May 2, 2023

Ms. Vanessa Countryman
Secretary
U.S. Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549

Re: Joint Industry Plan; Notice of Filing of Amendment to the National Market System Plan Governing the Consolidated Audit Trail; File No. 4-698

Dear Ms. Countryman:

The Securities Industry and Financial Markets Association (“SIFMA”)1 respectfully submits this comment letter to the U.S. Securities and Exchange Commission (the “Commission”) in response to the proposal by the self-regulatory organizations (“SROs) to establish a revised funding model (“Funding Proposal”) 2 for the consolidated audit trail (“CAT”) and to establish a fee schedule in accordance with the Funding Proposal. The Funding Proposal replaces and is virtually identical to the prior “Executed Share Model” that was withdrawn by the SROs on March 1, 2023.3 As such, SIFMA continues to have the same concerns with the Funding Proposal that we had with the Executed Share Model, and accordingly, our prior comments on the Executed Share Model apply equally to the Funding Proposal. 4 As set forth below and stated previously regarding the Executed Share Model, the Commission should disapprove the Funding Proposal because the SROs as the CAT NMS Plan Participants (“Participants”) have not demonstrated that the Funding Proposal meets the relevant standards governing SRO fees under the Securities Exchange Act of 1934 (“Exchange Act”).

While SIFMA staff appreciated meeting with the Participants on April 14, 2023 to share our concerns with the proposed definition of “executing broker” in the Funding Proposal, we continue to be disappointed with the SROs’ overall lack of consultation and collaboration with SIFMA and its members on other critical aspects of the Funding Proposal. As we have stated previously, we recognize and accept that Industry Members will be responsible for a portion of CAT costs. Nonetheless, we continue to believe that the process followed by the SROs in connection with establishing the Executed Share Model, as well as the Funding Proposal, has been significantly flawed. In submitting the Funding Proposal, the SROs have continued to follow a problematic path of not meaningfully soliciting industry input on a viable CAT funding model.

We also find it extremely noteworthy that the Financial Industry Regulatory Authority, Inc. (“FINRA”), the not-for-profit self-regulator for the entire brokerage industry, submitted a comment letter on the Funding Proposal urging the Commission to disapprove it.5 In its letter, FINRA asserts that the proposal “fails to adequately address concerns that have been previously raised both by FINRA and industry members regarding, among other things, the inequitable allocation to FINRA of a disproportionate share of the total CAT costs to be borne by the [SROs], the reasonableness and fairness of such an approach, and the impact it would have on FINRA and FINRA members.”6 As the Commission knows, FINRA is funded by Industry Members. As we have stated previously, this Industry Member funding of FINRA should be taken into account in determining whether the proposed allocation of CAT costs between Participants and Industry Members under the Funding Proposal is fair and reasonable. More importantly, it should lead the Commission to disapprove the proposal because it would cause Industry Members to pay not only for their proposed share of CAT costs, but also for FINRA’s share of CAT costs, leading Industry Members to pay in excess of 80% of total CAT cost under the proposal. In addition, as FINRA notes in its comment letter, the Participants’ treatment of FINRA under the proposal is manifestly unfair, as the Participants are proposing to assess FINRA approximately 34% of the Participants’ share of CAT costs. Consistent with our discussion below, we support the points raised by FINRA in its comment letter regarding the proposal’s inequitable allocation of fees and its conclusion that the Commission disapprove it.7

We further request that if and when a CAT funding model is approved, that Industry Members be given ample time to implement any necessary changes to systems and processes for them to be able to capture their portion of CAT costs. We would suggest a minimum of a year for such an implementation period, but as noted, are happy to further discuss this and other issues related to CAT funding directly with the SROs.

I. Executive Summary

As noted, SIFMA continues to have the same concerns with the Funding Proposal that we had with the Executed Share Model. Therefore, all of our prior comments on the Executed Share Model continue to apply to the Funding Proposal. These include our objections to the way in which the Participants propose to handle and allocate Historical CAT Costs, which we continue to believe is inconsistent with the Exchange Act fee standards.8 We are focusing in this letter on certain of our prior comments that need to be further elaborated in light of the Funding Proposal. We believe for the reasons set forth below, as well as in our prior comment letters, that the Commission should disapprove the Funding Proposal as the Participants have not met their burden under the Exchange Act of demonstrating that the proposal (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. Specifically, we believe that:

• The definition of “executing broker” in the proposal leads to the inequitable allocation of fees;
• The Participants’ decision to allocate two-thirds of CAT costs to Industry Members – and in excess of 80% if Industry Member funding of FINRA is considered – is unfair and unreasonable, as well as arbitrary, because the Participants are equally responsible for the complexity of the trading activity in the equity and options markets, complexity that could exponentially increase if the Commission moves forward with its equity auction and new minimum pricing increment proposals;9 and
• CAT continues to need an independent cost review mechanism to help ensure that future CAT Fees are fair and reasonable and to ensure that controls are put into place to guard against unchecked spending.

We address each of these points in more detail below.

 

1 SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s one million employees, we advocate on legislation, regulation and business policy affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org.

2 See Release No. 34-97151 (March 15, 2023), 88 FR 17086 (March 21, 2023). Capitalized terms not otherwise defined in this letter have the same meanings as they do in the CAT NMS Plan and/or the Funding Proposal.

3 See Release No. 34-97212 (March 28, 2023), 88 FR 19693 (April 3, 2023).

4 See (https://www.sec.gov/comments/4-698/4698-20132695-303187.pdf) (“June 2022 Comment Letter”), (https://www.sec.gov/comments/4-698/4698-20145239-310561.pdf) (“October 2022 Comment Letter”), (https://www.sec.gov/comments/4-698/4698-20152795-320485.pdf) (“December 2022 Comment Letter”), and (https://www.sec.gov/comments/4-698/4698-20154753-322976.pdf) (“January 2023 Comment Letter”).

5 See (https://www.sec.gov/comments/4-698/4698-20164063-334005.pdf) (“FINRA Comment Letter”).

6 Id.

7 To be clear, our support of the FINRA Comment Letter relates to points regarding the inequitable allocation of fees and its conclusion that the Commission disapprove the proposal, and not to certain other suggestions such as the one to create a CAT funding model based on the Section 31 fee model.

8 See SIFMA’s June 2022 Comment Letter, October 2022 Comment Letter, and January 2023 Comment Letter. Our prior comments also highlight, among other things, the problems with the Participants’ decision to provide for a reserve of not more than 25% of the CAT budget as part of the budget.

9 See Release No. 34-96495 (December 14, 2022), 88 FR 128 (January 3, 2023) (Order Competition Rule); Release No. 34-96494 (December 14, 2022), 87 FR 80266 (December 29, 2022) (Regulation NMS: Minimum Pricing Increments, Access Fees, and Transparency of Better Priced Orders).