March 5, 2024

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

Re: Consolidated Audit Trail (“CAT”) Fee Filings from the Self-Regulatory Organizations (“SROs”)

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 rule filings by the SROs to establish fees for Industry Members related to certain historical costs of the National Market System Plan Governing the Consolidated Audit Trail (the “CAT NMS Plan” or “Plan”) incurred by the SROs prior to January 1, 2022 (“CAT Fee Filings”).2 For the reason set forth below, we believe that the CAT Fee Filings should be disapproved because they do not meet the requirements governing SRO fees in the Securities Exchange Act of 1934 (“Exchange Act”), which requires such fees to be (i) reasonable, (ii) equitably allocated, (iii) not unfairly discriminatory, and (iv) not an undue burden on competition.3 We strongly agree with the Commission’s decision under Section 19(b)(3)(C) to temporarily suspend the CAT Fee Filings and issue orders instituting proceedings (“OIPs”) to determine whether to approve or disapprove them under the Exchange Act.

The CAT Fee Filings follow the Commission’s approval in September 2023 of the SROs’ revised funding model for the CAT (“CAT Funding Model”),4 which created the framework for the SROs as the CAT NMS Plan Participants (“Participants”) to establish and collect fees from Industry Members to cover both historical and future CAT costs incurred by the Participants. The fees imposed under CAT Fee Filings would be payable to Consolidated Audit Trail, LLC starting in April 2024 based on March 2024 trading activity. The Participants refer to the fees as “Historical CAT Assessment 1” and as noted, they are designed to recoup CAT costs incurred by the Participants prior to January 1, 2022. This would include costs incurred by the Participants during the period from June 22, 2020 to December 31, 2021 in which they were subject to the Commission-imposed financial accountability milestones (“FAMs”) 1 through 3 related to completion of the CAT.5 The Commission imposed the FAMs on the Participants in May 2020 to increase “the Participants’ financial accountability for the timely completion of the consolidated audit trail.”6

As a threshold matter, we continue to believe the CAT Funding Model is not consistent with the Exchange Act and the CAT Fee Filings are further evidence of this. In the CAT Funding Model, the Commission approved and committed to a process in which the reasonableness of CAT fees and their satisfaction of the other Exchange Act fee requirements would be evaluated through rule filings submitted by the SROs under Section 19(b) of the Exchange Act. 7 Yet the process created by the CAT Funding Model is one in which the SROs are allowed to file CAT fees for immediate effectiveness under Section 19(b)(3)(A) of the Exchange Act without any requirement that the Commission affirmatively determine that the fees meet these Exchange Act requirements.8 Unless the Commission suspends the CAT fees and institutes proceedings, there will be no Commission finding in any current or future CAT fee filings that the fees are reasonable, equitably allocated and otherwise meet Exchange Act fee requirements.

The CAT Fee Filings directly demonstrate these flaws with the CAT Funding Model. As permitted under the model, the Participants submitted the filings for immediate effectiveness at the beginning of January 2024, seeking to force Industry Members to build entirely new systems and processes to validate and pay CAT fees by March 1, 2024. In the filings, the Participants are seeking to pass along to Industry Members virtually all historical costs incurred by them through the proposed CAT fees regardless of the reasonableness of passing along such costs. Absent the Commission’s intervention here, Industry Members would have been faced with the impossible task of building new systems and processes to pay such fees in two months without any Commission evaluation of the reasonableness of the fee collection process or the fees themselves.

As described below, the Commission should disapprove the CAT Fee Filings because they do not meet the Exchange Act fee requirements as well as the requirement in Section 11.1 of the CAT NMS Plan that CAT costs be fairly and reasonably shared among the Participants and Industry Members. In particular, the Participants through the CAT Fee Filings:

• Seek to establish an unreasonable fee collection process under which Industry Members are not afforded sufficient time to verify the accuracy and completeness of the CAT billing data, build new systems and processes to validate and pay CAT fees, or evaluate whether the fees meet the Exchange Act fee standards, including whether the fees are reasonable and equitably allocated;
• Seek to impose unreasonable fees on Industry Members by allocating to them inappropriate CAT costs that were (and continue to be) unconstrained by any controls or limits; and
• Have not demonstrated that they have met FAMs 1 through 3, as the Participants are required to do under the CAT Funding Model and CAT NMS Plan prior to collecting any fees for historical CAT costs. Therefore, under the terms of the FAMs, they are not entitled to recover 100% of the costs incurred during the period covered from FAMs 1 through 3.

Each of these points is discussed in more detail below.

A number of these flaws with the CAT Funding Model, as evidenced by the CAT Fee Filings, are subject to litigation in which certain affected groups are challenging the Commission’s approval of the CAT Funding Model in the Eleventh Circuit.9 In SIFMA’s amicus brief in support of vacating the Commission’s approval, we include arguments that the Commission’s imposition of uncontrolled CAT costs on broker-dealers and investors through the approval of the CAT Funding Model is unlawful.10 Given the Eleventh Circuit’s review of the CAT Funding Model on which the CAT Fee Filings are based, SIFMA urges the Commission to halt the process for consideration of the CAT Fee Filings until the fate of the funding model is clear.

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, e.g., Release No. 34-99363 (January 17, 2024), 89 FR 10850 (February 13, 2024) (SR-FINRA-2024-002). This comment letter also applies to the other CAT Fee Filings by the SROs: SR-BOX-2024-03, SR-CboeBYX-2024-002, SR-CboeBZX-2024-004, SR-C2-2024-002, SR-CboeEDGA-2024-002, SR-CboeEDGX-2024-005, SR-CBOE-2024-003, SR-IEX-2024-01, SR-LTSE-2024-02, SR-MEMX-2024-01, SR-EMERALD-2024-01, SR-PEARL-2024-02, SR-BX-2024-002, SR-GEMX-2024-02, SR-ISE-2024-02, SR-MRX-2024-01, SR-Phlx-2024-01, SR-NASDAQ-2024-001, SR-NYSE-2024-03, SR-NYSEARCA-2024-02, SR-YSEAMER-2024-02, SR-NYSECHX-2024-02, and SR-NYSENAT-2024-01.

3 See Sections 6 and 15A of the Exchange Act.

4 See Release No. 34-98290 (September 6, 2023), 88 FR 62628 (September 12, 2023). Capitalized terms not otherwise defined in this letter have the same meanings as they do in the CAT NMS Plan and/or the CAT Funding Model.

5 In May 2020, the Commission amended the CAT NMS Plan (“May 2020 Amendments”) to include financial accountability milestones to incentivize the Participants to complete the CAT in a timely manner. See Release No. 34-88890 (May 15, 2020), 85 FR 31322 (May 22, 2020).

6 Id.

7 In this regard, for example, the Commission noted in its CAT Funding Model approval order that “[o]nce 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.” See CAT Funding Model at 62663. The Commission also noted that “[e]ven 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.” See CAT Funding Model at 62636.

8 This is the completely opposite approach to the one the Commission recently took in amending Rule 608 of Regulation NMS, in which the Commission eliminated the ability of NMS plan participants to file fee changes for fees charged under the plans for immediate effectiveness. See Release No. 34-89618 (August 19, 2020), 85 FR 65470 (October 15, 2020). Now, such fee filings must be published for comment and approved by the Commission before they can become effective.

9 Am. Sec. Ass’n v. SEC, No. 23-13396 (11th Cir.) (filed Oct. 17, 2023).

10 Dkt. 61, Am. Sec. Ass’n v. SEC, No. 23-13396 (11th Cir.) (filed Feb. 15, 2024).