Notice2026-05350
Joint Industry Plan; Order Approving an Amendment to the National Market System Plan Governing the Consolidated Audit Trail, as Modified by the Commission, Regarding Implementation of a Revised Funding Model
Primary source
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Published
March 19, 2026
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 91 Issue 53 (Thursday, March 19, 2026)</title>
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[Federal Register Volume 91, Number 53 (Thursday, March 19, 2026)]
[Notices]
[Pages 13410-13481]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-05350]
[[Page 13409]]
Vol. 91
Thursday,
No. 53
March 19, 2026
Part II
Securities and Exchange Commission
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Joint Industry Plan; Order Approving an Amendment to the National
Market System Plan Governing the Consolidated Audit Trail, as Modified
by the Commission, Regarding Implementation of a Revised Funding Model;
Notice
Federal Register / Vol. 91, No. 53 / Thursday, March 19, 2026 /
Notices
[[Page 13410]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-105003; File No. 4-698]
Joint Industry Plan; Order Approving an Amendment to the National
Market System Plan Governing the Consolidated Audit Trail, as Modified
by the Commission, Regarding Implementation of a Revised Funding Model
March 16, 2026.
I. Introduction
On September 5, 2025, the Consolidated Audit Trail, LLC (``CAT
LLC''), on behalf of the Participants \1\ to the National Market System
Plan Governing the Consolidated Audit Trail (``CAT NMS Plan'' or
``Plan''),\2\ filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 11A of the Exchange Act \3\ and
Rule 608 of Regulation National Market System (``Regulation NMS'')
thereunder,\4\ a proposed amendment to the CAT NMS Plan (``Initial
Proposed Amendment'') to implement a revised funding model (the
``Executed Share Model'') for the consolidated audit trail (``CAT'')
\5\ and to establish a fee schedule for Participant CAT fees in
accordance with the Executed Share Model.\6\ The Initial Proposed
Amendment was published for comment in the Federal Register on
September 17, 2025.\7\
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\1\ The Participants are: 24X National Exchange LLC, 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. (``FINRA''), 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 GEMX, LLC,
Nasdaq ISE, LLC, Nasdaq MRX, LLC, Nasdaq PHLX LLC, Nasdaq Texas,
LLC, The NASDAQ Stock Market LLC, New York Stock Exchange LLC, NYSE
American LLC, NYSE Arca, Inc., NYSE National, Inc., and NYSE Texas,
Inc. (collectively, the ``Participants,'' ``self-regulatory
organizations,'' or ``SROs'').
\2\ The CAT NMS Plan is a national market system plan approved
by the Commission pursuant to Section 11A of the Securities Exchange
Act of 1934 (``Exchange Act'') and the rules and regulations
thereunder. See Securities Exchange Act Release No. 78318 (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 CAT NMS Plan Approval Order, 81 FR 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 (``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 August 29, 2019, which they designated as effective on filing. On
August 29, 2019, the Participants replaced the CAT NMS Plan in its
entirety with the limited liability company agreement of a new
limited liability company, CAT LLC, which became the Company. See
Securities Exchange Act Release No. 87149 (Sept. 27, 2019), 84 FR
52905 (Oct. 3, 2019). The latest version of the CAT NMS Plan is
available at <a href="https://catnmsplan.com/about-cat/cat-nms-plan">https://catnmsplan.com/about-cat/cat-nms-plan</a>.
\3\ 15 U.S.C. 78k-1.
\4\ 17 CFR 242.608.
\5\ The Proposed Amendment modifies the existing funding model
in Article XI of the CAT NMS Plan.
\6\ See Letter to Vanessa Countryman, Secretary, Commission,
from Robert Walley, Chair, CAT NMS Plan Operating Committee, dated
Sept. 5, 2025.
\7\ See Securities Exchange Act Release No. 103960 (Sept. 12,
2025), 90 FR 44910 (``Notice''). Comments received in response to
the Notice 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>.
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On November 21, 2025, the Commission instituted proceedings
pursuant to Rule 608(b)(2)(i) of Regulation NMS \8\ to determine
whether to disapprove the Initial Proposed Amendment or to approve the
Initial Proposed Amendment with any changes or subject to any
conditions the Commission deems necessary or appropriate after
considering public comment (``OIP'').\9\ On December 18, 2025, CAT LLC,
on behalf of the Participants to the CAT NMS Plan, filed an amendment
to the Initial Proposed Amendment.\10\
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\8\ 17 CFR 242.608(b)(2)(i).
\9\ See Securities Exchange Act Release No. 104234 (Nov. 21,
2025), 90 FR 54438 (Nov. 26, 2025). Comments received in response to
the OIP 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>.
\10\ See Letter to Vanessa Countryman, Secretary, Commission,
from Robert Walley, Chair, CAT NMS Plan Operating Committee, dated
Dec. 18, 2025, available at: <a href="https://www.sec.gov/comments/4-698/4698-685927-2125515.pdf">https://www.sec.gov/comments/4-698/4698-685927-2125515.pdf</a> (``CAT LLC December 2025 Response Letter''
or ``Amendment No. 1''). In Amendment No. 1, CAT LLC proposes to
revise proposed Section 11.3(e) of Appendix D of the CAT NMS Plan to
``better, reflect that the Proposed Amendment was approved under the
Plan and avoid statements suggesting that all Participants voted for
the proposal,'' by modifying the provision to modify a clause
stating that ``[e]ach Participant agrees not to file . . .'' to
instead be, ``[n]o Participant will file.'' Id. at 5.
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This order approves the Proposed Amendment, as modified by the
Commission (hereinafter, the ``Proposed Amendment'' unless otherwise
noted).\11\ For the reasons discussed below, the Commission finds that
the Proposed Amendment, as modified by the Commission, is 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 Exchange Act.
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\11\ The Commission is modifying the Proposed Amendment to
reflect Amendment No. 1 and approving the Proposed Amendment, as so
modified, pursuant to Rule 608(b)(2), as discussed in more detail in
Part III.A.2 below.
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II. Background
On July 11, 2012, the Commission adopted Rule 613 of Regulation
NMS, which required the SROs to submit a national market system
(``NMS'') plan to create, implement and maintain a consolidated audit
trail that would capture customer and order event information for
orders in NMS securities.\12\ On November 15, 2016, the Commission
approved the CAT NMS Plan.\13\ Under the CAT NMS Plan, the Operating
Committee of the Company, of which each Participant is a member, has
the discretion (subject to the funding principles set forth in the
Plan) to establish funding for the Company to operate the CAT,
including establishing fees to be paid by the Participants and Industry
Members.\14\
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\12\ 17 CFR 242.613.
\13\ See CAT NMS Plan.
\14\ The CAT NMS Plan defines ``Industry Member'' as ``a member
of a national securities exchange or a member of a national
securities association.'' See CAT NMS Plan, at Section 1.1. See also
id. at Section 11.1(b).
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Under the CAT NMS Plan, CAT fees are to be implemented in
accordance with various funding principles, including an ``allocation
of the Company's related costs among Participants and Industry Members
that is consistent with the Exchange Act taking into account . . .
distinctions in the securities trading operations of Participants and
Industry Members and their relative impact upon the Company resources
and operations'' and the ``avoid[ance of] any disincentives such as
placing an inappropriate burden on competition and reduction in market
quality.'' \15\ The Plan specifies that, in establishing the funding of
the Company, the Operating Committee shall establish ``a tiered fee
structure in which the fees charged to: (1) CAT Reporters \16\ that are
Execution Venues,\17\ including ATSs,\18\ are based upon the level of
market share; (2) Industry Members' non-ATS activities are based upon
message traffic; and (3) the CAT Reporters with the most CAT-related
activity (measured by market
[[Page 13411]]
share and/or message traffic, as applicable) are 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).'' \19\
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\15\ Id. at Section 11.2(b) and (e).
\16\ The CAT NMS Plan defines ``CAT Reporter'' as ``each
national securities exchange, national securities association and
Industry Member that is required to record and report information to
the Central Repository pursuant to SEC Rule 613(c).'' Id. at Section
1.1.
\17\ The CAT NMS Plan defines ``Execution Venue'' as ``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).'' Id.
\18\ Id.
\19\ See CAT NMS Plan, at Section 11.2(c). See id. at Article XI
for additional detail.
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On May 15, 2020, the Commission adopted amendments to the CAT NMS
Plan designed to increase the Participants' financial accountability
for the timely completion of the CAT (``Financial Accountability
Amendments'').\20\ The Financial Accountability Amendments added
Section 11.6 to the CAT NMS Plan to govern the recovery from Industry
Members of any fees, costs, and expenses (including legal and
consulting fees, costs and expenses) incurred by or for the Company in
connection with the development, implementation and operation of the
CAT from June 22, 2020 until such time that the Participants have
completed Full Implementation of CAT NMS Plan Requirements \21\
(``Post-Amendment Expenses''). Section 11.6 establishes target
deadlines for four Financial Accountability Milestones (Periods 1, 2, 3
and 4) \22\ and reduces the amount of fee recovery available to the
Participants if these deadlines are missed.\23\
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\20\ See Securities Exchange Act Release No. 88890, 85 FR 31322
(May 22, 2020).
\21\ ``Full Implementation of CAT NMS Plan Requirements'' means
``the point at which the Participants have satisfied all of their
obligations to build and implement the CAT, such that all CAT system
functionality required by Rule 613 and the CAT NMS Plan has been
developed, successfully tested, and fully implemented at the initial
Error Rates specified by Section 6.5(d)(i) or less, including
functionality that efficiently permits the Participants and the
Commission to access all CAT Data required to be stored in the
Central Repository pursuant to Section 6.5(a), including Customer
Account Information, Customer-ID, Customer Identifying Information,
and Allocation Reports, and to analyze the full lifecycle of an
order across the national market system, from order origination
through order execution or order cancellation, including any related
allocation information provided in an Allocation Report. This
Financial Accountability Milestone shall be considered complete as
of the date identified in a Quarterly Progress Report meeting the
requirements of Section 6.6(c).'' CAT NMS Plan, at Section 1.1.
\22\ See CAT NMS Plan, Section 11.6(a)(i).
\23\ Id. at Section 11.6(a)(ii) and (iii).
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Since the CAT plan's approval in 2016, CAT LLC has proposed,
withdrawn, and refiled several iterations of the funding amendment,
resulting in an extensive process of evaluating and receiving comment
on various funding models. On September 6, 2023, the Commission
approved an amendment to the CAT NMS Plan to implement a new funding
model (the ``Executed Share Model''), which charged fees based on
executed equivalent share volume of transactions in Eligible Securities
(``2023 Funding Model Amendment'').\24\
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\24\ See Notice, at 44910; Securities Exchange Act Release No.
98290, 88 FR 62628 (Sept. 12, 2023) (the ``2023 Funding Model
Order'')
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The Executed Share Model established two categories of CAT fees:
(1) ``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''); and (2) ``Historical CAT Assessments'' to be payable by
Industry Members who were CAT Executing Brokers for the Buyer and for
the Seller with regard to CAT Costs previously paid by the Participants
(``Past CAT Costs'').\25\ For each of these categories, Participants
were to submit fee filings pursuant to Section 19(b) of the Exchange
Act to establish CAT Fees and a Historical CAT Assessment to be charged
to Industry Members based on the Executed Share Model. To date, each of
the Participants filed fee filings related to three CAT fees and one
Historical CAT Assessment, and as of the initial filing of the Proposed
Amendment, CAT LLC collected or was collecting such CAT fees.\26\
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\25\ Id.
\26\ See Notice, at 44911. On November 25, 2025, CAT LLC issued
CAT Fee Alert 2025-4, which states that CAT Reporters would not
receive further monthly invoices for CAT Fees and for Historical CAT
Assessments until further notice. See CAT Fee Alert 2025-4, dated
Nov. 25, 2025, available at: <a href="https://www.catnmsplan.com/sites/default/files/2025-11/11.25.25-CAT-Fee-Alert-2025-4.pdf">https://www.catnmsplan.com/sites/default/files/2025-11/11.25.25-CAT-Fee-Alert-2025-4.pdf</a>. The
Commission anticipates that CAT LLC will establish a new CAT Fee and
Historical CAT Assessment, and that the Participants will submit new
rule filings pursuant to Section 19(b) of the Exchange Act to
implement those fees, after approval of the Proposed Amendment, as
modified by the Commission.
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On July 25, 2025, the U.S. Court of Appeals for the Eleventh
Circuit (the ``Court'') issued an opinion vacating the 2023 Funding
Model Order and remanding the matter to the Commission for further
proceedings consistent with its opinion.\27\ The Court did not take
issue with--and, in their briefing, the petitioners did not challenge
the reasonableness of--the Executed Share Model or its allocation of
fees among the Participants and the Executing Brokers for the Buyer and
for the Seller. Rather, the Court concluded that the 2023 Funding Model
Order was arbitrary and capricious because the Commission ``did not
explain or justify'' its decision not to preemptively prohibit the
Participants from ``pass[ing] through'' their share of CAT costs onto
Industry Members in future fee filings and failed to incorporate actual
CAT costs into its economic analysis.\28\ The Court stayed its judgment
for sixty days following the issuance of its mandate, recognizing that
vacatur would ``leave[ ] the CAT without a mechanism for the equitable
allocation of costs between self-regulatory organizations and broker-
dealers'' and that ``the Commission and the industry need some time to
adjust and react to this reality.'' \29\ Prior to the effective date of
the Court's judgment (December 1, 2025), the Participants filed the
Proposed Amendment, seeking to implement an Executed Share Model
similar to that in the 2023 Funding Model Amendment with the addition
of a provision related to direct pass-through fees.\30\
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\27\ See Am. Sec. Ass'n v. SEC, 147 F.4th 1264 (11th Cir. 2025).
\28\ Id. at 1269, 1274.
\29\ Id. at 1280.
\30\ See supra note 7.
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III. Discussion and Commission Findings
The Commission is currently engaged in a comprehensive review of
the CAT which is intended to include, among other things, its design
and functionality, the scope of information it collects, and an
examination of CAT costs.\31\ Several commenters suggest that the
Proposed Amendment should not be approved in advance of the outcome of
that review.\32\ FINRA and the Cboe
[[Page 13412]]
Exchanges, both Participants or representing multiple Participants of
the CAT NMS Plan, suggest that the Commission should consider a time-
limited interim funding solution.\33\
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\31\ See Prepared Remarks Before SEC Speaks, Chairman Paul S.
Atkins, May 19, 2025, available at <a href="https://www.sec.gov/newsroom/speeches-statements/atkins-prepared-remarks-sec-speaks-051925">https://www.sec.gov/newsroom/speeches-statements/atkins-prepared-remarks-sec-speaks-051925</a>.
\32\ See Letters to Vanessa Countryman, Secretary, Commission,
from Steffen N. Johnson, Wilson Sonsini Goodrich & Rosati, dated
October 17, 2025 (``FINRA October 2025 Letter''), at 14-15 and dated
Jan. 30, 2026 (``FINRA Wilson Sonsini January 2026 Letter''), at 5;
Letter to Vanessa Countryman, Secretary, Commission, from Marcia E.
Asquith, Corporate Secretary, EVP, Board and External Relations,
FINRA, dated January 30, 2026, at 2 (``FINRA January 2026 Letter'');
Letters to Vanessa Countryman, Secretary, Commission, from Stephen
John Berger, Managing Director, Global Head of Government &
Regulatory Policy, Citadel Securities, dated October 17, 2025
(``Citadel October 2025 Letter''), at 14 and dated Jan. 30, 2026
(``Citadel January 2026 Letter''), at 8; Letter, to Vanessa
Countryman, Secretary, Commission, from Katie Kolchin, CFA, Managing
Director, Head of Equity & Options Market Structure and Joseph
Corcoran, Managing Director and Associate General Counsel,
Securities Industry and Financial Markets Association, dated October
21, 2025 (``SIFMA October 2025 Letter''), at 4 Letters to Vanessa
Countryman, Secretary, Commission, from Christopher A. Iacovella,
President & Chief Executive Officer, American Securities
Association, dated October 31, 2025 (``ASA October 2025 Letter''),
at 2 and dated Feb. 10, 2026 (``ASA January 2026 Letter''), at 2;
Letter to Vanessa Countryman, Secretary, Commission, from Gentry
Collins, CEO, AmFree Chamber, dated October 17, 2025 (``AmFree
Letter''), at 1; Letter to Vanessa Countryman, Secretary,
Commission, from Patrick Sexton, EVP, General Counsel, Corporate
Secretary, Cboe Exchanges, dated October 31, 2025 (``Cboe Letter''),
at 2; Letter to Vanessa Countryman, Secretary, Commission, from
Joanna Mallers, Secretary, PTG, dated Nov. 24, 2025 (``PTG
Letter''), at 2; The Cboe Exchanges include Cboe BYX Exchange, Inc.,
Cboe BZX Exchange, Inc., Cboe C2 Exchange, Inc., Cboe EDGA Exchange,
Inc., Cboe EDGX Exchange, Inc., and Cboe Exchange, Inc.
(collectively, ``the Cboe Exchanges''). See Cboe Letter, at 1, n.1.
\33\ See Cboe Letter, at 2; FINRA October 2025 Letter; FINRA
Wilson Sonsini January 2026 Letter, at 5.
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CAT LLC states in response that it supports the Commission's
announced comprehensive review as well as its broader efforts to ensure
that CAT achieves its intended regulatory purposes in a cost-effective
manner, but asserts that a time-limited, interim funding solution would
not address the pressing need to implement a stable funding mechanism
for the CAT given the CAT's significant costs and its substantial
regulatory value to regulators.\34\ CAT LLC cautions that it ``should
not be assumed that any Participant will voluntarily agree to loan
funds to the Company once the operational reserve is exhausted,'' and
that, ``absent Commission action to approve a viable funding model for
the CAT, there is significant uncertainty regarding the continued
operation of the CAT and the Company's ability to continue as a going
concern.'' \35\
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\34\ See CAT LLC December 2025 Response Letter, at 9.
\35\ Id. at 13. In a comment letter submitted in connection with
the 2023 Funding Model Amendment, a commenter objected to a
reference to the financial viability of the CAT as an attempt to
``coerce the Commission into prematurely opining on a funding
proposal that does not meet basic Exchange Act requirements.'' See
Letter to Vanessa Countryman, Secretary, Commission, from Stephen
John Berger, Managing Director, Global Head of Government &
Regulatory Policy, Citadel Securities, dated August 22, 2023
(``Citadel August 2023 Letter''), at 1. For the reasons explained in
this order, the Proposed Amendment, as modified by the Commission,
meets the applicable standard for approval.
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The Commission agrees with commenters that it would be premature to
adopt a new, permanent funding model while it considers changes to the
CAT that could potentially affect its design, functionality, the
information it collects, and how and by whom it is funded. Any such
changes to the system could bear on the Commission's analysis of
options for a permanent funding solution. At the same time, the SROs
and the Commission currently rely on CAT to carry out their market
oversight functions, and a defined funding source is needed to ensure
its continued existence and funding during the period in which the
Commission conducts its review. Operating CAT without consistent,
defined funding during this interim period would be a potentially
destabilizing option, that is inconsistent with the CAT NMS Plan's
premise that the costs of CAT are to be allocated to both the
Participants and Industry Members.\36\
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\36\ See CAT NMS Plan, at Section 11.2(b).
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As discussed in detail below, the Commission concludes that the
Proposed Amendment constitutes a reasonable approach to allocating the
costs of CAT during the interim period. The Commission is therefore
approving the Proposed Amendment, with a modification, pursuant to Rule
608(b)(2), that provides for a two-year deadline for the proposed
funding model. Specifically, new subparagraph (f) to Section 11.3
(Recovery) of the CAT NMS Plan will state the following:
(f) Time Limitation. The Company, the Plan Processor and the
Participants will not be permitted to bill or otherwise request the
payment of CAT Fees or Historical CAT Assessments from Industry Members
after March 31, 2028. No Industry Member can be required to directly
contribute to the funding of the CAT by the Company, the Plan
Processor, or any Participant after such date except for CAT Fees or
Historical CAT Assessments billed to the Industry Member prior to March
31, 2028.
This provision will effectively end the collection of fees pursuant
to the funding model in the Proposed Amendment in two years absent
further action by the Commission. To the extent that commenters
disagree with the Commission's conclusions regarding the likely effects
of the Proposed Amendment, the Commission will be able to take the
experience with this interim funding model into account when
considering a longer-term replacement.
After careful review, the Commission, pursuant to Section 11A of
the Exchange Act,\37\ and Rule 608(b)(2) \38\ thereunder, is approving
the Proposed Amendment, as modified by the Commission, to provide for
funding of the CAT for a two-year interim period while the Commission
engages in its comprehensive review of the CAT. Section 11A of the
Exchange Act authorizes the Commission, by rule or order, to authorize
or require the self-regulatory organizations to act jointly with
respect to matters as to which they share authority under the Exchange
Act in planning, developing, operating, or regulating a facility of the
national market system.\39\ Rule 608 of Regulation NMS authorizes two
or more SROs, acting jointly, to file with the Commission proposed
amendments to an effective NMS plan,\40\ and further provides that the
Commission shall approve an amendment to an effective NMS plan if it
finds that the amendment is necessary or appropriate in the public
interest, for the protection of investors and the maintenance of fair
and orderly markets, to remove impediments to, and perfect the
mechanisms of, a national market system, or otherwise in furtherance of
the purposes of the Exchange Act.\41\
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\37\ 15 U.S.C. 78k-1.
\38\ 17 CFR 242.608(b)(2).
\39\ See 15 U.S.C. 78k-1(a)(3)(B).
\40\ See 17 CFR 242.608.
\41\ See 17 CFR 242.608(b)(2).
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The Participants have sufficiently demonstrated that the proposed
allocation of fees is appropriate and meets the Rule 608(b) approval
standard. In the interim period during which the Commission undertakes
its comprehensive review of the CAT, the CAT must be funded to ensure
that the SROs and the Commission can continue to fulfill their
regulatory responsibilities to oversee the equities and options
markets. There are a number of potential approaches to allocating the
costs of operating the CAT, all of which have relative strengths and
weaknesses. The CAT NMS Plan requires both Execution Venues (which
include the Participants) and Industry Members (which include CAT
Executing Brokers) to fund the CAT. The Proposed Amendment provides for
the allocation of one-third of CAT fees each to the applicable
Participant in a transaction, the CAT Executing Broker for the buyer in
a transaction, and the CAT Executing Broker for the seller in a
transaction.\42\ In our view, splitting the costs of the CAT evenly
among the buyer, seller, and market regulator in transactions
reportable to the CAT--at least during this interim period--constitutes
a reasonable and equitable allocation of costs among the primary
parties that participate in and benefit from such trading activity and
the market oversight CAT enables.
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\42\ See infra Part III.A.2.
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Unlike the funding model approved in the 2023 Funding Model Order,
the Proposed Amendment, as modified by the Commission,\43\ states that
no Participant will file with the SEC a proposed rule change pursuant
to Section 19(b) and Rule 19b-4 thereunder that would establish a new
[[Page 13413]]
fee for passing through to its members the CAT fee charged to such
Participant.\44\ The Commission believes that this prohibition on
directly passing through CAT fees by Participants reasonably aligns
with the premise of the Plan since the time of its approval that there
is to be an ``allocation of the costs'' of CAT among the Participants
and Industry Members.\45\ The proposed prohibition reasonably responds
to the concern that a Participant's ability to create a new fee
directly passing-through the one-third share of CAT costs that the Plan
allocates to the Participant calls into question whether there is an
``allocation of the costs'' of the CAT as contemplated by the Plan.\46\
By precluding the simple filing of a new fee to directly pass through
CAT costs, it places Participants in a similar position as Industry
Members who must also make decisions as to how to fund their financial
obligations to the CAT in the context of their overall regulatory and
business expenses.
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\43\ See supra note 10 and accompanying text.
\44\ See proposed Section 11.3(e).
\45\ See CAT NMS Plan Approval Order, at 84795; see also CAT NMS
Plan Section 11.2(b); Am. Secs. Ass'n, 147 F.4th at 1274-75.
\46\ See Am. Secs. Ass'n, 147 F.4th at 1274-75, 1279 & n.1
(discussing FINRA fees directly passing through FINRA's share of CAT
costs). For example, the FINRA pass-through fees highlighted by the
Eleventh Circuit were specific ``cost recovery fee[s] designed to
permit FINRA to recoup its designated portion of the reasonably
budgeted CAT costs of the [CAT NMS Plan].'' See Securities Exchange
Act Release No. 103373 (July 2, 2025), 90 FR 30171, 30171 (July 8,
2025) (SR-FINRA-2025-010).
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The provision would not prohibit Participants from funding their
share of CAT costs through other mechanisms that may indirectly result
in Industry Members (or others, including investors) ultimately bearing
those costs, any more than it limits Industry Members' discretion to
pass some or all of their costs onto their customers. As both a legal
and practical matter, the Plan's cost-sharing premise governs the
initial allocation of costs between Participants and Industry Members.
From the inception of the CAT NMS Plan, the Commission has recognized
both that some portion of the costs of the CAT should be allocated to
the Participants and that the Exchange Act expressly permits the
Participants to recover their regulatory costs--including the portion
of costs that the Plan allocates to them--from their members through
fee filings, subject to the requirements of the Act.\47\ Similarly, the
Commission has long recognized that, despite the initial allocation of
CAT costs to the Participants and Industry Members, ``some or most of
the costs of CAT will be passed on to investors.'' \48\ Thus, while the
Proposed Amendment prevents the Participants from effectively altering
the initial allocation of costs by directly passing their share through
to Industry Members, the Plan has never purported to regulate the
business decisions individual Participants or Industry Members may make
to finance the costs they incur to comply with their regulatory
obligations, including the costs allocated to them by the Plan.
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\47\ For example, in adopting Rule 613 in 2012, the Commission
explained that ``although the [SROs] likely would initially incur
the costs to establish and fund the central repository''--i.e., to
establish and operate CAT--``directly, they may seek to recover some
or all of these costs from their members.'' Securities Exchange Act
Release No. 67457 (July 18, 2012), 77 FR 45722, 45795 (Aug. 1, 2012)
(``Rule 613 Adopting Release''). In approving the Plan in 2016, the
Commission similarly acknowledged that the Exchange Act permits the
Participants to recover their regulatory costs through fees on
members if such fees meet the requirements of the Act. See, e.g.,
CAT NMS Plan Approval Order, at 84794 (``The Participants, as SROs,
have traditionally recovered their regulatory costs through the
collection of fees from their members, and such fees are
specifically contemplated by the Exchange Act . . . . [S]uch fees
must be consistent with applicable statutory standards under the
Exchange Act.''); id. (``[T]he Exchange Act specifically permits the
Participants to charge members fees to fund their self-regulatory
obligations.''); id. at 84796-97 (``[T]he Exchange Act permits the
Participants to assess fees among their members to recoup their
regulatory costs, as long as such fees meet the applicable Exchange
Act standards.''). This understanding is also reflected in the
Commission's assumption in the CAT NMS Plan Approval Order that the
Participants would recover from Industry Members 100% of the CAT
development costs they had incurred to date. See id. at 84,855,
84,858, 84, 864.
\48\ See CAT NMS Plan Approval Order, at 84863.
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In leaving open the possibility that the Participants could propose
to recover their share of costs from Industry Members indirectly by
increasing existing fees, the Commission is making no determination
that it would be permissible to so recover costs in any particular
instance. To the extent a Participant were to seek to offset the CAT
costs it incurs by raising the rates of its other member fees, any such
indirect pass-through fees would be subject to the rule filing process
under Section 19(b)(2) of the Act and must be reasonable, equitable,
and not unfairly discriminatory.\49\ Participants must file proposed
rule changes relating to fees with the Commission and these proposed
rule changes are published by the Commission and there is an
opportunity for public comment. The Commission has a statutory
obligation to suspend and disapprove proposed rule changes if they do
not satisfy the Act's requirements.\50\ Moreover, if the Participants
were to attempt to increase existing fees for the purpose of recovering
their share of CAT costs during the two-year period in which the
Proposed Amendment is in effect, the Commission can take that
experience into account in assessing options for a longer-term funding
model. But the Commission cannot now assess a hypothetical future fee
filing by an unknown Participant seeking recovery of an unknown amount
of costs in an unknown manner under unknown circumstances. While this
order therefore makes no determination as to the lawfulness of any
future attempt by a Participant to indirectly pass through its share of
CAT costs, the Commission nonetheless considers ``the effects of
potential broker-dealer only funding'' of CAT for the next two years
below,\51\ consistent with the Eleventh Circuit's opinion.\52\
---------------------------------------------------------------------------
\49\ See Section 6(b)(4); Section 15A(b)(5); Section 6(b)(5);
Section 15A(b)(6). 15 U.S.C. 78f(b)(4); 15 U.S.C. 78f(b)(6); 15
U.S.C. 78o-3(b)(5); 15 U.S.C. 78o-3(b)(6).
\50\ See Bloomberg L.P. v. SEC, 45 F.4th 462, 476 (D.C. Cir.
2022) (recognizing that the Commission ``has control over proposed
[SRO] fees and will not approve them unless they are reasonable and
equitable such that they are consistent with the Exchange Act'').
\51\ See infra Part IV.B.
\52\ See Am. Secs. Ass'n, 147 F.4th at 1275.
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The use of executed equivalent share volume provides an appropriate
basis for the calculation of CAT fees. Executed equivalent share volume
is readily determinable and--because it is based on trading activity,
which impacts CAT costs--provides a reasonable proxy for the costs to
CAT, allowing CAT Reporters to be assessed fees corresponding to the
cost burden they impose on the CAT. Charging CAT Executing Brokers is
also appropriate because the proposed Executed Share Model is based on
executed equivalent shares (emphasis added). Therefore, charging the
CAT Executing Brokers would reflect their executing role in each
transaction, which is already recorded in transaction reports from the
exchanges and FINRA's equity trade reporting facilities. Because such
entities are already identified and their CAT fees are known, this
method could streamline the billing process and allow such entities to
calculate their own fees. The Commission also concludes that the
division of fees into Prospective CAT Fees and the Historical CAT
Assessment provides an appropriate method of allowing Participants to
ensure funding for operation of the system during the interim period.
In addition, the provision of fee calculation information, approach to
billing and collection of fees, conforming changes and the proposal for
a fee schedule are all appropriate, and will provide transparency to
CAT Reporters regarding the calculation of their CAT
[[Page 13414]]
Fees and should permit CAT Execution Brokers the ability to confirm the
accuracy of their invoices for CAT Fees.
As discussed above, the Commission is modifying the Proposed
Amendment to provide for a two-year limitation on collecting funds from
Industry Members under this funding model. This limitation could be
removed in the future, but removing the limitation (and thus codifying
the funding model in the Proposed Amendment) would require another CAT
NMS Plan amendment, either submitted by the Participants and approved
by the SEC, or initiated by Commission rulemaking. The Commission
believes that this is appropriate in light of the Commission's ongoing
comprehensive review of the CAT,\53\ and potential benefits of further
deliberation on the mechanism and system for funding the CAT on a long-
term basis. The Commission is therefore approving the Proposed
Amendment, as modified and discussed above.
---------------------------------------------------------------------------
\53\ See Securities Exchange Act Release No. 104144 (Sept. 30,
2025), 90 FR 47853, 47854 (Oct. 2, 2025) (stating that ``the
Chairman of the Commission instructed the staff to undertake a
comprehensive review of the CAT'' and citing Prepared Remarks Before
SEC Speaks, Chairman Paul S. Atkins, May 19, 2025, available at
<a href="https://www.sec.gov/newsroom/speeches-statements/atkins-prepared-remarks-sec-speaks-051925">https://www.sec.gov/newsroom/speeches-statements/atkins-prepared-remarks-sec-speaks-051925</a>). See also SIFMA October 2025 Letter, at 2
(stating that the commenter ``wholeheartedly'' supports the
announced comprehensive review of the CAT and is submitting a
separate letter with several high-level recommendations).
---------------------------------------------------------------------------
A. Funding Model
1. Overview
CAT LLC proposes to replace the funding model set forth in Article
XI of the CAT NMS Plan (``Original Funding Model'') with the Executed
Share Model. The Executed Share Model is in most material respects
identical to the funding model approved in the 2023 Funding Model
Order, with the exception of the prohibition on new fees to directly
pass-through costs incurred by the Participants to Industry Members.
The Original Funding Model involved 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.\54\ In contrast, the Executed Share Model would
charge fees based on the executed equivalent share volume of
transactions in Eligible Securities.\55\ In addition, instead of
charging fees to Industry Members, under the Executed Share Model, fees
would be charged to each Industry Member that is a CAT Executing Broker
\56\ 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'').\57\
---------------------------------------------------------------------------
\54\ See CAT NMS Plan, at Section 11.3(a) and (b).
\55\ See Notice, 90 FR at 44917-19.
\56\ See infra Part III.A.4. for the definition of CAT Executing
Broker.
\57\ See Notice, 90 FR at 44919.
---------------------------------------------------------------------------
Under the Executed Share Model, CAT LLC proposes to establish two
categories of CAT fees. The first category of CAT fees would be 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'').\58\
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'').\59\
---------------------------------------------------------------------------
\58\ Id., at 44916; see also proposed Section 11.3(a). The
defined term ``CAT Fees'' applies specifically to CAT fees related
to Prospective CAT Costs. Id.
\59\ See Notice, 90 FR at 44920; see also proposed Section
11.3(b).
---------------------------------------------------------------------------
For each category of fees, each CEBB and each CEBS will be required
to pay a CAT fee for each such transaction in Eligible Securities in
the prior month based on CAT Data.\60\ 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 by one-third and by the reasonably determined Fee
Rate,\61\ as described below.\62\ Participants would incur CAT Fees
only for Prospective CAT Costs and the Participant CAT Fee will be
calculated by multiplying the number of executed equivalent shares in
the transaction by one-third and by the reasonably determined Fee
Rate.\63\ The Participants' one-third share of Historical CAT Costs
\64\ 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.\65\
---------------------------------------------------------------------------
\60\ See Notice, 90 FR at 44919; see also proposed Section
11.3(a)(iii), proposed Section 11.3(b)(iii).
\61\ See infra Part III.A.5.a. (Prospective CAT Fees--Fee Rate
Formula) for the definition and description of the calculation of
the Fee Rate.
\62\ See Notice, 90 FR at 44919; infra Parts III.A.2 and
III.A.5.a. See also proposed Section 11.3(a)(iii), proposed Section
11.3(b)(iii).
\63\ See Notice, 90 FR at 44919; see also proposed Section
11.3(a)(ii).
\64\ The actual amount of Past CAT Costs to be recovered through
the Historical CAT Assessments would be reduced by an amount of
excluded costs. The resulting amount would be defined as
``Historical CAT Costs'' in proposed Section 11.3(b)(i)(C) of the
CAT NMS Plan. See infra Part III.A.6.a. for a discussion of
Historical CAT Costs.
\65\ See proposed Section 11.3(b)(ii).
---------------------------------------------------------------------------
FINRA CAT would be responsible for calculating the CAT fees and
submitting invoices to the CAT Executing Brokers based on this CAT
Data.\66\ All data used to calculate the fees under the Executed Share
Model would be CAT Data, and, therefore, it would be directly available
through the CAT to FINRA CAT for calculating CAT fees.\67\ CAT fees
would be charged to Industry Members pursuant to separately filed
proposed rule filings pursuant to Section 19(b) of the Exchange
Act,\68\ establishing the amounts of the proposed CAT Fees and
Historical CAT Assessments to be charged to Industry Members, subject
to the satisfaction of applicable Financial Accountability Milestones
as set forth in Section 11.6 of the CAT NMS Plan and the implementation
of the billing and collection system for the CAT fees.\69\ In each
proposed rule filing, if the Participants seek to recover amounts under
the Financial Accountability Milestones, they would need to discuss
their completion of the applicable milestone.\70\
---------------------------------------------------------------------------
\66\ See Notice, 90 FR at 44913.
\67\ Id.
\68\ 15 U.S.C. 78s(b).
\69\ See Notice, 90 FR at 44923.
\70\ Proposed Section 11.3(b)(iii)(B)(III) would prohibit any
Participant from filing proposed rule filings pursuant to Section
19(b) of the Exchange Act regarding any Historical CAT Assessment
until any applicable Financial Accountability Milestone in Section
11.6 of the CAT NMS Plan has been satisfied.
---------------------------------------------------------------------------
Commenters state that the Proposed Amendment lacks input from the
industry.\71\ One commenter states that the SROs through the CAT
Operating Committee have for years sought to establish a funding model
for CAT without meaningful industry input, including the Proposed
Amendment
[[Page 13415]]
which was filed without prior consultation with Industry Members.\72\
---------------------------------------------------------------------------
\71\ See, e.g., SIFMA October 2025 Letter, at 3; PTG Letter, at
3. See also FINRA June 2022 Letter, at 8, 9 (advocating for a more
inclusive development process that would include input from the
industry); Letter to Vanessa Countryman, Secretary, Commission, from
Stephen John Berger, Managing Director, Global Head of Government &
Regulatory Policy, dated July 14, 2023 (``Citadel July 2023
Letter''), at 9-10.
\72\ See SIFMA October 2025 Letter, at 3; supra note 27.
---------------------------------------------------------------------------
Two of these commenters submitted comment letters stating that they
incorporate prior comment letters submitted regarding the 2023 Funding
Model Amendment.\73\ Because the 2023 Funding Model Amendment is
substantively identical to the Proposed Amendment, with the exception
of the pass-through prohibition discussed in Part III.A.2 below, the
Commission is considering comment letters from these two commenters
regarding the 2023 Funding Model Amendment to the extent that they are
still applicable to the Proposed Amendment. In addition, the Commission
is considering CAT LLC's responses to those previous comment letters,
submitted in various response letters by CAT LLC in the context of the
2023 Funding Model Amendment.\74\ The Commission is not otherwise
discussing or considering comment letters submitted in connection with
the 2023 Funding Model Amendment, which was a proposed amendment to the
CAT NMS Plan that was subject to its own distinct comment period.
---------------------------------------------------------------------------
\73\ See Citadel January 2026 Letter, at 5 n.5 (stating that
Citadel Securities incorporates and restates the comments set forth
in all of its prior submissions regarding the CAT); FINRA October
2025 Letter, at 4 (incorporating by reference FINRA's prior comment
letters concerning the Executed Share Model and the 2023 Funding
Model Amendment). Comments received in response to the 2023 Funding
Model Amendment 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>.
\74\ See CAT LLC December 2025 Response Letter at 3, n.10
(stating that CAT LLC incorporates by reference its prior letters
concerning the Executed Shares Model).
---------------------------------------------------------------------------
In connection with the 2023 Funding Model Amendment, one of these
commenters states that the Operating Committee refuses to engage the
industry in constructive dialogue, instead choosing to file funding
proposals that are inconsistent with the Exchange Act.\75\ The
commenter also states that the CAT Advisory Committee has been
completely ignored by the Operating Committee and that its
recommendations are non-binding.\76\
---------------------------------------------------------------------------
\75\ See Citadel July 2023 Letter, at 9-10.
\76\ Id. at 6.
---------------------------------------------------------------------------
CAT LLC states that commenters incorrectly state that the Proposed
Amendment lacks input from the industry and that CAT LLC has engaged
with the industry extensively and in good faith since 2016 as it has
explored different approaches to CAT funding and considered various CAT
funding issues, and as detailed in the CAT LLC May 2023 Response Letter
and CAT LLC July 2023 Response Letter.\77\ CAT LLC previously stated
that it has engaged with the industry on the funding model over the
prior seven years, explaining that it has discussed funding model
issues with the CAT Advisory Committee, which includes representation
from the industry, as well as with industry associations such as SIFMA
and the Financial Information Forum, and with individual Industry
Members; analyzed and responded to comment letters on the prior
proposals; and hosted webinars for the industry on funding issues.\78\
CAT LLC listed ideas suggested by the industry that it adopted in
revised versions of the funding model in 2023,\79\ which is largely
identical to the funding model proposed in the Proposed Amendment, and
previously stated that ``the current model results from years of
modifications that have been made in significant part in response to
industry comments to earlier versions.'' \80\ CAT LLC previously stated
that it welcomes industry input on the funding model but believes a
decision on the model is overdue.\81\ CAT LLC states that it remains
``committed to working constructively with the industry on issues
related to CAT funding.'' \82\
---------------------------------------------------------------------------
\77\ See CAT LLC December 2025 Response Letter, at 6.
\78\ See Letter to Vanessa Countryman, Secretary, Commission,
from Brandon Becker, Chair, CAT NMS Plan Operating Committee, dated
May 18, 2023 (``CAT LLC May 2023 Response Letter''), at 12; Letter
to Vanessa Countryman, Secretary, Commission, from Brandon Becker,
CAT NMS Plan Operating Committee Chair, dated July 28, 2023 (``CAT
LLC July 2023 Response Letter''), at 26-27; see also CAT LLC
December 2025 Response Letter, at 6 (stating that, as ``discussed in
detail'' in the CAT LLC May 2023 Response Letter, and CAT LLC July
2023 Response Letter, CAT LLC has engaged with the industry--
including the CAT Advisory Committee, industry associations, as well
as individual Industry Members--extensively and in good faith since
2016 as it has explored different approaches to CAT funding and
considered various CAT funding issues).
\79\ See CAT LLC July 2023 Response Letter, at 27-28.
\80\ Id. at 28. CAT LLC also stated that it has ``repeatedly
sought the views of SIFMA and other industry participants on
specific aspects of the model.'' Id.
\81\ See CAT LLC May 2023 Response Letter, at 12.
\82\ See CAT LLC December 2025 Response Letter, at 6.
---------------------------------------------------------------------------
2. Allocation of Fees Between Participants and Industry Members
Under the Executed Share Model, CAT fees would be allocated one-
third to the applicable Participant, one-third to the CEBS and one-
third to the CEBB of a transaction. Certain commenters opposed the
proposed allocation.\83\
---------------------------------------------------------------------------
\83\ See Citadel October 2025 Letter, at 6-8; Citadel July 2023
Letter; Citadel August 2023 Letter; ASA October 2025 Letter, at 2
(stating that ``neither Rule 613 nor the national market system
(NMS) plan adopted for the CAT in 2016 authorizes a single dollar of
those expenses to be paid by broker-dealers''); Letters to Vanessa
Countryman, Secretary, Commission, from Marcia E. Asquith, Corporate
Secretary, EVP, Board and External Relations, FINRA, dated May 25,
2023 (``FINRA May 2023 Letter''); April 11, 2023 (``FINRA April 2023
Letter''); and June 22, 2022 (``FINRA June 2022 Letter'') (the FINRA
June 2022 Letter was submitted in response to the prior funding
proposal and was attached and incorporated by reference in the FINRA
April 2023 Letter).
---------------------------------------------------------------------------
Comments on the 2023 Funding Model Amendment
In comment letters submitted previously in response to the 2023
Funding Model Amendment, and incorporated by reference in the FINRA
October 2025 Letter, FINRA stated that, while the Proposed Amendment
justified the fairness of the Executed Share Model because it would
operate like other fees, such as FINRA's Trading Activity Fee
(``TAF''), Section 31 fees, and the options regulatory fee,\84\ the
Proposed Amendment did not support why those fee frameworks should be
used as a model in this context.\85\ For example, FINRA stated that the
TAF is designed to recover the costs of FINRA's regulatory activities,
while the CAT fees are intended to align with the costs to build,
operate and administer the CAT.\86\ Further, FINRA stated that the
Proposed Amendment has insufficiently explained the connection between
the TAF and CAT fees, merely stating that they are similar fees because
they are transaction-based fees used to provide funding for regulatory
costs.\87\ FINRA stated that ``CAT LLC's observations superficially
focus on the fact that these fees also use transaction-based metrics
(and may be assessed on members) and neglects other factors relevant to
the analysis including, for example, that these fees are used in
combination with other funding mechanisms and metrics to support an
overall funding framework.'' \88\
---------------------------------------------------------------------------
\84\ See Notice, 90 FR at 44926-27.
\85\ See FINRA June 2022 Letter, at 4. See also 2023 Funding
Model Amendment Approval Order, at 62630.
\86\ See FINRA April 2023 Letter, at 8.
\87\ Id. FINRA also stated that ``it is unclear how assessing on
FINRA the largest allocation of the SRO portion of CAT expenses
`provides funding for regulatory costs' in any reasonable and
equitable sense comparable to the TAF. . .'' Id.
\88\ See FINRA May 2023 Letter, at 3.
---------------------------------------------------------------------------
Furthermore, in a comment on the 2023 Funding Model Amendment that
FINRA incorporated by reference because it applies to the Proposed
Amendment, FINRA objected to statements that Industry Members can pass
through to their customers their CAT cost allocation and additional
costs resulting from an increase in FINRA
[[Page 13416]]
fees.\89\ FINRA stated that ``[s]ummarily stating that investors can be
made to bear the costs resulting from the Funding Model without a
detailed description of and transparency into how these fees would be
determined or passed on to customers is inadequate, and does not
provide interested parties sufficient information to consider the costs
and benefits related to the Fee Proposal.'' \90\ In response to that
comment on the 2023 Funding Model Amendment, CAT LLC stated that
Industry Members can pass through their own CAT fees to their
customers, like broker-dealers do for transaction-based fees.\91\ CAT
LLC stated that this may result in Industry Members not having any
funding burden if they decide to entirely pass-through their allocation
to investors.\92\ CAT LLC also stated that Participants are permitted
by the Exchange Act to charge their members fees to fund the
Participants' share of CAT fees, as long as they submit fee filings
that demonstrate that any proposed fee is consistent with the Exchange
Act.\93\
---------------------------------------------------------------------------
\89\ See FINRA April 2023 Letter, at 6-7.
\90\ Id. at 7.
\91\ See CAT LLC July 2023 Response Letter, at 8.
\92\ Id.
\93\ See CAT LLC July 2023 Response Letter, at 9.
---------------------------------------------------------------------------
Another commenter states that the proposed CAT funding model cannot
be compared to Section 31 fees, the TAF, or the options regulatory fee
because the commenter believes that CAT fees appear to be unconstrained
and out of the industry's control.\94\ The commenter explains that,
unlike the proposed CAT fees, Section 31 fees are based on an annual
budget set by Congress and the options regulatory fee is only applied
to customer transactions and thus can be easily passed-on to other
market participants (unlike CAT fees for market making activity).\95\
Additionally, the commenter states that there is no precedent for fees
to be allocated to Industry Members in perpetuity, stating that this
would contravene the Exchange Act.\96\
---------------------------------------------------------------------------
\94\ See Citadel July 2023 Letter, at 27. See also 2023 Funding
Model Order, at 62630-31.
\95\ Id. The commenter also stated that FINRA has sought to
avoid increases in the TAF. Id.
\96\ Id. This commenter states that it is inequitable to require
Industry Members to fund CAT costs in perpetuity when they lack
representation on the Operating Committee and therefore have little
transparency into the drivers of the costs, and there is no plan to
contain the costs. See id. at 2.
---------------------------------------------------------------------------
In response to the comment stating that there is no precedent for
CAT fees to be allocated to Industry Members in perpetuity, and that
the Exchange Act would not allow CAT LLC to require Industry Members to
fund unlimited costs in perpetuity,\97\ CAT LLC states that the
proposed allocation would not require Industry Members to fund all
costs since it would divide CAT costs such that one-third would be paid
each by the Participant, CEBB and CEBS in a transaction.\98\
Furthermore, CAT LLC states that fees would not be paid in perpetuity,
as the Fee Rate set by the Operating Committee at the beginning of each
year would be based on reasonably budgeted CAT costs and projected
total executed equivalent share volume for the year and would be
adjusted mid-year, and that to implement the Fee Rates, the
Participants would need to file fee filings pursuant to Rule 19b-4 with
the Commission that must be consistent with the Exchange Act and allow
the public the opportunity to comment on the fees.\99\ CAT LLC adds
that the Executed Share Model would operate similarly to other fees
that the Commission has determined are consistent with the Exchange
Act, such as Participants' sales value fees related to Section 31, the
TAF and the options regulatory fee, and that the comment did not
recognize that Industry Members can choose to pass-through CAT fees to
their customers like they do the Section 31-related sales value
fees.\100\
---------------------------------------------------------------------------
\97\ See Citadel July 2023 Letter, at 27.
\98\ See CAT LLC July 2023 Response Letter, at 14.
\99\ Id.
\100\ Id.
---------------------------------------------------------------------------
FINRA also states that the Proposed Amendment did not justify why
the proposed allocation by thirds to the Participant, buy-side and
sell-side is equitable in the context of the CAT NMS Plan.\101\ FINRA
also states that the Proposed Amendment did not consider alternatives
suggested by commenters on a prior proposed funding model,\102\ such as
a model similar to Section 31 fees and a CAT funding model based on the
``Cost Recovery Principle'' and the ``Benefits Received Principle.''
\103\ FINRA urges the Commission to require those alternatives to be
analyzed.\104\ Another commenter states that once analyzed by the
Commission, ``it will be clear'' that allocating at least two-thirds of
CAT system costs to broker-dealers and their customers in the manner
contemplated by the Proposed Amendment is not fair and equitable under
the Exchange Act, and that that Commission must also consider the
economic implications of the ``winners and losers'' in terms of the
proposed allocation of costs.\105\
---------------------------------------------------------------------------
\101\ See FINRA June 2022 Letter, at 3.
\102\ See Securities Exchange Act Release Nos. 94984 (May 25,
2022), 87 FR 33226 (June 1, 2022); 96394 (Nov. 28, 2022), 87 FR
74183 (Dec. 2, 2022); and Letter from Michael Simon, Chair Emeritus,
CAT NMS Plan Operating Committee, to Vanessa Countryman, Secretary,
Commission (Feb. 15, 2023).
\103\ See FINRA April 2023 Letter, at 5 (citing Letter to
Vanessa Countryman, Secretary, Commission, from Lawrence Harris,
Fred V. Keenan Chair in Finance, Professor of Finance and Business
and Economics, U.S.C. Marshall School of Business, dated June 21,
2022).
\104\ Id.
\105\ See Citadel October 2025 Letter, at 8.
---------------------------------------------------------------------------
In response to the comment stating that the Participants had not
analyzed a suggested Section 31-style approach to a funding model,\106\
CAT LLC stated in a response letter submitted for the 2023 Funding
Model Amendment that the CAT fee approach is similar to the Section 31
fee approach in how an exchange would be obligated to pay a transaction
fee based on transactions occurring on that exchange, and that FINRA
would be obligated to pay a transaction fee based on transactions in
the over-the-counter market.\107\ CAT LLC stated that the approaches
are also similar because, in both, an exchange would be able to
determine to pass the fee onto its members, as would FINRA.\108\ CAT
LLC stated that if the Section 31 approach would comply with the
Exchange Act, then the proposed CAT fee approach should also comply
with the Exchange Act and CEBBs and CEBSs could determine whether to
pass such fees onto their clients.\109\
---------------------------------------------------------------------------
\106\ See FINRA April 2023 Letter, at 5.
\107\ See CAT LLC May 2023 Response Letter, at 9.
\108\ Id.
\109\ Id.
---------------------------------------------------------------------------
In response, FINRA stated that the CAT LLC May 2023 Response Letter
misrepresented the commenter's letter by incorrectly stating that the
commenter's letter recommended an approach similar to Section 31
fees.\110\ FINRA clarified that it was noting that the Commission had
received comments suggesting a model like the Section 31 fees, that the
Participants had not ``meaningfully analyzed'' the suggested
alternatives in the Proposed Amendment, and that the Commission should
require the Participants to analyze the alternatives.\111\
---------------------------------------------------------------------------
\110\ See FINRA May 2023 Letter, at 3, n.8.
\111\ Id.
---------------------------------------------------------------------------
CAT LLC further responded to FINRA's objections to the use of the
TAF as precedent for CAT fees--specifically, FINRA's statement that
unlike the proposed CAT fees, the TAF recovers the costs of FINRA's
regulatory activities, while the Proposed Amendment is designed to
align with the costs to build, operate and administer the CAT.\112\ CAT
LLC stated that there is no distinction between the
[[Page 13417]]
two points raised by the commenter because CAT only has a regulatory
purpose; therefore, costs to build, operate and administer the CAT are
inherently regulatory costs.\113\ CAT LLC also noted that FINRA
distinguished the TAF from the proposed CAT fees by describing the TAF
as being used in combination with other funding mechanisms to support a
funding framework, but CAT LLC stated that ``this does not change the
general conclusion that a transaction-based fee complies with the
Exchange Act.'' \114\
---------------------------------------------------------------------------
\112\ See FINRA May 2023 Letter, at 3.
\113\ See CAT LLC July 2023 Response Letter, at 35.
\114\ Id.
---------------------------------------------------------------------------
In a comment letter submitted previously in response to the 2023
Funding Model Amendment, a commenter states that the Proposed Amendment
does not demonstrate that it is equitable, as required by Section
6(b)(4),\115\ or rational, as required by the Administrative Procedure
Act,\116\ to allocate two-thirds of CAT costs to Industry Members,
stating that ``there is no suggestion that Industry Members somehow
receive 67% of the benefits from CAT.'' \117\ Furthermore, the
commenter states that the Proposed Amendment would result in an
inequitable allocation to a small number of Industry Members.\118\
---------------------------------------------------------------------------
\115\ 15 U.S.C. 78f(b)(4).
\116\ 5 U.S.C. 551 et seq.
\117\ See Citadel July 2023 Letter, at 17.
\118\ Id.
---------------------------------------------------------------------------
In response to comments that object to the proposed allocation to
Industry Members because Industry Members would not benefit from the
CAT,\119\ CAT LLC states allocating costs based on who benefits from
the CAT is ``not appropriate or practical.'' \120\ CAT LLC states that
the CAT is intended to benefit all market participants, explaining how
it would benefit Industry Members, and stated that it would be
``impractical to determine a model that allocates a measurable amount
of benefit that each market participant receives from the CAT.'' \121\
In response to a commenter that suggests that Industry Members should
not be allocated any ``costs for matters that primarily benefit the CAT
Operating Committee or the SROs.'' \122\ CAT LLC disagrees that
Industry Members do not benefit from the CAT because CAT is critical
for the protection of investors and because CAT supports fair and
efficient markets.\123\ CAT LLC also states that it was not
``reasonable or practical to attempt to parse CAT costs by who
`primarily benefits' from those costs.'' \124\
---------------------------------------------------------------------------
\119\ See Citadel July 2023 Letter, at 17.
\120\ See CAT LLC July 2023 Response Letter, at 10.
\121\ Id. at 11.
\122\ See Citadel July 2023 Letter, at 32.
\123\ See CAT LLC July 2023 Response Letter, at 13.
\124\ Id. at 12. See also id. at 13.
---------------------------------------------------------------------------
The commenter also states that the Proposed Amendment would result
in the allocation of all of the costs to build and operate the CAT to
Industry Members and would therefore be inconsistent with Section
6(b)(4) to equitably allocate reasonable fees.\125\ The commenter
states that, in addition to the proposed allocation to Industry
Members, FINRA's 11% cost allocation would be passed-on to Industry
Members and that exchanges would also pass-on their 22% cost
allocation.\126\ The commenter stated that, with FINRA's allocation,
78% of the costs to build and operate the CAT would be allocated to
Industry Members under the 2023 Funding Model Amendment.\127\ The
commenter stated that 78% is the same amount allocated to Industry
Members in a prior CAT funding model proposal from 2021, and states
that in the 2023 Funding Model Amendment, the Operating Committee
concedes that the 2021 allocation ``may have an adverse effect on
competition, liquidity or other aspects of market structure,'' \128\
however the 2023 Funding Model Amendment does not explain why using a
different metric--executed share volume rather than message traffic--to
create the same allocation would not result in similar
consequences.\129\
---------------------------------------------------------------------------
\125\ Id. at 1, 16, 22.
\126\ Id. at 1, 21, 22.
\127\ Id. at 21.
\128\ Id.
\129\ See Citadel July 2023 Letter, at 21.
---------------------------------------------------------------------------
Further, the commenter states that Industry Members may also be
required to pay the exchange cost allocation,\130\ citing a statement
in the 2023 Funding Model Amendment that ``each Participant may
determine to charge their members fees to fund their share of the CAT
fees.'' \131\ The commenter states that if exchanges choose to do this,
then Industry Members would be responsible for 100% of CAT costs, which
would ``distort incentives and hinder the prioritization of critical
cost-control measures, as the firms governing CAT are not bearing any
of the associated costs.'' \132\ The commenter requests that the
Commission prohibit exchanges from passing-on their CAT costs.\133\ The
commenter also states that even after restructuring the funding model
to base allocation on share volume instead of message traffic, as in
prior funding model proposals, the allocation to exchanges stayed the
same, arguing that the exchanges are unwilling to allocate themselves
more than 22% of total costs.\134\ The commenter states that the
proposed allocation methodology is inconsistent with the Exchange Act
because of the excessive percentage of total costs proposed to be
allocated to Industry Members and the unfair method of allocating costs
among Industry Members,\135\ stating, ``[t]he allocation methodology
will have a direct and negative impact on market efficiency,
competition, and capital formation, and the Commission must
comprehensively assess those impacts before approving this filing.''
\136\
---------------------------------------------------------------------------
\130\ Id. at 22. See also Citadel August 2023 Letter, at 2.
\131\ See Citadel July 2023 Letter, at 22. See also 2023 Funding
Model Amendment, 88 FR at 17107. The commenter also states that
while the 2023 Funding Model Amendment describes the funding model
as ``neutral as to location and manner of execution,''
counterparties to off-exchange transactions would receive higher
fees than on-exchange transactions if exchanges choose not to pass-
on their cost allocation to Industry Members. See Citadel July 2023
Letter, at 21. See also 2023 Funding Model Amendment, 88 FR at
17087; Notice, 90 FR at 44911.
\132\ Citadel July 2023 Letter, at 22. See also id. at 16. See
also Citadel August 2023 Letter, at 2 (stating that an allocation of
100% of CAT costs to Industry Members cannot be lawful).
\133\ Citadel July 2023 Letter, at 22.
\134\ Id. at 10.
\135\ Id. at 15.
\136\ Id.
---------------------------------------------------------------------------
In response to comments that state that Industry Members could bear
100% of CAT costs if Participants decide to pass-through their costs to
them,\137\ and in the context of the 2023 Funding Model Amendment, CAT
LLC states that Industry Members can pass through their own CAT fees to
their customers, like broker-dealers do for transaction-based
fees.\138\ CAT LLC states that this may result in Industry Members not
having any funding burden if they decide to entirely pass-through their
allocation to investors.\139\ In response to commenters that request
that Participants be prohibited from passing-on their CAT costs to
their members,\140\ CAT LLC states that Participants are permitted by
the Exchange Act to charge their members fees to fund the Participants'
share of CAT fees, as long as they submit fee filings that demonstrate
that any proposed fee is consistent with the Exchange Act.\141\ As
discussed below, unlike the 2023 Funding Model Amendment, the Proposed
Amendment includes a proposed provision limiting the ability of
Participants to establish new fees to pass-through their CAT costs.
---------------------------------------------------------------------------
\137\ See Citadel July 2023 Letter, at 16, 22.
\138\ See CAT LLC July 2023 Response Letter, at 8.
\139\ Id.
\140\ See Citadel July 2023 Letter, at 3, 22, 30.
\141\ See CAT LLC July 2023 Response Letter, at 9.
---------------------------------------------------------------------------
[[Page 13418]]
The commenter stated that the 2023 Funding Model Amendment does not
provide the percentage of total costs to build and operate the CAT that
will be borne by Industry Members in practice.\142\ The commenter
states that it is necessary to determine the ultimate allocation of CAT
costs to evaluate whether the proposed allocation is consistent with
the Exchange Act, arguing that the statements made in support of the
allocation were premised on the Participants being responsible for one-
third of total CAT costs, and that if this is untrue, ``the filing must
be completely reconsidered, taking into account (a) the impact on
market efficiency, competition and capital formation of allocating this
magnitude of additional costs to Industry Members, (b) whether such a
lopsided allocation is fair and equitable, and (c) the implications for
CAT governance and budget control if the firms governing CAT do not
have any skin-in-the-game.'' \143\
---------------------------------------------------------------------------
\142\ See Citadel August 2023 Letter, at 2.
\143\ Id.
---------------------------------------------------------------------------
This commenter states that the allocation does not take into
account fees currently paid by the industry and implementation costs
incurred by Industry Members to comply with CAT reporting
requirements.\144\ The commenter states that Industry Members already
provide funding for regulatory matters to exchanges through regulatory
fees, membership fees, market data fees, and registration fees, and
that these fees must be factored into any equitable or rational
allocation of CAT costs.\145\ The commenter states that although the
2023 Funding Model Amendment states that there is no precedent for
regulatory fees to be determined based on the cost of compliance of a
regulated entity, it is necessary to take into account all CAT-related
costs including those already allocated to Industry Members to assess
whether the Proposed Amendment is equitable.\146\
---------------------------------------------------------------------------
\144\ See Citadel July 2023 Letter, at 17.
\145\ See Citadel July 2023 Letter, at 17 (further stating,
``Industry Members are already bearing nearly all of the total CAT-
related costs, at a rate much higher than the Commission estimated
in its approval of the 2016 CAT NMS Plan.'' Id. at 18).
\146\ Id.
---------------------------------------------------------------------------
In response to comments objecting to the proposed allocation to
Industry Members for not taking into account regulatory fees currently
paid by Industry Members,\147\ CAT LLC states that the Proposed
Amendment is intended to assess fees ``directly associated with the
costs of establishing and maintaining the CAT, and not unrelated SRO
services.'' \148\
---------------------------------------------------------------------------
\147\ See Citadel July 2023 Letter, at 17. CAT LLC also objected
to one commenter's description of the CAT as an exchange ``revenue
generator,'' stating that CAT LLC is a business league under Section
501(c)(6) of the Internal Revenue Code, and that enforcement
activity obtains restitution for investors and deters future
misconduct rather than generating revenue. See CAT LLC July 2023
Response Letter, at 13-14 (responding to Citadel July 2023 Letter,
at 17).
\148\ See CAT LLC July 2023 Response Letter, at 13.
---------------------------------------------------------------------------
This commenter also objects to statements made regarding the
complexity of Industry Member business models contributes substantially
to the costs of the CAT. This commenter states that the complexity
arguments in the Proposed Amendment contradict statements from the
Operating Committee that stringent performance and other requirements
for processing CAT data are significant drivers of CAT costs,\149\ and
that the complexity arguments suggest that costs should be allocated
evenly among Industry Members, not just a small group of Industry
Members based on volume.\150\
---------------------------------------------------------------------------
\149\ See Citadel July 2023 Letter, at 17-18. See also Notice,
at 44927 (noting the ``complexity of market activity'').
\150\ Id. at 18.
---------------------------------------------------------------------------
In response to comments regarding the complexity of Industry Member
business models as a driver of CAT costs,\151\ CAT LLC states that its
analysis of the complexity of the industry's business models is based
on the effects of those models on the costs of the CAT, which it states
are more profound than those of Participants, not on complexity of the
market in general.\152\ CAT LLC explains that the complexity of the
Industry Members' business models results in significant data
processing and storage costs, which Participants do not contribute to
as they do not originate market activity or orders.\153\ CAT LLC
explains that (1) the complexity and diversity of Industry Members'
business models and order handling practices require processing and
storing hundreds of reporting scenarios for Industry Members, resulting
in significant data processing and storage costs; \154\ (2) Industry
Members have more late data and corrections than Participants,
resulting in significant linker costs; \155\ and (3) Industry Members
have customers, which results in CAT costs related to customer account
information (FDID, CCID and CAIS) and customer investment
strategies.\156\ CAT LLC also states that Participants would pay the
same amount as the CEBBs and CEBSs in each transaction.\157\ CAT LLC
states that commenters did not demonstrate a causal connection between
exchange fee structures and CAT costs.\158\ CAT LLC states that it was
not involved in these Industry Member business decisions and a
substantial amount of CAT costs result from such business
decisions.\159\ CAT LLC also states that Participant activity does not
contribute as much to CAT costs as complex Industry Member
activity.\160\
---------------------------------------------------------------------------
\151\ See Citadel July 2023 Letter, at 17-18.
\152\ See CAT LLC May 2023 Response Letter, at 6; CAT LLC July
2023 Response Letter, at 6.
\153\ See CAT LLC May 2023 Response Letter, at 7; CAT LLC July
2023 Response Letter, at 7.
\154\ See CAT LLC July 2023 Response Letter, at 7.
\155\ Id.
\156\ Id.
\157\ Id. at 6.
\158\ See CAT LLC July 2023 Response Letter, at 6.
\159\ Id.
\160\ Id.
---------------------------------------------------------------------------
This commenter also states that, while most Industry Members will
pay little to no CAT costs, 20 Industry Members will be responsible for
75% of the costs allocated to Industry Members.\161\ The commenter
states that this would contradict the 2023 Funding Model Amendment's
arguments that there are more Industry Members than Participants and
that Industry Members have greater financial resources than
Participants because the Operating Committee would outnumber the
Industry Members that would be paying the most in costs.\162\
---------------------------------------------------------------------------
\161\ See Citadel July 2023 Letter, at 17. The commenter also
stated that the Proposed Amendment does not explain why it would be
equitable to allocate 50% of total CAT costs to 20 Industry Members
and 22% of total CAT costs to 24 exchanges. Id.
\162\ Id.
---------------------------------------------------------------------------
The commenter also states that the Proposed Amendment lacks support
for the proposed allocation.\163\ The commenter states that the
Operating Committee has not met its burden to demonstrate that the
proposed allocation is consistent with the Exchange Act.\164\ The
commenter also states that the Proposed Amendment does not consider the
impact of the proposed allocation to Industry Members on market
efficiency, competition and capital formation, particularly with
respect to the costs the industry will incur to build systems to pass-
through their CAT fees, the expected impact on volumes, the expected
impact on retail investors, and the expected impact on market
makers.\165\
---------------------------------------------------------------------------
\163\ Id. at 13. See also Citadel August 2023 Letter, at 2.
\164\ See Citadel July 2023 Letter, at 13.
\165\ Id. at 2, 16, 19, 20. The commenter further stated that
the Proposed Amendment is inconsistent with the Exchange Act because
it cannot equitably allocate fees and will harm market efficiency,
competition and capital formation. Id. at 16.
---------------------------------------------------------------------------
[[Page 13419]]
The commenter suggests alternatives to the proposed allocation
methodology.\166\ The commenter states that Industry Members should not
be allocated more than 50% of ongoing CAT costs (including FINRA's
allocation) due to their lack of industry voting representation and
because they already bear nearly all of the total CAT-related
costs.\167\ The commenter also suggests that exchanges should be
prohibited from passing-on their CAT cost allocation to market
participants,\168\ and that the Participants consider allocating costs
to the Commission ``to align incentives.'' \169\ The commenter
recommends a consistent methodology for allocating costs to both
Industry Members and exchanges.\170\ The commenter also recommends an
allocation methodology that would ensure that ``a small group of firms
are not disproportionately bearing costs given that CAT is designed to
facilitate market-wide surveillance across all market participants,''
\171\ and would not inequitably allocate costs to specific market
segments (such as ``retail trading activity in NMS stocks'').\172\ The
commenter suggests that the approach could have ``(I) minimum and
maximum fee levels, (II) appropriate calibrations for liquidity
provision, (III) a volume component based on notional (instead of
executed shares), and (IV) consideration of additional metrics that
could achieve a more equitable outcome (e.g., broker-dealer capital).''
\173\
---------------------------------------------------------------------------
\166\ Id. at 3, 30, 31. The commenter stated that the Commission
must consider reasonable alternatives and that the proposal should
be rejected and replaced by a proposal incorporating the commenter's
recommendations. Id. at 30, 2.
\167\ Id. at 3, 30, 31.
\168\ See Citadel July 2023 Letter, at 3, 30, 31.
\169\ Id. at 3, 31. In response, CAT LLC stated that the
Commission is not a party to the CAT NMS Plan, or subject to Rule
608 of Regulation NMS or Section 19(b) of the Exchange Act. See CAT
LLC July 2023 Response Letter, at 31, n.144.
\170\ See Citadel July 2023 Letter, at 30-31.
\171\ Id. at 30.
\172\ Id. at 3, 30.
\173\ See id. at 30. See also Citadel August 2023 Letter, at 5.
---------------------------------------------------------------------------
In response to the commenter that recommended allocating no more
than 50% of CAT costs to Industry Members, including the FINRA
allocation,\174\ CAT LLC states that the commenter did not offer a
reasoned basis why such an allocation would be consistent with the
Exchange Act.\175\ CAT LLC also states that such an allocation would
raise fairness concerns because, as compared to Participants, Industry
Members have greater financial resources, and their complex business
models ``contribute substantially to the costs of the CAT.'' \176\
Furthermore, in response to the commenter's other suggested allocation
methodology which the commenter states would ensure that a small group
of firms and specific market segments would not be subject to
inequitable cost burdens,\177\ CAT LLC states that the commenter did
not explain how the suggested methodology would fit into a funding
model or how such a funding model would be consistent with the Exchange
Act.\178\ CAT LLC states that it evaluated various other funding models
over the past seven years and concluded that ``the Executed Share Model
provides a variety of advantages in comparison to the alternatives, and
satisfies the requirements of the Exchange Act.'' \179\
---------------------------------------------------------------------------
\174\ See Citadel July 2023 Letter, at 31.
\175\ See CAT LLC July 2023 Response Letter, at 10.
\176\ Id.
\177\ See Citadel July 2023 Letter, at 30.
\178\ See CAT LLC July 2023 Response Letter, at 10.
\179\ Id. at 11-12.
---------------------------------------------------------------------------
In response, the commenter states that its suggestions, which
included minimum and maximum fee levels, calibrations for liquidity
provision, and consideration of additional metrics,\180\ were included
in prior funding model proposals.\181\ The commenter states that the
CAT Operating Committee should explain why it changed its position on
``the importance of these elements as part of a fair and equitable
funding proposal that is consistent with the Exchange Act.'' \182\
---------------------------------------------------------------------------
\180\ See Citadel August 2023 Letter, at 5.
\181\ Id. (citing the minimum and maximum fees and market making
discounts proposed in a funding model proposal from the CAT
Operating Committee that was filed in 2021. See Securities Exchange
Act Release No. 91555 (Apr. 14, 2021), 86 FR 21050 (Apr. 21, 2021)).
\182\ Id.
---------------------------------------------------------------------------
This commenter also states that many of the largest Industry
Members would be allocated CAT fees based on proprietary trading
activity, so they would not be able to pass through their fees to
investors.\183\ The commenter urges for an analysis of proprietary
executed volume compared to customer executed volume in order to
evaluate how CAT costs will be allocated among Industry Members and
whether the allocation methodology is fair, equitable and not unfairly
discriminatory.\184\ The commenter also states that the 2023 Funding
Model Amendment is inconsistent with Section 6(b)(5) by imposing a new
and increasing expense on investors, which would negatively impact
liquidity and efficiency, and that the proposed allocation to Industry
Members would disproportionately impact market makers (because 20 firms
would have to pay most of the costs) and retail investors (due to their
trading in sub-dollar NMS stocks that increase executed share volume),
in violation of Section 6(b)(8).\185\
---------------------------------------------------------------------------
\183\ See Citadel July 2023 Letter, at 20. See also Citadel
August 2023 Letter, at 3.
\184\ See Citadel August 2023 Letter, at 3. The commenter said
that such an analysis is feasible and should account for aggregate
costs to be borne by affiliated entities, stating that this is
required in Section 11.2(c) of the 2016 CAT NMS Plan. Id.
\185\ See Citadel July 2023 Letter, at 2.
---------------------------------------------------------------------------
Comments on the Proposed Amendment
Subsequent to the 2023 Funding Model Order and vacatur of that
order by the Eleventh Circuit, the Participants submitted the Proposed
Amendment which would include a new paragraph (e) to Section 11.3 of
the CAT NMS Plan that would provide that each Participant agrees not to
establish a new fee for passing through its CAT fees, which the
Participants state is to ``address the Eleventh Circuit's opinion
regarding the potential for Participants to pass-through 100% of their
CAT fees to Industry Members, and its effect on the allocation of CAT
costs under the Executed Share Model.'' \186\ Proposed Section 11.3(e)
of the CAT NMS Plan, as modified by the Commission,\187\ would state
that no Participant will file with the SEC a proposed rule change
pursuant to Section 19(b) and Rule 19b-4 thereunder that would
establish a new fee for directly passing through to its members the CAT
fee charged to such Participant in accordance with Section 11.3(a) (the
``direct pass-through prohibition'').
---------------------------------------------------------------------------
\186\ Notice, at 44923.
\187\ See supra note 10 and accompanying text.
---------------------------------------------------------------------------
Multiple commenters state that the direct pass-through prohibition
would be ineffective in its stated goal.\188\ Commenters specifically
note that the direct pass-through prohibition only purports to prevent
a Participant from filing a rule change with the Commission to
establish a ``new fee.'' \189\ One of these commenters states that this
usage of the term ``new fee'' raises the specter of adding CAT costs to
existing fees the SROs already charge their members to recoup their CAT
costs, thus doing indirectly what they cannot
[[Page 13420]]
do directly.\190\ FINRA states that this theoretical limit on direct
pass-through fees also ignores the reality of FINRA's funding
structure, because the most direct way to allocate FINRA's designated
CAT costs to its members (who ultimately will bear costs allocated to
FINRA) would be to apply cost recovery fees to members whose activities
most directly contribute to FINRA's designated portion of Participant
CAT fees.\191\ Another commenter states that CAT LLC is ``clearly''
attempting to preserve the ability for SROs to pass through some of all
of their CAT costs to their members in other ways in direct
contravention of the Eleventh Circuit's decision.\192\ This commenter
states that allowing SRO pass-throughs directly conflicts with the
Eleventh Circuit's decision and fundamentally alters the allocation
formula that the Commission is considering.\193\ Another commenter
states that FINRA is responsible for roughly 10% of the entire CAT
budget, and nothing in the Proposed Amendment stops FINRA from passing
on 100% of those costs to its members by increasing its existing
membership fees.\194\ Multiple commenters state that the Proposed
Amendment is simply an attempt to circumvent the Eleventh Circuit's
opinion vacating the 2023 Funding Model Order, and that the Proposed
Amendment should be disapproved.\195\
---------------------------------------------------------------------------
\188\ See FINRA Wilson Sonsini January 2026 Letter, at 1; FINRA
October 2025 Letter, at 10-11; Citadel October 2025 Letter, at 9-10;
SIFMA October 2025 Letter, at 2; PTG Letter, at 2; AmFree Letter, at
5. See also Citadel July 2023 Letter, at 20 and Citadel August
Letter, at 3 (both raising concerns about CAT costs being passed on
to investors); ASA February 2026 Letter, at 4.
\189\ See FINRA October 2025 Letter, at 10-11; Citadel October
2025 Letter, at 9; SIFMA October 2025 Letter, at 2; PTG Letter, at
2. See also ASA February 2026 Letter, at 4 (stating that while the
Proposed Amendment purports to limit certain pass-throughs, it
leaves in place Plan language that permits SROs to bundle or
otherwise incorporate CAT costs into their various other fees or
assessments).
\190\ See SIFMA Letter, at 2. See also PTG Letter, at 2.
\191\ See FINRA October 2025 Letter, at 11-12. This commenter
states that the direct pass-through prohibition is ``unlawful,
ineffective, and fails to cure the defects identified by the
Eleventh Circuit.'' See FINRA Wilson Sonsini January 2026 Letter, at
1.
\192\ See Citadel October 2025 Letter, at 9.
\193\ See id. See also ASA February 2026 Letter, at 4 (stating
that if SRO pass-throughs up to 100% of their allocations are
permitted in substance, the Commission must confront that reality,
explain its policy shift, and incorporate the full economic impact
into its analysis).
\194\ See AmFree Letter, at 5. The commenter states that at
minimum the Proposed Amendment must prohibit FINRA from increasing
its existing membership fees to account for CAT costs. Id. at 6. See
also Citadel October 2025 Letter, at 9 (stating that the Proposed
Amendment provides no explanation as to how FINRA, as a not-for-
profit-organization, will fund its allocation of CAT costs, which
amounts to more than 10% of the entire CAT budget).
\195\ See Citadel October 2025 Letter, at 1; SIFMA October 2025
Letter, at 1-3. See also ASA October 2025 Letter, at 1-2 (stating
that the Proposed Amendment ``mirrors the unlawful 2023 plan in
every essential respect''); PTG Letter, at 1 (stating that the
Proposed Amendment disregards the decision and is the SROs attempt
to ``simply repackage the same unlawful model''); ASA February 2026
Letter, at 4 (stating that the Eleventh Circuit made clear that the
Commission cannot pretend that SROs will bear a portion of CAT costs
while ignoring their ability to pass those costs on to broker-
dealers and their customers).
---------------------------------------------------------------------------
Two commenters state that the Proposed Amendment exceeds CAT LLC's
authority and is unlawful, because the Exchange Act and Rule 608 of
Regulation NMS do not empower CAT LLC or the Plan Participants to
restrict fee filings made by other Plan Participants or control how
other Plan Participants internally fund their costs.\196\ One commenter
states that both the text and history of Rule 608's predecessor
establishes that Rule 608's scope of fee authority is limited to joint
fees for NMS plans.\197\ This commenter states that the proposed direct
pass-through prohibition would not control CAT LLC fees, but instead
purport to control how a Participant SRO funds its own SRO costs
through separate SRO fees, which could potentially establish a
dangerous precedent and enable similar overreach in other NMS
plans.\198\
---------------------------------------------------------------------------
\196\ See FINRA October 2025 Letter, at 2, 7-10; FINRA Wilson
Sonsini January 2026 Letter, at 2-3; FINRA January 2026 Letter, at
2; Cboe Letter, at 1-2.
\197\ See FINRA October 2025 Letter, at 8-9.
\198\ Id. at 9. This commenter further states that the Plan may
violate FINRA's due process rights and run afoul of the Takings
Clause. Id. at 10.
---------------------------------------------------------------------------
CAT LLC states that commenters incorrectly state that the direct
pass-through prohibition attempts to circumvent the Eleventh Circuit's
opinion.\199\ CAT LLC explains that the Eleventh Circuit held that the
Commission's order approving the Executed Shares Model violated the
Administrative Procedures Act as a result of (1) the Commission
allowing for the possibility for ``self-regulatory organizations to
pass through 100% of their fees to broker-dealers--without considering
the effects of that choice'' or providing a ``reasoned justification or
explanation'' of that policy change; and (2) the Commission failing to
``conduct a new economic analysis or revise its previous economic
analysis.'' \200\ CAT LLC states that the Proposed Amendment directly
addresses the Eleventh Circuit's core concern regarding the possibility
of 100% pass-through costs under the 2023 funding order without the SEC
considering the effects of that choice, and that CAT LLC will continue
to work collaboratively with the Commission to inform its new economic
analysis.\201\
---------------------------------------------------------------------------
\199\ See CAT LLC December 2025 Response Letter, at 3.
\200\ Id. at 3-4.
\201\ Id. at 4.
---------------------------------------------------------------------------
CAT LLC disagrees with commenters that state that the direct pass-
through prohibition would allow SROs to charge their members to recoup
their CAT costs indirectly and that this would circumvent the Eleventh
Circuit's decision.\202\ CAT LLC states that the Eleventh Circuit
disapproved the Executed Shares Model Approval Order only insofar as it
permitted ``self-regulatory organizations to pass through 100% of their
fees to broker-dealers--without considering the effects of that
choice'' or satisfactorily explaining that policy change.\203\ CAT LLC
states that the Eleventh Circuit did not hold that SROs could never
pass through 100% of their CAT-related fees, but rather that in
considering a pass-through the SEC must weigh the effects of and
explain its decision.\204\
---------------------------------------------------------------------------
\202\ Id. at 4 (citing SIFMA October 2025 Letter, at 2 and PTG
Letter, at 2).
\203\ Id.
\204\ Id.
---------------------------------------------------------------------------
CAT LLC also states that the direct pass-through provision, as
originally proposed, was intended to impose an obligation on all
Participants, and not intended to suggest that all Participants voted
to approve the Proposed Amendment.\205\ Subsequent to the filing of
those comment letters, CAT LLC submitted Amendment No. 1., which
proposes to revise proposed Section 11.3(e) of Appendix D of the CAT
NMS Plan to ``better reflect that the Proposed Amendment was approved
under the Plan and avoid statements suggesting that all Participants
voted for the proposal,'' by modifying the provision to state that
``[e]ach Participant agrees not to file . . .'' to instead be, ``[n]o
Participant will file.'' \206\ CAT LLC states that this would better
reflect that the Proposed Amendment was approved under the Plan and
avoid statements suggesting that all participants voted for the
proposal.\207\ As noted above, the Commission instead is modifying the
Proposed Amendment to reflect Amendment No. 1 pursuant to Rule
608(b)(2).
---------------------------------------------------------------------------
\205\ Id. at 5. CAT LLC states that as required by the CAT NMS
Plan, a supermajority of Participants voted in favor of the Proposed
Amendment, but there was no unanimity. Id.
\206\ See id.
\207\ See CAT LLC December 2025 Response Letter, at 5.
---------------------------------------------------------------------------
CAT LLC also objects to comments arguing that it is unlawful for
the CAT NMS Plan to prevent individual Participants from passing their
CAT fees through to Industry Members.\208\ CAT LLC states that the
proposed direct pass-through provision falls squarely within the broad
authority of SEC Rule 608(a)(4)(ii) because it embodies a written
understanding relating to the interpretation of the CAT NMS Plan.\209\
CAT LLC also notes that the CAT NMS Plan already includes provisions
that
[[Page 13421]]
prevent the Participants from collecting Post-Amendment Industry Member
Fees, and thus the CAT NMS Plan already imposes restrictions on
individual SRO fees.\210\
---------------------------------------------------------------------------
\208\ Id. at 5.
\209\ Id.
\210\ Id. at 5-6.
---------------------------------------------------------------------------
One commenter responds by stating that CAT LLC's attempt to justify
the direct pass-through prohibition are unpersuasive.\211\ This
commenter states that CAT LLC's argument regarding SEC Rule
608(a)(4)(ii) conflates interpreting the Plan with controlling
individual SRO actions, and thus rests on a flawed reading of Rule
608's text and purpose.\212\ This commenter states that Rule 608
imposes requirements to facilitate transparency, by requiring
disclosure to the Commission and the public of how internal operations
of the Plan--not the external relationship between a distinct SRO and
its members--will be managed, and the relevant provisions of Rule 608
do not grant substantive authority of any sort, much less authority for
a majority of Plan Participants to effectively suspend Section 19(b) of
the Exchange Act, the plain text of which grants individual SROs the
right to file their own fee rules.\213\ The commenter also states that
other provisions identified by CAT LLC in the CAT NMS Plan are not
analogous to the proposed direct pass-through prohibition, and none of
them support the proposition that the CAT NMS Plan may lawfully
restrict how an individual Participant SRO funds its own SRO costs
through separate SRO fees.\214\
---------------------------------------------------------------------------
\211\ See FINRA Wilson Sonsini January 2026 Letter, at 1.
\212\ See id. at 1-2.
\213\ See id. at 2.
\214\ See id. at 2-3.
---------------------------------------------------------------------------
This commenter also states that CAT LLC presents a false dichotomy
when it states that prohibiting all pass-throughs is lawful because the
Eleventh Circuit implicitly held that ``prior to 2023 the CAT NMS Plan
did not contemplate 100% pass-throughs via individual SRO fees.'' \215\
The commenter states that the Eleventh Circuit vacated the 2023 Funding
Order because it allowed--without explanation or ``reason''--for the
possibility that all SROs would pass through 100% of CAT costs, leaving
``broker-dealers . . . on the hook for [the CAT's] entire cost.''
(emphasis in original).\216\ This commenter continues to state that
``[n]othing in the Eleventh Circuit's decision hinted that it viewed
100% pass-through by FINRA as unlawful or inconsistent with the prior
CAT NMS Plan. On the contrary, the Court acknowledged that ``FINRA may
be unique[ly]'' justified in passing through its CAT costs, as it is
``the only nonprofit exchange.'' \217\
---------------------------------------------------------------------------
\215\ See id. at 3 (citing CAT LLC December 2025 Response
Letter, at 5).
\216\ See FINRA Wilson Sonsini January 2026 Letter, at 3 (citing
Eleventh Circuit Decision, at 1275).
\217\ See FINRA Wilson Sonsini January 2026 Letter, at 3 (citing
Eleventh Circuit Decision, at 1279).
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The commenter also states that CAT LLC's amendment of the language
of the direct pass-through prohibition, deleting the phrase ``[e]ach
Participant agrees,'' by replacing it with ``[n]o Participant will
file,'' is more accurate but not more lawful, and underscores that
proposed Section 11.3(e) is not a ``written understanding'' among
consenting parties, but rather a regulation that CAT LLC is attempting
to unlawfully impose over the objection of dissenting
Participants.\218\ This commenter states that the Proposed Amendment
purports to restrict FINRA's ability to fund itself while leaving
untouched the commercial revenue generated for exchanges, when FINRA is
the only not-for-profit SRO that relies primarily on fees from its
members for funding and the only Participant not operating a market,
which means that the practical reality is that any allocation of
Participants' CAT costs to FINRA will almost certainly be equivalent to
allocating those costs to industry members.\219\
---------------------------------------------------------------------------
\218\ See id. at 3-4. See also FINRA January 2026 Letter, at 2
(stating that while this formulation is more accurate, it is no more
lawful because FINRA did not vote in favor of this modified
formulation, in part because SROs may not use the mechanism of a
national market system plan to control the fees of other SROs that
are participants in the plan).
\219\ See FINRA Wilson Sonsini January 2026 Letter, at 4.
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One commenter also states that the Proposed Amendment would have an
``undue impact'' on market makers, by allocating a disproportionate
percentage of total CAT system costs to a ``small handful of market
makers,'' and that because market makers would be allocated costs for
their proprietary trading activity, those costs could be passed-on to
other market participants through higher trading spreads.\220\ The
commenter states that the Commission must assess the economic
implications for market makers and overall market liquidity by
determining (i) the percentage of total CAT costs that the ten largest
market makers would be allocated based their proprietary trading
activity (using CAT data and the invoices sent by CAT LLC over the past
year under the vacated 2023 funding order) and (ii) the potential
impact on spreads, particularly in less liquid stocks with wider quoted
spreads.\221\
---------------------------------------------------------------------------
\220\ See Citadel October 2025 Letter, at 7.
\221\ Id.
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CAT LLC states that commenters make several arguments related to
the decision to allocate one-third of CAT costs to Participants and
two-thirds of CAT costs to Industry Members and that these commenters
made the same arguments with respect to the allocation of CAT costs
between Participants and Industry Members under the Executed Shares
Model when it was originally proposed, and CAT LLC addressed those
comments in detail in its prior comment letters concerning the Executed
Shares Model, as well as when it originally proposed the Executed
Shares Model.\222\
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\222\ See CAT LLC December 2025 Response Letter, at 2-3. See
also Letter to Vanessa Countryman, Secretary, Commission, from
Robert Walley, CAT NMS Plan Operating Committee Chair, dated Jan.
14, 2026 (``CAT LLC January 2026 Response Letter'').
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Findings Regarding Allocation of Fees
The Commission disagrees with the assertions of certain commenters
that the Proposed Amendment violates the Exchange Act, contravenes the
Eleventh Circuit's decision, imposes an excessive portion of CAT costs
on Industry Members, or will result in an insufficient focus on cost
control. The Executed Share Model reflects an appropriate approach to
funding the operation of the CAT during the interim period while the
Commission engages in its comprehensive review of CAT.\223\ The CAT NMS
Plan contemplates that the costs of the CAT are to be allocated between
the Participants \224\ and Industry Members (which would include CAT
Executing Brokers).\225\ How the costs of CAT should be allocated
between Participants and Industry Members is a question of judgment for
which there may be multiple reasonable approaches. CAT LLC's proposal
to split CAT fees evenly among the three parties who have primary roles
related to transactions reportable to CAT--the buyer, seller, and
market regulator--constitutes a reasonable and equitable allocation of
the costs of CAT among the primary
[[Page 13422]]
parties that participate in and benefit from such trading activity and
the market oversight CAT enables. In vacating the 2023 funding order,
the Eleventh Circuit decision did not question the reasonableness of
this method of determining and allocating CAT fees.
---------------------------------------------------------------------------
\223\ See 17 CFR 242.608(b)(2).
\224\ The CAT NMS Plan requires Execution Venues and Industry
Members to fund the CAT. The definition of ``Execution Venue''
includes Participants. See supra note 17.
\225\ See CAT NMS Plan, at Section 11.1(b), 11.3(a) and (b).
Section 11.1(b) of the CAT NMS Plan authorizes the Operating
Committee to establish fees for Execution Venues (which include
Participants) and Industry Members to fund the CAT and Sections
11.3(a) and (b) of the CAT NMS Plan set forth how these fees would
be calculated. See also Rule 613(a)(1)(vii)(D) discussing how the
CAT NMS Plan shall discuss the proposed allocation of estimated
costs among the plan sponsors, and between the plan sponsors and
members of the plan sponsors. 17 CFR 242.613(a)(1)(vii)(D).
---------------------------------------------------------------------------
The Proposed Amendment's approach to the issue of Participant pass-
through does not alter our conclusion. As discussed above, the
prohibition on Participants directly passing through their one-third
share of CAT fees through a new fee on Industry Members reasonably
reinforces CAT's cost-sharing premise.\226\ Inconsistency with that
Plan provision would be grounds for suspension and disapproval of a fee
filing.\227\ FINRA and the Cboe Exchanges state that a national market
system plan cannot lawfully constrain how an SRO chooses to fund its
own costs through fees on its own members.\228\ FINRA also states that
the direct pass-through prohibition ``ignores the reality of FINRA's
funding structure,'' because the most direct way to allocate FINRA's
designated CAT costs to its members (who ultimately will bear costs
allocated to FINRA) would be to apply cost recovery fees to members
whose activities most directly contribute to FINRA's designated portion
of Participant CAT fees.\229\ But FINRA represents that it makes ``the
following firm commitment: should the Commission approve a CAT funding
model on a temporary or interim basis, FINRA will not establish any new
CAT recovery fees for a period of two years from approval of such
temporary funding model (or for a shorter period designated by the
Commission in an approval order as the effective period of such interim
funding model).'' \230\ FINRA has thus voluntarily committed to abide
by the direct pass-through prohibition for the two years the Proposed
Amendment will be in effect. In addition, the Cboe Exchanges have
expressed a willingness to agree to refrain from new direct pass-
through CAT fees to their members.\231\ And as FINRA observes, all of
the other CAT NMS Plan Participants voted in favor of the direct pass-
through prohibition, thereby indicating that they too have individually
determined and committed to not establish new CAT recovery fees.\232\
Given the Participants' willingness to discuss a voluntary agreement to
not make rule filings seeking to directly pass through their CAT costs
for a specified period, the fact that we are only approving this
funding model on a temporary basis while we consider the CAT more
broadly, and because the Commission would have imposed the same direct
pass-through prohibition if the Participants had not proposed it for
reasons discussed elsewhere in this order, the Commission is not
deciding at this time what limits a national market system plan can or
cannot place on an SRO's discretion with respect to the way in which it
recovers its regulatory costs.
---------------------------------------------------------------------------
\226\ See supra Part III.
\227\ See 15 U.S.C. 78s(b)(2)(C) (``The Commission shall approve
a proposed rule change of a self-regulatory organization if it finds
that such proposed rule change is consistent with the requirements
of [the Exchange Act] and the rules and regulations [thereunder]
that are applicable to such organization,'' and ``shall disapprove''
the proposed rule change ``if it does not make [that] finding''); 17
CFR 242.608(c) (``Each self-regulatory organization shall comply
with the terms of any effective national market system plan of which
it is a sponsor or a participant.'').
\228\ See FINRA October 2025 Letter, at 2, 7-10; FINRA January
2026 Letter, at 2-3; FINRA Wilson Sonsini January 2026 Letter, at 1-
3; Cboe Letter, at 2-3.
\229\ See FINRA October 2025 Letter, at 11-12.
\230\ See FINRA January 2026 Letter, at 3.
\231\ See Cboe Letter, at 2; FINRA January 2026 Letter, at 3
(stating that Cboe ``has previously expressed that it is `open to
discussing a voluntary agreement by all of the SROs not to make rule
filings seeking to pass through their costs for a specified period,'
'' citing Cboe Letter).
\232\ See FINRA January 2026 Letter, at 3.
---------------------------------------------------------------------------
The decision not to preemptively prohibit the Participants from
passing through their share of CAT costs indirectly through other
member fees is also reasonable. As discussed above, the Exchange Act
expressly contemplates the ability of the Participants to recoup their
costs to fulfill their statutory obligations under the Exchange Act,
and consistent with that principle, the Commission has recognized since
CAT's inception that the Participants may seek to recover some or all
of the CAT costs they incur, subject to the requirements set forth in
the Act.\233\ The Eleventh Circuit did not hold that it would be
arbitrary and capricious to leave open the possibility of pass-through,
as one commenter suggests. Rather, the court held only that the 2023
funding order did not adequately ``explain or justify,'' and
``consider[ ] the effects of,'' that decision.\234\
---------------------------------------------------------------------------
\233\ See supra Part III.
\234\ Am. Secs. Ass'n, 147 F.4 at 1274-77.
---------------------------------------------------------------------------
The Commission is not including a prohibition on any action the
Participants may take that might result in their indirectly recovering
some of their CAT costs from Industry Members as suggested by some
commenters.\235\ While the direct pass-through prohibition gives
meaning to the Plan's requirement that the Participants and Industry
Members share in CAT costs, the Plan doesn't change the reality as to
how the Participants are funded, including how they fund the costs of
fulfilling their regulatory obligations. It would be inequitable to
single out the Participants and prevent only them from attempting to
recover their costs when the Plan contains no restriction on the
ability of Industry Members to pass through their share to others,
particularly given that, unlike Industry Members, the Participants
would be required to establish that increases in any other fees are
reasonable, equitable, and not unfairly discriminatory in the rule
filing process. Moreover, as a practical matter it would be difficult
to effectively amend the CAT NMS Plan in such a way as to prevent a
Participant from ever indirectly passing through any CAT costs.
---------------------------------------------------------------------------
\235\ See, e.g., SIFMA October 2025 Letter, at 2 (stating the
Participants raise the specter of adding CAT costs to existing fees
the SROs already charge their members to recoup their CAT costs,
thus doing indirectly what they cannot do directly); Citadel October
2025 Letter, at 9 (stating that CAT LLC is clearly attempting to
preserve the ability for SROs to pass through some or all of their
CAT costs to their members in other ways in direct contravention of
the Eleventh Circuit's decision); PTG Letter, at 2; ASA February
2026 Letter, at 4 (stating that the Proposed Amendment does not
meaningfully prohibit SRO pass-throughs of CAT costs).
---------------------------------------------------------------------------
Nor does the Commission believe that a total, preemptive
prohibition on all forms of pass-through during the two years in which
the Proposed Amendment will be in effect is necessary to maintain an
adequate focus on cost control. CAT costs are driven by a variety of
factors, including storage, data processing, and message traffic.
Pursuant to the CAT NMS Plan, the CAT must process and store extremely
large data volumes within specific timeframes, and this process has
been occurring in a market environment of increasing message
traffic.\236\
---------------------------------------------------------------------------
\236\ See Securities Exchange Act Release No. 104504 (Dec. 23,
2025), 90 FR 61506, 61506 n.7 (Dec. 31, 2025) (``2025 Cost Savings
Amendment'') (stating that there were 109 trillion events in 202,
116 trillion events in 2023, and 154 trillion events in 2024, a 41%
growth in data volumes over a three-year period).
---------------------------------------------------------------------------
The Commission and the Participants have recently taken a series of
measures to bring down these costs. For example, a 2024 CAT NMS Plan
amendment was approved that CAT LLC states has resulted in projected
savings of $30 million in the first year,\237\ and another amendment
recently approved relating to Customer data in the CAT is projected to
achieve an estimated $7 to $9 million in annual cost savings (the
[[Page 13423]]
``CAIS Amendment'').\238\ In addition, the Commission is currently
considering a proposed CAT amendment that would in part codify
exemptive relief granted by the Commission designed to allow the
Participants to reduce the costs of operating the CAT,\239\ and that
proposed amendment is estimated by the Participants to provide cost
savings of $55 million to $73 million, if approved.\240\ The cost
savings efforts that have been approved have already reduced the CAT
budget significantly, with the projected 2026 CAT budget currently
estimated to be $156,432,998,\241\ compared to the initial estimated
2025 CAT budget of $248,846,076.\242\ These efforts demonstrate that
the Commission and the Participants are focused on controlling the
costs of the CAT.
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\237\ See Securities Exchange Act Release No. 101901 (Dec. 12,
2024), 89 FR 103033 (Dec. 18, 2024) (``2024 CAT Cost Savings
Amendment'').
\238\ See Securities Exchange Act Release No. 104586 (Jan. 13,
2026), 91 FR 2164 (Jan. 16, 2026) (``CAIS Amendment Approval
Order'').
\239\ See Securities Exchange Act Release No. 104144 (Sept. 30,
2025), 90 FR 47853 (Oct. 2, 2025) (``September 2025 Exemptive
Order'').
\240\ See 2025 Cost Savings Amendment, at 61508-09.
\241\ See Consolidated Audit Trail, LLC, 2026 Financial and
Operating Budget, dated Dec. 11, 2025, available at: <a href="https://www.catnmsplan.com/sites/default/files/2025-12/12.08.25-CAT-LLC-2026-Financial_and_Operating_Budget.pdf">https://www.catnmsplan.com/sites/default/files/2025-12/12.08.25-CAT-LLC-2026-Financial_and_Operating_Budget.pdf</a>.
\242\ See Consolidated Audit Trail, LLC, 2025 Financial and
Operating Budget, dated Nov. 20, 2024, available at: <a href="https://www.catnmsplan.com/sites/default/files/2024-11/11.20.24-CAT-LLC-2025-Financial_and_Operating-Budget.pdf">https://www.catnmsplan.com/sites/default/files/2024-11/11.20.24-CAT-LLC-2025-Financial_and_Operating-Budget.pdf</a>.
---------------------------------------------------------------------------
Even Participants that attempt to increase existing fees to recover
their CAT costs will continue to have incentives to contain the costs
that are within their control. Any such indirect pass-through effort
would be subject to the rule filing process under Section 19(b) and
Rule 19b-4, and, if the Participants fail to control costs, their
ability to demonstrate that the CAT budget is ``reasonable'' and that a
proposed fee is reasonable and consistent with the Exchange Act may be
compromised. In general, after a Participant files proposed rule
changes relating to fees with the Commission, those proposed rule
changes are published by the Commission and there is an opportunity for
public comment.\243\ Although the proposed rule changes may take effect
upon filing,\244\ the Commission can temporarily suspend immediately
effective rule changes if such action is necessary or appropriate in
the public interest, for the protection of investors, or otherwise in
furtherance of the purposes of the Exchange Act.\245\ If the Commission
takes such action, the Commission will institute proceedings under
Section 19(b)(2)(B) to determine whether the proposed rule changes
should be approved or disapproved.\246\ As is the case with all of the
fees the Participants collect from their members to fund their SRO
responsibilities in market and member regulation, a Participant seeking
to increase existing fees in an attempt to recover CAT costs paid by
the Participant would be required to establish that the fee is
consistent with applicable statutory standards under the Exchange Act,
including being reasonable, equitable and not unfairly
discriminatory.\247\
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\243\ 15 U.S.C. 78s(b).
\244\ 15 U.S.C. 78s(b)(3)(A); 17 CFR 240.19b-4(f)(2). Pursuant
to Exchange Act Rule 19b-4, a proposed rule change may take effect
upon filing with the Commission pursuant to Section 19(b)(3)(A) of
the Exchange Act if properly designated by the self-regulatory
organization as: (1) constituting a stated policy, practice, or
interpretation with respect to the meaning, administration, or
enforcement of an existing rule; (2) establishing or changing a due,
fee, or other charge applicable only to a member; (3) concerned
solely with the administration of the self-regulatory organization.
\245\ 15 U.S.C. 78s(b)(3)(C).
\246\ 15 U.S.C. 78s(b)(2)(B).
\247\ See Section 6(b)(4); Section 15A(b)(5); Section 6(b)(5);
Section 15A(b)(6). 15 U.S.C. 78f(b)(4); 15 U.S.C. 78f(b)(6); 15
U.S.C. 78o-3(b)(5); 15 U.S.C. 78o-3(b)(6). See also e.g., Schedule A
to the By-Laws of FINRA, Section 1(a) (stating ``FINRA shall, in
accordance with this section, collect member regulatory fees that
are designed to recover the costs to FINRA of the supervision and
regulation of members, including performing examinations, financial
monitoring, and policy, rulemaking, interpretive, and enforcement
activities'').
---------------------------------------------------------------------------
In addition, the Proposed Amendment requires that the Fee Rate
calculated by the Operating Committee twice per year be based on
``reasonably budgeted CAT costs'' \248\ and that such budgeted CAT
costs be composed 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.'' \249\
The Operating Committee must demonstrate that their proposed budget and
associated fees are reasonable, and the Participants must provide
support for such reasonableness in their associated fee filings. If a
Participant cannot demonstrate both that their budgeted CAT costs are
reasonable and that the proposed fee is reasonable and consistent the
Exchange Act, then that would constitute grounds to suspend and
disapprove not only fee filings seeking to recover the Participants'
one-third share of CAT costs, but also fee filings seeking to collect
Industry Members' two-thirds share.
---------------------------------------------------------------------------
\248\ See proposed Section 11.3(a)(i)(A)(I) and proposed Section
11.3(a)(i)(A)(II).
\249\ See proposed Section 11.3(a)(i)(C).
---------------------------------------------------------------------------
The Participants may be further incentivized to limit CAT costs
because even if a Participant were able to pass-through the
Participant's allocated CAT costs to its members, the Participant would
experience a delay in recouping such funds and bear the risk of non-
payment from members. In addition, the higher the relevant CAT costs
are, the more difficult it may be for the Participants to explain to
their members and the more difficult it would be to establish a pass-
through of a CAT fee or a recovery of the CAT costs by increasing other
fees. For example, a Participant seeking to increase other fees to
recover substantial CAT costs paid by that Participant would be
required to establish that the specific fee increase is reasonable, and
Industry Members and market participants would have the opportunity to
comment and question whether or not that fee increase is
reasonable.\250\ Additionally, these incentives are further reinforced
by a number of cost discipline mechanisms discussed below.\251\
---------------------------------------------------------------------------
\250\ The Commission has previously suspended and/or disapproved
numerous rule filings submitted under Section 19(b), and
Participants would be required to establish that any fee seeking to
indirectly recover CAT costs satisfy all Exchange Act requirements,
and the rules and regulations thereunder. See e.g., Securities
Exchange Act Release No. 101766, (SR-NASDAQ-2024-016) (disapproving
fee proposal for, among other things, the Exchange not meeting its
burden under the Exchange Act and the Commission's Rules of Practice
to demonstrate that the Proposal is consistent with the requirements
of Sections 6(b)(4), (b)(5), and (b)(8) of the Exchange Act, as well
as Section 11A of the Exchange Act and Rules 603(a)(1) and 603(a)(2)
of Regulation NMS which, among other things, require the Exchange to
distribute market data on terms that are ``fair and reasonable'' and
``not unreasonably discriminatory.'').
\251\ See infra notes 606-608 and accompanying text.
---------------------------------------------------------------------------
Moreover, even if a Participant is able to establish that an
increase in existing fees to recover CAT costs is consistent with
applicable statutory standards, including that it is reasonable,
equitable, and not unfairly discriminatory, Industry Members may be
able to offset fees assessed to them by passing their CAT fees through
to their customers.\252\ The Commission recognizes that not all
Industry Members currently pass through fees
[[Page 13424]]
and cannot determine in advance the extent to which Industry Members
can or will pass-through their CAT fees to investors or would determine
to do so in the future. But the Commission believes that many are able
to and that at least some will do so. For all of these reasons, the
Commission does not believe that the potential ability of SRO costs to
be passed through to Industry Members indirectly precludes a finding
that the allocation model set forth in the Proposed Amendment meets the
approval standard.
---------------------------------------------------------------------------
\252\ See Notice, 90 FR at 17108; see also CAT LLC July Response
Letter, at 8-9; cf. Citadel July 2023 Letter, at 20. Any efforts to
recoup CAT costs will be subject to statutory and regulatory
oversight as appropriate. Under the federal securities laws and
FINRA rules, prices for securities and broker-dealer compensation
are required to be fair and reasonable, taking into consideration
all relevant circumstances. See, e.g., Exchange Act Sections 10(b)
and 15(c); FINRA Rules 2121 (Fair Prices and Commissions), 2122
(Charges for Services Performed), and 2341 (Investment Company
Securities). See also FINRA Rule 3221 (Non-Cash Compensation).
Broker-dealers are also required to disclose the fees they charge
related to a transaction pursuant to Exchange Act Rule 10b-10. See
17 CFR 240.10b-10.
---------------------------------------------------------------------------
Contrary to the arguments of one commenter,\253\ it is appropriate
to charge executing brokers regardless of whether they are trading for
their own account or for a customer's account. The Commission
acknowledges that there is not a customer per se for proprietary trades
and therefore, proprietary trading firms would not be able to pass-
through their CAT fees to customers and proprietary trading firms would
be incentivized to recoup CAT fees in other ways, including potentially
higher trading spreads. However, regardless of whether a firm trades
for its own account or for a customer account, in both instances, the
firm engages in trading activity to earn a profit. In the Commission's
view, it is reasonable to allow a firm to incur CAT fees for its
profit-making business activities, such as proprietary activity. The
Commission recognizes that Industry Members may pass-through CAT fees
for customer executed volume but in the case of proprietary trades
where a firm is trading for its own account, there is no customer to
which the firm can pass-through fees, as the firm itself is the
ultimate investor, and thus it is reasonable for the firm to be
responsible for payment of CAT fees for those trades. CAT enables the
Participants and the Commission to oversee and ensure the integrity of
the markets from which Industry Members earn profits and therefore it
is reasonable for fees to be charged for that profit-making activity,
regardless of whether those fees can be passed on to customers.
---------------------------------------------------------------------------
\253\ See Citadel October 2025 Letter, at 7; Citadel July 2023
Letter, at 20; Citadel August 2023 Letter, at 3.
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Further, the fact that the proposed allocation did not account for
the costs already incurred by Industry Members to comply with the CAT
or other fees paid by Industry Members to exchanges for other
regulatory matters do not render that allocation unreasonable. Both
Participants and Industry Members have incurred costs in adapting their
operations to report to CAT as is required to achieve the benefits
anticipated from the CAT. The purpose of the funding model is to
provide a framework for the recovery of a different set of costs--those
incurred by the Participants' in developing and maintaining the CAT
system. Section 11.1(c) of the CAT NMS Plan explicitly permits the
Operating Committee to recover those costs, allowing it to ``take into
account fees, costs and expenses . . . incurred by the Participants on
behalf of the Company . . . and such fees, costs and expenses shall be
fairly and reasonably shared among the Participants and Industry
Members.'' \254\ The decision to exclude the costs of compliance from
this funding model is thus a reasonable one.
---------------------------------------------------------------------------
\254\ See CAT NMS Plan, at Section 11.1(c).
---------------------------------------------------------------------------
Nor does the Commission base its finding with respect to the
proposed allocation of costs between Participant and Industry Members
on their respective responsibility for any complexity in the markets.
Regardless of the origin of that complexity, its existence contributes
to the costs of CAT and the purpose of the funding model is to account
for those current and future costs, not assess responsibility for the
market structure. The Participants' decision to divide the costs evenly
among the three parties who have primary roles related to the
transaction is appropriate.
The Commission acknowledges the commenter concern that certain
market makers may be responsible for a ``disproportionate percentage of
total CAT system costs,'' and that these costs could be passed-on to
other market participants through higher trading spreads, but the usage
of executed equivalent share volume in the Executed Share Model is
reasonably designed to attribute CAT fees to market participants in
proportion to their trading activity. To the extent that certain market
makers or market participants pay proportionately larger CAT fees, this
is a result of more trading activity, which impacts CAT cost drivers.
As previously stated, the Original Funding Model would have used
message traffic, which could have resulted in an even greater share of
costs on market makers and the provision of quotes.
The Commission believes that the Executed Share Model is a
reasonable method of allocating costs for the interim period while the
Commission engages in a comprehensive review of the CAT because it
reasonably reflects the extent to which different CAT Reporters
participate in and benefit from the equities and options markets,\255\
and 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 (e.g.,
CAT fees would be the same regardless of whether a transaction is
executed on an exchange or in the over-the-counter market).\256\ The
Participants considered, and have previously proposed, alternative
allocations and funding models.\257\ And the Commission acknowledges
the alternative funding models and allocations suggested by
commenters.\258\ Each of those alternatives has relative strengths and
weaknesses. Similarly, the alternatives suggested by a commenter,\259\
including maximum and minimum fees, appropriate calibrations for
liquidity provision and consideration of additional provisions (e.g.,
broker-dealer capital), have strengths and weaknesses. For example,
imposing maximum and minimum fees would transfer costs from the largest
members to the smallest members, distorting the economic incentives of
the Executed Share Model. A similar distortion could arise to the
extent market maker volume is discounted or otherwise calibrated or to
the extent considering other metrics that are not necessarily
correlated with the cost drivers of the CAT. Given that each of these
alternatives has its own potential weaknesses, and the limited time
period for which this funding model is being approved, the Commission
does not believe that the existence of alternatives, or the remaining
concerns identified by commenters individually or
[[Page 13425]]
collectively, call into question the Proposed Amendment's satisfaction
of the approval standard in Rule 608(b)(2),\260\ or otherwise warrant a
departure from the policy choices made by the Participants.
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\255\ See Notice, 90 FR at 44911.
\256\ Id.
\257\ In the Proposed Amendment, CAT LLC stated that it
considered but rejected a number of alternative approaches to the
CAT funding model; specifically, an approach based on a CAT
Reporter's cost burden on the CAT, a 50%-50% allocation of costs
between Industry Members and Participant exchanges, a revenue-based
funding model in which CAT Reporters would pay fees based on their
revenue, a message traffic model in which both Industry Members and
Participants would be assessed fees based on message traffic in the
CAT, a sales value model in which fees would be calculated based on
transaction sales models, an alternative allocation in which fees
would only be allocated to the CEBS, and the 2018 and 2021 Fee
Proposals, a model in which CAT LLC would allocate all costs among
the Participants and permit each Participant to charge its own
members as it deems appropriate, and a cost allocation based on a
strict pro-rata distribution regardless of the type or size of CAT
Reporters. Id. at 44928-30, 44941-42. While alternative models have
been suggested and considered, the proposed Executed Share Model
meets the approval standard in Rule 608(b)(2).
\258\ See FINRA April 2023 Letter, at 5; Citadel July Letter, at
3, 30-32; Citadel August 2023 Letter, at 5.
\259\ See Citadel August 2023 Letter, at 5.
\260\ 17 CFR 242.608(b)(2).
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3. Executed Equivalent Shares
Under the Executed Share Model, a CAT fee would be charged with
regard to each transaction in Eligible Securities \261\ as reported in
CAT Data based on executed equivalent shares.\262\ 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.\263\
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\261\ The CAT NMS Plan defines an ``Eligible Security'' as
including all NMS Securities and all OTC Equity Securities. See CAT
NMS Plan, at Section 1.1. ``NMS Security'' is defined 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.'' Id. ``OTC
Equity Security'' is defined by the CAT NMS Plan 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.'' Id.
\262\ See Notice, 90 FR at 44917-18.
\263\ Id. at 44917.
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Proposed Section 11.3(a)(i)(B) of the CAT NMS Plan describes how
executed equivalent shares would be counted for purposes of calculating
CAT fees. Specifically, the Executed Share Model 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.\264\ Proposed Section
11.3(a)(i)(B) would require the shares to be reasonably counted for
each type of Eligible Securities in the following manner:
---------------------------------------------------------------------------
\264\ Id. at 44918.
---------------------------------------------------------------------------
NMS Stocks. Under the Executed Share Model, each executed share for
a transaction in NMS Stocks would be counted as one executed equivalent
share.\265\ 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.'' \266\
---------------------------------------------------------------------------
\265\ Id.
\266\ Proposed Section 11.3(a)(i)(B)(I).
---------------------------------------------------------------------------
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.\267\ Typically, a
Listed Option contract represents 100 shares; however, it may also
represent another designated number of shares.\268\
---------------------------------------------------------------------------
\267\ See Notice, 90 FR at 44918.
\268\ Id. See also proposed Section 11.3(a)(i)(B)(II).
---------------------------------------------------------------------------
OTC Equity Securities. Similarly, in recognition of the different
trading characteristics of OTC Equity Securities as compared to NMS
Stocks, the Executed Share Model would discount the share volume of OTC
Equity Securities when calculating CAT Fees.\269\ CAT LLC explained
that 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.\270\ Accordingly,
a disproportionately large number of shares are involved in
transactions involving OTC Equity Securities versus NMS Stocks.\271\
Because the Executed Share Model 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.\272\ To address this potential concern, CAT LLC proposed that
the Executed Share Model would count each executed share for a
transaction in OTC Equity Securities as 0.01 executed equivalent
shares.\273\
---------------------------------------------------------------------------
\269\ See Notice, 90 FR at 44918.
\270\ Id.
\271\ In an example provided by CAT LLC, 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. Id. at 44918, n.42.
\272\ Id. at 44918.
\273\ See proposed Section 11.3(a)(i)(B)(III).
---------------------------------------------------------------------------
a. Executed Equivalent Share Volume
CAT LLC has represented that a disproportionately large number of
shares are involved in transactions involving OTC Equity Securities
versus NMS Stocks,\274\ and that based on data from 2001, 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,\275\ and that under the Executed Share Model, CAT Reporters
trading OTC Equity Securities would likely be subject to higher fees
than their market activity may warrant.\276\ CAT LLC also explained the
analysis it undertook to determine to count each executed share for a
transaction in OTC Equity Securities as 0.01 executed equivalent
shares, stating the discount was the result of an analysis of several
different metrics comparing the markets for OTC Equity Securities and
NMS Stocks. CAT LLC stated that, using 2021 data, ``(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%.'' \277\ For
ease of application and because the calculations involve averages, CAT
LLC decided to round the metrics to 1%.\278\
---------------------------------------------------------------------------
\274\ See Notice, 90 FR at 44918.
\275\ Id. at 44918, n.42.
\276\ Id. at 44918.
\277\ Id.
\278\ Id.
---------------------------------------------------------------------------
In support of the use of executed equivalent shares to allocate
costs under the Executed Share Model, CAT LLC explained 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.'' \279\ CAT LLC stated that it is not feasible to determine
the specific cost burden of each CAT Reporter on the CAT, explaining
that ``[t]he 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.'' \280\ CAT LLC added that
increased trading activity correlates with an increased cost burden on
the CAT and Industry Members are generally engaged in effecting
transactions in the market, so executed share volume would be an
appropriate metric for the allocation of CAT costs.\281\ CAT LLC stated
that this conclusion is consistent with the Commission's prior
recognition of the use of transaction volume to set regulatory
fees.\282\ Additionally, CAT LLC stated that technology costs dominate
all CAT costs, with compute costs comprising more than half of all
technology costs, and ``[w]hile [compute costs] are related in part to
message
[[Page 13426]]
traffic, they are driven by the stringent performance timelines, data
complexity and operational requirements in the CAT NMS Plan.'' \283\
This was one of the reasons CAT LLC decided to change from using
message traffic to calculate CAT fees using executed equivalent share
volume.\284\
---------------------------------------------------------------------------
\279\ See Notice, 90 FR at 44927.
\280\ Id. at 44930.
\281\ Id.
\282\ Id.
\283\ Id.
\284\ Id.
---------------------------------------------------------------------------
In comment letters submitted in connection with the 2023 Funding
Model Amendment, and incorporated by reference by the FINRA October
2025 Letter, FINRA questioned the support for the use of executed share
volume instead of message traffic, which was previously proposed in
prior funding models.\285\ FINRA stated that the Proposed Amendment
does not explain why the use of executed share volume as the basis of
the cost allocation methodology, instead of message traffic, is
equitable.\286\ FINRA explained that in prior models, message traffic
was the key proxy for cost generation used to align CAT fees with CAT
costs, but the Executed Share Model would base its cost allocation
methodology entirely on executed share volume.\287\ FINRA stated that
the Participants' argument that executed share volume is related to
cost generation is not enough to demonstrate that its use is reasonable
and equitable.\288\
---------------------------------------------------------------------------
\285\ See FINRA June 2022 Letter, at 3, 4; Citadel July 2023
Letter, at 10.
\286\ See FINRA June 2022 Letter, at 3.
\287\ Id.
\288\ Id. at 4.
---------------------------------------------------------------------------
In comment letters submitted in connection with the 2023 Funding
Model Amendment, another commenter states that the Operating Committee
cannot explain why the proposed allocation to Industry Members is
equitable, noting that it previously stated that charging Industry
Members based on message traffic was the most equitable means of
establishing fees.\289\ The commenter states that allocating costs
among Industry Members based on share volume is inconsistent with the
Exchange Act.\290\ The commenter states that there is no evidence to
support the Operating Committee's assertion that trading activity is a
reasonable proxy for cost burden on the CAT, explaining that the
Operating Committee has stated before that CAT Data processing
requirements and message traffic are significant drivers of CAT costs.
The same commenter states that, according to one Participant, options
activity creates a greater cost burden than equities trading volume and
that the Proposed Amendment does not accurately describe the sources of
CAT's cost burdens.\291\ The commenter states that the CAT Operating
Committee must demonstrate how the proposed allocation would not
unfairly discriminate against equities market participants and compare
equities and options activity with respect to (i) their cost burden on
the CAT and (ii) the allocation of CAT costs to Industry Members.\292\
The commenter states that if the equities markets are subsidizing
options activity, this could have broad impacts on equity market
liquidity, competition and efficiency that must be assessed under the
Exchange Act.\293\
---------------------------------------------------------------------------
\289\ See Citadel July 2023 Letter, at 10.
\290\ Id. at 19.
\291\ Id. at 18, 19. See also Citadel August 2023 Letter, at 4.
\292\ See Citadel August 2023 Letter, at 4.
\293\ Id.
---------------------------------------------------------------------------
Further, the commenter states that allocating costs based on volume
would result in costs being mostly allocated to ``an extremely small
group of broker-dealers,'' which would unduly burden competition.\294\
The commenter states that the Proposed Amendment also lacks a
discussion of the impact of this allocation on market competition,
efficiency and liquidity, but that the Operating Committee recognized
in the Proposed Amendment that prior proposals, where message traffic
was a metric used for fee allocation, could impose an outsized
financial impact on certain Industry Members.\295\
---------------------------------------------------------------------------
\294\ See Citadel July 2023 Letter, at 19.
\295\ Id. See also Citadel August 2023 Letter, at 2-3.
---------------------------------------------------------------------------
Additionally, FINRA objected to the statement in the Proposed
Amendment 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.'' \296\ The commenter stated
that this statement is inconsistent with information that demonstrates
that volume from FINRA trade reporting facilities (``TRFs'') contribute
``a very small percentage of annual CAT compute and storage costs.''
\297\ The commenter stated that as a result, it cannot support the
Participants' assertion that trading activity is a reasonable proxy for
cost burden.\298\ The commenter stated that the Proposed Amendment
``fails to provide for reasonable fees that are equitably allocated and
not unfairly discriminatory, does not reflect a reasonable approach to
allocating costs amongst the Participants, nor does it transparently or
accurately present information regarding the true sources of cost
burdens on the CAT.'' \299\
---------------------------------------------------------------------------
\296\ See Notice, 90 FR at 44927.
\297\ See FINRA May 2023 Letter, at 2.
\298\ See id. See also FINRA April 2023 Letter, at 8.
\299\ See FINRA May 2023 Letter, at 4.
---------------------------------------------------------------------------
This commenter further states that the Executed Share Model is
inconsistent with the ``cost alignment'' funding principle in Section
11.2(b) of the CAT NMS Plan, which requires the Participants to seek to
establish an allocation of costs that takes into account distinctions
in the securities trading operations of Participants and Industry
Members and their relative impact upon Company resources and
operations.\300\ The commenter states that ``the Proposal fails to
establish a sufficient nexus between executed share volume and the
technology burdens that generate CAT costs and fails to relate each
reporter group's allocation to the burden that each reporter group
imposes on CAT.'' \301\
---------------------------------------------------------------------------
\300\ Id. See also FINRA April 2023 Letter, at 7-9.
\301\ See FINRA June 2022 Letter, at 4.
---------------------------------------------------------------------------
In response to FINRA's comment raising concerns about the use of
trading activity as a proxy for costs,\302\ CAT LLC stated in a comment
letter submitted in connection with the 2023 Funding Model Amendment
that the proposed funding model would provide an appropriate approach
for allocating CAT costs because Industry Member activity is generally
for the purpose of effecting transactions, and trading activity impacts
various factors driving CAT costs, such as storage, data processing and
message traffic.\303\ CAT LLC also stated that the Exchange Act does
not require fees to be directly correlated with the costs created by
the person charged the fee.\304\ CAT LLC stated that it is difficult to
determine the precise cost burden created by each CAT Reporter on the
CAT, and believes trading activity is a reasonable proxy for cost
burden on the CAT.\305\
---------------------------------------------------------------------------
\302\ See FINRA May 2023 Letter, at 2.
\303\ See CAT LLC July 2023 Response Letter, at 34.
\304\ Id.
\305\ Id.
---------------------------------------------------------------------------
CAT LLC responded to the commenter's statement that the proposed
allocation is inconsistent with the cost alignment principles of the
CAT NMS Plan by noting that the Proposed Amendment incorporates the
concept of cost burden in at least two ways.\306\ Specifically, CAT LLC
stated that it does so because ``the allocation of CAT costs
contemplates the effect of Industry Member activity on the cost of the
CAT. . . and because trading activity provides a reasonable proxy for
cost burden on the CAT, trading activity is an appropriate metric for
allocating CAT costs among CAT Reporters.'' \307\ CAT
[[Page 13427]]
LLC added that because there are other examples of trading activity-
based fees, the Executed Share Model would not be novel or unique.\308\
---------------------------------------------------------------------------
\306\ See CAT LLC May 2023 Response Letter, at 7.
\307\ Id.
\308\ Id.
---------------------------------------------------------------------------
One commenter also states that equities market participants will
contribute ``far more'' under the Proposed Amendment than options
market participants due to the proposed allocation methodology.\309\
This commenter states that the Commission must evaluate this split
using CAT data and the invoices sent by CAT LLC over the past year
under the vacated 2023 funding order (as the proposed allocation is the
same) and (ii) the estimated CAT system costs associated with equities
versus options trading activity in order to determine whether equities
market participants are inappropriately subsidizing CAT costs arising
from options activity and the associated economic implications.\310\
---------------------------------------------------------------------------
\309\ See Citadel October 2025 Letter, at 6.
\310\ Id.
---------------------------------------------------------------------------
In comments submitted for the 2023 Funding Model Amendment, this
commenter states that the funding model discriminates against Industry
Members that handle retail orders because of the amount of retail
activity in sub-dollar stocks and fractional share trading, and that
the Proposed Amendment does not explain why volume by shares was chosen
over notional volume, or address its impact on specific Industry
Members, investors, or overall market competition, efficiency and
liquidity.\311\ This commenter states that the Proposed Amendment would
particularly impact retail investors given the amount of retail trading
in low-priced NMS stocks.\312\ This commenter states that CAT LLC
recognized the unfairness of allocating fees for OTC equities by
amending the allocation formula, but that no similar adjustment for
low-priced NMS stocks was included.\313\ The commenter states that this
creates ``nonsensical outcomes,'' stating that, ``for example, buying
1,000 shares of an NMS stock priced at $0.50 results in 50 times more
fees than buying 2,000 shares of an OTC stock priced at $5, even though
the purchase was for half the number of shares and 1/20th of the
notional value.'' \314\ In particular, the commenter states that it is
arbitrary, capricious, and unfairly discriminatory for the CAT
Operating Committee to significantly adjust executed share volumes for
sub-dollar OTC Equity Securities but not to do the same for sub-dollar
NMS stocks, as retail investor transactions will be allocated a
disproportionate percentage of total CAT costs simply due to the
securities traded.\315\ The commenter states that the Commission must
assess the economic implications of the Proposed Amendment for retail
investors in particular, to help determine whether retail investors are
inappropriately subsidizing CAT costs arising from other trading
activity, leading to negative impacts on efficiency, competition, and
capital formation.\316\
---------------------------------------------------------------------------
\311\ See Citadel July 2023 Letter, at 20; Citadel August 2023
Letter, at 5; Citadel October 2023 Letter, at 6.
\312\ See Citadel October 2025 Letter, at 6. The commenter
states that data shows that approximately 33% of total retail NMS
stock trading activity in sub-dollar NMS stocks. Id. See also
Citadel July 2023 Letter, at 20 (stating that the 2023 Funding Model
Amendment made no adjustments for sub-dollar trading activity in NMS
stocks, when adjustments were made to volume in OTC Equity
Securities to adjust for the large number of shares transacted in
sub-dollar securities).
\313\ See Citadel October 2025 Letter, at 7.
\314\ See Citadel October 2025 Letter, at 7.
\315\ See Citadel August 2023 Letter, at 4-5 (stating that it is
arbitrary, capricious, and unfairly discriminatory for the CAT
Operating Committee to significantly adjust executed share volumes
for sub-dollar OTC Equity Securities but not to do the same for sub-
dollar NMS stocks, as retail investor transactions will be allocated
a disproportionate percentage of total CAT costs simply due to the
securities traded). The commenter states that since fractional
shares would be rounded up to one share, the result would overstate
volume. See Citadel July 2023 Letter, at 20.
\316\ See Citadel October 2025 Letter, at 7. See also Citadel
August 2023 Letter, at 4-5 (stating that the CAT Operating Committee
must explain why it proposes to treat these securities differently
and analyze the impact on retail investors).
---------------------------------------------------------------------------
CAT LLC states that this commenter makes several arguments stating
that the Proposed Amendment does not adequately explain why it is
equitable to use executed equivalent share volume as the basis for
calculating CAT fees rather than message traffic, and that this
commenter made the same arguments with respect to the use of executed
equivalent share volume to calculate CAT fees under the Executed Shares
Model when it was originally proposed, and CAT LLC addressed those
comments in its May 2023 Response to Comments.\317\
---------------------------------------------------------------------------
\317\ See CAT LLC December 2025 Response Letter, at 3; see also
supra notes [345-350 and 372-374] and accompanying text. CAT LLC
also states that it addressed this issue in the original filing
proposing the 2023 Funding Model Amendment. Id.
---------------------------------------------------------------------------
CAT LLC proposed to delete the requirement in existing Section
11.2(b) of the CAT NMS Plan to take into account ``distinctions in the
securities trading operations of Participants and Industry Members and
their relative impact upon Company resources and operations'' in
establishing the funding of the Company.\318\ CAT LLC explained that
this requirement is 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.\319\ CAT LLC explained that the requirement
is no longer relevant because the proposed Executed Share Model uses
the executed equivalent shares metric instead of message traffic and
market share.\320\
---------------------------------------------------------------------------
\318\ See proposed Section 11.2(b).
\319\ See Notice, 90 FR at 44924.
\320\ Id.
---------------------------------------------------------------------------
With respect to the deletion in Section 11.2(b) of the requirement
that, when establishing the funding of the CAT, the Operating Committee
must take into account ``distinctions in the securities trading
operations of Participants and Industry Members and their relative
impact upon Company resources and operations,'' FINRA stated that the
Participants have proposed to delete the language in Section 11.2(b)
because the proposed Executed Share Model is inconsistent with the
language.\321\ FINRA stated that the Proposed Amendment ``seeks to
amend the core funding principles to align with an unjustified
allocation methodology.'' \322\ FINRA stated that any changes to the
funding principles ``must be well-reasoned and transparent and must
continue to support the achievement of a fair and equitable outcome.''
\323\
---------------------------------------------------------------------------
\321\ See FINRA June 2022 Letter, at 4; see also FINRA April
2023 Letter, at 7.
\322\ See FINRA June 2022 Letter, at 4. The commenter states
that the Executed Share Model instead places the greatest emphasis
on the funding principle relating to the ``ease of billing and other
administrative functions,'' favoring that principle over cost
alignment. Id. at 5.
\323\ Id.; FINRA April 2023 Letter, at 8-9.
---------------------------------------------------------------------------
In the Commission's view, the use of executed equivalent share
volume as the basis for determining and allocating CAT costs during the
two-year interim period is appropriate and consistent with the funding
principles of the CAT NMS Plan.\324\ The proposed use of executed
equivalent shares would continue to incorporate the concept of cost
alignment because trading activity, as reflected through executed
equivalent share volume, would, as CAT LLC explained, correlate with
the cost burden on the CAT.\325\ It may not be possible to directly
calculate each CAT Reporter's cost burden on the CAT due to the many
factors impacting CAT costs, such as data processing, storage,
reporting timelines and requirements, and connectivity. But executed
equivalent share volume is a reasonable proxy for those costs because
it is a result of trading activity, which CAT
[[Page 13428]]
LLC explained impacts various CAT cost drivers, such as storage, data
processing and message traffic.\326\ In addition, because the proposed
use of executed equivalent share volume would preserve the cost
alignment principle, while no longer relying on message traffic, the
deletion of the requirement in Section 11.2(b) of the CAT NMS Plan that
the Operating Committee, in allocating costs, take into account
``distinctions in the securities trading operations of Participants and
Industry Members and their relative impact upon Company resources and
operations'' \327\ is appropriate.
---------------------------------------------------------------------------
\324\ See Section 11.2(b) of the CAT NMS Plan.
\325\ See CAT LLC May 2023 Response Letter, at 7.
\326\ Id. See also Notice, 90 FR at 44927, 44930.
\327\ See Notice, 90 FR at 44924.
---------------------------------------------------------------------------
In response to the commenter that stated that equities market
participants will contribute ``far more'' than options market
participants,\328\ the Commission believes that subsidization of
options market activity likely is reduced due to other CAT cost
burdens, such as those relating to data processing (such as equity
linkage processing, which the Commission understands is more complex
than options order linkage processing, and thus more costly), imposed
on the CAT by equity market activity. The Commission, however, does not
believe the failure to eliminate a potential subsidization of options
market activity (and any potential attendant impacts on liquidity,
competition and efficiency) renders the Participants' Funding Model
proposal inconsistent with the Exchange Act. The Commission does not
believe it is possible for the Participants to predict with certainty
how the magnitude of each driver of CAT costs will change over time. To
the extent the other costs noted above exceed, for example, the subsidy
accorded to options market participants when calculating their executed
equivalent shares, there may be no subsidy or even a reverse subsidy
from options to equities markets. When the relative magnitudes of these
cost drivers change, the amount of any subsidy changes. In light of the
potential for the cost drivers to change over time, the Commission
believes that the Participants' proposal is appropriate.
---------------------------------------------------------------------------
\328\ See Citadel October 2024 Letter, at 6; see also Citadel
August 2023 Letter, at 4.
---------------------------------------------------------------------------
The Proposed Amendment's treatment of sub-dollar NMS stocks is
appropriate. The Commission does not believe that the Participants'
failure to discount sub-dollar NMS stocks renders the Proposed
Amendment inconsistent with the Exchange Act. The Commission
acknowledges one commenter's statement that retail investors could be
allocated a disproportionate percentage of total CAT costs due to the
lack of a discount for sub-penny NMS stocks.\329\ However, treating a
subset of NMS stocks differently from NMS securities could introduce
unnecessary complexity or administrative burdens to the extent an NMS
stock price falls or rises above a dollar. It is therefore appropriate
for the Proposed Amendment to treat all NMS stocks the same, even
though certain sub-dollar NMS stocks might have characteristics similar
to OTC Equity Securities. Additionally, in response to the commenter's
statement that since fractional shares would be rounded up to one
share, the result would overstate volume,\330\ the Commission notes
that CAT fees will be based on the data contained in the transaction
reports and transaction reports do not provide for fractional
quantities; therefore, CAT fees cannot be calculated using fractional
shares or fractional share components of executed orders at this
time.\331\ CAT LLC stated that if FINRA's equity transaction reporting
facilities or the exchanges report transactions in fractional shares in
the future, then the calculation of CAT fees would also reflect
fractional shares.\332\ In response to the comment that stated that the
Proposed Amendment does not explain why volume by shares was chosen
over notional volume,\333\ calculating the notional value of stock
introduces additional complexity as the notional value would have to be
calculated and would depend on the value of the execution or trade,
whereas the number of executed shares is reported and, in the cases of
options for example, is based on a known multiplier (1/100). While
using executed notional shares may offer advantages and may lessen any
discrimination, the Proposed Amendment's use of executed shares is
administratively easier, less prone to error, and thus for these
reasons and the reasons set forth above, is a reasonable proxy for
allocating the cost of the CAT.
---------------------------------------------------------------------------
\329\ See Citadel October 2025 Letter, at 6-7; Citadel August
2023 Letter, at 4-5.
\330\ See Citadel July 2023 Letter, at 20.
\331\ See Notice, 90 FR at 44914.
\332\ Id. at 44914, n.32.
\333\ See Citadel July 2023 Letter, at 20. See also Citadel
August 2023 Letter, at 5.
---------------------------------------------------------------------------
The Original Funding Model would have used message traffic and
market share to assess CAT fees on Industry Members and Execution
Venues, respectively.\334\ CAT LLC expressed its belief that the use of
executed equivalent share volume would be an improvement on the
Original Funding Model's use of message traffic,\335\ explaining that
the use of executed equivalent share volume would result in fees tied
to transactions (which CAT LLC stated is the ``traditional source of
revenue for Industry Members'' \336\), that the resulting CAT fees
would not adversely impact market makers, and that the Executed Share
Model is simple to understand and to implement.\337\ CAT LLC stated
that Industry Member revenue is often driven by transactions, but
``[b]ecause 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,'' \338\ which could negatively
impact certain Industry Members in a significant way.\339\ CAT LLC
stated that use of message traffic to calculate fees for Industry
Members could adversely impact market makers because they generally
create high levels of message traffic.\340\ The Commission agrees with
CAT LLC regarding the benefits of the Executed Share Model and the
drawbacks of the Original Funding Model, and thus believe that the
decision to replace the use of message traffic to calculate CAT fees
with executed equivalent share volume in the Executed Share Model is
appropriate.
---------------------------------------------------------------------------
\334\ See CAT NMS Plan, at Section 11.3(a) and (b).
\335\ See Notice, 90 FR at 44930. The Original Funding Model
uses message traffic as the basis of Industry Member CAT fees. See
CAT NMS Plan, at Section 11.3(b).
\336\ See Notice, 90 FR at 44927.
\337\ Id.
\338\ Id.
\339\ Id.
\340\ Id. at 44942.
---------------------------------------------------------------------------
Moreover, the Executed Share Model does not change the criteria
used to charge Execution Venues (market share).\341\ While there are
differences in how the CAT fees would be allocated among the
Participants under the Executed Share Model and the existing Original
Funding Model, under the Executed Funding Model, as in the Original
Funding Model, the fees charged to Participants will continue to be
based upon the level of market share of each Participant.\342\ The
Original Funding Model approved by the Commission would have assessed
CAT fees on Execution Venues (which would include the Participants)
\343\ based on market share determined by the share volume for a
national securities exchange and determined by reported share volume of
trades for a national securities association (i.e., FINRA) that had
trades reported by its members to
[[Page 13429]]
its trade reporting facility or facilities for reporting transactions
effected otherwise than on an exchange in NMS Stocks or OTC Equity
Securities.\344\ FINRA's allocation of CAT fees under the Executed
Share Model will continue to be based on its off-exchange market share.
---------------------------------------------------------------------------
\341\ See CAT NMS Plan Approval Order, 81 FR at 84793-97; CAT
NMS Plan, at Section 11.2, Section 11.3.
\342\ Id.
\343\ See supra note 17.
\344\ See CAT NMS Plan, at Section 11.3(a)(i).
---------------------------------------------------------------------------
The Commission recognizes that the proposed use of executed
equivalent share volume is not a perfect proxy for CAT costs, but
believes it is nonetheless a reasonable proxy. The costs of CAT are
attributable to a number of factors, such as message traffic, storage,
and data processing costs, and that for these reasons, the Commission
understands that it is difficult to calculate each CAT Reporter's
individual cost burden on the CAT. Additionally, there are other
operational costs of the CAT that cannot be easily attributed to a
particular CAT Reporter and that need to be funded, such as costs for
CAT NMS Plan requirements related to intake capacity,\345\ data search
tools \346\ and data security.\347\ Based on the breadth of CAT costs,
it is not feasible to calculate the cost burden on CAT of each CAT
Reporter. A reasonable proxy for CAT cost burden must therefore be
used. As discussed above, the Commission believes the proposed use of
executed equivalent share volume is a reasonable method of
approximating the cost burden of CAT.
---------------------------------------------------------------------------
\345\ In the CAT NMS Plan Notice, the Commission said that it
preliminarily believed that intake capacity level is likely to be a
primary cost driver for the Central Repository. See Securities
Exchange Act Release No. 77724 (Apr. 27, 2016), 81 FR 30614, 30770
(May 17, 2016) (``CAT NMS Plan Notice'').
\346\ See CAT NMS Plan, at Appendix C, Section 8.1-8.2.
\347\ Id. at Appendix D, Section 4.
---------------------------------------------------------------------------
Additionally, CAT LLC stated that the proposed Executed Share Model
would not unfairly burden or favor a product or product type because
the model would recognize the different types of securities by counting
executed equivalent share volume differently for NMS Stocks, Listed
Options and OTC Equity Securities.\348\ The proposed treatment of these
different types of securities would result in the equitable allocation
of reasonable CAT fees across these securities. The Executed Share
Model would count each executed contract for a transaction in Listed
Options using the contract multiplier applicable to the specific Listed
Option in the relevant transaction,\349\ which is appropriate because a
Listed Option contract typically represents 100 shares, or it could
represent another designated number of shares, and since Listed Options
trade in contracts instead of shares, they would need to be converted
into shares for purposes of calculating the executed equivalent share
volume of a transaction in Listed Options. For OTC Equity Securities,
the Executed Share Model would count each executed share for a
transaction in OTC Equity Securities as 0.01 executed equivalent
shares,\350\ which is appropriate because CAT LLC represented that this
amount was a result of an analysis it conducted of several different
metrics comparing the markets for OTC Equity Securities and NMS Stocks,
specifically total notional dollar value, total trades, and average
share price per trade.\351\ Additionally, since transactions in OTC
Equity Securities typically are priced below one dollar, or even one
penny, and tend to trade in larger quantities, this treatment is
appropriate to prevent CAT Reporters trading OTC Equity Securities from
being assessed higher CAT fees than their activity would deserve.
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\348\ See Notice, 90 FR at 44938.
\349\ Id. at 44918. A Listed Option contract typically
represents 100 shares, or it could represent another designated
number of shares. Id.
\350\ See proposed Section 11.3(a)(i)(B)(III).
\351\ See Notice, 90 FR at 44918.
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The equal allocation of Participant CAT fees to Participants,
regardless of whether they are transacting in options or in equities,
is appropriate. The Original Funding Model would have divided
Participant CAT fees by Execution Venues that execute transactions (or
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 and by Execution Venues that execute
transactions in Listed Options.\352\ The Executed Share Model instead
assesses a CAT fee based purely on executed equivalent share
volume.\353\ CAT LLC explained that 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 by counting executed
equivalent share volume differently for Listed Options and for
equities.\354\ The use of executed equivalent share volume and, in
particular, the different weights assigned to equities versus options,
are designed to result in an equitable treatment of the equities and
options markets.
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\352\ See CAT NMS Plan, at Section 11.3(a)(i), (ii).
\353\ The Executed Share Model would count executed equivalent
share volume differently for NMS Stocks, OTC Equity Securities and
Listed Options for purposes of calculating a CAT fee. CAT LLC
explains that the proposed approach ``would not favor or unfairly
burden any one type of product or product type.'' See Notice, 90 FR
at 44938. See also supra Part III.A.3.
\354\ See Notice, 90 FR at 44918.
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b. FINRA Allocation
Under the Executed Share Model, because FINRA is the Participant
primarily responsible for oversight of off-exchange securities trading
activity,\355\ FINRA will likely have greater executed equivalent share
volume than other Participants \356\ and thus will be responsible for a
significant portion of total CAT fees. In the Proposed Amendment, CAT
LLC stated that the size of FINRA's fee is calculated based on the
activity in the over-the-counter market.\357\ CAT LLC stated that the
executed equivalent share volume for over-the-counter trades in
Eligible Securities in June 2025 was 377,983,597,154.08 out of a total
volume of 952,977,614,616.08 executed equivalent shares for trades in
Eligible Securities.\358\ CAT LLC stated that approximately 40% of the
executed equivalent share volume in Eligible Securities took place in
the over-the-counter market.\359\
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\355\ See Securities Exchange Act Release No. 95388 (July 29,
2022), 87 FR 49930 (Aug. 12, 2022), at 49931 (stating that FINRA
historically has overseen off-exchange securities trading activity
and that ``the Exchange Act's statutory framework places SRO
oversight responsibility with a [national securities association]
for trading that occurs elsewhere than an exchange to which a broker
or dealer belongs as a member.''), 49932 (stating that an exchange
would primarily have SRO oversight responsibility of its members and
their trading on the exchange, while SRO oversight of other trading
activity, such as off-exchange trading, is primarily the
responsibility of a national securities association).
\356\ See Notice, 90 FR at 44932.
\357\ Id.
\358\ Id.
\359\ Id.
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CAT LLC stated that the assessment of a CAT fee on FINRA in the
same manner as the other Participants would not result in a burden on
competition for FINRA or for Industry Members engaging in off-exchange
activity.\360\ CAT LLC also stated that FINRA and the exchanges should
not be evaluated differently based upon the potential for a particular
Participant to recoup its CAT fees through charging fees to its members
or through revenue-generating activity other than passing its fees
through to its members.\361\ CAT LLC stated that each Participant,
including FINRA, will need to determine for itself how it will obtain
the funds to pay for its CAT fees.\362\ Additionally, CAT LLC
[[Page 13430]]
stated that FINRA, just like the exchange Participants, has revenue
sources other than membership fees,\363\ explaining that FINRA
generates significant revenues via Regulatory Services Agreements
(``RSAs'') with the exchanges, among other sources.\364\ According to
CAT LLC, these other revenue sources may be used to pay CAT fees, and,
if they are used, would not lead to an increase in fees for Industry
Members.\365\
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\360\ Id.
\361\ Id. See also CAT LLC May 2023 Response Letter, at 9.
\362\ See Notice, 90 FR at 44932.
\363\ Id.
\364\ Id.
\365\ Id.
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FINRA objects to the Proposed Amendment on the ground that it
forces FINRA to bear a disproportionate share of CAT costs without
grappling with the implications of these costs, particularly given
FINRA's status as a non-profit, member-funded national securities
association.\366\ FINRA also states that its allocation would largely
be based on transaction volume reported to the TRF, but that TRF
transactions generate fewer costs for the CAT,\367\ as opposed to
options activity, and yet only 25% of total Participant CAT fees would
be assessed for options activity, while the remaining 75% would be
assessed for equities activity.\368\
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\366\ See FINRA October 2025 Letter, at 4, 6-7; FINRA May 2023
Letter, at 2; FINRA April 2023 Letter, at 3; FINRA June 2022 Letter.
See also FINRA Wilson Sonsini January 2026 Letter, at 4 (stating
that CAT LLC ``elides FINRA's continued objections to a cost
allocation methodology based entirely on executed share volume,''
and that ``FINRA objected to that model because it
disproportionately allocated the Participants' share of CAT costs to
FINRA, the only not-for-profit SRO that relies primarily on fees
from its members for funding and the only Participant not operating
a market''). The commenter has previously stated that FINRA's share
was more than double that of the next highest Participant and $4
million more than all option exchanges combined. See FINRA April
2023 Letter, at 4; see also FINRA June 2022 Letter, at 5.
\367\ See FINRA April 2023 Letter, at 8, n.23.
\368\ Id.; FINRA May 2023 Letter, at 2.
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FINRA states that, unlike the exchange Participants, transactions
are not executed on a FINRA marketplace and FINRA does not receive
commercial revenue for those transactions.\369\ FINRA explains that it
does not currently directly receive fees from its TRFs for listed
stocks that would cover CAT costs, because each FINRA TRF is operated
by an exchange that retains the trade reporting and market data
revenues generated by TRFs, subject to certain payments to FINRA for
agreed-upon costs.\370\ Thus, FINRA states that ``exchanges have direct
revenue streams from the operation of facilities on which the
transactions that are taxed using the Executed Share Model occur,''
whereas FINRA generally does not retain such revenue for over-the-
counter transactions in listed securities.\371\ FINRA also states that
its members can report over-the-counter transactions in listed stocks
to the FINRA Alternative Display Facility, although most transactions
are reported to a TRF.\372\
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\369\ See FINRA April 2023 Letter, at 3; FINRA October 2025
Letter, at 12.
\370\ See FINRA October 2025 Letter, at 12. See also FINRA April
2023 Letter, at 3.
\371\ See FINRA October 2025 Letter, at 12. See also FINRA April
2023 Letter, at 4.
\372\ Id. FINRA April 2023 Letter, 3, n.8.
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FINRA further states that regulatory services agreements (``RSAs'')
that FINRA has entered into with various exchanges to perform
regulatory oversight and market surveillance functions have RSA-related
revenues that cover FINRA's costs of regulatory services provided to
the exchanges. FINRA states that they have not been--and, as voluntary
commercial contracts, cannot be reasonably viewed as--a reliable source
of sustainable CAT funding sufficient to replace membership fees at the
levels required by the Executed Share Model.\373\ Additionally, FINRA
questions CAT LLC's statement that the Proposed Amendment ``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.'' \374\ Specifically, the commenter asks how CAT
LLC's statement explains the size of FINRA's allocation \375\ and notes
that this statement ``conflates the costs to create and operate the CAT
with the usage of CAT data.'' \376\
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\373\ See FINRA October 2025 Letter, at 12. See also FINRA April
2023 Letter, at 4.
\374\ Id. FINRA April 2023 Letter, at 7.
\375\ Id.
\376\ Id.; see also FINRA June 2022 Letter, at 6.
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FINRA also expresses concern about alleged arbitrary treatment by
the other Participants of the CAT NMS Plan.\377\ FINRA believes that
its ``outsized allocation'' \378\ was because of its limited voting
power, only having one out of 25 votes on the Operating Committee as it
does not control, nor is under common control with, any other
Participant.\379\ FINRA states that it is critical for the Commission
to consider the differences among Participants and the inevitable
impact on FINRA members of any cost allocation to FINRA.\380\ FINRA
believes that the other Participants' treatment of FINRA arbitrarily
benefits themselves, treating FINRA as a market center in the CAT NMS
Plan while not as a market center under the CT Plan, which governs the
public dissemination of real-time consolidated market data for national
market system stocks.\381\
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\377\ See FINRA April 2023 Letter, at 6, n.16.
\378\ See FINRA April 2023 Letter, at 7; FINRA June 2022 Letter,
at 6.
\379\ See FINRA April 2023 Letter, at 4, 8. See also FINRA June
2022 Letter, at 8.
\380\ See FINRA October 2025 Letter, at 15-16.
\381\ See FINRA April 2023 Letter, at 6, n.16.
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Commenters also believe that the allocation to FINRA would increase
the allocation to Industry Members.\382\ FINRA stated that because it
relies on regulatory fees from its members for funding, it must
increase its member fees in order to fund CAT costs that it cannot
recover from contractual arrangements with TRF exchanges.\383\ FINRA
stated that the Proposed Amendment does not adequately analyze the
allocation's impact, including whether the allocation would increase
Industry Members' allocation of total costs beyond two-thirds.\384\ The
other commenter states that the Proposed Amendment provides no
explanation as to how FINRA, as a not-for-profit organization, will
fund its allocation of CAT costs, and suggests that broker-dealers and
their customers could actually be allocated, for example, at least 80%
of the entire CAT budget due to bearing FINRA's portion.\385\
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\382\ See FINRA April 2023 Letter, at 5-7; FINRA Wilson Sonsini
January 2026 Letter, at 4; Citadel July 2023 Letter, at 2, 16, 21.
See also Citadel October 2025 Letter, at 9.
\383\ See FINRA April 2023 Letter, at 5-6. See also FINRA June
2022 Letter, at 7.
\384\ See FINRA April 2023 Letter, at 6.
\385\ See Citadel October 2025 Letter, at 9.
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In the Proposed Amendment, CAT LLC contested the view 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'').\386\ CAT LLC explained that the
purpose and implementation of the CT Plan and the CAT NMS Plan are
different.\387\ CAT LLC stated that while the CAT NMS Plan explicitly
contemplates charging fees to all Participants, including FINRA,\388\
and that the CAT is solely for
[[Page 13431]]
regulatory purposes, providing a regulatory system to facilitate the
performance of the self-regulatory obligations of all of the
Participants, including the exchanges and FINRA,\389\ ``[i]n contrast,
the CT Plan governs the public dissemination of real-time consolidated
equity market data for NMS stocks.'' \390\
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\386\ See Notice, 90 FR at 44932. See also Joint Industry Plan;
Order Approving, as Modified, a National Market System Plan
Regarding Consolidated Equity Market Data; Securities Exchange Act
Release No. 92586 (Aug. 6, 2021), 86 FR 44142 (Aug. 11, 2021) (File
No. 4-757) (``Order Approving the CT Plan''). The Order Approving
the CT Plan was vacated by the D.C. Circuit on July 5, 2022. See The
NASDAQ Stock Market LLC et al. v. SEC, Case No. 21-1167, D.C. Cir.
(July 5, 2022). See also Securities Exchange Act Release No. 88827;
File No. 4-757 (May 6, 2020), 85 FR 28702 (May 13, 2020) (Order
Directing the Exchanges and the Financial Industry Regulatory
Authority to Submit a New National Market System Plan Regarding
Consolidated Equity Market Data).
\387\ See Notice, 90 FR at 44932.
\388\ See CAT NMS Plan, at Sections 11.2 and 11.3.
\389\ See Notice, 90 FR at 44932.
\390\ Id.
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In a response to the comments to the 2023 Funding Model Amendment,
CAT LLC stated that the proposed transaction-based CAT fee is purposely
agnostic as to the location of where a trade occurs, and an intent of
this design is to avoid influencing whether or where any trading
activity would take place. Moreover, CAT LLC stated that FINRA is no
different from the exchanges in terms of its regulatory obligations
regarding the CAT.\391\ CAT LLC also stated that FINRA's allocation is
``fair and reasonable as FINRA is currently, and is expected to
continue to be, one of the largest regulatory users of the CAT, and it
is responsible for the oversight of the very large over-the-counter
securities market.'' \392\
---------------------------------------------------------------------------
\391\ Id.
\392\ See CAT LLC July 2023 Response Letter, at 35.
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FINRA requested that if the Commission were to approve the Proposed
Amendment, 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.'' \393\ FINRA also stated 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.\394\
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\393\ FINRA April 2023 Letter, at 7.
\394\ Id.
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The Commission acknowledges that executions do not take place on
FINRA; however, the CAT NMS Plan already categorizes FINRA as an
Execution Venue because it has trades reported by its members to its
TRFs for reporting transactions effected otherwise than on an exchange.
Thus, treatment of FINRA as an Execution Venue is not a change to the
existing CAT NMS Plan.\395\ Additionally, this allocation of fees to
FINRA is similar to how Section 31 fees are assessed on FINRA.\396\
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\395\ See CAT NMS Plan Approval Order, 81 FR at 84793; CAT NMS
Plan, at Section 1.1. (defining ``Executing Venues'').
\396\ 15 U.S.C. 78ee. Section 31 of the Securities Exchange Act
requires each national securities exchange and national securities
association to pay transaction fees to the Commission. Specifically,
Section 31(c) requires each national securities association to pay
to the Commission fees based on the aggregate dollar amount of
covered sales transacted by or through any member of the association
other than on an exchange. 15 U.S.C. 78ee(c). Section 31(a) permits
the Commission to collect transaction fees and assessments designed
to recover the costs to the Government of the annual appropriation
to the Commission by Congress. 15 U.S.C. 78ee(a).
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The Commission acknowledges the comments objecting to the
allocation to FINRA of approximately 40% of the total CAT costs to be
borne by Participants,\397\ but believes that it is appropriate for the
Proposed Amendment to assess fees to FINRA based on executed equivalent
share volume like the other Participants for purposes of funding the
CAT during the interim two-year period in which the Proposed Amendment
is in effect. FINRA is a Participant of the CAT NMS Plan. The CAT NMS
Plan contemplates the allocation of a share of CAT costs to all
Participants, and any funding model that governs during the interim
two-year period must determine how to allocate the Participants' share
among the individual Participants.\398\ The Executed Share Model
reasonably allocates CAT fees among the Participants based on market
share. In particular, the Executed Share Model assesses CAT fees based
on executed equivalent share volume and splits the fees evenly among
the buyer, seller, and the market regulator in each transaction. FINRA
would pay the Participant CAT fee based on off-exchange trades reported
by its members to its trade reporting facilities because FINRA is the
market regulator responsible for the market in which the TRF
transactions occur. Since FINRA is generally the market regulator for
the over-the-counter markets, its CAT fees, and thus market share, will
be based on the trading activity in the over-the-counter markets
reported to it by its members. The trading volume of the over-the-
counter markets is greater than that on the exchanges; consequently,
FINRA will likely be allocated a greater executed equivalent share
volume, and thus a greater share of CAT fees, than the other
Participants. That outcome reasonably reflects the fact that trading
volume generates costs for CAT. As discussed above, because it is
difficult to calculate each CAT Reporter's individual cost burden on
the CAT, a reasonable proxy for CAT cost burden must be used, and
executed share volume is one such reasonable proxy because trading
activity impacts CAT costs. The proposed use of executed equivalent
share volume is thus a readily determinable and equitable method of
allocating costs during the interim two-year period. In practice, CAT
Reporters will be assessed fees corresponding to their trading
activity, or in FINRA's case, trading activity in the over-the-counter
markets reported to it by its members.
---------------------------------------------------------------------------
\397\ Id. at 3.
\398\ See CAT NMS Plan, at Section 11.1(b); Section 11.3(a).
---------------------------------------------------------------------------
The Commission recognizes that there could be other methodologies
for allocating costs among CAT Reporters during the two-year interim
period, such as allocations that take into account the manner in which
each Participant earns revenue, but these other methodologies may be
significantly more complex and would not necessarily more accurately
reflect the cost burden of each CAT Reporter. CAT LLC chose to propose
the use of executed equivalent share volume, explaining why trading
activity is a reasonable proxy for cost burden and an appropriate
metric for allocating CAT costs.\399\ Although there may be multiple
permissible approaches to cost allocation, the proposed allocation of
Participant CAT fees based on executed equivalent share volume is
appropriate and meets the Rule 608 approval standard.\400\
---------------------------------------------------------------------------
\399\ See Notice, 90 FR at 44927.
\400\ See 17 CFR 242.608(b)(2).
---------------------------------------------------------------------------
The Commission agrees with CAT LLC that the Executed Share Model
reasonably assesses fees to FINRA in the same manner based on
transaction volume as other Participants. The Executed Share Model is
reasonably designed to be neutral as to the manner of execution and
place of execution.\401\ 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 regulatory responsibilities for the
operations of CAT are the same.\402\
---------------------------------------------------------------------------
\401\ See Notice, 90 FR at 44927.
\402\ Id.
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The Commission acknowledges the concern expressed that FINRA's
allocation could indirectly increase the allocation of CAT fees to
Industry Members since Industry Members contribute to FINRA's
funding.\403\ In addition, the Commission understands that FINRA does
not directly receive fees from its TRFs for listed stocks that would
cover CAT costs, be
[…truncated; see source link]Indexed from Federal Register on March 19, 2026.
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