Self-Regulatory Organizations; Bats BZX Exchange, Inc.; Bats EDGX Exchange, Inc.; BOX Options Exchange LLC; C2 Options Exchange, Incorporated; Chicago Board Options Exchange, Incorporated; Financial Industry Regulatory Authority, Inc.; International Securities Exchange, LLC; Investors Exchange LLC; Miami International Securities Exchange LLC; MIAX PEARL, LLC; The NASDAQ Stock Market LLC; NASDAQ BX, Inc.; NASDAQ PHLX LLC; New York Stock Exchange LLC; NYSE Arca, Inc.; NYSE MKT LLC; Notice of Filing of Amendment No. 1 by Bats BZX Exchange, Inc.; Bats EDGX Exchange, Inc.; BOX Options Exchange LLC; C2 Options Exchange, Incorporated; Chicago Board Options Exchange, Incorporated; Financial Industry Regulatory Authority, Inc.; Investors Exchange LLC; New York Stock Exchange LLC; NYSE Arca, Inc.; NYSE MKT LLC, of Amendment Nos. 1 and 2 by International Securities Exchange, LLC; The NASDAQ Stock Market LLC; NASDAQ BX, Inc.; and NASDAQ PHLX LLC, of Amendment No. 2 by MIAX PEARL, LLC, and of Amendment No. 3 by Miami International Securities Exchange LLC; Order Instituting Proceedings To Determine Whether To Approve or Disapprove the Proposed Rule Changes, as Modified by Amendments Thereto, To Eliminate Requirements That Will Be Duplicative of CAT

I. Introduction

On May 15, 2017, Bats BZX Exchange, Inc. (“Bats BZX”); Bats EDGX Exchange, Inc. (“Bats EDGX”); BOX Options Exchange LLC (“BOX”); C2 Options Exchange, Incorporated (“C2”); Chicago Board Options Exchange, Incorporated (“CBOE”); Financial Industry Regulatory Authority, Inc. (“FINRA”); International Securities Exchange, LLC (“ISE”); Investors Exchange LLC (“IEX”); Miami International Securities Exchange LLC (“MIAX”); MIAX PEARL, LLC (“PEARL”); NYSE Arca, Inc. (“NYSE Arca”); and NYSE MKT LLC (“NYSE MKT”) (n/k/a NYSE American LLC) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) and Rule 19b-4 thereunder, proposed rule changes to eliminate or modify certain rules that require the collection or reporting of information that is duplicative of the information that will be collected by the Consolidated Audit Trail (“CAT”) established pursuant to the National Market System Plan contemplated by Rule 613 of Regulation NMS. On May 22, 2017, the New York Stock Exchange LLC (“NYSE”) filed with the Commission a proposed rule change for the same purpose, and each of NYSE Arca and NYSE MKT filed an additional proposed rule change for the same purpose. On May 26, 2017, the NASDAQ Stock Market LLC (“NASDAQ”) and NASDAQ PHLX LLC (“Phlx”) filed with the Commission proposed rule changes for the same purpose. On May 30, 2017, NASDAQ BX, Inc. (“BX”) filed with the Commission a proposed rule change for the same purpose. In this notice and order, all of these proposed rule changes are referred to collectively as the “Systems Retirement Proposals.” Bats BZX, Bats EDGX, BOX, BX, C2, CBOE, ISE, IEX, MIAX, PEARL, NASDAQ, NYSE, NYSE Arca, NYSE MKT, and Phlx are collectively referred to as the “Exchanges,” and, together with FINRA, are referred to as the “SROs.”

On June 1, 2017, the proposed rule changes submitted by Bats BZX, Bats EDGX, BOX, C2, CBOE, FINRA, IEX, ISE, MIAX, and PEARL; both proposed rule changes submitted by NYSE MKT; and one of the proposed rule changes submitted by NYSE Arca were published for comment in the Federal Register. On June 2, 2017, the proposed rule change submitted by NYSE and the other proposed rule change submitted by NYSE Arca were published for comment in the Federal Register. On June 5, 2017, the proposed rule changes submitted by NASDAQ, BX, and Phlx were published for comment in the Federal Register.

Four comments were submitted to File Number SR-FINRA-2017-013.

On June 22, 2017, each of NASDAQ, BX, ISE, and Phlx filed an amendment to its proposed rule change. On July 14, 2017, the Commission extended the time period for Commission action on all of the Systems Retirement Proposals to August 30, 2017.

On August 24, 2017, BOX submitted Amendment No. 1 to its proposed rule filing, IEX submitted Amendment No. 1 to its proposed rule filing, PEARL submitted Amendment No. 2 to its proposed rule filing, and MIAX submitted Amendment No. 3 to its proposed rule filing. On August 25, 2017, Bats BZX submitted Amendment No. 1 to its proposed rule filing, Bats EDGX submitted Amendment No. 1 to its proposed rule filing, BX submitted Amendment No. 1 to its proposed rule filing, C2 submitted Amendment No. 1 to its proposed rule filing, CBOE submitted Amendment No. 1 to its proposed rule filing, FINRA submitted Amendment No. 1 to its proposed rule filing, ISE submitted Amendment No. 2 to its proposed rule filing, NASDAQ submitted Amendment No. 2 to its proposed rule filing, NYSE submitted Amendment No. 1 to its proposed rule filing, NYSE Arca submitted Amendment No. 1 to each of its proposed rule filings, NYSE MKT submitted Amendment No. 1 to each of its proposed rule filings, and Phlx submitted Amendment No. 2 to its proposed rule filing.

The Commission is publishing this notice and order to solicit comments on the proposed rule changes, as modified by the respective amendments thereto, from interested persons and to institute proceedings pursuant to Section 19(b)(2)(B) of the Act to determine whether to approve or disapprove the proposed rule changes, as modified by the respective amendments thereto.

II. Description of the Proposals, as Modified by Amendments Thereto

As required by the CAT NMS Plan, the Systems Retirement Proposals discuss: (1) The specific standards that will govern when SRO rules and related systems that are duplicative of CAT—including the Order Audit Trail System (“OATS”), the Consolidated Options Audit Trail System (“COATS”), and the Electronic Blue Sheets system (“EBS”)—will be modified or eliminated; (2) whether the availability of data from Small Industry Members in November of 2018 would facilitate duplicative systems retirement; and (3) the feasibility of granting exemptions from reporting to duplicative systems to individual Industry Members whose CAT reporting meets certain accuracy and reliability thresholds.

A. Specific Accuracy and Reliability Standards

1. OATS

FINRA's OATS rules require certain FINRA members to report a variety of data regarding transactions in OTC equity securities and NMS stocks to the system on a daily basis. Several other SROs have their own OATS rules that mirror FINRA's rule or incorporate it by reference. FINRA and the other SROs with OATS rules (the “OATS SROs”) have proposed to delete their OATS rules from their respective rulebooks. As described in more detail below, these deletions will be implemented once CAT Data achieves certain pre- and post-correction error rates and certain qualitative criteria have been met.

In its Systems Retirement Proposal, FINRA stated that it believes that relevant error rates are the primary, but not the sole, metric by which to determine the CAT's accuracy and reliability and will serve as the baseline requirement needed before OATS can be retired to account for information being available in the CAT.

FINRA noted that the Participants established an initial Error Rate, as defined in the Plan, of 5% on initially submitted data (i.e., data as submitted by a CAT Reporter before any required corrections are performed). The Participants noted in the Plan their expectation that “error rates after reprocessing of error corrections will be de minimis.” The Participants based this Error Rate on their consideration of “current and historical OATS Error Rates, the magnitude of new reporting requirements on the CAT Reporters and the fact that many CAT Reporters may have never been obligated to report data to an audit trail.”

In its Systems Retirement Proposal, FINRA expressed agreement with the Participants' conclusion that a 5% pre-correction threshold “strikes the balance of adapting to a new reporting regime, while ensuring that the data provided to regulators will be capable of being used to conduct surveillance and market reconstruction, as well as having a sufficient level of accuracy to facilitate the retirement of existing regulatory reports and systems where possible.” However, FINRA believed that, when assessing the accuracy and reliability of the data for the purposes of retiring OATS, the error thresholds should be measured in more granular ways and should also include minimum error rates of post-correction data, which represents the data most likely to be used by FINRA to conduct surveillance. Although FINRA is proposing to measure the appropriate error rates in the aggregate rather than firm-by-firm, FINRA expressed the belief that the error rates for equity securities should be measured separately from options since options orders are not currently reported regularly or included in OATS.

FINRA has proposed that, before OATS could be retired, the CAT would generally need to achieve a sustained error rate for Industry Member reporting in each of the categories below:

• Rejection Rates and Data Validations. Data validations for the CAT, while not expected to be designed the same as OATS, must be functionally equivalent to OATS in accordance with the CAT NMS Plan (i.e., the same types of basic data validations must be performed by the Plan Processor to comply with the CAT NMS Plan requirements). Appendix D of the Plan, for example, requires that certain file validations and syntax and context checks be performed on all submitted records. If a record does not pass these basic data validations, it must be rejected and returned to the CAT Reporter to be corrected and resubmitted. The specific validations can be determined only after the Plan Processor has finalized the Industry Member Technical Specifications; however, the Plan also requires the Plan Processor to provide daily statistics on rejection rates after the data has been processed, including the number of files rejected and accepted, the number of order events accepted and rejected, and the number of each type of report rejected. FINRA is proposing that, over the 180-day period, aggregate rejection rates (measured separately for equities and options) must be no more than 5% pre-correction or 2% post-correction across all CAT Reporters.

• Intra-Firm Linkages. The Plan requires that “the Plan Processor must be able to link all related order events from all CAT Reporters involved in the lifecycle of an order.” At a minimum, this requirement includes the creation of an order lifecycle between “[a]ll order events handled within an individual CAT Reporter, including orders routed to internal desks or departments with different functions (e.g., an internal ATS).” FINRA is proposing that aggregate intra-firm linkage rates across all Industry Member Reporters must be at least 95% pre-correction and 98% post-correction.

• Inter-Firm Linkages. The order linkage requirements in the Plan also require that the Plan Processor be able to create the lifecycle between orders routed between broker-dealers. FINRA is proposing that at least a 95% pre-correction and 98% post-correction aggregate match rate be achieved for orders routed between two Industry Member Reporters.

• Order Linkage Rates. In addition to creating linkages within and between broker-dealers, the Plan also includes requirements that the Plan Processor be able to create lifecycles to link various pieces of related orders. For example, the Plan requires linkages between customer orders and “representative” orders created in firm accounts for the purpose of facilitating a customer order, various legs of option/equity complex orders, riskless principal orders, and orders worked through average price accounts. FINRA is proposing that there be at least a 95% pre-correction and 98% post-correction linkage rate for multi-legged orders (e.g., related equity/options orders, VWAP orders, riskless principal transactions).

• Exchange and TRF/ORF Match Rates. The Plan requires that an order lifecycle be created to link “[o]rders routed from broker-dealers to exchanges” and “[e]xecuted orders and trade reports.” FINRA is proposing at least a 95% pre-correction and 98% post-correction aggregate match rate to each equity exchange for orders routed from Industry Members to an exchange and, for over-the-counter executions, the same match rate for orders linked to trade reports.

FINRA believes that an error rate of 5% or lower, measured on a pre-correction or as-submitted basis, and 2% or lower on a post-correction basis (measured at T+5), should be attained across a 180-day period before retiring OATS. FINRA believes that this time period is necessary to reveal any errors that could manifest themselves only after surveillance patterns and other queries have been run and to confirm that the Plan Processor is meeting its obligations and performing its functions adequately. FINRA would not require a maximum 5% pre-correction error rate and 2% post-correction error rate each day for 180 consecutive days. FINRA's Systems Retirement Proposal also provides that, during the 180-day period over which the thresholds are calculated, FINRA's use of the data in the CAT must confirm that (i) usage over that time period has not revealed material issues that have not been corrected, (ii) the CAT includes all data necessary to allow FINRA to continue to meet its surveillance obligations, and (iii) the Plan Processor is sufficiently meeting all of its obligations under the Plan.

Finally, FINRA notes that it will implement the deletion of its OATS rules on a date to be announced in a Regulatory Notice once FINRA concludes the thresholds for accuracy and reliability described above have been met. In addition, FINRA added proposed introductory language to its OATS rules in its Amendment No. 1 that clarified that, if approved, the OATS rules will be deleted from its rulebook upon announcement by FINRA that the CAT has achieved a level of accuracy and reliability sufficient to replace OATS.

In their Systems Retirement Proposals, some of the OATS SROs proposed to assess when to eliminate their respective OATS rules based on the same accuracy and reliability standards as proposed by FINRA, and to announce the implementation date of the elimination of their OATS rules via regulatory notice once each has concluded that these standards have been met. Other OATS SROs proposed to implement the elimination of their OATS rules via regulatory notice once FINRA has determined that the accuracy and reliability standards proposed by FINRA had been met, and FINRA publishes a notice announcing the date it will retire its OATS rules.

2. COATS

Bats BZX, Bats EDGX, BX, BOX, CBOE, C2, NASDAQ, NYSE Arca, NYSE MKT, and Phlx (collectively, the “COATS SROs”) utilize COATS to collect and review data regarding orders, quotes, and transactions in listed options. In their Systems Retirement Proposals, the COATS SROs noted that the Participants have provided COATS technical specifications to the CAT Plan Processor for use in developing the Technical Specifications for the CAT, and that the Participants are working with the Plan Processor to include the necessary COATS data elements in the CAT Technical Specifications. Accordingly, the COATS SROs have proposed to eliminate COATS once CAT is operational and CAT Data is sufficiently accurate and reliable for the COATS SROs to perform the regulatory functions that they now perform via COATS. The COATS SROs also have proposed to eliminate certain provisions of their rules that reference COATS or implement COATS requirements and/or to replace certain provisions that implement COATS requirements with others that provide for compliance with CAT requirements.

Similar to the standards described in the Systems Retirement Proposals that discuss eliminating OATS-related rules, the COATS SROs believe that, before COATS can be retired and the proposed modifications to COATS-related rules can be implemented, the CAT would need to achieve an aggregate average error rate of 5% or lower measured on a pre-correction or as-submitted basis, and 2% or lower on a post-correction basis (measured at T+5). The 5% and 2% error rates would be measured across a 180-day period. For purposes of COATS retirement, the COATS SROs have proposed to measure the error rates for CAT records relating only to listed options and not to equities, as only options orders and transactions are currently subject to COATS reporting. As with the proposals to retire OATS, the COATS SROs believe that, during the minimum 180-day period during which the error thresholds are calculated, their use of CAT Data must confirm that (1) there are no material issues that have not been corrected, (2) the CAT includes all data necessary to allow the COATS SROs to continue to meet their surveillance obligations, and (3) the Plan Processor is sufficiently meeting all of its obligations under the CAT NMS Plan. Each COATS SRO also noted that, if the Commission approves its proposed rule change, it would announce the date for modification or elimination, as applicable, of reporting requirements and the implementation date of the proposed rule changes via regulatory notices or circulars that would be published once the thresholds for accuracy and reliability described above have been met and the Plan Processor is sufficiently meeting all of its obligations under the Plan. In amendments to their respective filings, each COATS SRO also added introductory language to each of the rules that it has proposed to modify in connection with the retirement of COATS specifying that the rule will be amended upon announcement by the SRO that the CAT has achieved a sufficient level of accuracy and reliability.

3. EBS

Each of Bats BZX, Bats EDGX, BX, BOX, CBOE, C2, FINRA, IEX, ISE, MIAX, PEARL, Phlx, NASDAQ, NYSE, NYSE Arca, and NYSE MKT (each an “EBS SRO”) has a rule requiring a member, upon request by the SRO, to provide trading information using the electronic blue sheets (“EBS”) system in such format as may be prescribed by the SRO.

According to the EBS SROs, after broker-dealer reporting to the CAT begins, CAT will contain much of the data with respect to transactions in CAT-Eligible Securities that an SRO could otherwise have requested via the EBS system. Consequently, the EBS SROs would no longer need to request information pursuant to the EBS Rules for transactions in CAT-Eligible Securities after such time as appropriate thresholds for accuracy and reliability, including for customer and account information, are achieved. However, the EBS SROs do not believe that the EBS rules can be completely removed from their rulebooks and the EBS system completely retired, because EBS requests might have to be made to obtain information about transactions occurring before CAT has attained an appropriate threshold for accuracy and reliability. Some of the EBS SROs also noted that their EBS rules apply to transactions in non-CAT-Eligible Securities, such as fixed-income securities. Thus, the rules would have to remain in effect with respect to those transactions.

Each of the EBS SROs proposed to add new language to its EBS rule to clarify how it will request data under these rules after members are reporting to the CAT. Specifically, the proposed new language notes that the SRO will not request trade data or information under the rule, and members will not be required to provide trade data or information under the rule, for trades reported to the CAT after the SRO (or, in some cases, FINRA) announces that it has determined that the accuracy and reliability of the CAT are sufficient to replace requests pursuant to the EBS rule.

As noted above, the EBS SROs believe (or reiterate FINRA's belief) that the CAT must meet certain minimum accuracy and reliability standards before it, or FINRA, could rely on the CAT Data to replace existing regulatory tools, including EBS. Therefore, the EBS SROs propose to implement the new rule text related to their EBS rules only after CAT achieves certain accuracy thresholds. The EBS SROs proposed similar standards to those for eliminating OATS-related rules set forth above, as well as specific accuracy standards for customer and account information. In addition, each of the EBS SROs states that it (or, in some cases, FINRA) can rely on CAT Data to replace EBS requests only after it has determined that its usage of the CAT Data over a 180-day period has not revealed material issues that have not been corrected, confirmed that the CAT includes all data necessary to allow it or FINRA to continue to meet its surveillance obligations, and confirmed that the Plan Processor is fulfilling its obligations under the Plan.

4. Other Rules

Certain Exchanges proposed to amend other reporting rules that they have determined are duplicative of CAT requirements. BatsBZX, BatsEDGX, BOX, BX, C2, CBOE, MIAX, PEARL, Phlx, and NASDAQ currently have rules requiring certain market participants (e.g., specialists and market makers) to report certain account or order information for accounts over which the market participant engages in trading activities or exercises investment discretion. These Exchanges stated that, once broker-dealers are reporting to CAT, CAT will contain some of the data the Exchanges would otherwise have requested under these rules. Similar to the proposed revisions to the EBS rules, some of the Exchanges have proposed to add new text to these order and account identification rules stating that the Exchange will not request information under the rule, and members will not be required to provide information under the rule, for trades reported to CAT after the Exchange announces that it has determined that the accuracy and reliability of the CAT are sufficient to replace requests pursuant to the rule. Other Exchanges have proposed to revise these rules by deleting specific reporting requirements that are duplicative of CAT while retaining their position reporting requirements, which are not duplicative of CAT. In their respective amendments, these Exchanges proposed to add introductory language to these rules to clarify that the rules will be amended upon announcement by the Exchange that the CAT has achieved a sufficient level of accuracy and reliability.

In addition, CBOE and EDGX currently require members to submit to the Exchange stock transaction information for each Qualified Contingent Cross order executed at the Exchange. CAT will require exchange members to report stock transaction information. Therefore, CBOE and EDGX intend to eliminate this reporting requirement in accordance with the proposed timeline and standards below.

These Exchanges proposed standards for when the proposed modifications to these reporting rules will be implemented that are similar to those for eliminating OATS-related rules set forth above. Accordingly, these Exchanges proposed that CAT would need to achieve a sustained error rate for a period of at least 180 days of 5% or lower measured on a pre-correction or as-submitted basis, and 2% or lower on a post-correction basis (measured at T+5). These Exchanges have proposed to measure the 5% pre-correction and 2% post-correction thresholds by averaging the error rate across the period, not requiring a 5% pre-correction and 2% post-correction maximum each day for 180 consecutive days. In addition, each of these Exchanges stated that it can rely on CAT Data to replace information required to be reported under duplicative rules only after it has determined that its usage of the CAT Data over a 180-day period has not revealed material issues that have not been corrected, confirmed that the CAT includes all data necessary to allow it to continue to meet its surveillance obligations, and confirmed that the CAT Plan Processor is fulfilling its obligations under the CAT NMS Plan.

B. Small Industry Member Data Availability

As noted above, the CAT NMS Plan requires the SROs, in their Systems Retirement Proposals, to address “whether the availability of certain data from Small Industry Members two years after the Effective Date would facilitate a more expeditious retirement of duplicative systems.”

In its Systems Retirement Proposal, FINRA stated its view that there is no effective way to retire OATS until all current OATS reporters are reporting to the CAT and that having data from Small Industry Members currently reporting to OATS available two years after the Effective Date rather than three would “substantially facilitate a more expeditious retirement of OATS.” Therefore, FINRA supports an amendment to the Plan that would require current OATS reporters that are Small Industry Members to report to CAT two years after the Effective Date (instead of three) and stated that it intends to work with the other SROs to propose such an amendment to the Plan.

FINRA has identified approximately 300 member firms that currently report to OATS and meet the definition of “Small Industry Member.” According to FINRA, only ten of these firms submit information to OATS on their own behalf, and eight of those ten firms report very few records to OATS. The vast majority of these 300 firms use third parties to fulfill their reporting obligations, and many of these third parties will begin reporting to CAT in November 2018. Consequently, FINRA believes that the burden on current OATS reporters that are Small Industry Members would not be significant if those firms are required to report to CAT beginning in November 2018 rather than November 2019. FINRA does not believe that it is necessary or appropriate to accelerate CAT reporting for Small Industry Members that are not currently reporting to OATS.

The Systems Retirement Proposals of BX, IEX, NYSE, NYSE Arca, NYSE MKT, NASDAQ, and Phlx contain the same analysis as FINRA (or summarize FINRA's analysis) in connection with whether the earlier availability of data from Small Industry Members would facilitate the retirement of their own respective OATS rules, and these Exchanges expressed support for the Plan amendment described by FINRA.

Some of the Systems Retirement Filings also discussed how earlier availability of data from Small Industry Members might affect the retirement of systems other than OATS. The COATS SROs expressed the view that COATS should not be retired until all Participants and Industry Members that report data to COATS are reporting comparable data to the CAT. They noted that, while the early submission of options data to the CAT by Small Industry Members could expedite the retirement of COATS, they believe it premature to consider such a change, and that additional analysis would be necessary to determine whether such early reporting by Small Industry Members would be feasible. Some of the EBS SROs made statements similar to the COATS SROs with respect to whether earlier availability of data from Small Industry Members would facilitate EBS retirement, while other EBS SROs stated that the submission of data to the CAT by Small Industry Members a year earlier than is required in the CAT NMS Plan, at the same time as the other Industry Members, would expedite the replacement of EBS data with CAT Data because CAT would then have all necessary data from Industry Members to enable these SROs to perform the regulatory surveillance that currently is performed via EBS.

C. Individual Industry Member Exemptions

As noted above, the CAT NMS Plan also requires the SROs, in their Systems Retirement Proposals, to address “whether individual Industry Members can be exempted from reporting to duplicative systems once their CAT reporting meets specified accuracy and reliability standards, including, but not limited to, ways in which establishing cross-system regulatory functionality or integrating data from existing systems and the CAT would facilitate such Individual Industry Member exemptions.”

All of the SROs stated (or reiterated FINRA's statement) that a single “cut-over” from existing systems to CAT is preferable to elimination of OATS reporting requirements on a firm-by-firm basis. Some of the SROs stated that providing individual exemptions to Industry Members would be inefficient, more costly, and less reliable than the single cut-over. These SROs further stated that providing individual exemptions would require the temporary creation of a cross-system regulatory function and the integration of data from existing systems and the CAT to avoid creating any regulatory gaps as a result of such exemptions. These SROs believed that such a function would be costly to create and would give rise to a greater likelihood of data errors or other issues. These SROs stated that, given the limited time in which such exemptions would be necessary, they did not believe that such exemptions would be an appropriate use of limited resources. Some of the SROs also noted that, if an amendment to require Small Industry Members who currently report to OATS to begin reporting to CAT in November of 2018 were approved by the Commission, there would be no need to exempt members from OATS requirements on a firm-by-firm basis.

FINRA argued that the primary beneficiary of its proposed approach would be the investing public. FINRA noted that firm-by-firm retirement of OATS would require merging OATS and CAT data, and that such an approach would be “technologically costly and difficult and could introduce errors into the data being surveilled that did not exist prior to integration.” FINRA further stated that conducting its surveillance using a single source “increases the efficiency and effectiveness of the process and improves the integrity of the markets.” FINRA noted that the potential costs of this approach would be borne by those firms that would have met an individual threshold sooner and that the approach could disincentivize individual firms from meeting the minimum error rate thresholds, which could, at the margin, extend the period of duplicative reporting for all firms. However, FINRA noted this disincentive would be small for firms with significant reporting burdens, as they would want to end duplicative reporting quickly, and that firms that otherwise delay in meeting their error rates could incur higher costs through enforcement actions.

III. Summary of Comments

The Commission received four comments that were submitted to File Number SR-FINRA-2017-13. Two of the commenters noted that their comments applied to the similar proposals made by the other SROs. While the commenters supported certain aspects of the Systems Retirement Proposals, there were others—noted below—where the commenters did not agree and believed that the SROs had not provided adequate justification.

A. Possibility of Firm-by-Firm Retirement

All four of the commenters disagreed with the SROs' proposed approach of applying a single cut-over from existing systems to CAT. Two of the commenters argued that individual firms that achieve the quality criteria—even if the industry as a whole has not—should be granted exemptions from reporting to existing systems until those systems can be retired. In the commenters' view, the SROs' proposed approach would penalize firms that quickly and consistently meet or exceed quality standards for CAT reporting. A third commenter argued that the single cut-over approach provides little incentive for an individual firm to reduce its error rate, because the retirement of OATS will be based on an industry-wide error rate that is beyond its control.

Two commenters took the view that FINRA had not provided sufficient cost/benefit analysis to justify its position and emphasized the significant costs of duplicative reporting to broker-dealers. One of these commenters noted that broker-dealers who do not outsource their regulatory reporting (approximately 126 firms) spend on average $725,615 per month on their regulatory reporting obligations (which include OATS, EBS, large trader reporting, and other reporting). This commenter estimated that duplicative OATS and EBS reporting for these 126 broker-dealer firms would cost more than $20 million per month and stated that this approach would severely penalize broker-dealer firms that rapidly and consistently met reporting standards. Another commenter cited the same average monthly cost of $725,615 and argued that the benefits of individual Industry Member exemptions outweigh the “generalized and unsubstantiated justifications against such an approach” outlined by the SROs.

One commenter stated that FINRA has not provided sufficient technological rationale to explain its opposition to individual firm exemptions, and disagreed with FINRA's conclusion that the technology to merge OATS and CAT would be costly and could introduce errors. The commenter argued that there are “multiple possible approaches that could be used to integrate CAT and OATS data allowing FINRA to effectively surveil the market, especially if FINRA and the Plan Processor work jointly on a cooperative solution.” In addition, the commenter noted that, because the EBS retirement plan proposes to extract any data available in CAT before requesting historical data or data for asset classes not covered by CAT, the SROs can effectively merge CAT data and existing EBS data to meet their surveillance obligations. Similarly, another commenter noted that the Participants have committed to include the relevant fields required for the decommissioning of OATS in the initial phase of CAT and recommended that FINRA utilize data from CAT to obtain what it would otherwise receive from OATS.

Another commenter recommended that the SROs include a cost-benefit analysis of a “CAT-to-OATS converter” that would allow firms that meet the error rates to cease sending data to OATS directly. Instead, the Plan Processor would convert the CAT reports of the firm into an OATS-eligible format and report that firm's audit trail information to OATS. The commenter believed that this approach is technically possible based on comments made by the Plan Processor, and “that CAT Industry Member Specifications could incorporate this concept.”

B. Assessment Criteria

All four of the commenters generally maintained that only data required by OATS or EBS rules today should be included in the accuracy and reliability metrics for system retirement, and that CAT data elements or other aspects of CAT that are not required by existing systems should be outside the scope for assessment. One commenter argued, for example, that CAT error rates related to customer information and options activity should not have any bearing on the retirement of OATS, as FINRA does not rely on OATS for that information. Another commenter posed a number of clarifying questions regarding the standards, including whether the proposed accuracy and reliability metrics apply to Participants as well as Industry Members, whether the proposed accuracy and reliability metrics for the OATS retirement plan apply only to equities data, whether customer and account information accuracy standards are excluded from the OATS retirement plan, whether the inter-firm linkage quality metric is calculated as an aggregate measurement across all Industry Members, and whether the 2% post-correction error rate is an average error rate over the period calculated as the number of erroneous records, as measured on T+5 divided by the total number of records received. This commenter also recommended that FINRA consider that the average pre-correction error rate across the five categories (i.e., rejection rates, intra-firm linkages, inter-firm linkages, order linkage rates, exchange and TRF/ORF match rates) must achieve 5%, but no single category could exceed 7% for the pre-correction error rate. This commenter further recommended that corrections should be calculated under CAT in the same timeframes as under existing audit trail systems (i.e., T+6 for OATS and T+10 for EBS rather than T+5, as proposed).

Three commenters raised concerns about the broader, qualitative factors proposed by the SROs—that during the 180-day evaluation period material issues are not revealed, that the CAT includes all data necessary to allow FINRA to continue to meet its surveillance obligations, and that the Plan Processor is sufficiently meeting all of its obligations under the Plan. Two commenters suggested that the Systems Retirement Proposals should require these conditions to be met before CAT goes live and acknowledge that evaluation of all of these issues will begin with CAT Participant reporting. Another commenter opined that these additional standards do not provide enough clarity regarding when FINRA will retire OATS and provide too much discretion to FINRA.

C. Assessment Length and Other Considerations Relating to the Assessment Period

One commenter recommended that the SROs should consider shortening the trial period if all criteria have been met before the 180th day. This commenter also recommended that the 180-day trial period be a “rolling metric”—i.e., if the industry does not meet the quality criteria by the end of the first 180 days, the most recent 180 days should be recalculated each day thereafter. The same commenter urged FINRA to “take a daily accounting of the measurements” and to “communicate both the aggregate measurements and the individual Industry Member measurements so that all parties are regularly updated” regarding the status of the various error rates and can make necessary corrections.

Two commenters argued that the early phases of CAT compliance should be viewed as a “trial period” and that there should be no CAT penalties or regulatory inquiries associated with CAT reporting before the end of the trial period. One of these commenters suggested “that CAT not go-live until the 95% uncorrected and 98% post-correction thresholds have been met for two weeks during the testing period.” Similarly, another commenter stated that the SROs “should establish a test period to gather information prior to production reporting” to “enable CAT to go into production at a confidence level that allows its reporting systems to serve as many existing regulatory requirements and accompanying surveillance programs as possible.”

D. Additional Plan Amendments

All of the commenters supported requiring reporting for current OATS reporters 24 months after the CAT effective date. Of those, two commenters supported the proposal to amend the CAT NMS Plan to accelerate CAT reporting for Small Industry Members who currently report to OATS from 36 to 24 months after the CAT Effective Date. Two other commenters instead recommended that all current OATS reporters—regardless of size—should begin reporting to CAT in November of 2018 and all non-OATS reporters should be allowed to begin reporting to CAT in November of 2019. One of these commenters noted that many large broker-dealers do not report to OATS and argued that “requiring such firms to implement the systems and reporting mechanisms for the CAT on a shortened timeframe simply due to their designation as a `Large Industry Member' may result in significant technological and operational challenges.” Accordingly, the commenter urged some mechanism to allow such Large Industry Members to begin reporting 36 rather than 24 months after the CAT Effective Date. The other commenter noted that, if the first phase of Industry Member reporting were limited to current OATS reporting firms, FINRA would still have all of the data that it currently has from OATS today.

E. Other Comments

Three commenters requested that the CAT NMS Plan be clarified to specify that prime broker transactions are included in the CAT reporting requirements. One commenter stated that “this will enable a more complete set of transactions in the CAT audit trail and allow CAT to replace EBS as a more complete reporting source for this data.” Similarly, another commenter noted that prime broker transactions are missing from the CAT NMS Plan, which “may prevent the regulators from utilizing CAT data as envisioned.”

IV. Proceedings To Determine Whether To Approve or Disapprove the Systems Retirement Proposals, as Modified by Amendments Thereto

The Commission hereby institutes proceedings pursuant to Section 19(b)(2) of the Act to determine whether the Systems Retirement Proposals of Bats BZX, Bats EDGX, BOX, BX, C2, CBOE, FINRA, IEX, ISE, MIAX, NASDAQ, PEARL, NYSE, NYSE Arca, NYSE MKT, and Phlx, as modified by their respective amendments, should be approved or disapproved. Further, pursuant to Section 19(b)(2)(B) of the Act, the Commission is hereby providing notice of the grounds for disapproval under consideration. The Commission believes that it is appropriate to institute proceedings at this time in view of the legal and policy issues raised by the proposals. Institution of proceedings does not indicate, however, that the Commission has reached any conclusions with respect to any of the issues involved.

In particular, the Commission is instituting proceedings to allow for additional analysis for consistency with: (1) Section 6(b)(5) of the Act, with respect to the Exchanges' Systems Retirement Proposals, and Section 15A(b)(6) of the Act, with respect to FINRA's Systems Retirement Proposal, both of which sections require, among other things, that the rules of a national securities exchange or registered securities association be designed “to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, . . . to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest;” and (2) Section 6(b)(8) of the Act, with respect to the Exchanges' Systems Retirement Proposals, and Section 15A(b)(9) of the Act, with respect to FINRA's Systems Retirement Proposal, both of which sections require that the rules of a national securities exchange or registered securities association “not impose any burden on competition not necessary or appropriate in furtherance of the purposes of [the Act].”

In addition, the Commission is instituting proceedings to allow for additional analysis of whether the Systems Retirement Proposals are consistent with Section 11A of the Act and Rules 608(c) and 613 of Regulation NMS thereunder. Section 11A of the Act directs the Commission, with due regard for the public interest, the protection of investors, and the maintenance of fair and orderly markets, to use its authority to facilitate the establishment of a national market system for securities, including by authorizing or requiring SROs to act jointly to plan, develop, operate, or regulate a national market system. Rule 608(c) requires each SRO to comply with the terms of any effective NMS plan of which it is a sponsor or participant. Rule 613 requires the CAT NMS Plan to include a “plan to eliminate existing rules and systems . . . that will be rendered duplicative by the consolidated audit trail.” The Plan, in turn, required the SROs to file proposed rule changes, within six months of the Commission's approval of the Plan, to eliminate or modify their duplicative rules. The Plan further stated that the rule change proposals to eliminate or modify duplicative rules and systems should be “effective at such time as CAT Data meets minimum standards of accuracy and reliability.” As discussed above, the Plan also requires these proposals to discuss the specific accuracy and reliability standards that would determine when duplicative systems would be retired, whether the availability of certain data from Small Industry Members in November 2018 would facilitate a more expeditious retirement of duplicative systems, and whether individual Industry Members could be exempted from reporting to duplicative systems once their CAT reporting meets specified accuracy and reliability standards. Accordingly, the SROs filed the Systems Retirement Proposals to indicate which duplicative rules and systems would be eliminated once CAT is sufficiently accurate and reliable and to explain how they intend to assess CAT's accuracy and reliability. The Commission is therefore considering whether the Systems Retirement Proposals are consistent with the SROs' regulatory obligations under Rule 608(c), Rule 613, and the Plan, and are otherwise consistent Section 11A of the Act and the rules and regulations thereunder.

As noted above, the CAT NMS Plan required the SROs' proposals to retire duplicative audit trail systems to consider whether “individual Industry Members can be exempted from reporting to duplicative systems once their CAT reporting meets specified accuracy and reliability standards, including, but not limited to, ways in which establishing cross-system regulatory functionality or integrating data from existing systems and the CAT would facilitate such Individual Industry Member exemptions.” In addition, in the CAT Approval Order, the Commission noted “that FINRA is considering whether it can integrate CAT Data with OATS data in such a way that `ensures no interruption in FINRA's surveillance capabilities,' and that FINRA will consider `exempting firms from the OATS Rules provided they report data to the Central Repository pursuant to the CAT NMS Plan and any implementing rules.' ” The Commission also “encourage[d] the other Participants to consider similar measures to exempt firms from reporting to existing systems once they are accurately reporting comparable data to the CAT and to enable the usage of CAT Data to conduct their regulatory activities.” As described above, the SROs considered individual firm exemptions but believe that a single cut-over from existing systems to CAT is preferable to a firm-by-firm approach. Several of the SROs assert that providing firm-by-firm exemptions would be inefficient, more costly, and less reliable than the single cut-over. However, commenters disagreed with this aspect of the SROs' proposals, and questioned whether FINRA had adequately analyzed the costs and benefits of allowing firms to discontinue OATS reporting on an individual basis. Commenters also noted the high costs of duplicative reporting. Accordingly, the Commission is considering whether the Systems Retirement Proposals impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act, including the potential competitive burdens that may be created by an extended period of duplicative reporting for certain firms.

As discussed in more detail above, the SROs also proposed certain accuracy and reliability standards that CAT Data must meet before existing systems can be retired. These standards include both quantitative and qualitative metrics. Commenters raised questions about the scope of these metrics, in particular data elements and functionalities that were not included in current audit trail systems, and asked for clarification regarding a number of metrics. In addition, several commenters raised concerns about the broader, qualitative factors proposed by the SROs. Accordingly, the Commission is considering the accuracy and reliability standards set forth in the Systems Retirement Proposals.

In addition, the Commission is considering whether the Systems Retirement Proposals are designed to prevent fraudulent and manipulative acts and practices and, in particular, whether the Systems Retirement Proposals would help to ensure that the SROs can effectively conduct their surveillance and oversight functions. The Commission is also considering whether the Systems Retirement Proposals remove impediments to and perfect the mechanism of a free and open market and a national market system and whether they adequately balance the duplicative reporting costs incurred by broker-dealers and the risks to effective surveillance and oversight, which may impact investor protection.

V. Commission's Solicitation of Comments

The Commission requests that interested persons provide written submissions of their views, data, and arguments with respect to the issues identified above, as well as any other concerns that they may have with any of the Systems Retirement Proposals. In particular, the Commission invites the written views of interested persons concerning whether the Systems Retirement Proposals, as modified by the amendments thereto, are consistent with Sections 6(b)(5), 6(b)(8), 15A(b)(6), 15A(b)(9), or any other provision of the Act, and the rules and regulations thereunder. Although there do not appear to be any issues relevant to approval or disapproval that would be facilitated by an oral presentation of views, data, and arguments, the Commission will consider, pursuant to Rule 19b-4, any request for an opportunity to make an oral presentation.

Such comments should be submitted by September 27, 2017. Rebuttal comments should be submitted by October 11, 2017. The Commission asks that commenters address the sufficiency and merit of the SROs' statements in support of their respective Systems Retirement Proposals, in addition to any other comments that commenters may wish to submit about any of the proposed rule changes. The Commission also asks the SROs to respond to the issues raised in the four comment letters received to date, including the commenters' cost estimates. In addition, the Commission seeks comment, including, where relevant, any specific data, statistics, or studies, on the following:

1. What would be the monetary costs of constructing a CAT-to-OATS “converter” or developing an alternative mechanism for linking CAT Data to OATS that would provide continuity of the OATS SROs' surveillance capabilities? To the extent possible, please provide specific data, analyses, or studies for support for your answer.

2. What technological challenges would have to be addressed to make a converter or other mechanism feasible? When could work begin on a converter or alternative mechanism? For example, could work begin before technical specifications for Industry Member reporting to CAT have been finalized? Could work begin before the Plan Processor had begun accepting CAT reports from Industry Members and making those reports available to regulators? How long would it take to construct a converter or other mechanism? To the extent possible, please provide specific data, analyses, or studies for support for your answer.

3. Are there any entities that would be capable of constructing a converter? Please explain who they are and why you believe they have the ability to construct a converter. To the extent possible, please provide specific data, analyses, or studies for support for your answer.

4. If the costs of the converter would be passed on to Industry Members, would the benefits of a converter be undermined? To the extent possible please provide specific data, analyses, or studies for support for your answer.

5. Please estimate, to the extent possible, the percentage of Industry Members' CAT reports that would qualify for an individual exemption from OATS reporting for each month after Industry Members begin reporting in November 2018. Do you believe that the costs and/or benefits of a converter would be affected by the number of Industry Members that can be expected to meet the threshold error rates for CAT reporting (weighted by their percentage of total CAT reports submitted by OATS-reporting Industry Members) before full OATS retirement, thus qualifying for an individual exemption from OATS and to have their CAT reports converted to OATS? To the extent possible, please provide specific data, analyses, or studies for support for your answer.

6. Do you believe that the Systems Retirement Proposals would result in any burden on competition and, if so, please analyze whether any such burden would be necessary or appropriate in furtherance of the purposes of the Act. If there are burdens, how would they compare to the burdens that would be imposed by the converter approach? To the extent possible, please provide specific data, analyses, or studies for support of your answer.

7. What impact would a converter have on the SROs' ability to conduct their surveillance and oversight? Specifically, do you believe that there are risks that a converter might not be able to successfully integrate CAT reports into OATS? If so, what is the likelihood of failures and what would be the magnitude of the costs resulting from any such failures? What costs might be incurred by SROs to detect and address any regulatory gaps created by a converter? For example, would an OATS SRO have to design additional surveillances to address that possibility? If so, what sort of additional surveillances might be necessary and how would you estimate the cost for an SRO to develop them? To the extent possible, please provide specific data, analyses, or studies for support.

8. How long do you believe it will take before CAT reaches the accuracy and reliability thresholds proposed by the SROs before retiring OATS and other systems for all firms? Also, how long do you think it would take to make an effective converter available and how long would the converter be used for those firms who individually have met the thresholds while CAT overall has not? Does the length of this period affect your cost/benefit analysis for the converter approach? If so, how?

9. Regarding the converter approach and firm-by-firm exemptions from OATS reporting, what criteria should the OATS SROs consider for releasing a firm from its OATS requirements? To the extent possible please provide specific data, analyses, or studies for support. Would you still support a firm-by-firm approach if it also incorporated an assessment of whether the Plan Processor is sufficiently meeting all of its obligations under the Plan?

10. Please describe any opportunity costs associated with the converter approach. For example, would the development of the converter and any new processes and procedures at the SRO level to accommodate the converter divert resources that otherwise would be devoted to CAT implementation? If so, please describe the nature and extent of such effects.

11. Do you agree with the estimated costs of duplicative reporting described by two of the commenters? Are there any additional opportunity costs faced by Industry Members that would result from duplicative reporting? How would the length of the duplicative reporting period affect the opportunity costs? To the extent possible, please provide specific data, analyses, or studies for support.

12. Do you agree with the proposed quantitative metrics for the pre- and post-correction error rates that would have to be attained by CAT before the SROs would retire duplicative systems? Do you agree with the proposed categories for the assessment? Why or why not? Are these categories sufficiently clear? If you believe that different thresholds or alternative areas for consideration would be more appropriate, please describe. What are the costs and benefits of the proposed approach versus any alternative approach that you would recommend?

13. Do you agree with the SROs' proposed qualitative standards for retirement of duplicative systems, i.e., that retirement could not be permitted to occur until it is confirmed that (1) there are no material issues in CAT that have not been corrected, (2) the CAT includes all data necessary to allow the SROs to continue to meet their surveillance obligations, and (3) the Plan Processor is sufficiently meeting all of its obligations under the CAT NMS Plan? Why or why not? What are the costs and benefits of the proposed approach versus an alternative approach, which may include not having any additional qualitative considerations?

14. To what extent should the SROs consider CAT performance regarding functions and data elements not present within existing audit trail systems when determining when to allow retirement of those existing systems? What are the costs and benefits of the proposed approach versus any alternative approach that you would recommend? Do you believe that the Systems Retirement Proposals will promote efficiency, competition, and capital formation? Please submit any data or information that would assist the Commission in considering these issues.

15. Do you agree with the length of the assessment period proposed by the SROs? Why or why not? If not, what alternative do you believe would be more appropriate and why? What are the costs and benefits of the proposed approach versus any alternative approach that you would recommend? To the extent possible, please provide specific data, analyses, or studies for support.

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's Internet comment form ( http://www.sec.gov/rules/sro.shtml ); or
• Send an email to rule-comments@sec.gov. Please include any of File Numbers SR-BatsBZX-2017-37, SR-BatsEDGX-2017-23, SR-BOX-2017-17, SR-BX-2017-027, SR-C2-2017-018, SR-CBOE-2017-041, SR-FINRA-2017-013, SR-IEX-2017-18, SR-ISE-2017-46, SR-MIAX-2017-20, SR-NASDAQ-2017-055, SR-PEARL-2017-23, SR-NYSE-2017-23, SR-NYSEArca-2017-57, SR-NYSEArca-2017-59, SR-NYSEMKT-2017-29, SR-NYSEMKT-2017-30, or SR-Phlx-2017-43, as appropriate, on the subject line.

Paper Comments

• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to any of: File Numbers SR-BatsBZX-2017-37, SR-BatsEDGX-2017-23, SR-BOX-2017-17, SR-BX-2017-027, SR-C2-2017-018, SR-CBOE-2017-041, SR-FINRA-2017-013, SR-IEX-2017-18, SR-ISE-2017-46, SR-MIAX-2017-20, SR-NASDAQ-2017-055, SR-PEARL-2017-23, SR-NYSE-2017-23, SR-NYSEArca-2017-57, SR-NYSEArca-2017-59, SR-NYSEMKT-2017-29, SR-NYSEMKT-2017-30, or SR-Phlx-2017-43, as appropriate. The file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( http://www.sec.gov/rules/sro.shtml ). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the SRO. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly.

All submissions should refer to any of File Numbers SR-BatsBZX-2017-37, SR-BatsEDGX-2017-23, SR-BOX-2017-17, SR-BX-2017-027, SR-C2-2017-018, SR-CBOE-2017-041, SR-FINRA-2017-013, SR-IEX-2017-18, SR-ISE-2017-46, SR-MIAX-2017-20, SR-NASDAQ-2017-055, SR-PEARL-2017-23, SR-NYSE-2017-23, SR-NYSEArca-2017-57, SR-NYSEArca-2017-59, SR-NYSEMKT-2017-29, SR-NYSEMKT-2017-30, or SR-Phlx-2017-43, as appropriate, and should be submitted by September 27, 2017. Rebuttal comments should be submitted by October 11, 2017.