Rule 613 Supporting Statement FINAL - 10-26-15 (extension)

SUPPORTING STATEMENT
for the Paperwork Reduction Act Information Collection Submission
for Rule 613: Consolidated Audit Trail-~Filing a National
Market System Plan
A.

Justification
1.

Information Collection Necessity

The Securities and Exchange Commission (“Commission”) adopted Rule 613
under the Securities Exchange Act of 1934 (“Exchange Act” or “Act”) to require national
securities exchanges and national securities associations (“self-regulatory organizations”
or “SROs”) to jointly submit to the Commission a national market system (“NMS”) plan
to develop, implement, and maintain a consolidated order tracking system, or
consolidated audit trail, with respect to the trading of NMS securities, that would capture
customer and order event information for orders in NMS securities, across all markets,
from the time of order inception through routing, cancellation, modification, or
execution.
Today, staff of the SROs and the Commission must rely on the data provided by
the separate audit trail systems that are maintained by some of the SROs, which vary in
scope, required data elements and format, to exercise their regulatory responsibilities.
The Commission believes that there are numerous shortcomings in the completeness,
accuracy, accessibility, and timeliness of these existing audit trail systems. Some of these
shortcomings are a result of the disparate nature of the systems, which make it
impractical, for example, to follow orders through their entire life cycle as they may be
routed, aggregated, re-routed, and disaggregated across multiple markets. Other
shortcomings are a result of a functional inability to collect key information in the audit
trails that would be useful for regulatory oversight, such as the identity of the customers
who originate orders, or even the fact that two sets of orders may have been originated by
the same customer. The Commission believes that the information contained in the NMS
plan required by Rule 613 will provide it and the public with detailed information
regarding how the SROs propose to create, implement, and maintain a consolidated audit
trail that addresses the shortcomings of the existing audit trails. The Commission
believes that collecting such information through an NMS plan is an appropriate first
step, given the complexity and the anticipated costs of the consolidated audit trail.
When it adopted Rule 613, the Commission discussed the burden hours associated
with the development and submission of the NMS plan. 1 In doing so, the Commission
noted that the development and submission of the NMS plan is part of a multi-step
process for developing the consolidated audit trail and that the Commission deferred its
discussion of the burden hours associated with the other paperwork requirements required
by Rule 613 – such as the requirements to provide certain data to the central repository –
1

See Securities Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722
(August 1, 2012) (“Adopting Release”), at 45804–45807.

until after the SROs submit an NMS plan and there has been an opportunity for public
comment. 2 Therefore, the existing collection of information associated with Rule 613
covers only the Commission’s estimates of the burden hours associated with the
development and filing of the NMS plan. The SROs submitted to the Commission the
NMS plan on September 30, 2014 3 and an amended and restated NMS Plan on February
27, 2015. 4 Although the existing collection of information pertains to the development
and submission of an NMS plan, and such NMS plan has been developed and submitted,
Commission staff believes it is prudent to extend this collection of information beyond its
expiration during the pendency of the Commission’s review of the NMS plan.
2.

Information Collection Purposes and Use

The information contained in the NMS plan will provide the Commission and the
public with detailed information regarding how the SROs propose to create, implement
and maintain a consolidated audit trail that addresses the shortcomings of the existing
audit trails. The NMS plan also is required to contain: (1) an estimate of the costs
associated with implementing the consolidated audit trail under the terms of the NMS
plan; (2) a discussion of the costs, benefits, and rationale for the choices made in
developing the NMS plan; and (3) an analysis of the plan’s potential impact on
competition, efficiency and capital formation. This information should help the
Commission and the public carefully consider all aspects of the NMS plan submitted to
the Commission for its consideration. Further, the information contained in the NMS
plan should facilitate an analysis of how well the NMS plan will allow regulators to
effectively and efficiently carry out their responsibilities.
Consideration Given to Information Technology
The Rule requires the preparation and submission of an NMS plan to require the
creation of an electronic audit trail record or report for orders in NMS securities.
Commission staff does not believe that improvements in information technology would
have any impact on the burdens associated with the preparation of the NMS plan, nor that
any obstacles exist to reducing such burdens.
Duplication
Commission staff believes that the requirement to prepare and file an NMS plan
would not result in a duplication of burden hours for the SROs. As noted above, the
Commission believes that there are numerous shortcomings in the completeness,
accuracy, accessibility, and timeliness of these existing audit trail systems. The Rule
2

Id. at 45804.

3

See Letter from the SROs, to Brent J. Fields, Secretary, Commission, dated
September 30, 2014.

4

See Letter from the SROs, to Brent J. Fields, Secretary, Commission, dated
February 27, 2015.

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requires the submission of an NMS plan that addresses these shortcomings and thus is not
duplicative of any other information request. In addition, the Rule’s requirements are
intended to ensure that the Commission and the public have sufficiently detailed
information to carefully consider all aspects of the NMS plan submitted by the SROs,
facilitating an analysis of how well the NMS plan would allow regulators to effectively
and efficiently carry out their responsibilities.
Effect on Small Entities
Rule 613 requires the SROs to submit an NMS plan to implement the
consolidated audit trail. 5 Paragraph (e) of Rule 0-10 provides that an exchange is
considered a “small business” if it has been exempted from the reporting requirements of
Rule 601 of Regulation NMS, and is not affiliated with any person (other than a natural
person) that is not a small business or small organization as defined in Rule 0-10. 6 Under
this standard, none of the national securities exchanges subject to Rule 613 is a
“small business.” In addition, FINRA is not a small entity as defined in Rule 0-10. 7
Accordingly, Commission staff believes that no small entities will be affected by Rule
613.
Commission staff notes that if it approves the NMS plan, the NMS plan could
have an effect on small entities. However, because the Rule provides the SROs with a
range of options and greater flexibility for how they choose to meet the requirements of
the Rule, Commission staff will not know the specific requirements of the NMS plan
until the Commission has completed its review of the NMS plan and thus cannot analyze
how the NMS plan will impact small entities until then.
Consequences of Not Conducting Collection
There is no way to not require the collection without undermining the purposes of
the Rule. 8 Commission staff notes that the Rule requires the filing of an NMS plan
within 270 days of the date of publication of the Adopting Release in
the Federal Register. 9
5

See Rule 613(a)(1).

6

17 CFR 240.0-10. See also 13 CFR 121.201.

7

Id.

8

Once the NMS plan required under Rule 613 has been approved by the
Commission, audit trail data would be collected from SROs and their members.
As noted above, the Commission is deferring its discussion of such burdens until
after there has been an opportunity for public comment on the NMS plan.

9

See supra notes 3 and 4. At the SROs’ request, the Commission granted
exemptions extending the deadline for the filing of the NMS Plan to December 6,
2013, and then to September 30, 2014. See Securities Exchange Act Release No.
69060 (March 7, 2013), 78 FR 15771 (March 12, 2013); Securities Exchange Act
Release No. 71018 (December 6, 2013), 78 FR 75669 (December 12, 2013). As
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Inconsistencies with Guidelines in 5 CFR 1320.5(d)(2)
There are no special circumstances. This collection is consistent with the
guidelines in 5 CFR 1320.5(d)(2).
Consultations Outside the Agency
The required Federal Register notices with 60-day and 30-day comment periods
soliciting comments on this collection of information were published. One public
comment letter was received in response to this submission.10
The comment letter, which was submitted by the SROs, notes that the amended
and restated NMS plan contained estimates of the SROs’ contribution of full time
employee hours and public relations, legal and consulting costs already incurred by the
SROs to develop and file the NMS Plan 11 and the amended and restated NMS Plan as of
February 27, 2015. 12
Commission staff acknowledges the cost information received from the SROs
relating to the development and filing of the NMS Plan required under Rule 613.
Commission staff, however, notes that the estimates in this extension relate to the
estimated costs of compliance with the requirement in Rule 613 to develop and file the
NMS plan during the three year period beginning on the expiration of the original
paperwork collection statement and not to costs already incurred. Given that the NMS
Plan has already been filed with the Commission,13 that the SROs’ estimates relate to
costs already incurred, and that the extension covers the following three years,
Commission staff does not believe it necessary to adjust the estimates contained in
the Federal Register. Commission staff, however, is clarifying that the estimates
contained herein relate to the activities following the expiration of the original paperwork
collection statement. Commission staff believes it is taking a conservative approach of
extending the current paperwork collection to address activities associated with the
already-filed NMS plan during the pendency of the Commission’s review of the NMS
plan.
noted above, the SROs filed the NMS Plan on September 30, 2014, and then filed
an amended and restated NMS Plan on February 27, 2015. Although the existing
collection of information pertains to the development and submission of an NMS
plan, and such NMS plan has been developed and submitted, Commission staff
believes it is prudent to extend this collection of information during the pendency
of the Commission’s review of the NMS plan.
10

See Letter from the SROs to Pamela Dyson, Director/Chief Information Officer,
Commission, dated September 25, 2015 (“SRO Comment Letter”).

11

See supra note 3.

12

See supra note 4.

13

See supra notes 3 and 4.
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Payment or Gift
Not applicable.
Confidentiality
The NMS plan required under Rule 613 must limit the use of the consolidated
data by the SROs for purposes of performing their respective regulatory and oversight
responsibilities pursuant to the federal securities laws, rules, and regulations. This
restriction would not prevent any SRO from using the data that it individually collects
and provides to the central repository pursuant to the Rule for other purposes as permitted
by applicable law, rule or regulation. Further, the NMS plan must contain several
provisions requiring the security of the information to be addressed. Rule 613(a)(1)(iv)
requires the SROs to discuss the security and confidentiality of the information reported
to the central repository in the NMS plan. Rule 613(b)(6) requires the NMS plan to
include a provision requiring the plan sponsors to provide to the Commission, at least every
two years after effectiveness of the national market system plan, a written assessment of
the operation of the consolidated audit trail, which would include an evaluation of the
performance of the consolidated audit trail’s system security. Rule 613(e)(4)(i) also
requires that the NMS plan include policies and procedures, including standards, to be
used by the plan processor to ensure the security and confidentiality of all information
reported to the central repository. The plan sponsors, and employees of the plan sponsors
and central repository, would be required to agree to use appropriate safeguards to ensure
the confidentiality of such data. Further, the Rule requires that the NMS plan require that
audit trail data may not be used by the SROs other than for surveillance or other
regulatory purposes.
The Commission would establish appropriate protections within the agency to
help ensure the confidentiality of the records proposed to be accessible to the
Commission pursuant to the Rule.
Sensitive Questions
No questions of a sensitive nature are asked. The information collection does not
collect any Personally Identifiable Information (PII).
Burden of Information Collection
Rule 613 requires the SROs to submit to the Commission an NMS plan to govern
the creation, implementation, and maintenance of a consolidated audit trail and central
repository for the collection of information for NMS securities. The NMS plan must
require each SRO and its respective members to provide certain data to the central
repository in compliance with Rule 613.

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As noted above, Commission staff believes it is taking a conservative approach of
extending the current paperwork collection to address activities associated with the
already-filed NMS plan during the pendency of the Commission’s review of the NMS
plan (the “Extension Period”). Accordingly, Commission staff estimates that the
aggregate one-time burden hour amount for these activities would be approximately
2,760 burden hours per SRO, 14 or approximately 52,440 burden hours in the aggregate. 15
Commission staff estimates that it would take the SROs approximately 17,480
annualized burden hours of internal legal, compliance, information technology, and
business operations time during the Extension Period [(2,760 initial one-time burden
hours amortized over three years) X (19 SROs)].
Costs to Respondents
Commission staff estimates that, on average, each exchange and association
would outsource 50 hours of legal time during the Extension Period, at an average hourly
rate of $400. 16 Commission staff estimates that the aggregate one-time reporting burden
would be approximately $20,000 in external costs per SRO, 17 or approximately $380,000
in the aggregate. 18
Commission staff estimates that the SROs would incur an aggregate, annualized
capital external cost of approximately $126,666.67 during the Extension Period resulting
from outsourced legal work [(50 hours x $400 per hour = $20,000, amortized over three
years) x (19 SROs)].
Costs to Federal Government
The Commission has incurred an external cost of $250,000 for technology
consulting services.
Changes in Burden

14

Commission staff estimates that each SRO would spend [(880 programmer
analyst hours) + (880 business analyst hours) + (700 attorney hours) + (300
compliance manager hours) = 2,760 burden hours.

15

Commission staff estimates that the SROs would spend an aggregate of [(2,760
hours) x (19 SROs)] = 52,440 burden hours.

16

This is based on an estimated $400 per hour cost for outside legal services used in
“Regulation Systems Compliance and Integrity” final rule: Securities Exchange
Act Release No. 73639, 79 FR 72252 (December 5, 2014).

17

Commission staff estimates that each SRO would spend 50 legal hours x $400 per
hour = $20,000 in external costs.

18

Commission staff estimates that the SROs would spend an aggregate of
[($20,000) x (19 SROs)] = $380,000 on outsourced legal work.
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The estimated one-time aggregate burden hours for SROs has increased from
46,920 to 52,440. Relatedly, the estimated annualized burden hours has increased from
15,640 to 17,480 annualized burden hours. These increases are due to an increase in the
number of SRO respondents, from 17 SROs to 19 SROs. In addition, the one-time
aggregate, annualized external cost has increased from $113,333.39 to $126,666.67.
These increases are the result of an increase in the number of SRO respondents (from 17
SROs to 19 SROs). The external legal cost per SRO has not changed. All other
assumptions remain unchanged.
Information Collection Planned for Statistical Purposes
Not applicable. The information collection is not used for statistical purposes.
Approval to Omit OMB Expriation Date
The Commission is not seeking approval to omit the OMB expiration date.
Exceptions to Certification for Paperwork Reduction Act Submissions
This collection complies with the requirements in 5 CFR 1320.9.
B.

Collections of Information Employing Statistical Methods
This information collection does not involve statistical methods.

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