Prohibition on the Use of Reserve Funds by the Consolidated Audit Trail National Market System Plan

Summary

SIFMA submitted a letter to the SEC opposing the proposed amendment to the CAT NMS Plan, which seeks to readopt a vacated funding model. They argue that using reserves built under the invalid model for CAT funding is unlawful and contradicts the court’s decision. SIFMA recommends holding reserves in escrow until a new funding path is established.

Excerpt

The Securities Industry and Financial Markets Association (“SIFMA”) ¹ submits this letter to the U.S. Securities and Exchange Commission (“Commission” or “SEC”) in connection with our ongoing review of the proposed amendment (“Proposed Amendment”) to the Consolidated Audit Trail National Market System Plan (“CAT NMS Plan”) to effectively readopt the now- vacated CAT funding model. ² CAT LLC filed the Proposed Amendment with the Commission purportedly in an attempt to address the decision by the 11th Circuit Court of Appeals that vacated the 2023 CAT funding model as of December 1, 2025. ³

On October 21, 2025, SIFMA submitted a comment letter to the Commission urging it to disapprove the Proposed Amendment, ⁴ a view that was shared by a number of other commenters, including certain of the Plan Participants. On December 18, 2025, the Plan Participants responded to the comments submitted on the proposal. ⁵ We are reviewing the response letter and may provide additional comments on the Proposed Amendment in light of the response and the Commission’s recent order instituting proceedings (“OIP”) regarding it. ⁶ In the meantime, we write to express our concerns about the Plan Participants’ intent to fund CAT through the millions in reserves it has built up in 2024 and 2025 under the now-vacated funding model. ⁷ Spending down the reserves at this point would be unlawful and inconsistent with the Court’s decision vacating (i.e., removing) the entire 2023 funding model that was added to the CAT NMS Plan for multiple reasons. ⁸ We also note that such a course of action would be contrary to any remedy needed to address what appears to be significant overcharging of CAT fees by CAT LLC in 2025. Furthermore, for the reserves it currently holds, we recommend that CAT LLC hold them in escrow until the Commission and industry stakeholders are able to chart a new path forward on CAT funding.

The 11th Circuit’s decision eliminated CAT LLC’s funding authority under the 2023 CAT funding model.

As of December 1, 2025, the Court vacated the CAT funding model adopted in September 2023. ⁹ Not only does the decision mean that CAT LLC no longer has the authority to collect CAT fees pursuant to the 2023 funding model, but all of the provisions governing the 2023 funding model in the CAT NMS Plan, including the one governing reserve funds, are invalid and no longer in effect. That includes a provision in Article XI allowing the CAT NMS Plan to include in its budget “an amount reasonably necessary to allow the Company to maintain a reserve of not more than 25% of the annual budget.” ¹⁰ The same provision stated: “To the extent collected CAT fees exceed CAT costs, including the reserve of 25% of the annual budget, such surplus shall be used to offset future fees.” ¹¹

With regard to CAT funding, the Court’s decision places the Plan Participants in the position they were in prior to the Commission’s approval in September 2023 of the now-vacated funding model, which is no longer part of the CAT NMS Plan. Prior to September 2023, the Plan Participants funded CAT directly because the Commission had not yet approved a funding model for the CAT. The Plan Participants thus are now subject to the same funding obligations as they were prior to the Commission’s approval of the 2023 funding model.

The Court’s decision prohibits CAT LLC from using any funds, including any reserves, collected pursuant to the vacated funding model to fund ongoing and future CAT costs.

According to the most recent “Revised 2025 Financial and Operating Budget” posted on the CAT NMS Plan’s website, the Plan’s liquidity reserve balance is estimated to be $125,128,336 as of the end of 2025. ¹² In a recent fee alert, CAT LLC stated that subsequent to the invoices it will issue in late December 2025 for November 2025 activity, it will not issue additional invoices for CAT fees to Industry Members “until further notice.” ¹³ While the statement confirmed that CAT LLC no longer will charge CAT fees pursuant to the 2023 funding model, it raised the question of how the Plan Participants plan to pay for the CAT beginning in December 2025 since the funding model is no longer in place. ¹⁴ As discussed, the CAT NMS Plan confirmed that CAT LLC intends to fund the CAT by spending down the reserve amount. ¹⁵ CAT LLC cannot do so for multiple reasons.

First, as discussed, all of the money in the reserve fund was charged and collected using the authority given to CAT LLC by the now invalid 2023 funding model. Based on the Court’s
vacatur of the 2023 funding model, CAT LLC is now prohibited from using the reserves in any manner to fund the CAT. If CAT LLC is funding its ongoing operations costs using the reserves collected under the 2023 funding model, it would effectively extend the life of the unlawful 2023 funding model well beyond the date of its vacatur.

Second, the Plan Participants introduced the concept of a reserve in the funding model of the CAT NMS Plan to serve as a financial buffer, helping smooth out fluctuations and prevent
sudden changes in fees and manage timing mismatches between fee collection and actual CAT expenses. ¹⁶ The reserve was not intended for use by the Plan Participants or the SEC as a way to avoid addressing the lack of a proper funding model. Using the reserve when its legal foundation has been deemed invalid contradicts its core purpose. Treating the reserve as a fund for the Plan Participants in the absence of a lawful funding model also could set a negative precedent for including such a reserve in future models. Any attempt by the Plan Participants to use the reserves to fund CAT costs would be in direct contravention of the Court’s decision and unlawful.