\
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\31\ Given that the average monthly executed equivalent share
volume in Eligible Securities where FINRA was the relevant
Participant was approximately 104.7 billion shares for the 12 months
from June 1, 2023 through May 31, 2024, and assuming similar volumes
for the period from September 1, 2024 through December 31, 2024,
FINRA would be invoiced approximately $14.7 million for CAT Fee
2024-1 but would only bill approximately $14.3 million to member
CEBBs and CEBSs via Prospective CAT Cost Recovery Fee 2024-1 during
the same period.
However, FINRA intends to avoid a similar shortfall from
occurring with respect to future fee recovery past December 2024
(e.g., by rounding up the last digit instead of truncating, or
another means of addressing this issue). The fee rate resulting from
any such determinations would be subject to a proposed rule change
filed pursuant to Section 19(b) of the Exchange Act and Rule 19b-4
thereunder.
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To implement Prospective CAT Cost Recovery Fee 2024-1, FINRA
proposes to adopt Rule 6897(b)(1)(C)(i) to provide that each member CAT
Executing Broker shall receive its first invoice from FINRA in October
2024, setting forth the Prospective CAT Cost Recovery Fee 2024-1 fees
calculated based on transactions in September 2024, and shall receive
an invoice for Prospective CAT Cost Recovery Fee 2024-1 from FINRA for
each month thereafter until January 2025. As provided in proposed Rule
6897(b)(1)(C)(ii), FINRA shall provide each member CAT Executing Broker
with an invoice for Prospective CAT Cost Recovery Fee 2024-1 on a
monthly basis (which shall be separate from the invoice provide by CAT
LLC with respect to CAT Fee 2024-1). Each monthly invoice provided by
FINRA shall set forth a fee for each transaction in Eligible Securities
executed by the CAT Executing Broker in its capacity as the CEBB and/or
the CEBS (as applicable) otherwise than on an exchange from the prior
month as set forth in CAT Data. The fee assessed to each CEBB and CEBS
for each such transaction will be calculated by multiplying the number
of executed equivalent shares in the transaction by the Prospective CAT
Cost Recovery Fee 2024-1 fee rate of $0.000017 per executed equivalent
share.
Further, as provided in proposed Rule 6897(b)(1)(C)(iii),
notwithstanding the last invoice date of January 2025 for Prospective
CAT Cost Recovery Fee 2024-1 in Rule 6897(b)(1)(C)(i), Prospective CAT
Cost Recovery Fee 2024-1 shall continue in effect after January 2025,
with each CAT Executing Broker receiving an invoice for Prospective CAT
Cost Recovery Fee 2024-1 each month, until a new subsequent Prospective
CAT Cost Recovery Fee is in effect with regard to members in accordance
with Section
[[Page 73460]]
19(b) of the Exchange Act.\32\ Proposed paragraph (b)(1)(C)(iii) of
Rule 6897 also states that FINRA will provide notice when Prospective
CAT Cost Recovery Fee 2024-1 will no longer be in effect. Proposed Rule
6897(b)(1)(C)(iv) provides that each member CAT Executing Broker shall
be required to pay each invoice for Prospective CAT Cost Recovery Fee
2024-1 as set forth in Rule 6897(b)(2).
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\32\ As noted in File No. SR-FINRA-2024-011, CAT Fee 2024-1
would continue in effect after January 2025 until a new subsequent
CAT Fee to collect the Industry Members' designated portion of
Budgeted CAT Costs is in effect, in accordance with Section 19(b) of
the Exchange Act. While CAT Fee 2024-1 remains in effect for
Industry Members, the Participants would continue to be assessed a
monthly fee based on that same fee rate, i.e., $0.000035 per
executed equivalent share. Likewise, unless amended, Prospective CAT
Cost Recovery Fee 2024-1 also would remain in effect to allow FINRA
to continue substantially to recoup funds in connection with its
monthly payment obligations under CAT Fee 2024-1, until a new CAT
Fee is established by the Operating Committee.
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FINRA also proposes to adopt Rule 6897(b)(2) (Timing and Manner of
Payments), which provides that each member CAT Executing Brokers shall
pay the CAT Cost Recovery Fees as required pursuant to Rule 6897(b)(1)
each month to FINRA in the manner prescribed by FINRA. In addition,
proposed paragraph (b)(2)(B) of Rule 6897 provides that each CAT
Executing Broker shall pay the CAT Cost Recovery Fees required pursuant
to Rule 6897(b)(1) within 30 days after receipt of an invoice or other
notice indicating payment is due (unless a longer payment period is
otherwise indicated).
Beginning with the initial invoice for Prospective CAT Cost
Recovery Fee 2024-1 in October 2024, FINRA will make available to each
member CAT Executing Broker a copy of the relevant details for fee
liable transactions executed each month otherwise than on an exchange.
Similar to the information that would be provided by CAT LLC to CAT
Executing Brokers in assessing the off-exchange portion of CAT Fee
2024-1 each month,\33\ such information would provide member CAT
Executing Brokers with the ability to understand the details regarding
the calculation of their Prospective CAT Cost Recovery Fee 2024-1 fees.
In addition, to provide transparency to the industry, FINRA will make
publicly available on its website: (i) the total amount invoiced each
month that Prospective CAT Cost Recovery Fee 2024-1 is in effect, (ii)
the total amount invoiced for Prospective CAT Cost Recovery Fee 2024-1
for all months since its commencement, (iii) the total amount that
FINRA is invoiced each month by CAT LLC in connection with CAT Fee
2024-1, (iv) the total amount that FINRA has been invoiced for CAT Fee
2024-1 for all months since its commencement, and (v) the variance,
both on a monthly and cumulative basis, between the amount invoiced by
FINRA under Prospective CAT Cost Recovery 2024-1 and the amount FINRA
is invoiced under CAT Fee 2024-1.
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\33\ See File No. SR-FINRA-2024-011.
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FINRA has filed the proposed rule change for immediate
effectiveness. The effective date and the implementation date will be
the date of filing.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\34\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest; and must not be designed to permit unfair
discrimination between customers, issuers, brokers or dealers. FINRA
also believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(5) of the Act,\35\ which requires, among
other things, that FINRA rules provide for the equitable allocation of
reasonable dues, fees and other charges among members and issuers and
other persons using any facility or system that FINRA operates or
controls. FINRA further believes that the proposed rule change is
consistent with Section 15A(b)(9) of the Act, which requires that FINRA
rules not impose any burden on competition that is not necessary or
appropriate in furtherance of the purpose of the Exchange Act.\36\
Section 15A(b)(2) of the Act also requires that FINRA be ``so organized
and [have] the capacity to be able to carry out the purposes'' of the
Act and ``to comply, and . . . to enforce compliance by its members,
and persons associated with its members,'' with the provisions of the
Exchange Act.\37\
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\34\ 15 U.S.C. 78o-3(b)(6).
\35\ 15 U.S.C. 78o-3(b)(5).
\36\ 15 U.S.C. 78o-3(b)(9).
\37\ See 15 U.S.C. 78o-3(b)(2).
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FINRA believes that this proposed rule change is consistent with
the Act because it is designed to assist FINRA in meeting regulatory
obligations pursuant to the Plan. In approving the Plan, the SEC noted
that the Plan ``is necessary and appropriate in the public interest,
for the protection of investors and the maintenance of fair and orderly
markets, to remove impediments to, and perfect the mechanism of a
national market system, or is otherwise in furtherance of the purposes
of the Act.'' \38\ To the extent that this proposed rule change
implements a requirement that facilitates FINRA's achievement of its
regulatory obligations under the Plan and applies specific requirements
to FINRA members in this regard, FINRA believes that this proposed rule
change furthers the objectives of the Plan, as identified by the SEC,
and is therefore consistent with the Act.
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\38\ CAT NMS Plan Approval Order, 81 FR 84696, 84697.
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As discussed in detail in File No. SR-FINRA-2024-011, FINRA
believes that the proposed fees paid by the CEBBs and CEBSs in
connection with CAT Fee 2024-1 are reasonable, equitably allocated and
not unfairly discriminatory. Prospective CAT Cost Recovery Fee 2024-1
would similarly allow FINRA substantially to recover costs related to
CAT Fee 2024-1 from member CAT Executing Brokers in a fair and
reasonable manner, as contemplated by the Exchange Act and consistent
with the CAT Funding Model Approval Order.
Proposed Prospective CAT Cost Recovery Fee 2024-1 would be charged
to member CAT Executing Brokers in support of the maintenance of a
consolidated audit trail for regulatory purposes. The proposed fees,
therefore, are consistent with the Commission's view that regulatory
fees be used for regulatory purposes. The proposed fees would not cover
FINRA services unrelated to the CAT and would not result in any surplus
to FINRA.\39\ Accordingly, FINRA believes that the proposed fees are
reasonable, equitable and not unfairly discriminatory.
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\39\ See supra note 31 and accompanying text.
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The reasonableness of Prospective CAT Cost Recovery Fee 2024-1 and
its consistency with the Exchange Act likewise is grounded in the facts
described above and detailed in File No. SR-FINRA-2024-011.
Specifically, the reasonably budgeted expenses that compose the portion
of Budgeted CAT Costs 2024-1 sought substantially to be recovered
through Prospective CAT Cost Recovery Fee 2024-1 were recognized by the
SEC as appropriate for recovery pursuant to the formula approved in the
CAT Funding Model (i.e., technology, legal, consulting, insurance,
professional administration, and public relations costs). FINRA has
determined that these costs, which are described in detail in File No.
SR-FINRA-2024-011, are reasonable and it is appropriate that FINRA
substantially recover its designated portion of such costs through
Prospective CAT Cost Recovery Fee
[[Page 73461]]
2024-1. FINRA also has determined that Prospective CAT Cost Recovery
Fee 2024-1 provides for the equitable allocation of fees among FINRA
members and is not unfairly discriminatory, as discussed herein.
Prospective CAT Cost Recovery Fee 2024-1 is designed to allow FINRA
to substantially recover its designated portion of Budgeted CAT Costs
2024-1, consistent with the Exchange Act and the CAT Funding Model
Approval Order.\40\ In approving the CAT Funding Model, the Commission
noted FINRA's request that it acknowledge ``FINRA's need and ability to
cover CAT costs that are not recovered through contractual arrangements
through member fee increases, so as not to jeopardize FINRA's ability
to carry out its critical regulatory mission.'' \41\ The Commission
also recognized that ``the Exchange Act expressly contemplates the
ability of the Participants to recoup their costs to fulfill their
statutory obligations under the Exchange Act.'' \42\ The Commission
further noted FINRA's statement ``that it would file a rule change to
increase its member fees with the filing of any proposed rule change to
effectuate the Funding Model.'' \43\ The instant proposed rule change
to adopt Prospective CAT Cost Recovery Fee 2024-1 represents such a fee
with respect to Budgeted CAT Costs 2024-1.
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\40\ See supra note 16 and note 31 and accompanying text.
\41\ See CAT Funding Model Approval Order, 88 FR 62628, 62645.
\42\ See CAT Funding Model Approval Order, 88 FR 62628, 62636.
\43\ See supra note 41.
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Without a mechanism to recover its CAT costs, FINRA, which is
unique among the Participants as a not-for-profit, national securities
association, would not be able to effectively sustain its regulatory
mission.\44\ Thus, consistent with the cost allocation framework put in
place by the SEC-approved CAT Funding Model, whereby CEBBs and CEBSs
share equal responsibility for the costs assessed directly to Industry
Members based on their transactions in Eligible Securities, FINRA is
seeking substantially to recoup its designated portion of Budgeted CAT
Costs 2024-1 in a like manner that is fair, reasonable, and equitably
allocated among FINRA's member firms in their capacity as CAT Executing
Brokers.
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\44\ See supra note 16.
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Prospective CAT Cost Recovery Fee 2024-1 is designed substantially
to recover FINRA's designated portion of budgeted CAT costs to be
incurred by CAT LLC associated with the development, implementation,
and operation of the CAT system under the CAT NMS Plan. Thus,
Prospective CAT Cost Recovery Fee 2024-1 also generally is designed to
support FINRA's efforts to align its operating expenses with its
operating revenues, target break-even cash flows, and continue to
responsibly manage expenses driven by mandatory initiatives, like the
CAT NMS Plan, in a manner consistent with FINRA's public Financial
Guiding Principles.\45\
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\45\ See FINRA's Financial Guiding Principles, <a href="https://www.finra.org/sites/default/files/finra_financial_guiding_principles_0.pdf">https://www.finra.org/sites/default/files/finra_financial_guiding_principles_0.pdf</a>. See also Securities
Exchange Act Release No. 90176 (October 14, 2020), 85 FR 66592,
66602-03 (October 20, 2020) (Notice of Filing and Immediate
Effectiveness of File No. SR-FINRA-2020-032).
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FINRA's approach in determining Prospective CAT Cost Recovery Fee
2024-1, which generally is consistent with the approach provided for
under the SEC-approved CAT Funding Model, is also reasonable and
consistent with the Exchange Act. Specifically, similar to the CAT cost
assessment methodology approved by the Commission, FINRA proposes to
allocate equally among member CEBBs and CEBSs FINRA's designated
portion of the Participants' one-third share of Budgeted CAT Costs
2024-1.\46\ FINRA proposes to determine the rate for Prospective CAT
Cost Recovery Fee 2024-1 by dividing the fee rate assessed to the
Participants in connection with the implementation of CAT Fee 2024-1,
i.e., $0.000035 per executed equivalent share, by two and then
truncating the result to six decimal places such that member CEBBs and
CEBSs would each be subject to an equal fee, i.e., $0.000017 per
executed equivalent share, for each transaction in Eligible Securities
executed otherwise than on an exchange. Therefore, for each month that
Prospective CAT Cost Recovery Fee 2024-1 is in effect, member CEBBs and
CEBSs will pay a fee to FINRA based on the same transactions used to
determine fees payable by CEBBs and CEBSs to CAT LLC under CAT Fee
2024-1 for off-exchange transactions.\47\ FINRA believes that this
approach is reasonable in that, as is the case with the SEC-approved
CAT Funding Model, it apportions the assessed fee for members equally
between the CAT Executing Broker for the buyer and the seller.\48\
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\46\ In its approval of the CAT Funding Model, the Commission
determined that charging CAT fees to CAT Executing Brokers was
reasonable. In reaching this conclusion the Commission noted that
the use of CAT Executing Brokers is appropriate because the CAT
Funding Model is based upon the calculation of executed equivalent
shares, and, therefore, charging CAT Executing Brokers would reflect
their executing role in each transaction. Furthermore, the
Commission noted that, because CAT Executing Brokers are already
identified in transaction reports from FINRA's equity trade
reporting facilities recorded in CAT Data, charging CAT Executing
Brokers could streamline the billing process. See CAT Funding Model
Approval Order, 88 FR 62628, 62629.
\47\ Based on historical executed equivalent share volumes in
Eligible Securities where FINRA was the relevant Participant, FINRA
would expect to recoup roughly $3.6 million per month during the
time that Prospective CAT Cost Recovery Fee 2024-1 is in effect. See
supra note 31.
\48\ See supra note 46.
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FINRA believes that it is reasonable, appropriate, and consistent
with the Exchange Act to determine Prospective CAT Cost Recovery Fee
2024-1 by dividing CAT Fee 2024-1, i.e., $0.000035 per executed
equivalent share, by two (which equals $0.0000175) and then truncating
the result to six decimal places such that member CEBBs and CEBSs would
each be subject to an equal fee of $0.000017 per executed equivalent
share. As discussed above, equally apportioning the fee between the
CEBBs and CEBSs is consistent with the approach to apportioning costs
between Executing Brokers under the SEC-approved CAT Funding Model.\49\
In addition, FINRA believes it is reasonable and appropriate at this
time to truncate half of CAT Fee 2024-1 to limit the Prospective CAT
Cost Recovery Fee 2024-1 fee rate to six decimal places. As noted above
and in File No. SR-FINRA-2024-011, CAT LLC determined to use six
decimal places for the CAT Fee 2024-1 fee rate to balance the accuracy
of the calculation with the potential systems and other
impracticalities of using additional decimal places in the calculation.
FINRA likewise believes that it is appropriate at this time to use six
decimal places to maintain consistency with the approach determined by
CAT LLC, to which members have been testing since earlier this year,
which should reduce potential complexity in connection with the fee and
billing structure for Prospective CAT Cost Recovery Fee 2024-1.
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\49\ See supra note 46.
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B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. Section 15A(b)(9) of the Act
\50\ requires that FINRA's rules not impose any burden on competition
that is not necessary or appropriate in furtherance of the purpose of
the Exchange Act. FINRA notes that Prospective CAT Cost Recovery Fee
2024-1 is designed to
[[Page 73462]]
assist FINRA in meeting its regulatory obligations pursuant to the
Plan.
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\50\ 15 U.S.C. 78o-3(b)(9).
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Furthermore, in approving the CAT Funding Model, the SEC analyzed
the potential competitive impact of the CAT Funding Model, including
competitive issues related to market services, trading services and
regulatory services, efficiency concerns, and capital formation.\51\
The SEC also analyzed the potential effect of CAT fees calculated
pursuant to the CAT Funding Model on affected categories of market
participants, including Participants (including exchanges and FINRA),
Industry Members (including subcategories of Industry Members, such as
alternative trading systems, CAT Executing Brokers and market makers),
and investors generally, and considered market effects related to
equities and options, among other things.\52\ Based on this analysis,
the SEC approved the CAT Funding Model as compliant with the Exchange
Act. The Prospective CAT Cost Recovery Fee 2024-1 framework generally
is consistent with the fee framework of the CAT Funding Model, as
approved by the SEC.
---------------------------------------------------------------------------
\51\ See CAT Funding Model Approval Order, 88 FR 62628, 62678-
86.
\52\ See supra note 51.
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As discussed in File No. SR-FINRA-2024-011, each of the inputs into
the calculation of CAT Fee 2024-1 is reasonable and the resulting fee
rate for CAT Fee 2024-1 is reasonable. Therefore, Prospective CAT Cost
Recovery Fee 2024-1, for these same reasons, is reasonable and would
not impose any burden on competition that is not necessary or
appropriate in furtherance of the purpose of the Exchange Act.
Economic Impact Assessment
Based on the regulatory need discussed above, FINRA has undertaken
an economic impact assessment, as set forth below, to analyze the
potential economic impacts of the proposed rule change, including
potential costs, benefits, and distributional and competitive effects,
relative to the current baseline.
Regulatory Need
As discussed above under the ``FINRA's Designated Portion of
Budgeted CAT Costs 2024-1'' section, FINRA is filing a proposed rule
change to establish Prospective CAT Cost Recovery Fee 2024-1
substantially to recover its designated portion of the Participants'
share of Budgeted CAT Costs 2024-1. FINRA intends that the fee
framework and timeline for Prospective CAT Cost Recovery Fee 2024-1
generally correspond to the fee framework and timeline put in place by
CAT LLC with respect to CAT Fee 2024-1, as provided for in File No. SR-
FINRA-2024-011 and as discussed above.
Economic Baseline
Also, as discussed above under the ``FINRA's Designated Portion of
Budgeted CAT Costs 2024-1'' section, FINRA arrived at the fee rate for
Prospective CAT Cost Recovery Fee 2024-1 by dividing by two the fee
rate assessed to the Participants in connection with the implementation
of CAT Fee 2024-1, i.e., $0.000035 per executed equivalent share, and
truncating the result to six decimal places.\53\
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\53\ See also File No. SR-FINRA-2024-011.
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For the twelve months from June 1, 2023, through May 31, 2024,
based on transactions reported to a FINRA TRF or to the ORF, there were
896 firm MPIDs that executed at least one purchase or sale of an
equivalent share of an Eligible Security.\54\ The top 50 MPIDs by
reported executed equivalent share volume bought and/or sold
2,161,308,428,108 equivalent shares, or 85.08% of total shares bought
and/or sold.
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\54\ For the twelve months from June 1, 2023, through May
31,2024, approximately 1.25 trillion shares of NMS stocks were
reported to the TRF, and approximately 1.16 trillion shares of OTC
Equity Securities were reported to ORF. Given that each executed
share for a transaction in an OTC Equity Security is counted as 0.01
equivalent share, FINRA estimates that the executed equivalent share
volume for NMS stocks and OTC Equity Securities reported to a FINRA
equity trade reporting facility in that twelve-month period is
approximately 1.26 trillion shares. Dividing that figure by twelve
provides the average monthly executed equivalent share volume of
approximately 104.7 billion shares.
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Economic Impacts
FINRA's proposal substantially to recover its designated portion of
the Participants' share of Prospective CAT Costs applies an approach
generally consistent with the CAT Funding Model as approved by the SEC
in that it assesses half of the fee rate that is assessed to FINRA
under CAT Fee 2024-1 (truncated to six decimal places) to each of the
CEBB and CEBS for transactions where FINRA is the relevant
Participant.\55\ With regard to off-exchange transactions in Eligible
Securities, generally the same members that will be assessed
Prospective CAT Cost Recovery Fee 2024-1 will also be assessed CAT Fee
2024-1. Therefore, FINRA's proposed approach in substantially
recovering its designated portion of Budgeted CAT Costs 2024-1 should
reduce potential complexity in connection with the fee and billing
structure for Prospective CAT Cost Recovery Fee 2024-1.\56\
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\55\ See also File No. SR-FINRA-2024-011 and CAT Funding Model
Approval Order, 88 FR 62628.
\56\ See supra notes 29 through 31 and accompanying text.
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As the SEC noted in approving the revised CAT Funding Model, if
FINRA passes on its portion of the CAT fee allocation to its member
firms and exchanges choose not to pass through their CAT fee
allocations to their members, the cost to transact off-exchange may
increase relative to executing on an exchange, potentially giving
exchanges a competitive advantage.\57\ However, we do not know whether
or to what extent (or how) the exchanges may seek to recover their
portion of the Budgeted CAT Costs 2024-1, and we do not know whether or
to what extent member firms will choose to pass through exchange-
incurred CAT fees to customers. We also note that FINRA members remain
subject to regulatory obligations, such as best execution obligations,
with respect to their order routing decisions.
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\57\ See CAT Funding Model Approval Order, 88 FR 62628, 62684.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Exchange Act \58\ and Rule 19b-4(f)(2)
thereunder,\59\ because it establishes or changes a due, or fee.
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\58\ 15 U.S.C. 78s(b)(3)(A)(ii).
\59\ 17 CFR 240.19b-4(f)(2).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend the rule
change if it appears to the Commission that the action is necessary or
appropriate in the public interest, for the protection of investors, or
would otherwise further the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act.
[[Page 73463]]
Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#641611080149070b0909010a1017241701074a030b12"><span class="__cf_email__" data-cfemail="750700191058161a1818101b0106350610165b121a03">[email protected]</span></a>. Please include
file number
SR-FINRA-2024-012 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-FINRA-2024-012. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of FINRA. Do not include
personal identifiable information in submissions; you should submit
only information that you wish to make available publicly. We may
redact in part or withhold entirely from publication submitted material
that is obscene or subject to copyright protection.
All submissions should refer to file number SR-FINRA-2024-012 and
should be submitted on or before October 1, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\60\
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\60\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-20323 Filed 9-9-24; 8:45 am]
BILLING CODE 8011-01-P
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