FR 2021-02188

The document announced by the Securities and Exchange Commission (SEC) pertains to proposed modifications by Cboe BZX Exchange, Inc. regarding their compliance rules. These changes align with an exemption granted by the SEC from certain requirements in the National Market System Plan Governing the Consolidated Audit Trail (CAT NMS Plan). These adjustments propose an "Allocation Alternative," which intends to enhance reporting efficiency by focusing data submissions on those industry members who have full information about allocations.

General Summary

The proposed rule changes introduce an alternative method for the reporting of allocation details, aiming to alleviate unnecessary burdens on certain brokers. Specifically, these changes redefine what constitutes an "Allocation" and detail the elements required in an "Allocation Report." The primary objective is to ensure that only those industry members directly involved in the allocation process are responsible for reporting, thus streamlining the process and improving overall regulatory efficiency.

Significant Issues or Concerns

Complex Language: The document is laden with technical legal jargon and dense regulatory language, which could hinder comprehension among laypeople. This complexity might obscure understanding of the rule changes and their real-world implications.

Implications for Stakeholders: The document does not explicitly state how the proposed changes will affect different stakeholders, such as industry members, brokers, and investors. Greater clarity would help stakeholders prepare for and adapt to these changes.

Benefits and Efficiency: While the document promises enhanced regulatory efficiency and data accuracy, it fails to clearly elucidate how these improvements will specifically be achieved through the Allocation Alternative.

Impact on Smaller Firms: There is no discussion on how smaller brokers or firms, possibly with fewer resources, might be impacted. The changes could potentially place a different level of burden on them compared to larger entities.

Insider Knowledge Assumption: The use of specialized industry terms without adequate explanation assumes a degree of prior knowledge that general audiences, and even some industry participants, may not possess.

Public Impact

Broadly, the public may benefit from these reforms if they lead to a more efficient market system with fewer reporting redundancies. However, due to the document's technical nature, its direct implications for the general investor or the average member of the public remain somewhat opaque.

Impact on Specific Stakeholders

Executing Brokers: For brokers not directly performing allocations, these changes might reduce the regulatory load, freeing them from the obligation to submit allocation data for trades they execute but do not clear.

Industry Members with Allocation Information: These members could face increased responsibilities, as they will be required to ensure thorough reporting with expanded data requirements. However, this redistribution might streamline the reporting process by concentrating the task on those with complete access to relevant information.

While the aim of these updates is improved efficiency in data handling, challenges related to the clarity of documentation and potential new burdens on smaller entities must be addressed to prevent unforeseen negative impacts. The benefits of these rule changes will ultimately depend on their implementation and stakeholders' ability to adapt efficiently.

The document references financial criteria in the context of identifying "institutional accounts" under FINRA Rule 4512(c). According to this rule, an institutional account can be defined as the account of various types of financial entities or individuals holding significant assets. Specifically, it includes:

1. A bank, savings and loan association, insurance company, or registered investment company.
2. An investment adviser registered either with the Commission under Section 203 of the Investment Advisers Act or with a state securities commission.
3. Any other person or entity with total assets of at least $50 million.

This definition is important within the document's context because it relates directly to the proposed changes in the reporting of allocations to different types of accounts. An understanding of who qualifies as an "institutional account" is essential because it influences how and when Allocation Reports must be filed, particularly regarding accounts with significant financial holdings.

The financial threshold of $50 million in total assets signals a level of substantial financial activity, which impacts reporting requirements for brokers when dealing with these kinds of accounts. This high asset threshold ensures that more substantial financial dealings are tracked and reported accurately, which can help regulators detect any misuse of the allocation process.

Connecting this financial reference to the identified issues, the document does not clearly outline how these significant financial criteria affect smaller brokers or firms, which may not have the necessary infrastructure to meet the reporting standards imposed by these rules. While the focus is clearly on large institutions, smaller entities may struggle to comply without additional resources.

Moreover, the document uses complex terminology and doesn't sufficiently explain how these financial allocations and thresholds benefit regulatory efficiency or data accuracy. For the general public, especially those without a background in finance or regulatory practices, understanding the reasoning behind these financial delineations and the resultant exemptions can be challenging without additional context.

Overall, while the financial references and thresholds are clear in establishing what constitutes an institutional account, the implications of these distinctions, particularly for different market participants like smaller brokers, are less transparent. This lack of clarity on who is primarily impacted by these changes could affect the perceived equity and fairness of the regulatory adjustments proposed in the document.