Notice2025-01613
Order Granting Temporary Conditional Exemptive Relief, Pursuant to Section 36(a)(1) of the Securities Exchange Act of 1934 and Rule 608(e) of Regulation NMS Thereunder, From Certain Requirements of Appendix D, Section 3 of the National Market System Plan Governing the Consolidated Audit Trail
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Published
January 23, 2025
Issuing agencies
Securities and Exchange Commission
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<title>Federal Register, Volume 90 Issue 14 (Thursday, January 23, 2025)</title>
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[Federal Register Volume 90, Number 14 (Thursday, January 23, 2025)]
[Notices]
[Pages 8078-8080]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-01613]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102234]
Order Granting Temporary Conditional Exemptive Relief, Pursuant
to Section 36(a)(1) of the Securities Exchange Act of 1934 and Rule
608(e) of Regulation NMS Thereunder, From Certain Requirements of
Appendix D, Section 3 of the National Market System Plan Governing the
Consolidated Audit Trail
January 17, 2025.
I. Introduction
On December 9, 2024,\1\ Financial Information Forum (``FIF'')
requested that the Securities and Exchange Commission (``Commission''
or ``SEC'') extend temporary conditional exemptive relief, pursuant to
its authority under section 36(a)(1) of the Securities Exchange Act of
1934 (``Exchange Act'') \2\ and Rule 608(e) of Regulation NMS under the
Exchange Act,\3\ related to the requirement set forth in Appendix D,
section 3 of the national market system plan governing the consolidated
audit trail (``CAT NMS Plan'') \4\ that the consolidated audit trail
(``CAT'') ``must be able to create the lifecycle between . . .
[c]ustomer orders to `representative' orders created in firm accounts
for the purpose of facilitating a customer order (e.g., linking a
customer order handled on a riskless principal basis to the street-side
proprietary order).'' \5\ For the reasons set forth below, the
Commission has determined to grant FIF's request for a six-month
extension of the temporary conditional exemptive relief previously
provided by the Commission with respect to the above-described
requirement set forth in Appendix D, section 3 of the CAT NMS Plan for
representative order scenarios in which Industry Members do not have a
systematic or direct link between their order management systems and
execution management systems.
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\1\ See Letter from Howard Meyerson, Managing Director,
Financial Information Forum, to Commission, dated Dec. 9, 2024,
available at <a href="https://fif.com/index.php/working-groups/category/271-comment-letters?download=3057:fif-request-to-the-commission-for-a-six-month-extension-of-the-current-exemption-relating-to-cat-representative-order-linkage&view=category">https://fif.com/index.php/working-groups/category/271-comment-letters?download=3057:fif-request-to-the-commission-for-a-six-month-extension-of-the-current-exemption-relating-to-cat-representative-order-linkage&view=category</a> (``Request'').
\2\ 15 U.S.C. 78mm(a)(1).
\3\ 17 CFR 242.608(e).
\4\ See Securities Exchange Act Release No. 79318 (Nov. 15,
2016), 81 FR 84696 (Nov. 23, 2016) (``CAT NMS Plan Approval
Order''). The CAT NMS Plan is Exhibit A to the CAT NMS Plan Approval
Order. See id. at 84943-85034. The CAT NMS Plan functions as the
limited liability company agreement of the jointly owned limited
liability company formed under Delaware State law through which the
Participants conduct the activities of the CAT (the ``Company'').
Each Participant is a member of the Company and jointly owns the
Company on an equal basis. The Participants submitted to the
Commission a proposed amendment to the CAT NMS Plan on Aug. 29,
2019, which they designated as effective on filing. Under the
amendment, the limited liability company agreement of a new limited
liability company named Consolidated Audit Trail, LLC serves as the
CAT NMS Plan, replacing in its entirety the CAT NMS Plan. See
Securities Exchange Act Release No. 87149 (Sept. 27, 2019), 84 FR
52905 (Oct. 3, 2019).
\5\ See id. at Appendix D, section 3. A representative order is
an order originated in a firm-owned or -controlled account,
including principal, agency average price and omnibus accounts, by
an industry member for the purpose of working one or more customer
or client orders. See, e.g., Securities Exchange Act Release No.
88702 (Apr. 20, 2020), 85 FR 23075, 23076 n.26 (Apr. 24, 2020). FIF
states in the Request that ``the term `representative order' is a
concept created by CAT (it is not a concept that exists in actual
trading), and that all of the linkage requirements covered in [the]
July 2024 FIF exemption request involve linkage either from or to a
representative order.'' See Request, supra note 1.
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II. Discussion of the Request for Relief
On July 18, 2012, the Commission adopted Rule 613 of Regulation
NMS, which required national securities exchanges and national
securities associations (``Participants'') \6\ to jointly develop and
submit to the Commission a national market system plan to create,
implement, and maintain the CAT.\7\ The goal of Rule 613 was to create
a modernized audit trail system that would provide regulators with
timely access to a comprehensive set of trading data, thus enabling
regulators to more efficiently and effectively analyze and reconstruct
market events, monitor market behavior, conduct market analysis to
support regulatory decisions, and perform surveillance, investigation,
and enforcement activities. On November 15, 2016, the Commission
approved the national market system plan required by Rule 613--the CAT
NMS Plan.\8\
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\6\ The Participants include BOX Exchange LLC, Cboe BYX
Exchange, Inc., Cboe BZX Exchange, Inc., Cboe C2 Exchange, Inc.,
Cboe EDGA Exchange, Inc., Cboe EDGX 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, MIAX Sapphire, 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.
\7\ See Securities Exchange Act Release No. 67457 (July 18,
2012), 77 FR 45722 (Aug. 1, 2012); 17 CFR 242.613.
\8\ See CAT NMS Plan Approval Order, supra note 4.
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On December 16, 2020, the Commission issued an exemptive relief
order regarding the implementation of the CAT NMS Plan (``First
Order'').\9\ This order granted temporary
[[Page 8079]]
conditional exemptive relief from several requirements set forth in the
CAT NMS Plan, including the requirement set forth in Appendix D,
section 3 of the CAT NMS Plan that the CAT ``must be able to create the
lifecycle between . . . [c]ustomer orders to `representative' orders
created in firm accounts for the purpose of facilitating a customer
order (e.g., linking a customer order handled on a riskless principal
basis to the street-side proprietary order).'' \10\ This relief was
initially granted until July 31, 2023.\11\
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\9\ See Securities Exchange Act Release No. 90688 (Dec. 16,
2020), 85 FR 83634 (Dec. 22, 2020).
\10\ See id. at 83636. The Commission stated its understanding
that ``the Participants do not currently have the ability to create
lifecycles in certain representative order scenarios, particularly
because of the difficulty of linking representative orders for
Industry Members with separate order management systems and
execution management systems that do not currently have a systematic
or direct link between them.'' Id.
\11\ Id.
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On July 8, 2022, the Commission issued a new exemptive relief order
(``Second Order''),\12\ which superseded the First Order and modified
and/or clarified certain aspects of the First Order. The Second Order
granted temporary conditional exemptive relief until July 31, 2024,
from the above-described linkage requirement set forth in Appendix D,
section 3, ``for representative order scenarios in which Industry
Members do not have a systematic or direct link between their order
management systems and execution management systems.'' \13\ The
Commission subsequently issued an order (``Third Order''), on May 19,
2023, further extending such exemptive relief until January 31,
2025.\14\ This relief was superseded by a new order issued by the
Commission on November 2, 2023 (``Fourth Order''),\15\ which was
intended to mirror the temporary conditional exemptive relief granted
by the Third Order (and the Second Order) with respect to the
requirements set forth in Appendix D, section 3 of the CAT NMS Plan
regarding lifecycle linkages between customer orders and representative
orders for scenarios in which Industry Members do not have a systematic
or direct link between their order management systems and execution
management systems.\16\ The Fourth Order did not extend the temporary
conditional exemptive relief beyond the time period provided by the
Third Order.\17\
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\12\ See Securities Exchange Act Release No. 95234 (July 8,
2022), 87 FR 42247 (July 14, 2022).
\13\ Id. at 42255-56. The term ``Industry Member'' is defined as
``a member of a national securities exchange or a member of a
national securities association.'' See CAT NMS Plan, supra note 4,
at section 1.1.
\14\ See Securities Exchange Act Release No. 97530 (May 19,
2023), 88 FR 33655 (May 24, 2023).
\15\ See Securities Exchange Act Release No. 98848 (Nov. 2,
2023), 88 FR 77128 (Nov. 8, 2023).
\16\ Id. at 77132.
\17\ Id.
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FIF requests that the Commission extend the previously granted
temporary conditional exemptive relief until July 31, 2025.\18\
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\18\ See Request, supra note 1, at 1.
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FIF states that the Participants, at the direction of the
Commission, will ``remove from the CAT system the ability for industry
members to report certain flags on Order Fulfillment events
(specifically, the `YE' and `YP' flags) in lieu of reporting linkage to
specific representative orders'' after January 31, 2025.\19\ FIF states
that FIF and its members have demonstrated the ``ongoing focus of
industry members in complying with their CAT reporting obligations''
and have devoted ``significant resources . . . over many years towards
such compliance.'' \20\ Nevertheless, FIF suggests that it may be
difficult or impossible for Industry Members to comply with the
requirement to report linkages for certain scenarios, which it states
will be required as of February 1, 2025.\21\ ``In some scenarios,'' FIF
states that ``no representative order exists, and thus it is not
possible for industry members to provide the linkage to specific
representative orders that will be required as of February 1, 2025.''
\22\ In other scenarios, FIF states that ``industry members do not
maintain this linkage in their books and records.'' \23\ Finally, FIF
states that there are scenarios in which ``the CAT system does not
provide a method to provide linkage to a specific order.'' \24\
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\19\ See Request, supra note 1, at 1-2 (citing CAT Reporting
Technical Specifications for Industry Members, version 4.1.0 r4,
dated Oct. 18, 2024, at 367-69, available at <a href="https://catnmsplan.com/sites/default/files/2024-10/10.18.24_CAT_Reporting_Technical_Specifications_for_Industry_Members_v4.1.0r4_CLEAN.pdf">https://catnmsplan.com/sites/default/files/2024-10/10.18.24_CAT_Reporting_Technical_Specifications_for_Industry_Members_v4.1.0r4_CLEAN.pdf</a>). Contrary to the assertion made by FIF, the
Commission has not directed the Participants to remove the ``YE'' or
``YP'' flags from the CAT Reporting Technical Specifications for
Industry Members by any specific date. Furthermore, and also
contrary to the assertion made by FIF in its request, the Commission
understands that the ``YE'' and ``YP'' flags would continue to be
available after Jan. 31, 2025, even in the absence of the temporary
conditional exemptive relief granted by the Commission herein.
\20\ See Request, supra note 1, at 3.
\21\ But see supra note 19.
\22\ See Request, supra note 1, at 2.
\23\ Id.
\24\ Id. FIF states that these scenarios are more fully
described in a previous request for exemptive relief submitted to
the Commission. See id.; see also Letter from Howard Meyerson,
Managing Director, FIF, to Commission, dated July 2, 2024, available
at <a href="https://fif.com/index.php/working-groups/category/271-comment-letters?download=2962:fif-exemptive-request-letter-to-the-sec-on-representative-order-linkage&start=10&view=category">https://fif.com/index.php/working-groups/category/271-comment-letters?download=2962:fif-exemptive-request-letter-to-the-sec-on-representative-order-linkage&start=10&view=category</a>.
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If Industry Members cannot use the ``YE'' and ``YP'' flags to
report certain trading scenarios and/or must report the information
necessary for FINRA CAT to create lifecycle linkages between customer
orders and representative orders, FIF states that Industry Members
``will be faced with the choice of either (i) submitting large numbers
of Order Fulfillment events that the CAT system will reject and that
will not be repairable, or (ii) abandoning certain common existing
trading workflows.'' \25\ FIF further states its view of the potential
harms that could flow from the expiration of the existing exemptive
relief:
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\25\ See Request, supra note 1, at 2. These outcomes could occur
even if the ``YE'' and ``YP'' flags remain available after Jan. 31,
2025, because Industry Members would be required to report the
information necessary for FINRA CAT to create lifecycle linkages
between customer orders and representative orders in the absence of
the temporary conditional exemptive relief granted by the Commission
in the past and herein. See supra note 19.
For example, it is a common workflow for industry members to
trade as a principal against customer orders without the industry
member creating a firm order. This workflow will no longer be
possible if the flags referenced above are removed from CAT because
a firm will not be able to report Order Fulfillments to CAT when the
firm fulfills is `Manning' obligation for this workflow. Conversely,
if industry members submit large numbers of Order Fulfillments that
the CAT system will reject, this will present a significant
processing and workflow challenge for the CAT system, the regulators
and industry members as large numbers of rejected and unsubmitted
CAT events pile-up.\26\
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\26\ See id. at 2-3.
FIF states that its members have further identified for Commission
staff, the Participants, and FINRA CAT the ``significant challenges
with implementing certain CAT linkage requirements relating to
representative orders and order fulfilments'' in presentations \27\ and
previous exemptive relief requests that were submitted to the
Commission in March 2024 and July 2024.\28\ FIF therefore requests an
extension of the current exemptive relief to identify long-term
reporting solutions for the specific trading scenarios set forth in
previous exemptive relief requests.\29\
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\27\ See Request, supra note 1, at 3 n.10-11 and associated
text.
\28\ See id. at 3-4 n.13-14 and associated text.
\29\ Id. at 2, 4.
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Section 36(a)(1) of the Exchange Act grants the Commission the
authority to ``conditionally or unconditionally exempt any person,
security, or transaction . . . from any provision or provisions of [the
Exchange Act] or of
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any rule or regulation thereunder, to the extent that such exemption is
necessary or appropriate in the public interest, and is consistent with
the protection of investors.'' \30\ Rule 608(e) of Regulation NMS
similarly grants the Commission the authority to ``exempt from [Rule
608], either unconditionally or on specified terms and conditions, any
self-regulatory organization, member thereof, or specified security, if
the Commission determines that such exemption is consistent with the
public interest, the protection of investors, the maintenance of fair
and orderly markets and the removal of impediments to, and perfection
of the mechanisms of, a national market system.'' \31\
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\30\ 15 U.S.C. 78mm(a)(1).
\31\ 17 CFR 242.608(e).
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The Commission agrees that additional time is needed to identify
and evaluate appropriate long-term solutions for certain trading
scenarios. In developing those solutions, the Commission emphasizes its
willingness to consider alternative solutions that achieve the
regulatory goals of Rule 613 and the CAT NMS Plan. The Commission
therefore determines that the requested extension of the existing
exemptive relief is appropriate in the public interest and consistent
with the protection of investors under section 36(a)(1) of the Exchange
Act, as well as consistent with the public interest, the protection of
investors, the maintenance of fair and orderly markets, and the
perfection of the mechanisms of a national market system under Rule
608(e) of Regulation NMS.
Specifically, the Commission grants temporary conditional exemptive
relief from the requirements set forth in Appendix D, section 3 of the
CAT NMS Plan related to lifecycle linkages between customer orders and
representative orders,\32\ for representative order scenarios in which
Industry Members do not have a systematic or direct link between their
order management systems and execution management systems, until July
31, 2025. Such relief is intended to mirror the exemptive relief
provided by the Second Order, the Third Order, and the Fourth Order.
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\32\ The requirements related to lifecycle linkages between
customer orders and representative orders set forth in Appendix D,
section 3 of the CAT NMS Plan are described in the Second Order. See
Second Order, supra note 12, at 42255-56.
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III. Conclusion
Accordingly, it is hereby ordered, pursuant to Section 36(a)(1) of
the Exchange Act \33\ and Rule 608(e) under the Exchange Act,\34\ that
the above-described temporary conditional exemptive relief be granted.
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\33\ 15 U.S.C. 78mm(a)(1).
\34\ 17 CFR 242.608(e).
By the Commission.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-01613 Filed 1-22-25; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on January 23, 2025.
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