[Federal Register Volume 88, Number 175 (Tuesday, September 12, 2023)]
[Notices]
[Pages 62628-62686]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-19525]



[[Page 62627]]

Vol. 88

Tuesday,

No. 175

September 12, 2023

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; Notice

  Federal Register / Vol. 88, No. 175 / Tuesday, September 12, 2023 / 
Notices  

[[Page 62628]]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98290; File No. 4-698]


Joint Industry Plan; Order Approving an Amendment to the National 
Market System Plan Governing the Consolidated Audit Trail; Notice

September 6, 2023.

I. Introduction

    On March 13, 2023, 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 (``Proposed 
Amendment'') to implement a revised funding model (``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 (``Proposed Participant Fee Schedule'').\6\ 
The Proposed Amendment was published for comment in the Federal 
Register on March 21, 2023.\7\
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    \1\ The Participants are: 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., The 
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, Nasdaq BX, Inc., Nasdaq GEMX, LLC, Nasdaq ISE, LLC, 
Nasdaq MRX, LLC, Nasdaq PHLX LLC, The Nasdaq Stock Market LLC, New 
York Stock Exchange LLC, NYSE American LLC, NYSE Arca, Inc., NYSE 
Chicago, Inc., and NYSE National, Inc. (collectively, the 
``Participants,'' ``self-regulatory organizations,'' or ``SROs'').
    \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 https://catnmsplan.com/about-cat/cat-nms-plan.
    \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 from Brandon Becker, Chair, CAT NMS Plan 
Operating Committee, to Vanessa Countryman, Secretary, Commission 
(Mar. 13, 2023) (``Transmittal Letter'').
    \7\ See Securities Exchange Act Release No. 97151 (Mar. 15, 
2023), 88 FR 17086 (Mar. 21, 2023) (``Notice''). Comments received 
in response to the Notice can be found on the Commission's website 
at https://www.sec.gov/comments/4-698/4-698-a.htm.
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    On June 16, 2023, the Commission instituted proceedings pursuant to 
Rule 608(b)(2)(i) of Regulation NMS \8\ to determine whether to 
disapprove the Proposed Amendment or to approve the Proposed Amendment 
with any changes or subject to any conditions the Commission deems 
necessary or appropriate after considering public comment (``OIP'').\9\
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    \8\ 17 CFR 242.608(b)(2)(i).
    \9\ See Securities Exchange Act Release No. 97750 (June 16, 
2023), 88 FR 41142 (June 23, 2023). Comments received in response to 
the OIP can be found on the Commission's website at https://www.sec.gov/comments/4-698/4-698-a.htm.
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    This order approves the Proposed Amendment.

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.\10\ On November 15, 2016, the Commission 
approved the CAT NMS Plan.\11\ 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.\12\
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    \10\ 17 CFR 242.613.
    \11\ See CAT NMS Plan, supra note 2.
    \12\ 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, supra note 2, 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.'' \13\ 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 \14\ that are 
Execution Venues,\15\ including ATSs,\16\ 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 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).'' \17\
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    \13\ Id. at Section 11.2(b) and (e).
    \14\ 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.
    \15\ 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.
    \16\ Id.
    \17\ CAT NMS Plan, supra note 2, 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'').\18\ 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 \19\ 
(``Post-Amendment

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Expenses''). Section 11.6 establishes target deadlines for four 
Financial Accountability Milestones (Periods 1, 2, 3 and 4) \20\ and 
reduces the amount of fee recovery available to the Participants if 
these deadlines are missed.\21\
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    \18\ See Securities Exchange Act Release No. 88890, 85 FR 31322 
(May 22, 2020).
    \19\ ``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, supra note 2, at 
Section 1.1.
    \20\ See CAT NMS Plan, supra note 2, at Section 11.6(a)(i).
    \21\ Id. at Section 11.6(a)(ii) and (iii).
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III. Discussion and Commission Findings

    After careful review, the Commission, pursuant to Section 11A of 
the Exchange Act,\22\ and Rule 608(b)(2) \23\ thereunder, is approving 
the Proposed Amendment. 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.\24\ Rule 608 of Regulation NMS authorizes two or more SROs, 
acting jointly, to file with the Commission proposed amendments to an 
effective NMS plan,\25\ 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.\26\
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    \22\ 15 U.S.C. 78k-1.
    \23\ 17 CFR 242.608(b)(2).
    \24\ See 15 U.S.C. 78k-1(a)(3)(B).
    \25\ See 17 CFR 242.608.
    \26\ See 17 CFR 242.608(b)(2).
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    The Participants have sufficiently demonstrated that the proposed 
allocation of fees is reasonable. There are a number of potential 
approaches to allocating the costs of operating the CAT, all of which 
have relative strengths and weaknesses. In adopting Rule 613 and 
approving the CAT NMS Plan, the Commission determined that the CAT was 
appropriate in order to enable the SROs and the Commission to fulfill 
their responsibilities to oversee the equities and options markets. 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 one-third allocation of CAT fees 
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, assesses an equal fee to the three primary 
roles in a transaction: the buyer, seller and market regulator. In our 
view, allocating the costs for the CAT among the three parties who play 
significant roles in transactions reportable to the CAT in this manner 
represents a reasonable method of allocating costs among the parties 
who participate in and benefit from those markets.
    Commenters expressed concern that the Participant exchanges and 
FINRA would pass their share of costs on to Industry Members. But the 
Exchange Act expressly contemplates the ability of the Participants to 
recoup the costs of fulfilling their statutory obligations under the 
Exchange Act. And, as we explained in adopting Rule 613 and approving 
the CAT NMS Plan, the CAT is important to the performance of these 
regulatory activities in modern, interconnected markets, to the 
ultimate benefit of investors and market participants. Moreover, these 
costs will not be unchecked. The Participants must file their 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. CAT fees, like any fees the Participants collect from 
their members to fund their SRO responsibilities in market and member 
regulation, must be consistent with applicable statutory standards 
under the Exchange Act, including being reasonable, equitable and not 
unfairly discriminatory.
    We also conclude that the use of executed equivalent share volume 
provides a reasonable basis for the calculation of these 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. 
The use of 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 for calculating the CAT fees. 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. We also conclude that the division of fees 
into Prospective CAT Fees and the Historical CAT Assessment provides a 
reasonable method of allowing Participants to recoup their significant 
expenditures on the development of CAT to date while ensuring funding 
for future operations of the system. And the provision of fee 
calculation information, approach to billing and collection of fees, 
conforming changes and the Proposed Participant Fee Schedule are all 
reasonable. The Commission is therefore approving the Proposed 
Amendment.\27\
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    \27\ Id.
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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 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.\28\ In contrast, the Executed 
Share Model would charge fees based on the executed equivalent share 
volume of transactions in Eligible Securities.\29\ 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 \30\ 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

[[Page 62630]]

Securities (``CAT Executing Broker for the Seller'' or ``CEBS'').\31\
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    \28\ See CAT NMS Plan, supra note 2, at Section 11.3(a) and (b).
    \29\ See Notice, supra note 7, 88 FR at 17086.
    \30\ See infra Section III.A.4. for the definition of CAT 
Executing Broker.
    \31\ See Notice, supra note 7, 88 FR at 17087.
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    Under the Executed Share Model, CAT LLC proposes to establish two 
categories of CAT fees. The first category of CAT fees would be fees 
(``CAT Fees'') payable by Participants and Industry Members that are 
CAT Executing Brokers for the Buyer and for the Seller with regard to 
CAT costs not previously paid by the Participants (``Prospective CAT 
Costs'').\32\ 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'').\33\
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    \32\ Id. at 17086; see also proposed Section 11.3(a). The 
defined term ``CAT Fees'' applies specifically to CAT fees related 
to Prospective CAT Costs. Id.
    \33\ See Notice, supra note 7, 88 FR at 17086; see also proposed 
Section 11.3(b).
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    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.\34\ 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,\35\ as described below.\36\ 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.\37\ The Participants' one-third share of Historical CAT Costs 
\38\ 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.\39\
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    \34\ See Notice, supra note 7, 88 FR at 17093; see also proposed 
Section 11.3(a)(iii), proposed Section 11.3(b)(iii).
    \35\ See infra Section III.A.5.a. (Prospective CAT Fees--Fee 
Rate Formula) for the definition and description of the calculation 
of the Fee Rate. See also infra notes 1100-1102 and accompanying 
text (stating that the anticipated CAT Fee Rate and the fee rate for 
Historical CAT Assessments are expected to be relatively small).
    \36\ See Notice, supra note 7, 88 FR at 17095; see also proposed 
Section 11.3(a)(iii), proposed Section 11.3(b)(iii).
    \37\ See Notice, supra note 7, 88 FR at 17094; see also proposed 
Section 11.3(a)(ii).
    \38\ 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 Section III.A.6.a. for a discussion of 
Historical CAT Costs.
    \39\ See proposed Section 11.3(b)(ii).
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    FINRA CAT would be responsible for calculating the CAT fees and 
submitting invoices to the CAT Executing Brokers based on this CAT 
Data.\40\ 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.\41\
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    \40\ See Notice, supra note 7, 88 FR at 17088.
    \41\ Id.
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    Once the Proposed Amendment has been approved by the Commission, 
the Participants would separately file proposed rule filings pursuant 
to Section 19(b) of the Exchange Act \42\ to establish 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.\43\ 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.\44\
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    \42\ 15 U.S.C. 78s(b).
    \43\ See Notice, supra note 7, 88 FR at 17086, 17122.
    \44\ 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.
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2. Allocation of Fee Among 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.\45\
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    \45\ See Letters to Vanessa Countryman, Secretary, Commission, 
from Stephen John Berger, Managing Director, Global Head of 
Government and Regulatory Policy, Citadel Securities, dated July 14, 
2023 (``Citadel July Letter''); August 22, 2023 (``Citadel August 
Letter''); 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); Ellen Greene, Managing Director, Equities & Options Market 
Structure, and Joseph Corcoran, Managing Director, Associate General 
Counsel, SIFMA, dated July 13, 2023 (``SIFMA July 2023 Letter''); 
June 5, 2023 (``SIFMA June 2023 Letter''); May 2, 2023 (``SIFMA May 
2023 Letter''); January 12, 2023 (``SIFMA January 2023 Letter''); 
December 14, 2022 (``SIFMA December 2022 Letter''); October 7, 2022 
(``SIFMA October 2022 Letter''); and June 22, 2022 (``SIFMA June 
2022 Letter'') (the SIFMA June 2022 Letter, SIFMA October 2022 
Letter, SIFMA December 2022 Letter and SIFMA January 2023 Letter 
were submitted in response to the prior funding proposal and 
incorporated by reference in the SIFMA May 2023 Letter); Joanna 
Mallers, Secretary, FIA Principal Traders Group, dated July 14, 2023 
(``FIA Letter''); Douglas A. Cifu, Chief Executive Officer, Virtu 
Financial, dated July 13, 2023 (``Virtu Letter''). See infra note 
58.
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    FINRA stated that, while the Proposed Amendment justified the 
fairness of the Executed Share Model because it would operate like 
other fees, like FINRA's Trading Activity Fee (``TAF''), Section 31 
fees, and the options regulatory fee,\46\ the Proposed Amendment did 
not support why those fee frameworks should be used as a model in this 
context.\47\ 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.\48\ 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.\49\ 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.'' \50\
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    \46\ See Notice, supra note 7, 88 FR at 17122.
    \47\ See FINRA June 2022 Letter at 4.
    \48\ See FINRA April 2023 Letter at 8.
    \49\ Id. The commenter 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.
    \50\ FINRA May 2023 Letter at 3.
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    Another commenter stated 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.\51\ The commenter explained 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).\52\ 
Additionally,

[[Page 62631]]

the commenter stated that there is no precedent for fees to be 
allocated to Industry Members in perpetuity, stating that this would 
contravene the Exchange Act.\53\
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    \51\ Citadel July Letter at 27.
    \52\ Id. The commenter also stated that FINRA has sought to 
avoid increases in the TAF. Id.
    \53\ Id. This commenter stated 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.
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    One commenter disagreed with the Participants' statement that the 
Executed Share Model's similarity to other transaction-based fees 
approved by the Commission is adequate justification for consistency 
with the Exchange Act.\54\ The commenter stated that similarity to 
other transaction-based fees is not an adequate basis to show that the 
Executed Share Model is consistent with relevant standards; each 
proposed fee must be individually supported.\55\ For example, the 
commenter stated that the Participants compared the Executed Share 
Model to Section 31 fees as justification for the Executed Share Model, 
but failed to address the differences between the Executed Share Model 
and Section 31 fees, such as the Executed Share Model's treatment of 
high-volume trades in low-priced stocks while Section 31 fees are based 
on the notional value of a trade.\56\
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    \54\ See SIFMA June 2022 Letter at 4.
    \55\ Id.
    \56\ See SIFMA October 2022 Letter at 7. See also Citadel August 
Letter at 5.
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    Commenters also questioned the Participants' justifications for the 
one-third allocation methodology. FINRA stated 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.\57\ FINRA also stated that the Proposed Amendment did not 
consider alternatives suggested by commenters on a prior proposed 
funding model,\58\ 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.'' \59\ FINRA urged the Commission to 
require those alternatives to be analyzed.\60\
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    \57\ See FINRA June 2022 Letter at 3.
    \58\ 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).
    \59\ 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).
    \60\ Id. Another commenter suggested a review of alternative 
approaches to funding, such as the extent to which CAT could be 
funded by Section 31 fees. See Letter to Vanessa Countryman, 
Secretary, Commission, from Kirsten Wegner, Chief Executive Officer, 
Modern Markets Initiative, dated July 13, 2023 (``MMI July 
Letter''), at 4.
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    One commenter stated that the Participants have not met their 
burden to demonstrate the proposed allocation is consistent with the 
Exchange Act fee standards and not arbitrary.\61\ The commenter stated 
that because FINRA is funded by Industry Members, Industry Members 
would pay over 80% of CAT costs since they must pay not only their own 
share but FINRA's as well; therefore, the Commission should disapprove 
the proposal.\62\ The commenter stated that the Proposed Amendment does 
not explain how allocating 80% of total CAT costs to the industry in 
perpetuity without a mechanism to limit the budget \63\ is consistent 
with the Exchange Act and guidance on SRO filings related to fees 
because the industry has no role in the governance, oversight or design 
of CAT and does not benefit from the CAT.\64\ Another commenter stated 
that Industry Members will bear significantly more costs than the 
Proposal suggests if the Participants decide to charge their members to 
fund their share of CAT fees.\65\ The commenter stated that ``[i]f the 
Participants were to do this, it would render the entire Funding Model 
meaningless, with Industry Members bearing 100% of CAT costs.'' \66\ 
Another commenter also stated that it was inappropriate to place 
responsibility for funding the CAT ``on industry members that do not 
stand to benefit from it.'' \67\
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    \61\ See SIFMA May 2023 Letter at 6; SIFMA June 2023 Letter at 
1-2. The commenter also stated that the Proposed Amendment provides 
unsupported conclusory statements that it meets the requirements of 
the Exchange Act. See SIFMA June 2023 Letter at 2. See also id. at n 
11; FIA Letter at 2.
    \62\ See SIFMA May 2023 Letter at 2. See also SIFMA June 2022 
Letter at 1-2 (stating that the proposed cost allocation methodology 
is inconsistent with Exchange Act fee standards because most costs 
would be imposed on Industry Members).
    \63\ The commenter stated that the CAT annual budget increased 
over 30% in the last year. See SIFMA June 2023 Letter at 4. See also 
Virtu Letter at 4 (stating that the budget increase indicated that 
the Industry Members could be subject to ever-increasing fees with 
no say on the budget). See also FIA Letter at 3 (stating that 
``[w]ith little to no skin-in-the-game, the Participants will not be 
incentivized to control costs.''). See infra Section III.A.5.b 
(discussing budgeted CAT costs and comments suggesting a review 
mechanism to control costs).
    \64\ See SIFMA June 2023 Letter at 3, 4. The commenter stated 
that approving such a proposal would ``directly threaten[ ] 
efficiency, competition, and capital formation in U.S. securities 
markets.'' Id. at 4. The commenter also quoted a Commission release 
stating that the Participants are potentially conflicted in 
allocating CAT fees to themselves and the Industry Members. See 
Securities Exchange Act Release No. 89618 (Aug. 19, 2020), 85 FR 
65470, 65482 (Oct. 15, 2020). Another commenter stated that the 
allocation of 80% to the industry was unfair. See Virtu Letter at 4.
    \65\ See FIA Letter at 2.
    \66\ Id.
    \67\ See Virtu Letter at 2.
---------------------------------------------------------------------------

    One commenter stated that the Proposed Amendment does not 
demonstrate that it is equitable, as required by Section 6(b)(4),\68\ 
or rational, as required by the Administrative Procedure Act,\69\ 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.'' \70\ Furthermore, the commenter stated that 
the Proposed Amendment would result in an inequitable allocation to a 
small number of Industry Members.\71\
---------------------------------------------------------------------------

    \68\ 15 U.S.C. 78f(b)(4).
    \69\ 5 U.S.C. 551 et seq.
    \70\ See Citadel July Letter at 17.
    \71\ Id.
---------------------------------------------------------------------------

    The commenter also stated 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.\72\ The commenter stated 
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.\73\ 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 Proposed Amendment.\74\ The commenter stated that 78% is the same 
amount allocated to Industry Members in a prior CAT funding model 
proposal from 2021, and stated that in the Proposed Amendment, the 
Operating Committee concedes that the 2021 allocation ``may have an 
adverse effect on competition, liquidity or other aspects of market 
structure,'' \75\ however the Proposed 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.\76\
---------------------------------------------------------------------------

    \72\ Id. at 1, 16, 22.
    \73\ Id. at 1, 21, 22.
    \74\ Id. at 21.
    \75\ Id.
    \76\ See Citadel July Letter at 21.
---------------------------------------------------------------------------

    Further, the commenter stated that Industry Members may also be 
required

[[Page 62632]]

to pay the exchange cost allocation,\77\ citing a statement in the 
Proposed Amendment that ``each Participant may determine to charge 
their members fees to fund their share of the CAT fees.'' \78\ The 
commenter stated 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.'' \79\ The commenter requested that the Commission 
prohibit exchanges from passing-on their CAT costs.\80\ The commenter 
also stated 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.\81\ The commenter stated 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,\82\ 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.'' \83\
---------------------------------------------------------------------------

    \77\ Id. at 22. See also Citadel August Letter at 2.
    \78\ See Citadel July Letter at 22. See also Notice, supra note 
7, 88 FR at 17107. The commenter also stated that while the Proposed 
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 Letter at 21. See also Notice, supra note 
7, 88 FR at 17087.
    \79\ Citadel July Letter at 22. See also id. at 16. See also 
Citadel August Letter at 2 (stating that an allocation of 100% of 
CAT costs to Industry Members cannot be lawful).
    \80\ Citadel July Letter at 22.
    \81\ Id. at 10.
    \82\ Id. at 15.
    \83\ Id.
---------------------------------------------------------------------------

    The commenter stated that the Proposed Amendment does not provide 
the percentage of total costs to build and operate the CAT that will be 
borne by Industry Members in practice.\84\ The commenter stated 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.'' \85\
---------------------------------------------------------------------------

    \84\ See Citadel August Letter at 2.
    \85\ Id.
---------------------------------------------------------------------------

    One commenter stated that the Participants do not account for ``the 
time and expense Industry Members have devoted to developing and 
maintaining internal systems to be able to report the [sic] CAT, as 
well as the time and expense Industry Members have devoted to assisting 
the Operating Committee with its job of developing reporting 
specifications that allow the CAT to achieve its regulatory purpose'' 
in the proposed allocation \86\ and that ``this omission is a flaw with 
the Participants' decision to allocate two-thirds of the CAT costs to 
Industry Members and its inclusion would demonstrate that the 
Participants' Executed Share Model does not provide for the equitable 
allocation of reasonable fees.'' \87\
---------------------------------------------------------------------------

    \86\ SIFMA June 2022 Letter at 4. See also SIFMA January 2023 
Letter at 4.
    \87\ SIFMA June 2022 Letter at 4-5. See also SIFMA January 2023 
Letter at 5; Virtu Letter at 3.
---------------------------------------------------------------------------

    Similarly, one commenter stated 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.\88\ The commenter stated 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.\89\ The commenter stated that although the 
Proposed Amendment argues 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.\90\
---------------------------------------------------------------------------

    \88\ See Citadel July Letter at 17. See also Virtu Letter at 2 
(noting that Industry Members ``already provide the Plan 
Participants with a very substantial level of funding through 
membership fees, registration and licensing fees, dedicated 
regulatory fees, and options regulatory fees'').
    \89\ See Citadel July 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).
    \90\ Id.
---------------------------------------------------------------------------

    Commenters also objected to statements made in the Proposed 
Amendment that the complexity of Industry Member business models 
contributes substantially to the costs of the CAT.\91\ One commenter 
stated that the proposed allocation of two-thirds of CAT costs to 
Industry Members is unfair, unreasonable and arbitrary because the 
Participants are equally responsible for the complexity of trading 
activity in the markets.\92\ The commenter disagreed with the 
Participants' argument that the allocation satisfies Exchange Act fee 
standards because Industry Members and the complexity of their business 
models drive the costs of the CAT, by stating that the examples of 
complexities provided were developed to address order types, activities 
and fee structures (such as the maker-taker fee structure) established 
by the Participant exchanges.\93\ The commenter stated that the 
Participants are just as responsible for such cost-driving complex 
trading activity in the equity and options markets as Industry Members 
due to the ``large number of equity and options exchanges established 
by the exchange families with fundamentally different execution models 
and order types.'' \94\ The commenter stated that the Participant 
exchanges have not analyzed how their own business decisions have 
resulted in the complexity of Industry Member order routing practices 
and CAT costs.\95\ Another commenter stated 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,\96\ 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.\97\
---------------------------------------------------------------------------

    \91\ See Notice, supra note 7, 88 FR at 17104.
    \92\ See SIFMA May 2023 Letter at 3. See also SIFMA January 2023 
Letter at 2, 3-4.
    \93\ See SIFMA May 2023 Letter at 6-7. See also SIFMA January 
2023 Letter at 3; Notice, supra note 7, 88 FR at 17104.
    \94\ SIFMA January 2023 Letter at 3.
    \95\ See SIFMA May 2023 Letter at 7.
    \96\ See Citadel July Letter at 17-18.
    \97\ Id. at 18.
---------------------------------------------------------------------------

    Commenters also disagreed with other justifications made in the 
Proposed Amendment for the proposed allocation; specifically, that 
there are more Industry Members than Participants and that Industry 
Members receive more in

[[Page 62633]]

revenue than the Participants.\98\ One commenter stated that these 
assertions are not relevant in demonstrating that the proposed 
allocation is fair and reasonable.\99\ The commenter stated that the 
Participants are justifying the allocation based on the ability to pay 
rather than cost generation, which the commenter believes is 
inconsistent ``with the Participant Exchanges' proposed approach . . . 
of allocating CAT costs based on approximate responsibility for 
generating them . . .'' and ``with the historical CAT decision to 
allocate costs to the parties responsible for generating them.'' \100\ 
The commenter suggested an alternative allocation that would equally 
split CAT costs between Participant exchanges and Industry Members, 
while FINRA would be subject only to a nominal regulatory user fee to 
access CAT Data.\101\ Another commenter stated 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.\102\ The commenter said this would contradict the Proposed 
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.\103\
---------------------------------------------------------------------------

    \98\ See Notice, supra note 7, 88 FR at 17104.
    \99\ See SIFMA May 2023 Letter at 7. See also SIFMA January 2023 
Letter at 4.
    \100\ See SIFMA May 2023 Letter at 7. The commenter cited to the 
funding principles in Section 11.2 of the CAT NMS Plan.
    \101\ See SIFMA January 2023 Letter at 4. See also SIFMA May 
2023 Letter at 8; SIFMA June 2022 Letter at 5; SIFMA October 2022 
Letter at 4. This commenter also suggested another alternative 
allocation in which costs would be allocated to those Participants 
and Industry Members most directly responsible for the costs. Under 
this alternative, Industry Members would be responsible for the cost 
associated with initial ingestion of the data into the CAT system. 
The commenter explained that Participants would be responsible for 
the costs associated with the stages after the data is initially 
ingested into the CAT system because the regulators directly control 
and benefit from these stages of the CAT system after ingestion. See 
SIFMA June 2022 Letter at 5-6.
    \102\ See Citadel July 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.
    \103\ Id.
---------------------------------------------------------------------------

    The commenter also stated that the Proposed Amendment lacks support 
for the proposed allocation.\104\ The commenter stated that the 
Operating Committee has not met its burden to demonstrate that the 
proposed allocation is consistent with the Exchange Act.\105\ The 
commenter also stated 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.\106\
---------------------------------------------------------------------------

    \104\ Id. at 13. See also Citadel August Letter at 2.
    \105\ See Citadel July Letter at 13.
    \106\ 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.
---------------------------------------------------------------------------

    The commenter suggested alternatives to the proposed allocation 
methodology.\107\ The commenter stated 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.\108\ The commenter also suggested that exchanges should be 
prohibited from passing-on their CAT cost allocation to market 
participants,\109\ and that the Participants consider allocating costs 
to the Commission ``to align incentives.'' \110\ The commenter 
recommended a consistent methodology for allocating costs to both 
Industry Members and exchanges.\111\ The commenter also recommended 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,'' 
\112\ and would not inequitably allocate costs to specific market 
segments (such as ``retail trading activity in NMS stocks'').\113\ The 
commenter suggested 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).'' 
\114\
---------------------------------------------------------------------------

    \107\ 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.
    \108\ Id. at 3, 30, 31.
    \109\ See Citadel July Letter at 3, 30, 31.
    \110\ 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 
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 31, n.144.
    \111\ See Citadel July Letter at 30-31.
    \112\ Id. at 30.
    \113\ Id. at 3, 30.
    \114\ See id. at 30. See also Citadel August Letter at 5.
---------------------------------------------------------------------------

    Commenters also raised concerns about statements in the Proposed 
Amendment that CAT costs would be passed on to investors.\115\ One 
commenter stated, ``[s]uch an assertion is inaccurate because it is 
almost certain that there will be scenarios faced by Industry Members 
in which they will not be able to figure out who was responsible for 
generating certain Historical CAT Costs.'' \116\ The commenter stated 
that such assertions would minimize the Participants' obligation to 
allocate fees consistent with Exchange Act fee standards and could 
result in the inequitable allocation of CAT fees to Industry Members 
under the mistaken belief that such fees would be passed down to 
investors.\117\ FINRA objected to statements in the Proposed Amendment 
that Industry Members can pass through to their customers their CAT 
cost allocation and additional costs resulting from an increase in 
FINRA fees.\118\ 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.'' \119\ Another commenter 
expressed concern that CAT costs will be passed-through to investors 
directly or indirectly by affecting the transaction prices of equities, 
stating that this could negatively impact the investment returns of 
long-term investors (including retail investors).\120\ The commenter 
stated that the Participants have failed to analyze how passing-through 
CAT costs to investors is consistent with Exchange Act fee standards, 
and that the Commission has not fully considered

[[Page 62634]]

these economic effects on clients and other end investors.\121\
---------------------------------------------------------------------------

    \115\ See SIFMA May 2023 Letter at 8; FINRA April 2023 Letter at 
6-7; Citadel July Letter at 20; Citadel August Letter at 3; Letter 
to Vanessa Countryman, Secretary, Commission, from Lindsey Weber 
Keljo, Head--Asset Management Group, SIFMA, dated September 5, 2023 
(``SIFMA AMG Letter''). See also Virtu Letter at 4 (noting the 
inherent difficulties in implementing systems and processes to track 
and pass through fees to the appropriate client firms and stating 
that executing brokers would likely end up absorbing the fees 
themselves).
    \116\ See SIFMA May 2023 Letter at 8; see also Virtu Letter at 
4.
    \117\ See SIFMA May 2023 Letter at 8.
    \118\ See FINRA April 2023 Letter at 6-7.
    \119\ Id. at 7.
    \120\ See SIFMA AMG Letter at 2.
    \121\ Id. at 2, 3. The commenter stated that, ``[u]nder the 
Exchange Act, the Participants are required to demonstrate that the 
Proposed Amendment: (1) provides `for the equitable allocation of 
reasonable dues, fees, and other charges,' (2) is `not designed to 
permit unfair discrimination between customers, issuers, brokers or 
dealers' and (3) does not `impose any burden on competition not 
necessary or appropriate in furtherance of the purposes' of the 
Exchange Act.'' Id. at 1, n.4 (citing to Sections 6 and 15A of the 
Exchange Act and Rule 700(b)(3)(iii) of the Commission's Rules of 
Practice. 15 U.S.C. 78s; 15 U.S.C. 15o-3; 17 CFR 
201.700(b)(3)(iii)). Approval of the Proposed Amendment, however, is 
governed by Rule 608 of Regulation NMS. That rule requires the 
Commission to approve a proposed amendment to an effective national 
market system 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 Act. 17 
CFR 242.608(b)(2).
---------------------------------------------------------------------------

    One commenter stated 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.\122\ 
The commenter urged 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.\123\ The commenter 
also stated that the Proposed 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).\124\
---------------------------------------------------------------------------

    \122\ See Citadel July Letter at 20. See also Citadel August 
Letter at 3.
    \123\ See Citadel August 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.
    \124\ See Citadel July Letter at 2. See also infra notes 260-
265.
---------------------------------------------------------------------------

    In response to the comment stating that the Participants had not 
analyzed a suggested Section 31-style approach to a funding model,\125\ 
CAT LLC stated 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.\126\ 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.\127\ 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.\128\
---------------------------------------------------------------------------

    \125\ See FINRA April 2023 Letter at 5.
    \126\ 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 9.
    \127\ Id.
    \128\ 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.\129\ 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.\130\
---------------------------------------------------------------------------

    \129\ See FINRA May 2023 Letter at 3, n.8.
    \130\ 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.\131\ CAT 
LLC stated that there is no distinction between the 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.\132\ 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.'' \133\
---------------------------------------------------------------------------

    \131\ See FINRA May 2023 Letter at 3.
    \132\ See CAT LLC July 2023 Response Letter at 35.
    \133\ Id.
---------------------------------------------------------------------------

    In response to a commenter that stated 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,\134\ CAT LLC stated 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.\135\ 
Furthermore, CAT LLC stated 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.\136\ CAT LLC added 
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.\137\
---------------------------------------------------------------------------

    \134\ See Citadel July Letter at 27.
    \135\ See CAT LLC July 2023 Response Letter at 14.
    \136\ Id.
    \137\ Id.
---------------------------------------------------------------------------

    In response to comments that objected to the proposed allocation to 
Industry Members because Industry Members would not benefit from the 
CAT,\138\ CAT LLC stated allocating costs based on who benefits from 
the CAT is ``not appropriate or practical.'' \139\ CAT LLC stated 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.'' \140\ 
In response to a commenter that suggested that Industry Members should 
not be allocated any ``costs for matters that primarily benefit the CAT 
Operating Committee or the SROs,'' \141\ and a commenter that stated 
that the industry does not benefit from the CAT,\142\ CAT LLC disagreed 
that Industry Members do not benefit from the CAT because CAT is 
critical for the

[[Page 62635]]

protection of investors and because CAT supports fair and efficient 
markets.\143\ CAT LLC also stated that it was not ``reasonable or 
practical to attempt to parse CAT costs by who `primarily benefits' 
from those costs.'' \144\
---------------------------------------------------------------------------

    \138\ See Citadel July Letter at 17; Virtu Letter at 2.
    \139\ CAT LLC July 2023 Response Letter at 10.
    \140\ Id. at 11.
    \141\ Citadel July Letter at 32.
    \142\ See Virtu Letter at 4.
    \143\ See CAT LLC July 2023 Response Letter at 13.
    \144\ Id. at 12. See also id. at 13.
---------------------------------------------------------------------------

    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,\145\ CAT LLC stated that Industry Members can pass through their 
own CAT fees to their customers, like broker-dealers do for 
transaction-based fees.\146\ 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.\147\ In response 
to commenters that requested that Participant be prohibited from 
passing-on their CAT costs to their members,\148\ CAT LLC 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.\149\
---------------------------------------------------------------------------

    \145\ See Citadel July Letter at 16, 22; FIA Letter at 2.
    \146\ See CAT LLC July 2023 Response Letter at 8.
    \147\ Id.
    \148\ See Citadel July Letter at 3, 22, 30; FIA Letter at 2-3.
    \149\ See CAT LLC July 2023 Response Letter at 9.
---------------------------------------------------------------------------

    In response to comments objecting to the proposed allocation to 
Industry Members for not taking into account regulatory fees currently 
paid by Industry Members,\150\ CAT LLC stated 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.'' \151\
---------------------------------------------------------------------------

    \150\ See Citadel July Letter at 17; Virtu Letter at 2. 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 
Letter at 17).
    \151\ CAT LLC July 2023 Response Letter at 13.
---------------------------------------------------------------------------

    In response to comments on whether Participants' models are equally 
to blame for the complexity of the markets,\152\ CAT LLC stated 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 
stated are more profound than those of Participants, not on complexity 
of the market in general.\153\ CAT LLC explained 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.\154\ CAT LLC 
explained that (1) the complexity and diversity of Industry Members' 
business models and order handling practices require processing and 
storage of hundreds of reporting scenarios for Industry Members, 
resulting in significant data processing and storage costs; \155\ (2) 
Industry Members have more late data and corrections than Participants, 
resulting in significant linker costs; \156\ and (3) Industry Members 
have customers, which results in CAT costs related to customer account 
information (FDID, CCID and CAIS) and customer investment 
strategies.\157\ CAT LLC also stated that Participants would pay the 
same amount as the CEBBs and CEBSs in each transaction.\158\ In 
response to one commenter that stated that Industry Members implemented 
complex routing strategies to optimize exchange fees and rebates 
because exchange business decisions resulted in these and other 
exchange fee structures,\159\ CAT LLC stated that the commenter did not 
demonstrate a causal connection between exchange fee structures and CAT 
costs.\160\ CAT LLC stated that it was not involved in these Industry 
Member business decisions and a substantial amount of CAT costs result 
from such business decisions.\161\ CAT LLC also stated that Participant 
activity does not contribute as much to CAT costs as complex Industry 
Member activity.\162\
---------------------------------------------------------------------------

    \152\ See SIFMA May 2023 Letter at 3; 6-7. See also SIFMA 
January 2023 Letter at 2, 3-4.
    \153\ See CAT LLC May 2023 Response Letter at 6; CAT LLC July 
2023 Response Letter at 6.
    \154\ See CAT LLC May 2023 Response Letter at 7; CAT LLC July 
2023 Response Letter at 7.
    \155\ See CAT LLC July 2023 Response Letter at 7.
    \156\ Id.
    \157\ Id.
    \158\ Id. at 6.
    \159\ See SIFMA May 2023 Letter at 7.
    \160\ See CAT LLC July 2023 Response Letter at 6.
    \161\ Id.
    \162\ Id.
---------------------------------------------------------------------------

    CAT LLC also disagreed with one commenter's dismissal of CAT LLC's 
consideration of Industry Members' relative ability to pay,\163\ 
stating that the Exchange Act specifically requires that the fees be 
fair and reasonable, which necessitates consideration of the relative 
ability to pay.\164\ CAT LLC stated that fairness issues require the 
Participants to consider the greater financial resources of Industry 
Members in the creation of a funding model. CAT LLC also stated that 
the commenter's position runs contrary to its comments that an Industry 
Member's ability to pay is an important consideration in the context of 
CAT fees.\165\
---------------------------------------------------------------------------

    \163\ See SIFMA May 2023 Letter at 7. See also SIFMA January 
2023 Letter at 4.
    \164\ See CAT LLC May 2023 Response Letter at 7; CAT LLC July 
2023 Response Letter at 7.
    \165\ See CAT LLC July 2023 Response Letter at 7-8.
---------------------------------------------------------------------------

    Additionally, CAT LLC objected to the commenter's statement that 
the proposed allocation is ``inconsistent with the historical CAT 
decision to allocate costs to the parties responsible for generating 
them.'' \166\ CAT LLC stated that, while the CAT NMS Plan does not 
require CAT costs to be allocated to parties responsible for generating 
such costs, the proposed allocation addresses cost burden on the CAT by 
(i) taking into account the impact of Industry Member activity on CAT 
costs, and (ii) using trading activity, which CAT LLC believes is a 
``reasonable proxy for cost burden on the CAT,'' \167\ as the metric 
for cost allocation.\168\ CAT LLC also stated that there are other 
examples of trading activity-based fees so the funding model would not 
be novel or unique.\169\
---------------------------------------------------------------------------

    \166\ See CAT LLC May 2023 Response Letter at 7; CAT LLC July 
2023 Response Letter at 8; SIFMA May 2023 Letter at 7.
    \167\ See CAT LLC May 2023 Response Letter at 7; CAT LLC July 
2023 Response Letter at 8.
    \168\ See CAT LLC May 2023 Response Letter at 7; CAT LLC July 
2023 Response Letter at 8.
    \169\ See CAT LLC July 2023 Response Letter at 8.
---------------------------------------------------------------------------

    Additionally, CAT LLC responded to the commenter's suggested 
alternative proposal that would equally allocate CAT costs to 
Participant exchanges and Industry Members, stating that the commenter 
did not explain why the alternative would satisfy the Exchange Act 
standards, and noting that CAT LLC had previously considered such an 
allocation but believed that it would not result in a fair and 
equitable allocation due to the greater number of Industry Members than 
Participants, the greater financial resources of Industry Members, and 
the failure of the suggested allocation to take into account how the 
complexity of Industry Member business models contributes substantially 
to CAT costs.\170\
---------------------------------------------------------------------------

    \170\ See CAT LLC May 2023 Response Letter at 7.
---------------------------------------------------------------------------

    In response, the commenter stated that the CAT LLC Response Letter 
did not meaningfully address the concerns it raised about the 
allocation of CAT costs between Participants and Industry Members.\171\ 
CAT LLC further responded, stating that it has responded to the 
commenter's comments several times and that just because CAT LLC did 
not adopt the commenter's viewpoints does not mean that CAT LLC

[[Page 62636]]

did not consider or respond to the commenter's comments.\172\
---------------------------------------------------------------------------

    \171\ See SIFMA June 2023 Letter at 2.
    \172\ See CAT LLC July 2023 Response Letter at 27.
---------------------------------------------------------------------------

    In response to a commenter that recommended allocating no more than 
50% of CAT costs to Industry Members, including the FINRA 
allocation,\173\ CAT LLC stated that the commenter did not offer a 
reasoned basis why such an allocation would be consistent with the 
Exchange Act.\174\ CAT LLC also stated 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.'' \175\ 
Furthermore, in response to the commenter's other suggested allocation 
methodology which the commenter believed would ensure that a small 
group of firms and specific market segments would not be subject to 
inequitable cost burdens,\176\ CAT LLC stated 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.\177\ CAT LLC stated 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. . .'' \178\
---------------------------------------------------------------------------

    \173\ See Citadel July Letter at 31.
    \174\ See CAT LLC July 2023 Response Letter at 10.
    \175\ Id.
    \176\ See Citadel July Letter at 30.
    \177\ See CAT LLC July 2023 Response Letter at 10.
    \178\ Id. at 11-12.
---------------------------------------------------------------------------

    In response, the commenter stated that its suggestions, which 
included minimum and maximum fee levels, calibrations for liquidity 
provision, and consideration of additional metrics,\179\ were included 
in prior funding model proposals.\180\ The commenter stated 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.'' \181\
---------------------------------------------------------------------------

    \179\ See Citadel August Letter at 5.
    \180\ 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)).
    \181\ Id.
---------------------------------------------------------------------------

    The Executed Share Model reflects a reasonable approach to funding 
the building and operation of the CAT.\182\ The CAT NMS Plan requires 
both Participants \183\ and Industry Members (which would include CAT 
Executing Brokers) to fund the CAT.\184\ The costs of CAT therefore 
must be allocated in some fashion between Participants and Industry 
Members, and how to do so is a question of judgment for which there may 
be multiple reasonable approaches. CAT LLC has proposed to allocate CAT 
fees equitably among the three parties who have primary roles related 
to the transaction: the buyer, seller, and market regulator. In 
response to one commenter that stated that the proposed allocation 
methodology is inconsistent with the Exchange Act because of an 
excessive percentage of total costs proposed to be allocated to 
Industry Members and an unfair method of allocating costs among 
Industry Members,\185\ the Commission believes that the proposed 
allocation is reasonable as discussed below.\186\
---------------------------------------------------------------------------

    \182\ See 17 CFR 242.608(b)(2).
    \183\ The CAT NMS Plan requires Execution Venues and Industry 
Members to fund the CAT. The definition of ``Execution Venue'' 
includes Participants. See supra note 15.
    \184\ See CAT NMS Plan, supra note 2, 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).
    \185\ See Citadel July Letter at 15.
    \186\ See infra notes 189-201 and accompanying text.
---------------------------------------------------------------------------

    While a commenter said the Proposed Amendment did not justify why 
the TAF, options regulatory fee, and Section 31 fees should be used as 
a model in the context of the Executed Share Model,\187\ CAT was 
created to serve regulatory purposes. Moreover, CAT Data can only be 
used by SROs and the Commission for regulatory and surveillance 
purposes.\188\ Therefore, the costs incurred by the Participants to 
build, operate and administer the CAT similarly are regulatory costs, 
which here the Participants are seeking to recover through the CAT 
fees.
---------------------------------------------------------------------------

    \187\ See FINRA June 2022 Letter at 4; FINRA April 2023 Letter 
at 8.
    \188\ See 17 CFR 242.613(e)(4)(i)(A); CAT NMS Plan Sections 
6.5(c) and 6.5(g) and Appendix D, Section 8.1.
---------------------------------------------------------------------------

    Commenters expressed concerns that the Participants may impose fees 
on their members to recoup costs relating to CAT, making Industry 
Members responsible for CAT funding costs beyond those to which they 
will be directly assessed pursuant to the Executed Share Model,\189\ 
that CAT costs will be passed-through to investors and that this aspect 
of the Proposed Amendment lacks information needed to demonstrate that 
it meets the approval standard and to allow the Commission and other 
interested parties to consider the resulting economic effects.\190\ In 
response to the comments, the Commission acknowledges the concerns but 
also emphasizes that, as discussed above, the CAT provides important 
benefits in facilitating effective market surveillance and the Exchange 
Act expressly contemplates the ability of the Participants to recoup 
their costs to fulfill their statutory obligations under the Exchange 
Act.\191\ To that end, the CAT NMS Plan expressly contemplates the 
allocation of the costs associated with operating the CAT among the 
Participants and the Industry Members. The use of the Executed Share 
Model is a reasonable method, among a number of potential approaches to 
do so.
---------------------------------------------------------------------------

    \189\ See SIFMA May 2023 Letter at 2; Citadel July Letter at 16, 
17, 21, 22; Citadel August Letter at 2.
    \190\ See SIFMA AMG Letter at 2; FINRA April 2023 Letter at 6-7.
    \191\ Sections 6(b)(1) and 15A(b)(2) of the Exchange Act require 
that a national securities exchange or national securities 
association have the capacity to be able to carry out the purposes 
of the Exchange Act, the rules and regulations thereunder, and the 
rules of the exchange or association. 15 U.S.C. 78f(b)(1); 15 U.S.C. 
78o-3(b)(2).
---------------------------------------------------------------------------

    The Commission recognizes that these operational costs may be 
passed on in other ways, including by both the Participants and 
Industry Members, who each may elect to pass on such operational costs 
as fees to customers indirectly through their charges for services to 
customers. That would be true regardless of how the Proposed Amendment 
chose to set the initial allocation. Even if the Participants decide to 
pass-through the costs of CAT to Industry Members, however, in our 
view, the rule filing process under Section 19(b) and Rule 19b-4 will 
still incentivize the Participants to control costs. Any effort to 
pass-through costs will be subject to that process and, if the 
Participants fail to control costs, their ability to demonstrate that a 
proposed fee is reasonable and consistent with the Exchange Act may be 
compromised. After the Participants file their 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.\192\ Although the proposed rule changes could likely take 
effect upon filing,\193\ the Commission

[[Page 62637]]

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.\194\ 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.\195\ Those fees, like any fees the Participants collect 
from their members to fund their SRO responsibilities in market and 
member regulation, must be consistent with applicable statutory 
standards under the Exchange Act, including being reasonable, equitable 
and not unfairly discriminatory.\196\ Additionally, as stated by CAT 
LLC, Industry Members may be able to offset fees that FINRA assesses 
them by passing their CAT fees through to their customers,\197\ and as 
discussed further below, the Commission believes that the additional 
costs borne by investors are likely small relative to current 
transaction costs.\198\ The Commission recognizes that not all Industry 
Members currently pass through fees 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 we 
believe that many are able to and that at least some will do so. For 
all of these reasons, contrary to the view of some commenters,\199\ the 
Commission does not believe that the inability to determine the amount 
of the CAT costs that will be passed along to investors precludes a 
finding that the allocation model set forth in the Proposed Amendment 
meets the approval standard.
---------------------------------------------------------------------------

    \192\ 15 U.S.C. 78s(b).
    \193\ 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.
    \194\ 15 U.S.C. 78s(b)(3)(C).
    \195\ 15 U.S.C. 78s(b)(2)(B).
    \196\ 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'').
    \197\ See Notice, supra note 7, 88 FR at 17108; see also CAT LLC 
July Response Letter at 8-9; cf. SIFMA May 2023 Letter at 8; Citadel 
July Letter at 20.
    \198\ 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.
    \199\ See SIFMA AMG Letter at 2; FINRA April 2023 Letter at 6-7.
---------------------------------------------------------------------------

    In response to the commenter stating that proprietary trading firms 
cannot pass-through fees to investors and suggesting that an analysis 
of proprietary executed volume compared to customer executed volume is 
necessary to determine if the allocation is fair, equitable, and 
unfairly discriminatory,\200\ the Commission believes it is reasonable 
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. 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. Further, 
the Commission believes it is reasonable to allow a firm to incur CAT 
fees for its profit-making activity, which in this case is proprietary 
activity. CAT is a regulatory tool that will be used by the 
Participants and the Commission to oversee the activities for which 
Industry Members earn profits and therefore it is reasonable for fees 
to be charged for that profit-making activity, even if those fees 
cannot be passed on to customers.
---------------------------------------------------------------------------

    \200\ See Citadel July Letter at 20; Citadel August Letter at 3.
---------------------------------------------------------------------------

    While comments raised concerns that the industry would be allocated 
most of the CAT costs in perpetuity without a mechanism to limit the 
budget,\201\ there is a statutory process for notice and comment and 
Commission review of proposed rule changes relating to fees, under 
Section 19(b) and Rule 19b-4.\202\ 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'' \203\ 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.'' \204\ 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 that their 
budgeted CAT costs are reasonable in a particular filing, following 
notice and public comment, then that would provide the Commission with 
grounds to suspend the filing and ultimately disapprove it, which 
should impose discipline or constraints on the fee setting process.
---------------------------------------------------------------------------

    \201\ See SIFMA June 2023 Letter at 3, 4; Citadel July Letter at 
2; FIA Letter at 2-5.
    \202\ See supra notes 192-196 and accompanying text.
    \203\ See proposed Section 11.3(a)(i)(A)(I) and proposed Section 
11.3(a)(i)(A)(II).
    \204\ See proposed Section 11.3(a)(i)(C).
---------------------------------------------------------------------------

    Further, the concerns expressed 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. But 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.'' \205\ The decision to exclude 
the costs of compliance from this funding model is thus a reasonable 
one.
---------------------------------------------------------------------------

    \205\ CAT NMS Plan, supra note 2, at Section 11.1(c).
---------------------------------------------------------------------------

    Further, the Commission does not base its finding with respect to 
the proposed allocation of costs between Participant and Industry 
Members on their respective responsibility for any

[[Page 62638]]

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 reasonable.
    As explained below, the Commission agrees with CAT LLC's statements 
that, ``[t]he Executed Share Model . . . 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,'' 
\206\ 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.'' 
\207\ The Participants considered, and have previously proposed, 
alternative allocations and funding models.\208\ And the Commission 
acknowledges the alternative funding models and allocations suggested 
by commenters.\209\ Each of those alternatives, as well as those 
suggested by commenters, has relative strengths and weaknesses. 
Similarly, the alternatives suggested by a commenter,\210\ 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 the potential distortions that 
could occur with these alternatives, the Commission does not believe 
that the existence of those alternatives, or the remaining concerns 
identified by commenters individually or collectively, call into 
question the Proposed Amendment's satisfaction of the approval standard 
in Rule 608(b)(2),\211\ or otherwise warrant a departure from the 
policy choices made by the Participants.
---------------------------------------------------------------------------

    \206\ See Notice, supra note 7, 88 FR at 17087.
    \207\ Id.
    \208\ 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 17105-06, 17117-19. See also CAT LLC May 2023 
Response Letter at 8, where CAT LLC responded that SIFMA did not 
offer a reasoned basis for why a 50-50 allocation would satisfy the 
standards set forth in the Exchange Act. While alternative models 
have been suggested and considered, the proposed Executed Share 
Model meets the approval standard in Rule 608(b)(2).
    \209\ See FINRA April 2023 Letter at 5; SIFMA January 2023 
Letter at 4. See also SIFMA May 2023 Letter at 8; SIFMA June 2022 
Letter at 5-6; SIFMA October 2022 Letter at 4; Citadel July Letter 
at 3, 30, 31, 32.
    \210\ See Citadel August Letter at 5.
    \211\ 17 CFR 242.608(b)(2).
---------------------------------------------------------------------------

3. Executed Equivalent Shares
    Under the Executed Share Model, a CAT fee would be charged with 
regard to each transaction in Eligible Securities \212\ as reported in 
CAT Data based on executed equivalent shares.\213\ 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.\214\
---------------------------------------------------------------------------

    \212\ The CAT NMS Plan defines an ``Eligible Security'' as 
including all NMS Securities and all OTC Equity Securities. See CAT 
NMS Plan, supra note 2, 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.
    \213\ See Notice, supra note 7, 88 FR at 17086.
    \214\ Id. at 17093.
---------------------------------------------------------------------------

    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.\215\ 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:
---------------------------------------------------------------------------

    \215\ Id.
---------------------------------------------------------------------------

    NMS Stocks. Under the Executed Share Model, each executed share for 
a transaction in NMS Stocks would be counted as one executed equivalent 
share.\216\ 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.'' \217\
---------------------------------------------------------------------------

    \216\ Id.
    \217\ 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.\218\ Typically, a 
Listed Option contract represents 100 shares; however, it may also 
represent another designated number of shares.\219\
---------------------------------------------------------------------------

    \218\ See Notice, supra note 7, 88 FR at 17093.
    \219\ 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.\220\ 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.\221\ Accordingly, 
a disproportionately large number of shares are involved in 
transactions involving OTC Equity Securities versus NMS Stocks.\222\ 
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.\223\ To address this potential concern, CAT LLC proposed that 
the Executed Share Model would count each executed share for a

[[Page 62639]]

transaction in OTC Equity Securities as 0.01 executed equivalent 
shares.\224\
---------------------------------------------------------------------------

    \220\ See Notice, supra note 7, 88 FR at 17093.
    \221\ Id.
    \222\ 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 17093, n.36.
    \223\ Id. at 17093.
    \224\ See proposed Section 11.3(a)(i)(B)(III).
---------------------------------------------------------------------------

a. Executed Equivalent Share Volume
    CAT LLC had represented that a disproportionately large number of 
shares are involved in transactions involving OTC Equity Securities 
versus NMS Stocks,\225\ that 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,\226\ 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.\227\ 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 
``(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%.'' 
\228\ For ease of application and because the calculations involve 
averages, CAT LLC decided to round the metrics to 1%.\229\
---------------------------------------------------------------------------

    \225\ See Notice, supra note 7, 88 FR at 17093.
    \226\ Id. at 17093, n.36.
    \227\ Id. at 17093.
    \228\ Id.
    \229\ 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.'' \230\ 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.'' \231\ 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.\232\ CAT LLC stated 
that this conclusion is consistent with the Commission's prior 
recognition of the use of transaction volume to set regulatory 
fees.\233\ 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 traffic, they are driven by the stringent performance 
timelines, data complexity and operational requirements in the CAT NMS 
Plan.'' \234\ This was one of the reasons CAT LLC decided to change 
from using message traffic to calculate CAT fees using executed 
equivalent share volume.\235\
---------------------------------------------------------------------------

    \230\ See Notice, supra note 7, 88 FR at 17103.
    \231\ Id. at 17105; see also id. at 17103.
    \232\ Id. at 17105.
    \233\ Id.
    \234\ Id.
    \235\ See Notice, supra note 7, 88 FR at 17105.
---------------------------------------------------------------------------

    Commenters questioned the support for the use of executed share 
volume instead of message traffic, which was previously proposed in 
prior funding models.\236\ 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.\237\ 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.\238\ 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.\239\
---------------------------------------------------------------------------

    \236\ See FINRA June 2022 Letter at 3, 4; Citadel July Letter at 
10.
    \237\ See FINRA June 2022 Letter at 3.
    \238\ Id.
    \239\ Id. at 4.
---------------------------------------------------------------------------

    Another commenter stated 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.\240\ The commenter stated that allocating costs among Industry 
Members based on share volume is inconsistent with the Exchange 
Act.\241\ The commenter stated 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 stated 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.\242\ The commenter stated 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.\243\ 
The commenter stated 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.\244\
---------------------------------------------------------------------------

    \240\ See Citadel July Letter at 10.
    \241\ Id. at 19.
    \242\ Id. at 18, 19. See also Citadel August Letter at 4.
    \243\ See Citadel August Letter at 4.
    \244\ Id.
---------------------------------------------------------------------------

    Further, the commenter stated 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.\245\ 
The commenter stated 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.\246\
---------------------------------------------------------------------------

    \245\ Citadel July Letter at 19.
    \246\ Id. See also Citadel August 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.'' \247\ The commenter stated 
that this statement is inconsistent with information that demonstrates 
that volume from FINRA's trade reporting facilities (``TRFs'') 
contributes ``a very small percentage of annual CAT compute and storage 
costs.'' \248\ FINRA stated, ``. . . despite the minimal data compute 
and storage costs for

[[Page 62640]]

transactions reported to the TRF, FINRA would be assessed an estimated 
34% of the total CAT costs to be borne amongst the 25 Participants, and 
more than all options exchanges combined,'' therefore it cannot support 
the Participants' assertion that trading activity is a reasonable proxy 
for cost burden.\249\ FINRA 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.'' \250\
---------------------------------------------------------------------------

    \247\ FINRA May 2023 Letter at 2 (quoting Notice, supra note 7, 
88 FR at 17103.)
    \248\ FINRA May 2023 Letter at 2.
    \249\ Id. See also FINRA April 2023 Letter at 8.
    \250\ FINRA May 2023 Letter at 4.
---------------------------------------------------------------------------

    FINRA further stated 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.\251\ FINRA 
stated 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.'' \252\
---------------------------------------------------------------------------

    \251\ Id. See also FINRA April 2023 Letter at 7-9; Section 
11.2(b) of the CAT NMS Plan. The Proposed Amendment would amend 
Section 11.2(b). See proposed Section 11.2(b); see also infra 
Section III.A.8 (Additional Changes from Original Funding Model).
    \252\ 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,\253\ CAT LLC stated that the 
Proposed Amendment 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.\254\ 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.\255\ 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.\256\
---------------------------------------------------------------------------

    \253\ See FINRA May 2023 Letter at 2.
    \254\ See CAT LLC July 2023 Response Letter at 34.
    \255\ Id.
    \256\ 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.\257\ 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.'' \258\ CAT LLC added that 
because there are other examples of trading activity-based fees, the 
Executed Share Model would not be novel or unique.\259\
---------------------------------------------------------------------------

    \257\ CAT LLC May 2023 Response Letter at 7.
    \258\ Id.
    \259\ Id.
---------------------------------------------------------------------------

    One commenter also stated that the Proposed 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.\260\ 
The commenter also stated 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.\261\ The 
commenter stated that the CAT Operating Committee must explain why it 
proposes to treat these securities differently and analyze the impact 
on retail investors.\262\ The commenter also stated that since 
fractional shares would be rounded up to one share, the result would 
overstate volume.\263\ The commenter stated that the Proposed Amendment 
thus discriminates against Industry Members that handle retail orders 
because of the amount of retail activity in sub-dollar stocks and 
fractional share trading.\264\ The commenter stated 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.\265\
---------------------------------------------------------------------------

    \260\ See Citadel July Letter at 20.
    \261\ See Citadel August Letter at 4-5.
    \262\ Id. at 5.
    \263\ See Citadel July Letter at 20.
    \264\ Id. See also Citadel August Letter at 4-5.
    \265\ See Citadel July Letter at 20. See also Citadel August 
Letter at 5.
---------------------------------------------------------------------------

    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.\266\ 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.\267\ 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.\268\
---------------------------------------------------------------------------

    \266\ See proposed Section 11.2(b).
    \267\ See Notice, supra note 7, 88 FR at 17099.
    \268\ 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.\269\ FINRA stated that the Proposed Amendment ``seeks to 
amend the core funding principles to align with an unjustified 
allocation methodology.'' \270\ 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.'' 
\271\
---------------------------------------------------------------------------

    \269\ See FINRA June 2022 Letter at 4; see also FINRA April 2023 
Letter at 7.
    \270\ 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.
    \271\ Id.; FINRA April 2023 Letter at 8-9.
---------------------------------------------------------------------------

    In the Commission's view, the use of executed equivalent share 
volume as the basis of the proposed cost allocation methodology is 
reasonable and consistent with the approach taken by the funding 
principles of the CAT NMS Plan.\272\ The proposed use of executed 
equivalent shares would continue to incorporate the concept of cost

[[Page 62641]]

alignment because trading activity, as reflected through executed 
equivalent share volume, would, as CAT LLC explained, correlate with 
the cost burden on the CAT.\273\ 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 LLC explained impacts 
various CAT cost drivers, such as storage, data processing and message 
traffic.\274\ 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'' \275\ is 
reasonable.
---------------------------------------------------------------------------

    \272\ See Section 11.2(b) of the CAT NMS Plan.
    \273\ CAT LLC May 2023 Response Letter at 7.
    \274\ Id. See also Notice, supra note 7, 88 FR at 17105; see 
also id. at 17103.
    \275\ See Notice, supra note 7, 88 FR at 17105; see also id. at 
17103.
---------------------------------------------------------------------------

    In response to the commenter that urged the CAT Operating Committee 
to demonstrate how the proposed allocation would not unfairly 
discriminate against equities market participants by subsidizing CAT 
costs related to options market activity,\276\ 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),\277\ imposed on the CAT by equity market activity. The 
Commission, however, does not believe the failure to eliminate the 
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 reasonable.
---------------------------------------------------------------------------

    \276\ See Citadel August Letter at 4.
    \277\ See infra notes 1075-1082 and accompanying text.
---------------------------------------------------------------------------

    The Proposed Amendment's treatment of sub-dollar NMS stocks and 
fractional shares 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.\278\ 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 reasonable 
for the Proposed Amendment to treat all NMS stocks the same, even 
though certain sub-dollar NMS stocks and fractional shares 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,\279\ 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.\280\ 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.\281\ In response to 
the comment that stated that the Proposed Amendment does not explain 
why volume by shares was chosen over notional volume,\282\ 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 the Commission does not disagree that 
using executed notional shares may offer advantages and may lessen any 
discrimination, the Commission believes that 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,\283\ is a 
reasonable proxy for allocating the cost of the CAT.
---------------------------------------------------------------------------

    \278\ See Citadel August Letter at 4-5.
    \279\ See Citadel July Letter at 20.
    \280\ See Notice, supra note 7, 88 FR at 17089.
    \281\ Id. at 17089, n.23.
    \282\ See Citadel July Letter at 20. See also Citadel August 
Letter at 5.
    \283\ See supra notes 272-275 and accompanying text.
---------------------------------------------------------------------------

    The Commission also believes that CAT LLC's explanation that 
increased trading activity correlates with an increased cost burden on 
the CAT is reasonable and that executed share volume is a reasonable 
proxy for a CAT Reporter's cost burden on the CAT \284\ because 
increased trading activity impacts message traffic, but also data 
processing and storage costs.\285\ The Original Funding Model would 
have used message traffic and market share to assess CAT fees on 
Industry Members and Execution Venues, respectively.\286\ 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,\287\ 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'' \288\), 
that the resulting CAT fees would not adversely impact market makers, 
and that the Executed Share Model is simple to understand and to 
implement.\289\ 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,'' \290\ which 
could negatively impact certain Industry Members in a significant 
way.\291\ CAT LLC stated that use of message traffic to calculate fees 
for Industry Members could adversely impact market makers because they

[[Page 62642]]

generally create high levels of message traffic.\292\ We agree 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 
reasonable.
---------------------------------------------------------------------------

    \284\ See Notice, supra note 7, 88 FR at 17105; id. at 17101-03.
    \285\ Id. at 17105.
    \286\ See CAT NMS Plan, supra note 2, at Section 11.3(a) and 
(b).
    \287\ See Notice, supra note 7, 88 FR at 17102-03. The Original 
Funding Model uses message traffic as the basis of Industry Member 
CAT fees. See CAT NMS Plan, supra note 2, at Section 11.3(b).
    \288\ Notice, supra note 7, 88 FR at 17103.
    \289\ Id.
    \290\ Id. at 17102.
    \291\ Id.
    \292\ Id. at 17103.
---------------------------------------------------------------------------

    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.\293\ Additionally, this allocation of fees to 
FINRA is similar to how Section 31 fees are assessed on FINRA.\294\
---------------------------------------------------------------------------

    \293\ See CAT NMS Plan Approval Order, supra note 2, 81 FR at 
84793; CAT NMS Plan, supra note 2, at Section 1.1. (defining 
``Executing Venues'').
    \294\ 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).
---------------------------------------------------------------------------

    Moreover, the Executed Share Model does not change the criteria 
used to charge Execution Venues (market share).\295\ 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.\296\ The 
Original Funding Model approved by the Commission would have assessed 
CAT fees on Execution Venues (which would include the Participants) 
\297\ 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 its trade reporting facility or 
facilities for reporting transactions effected otherwise than on an 
exchange in NMS Stocks or OTC Equity Securities.\298\ Additionally, 
this allocation is similar to how Section 31 fees are assessed on the 
exchanges and FINRA. FINRA's allocation of CAT fees under the Executed 
Share Model will continue to be based on its off-exchange market share.
---------------------------------------------------------------------------

    \295\ See CAT NMS Plan Approval Order, supra note 2, 81 FR at 
84793-97; CAT NMS Plan, supra note 2, at Section 11.2, Section 11.3.
    \296\ Id.
    \297\ See supra note 15.
    \298\ See CAT NMS Plan, supra note 2, 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,\299\ data search 
tools \300\ and data security.\301\ 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.\302\ 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.\303\ 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,\304\ 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,\305\ 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.\306\ 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.
---------------------------------------------------------------------------

    \299\ 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 (May 17, 
2016), 81 FR at 30770.
    \300\ See CAT NMS Plan, supra note 2, at Appendix C, Section 
8.1-8.2.
    \301\ Id. at Appendix D, Section 4.
    \302\ See supra notes 271-274 and accompanying text.
    \303\ See Notice, supra note 7, 88 FR at 17116.
    \304\ Id. at 17093. A Listed Option contract typically 
represents 100 shares, or it could represent another designated 
number of shares. Id.
    \305\ See proposed Section 11.3(a)(i)(B)(III).
    \306\ See supra notes 227-229 and accompanying text.
---------------------------------------------------------------------------

b. Options vs. Equities
    The equal allocation of Participant CAT fees to Participants, 
regardless of whether they are transacting in options or in equities, 
is reasonable. 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.\307\ The Executed Share Model instead 
assesses a CAT fee based purely on executed equivalent share 
volume.\308\ CAT LLC explained that the use of equivalent executed 
share volume is designed to

[[Page 62643]]

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.\309\ 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. The 
proposed treatment of these different types of securities reasonably 
equalizes the 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,\310\ which is appropriate because 
one options contract typically represents 100 shares.
---------------------------------------------------------------------------

    \307\ See CAT NMS Plan, supra note 2, at Section 11.3(a)(i), 
(ii).
    \308\ 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, supra 
note 7, at 17116. See also supra Section III.A.3.
    \309\ See Notice, supra note 7, 88 FR at 17108.
    \310\ Id. at 17093.
---------------------------------------------------------------------------

c. FINRA Allocation
    Under the Executed Share Model, because FINRA is the Participant 
primarily responsible for oversight of off-exchange securities trading 
activity,\311\ FINRA will likely have greater executed equivalent share 
volume than other Participants \312\ 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.\313\ CAT LLC stated that the 
executed equivalent share volume for over-the-counter trades in 
Eligible Securities in 2021 was 1,361,484,729,008 out of a total volume 
of 3,963,697,612,395 executed equivalent shares for trades in Eligible 
Securities.\314\ CAT LLC stated that approximately 34% of the executed 
equivalent share volume in Eligible Securities took place in the over-
the-counter market.\315\
---------------------------------------------------------------------------

    \311\ 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).
    \312\ See Notice, supra note 7, 88 FR at 17107.
    \313\ Id.
    \314\ Id.
    \315\ Id.
---------------------------------------------------------------------------

    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.\316\ 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.\317\ CAT LLC stated that each Participant, 
including FINRA, can choose to charge its members fees to fund the 
Participant's CAT fees.\318\ Additionally, CAT LLC stated that FINRA, 
just like the exchange Participants, has revenue sources other than 
membership fees,\319\ explaining that FINRA generates significant 
revenues via Regulatory Services Agreements (``RSAs'') with the 
exchanges, among other sources.\320\ 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.\321\
---------------------------------------------------------------------------

    \316\ Id.
    \317\ Id. See also CAT LLC May 2023 Response Letter at 9.
    \318\ See Notice, supra note 7, 88 FR at 17107.
    \319\ Id. at 17108.
    \320\ Id.
    \321\ Id.
---------------------------------------------------------------------------

    Certain commenters objected to the proposed allocation of 
Participant CAT fees to FINRA.\322\ A subset of these commenters 
objected to the allocation to FINRA of 34% of the total CAT costs \323\ 
to be borne by the Participants.\324\ FINRA stated that this amount was 
a ``disproportionate share of CAT costs,'' \325\ especially as FINRA 
does not operate a market,\326\ and that the Proposed Amendment would 
place an undue burden on FINRA.\327\ FINRA stated that its share was 
``more than double that of the next highest Participant and $4 million 
more than all option exchanges combined.'' \328\ FINRA also stated that 
its allocation would largely be based on transaction volume reported to 
the TRF; however, FINRA stated that TRF transactions generate fewer 
costs for the CAT,\329\ as opposed to options activity, but that only 
25% of total Participant CAT fees would be assessed for options 
activity, while the remaining 75% would be assessed for equities 
activity.\330\ FINRA stated that ``. . . FINRA would be assessed an 
estimated 34% of the total CAT costs to be borne amongst the 25 
Participants, and more than all options exchanges combined.'' \331\
---------------------------------------------------------------------------

    \322\ See FINRA May 2023 Letter; FINRA April 2023 Letter; FINRA 
June 2022 Letter; SIFMA May 2023 Letter; SIFMA June 2022 Letter; 
SIFMA October 2022 Letter. One of the commenters supported the 
points raised in the FINRA April 2023 Letter that stated that the 
Proposed Amendment would result in the inequitable allocation of 
fees and should be disapproved. See SIFMA May 2023 Letter at 2. 
Another commenter supported these points and stated that the fact 
that one of the biggest Participants was so strongly opposed to the 
plan was evidence that it should be disapproved. See Virtu Letter at 
3.
    \323\ One commenter stated that this estimate is based on 2021 
data and urged the Commission to require the Participants to amend 
the Proposed Amendment to include the 2022 data and fee allocation 
estimates, stating that the CAT budget has grown significantly from 
2021. See FINRA April 2023 Letter at 3, 4-5. In its response to 
comments, CAT LLC provided the Historical CAT Costs for 2022. The 
total operating expenses increased from $144,415,268 in 2021 to 
$181,107,294 for 2022. See Notice, supra note 7, 88 FR at 17111; CAT 
LLC May 2023 Response Letter at 13.
    \324\ See FINRA May 2023 Letter at 2; FINRA April 2023 Letter at 
3; SIFMA May 2023 Letter at 2.
    \325\ FINRA April 2023 Letter at 3.
    \326\ Id.
    \327\ See FINRA June 2022 Letter at 6.
    \328\ FINRA April 2023 Letter at 4; see also FINRA June 2022 
Letter at 5.
    \329\ See FINRA April 2023 Letter at 8, n.23. The commenter also 
stated that ``TRF volume contributes to only a very small percentage 
of annual CAT compute and storage costs.'' FINRA May 2023 Letter at 
2.
    \330\ See FINRA April 2023 Letter at 8, n.23; FINRA May 2023 
Letter at 2.
    \331\ FINRA May 2023 Letter at 2.
---------------------------------------------------------------------------

    FINRA stated that, unlike the exchange Participants, transactions 
are not executed on a FINRA marketplace and FINRA does not receive 
commercial revenue for those transactions.\332\ FINRA explained that 
``while the NMS stock allocation to FINRA under the Funding Model is 
based on transactions that are reported to FINRA [TRFs], these 
transactions are not executed on a FINRA marketplace and FINRA does not 
retain commercial revenues from those transactions'' \333\ unlike the 
exchanges that operate each FINRA TRF, which retain the market data and 
trade reporting revenue of the TRF.\334\ FINRA stated that, unlike 
itself, these exchanges would thus have a revenue stream related to the 
transactions that would be assessed a CAT fee, and that also, unlike 
FINRA, exchanges generate revenue from listings and proprietary data 
feeds in NMS securities.\335\ FINRA also stated that FINRA members can 
report over-the-counter transactions in listed stocks to the FINRA 
Alternative Display Facility, although most transactions are reported 
to a TRF.\336\
---------------------------------------------------------------------------

    \332\ See FINRA April 2023 Letter at 3.
    \333\ Id.
    \334\ Id.
    \335\ Id. at 4.
    \336\ Id. at 3, n.8.
---------------------------------------------------------------------------

    FINRA further stated that it cannot necessarily recoup its costs 
through RSAs that it has entered into with

[[Page 62644]]

certain exchanges \337\ because the exchanges must first agree to be 
charged CAT costs under the RSAs; therefore, RSAs would not be a 
reliable source of CAT funding for FINRA.\338\ Additionally, FINRA 
questioned 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.'' \339\ Specifically, FINRA asked how this 
explains the size of its allocation \340\ and noted that this statement 
``conflates the costs to create and operate the CAT with the usage of 
CAT data.'' \341\
---------------------------------------------------------------------------

    \337\ This statement was made in response to a statement in the 
Proposed Amendment that FINRA, like the exchange Participants, has 
revenue sources other than membership fees, giving as an example the 
RSAs. See Notice, supra note 7, 88 FR at 17107.
    \338\ See FINRA April 2023 Letter at 4.
    \339\ Id. at 7.
    \340\ Id.
    \341\ Id.; see also FINRA June 2022 Letter at 6.
---------------------------------------------------------------------------

    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'').\342\ CAT LLC explained that the 
purpose and implementation of the CT Plan and the CAT NMS Plan are 
different.\343\ CAT LLC stated that while the CAT NMS Plan explicitly 
contemplates charging fees to all Participants, including FINRA,\344\ 
and that the CAT is solely for 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,\345\ ``[i]n contrast, the CT Plan governs the public 
dissemination of real-time consolidated equity market data for NMS 
stocks.'' \346\
---------------------------------------------------------------------------

    \342\ See Notice, supra note 7, 88 FR at 17108. 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).
    \343\ See Notice, supra note 7, 88 FR at 17108.
    \344\ See CAT NMS Plan, supra note 2, at Sections 11.2 and 11.3.
    \345\ See Notice, supra note 7, 88 FR at 17108.
    \346\ Id.
---------------------------------------------------------------------------

    Certain commenters expressed concern about alleged arbitrary 
treatment of FINRA by the other Participants of the CAT NMS Plan.\347\ 
FINRA believes that its ``outsized allocation'' \348\ 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.\349\ Another commenter stated that the 
current CAT NMS Plan voting structure results in the unfair and 
inequitable treatment of FINRA.\350\ Both commenters believe that the 
exchange Participants treat FINRA arbitrarily to benefit 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.\351\ One commenter stated that the Participants do not treat 
FINRA as a market center under the CT Plan in order to limit FINRA's 
voting power and therefore its ability to decide how to allocate market 
data revenue.\352\ The commenter stated that this example demonstrates 
the ``. . . inherent conflicts of interest that for-profit exchanges 
have in operating as SROs. . .'' \353\
---------------------------------------------------------------------------

    \347\ See FINRA April 2023 Letter at 6; SIFMA October 2022 
Letter at 3. See also SIFMA May 2023 Letter at 6, n.11.
    \348\ FINRA April 2023 Letter at 7; FINRA June 2022 Letter at 6.
    \349\ FINRA April 2023 Letter at 4, 8. See also FINRA June 2022 
Letter at 8.
    \350\ See SIFMA January 2023 Letter at 3, n.7.
    \351\ See FINRA April 2023 Letter at 6, n.16; SIFMA October 2022 
Letter at 3. See also SIFMA May 2023 Letter at 6, n.11. One 
commenter stated that the Participants treat FINRA in ways that are 
financially beneficial to them without considering FINRA's role in 
the marketplace ``. . . as the not-for-profit self-regulator for the 
entire brokerage industry. . .'' SIFMA October 2022 Letter at 3. See 
also SIFMA January 2023 Letter at 4; SIFMA October 2022 Letter at 4; 
SIFMA May 2023 Letter at 8 (recommending that FINRA be treated 
differently from the Participant exchanges due to its unique role).
    \352\ See SIFMA October 2022 Letter at 3-4. See also SIFMA May 
2023 Letter at 6, n.11.
    \353\ SIFMA October 2022 Letter at 3. See also SIFMA June 2023 
Letter at 4 (quoting a Commission release stating that the 
Participants are potentially conflicted in allocating CAT fees to 
themselves and the Industry Members); supra note 64.
---------------------------------------------------------------------------

    Certain commenters suggested that the Commission issue an order 
soliciting comment on whether the Operating Committee should be 
reorganized consistent with the CT Plan.\354\ One commenter stated, 
``[w]e believe such a governance structure for the CAT would help 
facilitate a fairer structure for the views of the SROs and industry to 
be heard and incorporated into any further CAT funding proposal by 
reducing the ability of the largest exchange groups to dictate the 
terms of any CAT funding proposal over the objections of other SRO 
Participants and the industry.'' \355\
---------------------------------------------------------------------------

    \354\ SIFMA October 2022 Letter at 2. See also infra Section 
III.A.9.f. (suggesting changes to the governance structure of the 
CAT NMS Plan); see also MMI July Letter at 1-3. The latter commenter 
also felt that there should be a disclosure of the conflicts of 
interest the commenter believes are inherent in having the funding 
model determined by the Participants.).
    \355\ SIFMA October 2022 Letter at 2. The commenter also stated 
that the Industry Members are not voting members of the Operating 
Committee and have no way to direct the cost control efforts of the 
Participants or change their course if the cost control efforts 
prove to be unsuccessful. See SIFMA June 2022 Letter at 8.
---------------------------------------------------------------------------

    Commenters also believe the allocation to FINRA would increase the 
allocation to Industry Members.\356\ 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 business members.\357\ 
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.\358\ FINRA dismissed as inadequate the Participants' argument 
that Industry Members can pass through their costs, stating that the 
Proposed Amendment lacks a detailed description of and transparency 
into how the fees may be passed on to customers.\359\ Another commenter 
stated that the Participants ``do not address the fact that the 
Executed Share Model for Prospective CAT Costs allocates two-thirds of 
CAT costs to Industry Members for exchange transactions and more for 
off-exchange transactions'' \360\ because they cannot demonstrate that 
the proposed allocation results in an equitable allocation of 
reasonable fees.\361\ The commenter stated that Industry Members, who 
would be subject to two-thirds of Prospective CAT Costs under the 
Executed Share Model, already pay FINRA's operating costs through 
regulatory fines and fees;

[[Page 62645]]

therefore, Industry Members would additionally be indirectly assessed 
FINRA's one-third CAT fee for off-exchange transactions.\362\ The 
commenter suggested an alternative allocation \363\ that would subject 
FINRA only to a nominal regulatory user fee to access CAT Data.\364\
---------------------------------------------------------------------------

    \356\ See FINRA April 2023 Letter at 5-7; SIFMA June 2022 Letter 
at 4; Citadel July Letter at 2, 16, 21, supra notes 73-74 and 
accompanying text. See also SIFMA October 2022 Letter at 2, 3.
    \357\ See FINRA April 2023 Letter at 5-6. See also FINRA June 
2022 Letter at 7.
    \358\ See FINRA April 2023 Letter at 6.
    \359\ Id. at 6-7.
    \360\ SIFMA June 2022 Letter at 4. See also SIFMA October 2022 
Letter at 3 (``. . . we believe the proposal is flawed because it 
fails to appropriately consider that Industry Members pay the full 
costs of operating FINRA.'').
    \361\ See SIFMA June 2022 Letter at 4.
    \362\ Id. The commenter also stated that the proposed allocation 
would result in two-thirds of CAT costs for exchange transactions 
being imposed on Industry Members, and that this amount would be 
higher for off-exchange transactions as FINRA would be assessed one-
third as the venue fee and Industry Members would be indirectly 
assessed FINRA's portion of CAT costs as they pay the entire costs 
of operating FINRA. Id. See also SIFMA October 2022 Letter at 2.
    \363\ See supra notes 100-101 and accompanying text.
    \364\ See SIFMA January 2023 Letter at 4. See also SIFMA May 
2023 Letter at 8; SIFMA June 2022 Letter at 5; SIFMA October 2022 
Letter at 4; supra notes 100-101 and accompanying text.
---------------------------------------------------------------------------

    CAT LLC disagreed with the commenter's proposal to charge FINRA 
only a nominal regulatory fee.\365\ 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.\366\ 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.'' \367\
---------------------------------------------------------------------------

    \365\ See CAT LLC May 2023 Response Letter at 8.
    \366\ Id.
    \367\ See CAT LLC July 2023 Response Letter at 35.
---------------------------------------------------------------------------

    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.'' \368\ 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.\369\
---------------------------------------------------------------------------

    \368\ FINRA April 2023 Letter at 7.
    \369\ Id.
---------------------------------------------------------------------------

    The Commission acknowledges the comments objecting to the 
allocation to FINRA of 34% of the total CAT costs to be borne by 
Participants,\370\ but believes that it is reasonable for the Proposed 
Amendment to assess fees to FINRA based on executed equivalent share 
volume like the other Participants for purposes of CAT funding. FINRA 
is a Participant of the CAT NMS Plan. All Participants are mandated 
under the CAT NMS Plan to fund the CAT.\371\ The Executed Share Model 
would assess CAT fees based on executed equivalent share volume. Under 
the Executed Share Model, CAT fees would be allocated 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. The Executed Share Model, like the current funding model, is 
designed to allocate CAT fees among the Participants based on market 
share. 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 than the other 
Participants. However, trading volume generates costs for CAT, 
therefore, given its role overseeing the over-the-counter market, it is 
reasonable for FINRA to incur a greater share of CAT fees based on the 
over-the-counter market's trading volume. As discussed above, it is 
difficult to calculate each CAT Reporter's individual cost burden on 
the CAT, and a reasonable proxy for CAT cost burden must be used. The 
proposed use of executed equivalent share volume is a reasonable method 
of allocating costs because it is readily determinable and equitable 
since executed share volume is based on trading activity, which impacts 
CAT costs. In practice, CAT Reporters will be assessed fees 
corresponding to the cost burden they impose on the CAT through their 
trading activity, or in FINRA's case, trading activity in the over-the-
counter markets reported to it by its members.
---------------------------------------------------------------------------

    \370\ Id. at 3; SIFMA May 2023 Letter at 2.
    \371\ See CAT NMS Plan, supra note 2, at Section 11.1(b); 
Section 11.3(a).
---------------------------------------------------------------------------

    The Commission recognizes that there could be other methodologies 
for allocating costs among CAT Reporters, 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.\372\ 
Although there may be multiple permissible approaches to cost 
allocation, the proposed allocation of Participant CAT fees based on 
executed equivalent share volume is reasonable and meets the Rule 608 
approval standard.\373\
---------------------------------------------------------------------------

    \372\ See Notice, supra note 7, 88 FR at 17103.
    \373\ 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.\374\ 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.\375\
---------------------------------------------------------------------------

    \374\ See Notice, supra note 7, 88 FR at 17107.
    \375\ Id.
---------------------------------------------------------------------------

    The Commission acknowledges the concerns expressed by commenters 
that FINRA's allocation could indirectly increase the allocation of CAT 
fees to Industry Members since Industry Members contribute to FINRA's 
funding.\376\ As discussed above, however, the costs of CAT must be 
allocated between the Participants and Industry Members according to 
some formula. Although the Participants and Industry Members have 
different means of potentially recovering from others some of the costs 
allocated to them (e.g., the Participants from Industry Members and 
Industry Members from customers), it is reasonable to allocate costs 
evenly among the three parties who have primary roles related to the 
transaction. The Commission agrees with CAT LLC that Industry Members 
may be able to offset any fees that FINRA assesses them by passing 
their CAT fees through to their customers, just as they may do with 
Section 31-related fees and other fees. The Commission recognizes, 
however, that not all Industry Members currently pass through fees or 
would determine to do so in the future.
---------------------------------------------------------------------------

    \376\ See FINRA April 2023 Letter at 5-7; SIFMA June 2022 Letter 
at 4; Citadel July Letter at 2, 16, 21, supra notes 73-74 and 
accompanying text. See also SIFMA October 2022 Letter at 2, 3; FINRA 
June 2022 Letter at 4.
---------------------------------------------------------------------------

    Finally, the Commission does not agree that the Participants' 
treatment of FINRA is arbitrary because FINRA is treated as a market 
center for purposes

[[Page 62646]]

of determining its CAT funding obligations while the CT Plan, which 
governs the public dissemination of consolidated market data, would not 
have counted FINRA's market activity for purposes of determining the 
allocation of votes on the Operating Committee.\377\ The different 
treatment of FINRA in these NMS plans reasonably reflects the very 
different roles that a market center is used for in these contexts. The 
CT Plan provisions discussed by the commenters involve the 
determination of which Participant(s) could be eligible for a second 
vote on the Operating Committee,\378\ while the Executed Share Model 
proposes to assess FINRA a Participant CAT Fee based on its role as the 
regulator for the over-the-counter market in which such trades 
occur.\379\ The commenter's request that the Commission issue an order 
soliciting comment on whether the Operating Committee should be 
reorganized consistent with the CT Plan \380\ would be better addressed 
in the context of a separate plan amendment.
---------------------------------------------------------------------------

    \377\ The CT Plan provided that an exchange group or independent 
exchange that has more than 15 percent of consolidated equity market 
share during four of the six calendar months preceding a vote of the 
operating committee would be authorized to cast two votes. The CT 
Plan stated that FINRA is not considered a market center for 
purposes of determining consolidated equity market share solely by 
virtue of facilitating trades through any TRF that FINRA operates in 
affiliation with a national securities exchange designed to report 
transactions otherwise than on an exchange. See supra note 342.
    \378\ See FINRA April 2023 Letter at 6; SIFMA October 2022 
Letter at 3. See also SIFMA January 2023 Letter at 4; SIFMA October 
2022 Letter at 4; SIFMA May 2023 Letter at 8.
    \379\ See supra notes 371-372 and accompanying text.
    \380\ See SIFMA October 2022 Letter at 2.
---------------------------------------------------------------------------

4. CAT Executing Broker
    As noted above, CAT Executing Brokers will be charged CAT 
fees.\381\ CAT LLC proposed to add a definition of ``CAT Executing 
Broker'' to Section 1.1 of the CAT NMS Plan. The definition would 
explain which party would be identified as a CAT Executing Broker in a 
transaction.
---------------------------------------------------------------------------

    \381\ See Notice, supra note 7, 88 FR at 17087.
---------------------------------------------------------------------------

    With respect to transactions on an exchange and over-the-counter 
transactions, CAT LLC would use transaction reports reported to the CAT 
by FINRA or the exchanges to identify the transaction, as well as the 
CAT Executing Broker for each transaction, for purposes of calculating 
the CAT fees.\382\ Under the Participant Technical Specifications, for 
transactions occurring on a Participant exchange, there is a field for 
the exchange to report the market participant identifier (``MPID'') of 
``the member firm that is responsible for the order on this side of the 
trade.'' \383\ The Industry Members identified in these fields for the 
transaction reports would be the CAT Executing Brokers for transactions 
executed on an exchange.\384\ FINRA is required to report to the CAT 
transactions in Eligible Securities reported to a FINRA trade reporting 
facility (i.e., the TRF, Over-the Counter Reporting Facility (``ORF'') 
and Alternative Display Facility (``ADF'')).\385\ Under the Participant 
Technical Specifications, for such transactions reported to a FINRA 
trade reporting facility, FINRA is required to report the MPID of the 
executing party as well as the MPID of the contra-side executing 
party.\386\ The Industry Members identified in these two fields for the 
transaction reports would be the CAT Executing Brokers for over-the-
counter transactions.\387\
---------------------------------------------------------------------------

    \382\ Id. at 17088. The transaction reports used to identify 
transactions and CAT Executing Brokers do not provide for fractional 
quantities; therefore, CAT fees would not be calculated using 
fractional shares or fractional share components of executed orders. 
Id. at 17089. See supra notes 280-266 and accompanying text.
    \383\ Section 4.7 (Order Trade Event) and Section 5.2.5.1 
(Simple Option Trade Event: Side Details) of the CAT Reporting 
Technical Specifications for Plan Participants, Version 4.1.0-r17 
(Feb. 21, 2023), https://www.catnmsplan.com/sites/default/files/2023-02/02.21.2023-CAT-Reporting-Technical-Specifications-for-Participants-4.1.0-r17.pdf.
    \384\ See Notice, supra note 7, 88 FR at 17087-88.
    \385\ See Section 6.1 of the CAT Reporting Technical 
Specifications for Plan Participants (Feb. 21, 2023). A CAT 
Executing Broker in over-the-counter transactions identified on the 
TRF/ORF/ADF Transaction Data Event is determined based on the tape 
or media report, that is, a trade report that is submitted to a 
FINRA trade reporting facility and reported to and publicly 
disseminated by the appropriate exclusive Securities Information 
Processor. A CAT Executing Broker for over-the-counter transactions 
is not determined based on a non-tape report (e.g., a regulatory 
report or a clearing report), which is not publicly disseminated. 
There is an exception to this statement for away-from-market trades. 
These are non-media trades reported to the TRF with an ``SRO 
Required Modifier Code'' of ``R''.
    \386\ See Notice, supra note 7, 88 FR at 17087-88.
    \387\ Id. at 17088.
---------------------------------------------------------------------------

    For transactions on ATSs, if an ATS is identified as the executing 
party and/or the contra-side executing party in the TRF/ORF/ADF 
Transaction Data Event, then the ATS would be a CAT Executing Broker 
for purposes of the Executed Share Model.\388\ If the ATS is identified 
as the executing party for the buyer in such transaction reports, then 
the ATS would be the CEBB.\389\ If the ATS is identified as the 
executing party for the seller in such transaction reports, then the 
ATS would be the CEBS.\390\ If the ATS is identified as both the 
executing party and contra-side executing party, the ATS would be both 
the CEBB and the CEBS.\391\ ATSs would determine the executing party 
and the contra-side executing party reported to FINRA's equity trading 
facilities in accordance with the transaction reporting requirements 
for FINRA's equity trading facilities.\392\
---------------------------------------------------------------------------

    \388\ Id. at 17088-89.
    \389\ Id. at 17089.
    \390\ Id.
    \391\ Id. See also FINRA, Trade Reporting Frequently Asked 
Questions at Section 203, available at https://www.finra.org/filing-reporting/market-transparency-reporting/trade-reporting-faq#203; 
FINRA Regulatory Notice 09-08, available at https://www.finra.org/rules-guidance/notices/09-08.
    \392\ See Notice, supra note 7, 88 FR at 17089.
---------------------------------------------------------------------------

    For transactions that do not occur on an exchange and there is only 
a FINRA member identified for one side of the trade, that FINRA member 
would be treated as the CAT Executing Broker for both the buy-side and 
the sell-side of the transaction, that is, as the CEBS and CEBB.\393\ 
Additionally, ``[f]or any trade report on which a Canadian non-member 
appears as a party to the trade, the FINRA member must appear as the 
reporting party.'' \394\ In this situation, the executing broker 
identified in the ``reportingExecutingMpid'' field would be billed for 
both sides of the transaction.\395\
---------------------------------------------------------------------------

    \393\ See proposed Section 1.1. (definition of ``CAT Executing 
Broker'').
    \394\ Notice, supra note 7, 88 FR at 17089.
    \395\ Id.
---------------------------------------------------------------------------

    The Executed Share Model also provides for cancellations and 
corrections.\396\ CAT LLC stated that it expects to determine CAT fees 
based on the transaction reports for a month as of a particular 
day.\397\ To the extent that changes are made to the transaction 
reports on or before the day the CAT fees are determined for the given 
month, the changes will be reflected in the monthly bill.\398\ To the 
extent that changes are made to the transaction reports after the day 
the CAT fees are determined for that month, subsequent bills will 
reflect any changes via debits or credits, as applicable.\399\ CAT LLC 
represented that it will establish specific policies and procedures 
regarding the treatment of such adjustments as those related to 
cancellations and corrections, as is required under the CAT NMS Plan to 
adopt policies, procedures, and practices regarding the billing and 
collection of fees.\400\ Furthermore, CAT LLC stated that it will 
inform Industry Members and other market participants

[[Page 62647]]

of these policies and procedures via FAQs, CAT Alerts and/or other 
appropriate methods.\401\
---------------------------------------------------------------------------

    \396\ Id.
    \397\ Id.
    \398\ Id.
    \399\ Id.
    \400\ See CAT NMS Plan, supra note 2, at Section 11.1(d).
    \401\ See Notice, supra note 7, 88 FR at 17089.
---------------------------------------------------------------------------

    Certain commenters objected to the proposed definition of ``CAT 
Executing Broker.'' \402\ One commenter stated that the term ``CAT 
Executing Broker'' ``does not appear to be universally defined or 
accepted by Option Industry Members or Participants'' and that such 
lack of acceptance ``present[s] a challenge when firms try to assess 
the impact the `Funding Proposal' will have on their respective 
businesses.'' \403\ Accordingly, the commenter advocated that the 
Executed Share Model follow the ``structure already in place for 
[collecting] Regulatory Fees,'' such as charging Clearing Brokers.\404\
---------------------------------------------------------------------------

    \402\ See SIFMA May 2023 Letter; Letter from Timothy Miller, 
Chief Operating Officer, DASH Financial Technologies, LLC to Vanessa 
Countryman, Secretary, Commission (July 13, 2023) (``DASH July 2023 
Letter''), at 1-2; Letter from Timothy Miller, Chief Operating 
Officer, DASH Financial Technologies, LLC to Vanessa Countryman, 
Secretary, Commission (April 11, 2023) (``DASH April 2023 Letter''), 
at 1-2. Both the DASH July 2023 Letter and the DASH April 2023 
Letter incorporated by reference a separate letter submitted by the 
commenter on the prior funding proposal (stating that the concerns 
expressed in the prior letter concerning the operating and 
competitive burdens of the proposed funding model are unchanged). 
See Letter from Timothy Miller, Chief Operating Officer, DASH 
Financial Technologies LLC, to Vanessa Countryman, Secretary, 
Commission (Jan. 3, 2023) (``DASH January 2023 Letter'').
    \403\ DASH April 2023 Letter at 1. See also DASH July 2023 
Letter at 1-2.
    \404\ DASH April 2023 Letter at 2. See also DASH July 2023 
Letter at 1-2. The commenter reiterated that it believes clearing 
firms are still best suited to process the collection of fees, as 
this can occur at trade settlement and the cost is ultimately borne 
by the end beneficiary of each transaction. The commenter further 
stated that ``there is precedent to follow with other Regulatory 
Fees, such as ORF and OCC, to streamline the workflow and reduce the 
number of counterparties involved in the payment/collection 
process,'' and ``that in the options industry, ORF and Section 31 
fees are not consistently billed to the exchange facing member; but, 
most of the time, these fees follow the clearing firm associated 
with the order.''
---------------------------------------------------------------------------

    Another commenter stated that the proposed definition of executing 
broker would result in the inequitable allocation of fees.\405\ While 
the commenter supported the change from having clearing firms be 
assessed Industry Member CAT fees to executing brokers having this 
obligation,\406\ because clearing firms would have been unfairly 
burdened with CAT costs and could have been placed in situations in 
which they would have been unable to identify the client responsible 
for the costs,\407\ the commenter expressed concerns with how the 
Participants determined which entities would be considered executing 
brokers.\408\ In comment letters on the prior funding model 
proposal,\409\ which was amended to require executing brokers instead 
of clearing firms to be assessed CAT fees,\410\ the commenter requested 
additional detail on how an executing broker would be defined.\411\ The 
commenter subsequently stated that the definition in the current 
Proposed Amendment suffers from the same problems as the prior proposal 
in which CAT fees were allocated to clearing firms and would result in 
the inequitable allocation of CAT fees among Industry Members.\412\
---------------------------------------------------------------------------

    \405\ See SIFMA May 2023 Letter at 3.
    \406\ Id. See also SIFMA January 2023 Letter at 7-8.
    \407\ See SIFMA May 2023 Letter at 3-4. See also SIFMA October 
2022 Letter at 5. The commenter also expressed concerns about the 
assessment of CAT fees on clearing firms because clearing firms 
would be required to collect fees and thus would have to develop new 
systems and processes under the Executed Share Model, and because a 
clearing firm for a buyer or seller would not always be a party to a 
trade as it could be the clearer of a trade on behalf of an 
executing broker. See SIFMA June 2022 Letter at 9; SIFMA October 
2022 Letter at 7.
    \408\ See SIFMA May 2023 Letter at 4.
    \409\ See Securities Exchange Act Release No. 94984 (May 25, 
2022), 87 FR 33226 (June 1, 2022) (``Prior Funding Model 
Proposal'').
    \410\ Two partial amendments were submitted on the Prior Funding 
Model Proposal. The first partial amendment initially proposed the 
use of executing brokers. See Securities Exchange Act Release No. 
96394 (Nov. 28, 2022), 87 FR 74183 (Dec. 3, 2022). The Prior Funding 
Model Proposal, as modified by the two partial amendments, was 
withdrawn by the Participants on March 1, 2023. See Securities 
Exchange Act Release No. 97212 (Mar. 28, 2023), 88 FR 19693 (Apr. 3, 
2023).
    \411\ See SIFMA January 2023 Letter at 2, 8; SIFMA December 2022 
Letter at 3. See also SIFMA May 2023 Letter at 4.
    \412\ See SIFMA May 2023 Letter at 4. See also SIFMA June 2022 
Letter at 9-10; SIFMA October 2022 Letter at 5.
---------------------------------------------------------------------------

    The commenter explained that CAT operates on a cost-recovery basis, 
with costs resulting from the number of messages that Participants and 
Industry Members report to the CAT, the processing and linking of such 
messages, and the costs of providing tools to regulators to analyze CAT 
data.\413\ The commenter stated that the use of message traffic as the 
basis of fees, in the Original Funding Model, would have ensured that 
all CAT Reporters would contribute to CAT's funding.\414\ However, the 
commenter stated that, since the Proposed Amendment would not impose 
fees on all CAT Reporters, instead imposing fees on executing brokers, 
it would result in an inequitable allocation of fees as the executing 
brokers would be the last broker among many other brokers handling an 
order.\415\ The commenter stated that any analysis of such a funding 
model must evaluate whether (i) the executing brokers would pass-
through or absorb the CAT fees and any negative impacts on competition, 
noting that the Proposed Amendment would require executing brokers to 
incur expenses that other Industry Members would not incur since they 
would be required to collect the Industry Member portion of CAT fees on 
behalf of the Participants,\416\ and (ii) Industry Members that 
executed trades for introducing brokers and acted as order 
consolidators and ATSs would be responsible for CAT fees for 
transactions they did not originate and would have to either pay the 
fee for their clients or develop software and processes to collect the 
fees from their clients as they often are not capable of passing 
through fees to the clients that sent them the orders.\417\ The 
commenter stated that the Proposed Amendment would subject executing 
brokers to unfair burdens and require them to ``shoulder CAT costs in 
scenarios in which they could not determine which client firm was 
responsible for creating the CAT costs by initiating the transaction.'' 
\418\
---------------------------------------------------------------------------

    \413\ See SIFMA May 2023 Letter at 4.
    \414\ Id.
    \415\ Id. at 4-5.
    \416\ Id. at 5. See also Virtu Letter at 5 (stating that it is 
``highly likely'' that executing brokers would end up absorbing the 
fees themselves, as they would not have the systems in place to 
trace to whom the fees were properly allocable).
    \417\ See SIFMA May 2023 Letter at 5.
    \418\ Id. Another commenter similarly objected to the imposition 
of CAT fees on Executing Brokers. This commenter, a major wholesaler 
who also serves as the Executing Broker on many transactions, stated 
it was unjust to disproportionately burden Executing Brokers in this 
manner, and noted that the cost of designing processes and systems 
to route the fees to the appropriate parties could be prohibitive to 
smaller brokers. See Virtu Letter at 4-5.
---------------------------------------------------------------------------

    The commenter suggested instead an allocation in which the Industry 
Member that originated an order would be treated as an ``executing 
broker'' and therefore be responsible for Industry Member CAT 
fees.\419\ Under this alternative, ``the Industry Member who originates 
a new principal order or the Industry Member who initially receives and 
routes a customer order for execution on an agency basis would be 
directly assessed CAT Fees.'' \420\ The commenter stated that this 
would be the most reasonable way to allocate CAT costs among Industry 
Members \421\ and that it would be ``relatively easy to accommodate 
this approach.'' \422\ One other commenter also suggested allocating 
costs to the party originating an order, stating that this would

[[Page 62648]]

``streamline the process and more accurately allocate costs . . .'' 
\423\
---------------------------------------------------------------------------

    \419\ See SIFMA May 2023 Letter at 5.
    \420\ Id. at 6.
    \421\ Id. at 5.
    \422\ Id. at 6.
    \423\ See Citadel July Letter at 20. See also id. at 3, 30, 31.
---------------------------------------------------------------------------

    One commenter expressed concerns about the imposition of CAT fees 
on CAT Executing Brokers.\424\ The commenter stated that charging CAT 
Executing Brokers ``inordinately burdens Broker Dealers, especially 
small to medium-sized firms.'' \425\ This commenter recommended using 
instead the existing structure for regulatory fees, including ``the 
efficiencies afforded by the current structure, and the resulting 
alleviation of risk.'' \426\ In this regard, the commenter stated that 
``Clearing Firms are best suited to process the collection of fees as 
it can occur at trade settlement and the cost is ultimately borne by 
the end beneficiary of each transaction.'' \427\ The commenter also 
stated that small and medium-sized executing brokers could expect a 
significant negative impact on their net capital as a result of the 
proposal, stating, ``. . . the firms will be forced to recoup these 
costs by passing them on to their clients, either in the form of higher 
commission rates or as a separate transactional fee. Using [Clearing 
Member Trade Agreement] commission invoicing and/or SEC 31(b) fees in a 
broker-to-broker relationship as a proxy, these invoices are generally 
paid well after the 60-day milestone to qualify the receivable as `good 
capital.' '' \428\
---------------------------------------------------------------------------

    \424\ See DASH April 2023 Letter. See also DASH July 2023 Letter 
at 1-2.
    \425\ See DASH April 2023 Letter at 1. See also DASH January 
2023 Letter at 1; DASH July 2023 Letter at 1.
    \426\ DASH January 2023 Letter at 3. See also DASH April 2023 
Letter at 1-2; DASH July 2023 Letter at 1-2.
    \427\ DASH April 2023 Letter at 1. See also DASH January 2023 
Letter at 1; DASH July 2023 Letter at 1.
    \428\ DASH January 2023 Letter at 2; DASH July 2023 Letter at 1-
2.
---------------------------------------------------------------------------

    In response to the comment about the definition of CAT Executing 
Broker and the billing and collection process being better suited for 
clearing firms, CAT LLC stated that the proposed assessment of CAT fees 
on CAT Executing Brokers only addresses the party obligated to pay the 
CAT fee.\429\ CAT LLC stated that a CAT Executing Broker would not be 
required to follow a particular process for paying CAT fees, as it 
could pay the fees itself, or require a clearing firm or other third 
party to pay CAT fees on its behalf.\430\ For example, CAT LLC stated 
that a CAT Executing Broker can decide to enter into an arrangement 
with its clearing broker for the clearing broker to collect and pass-
through the CAT fees like it does in other contexts.\431\
---------------------------------------------------------------------------

    \429\ See CAT LLC May 2023 Response Letter at 12; CAT LLC July 
2023 Response Letter at 3.
    \430\ See CAT LLC July 2023 Response Letter at 3.
    \431\ CAT LLC May 2023 Response Letter at 12.
---------------------------------------------------------------------------

    With respect to alternatives to the proposed definition of the CAT 
Executing Broker, CAT LLC stated that the ``originating broker'' 
suggestion was from a commenter who had previously recommended charging 
executing brokers in comment letters on the Prior Funding Model 
Proposal.\432\ CAT LLC stated that the commenter's objection to 
charging executing brokers in the Executed Share Model was an attempt 
to further delay the approval of a funding model and the resultant 
payment of CAT fees by its members, rather than expressing a concern 
about the merits of charging executing brokers.\433\
---------------------------------------------------------------------------

    \432\ Id. at 2. See also supra note 409.
    \433\ CAT LLC May 2023 Response Letter at 3.
---------------------------------------------------------------------------

    In response, the commenter stated that the Operating Committee 
mischaracterized the commenter's position on the assessment of CAT fees 
to executing brokers by stating in the CAT LLC Response Letter that the 
commenter changed its position on this proposed change to delay 
adoption of a CAT funding model.\434\ The commenter represented that it 
stated in comment letters it submitted on the Prior Funding Model 
Proposal \435\ that initially proposed the use of executing brokers 
\436\ that (1) the Participants did not define who would be an 
executing broker in a transaction, (2) a clear definition is necessary 
for Industry Members to understand when they would be assessed costs 
under the Executed Share Model, and (3) its understanding was that the 
concept of executing broker generally refers to the Industry Member 
that initiates an order.\437\ The commenter stated that the 
Participants only provided a definition of executing broker in the 
Proposed Amendment.\438\ The commenter stated that it provided concerns 
about the proposed definition in its May 2023 comment letter, which the 
commenter stated were mischaracterized by the Operating Committee in 
the CAT LLC Response Letter in an attempt to rush the Commission to a 
decision on the Proposed Amendment.\439\
---------------------------------------------------------------------------

    \434\ See SIFMA June 2023 Letter at 5.
    \435\ See supra note 409.
    \436\ See supra note 410.
    \437\ See SIFMA June 2023 Letter at 5.
    \438\ Id.
    \439\ Id. at 5-6.
---------------------------------------------------------------------------

    In response to the comment that imposing fees on executing brokers 
would result in an inequitable allocation of fees and the suggestion 
that the use of message traffic as the basis of fees would have ensured 
that all CAT Reporters would contribute to CAT's funding, CAT LLC 
disagreed and stated that because the 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.\440\ CAT LLC stated 
that, as a result, CAT fees based on message traffic could impose an 
outsized adverse financial impact on certain Industry Members, raising 
this same issue of an inequitable allocation of fees.\441\ Further, in 
response to the commenter's criticism that in charging executing 
brokers, the fee would be charged to a subset of Industry Members and, 
as a result, that subset of Industry Members would incur expenses that 
other Industry Members would not incur, CAT LLC stated that it 
continues to believe that charging CAT Executing Brokers would satisfy 
the requirements of the Exchange Act.\442\ CAT LLC stated that in the 
past, the Commission has approved fees that are charged to some, but 
not all, broker-dealers.\443\ CAT LLC noted that, for example, FINRA's 
TAF is assessed to a subset of FINRA members--that is, it is assessed 
on the sell side of member transactions.\444\ CAT LLC also stated that 
the options exchanges charge options regulatory fees per executed 
contract side, and, for both options and equities, Section 31-related 
fees are charged to the sell-side in a transaction.\445\ CAT LLC 
recognized that, under the proposal to charge CAT Executing Brokers, 
the CAT Executing Broker, but not other Industry Members involved in a 
given order lifecycle, would be required to pay the CAT fees, and that 
Industry Members that sought to recoup such fees would have to develop 
processes to collect such fees from their clients.\446\ CAT LLC stated 
that this regulatory requirement would have a similar effect as other 
types of regulatory fees, such as the FINRA TAF, the options regulatory 
fee and Section 31-related sales value pass-through fees because, 
``[i]n each such case, a subset of broker-dealers is required to pay a 
transaction-based regulatory fee, and those broker-dealers seeking to 
recover such fees from other broker-dealers or non-broker-dealers have 
established processes with regard to the pass-through of such fees.'' 
\447\
---------------------------------------------------------------------------

    \440\ See CAT LLC May 2023 Response Letter at 4.
    \441\ Id.
    \442\ Id. at 3.
    \443\ Id.
    \444\ Id.
    \445\ Id.
    \446\ See CAT LLC May 2023 Response Letter at 4.
    \447\ Id.
---------------------------------------------------------------------------

    CAT LLC further stated that it disagrees with charging an 
originating

[[Page 62649]]

broker instead of an executing broker because there are already several 
existing examples of transaction-based fees being assessed to executing 
brokers as opposed to the originating broker (e.g., TAF, Section 31 
fees, ORF fees), and it disagrees with the assertion that charging 
originating brokers would be easier.\448\ CAT LLC stated that charging 
the originating Industry Member would be difficult to implement and 
would increase the costs of implementing CAT fees, whereas charging CAT 
Executing Brokers is simple, straightforward and in line with existing 
fee and business models because for any given trade (buy or sell), 
there is only one CAT Executing Broker to which shares can be 
allocated.\449\ As such, CAT LLC stated that ``charging the CAT 
Executing Broker is simple and straightforward, and leverages a one-to-
one relationship between billable events (trades) and billable 
parties.'' \450\ CAT LLC stated that, for a single trade event, there 
may be many originating brokers, and each trade must be broken down on 
a pro-rata basis, ``to account[] for one or more layers of aggregation, 
disaggregation, and representation of the underlying orders.'' \451\ 
Therefore, CAT LLC stated that one commenter's \452\ ``suggestion of a 
model that begins the funding analysis with new order events (e.g., 
MENO or MONO events) and then looks for any execution or fulfillment 
that is directly associated with that event does not reduce or mitigate 
the complexity associated with aggregation.'' \453\ Further, CAT LLC 
stated that the commenter's recommendation would not work with the 
design of the CAT system, stating that ``[w]hile CAT is indeed designed 
to capture and unwind complex aggregation scenarios, the data and 
linkages are structured to facilitate regulatory use, and not a billing 
mechanism that assesses fees on a distinct set of executed trades; it 
is not simply a matter of using existing CAT linkages.'' \454\ CAT LLC 
also stated that charging originating brokers would implicate issues 
related to lifecycle linkage rates, and issues related to corrections, 
cancellations and allocations, but charging CAT Executing Brokers would 
avoid such complications.\455\ CAT LLC also stated that allocating to 
the originating broker would not include Industry Members that were 
only involved in routing and execution, which would include ``some of 
the largest Industry Members,'' \456\ and that these Industry Members 
``are not involved in the origination of orders or originate few orders 
in relation to their overall market activity.'' \457\ Furthermore, CAT 
LLC stated that originating brokers would also need to establish 
processes for paying CAT fees, just as CAT Executing Brokers 
would.\458\
---------------------------------------------------------------------------

    \448\ Id. at 5. See also CAT LLC July 2023 Response Letter at 3-
4, 4 (detailing challenges of allocating CAT costs to originating 
brokers).
    \449\ See CAT LLC May 2023 Response Letter at 5. See also CAT 
LLC July 2023 Response Letter at 3.
    \450\ CAT LLC May 2023 Response Letter at 5. See also CAT LLC 
July 2023 Response Letter at 4.
    \451\ CAT LLC May 2023 Response Letter at 5. See also CAT LLC 
July 2023 Response Letter at 3.
    \452\ See SIFMA May 2023 Letter at 5.
    \453\ See CAT LLC May 2023 Response Letter at 5.
    \454\ Id.
    \455\ Id.
    \456\ See CAT LLC July 2023 Response Letter at 3.
    \457\ Id.
    \458\ Id.
---------------------------------------------------------------------------

    One commenter expressed uncertainty about CAT LLC's response that 
some of the largest Industry Members are not involved in order 
origination or originate few orders relative to their market activity, 
stating that it is unclear to whom the statement is referring since the 
executing broker and the originating broker would be the same firm in 
the case of proprietary trading activity.\459\ Additionally, the 
commenter stated that the originating broker model should be pursued if 
it dramatically reduces market-wide implementation costs with a 
marginal increase in CAT costs, noting that Industry Members could bear 
most, if not all, CAT costs to implement the originating broker 
model.\460\ The commenter stated that, before proceeding, the CAT 
Operating Committee must publish an analysis of the costs and benefits 
of the executing broker and originating broker models including any 
differences in CAT implementation costs and Industry Member 
implementation costs.\461\
---------------------------------------------------------------------------

    \459\ See Citadel August Letter at 6.
    \460\ Id.
    \461\ Id.
---------------------------------------------------------------------------

    In response to a comment stating that executing brokers lacked 
systems and processes to recover costs from their clients and would 
either choose to absorb the CAT fees or exit the business because of 
the investments necessary for the cost-recovery process,\462\ CAT LLC 
stated that those Industry Members that pass-through CAT fees will 
accordingly need to develop processes to recover the fees from their 
clients, like they do for other regulatory-related fees, like the TAF, 
the options regulatory fee and Section 31-related fees.\463\ CAT LLC 
also stated that CAT Executing Brokers would ``have full discretion as 
to whether and the manner and extent to which they pass on their CAT 
fees, if at all,'' noting that ``a CAT Executing Broker could round up 
its fees to the nearest cent, or decide to charge for, or not charge 
for certain transactions, or assess a specific fee or incorporate the 
costs into other fee programs.'' \464\ CAT LLC stated that assessing a 
transaction-based fee to an executing broker and the executing broker 
deciding whether and how to pass-through its costs to clients is ``not 
new or novel.'' \465\ Finally, CAT LLC noted that the Plan Processor 
would provide trade-by-trade data to CAT Executing Brokers, and will 
offer a training program for CAT Executing Brokers to help them 
understand their CAT bills.\466\
---------------------------------------------------------------------------

    \462\ See Virtu Letter at 5.
    \463\ See CAT LLC July 2023 Response Letter at 9. See also id. 
at 5.
    \464\ CAT LLC July 2023 Response Letter at 10. See also id. at 5 
(adding that broker-dealers pass-through fees to customers related 
to Section 31 fees).
    \465\ Id.
    \466\ Id. at 10. See also id. at 5.
---------------------------------------------------------------------------

    In the Commission's view, CAT LLC's definition of ``CAT Executing 
Broker'' is reasonable given that the Executed Share Model is based 
upon the calculation of executed equivalent shares (emphasis 
added),\467\ and the executing brokers are reasonably suited to know 
their own volume and plan for future volume of executed equivalent 
shares to pay the CAT fees. One commenter's suggested approach would 
also result in the assessment of fees on a subset of Industry Members 
--originating brokers--and thus could raise similar allocation concerns 
as those raised by the commenter about the proposed approach.\468\ In 
addition, as discussed below, the Commission agrees with the 
Participants that the ease of administration in using the transaction 
reports to identify the executing broker is an advantage of the 
Proposed Amendment. Given the similar issues with either approach--
either charging the fees to a subset of Industry Members based on 
whether they are the ``CAT Executing Broker'' or the originating 
broker--it is reasonable to choose the less administratively burdensome 
of the two options. Accordingly, the assessment of CAT fees on CAT 
Executing Brokers is reasonable.\469\
---------------------------------------------------------------------------

    \467\ See Notice, supra note 7, 88 FR at 17086.
    \468\ See SIFMA May 2023 Letter at 5, 6.
    \469\ See 17 CFR 242.608(b)(2).
---------------------------------------------------------------------------

    In response to the commenter that questioned CAT LLC's response 
that some of the largest Industry Members are not involved in order 
origination or originate few orders relative to their market 
activity,\470\ the Commission is not relying on this statement by CAT 
LLC and understands that the executing broker and the originating 
broker would be the same in the case of proprietary

[[Page 62650]]

trading activity. Although one commenter suggested that the originating 
broker model should be pursued if it dramatically reduces market-wide 
implementation costs with a marginal increase in CAT costs,\471\ the 
Commission believes that the executing broker model is reasonable. The 
Commission understands the argument that charging originating brokers 
instead of executing brokers would be easier and more cost effective 
for the executing brokers, but it would be at the expense of the 
originating brokers. The Commission also understands that charging 
executing brokers instead of originating brokers is easier and more 
cost effective for the CAT Plan Processor. Using CAT Data, the CAT Plan 
Processor can more easily determine which executing broker to charge. 
On the other hand, if the CAT Plan Processor were to charge originating 
brokers, the Commission believes the CAT Plan Processor would have to 
rely on linkages, which may not be one-for-one in all circumstances, to 
determine which originating broker to charge for an execution. And this 
difficulty not only would add to the costs of the CAT but also would 
impact transparency and potentially the relative simplicity of the CAT 
Fees. Moreover, the Proposed Amendment does not address how executing 
brokers pass-through CAT fees to their customers.
---------------------------------------------------------------------------

    \470\ See Citadel August Letter at 6.
    \471\ Id.
---------------------------------------------------------------------------

    Using transaction reports to identify the transaction for purposes 
of calculating the CAT fees as well as the CAT Executing Broker for 
each transaction for purposes of calculating the CAT fees is a 
straightforward and more objective method of identifying executing 
brokers than other methods, such as identifying an originating broker 
through an evaluation of CAT linkages. Although the definition of ``CAT 
Executing Broker'' may not be used by the industry or universally 
accepted, CAT Executing Brokers will be able review their transactions 
reports and request details regarding the calculation of their fees, 
which should allow them to better assess the impact of the Executed 
Share Model on their business models.\472\ It is appropriate for CAT 
LLC to establish policies and procedures on the treatment of 
adjustments related to cancellations and corrections. CAT LLC stated 
that to the extent changes are made to the transaction reports on or 
before the day the CAT fees are determined for the given month, the 
changes will be reflected in the monthly bill.\473\ To the extent that 
changes are made to the transaction reports after the day the CAT fees 
are determined for that month, subsequent bills will reflect any 
changes via debits or credits, as applicable.\474\ It is appropriate to 
adjust an Industry Member's or Participant's CAT fees for cancellations 
and corrections when such adjustments are made to the transaction 
reports that are used for calculate CAT fees for that month. 
Additionally, under Section 11.1(d) of the CAT NMS Plan, the Operating 
Committee is required to adopt policies and procedures regarding the 
billing and collection of fees.\475\
---------------------------------------------------------------------------

    \472\ See proposed Section 11.3(a)(iv)(A) and 11.3(b)(iv)(A). 
See also infra Section III.A.7. (Calculation Information; Billing 
and Collection of CAT Fees).
    \473\ See Notice, supra note 7, 88 FR at 17089.
    \474\ Id.
    \475\ See CAT NMS Plan, supra note 2, at Section 11.1(d).
---------------------------------------------------------------------------

    It is the Commission's view that charging CEBBs and CEBSs is 
reasonable. The Executed Share Model recognizes that there are three 
parties who play significant roles in transactions reportable to the 
CAT: the Participant, the buy-side and the sell-side.\476\ The Proposed 
Amendment also is based on executed equivalent shares (emphasis 
added).\477\ As such, CAT LLC stated that charging the CEBBs and CEBSs 
would reflect the executing role the CEBB and CEBS have in each 
transaction.\478\ Additionally, charging CEBBs and CEBSs is in line 
with the use of transaction reports from the exchanges and FINRA's 
equity trading reporting facilities for calculating the CAT fees.\479\ 
Specifically, these transaction reports identify CEBBs and CEBSs, so 
charging such entities potentially streamlines the fee charging 
process.\480\ CAT LLC also explained that charging both the buy-side 
and the sell-side of a transaction would be consistent with other fees, 
such as the options regulation fee.\481\
---------------------------------------------------------------------------

    \476\ See Notice, supra note 7, 88 FR at 17104.
    \477\ Id. at 17086.
    \478\ Id. at 17103.
    \479\ Id.
    \480\ Id.
    \481\ Id. at 17108.
---------------------------------------------------------------------------

    In Rule 613, the Commission made the determination that the costs 
of the CAT should be shared by the Participants and Industry Members. 
Charging CAT Executing Brokers, clearing firms or ``originating 
brokers'' all would impose the costs initially on a subset of Industry 
Members. As discussed above, given that the charges are based on 
executed equivalent shares, it makes sense to use the CAT Executing 
Brokers as the immediate recipients of the charge. Accordingly, the 
Commission agrees with CAT LLC that it is reasonable to impose the 
charge on CAT Executing Brokers. The Commission acknowledges that 
charging CEBBs and CEBSs would impose a burden on such firms, which 
could potentially have an effect on their net capital. However, 
currently, such firms regularly pay transaction-based fees to the 
Participants, which they may pass-through to their customers who, in 
turn, could pass their CAT fees to their customers, until the fee is 
imposed on the ultimate participant in the transaction.\482\ 
Additionally, unlike clearing firms that may simply clear a trade on 
behalf of the executing broker, executing brokers are always parties to 
a transaction, including instances that may result in CAT costs but not 
in actual trades, such as unexecuted orders. The Commission therefore 
agrees with CAT LLC that assessing Industry Members CAT fees on CEBBs 
and CEBSs would be reasonable for their ``executing role'' in each 
transaction.\483\
---------------------------------------------------------------------------

    \482\ See Notice, supra note 7, 88 FR at 17103.
    \483\ Id.
---------------------------------------------------------------------------

5. Prospective CAT Fees
a. Fee Rate Formula
    Under the Executed Share Model, Participants, CEBSs and CEBBs would 
be subject to fees designed to cover the ongoing budgeted costs of the 
CAT, as determined by the Operating Committee.\484\ Each Participant 
and CAT Executing Broker would be required to pay a CAT Fee related to 
Prospective CAT Costs for each transaction in Eligible Securities in 
the prior month based on CAT Data.\485\ CAT Fees would be calculated by 
multiplying the executed equivalent shares in the transaction by one-
third and the applicable ``Fee Rate.'' \486\ The Commission received no 
comments on the Fee Rate Formula.
---------------------------------------------------------------------------

    \484\ See proposed Section 11.3(a)(i)(A)(I) and (II); proposed 
Section 11.3(a)(iii)(A).
    \485\ See proposed Section 11.3(a)(ii)(A) and (iii)(A).
    \486\ Id.
---------------------------------------------------------------------------

    At the beginning of each year, the Operating Committee would set 
the Fee Rate to be used to determine CAT Fees.\487\ To calculate the 
Fee Rate for Prospective CAT Costs, the Operating Committee would 
divide the reasonably budgeted CAT costs by the reasonably projected 
total executed equivalent share volume of all transactions in Eligible 
Securities for that year.\488\ The Operating Committee would base the 
projected total executed equivalent

[[Page 62651]]

share volume on the total executed equivalent share volume of 
transactions in Eligible Securities from the prior twelve months.\489\ 
Additionally, CAT LLC would permit the Operating Committee to use its 
discretion to analyze likely volume for the upcoming year \490\ and 
Participants would be required to describe the calculation of the 
projection in their fee filings submitted to the Commission pursuant to 
Section 19(b) to implement the CAT Fee for Industry Members.\491\ The 
Operating Committee also would be required to perform a mid-year 
adjustment of the Fee Rate for CAT Fees related to Prospective CAT 
Costs.\492\
---------------------------------------------------------------------------

    \487\ See proposed Section 11.3(a)(i)(A)(I). The Fee Rate would 
be established through a majority vote of the Operating Committee. 
See Notice, supra note 7, 88 FR at 17108.
    \488\ See proposed Section 11.3(a)(i)(A)(I).
    \489\ See proposed Section 11.3(a)(i)(D).
    \490\ See Notice, supra note 7, 88 FR at 17094.
    \491\ See proposed Section 11.3(a)(iii)(B); 15 U.S.C. 78s(b).
    \492\ See proposed Section 11.3(a)(i)(A)(II).
---------------------------------------------------------------------------

    CAT LLC proposed Section 11.3(a)(i)(A)(I) of the CAT NMS Plan to 
describe the annual calculation of the Fee Rate and the requirement for 
Participants to file a fee filing for CAT Fees to be charged to 
Industry Members calculated using the Fee Rate. Under the Executed 
Share Model, the Operating Committee will calculate the Fee Rate by 
dividing the reasonably budgeted CAT costs for the year by the 
reasonably projected total executed equivalent share volume of all 
transactions in Eligible Securities for the year.\493\ Should the 
budgeted costs be higher than actual costs, any budget surplus will be 
credited against the fees for the following year, as CAT LLC cannot 
hold higher than a 25% reserve.\494\
---------------------------------------------------------------------------

    \493\ See proposed Section 11.3(a)(i)(A)(I).
    \494\ See infra Section III.A.5.c (Reserves).
---------------------------------------------------------------------------

    Once the Operating Committee has approved such Fee Rate, the 
Participants shall be required to file with the Commission, pursuant to 
Section 19(b) of the Exchange Act,\495\ CAT Fees to be charged to 
Industry Members calculated using such Fee Rate.\496\ Participants and 
Industry Members will be required to pay CAT Fees calculated using this 
Fee Rate once such CAT Fees are in effect with regard to Industry 
Members in accordance with Section 19(b) of the Exchange Act.\497\
---------------------------------------------------------------------------

    \495\ 15 U.S.C. 78s(b).
    \496\ See proposed Section 11.3(a)(i)(A)(I).
    \497\ Id.
---------------------------------------------------------------------------

    Proposed Section 11.3(a)(i)(A)(II) of the CAT NMS Plan describes 
the mandatory mid-year calculation of the Fee Rate and the requirement 
for Participants to file a fee filing for CAT Fees to be charged 
Industry Members calculated using the Fee Rate. Under the Executed 
Share Model, the Operating Committee will adjust the Fee Rate once mid-
year \498\ by dividing the reasonably budgeted CAT costs for the 
remainder of the year by the reasonably projected total executed 
equivalent share volume of all transactions in Eligible Securities for 
the remainder of the year.\499\ Once the Operating Committee has 
approved the new Fee Rate, the Participants shall be required to file 
with the Commission, pursuant to Section 19(b) of the Exchange Act, CAT 
Fees to be charged to Industry Members calculated using the new Fee 
Rate.\500\ Participants and Industry Members will be required to pay 
CAT Fees calculated using this new Fee Rate once such CAT Fees are in 
effect with regard to Industry Members in accordance with Section 19(b) 
of the Exchange Act.\501\
---------------------------------------------------------------------------

    \498\ See proposed Section 11.3(a)(i)(A)(II).
    \499\ Id.
    \500\ Id.
    \501\ Id.
---------------------------------------------------------------------------

    CAT LLC proposed to add Section 11.3(a)(i)(A)(III) to the CAT NMS 
Plan to state that CAT Fees related to Prospective CAT Costs do not 
sunset automatically; such CAT Fees would remain in place until new CAT 
Fees are in place with a new Fee Rate.\502\
---------------------------------------------------------------------------

    \502\ See proposed Section 11.3(a)(i)(A)(III).
---------------------------------------------------------------------------

    CAT LLC proposed to add Section 11.3(a)(i)(A)(IV) to the CAT NMS 
Plan to provide that the first CAT Fee may commence at the beginning of 
the year or during the year. If it were to commence during the year, 
the CAT Fee would be calculated as if it were a mid-year 
calculation.\503\
---------------------------------------------------------------------------

    \503\ See proposed Section 11.3(a)(i)(A)(IV).
---------------------------------------------------------------------------

    The proposed recovery of Prospective CAT Costs is appropriate. It 
is appropriate to require that each Participant, CEBB and CEBS pay a 
CAT Fee related to Prospective CAT Costs for each transaction in the 
prior month based on CAT Data.\504\ Basing the CAT Fee on transaction 
data from the prior month is appropriate as it is recent in time and 
therefore more reflective of current market data, and the Commission 
did not receive any comments on this issue.
---------------------------------------------------------------------------

    \504\ See proposed Section 11.3(a)(ii)(A) and (iii)(A).
---------------------------------------------------------------------------

    The manner in which the Fee Rate for Prospective CAT Costs will be 
calculated (i.e., by dividing the CAT costs reasonably budgeted for the 
upcoming year by the reasonably projected total executed equivalent 
share volume of all transactions in Eligible Securities for the year) 
is reasonable.\505\ The use of projected executed equivalent share 
volume in determining the Fee Rate is appropriate because it would 
provide the likely volume for the year to be used as the denominator. 
It is reasonable to use the prior twelve months to determine the 
projected total executed equivalent share volume of all transactions in 
Eligible Securities for the year \506\ because it would be the most 
recent data available to use to make a projection needed to calculate 
the Fee Rate, and the most recent data is on balance more likely to 
resemble the near future. Additionally, as noted above, that the 
Commission agrees with CAT LLC's analysis 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.'' \507\ Further, requiring that the CAT costs be 
``reasonably budgeted'' and projected total executed equivalent share 
volume be ``reasonably projected'' is designed to help impose some 
discipline or constraints in the fee setting process. It is reasonable 
for CAT LLC to permit the Operating Committee to project the upcoming 
volume for the upcoming year.\508\ It is not possible to know exactly 
what the volume will be before the year begins, so a projection will be 
necessary. If the volume turns out to be higher than projected, then 
CAT LLC will be able to use its reserve to cover any shortage. If it is 
lower, resulting in a budget surplus, the CAT fees for the following 
year would be lower.\509\ Furthermore, since the Participants would be 
required to describe the calculation of the projected total executed 
equivalent share volume in the fee filings submitted to the Commission, 
pursuant to Section 19(b) of the Exchange Act, to implement CAT Fees 
for Industry Members, the public will have an opportunity to review the 
projection and provide comment.\510\
---------------------------------------------------------------------------

    \505\ See proposed Section 11.3(a)(i)(A)(I).
    \506\ See proposed Section 11.3(a)(i)(D).
    \507\ See Notice, supra note 7, 88 FR at 17103.
    \508\ Id. at 17094.
    \509\ See infra Section III.A.5.c (Reserves).
    \510\ See proposed Section 11.3(a)(iii)(B).

---------------------------------------------------------------------------

[[Page 62652]]

    The annual and mid-year adjustments of the Fee Rate for Prospective 
CAT Costs \511\ are appropriate because they would ensure that CAT Fees 
related to Prospective CAT Costs would stay aligned with changes to the 
budget and projected volume occurring as the year progresses with 
contemporaneous data. Additionally, calculating a CAT Fee that starts 
mid-year as if it were a mid-year Fee Rate calculation is appropriate 
because calculating it that way would base the CAT Fee on the budgeted 
CAT costs and projected total executed equivalent share volume of all 
transactions in Eligible Securities for the remainder of the year, 
rather than for the entire year. This is an appropriate treatment of a 
CAT Fee that would commence mid-year, not at the beginning of the year.
---------------------------------------------------------------------------

    \511\ See proposed Section 11.3(a)(i)(A)(I) and (II).
---------------------------------------------------------------------------

b. Budgeted CAT Costs
    The calculation of the Fee Rate for CAT Fees related to Prospective 
CAT Costs requires the determination of the Budgeted CAT Costs for the 
year or other relevant period.\512\ Proposed Section 11.3(a)(i)(C) of 
the CAT NMS Plan provides that the budgeted CAT costs for the year 
shall be comprised of all reasonable fees, costs and expenses 
reasonably budgeted to be incurred by or for the Company in connection 
with the development, implementation and operation of the CAT as set 
forth in the annual operating budget approved by the Operating 
Committee pursuant to Section 11.1(a) of the CAT NMS Plan, or as 
adjusted during the year by the Operating Committee.\513\
---------------------------------------------------------------------------

    \512\ See proposed Section 11.3(a)(i)(A)(I).
    \513\ CAT LLC proposed to use budgeted CAT costs in calculating 
CAT Fees rather than costs incurred. CAT LLC explained that using 
budgeted CAT costs is necessary to build financial stability to 
support the Company as a going concern, in accordance with the 
funding principle in Section 11.2(f) of the CAT NMS Plan, because it 
would allow CAT LLC to collect fees before bills become payable. CAT 
LLC stated that if CAT Fees were only collected after bills become 
payable, Participants would have to continue to fund the CAT for all 
CAT costs to pay bills as they are due. See Notice, supra note 7, 88 
FR at 17114.
---------------------------------------------------------------------------

    Section 11.1(a) of the CAT NMS Plan describes the requirement for 
the Operating Committee to approve an operating budget for CAT LLC on 
an annual basis. It requires the budget to ``include the projected 
costs of the Company, including the costs of developing and operating 
the CAT for the upcoming year, and the sources of all revenues to cover 
such costs, as well as the funding of any reserve that the Operating 
Committee reasonably deems appropriate for prudent operation of the 
Company.'' \514\ CAT LLC proposed to amend Section 11.1(a) to require 
the Operating Committee to approve a reasonable operating budget for 
CAT LLC on an annual basis.\515\
---------------------------------------------------------------------------

    \514\ See CAT NMS Plan, supra note 2, at Section 11.1(a).
    \515\ See proposed Section 11.1(a).
---------------------------------------------------------------------------

    CAT LLC also proposed to amend Section 11.1(b) of the CAT NMS Plan 
to add a reference to Section 11.1. Currently, Section 11.1(b) states 
that ``[s]ubject to Section 11.2, the Operating Committee shall have 
the discretion to establish funding for the Company'' including 
establishing fees to be paid by the Participants and Industry Members 
(that shall be implemented by the Participants) . . .'' \516\ CAT LLC 
proposed to add a reference to Section 11.1 so that ``[s]ubject to 
Section 11.1 and Section 11.2'' the Operating Committee would have the 
discretion to establish funding for the Company.\517\ CAT LLC explained 
that this proposed change is relevant because Section 11.1 relates to 
the budget and the budget is used to calculate fees.\518\
---------------------------------------------------------------------------

    \516\ See CAT NMS Plan, supra note 2, at Section 11.1(b).
    \517\ See Notice, supra note 6, 88 FR at 17090.
    \518\ Id.
---------------------------------------------------------------------------

    CAT LLC also proposed to add subparagraph (i) to Section 11.1(a) of 
the CAT NMS Plan to list the types of CAT costs to be included in the 
budget. Specifically, CAT LLC proposed to state that ``[w]ithout 
limiting the foregoing, the reasonably budgeted CAT costs shall include 
technology (including cloud hosting services, operating fees, CAIS 
operating fees, change request fees and capitalized developed 
technology costs), legal, consulting, insurance, professional and 
administration, and public relations costs, a reserve, and such other 
categories as reasonably determined by the Operating Committee to be 
included in the budget.'' \519\
---------------------------------------------------------------------------

    \519\ Id. CAT LLC has stated that it will consider providing 
additional detailed subcategories regarding technology costs, but 
notes that what it is currently providing is consistent with what is 
made publicly available on its website. CAT LLC has stated that it 
will consider the need to provide additional detailed subcategories 
for any area besides technology, both because technology costs 
account for the majority of the budget and because it is not 
considered ``best practices'' to disclose detailed legal or 
insurance information, as these are particularly sensitive. Id. 
Detailed information is always available to the Commission for 
review upon request. Id.
---------------------------------------------------------------------------

    Certain commenters noted a lack of detail provided on the cost 
categories.\520\ One commenter stated that the budget line item 
categories are too high level.\521\ The commenter urged the inclusion 
of much greater detail and specificity on the budget spending choices, 
especially in technology,\522\ to allow Industry Members and the public 
to understand and evaluate CAT spending decisions.\523\ Similarly, 
other commenters requested more transparency into the drivers of CAT 
costs, in particular, technology costs, which they stated is the 
largest expense item.\524\ One commenter stated that their ``concerns 
are exacerbated by the general lack of transparency coming from the CAT 
Operating Committee. Despite continued requests for information about 
key drivers of the rapidly growing CAT costs, the CAT Operating 
Committee points to high-level financial and operating budgets 
published by the Committee that merely provide broad categories of 
costs and expenses. Likewise, in the current structure, the SEC staff 
also have no incentive to control costs . . . This process does not 
afford industry members with appropriate notice of, and opportunity to 
comment on, material changes to the CAT. Nor does it adhere to the 
requirements under the Exchange Act to weigh the costs and benefits of 
proposed changes to the NMS plan.'' \525\ Another commenter stated that 
the Operating Committee refuses to provide cost transparency, such as 
more details on the broad expense categories provided in the operating 
expenses (as well as the Historical CAT Costs) provided in the Proposed 
Amendment.\526\ The

[[Page 62653]]

commenter believes that the lack of transparency into costs would 
prevent the Commission from finding that the proposed allocation 
methodology is reasonable \527\ and would raise concerns that 
inappropriate expenses would be allocated to Industry Members, like 
litigation expenses incurred by the Operating Committee against the 
Commission, and expenses prohibited by the Financial Accountability 
Amendments from being recovered by the Operating Committee.\528\ The 
commenter also stated that the Proposed Amendment lacks sufficient 
detail for the Commission to perform the required economic 
analysis.\529\
---------------------------------------------------------------------------

    \520\ See SIFMA January 2023 Letter at 6; Citadel July Letter at 
13-14; FIA Letter at 2-5; Letter to Vanessa Countryman, Secretary, 
Commission, from Joseph Corcoran, Managing Director, Associate 
General Counsel and Ellen Greene, Managing Director, Equities and 
Options Market Structure, SIFMA, and Howard Meyerson, Managing 
Director, Financial Information Forum, dated July 31, 2023 (``FIF 
and SIFMA Letter''), at 8.
    \521\ See SIFMA January 2023 Letter at 6.
    \522\ Id. (stating that CAT spending on technology should be 
broken into further refined cost breakdowns of the following 
categories: cloud hosting services, operating fees, CAIS operating 
fees and change request fees). The proposed breakdown is consistent 
with what is currently provided to the public. See Notice, supra 
note 6, 88 FR at 17090. See also FIF and SIFMA Letter at 8.
    \523\ See SIFMA January 2023 Letter at 6.
    \524\ See FIF and SIFMA Letter at 8. The commenter stated that 
the 2023 budget divides technology costs, estimated to be $222.5 
million and 95.3% of total operating costs, into four categories 
with cloud hosting services represents 75.5% of estimated CAT costs 
for 2023. Id. The commenter requested the Commission and the 
Participants to make publicly available the financial terms of the 
contract between the Participants and Amazon Web Services (``AWS''), 
the cloud hosting services provider, and publish all invoices from 
AWS. Id. The Commission declines to mandate the publication of a 
contract between private parties. Similarly, the Commission declines 
to mandate the publication of AWS invoices. The Participants can 
choose to publish this information if they believe it is 
appropriate.
    \525\ See FIA Letter at 2-5.
    \526\ See Citadel July Letter at 13-14. See also id. at 23.
    \527\ Id. at 2, 15, 26.
    \528\ Id. at 2.
    \529\ Id. at 11. Rule 613(a)(5) of Regulation NMS requires the 
Commission to conduct an assessment of the Proposed Amendment's 
impact on efficiency, competition and capital formation, which is 
not the same economic analysis as the Commission conducts when 
engaged in a rulemaking. 17 CFR 242.613(a)(5). The Proposed 
Amendment contains the information needed for the Commission to 
conduct this assessment. See infra Section IV. See also infra note 
1044.
---------------------------------------------------------------------------

    The commenter suggested enhancements to improve budget 
transparency.\530\ The commenter suggested that all CAT operating 
budgets should remain published on the CAT website \531\ and that any 
material change to the CAT system, related technology contracts or 
implementation scope should require the filing of an NMS plan amendment 
explaining the necessity of the change and include a robust cost-
benefit analysis.\532\
---------------------------------------------------------------------------

    \530\ See Citadel July Letter at 33-35.
    \531\ Id. at 3, 34.
    \532\ Id. See also FIF and SIFMA Letter at 13.
---------------------------------------------------------------------------

    In addition, the commenter suggested that exchanges be responsible 
for costs that exceed the budget in order to incentivize cost 
control,\533\ and that Industry Members should not be allocated costs 
for matters specifically for the benefit of the Operating Committee or 
the Commission (such as costs related to litigation ``or filings that 
are inconsistent with the Exchange Act'' \534\), stating that 
``Industry Members should also not be allocated costs relating to how 
data is presented to, and used by, regulatory Staff at the SROs or the 
Commission.'' \535\ Furthermore, the commenter suggested that change 
requests that do not involve specific NMS Plan requirements should be 
allocated to the requestor, including the Commission.\536\
---------------------------------------------------------------------------

    \533\ See Citadel July Letter at 3, 32.
    \534\ Id. at 32.
    \535\ Id.
    \536\ Id.
---------------------------------------------------------------------------

    Commenters also discussed a need for a cost review mechanism,\537\ 
with several commenters citing to high operating costs as evidence for 
the need of one.\538\ One commenter stated that CAT costs are 
increasing at an unsustainable level and need to be controlled.\539\ 
The commenter stated that the Commission lacks a process to manage CAT 
costs as CAT operating costs are not part of the Commission's budget 
and do not require an appropriation.\540\ The commenter urged that 
there is a need to allow the public, the Commission and industry to 
have a better understanding of the drivers of CAT operating costs,\541\ 
why they have exceeded the operating costs estimated in the CAT NMS 
Plan,\542\ and why they are projected to increase 27% from 2022 to 
2023.\543\ The commenter requested that the Commission direct the 
Participants to analyze the increase in CAT operating costs and to 
evaluate future expected annual CAT operating cost increases,\544\ and 
also advised the Commission not to mandate any new processing or 
reporting requirements until such analysis has concluded.\545\
---------------------------------------------------------------------------

    \537\ See SIFMA May 2023 Letter at 3, 8-10; Citadel July Letter 
at 8, 26, 27; FIF and SIFMA Letter at 8-9; SIFMA AMG Letter at 3. 
See also SIFMA October 2022 Letter at 5-6; SIFMA January 2023 Letter 
at 2, 5-6; SIFMA June 2023 Letter at 2, n.10, 4; Virtu Letter at 4; 
MMI July Letter at 3-4; FIA Letter at 3, 5.
    \538\ See, e.g., MMI July Letter at 3; Virtu Letter at 4, FIF 
and SIFMA Letter at 2, 5-9; SIFMA AMG Letter at 3.
    \539\ FIF and SIFMA Letter at 2, 5. The commenter stated that 
internal costs and costs associated with trading workflow changes to 
comply with certain CAT reporting requirements should also be 
considered, arguing that these costs would significantly exceed CAT 
operating costs are 100% paid for by broker-dealers and exchanges. 
Id. at 2, 5, 6.
    \540\ Id. at 8.
    \541\ Id.
    \542\ Id. at 7, 9.
    \543\ Id. at 9.
    \544\ FIF and SIFMA Letter at 4.
    \545\ Id.
---------------------------------------------------------------------------

    One commenter stated that asset managers were concerned about the 
lack of an independent cost review mechanism for the CAT budget to 
ensure that future fees are fair and reasonable and spending will be 
appropriate and cost-effective.\546\ Similarly, another commenter 
stated that an independent cost review mechanism is necessary to ensure 
future CAT fees are fair and reasonable and to safeguard against 
unchecked spending.\547\ The commenter urged the inclusion of a 
mechanism to allow the public to review the annual CAT budget before it 
is finalized, since, as proposed, the public would only have the 
opportunity to review the CAT budget when the Participants submit 
proposed rule changes, pursuant to Section 19(b) of the Exchange 
Act,\548\ to implement CAT fees on Industry Members.\549\ The commenter 
also stated that it is unlikely that the Commission would decide that a 
proposed CAT fee does not meet Exchange Act fee standards and require 
the Participants to modify the CAT budget because it would be a 
lengthy, time-consuming process and due to ``the regulatory value of 
CAT data and the CAT system to the Commission.'' \550\ The commenter 
stated that the Commission is ``directly conflicted in its role as the 
user and beneficiary of the CAT system for regulatory functions and its 
role as the reviewer of the CAT budget and fee filings, a conflict that 
is only heightened due to a lack of a Commission funding obligation for 
CAT.'' \551\ The commenter also requested that ``the Participants' 
proposed budget include as a separate line-item projected usage costs 
and system change costs related to the Commission's use and design of 
the CAT system.'' \552\ Similarly, another commenter suggested that an 
independent expert committee assess whether cost levels and third party 
arrangements are reasonable, and whether more cost-control measures are 
warranted,\553\ and that the Commission formally approve the CAT budget 
on an annual basis.\554\ The commenter further stated that the Proposed 
Amendment made no attempt to specify the key drivers of costs, such as 
explaining the requirements that resulted in significant cost 
increases, or the design alternatives the Operating Committee 
previously considered.\555\ The commenter added that Industry Members 
must fund a 25% reserve above budgeted amounts, and ad-hoc discussions 
between the Operating Committee and the

[[Page 62654]]

Commission could result in higher costs.\556\
---------------------------------------------------------------------------

    \546\ See SIFMA AMG Letter at 3.
    \547\ See SIFMA May 2023 Letter at 3, 8-10. See also SIFMA 
October 2022 Letter at 5-6; SIFMA January 2023 Letter at 2, 5-6; 
SIFMA June 2023 Letter at 2, n.10, 4; Citadel July Letter at 2, 26 
(stating that that ``the trajectory of annual operating expenses is 
unconstrained,'' and that the ``magnitude and trajectory'' of the 
costs are not reasonable since Industry Members have borne nearly 
all CAT-related costs''); Citadel August Letter at 7.
    \548\ 15 U.S.C. 78s(b).
    \549\ See SIFMA May 2023 Letter at 8-9. See also SIFMA June 2022 
Letter at 8-9; SIFMA October 2022 Letter at 6; SIFMA January 2023 
Letter at 5, 6.
    \550\ SIFMA May 2023 Letter at 9.
    \551\ Id. at 9-10.
    \552\ Id. See also SIFMA January 2023 Letter at 6.
    \553\ See Citadel July Letter at 3, 33.
    \554\ Id.
    \555\ Id. at 14.
    \556\ Id. at 26.
---------------------------------------------------------------------------

    The commenter also suggested enhancements to reduce overall CAT 
operating costs.\557\ Specifically, the commenter suggested that the 
Operating Committee and the Commission stop making changes to the CAT 
to stabilize operating costs, stating that there are changes slated for 
development that are currently subject to exemptive relief, and other 
requirements the commenter believes are outside the scope of the CAT 
NMS Plan that would result in costs that outweigh benefits.\558\ The 
commenter suggested that the Operating Committee file an updated NMS 
plan to reflect the status quo,\559\ and work with the Commission and 
industry to identify technical requirements that could be modified to 
reduce costs without sacrificing the key benefits of the CAT system, 
like moving timelines from T+1 to T+2.\560\ The commenter also 
suggested that steps should be taken to streamline the CAT submission 
process to minimize reporting errors and to reduce industry 
implementation costs, like implementing further data validation.\561\ 
One commenter stated that if the Participants ``determine to charge 
their members fees to fund their share of CAT fees,'' then Industry 
Members would bear 100% of CAT costs, and thus,''[w]ith little to no 
skin-in-the-game, the Participants will not be incentivized to control 
costs.'' \562\ The commenter further stated that they join other 
commenters in calling for an ``independent cost review mechanism.'' 
\563\
---------------------------------------------------------------------------

    \557\ See Citadel July Letter at 33-35.
    \558\ Id. at 3, 32-33. One other commenter echoed some of these 
same considerations. See MMI July Letter at 4.
    \559\ See Citadel July Letter at 3, 33.
    \560\ Id.
    \561\ Id.
    \562\ See FIA Letter at 3. See also Citadel August Letter at 2.
    \563\ FIA Letter at 5.
---------------------------------------------------------------------------

    In response to the comment that suggested that all CAT operating 
budgets should remain published on the CAT website,\564\ CAT LLC stated 
that it publishes its annual financial statements from 2017-on and 
voluntarily publishes its annual operating budget and updates to the 
budget occurring during the year.\565\ CAT LLC stated that, in response 
to the comment, it intends that prior CAT operating budgets will stay 
available on the CAT website.\566\
---------------------------------------------------------------------------

    \564\ See Citadel July Letter at 3, 34.
    \565\ See CAT LLC July 2023 Response Letter at 26.
    \566\ Id.
---------------------------------------------------------------------------

    In response to a commenter suggesting that the exchanges be 
responsible for any costs that exceeded the approved budget,\567\ CAT 
LLC stated that this suggestion would not result in a fair and 
equitable allocation consistent with the Exchange Act because Industry 
Member trading activity ``contributes significantly'' \568\ to CAT 
costs and it would not be fair for Participants to bear CAT costs 
exceeding the budget if unexpected increases in trading volume resulted 
in the increased CAT costs.\569\ CAT LLC also stated that this 
suggestion could incentivize the Participants to base the budget on 
``the most conservative projections for future Industry Member data 
volume'' \570\ to not be responsible for costs that go over the 
budget.\571\ In addition, CAT LLC noted that the Proposed Amendment 
would include both a requirement to adjust the Fee Rate during the year 
to address any changes in projected or actual transaction volume or 
budgeted or actual CAT costs, and an operational reserve to address 
shortfalls in collected fees versus actual CAT costs.\572\
---------------------------------------------------------------------------

    \567\ See Citadel July Letter at 32.
    \568\ See CAT LLC July 2023 Response Letter at 12.
    \569\ Id.
    \570\ Id.
    \571\ Id.
    \572\ Id.
---------------------------------------------------------------------------

    In response to suggestions to use an independent cost review 
mechanism,\573\ CAT LLC stated that such a review process is 
unnecessary because it would go beyond what is required by either Rule 
613 or the CAT NMS Plan, and would be superfluous since any CAT fees 
must, prior to being implemented, undergo the review process detailed 
in Rule 608 and Section 19(b) of the Exchange Act.\574\ CAT LLC also 
noted that the Commission is entitled to request additional budget or 
cost information it views as necessary to better evaluate those 
fees.\575\ CAT LLC also stated that it already provides significant 
cost transparency through the public disclosure of its quarterly budget 
information and its financials, and that it is already actively engaged 
in cost discipline efforts, including through a designated cost-
management working group.\576\ CAT LLC further explained that 
Participants are subject to regulatory requirements to implement CAT 
and oversee their members and cannot have their compliance subject to a 
third party without such restrictions.\577\ CAT LLC added that the 
Commission itself could have its ability to oversee the securities 
markets undermined if CAT is subject to review by a third party without 
regulatory restrictions.\578\ In response, one commenter stated that 
the CAT LLC Response Letter did not meaningfully address its concerns 
about the lack of a cost control mechanism.\579\
---------------------------------------------------------------------------

    \573\ See SIFMA May 2023 Letter at 3, 8-10. See also SIFMA 
October 2022 Letter at 5-6; SIFMA January 2023 Letter at 2, 5-6; 
SIFMA June 2023 Letter at 2, n.10, 4; Citadel July Letter at 3, 33; 
FIA Letter at 5.
    \574\ See CAT LLC May 2023 Response Letter at 10.
    \575\ Id.
    \576\ Id.
    \577\ Id.
    \578\ Id.
    \579\ See SIFMA June 2023 Letter at 2.
---------------------------------------------------------------------------

    CAT LLC provided a further response to commenters that recommended 
the adoption of an independent cost review mechanism for CAT 
costs,\580\ stating that a review process is not necessary or 
appropriate.\581\ CAT LLC explained that it is already actively 
involved in cost discipline efforts, such as through a designated cost 
management working group, and already provides ``significant cost 
transparency'' by publishing its quarterly budget information and 
financial information.\582\ CAT LLC also stated that such a review 
process would go beyond the requirements of Rule 613 and would be 
unnecessary because changes to the funding model would be filed as a 
plan amendment under Rule 608 of Regulation NMS and CAT fees for 
Industry Members would be filed pursuant to Section 19(b) of the 
Exchange Act, and both processes would permit the public to comment on 
such proposals.\583\ CAT LLC further stated that providing a third-
party that does not have regulatory obligations control over the annual 
budget could ``impermissibly restrict the Participants from discharging 
their regulatory obligations'' and undermine the Commission's ability 
to oversee the securities markets.\584\ CAT LLC also responded to the 
commenter that urged the Commission to annually approve the CAT budget 
\585\ by stating that such an approval process would not be necessary 
or appropriate as CAT LLC is a private entity subject to the 
requirements of the Exchange Act, not a governmental entity, and CAT 
fees would be filed with the Commission under Rule 608 of Regulation 
NMS and Section 19(b) of the Exchange Act and subject to the 
Commission's review for consistency with the Exchange Act.\586\

[[Page 62655]]

Furthermore, CAT LLC stated that the Commission can request budget and 
financial information from CAT LLC if necessary for the evaluation of 
CAT fee filings.\587\
---------------------------------------------------------------------------

    \580\ See Citadel July Letter at 33; FIA Letter at 5; MMI July 
Letter at 2; SIFMA June 2023 Letter at 2; id. at n.10; Virtu Letter 
at 4.
    \581\ See CAT LLC July 2023 Response Letter at 19.
    \582\ Id. at 20.
    \583\ Id. at 19-20.
    \584\ Id. at 20.
    \585\ See Citadel July Letter at 33.
    \586\ See CAT LLC July 2023 Response Letter at 20-21.
    \587\ Id. at 21.
---------------------------------------------------------------------------

    In response to the commenter that asked whether the Participants 
would have an incentive to manage costs because they proposed to 
allocate most costs to Industry Members,\588\ CAT LLC stated that it 
``strongly disagrees with the suggestion that the Participants would 
not be incentivized to control CAT costs if they are only responsible 
for one-third of the CAT costs going forward.'' \589\ CAT LLC stated 
that the Participants have been focused on cost management when paying 
100% of CAT costs and will continue this focus since they will be 
paying one-third of CAT costs, a ``significant incentive to keep costs 
at an appropriate level.'' \590\
---------------------------------------------------------------------------

    \588\ See FIA Letter at 4-5.
    \589\ See CAT LLC July 2023 Response Letter at 26.
    \590\ Id.
---------------------------------------------------------------------------

    In response to comments expressing concern about increasing CAT 
operating costs,\591\ CAT LLC described its commitment to cost 
management,\592\ stating that cost management is a top priority and 
that it works to reduce costs in a number of ways, including through 
the Cost Management Working Group comprised of senior members of the 
Participants that works to find and address cost management needs.\593\ 
CAT LLC also noted that Rule 613 and the CAT NMS Plan ``impose 
significant regulatory obligations on the Participants regarding how to 
design, build and operate the CAT System'' and that the Commission 
could compel the Participants to comply with Rule 613 or the CAT NMS 
Plan through enforcement actions if CAT LLC and the Participants ever 
fail to do so.\594\ CAT LLC stated that its largest cost driver is the 
processing and storage of CAT data in the cloud, representing 75% of 
all CAT costs.\595\ CAT LLC stated that CAT NMS Plan requirements ``do 
not allow for any material flexibility in cloud architecture design 
choices, processing timelines (e.g., the use of non-peak processing 
windows), or lower-cost storage costs,'' limiting CAT LLC's cost 
management efforts, and provided examples where CAT LLC and the Plan 
Processor worked to optimize cloud cost savings despite regulatory 
constraints.\596\ CAT LLC described other steps it has taken to save 
costs, such as through requests to the Commission for exemptive relief 
and litigation challenging the Commission's interpretation of specific 
requirements of the CAT NMS Plan,\597\ as well as identification of 
other changes that could substantially lower costs but would require 
exemptive relief or the filing of a Plan amendment.\598\
---------------------------------------------------------------------------

    \591\ See Citadel July Letter at 7-9, MMI July Letter at 1, 4, 
SIFMA June 2023 Letter at 4; Virtu Letter at 4.
    \592\ See CAT LLC July 2023 Response Letter at 22-25.
    \593\ Id. at 22.
    \594\ Id.
    \595\ Id.
    \596\ Id. at 23.
    \597\ Id. at 24.
    \598\ See CAT LLC July 2023 Response Letter at 25.
---------------------------------------------------------------------------

    In response to one commenter's recommendation that CAT LLC work 
with the Commission to identify technical requirements that could be 
modified to reduce costs without sacrificing the key benefits of the 
CAT system,\599\ CAT LLC stated that both it and the Plan Processor 
work to identify and raise with Commission staff potential fundamental 
changes to the CAT NMS Plan that would limit costs without compromising 
on regulatory goals, and provided examples of such changes.\600\
---------------------------------------------------------------------------

    \599\ See Citadel July Letter at 33.
    \600\ See CAT LLC July 2023 Response Letter at 25-26.
---------------------------------------------------------------------------

    The Commission acknowledges the comments expressing concern about 
increases to the CAT operating budget, particularly why it is now five 
times the amount estimated in the CAT NMS Plan Approval Order,\601\ and 
the comments urging the need for a cost review mechanism,\602\ but 
believes the Participants have reasonably explained why they chose not 
to include an independent cost review mechanism for budgeted CAT costs 
for the reasons stated above and in the Notice. Given the transparency 
of the budget and Rule 19b-4 process, the one-third allocation of costs 
to Participants, which provides them with at least some incentive to 
control costs, and the pre-existing requirement for an independent 
audit of all fees, costs and expenses incurred by the Participants 
prior to filing this amendment,\603\ it is reasonable not to have an 
additional independent cost-review mechanism for the reasons set forth 
above. The Commission believes that the incentive to control costs 
still exists even if the Participants pass-through to Industry Members 
some or most of the costs of the CAT. This is because, in order to 
pass-through CAT costs, the Participants would have to submit rule 
filings under the Section 19(b) fee filing process. To the extent the 
Participants fail to control costs, their ability to demonstrate that a 
proposed fee is reasonable and consistent with the Exchange Act may be 
compromised. While the above obligations and controls are sufficient, 
other cost discipline mechanisms proposed by CAT LLC would provide 
beneficial cost transparency, which would help keep fees and costs 
reasonable.\604\ For example, (1) Section 9.2(a) of the CAT NMS Plan 
requires CAT LLC to make public an audited balance sheet, income 
statement, statement of cash flows and statement of changes in equity, 
and requires the Operating Committee to maintain a system of accounting 
established and administered in accordance with GAAP and to prepare 
financial statements or information supplied to the Participants in 
accordance with GAAP; \605\ (2) CAT LLC publicly provides the annual 
operating budget and updates to the budget on the CAT NMS Plan website 
and also has held webinars about CAT costs and alternative funding 
models; (3) involvement by CAT LLC and FINRA CAT in efforts to reduce 
CAT costs through CAT working groups and review of options to lower 
costly needs and obtain services in a cost-effective manner; and (4) 
Commission oversight of CAT funding through attendance at Operating 
Committee, Subcommittee and working group meetings and review of the 
Proposed Amendment and any associated CAT fees.\606\ Additionally, the 
specification of the items required to be included in the operating 
budget is

[[Page 62656]]

appropriate in that it will help the Commission, Industry Members and 
others evaluate CAT costs for purposes of commenting on CAT fees when 
they are proposed under Section 19(b) of the Exchange Act.\607\ This 
additional detail should provide sufficient information about the 
budget for the Commission to determine whether such proposed fees are 
reasonable, and obviate the need for a separate Commission approval of 
the CAT budget, as suggested by commenters.\608\ Additionally, the 
Commission understands that technology costs account for more than 90% 
of the CAT budget \609\ and thus believes that it is appropriate for 
the CAT NMS Plan to require the Participants to separate such costs 
into costs for cloud hosting services, operating fees, CAIS operating 
fees, change request fees and capitalized developed technology 
costs.\610\
---------------------------------------------------------------------------

    \601\ See, e.g., Citadel August Letter at 8; Citadel July Letter 
at 2, 5. The Commission acknowledges a commenter's suggestion that 
the Commission perform its own analysis of the budget increases. 
Under the Proposed Amendment, the Participants must submit Rule 19b-
4 filings that include a discussion of the budget that was used to 
calculate the Fee Rate. At such time the Commission, Industry 
Members and the public will have an opportunity analyze the budget. 
This Order, which approves the Funding Model, does not weigh-in on 
the budgets or the resulting Fee Rates.
    \602\ See SIFMA May 2023 Letter at 3, 8-10; Citadel July Letter 
at 8, 26, 27; FIF and SIFMA Letter at 2, 5-9; SIFMA AMG Letter at 3. 
See also SIFMA October 2022 Letter at 5-6; SIFMA January 2023 Letter 
at 2, 5-6; SIFMA June 2023 Letter at 2, n.10, 4; Virtu Letter at 4; 
MMI July Letter at 3-4; FIA Letter at 3, 5.
    \603\ See CAT NMS Plan, supra note 2 at Section 6.2(a)(v)(B).
    \604\ See Notice, supra note 7, 88 FR at 17117.
    \605\ See CAT NMS Plan, supra note 2, at Section 9.2(a). Section 
9.2(a) states that unaudited statements shall be subject to year-end 
adjustments and may not include footnotes.
    \606\ See Notice, supra note 7, 88 FR at 17117. CAT LLC also 
lists the following as cost-control mechanisms: (1) CAT LLC must 
operate on a break-even basis, in which fees would be used to 
recover costs and a reserve, and a surplus would be treated as an 
operational reserve to offset future fees (see CAT NMS Plan, supra 
note 2, at Section 11.1(c)); (2) CAT LLC qualifies as a Section 
501(c)(6) business league, which means it is not organized for 
profit and no part of its net earnings can inure to the benefit of 
any private shareholder or individual (26 U.S.C. 501(c)(6)).
    \607\ 15 U.S.C. 78s(b).
    \608\ See proposed Section 11.1(a)(i); proposed Section 
11.3(a)(iii)(B) (requiring the information to be provided in the 
Industry Member CAT Fee filings submitted by the Participants to be 
of sufficient detail to demonstrate that the budget for the upcoming 
year, or part of year as applicable, is reasonable and appropriate).
    \609\ See Notice, supra note 7, 88 FR at 17090.
    \610\ Id. at 17117.
---------------------------------------------------------------------------

    One commenter requested further information to be provided on 
technology costs.\611\ The Participants would be required to describe 
each line item (including such technology costs) in the fee filings for 
Industry Member CAT Fees and the Historical CAT Assessment, including 
the reasons for changes in each line item from the prior CAT fee 
filing, and that this information would be provided with sufficient 
detail to demonstrate the budget or Historical CAT Costs (as 
applicable) is reasonable and appropriate.\612\ Because the 
Participants are also assessed CAT fees, they have at least some 
incentive similar to that of the Industry Members to keep costs down. 
As discussed above, the Commission believes that this incentive still 
exists even if the Participants pass-through to Industry Members some 
or most of the costs of the CAT, because any effort to pass on costs 
would require Participants to submit filings under the Section 19(b)(2) 
rule filing process. Moreover, to the extent the Industry Members have 
concerns about the amounts allocated for each category in a particular 
budget, those concerns can be raised when the fee filings are submitted 
for Prospective CAT fees. The Section 19(b)(2) rule filing process 
provides an opportunity for public comments and will allow commenters 
to raise concerns if they believe fees, including CAT Fees, are not 
reasonable and equitably allocated, would result in unfair 
discrimination, or would impose any burden on competition that is not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act. While a commenter stated that the Commission is a conflicted party 
due to its use of the CAT and its responsibility to review CAT fee 
filings,\613\ the Commission is not a party to the Plan.\614\ Moreover, 
as regulator of the Participants, the Commission oversees and enforces 
compliance with the Plan, as well as consistency of any fees with 
statutory and regulatory standards.\615\
---------------------------------------------------------------------------

    \611\ See supra note 522.
    \612\ See proposed Section 11.3(a)(iii)(B); proposed Section 
11.3(b)(iii)(B)(II).
    \613\ See SIFMA May 2023 Letter at 9-10.
    \614\ See 17 CFR 242.608(a)(1) (stating that NMS plans are filed 
by two or more SROs).
    \615\ See 17 CFR 242.608(b)(2), (c), (d); 17 CFR 242.613(h).
---------------------------------------------------------------------------

    Additionally, one commenter recommended the inclusion of the 
Commission's line item costs associated with its usage and design of 
the CAT in the budget.\616\ In response,\617\ CAT LLC responded that, 
because all costs related to CAT are a result of the Commission's 
adoption of Rule 613 and the total costs are reflected in the budget, 
it would be impractical to break out Commission-specific costs and 
would not be useful as a practical matter.\618\ The Commission agrees 
that it would be impractical to add a Commission-specific line item in 
the budget, in part because it would be difficult to separate costs 
associated with Commission use of the CAT system from costs associated 
with Participant use of the CAT system.\619\ Moreover, the 
implementation of the CAT--while mandated by the Commission through 
Rule 613--has been managed by the Participants and the Plan Processor; 
the Commission does not believe that any changes to its design have 
been made that are inconsistent with the CAT NMS Plan as approved in 
2016, such that the inclusion of a line item in the budget attributing 
certain design costs to the Commission would be inaccurate and 
misleading.\620\
---------------------------------------------------------------------------

    \616\ See SIFMA May 2023 Letter at 10. CAT LLC May 2023 Response 
Letter at 11.
    \617\ See SIFMA May 2023 Letter at 10.
    \618\ See CAT LLC May 2023 Response Letter at 11.
    \619\ All Participants are required to use the CAT in their 
surveillance programs. See CAT NMS Plan, supra note 2, at Section 
6.10.
    \620\ For further discussion, see infra Section III.A.9.c.-d.
---------------------------------------------------------------------------

    The Commission acknowledges the enhancements a commenter suggested 
to reduce CAT operating costs by modifying the technical specifications 
(e.g., by moving certain timelines to T+2 from T+1) and streamlining 
the reporting submission process (e.g., implementing further data 
validation),\621\ but such suggestions are better addressed in the 
context of a separate plan amendment. The commenter also suggested that 
the CAT Operating Committee and the Commission stop making any changes 
to the CAT and noted that there are several changes that are currently 
subject to exemptive relief that are slated for development.\622\ The 
Commission disagrees that the changes cited by the commenter are new 
CAT NMS Plan requirements; indeed the relevant Commission orders 
granting exemptive relief discuss the various requirements under the 
CAT NMS Plan that form the basis of the relief granted.\623\ 
Furthermore, any amendments to the requirements in the CAT NMS Plan 
must be filed with the Commission and published for notice and comment 
and generally shall not become effective unless approved by the 
Commission.\624\ Regarding the suggested enhancements to improve CAT 
transparency,\625\ the CAT NMS Plan and Rules 608 and 613 of Regulation 
NMS provide for sufficient advance notice of material changes to the 
CAT system and related costs. As discussed above, changes to the CAT 
NMS Plan must be filed with the Commission as an NMS plan amendment 
pursuant to Rule 608 of Regulation NMS and therefore be subject to 
notice and comment, and the Commission shall consider, in determining 
to approve the amendment, the impact of the amendment on efficiency, 
competition and capital formation.\626\ Additionally, Section 6.9 of 
the CAT NMS Plan requires a Supermajority Vote of the CAT Operating 
Committee in order to make Material Amendments \627\ to the Technical 
Specifications. Section 6.9, however, does not provide unfettered 
discretion to the CAT Operating

[[Page 62657]]

Committee to make changes to the CAT system; any amendments to the CAT 
Technical Specifications must be consistent with the CAT NMS Plan. If 
the CAT Operating Committee or the Commission wish to impose additional 
requirements that are not contemplated by the CAT NMS Plan, such 
requirements must be proposed through an amendment to the CAT NMS Plan, 
filed under Rule 608 of Regulation NMS, which must be published for 
notice and comment.\628\ The Commission agrees with the commenter that 
all CAT operating budgets should remain published on the CAT NMS Plan 
website, as they have been since 2022, and understands that CAT LLC 
will continue to do so in the future.\629\ Therefore, the Commission 
does not believe it is necessary to add an explicit requirement to this 
effect.
---------------------------------------------------------------------------

    \621\ See Citadel July Letter at 33-35.
    \622\ Id.
    \623\ See Securities Exchange Act Release No. 97350 (May 18, 
2023), 88 FR 33655 (May 24, 2023); Securities Exchange Act Release 
No. 90689 (Dec.16, 2020), 85 FR 83667 (Dec. 22, 2020); Securities 
Exchange Act Release No. 90688 (Dec. 16, 2020), 85 FR 83634 (Dec. 
22, 2020).
    \624\ See Rule 608(b)(1); 17 CFR 242.608(b)(1). However, a plan 
amendment can be put into effect upon filing with the Commission if 
it is designated as solely administrative, technical or ministerial. 
See Rule 608(b)(3).
    \625\ See supra notes 530-532.
    \626\ Rule 613(a)(5). 17 CFR 242.613(a)(5).
    \627\ The CAT NMS Plan defines a ``Material Amendment'' as an 
amendment to the Technical Specifications that ``would require a 
Participant or an Industry Member to engage in significant changes 
to the coding necessary to submit information to the Central 
Repository pursuant to this Agreement or if it is required to 
safeguard the security or confidentiality of the CAT Data.'' See CAT 
NMS Plan, supra note 2, at Section 6.9(c).
    \628\ See Rule 608(b)(1). 17 CFR 242.608(b)(1).
    \629\ See CAT LLC May 2023 Response Letter at 10-11.
---------------------------------------------------------------------------

    The use of budgeted CAT costs is appropriate to determine the Fee 
Rate because it ties the Fee Rate to the costs that the CAT will likely 
incur during the relevant period which are also the Prospective CAT 
Costs that will need to be apportioned among the Participants and CAT 
Executing Brokers.\630\ Should the use of budgeted costs result in a 
budget surplus, that surplus would translate to lower fees in the 
coming year because there would be a lower requirement for 
reserves.\631\ Also, using budgeted costs to determine the Fee Rate 
facilitates financial stability, allowing CAT LLC to collect fees 
before bills become payable.\632\
---------------------------------------------------------------------------

    \630\ See Notice, supra note 7, 88 FR at 17114.
    \631\ See infra Section III.A.5.c. (Reserve).
    \632\ See id.
---------------------------------------------------------------------------

    The requirements that the Operating Committee approve a 
``reasonable'' operating budget for CAT LLC,\633\ that fees, costs and 
expenses be ``reasonable'' and that they be ``reasonably budgeted to be 
incurred by or for the Company in connection with the development, 
implementation and operation of the CAT as set forth in the annual 
operating budget approved by the Operating Committee'' \634\ is 
appropriate in the public interest.\635\ The existing CAT NMS Plan did 
not include such language, potentially providing the Participants full 
discretion to pass along to Industry Members costs that are not 
reasonable. Such costs could have included costs that were incurred due 
to Participant mismanagement, costs that were inflated or costs that 
should reasonably be allocated to only the Participants. Requiring 
these costs to be reasonable and reasonably budgeted imposes discipline 
on CAT spending, and the Commission, Industry Members and others will 
be able to review budget information during the rule filing process 
under Section 19(b) of the Exchange Act.
---------------------------------------------------------------------------

    \633\ See proposed Section 11.1(a).
    \634\ Proposed Section 11.3(a)(i)(C).
    \635\ One commenter complained that Participants were not 
providing the public with an opportunity to review the budget until 
after it was finalized. See SIFMA May 2023 Letter at 8-10. As CAT 
LLC explained, this appears to be based on a misunderstanding, as 
CAT LLC provides the annual budget and quarterly updates to the 
public. See CAT LLC May 2023 Response Letter at 11.
---------------------------------------------------------------------------

c. Reserve
    CAT LLC proposed to add a requirement to Section 11.1(a)(i) of the 
CAT NMS Plan that the budget shall include ``a reserve and such other 
cost categories as reasonably determined by the Operating Committee to 
be included in the budget.'' \636\ CAT LLC also proposed to add 
paragraph (ii) to Section 11.1(a) of the CAT NMS Plan to state that 
``[f]or the reserve referenced in paragraph (a)(i) of this Section, the 
budget will include an amount reasonably necessary to allow the Company 
to maintain a reserve of not more than 25% of the annual budget.'' 
\637\ Moreover, CAT LLC would calculate the reserve based on the amount 
of the budget other than the reserve.\638\ In addition, proposed 
subparagraph (ii) of Section 11.1(a) of the CAT NMS Plan would state 
that ``[t]o the extent collected CAT fees exceed CAT costs, including 
the reserve of 25% of the annual budget, such surplus will be used to 
offset future fees.'' \639\ Proposed Section 11.1(a)(ii) of the CAT NMS 
Plan provides that ``[f]or the avoidance of doubt, the Company will 
only include an amount for the reserve in the annual budget if the 
Company does not have a sufficient reserve (which shall be up to but 
not more than 25% of the annual budget).'' \640\
---------------------------------------------------------------------------

    \636\ Proposed Section 11.1(a)(i).
    \637\ Proposed Section 11.1(a)(ii).
    \638\ Specifically, proposed Section 11.1(a)(ii) of the CAT NMS 
Plan would state that ``[f]or the avoidance of doubt, the 
calculation of the amount of the reserve would exclude the amount of 
the reserve from the budget.''
    \639\ Id.
    \640\ Id.
---------------------------------------------------------------------------

    One commenter stated that the proposed reserve of not more than 25% 
of the CAT budget is excessive.\641\ The commenter noted that the 
support provided for the proposed change was the Participants' 
difficulty in forecasting CAT costs, which the commenter stated 
demonstrates a need for an independent cost review mechanism.\642\
---------------------------------------------------------------------------

    \641\ See SIFMA January 2023 Letter at 6, n.15. See also Citadel 
July Letter at 26 (objecting to the requirement that Industry 
Members ``fund an additional 25% reserve over budgeted amounts each 
year.'').
    \642\ See SIFMA January 2023 Letter at 6, n.15.
---------------------------------------------------------------------------

    The Proposed Amendment providing that the annual operating budget 
include a reserve of not more than 25% of the annual budget is 
reasonable.\643\ Because the CAT is a critical regulatory tool/system, 
the CAT needs to have a stable funding source to build financial 
stability to support the Company as a going concern.\644\ Funding for 
the CAT, as noted in Section 11.1(b), is the responsibility of the 
Participants and the industry.\645\ Because CAT fees are charged based 
on the budget, which is based on anticipated volume, it is reasonable 
to have a reserve on hand to prevent a shortfall in the event there is 
an unexpectedly high volume in a given year. A reserve would help to 
assure that the CAT has sufficient resources to cover costs should 
there be unanticipated costs or costs that are higher than expected. 
CAT LLC explained that the proposed reserve amount of not more than 25% 
of the annual budget is based on a comparison of actual CAT costs and 
budgeted costs from 2020 through the first nine months of 2022 that 
demonstrated that actual CAT costs exceeded budgeted costs by 20% 
during this time period.\646\ CAT LLC also noted difficulty in 
predicting variable CAT costs in concluding to cap the reserve at 
25%.\647\ Additionally, CAT LLC explained that CAT fees will be 
collected approximately three months after trading activity on which a 
CAT fee is based, or 25% of the year.\648\ CAT LLC stated that the 
reserve would be available to address funding needs related to this 
three-month delay.\649\ No commenter stated that they thought anything 
higher than a 25% reserve was necessary and no commenter provided an 
alternative solution to make sure that CAT remains funded and able to 
pay its bills. The Commission therefore believes that a reserve of no 
more than 25% is reasonable based on the factors listed by CAT LLC.
---------------------------------------------------------------------------

    \643\ See Notice, supra note 6, 88 FR at 17090.
    \644\ See CAT NMS Plan, supra note 2, at Section 11.2(f).
    \645\ Id. at Section 11.1(b).
    \646\ See Notice, supra note 7, 88 FR at 17090.
    \647\ Id.
    \648\ Id. at 17091.
    \649\ Id.
---------------------------------------------------------------------------

    In addition, the Commission recognizes that if CAT fees exceed CAT 
costs, including the reserve, the surplus will be used to offset future 
fees, and that a reserve will only be included in the annual budget on 
which the fees are based if CAT LLC does not have a

[[Page 62658]]

sufficient reserve, which would be limited to 25% of the annual 
budget.\650\ The Commission also recognizes that the Company must 
operate on a break-even basis and that any surpluses would be treated 
as an operational reserve to offset future fees and not be distributed 
to Participants as profits.\651\ The Commission further recognizes that 
proposed Section 11.1(a)(ii) states that CAT LLC will only include an 
amount for the reserve in the annual budget if the Company does not 
have a sufficient reserve; therefore, the Participants would not be 
collecting additional fees if CAT LLC already has a reserve of 25% of 
the annual budget.\652\ Furthermore, the reserve would be calculated by 
CAT LLC based on the amount of the budget other than the reserve 
because the reserve is meant to fund CAT LLC to pay its bills if 
necessary.\653\ These requirements should obviate the need for a refund 
mechanism.
---------------------------------------------------------------------------

    \650\ Id. See also proposed Section 11.1(a)(ii).
    \651\ The CAT NMS Plan requires that a surplus of the Company's 
revenues over its expenses be treated as an operational reserve to 
offset future fees. See CAT NMS Plan, supra note 2, at Section 
11.1(c).
    \652\ See Notice, supra note 7, 88 FR at 17091. See also 
proposed Section 11.1(a)(ii).
    \653\ See Notice, supra note 7, 88 FR at 17090. See also 
proposed Section 11.1(a)(ii).
---------------------------------------------------------------------------

    To date, CAT has been solely funded by the Participants.\654\ The 
CAT NMS Plan, however, requires funding for the CAT come from both 
Participants and Industry Members.\655\ It is the Commission's view 
that establishing a reserve is a reasonable way to ensure that future 
funding is secured from all intended parties, rather than relying on 
Participants alone.
---------------------------------------------------------------------------

    \654\ One commenter objected to CAT LLC's 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 Citadel August 
Letter at 1. For the reasons explained in this order, the Funding 
Model meets the applicable standard for approval.
    \655\ See CAT NMS Plan, supra note 2, at Section 11.1(b), 
11.3(a) and (b).
---------------------------------------------------------------------------

d. Fee Filings Under Section 19(b) of the Exchange Act for Industry 
Member CAT Fees
    CAT LLC described the information that Participants would be 
required to include in their fee filings to be made pursuant to Section 
19(b) of the Exchange Act and Rule 19b-4 thereunder for Industry Member 
CAT Fees in proposed paragraph (B) of proposed Section 11.3(a)(iii) of 
the CAT NMS Plan.\656\ Specifically, such filings would be required to 
include with regard to the CAT Fee: (A) the Fee Rate; (B) the budget 
for the upcoming year (or remainder of the year, as applicable), 
including a brief description of each line item in the budget, 
including (1) technology line items of cloud hosting services, 
operating fees, CAIS operating fees, change request fees and 
capitalized developed technology costs, (2) legal, (3) consulting, (4) 
insurance, (5) professional and administration, and (6) public 
relations costs, a reserve and/or such other categories as reasonably 
determined by the Operating Committee to be included in the budget and 
the reason for changes in each such line item from the prior CAT Fee 
filing; \657\ (C) a discussion of how the budget is reconciled to the 
collected fees; and (D) the projected total executed equivalent share 
volume of all transactions in Eligible Securities for the year (or 
remainder of the year, as applicable), and a description of the 
calculation of the projection. This detail would describe how the Fee 
Rate is calculated and explain how the budget used in the calculation 
is reconciled to the collected fees.\658\ In addition, CAT LLC proposed 
to state that the budgeted CAT costs described in the fee filings must 
provide sufficient detail to demonstrate that the CAT budget used in 
calculating the CAT Fees is reasonable and appropriate.\659\
---------------------------------------------------------------------------

    \656\ CAT LLC stated that it expected the fee filings required 
to be made by the Participants pursuant to Section 19(b) of the 
Exchange Act with regard to CAT Fees to be filed pursuant to Section 
19(b)(3)(A) of the Exchange Act and Rule 19b-4(f)(2) thereunder. CAT 
LLC further stated that in accordance with Section 19(b)(3)(A) of 
the Exchange Act and Rule 19b-4(f)(2) thereunder, such fee filings 
would be effective upon filing. See Notice, supra note 7, 88 FR at 
17095, n.38. Pursuant to Section 19(b)(3)(A) and Rule 19b-4(f)(2), a 
proposed rule change can take effect upon filing with the Commission 
if designated by the SRO as establishing or changing a due, fee, or 
other charge imposed by the SRO. 15 U.S.C. 78s(b), 15 U.S.C. 
78s(b)(3)(A), 17 CFR 240.19b-4(f)(2).
    \657\ CAT LLC stated that it intends to include any other 
categories as reasonably determined by the Operation Committee. 
Accordingly, this provision refers to ``such other categories as 
reasonably determined by the Operating Committee to be included in 
the budget.'' Notice, supra note 7, 88 FR at 17095, n.39.
    \658\ As a practical matter, the fee filing would provide the 
exact fee per executed equivalent share to be paid for the CAT Fees, 
by multiplying the Fee Rate by one-third and describing the relevant 
number of decimal places for the fee. See Notice, supra note 7, 88 
FR at 17095, n.40.
    \659\ See proposed Section 11.3(a)(iii)(B).
---------------------------------------------------------------------------

    The collection of CAT Fees from Industry Members is subject to 
Section 11.6 of the CAT NMS Plan regarding the Financial Accountability 
Milestones.\660\ Accordingly, CAT LLC proposed to state that 
Participants will not make fee filings pursuant to Section 19(b) of the 
Exchange Act \661\ regarding CAT Fees until the Financial 
Accountability Milestone related to Period 4 described in Section 11.6 
of the CAT NMS Plan has been satisfied.\662\
---------------------------------------------------------------------------

    \660\ See CAT NMS Plan, supra note 2, at Section 11.6; see also 
supra note 18.
    \661\ 15 U.S.C. 78s(b).
    \662\ See proposed Section 11.3(a)(iii)(C); see also CAT NMS 
Plan, supra note 2, at Section 11.6(a)(i)(D).
---------------------------------------------------------------------------

    As discussed above, one commenter stated that the budget line-item 
categories, which would be included in the Section 19(b) fee filings, 
are too high level.\663\ The commenter urged the inclusion of much 
greater detail and specificity on the budget spending choices, 
especially in technology, to allow Industry Members and the public to 
understand and evaluate CAT spending decisions.\664\
---------------------------------------------------------------------------

    \663\ See supra note 521.
    \664\ Id.
---------------------------------------------------------------------------

    The proposed process for implementing CAT Fees related to 
Prospective CAT Costs for Industry Members is reasonable. Under the 
Executed Share Model, the Participants would be required to submit fee 
filings pursuant to Section 19(b) of the Exchange Act to change the Fee 
Rates for Industry Members twice a year, once at the beginning and once 
during the year.\665\ It is appropriate to accompany each Fee Rate 
change with a Section 19(b) fee filing because it would provide notice 
to Industry Members and the public of the Fee Rate change and permit 
such entities to provide comment on the change.
---------------------------------------------------------------------------

    \665\ See proposed Section 11.3(a)(i)(A)(I) and (II).
---------------------------------------------------------------------------

    In addition to the budget information already provided by the 
Participants on the CAT website, the detail provided in the fee filings 
for the budget would provide transparency into the budget as it would 
describe the line items of the budget and any changes to the budget and 
allow the public the ability to comment on the budget.\666\ The fee 
filings must discuss how the budget is reconciled to collected fees, 
which would provide the public an opportunity to comment on the 
effectiveness of the reconciliation.\667\ The Executed Share Model 
establishes the framework for Industry Member CAT fees; details of the 
Budgeted CAT Costs will be provided in the Section 19(b) fee filings 
submitted by the Participants.
---------------------------------------------------------------------------

    \666\ See proposed Section 11.3(a)(iii)(B).
    \667\ Id.
---------------------------------------------------------------------------

    One commenter objected to how the Proposed Amendment addressed the 
Financial Accountability Amendments Period 4 \668\ expenses.\669\ The 
commenter stated that if full implementation does not occur by 
September 27, 2023, the Operating Committee cannot recover from 
Industry

[[Page 62659]]

Members any expenses related to Period 4.\670\ The commenter explained 
that the Proposed Amendment states that costs incurred during Period 4 
may be allocated to Industry Members and that the Operating Committee 
had requested exemptive relief to extend the deadline for full 
implementation until August 31, 2024, which would allow the 
Participants to recover all Period 4 expenses from Industry 
Members.\671\ The commenter stated that the expenses related to Period 
4 would likely total more than $400 million, and expressed the belief 
that this amount may be allocated in its entirety to Industry Members 
if the terms of the CAT NMS Plan are not enforced.\672\
---------------------------------------------------------------------------

    \668\ See CAT NMS Plan, supra note 2, at Section 11.6.
    \669\ See Citadel July Letter at 24.
    \670\ Id.
    \671\ Id. at 24-25. The commenter further explained that the 
Commission has reserved judgment on whether the terms of the 
Financial Accountability Amendments in Section 11.6 of the CAT NMS 
Plan would be enforced.
    \672\ Id. at 25.
---------------------------------------------------------------------------

    The commenter stated that this issue is ``highly relevant to the 
Commission's analysis of the 2023 Funding Proposal'' \673\ and 
recommended three alternatives for the Commission to address the 
matter: (1) to state that relevant financial accountability provisions 
will be enforced as written and permit the Operating Committee to 
allocate Period 4 expenses only to the extent permitted by the CAT NMS 
Plan (reduced by 75%, and by 100% if full implementation does not occur 
by September 27, 2023); \674\ (2) defer judgment and provide that 
Period 4 expenses cannot be allocated to Industry Members; \675\ or (3) 
defer judgment and permit the Operating Committee to allocate Period 4 
expenses to Industry Members and analyze the potential impact of 
allocating all Period 4 costs to Industry Members on market efficiency, 
competition and capital formation.\676\ The commenter urged the 
Commission to conduct this analysis before waiting for a subsequent 
filing, stating that once the Commission approves an allocation 
methodology, ``the CAT Operating Committee would simply apply that 
approved methodology to the costs incurred during a specific time 
period.'' \677\
---------------------------------------------------------------------------

    \673\ Id.
    \674\ See Citadel July Letter at 25.
    \675\ Id.
    \676\ Id.
    \677\ Id. at 26.
---------------------------------------------------------------------------

    In response to the commenter's criticism that the Proposed 
Amendment does not adequately address the Period 4 expenses,\678\ CAT 
LLC stated that it recognizes the applicability of the Financial 
Accountability Milestones on the collection of CAT Fees and Historical 
CAT Assessments.\679\ CAT LLC stated that the Participants will not 
file CAT fee filings until they believe any applicable Financial 
Accountability Milestone has been satisfied, and noted that the 
Commission has not made a determination regarding the Participants' 
satisfaction of the Financial Accountability Milestones.\680\
---------------------------------------------------------------------------

    \678\ Id. at 24.
    \679\ See CAT LLC July 2023 Response Letter at 30.
    \680\ Id.
---------------------------------------------------------------------------

    As stated by the Participants, the Proposed Amendment acknowledges 
that the Participants are prohibited from submitting Exchange Act 
filings regarding Prospective CAT Fees until the Financial 
Accountability Milestone related to Period 4 described in Section 11.6 
of the CAT NMS Plan has been satisfied.\681\ This is a reasonable 
approach for addressing how fee filings will be handled in conjunction 
with a determination of the Participants' compliance with the Financial 
Accountability Milestones. Under existing Section 11.6, the 
Participants will not be able to recover the full costs of the CAT for 
a period if the relevant Financial Accountability Milestone has not 
been satisfied.\682\ Because the amount the Participants cannot recover 
from Industry Members is not known until the Financial Accountability 
Milestone has been satisfied, it would not be appropriate for the 
Participants to require Industry Members to pay CAT costs in advance, 
as the amount of such costs could be reduced.\683\ The Commission 
acknowledges the concerns raised and suggestions offered by the 
commenter but the Commission is not making a finding on the 
satisfaction of the Period 4 Financial Accountability Milestone in this 
Order nor is such a finding required. This filing merely establishes 
the framework under which costs will be allocated, not the amount to be 
allocated. The Participants will not be able to submit filings to 
recover Prospective CAT Fees or Historical CAT Assessments to recover 
Period 4 expenses until the Period 4 Milestone has been satisfied. When 
they do submit such filings, the question of compliance will impact how 
much can be recovered under the applicable framework; this model will 
then be used to determine how to allocate that amount.
---------------------------------------------------------------------------

    \681\ See proposed Section 11.3(a)(iii)(C).
    \682\ See CAT NMS Plan, supra note 2, at Section 11.6.
    \683\ See infra note 807.
---------------------------------------------------------------------------

e. Participant CAT Fees for Prospective CAT Costs
    CAT LLC proposed to describe the Participant CAT Fees related to 
Prospective CAT Costs in proposed Section 11.3(a)(ii) of the CAT NMS 
Plan. Specifically, under proposed Section 11.3(a)(ii)(A) of the CAT 
NMS Plan, each Participant that is a national securities exchange will 
be required to pay the CAT Fee for each transaction in Eligible 
Securities executed on the exchange in the prior month based on CAT 
Data. Each Participant that is a national securities association will 
be required to pay the CAT Fee for each transaction in Eligible 
Securities executed otherwise than on an exchange in the prior month 
based on CAT Data.\684\ The CAT Fee for each transaction in Eligible 
Securities will be calculated by multiplying the number of executed 
equivalent shares in the transaction by one-third and by the Fee Rate 
determined pursuant to proposed Section 11.3(a)(i).\685\
---------------------------------------------------------------------------

    \684\ See proposed Section 11.3(a)(ii)(A).
    \685\ Id.
---------------------------------------------------------------------------

    CAT LLC also proposed Section 11.3(a)(ii)(B) of the CAT NMS Plan to 
provide that Participants would only be required to pay CAT Fees when 
Industry Members are required to pay CAT Fees. CAT Fees charged to 
Industry Members become effective in accordance with the requirements 
of Section 19(b) of the Exchange Act.\686\ In contrast, CAT Fees 
charged to Participants are implemented via an approval of the CAT Fees 
by the Operating Committee in accordance with the requirements of the 
CAT NMS Plan.\687\ Specifically, to implement the Participant CAT fees, 
CAT LLC proposed to add the Proposed Participant Fee Schedule, entitled 
``Consolidated Audit Trail Funding Fees,'' to Appendix B of the CAT NMS 
Plan. Proposed Paragraph (a) stated that ``[e]ach Participant shall pay 
the CAT Fee set forth in Section 11.3(a) of the CAT NMS Plan to 
Consolidated Audit Trail, LLC in the manner prescribed by Consolidated 
Audit Trail, LLC on a monthly basis based on the Participant's 
transactions in Eligible Securities in the prior month.'' \688\ Because 
each Participant would be required to pay a CAT Fee once a Fee Rate has 
been established by the Operating Committee, and because of the time 
and burden required, CAT LLC stated that it would not submit an 
amendment to the CAT NMS Plan every time the Fee Rate is established or 
adjusted.\689\
---------------------------------------------------------------------------

    \686\ See proposed Section 11.3(a)(i)(A)(I) and (II); see also 
15 U.S.C. 78s(b).
    \687\ See Notice, supra note 7, 88 FR at 17094.
    \688\ Paragraph (a) of the Proposed Participant Fee Schedule.
    \689\ See Notice, supra note 7, 88 FR at 17108-09.
---------------------------------------------------------------------------

    It is reasonable to require that each Participant pay a CAT Fee 
related to

[[Page 62660]]

Prospective CAT Costs for each transaction in the prior month based on 
CAT Data.\690\ The CAT NMS Plan requires the Participants to contribute 
to the funding of the CAT.\691\ Additionally, as CAT LLC explained, the 
Executed Share Model recognizes the Participants (as market regulators) 
as one of the three parties who have primary roles in a 
transaction,\692\ so it is appropriate for a transaction-based funding 
model to assess a CAT Fee upon the Participants.
---------------------------------------------------------------------------

    \690\ See proposed Section 11.3(a)(ii).
    \691\ See CAT NMS Plan, supra note 2, at Section 11.1(b), 
Section 11.3(a).
    \692\ See Notice, supra note 7, 88 FR at 17104.
---------------------------------------------------------------------------

    The Commission also believes it is reasonable that proposed Section 
11.3(a)(ii)(B) provides that the Participants would be required to pay 
CAT Fees only when Industry Members are required to pay CAT Fees. The 
CAT Fees charged to Participants would be implemented through an 
approval of the CAT Fees by the Operating Committee and not through a 
plan amendment submitted each time the Fee Rate changes,\693\ while CAT 
Fees charged to Industry Members may only become effective in 
accordance with the requirements of Section 19(b) of the Exchange 
Act.\694\ However, both Participants and Industry Members would be 
subject to the same Fee Rate \695\ so it is appropriate to provide that 
Participants would be required to pay the Participant CAT Fee once CAT 
Fees based on the Fee Rate are effective for Industry Members.
---------------------------------------------------------------------------

    \693\ Id. at 17108-09.
    \694\ See proposed Section 11.3(a)(i)(A). See also 15 U.S.C. 
78s(b).
    \695\ See proposed Section 11.3(a)(ii)(A) and (B).
---------------------------------------------------------------------------

    The Proposed Participant Fee Schedule is reasonable. As the 
Proposed Participant Fee Schedule requires each Participant to pay the 
CAT Fee detailed in Section 11.3(a) of the CAT NMS Plan on a monthly 
basis, based on the Participant's transactions in Eligible Securities 
in the prior month, in the manner prescribed by CAT LLC,\696\ the 
proposed fee schedule is appropriate because it imposes the Executed 
Share Model's Participant CAT Fee obligation on the Participants by 
specifically requiring the Participants to pay a CAT Fee in accordance 
with the Executed Share Model. The requirement in the Proposed 
Participant Fee Schedule clearly sets forth how the Participants will 
calculate their monthly CAT Fee obligation, and therefore does not 
believe that it is necessary for the Participants to submit an 
amendment to the CAT NMS Plan each time the Fee Rate changes; the 
formula for calculating fees will be constant although the Fee Rate 
that would be applied, which is objectively determined, will change 
only following a Participant fee filing under section 19(b) of the 
Exchange Act.\697\ This approach is reasonable in this circumstance 
because the CAT NMS Plan sets forth the Executed Share Model, the 
Participants are required to pay CAT Fees pursuant to the CAT NMS Plan 
and the same Fee Rate that would apply to Industry Members would apply 
to Participants.\698\
---------------------------------------------------------------------------

    \696\ See paragraph (a) of the Proposed Participant Fee 
Schedule.
    \697\ See Notice, supra note 7, 88 FR at 17109.
    \698\ See proposed Section 11.3(a)(ii)(A) and (B).
---------------------------------------------------------------------------

6. Historical CAT Assessment
a. Calculation of Historical CAT Assessment
    Under the Executed Share Model, Past CAT Costs will be recovered 
from CEBBs and CEBSs through Historical CAT Assessments.\699\ Pursuant 
to proposed Section 11.3(b) of the CAT NMS Plan the Operating Committee 
will establish one or more Historical CAT Assessments depending upon 
the timing of any approval of the Proposed Amendment and the completion 
of the Financial Accountability Milestones.\700\ In establishing a 
Historical CAT Assessment, the Operating Committee will determine a 
``Historical Recovery Period'' \701\ and calculate a ``Historical Fee 
Rate'' \702\ for that Historical Recovery Period. Then, for each month 
in which a Historical CAT Assessment is in effect, each CEBB and each 
CEBS will pay a fee (the Historical CAT Assessment) for each 
transaction in Eligible Securities executed by the CEBB or CEBS from 
the prior month as set forth in CAT Data, where the Historical CAT 
Assessment for each transaction will be calculated by multiplying the 
number of executed equivalent shares in the transaction by one-third 
and by the Historical Fee Rate reasonably determined pursuant to 
proposed Section 11.3(b)(i).\703\
---------------------------------------------------------------------------

    \699\ See Notice, supra note 7, 88 FR at 17086; see also 
proposed Section 11.3(b); supra notes 32-33 and accompanying text 
(defining Historical CAT Assessments).
    \700\ See proposed Section 11.3(b)(iii). See Notice, supra note 
7, 88 FR at 17096, n.43; see also supra note 18 and CAT NMS Plan, 
supra note 2, at Section 11.6.
    \701\ The Historical Recovery Period would be used to calculate 
the Historical Fee Rate for a Historical CAT Assessment. Proposed 
Section 11.3(b)(i)(D) of the CAT NMS Plan provides the Operating 
Committee with the discretion to reasonably establish the length of 
the Historical Recovery Period as long as no such period is less 
than 24 months and more than five years. See infra Section 
III.A.6.b.
    \702\ The Historical Fee Rate is the fee rate used to calculate 
the Historical CAT Assessment. See infra Section III.A.6.c.
    \703\ See proposed Section 11.3(b)(iii)(A).
---------------------------------------------------------------------------

    The actual amount of Past CAT Costs to be recovered through the 
Historical CAT Assessments would be reduced by an amount of ``Excluded 
Costs.'' \704\ The resulting amount would be defined as ``Historical 
CAT Costs'' in proposed Section 11.3(b)(i)(C) of the CAT NMS Plan. 
Proposed Section 11.3(b)(i)(C) states that ``[t]he Operating Committee 
will reasonably determine the Historical CAT Costs sought to be 
recovered by each Historical CAT Assessment, where the Historical CAT 
Costs will be Past CAT Costs minus Past CAT Costs reasonably excluded 
from Historical CAT Costs by the Operating Committee.'' \705\ The 
Historical CAT Costs would not include an amount of ``Excluded Costs'' 
so that Industry Members would not be assessed a Historical CAT 
Assessment to recover such Excluded Costs.\706\
---------------------------------------------------------------------------

    \704\ The Excluded Costs would be $48,874,937 in CAT costs 
incurred from November 15, 2017 through November 15, 2018, and 
$14,749,362 in costs related to the termination of the initial Plan 
Processor. See CAT LLC July 2023 Response Letter at 19.
    \705\ Proposed Section 11.3(b)(i)(C).
    \706\ See Notice, supra note 7, 88 FR at 17111. According to the 
Proposed Amendment, ``[e]ach Historical CAT Assessment will seek to 
recover from CAT Executing Brokers two-thirds of Historical CAT 
Costs incurred during the period covered by the Historical CAT 
Assessment.'' Proposed Section 11.3(b)(i)(C). The Historical CAT 
Costs would be Past CAT Costs minus the Excluded Costs. Id.
---------------------------------------------------------------------------

    Certain commenters objected to the method of calculating the 
Historical CAT Assessment using current transaction activity.\707\ One 
commenter disagreed with the proposed method ``due to difficulty of 
using current volumes and trading activity by individual Industry 
Members as a mechanism for assessing costs in the past where the 
trading volumes and individual Industry Member trading activity likely 
were different.'' \708\ The commenter also stated that the proposed 
assessment of Past CAT Costs on current Industry Members based on their 
current trading activity is not fair or reasonable because new Industry 
Members would be assessed a share of Past CAT Costs even if they were 
not in operation when those costs were incurred, and that such costs 
would be attributable to Industry Members that are no longer in 
business.\709\ The

[[Page 62661]]

commenter added that the Proposed Amendment has not explained how 
allocating ``approximately $350 million in historical costs . . . to a 
small group of executing broker firms based on current market volumes'' 
is consistent with the Exchange Act or how it would impact liquidity 
and competition.\710\ The commenter stated that since the proposed 
allocation would be based on current market share and unrelated to the 
firms or activity that contributed to historical costs, there would be 
little ability for executing brokers to pass on such costs.\711\ 
Another commenter stated that the Proposed Amendment lacked a clear 
mechanism for Industry Members to pass-on historical costs to other 
market participants.\712\ The commenter stated, ``[i]t appears 
challenging for the CAT Operating Committee to allocate historical 
costs in a way that is directly tied to historical activity, which 
makes it more difficult for Industry Members to pass-on these costs to 
other market participants.'' \713\ Another commenter suggested a 
``review of current market percentage share dictating cost structure--
e.g., industry fluctuations--how current market share [sic] not 
reflective of past/future market shares- need for adjustments.'' \714\
---------------------------------------------------------------------------

    \707\ See SIFMA June 2023 Letter at 4; SIFMA January 2023 Letter 
at 7; SIFMA October 2022 Letter at 5; Citadel July Letter at 24, 32; 
MMI July Letter at 4; Virtu Letter at 4.
    \708\ SIFMA October 2022 Letter at 5.
    \709\ See SIFMA January 2023 Letter at 7. See also FIA Letter at 
4 (stating that it is ``patently unfair'' to allocate all historical 
costs to current Industry Members based on their current market 
activity because current ``Industry Members had no control over the 
stops and starts incurred in the development of CAT.'').
    \710\ SIFMA June 2023 Letter at 4. This statement was echoed by 
another commenter. See Virtu Letter at 4.
    \711\ SIFMA June 2023 Letter at 4. The commenter also stated 
that the assessment of ``retroactive liability for monies spent that 
private parties had no control over'' for public purposes would 
violate the Fifth Amendment Takings Clause. See infra Section 
III.9.d.
    \712\ See Citadel July Letter at 24.
    \713\ Id. at 32.
    \714\ See MMI July Letter at 4.
---------------------------------------------------------------------------

    One commenter recommended a reevaluation of the use of transaction 
fees to assess Past CAT Costs,\715\ and suggested an alternative 
approach in which Past CAT Costs would be assigned to Industry Members 
``based on the lesser of (i) the CAT Fees that would be assessed on an 
Industry Member under the Participants' proposed approach of using 
current trading activity or (ii) the CAT Fees that would be assessed on 
such member based on their prior trading activity in the years since 
2016 when the CAT was being built and then operationalized . . .'' 
\716\ The commenter stated that the share of Past CAT Costs belonging 
to Industry Members that are no longer in business could be calculated 
using this approach and then divided equally among the current Industry 
Members, while Industry Members that entered into business after 
certain Past CAT Costs were incurred would be assessed Past CAT Costs 
starting in the year after which they started operating based on the 
above approach.\717\ The commenter acknowledged that, while this 
approach would require more effort by the Participants, it would be 
``significantly closer to the fair and reasonable standard in the 
Exchange Act than the approach set forth by the Participants in the 
Executed Share Model.'' \718\
---------------------------------------------------------------------------

    \715\ See SIFMA October 2022 Letter at 5.
    \716\ SIFMA January 2023 Letter at 7.
    \717\ Id.
    \718\ Id.
---------------------------------------------------------------------------

    Additionally, commenters objected to the allocation of Past CAT 
Costs to Industry Members.\719\ One commenter stated that the 
Participants have failed to justify the allocation of Past CAT Costs to 
Industry Members during the period when only Participants were 
reporting to the CAT.\720\ Certain commenters stated that Industry 
Members should not be assessed any fees related to the decision to 
employ Thesys Technologies, LLC as the Plan Processor or legal or 
consulting fees incurred by the Participants in the creation of the CAT 
NMS Plan.\721\ One commenter stated that the Proposed Amendment fails 
to provide how much of the allocation to Industry Members is related to 
Thesys Technologies, LLC, and, therefore, the Participants have not 
demonstrated how the Executed Share Model is consistent with the 
Exchange Act.\722\
---------------------------------------------------------------------------

    \719\ See SIFMA January 2023 Letter at 6-7; SIFMA October 2022 
Letter at 7; SIFMA June 2022 Letter at 7; Citadel July Letter at 3, 
23, 24, 31, 32; FIA Letter at 4; MMI July Letter at 4 (suggesting 
accountability for historic costs).
    \720\ See SIFMA October 2022 Letter at 7.
    \721\ See SIFMA June 2022 Letter at 7; SIFMA January 2023 Letter 
at 6-7; FIA Letter at 4.
    \722\ See SIFMA June 2022 Letter at 7.
---------------------------------------------------------------------------

    Another commenter stated that it would be inappropriate to allocate 
any costs related to Thesys Technologies, LLC's role as the plan 
processor, including the costs of transitioning to a new plan 
processor, or the Operating Committee's costs of litigation against the 
Commission.\723\ The commenter expressed concern about a lack of 
transparency into Historical CAT Costs and the size of such costs, 
stating that the historical costs are excessive and inconsistent with 
the CAT NMS Plan.\724\ The commenter stated that a lack of transparency 
into historical costs raises questions about whether Industry Members 
would be allocated costs for the period when Thesys Technologies, LLC 
was the plan processor, noting that the Proposed Amendment only 
intended to exclude $64 million in costs related to the ``failed 
engagement of Thesys,'' when the costs were much higher; \725\ whether 
Industry Members would be allocated costs related to litigation between 
the Operating Committee and the Commission; \726\ and whether Industry 
Members would be allocated costs related to repeated filing of prior 
funding models.\727\ The commenter stated that, without knowing the 
total amount of Historical CAT Costs, or basic information about such 
costs, the Commission cannot determine whether Historical CAT Costs are 
reasonable and cannot assess the impact of the proposed allocation on 
market liquidity, efficiency and competition.\728\ For example, the 
commenter stated that the CAT Operating Committee has not assessed 
``whether trading activity may decline or bid-offer spreads may 
widen.'' \729\ The commenter stated that the CAT Operating Committee 
``recklessly argues'' that the proposed allocation of Historical CAT 
Costs is not concerning due to the existence of higher transaction-
based fees.\730\ In addition, the commenter stated that Industry 
Members have borne nearly all of the total CAT-related costs due to ``a 
near-constant barrage'' of changes to technical specifications.\731\ 
The commenter recommended not allocating any historical costs to 
Industry Members.\732\
---------------------------------------------------------------------------

    \723\ See Citadel July Letter at 31.
    \724\ Id. at 23. See also Citadel August Letter at 6-7.
    \725\ See Citadel July Letter at 23. See also id. at 23, n.100; 
id. at 8 (stating that ``missteps'' by the Operating Committee 
related to the hiring of the initial plan processor and the hiring 
of FINRA CAT to replace the initial plan processor resulted in 
``wasted expenditures'' of more than $100 million). See also Citadel 
August Letter at 7.
    \726\ See Citadel July Letter at 23. See also Citadel August 
Letter at 7.
    \727\ See Citadel July Letter at 24. See also Citadel August 
Letter at 7.
    \728\ See Citadel August Letter at 7.
    \729\ Id.
    \730\ Id.
    \731\ See Citadel July Letter at 31. The commenter noted that in 
2016, the Commission estimated that broker-dealers would incur 90% 
of total CAT-related costs, even if not allocated any costs for 
building and operating the CAT. The commenter stated that updates to 
these estimates would show that this figure would underestimate 
their cost burdens. See id.
    \732\ Id. at 3, 31, 32.
---------------------------------------------------------------------------

    One commenter stated that Industry Members were not subject to CAT 
obligations before the CAT NMS Plan's approval, had no input into the 
selection of the service providers, and that ``it is difficult to 
envision how the Participants could demonstrate that such an allocation 
provides for the equitable allocation of reasonable fees due to the 
fact that the CAT NMS Plan

[[Page 62662]]

did not exist during the period prior to its approval.'' \733\
---------------------------------------------------------------------------

    \733\ See SIFMA June 2022 Letter at 7.
---------------------------------------------------------------------------

    The commenter also stated that the Participants have not analyzed 
different alternatives to collecting Past CAT Costs and the costs 
associated with such alternatives or the costs associated with the 
proposed approach.\734\ The commenter urged collaboration between the 
Participants and Industry Members on the allocation of Past CAT 
Costs.\735\
---------------------------------------------------------------------------

    \734\ See SIFMA October 2022 Letter at 5.
    \735\ Id. See also SIFMA October 2022 Letter at 2 (``[w]e also 
reiterate our call for the Participants to work with SIFMA and the 
industry in a collaborative manner to establish a viable CAT funding 
model.'').
---------------------------------------------------------------------------

    With respect to one commenter's criticisms of the calculation and 
assessment of the Historical CAT Assessment,\736\ CAT LLC stated that 
the commenter had a ``persistent misunderstanding'' of the Historical 
CAT Assessment, explaining that, contrary to the commenter's assertions 
in its comment letters, the Historical CAT Assessment would be assessed 
based on current market activity, not past market activity.\737\ While 
the fee rate would be calculated based on Historical CAT Costs, the fee 
rate would be applied to current market transactions.\738\ CAT LLC 
stated that the process of assessing fees for the Historical CAT 
Assessment would be exactly the same as with CAT Fees related to 
Prospective CAT Costs, and would be passed through in the same manner 
if a CEBB or CEBS so chooses.\739\ CAT LLC also stated that it would 
provide CAT Executing Brokers with details of their CAT fees to 
facilitate this process.\740\
---------------------------------------------------------------------------

    \736\ See SIFMA May 2023 Letter at 8; SIFMA October 2022 Letter 
at 4-5; supra notes 708-713 and accompanying text.
    \737\ See CAT LLC May 2023 Response Letter at 9.
    \738\ Id.
    \739\ Id.
    \740\ Id.
---------------------------------------------------------------------------

    In response, the commenter stated that the CAT LLC Response Letter 
did not meaningfully address the concerns it raised about ``the 
inability of firms defined as `executing brokers' to transfer fees to 
those who may be more appropriate to bear certain historical CAT costs 
in the first place.'' \741\ CAT LLC reiterated that the Historical CAT 
Assessment would be assessed in the same manner as CAT Fees for 
Prospective CAT Costs, and could likewise be passed-through by the CEBB 
or CEBS,\742\ and that CAT LLC would provide the relevant data to help 
CAT Executing Brokers pass-through the fees.\743\
---------------------------------------------------------------------------

    \741\ See SIFMA June 2023 Letter at 2.
    \742\ See CAT LLC July 2023 Response Letter at 16.
    \743\ Id.
---------------------------------------------------------------------------

    In response to a commenter that stated that a small group of 
broker-dealers would shoulder the Historical CAT Costs and asked 
whether allocating these costs to a small group of executing brokers 
based on current market volume is consistent with the Exchange 
Act,\744\ CAT LLC stated that ``almost 700 of the 1100 Industry Members 
would have an obligation to contribute to Historical CAT Costs. . . not 
just a few CAT Executing Brokers'' \745\ and since ``the fees vary in 
accordance with the market activity of the CAT Executing Brokers, 
certain CAT Executing Brokers will have large bills for very 
significant market activity.'' \746\ CAT LLC also reiterated that the 
Section 11.2(b) of the CAT NMS Plan contemplates that Industry Members 
would contribute to funding the costs of the CAT and that CAT Executing 
Brokers may pass on their CAT fees so they would not have any 
obligation to pay CAT fees.\747\ CAT LLC also clarified that Industry 
Members would be allocated Historical CAT Costs over a period of time 
that would be no less than 24 months and no more than five years, not 
in a single lump sum,\748\ and stated that ``it would potentially be 
appropriate to spread the Historical CAT Costs over a time period of a 
little less than three years, a time period which is within the two to 
five year range for the Historical Recovery Period.'' \749\
---------------------------------------------------------------------------

    \744\ See SIFMA June 2023 Letter at 4. See also Virtu Letter at 
4.
    \745\ See CAT LLC July 2023 Response Letter at 15.
    \746\ Id.
    \747\ Id.
    \748\ Id.
    \749\ See CAT LLC July 2023 Response Letter at 17. CAT LLC also 
provided a comparison of Historical CAT Costs to Prospective CAT 
Costs, demonstrating that the $233 million 2023 CAT budget is 
approximately 45% of the $518 million in Historical CAT Costs 
(through 2022). Id.
---------------------------------------------------------------------------

    In response to the commenter that stated that Industry Members are 
bearing almost all of the CAT-related costs,\750\ CAT LLC stated that 
the commenter was conflating the Industry Members' internal costs to 
comply with CAT reporting requirements with the direct costs of the 
CAT.\751\ CAT LLC stated that the Proposed Amendment is intended to 
address the funding of the direct costs of the CAT and not Participants 
and Industry Members' compliance costs.\752\
---------------------------------------------------------------------------

    \750\ See Citadel July Letter at 31.
    \751\ See CAT LLC July 2023 Response Letter at 16.
    \752\ Id.
---------------------------------------------------------------------------

    CAT LLC provided a comparison of Historical CAT Costs to 
Prospective CAT Costs, demonstrating that the $233 million 2023 CAT 
budget is approximately 45% of the $518 million in Historical CAT Costs 
(through 2022).\753\ CAT LLC stated that it expects to propose a fee 
rate for the Historical CAT Assessment that would be similar to or 
smaller than other transaction-based fees, and provided examples in 
which CEBBs and CEBSs would be assessed less than 1/1000 of a penny per 
executed equivalent share.\754\ CAT LLC noted that broker-dealers are 
currently charged other transaction-based fees that are higher than the 
proposed CAT fees.\755\
---------------------------------------------------------------------------

    \753\ Id. at 17.
    \754\ Id. at 18.
    \755\ Id. at 18-19.
---------------------------------------------------------------------------

    In response to commenters that objected to the allocation to 
Industry Members of Historical CAT Costs related to the initial Plan 
Processor,\756\ CAT LLC stated that the Historical CAT Costs to be 
allocated to Industry Members would not include two categories of costs 
related to the initial Plan Processor: $48,874,937 in CAT costs 
incurred from November 15, 2017 through November 15, 2018, and 
$14,749,362 in costs related to the termination of the initial Plan 
Processor.\757\ CAT LLC stated that the Participants would remain 
responsible for these costs.\758\
---------------------------------------------------------------------------

    \756\ See FIA Letter at 4; Citadel July Letter at 23, 31.
    \757\ See CAT LLC July 2023 Response Letter at 19.
    \758\ Id.
---------------------------------------------------------------------------

    In the Commission's view, the proposed recovery of Past CAT Costs 
via the Historical CAT Assessment is reasonable, and it is reasonable 
to require that each CEBB and CEBS pay a Historical CAT Assessment for 
each transaction in the prior month based on CAT Data.\759\ First, 
current Industry Members are actively reporting to the CAT \760\ and 
therefore receive the benefits from the CAT. The CAT provides more 
effective oversight of market activity, which could increase investor 
confidence, resulting in expanded investment opportunities and 
increased trading activity.\761\ Second, it would be difficult to 
impose fees on Industry Members for their activity in the past because 
some Industry Members may no longer be in business and such Industry 
Members would not have taken into consideration the Historical CAT 
Assessment when entering into the past transactions.\762\ In this case, 
the Commission understands,

[[Page 62663]]

from CAT LLC's analysis of Industry Members, that there is 
``substantial continuity'' among the largest Industry Members, going 
back to 2020,\763\ and thus it is likely that the Industry Members 
responsible for substantial transaction activity in 2020 (and perhaps 
earlier, beyond the scope of CAT LLC's analysis) would also be 
responsible for substantial transaction activity in 2023, mitigating 
concerns that current Industry Members would be responsible for CAT 
fees for the past transaction activity of non-operational Industry 
Members.
---------------------------------------------------------------------------

    \759\ See proposed Section 11.3(a)(ii)(A) and (iii)(A).
    \760\ See Notice, supra note 7, 88 FR at 17113.
    \761\ CAT NMS Plan Approval Order, at 81 FR at 84993.
    \762\ See Notice, supra note 7, 88 FR at 17113.
    \763\ Id. at 17113, n.116 (stating that there has been 
substantial continuity in the largest Industry Members over time and 
providing statistics about the continuity).
---------------------------------------------------------------------------

    Additionally, requiring CAT Executing Brokers to pay Historical CAT 
Assessments is appropriate because the Participants have thus far paid 
all Past CAT Costs and the CAT NMS Plan contemplates that both Industry 
Members and Participants would fund the Company.\764\ Furthermore, it 
is reasonable, in the Commission's view, for the Participants to 
exclude certain costs from the Past CAT Costs to be recovered from 
Industry Members; for example, such excluded costs would encompass 
costs incurred when Industry Members as a group were not reporting to 
the CAT, and costs associated with the conclusion of the relationship 
with the Initial Plan Processor.\765\ CAT LLC also proposes to require 
the Operating Committee, in determining fees on Participants and 
Industry Members, to take into account fees, costs and expenses 
(including legal and consulting fees) reasonably incurred by the 
Participants on behalf of the Company prior to the Effective Date in 
connection with the creation and implementation of the CAT.\766\
---------------------------------------------------------------------------

    \764\ See, e.g., CAT NMS Plan, supra note 2, at Section 11.1(b), 
Section 11.1(c), Section 11.2(b), Section 11.3.
    \765\ See Notice, supra note 7, 88 FR at 17111.
    \766\ See proposed Section 11.1(c) (emphasis added).
---------------------------------------------------------------------------

    In the Commission's view, requiring the Operating Committee to take 
into account fees, costs and expenses (including legal and consulting 
fees) reasonably incurred by the Participants on behalf of the Company 
prior to the Effective Date in connection with the creation and 
implementation of the CAT, when determining fees for Participants and 
Industry Members will constrain the Operating Committee from assessing 
fees based on costs and expenses that are not reasonable. Further, the 
proposed exclusion of the ``Excluded Costs'' from Past CAT Costs is 
reasonable in the Commission's view because it would not require all 
costs incurred by the Participants to be recovered from Industry 
Members through the Historical CAT Assessment, specifically excluding 
those costs related to the delay in the start of reporting to the CAT 
and costs related to the conclusion of the relationship with the 
Initial Plan Processor.\767\
---------------------------------------------------------------------------

    \767\ See Notice, supra note 7, 88 FR at 17111.
---------------------------------------------------------------------------

    Finally, the Proposed Amendment sets forth a process that the 
Commission believes will offer an appropriate level of transparency 
into Historical CAT Costs. In response to a commenter that objected to 
the level of transparency provided about the total amount of Historical 
CAT Costs, and basic information about such costs, and stated that, as 
a result, the Commission cannot determine whether Historical CAT Costs 
are reasonable and cannot assess the impact of the proposed allocation 
on market liquidity, efficiency and competition,\768\ as discussed in 
Section III.A.6.e. herein, the Section 19(b) fee filings to be filed 
with the Commission by the Participants to impose the Historical CAT 
Assessment on Industry Members must include detailed information on the 
Historical CAT Costs, including the amount and type of Historical CAT 
Costs, and will allow the public the ability to comment on the 
Historical CAT Costs.\769\ In addition to addressing all relevant 
statutory requirements, including the requirements that the fees are 
reasonable, equitably allocated, not unfairly discriminatory, and do 
not unduly burden competition,\770\ these proposed Section 19(b) fee 
filings must contain ``sufficient detail to demonstrate that such costs 
are reasonable and appropriate,'' \771\ which would provide the public 
and the Commission the detail needed to evaluate the Historical CAT 
Assessments. Once the proposed Section 19(b) fee filings are filed by 
the Participants, the Commission will review them for consistency with 
the Exchange Act and the CAT NMS Plan.
---------------------------------------------------------------------------

    \768\ See Citadel August Letter at 7.
    \769\ See proposed Section 11.3(b)(iii)(B)(II).
    \770\ 15 U.S.C. 78f(b)(4), 15 U.S.C. 78o-3(b)(5); 15 U.S.C. 
78f(b)(5), 15 U.S.C. 78o-3(b)(6); 15 U.S.C. 78f(b)(8), 15 U.S.C. 
78o-3(b)(9).
    \771\ See proposed Section 11.3(b)(iii)(B)(II).
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    In response to the comment that stated that the CAT Operating 
Committee has not assessed ``whether trading activity may decline or 
bid-offer spreads may widen,'' \772\ and in response to the comment 
that the CAT Operating Committee ``recklessly argues'' that the 
proposed allocation of Historical CAT Costs is not concerning due to 
the existence of higher transaction-based fees,\773\ as stated above, 
the Proposed Amendment does not approve per se the amount of the 
Historical CAT Costs; it sets forth the model but leaves the amount and 
description of the Historical CAT Costs for the Section 19(b) fee 
filings. The Commission recognizes, however, that the Participants have 
disclosed the amount of the Historical CAT Costs in the Proposed 
Amendment.\774\ While such Historical CAT Costs are not being approved 
by the Commission at this time, the Commission understands that such 
amounts provide an indication of what might be charged. In this regard, 
the Commission notes the Participants have included in Exhibit C to the 
Proposed Amendment a chart setting forth an example Historical CAT 
Assessment, for illustrative purposes only, that each CAT Executing 
Broker would pay based on its transactions in Eligible Securities in 
December 2022 related to CAT costs from prior to 2022. The chart 
indicated that the Historical Fee Rate for the assumed December 2022 
period was $0.0000417950 per executed equivalent share. The Commission 
believes that potential Historical CAT Assessments are likely to be 
significantly lower than fees assessed pursuant to Section 31.\775\ 
Accordingly, the Commission believes that any potential impact on 
trading activity or bid-ask spreads would likely be limited.
---------------------------------------------------------------------------

    \772\ See Citadel August Letter at 7.
    \773\ Id.
    \774\ See Notice, supra note 7, 88 FR at 17110-11 (providing 
Historical CAT Costs prior to 2022). CAT LLC also provided updated 
Historical CAT Costs through 2022. See CAT LLC July 2023 Response 
Letter at 17.
    \775\ See infra notes 1099-1102 and accompanying text (stating 
that a comparison to recent Section 31 fees of $0.00009 per share to 
$0.0004 per share indicates that the anticipated Historical Fee Rate 
and Fee Rate, assuming the Fee Rate is of a similar magnitude as the 
Historical Fee Rate, are expected to be relatively small). See also 
infra note 1102 (discussing another example Historical Fee Rate that 
was provided in the CAT LLC July 2023 Response Letter at 18-19 that 
was close to the Historical Fee Rate in Exhibit C of the Proposed 
Amendment).
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b. Historical Recovery Period
    The ``Historical Recovery Period'' would be used to calculate the 
Historical Fee Rate for a Historical CAT Assessment.\776\ Proposed 
Section 11.3(b)(i)(D) of the CAT NMS Plan provides the Operating 
Committee with the discretion to reasonably establish the length of the 
Historical Recovery Period as long as no such period is less than 24 
months and more than five years. CAT LLC analyzed potential recovery 
periods and determined that the Historical Fee Rate calculated using

[[Page 62664]]

the proposed Historical Recovery Period of two to five years would be 
reasonable for Industry Members even if they had to pay both the 
ongoing CAT Fee and the Historical Fee Assessment simultaneously.\777\ 
Additionally, in determining the range for the Historical Recovery 
Period, CAT LLC ``sought to weigh the need for a reasonable Historical 
Fee Rate that spreads the Historical CAT Costs over an appropriate 
amount of time and the need to repay the loan notes to the Participants 
in a timely fashion.'' \778\ In the Commission's view, it is reasonable 
for the Operating Committee to establish the length of the Historical 
Recovery Period to be no less than 24 months and no more than five 
years. According to the Participants, ``[t]he length of the Historical 
Recovery Period used in calculating each Historical Fee Rate will be 
reasonably established by the Operating Committee based on the amount 
of the Historical CAT Costs to be recovered by the Historical CAT 
Assessment.'' \779\ The Operating Committee is authorized by the CAT 
NMS Plan to establish the funding of CAT LLC, including the fees to be 
paid by Participants and Industry Members.\780\ Because the Historical 
Recovery Period is used in the calculation of Historical CAT 
Assessments to recover costs incurred to fund the CAT, the Commission 
views it as appropriate for the Operating Committee to determine a 
reasonable length of time for the Historical Recovery Period since the 
Operating Committee has authority over CAT funding pursuant to the 
Plan.
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    \776\ See proposed Section 11.3(b)(i)(D)(I).
    \777\ See Notice, supra note 7, 88 FR at 17096-97. CAT LLC 
acknowledged that the Historical CAT Assessment would need to be 
calculated using up-to-date Historical CAT Costs and executed 
equivalent share volume. Id. at 17097.
    \778\ Id. at 17096.
    \779\ Id. at 17097.
    \780\ See CAT NMS Plan, supra note 2, at Section 11.1(b).
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c. Historical Fee Rate
    The Historical Fee Rate would be used to calculate Historical CAT 
Assessments. The Operating Committee will calculate the Historical Fee 
Rate for each Historical CAT Assessment by dividing the Historical CAT 
Costs for each Historical CAT Assessment by the reasonably projected 
total executed equivalent share volume of all transactions in Eligible 
Securities for the Historical Recovery Period.\781\ Additionally, 
proposed Section 11.3(b)(i)(A) states that once the Operating Committee 
has approved a Historical Fee Rate, the Participants will be required 
to file with the Commission, pursuant to Section 19(b) of the Exchange 
Act,\782\ the Historical CAT Assessment to be charged to Industry 
Members using the Historical Fee Rate.\783\ Industry Members would be 
required to pay such Historical CAT Assessment using such Historical 
Fee Rate once such Historical CAT Assessment is in effect in accordance 
with Section 19(b) of the Exchange Act.\784\
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    \781\ See proposed Section 11.3(b)(i)(A). Proposed Section 
11.3(b)(i)(B) provides that the executed equivalent shares used to 
calculate the Historical CAT Assessment would be counted in the same 
manner as executed equivalent shares used to calculate CAT Fees 
related to Prospective CAT Costs.
    \782\ 15 U.S.C. 78s(b).
    \783\ See proposed Section 11.3(b)(i)(A).
    \784\ Id.; see also 15 U.S.C. 78s(b); see infra Section 
III.A.6.e. (Historical CAT Assessment--Fee Filings under Section 
19(b) of the Exchange Act for Industry Member CAT Fees) for a 
discussion of Section 19(b) filing requirements.
---------------------------------------------------------------------------

    Proposed Section 11.3(b)(i)(E) of the CAT NMS Plan provides that 
``[t]he Operating Committee shall reasonably determine the projected 
total executed equivalent share volume of all transactions in Eligible 
Securities for each Historical Recovery Period based on the executed 
equivalent share volume of all transactions in Eligible Securities for 
the prior twelve months.'' \785\ CAT LLC would allow the Operating 
Committee to base its projected total executed equivalent share volume 
on the prior twelve months, but to use its discretion to analyze the 
likely volume for the upcoming year.\786\ Participants would be 
required to describe the calculation of the projection in their fee 
filings submitted to the Commission, pursuant to Section 19(b) of the 
Exchange Act, to implement the Historical CAT Assessments on Industry 
Members.\787\
---------------------------------------------------------------------------

    \785\ Proposed Section 11.3(b)(i)(E).
    \786\ See Notice, supra note 7, 88 FR at 17097.
    \787\ See proposed Section 11.3(b)(iii)(B)(II).
---------------------------------------------------------------------------

    The calculation of the Historical Fee Rate by dividing Historical 
CAT Costs by the projected total executed equivalent share volume of 
all transactions in Eligible Securities for the Historical Recovery 
Period \788\ is reasonable. First, it is appropriate for the Historical 
Fee Rate to be based on Historical CAT Costs. The Proposed Amendment 
defines Historical CAT Costs as Past CAT Costs minus the Past CAT Costs 
reasonably excluded from Historical CAT Costs by the Operating 
Committee \789\ (e.g., the Excluded Costs).\790\ It is appropriate to 
use the Historical CAT Costs related to a Historical CAT Assessment to 
calculate the Historical Fee Rate used to calculate the Historical CAT 
Assessment because the Participants are seeking to recover the 
Historical CAT Costs through the Historical CAT Assessment.\791\ The 
use of Historical CAT Costs is appropriate to determine the Historical 
Fee Rate because it ties the Historical Fee Rate to the costs that the 
CAT has incurred and will be apportioned among the CAT Executing 
Brokers for recovery. Second, it is appropriate to use the projected 
total executed equivalent share volume of all transactions in Eligible 
Securities for the Historical Recovery Period to calculate the 
Historical Fee Rate because this would provide the likely volume for 
the Historical Recovery Period to be used as the denominator, similar 
to the manner in which the Fee Rate for Prospective CAT Fees would be 
calculated. This proposed projection of total executed equivalent share 
volume based on the prior twelve months is appropriate because it 
balances the use of data that is sufficiently long to avoid short term 
fluctuations while providing data close in time to the calculation of 
the Fee Rate or Historical Fee Rate.\792\ Additionally, it is 
appropriate for CAT LLC to permit the Operating Committee to use its 
discretion to analyze the likely volume for the upcoming year.\793\ 
This would allow the Operating Committee to use its judgment when 
estimating projected total executed equivalent share volume if the 
volume over the prior twelve months was unusual or otherwise unfit to 
serve as the basis of a future volume estimate. Furthermore, since the 
Participants would be required to describe the calculation of the 
projected total executed equivalent share volume in the fee filings 
submitted to the Commission, pursuant to Section 19(b) of the Exchange 
Act, to implement the Historical CAT Assessments on Industry Members, 
the public will have an opportunity to review the projection and 
provide comment.\794\
---------------------------------------------------------------------------

    \788\ See proposed Section 11.3(b)(i)(A).
    \789\ See proposed Section 11.3(b)(i)(C).
    \790\ See Notice, supra note 7, 88 FR at 17111.
    \791\ See proposed Section 11.3(b)(i)(C).
    \792\ See Notice, supra note 7, 88 FR at 17116-17.
    \793\ Id. at 17097.
    \794\ See proposed Section 11.3(b)(iii)(B)(II).
---------------------------------------------------------------------------

d. Length of Time Historical CAT Assessment Would Be in Effect
    Proposed Section 11.3(b)(i)(D)(II) of the CAT NMS Plan would 
describe the length of time that a Historical CAT Assessment would be 
in effect. This period of time may be longer or shorter than the 
Historical Recovery Period used to calculate the Historical Fee Rate 
for a Historical CAT Assessment. Each Historical CAT Assessment 
calculated

[[Page 62665]]

using the Historical Fee Rate would remain in effect until all 
Historical CAT Costs for that Historical CAT Assessment are 
collected.\795\ CAT LLC stated that ``[a]ny Historical CAT Assessment 
would remain in effect until the relevant Historical CAT Costs are 
collected, whether that time is shorter or longer than the Historical 
Recovery Period used in calculating the Historical Fee Rate.'' \796\ 
The length of time that the Historical CAT Assessment would be in 
effect would depend ``on the amount of the Historical CAT Assessments 
collected based on the actual volume during the time that the 
Historical CAT Assessment is in effect.'' \797\
---------------------------------------------------------------------------

    \795\ See proposed Section 11.3(b)(i)(D)(II).
    \796\ Notice, supra note 7, 88 FR at 17097.
    \797\ Id.
---------------------------------------------------------------------------

    In the Commission's view, it is reasonable for Industry Members to 
be charged a Historical CAT Assessment until all Historical CAT Costs 
for the Historical CAT Assessment are collected. The Commission 
understands that the amount of Historical CAT Costs collected will vary 
depending on how the actual volume compares to the estimated volume. To 
the extent the actual volume exceeds the estimated volume, a Historical 
CAT Assessment would be collected faster and thus would be in effect 
for a shorter period. Similarly, to the extent the actual volume is 
less than the estimated volume, the Historical CAT Assessment would be 
collected slower and thus would be in effect for a longer period.
e. Fee Filings Under Section 19(b) of the Exchange Act for Industry 
Member CAT Fees
    Once the Operating Committee has approved a Historical Fee Rate, 
the Participants shall be required to file with the Commission, 
pursuant to Section 19(b) of the Exchange Act,\798\ such Historical CAT 
Assessment to be charged Industry Members calculated using such 
Historical Fee Rate.\799\ CAT LLC proposes to provide additional 
details regarding the fee filings to be filed by the Participants 
regarding each Historical CAT Assessment pursuant to Section 19(b) of 
the Exchange Act in proposed Section 11.3(b)(iii)(B) of the CAT NMS 
Plan. Specifically, this provision would describe that fee filings 
would be required for each Historical CAT Assessment, the content of 
such fee filings, and the effect of the Financial Accountability 
Milestones described in Section 11.6 of the CAT NMS Plan on the fee 
filings.\800\
---------------------------------------------------------------------------

    \798\ 15 U.S.C. 78s(b).
    \799\ See proposed Section 11.3(b)(i)(A).
    \800\ See proposed Section 11.3(b)(iii)(B)(I), (II), (III).
---------------------------------------------------------------------------

    Proposed Section 11.3(b)(iii)(B)(I) of the CAT NMS Plan would state 
that ``Participants will be required to file with the SEC pursuant to 
Section 19(b) of the Exchange Act a filing for each Historical CAT 
Assessment.'' \801\ CAT LLC proposes to provide additional detail about 
the information that Participants would be required to include in the 
filings for the Historical CAT Assessments in proposed Section 
11.3(b)(iii)(B)(II). The proposed paragraph sets forth the information 
about the Historical CAT Assessments that should be included in the fee 
filings required to be made by the Participants pursuant to Section 
19(b) of the Exchange Act.\802\ Specifically, such filings would be 
required to include: (A) the Historical Fee Rate; (B) a brief 
description of the amount and type of Historical CAT Costs, including 
(1) the technology line items of cloud hosting services, operating 
fees, CAIS operating fees, change request fees and capitalized 
developed technology costs, (2) legal, (3) consulting, (4) insurance, 
(5) professional and administration, and (6) public relations costs; 
(C) the Historical Recovery Period and the reasons for its length; and 
(D) the projected total executed equivalent share volume of all 
transactions in Eligible Securities for the Historical Recovery Period, 
and a description of the calculation of the projection.\803\
---------------------------------------------------------------------------

    \801\ Proposed Section 11.3(b)(iii)(B)(II).
    \802\ 15 U.S.C. 78s(b).
    \803\ See proposed Section 11.3(b)(iii)(B)(II).
---------------------------------------------------------------------------

    In addition, CAT LLC proposes to clarify that the Historical CAT 
Costs described in the fee filings must provide sufficient detail to 
demonstrate that such costs are reasonable and appropriate.\804\ 
Therefore, CAT LLC proposes to add the following sentence to proposed 
Section 11.3(b)(iii)(B)(II) of the CAT NMS Plan: ``The information 
provided in this Section would be provided with sufficient detail to 
demonstrate that the Historical CAT Costs are reasonable and 
appropriate.'' \805\
---------------------------------------------------------------------------

    \804\ Id.
    \805\ Id.
---------------------------------------------------------------------------

    Proposed Section 11.3(b)(iii)(B)(III) provides that the 
Participants will not make CAT fee filings pursuant to Section 19(b) of 
the Exchange Act \806\ regarding a Historical CAT Assessment until any 
applicable Financial Accountability Milestone has been satisfied. This 
provision is appropriate as it takes into account existing requirements 
set forth in Section 11.6 of the CAT NMS Plan that prevent the 
Participants from recovering fees related to any given Financial 
Accountability Milestone until that Financial Accountability Milestone 
has been achieved.\807\
---------------------------------------------------------------------------

    \806\ 15 U.S.C. 78s(b).
    \807\ See, e.g., Section 11.6(a)(iv) (``The Participants will 
only be permitted to collect Post-Amendment Industry Member Fees for 
Period 1, Period 2, Period 3, or Period 4 at the end of each 
respective Period.''). Section 11.6 of the CAT NMS Plan is designed 
to reduce the amount of fees, costs, and expenses that the 
Participants may recover from Industry Members if the Participants 
miss the target deadlines established by that Section. To the extent 
that the Participants miss a target deadline established by Section 
11.6, the Participants would be responsible for paying a larger 
amount of CAT-related fees, costs, and expenses on their own. The 
Commission expects that the portion of these fees, costs, and 
expenses that is attributable to for-profit national securities 
exchanges would likely be paid out of their existing profits, 
whereas the portion of these fees, costs, and expenses that is 
attributable to non-profit national securities associations like 
FINRA would likely be paid out of past revenue or new and/or 
existing fees. The Commission would evaluate any such new or 
existing fees in accordance with Section 6(b)(4) and Section 
15A(b)(5) of the Exchange Act. 15 U.S.C. 78f(b)(4); 15 U.S.C. 78o-
3(b)(5).
---------------------------------------------------------------------------

    The Commission emphasizes that the fee filings filed with the 
Commission, pursuant to Section 19(b) of the Exchange Act,\808\ to 
implement each Historical CAT Assessment on Industry Members will need 
to provide sufficient information to enable the Commission to make a 
determination on whether and when the Participants have satisfied each 
of the Financial Accountability Milestones--questions that the 
Commission is not deciding herein. This Order only approves the 
establishment of the framework by which the Participants will propose 
Historical CAT Assessments to be charged to Industry Members.\809\
---------------------------------------------------------------------------

    \808\ 15 U.S.C. 78s(b).
    \809\ The Commission does not believe it could determine whether 
the Historical CAT Costs associated with a Financial Accountability 
Milestone are ``reasonable or appropriate'' under Section 
11.3(b)(iii)(B)(II) without such information.
---------------------------------------------------------------------------

    In the Commission's view, the proposed requirement for the 
Participants to file fee filings with the Commission, pursuant to 
Section 19(b) of the Exchange Act,\810\ to implement each Historical 
Fee Assessment on Industry Members is appropriate. The detail provided 
in the fee filings for the Historical CAT Assessment would provide 
transparency into the Past CAT Costs as it would describe the amount 
and type of Historical CAT Costs and allow the public the ability to 
comment on the Historical CAT Costs.\811\ The fee filings must contain 
sufficient detail to demonstrate that the fees are consistent with the 
Exchange Act, including that such costs are reasonable and

[[Page 62666]]

appropriate,\812\ and provide the public with the detail needed to 
evaluate the Historical CAT Assessments for comment.
---------------------------------------------------------------------------

    \810\ 15 U.S.C. 78s(b).
    \811\ See proposed Section 11.3(b)(iii)(B)(II).
    \812\ Id.
---------------------------------------------------------------------------

    The Proposed Amendment offers an appropriate level of transparency 
into the Past CAT Costs used for the Historical CAT Assessment so that 
the industry and the public will be able to understand and assess the 
Past CAT Costs and the Historical Fee Rate. The Proposed Amendment 
requires the Section 19(b) fee filings to be submitted to the 
Commission by the Participants to establish the Historical CAT 
Assessments for Industry Members to contain the following information: 
``(A) the Historical Fee Rate; (B) a brief description of the amount 
and type of Historical CAT Costs, including (1) the technology line 
items of cloud hosting services, operating fees, CAIS operating fees, 
change request fees and capitalized developed technology costs, (2) 
legal, (3) consulting, (4) insurance, (5) professional and 
administration, and (6) public relations costs; (C) the Historical 
Recovery Period and the reasons for its length; and (D) the projected 
total executed equivalent share volume of all transactions in Eligible 
Securities for the Historical Recovery Period, and a description of the 
calculation of the projection.'' \813\ CAT LLC explained that this 
information ``would provide Industry Members and other interested 
parties with a clear understanding of the calculation of each 
Historical CAT Assessment and its relationship to Historical CAT 
Costs.'' \814\ In the Commission's view, the detail provided in the fee 
filings for the Historical CAT Assessment would provide transparency 
into the Past CAT Costs as the filings would describe the amount and 
type of Historical CAT Costs and allow the public the ability to 
comment on the Historical CAT Costs.\815\ Additionally, pursuant to the 
Proposed Amendment being approved, the fee filings will also need to 
contain ``sufficient detail to demonstrate that such costs are 
reasonable and appropriate,'' \816\ which would provide the public and 
the Commission the detail needed to evaluate the Historical CAT 
Assessments for consistency with the Exchange Act and the CAT NMS Plan.
---------------------------------------------------------------------------

    \813\ Proposed Section 11.3(b)(iii)(B)(II).
    \814\ Notice, supra note 7, 88 FR at 17098.
    \815\ See proposed Section 11.3(b)(iii)(B)(II).
    \816\ Id.
---------------------------------------------------------------------------

f. Past CAT Costs and Participants
    Proposed Section 11.3(b)(ii) of the CAT NMS Plan would clarify that 
the Participants would not be required to pay the Historical CAT 
Assessment as the Participants previously have paid all Past CAT Costs. 
It would state that, ``[b]ecause Participants previously have paid Past 
CAT Costs via loans to the Company, Participants would not be required 
to pay any Historical CAT Assessment.'' \817\ In addition, proposed 
Section 11.3(b)(ii) of the CAT NMS Plan would state that the Historical 
CAT fees collected from Industry Members would be allocated to 
Participants for repayment of the outstanding loan notes of the 
Participants to the Company on a pro rata basis; such fees would not be 
allocated to Participants based on the executed equivalent share volume 
of transactions in Eligible Securities.\818\ Specifically, proposed 
Section 11.3(b)(ii) of the CAT NMS Plan would state that ``[i]n lieu of 
a Historical CAT Assessment, the Participants' one-third share of 
Historical CAT Costs and such other additional Past CAT Costs as 
reasonably determined by the Operating Committee will be paid by the 
cancellation of loans made to the Company on a pro rata basis based on 
the outstanding loan amounts due under the loans.'' \819\ Furthermore, 
proposed Section 11.3(b)(ii) of the CAT NMS Plan would emphasize that 
``[t]he Historical CAT Assessment is designed to recover two-thirds of 
the Historical CAT Costs.'' \820\
---------------------------------------------------------------------------

    \817\ Proposed Section 11.3(b)(ii).
    \818\ See Notice, supra note 7, 88 FR at 17112.
    \819\ Proposed Section 11.3(b)(ii).
    \820\ Id.
---------------------------------------------------------------------------

    The proposed allocation of the Historical CAT Assessment solely to 
CEBSs and CEBBs, and ultimately Industry Members, is reasonable. The 
Historical CAT Assessment will still be divided into thirds.\821\ CAT 
LLC stated that the Participants' one-third share of Historical CAT 
Costs and such other additional Past CAT Costs as reasonably determined 
by the Operating Committee ``will be paid by the cancellation of loans 
made to the Company on a pro rata basis based on the outstanding loan 
amounts due under the loans'' and that the Participants will also be 
100% responsible for the Excluded Costs.\822\ CAT LLC explained that 
the terms of the loan agreements between CAT LLC and the Participants 
dictate that repayment of the notes will be on a pro rata basis.\823\ 
The pro rata basis for cancelling the loans is appropriate because 
repayment of the loans made by the Participants is required pro rata 
per the loan agreements between the Participants and CAT LLC.\824\ The 
CAT NMS Plan permits the Participants to seek recovery of CAT costs 
from Industry Members, which includes Past CAT Costs.\825\ However, 
similar to cancelling the loans, the Executed Share Model would require 
the Participants to pay CAT fees related to Prospective CAT Costs.\826\
---------------------------------------------------------------------------

    \821\ Id.
    \822\ Notice, supra note 7, 88 FR at 17097, n.48.
    \823\ Id. at 17112.
    \824\ Id.
    \825\ See CAT NMS Plan, supra note 2, at Section 11.1(b), 
Section 11.3(b).
    \826\ See proposed Section 11.3(a)(ii).
---------------------------------------------------------------------------

7. Calculation Information; Billing and Collection of CAT Fees
    CAT LLC proposed to provide Participants and CAT Executing Brokers 
with details regarding the calculation of their CAT Fees upon 
request.\827\ Specifically, CAT LLC proposed to add Section 
11.3(a)(iv)(A) to the CAT NMS Plan to provide that ``[d]etails 
regarding the calculation of a Participant or CAT Executing Brokers' 
CAT Fees will be provided upon request to such Participant or CAT 
Executing Broker.'' \828\ Similarly, for the Historical CAT Assessment, 
under proposed Section 11.3(b)(iv)(A), ``at minimum, such details would 
include each CAT Executing Broker's executed equivalent share volume 
and corresponding fee.'' \829\ In both cases, the new sections require 
that these details be separated by (1) Listed Options, NMS Stocks and 
OTC Equity Securities, (2) by transactions executed on each exchange 
and transactions executed otherwise than on an exchange, and (3) by 
buy-side transactions and sell-side transactions.\830\ Additionally, 
for each CAT Fee and Historical CAT Assessment, at a minimum, CAT LLC 
will make publicly available the aggregate executed equivalent share 
volume and corresponding aggregate fee also by (1) Listed Options, NMS 
Stocks and OTC Equity Securities, (2) by transactions executed on each 
exchange and transactions executed otherwise than on an exchange, and 
(3) by buy-side transactions and sell-side transactions.\831\ The 
Commission understands that the publicly available aggregate statistics 
will be made available by CAT LLC on a monthly basis with each invoice.
---------------------------------------------------------------------------

    \827\ See Notice, supra note 7, 88 FR at 17086.
    \828\ Proposed Section 11.3(a)(iv)(A).
    \829\ Proposed Section 11.3(b)(iv)(A).
    \830\ See proposed Section 11.3(a)(iv)(A); proposed Section 
11.3(b)(iv)(A)
    \831\ See proposed Section 11.3(a)(iv)(B); proposed Section 
11.3(b)(iv)(B).
---------------------------------------------------------------------------

    CAT LLC stated that consistent with Section 11.1(d) of the CAT NMS 
Plan, it will adopt policies, procedures and practices regarding the 
billing and

[[Page 62667]]

collection of fees Section 11.4 of the CAT NMS Plan.\832\ In addition, 
pursuant to Section 11.4 of the CAT NMS Plan, CAT LLC will establish a 
system for the collection of CAT fees from Participants and Industry 
Members.\833\ Under Section 11.4 of the CAT NMS Plan, the Participants 
must require each Industry Member to pay all applicable fees authorized 
under this Article XI within thirty (30) days after receipt of an 
invoice or other notice indicating payment is due (unless a longer 
payment period is otherwise indicated). If an Industry Member fails to 
pay any such fee when due, such Industry Member shall pay interest on 
the outstanding balance from such due date until such fee is paid at a 
per annum rate equal to the lesser of: (a) the Prime Rate plus 300 
basis points; or (b) the maximum rate permitted by applicable law.\834\
---------------------------------------------------------------------------

    \832\ See Notice, supra note 6, 88 FR at 17089.
    \833\ Id. at 17101.
    \834\ See CAT NMS Plan, supra note 2, at Section 11.4.
---------------------------------------------------------------------------

    Similarly, as set forth in Section 3.7(b) of the CAT NMS Plan, each 
Participant must pay all fees or other amounts required to be paid 
under the Plan within thirty (30) days after receipt of an invoice or 
other notice indicating payment is due (unless a longer payment period 
is otherwise indicated) (``Payment Date''). The Participant shall pay 
interest on the outstanding balance from the Payment Date until such 
fee or amount is paid at a per annum rate equal to the lesser of: (i) 
the Prime Rate plus 300 basis points; or (ii) the maximum rate 
permitted by applicable law.\835\ The Commission did not receive any 
objections to nor any comments regarding the calculation of this 
interest rate.
---------------------------------------------------------------------------

    \835\ Id. at Section 3.7(b). If any such remaining outstanding 
balance is not paid within thirty (30) days after the Payment Date, 
the Participants shall file an amendment to this Agreement 
requesting the termination of the participation in the Company of 
such Participant, and its right to any Company Interest, with the 
Commission.
---------------------------------------------------------------------------

    The proposed provision to Participants and CAT Executing Brokers 
with details regarding the calculation of their CAT Fees upon request 
is reasonable. In the Commission's view, providing CAT Execution 
Brokers information regarding the calculation of their CAT Fees will 
aid in transparency and permit CAT Execution Brokers to confirm the 
accuracy of their invoices for CAT Fees. The publication of the 
aggregate executed equivalent share volume and aggregate fee is 
appropriate because it would allow Participants and CAT Executing 
Brokers a high-level validation of executed volume and fees.
8. Additional Changes From Original Funding Model
    CAT LLC proposed to delete the term ``Execution Venue'' and its 
definition from Section 1.1 of the CAT NMS Plan, explaining that this 
term is not relevant in the Executed Share Model.\836\ Section 1.1 of 
the existing CAT NMS Plan defined ``Execution Venue'' to mean ``a 
Participant or an alternative trading system (`ATS') (as defined in 
Rule 300 of Regulation ATS) that operates pursuant to Rule 301 of 
Regulation ATS (excluding any such ATS that does not execute orders).'' 
The Original Funding Model would have imposed fees based on market 
share to CAT Reporters that are Execution Venues, including ATSs, and 
fees based on message traffic for Industry Members' non-ATS 
activities.\837\ In contrast, the Executed Share Model does not use the 
term ``Execution Venue,'' as the Executed Share Model imposes fees 
based on the executed equivalent shares of transactions in Eligible 
Securities for three categories of CAT Reporters: Participants, CEBBs 
and CEBSs.\838\
---------------------------------------------------------------------------

    \836\ See Notice, supra note 7, 88 FR at 17099.
    \837\ See CAT NMS Plan, supra note 2, at Section 11.3(a)(i) and 
(ii); Section 11.3(b).
    \838\ See proposed Section 11.3(a)(ii) and (iii); proposed 
Section 11.3(b)(iii).
---------------------------------------------------------------------------

    CAT LLC also proposed to amend Section 11.2(c) and Section 11.3(a) 
and (b) of the CAT NMS Plan to require Participants and CAT Executing 
Brokers to pay CAT fees based on the number of executed equivalent 
shares in a transaction in Eligible Securities instead of based on 
market share and message traffic.\839\
---------------------------------------------------------------------------

    \839\ See Notice, supra note 7, 88 FR at 17099.
---------------------------------------------------------------------------

    First, CAT LLC proposed to delete subparagraphs (i) and (ii) of 
Section 11.2(c) and replace these subparagraphs with the requirement 
that the fee structure in which the fees charged to ``Participants and 
Industry Members are based upon the executed equivalent share volume of 
transactions in Eligible Securities.'' \840\ The deleted provisions 
would have required the Operating Committee, in establishing the 
funding of the Company, to seek to establish a tiered fee structure in 
which the fees charged to: (i) CAT Reporters that are Execution Venues, 
including ATSs, are based upon the level of market share and (ii) 
Industry Members' non-ATS activities are based upon message traffic.
---------------------------------------------------------------------------

    \840\ Proposed Section 11.2(c).
---------------------------------------------------------------------------

    Second, CAT LLC proposed to amend Sections 11.3(a) and 11.3(b) of 
the CAT NMS Plan to remove detail regarding fixed fees and fee tiers 
for market share and message traffic by Participants and Execution 
Venue ATSs under the Original Funding Model.\841\ Section 11.3(a) 
currently describes the fixed CAT fees to be paid by Participants and 
Execution Venue ATSs based on market share and Section 11.3(b) 
currently describes the fixed CAT fees to be paid by Industry Members 
(other than Execution Venue ATSs) based on message traffic.\842\ The 
text in these sections would be replaced with proposed Sections 11.3(a) 
and (b), which, as discussed above, would describe the calculation and 
application of the CAT Fees related to Prospective CAT Costs and the 
Historical CAT Assessments. These proposed changes to Sections 11.3(a) 
and (b) would also replace references to ``fixed fees'' with ``fees'' 
instead. CAT LLC explained that the concept of fixed fees is not 
relevant in the Executed Share Model.\843\
---------------------------------------------------------------------------

    \841\ See Notice, supra note 7, 88 FR at 17100-01.
    \842\ See CAT NMS Plan, supra note 2, at Section 11.3(a) and 
(b).
    \843\ See Notice, supra note 7, 88 FR at 17101.
---------------------------------------------------------------------------

    CAT LLC also proposed to amend Sections 11.1(d), 11.2(c), 11.3(a) 
and 11.3(b) of the CAT NMS Plan to eliminate tiered fees and related 
concepts because the Executed Share Model does not utilize 
tiering.\844\ First, CAT LLC proposed to remove a reference to the 
``assignment of tiers'' from Section 11.1(d). CAT LLC also proposed to 
remove two sentences from Section 11.1(d) permitting the Operating 
Committee to change the tier assigned to any Person. Second, CAT LLC 
proposed to amend Section 11.2(c) to delete a reference to a tiered fee 
structure (specifically, deleting the word ``tiered'') so that CAT fees 
would not be tiered under the Executed Share Model. Third, CAT LLC 
proposed to delete subparagraph (iii) of Section 11.2(c), which 
required the Operating Committee, in establishing the funding of the 
Company, to seek to establish a fee structure in which the fees charged 
to CAT Reporters with the most CAT-related activity (measured by market 
share and/or message traffic, as applicable) are generally comparable 
(where, for these comparability purposes, the tiered fee structure 
takes into consideration affiliates between or among CAT Reporters, 
whether Execution Venues and/or Industry Members).\845\ CAT LLC 
explained that this comparability provision was a factor used to 
determine the tiers for Industry Members and Execution Venues under the 
Original Funding Model, but that it is no longer necessary since the 
proposed Executed Share

[[Page 62668]]

Model would not use a tiered fee structure.\846\ Finally, as discussed 
above, CAT LLC proposed to amend Sections 11.3(a) and (b) to replace 
the language with proposed Sections 11.3(a) and (b), which would 
describe the calculation and application of the CAT Fees related to 
Prospective CAT Costs and the Historical CAT Assessments. CAT LLC 
states that such proposed changes would remove the references to tiers 
in Sections 11.3(a)(i) and (ii) and 11.3(b).\847\
---------------------------------------------------------------------------

    \844\ Id. at 17100-01.
    \845\ Id. at 17100.
    \846\ Id.
    \847\ Id. at 17100-01.
---------------------------------------------------------------------------

    In addition, CAT LLC proposed to amend the CAT funding principles 
to clarify that CAT Fees and the Historical CAT Assessments are 
intended to be cost-based fees.\848\ Specifically, CAT LLC proposed to 
amend the funding principle set forth in Section 11.2(c) by making a 
specific reference to ``the costs of the CAT.'' Proposed Section 
11.2(c) would state, ``[i]n establishing the funding of the Company, 
the Operating Committee shall seek . . . to establish a fee structure 
in which the fees charged to Participants and Industry Members are 
based upon the executed equivalent share volume of transactions in 
Eligible Securities, and the costs of the CAT (emphasis added).'' \849\
---------------------------------------------------------------------------

    \848\ Id. at 17099.
    \849\ Proposed Section 11.2(c).
---------------------------------------------------------------------------

    In the Commission's view, the proposed deletion of the term 
``Execution Venue'' from the CAT NMS Plan is reasonable because the 
term is no longer relevant to the CAT NMS Plan. The proposed Executed 
Share Model does not impose fees on Execution Venues and would instead 
impose fees on Participants and CAT Executing Brokers (and, ultimately, 
Industry Members) and therefore it is appropriate to delete the term.
    Additionally, it is reasonable to amend Section 11.2(c) and Section 
11.3(a) and (b) of the CAT NMS Plan to reflect the proposed use of the 
number of executed equivalent shares in transactions in Eligible 
Securities in calculating CAT fees. These changes are appropriate 
because, unlike the Original Funding Model, the proposed Executed Share 
Model would not use message traffic, or a tiered fee structure.
    Further, the proposed elimination of tiered fees and related 
concepts from the CAT NMS Plan and the proposed replacement of ``fixed 
fees'' with references to ``fees'' in the CAT NMS Plan are reasonable. 
The Original Funding Model would use a tiered fee structure of fixed 
fees; however, the proposed Executed Share Model would require each 
Participant and CAT Executing Broker to pay a CAT fee based on its 
transactions in Eligible Securities.\850\ CAT LLC explained that 
``[t]he proposed non-tiering approach is simpler and more objective to 
administer than the tiering approach'' \851\ and that removing tiers 
``eliminates a variety of subjective analyses and judgments from the 
model and simplifies the determination of CAT fees.'' \852\ 
Additionally, the Proposed Amendment would replace the concept of 
``fixed fees'' with ``fees'' because CAT fees will vary in accordance 
with the number of executed equivalent shares in a transaction.\853\ 
The proposed elimination of tiered fees and related concepts from the 
CAT NMS Plan and the proposed replacement of ``fixed fees'' with 
references to ``fees'' in the CAT NMS Plan are reasonable because these 
changes conform the CAT NMS Plan funding model to the proposed Executed 
Share Model.
---------------------------------------------------------------------------

    \850\ See proposed Section 11.3(a)(ii)(A), (a)(iii)(A), 
(b)(iii)(A).
    \851\ Notice, supra note 7, 88 FR at 17100.
    \852\ Id.
    \853\ Id. at 17101.
---------------------------------------------------------------------------

    Additionally, the Proposed Amendment would amend Section 11.2(c) to 
make clear that the fee structure established by the Operating 
Committee to charge fees to Participants and Industry Members would 
also be based on the costs of the CAT.\854\ CAT LLC explained that the 
change clarifies that the CAT fees are cost-based fees designed to 
recover the cost of the creation, implementation and operation of the 
CAT.\855\ These proposed changes are appropriate because they would 
update language in the Original Funding Model to reflect the operation 
of the proposed Executed Share Model.
---------------------------------------------------------------------------

    \854\ See proposed Section 11.2(c) (``. . . fees charged to 
Participants and Industry Members are based upon the executed 
equivalent share volume of transactions in Eligible Securities, and 
the costs of the CAT.'' (emphasis added)).
    \855\ See Notice, supra note 7, 88 FR at 17099.
---------------------------------------------------------------------------

9. Other Comments
a. Lack of Industry Input
    A number of commenters stated that the Proposed Amendment lacks 
input from the industry.\856\ One commenter stated that the 
Participants did not meaningfully solicit input from the industry when 
developing the Executed Share Model.\857\ Another commenter stated that 
the Proposed Amendment reflects a lack of representation by executing 
brokers and offered its participation in future discussions and 
advisory committees on the topic of CAT funding.\858\ One commenter 
stated that ``[t]he impact of CAT on the brokerage community must be 
taken seriously by the SRO committee, and brokers need their voice 
heard on the committee's recommendations. To date, we have seen little 
evidence of either.'' \859\ This commenter also suggested the 
allocation of human resources to hire industry experts in industry 
workflows and public-private engagement to assist with building the 
CAT.\860\
---------------------------------------------------------------------------

    \856\ See DASH April 2023 Letter at 2; DASH January 2023 Letter 
at 3; SIFMA June 2023 Letter at 4; SIFMA May 2023 Letter at 2; SIFMA 
June 2022 Letter at 2; SIFMA January 2023 Letter at 2; Citadel July 
Letter at 9-10. See also FINRA June 2022 Letter at 8, 9 (advocating 
for a more inclusive development process that would include input 
from the industry); MMI July Letter at 2, 4; Virtu Letter at 6 
(stating that they would like to have a meaningful dialogue with the 
Participants and that the best way forward is for the interested 
parties to meet and devise an equitable solution); FIA Letter at 4 
(stating that they have ``raised concerns over the lack of industry 
participation in the development, operation and cost allocation 
processes of the CAT'' and they ``believe that at a minimum, the CAT 
Operating Committee should be reconfigured, with Industry Members 
comprising the percentage of the Committee equivalent to whatever 
cost allocation percentage is eventually allocated to them.'').
    \857\ See SIFMA May 2023 Letter at 2. See also SIFMA June 2023 
Letter at 4, 5; SIFMA June 2022 Letter at 2; SIFMA January 2023 
Letter at 2.
    \858\ See DASH April 2023 Letter at 2; DASH January 2023 Letter 
at 3.
    \859\ MMI July Letter at 4.
    \860\ Id.
---------------------------------------------------------------------------

    In response, CAT LLC stated that it has engaged with the industry 
on the funding model over the past 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.\861\ CAT LLC stated that it welcomes industry input on 
the funding model but believes a decision on the model is overdue.\862\
---------------------------------------------------------------------------

    \861\ See CAT LLC May 2023 Response Letter at 12.
    \862\ Id.
---------------------------------------------------------------------------

    In response, one commenter stated that Industry Members are willing 
to work with the Commission and the Participants to develop a CAT 
funding model.\863\ The commenter urged collaboration and dialogue 
between the Participants and the Industry Members before the filing of 
a formal proposal with the Commission.\864\ The commenter also stated 
that limiting industry input to the notice and comment process for NMS 
plan amendments is an inefficient process

[[Page 62669]]

resulting in significant delays.\865\ Another commenter stated 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.\866\ The commenter also stated that 
the CAT Advisory Committee has been completely ignored by the Operating 
Committee and that its recommendations are non-binding.\867\
---------------------------------------------------------------------------

    \863\ See SIFMA June 2023 Letter at 4.
    \864\ Id.
    \865\ Id. at 4-5.
    \866\ See Citadel July Letter at 9-10.
    \867\ Id. at 6.
---------------------------------------------------------------------------

    CAT LLC further responded to two commenters that stated that CAT 
LLC refused to collaborate with the industry in the development of the 
Proposed Amendment.\868\ CAT LLC stated that it has engaged with the 
industry over the last seven years, discussing funding model issues 
with the CAT Advisory Committee, holding industry-wide webinars on 
funding issues, and meeting with industry associations and individual 
Industry Members to discuss funding model issues.\869\ CAT LLC stated 
that it has ``repeatedly sought the views of SIFMA and other industry 
participants on specific aspects of the model.'' \870\ CAT LLC listed 
ideas suggested by the industry that it adopted in revised versions of 
the funding model \871\ and stated ``the current model results from 
years of modifications that have been made in significant part in 
response to industry comments to earlier versions.'' \872\
---------------------------------------------------------------------------

    \868\ See MMI July Letter at 2; SIFMA June 2023 Letter at 4.
    \869\ See CAT LLC July 2023 Response Letter at 26-27.
    \870\ Id. at 28.
    \871\ Id. at 27-28.
    \872\ Id. at 28.
---------------------------------------------------------------------------

    The Commission understands that Industry Members and other market 
participants have been able to provide input into CAT funding through 
meetings with CAT LLC, participation in webinars held by CAT LLC on CAT 
costs and potential alternative funding models,\873\ and through the 
provision of comments on the current and prior proposed funding 
models.\874\ The Commission encourages frequent and constructive 
collaboration between the industry and CAT LLC.
---------------------------------------------------------------------------

    \873\ See CAT Industry Webinar: CAT Costs (Sept. 21, 2021), 
available at https://catnmsplan.com/sites/default/files/2021-09/09.21.21-CAT-Costs_0.pdf; CAT Industry Webinar: Fee Models (Sept. 
22, 2021), available at https://catnmsplan.com/sites/default/files/2021-09/09.22.21-CAT-Fee-Model.pdf.
    \874\ See, e.g., supra note 58; see also https://www.sec.gov/comments/4-698/4-698-a.htm.
---------------------------------------------------------------------------

b. Implementation
    One commenter suggested that upon approval of any CAT funding 
model, Industry Members should be given at least a year ``to implement 
any necessary changes to systems and processes for them to be able to 
capture their portion of CAT costs.'' \875\ CAT LLC responded that it 
was unlikely to take Industry Members a year to implement any needed 
changes, particularly given the relatively small fees likely to be 
incurred by most small Industry Members that would not require 
extensive new processes to pay.\876\
---------------------------------------------------------------------------

    \875\ SIFMA May 2023 Letter at 2.
    \876\ See CAT LLC May 2023 Response Letter at 12.
---------------------------------------------------------------------------

    The Commission acknowledges this comment but highlights, as did CAT 
LLC,\877\ that the Participants have entirely funded the CAT to date; 
in the Commission's view, it is imperative that CAT funding be 
established in a timely manner after approval of the Executed Share 
Model.
---------------------------------------------------------------------------

    \877\ Id.
---------------------------------------------------------------------------

c. Rule 613 and the CAT NMS Plan
    Certain commenters stated that the CAT as it is structured today is 
not what was contemplated by Rule 613 of Regulation NMS.\878\ One 
commenter recommended that the Commission come up with a new structure 
for the CAT.\879\ The commenter stated that Rule 613 and the 2016 CAT 
NMS Plan do not support CAT as it is currently structured \880\ and 
provided examples where it believes that subsequent changes to the CAT 
requested by the Commission have caused the CAT to become inconsistent 
with the requirements of Rule 613 and the 2016 CAT NMS Plan.\881\ 
According to the commenter: (1) Rule 613 requires the reporting of 
certain events and that the events must be linked to their originating 
order, but the Commission has required the reporting of events that are 
not CAT-reportable and are not linked to particular orders (for 
example, Rule 613 requires the reporting of the cancellation of an 
order, but the Commission has also required the reporting of messages 
acknowledging the receipt of a cancellation request); \882\ (2) the 
Commission expanded the CAT to include OTC equities and requests-for-
quotes; \883\ (3) the CAT NMS Plan contemplates that data will be 
available to the Commission on a T+5 basis, but the Commission and 
staff have insisted that certain data be available to the Commission 
for use before T+5; \884\ (4) Rule 613 requires the reporting of every 
material term of an order, but the Commission has also required the 
reporting of the port-level settings applicable to all orders sent to a 
port on an exchange.\885\ The commenter stated that these changes to 
CAT resulted from discussions between the Commission and the 
Participants, that such changes ``significantly increased CAT costs,'' 
and that Industry Members with ``no voice and little transparency'' 
into the building of the CAT system would be allocated most of the 
increased CAT costs.\886\ The commenter stated that the Commission 
approval of a funding proposal for a system that is not consistent with 
Rule 613 and the CAT NMS Plan would be arbitrary and capricious 
action.\887\
---------------------------------------------------------------------------

    \878\ See SIFMA June 2023 Letter at 2, 6-7; Citadel July Letter 
at 5; FIA Letter at 5; FIF and SIFMA Letter at 4, 5, 8-23.
    \879\ See SIFMA Letter June 2023 at 6.
    \880\ Id. at 6-7.
    \881\ Id. at 6.
    \882\ Id. at 6-7.
    \883\ Id. at 7.
    \884\ See SIFMA June 2023 Letter at 6.
    \885\ Id. See also Citadel July Letter at 32-33.
    \886\ See SIFMA June 2023 Letter at 7.
    \887\ Id.
---------------------------------------------------------------------------

    Another commenter stated that some of the drivers of CAT costs are 
the addition of various new system features and reporting requirements 
that were established as the result of discussion between Commission 
staff and the CAT Operating Committee.\888\ The commenter stated that 
some of these requirements have been driven by ``informal 
reinterpretations'' of the Plan and have resulted in material changes 
to the CAT without proper weighing of costs and benefits associated 
with such changes.\889\ The commenter further stated that the 
Participants should confirm that the existing CAT system meets the 
requirements of the Plan, before the funding proposal is 
finalized.\890\
---------------------------------------------------------------------------

    \888\ See FIA Letter at 5.
    \889\ Id.
    \890\ Id.
---------------------------------------------------------------------------

    One commenter believes that the Commission should require an 
amendment to the CAT NMS Plan for new reporting requirements or 
enhancements for which costs and benefits were never considered by 
Commission in the economic analysis for the approval of the CAT NMS 
Plan.\891\ This commenter believes that the Commission is imposing CAT 
processing requirements that are not required by Rule 613 and the CAT 
NMS Plan.\892\ The commenter further believes these ``changes'' should 
be subject to greater review by the Industry Members and the public at 
large, and therefore

[[Page 62670]]

should be filed as amendments to the CAT NMS Plan, thereby requiring a 
cost-benefit analysis to be conducted by the Commission and public 
disclosure.\893\ The commenter stated that the Commission has mandated 
additional reporting requirements for CAT that the commenter does not 
believe to be within the scope of Rule 613 and the CAT NMS Plan, and 
that these additional reporting requirements should be subject to an 
appropriate cost-benefit analysis.\894\ The commenter stated their 
concern that these reporting requirements would be very costly to 
implement and questioned whether the surveillance value of these 
additional reporting requirements justified the additional costs that 
will be imposed on market participants (and potentially passed through 
to customers).\895\ The commenter further stated that, to the extent 
that these additional reporting requirements are found to be within the 
scope of Rule 613 and the CAT NMS Plan, the Commission should grant 
exemptive relief with respect to these requirements because of the 
additional costs.\896\ The commenter also stated that if the Commission 
does not grant exemptive relief, then the Commission should require an 
amendment to the CAT NMS Plan, that sets forth the costs and benefits, 
for each of these additional reporting requirements because the 
commenter believes that these reporting requirements were not 
considered as part of the cost estimates in the CAT NMS Plan.\897\
---------------------------------------------------------------------------

    \891\ See FIF and SIFMA Letter at 4, 5.
    \892\ Id. at 9-12 (discussing various ``processing changes'' the 
commenter believes the Commission intends to impose, as well as 
summarizing the objections made by the Participants to these 
``changes'').
    \893\ Id. at 10-11. This commenter also stated that there were 
several ``processing requirements'' that could reduce CAT operating 
costs and that the Commission should direct the Participants to 
analyze these ``processing requirements'' and make that analysis 
available to the public for discussion. Id. at 12-13.
    \894\ See FIF and SIFMA Letter at 13-23 (discussing various 
reporting requirements that the commenter does not consider to be 
within the scope of Rule 613 and the CAT NMS Plan or believes that 
exemptive relief should be granted because of the costs for 
implementing these requirements, including: requiring CAT reporting 
of verbal (unstructured) activity; requiring CAT reporting of non-
executable RFQ responses; requiring CAT reporting of request 
messages; requiring that an order recipient report rejections to 
CAT; requiring an order sender to report venue (order recipient) 
port settings; requiring CAT reporting of linkage of representative 
to customer orders and linkage of order fulfillments to 
representative and principal orders; various requirements with 
respect to CAIS reporting; and other CAT reporting requirements 
relating to quoting activity on the OTC Link ATS operated by OTC 
Markets).
    \895\ Id. at 14.
    \896\ Id.
    \897\ Id.
---------------------------------------------------------------------------

    Another commenter stated that changes and cost overruns have 
changed the structure of the CAT from what was contemplated by Rule 
613.\898\ The commenter believes that the Operating Committee and the 
Commission have engaged in ad-hoc discussions to interpret what the 
Plan requires ``without adequate notice to Industry Members or due 
consideration of the costs and benefits associated with such 
interpretations.'' \899\ The commenter stated that the Commission has 
not regularly assessed whether costs resulting from a specific 
interpretation of Rule 613 and the CAT NMS Plan outweigh benefits.\900\ 
The commenter requested that the Commission revisit its assumptions 
from the CAT NMS Plan Approval Order \901\ due to inaccurate cost 
estimates, a failure to retire duplicative systems, impracticality of 
technology requirements, a lack of effective governance, and a lack of 
processes to consider requests to add more data.\902\
---------------------------------------------------------------------------

    \898\ See Citadel July Letter at 7.
    \899\ Id. at 6.
    \900\ Id.
    \901\ See supra note 2.
    \902\ See Citadel July Letter at 5; see also FIF and SIFMA 
Letter at 24-26.
---------------------------------------------------------------------------

    The commenter also stated that the Commission must update the 
economic analysis from the CAT NMS Plan Approval Order \903\ to revise 
its estimates of costs to build and operate CAT using actual costs 
incurred,\904\ to project average annual increases in the CAT operating 
budget,\905\ and to update its analysis of CAT-related costs to be 
borne by Industry Members.\906\ The commenter stated that the 2016 CAT 
NMS Plan lacked a funding model, so the Commission did not consider the 
implications of allocating costs to Industry Members to build and 
operate the CAT.\907\ The commenter stated that the Proposed Amendment 
would allocate at least 78% and up to 100% of costs to Industry Members 
and a small group of Industry Members will pay the majority of these 
costs (and potentially both historical and ongoing costs 
simultaneously).\908\ The commenter stated that the proposed allocation 
would have ``dramatic effects'' on market efficiency, competition and 
capital formation,\909\ stating that ``[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.'' 
\910\
---------------------------------------------------------------------------

    \903\ See CAT NMS Plan Approval Order, supra note 2.
    \904\ See Citadel July Letter at 12. The commenter stated that 
2016 figures underestimated such implementation costs for larger 
broker-dealers by assuming cost savings would be realized through 
retirement of other reporting systems which haven't been retired 
yet. Id. at 12-13.
    \905\ Id. at 13.
    \906\ Id. at 12.
    \907\ Id.
    \908\ See Citadel July Letter at 12; id. at 12, n.57.
    \909\ Id. at 12.
    \910\ Id. at 15.
---------------------------------------------------------------------------

    Additionally, the commenter stated that Rule 613 requires the 
Participants to provide an estimate of the costs associated with 
creating, implementing and maintaining the CAT, the costs, benefits and 
rationale for the choices made in developing the CAT NMS Plan, and 
their own analysis of the plan's impact on competition, efficiency and 
capital formation.\911\ The commenter requested the Commission to 
require the members of the Operating Committee to update the analysis 
required by Rule 613 in light of a ``massive increase'' in costs since 
2016.\912\ Another commenter similarly suggested that additional 
oversight and public review of the actual costs and purpose of the CAT 
is called for, and also requested additional transparency on the status 
of legacy reporting systems, since their retirement could offset some 
of the CAT fees.\913\
---------------------------------------------------------------------------

    \911\ Id. at 14-15; see also FIF and SIFMA Letter at 24-25.
    \912\ See Citadel July Letter at 15.
    \913\ See MMI July Letter at 6. This commenter did not 
specifically request that the Operating Committee update the Rule 
613 analysis.
---------------------------------------------------------------------------

    In response to one commenter that stated that Rule 613 and the CAT 
NMS Plan no longer reflect the operation of the CAT,\914\ CAT LLC 
stated that the CAT was implemented in accordance with Rule 613 and the 
CAT NMS Plan and that the CAT NMS Plan permits the recovery of costs 
incurred in the creation, implementation and maintenance of the 
CAT.\915\
---------------------------------------------------------------------------

    \914\ See SIFMA June 2023 Letter at 7.
    \915\ See CAT LLC July 2023 Response Letter at 28.
---------------------------------------------------------------------------

    CAT LLC also responded to comments that raised concerns about the 
Commission's interpretations of CAT NMS Plan requirements that were not 
related to the funding model and the costs and benefits of those 
interpretations.\916\ CAT LLC stated that the Proposed Amendment is not 
the appropriate forum to resolve interpretive questions.\917\ CAT LLC 
also stated that, for proposed changes to the CAT NMS Plan, the 
Participants are following the process in Rule 608 for plan amendments 
and noted that material changes to the CAT system would require an 
amendment to the CAT NMS Plan,\918\ but not a material change to a 
technology contract as the CAT NMS Plan permits the Operating

[[Page 62671]]

Committee to enter into, modify or terminate a material contract.\919\
---------------------------------------------------------------------------

    \916\ See Citadel July Letter at 32-34; FIA Letter at 3, 4; MMI 
July Letter at 4.
    \917\ See CAT LLC July 2023 Response Letter at 29.
    \918\ Id.
    \919\ Id. at 30 (citing to Section 4.3 of the CAT NMS Plan).
---------------------------------------------------------------------------

    The CAT NMS Plan is consistent with Rule 613 and we do not believe 
that any changes have been made that are inconsistent with the Plan as 
approved in 2016, as amended in 2020.\920\ The examples provided by 
commenters of changes to the CAT requested by the Commission,\921\ in 
the Commission's view, were included in the CAT NMS Plan approved by 
the Commission in 2016.\922\ Rule 608 and Rule 613 of Regulation NMS 
provide advance notice of material changes to the CAT system and 
related costs by requiring changes to the CAT NMS Plan to be filed with 
the Commission as an NMS plan amendment pursuant to Rule 608 of 
Regulation NMS and thereby be subject to notice and comment, and 
require that the Commission consider, in determining to approve the 
amendment, the impact of the amendment on efficiency, competition and 
capital formation.\923\ Section 6.9 of the CAT NMS Plan does not 
provide unfettered discretion to the CAT Operating Committee to make 
Material Amendments to the CAT system. If the CAT Operating Committee 
or the Commission wish to impose additional requirements to the CAT NMS 
Plan, such requirements must be proposed through an amendment to the 
CAT NMS Plan, filed under Rule 608 of Regulation NMS. Such amendments 
must be published for notice and comment.\924\ Additionally, Rule 
613(a)(5) of Regulation NMS \925\ requires the Commission to consider, 
in determining whether to approve an amendment to the CAT NMS Plan, the 
impact of the amendment on efficiency, competition and capital 
formation; therefore, this Order contains an analysis of the Proposed 
Amendment's impact on efficiency, competition, and capital formation.
---------------------------------------------------------------------------

    \920\ See Securities Exchange Act Release No. 89387 (July 24, 
2020), 85 FR 45941 (July 30, 2020); Financial Accountability 
Amendments, supra note 18.
    \921\ See SIFMA June 2023 Letter at 6, 7, supra notes 881-885 
and accompanying text; Citadel July Letter at 33-35; FIF and SIFMA 
Letter at 8-23. The issues raised by those commenters are either 
being adjudicated in a separate forum or addressed through a request 
for exemptive relief. See Petition for Review, USCA Case No. 22-
1234; Request for Exemption from Certain Provisions of the CAT NMS 
Plan Related to Reporting of Certain Verbal Activity, Floor and 
Upstairs Activity, available at https://catnmsplan.com/sites/default/files/2023-03/03.31.23-CAT-Exemption-Request-Verbal-Floor-and-Upstairs-Activity.pdf. 22-1234; Request for Exemption from 
Certain Provisions of the CAT NMS Plan Related to Reporting of 
Certain Verbal Activity, Floor and Upstairs Activity, available at 
https://catnmsplan.com/sites/default/files/2023-03/03.31.23-CAT-Exemption-Request-Verbal-Floor-and-Upstairs-Activity.pdf.
    \922\ See Securities Exchange Act Release No. 95234 (July 8, 
2022), 87 FR 42247 (July 14, 2022).
    \923\ Rule 613(a)(5). 17 CFR 242.613(a)(5).
    \924\ See Rule 608(a)(1). 17 CFR 242.608(a)(1).
    \925\ 17 CFR 242.613(a)(5).
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d. Funding in the Appropriation Process
    Certain commenters believe that funding for the CAT should be 
accomplished through Congressional appropriations.\926\ These 
commenters characterized the CAT as a Commission tool for law 
enforcement.\927\ One commenter stated that the Proposed Amendment 
would ``evade'' \928\ the separation of powers established by the 
Constitution, arguing that since the CAT is a ``Commission system used 
for enforcement'' \929\ and that law enforcement ``is an executive 
prerogative,'' \930\ Congress must approve public funds to build the 
CAT through the appropriations process.\931\ The commenter stated 
``[t]he Constitution does not permit the Commission to fund its own 
enforcement apparatus through the backdoor--to require the SROs to 
raise and spend hundreds of millions of dollars to build a new law 
enforcement tool for the Commission.'' \932\ The commenter also stated 
that the assessment of ``retroactive liability for monies spent that 
private parties had no control over'' for public purposes would violate 
the Fifth Amendment Takings Clause.\933\
---------------------------------------------------------------------------

    \926\ See SIFMA June 2023 Letter at 8; Citadel July Letter at 
28-29; FIA Letter at 3; MMI July Letter at 2-4. See also MMI July 
Letter at 1-2. This commenter suggested evaluating whether the CAT 
is truly an NMS plan, or if it is better viewed as a Commission 
system whose budget should be subject to Congressional approval and 
oversight. In response, CAT LLC stated that this comment is outside 
the scope of the Proposed Amendment. See CAT LLC July 2023 Response 
Letter at 31, n.144.
    \927\ See SIFMA June 2023 Letter at 8; FIA Letter at 3; Citadel 
July Letter at 28, 29. See also MMI July Letter at 2-4 (categorizing 
the CAT as a Commission system, required by and dictated by the 
Commission that should be funded in the same way as other Commission 
functions).
    \928\ See SIFMA June 2023 Letter at 8.
    \929\ Id. See also FIA Letter at 3.
    \930\ See SIFMA June 2023 Letter at 8.
    \931\ Id.
    \932\ Id. See also Citadel July Letter at 28, 29.
    \933\ See SIFMA June 2023 Letter at 8.
---------------------------------------------------------------------------

    Another commenter stated that the Proposed Amendment is 
unconstitutional because it would require Industry Members to provide 
the Operating Committee with a blank check to fund 100% of costs in 
perpetuity for a law enforcement tool designed for the Commission that 
has not been authorized by Congress.\934\ The commenter also stated 
that requiring the Participants to build ``a multi-billion dollar 
enforcement tool'' is beyond the scope of Section 11A's authorization 
to the Commission to require SROs to act jointly or facilitate the 
development of a national market system.\935\ Another commenter stated 
that the Commission has directed the development of CAT to supplement 
the government's surveillance program while the Funding Proposal 
effectively places all or most of the costs of the CAT on the Industry 
Members, who have no voice in its control or development.\936\ The 
commenter states that these costs are essentially a tax on the industry 
from an agency and should require Congressional oversight.\937\ 
Additionally, one commenter suggested the treatment of the CAT budget 
in terms of accounting and transparency as a Commission system, and a 
cap on the budget for CAT which, if exceeded, would trigger 
Congressional budget oversight.\938\
---------------------------------------------------------------------------

    \934\ See Citadel July Letter at 29.
    \935\ Id. at 28.
    \936\ See FIA Letter at 3.
    \937\ Id.
    \938\ See MMI July Letter at 2, 4.
---------------------------------------------------------------------------

    In response to recent comments expressing concern that the Industry 
Member allocation would raise constitutional issues,\939\ CAT LLC 
stated that the first commenter to raise this issue had never once 
before challenged the constitutionality of Rule 613 or the CAT NMS 
Plan.\940\ CAT LLC stated ``SIFMA's strategic decision to inundate the 
Commission with these arguments--which directly contradict its prior 
statements that industry contributions are `justifiable under the 
Exchange Act'--just two days before a scheduled SEC Open Meeting to 
consider the Funding Proposal suggests their ultimate strategy is to 
delay the Commission's review and approval of any funding model that 
would require the industry to contribute to the funding of the CAT.'' 
\941\ CAT LLC urged the Commission to not let the commenter further 
delay a decision on the Proposed Amendment by filing comments that it 
could have submitted years before.\942\ CAT LLC also noted that, 
despite the commenter's argument that requiring Industry Members to 
contribute to CAT costs was a constitutional takings problem, the 
commenter had suggested a funding model for the CAT based on a 50%-50% 
allocation of costs divided among Participants and Industry

[[Page 62672]]

Members.\943\ CAT LLC stated that regardless of how this issue is 
resolved, the Participants should be able to recover their investment 
in CAT because Rule 613 and the CAT NMS Plan contemplate Industry 
Member contributions to CAT funding.\944\
---------------------------------------------------------------------------

    \939\ See SIFMA June 2023 Letter at 7-9; Citadel July Letter at 
28-29; FIA Letter at 3; Virtu Letter at 2.
    \940\ See CAT LLC July 2023 Response Letter at 31.
    \941\ Id. at 32.
    \942\ Id. at 33.
    \943\ Id. at 31. See also SIFMA May 2023 Letter at 2; supra note 
101 and accompanying text.
    \944\ See CAT LLC July 2023 Response Letter at 33.
---------------------------------------------------------------------------

    In characterizing CAT as solely a ``Commission tool used for 
enforcement,'' these comments misunderstand its purposes.\945\ CAT 
serves multiple regulatory purposes for both SROs and the Commission. 
SROs have long had audit trail systems and the SROs themselves, as well 
as the Commission, have long used the market data from those systems to 
oversee the securities markets and fulfill their responsibilities under 
federal securities laws.\946\ In directing the SROs to file an NMS plan 
establishing the CAT, the Commission sought to address shortcomings in 
those existing systems and create an audit trail system that would 
provide both the SROs and the Commission with timely access to a 
comprehensive set of trading data sufficient to oversee modern markets. 
And in approving the CAT NMS Plan, the Commission determined that the 
Plan would substantially improve the ability of both the SROs and the 
Commission to perform these regulatory activities to the benefit of 
investors and markets.\947\
---------------------------------------------------------------------------

    \945\ See SIFMA June 2023 Letter at 8; FIA Letter at 3; Citadel 
July Letter at 28, 29. See also MMI July Letter at 2-4 (categorizing 
the CAT as a Commission system, required by and dictated by the 
Commission that should be funded in the same way as other Commission 
functions).
    \946\ See Securities Exchange Act Release No. 67457 (July 18, 
2012), 77 FR 45722 (Aug. 1, 2012) (``CAT Adopting Release'') at 
45727.
    \947\ See CAT NMS Plan Approval Order, supra note 2, 81 FR at 
84727, 84800.
---------------------------------------------------------------------------

    In this respect, the CAT's regulatory and enforcement utility to 
the SROs as well as the Commission is similar to many of the SROs' 
other self-regulatory functions that are funded in part by Industry 
Members. And this dual purpose is consistent with the long history of 
SRO and Commission oversight of the securities markets. Self-regulation 
in the securities industry predates the securities laws and, in 
enacting the Exchange Act in 1934, Congress formalized this structure, 
purposefully determining to rely on self-regulation as a fundamental 
component of U.S. market and broker-dealer regulation.\948\ Among other 
things, Congress determined that effectively regulating the inner-
workings of the securities industry at the federal level was cost 
prohibitive and inefficient.\949\ And industry participants preferred 
the less invasive regulation by their peers to direct government 
regulation.\950\ Congress and the Commission have repeatedly reaffirmed 
that decision in the years since.\951\ And Courts have repeatedly 
affirmed the constitutionality of this system of self-regulation.\952\ 
As contemplated by Congress, the SROs have also long funded their 
frontline responsibility to supervise their members' compliance with 
their own rules and the federal securities laws, subject to Commission 
oversight, through fees on those members.\953\ The participation of 
Industry Members in the funding of CAT is no different.
---------------------------------------------------------------------------

    \948\ See Securities Exchange Act Release No. 50700 (Nov. 18, 
2004), 69 FR 71255 (Dec. 8, 2004) (``Concept Release Concerning 
Self-Regulation'').
    \949\ Id., citing S. Rep. No. 1455, 73d Cong., 2d Sess. (1934); 
H.R. Doc. No. 1383, 73d Cong., 2d Sess. (1934); S. Rep. No. 1455, 
73d Cong., 2d Sess. (1934).; see also S. Rep. No. 94-75, 94th Cong., 
1st Sess. 7, II (1975) (stating that a principal reason for 
retaining a self-regulatory regime was the ``sheer ineffectiveness 
of attempting to assure [regulation] directly through the government 
on a wide scale'')
    \950\ See Concept Release on Self-Regulation, supra note 948, 69 
FR at 71256-57.
    \951\ See e.g., Exchange Act Amendments of 1975, Pubic Law 29, 
89 Stat. 97 (1975); 1961-1963 Special Study of Securities Markets. 
Securities and Exchange Commission, Report of Special Study of 
Securities Markets, (``Special Study''), H.R. Doc. No. 95, 88th 
Cong., 1st Sess. (1963) and Market 2000: An Examination of Current 
Equity Market Developments, Division of Market Regulation, U.S. 
Securities and Exchange Commission (January 1994) (``Market 2000 
Report'').
    \952\ See Todd & Co. v. SEC, 557 F.2d 1008, 1012-13 (3d Cir. 
1977); First Jersey Sec., Inc. v. Bergen, 605 F.2d 690, 697 (3d Cir. 
1979); Sorrell v. SEC, 679 F.2d 1323, 1325-26 (9th Cir. 1982); R.H. 
Johnson & Co. v. SEC, 198 F.2d 690, 695 (2d Cir. 1952); see 
generally Oklahoma v. United States, 62 F.4th 221, 229 (6th Cir. 
2023).
    \953\ See Concept Release Concerning Self-Regulation, supra note 
948, 69 FR at 71268-69, citing Exchange Act Section 6(b)(4), 15 
U.S.C. 78f(b)(4); Exchange Act Section 15A(b)(5), 15 U.S.C. 78o-
3(b)(5); Exchange Act Section 15A(b)(2) and 6(b)(1) 15 U.S.C. 78o-
3(b)(2) and 78f(b)(1).]
---------------------------------------------------------------------------

    The assertion by commenters that the funding of the CAT violates 
the Appropriations Clause or other constitutional limitations thus 
lacks merit. The funding of an initiative, such as CAT, that has 
utility to both the SROs and the Commission does not implicate the 
Appropriations Clause in the manner that has been questioned in 
courts.\954\ As the Supreme Court has stated, that clause ``means 
simply that no money can be paid out of the Treasury unless it has been 
appropriated by an act of Congress.'' \955\ The use of SRO and Industry 
Member funding for a self-regulatory initiative--which, as discussed 
below, falls within the authority provided by Congress--does not 
transgress that principle.
---------------------------------------------------------------------------

    \954\ For these reasons, we disagree with the assertion of 
commenters that the Fifth Circuit's reasoning in Cmty. Fin. Servs. 
Ass'n of Am., Ltd. v. CFPB, 51 F.4th 616, 642 (5th Cir. 2022), cert. 
granted sub nom. CFPB v. Com. Fin. Servs. Ass'n, U.S. (Feb. 27, 
2023), casts doubt on the constitutionality of CAT. The holding in 
that case rested on the court's view that the CFPB's ``perpetual 
self-directed, double-insulated funding structure'' was 
``unprecedented'' for an agency that ``wields vast rulemaking, 
enforcement, and adjudicatory authority.'' See also CFPB v. Law 
Offices of Crystal Maroney, 63 F.4th174, 181-83 (2d. Cir. 2023) 
(disagreeing with Fifth Circuit's reasoning and rejecting challenge 
to CFPB's funding structure).
    \955\ See Cincinnati Soap Co. v. United States, 301 U.S. 308, 
321 (1937); see also Off. Of Pers. Mgmt. v. Richmond, 496 U.S. 414, 
424 (1990) (The Appropriations Clause requires that ``the payment of 
money from the Treasury must be authorized by a statute.'').
---------------------------------------------------------------------------

    Nor does Industry Members' participation in CAT funding implicate 
the Takings Clause. In choosing to participate in the securities 
industry, Industry Members could not have had any ``distinct 
investment-backed expectations'' \956\ that they would not have to 
share in funding regulatory initiatives such as development and 
maintenance of a consolidated audit trail for tracking securities 
trading, the purpose of which is to ``strengthen the integrity and 
efficiency of the markets'' and thus ``enhance investor protection and 
increase capital formation.'' \957\
---------------------------------------------------------------------------

    \956\ See Penn Central Transp. Co. v. New York City, 438 U.S. 
104, 124 (1978).
    \957\ See CAT NMS Plan Approval Order, supra note 2, 81 FR at 
84727.
---------------------------------------------------------------------------

    Finally, the creation of CAT falls within the Commission's 
authority under the Exchange Act.\958\ Pursuant to that Act, each 
national securities exchange and national securities association must 
be organized and have the capacity to comply, and enforce compliance by 
its members, with its rules, and with the federal securities laws, 
rules, and regulations.\959\ And, among other things, the Commission 
has a responsibility to oversee those organizations and to enforce 
compliance by the members of exchanges and associations with the 
respective exchange's or association's rules, and the federal 
securities laws and regulations.\960\ Congress has also charged the 
Commission with ``insur[ing] the maintenance of fair and

[[Page 62673]]

honest markets,'' removing ``impediments to'' and perfecting ``the 
mechanisms of a national market system for securities'' and 
``provid[ing] for regulation and control of'' transactions on 
securities exchanges and the over-the-counter market.\961\ In 
furtherance of these responsibilities, Congress authorized the 
Commission to ``impose requirements necessary to make such regulation 
and control reasonably complete and effective'' \962\ as well as to 
make such rules and regulations ``as may be necessary or appropriate to 
implement the provisions'' of the Exchange Act.\963\
---------------------------------------------------------------------------

    \958\ See 15 U.S.C. 78b, 78c(b), 78e, 78f, 78k-1, 78o, 78o-3; 
cf. Nasdaq Stock Mkt. LLC v. SEC, 38 F.4th 1126, 1131 (D.C. Cir. 
2022) (explaining that Congress granted the Commission `` `broad, 
discretionary powers' to ensure `maximum flexibility' in 
`oversee[ing] the development of a national market system' and 
`implement[ing] its specific components in accordance with the 
findings and . . . objectives' of the legislation,'' quoting S. Rep. 
94-75, at 7 (1975)).
    \959\ See, e.g., Sections 6(b)(1), 19(g)(1) and 15A(b)(2) of the 
Exchange Act, 15 U.S.C. 78f(b)(1), 78s(g)(1), and 78o-3(b)(2).
    \960\ See, e.g., Sections 2, 6(b), 15A(b), and 19(h)(1) of the 
Exchange Act, 15 U.S.C. 78b, 15 U.S.C. 78f(b), 15 U.S.C. 78o-3(b), 
and 15 U.S.C. 78s(h)(1).
    \961\ See Section 2 of the Exchange Act, 15 U.S.C. 78b.
    \962\ Id.
    \963\ Section 23(a)(1) of the Exchange Act.
---------------------------------------------------------------------------

    More recently, Congress also directed the Commission to facilitate 
the establishment of a national market system in accordance with 
specified findings and objectives.\964\ The initial Congressional 
findings were that the securities markets are an important national 
asset that must be preserved and strengthened, and that new data 
processing and communications techniques create the opportunity for 
more efficient and effective market operations.\965\ Congress then 
proceeded to mandate a national market system composed of multiple 
competing markets that are linked through technology, directing the 
Commission to ``use its authority under [the Exchange Act] to 
facilitate the establishment of a national market system,'' including 
``by rule'' ``to authorize or require 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 
regulation a national market system.'' \966\
---------------------------------------------------------------------------

    \964\ Section 11A of the Exchange Act, 15 U.S.C. 78k-1.
    \965\ 15 U.S.C. 78k-1(a)(1).
    \966\ 15 U.S.C. 78k-1(a)(3)(B).
---------------------------------------------------------------------------

    The creation of the CAT was an appropriate exercise of this 
authority. The Commission's task pursuant to the mandate in Section 11A 
has been to facilitate an appropriately balanced market structure that 
promotes competition among markets, while minimizing the potentially 
adverse effects of fragmentation. An appropriately balanced market 
structure also must provide for strong investor protection.\967\ As the 
Commission explained in adopting Rule 613, the creation of a 
consolidated audit trail with the ability to surveil cross-market 
activity had become key to the ability of both the SROs and the 
Commission to perform many of their core regulatory functions in the 
modern iteration of the national market system.\968\ While the SROs and 
the Commission relied on existing audit trails and data in fulfilling 
their regulatory responsibilities prior to CAT, each of those systems 
had its own flaws and drawbacks, and there was a significant disparity 
in the audit trail requirements among the exchanges and FINRA. At the 
same time, the rapid change to fast, electronic markets on which 
trading was dispersed across market centers gave rise to an increasing 
need to a more uniform audit trail with cross-market 
compatibility.\969\ The establishment of the CAT thus enabled the SROs 
and the Commission to more efficiently and effectively perform their 
respective regulatory responsibilities, including to analyze and 
reconstruct market events, monitor market behavior, conduct market 
analysis to support regulatory decisions, and perform surveillance, 
investigation, and enforcement activities.\970\
---------------------------------------------------------------------------

    \967\ See Securities Exchange Act Release No. 61358 (Jan. 14, 
2010), 75 FR 3594 (Jan. 21, 2010) at 3597.
    \968\ See CAT Adopting Release, supra note 946. Indeed, many 
SROs, in commenting on that rule, recognized the essential nature of 
the project. Id. at 45736, quoting Letter from Marcia E. Asquith, 
Senior Vice President and Corporate Secretary, FINRA, and Janet 
McGinness Kissane, Senior Vice President and Corporate Secretary, 
NYSE Euronext, to Elizabeth M. Murphy, Secretary, Commission, dated 
August 9, 2010 (``the evolution of the U.S. equity markets and the 
technological advancements that have recently taken place have 
created an environment where a consolidated audit trail is now 
essential to ensuring the proper surveillance of the securities 
markets and maintaining the confidence of investors in those 
markets.'').
    \969\ See Securities Exchange Act Release No. 62174 (May 26, 
2010), 75 FR 32556 (June 8, 2010) (``CAT Proposing Release''). Even 
prior to proposing the creation of the CAT in 2010, the Commission 
had twice requested comment regarding how best to enhance the 
capability of SROs and the Commission to effectively and efficiently 
conduct cross-market supervision of trading activity. See Securities 
Exchange Act Release No. 47849 (May 14, 2003), 68 FR 27722 (May 20, 
2003) (File No. S7-11-03) (``Intermarket Trading Concept Release'') 
and Concept Release Concerning Self-Regulation.
    \970\ See CAT Adopting Release, supra note 946, 77 FR at 45727; 
see also CAT NMS Plan Approval Order, supra note 2, 81 FR at 84727, 
84738, 84800.
---------------------------------------------------------------------------

    Contrary to one commenter's suggestion, the Supreme Court's major 
questions doctrine is not implicated here. In directing the SROs to act 
jointly to create an accurate, complete, accessible and timely audit 
trail to replace these existing audit trails, the Commission did not 
claim an ``[e]xtraordinary grant[ ] of regulatory authority'' based on 
``vague,'' ``cryptic,'' ``ancillary,'' or ``modest'' statutory 
language.\971\ Nor did it assert authority that falls outside its 
``particular domain.'' \972\ And, while CAT is undoubtedly a large 
database, that is a function of the size of the ``complex, dispersed, 
and highly automated national market system'' \973\ Congress expressly 
charged the SROs and the Commission with overseeing. As detailed above, 
the collection of securities transaction data by the SROs and the 
Commission is an important factor in enabling both to fulfill their 
statutory responsibilities and has a long history. There is no reason 
to question that Congress would have intended for the Commission to 
address the serious shortcomings and regulatory obstacles associated 
with the lack of a consolidated audit trail. And there is therefore no 
basis for dispensing with ordinary principles of statutory construction 
to require express authorization for CAT by Congress.\974\
---------------------------------------------------------------------------

    \971\ West Virginia v. EPA, 142 S. Ct. 2587, 2608-10 (2022) 
(quotation omitted).
    \972\ Alabama Ass'n of Realtors v. HHS, 141 S. Ct. 2485, 2489 
(2021) (per curiam).
    \973\ See CAT Adopting Release, supra note 946, 77 FR at 45723.
    \974\ Contra Biden v. Nebraska, 143 S. Ct. 2355, 2372, 2375 
(2023), 143 S.Ct. 2355, 2372, 2375 (2023).
---------------------------------------------------------------------------

e. Rule 608 and Rule 19b-4
    Certain commenters believe the assessment of CAT fees on Industry 
Members through filings submitted by each exchange under Rule 19b-4 is 
likely inconsistent with Rule 608.\975\ One commenter stated that the 
Commission amended Rule 608 in 2020 to remove the effective-upon-filing 
procedure for NMS plan fees by requiring that NMS plan fees be subject 
to notice and comment and Commission approval prior to becoming 
effective.\976\ The commenter also stated that the 2020 amendment 
specifically contemplates that CAT fees would be subject to Rule 
608,\977\ however the Commission was considering approving a process 
for CAT fees that would not permit a meaningful review opportunity, 
contrary to the Rule 608 amendment.\978\ The commenter acknowledged 
that the CAT NMS Plan provides for Section 19(b) fee filings but also 
stated that (1) the CAT NMS Plan was approved prior to the amendment of 
Rule 608 in 2020 and (2) the CAT NMS Plan is silent about whether 
Section 19(b) fee filings would need to be made after the Operating 
Committee receives approval to assess the fees under Rule 608.\979\ The 
commenter suggested that due to the ``infirmities with the process for 
establishing and assessing CAT Fees

[[Page 62674]]

under the Funding Proposal,'' the Operating Committee must create a new 
funding process consistent with Rule 608 and stated that the Commission 
cannot find that the Proposed Amendment is consistent with the Exchange 
Act.\980\ Another commenter stated that the proposed approach seems 
inconsistent with recent Commission rulemaking to ensure that fee 
filings related to an NMS plan can no longer be effective upon 
filing.\981\
---------------------------------------------------------------------------

    \975\ See SIFMA June 2023 Letter at 4, 9; Citadel July Letter at 
15.
    \976\ See SIFMA June 2023 Letter at 9.
    \977\ Id.
    \978\ Id.
    \979\ Id. at 9, n.45.
    \980\ Id.
    \981\ See Citadel July Letter at 15.
---------------------------------------------------------------------------

    In response to one commenter that stated that the filing of 
Industry Member CAT fees under Rule 19b-4 likely violates Rule 608 of 
Regulation NMS,\982\ CAT LLC stated that it disagreed with the comment 
because the Proposed Amendment complies with Rule 608.\983\ CAT LLC 
stated that Section 11.1(b) of the CAT NMS Plan requires the 
Participants to file Industry Member CAT fees pursuant to Section 19(b) 
of the Exchange Act,\984\ and Section 19(b) permits fees to become 
effective upon filing.\985\ CAT LLC also noted that the funding 
methodology for Participant fees would be established through the 
Proposed Amendment, which was filed in accordance with Rule 608; 
therefore, Participant CAT fees would be adopted in accordance with 
Rule 608.\986\ CAT LLC stated that Industry Member CAT fees would be 
filed pursuant to Rule 19b-4 and those filings would be based on the 
Proposed Amendment, which would have to be approved pursuant to Rule 
608, therefore ``any Industry Member CAT fees will have been subject to 
the same extensive notice and comment process as Participant CAT fees 
and must satisfy the requirements of the Exchange Act.'' \987\
---------------------------------------------------------------------------

    \982\ See SIFMA June 2023 Letter at 9.
    \983\ See CAT LLC July 2023 Response Letter at 30.
    \984\ Id.
    \985\ Id.
    \986\ Id. at 31.
    \987\ Id.
---------------------------------------------------------------------------

    The Commission disagrees with the commenters' position. The filing 
of Industry Member CAT fees under Rule 19b-4 is consistent with the 
structure of the CAT. The CAT NMS Plan functions as a joint agreement 
amongst the SROs who are parties to the CAT NMS Plan. But Industry 
Members are not parties to the Plan and the Plan itself does not bind 
Industry Members. Rather, Rule 608(c) of Regulation NMS requires each 
SRO to enforce compliance by its members with an effective NMS plan of 
which it is a sponsor or a participant.\988\ Additionally, Rule 613(g) 
requires: (1) each SRO plan sponsor to file a proposed rule change to 
require its members to comply with Rule 613 and the CAT NMS Plan 
pursuant to Section 19(b)(2) of the Exchange Act and Rule 19b-4 
thereunder; \989\ (2) each member of an SRO plan sponsor to comply with 
the CAT NMS Plan; \990\ (3) each SRO plan sponsor to agree to enforce 
compliance by its members with the CAT NMS Plan; \991\ and (4) the CAT 
NMS Plan to include a mechanism to ensure compliance with the CAT NMS 
Plan.\992\ Thus, Industry Members' CAT reporting requirements stem from 
rules the Participants put in place for their members pursuant to the 
Section 19(b)(2) rule filing process.\993\
---------------------------------------------------------------------------

    \988\ 17 CFR 242.608(c). See also CAT NMS Plan at Section 3.11 
(requiring each Participant to comply with and enforce compliance, 
as required by Rule 608(c), by its Industry Members with the 
provisions of Rule 613 and the CAT NMS Plan).
    \989\ 17 CFR 242.613(g)(1).
    \990\ 17 CFR 242.613(g)(2).
    \991\ 17 CFR 242.613(g)(3).
    \992\ 17 CFR 242.613(g)(4).
    \993\ See Securities Exchange Act Release No. 80256 (Mar. 15, 
2017), 82 FR 14526 (Mar. 21, 2017).
---------------------------------------------------------------------------

    The amendments to Rule 608 (``Rescission of Effective-Upon-Filing 
Procedure for NMS Plan Fee Amendments''), among other things, rescinded 
Rule 608(b)(3)(i),\994\ a provision that permitted fee changes assessed 
under NMS plans to become effective-upon-filing, and required NMS Plan 
fee amendments to be filed pursuant to Rule 608(b)(1) and (2), thus 
mandating an opportunity for public comment and Commission approval by 
order before the effectiveness of such fees.\995\ Vendors and 
subscribers of market data under the Market Data Plans are subject to 
vendor or subscribers' fees charged by the applicable NMS Plan and 
filed by the NMS Plan using Rule 608. As these vendors and subscribers 
are not parties to the NMS Plans, the mechanism by which fees are 
imposed on them is contractual. Specifically, in order to receive 
market data under the NMS Plans, vendors and subscribers must 
individually enter into a vendor and/or a subscription agreement under 
which they agree to pay fees.\996\ The rescission impacted the way the 
Commission considers fees imposed on vendors and subscribers of market 
data under Market Data Plans since their fees are filed by the NMS 
Plans pursuant to Rule 608.
---------------------------------------------------------------------------

    \994\ 17 CFR 242.608(b)(3)(i).
    \995\ See Securities Exchange Act Release No. 89618 (Aug. 19, 
2020), 85 FR 65470, 65471 (Oct. 15, 2020).
    \996\ See, e.g., UTP Plan Subscriber Agreement, available at 
https://www.utpplan.com/DOC/subagreement.pdf; Second Restatement of 
the Plan Submitted to the Securities and Exchange Commission 
Pursuant to Rule 11Aa3-1 under the Securities Exchange Act of 1934, 
composite as of June 3, 2021, available at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/110000358917/CTA%20Plan%20-%20Composite%20as%20of%20June%203,%202021.pdf, at 
Exhibit C (Form of Vendor Contract); at Exhibit D (Form of 
Subscriber Contracts).
---------------------------------------------------------------------------

    In contrast, all Industry Members who are CAT Reporters are members 
of at least one Participant. Industry Members are bound by the rules of 
the Participant(s) of which they are members. The process for adopting 
rules of a Participant that affect their members is through the Section 
19(b) rule filing process, which includes the ability to adopt 
immediately-effective fees.\997\ Additionally, fees filed by the 
Section 19(b) rule filing process are still subject to public notice 
and comment, and the Commission may suspend and institute proceedings 
on these filings.\998\ For these reasons, the Commission does not 
believe that the Rescission of Effective-Upon-Filing Procedure for NMS 
Plan Fee Amendments impacts the CAT NMS Plan provisions relating to how 
Industry Member fees are filed with the Commission.
---------------------------------------------------------------------------

    \997\ 15 U.S.C. 78s(b)(3)(A).
    \998\ Id. See also 17 CFR 240.19b-4(f)(2). See also supra notes 
192-196 and accompanying text.
---------------------------------------------------------------------------

f. Governance
    One commenter stated that the CAT governance structure is flawed 
because exchange groups with multiple affiliated exchanges have 
``significant influence'' over the Operating Committee and can 
``dictate many CAT-related decisions'' such as the allocation of CAT 
costs.\999\ The commenter further stated that Industry Members lack 
representation on the Operating Committee; therefore, they cannot vote 
on the design, implementation or funding of the CAT.\1000\ The 
commenter stated that the governance structure results in the 
allocation of all CAT costs to Industry Members.\1001\ Additionally, 
the commenter believes the governance structure permits the Operating 
Committee to provide minimal information on the costs to be allocated 
to Industry Members,\1002\ stating that the financial information that 
has been provided by the Operating Committee through audited financial 
statements and an annual financial and operating budget is disclosed in 
broad categories and lacks detail about the key drivers of the costs, 
and that the annual financial and operating budget does not predict 
costs accurately.\1003\ Based on this lack of detail, the commenter 
stated that market participants cannot assess

[[Page 62675]]

whether total CAT costs are reasonable and cannot suggest cost-saving 
alternatives and must rely on the Operating Committee to contain the 
budget.\1004\ The commenter stated, ``[i]t is clearly inequitable to 
compel Industry Members to provide a blank check to fund these 
spiraling costs in perpetuity, without any governance role or any plan 
to contain overall costs,'' \1005\ and that allocating all CAT costs to 
firms without representation ``marginalize[s] cost-related 
considerations.'' \1006\ The commenter also stated that the governance 
structure does not require the Operating Committee or the Commission to 
assess whether the costs of a specific interpretation of the Plan 
outweigh any benefits.\1007\
---------------------------------------------------------------------------

    \999\ See Citadel July Letter at 5, 6.
    \1000\ Id. at 6.
    \1001\ See id.
    \1002\ Id.
    \1003\ Id. at 6-7; id. at n.14.
    \1004\ See Citadel July Letter at 7.
    \1005\ Id. at 2. See also id. at 23 (stating Section 6(b)(4), 
Section 6(b)(5) and Section 6(b)(8) of the Exchange Act do not allow 
a private entity to require Industry Members to provide a blank 
check in perpetuity because this is not an equitable allocation of 
reasonable fees and would greatly harm market competition, 
efficiency and liquidity).
    \1006\ Id. at 7.
    \1007\ Id. See also MMI July Letter at 4 (suggesting 
``[i]ncentivization of cost-consciousness and accountability for SEC 
interpretations and mandates for CAT reporting specifications, 
interpretations, and usage of CAT.'').
---------------------------------------------------------------------------

    The commenter recommended the following enhancements to improve CAT 
governance: (1) each exchange group and national securities association 
should have one vote on the Operating Committee, but will have a second 
vote if ``the exchange group or national securities association has a 
market center or centers that trade more than 15 percent of 
consolidated equity and options market share;'' \1008\ (2) all actions 
related to funding by the Operating Committee should be authorized by 
supermajority vote; \1009\ and (3) Industry Members should have voting 
representation on the Operating Committee commensurate with the costs 
allocated to them.\1010\ The commenter stated that if industry 
representation cannot be achieved through an NMS plan, the plan is not 
an appropriate vehicle for CAT governance.\1011\
---------------------------------------------------------------------------

    \1008\ See Citadel July Letter at 34.
    \1009\ Id. at 3, 34.
    \1010\ Id. See also MMI July Letter at 1, 2 (requesting the 
Commission require Industry Member representation on the Operating 
Committee before approving any funding proposal, with SIFMA acting 
as the broker representative); FIA Letter at 4 (stating that the CAT 
Operating Committee should be reconfigured, with Industry Members 
comprising the percentage of the Committee equivalent to whatever 
cost allocation percentage is eventually allocated to them).
    \1011\ See Citadel July Letter at 34. In response, CAT LLC 
stated that this comment is outside the scope of the Proposed 
Amendment. See CAT LLC July 2023 Response Letter at 31, n.144.
---------------------------------------------------------------------------

    In response to comments objecting to a lack of Industry Member 
voting representation on the Operating Committee and suggesting their 
inclusion based on the proportion of costs allocated to them,\1012\ CAT 
LLC stated that the addition of Industry Member voting representation 
is not consistent with the Exchange Act.\1013\ CAT LLC stated that 
``allowing Industry Members to control CAT LLC as the commenters 
suggest could adversely affect the regulatory objectives of the CAT'' 
\1014\ as Industry Members ``have no statutory obligation to protect 
investors or to act in the public interest, nor do they have any 
regulatory obligation to operate the CAT System in a manner that is 
consistent with the Rule 613 and the CAT NMS Plan.'' \1015\ CAT LLC 
stated that Industry Members can provide input through Plan amendments 
and fee filings and the CAT Advisory Committee.\1016\
---------------------------------------------------------------------------

    \1012\ See FIA Letter at 4; Citadel July Letter at 34; MMI July 
Letter at 2.
    \1013\ See CAT LLC July 2023 Response Letter at 21.
    \1014\ Id.
    \1015\ Id.
    \1016\ Id.
---------------------------------------------------------------------------

    In response to a comment suggesting changes to the allocation of 
Participant voting rights,\1017\ CAT LLC stated that this issue is 
beyond the scope of the CAT funding model. CAT LLC also responded to 
the commenter's suggestion that all funding actions by the Operating 
Committee require a supermajority vote by stating that it disagreed 
with the suggestion because all Operating Committee actions relate in a 
way to CAT costs; therefore, imposing a supermajority requirement could 
undermine governance.\1018\
---------------------------------------------------------------------------

    \1017\ See Citadel July Letter at 34.
    \1018\ See CAT LLC July 2023 Response Letter at 21-22.
---------------------------------------------------------------------------

    Regarding SRO and Industry Member voting rights, the Commission 
does not believe that modification of the voting rights, which the 
Commission considered when it approved the CAT NMS Plan, is within the 
scope of the Proposed Amendment.\1019\ Furthermore, in response to 
those comments suggesting the addition of Industry Members as voting 
members on the operating committee, we note that--in vacating the Order 
Approving the CT Plan--the D.C. Circuit concluded that the inclusion of 
non-SRO representation on the operating committee of the CT Plan was 
inconsistent with Section 11A of the Exchange Act.\1020\ Industry 
Members do have an opportunity to attend meetings of the Operating 
Committee through the CAT Advisory Committee. According to Section 
4.13(d) of the CAT NMS Plan, ``[m]embers of the Advisory Committee 
shall have the right to attend meetings of the Operating Committee or 
any Subcommittee, to receive information concerning the operation of 
the Central Repository (subject to Section 4.13(e)), and to submit 
their views to the Operating Committee or any Subcommittee on matters 
pursuant to [the CAT NMS Plan] prior to a decision by the Operating 
Committee on such matters.\1021\
---------------------------------------------------------------------------

    \1019\ See CAT NMS Plan Approval Order, supra note 2, 81 FR at 
84728-30.
    \1020\ See The NASDAQ Stock Market LLC et al. v. SEC, Case No. 
21-1167, D.C. Cir. (July 5, 2022). 15 U.S.C. 78k-1.
    \1021\ See CAT NMS Plan, supra note 2, at Section 4.13. See also 
17 CFR 242.613(b)(7).
---------------------------------------------------------------------------

g. Miscellaneous
    Certain commenters urged the Commission to address data security 
concerns associated with the CAT.\1022\ One commenter suggested that 
the Commission prioritize finalizing the proposed amendments to the CAT 
NMS Plan to enhance data security.\1023\ Commenters also raised 
concerns that the Commission was considering the Proposed Amendment at 
the same time it is considering modifying certain Commission rules 
governing equity market structure.\1024\
---------------------------------------------------------------------------

    \1022\ See Citadel July Letter at 3, 35; SIFMA June 2023 Letter 
at 2; Virtu Letter at 4.
    \1023\ See Citadel July Letter at 3, 35; see Securities Exchange 
Act Release No. 89632 (Aug. 21, 2020), 85 FR 65990 (Oct. 16, 2020). 
Two other commenters stated that the Commission has failed to 
address data security concerns associated with the CAT. See SIFMA 
June 2023 Letter at 2; Virtu Letter at 4.
    \1024\ See SIFMA June 2023 Letter at 3; Citadel July Letter at 
n.54 and 113; see Exchange Act Release Nos. 96496, 88 FR 5440 (Jan. 
27, 2023) (Regulation Best Execution); 96495, 88 FR 128 (Jan. 3, 
2023) (Order Competition Rule); 96494, 87 FR 80266 (Dec. 29, 2022) 
(Minimum Pricing Increments); 96493, 88 FR 3786 (Jan. 20, 2023) 
(Order Execution Information).
---------------------------------------------------------------------------

    One commenter expressed concern that the Commission would approve 
the Proposed Amendment prematurely without careful consideration.\1025\ 
The commenter also stated that the Commission is ``rushing forward to 
approve the latest proposal without taking advantage of the allotted 
time under the Exchange Act for careful consideration'' and 
``prematurely moving forward'' while simultaneously considering 
revisions of the rules governing equity and options market structure 
and proceeding with other proposals that will impose costs on Industry 
Members.\1026\ The commenter stated that ``[t]he unequitable 
distribution of CAT costs contemplated by the Funding Proposal will 
exacerbate these problems, harming the functioning of U.S. securities 
markets.'' \1027\ The

[[Page 62676]]

commenter further stated that the Commission cannot determine whether 
the proposed allocation of costs is equitable without assessing the 
distribution of costs and benefits under the other pending 
proposals.\1028\
---------------------------------------------------------------------------

    \1025\ See SIFMA June 2023 Letter at 3.
    \1026\ Id. See also Virtu Letter at 4.
    \1027\ See SIFMA June 2023 Letter at 3.
    \1028\ Id.
---------------------------------------------------------------------------

    In response to comments that urged the Commission to prioritize CAT 
data security concerns,\1029\ CAT LLC stated that ``CAT security is of 
paramount importance, and the CAT System is protected by a 
comprehensive information security program required by the CAT NMS Plan 
and overseen by a dedicated CISO, as well as via SEC oversight . . .'' 
\1030\ CAT LLC stated that security concerns should not be used to 
prevent appropriate funding of the CAT, noting that appropriate funding 
can help to ensure the security of CAT Data.\1031\
---------------------------------------------------------------------------

    \1029\ See Citadel July Letter at 35; SIFMA June 2023 Letter at 
2; Virtu Letter at 4.
    \1030\ See CAT LLC July 2023 Response Letter at 33.
    \1031\ Id.
---------------------------------------------------------------------------

    CAT LLC also responded to comments that expressed concern that the 
Commission was considering the Proposed Amendment while also 
considering changes to Commission rules governing equity market 
structure.\1032\ CAT LLC stated that the Commission's consideration of 
its market structure proposals should not impede its decision on the 
Proposed Amendment, which would ensure appropriate funding of the CAT 
as these are different decisions.\1033\
---------------------------------------------------------------------------

    \1032\ See Citadel July Letter at 26, n.112; SIFMA June 2023 
Letter at 3; Virtu Letter at 4.
    \1033\ See CAT LLC July 2023 Response Letter at 34.
---------------------------------------------------------------------------

    In response to the commenter that stated that the Commission would 
be rushing to approve the Proposed Amendment,\1034\ CAT LLC 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,'' \1035\ and that because the current proposal ``differs very 
little from the immediately preceding funding model,'' commenters had 
more than 400 days to comment on the substance of the Proposed 
Amendment.\1036\
---------------------------------------------------------------------------

    \1034\ See SIFMA June 2023 Letter at 3.
    \1035\ See CAT LLC July 2023 Response Letter at 28.
    \1036\ Id.
---------------------------------------------------------------------------

    The CAT data security issues and the costs and benefits of 
unrelated pending equity market structure proposals \1037\ are beyond 
the scope of the Proposed Amendment, which is limited to CAT funding. 
Further, the Commission's ability to consider the proposed amendments 
to the CAT NMS Plan to enhance data security is not impacted by the 
Proposed Amendment, as it is a separate proposal and both are being 
considered in due course.\1038\ Given the time between the Prior 
Funding Model Proposal and the OIP of the Proposed Amendment, the 
Commission has also had ample time for ``careful consideration'' of the 
Executed Share Model as the Proposed Amendment's proposed changes to 
the CAT NMS Plan are closely similar to the changes proposed in the 
Prior Funding Model Proposal,\1039\ as modified by the two partial 
amendments that were filed, respectively, in November 2022 and February 
2023.\1040\ Additionally, the time spent for the Commission's review of 
the Proposed Amendment is consistent with the time permitted by Rule 
608(b) for the Commission to approve or disapprove NMS plan 
amendments,\1041\ for both the Prior Funding Model Proposal (for which 
the Commission extended to 300 days from the date of notice publication 
the date by which the Commission would conclude proceedings to 
determine whether to approve or disapprove the Prior Funding Model 
Proposal),\1042\ and this Proposed Amendment.
---------------------------------------------------------------------------

    \1037\ See supra note 1024.
    \1038\ See supra note 1023.
    \1039\ See supra note 409.
    \1040\ See supra note 410.
    \1041\ 17 CFR 242.608(b).
    \1042\ See Securities Exchange Act Release No. 96725 (Jan. 20, 
2023), 88 FR 5059 (Jan. 26, 2023).
---------------------------------------------------------------------------

IV. Efficiency, Competition, and Capital Formation

    In determining whether to approve a proposed amendment, and whether 
such amendment is in the public interest, Rule 613 requires the 
Commission to consider the potential effects of the proposed amendment 
on efficiency, competition, and capital formation.\1043\ In its 
analysis, the Commission has reviewed the arguments about such effects 
put forth by the Participants and commenters and independently analyzed 
the likely effects of the Proposed Amendment on efficiency, 
competition, and capital formation.\1044\ Several commenters stated 
that, because CAT costs incurred to date are greater than those 
estimated at the time the CAT NMS Plan was approved, the Commission 
should update its economic analysis of that plan. Because that analysis 
was conducted in the process of deciding whether to approve the 
original plan and was appropriately based upon the information 
available to the Commission at the time it made that determination, we 
decline to do so. However, in analyzing the potential impacts of the 
Proposed Amendment on efficiency, competition, and capital formation--
including our discussion of the economic baseline--the Commission has 
supplemented the analysis in the CAT NMS Plan Approval Order with 
additional information learned since the time of that Order. Therefore, 
for the purposes of this analysis, the effects are measured against a 
baseline that recognizes that the Proposed Amendment replaces certain 
provisions of the CAT NMS Plan and the Proposed Amendment also provides 
detail not previously included in the CAT NMS Plan.\1045\ As a result, 
the Commission provides the baseline required to conduct a 
comprehensive analysis of the Proposed Amendment in light of issues 
raised in the Notice and public comments.
---------------------------------------------------------------------------

    \1043\ 17 CFR 242.613(a)(5).
    \1044\ Some commenters stated that the Participants' analysis of 
the effects of the Proposed Amendment on Efficiency, Competition, 
and Capital Formation was lacking analysis and/or information (see, 
e.g., SIFMA June Letter at 4; Citadel July Letter at 2, 11, 12-13, 
and 16) and several commenters made general statements that the 
Proposed Amendment would have negative effects on Efficiency, 
Competition, and Capital Formation (see, e.g., SIFMA June Letter at 
3; Citadel July Letter at 12 and 15). The Commission has 
independently analyzed the Proposed Amendment using information from 
the Participants and commenters as well as additional information as 
indicated.
    \1045\ Some of the conclusions of the Proposed Amendment on 
Efficiency, Competition, and Capital Formation provided by the 
commenters and Participants are assessed relative to alternatives 
rather than the baseline the Commission used in the analysis herein.
---------------------------------------------------------------------------

    Based on its analysis, the Commission believes that the Proposed 
Amendment will involve efficiency gains along some dimensions but will 
likely also involve tradeoffs against other forms of efficiency, could 
negatively alter the competitive position of particular competitors, 
though the fees associated with the Proposed Amendment are unlikely to 
be large enough to affect overall competition, and will result in 
insignificant effects on capital formation.\1046\ These effects are 
discussed below.
---------------------------------------------------------------------------

    \1046\ See supra Section III for a discussion of why the 
Commission is approving the Proposed Amendment.
---------------------------------------------------------------------------

A. Efficiency

1. Baseline
    In the CAT NMS Plan Approval Order, the Commission identified 
certain elements of the Original Funding Model that could have negative 
implications for efficiency and also stated that the significant 
uncertainty in the Original Funding Model could also have implications 
for efficiency.\1047\ In

[[Page 62677]]

consideration of the comment letters submitted in response to the 
Executed Share Model, the Commission recognizes that the Original 
Funding Model would have also resulted in additional inefficiencies. 
Overall, the Original Funding Model could have resulted in negative, 
but likely insignificant, reductions in operational efficiencies, 
skewed incentives for efficiency, and reductions in market 
efficiencies.
---------------------------------------------------------------------------

    \1047\ See CAT NMS Plan Approval Order, supra note 2, 81 FR at 
84882.
---------------------------------------------------------------------------

a. Operational Efficiency
    The tiered structure of the Original Funding Model would also have 
led to uncertainties affecting operational efficiencies of Industry 
Members and Participants. In particular, Industry Members would not 
have known their per-message cost until the end of the month, though 
they would have charged their customers in real time, creating an 
inefficiency. In particular, the Original Funding Model would have 
charged flat fees to Industry Members and Participants in the same 
tiers (``Original CAT Fees''). Thus, Industry Members with message 
traffic near the top of the tier would pay lower fees per message than 
Industry Members in the same tier but with lower message traffic. 
Likewise, Participants with more market share in their tiers would pay 
lower fees per executed share. Even if Industry Members and 
Participants could predict which tier they would be in, passing-through 
fees would involve Industry Members and Participants charging based on 
expected per-message or per-share Original CAT Fees rather than actual 
per-message or per-share Original CAT Fees, which could have been 
higher or lower than expected. This uncertainty creates an operational 
inefficiency in structuring the fee pass-through.
    Also, charging Industry Members a flat fee that depends on their 
message traffic could result in Industry Members, who generally earn 
revenue only for executed orders,\1048\ getting charged for orders that 
do not transact. This could have resulted in certain Industry Members 
paying more in Original CAT Fees than they generated from transactions. 
Further, some Industry Members would have found passing through fees 
only to those whose orders transact operationally more efficient by 
increasing existing fees (or reducing incentives such as payment for 
order flow). These situations would have resulted in transacted orders 
subsidizing the burdens of message traffic (assuming message traffic is 
the only cost driver).
---------------------------------------------------------------------------

    \1048\ See Notice, supra note 7, 88 FR at 17103.
---------------------------------------------------------------------------

    Complexities associated with creating tiers in the Original Funding 
Model would also have created operational inefficiencies. To ensure 
that the CAT NMS Plan covered its costs with the tiered fees, the 
creation of the fee schedule would have involved deciding on the number 
of tiers, estimating how many Industry Members would qualify for each 
tier, estimating how much to charge each tier, and then justifying each 
decision. The potential for disagreements resulting from the complexity 
and the challenges in drafting justifications for such complex 
decisions could have involved a cumbersome and inefficient fee setting 
experience.
b. Incentive Effects
    The Original Funding Model also could have affected efficiency by 
skewing incentives. Because fees to be charged by CAT are based on cost 
recovery, aligning such fees with burdens on CAT could promote 
efficiency by creating incentives to limit costs. If message traffic is 
the only cost driver of CAT, the Original Funding Model created 
incentives for Industry Members to limit costs by limiting their 
unnecessary message traffic,\1049\ but the tiered structure of the 
Original Funding Model would have dampened these incentives, and 
message traffic is not the only cost driver of CAT. Further, the 
uncertainty in the allocations across equities or options and across 
Participants or Industry Members meant that the Original Funding Model 
would have created the risk that the inefficiencies of such allocations 
were less than perfectly aligned with costs. Finally, any pass-throughs 
to Participants' members or the customers of Industry Members could 
have further dampened the incentives for cost efficiency. As a result, 
the Original Funding Model would not have perfectly aligned fees with 
the costs imposed on CAT, limiting the incentives for cost efficiency.
---------------------------------------------------------------------------

    \1049\ See CAT NMS Plan Approval Order, supra note 2, 81 FR at 
84881.
---------------------------------------------------------------------------

    While the Original Funding Model would have set fees for Industry 
Members based on their message traffic, the efficiency benefits were 
unlikely to have been significant. First, its tiered structure would 
have dampened the incentives to reduce the costs of CAT by reducing 
unnecessary message traffic. In particular, the Original Funding Model 
would have assigned Industry Members to tiers based on their message 
traffic. Within a tier, however, all Industry Members would have been 
charged the same flat fee. Thus, an additional message would have been 
free in terms of CAT costs unless it put the Industry Member into a 
higher tier. So, only those Industry Members close to a cutoff would 
have had the incentive to reduce message traffic, and Industry Members 
who expected to be in the top tier would have had no incentive to 
reduce unnecessary message traffic. Further, Industry Members cannot 
reduce message traffic without altering how they handle customer 
orders, which could be counter to their duties, or reducing liquidity, 
which could reduce market efficiency. Therefore, absent evidence of 
significant unnecessary message traffic, the efficiency improvements of 
basing Original CAT Fees on message traffic are unlikely to have been 
significant.
    In addition, since the approval of the CAT NMS Plan, additional 
information about the cost drivers have been made public and suggest 
that message traffic is not the only cost driver.\1050\ In particular, 
a September 2021 report shows that 51% of CAT costs are from the 
``Linker,'' 17% from storage, and 15% from ``Data, Processing, 
Collection, & ETL.'' In addition, the Participants in their response to 
commenters indicated that 75% of CAT costs are the processing and 
storage of CAT data in the cloud.\1051\ The ``Linker'' costs are the 
costs to link order messages across a lifecycle.\1052\ These costs 
involve looking across four days of data and are likely related to 
message traffic. While the report does not separate options messages 
from equities messages, it does indicate that Participant message 
traffic involved in linkage processing is much larger than Industry 
Member message traffic. However, the Commission understands that 
complexity of the order lifecycles is a cost driver within the linkage 
processing, and certain order handling practices of Industry Members, 
such as the use of riskless principal transactions, involve more 
complex linkages than other order handling practices. Indeed, while one 
commenter stated, ``costs are a direct result of the total number of 
messages that CAT Reporters (both Participants and

[[Page 62678]]

Industry Members) send to CAT, the costs of processing and linking such 
messages, and the costs to CAT of providing tools and mechanisms to the 
SEC and SROs to analyze the CAT data,'' \1053\ the processing and 
linking and regulatory use costs are not perfectly aligned with message 
traffic.
---------------------------------------------------------------------------

    \1050\ See CAT Industry Webinar: CAT Costs, supra note 873. The 
Participants stated in this presentation to Industry Members in 
Sept. 2021, that, ``[t]he primary cost drivers for the CAT are 
compute costs (e.g., linker) and storage costs. These costs are 
volume based and have increased significantly each year beyond the 
volume estimate included in the Plan.''
    \1051\ CAT LLC July 2023 Response Letter at 22. For the first 
quarter of 2023, 72.9% of CAT costs are cloud costs (See CAT 
Financial and Operating Budget [bond] CATNMSPLAN).
    \1052\ Id. See also, CAT NMS Plan Approval Order, supra note 2, 
81 FR at 85024-5 for a discussion of linkage requirements.
    \1053\ SIFMA May 2023 Letter at 4.
---------------------------------------------------------------------------

    The Original Funding Model did not indicate how Original CAT Fees 
would be allocated to equities versus options, but this allocation 
decision would have had an effect on efficiency. The options markets 
account for the vast majority of message traffic, but most of the 
options market message traffic is on-exchange message traffic (mostly 
market maker quotes).\1054\ However, option market maker quotes likely 
do not have complex order lifecycles that would drive the costs of the 
linkage processing. Further, the Commission understands that the 
linkage processing of equities orders is generally more complex than 
the linkage processing of options orders. As a result, it is unlikely 
that the Original Funding Model would have successfully matched 
Original CAT Fees with cost burdens without a complex algorithm to 
allocate costs across equities and options.
---------------------------------------------------------------------------

    \1054\ Furthermore, because options market makers do not report 
many of their quotes to CAT, instead sending a quote-sent time stamp 
to options exchanges that is included in the exchanges' CAT data, 
additional option market maker quotes increase the message traffic 
of Participants rather than option market makers and are, thus, not 
counted in the message traffic of Industry Members in the Original 
Funding Model. Consequently, roughly 72% of CAT message traffic 
could only affect Participant fees, which are capped in the Original 
Funding Model, though the Plan does not define the exact cap. See 
CAT NMS Plan Approval Order, supra note 2, 81 FR at 84873.
---------------------------------------------------------------------------

    The Original Funding Model also had the potential to result in a 
lack of incentives for Participants to seek efficient ways to achieve 
the regulatory objectives of CAT.\1055\ In particular, the Original 
Funding Model did not specify the allocation between Industry Members 
and Participants and it could have skewed heavily toward Industry 
Members. If the Original CAT Fees would have offset CAT costs without 
the Participants internalizing those CAT costs, Participants could lack 
the incentive to limit costs. Thus, a lower allocation to Participants 
could reduce Participants' incentives to limit CAT costs.
---------------------------------------------------------------------------

    \1055\ See CAT NMS Plan Approval Order, supra note 2, 81 FR at 
84891-2.
---------------------------------------------------------------------------

    The ability for Participants and Industry Members to pass through 
fees could reduce incentive effects of the Original Funding Model, but 
the Commission believes that Participants and Industry Members would 
still have had some incentives to limit costs. In the CAT Approval 
Order, the Commission recognized that FINRA could pass through its fees 
to its members.\1056\ Other Participants could have also passed through 
their fees to their members, but such pass-throughs could take several 
forms. The Commission understands that Participants, including FINRA, 
have many revenue sources, such as transaction fees, data fees, 
connectivity fees, listing fees, regulatory fees. In fact, because the 
Original Funding Model charged Participants based on their market 
share, the most direct way for Participants to pass through the costs 
would have been to increase fees related to their market share--their 
transaction fees, which are based on a fee schedule set pre-trade. 
Because the per volume CAT fee would have been unknown at the time the 
Participants had to file the transaction fees for such volume, the 
Participants would have internalized the risk of the pass-through fees 
not covering their Original CAT Fees. Likewise, Industry Members who 
pass-through their Original CAT Fees would have had reduced incentives 
to limit CAT costs, but the inability to structure their pass through 
to perfectly align with Original CAT Fees would have forced some 
internalization of costs.
---------------------------------------------------------------------------

    \1056\ Id. at 84853.
---------------------------------------------------------------------------

c. Market Efficiency
    The Original Funding Model could have resulted in market 
inefficiencies, though these inefficiencies were unlikely to be 
significant.\1057\ Several of these inefficiencies derive from the fact 
that the Original Funding Model would have charged Industry Members a 
flat fee according to a tiered fee schedule. An Industry Member's tier 
would have been determined by its message traffic. Because providing 
liquidity, including but not restricted to market making, involves more 
potential message traffic, the Original Funding Model could discourage 
liquidity provision. Discouraging liquidity provision could reduce 
liquidity, particularly in less liquid securities, potentially reducing 
market efficiency. The tiered nature of the Original Funding Model 
reduced the potential reduction in liquidity by flattening the fees, 
but this could create its own inefficiencies if Industry Members alter 
activity to avoid qualifying for a higher tier. The Commission 
concluded in the CAT NMS Plan Approval Order that any changes in 
behavior were unlikely except in those Industry Members near a fee-tier 
cutoff point, and, therefore, these behavior changes would likely not 
have a significant effect on market quality or efficiency.\1058\
---------------------------------------------------------------------------

    \1057\ See CAT NMS Plan Approval Order, supra note 2, 81 FR at 
84879.
    \1058\ Id. at 84879.
---------------------------------------------------------------------------

2. Analysis of the Proposed Amendment
    The Participants provided an analysis of efficiency in the Notice. 
In particular, the Participants state that, ``By providing for the 
financial viability of the CAT, the [Executed Share Model] would allow 
the CAT to provide its intended benefits. For example, the CAT is 
intended to provide significant improvements in efficiency related to 
how regulatory data is collected and used. In addition, the CAT could 
result in improvements in market efficiency by deterring violative 
activity.'' \1059\
---------------------------------------------------------------------------

    \1059\ See Notice, supra note 7, 88 FR at 17115.
---------------------------------------------------------------------------

    The Commission considered whether the Executed Share Model promotes 
efficiency along several dimensions: operational efficiency, incentive 
alignment, and market efficiency. In this analysis, the Commission 
considered both how the Executed Share Model differs from the Original 
Funding Model and the additional details in the Executed Share Model 
not previously included in the CAT NMS Plan. In the analysis below, the 
Commission explains that the Executed Share Model itself will promote 
operational efficiency and market efficiency, trade off some 
efficiencies associated with aligning fees with CAT costs against 
others, and create some efficiency-improving incentives at the expense 
of others. The analysis also recognizes below that some commenters 
stated that the Executed Share Model is less efficient than it could 
be.
a. Operational Efficiency
    The Commission believes that the Executed Share Model presents some 
operational efficiency improvements over the Original Funding Model 
while recognizing that commenters point out that it may not be as 
efficient as other alternatives. The Executed Share Model could improve 
efficiency over the Original Funding Model by providing more certainty 
on potential costs for Industry Members and by reducing the complexity 
of the fees. However, it is not clear that the Executed Share Model 
presents an operational efficiency improvement over the Original 
Funding Model with respect to precision of estimates of expected total 
fees to be collected.
    Relative to the Original Funding Model, Industry Members and 
Participants will be better able to observe their fee per activity, in 
this

[[Page 62679]]

case per share transacted, and can more easily pass all or a portion of 
those fees through to members or customers. Under the Executed Share 
Model, the CAT Fee and Historical CAT Assessments per Executed 
Equivalent Share are known before an order is submitted such that all 
market participants can estimate in advance the fees charged on each 
potential transaction rather than Industry Members only learning about 
their fees per message after the end of the month under the Original 
Funding Model.\1060\ Having more precise information on fee rates helps 
Industry Members and Participants who choose to pass-through these fees 
to create fee schedules for their customers that better reflect their 
costs, resulting in operational efficiencies. In response to the 
commenter who said that Industry Members ``are not set up to track and 
pass-through fees to the client [broker-dealers] that sent them the 
orders that resulted in executions'' \1061\ and other similar 
comments,\1062\ the Commission understands that such Industry Members 
generally have arrangements with client broker-dealers for services 
based on executed shares and these arrangements could include charges 
to cover various fees.\1063\ Further, CAT LLC argues that charging the 
executing brokers as specified in the Executed Share Model is an 
efficient way for CAT LLC to bill Participants and Industry Members as 
it is simple, straightforward, and in-line with existing fee and 
business models.\1064\ They also acknowledge that certain Industry 
Members will have to develop processes to collect pass-through CAT fees 
from clients and describe that the Plan Processor plans to make 
available trade-by-trade data to CAT Executing Brokers for each CAT 
bill, which will facilitate the passing-through of CAT fees.\1065\
---------------------------------------------------------------------------

    \1060\ See supra Section IV.A.1.a for a discussion of how the 
per-message fees would have varied within the flat-fee tiers of the 
Original Funding Model. Also, one commenter stated that the Proposed 
Amendment would afford industry with a ``straightforward rate to be 
applied across buyers and sellers.'' See DASH July Letter at 2.
    \1061\ See SIFMA May 2023 Letter at 5.
    \1062\ See, e.g., SIFMA June 2023 Letter at 2; MMI July Letter 
at 2; Citadel July Letter at 20 and 24; Citadel Letter August 2023 
at 5-6; and Virtu Letter at 4-5. Citadel July Letter at 20 and 24 
also focused specifically on the ability for IMs to pass through 
Historical CAT Assessments, but those fees would also have a fixed 
rate charged to future executed shares, so passing those fees 
through would still represent an efficiency improvement over the 
Original Funding Model.
    \1063\ See supra Section IV.A.1.a for information on current fee 
arrangements based on executed shares. See also CAT LLC July 2023 
Response Letter at 9 and 34.
    \1064\ See CAT LLC July 2023 Response Letter at 3-4.
    \1065\ See CAT LLC July 2023 Response Letter at 9-10.
---------------------------------------------------------------------------

    The Commission believes that the Executed Share Model reduces the 
complexities of the Original Funding Model, improving operational 
efficiency, but that the Executed Share Model may not increase the 
precision in estimating the fees to be collected, thus creating 
uncertainty in its impact on operational efficiency. The Executed Share 
Model will not involve designing a tiered structure that estimates how 
many Industry Members and Participants will qualify for each tier based 
on projections of each's message traffic or market share, coming up 
with cutoffs and flat fees in each tier to cover projected costs, and 
justifying each projection model, tier cutoff, and flat fee. Instead, 
the Executed Share Model involves estimating future volume, dividing 
budgeted costs by the estimated future volume, and justifying the 
estimated future volume model and budgeted costs. Thus, the Executed 
Share Model will be much less complex for Participants to implement. 
However, because the Executed Share Model involves estimating future 
volume and the Commission has observed significant fluctuations in 
volume, the fees actually collected in the Executed Share Model will 
not necessarily match the budgeted costs. Because the Original Funding 
Model had similar uncertainties, the Commission cannot determine if 
this inefficiency is more or less severe for the Executed Share Model.
    The Commission recognizes the inefficiencies pointed out by some 
commenters associated with invoicing CEBBs and CEBSs directly rather 
than using clearing brokers to collect fees.\1066\ Because the Original 
Funding Model allowed for but did not specify the use of clearing 
brokers, this inefficiency is not relative to the baseline but is 
relative to an alternative. The industry's current practice is to 
collect certain regulatory fees from the sell-side clearing broker-
dealer. One commenter stated, ``[c]learing Firms are best suited to 
process the collection of fees as it can occur at trade settlement and 
the cost is ultimately borne by the end beneficiary of each 
transaction. This seems prudent from a logistical and efficiency 
perspective and, in our opinion, also introduces the least financial 
risk to the industry today.'' \1067\ This commenter also made similar 
statements in subsequent comment letters.\1068\ However, as another 
commenter noted, collecting CAT fees from clearing broker-dealers could 
introduce inefficiencies as well.\1069\
---------------------------------------------------------------------------

    \1066\ See DASH January 3 Letter at 1.
    \1067\ Id.
    \1068\ See DASH April Letter at 1; DASH July Letter at 1.
    \1069\ This could result in Industry Member CAT fees being borne 
by clearing broker-dealers. The SIFMA May 2023 Letter said that 
allocating ``CAT Fees to clearing brokers would have led to unfair 
burdens on them and could have resulted in them shouldering the 
burden of CAT costs in scenarios in which they could not determine 
which clearing client was responsible for the costs.'' This 
commenter, commenting on the prior funding proposal which originally 
proposed to assess CAT fees on clearing brokers instead of executing 
brokers, stated that clearing brokers would especially have 
difficulty passing on the Past CAT Costs to their clearing clients. 
See Letter from Ellen Greene, Managing Director, Equities & Options 
Market Structure, and Joseph Corcoran, Managing Director, Associate 
General Counsel, SIFMA, to Vanessa Countryman, Secretary, Commission 
(Oct. 7, 2022), at 4-5, available at https://www.sec.gov/comments/4-698/4698-20145239-310561.pdf. This commenter also discussed the 
additional implementation and operational costs the prior funding 
model would impose on clearing broker-dealers. See Letter from Ellen 
Greene, Managing Director, Equities & Options Market Structure, and 
Joseph Corcoran, Managing Director, Associate General Counsel, 
SIFMA, to Vanessa Countryman, Secretary, Commission (June 22, 2022) 
(``SIFMA June 2022 Letter''), at 9, available at https://www.sec.gov/comments/4-698/4698-20132695-303187.pdf. Also, the 
Proposed Amendment requires the collection of CAT fees from both the 
buy and sell side of the transaction. Commenters on the prior 
funding proposal stated that current industry practice does not 
involve clearing broker-dealers collecting fees from the buy-side of 
the transaction, and thus it might require costly implementation 
steps from clearing broker-dealers. See Letter from Kirsten Wegner, 
Chief Executive Officer, Modern Markets Initiative, to Vanessa 
Countryman, Secretary, Commission (June 21, 2022), at 3, available 
at https://www.sec.gov/comments/4-698/4698-20132603-303126.pdf; 
SIFMA June 2022 Letter at 9; see https://www.sec.gov/comments/4-698/4698-20132603-303126.pdf; SIFMA June 2022 Letter at 9. See also 
supra note 58. CAT LLC describes in their response to comments that 
charging clearing brokers would be less efficient than charging 
executing brokers because it would require linking executed shares 
to clearing brokers. They argue that charging executing brokers is 
simple, straightforward, and in-line with existing fee and business 
models. They also describe how CAT LLC is planning to make pass-
through of costs easier, which would also increase operational 
efficiency for Participants and Industry Members. See CAT LLC July 
2023 Response Letter at 3 and 5.
---------------------------------------------------------------------------

b. Incentive Effects
    The Commission recognizes the potential for the Executed Share 
Model to affect incentives and, therefore, either improve or harm 
efficiency. Aligning fees with costs promotes economic efficiency 
because Industry Members and Participants bear the costs they directly 
or indirectly impose on CAT NMS, creating the incentive to limit costs. 
Overall, the Executed Share Model will have inefficiencies related to 
not perfectly aligning with costs, but might not be any more 
inefficient than

[[Page 62680]]

the Original Funding Model. In particular, basing Industry Member fees 
on share volume rather than message traffic could reduce efficiency 
relative to the Original Funding Model, but the efficiency benefits of 
the Original Funding Model would have been dampened by its tiered 
structure. The Commission recognizes that, based on the breadth of CAT 
costs, it is not feasible to calculate the cost burden on CAT of each 
CAT Reporter \1070\ and the Executed Share Model could also have some 
efficiency improvements over the Original Funding Model. The Commission 
also recognizes the potential risks of the Proposed Amendments on not 
incentivizing Participants enough to consider cost efficiency. In 
addition, the Commission considered other incentives as well, but 
believes that the potential magnitude of CAT fees is unlikely to 
significantly affect these efficiencies.
---------------------------------------------------------------------------

    \1070\ See Notice, supra note 7, 88 FR at 17103 (``In light of 
the many inter-related cost drivers of the CAT (e.g., storage, 
message traffic, processing), determining the precise cost burden 
imposed by each individual CAT Reporter on CAT is not feasible.''). 
See also CAT LLC July 2023 Response Letter at 34, where the 
Participants describe that it is difficult to determine the precise 
cost burden imposed by each individual CAT reporter. They state that 
increased trading activity impacts message traffic, data processing, 
storage, and other factors and, thus, correlate with cost burdens 
and that Industry Member activity is generally for the purpose of 
transacting.
---------------------------------------------------------------------------

    Because CAT costs have some relation to message traffic, a fee 
schedule less dependent on message traffic such as the Executed Share 
Model will be less efficient on this dimension. As such, the Executed 
Share Model could create inefficiencies relative to the message-traffic 
based Original Funding Model. Further, the Executed Share Model could 
result in Participants or Industry Members paying different fees across 
transactions despite potential similarities in cost. For example, 
Participants or Industry Members will be charged ten times the fee for 
a 1,000 share transaction than for a 100 share transaction. While 1,000 
share transactions may, on average, have a higher burden on CAT than a 
100 share transaction because such transactions are more likely to 
involve more messages and more complex lifecycles, the burden of a 
1,000 share transaction on CAT versus a 100 share transaction is 
unlikely to be ten times higher. However, the incentive efficiencies of 
the message-traffic based fees in the Original Funding Model would have 
been dampened by several factors,\1071\ including the tiered structure 
of the Original Funding Model and by the fact that message traffic is 
not the only significant cost driver for CAT.\1072\
---------------------------------------------------------------------------

    \1071\ See supra Section IV.A.1.c for further discussion of the 
inefficiencies of the Original Funding Model.
    \1072\ See supra note 1050 and accompanying text for a 
discussion of CAT cost drivers. The biggest cost driver is for 
linking order messages into a lifecycle, followed by storage costs.
---------------------------------------------------------------------------

    One commenter raised other potential inefficiencies related to 
outsized allocations to transactions for retail investors associated 
with those retail investors trading low priced NMS stocks.\1073\ The 
Commission recognizes that such an allocation could discourage brokers 
from servicing retail investors if they cannot pass through all CAT 
costs to investors and/or that retail investors could be paying for a 
large portion of CAT costs. In the Approval Order, the Commission 
recognized that retail investors were likely to bear costs for CAT and 
were beneficiaries of CAT.\1074\
---------------------------------------------------------------------------

    \1073\ See Citadel July Letter at 20. This commenter states that 
trades in stocks with sub $1 prices account for 33% of retail NMS 
stock trading and that rounding fractional shares to 1 share further 
increases the share of CAT costs charged to retail transactions. See 
also Citadel August Letter at 4.
    \1074\ See, e.g., CAT NMS Plan Approval Order, supra note 2, 81 
FR at 84863, 84881, 84888, and 84893 for examples of statements on 
investors bearing the costs of CAT and at 84833 to 84845 for ways 
that investors benefit from CAT.
---------------------------------------------------------------------------

    Further, if the Executed Share Model over-allocates fees to equity 
market transactions relative to options market or OTC equity 
transactions, it will create inefficiency by artificially inflating 
equity transaction costs while artificially decreasing options and OTC 
transaction costs. The Commission has mixed information on whether the 
Executed Share Model will, indeed, over-allocate fees to the equity 
markets. One commenter stated that equity trading volume creates a 
relatively low burden relative to options activity.\1075\ The 
Commission disagrees with this statement. Based on March 2023 public 
market data,\1076\ equities (NMS and OTC) account for approximately 73% 
of the equivalent share volume while options account for approximately 
27%. On the contrary, based on an analysis of March 2023 CAT data, 
equities account for 23% of message traffic while options account for 
77%.\1077\ The message traffic in the options market is driven by 
options market quotes, which are reported by options exchanges. If 
processing and storing CAT messages is a primary cost driver and option 
and equity messages are equally burdensome, aligning fees to costs 
would result in the Participants and Industry Members in the equities 
markets being assessed approximately 23% of the fees, suggesting that 
the Executed Share Model allocation of approximately 73% of the fees 
over-allocates fees to equities.
---------------------------------------------------------------------------

    \1075\ See FINRA April 2023 Letter at note 23. See also Citadel 
August Letter at 4 citing to the FINRA April 2023 Letter.
    \1076\ Calculated using monthly market volume data from Cboe for 
equities: Cboe, US Equities: Historical Market Volume Data, 
available at https://www.cboe.com/us/equities/market_statistics/historical_market_volume/, OCC for options: Options Clearing Corp., 
Market Data: Monthly & Weekly Volume Statistics, available at 
https://www.theocc.com/market-data/market-data-reports/volume-and-open-interest/monthly-weekly-volume-statistics, and FINRA for OTC 
securities: FINRA, Over-the-Counter-Equities: Market Statistics, 
available at https://otce.finra.org/otce/marketStatistics/historicalData. Option contract volume is multiplied by 100 and OTC 
volume is divided by 100 to establish rough estimates of equivalent 
share volume to reported equity transactions.
    \1077\ CAT Plan Participant and Industry Member Report Card 
Monthly Summary Tables, which contain the number of records 
processed into CAT.
---------------------------------------------------------------------------

    However, because equity order linking complexity likely accounts 
for higher costs than option order linking complexity, the higher 
allocation of CAT fees to equity market Participants and Industry 
Members could promote efficiency. The linkage processing costs of CAT 
are three times the storage costs.\1078\ The Commission estimated that 
roughly 90% of CAT Participant message traffic and 72% of total message 
traffic is comprised of options market quotes.\1079\ While option 
market maker quotes account for such a large fraction of message 
traffic and, thus, storage costs, option market maker quotes involve 
lower linkage costs than other messages.\1080\ Indeed, the equities 
market accounted for about 48.4% of the number of linkages processed 
and the number of options linkages processed was a third of the number 
of options messages reported, reflecting less linkage processing for 
many options market maker quotes.\1081\ Additionally, the Commission 
understands that

[[Page 62681]]

equities linkages can be more complex, and thus more costly to process, 
than are options messages. As a result, the Commission disagrees with 
the commenter's assertion that equity trading volume creates a 
relatively low burden relative to options activity.
---------------------------------------------------------------------------

    \1078\ See supra note 1050 and accompanying text for a 
discussion of cost drivers. ``Linker'' accounts for 51% of CAT costs 
while storage accounts for 17%. Data processing, Collection and ETL 
costs are 15%.
    \1079\ Mar. 2023 CAT data. If processing and storing CAT 
messages is a primary cost driver, options exchanges' collective 
8.9% share of CAT costs (compared to equity exchanges' 13.6% share 
and FINRA's 10.8% share) may also appear to inefficiently over-
allocate the Participants' share of CAT costs to equity exchanges. 
However, processing and storage costs combined account for lower 
costs than linkage processing. See id.
    \1080\ See supra Section IV.A.1.b for further discussion of 
option market maker quotes.
    \1081\ Based on Mar. 2023 CAT data containing statistics for 
validations and linkage for files submitted to FINRA CAT, the 
equities market accounted for 1.24 trillion linkages processed on 
1.20 trillion messages reported while the options market accounted 
for 1.33 trillion linkages processed on 4.02 trillion messages 
reported. Most options market maker quotes have only two events in 
their CAT Lifecycle (i.e., quote and quote cancelation) and don't 
require linkage to other CAT events.
---------------------------------------------------------------------------

    The Commission believes that the Executed Share Model presents a 
risk, as the Original Funding Model did,\1082\ that Participants might 
not have the incentive to seek efficient ways to achieve the regulatory 
objectives of CAT. While the Executed Share Model specifies an 
allocation that was unknown in the Original Funding Model, several 
commenters question whether the allocation provides Participants with 
incentives to seek efficiency.\1083\ Commenters also expressed concern 
with rising CAT costs to illustrate the magnitude of this potential 
inefficiency,\1084\ stating that they do not have enough transparency 
on cost drivers to assess whether CAT costs are reasonable,\1085\ that 
no data or estimates regarding future costs were provided,\1086\ and 
that the Proposed Amendment has no mechanism to control or limit the 
budget.\1087\ Some commenters further stated that the ability to pass 
through fees lessens Participants' incentive to control costs.\1088\
---------------------------------------------------------------------------

    \1082\ See supra Section IV.A.1.b.
    \1083\ See, e.g., Citadel July Letter at 1, 5, 6, and 16; 
Citadel August Letter at 2; MMI July Letter at 1-3.
    \1084\ See, e.g., Citadel July Letter at 2, 5, 7-9, 23, and 26-
27; Citadel August Letter at 7-8; FIA PTG at 4-5; FIF/SIFMA at 5. 
One commenter pointed out that CAT costs typically exceed the budget 
by 20% (See Citadel July Letter at 8-9, n.21; Citadel August Letter 
at 7). In addition, one commenter stated that CAT operating costs 
significantly exceed cost estimates in the CAT NMS Plan and recent 
increases in CAT operating costs are not sustainable (See FIF/SIFMA 
Letter at 7-8).
    \1085\ See, e.g., Citadel July Letter at 2, 6-7, 13-14, and 
nn.63, 64; Citadel August Letter at 6-7; FIA PTG at 1 and 4, MMI 
July Letter at 3. In addition, one commenter stated that enhanced 
transparency about CAT costs is necessary, especially for the cloud 
costs (See FIF/SIFMA Letter at 8-9).
    \1086\ See Citadel August Letter at 7.
    \1087\ See, e.g., SIFMA June Letter at 2 and 4; Virtu Letter at 
4; FIF/SIFMA Letter at 5; SIFMA AMG Letter at 3. One commenter (FIF/
SIFMA Letter at 5) pointed out that there is no legal limit to CAT 
costs. One commenter (Citadel August Letter at 7) states that there 
are no constraints on costs.
    \1088\ See, e.g., FIA PTG Letter at 2-3; Citadel July Letter at 
16 and 22; and MMI July Letter at 4.
---------------------------------------------------------------------------

    The Participants have stated that the transparency and level of 
detail in the fee filings will impose a discipline on the Participants 
to justify the costs of CAT.\1089\ For example, separating Historical 
CAT Costs from Prospective CAT Costs allows Industry Members more 
insight into the sources of CAT costs underlying the fees and to allow 
Industry Members to comment on the size of such fees. The Participants 
offer explanations for the increases in CAT costs. For example, at the 
adoption of the CAT NMS Plan in 2016, the Commission estimated that the 
CAT would receive 58 billion records per day, but the Participants 
state that as of the fourth quarter of 2022, the CAT receives an 
average 418 billion records per day.\1090\ This highlights the 
difficulty in estimating future costs because costs are directly 
related to trading activity. While the Participants did not provide 
data or estimates regarding future costs, they discussed how costs are 
related to trading activity, which should help Industry Members and 
other market participants form their own estimates.
---------------------------------------------------------------------------

    \1089\ See also, CAT LLC May 2023 Response Letter at 10-11 for a 
discussion of other efforts to manage the costs of CAT. The 
Participants provide a more comprehensive response about cost 
management efforts (See CAT LLC July 2023 Response Letter at 19-20). 
They state that Industry Members will have ample opportunity to 
comment, there will be quarterly budget information and financials, 
there is Commission oversight, and the Participants have ongoing 
cost discipline efforts through a cost management group and other 
efforts. For more details of the activities of the cost management 
group, see CAT LLC July 2023 Response Letter at 22-26.
    \1090\ See CAT LLC July 2023 Response Letter at 22.
---------------------------------------------------------------------------

    The Participants also disagree that they are not incentivized to 
manage costs with a one-third allocation. They argue that currently, 
there is a strong incentive to manage costs while paying 100% of the 
costs and that incentive will continue with a one-third allocation. 
They state that CAT costs are substantial and they will continue to 
receive critical review.\1091\ In response to comments on whether the 
exchanges will pass through all of their fees, some of the equity 
exchange Participants already charge transaction fees at the maximum 
level allowed by regulation, which prevents them from increasing their 
transaction fees to efficiently pass through all CAT fees to their 
members.\1092\ As a result, such equities exchanges will likely 
internalize some of their CAT fees, ensuring some incentive to limit 
costs. In addition, the fact that FINRA is expected to be the heaviest 
regulatory user of CAT suggests that FINRA being responsible for a 
large proportion of CAT costs promotes efficiency.\1093\ Further, the 
Participants argue that the complexity and diversity of Industry 
Members' chosen business models and order handling practices 
contributes substantially to CAT costs because they result in increased 
processing and storage costs.\1094\ In contrast, exchange features are 
not nearly as diverse as the ways in which Industry Members execute 
trades.\1095\ In addition, Industry Members have customers that create 
CAT costs related to FDIDs, CCIDs, and CAIS, while Participants do 
not.\1096\ Further, the Participants state that ``Industry Members have 
far more late data and corrections than Participants'' and that ``[t]he 
linker costs related to late data and corrections are significant.'' 
\1097\ The Commission believes that Industry Members being responsible 
for a large proportion of CAT costs promotes efficiency. This is 
particularly valid for late data and corrections, which is something 
Industry Members can directly control to reduce overall CAT costs.
---------------------------------------------------------------------------

    \1091\ See CAT LLC July 2023 Response Letter at 22.
    \1092\ See Securities Exchange Act Release No. 96494 (Dec. 14, 
2022), 87 FR 80266, tbl.5 (Dec. 29, 2022). While exchanges charge 
several tiers of fees, they will not be able to raise the fees that 
already match the fee cap.
    \1093\ But see FINRA April 2023 Letter: ``it is unclear . . . 
how the outsized allocation to FINRA is based on the extent to which 
FINRA participates in and benefits from the markets. In addition, 
this rationale conflates the costs to create and operate CAT with 
the usage of CAT data.'' The Commission believes that data usage 
does significantly contribute to CAT costs. Query tools, for 
example, account for 7% of CAT costs. See supra note 1050. Note that 
FINRA's allocation in the Original Funding Model (~48% for 
Participants' share of the costs allocated to equities) could have 
been the same or greater than the allocation in the Executed Share 
Model.
    \1094\ See CAT LLC July 2023 Response Letter at 7.
    \1095\ See supra note 1094.
    \1096\ See supra note 1094.
    \1097\ See supra note 1094.
---------------------------------------------------------------------------

    The Commission believes the Executed Share Model trades off 
incentives to inefficiently spend too much against incentives to 
inefficiently spend too little. The Commission does not believe that 
being responsible for CAT costs (or having to internalize CAT costs 
they do not pass through) will result in Participants having the 
incentive to under-spend on regulatory tools.\1098\ Any such under-
spending would not reduce the Participants' self-regulatory duties and 
could result in inefficiencies in their own regulatory costs.
---------------------------------------------------------------------------

    \1098\ The Participants state that they seed to reduce costs 
``without adversely affecting the regulatory goals of the CAT.'' See 
CAT LLC July 2023 Response Letter at 22.
---------------------------------------------------------------------------

    One commenter stated that charging for Historical CAT Costs using 
current volumes bears no relation to the contributions to CAT 
Costs.\1099\ The Commission agrees that the Historical Assessments in 
the Executed Share Model do not provide much incentive for efficiency. 
However, this does not reflect a change in the efficiency from the 
Original Funding Model, because Industry Members cannot retroactively 
change their behavior to reduce CAT

[[Page 62682]]

costs under either model. Indeed, by separating Historical CAT 
Assessments from CAT Fees, the Executed Share Model could allow 
Industry Members and Participants to more clearly assess how their own 
actions could affect the Prospective CAT Costs and their CAT Fees to 
promote improvements to efficiency relative to the Original Funding 
Model.
---------------------------------------------------------------------------

    \1099\ See SIFMA January 2023 Letter at 7.
---------------------------------------------------------------------------

    The Executed Share Model could change other incentives that could 
potentially affect efficiencies, but the expected magnitude of CAT Fees 
will mitigate the impact of such incentive changes. For example, if the 
fees for OTC transactions are not passed on to non-FINRA members, the 
Executed Share Model could discourage FINRA membership by those who 
have a choice. Further, the Historical Fee Rate in Exhibit C of 
$0.0000417950 per Executed Equivalent Share would result in each CEBB 
and CEBS paying $0.00001393167 per Executed Equivalent Share (one third 
of $0.0000417950). A comparison to recent Section 31 fees of $0.00009 
per share to $0.0004 per share \1100\ and average effective half 
spreads of $0.013 \1101\ indicates that the anticipated Historical Fee 
Rate and Fee Rate, assuming the Fee Rate is of a similar magnitude as 
the Historical Fee Rate, are expected to be relatively small.\1102\
---------------------------------------------------------------------------

    \1100\ Section 31 fees are expressed per dollar volume traded. 
Translating this to a per share range involves identifying 
reasonable high and low trade sizes. The lower end of this range 
comes from the 25\th\ percentile in $ trade size of 1,200 and share 
trade size of 71 from the first quarter of 2021. The higher end of 
this range comes from the 75\th\ percentile in $ trade size of 5,200 
and share trade size of 300 from the first quarter of 2021. Section 
31 fees have ranged from $5.10 per $Million to $23.10 per $Million 
from Oct. 1, 2016 to Mar. 1, 2023. The CAT LLC July 2023 Response 
Letter at 18-19 offers two additional comparisons to transaction-
based fees. They state that ``Nasdaq charges various transaction-
based equities fees, ranging from $0.0005 per share to $0.0030 [per 
share].'' They also state that ``Cboe charges an options regulatory 
fee that is $0.0017 per contract, and NYSE American charges an 
options regulatory fee of $0.0055.'' Assuming that option contracts 
are for 100 shares of the underlying, this would translate to 
options regulatory fees of $0.000017 and $0.000055 per equivalent 
share.
    \1101\ This is the average share-weighted effective spread 
across more liquid stocks from the first quarter of 2021. More 
liquid stocks were defined as the stocks in the most actively traded 
decile by total daily trading volume. Effective spreads are a 
measure of transaction costs. For each trade, the effective spread 
was calculated as the absolute value of the difference between the 
trade price and the quote midpoint at the time of the trade. Less 
liquid stocks have higher effective spreads, making the CAT fees 
even smaller relative to transaction costs.
    \1102\ See Notice, supra note 7, 88 FR at 17130. In particular, 
Exhibit C sets forth illustrative Historical CAT Assessments. While 
this is an illustrative example and actual Historical CAT 
Assessments may differ, the Commission believes that the Historical 
Fee Rate per equivalent share, will be calculated using the methods 
laid out in the table ``Calculation of Historical CAT Assessment.'' 
Further, the Commission assumes that the example Historical Fee Rate 
is of the approximate magnitude of potential Historical Fee Rates 
because this rate was calculated using actual CAT costs and volume 
estimates grounded in historical volume. While the rate may be 
imprecise for the reasons discussed in Exhibit C, the rate is 
unlikely to be orders of magnitudes larger because the sample fees 
assume two-year collection whereas the Operating Committee could 
choose a longer collection period. While Exhibit C only estimates 
Historical Fee Rates, the Commission does not expect Fee Rates to be 
significantly larger than Historical Fee Rates because Historical 
Fees will cover a longer time period than CAT Fees and will cover a 
broader scope of activities than CAT Fees. Historical Costs include 
costs incurred since the CAT Approval in Nov. 2016 to build, operate 
and maintain CAT up to a certain date and will be spread out over 
two to five years (the estimate was based on spreading it out two 
years). On the other hand, CAT Fees are based on Prospective Costs, 
which are estimates of monthly costs from a certain date forward and 
include costs to operate and maintain CAT. While some commenters 
expressed concern about increasing CAT costs that are much higher 
than those estimated in the 2016 Approval Order (See, e.g., SIFMA 
June Letter at 4; MMI July Letter at 3; and Virtu Letter at 4), some 
of those costs may reflect implementation costs in addition to 
ongoing costs. Once CAT is fully implemented, the Commission expects 
annual operating costs to reflect ongoing costs only. See also CAT 
LLC July 2023 Response Letter at 17 for a comparison and discussion 
of historical and prospective CAT costs. The CAT LLC July 2023 
Response Letter at 18-19 also provides another example of a 
Historical Fee Rate. They add an additional year and consider all 
Historical CAT Costs for prior to 2023 and find that each CEBB and 
CEBS would pay $0.0000142689 per executed equivalent share (one 
third of $0.0000428068). The Historical Fee Rate based in this 
example is close to the Historical Fee Rate in Exhibit C.
---------------------------------------------------------------------------

c. Market Efficiency
    The Commission believes that the Executed Share Model will promote 
market efficiency, but has uncertainty as to the degree of any 
improvement. The Executed Share Model eliminates the disincentives to 
provide liquidity of the Original Funding Model that could have 
resulted in market inefficiencies, including removing the potential for 
perverse incentives near the tier cutoffs.\1103\ Instead of paying 
higher fees with more message traffic, which would discourage liquidity 
providing activity,\1104\ the Executed Share Model charges a fee for 
each Executed Equivalent Share. Because market making and other 
liquidity providing activity tends to have a high ratio of message 
traffic to transactions, the Executed Share Model could be more 
favorable towards providing liquidity than the Original Funding Model. 
Promoting liquidity provision promotes market efficiency. However, 
because the Original Funding Model addressed this disincentive in its 
tier structure, the Commission cannot be certain that the reduction of 
this disincentive would have a significant effect on market efficiency. 
Further, the Commission previously concluded that the effect of 
behavior changes around the tier cutoffs on market efficiency was 
likely not significant.\1105\ As a result, the Commission believes the 
removal of tiers promotes market efficiency but is unable to conclude 
that it will significantly improve market efficiency.
---------------------------------------------------------------------------

    \1103\ See supra Section IV.A.1.a.
    \1104\ Id.
    \1105\ See supra note 1058 and accompanying text.
---------------------------------------------------------------------------

    Some commenters stated that the Proposed Amendments would harm 
liquidity provision and increase costs for investors, thus harming 
market efficiency.\1106\ The Commission recognizes that in charging 
fees only to CEBB and CEBS, the fees will be charged to fewer Industry 
Members than under the Original Funding Model and that market makers 
could be charged a large proportion of those fees. This could increase 
the importance of passing through fees to the ability to spread those 
fees out among more market participants. The Commission believes that 
efficiency improvements to the ability to pass through fees \1107\ will 
help alleviate the risk that CAT fees will harm liquidity provision 
from market makers and market efficiency.
---------------------------------------------------------------------------

    \1106\ See, e.g., MMI July Letter at 2; Citadel July Letter at 
2; Virtu Letter at 5. One commenter stated that the Proposed 
Amendments would disproportionately impact market makers in 
particular (see Citadel July Letter at 2 and Citadel August Letter 
at 4).
    \1107\ See supra Section IV.A.1 for a discussion of pass-through 
efficiency improvements.
---------------------------------------------------------------------------

    Some commenters argued that under the Proposed Amendment all CAT 
fees will ultimately be passed through to investors \1108\ and retail 
investors in particular,\1109\ thereby increasing transaction costs for 
investors and reducing market efficiency. The Commission recognizes 
that CAT fees may be passed through to investors, but the Proposed 
Amendment covers the allocation of CAT fees for operating the CAT among 
Participants and Industry Members and does not address whether Industry 
Members pass through their CAT fees to their customers.\1110\ Further, 
Industry Members may have passed through CAT fees to their customer 
under the Original Funding Model as well. Hence, any impact on market 
efficiency of CAT fees being potentially passed through to investors 
under the Proposed Amendment may not represent a change to the 
baseline. Finally, while Industry Members may pass through CAT fees to 
their customers, the customers also receive a

[[Page 62683]]

benefit from the CAT. The CAT provides more effective oversight of 
market activity, which could increase investor confidence, resulting in 
expanded investment opportunities and increased trading activity.\1111\
---------------------------------------------------------------------------

    \1108\ See SIFMA AMG Letter at 2.
    \1109\ See Virtu Letter at 5.
    \1110\ See supra Section III.A.2.
    \1111\ See supra note 761 and preceding text.
---------------------------------------------------------------------------

B. Competition

    Several commenters stated that the Proposed Amendments present a 
burden on competition.\1112\ The Commission analyzed the impact of the 
Proposed Amendments on the competition for trading services, broker-
dealer services, and regulatory services. The Commission believes the 
Proposed Amendment could negatively alter the competitive position of a 
few types of competitors for trading services and broker-dealer 
services, but the Commission also believes that whether such changes 
will render these markets less competitive overall is uncertain. 
Specifically, the Commission believes that the Executed Share Model 
could provide exchanges with a competitive advantage relative to off-
exchange market makers who internalize in providing trading services. 
Further, the Executed Share Model could provide competitive advantages 
to certain broker-dealer business models over others and could harm the 
competitive position of smaller broker-dealers by putting a strain on 
their net capital.
---------------------------------------------------------------------------

    \1112\ See SIFMA June Letter at 1-2; SIFMA July Letter at 2; 
Virtu Letter at 2 and 3; and Citadel July Letter at 1.
---------------------------------------------------------------------------

1. Baseline
    In the CAT NMS Plan Approval Order, the Commission identified 
certain elements of the Original Funding Model that could have negative 
implications for competition in trading services, broker-dealer 
services, and regulatory services.\1113\ In addition, the Commission 
stated ``the uncertainty regarding how the [Operating] Committee 
allocated the fees used to fund the Central Repository could affect the 
conclusions on competition.'' \1114\
---------------------------------------------------------------------------

    \1113\ See CAT NMS Plan Approval Order, supra note 2, 81 FR at 
84882-84884.
    \1114\ See id. at 84882 n.2800.
---------------------------------------------------------------------------

a. Trading Services
    The market for trading services, which is served by exchanges, 
ATSs, and liquidity providers (internalizers and others), relies on 
competition to supply investors with execution services at efficient 
prices. These trading venues, which compete to match traders with 
counterparties, provide a framework for price negotiation and 
disseminate trading information. The competitors for trading services 
compete on a number of dimensions, such as transaction fees and 
execution quality, and some attempt to attract order flow by paying for 
that order flow or otherwise rebating.
    The market for trading services in options and equities consists of 
24 national securities exchanges, which are all Plan Participants, and 
off-exchange trading venues including broker-dealer internalizers, 
which execute substantial volumes of transactions in equities, and 39 
ATSs, which are not Plan Participants.\1115\ Aside from trading venues, 
exchange market makers provide trading services in the securities 
market. These firms stand ready to buy and sell a security ``on a 
regular and continuous basis at publicly quoted prices.'' \1116\ 
Exchange market makers quote both buy and sell prices in a security 
held in inventory, for their own account, for the business purpose of 
generating a profit from trading with a spread between the sell and buy 
prices. Off-exchange market makers also stand ready to buy and sell out 
of their own inventory, but they do not quote buy and sell 
prices.\1117\
---------------------------------------------------------------------------

    \1115\ See Securities Exchange Act Release No. 61358, 75 FR 3594 
(Nov. 23, 2016) at 3598-3560, (for a discussion of the types of 
trading centers). The number of ATSs includes 34 NMS ATSs from 
https://www.sec.gov/divisions/marketreg/form-ats-n-filings.htm and 5 
OTC ATSs.
    \1116\ See SEC, Market Maker, available at http://www.sec.gov/answers/mktmaker.htm.
    \1117\ See Securities Exchange Act Release No. 96495, 88 FR at 
181 (Jan. 3, 2023).
---------------------------------------------------------------------------

    In the Original Funding Model, the portion of fees allocated to the 
exchanges, FINRA, and ATSs would have been divided among them according 
to market share of share volume and the portion allocated to Industry 
Members would have been divided among them according to message 
traffic, including message traffic sent to and from an ATS.\1118\ The 
Operating Committee would have allocated fees for the equities market 
and options market separately based on market share in each market. The 
Commission concluded that the Original Funding Model could have 
resulted in a competitive advantage for exchanges over ATSs because 
message traffic to and from an ATS would have generated fee obligations 
on the broker-dealer that sponsors the ATS, while exchanges would have 
incurred almost no message traffic fees.\1119\ In addition, the 
Commission recognized uncertainties associated with the allocation of 
fees that could have affected competition, such as the level of fees at 
each tier (though the entities in the smallest activity tier would have 
paid the lowest fees) and whether off-exchange liquidity providers 
would have paid fees similar to similarly-sized ATSs and exchanges. 
Finally, the Commission recognized potentially differential fees across 
market participants, including lower fees for internalizers, which 
could affect competition.\1120\
---------------------------------------------------------------------------

    \1118\ See CAT NMS Plan Approval Order, supra note 2, 81 FR at 
84793.
    \1119\ See id. at 84883.
    \1120\ See id. at 84879.
---------------------------------------------------------------------------

b. Broker-Dealer Services
    For simplification, the Commission presents its analysis as if the 
competition to provide broker-dealer services encompasses one broad 
market with multiple segments even though, in terms of competition, it 
actually may be more realistic to think of it as numerous inter-related 
markets. There are approximately 1,100 broker-dealers that are CAT 
Reporters.\1121\ The competition to provide broker-dealer services 
covers many different markets for a variety of services, including, but 
not limited to, managing orders for customers and routing them to 
various trading venues, holding customer funds and securities, handling 
clearance and settlement of trades, intermediating between customers 
and carrying/clearing brokers, dealing in government bonds, private 
placements of securities, and effecting transactions in mutual funds 
that involve transferring funds directly to the issuer. Some broker-
dealers may specialize in just one narrowly defined service, while 
others may provide a wide variety of services.
---------------------------------------------------------------------------

    \1121\ See Notice, supra note 7, 88 FR at 17104.
---------------------------------------------------------------------------

    The market for broker-dealer services relies on competition among 
broker-dealers to provide the services listed above to their customers 
at efficient levels of quality and quantity. The broker-dealer industry 
is highly competitive, with most business concentrated among a small 
set of large broker-dealers and thousands of small broker-dealers 
competing for niche or regional segments of the market. Broker-dealers 
often compete among each other through commission rates, service 
quality, and service variety and some bundle their services. At 
present, some broker-dealers specializing in individual investors 
charge zero commissions and instead cover costs by receiving payment 
for order flow or charging more for other services. To limit costs and 
make business more viable, small broker-dealers often contract with 
larger broker-dealers or service bureaus to handle certain functions, 
such as clearing and execution, or to update

[[Page 62684]]

their technology.\1122\ Large broker-dealers typically enjoy economies 
of scale over small broker-dealers and compete with each other to 
service the smaller broker-dealers, who are both their competitors and 
their customers.
---------------------------------------------------------------------------

    \1122\ See Securities Exchange Act Release No. 63241 (Nov. 3, 
2010), 75 FR 69791, 69822 (Nov. 15, 2010) (Risk Management Controls 
for Brokers or Dealers with Market Access).
---------------------------------------------------------------------------

    Some broker-dealers may offer specialized services in one line of 
business mentioned above, while other broker-dealers may offer 
diversified services across many different lines of businesses. As 
such, the competitive dynamics within each of these specific lines of 
business for broker-dealers is different, depending on the number of 
broker-dealers that operate in the given segment and the market share 
that the broker-dealers occupy.
    The CAT NMS Plan Approval Order described the Original Funding 
Model as an explicit source of financial obligation for broker-dealers 
and therefore an important feature to evaluate when considering 
potential differential effects of the Plan on competition in the market 
for broker-dealer services.\1123\ The Commission understood that the 
Original Funding Model should have resulted in the smallest broker-
dealers paying the lowest fees,\1124\ but the Plan did not outline how 
the magnitudes of fees would have differed across the tiers or whether 
the smallest broker-dealers would have paid the highest per-message 
fees. The Commission concluded that, regardless of the differential 
effects of the CAT NMS Plan Funding Model on small versus large broker-
dealers, the CAT NMS Plan Funding Model, in aggregate, would have 
likely not reduced competition in the overall market for broker-dealer 
services.\1125\
---------------------------------------------------------------------------

    \1123\ See CAT NMS Plan Approval Order, supra note 2, 81 FR at 
84885.
    \1124\ See id. at 84884.
    \1125\ See id. at 84887.
---------------------------------------------------------------------------

c. Regulatory Services
    In the CAT Approval Order, the Commission considered the effect of 
the CAT NMS Plan on competition to provide regulatory services.\1126\ 
SROs compete to provide regulatory services in at least two ways. 
First, because SROs are responsible for regulating their members and 
the trading within venues they operate, their regulatory oversight is 
bundled with the operations of their venues. Consequently, for a 
broker-dealer, selecting a trading venue also involves being subject to 
regulatory oversight of the SRO that operates that venue. Second, SROs 
can provide regulatory services for other SROs through the use of 
RSAs.\1127\ In addition, some regulatory activity is coordinated among 
SROs through multiparty 17d-2 agreements.\1128\ FINRA is the primary 
provider of contracted regulatory services. Any new competitors for 
regulatory services would face significant barriers to entry in 
building up the necessary expertise and technical capabilities.\1129\
---------------------------------------------------------------------------

    \1126\ See id. at 84887.
    \1127\ See supra note 320 and accompanying text.
    \1128\ See 17 CFR 240.17d-2.
    \1129\ The Commission stated in the Approval Order that ``CAT 
may reduce barriers to entry for this market'' while acknowledging 
other barriers to entry. See CAT NMS Plan Approval Order, supra note 
2, 81 FR at 84887, note 2849 (describing the barriers to entry 
addressed by CAT). See also Securities Exchange Act Release No. 
95388 (July 29, 2022), 87 FR 49930 (August 12, 2022) at 49961 
(describing the barriers to entry of potential new national 
securities associations more generally).
---------------------------------------------------------------------------

    RSAs are contracts that would not be renegotiated as often as CAT 
Fees would vary, which limits the precision to which FINRA can increase 
the charges on these agreements as a mechanism to pass through its CAT 
Fees. Since the start of the CAT NMS Plan implementation, the 
Commission has not observed a change in the competition for regulatory 
services.
2. Analysis of the Proposed Amendment
a. Trading Services
    The Participants state that, ``the [Executed Share Model] would not 
impose an inappropriate burden on competition,'' arguing that 
transaction-based models for fee recovery are already in place.\1130\ 
The Commission agrees that transaction-based models do offer some 
efficiency benefits over the Original Funding Model,\1131\ but believes 
the Proposed Amendment may provide a competitive advantage to exchanges 
and a competitive disadvantage to executing broker-dealers who 
internalize. The effects on these competitors might not affect the 
overall level of competition because the fees are expected to be 
relatively small.
---------------------------------------------------------------------------

    \1130\ See Notice, supra note 7, 88 FR at 17115.
    \1131\ See supra Section IV.A.2.b and IV.A.2.c for discussions 
of efficiency gains associated with basing CAT fees on shares 
executed rather than message traffic.
---------------------------------------------------------------------------

    The Commission believes that the Proposed Amendment may provide a 
competitive advantage for exchanges over off-exchange trading venues, 
but this advantage may not be large relative to the level of 
competition and relative to the advantages for exchanges in the 
Original Funding Model. In particular, the Executed Share Model will 
allocate higher CAT fee allocations to Industry Members relative to 
Participants, but exchanges, one type of Participant, could be in a 
better position to avoid raising transaction fees to offset their CAT 
fee allocations. Using March 2023 data, the Commission estimates that 
31% of share volume is reported to FINRA trade reporting facilities 
while the remaining 69% is reported by exchanges.\1132\ The Commission 
believes that FINRA's allocation of CAT fees likely will be passed 
through to Industry Members.\1133\ If FINRA's CAT fees are passed 
through to Industry Members, the Commission believes that Industry 
Members could bear 77% of CAT costs,\1134\ assuming that the exchanges 
do not also directly pass-through their CAT fee allocations to their 
members.\1135\ In fact, if the exchanges are able to offset their CAT 
fees in ways other than increasing transaction fees on exchanges, the 
cost to transact on ATSs or directly through broker-dealers will appear 
to increase more in response to CAT fee allocations, providing 
exchanges with a competitive advantage.\1136\ This is particularly 
probable for exchanges who do not rely solely on revenues from 
transaction fees. However, ATSs might be better off relative to 
exchanges under the Executed Share Model than they would have been 
under the Original Share Model, which would have resulted in a 
competitive disadvantage for ATSs.\1137\
---------------------------------------------------------------------------

    \1132\ Calculated using monthly market volume data from CBOE for 
equities, OCC for options, and FINRA for OTC securities. Option 
contract volume is multiplied by 100 and OTC volume is divided by 
100 to establish equivalent share volume to reported equity 
transactions.
    \1133\ See FINRA April 2023 Letter at 7 (``If the Funding Model 
is approved by the Commission, FINRA intends to file a rule change 
to increase member fees simultaneous with the filing of any proposed 
rule change to effectuate the Funding Model.'').
    \1134\ This results from dividing the FINRA allocation (31%) by 
its share of each off-exchange or OTC Executed Equivalent Share, 
three, and then adding the Industry Member share, two-thirds, to the 
result (31% x \1/3\ + \2/3\ = 77%) and ignores what Industry Members 
would pass to investors. Several commenters expressed concerns about 
the competitive effects of Industry Members paying 78-80% of CAT 
fees, assuming 100% FINRA pass through, and potentially more if 
exchanges pass through as well (See, e.g., Virtu Letter at 1-2 and 
4, FIA PTG Letter at 2-3, and Citadel July Letter at 16, 21 and 22). 
The Commission analysis assesses this competition from the ability 
to competitively price transaction services.
    \1135\ If exchanges passed their CAT fees onto their members in 
full, the Industry Members would effectively bear 100% of the CAT 
allocation (ignoring what they would pass to investors).
    \1136\ One commenter stated that the Proposed Amendments will 
result in off-exchange transactions being assessed higher fees than 
on-exchange transactions (See Citadel July Letter at 21).
    \1137\ See supra note 1119 and accompanying text.
---------------------------------------------------------------------------

    The Executed Share Model could increase the costs of 
internalization

[[Page 62685]]

relative to agency order matching (or riskless principal), creating a 
competitive disadvantage for the internalization model, reversing the 
competitive advantage internalizers would have had under the Original 
Funding Model.\1138\ Specifically, off-exchange market makers will be 
assessed at least CEBB or CEBS for their internalizing trades, both 
when trading with non-broker-dealer customers or broker-dealers who are 
not FINRA members and also when internalizing the orders of FINRA 
members or their customers. However, they do not have more than one 
customer to which to directly pass-through this fee. In particular, if 
an exchange were to directly pass-through its CAT Assessments, it could 
split its \1/3\ fee across buyers and sellers, or \1/6\ each (each side 
would also have a \1/3\ CAT assessment as CEBB or CEBS for a total of 
\1/2\). However, for internalizers to directly pass-through their fees 
would mean the internalized customer (whether an Industry Member or 
not) would pay \2/3\ of the fee plus whatever pass-through they pay for 
the FINRA assessment (up to \1/3\). Alternatively, an internalizer 
could also recover CAT assessments by reducing payment for order flow 
or price improvement.\1139\ Any of these alternatives could hurt 
internalizers competitively and create the incentive to not fully pass-
through their fees,\1140\ thus reducing their profit margins. In 
addition, some executing brokers could be charged two-thirds of the fee 
per Executed Equivalent Share when internalizing the orders of 
customers or non-FINRA broker-dealers, though this is likely rare.
---------------------------------------------------------------------------

    \1138\ See supra note 1120 and accompanying text.
    \1139\ See CAT LLC July 2023 Response Letter at 9-10.
    \1140\ One commenter stated that many executing brokers will 
absorb CAT fees (See Virtu Letter at 5). However, the Participants 
argue that the executing brokers may determine to pass their CAT 
fees through to their own customers and thus may not absorb the CAT 
fees (See CAT LLC July 2023 Response Letter at 8-9). Another 
commenter stated that fees charged on proprietary trading cannot be 
passed through (See Citadel July Letter at 19-20; see also Citadel 
August Letter at 3). This latter commenter also stated that the 
potential to pass through some CAT costs does not alleviate the 
competitive issues (See Citadel July Letter at 19; see also Citadel 
August Letter at 4).
---------------------------------------------------------------------------

    More generally, any market makers, whether on exchange or not, will 
be charged fees for their proprietary trading, and this could create 
competitive advantages in certain situations. The Commission recognizes 
that this likely would result in on-exchange market makers in equities 
being at a competitive disadvantage in having to absorb the fees 
because they do not know the identities of their counter-parties to 
directly pass-through the fees and they do not have other arrangements, 
such as payment for order flow, that could facilitate indirectly 
passing-through fees. Because other liquidity providers who post limit 
orders and quotes to trade would face the same cost, the displayed 
quotations on exchanges could appear to be less competitive overall but 
would likely increase only marginally--enough to cover CAT assessments. 
Such a marginal increase could also help to offset any disadvantage to 
internalization because marginally wider spreads could help 
internalizers avoid reductions in price improvement and payment for 
order flow. In options, however, the Executed Share Model could result 
in exchange members who bring an order to an exchange experiencing a 
competitive advantage in price improvement auctions. In particular, 
because knowing who is responsible for the order allows them to pass-
through their fees, they can bid more competitively in the auctions 
than can exchange members who cannot directly pass-through the fees.
    However, the Commission believes that the magnitude of changes in 
any competitive advantages or disadvantages is unlikely to 
significantly affect order flow because fee differences between 
competing venues are only one of many factors (such as availability of 
non-displayed order types and price impact characteristics of 
transactions on different venues) that broker-dealers consider when 
choosing how to route their order flow. Further, the Executed Share 
Model levels the playing field between exchanges and ATSs relative to 
the Original Funding Model.\1141\ In particular, the assessments and 
any pass-throughs paid by broker-dealers or investors of an execution 
on an ATS could be similar to those of an execution on an exchange, 
depending on how (and whether) ATSs and exchanges choose to pass-
through their fees. Further, the magnitude of the fees in the example 
in Exhibit C are small relative to current transaction costs.\1142\
---------------------------------------------------------------------------

    \1141\ See supra note 1120 and accompanying text for a 
discussion of the effect of the Original Funding Model on ATSs.
    \1142\ See supra notes 1100, 1101, and 1102 and accompanying 
text for analysis of the potential magnitude of fees under the 
Executed Share Model.
---------------------------------------------------------------------------

b. Broker-Dealer Services
    The Commission believes that the Executed Share Model alleviates 
concerns with the Original Funding Model about the allocation of fees 
across small and large broker-dealers. In particular, by charging CEBBs 
and CEBSs based on Executed Equivalent Shares, small broker-dealers are 
less likely to face CAT fees that are outsized relative to their 
revenue, whether they act as executing brokers or are charged pass-
throughs by executing brokers. This could reduce barriers to entry.
    On the other hand, the efficiency gains in passing through fees 
from the Executed Share Model will not be evenly distributed across 
broker-dealer competitive strategies. In particular, where competition 
has driven commissions to zero, the Executed Share Model Fees are more 
easily passed through to customers of broker-dealers who offer a wider 
variety of services than for broker-dealers who do not. These latter 
broker-dealers could be at a competitive disadvantage if they have no 
other option but to absorb such fees or accept reduced payment for 
order flow as a form of pass-through from executing brokers. Because 
more established broker-dealers are more likely to be the ones offering 
a wider variety of services, this effect could increase barriers to 
entry.
    Furthermore, as one commenter stated, there may be capital 
requirements associated with carrying the receivable associated with 
passing-through these CAT fees, which could be burdensome for small and 
medium-sized Executing Brokers.\1143\ According to this commenter, 
these burdens, coupled with FINRA Rule 15c3-1 will significantly impact 
healthy small and medium-sized brokers.\1144\ If so, the Executed Share 
Model could increase barriers to entry in providing broker-dealer 
services. However, whether and how to pass-on the CAT assessments is at 
the discretion of Executing Brokers.\1145\ Further, the economic effect 
of not passing-on fees is equivalent to passing-on fees to clients who 
pay more than 30 days after the Executing Broker has booked the 
receivable.\1146\ Therefore, this issue boils down to the magnitude of 
the potential costs and whether small and medium-sized Executing 
Brokers are treated the same as others. If small and

[[Page 62686]]

medium-sized Executing Brokers have lower trading activity than large 
Executing Brokers, their CAT assessments will be lower as well. 
Further, the per equivalent share fee rate will be the same across all 
Executing Brokers in the Executed Share Model whereas it would not have 
been under the Original Funding Model. In fact, small broker-dealers, 
including Executing Brokers, could be better positioned competitively 
under the Executed Share Model than under the Original Funding model, 
which contained uncertainty in the tier structure and whether small 
broker-dealers would have paid more in assessments than they earn in 
revenues.
---------------------------------------------------------------------------

    \1143\ See DASH January 2023 Letter at 1; DASH April 2023 Letter 
at 1.
    \1144\ See DASH January 2023 Letter at 2.
    \1145\ See supra Section III.A.4 for further discussion of the 
comments on net capital and the Commission's response to those 
comments.
    \1146\ The effect on net capital comes when Industry Members 
record that they expect to receive a pass-through from customers as 
an asset (a ``booked'' receivable) more than 30 days before when 
their customers pay. If the Industry Members book a receivable for 
the pass-through more than 30 days before they collect, they cannot 
count that receivable as an asset toward net capital. If Industry 
Members instead do not pass-through the fees, they will not have a 
receivable at all to count toward net capital.
---------------------------------------------------------------------------

    One commenter stated that the top 10 (20) Industry Members would be 
allocated 50% (70%) of the fees under the Executed Share Model, 
``unduly burdening competition''.\1147\ The Commission has considered 
this concentration and believes that several factors alleviate this 
concern. In particular, the Commission believes that many of these 
Industry Members will pass through much of their fees to client broker-
dealers.\1148\ In addition, the Commission believes that the Industry 
Members that will be charged the most under the Proposed Amendments 
engage in different services than broker-dealers who are charged the 
least or not charged fees at all under the Proposed Amendments.\1149\ 
Therefore, these two sets of broker-dealers are not direct competitors.
---------------------------------------------------------------------------

    \1147\ See Citadel July Letter at 19.
    \1148\ See supra Section IV.A.2.a.
    \1149\ Broker dealers that compete as electronic liquidity 
providers in high-volume securities are likely to have the highest 
executed share volume and thus pay the highest fees. However, these 
broker-dealers compete against each other in providing this service, 
and thus are likely to be similarly burdened by fees under the 
amendment. Broker-dealers that pay the lowest or no fees are 
unlikely to compete in this activity because such activity entails 
high fixed costs in specialized technology and thus are unlikely to 
gain a competitive advantage from the amendment.
---------------------------------------------------------------------------

c. Regulatory Services
    The Commission recognizes that if FINRA were to pass through its 
CAT fees by increasing its fees for RSAs over time, FINRA could be less 
competitive in providing regulatory services.\1150\ This could increase 
the chances either of exchanges conducting more of their own regulatory 
services or of another SRO attempting to compete with FINRA for RSAs. 
Indeed, such potential competitors would not have the burden of having 
to cover CAT Fees for off-exchange and OTC volume. However, because 
RSAs are not renegotiated as often as CAT Fees are likely to change, 
FINRA will likely not attempt to cover all of their share of CAT costs 
by increasing what they charge for RSAs.\1151\ Further, even with 
access to CAT, the barriers to entry in competing for RSAs could limit 
new competitors.
---------------------------------------------------------------------------

    \1150\ The Participants state, ``[b]y treating each Participant 
the same, the CAT fees would not become a competitive issue by and 
among the Participants.'' See Notice supra note 7, 88 FR at 17115. 
See also a similar statement at 17122. This conclusion does not seem 
to address competition to provide regulatory services specifically. 
However, the comments about the treatment of FINRA in, for example, 
the FINRA April 2023 Letter at 2-5 warrants considering this 
competition given FINRA's position in providing RSAs.
    \1151\ See FINRA April 2023 Letter at 7 (``If the Funding Model 
is approved by the Commission, FINRA intends to file a rule change 
to increase member fees simultaneous with the filing of any proposed 
rule change to effectuate the Funding Model.'').
---------------------------------------------------------------------------

C. Capital Formation

    In the CAT NMS Plan Approval Order, the Commission stated that the 
Original Funding Model for CAT was not wholly certain and, thus, stated 
the ``view that there is uncertainty concerning the extent to which 
investors will bear Plan costs and consequently to what extent Plan 
costs could affect investors' allocation of capital.'' \1152\ The 
Participants state that they believe the Proposed Amendment would have 
a positive effect on capital formation due to improvements in investor 
confidence.\1153\
---------------------------------------------------------------------------

    \1152\ See CAT NMS Plan Approval Order, supra note 2, 81 FR at 
84893.
    \1153\ See Notice, supra note 7, 88 FR at 17115.
---------------------------------------------------------------------------

    The Commission recognizes that the Proposed Amendment may have 
negative effects on capital formation if the CAT fees ultimately borne 
by investors are large enough to affect investors' allocation of 
capital or if capital constraints of small or mid-sized broker-dealers 
significantly hinder innovating to find more efficient ways to service 
investors.\1154\ However, the Commission believes that the net capital 
effect would not be significant.\1155\ Further, the additional costs 
borne by investors are likely small relative to current transaction 
costs.\1156\ While recognizing that the Executed Share Model might 
change which investors ultimately bear CAT costs, the Executed Share 
Model might not change the total costs borne by investors relative to 
the Original Funding Model.
---------------------------------------------------------------------------

    \1154\ See, e.g., DASH April 2023 Letter at 1; Virtu Letter at 
2; SIFMA AMG at 2-3.
    \1155\ See supra Section III.A.4 for a response to a commenter's 
concerns regarding net capital and supra Section IV.B.2.b for an 
explanation of why the net capital effects are like to be small.
    \1156\ See supra notes 1100, 1101, and 1102 and accompanying 
text for analysis of the potential magnitude of fees under the 
Executed Share Model.
---------------------------------------------------------------------------

V. Conclusion

    For the reasons discussed, the Commission, pursuant to Section 11A 
of the Exchange Act,\1157\ and Rule 608(b)(2) \1158\ thereunder, is 
approving the Proposed Amendment. 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.\1159\ Rule 608 of Regulation NMS authorizes two 
or more SROs, acting jointly, to file with the Commission proposed 
amendments to an effective NMS plan,\1160\ 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.\1161\
---------------------------------------------------------------------------

    \1157\ 15 U.S.C. 78k-1.
    \1158\ 17 CFR 242.608(b)(2).
    \1159\ See 15 U.S.C. 78k-1(a)(3)(B).
    \1160\ See 17 CFR 242.608.
    \1161\ See 17 CFR 242.608(b)(2).
---------------------------------------------------------------------------

    For the reasons set forth above, the Commission finds that the 
Proposed Amendment meets the required standard.
    It is therefore ordered, pursuant to Section 11A of the Exchange 
Act,\1162\ and Rule 608(b)(2) \1163\ thereunder, that the Proposed 
Amendment (File No. 4-698) be, and hereby is, approved.
---------------------------------------------------------------------------

    \1162\ 15 U.S.C. 78k-1.
    \1163\ 17 CFR 242.608(b)(2).

    By the Commission.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-19525 Filed 9-11-23; 8:45 am]
BILLING CODE 8011-01-P