I. Introduction

On December 9, 2024,^[1] Financial Information Forum (“FIF”) requested that the Securities and Exchange Commission (“Commission” or “SEC”) extend temporary conditional exemptive relief, pursuant to its authority under section 36(a)(1) of the Securities Exchange Act of 1934 (“Exchange Act”) ^[2] and Rule 608(e) of Regulation NMS under the Exchange Act,^[3] related to the requirement set forth in Appendix D, section 3 of the national market system plan governing the consolidated audit trail (“CAT NMS Plan”) ^[4] that the consolidated audit trail (“CAT”) “must be able to create the lifecycle between . . . [c]ustomer orders to `representative' orders created in firm accounts for the purpose of facilitating a customer order ( e.g., linking a customer order handled on a riskless principal basis to the street-side proprietary order).” ^[5] For the reasons set forth below, the Commission has determined to grant FIF's request for a six-month extension of the temporary conditional exemptive relief previously provided by the Commission with respect to the above-described requirement set forth in Appendix D, section 3 of the CAT NMS Plan for representative order scenarios in which Industry Members do not have a systematic or direct link between their order management systems and execution management systems.

II. Discussion of the Request for Relief

On July 18, 2012, the Commission adopted Rule 613 of Regulation NMS, which required national securities exchanges and national securities associations (“Participants”) ^[6] to jointly develop and submit to the Commission a national market system plan to create, implement, and maintain the CAT.^[7] The goal of Rule 613 was to create a modernized audit trail system that would provide regulators with timely access to a comprehensive set of trading data, thus enabling regulators to more efficiently and effectively analyze and reconstruct market events, monitor market behavior, conduct market analysis to support regulatory decisions, and perform surveillance, investigation, and enforcement activities. On November 15, 2016, the Commission approved the national market system plan required by Rule 613—the CAT NMS Plan.^[8]

On December 16, 2020, the Commission issued an exemptive relief order regarding the implementation of the CAT NMS Plan (“First Order”).^[9] This order granted temporary ( printed page 8079) conditional exemptive relief from several requirements set forth in the CAT NMS Plan, including the requirement set forth in Appendix D, section 3 of the CAT NMS Plan that the CAT “must be able to create the lifecycle between . . . [c]ustomer orders to `representative' orders created in firm accounts for the purpose of facilitating a customer order ( e.g., linking a customer order handled on a riskless principal basis to the street-side proprietary order).” ^[10] This relief was initially granted until July 31, 2023.^[11]

On July 8, 2022, the Commission issued a new exemptive relief order (“Second Order”),^[12] which superseded the First Order and modified and/or clarified certain aspects of the First Order. The Second Order granted temporary conditional exemptive relief until July 31, 2024, from the above-described linkage requirement set forth in Appendix D, section 3, “for representative order scenarios in which Industry Members do not have a systematic or direct link between their order management systems and execution management systems.” ^[13] The Commission subsequently issued an order (“Third Order”), on May 19, 2023, further extending such exemptive relief until January 31, 2025.^[14] This relief was superseded by a new order issued by the Commission on November 2, 2023 (“Fourth Order”),^[15] which was intended to mirror the temporary conditional exemptive relief granted by the Third Order (and the Second Order) with respect to the requirements set forth in Appendix D, section 3 of the CAT NMS Plan regarding lifecycle linkages between customer orders and representative orders for scenarios in which Industry Members do not have a systematic or direct link between their order management systems and execution management systems.^[16] The Fourth Order did not extend the temporary conditional exemptive relief beyond the time period provided by the Third Order.^[17]

FIF requests that the Commission extend the previously granted temporary conditional exemptive relief until July 31, 2025.^[18]

FIF states that the Participants, at the direction of the Commission, will “remove from the CAT system the ability for industry members to report certain flags on Order Fulfillment events (specifically, the `YE' and `YP' flags) in lieu of reporting linkage to specific representative orders” after January 31, 2025.^[19] FIF states that FIF and its members have demonstrated the “ongoing focus of industry members in complying with their CAT reporting obligations” and have devoted “significant resources . . . over many years towards such compliance.” ^[20] Nevertheless, FIF suggests that it may be difficult or impossible for Industry Members to comply with the requirement to report linkages for certain scenarios, which it states will be required as of February 1, 2025.^[21] “In some scenarios,” FIF states that “no representative order exists, and thus it is not possible for industry members to provide the linkage to specific representative orders that will be required as of February 1, 2025.” ^[22] In other scenarios, FIF states that “industry members do not maintain this linkage in their books and records.” ^[23] Finally, FIF states that there are scenarios in which “the CAT system does not provide a method to provide linkage to a specific order.” ^[24]

If Industry Members cannot use the “YE” and “YP” flags to report certain trading scenarios and/or must report the information necessary for FINRA CAT to create lifecycle linkages between customer orders and representative orders, FIF states that Industry Members “will be faced with the choice of either (i) submitting large numbers of Order Fulfillment events that the CAT system will reject and that will not be repairable, or (ii) abandoning certain common existing trading workflows.” ^[25] FIF further states its view of the potential harms that could flow from the expiration of the existing exemptive relief:

For example, it is a common workflow for industry members to trade as a principal against customer orders without the industry member creating a firm order. This workflow will no longer be possible if the flags referenced above are removed from CAT because a firm will not be able to report Order Fulfillments to CAT when the firm fulfills is `Manning' obligation for this workflow. Conversely, if industry members submit large numbers of Order Fulfillments that the CAT system will reject, this will present a significant processing and workflow challenge for the CAT system, the regulators and industry members as large numbers of rejected and unsubmitted CAT events pile-up.^[26]

FIF states that its members have further identified for Commission staff, the Participants, and FINRA CAT the “significant challenges with implementing certain CAT linkage requirements relating to representative orders and order fulfilments” in presentations ^[27] and previous exemptive relief requests that were submitted to the Commission in March 2024 and July 2024.^[28] FIF therefore requests an extension of the current exemptive relief to identify long-term reporting solutions for the specific trading scenarios set forth in previous exemptive relief requests.^[29]

Section 36(a)(1) of the Exchange Act grants the Commission the authority to “conditionally or unconditionally exempt any person, security, or transaction . . . from any provision or provisions of [the Exchange Act] or of ( printed page 8080) any rule or regulation thereunder, to the extent that such exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors.” ^[30] Rule 608(e) of Regulation NMS similarly grants the Commission the authority to “exempt from [Rule 608], either unconditionally or on specified terms and conditions, any self-regulatory organization, member thereof, or specified security, if the Commission determines that such exemption is consistent with the public interest, the protection of investors, the maintenance of fair and orderly markets and the removal of impediments to, and perfection of the mechanisms of, a national market system.” ^[31]

The Commission agrees that additional time is needed to identify and evaluate appropriate long-term solutions for certain trading scenarios. In developing those solutions, the Commission emphasizes its willingness to consider alternative solutions that achieve the regulatory goals of Rule 613 and the CAT NMS Plan. The Commission therefore determines that the requested extension of the existing exemptive relief is appropriate in the public interest and consistent with the protection of investors under section 36(a)(1) of the Exchange Act, as well as consistent with the public interest, the protection of investors, the maintenance of fair and orderly markets, and the perfection of the mechanisms of a national market system under Rule 608(e) of Regulation NMS.

Specifically, the Commission grants temporary conditional exemptive relief from the requirements set forth in Appendix D, section 3 of the CAT NMS Plan related to lifecycle linkages between customer orders and representative orders,^[32] for representative order scenarios in which Industry Members do not have a systematic or direct link between their order management systems and execution management systems, until July 31, 2025. Such relief is intended to mirror the exemptive relief provided by the Second Order, the Third Order, and the Fourth Order.

III. Conclusion

Accordingly, it is hereby ordered, pursuant to Section 36(a)(1) of the Exchange Act ^[33] and Rule 608(e) under the Exchange Act,^[34] that the above-described temporary conditional exemptive relief be granted.