Tuesday, July 25, 2017

SEC halts proposed consolidated audit trail funding after industry objections

By Amanda Maine, J.D.

In response to criticism from several industry members, the SEC has abrogated Amendment No. 2 to its National Market System (NMS) plan governing the Consolidated Audit Trail (CAT) relating to its tiered fee structure for funding the CAT. The Commission sided with funding plan critics who argued that the fee tiers were unfair, burdensome, and did not take into account adequate input from the industry (Release No. 34-81189, July 21, 2017).

CAT fees. To fund the CAT, the SEC implemented a tiered fee system charging fees to execution venues (such as alternative trading systems (ATSs)) based on level of market share, non-ATS activities based on market traffic, and CAT reporters with the most CAT-related activity (including market share and message traffic). This would be accomplished by Amendment No. 2 to the NMS CAT plan, submitted to the SEC by a number of exchange participants (“Participants”) (including Nasdaq, NYSE, FINRA, and the Chicago Board Options Exchange) to whom the fees would be charged.

Industry objections. The SEC received a number of comment letters from industry members that raised objections to the tiered fee structure and the CAT in general. One commenter disputed that the CAT was even a worthwhile endeavor and duplicative of existing audit trails. Another commentator challenged the imposition of a CAT fee due to the lack of justification for such a fee.

Other commentators disliked that the funding decisions were made without sufficient input from industry members. The existence of possible conflicts of interests about Participants who filed the proposed CAT plan in setting the fees was also brought up in comment letters. Others felt the allocation of fees was unfair and that the methodology used to establish the proposed tiering was inequitable and unreasonable.

As a result of these concerns, the SEC suspended its proposed CAT rules to evaluate whether they should be approved.

Amendment No 2. abrogated. After consideration of the comment letters, the Commission has announced that Amendment No. 2 raises questions as to whether the allocation of total CAT costs recovered between and among industry members and execution venues is reasonable, equitable, and not unfairly discriminatory. The Commission also called into question whether the determination to place execution venues for OTC equity securities in the same tier structure as those for NMS stocks would result in an undue or inappropriate burden on competition.

Accordingly, the Commission found that it was appropriate in the public interest and to the maintenance of fair and orderly markets to abrogate Amendment No. 2. The Participants may refile Amendment No. 2 pursuant to Exchange Act Section 11A and Rule 608 of Regulation NMS.

The release is No. 34-81189.

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