[Federal Register Volume 75, Number 78 (Friday, April 23, 2010)]
[Proposed Rules]
[Pages 21456-21498]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-9025]
[[Page 21455]]
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Part III
Securities and Exchange Commission
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17 CFR Parts 240 and 249
Large Trader Reporting System; Proposed Rule
Federal Register / Vol. 75, No. 78 / Friday, April 23, 2010 /
Proposed Rules
[[Page 21456]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240 and 249
[Release No. 34-61908; File No. S7-10-10]
RIN 3235-AK55
Large Trader Reporting System
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
proposing new Rule 13h-1 and Form 13H under Section 13(h) of the
Securities Exchange Act of 1934 (``Exchange Act'') to establish a large
trader reporting system. The proposal is intended to assist the
Commission in identifying and obtaining certain baseline trading
information about traders that conduct a substantial amount of trading
activity, as measured by volume or market value, in the U.S. securities
markets. In essence, a ``large trader'' would be defined as a person
whose transactions in NMS securities equal or exceed two million shares
or $20 million during any calendar day, or 20 million shares or $200
million during any calendar month. The proposed large trader reporting
system is designed to facilitate the Commission's ability to assess the
impact of large trader activity on the securities markets, to
reconstruct trading activity following periods of unusual market
volatility, and to analyze significant market events for regulatory
purposes. It also should enhance the Commission's ability to detect and
deter fraudulent and manipulative activity and other trading abuses,
and should provide the Commission with a valuable source of useful data
to study markets and market activity.
The proposed identification, recordkeeping, and reporting system
would provide the Commission with a mechanism to identify large traders
and their affiliates, accounts, and transactions. Specifically,
proposed Rule 13h-1 would require large traders to identify themselves
to the Commission and make certain disclosures to the Commission on
proposed Form 13H. Upon receipt of Form 13H, the Commission would issue
a unique identification number to the large trader, which the large
trader would then provide to its registered broker-dealers. Registered
broker-dealers would be required to maintain transaction records for
each large trader, and would be required to report that information to
the Commission upon request. In addition, registered broker-dealers
would be required to adopt procedures to monitor their customers for
activity that would trigger the identification requirements of the
proposed rule.
DATES: Comments should be submitted on or before June 22, 2010.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
Send an e-mail to [email protected]. Please include
File Number S7-10-10 on the subject line; or
Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F St., NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-10-10. This file number
should be included on the subject line if e-mail is used. To help us
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/proposed.shtml). Comments
are also available for Web site viewing and copying in the Commission's
Public Reference Room, 100 F St., NE., Washington, DC 20549 on official
business days between the hours of 10 a.m. and 3 p.m. 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.
FOR FURTHER INFORMATION CONTACT: Richard R. Holley III, Senior Special
Counsel, at (202) 551-5614, Christopher W. Chow, Special Counsel, at
(202) 551-5622, or Gary M. Rubin, Attorney, at (202) 551-5669, Division
of Trading and Markets, Securities and Exchange Commission, 100 F
Street, NE., Washington, DC 20549-7010.
SUPPLEMENTARY INFORMATION:
I. Introduction
U.S. securities markets have experienced a dynamic transformation
in recent years. In large part, the changes reflect the culmination of
a decades-long trend from a market structure with primarily manual
trading to a market structure with primarily automated trading. Rapid
technological advances have produced fundamental changes in the
structure of the securities markets, the types of market participants,
the trading strategies employed, and the array of products traded. The
markets also have become even more competitive, with exchanges and
other trading centers offering innovative order types, data products
and other services, and aggressively competing for order flow by
reducing transaction fees and increasing rebates. These changes have
facilitated the ability of large institutional and other professional
market participants to employ sophisticated trading methods to trade
electronically in huge volumes with great speed. For example, high
frequency traders have become increasingly prominent at a time when the
markets are experiencing an increase in overall volume. Market analysts
have offered a wide range of estimates for the level of activity
attributable to high frequency traders, but these estimates typically
exceed 50% of total volume.\1\ Meanwhile, consolidated average daily
share volume and trades in NYSE-listed stocks increased from just 2.1
billion shares and 2.9 million trades in January 2005, to 5.9 billion
shares (an increase of 181%) and 22.1 million trades (an increase of
662%) in September 2009.\2\
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\1\ See, e.g., Jonathan Spicer and Herbert Lash, Who's Afraid of
High-Frequency Trading?, Reuters.com, December 2, 2009, available at
http://www.reuters.com/article/idUSN173583920091202 (``High-
frequency trading now accounts for 60 percent of total U.S. equity
volume, and is spreading overseas and into other markets.''); Scott
Patterson and Goeffrey Rogow, What's Behind High-Frequency Trading,
Wall Street Journal, August 1, 2009 (``High frequency trading now
accounts for more than half of all stock-trading volume in the
U.S.''). See also Rob Iati, The Real Story of Trading Software
Espionage, Advanced Trading, July 10, 2009, available at http://advancedtrading.com/algorithms/showArticle.jhtml?articleID=218401501
(high frequency trading accounts for 73% of U.S. equity trading
volume). One source estimates that, five years ago, that number was
less than 25%. See Rob Curran & Geoffrey Rogow, Rise of the (Market)
Machines, Wall Street Journal, June 19, 2009, available at http://blogs.wsj.com/marketbeat/2009/06/19/rise-of-the-market-machines/.
The trend is clear that high frequency traders now play an
increasingly prominent role in the securities markets.
\2\ See NYSE Euronext, Consolidated Volume in NYSE Listed Issues
2000-2009 (available at http://www.nyxdata.com/nysedata/NYSE/FactsFigures/tabid/115/Default.aspx). In addition, NYSE's average
speed of execution for small (100-499 shares) market orders and
marketable limit orders was 10.1 seconds in January 2005, compared
to 0.7 seconds in October 2009. See NYSE Euronext, Rule 605 Reports
for January 2005 and October 2009, available at http://www.nyse.com/equities/nyseequities/1201780422054.html. Consolidated average trade
size in NYSE-listed stocks was 724 shares in 2005, compared to 268
shares in January through October 2009. See NYSE Euronext,
Consolidated Volume in NYSE Listed Issues 2000-2009, available at
http://www.nyxdata.com/nysedata/NYSE/FactsFigures/tabid/115/Default.aspx.
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With respect to market movements and volatility, 2008 marked the
third largest yearly decline for the Dow Jones Industrial Average
(``Dow'') since it was inaugurated in 1896, with the Dow finishing down
approximately 34% for the year. However, through the end of December
2009, the Dow had advanced approximately 19%.\3\ While such market
movements are pronounced in absolute terms, volatility and expectations
of volatility have fluctuated considerably. Notably, the CBOE VIX
volatility index (based on the S&P 500) marked a high of 80.86 on
November 20, 2008, but had fallen back to the low 20s by late 2009.\4\
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\3\ Bloomberg L.P. ``Stock price graph for Dow Jones Industrial
Average 12/31/08 to 12/31/09.'' (2010) (18.82%).
\4\ For purposes of comparison, the high in the VIX for 2007 was
31.09. See CBOE's Volatility Indexes (January 2009) available at
http://www.cboe.com/micro/vix/volatility_qrg.pdf. The VIX is a
measure of market expectations of near-term volatility conveyed by
stock index option prices. Specifically, VIX measures 30-day
expected volatility of the S&P 500 Index. The components of VIX are
near- and next-term put and call options, usually in the first and
second SPX contract months. See Chicago Board Options Exchange,
``The CBOE Volatility Index--VIX,'' at 1 and 4, available at http://www.cboe.com/micro/vix/vixwhite.pdf.
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In light of the dramatic changes to the securities markets,
including increased volumes, volatility, and the growing prominence of
large traders, the Commission recently published a Concept Release to
solicit public comment on a broad range of market structure issues.\5\
Given the dramatic changes to the securities markets, the Commission
believes it is appropriate to exercise its authority under Section
13(h) of the Exchange Act and propose to establish a large trader
reporting system, so as to enhance the Commission's ability to identify
large market participants, collect information on their trading, and
analyze their trading activity.
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\5\ See Securities Exchange Act Release No. 61358 (January 14,
2010), 75 FR 3594 (January 21, 2010) (File No. S7-02-10) (Concept
Release on Equity Market Structure).
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Currently, to support its regulatory and enforcement activities,
the Commission collects transaction data from registered broker-dealers
through the Electronic Blue Sheets (``EBS'') system.\6\ The Commission
uses the EBS system to obtain securities transaction information for
two primary purposes: (1) To assist in the investigation of possible
Federal securities law violations, primarily involving insider trading
or market manipulation; and (2) to conduct market reconstructions.
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\6\ See 17 CFR 240.17a-25 (Electronic Submission of Securities
Transaction Information by Exchange Members, Brokers, and Dealers).
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The EBS system has performed relatively effectively as an
enforcement tool for analyzing trading in a small sample of securities
over a limited period of time. However, because the EBS system is
designed for use in narrowly-focused enforcement investigations that
generally involve trading in particular securities, it has proven to be
insufficient for large-scale market reconstructions and analyses
involving numerous stocks during peak trading volume periods.\7\
Further, it does not address the Commission's need to identify
important market participants and their trading activity. To enhance
the Commission's ability to identify large traders and collect
information on their trading activity, Congress passed the Market
Reform Act of 1990 (``Market Reform Act'').\8\
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\7\ The shortcomings of the EBS system were noted by the Senate
Committee on Banking, Housing and Urban Affairs in the Senate Report
accompanying the Market Reform Act of 1990. See Senate Report, infra
note 9, at 48.
\8\ Public Law 101-432 (HR 3657), October 16, 1990.
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A. The Market Reform Act
Following declines in the U.S. securities markets in October 1987
and October 1989, Congress noted that the Commission's ability to
analyze the causes of a market crisis was impeded by its lack of
authority to gather trading information.\9\ To address this concern,
Congress passed the Market Reform Act, which, among other things,
amended Section 13 of the Exchange Act to add new subsection (h),
authorizing the Commission to establish a large trader reporting system
under such rules and regulations as the Commission may prescribe.
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\9\ The legislative history accompanying the Market Reform Act
also noted the Commission's limited ability to analyze the causes of
the market declines of October 1987 and 1989. See generally Senate
Comm. on Banking, Housing, and Urban Affairs, Report to accompany
the Market Reform Act of 1990, S. Rep. No. 300, 101st Cong. 2d Sess.
(May 22, 1990) (reporting S. 648) (``Senate Report'') and House
Comm. on Energy and Commerce, Report to accompany the Securities
Market Reform Act of 1990, H.R. No. 524, 101st Cong. 2d Sess. (June
5, 1990) (reporting H.R. 3657).
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The large trader reporting authority in section 13(h) of the
Exchange Act was intended to facilitate the Commission's ability to
monitor the impact on the securities markets of securities transactions
involving a substantial volume or large fair market value, as well as
to assist the Commission's enforcement of the federal securities
laws.\10\ In particular, the Market Reform Act provided the Commission
with the authority to collect broad-based information on large traders,
including their trading activity, reconstructed in time sequence, in
order to provide empirical data necessary for the Commission to
evaluate market movement and volatility and enhance its ability to
detect illegal trading activity.\11\
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\10\ See 15 U.S.C. 78m(h)(1). See also Senate Report, supra note
9, at 42.
\11\ See Senate Report, supra note 9, at 4, 44, and 71. In this
respect, though self-regulatory organization (``SRO'') audit trails
provide a time-sequenced report of broker-dealer transactions, those
audit trails generally do not identify the broker-dealer's
customers. Accordingly, the Commission is not presently able to
utilize existing SRO audit trail data to accomplish the objectives
of the Market Reform Act.
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The large trader reporting system envisioned by the Market Reform
Act authorizes the Commission to require large traders \12\ to self-
identify to the Commission and provide information to the Commission
identifying the trader and all accounts in or through which the trader
effects securities transactions.\13\ The Market Reform Act also
contemplated that the Commission could require large traders to
identify their status as large traders to any registered broker-dealer
through whom they directly or indirectly effect securities
transactions.\14\
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\12\ Section 13(h) of the Exchange Act defines a ``large
trader'' as ``every person who, for his own or an account for which
he exercises investment discretion, effects transactions for the
purchase or sale of any publicly traded security or securities by
use of any means or instrumentality of interstate commerce or of the
mails, or of any facility of a national securities exchange,
directly or indirectly by or through a registered broker or dealer
in an aggregate amount equal to or in excess of the identifying
activity level.'' See 15 U.S.C. 78m(h)(8)(A). The term ``identifying
activity level'' is defined in Section 13(h) as ``transactions in
publicly traded securities at or above a level of volume, fair
market value, or exercise value as shall be fixed from time to time
by the Commission by rule or regulation, specifying the time
interval during which such transactions shall be aggregated.'' See
15 U.S.C. 78m(h)(8)(C). The proposed ``identifying activity level''
is set forth in paragraph (a)(7) of proposed Rule 13h-1.
\13\ See 15 U.S.C. 78m(h)(1)(A).
\14\ See 15 U.S.C. 78m(h)(1)(B).
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In addition to facilitating the ability of the Commission to
identify large traders, the Market Reform Act authorizes the Commission
to collect information on the trading activity of large traders. In
particular, the Commission is authorized to require every registered
broker-dealer to make and keep records with respect to securities
transactions of large traders that equal or exceed a certain
``reporting activity level'' and report such
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transactions upon request of the Commission.\15\
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\15\ See 15 U.S.C. 78m(h)(2). Section 13(h) also provides the
Commission with authority to determine the manner in which
transactions and accounts should be aggregated, including
aggregation on the basis of common ownership or control. See 15
U.S.C. 78m(h)(3). The term ``reporting activity level'' is defined
in Section 13(h)(8)(D) of the Exchange Act to mean ``transactions in
publicly traded securities at or above a level of volume, fair
market value, or exercise value as shall be fixed from time to time
by the Commission by rule, regulation, or order, specifying the time
interval during which such transactions shall be aggregated.'' See
15 U.S.C. 78m(h)(8)(D).
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The Market Reform Act specifies that the information collected from
large traders and registered broker-dealers under a large trader
reporting system would be considered confidential, subject to limited
exceptions.\16\ In addition, the Market Reform Act provides the
Commission with the authority to exempt any person or class of persons
or any transaction or class of transactions from the large trader
reporting system requirements.\17\
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\16\ See 15 U.S.C. 78m(h)(7).
\17\ See 15 U.S.C. 78m(h)(6).
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B. Prior Rulemaking
The Commission initially proposed to use its authority under
Section 13(h) of the Exchange Act to establish a large trader reporting
system in 1991.\18\ Similar to the current proposal, the earlier
proposed rulemaking would have required large traders to disclose to
the Commission their accounts and affiliations by filing Form 13H and
would have imposed recordkeeping and reporting requirements on broker-
dealers with respect to the activity of their large trader
customers.\19\
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\18\ See Securities Exchange Act Release No. 29593 (August 22,
1991), 56 FR 42550 (August 28, 1991) (S7-24-91) (``1991 Proposal'').
\19\ In 1991, the Commission proposed an ``identifying activity
level,'' the triggering level at which large traders would be
required to identify themselves to the Commission, of aggregate
transactions during any 24-hour period that equals or exceeds either
100,000 shares or fair market value of $4,000,000, or any
transactions that constitute program trading. See 1991 Proposal,
supra note 18, 56 FR at 42551.
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After considering the comments received on the 1991 Proposal, the
Commission clarified and revised its proposed large trader system and
issued a re-proposal in 1994.\20\ Among other things, the re-proposal
sought to: clarify the definition of large trader and to increase the
reporting thresholds; \21\ streamline the filing requirements and
include provisions for an inactive filing status; \22\ and provide a
safe harbor for a broker-dealer's duty to monitor compliance with the
rule.\23\
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\20\ See Securities Exchange Act Release No. 33608 (February 9,
1994), 59 FR 7917 (February 17, 1994) (S7-24-91) (``1994
Reproposal'').
\21\ Specifically, the Commission proposed to increase the
``identifying activity level'' to aggregate transactions in publicly
traded securities that are equal to or greater than the lesser of
200,000 shares and fair market value of $2,000,000 or fair market
value of $10,000,000. The Commission left unchanged the provision
that captured transactions that constitute program trading. See 1994
Reproposal, supra note 20, 59 FR at 7922.
\22\ See 1994 Reproposal, supra note 20, 59 FR at 7927.
\23\ See id. at 7918.
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C. Rule 17a-25 and the Enhanced EBS System
The Commission did not adopt the large trader reporting rule as re-
proposed in 1994. However, in 2001 the Commission adopted Rule 17a-25
to enhance the EBS system and facilitate the Commission's ability to
collect electronic transaction data to support its investigative and
enforcement activities.\24\
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\24\ See Securities Exchange Act Release No. 44494 (June 29,
2001), 66 FR 35836 (July 9, 2001) (S7-12-00) (final rulemaking)
(``EBS Release''); 42741 (May 2, 2000), 65 FR 26534 (May 8, 2000)
(proposed rulemaking).
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Rule 17a-25 enhanced the EBS system in three primary areas. First,
it requires broker-dealers to submit to the Commission securities
transaction information responsive to a Blue Sheets request in
electronic format.\25\ Second, the rule modified the EBS system to take
into account evolving trading strategies used primarily by
institutional and professional traders. Specifically, the rule requires
firms to supply three additional data elements--prime brokerage
identifiers,\26\ average price account identifiers,\27\ and depository
institution identifiers \28\--to assist the Commission in aggregating
securities transactions by entities trading through multiple accounts
at more than one broker-dealer.\29\ Finally, the rule requires broker-
dealers to update their contact person information to provide the
Commission with up-to-date information necessary for the Commission to
direct EBS requests to the appropriate staff.\30\
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\25\ See 17 CFR 240.17a-25. Rule 17a-25 requires submission of
the same standard customer and proprietary transaction information
that SROs request in connection with their market surveillance and
enforcement inquiries. For a proprietary transaction, the broker-
dealer must include the following information: (1) Clearing house
number or alpha symbol used by the broker-dealer submitting the
information; (2) clearing house number(s) or alpha symbol(s) of the
broker-dealer(s) on the opposite side to the trade; (3) identifying
symbol assigned to the security; (4) date transaction was executed;
(5) number of shares, or quantity of bonds or options contracts, for
each specific transaction; whether each transaction was a purchase,
sale, or short sale; and, if an options contract, whether open long
or short or close long or short; (6) transaction price; (7) account
number; (8) identity of the exchange or market where each
transaction was executed; (9) prime broker identifier; (10) average
price account identifier; and (11) the identifier assigned to the
account by a depository institution. For customer transactions, the
broker-dealer also is required to include the customer's name,
customer's tax identification number, customer's address(es), branch
office number, registered representative number, whether the order
was solicited or unsolicited, and the date the account was opened.
If the transaction was effected for a customer of another member,
broker, or dealer, the broker-dealer must include information on
whether the other party was acting as principal or agent on the
transaction.
\26\ The Commission requires prime brokerage identifiers to
avoid double-counting of transactions where EBS submissions reflect
the same trade by both the executing broker-dealer and the broker-
dealer acting as the prime broker. See EBS Release, supra note 24,
66 FR at 35838.
\27\ Some broker-dealers use ``average price accounts'' as a
mechanism to buy or sell large amounts of a given security for their
customers. Under this arrangement, a broker-dealer's average price
account may buy or sell a security in small increments throughout a
trading session, and then transfer the accumulated long or short
position to one or more accounts for an average price or volume-
weighted average price after the market close. Similar to prime
brokerage identifiers, the Commission requires average price account
identifiers to avoid double-counting where the EBS submission
reflects the same transaction for both the firm's average price
account and the accounts receiving positions from the average price
account. See EBS Release, supra note 24, 66 FR at 35838-39.
\28\ The inclusion of a depository identifier in EBS reports was
designed to expedite the Commission's efforts to aggregate trading
when conducting complex trading reconstructions. See EBS Release,
supra note 24, 66 FR at 35839.
\29\ See 17 CFR 240.17a-25(b).
\30\ This provision was designed to address the recurring
problem of frequent staff turnover and re-organizations at broker-
dealers to ensure the Commission directs EBS requests to the
appropriate personnel. See EBS Release, supra note 24, 66 FR at
35839.
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D. The Current Proposal
While Rule 17a-25 enhanced the Commission's EBS system and improved
the Commission's ability to obtain electronic transaction records, it
is insufficient for large-scale investigations and market
reconstructions involving numerous stocks during peak trading volume
periods, and is therefore inadequate with respect to the Commission's
efforts to monitor the impact of large trader activity on the
securities markets.\31\
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\31\ See 15 U.S.C. 78m(h)(1).
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In particular, Rule 17a-25 does not specify a definitive deadline
by which EBS trade information must be furnished to the Commission and,
in the Commission's experience, data collected through the EBS system
often is subject to lengthy delays, particularly with respect to files
involving a large number of transactions over an extended time period.
Commission staff often must make multiple requests to broker-dealers to
obtain sufficient order information about the purchase or sale of a
specific security to be able to
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adequately analyze the trading. These multiple requests and responses
can take a significant amount of time and delay the Commission's
efforts to analyze the data on a contemporaneous basis. Further, since
decimal trading has increased the number of price points for
securities, the volume of transaction data subject to reporting under
the EBS system, particularly in the case of active large traders, can
be significantly greater than the EBS system was intended to
accommodate in a typical request for data. Thus, the current EBS system
does not efficiently collect large volumes of data in a timely manner
that allows the Commission to perform contemporaneous analysis of
market events.
Further, the data generated by the EBS system does not include
important information on the time of the trade or the identity of the
customer.\32\ While the Commission may be able to use price as a proxy
for execution time when reconstructing trading history in a particular
security, such analysis is extremely resource intensive and hinders the
Commission's ability to promptly analyze data on a contemporaneous
basis. Further, information to identify the large trader customer can
provide valuable information to permit the Commission to track large
trader activity across markets and through various broker-dealers. The
ability to track and analyze this information would facilitate the
Commission's efforts both to investigate potential manipulative
activity and to reconstruct a more accurate market history and would be
particularly useful when analyzing information on large traders, as
some large traders may trade through multiple accounts at multiple
broker-dealers and may trade using sponsored access.\33\
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\32\ The Commission staff also is developing, for Commission
consideration, a proposal to establish a consolidated audit trail
for equities and options that would collect and consolidate detailed
information about orders entered and trades executed on any exchange
or in the over-the-counter market. As Commission staff is unable to
estimate when that proposal could potentially be operational, the
large trader reporting system proposed today is designed to address
in the near term the Commission's current need for access to more
information about large traders and their activities. Longer term,
the proposed large trader reporting system should continue to
provide a uniquely valuable tool for efficiently identifying the
most significant market participants, in particular with respect to
the requirement on large traders to self-identify to the Commission,
as this aspect is uniquely addressed by Section 13(h) of the
Exchange Act and proposed Rule 13h-1.
\33\ The Commission recently proposed rules that would address
sponsored access to exchanges. See Securities and Exchange Act
Release No. 61379 (January 26, 2010), 75 FR 4713 (January 29, 2010)
(File No. S7-03-10).
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In light of recent turbulent markets and the increasing
sophistication and trading capacity of large traders, the Commission
needs to enhance further its ability to collect and analyze trading
information more efficiently, especially with respect to the most
active market participants. In particular, the Commission needs a
mechanism to reliably identify large traders, and promptly and
efficiently obtain their trading information on a market-wide basis.
The Commission believes a proposal for a large trader reporting
system is necessary because, as noted above, large traders appear to be
playing an increasingly prominent role in the securities markets. For
example, market observers have offered a wide range of estimates for
the percent of overall volume attributable to one potential subcategory
of large trader--high frequency traders--which are typically estimated
at 50% of total volume or higher.\34\ The proposed large trader
reporting system is intended to provide the Commission with an
efficient system for obtaining the information necessary to monitor
more effectively the impact on the securities markets of ``large
traders.'' As discussed in greater detail below, the Commission
proposes to define a ``large trader'' as a person who, in exercising
investment discretion, effects transactions in NMS securities \35\ in
an amount equal to or greater than (1) during a calendar day, either 2
million shares or shares with a fair market value of $20 million; or
(2) during a calendar month, either 20 million shares or shares with a
fair market value of $200 million.\36\
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\34\ See supra note 1.
\35\ 17 CFR 240.600(b)(46) (defining ``NMS security'' as ``any
security or class of securities for which transaction reports are
collected, processed, and made available pursuant to an effective
transaction reporting plan, or an effective national market system
plan for reporting transactions in listed options.''). The term
refers to all exchange-listed securities, including equities and
options.
\36\ See infra notes 72-73 and accompanying text (discussing the
calculation of the identifying activity level when determining who
meets the definition of large trader).
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Among other things, the Commission believes that a large trader
reporting system would enhance its ability to (1) reliably identify
large traders and their affiliates, (2) obtain far more promptly
trading data on the activity of large traders, including execution
time,\37\ and (3) aggregate and analyze trading data among affiliated
large traders.
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\37\ See infra note 149 and accompanying text.
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II. Description of the Proposed Rule
A. Application and Scope
As discussed in detail below, under proposed Rule 13h-1, any person
would be a ``large trader'' that ``directly or indirectly, including
through other persons controlled by such person, exercises investment
discretion over one or more accounts and effects transactions for the
purchase or sale of any NMS security for or on behalf of such accounts,
by or through one or more registered broker-dealers, in an aggregate
amount equal to or greater than the identifying activity level.'' \38\
All large traders would be required to identify themselves to the
Commission by filing Form 13H, and would be required to update their
Form 13H at least annually and more frequently as necessary.\39\
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\38\ See proposed Rule 13h-1(a)(1).
\39\ See proposed Rule 13h-1(b)(1).
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Upon receiving an initial Form 13H, the Commission would assign
each large trader a unique Large Trader Identification Number
(``LTID''). The LTID is a critical component of the proposal, and is
intended, among other things, to enable the Commission to aggregate
accounts and transactions of large traders on an inter-broker-dealer
basis to capture a large trader's trading activity even where the large
trader executes trades through a number of different registered broker-
dealers. In particular, the LTID would allow the Commission to
efficiently sort trade information by large trader.
A large trader would be required to disclose to each of its
registered broker-dealers its LTID and identify all of the accounts
held by that broker-dealer through which the large trader trades.\40\
By requiring the large trader to identify all applicable accounts to
its registered broker-dealer, the proposed rule would place the self-
identification requirement directly on the large trader, which should
assist the registered broker-dealer in easily identifying and marking
all of the large trader's accounts held by the broker-dealer. A broker-
dealer also would be required to identify itself as a large trader if
it effected transactions for a proprietary account (or other account
over which it exercises investment discretion) at or above the
identifying activity level. Further, the proposed rule would require
large traders to provide, upon request, additional information to the
Commission that would allow the Commission to further identify the
large
[[Page 21460]]
trader and all accounts through which the large trader effects
transactions.\41\
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\40\ See proposed Rule 13h-1(b)(2).
\41\ See proposed Rule 13h-1(b)(4). For example, the Commission
might request additional information regarding a response provided
in Schedule 6 to a large trader's Form 13H concerning the
identification of accounts.
---------------------------------------------------------------------------
Proposed Rule 13h-1 also would impose recordkeeping and reporting
requirements on registered broker-dealers, and would require registered
broker-dealers to provide large trader transaction data to the
Commission upon request. Finally, the proposed rule would require
registered broker-dealers to establish and maintain systems and
procedures designed to help assure compliance with the identification
requirements of the proposed rule.
Accordingly, the proposed rule would impose the following
obligations on a large trader: (1) Self-identify to the Commission by
filing and updating Form 13H; (2) disclose its LTID to its registered
broker-dealers and others with whom it collectively exercises
investment discretion; and (3) provide certain additional information
in response to a Commission request. The proposed rule would impose the
following obligations on registered broker-dealers: (1) Maintain
records of transactions effected for large traders that are identified
by the specific large trader; (2) electronically report large trader
transaction information to the Commission upon request; and (3) monitor
compliance with the proposed rule.
B. Defining Large Trader
The proposed definition of a large trader is based on the
definition of ``large trader'' in Section 13(h)(8)(A) of the Exchange
Act.\42\ Specifically, paragraph (a)(1) of the proposed rule defines a
``large trader'' as ``any person that directly or indirectly, including
through other persons controlled by such person, exercises investment
discretion over one or more accounts and effects transactions for the
purchase or sale of any NMS security for or on behalf of such accounts,
by or through one or more registered broker-dealers, in an aggregate
amount equal to or greater than the identifying activity level.''
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\42\ See 15 U.S.C. 78m(h)(8)(A) (providing that ``the term
`large trader' means every person who, for his own account or an
account for which he exercises investment discretion, effects
transactions for the purchase or sale of any publicly traded
security or securities by use of any means or instrumentality of
interstate commerce or of the mails, or of any facility of a
national securities exchange, directly or indirectly by or through a
registered broker or dealer in an aggregate amount equal to or in
excess of the identifying activity level'').
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When determining who would be subject to the proposed requirements
as a ``large trader,'' the proposed definition is intended to focus, in
more complex organizations, on the parent company of the entities that
employ or otherwise control the individuals that exercise investment
discretion. The purpose of this focus is to narrow the number of
persons that would need to self-identify as ``large traders'' while
allowing the Commission to identify the primary institutions that
conduct a large trading business. As discussed further below, the
proposed rule provides specific guidance as to who should self-identify
as a ``large trader.'' Paragraph (b)(3)(i) of the proposed rule
provides that a large trader shall not be required to separately comply
with the requirements of paragraph (b) if a person who controls the
large trader complies with all of the requirements under paragraphs
(b)(1), (b)(2), and (b)(4) applicable to such large trader with respect
to all of its accounts.\43\ The intent of this proposed provision is to
push the identification requirement up the corporate hierarchy to the
parent entity to identify the primary institutions that conduct a large
trading business. By focusing the identification requirements in this
manner, the Commission would be able to identify easily the controlling
persons that themselves, or through subsidiaries or employees, operate
as large traders, while limiting the filing and self-identification
burdens that would be imposed to a relatively small group of persons.
Accordingly, if a natural person or a subsidiary entity within a large
organization independently qualifies as a large trader, but the parent
company files Form 13H and identifies itself as the large trader, then
the natural person or subsidiary entity would not be required to
separately identify itself as a large trader, file Form 13H, or be
subject to the other requirements that would apply to large traders.
Importantly, this provision would require that the entity that self-
identifies as the ``large trader'' comply with the proposed rule with
respect to all accounts within the entity over which investment
discretion is exercised, directly or indirectly. Accordingly, if the
parent company files Form 13H, then all accounts over which any
controlled person exercises investment discretion should be tagged with
the parent company's LTID.\44\
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\43\ Notably, the definition of ``investment discretion'' in
Section 3(a)(35) of the Exchange Act, 15 U.S.C. 78c(a)(35), applies
to a person that is ``authorized to determine what securities or
other property shall be purchased or sold by or for the account'' as
well as a person that ``makes decisions as to what securities or
other property shall be purchased or sold by or for the account even
though some other person may have responsibility for such investment
decisions* * *.'' To the extent that an entity employs a natural
person that individually, or collectively with others, would meet
the proposed definition of a ``large trader,'' then, for purposes of
proposed Rule 13h-1, the entity that controls that person or those
persons would be considered a ``large trader.''
\44\ Although the proposed rule would relieve a controlled
person from separately reporting as a large trader so long as its
parent entity complies with the rule with respect to all of its
accounts, the Commission anticipates designing the large trader
reporting system to accommodate those large traders that wish to
voluntarily identify with more granularity the subsidiary, trading
desk, or other unit that is directly exercising investment
discretion over the account. For example, although the large trader
parent entity would be assigned a single LTID by the Commission, the
LTID could include a number of blank fields, so that the large
trader could elect to append additional characters to sub-identify
the relevant unit that directly controls the account. The large
trader could then use its generic LTID, along with the more
particularized information, when identifying its accounts to its
broker-dealers. Large traders voluntarily using these additional
characters on their LTID may choose to do so for internal
recordkeeping purposes and to facilitate responses to Commission
requests for information.
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Conversely, paragraph (b)(3)(ii) of the proposed rule would apply
the same principle on a ``top down'' basis, providing that a large
trader shall not be required to comply with the requirements of
paragraph (b) if one or more persons controlled by such large trader
collectively comply with all of the requirements under paragraphs
(b)(1), (b)(2), and (b)(4) applicable to such large trader with respect
to all of its accounts. A controlling person of one or more large
traders would be required to comply with all of the requirements of
paragraph (b) unless the entities that it controls discharge all of the
responsibilities of the controlling person under paragraph (b). The
intent of this provision is to focus the identification requirement on
the parent company, and avoid the application of the requirement to
natural persons who may be controlling owners of the parent company.
This provision is designed to limit the reporting burden to a
relatively small group of persons and avoid redundant identification of
accounts, while allowing the Commission to identify the controlling
institutions that operate as large traders and obtain information on
their trading. As with paragraph (b)(3)(i), this provision would
require that the entities that self-identify as large traders (i.e., an
entity that is ``controlled by'' the non-filer) comply with the
proposed rule with respect to all accounts of the non-filer controlling
person. In other words, a controlling person would not be excused from
the large trader requirements under this provision if it directly or
indirectly exercises investment discretion over any other accounts,
including those of other large traders, unless all of those other large
traders have also self-identified
[[Page 21461]]
with respect to all of its accounts. The purpose of this proposed
provision is to make sure that the entity that self-identifies as a
large trader encompasses the full extent of the large trader activity
within its domain and those of its controlling person.
For example, a parent holding company generally would file a Form
13H on behalf of itself and each of its large trader subsidiaries. So
long as the Form provides all of the relevant information (e.g.,
discloses contact information and all of the accounts through which it
and its affiliates trade), and the holding company makes the necessary
disclosures to its and its subsidiaries' broker-dealers, then the large
trader subsidiaries would not be required to individually file Forms
13H.\45\ Alternatively, if all of the large trader's subsidiaries
collectively comply with all of the requirements of proposed paragraphs
(b)(1), (b)(2), and (b)(4) with respect to all of the parent company's
trading activity, then the holding company would not be required to
file a Form 13H.\46\ If however, a holding company has two subsidiaries
that independently qualify as large traders, and only one elects to
file its own Form 13H, then the holding company still would be required
to file its own Form 13H that encompasses both subsidiaries.\47\ The
holding company's Form 13H therefore would include information on each
of its subsidiaries, and transactions of both subsidiaries would be
tagged with the parent company's LTID.\48\
---------------------------------------------------------------------------
\45\ See proposed paragraph (b)(3)(i).
\46\ See proposed paragraph (b)(3)(ii).
\47\ Both the holding company and subsidiary that elected to
file its own Form 13H would identify the other as an affiliated
large trader in Item 5 of the Form.
\48\ Transactions of the subsidiary that filed its own Form 13H
would also be tagged with its unique LTID. See infra text
accompanying note 113 (discussing multiple LTIDs).
---------------------------------------------------------------------------
The examples above describe situations in which, for the limited
purpose of determining who should self-identify as a large trader,
investment discretion would be considered to be indirectly exercised by
a parent company by virtue of the direct or indirect power that the
parent company exercises over its subsidiaries. Those who do not
exercise investment discretion--either directly or indirectly through,
for example controlled persons--would not be large traders, and so mere
ownership of accounts--by trusts,\49\ custodians, or nominees, for
example--through which the requisite number of securities transactions
are effected would not trigger large trader status.
---------------------------------------------------------------------------
\49\ Trustees exercising investment discretion on behalf of such
trusts would be large traders.
---------------------------------------------------------------------------
The proposed rule focuses on entities that directly or indirectly
exercise investment discretion and are responsible for trading large
amounts of securities. As these entities can represent significant
sources of liquidity and overall trading volume, their trading may have
a direct impact on the markets. As such, the Commission believes that
the proposed rule, if adopted, would allow the Commission to more
readily identify these large traders and obtain current information on
their trading activity. The Commission also believes that the proposed
rule is tailored to achieve the objectives of section 13(h) of the
Exchange Act by allowing the Commission to monitor the impact of large
traders on the securities markets and assisting the Commission's
enforcement of the Federal securities laws, while at the same time
minimizing the burden on affected entities.
1. Definition of Person and Control
Section 13(h)(8)(E) of the Exchange Act defines ``person'' as
having ``the meaning given in Section 3(a)(9) [of the Exchange Act] and
also includes two or more persons acting as a partnership, limited
partnership, syndicate, or other group, but does not include a foreign
central bank.'' \50\ Section 3(a)(9) of the Exchange Act defines person
as ``a natural person, company, government, or political subdivision,
agency, or instrumentality of a government.'' \51\ Paragraph (a)(2) of
the proposed rule defines ``person'' by reference to the definition
contained in Section 13(h)(8)(E) of the Exchange Act.'' \52\
Accordingly ``person,'' for purposes of proposed Rule 13h-1, would
include, among other things, two or more persons acting together for
the purpose of trading, acquiring, holding, or disposing of NMS
securities.\53\
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\50\ See 15 U.S.C. 78m(h)(8)(E).
\51\ 15 U.S.C. 78c(a)(9).
\52\ As required by Section 13(h)(8)(E) of the Exchange Act, the
proposed rule expressly excludes foreign central banks from the
definition of a person. See 15 U.S.C. 78m(h)(8)(E). See also Senate
Report, supra note 9, at 49 (noting that foreign central banks were
to be excluded in the interest of comity and due to the nature of
the specific functions of such entities).
\53\ See, e.g., House Comm. on Energy and Commerce, Report to
Accompany the Securities Market Reform Act of 1990, H.R. No. 524,
101st Cong. 2d Sess. (June 5, 1990) (reporting H.R. 3657).
---------------------------------------------------------------------------
In addition, paragraph (a)(3) of the proposed rule defines control
(including the terms ``controlling,'' ``controlled by,'' and ``under
common control with'') as ``the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies
of a person, whether through the ownership of securities, by contract,
or otherwise. Any person that directly or indirectly has the right to
vote or direct the vote of 25% or more of a class of voting securities
of an entity or has the power to sell or direct the sale of 25% of more
of a class of voting securities of such entity, or in the case of a
partnership, has the right to receive, upon dissolution, or has
contributed, 25% or more of the capital, is presumed to control that
entity.'' The proposed definition of control is based on the definition
of control contained in Form 1 (Application for Registration or
Exemption from Registration as a National Securities Exchange). The
Commission preliminarily believes that the proposed definition of
control is sufficiently limited to capture only those persons with a
significant enough controlling interest to warrant identification as a
large trader.\54\
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\54\ In particular, the Commission notes that the definition of
control contained in Form 1 is among the least expansive definitions
of control referenced in Commission rules. Cf. Rule 19h-1(f)(2)
under the Exchange Act, 17 CFR 240.19h-1(f)(2) (featuring a 10%
threshold with respect to the right to vote 10 percent or more of
the voting securities or receive 10 percent or more of the net
profits). The Commission believes that this definition of control
represents a less burdensome option that still achieves the goal of
identifying persons who exert direct or indirect control over large
traders. Further, the Commission has not incorporated the provision
contained in the Form 1 definition of control that is applicable to
directors, general partners, or officers that exercise executive
responsibility. Rather, given the proposed rule's focus on parent
companies, the Commission's proposed definition focuses on the
existence of a corporate control relationship over the large trader
entity.
---------------------------------------------------------------------------
While a natural person typically exercises investment discretion
over an account, the proposed large trader reporting system is intended
to capture the activity of the entity that employs the natural person
doing the trading.\55\ As discussed above, the proposed rule is
intended to push requirements triggered by the large trader definition
up the hierarchy of corporate control to the parent company, where
applicable. For example, a company that controls persons who,
collectively or individually, meet the definition of large trader would
file Form 13H and identify itself as the large trader, and all
transactions by its employee traders, as well as the employee traders
of entities under its control, would be marked with the parent's LTID
number.
---------------------------------------------------------------------------
\55\ Where a firm trades through an algorithmic trading system
in which trading decisions are performed by a computer program
without the intervention of a natural person, the exercise of
investment discretion would be attributed to the firm by way of the
natural person or persons who are responsible for the design of the
trading engine.
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[[Page 21462]]
The following examples elaborate on which person would identify
itself as the ``large trader.'' For example, if a firm (e.g., a
corporation, limited liability company, partnership, limited
partnership) employs two natural persons who exercise investment
discretion and trade in an amount that would qualify them individually
as ``large traders,'' then the firm, as their employer, would file Form
13H and identify itself as a large trader, and the individual employees
would not file Form 13H. In addition, if a firm employs two natural
persons who exercise investment discretion and trade in an amount that
would not individually qualify them as ``large traders,'' but, when
taken together, the exercise of investment discretion and trading
effected by those two natural persons would qualify the firm as a large
trader, then the firm, as their employer, would file Form 13H and
identify itself as a large trader. This would be the case as long as
the firm, directly or indirectly, is the employer of the natural
persons and exercises control over them in the context of the employer
relationship.\56\
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\56\ The Commission notes that the proposed rule would require
the aggregation of accounts over which employees exercise investment
discretion in the scope of their employment. See proposed Rule 13h-
1(a)(4) (defining ``investment discretion''). Therefore, as an
entity determines whether it is a large trader, it would not count
transactions effected by employees in their personal (e.g., 401(k))
accounts.
---------------------------------------------------------------------------
In the case of a large firm that is composed of numerous operating
subsidiaries, to accomplish the Commission's goals, the Commission
intends that the entity that is the ultimate parent company would file
Form 13H and identify itself as the large trader, not the individual
subsidiaries. For example, in the case of a large financial holding
company, if an adviser and a registered broker-dealer subsidiary both
employ persons who exercise investment discretion over accounts and
effect the requisite level of transactions (either collectively or
individually), the financial holding company could identify itself as
the large trader by filing Form 13H, and the adviser and broker-dealer
subsidiaries need not file Form 13H.
The following additional examples are intended to provide further
clarity as to the party the Commission believes should self-identify as
a large trader under the proposed rule:
In the case of a registered investment adviser that acts
as the adviser to several investment companies registered under the
Investment Company Act (e.g., mutual funds), even if each fund is
managed by one natural person that would meet the applicable large
trader threshold, the investment adviser would file Form 13H and
identify itself as a large trader and the individual fund manager would
not file Form 13H. For purposes of the proposed rule, the investment
company would not directly or indirectly exercise investment discretion
over one or more accounts and therefore would not file Form 13H.
Where four individuals form a partnership and operate a
proprietary trading business through a computerized algorithmic trading
engine, the partnership entity would file Form 13H and identify itself
as a large trader, and the four individual partners would not file Form
13H, so long as the partnership covers all of the partners' trading
activity for the partnership.\57\
---------------------------------------------------------------------------
\57\ See proposed Rule 13h-1(b)(3)(ii).
---------------------------------------------------------------------------
If a natural person large trader is not employed by an
entity (e.g., the person is self-employed), then the natural person
would file Form 13H and identify itself as a large trader.
By focusing on parent companies, the proposed rule requires large
traders to aggregate accounts over which persons they control exercise
investment discretion.\58\ Accordingly, even if any individual
employee, group, or subsidiary within a company would not effect
transactions that equal or exceed the identifying activity threshold by
itself, if collectively the ultimate parent company operates
subsidiaries or controls individuals that together effect transactions
that equal or exceed the identifying activity threshold, then the
parent company would need to identify itself as a large trader.
---------------------------------------------------------------------------
\58\ See proposed Rule 13h-1(a)(1) (defining the term ``large
trader'' to include ``any person that directly or indirectly,
including through other persons controlled by such person, exercises
investment discretion * * *'').
---------------------------------------------------------------------------
The Commission believes that the proposed focus on parent company-
level entities should reduce the burden of the proposed rule by
requiring self-identification by a concentrated group of parent
companies, while capturing those organizations that in the aggregate
are responsible for exercising investment discretion over the trading
of a substantial volume or fair market value of NMS securities.
Notably, companies would not be able to divide their trading among
employees, groups, or subsidiaries for the purpose of avoiding meeting
the definition of large trader under the proposed rule.
2. Definition of Investment Discretion
Paragraph (a)(4) of proposed Rule 13h-1 states that the definition
of ``investment discretion'' shall have the meaning provided for in
Section 3(a)(35) of the Exchange Act. Section 3(a)(35) provides that
``[a] person exercises `investment discretion' with respect to an
account if, directly or indirectly, such person (A) is authorized to
determine what securities or other property shall be purchased or sold
by or for the account, (B) makes decisions as to what securities or
other property shall be purchased or sold by or for the account even
though some other person may have responsibility for such investment
decisions, or (C) otherwise exercises such influence with respect to
the purchase and sale of securities or other property by or for the
account as the Commission, by rule, determines, in the public interest
or for the protection of investors, should be subject to the operation
of the provisions of this title and the rules and regulations
thereunder.'' \59\ A person's employees would be deemed to exercise
investment discretion on behalf of that person when they act within the
scope of their employment. This provision is intended to clarify that
when an entity determines whether it meets the definition of large
trader, it would not count, for example, transactions effected by
employees in their personal accounts. The Commission preliminarily
believes that this proposed definition would identify those persons and
entities responsible for making trading decisions concerning securities
transactions involving a substantial volume or a large fair market
value consistent with the purposes of section 13(h) of the Exchange
Act.
---------------------------------------------------------------------------
\59\ 15 U.S.C. 78c(a)(35)(B).
---------------------------------------------------------------------------
3. Definition of Transaction and NMS Security
Paragraph (a)(6) of the proposed rule defines the term
``transaction'' to mean all transactions in NMS securities, including
exercises or assignments of option contracts, except for a limited
number of transactions that are specifically identified in that
paragraph, which are discussed below. The term ``NMS security'' is
defined in Rule 600(b)(46) under the Exchange Act.\60\ The proposed
rule would apply to trading in NMS securities that are traded through
any facility of a national securities exchange, as well as traded in
foreign or domestic over-the-counter markets and after-hours systems.
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\60\ 17 CFR 240.600(b)(46). An ``NMS security'' means ``any
security or class of securities for which transaction reports are
collected, processed, and made available pursuant to an effective
transaction reporting plan, or an effective national market system
plan for reporting transactions in listed options.''
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[[Page 21463]]
Section 13(h)(8)(B) defines the term ``publicly traded security''
to mean ``any equity security (including an option on individual equity
securities, and an option on a group or index of such securities)
listed, or admitted to unlisted trading privileges, on a national
securities exchange, or quoted in an automated interdealer quotation
system.'' \61\ The Commission preliminarily believes that the
definition of ``NMS security'' encompasses the universe of securities
that the term ``publicly traded security'' used in Section 13(h)(8)(B)
was intended to cover.\62\
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\61\ See 15 U.S.C. 78m(h)(8)(B).
\62\ The Commission notes that the term ``NMS security'' was
adopted in 2005, fourteen years after the adoption of Section 13(h).
See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR
37496 (June 29, 2005) (File No. S7-10-04) (Regulation NMS adopting
release).
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For purposes of determining whether a person effects the requisite
amount of transactions in NMS securities to meet the definition of
``large trader,'' paragraph (a)(6) of the proposed rule would exclude a
limited set of transactions from the term ``transaction'' and the
requirements of the proposed rule. The proposed exclusions are designed
to exempt certain small and otherwise infrequent traders from the
definition of a large trader as well as activity that is not
characterized by active investment discretion or is associated with
capital raising or employee compensation.
Specifically, the Commission preliminarily believes that the
proposed excepted transactions are not effected with an intent that is
commonly associated with an arm's length purchase or sale of securities
in the secondary market and therefore do not fall within the types of
transactions that are characterized by the exercise of investment
discretion. While a large enough one-time transaction in the proposed
categories could have an impact on the market, the Commission would be
able to obtain information on that trade through other means, including
the EBS system. The Commission preliminarily believes that the benefit
to the Commission of identifying such person as a large trader solely
through one of the enumerated excepted transactions would not be
justified by the costs that would be imposed on the person and their
registered broker-dealer that accompany meeting the definition of large
trader. Accordingly, the Commission proposes to exclude the following
types of transactions, described below, from the proposed definition of
``transaction'':
Any journal or bookkeeping entry made to an account to
record or memorialize the receipt or delivery of funds or securities
pursuant to the settlement of a transaction; \63\
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\63\ The Commission notes that such activity is part of the
clearance and settlement process. Because proposed Rule 13h-1
focuses on effecting transactions for the purchase or sale of an NMS
security, the Commission does not believe that the capture of this
activity is useful in the context of a rule that is designed to
identify trading activity.
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Any transaction that is part of an offering of securities
by or on behalf of an issuer, or by an underwriter on behalf of an
issuer, or an agent for an issuer, whether or not such offering is
subject to registration under the Securities Act of 1933, provided,
however, that this exemption shall not include an offering of
securities effected through the facilities of a national securities
exchange;
Any transaction that constitutes a gift;
Any transaction effected by a court-appointed executor,
administrator, or fiduciary pursuant to the distribution of a
decedent's estate; \64\
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\64\ This proposed exclusion draws a distinction between the
distribution and continuing administration of an estate. A court-
appointed fiduciary may be authorized to invest and reinvest in
securities for many years. Transactions effected pursuant to the
continuing administration or investment of an estate's assets would
fall outside the exclusion for transactions of a decedent or marital
estate, as they would indicate an on-going exercise of investment
discretion and extend beyond a one-time event. Only those
transactions effected pursuant to the distribution or liquidation of
such estates would be excluded.
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Any transaction effected pursuant to a court order or
judgment;
Any transaction effected pursuant to a rollover of
qualified plan or trust assets subject to Section 402(c)(1) of the
Internal Revenue Code; \65\ and
---------------------------------------------------------------------------
\65\ 26 U.S.C. 402(c)(1).
---------------------------------------------------------------------------
Any transaction between an employer and its employees
effected pursuant to the award, allocation, sale, grant or exercise of
a NMS security, option or other right to acquire securities at a pre-
established price pursuant to a plan which is primarily for the purpose
of an issuer benefit plan or compensatory arrangement.
The Commission preliminarily believes that narrowing the definition of
a transaction should reduce the impact of the proposed rule on
infrequent traders and at the same time allow the Commission to focus
the proposed rule on those persons and activities that require large
trader identification.
4. Identifying Activity Level
Section 13(h)(8)(C) defined the term ``identifying activity level''
to mean ``transactions in publicly traded securities at or above a
level of volume, fair market value, or exercise value as shall be fixed
from time to time by the Commission by rule or regulation, specifying
the time interval during which such transactions shall be aggregated.''
\66\ The ``identifying activity level'' is the threshold level of
transaction activity at which a market participant would be considered
a ``large trader'' and required to identify itself to the Commission.
The Commission proposes that ``identifying activity level'' mean
aggregate transactions in NMS securities that are equal to or greater
than: during a calendar day, either two million shares or shares with a
fair market value of $20 million; or (2) during a calendar month,
either twenty million shares or shares with a fair market value of $200
million.\67\
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\66\ See 15 U.S.C. 78m(h)(8)(C).
\67\ See proposed Rule 13h-1(a)(7).
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The thresholds are designed to identify large traders that effect
transactions of a substantial magnitude relative to overall volume. In
formulating the proposed threshold, the Commission considered a level
that would identify those entities that effect transactions in an
amount corresponding to approximately 0.01% of the daily volume and
market value of trading in NMS stocks. The Commission staff estimates
that daily matched volume in NMS stocks traded on U.S. securities
exchanges or reported through a transaction reporting facility \68\ is
within a range of 7 to 10 billion shares in late 2009.\69\ Doubling
that matched volume figure to account for the two sides of every trade,
considering that the large trader proposal is focused on the aggregated
buy and sell activity of traders, results in a figure of between 14
billion and 20 billion shares. Given the Commission's objective to
define a ``large'' trader to be one who effects
[[Page 21464]]
transactions of approximately .01% of overall daily volume on the
equities markets, then a large trader would be a trader who effects
transactions involving 2 million shares daily. The Commission estimates
that, based on its experience with information gathered in connection
with transaction fees pursuant to Section 31 of the Exchange Act,\70\
the daily market value of trading in NMS stocks, also on a double-
counted basis, is approximately $200 billion. Applying the same 0.01%
standard to market value that was applied to daily volume results in a
threshold of approximately $20 million.
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\68\ Over-the-counter trades, including trades executed by
alternative trading systems, are reported to the consolidated trade
streams through one of the trade reporting facilities operated by
FINRA on behalf of exchanges, or through FINRA's ADF.
\69\ While the proposed large trader definition would include
options trading in defining a large trader, the proposed threshold
was based on information for NMS stock trading. This figure does not
count transactions conducted on derivatives markets. Consequently,
the Commission believes that the 7 to 10 billion figure understates
overall volume relative to the proposed gross-up methodology for
calculating the identifying activity threshold. Nevertheless, the
Commission preliminarily believes that considering reported volume
in NMS stocks provides an appropriate and relevant benchmark, using
figures that are widely accessible, for determining the threshold
for large trader status. The Commission notes that several exchanges
provide daily and moving average volume figures on public Web sites.
See, e.g., http://www.nasdaqtrader.com.
\70\ 15 U.S.C. 78ee.
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The first prong of the proposed threshold is designed to identify
large traders who effect transactions, on a daily basis, in a
substantial volume. The second prong of the proposed threshold is
intended to identify large traders who might not trigger the calendar-
day threshold but might nevertheless effect transactions in large
enough amounts over the course of a calendar month to warrant becoming
subject to the proposed requirements that would be applicable to large
traders. In addition, the second prong should allow the Commission to
establish a high enough first prong so as to not pick up small or
infrequent traders who might trigger identification based on a single
transaction.
Section 13(h)(3) of the Exchange Act authorizes the Commission to
prescribe rules governing the manner in which transactions and accounts
shall be aggregated for purposes of determining who should be defined
as a large trader.\71\ The proposal would require market participants
to use a ``gross up'' approach in calculating their activity levels.
Offsetting or netting transactions among or within accounts, even for
hedged positions, would be added to a participant's activity level in
order to show the full extent of a trader's purchase and sale
activity.\72\ Specifically, paragraph (c)(1) of proposed Rule 13h-1
would specify that the volume or fair market value of equity securities
purchased and sold would be aggregated with the market value of
transactions in options or on a group or index of equity
securities.\73\ For purposes of the identifying activity level, with
respect to options, only purchases and sales, and not exercises, would
be counted. By considering only purchases and sales, the proposed rule
is intended to focus on the trading of options and avoid double-
counting towards the applicable identification threshold.
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\71\ See 15 U.S.C. 78m(h)(3).
\72\ In particular, a trader that nets or hedges its positions,
e.g., one that seeks to achieve a net position of zero at the end of
a trading day, may nevertheless have transacted in a substantial
volume or fair market value during the course of the day. Through
the proposed rule, the Commission seeks to identify any person who
effects transactions in the requisite amount. Substantial trading
activity has the potential to impact the market regardless of the
person's net position.
\73\ For example, 50,000 shares of XYZ stock and 500 XYZ call
options would count as aggregate transactions of 100,000 shares in
XYZ (i.e., 50,000 + 500 x 100 = 100,000). With respect to index
options, the market value would be computed by multiplying the
number of contracts purchased or sold by the market price of the
options and the applicable multiplier. For example, if ABC Index has
a multiplier of 100, a person who purchased 200 ABC call options for
$400 would have effected aggregate transaction of $8 million (i.e.,
200 x 400 x 100 = $8,000,000). Transactions in index options are not
required to be ``burst'' into share equivalents for each of the
underlying component equities.
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The Commission believes that this approach would accurately
identify those traders that effect purchase and sale transactions in a
large volume of securities in absolute terms and is designed to
minimize the burden on affected entities in calculating the applicable
thresholds by utilizing a bright line standard that is readily applied.
To help prevent circumvention of the proposed rule, paragraph
(c)(2) further would prohibit a person from disaggregating accounts to
avoid identification and the accompanying proposed requirements of a
large trader. Accordingly, the proposal would prohibit, among other
things, persons from splitting activity among multiple registered
broker-dealers, accounts, or transactions for the purpose of evading
the large trader identification requirement. Additionally, where two
separate entities engage in a coordinated trading strategy that results
in the joint exercise of investment discretion over their individual
accounts, each entity must count the transactions in NMS securities
effected through those ``joint'' accounts toward its identifying
activity level.\74\
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\74\ The definition of ``person'' includes two or more persons
acting as a partnership, limited partnership, syndicate, or other
group. As discussed infra, if a person meets the identifying
activity level, the person would be a large trader and would need to
list the applicable accounts in proposed Schedule 6 to Form 13H.
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The Commission believes that the capture of substantial trading
activity would be essential to accomplish the purposes of Section 13(h)
of the Exchange Act. The Commission has balanced this need against the
burden of capturing the information and preliminarily believes that the
proposed identifying activity level strikes an appropriate balance. In
particular, the Commission preliminarily believes that trading activity
in an amount corresponding to the proposed identifying activity level
effected during the applicable measuring periods is sufficiently
substantial to warrant identification as a large trader so that the
Commission can more readily obtain information about that trader and
its market activity. The Commission also preliminarily believes that
the proposed identifying activity level would establish a simple
bright-line threshold consistent with the activity-based threshold
contemplated by Section 13(h) of the Exchange Act.
5. Inactive Status
Proposed Rule 13h-1(b)(3)(iii) would establish an optional inactive
status for large traders. Specifically, large traders previously
assigned an LTID whose aggregate transactions during the previous full
calendar year did not reach the identifying activity level at any time
during the year would be eligible to file for inactive status upon
checking a box on the cover page of a Form 13H filing. This status
would be available to traders that become less active and no longer
meet the threshold at which large trader status is realized. After a
large trader files for inactive status, it would be relieved from the
Form 13H filing requirements, as well as the requirement to inform its
registered broker-dealers and others with whom it shares investment
discretion, of its LTID.\75\
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\75\ In addition, a large trader on inactive status could inform
its broker-dealers of its inactive status and request that the
broker-dealer cease tagging its transactions with its LTID.
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As proposed, large traders on inactive status who once again reach
the identifying activity level would be required to reactivate their
large trader status by filing Form 13H promptly after effecting
transactions in an amount that equals or exceeds the large trader
identifying activity threshold.\76\ In submitting a ``Reactivated
Status'' Form 13H, the large trader would retain the LTID initially
assigned to it, and would be required to notify registered broker-
dealers and others of its status and LTID.
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\76\ See infra note 81 (discussing the ``promptly'' standard).
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The Commission believes that the proposed provision for an inactive
status should eliminate the ongoing costs of compliance with the
proposed rule, including the requirement to file amendments to Form 13H
with the Commission, for those entities that no longer trade in amounts
that would meet the definition of large trader. The Commission
preliminarily believes that
[[Page 21465]]
the provision for an inactive status is consistent with the objectives
of Section 13(h) of the Exchange Act.
As a subset of inactive status, proposed Form 13H would allow a
large trader that discontinues operations to file an amended Form 13H
reflecting its ``Termination'' status. For example, this status would
be applicable in the event of certain mergers or acquisitions involving
a large trader, including a merger of two large traders. In that
instance, the non-surviving large trader would be required to submit a
``Termination Filing'' that specifies the effective date of the merger.
In Item 5b of the Form 13H, the surviving large trader would be
required to list as an affiliate the non-surviving company, note that
the company no longer exists, and provide the LTID of the non-surviving
company. The Commission believes that specifically allowing a large
trader to file an updated Form 13H indicating that it has discontinued
operations will allow large traders to accurately reflect their status
to the Commission and will enhance the utility of the proposed large
trader reporting system.
C. Large Trader Self-Identification
Section 13(h)(1) of the Exchange Act authorizes the Commission to
prescribe identification requirements for large traders for the purpose
of monitoring the impact on the securities markets of securities
transactions involving a substantial volume, or a large fair market
value or exercise value, and to assist the Commission in the
enforcement of the Exchange Act.\77\ The Commission is specifically
authorized to require large traders to provide it with the information
deemed necessary or appropriate to identify large traders and all
accounts in or through which large traders effect transactions.\78\ The
Commission also is authorized to require large traders to disclose
their large trader status to the registered broker-dealers that carry
the accounts through which they effect transactions.\79\ The Commission
is proposing Rule 13h-1(b) and Form 13H to implement these provisions
of Section 13(h)(1) of the Exchange Act.
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\77\ See 15 U.S.C. 78m(h)(1).
\78\ See 15 U.S.C. 78m(h)(1)(A).
\79\ See 15 U.S.C. 78m(h)(1)(B).
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As discussed below, under the proposed rule, each large trader
would be required to identify itself to the Commission by filing
electronically with the Commission a Form 13H.\80\ Additionally, each
large trader would be required to identify itself to the broker-dealers
through which it effects transactions as well as to any other entity
with which it shares investment discretion over an account. Finally,
the proposed rule would require a large trader to promptly provide the
Commission with such other descriptive or clarifying information that
the Commission may request from time to time to further identify the
large trader and all accounts through which the large trader effects
transactions.\81\ Under this provision, the Commission would be able to
obtain, for example, clarifying information concerning information
provided in a Form 13H filing.
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\80\ The Commission is proposing an electronic filing system for
proposed Form 13H, and the proposed rule would require electronic
filing. See proposed Rule 13h-1(b)(1). If the Commission adopts the
proposed rule as proposed, it is possible that large traders might
be required to file Form 13H in paper until such time as an
electronic filing system is operational and capable of receiving the
Form. Large traders would be notified as soon as the electronic
system can accept filings of Form 13H.
\81\ See proposed Rule 13h-1(b)(4). See also infra note 83
(referencing the ``promptly'' standard of Rule 15b3-1).''
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1. Form 13H Filing Requirements
Paragraph (b)(1) of the proposed rule would require large traders
to file Form 13H with the Commission promptly after first effecting
transactions that reach the identifying activity level.\82\ Thereafter,
large traders would be required to file an amended Form 13H promptly
following the end of a calendar quarter, but only if any of the
information contained in the Form 13H becomes inaccurate for any reason
(e.g., change of name or address, contact number, type of organization,
principal business, regulatory status, or accounts maintained).\83\ To
the extent none of the information contained in the Form became
inaccurate during the quarterly period, the large trader would not be
required to file an amended form. Regardless of whether it files any
amended Forms 13H, a large trader would still be required to file
proposed Form 13H annually, within 45 days after the calendar year-end,
in order to help ensure the accuracy and currency of all of the
information reported to the Commission.\84\
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\82\ See proposed Rule 13h-1(b)(1)(i).
\83\ See proposed Rule 13h-1(b)(1)(iii) (requiring registered
broker-dealers to ``promptly file'' amendments to Form 13H as
necessary). See also 17 CFR 240.15b3-1 (concerning a similar
standard for Form BD).
\84\ See proposed Rule 13h-1(b)(1)(ii).
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The Commission believes that the proposed requirement that large
traders keep current the information contained in their Form 13H
submissions will provide the Commission with up-to-date information
that the Commission could utilize promptly when needed. Unless the
Commission has up-to-date Forms 13H for each large trader, the
Commission could be impaired in its ability quickly to identify and
contact large traders, as well as identify their accounts, affiliates,
and trading activity. Given the limited amount of information proposed
to be collected on the Form 13H, the Commission believes the burden of
amending the form would be justified by the benefit to the Commission
of minimizing problems that could arise from otherwise stale
information.
2. Form 13H and Instructions
Proposed Form 13H, and the Schedules and Instructions thereto, are
designed to capture basic information on each large trader consistent
with the Commission's authority under Section 13(h) of the Exchange
Act. The proposed Instructions to the proposed form provide all of the
pertinent definitions, examples of who would be a large trader, and
what information must be provided on Form 13H. The proposed
Instructions also provide guidance and cross-references to Rule 13h-1
and other related instructions. The Commission believes that a careful
review of the Instructions to Form 13H should assist large traders and
facilitate the completion and filing of Form 13H.
The cover page to proposed Form 13H requires a large trader to
indicate the nature of the submission it is filing, including:
``Initial Filing,'' ``Annual Filing,'' ``Interim Filing,'' ``Inactive
Status,'' ``Reactivated Status,'' and ``Termination Filing.'' It also
requires that a large trader provide its LTID. For its ``Initial
Filing,'' a large trader would not be able to provide an LTID, as the
Commission would issue the LTID only after it receives the initial Form
13H submission. After receiving its LTID, the large trader would need
to file promptly an ``Interim Filing'' to include the LTID and any new
information.\85\ The cover page also would require contact information
for the large trader, and requires the signature of the large trader's
representative. The cover page contains a statement for the person
signing the form to acknowledge that all of the information contained
in the form
[[Page 21466]]
is true, correct, and complete. In addition, the cover page notes that
intentional misstatements or omissions of fact constitute a federal
crime and may result in civil penalties or other sanctions.
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\85\ Proposed Schedule 6 of Form 13H would require a large
trader to provide the LTID for all other large traders (if any) that
also exercise investment discretion over the accounts it identifies.
When large traders submit their ``Initial Filings'' after
implementation of this rule, large traders may not have the LTID of
these other large traders for the same reason: the Commission may
not have issued them yet. Therefore, as the Commission issues LTID
numbers, and as large traders disclose their LTIDs to each other as
required under proposed paragraph (b)(2), large traders would need
to file ``Interim Filings.''
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Proposed Item 1 to Form 13H would require large traders to identify
their business by checking the appropriate pre-populated categories or
by indicating ``other.'' In Item 2, a large trader would be required to
disclose whether it or any of its affiliates files forms with the
Commission and, if so, to indicate the types of forms and all
applicable SEC File and CRD numbers. The Commission anticipates that
some of the most common registrations or filings that large traders may
list in proposed Item 2 would include, for example, Form BD, Form ADV,
or Form 10-K. Identification of this information will allow the
Commission to readily ascertain the regulatory status of the large
trader and its controlled persons.
Proposed Item 3 to Form 13H would require a large trader to
disclose whether it or any of its affiliates is: (1) A registered
trader or otherwise registered with the Commodity Futures Trading
Commission; (2) is a bank holding company, national bank, state member
bank of the Federal Reserve System, state non-member bank, savings bank
or association, credit union, or foreign bank; (3) an insurance
company; or (4) regulated by a foreign regulator. For each entity that
is, the form requires additional identifying information, which will
allow the Commission to readily ascertain the regulated status of the
large trader, and provide context for the Commission to understand the
large trader's operations. Such entities must be identified and, for
entities registered under the Commodity Exchange Act, the large trader
would be required to provide its registration type and number. For
other identified entities, a large trader would be required to disclose
the applicable regulator(s).
Proposed Item 4 to Form 13H, and the corresponding Schedule 4,
would require the large trader to disclose basic business information.
For example, the large trader must disclose whether it exercises
investment discretion as a trustee, partnership, or corporation.
Natural person large traders would be required to disclose whether they
are self-employed or otherwise employed. Entities would be required to
disclose the jurisdiction in which they are organized and their
organization type: partnership, limited partnership, corporation,
limited liability company, or other. In addition, entities would be
required to identify those persons who own or control a large trader
corporation, partnership, limited partnership, or trust. The term
``executive officer,'' used in proposed Schedule 4, would mean
``policy-making officer'' and otherwise would be interpreted in
accordance with Rule 16a-1(f) under the Exchange Act.\86\ Further, each
large trader would be required to describe the nature of its business.
Identification of this information will help the Commission understand
the corporate structure of the large trader and the nature of its
business. Among other things, this information would be useful to the
Commission to provide context to a large trader's operations, and would
help the Commission understand the control relationships surrounding
the large trader. This information also would be useful to the
Commission in tailoring any requests for additional information that it
may send to a large trader.
---------------------------------------------------------------------------
\86\ 17 CFR 240.16a-1(f).
---------------------------------------------------------------------------
Proposed Item 5 to Form 13H would collect information about the
affiliates of large traders that either exercise investment discretion
over accounts that hold NMS securities or that beneficially own NMS
securities, if any. For purposes of this form, ``affiliate'' would be
defined to mean any person that directly or indirectly controls, is
under common control with, or is controlled by the large trader. This
proposed definition of affiliate is designed to allow the Commission to
collect comprehensive identifying information relating to the large
trader and is consistent with other similar definitions of the
term.\87\ The large trader would be required to identify each affiliate
that either exercises investment discretion over accounts that hold NMS
securities or that beneficially owns NMS securities, state the nature
of its affiliate's business, and explain the relationship to the large
trader (e.g., limited partner, direct subsidiary). Additionally, the
large trader would be required to provide any applicable LTID for its
large trader affiliates. Among other things, proposed Item 5 would
allow the Commission to more carefully tailor any request that it may
make to disaggregate large trader activity, and should also assist the
Commission in understanding the affiliate relationships of the large
trader and determine whether the correct entities had self-identified
with the Commission.
---------------------------------------------------------------------------
\87\ This definition is similar to the definition of
``affiliate'' provided in the instructions to Form 1, 17 CFR 249.1.
See also supra note 54.
---------------------------------------------------------------------------
Proposed Item 6, and the accompanying Schedule 6, are designed to
collect information concerning accounts over which the large trader
exercises investment discretion. Specifically, the proposed schedule
would require the large trader to identify all the accounts over which
it directly or indirectly (e.g., through controlled persons) exercises
investment discretion for purposes of the proposed rule. Proposed
Schedule 6 also would require a large trader to disclose the LTID of
any other large traders that exercise investment discretion over the
identified accounts. The Commission would use this information to
cross-reference accounts and avoid the double counting of transactions.
To reduce the burden on large traders, the proposed Instructions
specify that large traders may submit internally produced lists of
accounts, provided that such lists contain all required information in
a format substantially similar to the applicable Schedule. Finally,
Schedule 6 would require the identification of a designated contact
person at the large trader that the Commission could consult concerning
the accounts listed on Schedule 6.
3. Confidentiality
Section 13(h)(7) of the Exchange Act provides that Section 13(h)
``shall be considered a statute described in subsection (b)(3)(B) of [5
U.S.C. 552]'', which is part of the Freedom of Information Act
(``FOIA'').\88\ As such, ``the Commission shall not be compelled to
disclose any information required to be kept or reported under [Section
13(h)].'' \89\ Accordingly, the information that a large trader would
be required to disclose on proposed Form 13H or provide in response to
a Commission request would be exempt from disclosure under FOIA. In
addition, any transaction information that a registered broker-dealer
would report under the proposed rule also would be exempt from
disclosure under FOIA.
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\88\ 5 U.S.C. 552(b)(3)(B) is now 5 U.S.C. 552(b)(3)(A)(ii).
\89\ See section 13(h)(7) of the Exchange Act, 15 U.S.C.
78m(h)(7).
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4. Self-Identification to Others
Proposed paragraph (b)(2) of Rule 13h-1 would require each large
trader to disclose its LTID to those registered broker-dealers that
effect transactions on its behalf. In doing so, a large trader would be
required to identify all of the accounts held by such broker-dealer to
which its LTID applies. For example, a large trader would not be
required to disclose to Broker-Dealer A the large trader's accounts
held by Broker-Dealer B, but the large trader would need to
[[Page 21467]]
specifically highlight to Broker-Dealer A all of the accounts held by
Broker-Dealer A over which the large trader exercises investment
discretion. Requiring large traders to provide this information to
their broker-dealers would place the primary account identification
responsibilities on those who can most readily satisfy them--the large
traders themselves--and would facilitate the ability of registered
broker-dealers to fulfill their recordkeeping and reporting
requirements under the proposed rule by facilitating their ability to
identify and properly mark all applicable accounts through which a
large trader trades.
Proposed paragraph (b)(2) of Rule 13h-1 also would require each
large trader to disclose its LTID to others with whom it collectively
exercises investment discretion. The purpose of this provision is to
enable large traders to provide all information required under Schedule
6 of Form 13H.\90\ In addition, the proposed requirement would
facilitate the ability of a large trader to provide a broker-dealer
with the LTID of all large traders that exercise investment discretion
over an account.\91\
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\90\ Specifically, Schedule 6 would require a large trader to
disclose the LTID of all other large traders who exercise investment
discretion over the accounts listed. Absent this requirement, large
traders would have no reason to know the LTIDs of the large traders
with whom they share investment discretion.
\91\ For example, where two advisers co-manage an account,
Adviser A would inform Adviser B of its LTID, and Adviser B would
provide both its LTID and Adviser A's LTID to the broker-dealer
carrying the account.
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D. Recordkeeping, Reporting, and Monitoring Responsibilities
Section 13(h)(2) of the Exchange Act authorizes the Commission to
prescribe for registered broker-dealers recordkeeping requirements
related to large trader activity that it deems necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Exchange Act.\92\ The Commission
also is authorized to conduct reasonable periodic, special, or other
examinations of registered broker-dealers of all records required to be
made and kept pursuant to the rule.\93\ Paragraph (d) of the proposed
rule would implement the recordkeeping provisions of Section 13(h)(2)
of the Exchange Act.
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\92\ See 15 U.S.C. 78m(h)(2).
\93\ See 15 U.S.C. 78m(h)(4).
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In addition, Section 13(h)(2) of the Exchange Act specifically
authorizes the Commission to require registered broker-dealers to
report transactions that equal or exceed the reporting activity level
effected directly or indirectly by or through such broker-dealer for
persons who they know are large traders, or any persons who they have
reason to know are large traders on the basis of transactions effected
by or through such broker-dealers.\94\ The Commission is proposing
paragraph (e) of Rule 13h-1 to implement the transaction reporting
provisions of Section 13(h)(2) of the Exchange Act. The proposed rule
would mirror the statutory requirement that records and information
required to be made and kept pursuant to the proposed rule be available
for reporting to the Commission on the morning after the day the
transactions were effected.\95\ While such information must be
available for reporting to the Commission on the following day, the
proposed rule further clarifies that transaction data would be required
to be submitted to the Commission before the close of business on the
day specified in the request for such transaction information.\96\
Further, the Commission is authorized to require that such transaction
reports be transmitted in any format that it may prescribe, including
machine-readable form.\97\ The proposed rule mirrors this requirement
and, as discussed further below, the proposed rule would utilize the
general format applicable to the EBS system, as modified to accommodate
the specific requirements of the proposed rule, including the fields of
LTID and execution time.\98\
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\94\ See 15 U.S.C. 78m(h)(2).
\95\ See proposed Rule 13h-1(d)(5). This requirement was
intended to include Saturdays or holidays. See Senate Report, supra
note 9, at 40.
\96\ See proposed Rule 13h-1(e).
\97\ See 15 U.S.C. 78m(h)(2).
\98\ See infra note 104 and accompanying text.
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The proposed rule would impose certain duties on broker-dealers. In
particular, the proposed rule would impose recordkeeping and reporting
requirements on the following: registered broker-dealers that are large
traders; registered broker-dealers that, together with a large trader
or Unidentified Large Trader, exercise investment discretion over an
account; and registered broker-dealers that carry accounts for large
traders or Unidentified Large Traders or, with respect to accounts
carried by a non-broker-dealer, broker-dealers that execute
transactions for large traders or Unidentified Large Traders.
Additionally, the proposed rule would require registered broker-dealers
to implement procedures to encourage and foster compliance with the
self-identification requirements of the proposed rule.
1. Broker-Dealer Recordkeeping
Proposed paragraph (d)(1) of Rule 13h-1 would provide that
``[e]very registered broker-dealer shall maintain records of all
information required under paragraphs (d)(2) and (d)(3) for all
transactions effected directly or indirectly by or through (i) An
account such broker-dealer carries for a large trader or an
Unidentified Large Trader, (ii) an account over which such broker-
dealer exercises investment discretion together with a large trader or
an Unidentified Large Trader, or (iii) if the broker-dealer is a large
trader, any proprietary or other account over which such broker-dealer
exercises investment discretion. Additionally, where a non-broker-
dealer carries an account for a large trader or an Unidentified Large
Trader, the broker-dealer effecting transactions directly or indirectly
for such large trader or Unidentified Large Trader shall maintain
records of all of the information required under paragraphs (d)(2) and
(d)(3) for those transactions.''
The term ``Unidentified Large Trader'' would be defined to mean
``each person who has not complied with the identification requirements
of paragraphs (b)(1) and (b)(2) of this rule that a registered broker-
dealer knows or has reason to know is a large trader.'' \99\ The
proposed ``reason to know'' standard is discussed in more detail below
in the context of a registered broker-dealer's responsibility to
monitor for Unidentified Large Traders.
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\99\ See proposed Rule 13h-1(a)(9).
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To help the Commission monitor the impact on the securities markets
of securities transactions involving a substantial volume or a large
fair market value, assist in the Commission's investigation of possible
Federal securities law violations, and allow the Commission to conduct
time-sequenced market reconstructions, the proposed rule would require
registered broker-dealers to maintain specified data that would be
relevant for these purposes. Notably, as discussed below, registered
broker-dealers already are required to maintain most of the proposed
fields of information for all of their customers pursuant to Rule 17a-
25 under the Exchange Act and the EBS system. In particular, the
proposed rule would require registered broker-dealers to maintain the
following information:
Date the transaction was executed;
Account number;
Identifying symbol assigned to the security;
[[Page 21468]]
Transaction price;
Number of shares or option contracts traded in each
specific transaction; whether each transaction was a purchase, sale, or
short sale; and, if an option contract, whether the transaction was a
call or put option, an opening purchase or sale, a closing purchase or
sale, or an exercise or assignment
Clearing house number of the entity maintaining the
information and the clearing house numbers of the entities on the
opposite side of the transaction;
Designation of whether the transaction was effected or
caused to be effected for the account of a customer of such registered
broker-dealer, or was a proprietary transaction effected or caused to
be effected for the account of such broker-dealer;
Identity of the exchange or other market center where the
transaction was executed;
Time that the transaction was executed;
LTID(s) associated with the account, unless the account is
for an Unidentified Large Trader;
Prime broker identifier;
Average price account identifier; and
If the transaction was processed by a depository
institution, the identifier assigned to the account by the depository
institution.
In addition, proposed paragraph (d)(3) broadens the list of
required broker-dealer records for transactions effected by
Unidentified Large Traders beyond those that would be required for a
self-identified large trader in order to assist the Commission in
identifying the Unidentified Large Trader. Specifically, for
Unidentified Large Traders, in addition to the above fields, the
registered broker-dealer also would be required to retain and report
such person's name, address, date the account was opened, and tax
identification number(s).
The proposed rule would incorporate the requirement contained in
Section 13(h)(2) that transaction records be available for reporting to
the Commission on the morning of the day following the day the
transactions were effected.\100\ When the Commission makes a request
for data, the proposed rule specifies that registered broker-dealers
would be required to furnish it before the close of business on the day
specified in the request for such transaction information.\101\
Paragraph (d)(4) of the proposed rule would require that such records
be kept for a period of three years, the first two in an accessible
place, in accordance with Rule 17a-4(b) under the Exchange Act.\102\
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\100\ See proposed Rule 13h-1(d)(5). This time frame is
established in Section 13(h)(2) of the Exchange Act. See 15 U.S.C.
78m(h)(2).
\101\ See proposed Rule 13h-1(e).
\102\ 17 CFR 240.17a-4(b).
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Currently, broker-dealers already are required to provide most of
the proposed fields of information for all of their customers pursuant
to Rule 17a-25 under the Exchange Act and the EBS system.\103\ The only
additional items of information that this proposal would capture beyond
what is currently captured by the existing EBS system are: (1) LTID and
(2) transaction execution time.\104\ In this respect, the proposed rule
is intended to address the principal limitations of the EBS system when
applied to a large trader reporting system under Section 13(h) of the
Exchange Act, namely the EBS system's lack of transaction execution
time information and lack of a LTID to uniformly identify large traders
on a market-wide basis. The proposed rule also would require registered
broker-dealers to be able to report trading information for large
traders to the Commission much more promptly than the EBS system.\105\
The Commission preliminarily believes that the collection of current
trading information is necessary to allow it to monitor the impact on
the securities markets of large trader activity, particularly during
times of market stress when such analyses are particularly relevant, as
well as to support the Commission's efforts to detect and deter
fraudulent and manipulative activity and other trading abuses.
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\103\ Rule 17a-25 requires that broker-dealers provide to the
Commission upon request the following information for proprietary
transactions: (1) Clearing house number or alpha symbol used by the
broker-dealer submitting the information; (2) clearing house
number(s) or alpha symbol(s) of the broker-dealer(s) on the opposite
side to the trade; (3) security identifier; (4) execution date; (5)
quantity executed; (6) transaction price; (7) account number; (8)
identity of the exchange or market where each transaction was
executed; (9) prime broker identifier; (10) average price account
identifier; and (11) the identifier assigned to the account by a
depository institution. For transactions effected for a customer
account, a broker-dealer must provide to the Commission upon request
the following information: The customer's name, customer's address,
the customer's tax identification number, and other related account
information. See Rule 17a-25(a)(2)(ii). Additionally, if the
transaction was effected for a customer of another firm or broker-
dealer, the broker-dealer must state whether the other broker-dealer
was acting as principal or agent on the transaction. See Rule 17a-
25(a)(2)(iii).
\104\ While the recording of execution time is already required
of registered broker-dealers pursuant to Rule 17a-3, 17 CFR 240.17a-
3, and is currently captured by many SRO audit trails, see, e.g.,
CBOE Chapter VI, Rule 6.51 (Reporting Duties), with respect to the
proposed large trader reporting system, the reporting of execution
times within the specified period would constitute a new requirement
compared to the existing EBS system. Execution times would need to
be recorded and reported with the same degree of precision that is
required by applicable rules.
\105\ See EBS Release, supra note 24, 66 FR at 35836 (noting
that firms are requested to submit the electronic bluesheets data
within 10 business days).
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In particular, the capture of transaction execution times would
allow the Commission to reconstruct a more accurate and complete time-
sequenced market history and facilitate the Commission's ability to
more accurately assess the market impact of large traders, particularly
during times of peak activity and market stress. The Commission
preliminarily believes that capturing execution time would be essential
for accomplishing the purposes of Section 13(h) of the Exchange Act, as
the Market Reform Act intended a large trader system through which the
Commission could perform time-sequenced reconstruction of trading
activity.\106\
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\106\ See Senate Report, supra note 9, at 38-40.
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The Commission acknowledges that, in some instances, multiple LTIDs
may be disclosed to a registered broker-dealer for a single account.
For example, such a situation could arise where more than one large
trader exercises investment discretion over an account (e.g., where two
large trader investment managers co-manage an account), or where a
parent company and one of its subsidiaries both identify themselves as
large traders. Therefore, registered broker-dealers would need to
develop systems capable of tracking multiple LTIDs. The Commission
preliminarily believes that capturing the LTID of all large traders
that exercise investment discretion for an account would be essential
to adequately monitor the trading activity of each large trader that
exercises investment discretion over those transactions that are
reported to the Commission by broker-dealers and thereby accomplish the
purposes of Section 13(h) of the Exchange Act. Without that
information, the Commission could be hindered in its ability to readily
use large trader data as contemplated in Section 13(h), including to
support its regulatory and enforcement activities.
2. Broker-Dealer Reporting
Complementing the proposed recordkeeping requirements on brokers
and dealers, proposed paragraph (e) of Rule 13h-1 would implement the
transaction reporting provisions of Section 13(h)(2) of the Exchange
Act.
a. General Requirements
[[Page 21469]]
Under proposed paragraph (e) of proposed Rule 13h-1, the broker-
dealers required to keep records pursuant to paragraph (d)(1) also
would have a duty to report that information upon request. More
specifically, upon the request of the Commission, those broker-dealers
would be required to report electronically, in machine-readable form
and in accordance with a format specified by the Commission that is
based on the existing EBS system format, all required information for
all transactions effected directly or indirectly by or through accounts
carried by such broker-dealer for large traders and Unidentified Large
Traders if they equal or exceed the reporting activity level.\107\
Broker-dealers would need to report a particular day's trading activity
only if it equals or exceeds the ``reporting activity level,'' which is
defined and discussed below. Transaction reports, including data on
transactions up to and including the day immediately preceding the
request, would need to be furnished to the Commission before the close
of business on the day specified in the request for such transaction
information.\108\ In recognition of the value of using existing
reporting systems where practicable, the proposed rule would require
broker-dealers to utilize the existing technology and infrastructure of
the EBS system to the greatest degree possible to maintain large trader
data and transmit it to the Commission.\109\
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\107\ Section 13(h)(2) requires that ``[s]uch records and
reports shall be in a format and transmitted in a manner prescribed
by the Commission (including, but not limited to, machine readable
form).'' See 15 U.S.C. 78m(h)(2).
\108\ Section 13(h)(2) requires that ``[s]uch records shall be
available for reporting to the Commission, or any self-regulatory
organization that the Commission shall designate to receive such
reports, on the morning of the day following the day the
transactions were effected, and shall be reported to the Commission
or a self-regulatory organization designated by the Commission
immediately upon request by the Commission or such a self-regulatory
organization.'' See 15 U.S.C. 78m(h)(2).
\109\ Section 13(h)(5)(A) of the Exchange Act directs the
Commission to take into account existing reporting systems in
exercising its authority under Section 13(h). See 15 U.S.C.
78m(h)(5)(A).
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b. Reporting Activity Level
Consistent with Section 13(h)(2) of the Exchange Act, the proposed
rule would require a registered broker-dealer to report only those
transactions that equal or exceed the reporting activity level for that
particular day of trading being reported. Paragraph (a)(8) of Rule 13h-
1 would define the ``reporting activity level'' as: (i) Each
transaction in NMS securities, effected in a single account during a
calendar day, that is equal to or greater than 100 shares; (ii) any
other transaction in NMS securities, effected in a single account
during a calendar day, that a registered broker-dealer may deem
appropriate; or (iii) such other amount that may be established by
order of the Commission from time to time. While a registered broker-
dealer would be required to report for a given day data only if it
equals or exceeds the reporting activity level, the rule specifically
would allow a broker-dealer to voluntarily report a day's trading
activity that falls short of the applicable threshold. For example,
registered broker-dealers may consider it more appropriate, given the
low level of the proposed reporting activity level, to take this
approach if they prefer to avoid implementing systems to filter the
transaction activity and would rather utilize a ``data dump'' approach
to reporting large trader transaction information to the Commission.
In proposing a reporting activity level of 100 shares, the
Commission notes that large traders often break-up large-size orders
and disburse their trading interest across multiple market centers in
an effort to maintain the confidentiality of the trade and minimize any
market impact it might otherwise have if it were revealed to its full
extent. Such large orders often are processed by algorithmic systems
that split the order into smaller orders of a hundred to a few hundred
shares. For example, high frequency traders often quote and trade in
round lots of 100 shares or a few hundred shares. By establishing a low
reporting activity level, the Commission intends for the proposed rule
to result in the reporting of substantially all large trader activity
in response to a request for data.\110\ Access to substantially all
trading data would allow the Commission to perform more complete and
accurate reconstructions of aggregate large trader activity.
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\110\ See proposed Rule 13h-1(a)(6) (exceptions to the
definition of transaction).
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The proposed rule also would implement the authority in Section
13(h)(8)(D) of the Exchange Act, allowing the Commission to establish,
from time to time, such reporting activity level that the Commission
shall specify by rule, regulation, or order, by proposing that the
Commission would be able to alter the reporting activity level by
order.\111\ The Commission could use this authority to change the
reporting activity level if necessary to assure, for example, the
quality of 13H Reports and the level of compliance with the
identification requirements.\112\
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\111\ See proposed Rule 13h-1(a)(8). See also Senate Report,
supra note 9, at 73 (noting that this authority to act by order was
intended to provide the Commission with the flexibility necessary
for responding to changing market conditions).
\112\ The Commission might, for example, consider whether an
alternative threshold amount would be more appropriate if large
traders were managing their account activity to avoid the proposed
100 share reporting activity level.
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Unlike the identifying activity level, when considering the
reporting activity level, a registered broker-dealer would consider
only the trading activity for each of its large trader and unidentified
accounts, and would not need to aggregate transaction information on an
intra-broker-dealer basis solely for calculating the reporting activity
level. Thus, if a large trader maintains two separate accounts at a
registered broker-dealer under the same LTID, the broker-dealer would
be required to report activity in each account only if the activity in
such account equaled or exceeded the reporting activity level on the
specified day. A registered broker-dealer would report each account
separately and would not need to aggregate accounts with the same LTID.
By establishing a low reporting activity level, the Commission's
proposal eliminates the need to propose aggregation requirements to
assure that most large trader accounts would be reported in response to
a request for data. The Commission believes that most active large
trader accounts on any given day should contain sufficient transactions
(i.e., at least 100 shares traded) to make the accounts reportable in
response to a particular Commission request.
c. Multiple LTIDs
Under the proposal, it is possible that more than one LTID could be
associated with a particular account. For example, such a situation
could arise where two or more large traders share investment discretion
over the account. For transactions involving these accounts, the
registered broker-dealer would be required to record each LTID for
every trade effected in such account.\113\ In response to a request for
records, the registered broker-dealer would report transaction
information containing each LTID associated with the account. For
identified large traders, the Commission could then use the LTID
information collected on Schedule 6 to proposed Form 13H to filter the
data and avoid double counting transactions.
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\113\ Broker-dealers also would need to monitor for Unidentified
Large Traders that effect transactions through a shared account.
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[[Page 21470]]
3. Broker-Dealer Monitoring and Safe Harbor
The proposed rule places the principal burden of compliance with
the identification requirements on large traders themselves. The
Commission, however, believes that a limited monitoring requirement at
the broker-dealer level would provide a necessary backstop to encourage
compliance and fulfill the objectives of Section 13(h) of the Exchange
Act.
Section 13(h) of the Exchange Act contemplates that registered
broker-dealers would assist in fostering compliance with a large trader
reporting system by monitoring their customers' compliance with the
large trader self-identification requirements. Specifically, Section
13(h)(2) of the Exchange Act authorizes the Commission to establish
rules for recordkeeping and reporting of transactions effected by
persons a registered broker-dealer ``knows or has reason to know'' is a
large trader, based on transactions effected directly or indirectly by
or through such broker-dealer. Proposed paragraphs (d) and (e) of Rule
13h-1 would implement that authority by requiring registered broker-
dealers to maintain records of and report to the Commission information
about transactions effected by Unidentified Large Traders.\114\
---------------------------------------------------------------------------
\114\ See supra text accompanying note 99 (discussing
recordkeeping requirements for Unidentified Large Traders). In
particular, proposed Rule 13h-1(d)(3) would broaden the list of
required elements for transactions effected by Unidentified Large
Traders, and would require broker-dealers to report for Unidentified
Large Traders such person's name, address, date the account was
opened, and tax identification number(s).
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With respect to identifying large traders, the Commission
emphasizes that the principal burden of compliance with the proposed
identification requirements is placed squarely on large traders
themselves. However, the Commission also believes that requiring some
form of monitoring by the entities that are in the best position to
know the details of a large trader's account would help assure that the
objectives of the rule are met.
The Commission acknowledges that the duty to monitor its large
trader customers would impose a burden on registered broker-dealers. To
minimize this burden, paragraph (f) of proposed Rule 13h-1 would
establish a ``safe harbor'' for the duty to monitor for Unidentified
Large Traders.\115\ Pursuant to proposed paragraph (a)(9), in the case
of an Unidentified Large Trader, a ``registered broker-dealer has
reason to know whether a person is a large trader based on the
transactions in NMS securities effected by or through such broker-
dealer.'' A registered broker-dealer would not be deemed to know or to
have reason to know that a person is an Unidentified Large Trader if:
(1) It does not have actual knowledge that a person is a large trader;
and (2) it established and maintained policies and procedures
reasonably designed to assure compliance with the identification
requirements of the proposed safe harbor. Paragraphs (f)(1) and (2) of
the proposed rule provide the specific elements that would be required
for the safe harbor.
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\115\ See proposed Rule 13h-1(a)(9) (defining an Unidentified
Large Trader as ``each person who has not complied with the
identification requirements of paragraphs (b)(1) and (b)(2) of this
rule that a registered broker-dealer knows or has reason to know is
a large trader.'')
---------------------------------------------------------------------------
The safe harbor contained in paragraph (f)(1) of the proposed rule
would require the establishment of systems ``reasonably designed to
detect and identify'' persons who have not complied with the
identification requirements by providing the broker-dealer with their
LTID and highlighting all accounts to which it applies. This paragraph
incorporates the ``reason to know'' standard and clarifies that, with
respect to an account or group of accounts that may be identified as
large traders (e.g., commonly owned or controlled accounts), policies
and procedures would be within the safe harbor if they are reasonably
designed to detect and identify such groups of accounts based on
account name, tax identification number, or other readily available
information.
The Commission would consider ``other readily available
information'' to include, for example, those instances where a single
customer effects the requisite transactions through a single registered
representative, trading desk, or branch office in his or her personal
accounts, accounts of family members, or accounts of others, pursuant
to written trading authorizations. In that case, a broker-dealer should
be able to identify a large trader based on readily available
information. Similarly, customer authorization to transfer funds or
securities among accounts in order to receive approval for trading
activities, meet margin requirements, or to settle transactions, would
be considered to be readily available information, as broker-dealers
could use that information to readily identify accounts that may be
related. Accordingly, a broker-dealer's responsibility would be limited
to those Unidentified Large Traders that are readily identifiable and
apparent to the broker-dealer.
Paragraph (f)(2) of the proposed rule would require that broker-
dealer monitoring policies and procedures contain systems reasonably
designed to inform persons of their obligations to file proposed Form
13H and disclose their large trader status. In this respect, the
Commission would consider questions and informative disclosures on new
account applications, as well as notices to Unidentified Large Traders
when their transactions approach the reporting level, among other
things, to fulfill this element of the safe harbor. The Commission
believes that, because broker-dealers are in the best position to know
the details of a large trader's account, a proposed requirement on
broker-dealers to inform a large trader customer of the customer's
responsibility to self-identify to the Commission would help educate
large traders on their obligations under the proposed rule and foster
compliance with it.
The Commission notes that the elements of the safe harbor do not
contain precise compliance prescriptions such as automated systems,
employee training programs, or other specific systems or procedures.
The adequacy of monitoring procedures would depend on the nature and
characteristics of a broker-dealer's business. The Commission believes
that a variety of systems or procedures may be effective for
accomplishing the objectives of the monitoring requirements and,
therefore, could satisfy the requirements of the safe harbor. The
Commission preliminarily believes that the proposed safe harbor
contains sufficient detail and adds objectivity to the ``reason to
know'' requirements of Section 13(h)(2) of the Exchange Act in a manner
that is designed to minimize the burden of the monitoring requirements
of the proposed large trader system.
E. Exemptions
Section 13(h)(6) of the Exchange Act authorizes the Commission ``by
rule, regulation, or order, consistent with the purposes of this title,
[to] exempt any person or class of persons or any transaction or class
of transactions, either conditionally or upon specified terms and
conditions or for stated periods, from the operation of [Section
13(h)], and the rules and regulations thereunder.'' \116\ Proposed Rule
13h-1(g) would implement this authority, providing that: ``[u]pon
written application or upon its own motion, the Commission may by order
exempt, upon specified terms and conditions or for stated periods, any
person or class of persons or any transaction or class of
[[Page 21471]]
transactions from the provisions of this rule to the extent that such
exemption is consistent with the purposes of the Securities Exchange
Act.'' Accordingly, persons desiring an exemption from Rule 13h-1 could
request exemptive relief under proposed paragraph (g) of the rule.
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\116\ 15 U.S.C. 78m(h)(6).
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The Commission is not proposing at this time any specific or class
exemptions with respect to persons or classes of persons covered by the
proposed rule.\117\ The Commission is proposing a comprehensive large
trader system that is designed to track all large traders through a
system capable of producing comprehensive trading records.
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\117\ As discussed above, however, the Commission does propose
limiting the application of those provisions of the proposed rule
that concern broker-dealers to carrying broker-dealers, or executing
broker-dealers where the account is carried by a bank. In addition,
the proposed rule proposes to exclude certain types of transactions
from the definition of ``transaction.'' See proposed Rule 13h-
1(a)(6). See also supra text accompanying notes 60-65 (discussing
the exceptions for transactions not covered by the proposed rule).
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F. Foreign Entities
Section 13(h)(5)(C) of the Exchange Act directs the Commission, in
exercising its authority under Section 13(h), to take into account the
relationship between U.S. and international securities markets.\118\
The Commission is concerned that excluding foreign large traders from
the proposed rule's requirements could create a competitive disparity
between domestic markets and persons and foreign markets and persons.
In particular, including foreign large traders within the scope of the
proposed rule would provide the Commission with information on entities
contemplated by the statute that trade substantial amounts of NMS
securities regardless of their legal domicile and would subject all
such entities equally to the self-identification and filing
requirements that the Commission is proposing herein.
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\118\ 15 U.S.C. 78m(h)(5)(C).
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As discussed above, the application and scope of the proposed rule
would be established by the proposed definition of a large trader,
which is based on Section 13(h)(8)(A) of the Exchange Act.\119\ The
Commission notes that foreign broker-dealers that are not U.S.
registered would not be subject to the broker-dealer recordkeeping or
transaction reporting requirements of the proposed rule. Accordingly,
the only foreign entities that would be subject to the proposed rule
are those that would qualify as large traders. As discussed above,
under the proposal, the duties and burdens imposed on each large trader
would be to: (1) File and update Form 13H; \120\ (2) disclose large
trader status; \121\ and (3) upon request, provide additional
descriptive or clarifying information with respect to information
provided on Form 13H.\122\
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\119\ 15 U.S.C. 78m(h)(8)(A).
\120\ See proposed Rule 13h-1(b)(1).
\121\ See proposed Rule 13h-1(b)(2).
\122\ See proposed Rule 13h-1(b)(4).
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Pursuant to the proposal, a foreign entity or person could be a
large trader, and thus subject to the proposed rule, if the following
elements were present: (1) The person exercises investment discretion
over accounts; \123\ (2) the aggregate transactions in NMS securities
for those accounts reach the identifying activity level; \124\ and (3)
such transactions were effected by use of any means or instrumentality
of interstate commerce or the mails or any facility of a national
securities exchange.\125\
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\123\ See proposed Rule 13h-1(a)(4) (defining ``investment
discretion'').
\124\ See proposed Rule 13h-1(a)(7) (defining ``identifying
activity level'').
\125\ See 15 U.S.C. 78m(h)(8)(A) (defining ``large trader'' as
``every person who, for his own account or an account for which he
exercises investment discretion, effects transactions for the
purchase or sale of any publicly traded security or securities by
use of any means or instrumentality of interstate commerce or of the
mails, or of any facility of a national securities exchange * *
*'').
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By way of example of how the proposal would operate, assume that a
foreign investment adviser maintains accounts with a registered broker-
dealer. Assume further that, through these accounts, the foreign
investment adviser effects trades in NMS securities on a national
securities exchange for its foreign clients (i.e., citizens of, or
persons domiciled in, a foreign country) that reach the identifying
activity level. In this case, the foreign investment adviser would be
required to file Form 13H and Schedules 4 and 6. If a foreign client of
the foreign investment adviser also were a large trader by virtue of
exercising investment discretion (together with the foreign investment
adviser) over its investments, then the foreign investment adviser
would be required to include in its Schedule 6 the client's LTID when
listing that client's account. The foreign investment adviser would not
be required to disclose on its Form 13H the identities of any of its
clients that have not been issued a LTID. Additionally, under the
proposal, the foreign investment adviser would be required to disclose
its LTID to its registered broker-dealers and anyone else with whom it
shares investment discretion.
As a second example of how the proposal would operate, assume that
a registered broker-dealer receives an order from a customer to effect
transactions in NMS securities in a foreign over-the-counter market or
exchange. To effect these trades, the registered broker-dealer
transmits the order information to a foreign broker-dealer affiliate.
Further, assume that the affiliated foreign broker-dealer effects the
transaction for an account that it carries in the name of the domestic
broker-dealer. Because the transaction was effected through a
registered broker-dealer, this activity could cause the customer to be
a large trader if the activity reached the identifying activity level.
The customer exercised investment discretion over its own account and
effected indirectly, through an account maintained by a registered
broker-dealer, the requisite level of transactions in NMS securities.
G. Proposed Implementation
The Commission proposes that the broker-dealer recordkeeping
requirements contained in paragraph (d) and the reporting requirements
contained in paragraph (e) of the proposed rule become effective 6
months after adoption of a final rule. The Commission believes that
this time frame would provide sufficient time for the registered
broker-dealers to plan, design, and implement the various enhancements
to their existing transaction reporting systems required by the
proposed rule. In particular, because the proposed rule would utilize
the existing infrastructure of the EBS system, the Commission
preliminarily believes that broker-dealers should be able to
efficiently enhance their existing recordkeeping and reporting systems
to meet the requirements of the proposed large trader system within the
proposed implementation period. In addition, the Commission proposes
that the identification requirements for large traders contained in
paragraph (b) become effective 3 months after adoption of a final rule.
The Commission believes that this time frame would provide sufficient
time for large traders to familiarize themselves with the new form and
the applicable filing requirements, and would give large traders
sufficient time to calculate their trading over the applicable
measuring period, which includes aggregate transactions during a
calendar month.
H. Solicitation of Comments
The Commission generally requests comment on all aspects of the
proposed rule and the proposed large trader reporting system. In
addition, the
[[Page 21472]]
Commission also requests comment on the following specific issues:
Is the definition of ``large trader'' in proposed Rule
13h-1(a)(1) to mean ``any person that directly or indirectly,
including through other persons controlled by such person, exercises
investment discretion over one or more accounts and effects
transactions for the purchase or sale of any NMS security for or on
behalf of such accounts, with or through one or more registered
broker-dealers, in an aggregate amount equal to or greater than the
identifying activity level'' appropriate and sufficiently clear?
Should the Commission consider an alternative definition?
Would the proposed definition of ``identifying activity
level'' (aggregate transactions in NMS securities that are equal to
or greater than: (1) During a calendar day, either two million
shares or shares with a fair market value of $20 million; or (2)
during a calendar month, either twenty million shares or shares with
a fair market value of $200 million) identify those market
participants that transact in a significant enough volume such that
the Commission should identify the person as a large trader? Should
the Commission consider different levels? Should they be higher or
lower than what has been proposed? Please explain your reasoning and
provide relevant data.
Is 0.01% of daily volume and market value of trading in
NMS stocks an appropriate basis from which to determine the
identifying activity level? Should the Commission consider an
alternative level?
Are there other factors the Commission should take into
consideration when determining who should be a large trader or what
should be the identifying activity level?
Would basing the large trader definition on aggregated
transactions during a different measuring period be more
appropriate? For example, to minimize the applicability of the rule
to persons that effect one-time transactions greater than the
identifying level but who otherwise never or rarely trade anywhere
near a substantial volume or large fair market value, instead of
considering activity over a calendar day, should the Commission
consider activity over several days, a week, or some other time
period?
Instead of requiring large traders to file Form 13H
with the Commission ``promptly'' after first effecting transactions
that reach the identifying activity level, should the Commission
consider an alternative deadline, such as 10 business days?
Are the proposed definitions of person, control, and
investment discretion appropriate? Should the Commission consider
alternative definitions?
Is the definition of ``transaction'' in proposed Rule
13h-1(a)(6) and the exceptions thereto appropriate to accomplish the
Commission's goals of focusing on trading activity that constitutes
an arm's length purchase or sale and warrants the continuing burdens
associated with the proposed requirements? Should any other
transactions be excluded from the definition of ``transaction?''
Should any of the transactions proposed to be excepted instead be
included? Please explain your reasoning.
Are the aggregation provisions in proposed Rule 13h-
1(c) for the purpose of determining whether a person meets the
definition of a large trader appropriate? Should the Commission
consider any other alternatives?
Is the definition of Unidentified Large Trader in
proposed Rule 13h-1(a)(9), i.e., a person who has not complied with
the identification requirements of paragraphs (b)(1) and (b)(2) of
the proposed rule that a registered broker-dealer knows or has
reason to know is a large trader, appropriate? Should the Commission
consider an alternative definition?
Is the proposal sufficiently drafted to identify the
appropriate person as a large trader? Is the proposed focus on
identifying the parent company appropriate to accomplish the
Commission's goals and the goals of Section 13(h) of the Exchange
Act? Or should the rule take a more granular focus and instead
require identification and the assignment of an LTID at a more
particularized level within the parent company? Would such an
approach be more or less burdensome? In the alternative, should the
LTID contain information on both the parent company and the trading
entity and the individual trader for a particular trade? Should the
Commission consider any other alternatives in this regard? Does
assigning a LTID at the parent level pose any difficulties to
achieving the goals of the proposed rule?
Are there other types of large trader identification
alternatives that would achieve the Commission's objectives without
diminishing the effectiveness of a large trader system in
accomplishing the objectives of Section 13(h) of the Exchange Act?
Are there any existing identifiers that could serve as an
alternative or supplement to the LTID?
In a situation where fiduciary duties require
segregation of proprietary trading from customer trading, should
separate LTIDs be required?
Should the LTID number be structured in any particular
manner? For example, should the LTID number be structured so that it
discloses both the identity of the parent company and the actual
legal entity that effects the trade? Should the LTID number be
designed to be ``extensible'' so that it could be expanded for use
in recording aggregated equity and equity option position (as
opposed to trade) information, OTC derivatives trades, OTC
derivatives positions, and different categories of trader (e.g.,
hedge fund, insurance company, pension plan), if tracking this
information becomes required under applicable law?
Are the filing requirements applicable to large traders
contained in proposed Rule 13h-1(b) sufficiently clear? Is the
provision for inactive status appropriate and sufficient, or should
it be modified or eliminated? Are the provisions in proposed Rule
13h-1(b)(3)(i) and (ii) regarding compliance by controlling or
controlled persons sufficiently clear, or should they be modified?
Are there other considerations or alternatives that the Commission
should consider?
Item 5 of proposed Form 13H requests information on a
large trader's affiliates, including name, description of their
business, relationship to the large trader, and LTID (if any).
Should the Commission require any other information on affiliates,
such as the tax identification number(s) of the affiliate?
Should the Commission implement an electronic filing
system for the receipt of Form 13H, and, if so, should any
particular features be incorporated into the system?
Is an Annual Filing requirement redundant, in light of
the proposed requirement to submit Interim Filings as necessary, or
is it necessary to require that large traders keep current their
disclosed information?
How often would large traders need to file ``Interim
Filings'' to correct information that has become inaccurate? The
Commission also solicits comments concerning the requirement to
submit Interim Filings ``promptly'' following the end of a calendar
quarter in the event that any of the information contained in a Form
13H filing becomes inaccurate for any reason. Are there some items
required by the Form that could be more efficiently updated on a
less frequent basis? Are there any items required by the Form that
ought to be updated more frequently?
For the broker-dealer recordkeeping requirements
contained in proposed Rule 13h-1(d)(2), are there any other fields,
elements, codes, designations, or identifiers that the Commission
should consider in order to be able to conduct market
reconstructions or to aid its investigatory program? Should any of
the proposed fields be modified or eliminated? If so, please explain
why.
Should registered broker-dealers also be required to
maintain (and report upon request) the exercise price and expiration
date of the option position? \126\
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\126\ This information is not covered by Rule 17a-25 under the
Exchange Act, 17 CFR 240.17a-25.
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Is the time frame for the availability of transaction
information specified in proposed Rule 13h-1(d)(5) appropriate to
ensure that the Commission has access to timely transaction data?
Should the Commission consider an alternative time frame?
Are the proposed monitoring responsibilities that would
apply to registered broker-dealers sufficient, or are there other or
more effective means, within the limitations provided by Section
13(h), that would help assure compliance with the large trader
identification requirements?
Is the safe harbor provided for in proposed Rule 13h-
1(f) sufficient to clarify the conditions under which a broker-
dealer would be deemed to know or have reason to know whether a
person is a large trader? Would an alternative formulation better
achieve the Commission's purpose to rely on broker-dealers to help
assure compliance by large traders with the self-identification
requirements of the proposed rule? Are the policies and procedures
that a broker-dealer would need to adopt to take advantage of the
proposed safe harbor sufficiently clear and appropriate? Are there
any other factors the Commission should consider?
Would the proposed monitoring responsibility on
registered broker-dealers
[[Page 21473]]
and the related safe harbor contained in proposed Rule 13h-1(f)
encourage entities that satisfy the large trader standard to
identify themselves? Should the Commission consider imposing other
types of monitoring duties on broker-dealers? Should the Commission
consider requiring a broker-dealer to report promptly to the
Commission any Unidentified Large Trader that it detects? Should the
Commission require a broker-dealer to report to the Commission a
list of all large traders for which it effects transactions?
Should the Commission consider imposing a duty on large
traders to monitor for Unidentified Large Traders among persons with
whom they share investment discretion?
Should the Commission consider exempting certain
categories of persons from the proposed rule? The Commission is
interested in comments concerning whether certain categories of
persons also should be exempt, including the following categories,
and if so why:
A registered broker-dealer that does not carry accounts
for itself or others and is registered by a national securities
exchange as a specialist or market maker.
A registered broker-dealer that does not carry accounts
for itself or others and is a member of a national securities
exchange that exclusively executes transactions on the floor of such
national securities exchange (i.e., a ``floor broker'').
The Commission is also interested in whether other
categories of persons should be excluded.
Is the proposed ``reporting activity level'' of
transactions in NMS securities, effected in a single account during
a calendar day, equal to or greater than 100 shares or any other
transaction in NMS securities, effected in a single account during a
calendar day, that a registered broker-dealer may consider an
appropriate threshold? Why or why not? If not, please identify a
more appropriate level and explain your rationale. Should
aggregation principles apply to the reporting activity level and
could doing so deter non-compliance with the rule? Would doing so
impose a significant technological burden on reporting systems?
Does the proposed 6-month implementation period with
respect to the recordkeeping and reporting requirements for broker-
dealers, and the 3-month implementation period with respect to the
large trader identification requirements, strike an appropriate
balance between timely implementation and time needed for system
changes, or would a longer or shorter period be more appropriate? If
another implementation period is suggested, please also estimate the
corresponding change in implementation costs (if any).
What are the expected costs and related burdens of
modifying firms' existing systems to accommodate the proposed new
data elements of LTID and execution time?
Currently, firms are requested to comply with an EBS
request for equity and equity option trade data in 10 business days.
Is it realistic to expect that broker-dealers will, the first time a
request for production is made by the Commission under the proposed
rule, be able to produce the required data elements for a day's
trades for a large trader in electronic, machine-readable form on
the morning after the day the transactions occur?
Is requiring broker-dealers to maintain the required
large trader trade information for prompt production to the
Commission upon request the best way to make this information
available to the Commission for the rule's purposes? In this
connection, we note that the CFTC's Large Trader Reporting Program
requires large traders of commodity futures and commodity options to
report positions periodically without the CFTC being required to
make a prior request for the information. Is this a meaningful
precedent for the Commission's large trader reporting system? Why or
why not?
Would a system that requests weekly or daily reporting
of large trader trade information to the Commission be unduly
burdensome to broker-dealers? Or would it actually be less
burdensome to broker-dealers than complying with occasional
Commission requests for such information, without having a reliable
system in place for providing such information to the Commission?
Does data production have to be systematized to be efficient and
reasonably free of errors? If a broker-dealer sets up a system to
provide large trader information to the Commission on a daily basis
as a matter of routine, would the ongoing costs to the broker-dealer
for providing large trader information be de minimis because the
information consists of data the broker-dealer produces on a daily
basis anyway in the course of operating its business?
The proposed rule also is designed to enhance the
Commission's ability to conduct market surveillance and to detect
and deter fraudulent and manipulative activity. Would it be
preferable and ultimately less burdensome for broker-dealers to
report large trader activity on a more routine basis (e.g., daily,
weekly, or monthly) rather than provide requested information on an
infrequent or ad hoc basis?
Should Item 5a of Form 13H and the corresponding
instructions be amended to permit large traders that are registered
broker-dealers to incorporate by reference the information provided
on Form BD about affiliates?
Does the proposed rule sufficiently minimize the burden
on natural persons?
Should the proposed rule be expanded to include
securities other than NMS securities? If so, what other types of
securities should be included?
Would the large trader reporting requirements influence
the day-to-day decisions made by large traders in any substantive
way? Would the proposed requirements impact trading strategies? For
example, might traders choose in some cases to avoid trading in
equities or options in favor of alternative vehicles such as OTC
derivatives to avoid reporting? Might they curtail the extent of
their trading? Might they trade in foreign jurisdictions?
Would the application of the proposed rule provide
incentives for trading to be effected through certain entities or
market centers? If so, how and which ones? For example, would large
traders direct their trading through non-registered broker-dealers,
like those relying on the foreign broker/dealer exemption (Rule 15a-
6)?
Is the proposed three-year record retention requirement
for registered broker-dealers adequate for the Commission to achieve
the objectives of the proposed rule? Should the Commission provide
for a longer retention period, for example five or more years?
Is the proposed treatment of foreign entities
appropriate? Why or why not? The Commission is aware that some
foreign jurisdictions may have statutes that could potentially
restrict the ability of a large trader to provide information to the
Commission on Form 13H, and that the ability of large traders
organized in such jurisdictions would depend on the provisions of
such statutes as applied to the scope of information solicited in
proposed Form 13H. To what extent do any foreign statutes complicate
foreign large traders' ability to comply with the proposed rule?
III. Specific Factors To Be Considered by the Commission
Section 13(h)(5) of the Exchange Act requires the Commission, when
exercising its rulemaking authority under Section 13(h) to take into
account: (1) Existing reporting systems; (2) the costs associated with
maintaining information with respect to transactions effected by large
traders and reporting such information to the Commission; and (3) the
relationship between United States and international securities
markets. As discussed in this release, the Commission took into account
these factors when formulating the proposed rule in exercising its
authority under Section 13(h) of the Exchange Act.
The proposed rule reflects the Commission's commitment to utilize
existing industry systems, such as the EBS system, in an effort to
minimize the costs associated with the proposed large trader system
while accomplishing the purposes of the proposed rule. Further, the
application of the proposed rule to foreign entities has been
considered in light of its impact on the relationship between U.S. and
international securities markets.
The Commission has attempted to propose an efficient large trader
system that accommodates different types of large traders and business
practices while at the same time providing the Commission with a useful
tool to identify large traders and their trading activity and assist
the Commission in monitoring the impact of large traders on the
securities markets. The Commission preliminarily believes that the
proposed rule would establish a narrow definition of large trader, and
thus limit the costs and burdens of the
[[Page 21474]]
system on the relevant entities that are responsible for trading
decisions.
The Commission preliminarily believes that the information to be
captured and disclosed under the proposed identification requirements
would be the minimum necessary for creating an effective large trader
system that would achieve the purposes of section 13(h) of the Exchange
Act. Moreover, the recordkeeping and reporting requirements of the
proposed rule have been designed to minimize costs while accomplishing
the purposes of section 13(h) of the Exchange Act. In particular, much
of the information that would be required to be retained by registered
broker-dealers under the proposed rule is similar to the information
currently required to be provided by broker-dealers under Rule 17a-25
of the Exchange Act. Further, the rule contemplates that registered
broker-dealers would use the existing reporting infrastructure of the
EBS system to transmit trading data to the Commission. As such, large
trader transaction data would be collected and disclosed in a manner
that utilizes the existing reporting systems. Accordingly, the
Commission preliminarily believes that the proposed recordkeeping and
reporting requirements are designed to minimize costs and provide a
tailored method of collecting large trader transaction information.
The Commission acknowledges that certain provisions of the proposed
rule would cause market participants to incur costs including: (1)
Preparation, filing, and updating of Form 13H; (2) maintenance and
reporting of large trader transaction information; (3) maintenance and
reporting of LTIDs and execution times; and (4) development and
implementation of monitoring systems and procedures.\127\ However, the
Commission preliminarily believes that the proposal minimizes the costs
of a proposed large trader reporting requirement to the greatest extent
possible while still allowing the Commission to implement a system that
captures a unique large trader identifier and execution times, both of
which the Commission believes would be critical elements necessary to
accomplish the objectives of Section 13(h) of the Exchange Act.
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\127\ See infra Sections IV (Paperwork Reduction Act) and V
(Consideration of Costs and Benefits).
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In addition, the monitoring provisions of the proposed rule would
require a registered broker-dealer to monitor its customers' trading.
These obligations are intended to facilitate compliance with the
proposed rule. The Commission preliminarily believes that the proposed
safe harbor provision would provide meaningful detail and objectivity
that would considerably reduce the burden of the monitoring
responsibility on registered broker-dealers.
Finally, the Commission believes that the proposed rule's
application to foreign persons accomplishes the objectives of Section
13(h) in part by maintaining uniformity between domestic and
international securities markets.\128\
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\128\ See House Comm. on Energy and Commerce, Report to
Accompany the Securities Market Reform Act of 1990, H.R. No. 524,
101st Cong. 2d Sess. (June 5, 1990) (reporting H.R. 3657)
(expressing the intent that the Commission consider ``the
relationship between our domestic markets and the international
market place for securities.'').
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IV. Paperwork Reduction Act
Certain provisions of the proposal contain ``collection of
information requirements'' within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'')\129\ and the Commission has submitted
them to the Office of Management and Budget (``OMB'') for review in
accordance with 44 U.S.C. 3507 and 5 CFR 1320.11. The title of the new
collection of information, including proposed Rule 13h-1 and proposed
Form 13H, is ``Information Required Regarding Large Traders Pursuant to
Section 13(h) of the Securities Exchange Act of 1934 and Rules
Thereunder.'' An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid control number.
---------------------------------------------------------------------------
\129\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
A. Summary of Collection of Information Under Proposed Rule p13h-1
Under proposed Rule 13h-1, a ``large trader'' would be any person
that directly or indirectly, including through other persons controlled
by such person, exercises investment discretion over one or more
accounts and effects transactions for the purchase or sale of any NMS
security for or on behalf of such accounts, with or through one or more
registered broker-dealers, in an aggregate amount equal to or greater
than the identifying activity level.
All large traders would be required to identify themselves to the
Commission by filing Form 13H, and would be required to update their
Form 13H from time to time.\130\ Upon receiving an initial Form 13H,
the Commission would assign to the large trader a unique large trader
identification number (``LTID''). Each large trader would be required
to disclose to registered broker-dealers effecting transactions on its
behalf its large trader identification number and each account to which
it applies.\131\ Each large trader also would be required to disclose
its large trader identification number to all others with whom it
collectively exercises investment discretion. Further, upon request by
the Commission, a large trader would be required promptly to provide
additional information to the Commission that would allow the
Commission to further identify the large trader and all accounts
through which the large trader effects transactions.\132\
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\130\ See proposed Rule 13h-1(b).
\131\ See proposed Rule 13h-1(b)(2).
\132\ See proposed Rule 13h-1(b)(4).
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Proposed Rule 13h-1 also would impose recordkeeping, reporting, and
monitoring requirements on registered broker-dealers. Proposed
paragraph (d)(1) would require every registered broker-dealer to
maintain records of all information required under paragraphs (d)(2)
and (d)(3) for all transactions effected directly or indirectly by or
through (i) An account such broker-dealer carries for a large trader or
an Unidentified Large Trader, (ii) an account over which such broker-
dealer exercises investment discretion together with a large trader or
an Unidentified Large Trader, or (iii) if the broker-dealer is a large
trader, any proprietary or other account over which such broker-dealer
exercises investment discretion. Additionally, where a non-broker-
dealer such as a bank carries an account for a large trader or an
Unidentified Large Trader, the broker-dealer effecting such
transactions directly or indirectly for a large trader would be
required to maintain records of all of the information required under
paragraphs (d)(2) and (d)(3) for those transactions. The term
``Unidentified Large Trader'' would be defined to mean each person who
has not complied with the identification requirements of paragraphs
(b)(1) and (b)(2) of proposed Rule 13h-1 that a registered broker-
dealer knows or has reason to know is a large trader.\133\ A registered
broker-dealer would have reason to know whether a person is a large
trader based on the transactions in NMS securities effected by or
through such broker-dealer. Further, a registered broker-dealer would
not be deemed to know or have reason to know that a person is a large
trader if it establishes policies and procedures reasonably designed to
assure compliance with the identification requirements and does
[[Page 21475]]
not have actual knowledge that a person is a large trader.\134\
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\133\ See proposed Rule 13h-1(a)(9).
\134\ See proposed Rule 13h-1(f).
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Section 13(h)(2) of the Exchange Act provides that records of a
large trader's transactions must be made available on the morning after
the day the transactions were effected.\135\ The proposed rule would
incorporate this requirement in paragraph (d)(5). Paragraph (d)(4) of
the proposed rule would require that such records be kept for a period
of three years, the first two in an accessible place, in accordance
with Rule 17a-4 under the Exchange Act.\136\
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\135\ See 15 U.S.C. 78m(h)(2).
\136\ 17 CFR 240.17a-4.
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Complementing the recordkeeping requirements on broker-dealers,
under proposed paragraph (e), registered broker-dealers that are
required to keep records pursuant to paragraph (d)(1) also would have a
duty to report that information.\137\ Specifically, upon the request of
the Commission, registered broker-dealers must report electronically,
in machine-readable form and in accordance with instructions issued by
the Commission, all information required under paragraphs (d)(2) and
(d)(3) for all transactions effected directly or indirectly by or
through accounts carried by such broker-dealer for large traders and
other persons for whom records must be maintained, equal to or greater
than the reporting activity level.\138\
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\137\ See proposed Rule 13h-1(e).
\138\ To assist the Commission in enforcing the self-
identification requirements of the proposed rule, paragraph (e) of
the proposed rule would require broker-dealers to maintain and
report certain information about all transactions effected by
Unidentified Large Traders. In addition to the information required
to be maintained for identified large traders, a broker-dealer would
be required to retain and report for Unidentified Large Traders such
person's name, address, date the account was opened, and tax
identification number(s). See proposed Rule 13h-1(d)(3).
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Broker-dealers would need to report a particular day's trading
activity only if it equals or exceeds the ``reporting activity level.''
While a registered broker-dealer is required to report for a given day
data only if it is equal to or greater than the reporting activity
level, the rule specifically allows a broker-dealer to voluntarily
report a day's trading activity that falls short of the applicable
threshold. Registered broker-dealers may wish to take this approach if
they prefer to avoid implementing systems to filter the transaction
activity and would rather utilize a ``data dump'' approach to reporting
large trader transaction information to the Commission.
In recognition of the value of utilizing existing reporting
systems, the proposed rule would require broker-dealers to transmit the
transaction records by utilizing the infrastructure of the existing EBS
system. Transaction reports, including data on transactions up to and
including the day immediately preceding the request, would need to be
furnished before the close of business on the day specified in the
request for the information.
B. Proposed Use of Information
The Commission would use the information collected pursuant to
proposed Rule 13h-1 to identify large traders and collect data on the
trading activity of large traders. The proposed large trader reporting
system would allow the Commission to monitor more readily and
efficiently the impact of large traders on the securities markets and
would facilitate the Commission's trading reconstruction efforts as
well as enhance its monitoring, enforcement, and regulatory activities.
Registered broker-dealers would use the information they collect
pursuant to proposed Rule 13h-1, namely the LTID, to comply with the
proposed recordkeeping requirements and the proposed requirement to
report to the Commission upon request all transactions effected for
large traders. In addition, any registered broker-dealer that chooses
to rely on the proposed safe harbor provisions would use the
information they collect pursuant to proposed Rule 13h-1 as well as
policies and procedures consistent with the proposed rule as part of
their systems to detect and identify Unidentified Large Traders and
inform them of their obligations to file Form 13H and disclose large
trader status under the proposed rule. Self-regulatory organizations,
pursuant to their obligations to enforce compliance by their members
and persons associated with their members with the rules and
regulations under the Exchange Act,\139\ would evaluate whether a
broker-dealer has collected and maintained the information required by
proposed Rule 13h-1 to surveil for and enforce compliance with the
proposed rule.
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\139\ See 15 U.S.C. 78f(b)(1).
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C. Respondents
While we are not aware of a database that would allow the
Commission to calculate the precise number of persons that would meet
the definition of large trader, based on the Commission's experience in
this area, the Commission estimates that there would be 400 large
traders subject to the proposed rule. The estimated number of large
traders accounts for the proposed filing requirement provisions
contained in proposed Rule 13h-1(b)(3), including the rule's focus, in
more complex organizations, on the parent company of the entities that
employ or otherwise control the individuals that exercise investment
discretion. In addition, the Commission estimates from broker-dealer
responses to FOCUS report filings with the Commission made in 2009 that
there would be 300 registered broker-dealers subject to the proposed
rule, including some broker-dealers that will also themselves be large
traders. This estimate reflects the number of broker-dealer carrying
firms that the Commission believes would carry accounts for large
traders or that would effect transactions directly or indirectly for a
large trader or Unidentified Large Trader where a non-broker-dealer
carries the account. The Commission seeks comment on the number of
large traders and registered broker-dealers that could be affected by
the proposed rule and the nature of the proposed rule's effect on those
persons and entities.
D. Estimated Total Annual Reporting and Recordkeeping Burden
1. Estimated Burden on Large Traders
Proposed Rule 13h-1 would present new burdens to persons and
entities that meet the definition of large trader. In particular,
persons, including those that might not presently be registered with
the Commission in some capacity, that meet the definition of ``large
trader'' would become subject to a new reporting duty, as the proposed
rule would require each large trader to identify itself to the
Commission by filing a Form 13H and submitting annual updates, as well
as updates on a quarterly basis if necessary to correct information
that becomes inaccurate. Additionally, each large trader would be
required to identify itself to each registered broker-dealer through
which it effects transactions and to all others with whom it
collectively exercises investment discretion.
Paragraph (b)(1) of the proposed rule would require large traders
to file Form 13H with the Commission promptly after first effecting
transactions that reach the identifying activity level.\140\
Thereafter, large traders would be required to file an amended Form 13H
promptly following the end of a calendar quarter in the event that any
of the information contained therein becomes inaccurate for any reason
(e.g., change of name and address, type of organization, principal
business,
[[Page 21476]]
regulatory status, accounts maintained, or associations).\141\
Regardless of whether any interim amended Form 13Hs are filed, large
traders also would be required to file Form 13H annually, within 45
days after the calendar year-end, in order to ensure the accuracy of
all of the information reported to the Commission.\142\ Additionally,
proposed Rule 13h-1(b)(4) provides that the Commission may require
large traders to provide, upon request, additional information to
identify the large trader and all accounts through which the large
trader effects transactions.
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\140\ See proposed Rule 13h-1(b)(1)(i).
\141\ See proposed Rule 13h-1(b)(1)(iii).
\142\ See proposed Rule 13h-1(b)(1)(ii).
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For purposes of the PRA, the Commission estimates that it would
take a large trader approximately 20 hours to calculate whether its
trading activity qualifies it as a large trader, complete the initial
Form 13H with all required information, obtain a LTID from the
Commission, and inform its registered broker-dealers and other entities
of its LTID and the accounts to which it applies. The Commission
understands that large traders currently maintain systems that capture
their trading activity, and believes that these existing systems would
be sufficient without further modification to enable a large trader to
determine whether it effects transactions for the purchase or sale of
any NMS security for or on behalf of accounts over which it exercises
investment discretion in an aggregate amount equal to or greater than
the identifying activity level. Accordingly, the Commission
preliminarily estimates that the one-time burden for large traders
would be approximately 8,000 burden hours.\143\
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\143\ The Commission derived the total estimated burdens from
the following estimates, which are based on the Commission's
experience with, and burden estimates for, other existing reporting
systems including Rule 13f-1: (Compliance Manager at 3 hours) +
(Compliance Attorney at 7 hours) + (Compliance Clerk at 10 hours) x
(400 potential respondents) = 8,000 burden hours. Rule 13f-1, like
the proposed rule, requires monitoring of a certain threshold and,
upon reaching that threshold, disclosure of information.
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The Commission preliminarily estimates that the ongoing annualized
burden for complying with proposed Rule 13h-1 would be approximately
6,800 burden hours for all large trader respondents.\144\ This figure
is based on the estimated number of hours it would take to file interim
updates and the annual updated Form 13H. The Commission estimates that
the average large trader would be required to file 1 annual update and
3 interim updates.\145\
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\144\ The Commission derived the total estimated burdens from
the following estimates, which are based on the Commission's
experience with, and burden estimates for, other existing reporting
systems including Rule 13f-1 and Rule 17a-25: (Compliance Manager at
2 hours) + (Compliance Attorney at 5 hours) + (Compliance Clerk at
10 hours) x (400 potential respondents) = 6,800 burden hours. Rule
13f-1, like the proposed rule, requires monitoring of a certain
threshold and, upon reaching that threshold, disclosure of
information. As discussed supra, Rule 17a-25 requires broker-dealers
to disclose information that is very similar in scope and character
to the information required under the proposed rule. The Commission
believes that determining whether a firm reaches the identifying
activity level is a compliance function and that no software
reprogramming would be required. See infra note 177.
\145\ This estimate is based on the varied characteristics of
large traders and the nature and scope of the items that would be
disclosed on proposed Form 13H that would require updating, and
considers that large traders would file one required annual update
and three quarterly updates when information contained in the Form
13H becomes inaccurate.
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Therefore, in summary, under the proposed rule, the total burden on
large trader respondents would be 8,000 hours for the first year and
6,800 hours for each subsequent year.
2. Estimated Burden on Registered Broker-Dealers
As part of the Commission's existing EBS system, pursuant to Rule
17a-25 under the Exchange Act, the Commission currently requires
registered broker-dealers to keep records of most of the information
for their customers that would be captured by proposed Rule 13h-1.\146\
The additional items of information that this proposal would capture
are: (1) LTID; and (2) transaction execution time. To capture the
additional field that includes the LTID number, all registered broker-
dealers with large trader customers or that are themselves large
traders would have to re-program their systems. Some registered broker-
dealers also would need to re-program their systems to capture
execution time, to the extent their systems do not already capture that
information in a manner that is reportable pursuant to an EBS request
for data, and LTID.
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\146\ See 17 CFR 240.17a-25. Pursuant to Rule 17a-25, broker-
dealers are required to maintain the following information that
would be captured by the proposed rule: date on which the
transaction was executed; account number; identifying symbol
assigned to the security; transaction price; the number of shares or
option contracts traded and whether such transaction was a purchase,
sale, or short sale, and if an option transaction, whether such was
a call or put option, an opening purchase or sale, a closing
purchase or sale, or an exercise or assignment; the clearing house
number of such broker or dealer and the clearing house numbers of
the brokers or dealers on the opposite side of the transaction; a
designation of whether the transaction was effected or caused to be
effected for the account of a customer of such broker or dealer, or
was a proprietary transaction effected or caused to be effected for
the account of such broker or dealer; market center where the
transaction was executed; prime broker identifier; average price
account identifier; and the identifier assigned to the account by a
depository institution. For customer transactions, the broker-dealer
is required to also include the customer's name, customer's address,
the customer's tax identification number, and other related account
information.
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The Commission believes that the burden of the proposed rule for
individual registered broker-dealers would likely vary due to
differences in their recordkeeping systems. The Commission estimates
that all registered broker-dealers that have a client base that
includes large traders and Unidentified Large Traders, or broker-
dealers that are themselves large traders, would be required to make
modifications to their existing systems to capture the additional data
elements that are not currently captured by systems that comply with
Rule 17a-25, including, for example, the LTID number. The Commission
estimates from broker-dealer responses to FOCUS report filings with the
Commission made in 2009 that there would be 300 registered broker-
dealers subject to the proposed rule, including some of those broker-
dealers that will also themselves be large traders. The Commission
preliminary estimates that the one-time, initial annualized burden for
registered broker-dealers for system development, including re-
programming and testing of the systems to comply with the proposed
rule, would be approximately 133,500 burden hours.\147\
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\147\ The Commission derived the total estimated burdens from
the following estimates, which are based on the Commission's
experience with, and burden estimates for, other existing reporting
systems including Rule 13f-1 and Rule 17a-25: (Computer Ops Dept.
Mgr. at 30 hours) + (Sr. Database Administrator at 25 hours) + (Sr.
Programmer at 150 hours) + (Programmer Analyst at 100 hours) +
(Compliance Manager at 20 hours) + (Compliance Attorney at 10 hours)
+ (Compliance Clerk at 20 hours) + (Sr. Systems Analyst at 50 hours)
+ (Director of Compliance at 5 hours) + (Sr. Computer Operator at 35
hours) x (300 potential respondents) = 133,500 burden hours. As
noted above, the Commission acknowledges that, in some instances,
multiple LTIDs may be disclosed to a registered broker-dealer for a
single account. Therefore, our hourly burden estimate factors in the
cost that registered broker-dealers would need to develop systems
capable of tracking multiple LTIDs. Rule 13f-1, like the proposed
rule, requires monitoring of a certain threshold and, upon reaching
that threshold, disclosure of information. As discussed supra, Rule
17a-25 requires broker-dealers to disclose information that is very
similar in scope and character to the information required under the
proposed rule.
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This figure is based on the estimated number of hours for initial
internal development and implementation, including software
development, taking into account the fact that new data elements are
required to be captured and must be available for reporting to the
Commission as of the morning following the day on which the
transactions were effected. Because broker-dealers already capture,
pursuant
[[Page 21477]]
to Rule 17a-25, most of the data that proposed Rule 13h-1 would
capture, the Commission does not expect broker-dealers to incur any
hardware costs.
The Commission preliminarily believes that the ongoing annualized
expense for the recordkeeping requirement for registered broker-dealers
would not result in a burden for purposes of the PRA, as registered
broker-dealers already are required to provide to the Commission almost
all of the proposed information for all of their customers pursuant to
Rule 17a-25 under the Exchange Act. Once a registered broker-dealer's
system is revised to capture the additional fields of information, the
Commission does not believe that the additional fields would result in
any ongoing annualized expense beyond what broker-dealers already incur
under Rule 17a-25.
In addition to requiring registered broker-dealers to maintain
records of account transactions, the proposed rule would also require
registered broker-dealers to report such transactions to the Commission
upon request. The Commission preliminarily believes that this
collection of information would not involve any substantive or material
change in the burden that already exists as part of registered broker-
dealers providing transaction information to the Commission in the
normal course of business.\148\ However, the Commission notes that the
information would need to be available for reporting to the Commission
on a next-day basis, versus the 10 business day period associated with
an EBS request for data.\149\ Nevertheless, once the electronic
recordkeeping system is in place to capture the information, where such
system is designed and built to furnish the information within the time
period specified in the proposal, the Commission preliminarily believes
that the collection of information would result in minimal additional
burden.
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\148\ See 17 CFR 240.17a-25.
\149\ See Securities Exchange Act Release No. 44494 (June 29,
2001), 66 FR 35836 (July 9, 2001) (S7-12-00) (17a-25 adopting
release).
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Although it is difficult to predict with certainty the Commission's
future needs to obtain large trader data, the Commission preliminarily
believes that, taking into account the Commission's likely need for
data to be used in market reconstruction purposes and investigative
matters, the Commission estimates that it would likely send 100
requests for large trader data per year to each registered broker-
dealer.\150\ The Commission estimates that it would take a registered
broker-dealer 2 hours to comply with each request, considering that a
broker-dealer would need to run the database query of its records,
download the data file, and transmit it to the Commission. Accordingly,
the ongoing annual aggregate hour burden for broker-dealers is
estimated to be 60,000 hours (100 x 300 x 2 = 60,000).\151\
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\150\ Compared to the EBS system, where the Commission sent
5,168 electronic blue sheets requests between January 2007 and June
2009, the Commission preliminarily expects to send fewer requests
for large trader data, in particular because the Commission
preliminarily expects that a request for large trader data would be
broader and encompass a larger universe of securities and a longer
time period than would be the case for the typically more targeted
EBS requests it sends to broker-dealers.
\151\ The Commission derived the total estimated burdens based
on the Commission's experience with, and burden estimates for, other
existing reporting systems, including Rule 17a-25. The Commission
estimated that each broker-dealer who electronically responds to a
request for data in connection with Rule 17a-25 and the EBS system
spends 8 minutes per request. See EBS Release, supra note 24, at 66
FR 35841. Unlike EBS, under proposed Rule 13h-1, a broker-dealer
would also be required to report data on Unidentified Large Traders.
The Commission therefore believes that the time to comply with a
request for data under the proposed rule could take longer than
would a similar request for data under the EBS system, as a broker-
dealer likely would take additional time to review and report
information on any Unidentified Large Traders, including the
additional fields of information specified in paragraph (d)(3) of
the proposed rule, that they would be required to report to the
Commission under the proposed rule.
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The proposed rule also would require registered broker-dealers to
monitor large traders to help ensure compliance by large traders with
the self-identification requirements of the rule. In particular,
proposed paragraph (e) would require certain broker-dealers to maintain
and report to the Commission certain information about all transactions
effected by Unidentified Large Traders.
The Commission acknowledges that the duty to monitor would impose
burdens on broker-dealers. To reduce the monitoring burden, the
Commission has proposed a safe harbor provision for the monitoring
duty. Specifically, registered broker-dealers would be deemed to not
know or to have no reason to know that a person is an Unidentified
Large Trader if: (1) It has established and maintains policies and
procedures reasonably designed to assure compliance with the
identification requirements of the proposed rule; and (2) it does not
have actual knowledge that a person is a large trader.\152\
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\152\ See proposed Rule 13h-1(f).
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The Commission preliminary estimates that the one-time, initial
burden for all registered broker-dealers to comply with the proposed
monitoring requirements would be approximately 21,000 burden hours to
establish a compliance system to detect and identify Unidentified Large
Traders.\153\ This figure is based on the estimated number of hours to
establish policies and procedures reasonably designed to assure
compliance with the identification requirements of the proposed rule.
The Commission preliminarily estimates that the ongoing annualized
burden to all broker-dealers for the monitoring requirements of the
proposed rule, including the proposed requirement on broker-dealers to
inform Unidentified Large Traders of their obligations to File Form 13H
and disclose their large trader status under proposed Rule 13h-1, would
be approximately 4,500 burden hours.\154\
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\153\ The Commission derived the total estimated burdens from
the following estimates, which are based on the Commission's
experience with, and burden estimates for, other existing reporting
systems including Rule 13f-1: (Sr. Programmer at 10 hours) +
(Compliance Manager at 10 hours) + (Compliance Attorney at 10 hours)
+ (Compliance Clerk at 20 hours) + (Sr. Systems Analyst at 10 hours)
+ (Director of Compliance at 2 hours) + (Sr. Computer Operator at 8
hours) x (300 potential respondents) = 21,000 burden hours. Rule
13f-1, like the proposed rule, requires monitoring of a certain
trading threshold.
\154\ The Commission derived the total estimated burdens from
the following estimates, which are based on the Commission's
experience with, and burden estimates for, other existing reporting
systems including Rule 13f-1 and Rule 17a-25: (Compliance Attorney
at 15 hours) x (300 potential respondents) = 4,500 burden hours.
Rule 13f-1, like the proposed rule, requires monitoring of a certain
threshold and, upon reaching that threshold, disclosure of
information.
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Therefore, under the proposed rule, the total burden on these
respondents would be 164,500 hours for the first year \155\ and 14,500
hours for each subsequent year.\156\
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\155\ This figure is derived from the estimated one-time burdens
from the recordkeeping requirement (133,500 burden hours) + the
reporting requirement (10,000 burden hours) + the monitoring
requirement (21,000 burden hours) = 164,500 total burden hours.
\156\ This figure is derived from the estimated ongoing burdens
from the reporting requirement (10,000 burden hours) + the
monitoring requirement (4,500 burden hours) = 14,500 total burden
hours.
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E. Collection of Information Is Mandatory
All collections of information pursuant to the proposed rule would
be a mandatory collection of information.
F. Confidentiality
Section 13(h)(7) of the Exchange Act provides that Section 13(h)
``shall be considered a statute described in subsection (b)(3)(B) of [5
U.S.C. 552]'', which is part of the Freedom of Information Act
(``FOIA'').\157\ As such,
[[Page 21478]]
``the Commission shall not be compelled to disclose any information
required to be kept or reported under [Section 13(h)].'' \158\
Accordingly, the information that a large trader would be required to
disclose on proposed Form 13H or provide in response to a Commission
request would be exempt from disclosure under FOIA. In addition, any
transaction information that a registered broker-dealer would report to
the Commission under the proposed rule also would be exempt from
disclosure under FOIA.
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\157\ 5 U.S.C. 552(b)(3)(B) is now 5 U.S.C. 552(b)(3)(A)(ii).
\158\ See section 13(h)(7) of the Exchange Act, 15 U.S.C.
78m(h)(7).
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G. Retention Period of Recordkeeping Requirements
Registered broker-dealers would be required to retain records and
information under the proposed rule for a period of three years, the
first two in an accessible place, in accordance with Rule 17a-4 under
the Exchange Act.\159\
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\159\ 17 CFR 240.17a-4.
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H. Request for Comments
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comment to: (1) Evaluate whether the proposed collection of information
is necessary for the performance of the functions of the agency,
including whether the information shall have practical utility; (2)
evaluate the accuracy of the agency's estimate of the burden of the
proposed collection of information; (3) enhance the quality, utility,
and clarity of the information to be collected; and (4) minimize the
burden of collection of information on those who are to respond,
including through the use of automated collection techniques or other
forms of information technology.
Persons wishing to submit comments on the collection of information
requirements should direct them to the Office of Management and Budget,
Attention: Desk Officer for the Securities and Exchange Commission,
Office of Information and Regulatory Affairs, Room 3208, New Executive
Office Building, Washington, DC 20503; and should send a copy to
Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100
F Street, NE., Washington, DC 20549-1090 with reference to File No. S7-
10-10. OMB is required to make a decision concerning the collection of
information between 30 and 60 days after publication, so a comment to
OMB is best assured of having its full effect if OMB receives it within
30 days of publication. The Commission has submitted the proposed
collection of information to OMB for approval. Requests for the
materials submitted to OMB by the Commission with regard to this
collection of information should be in writing, refer to File No. S7-
10-10, and be submitted to the Securities and Exchange Commission,
Office of Investor Education and Advocacy, 100 F Street, NE.,
Washington, DC 20549-0213.
V. Consideration of Costs and Benefits
The Commission is sensitive to the costs and benefits of our
proposal to establish a large trader reporting system. We request
comment on the costs and benefits associated with the proposal. The
Commission has identified certain costs and benefits associated with
the proposal and requests comment on all aspects of its preliminary
cost-benefit analysis, including identification and assessment of any
costs and benefits not discussed in this analysis. The Commission also
seeks comments on the benefits identified and the costs described in
each section of this cost-benefit analysis, as well as elsewhere in
this release. Finally, the Commission requests that commenters provide
data and any other information or statistics that the commenters relied
on to reach any conclusions on such estimates.
A. Benefits
U.S. securities markets have experienced a dynamic transformation
in recent years. In large part, the changes reflect the culmination of
a decades-long trend from a market structure with primarily manual
trading to a market structure with primarily automated trading. Rapid
technological advances have produced fundamental changes in the
structure of the securities markets, the types of market participants,
the trading strategies employed, and the array of products traded. The
markets also have become even more competitive, with exchanges and
other trading centers offering innovative order types, data products
and other services, and aggressively competing for order flow by
reducing transaction fees and increasing rebates. These changes have
facilitated the ability of large institutional and other professional
market participants to employ sophisticated trading methods to trade
electronically in huge volumes with great speed. In addition, large
traders have become increasingly prominent at a time when the markets
are experiencing an increase in overall volume.\160\
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\160\ See, e.g., infra note 1.
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Currently, to support its regulatory and enforcement activities,
the Commission collects transaction data through the EBS system.\161\
The Commission uses the EBS system to obtain securities transaction
information for two primary purposes: (1) To assist in the
investigation of possible federal securities law violations, primarily
involving insider trading or market manipulation; and (2) to conduct
market reconstructions.
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\161\ See 17 CFR 240.17a-25 (Electronic Submission of Securities
Transaction Information by Exchange Members, Brokers, and Dealers).
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The EBS system has performed effectively as an enforcement tool for
analyzing trading in a small sample of securities over a limited period
of time. However, because the EBS system is designed for use in
narrowly-focused enforcement investigations that generally involve
trading in particular securities, it has proven to be insufficient for
large-scale market reconstructions and analyses involving numerous
stocks during peak trading volume periods.\162\ Further, it does not
address the Commission's need to identify important market participants
and their trading activity.
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\162\ See supra note 7 and accompanying text.
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Following declines in the U.S. securities markets in October 1987
and October 1989, Congress noted that the Commission's ability to
analyze the causes of a market crisis was impeded by its lack of
authority to gather trading information.\163\ To address this concern,
Congress passed the Market Reform Act, which, among other things,
amended Section 13 of the Exchange Act to add new subsection (h),
authorizing the Commission to establish a large trader reporting system
under such rules and regulations as the Commission may prescribe.\164\
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\163\ The legislative history accompanying the Market Reform Act
also noted the Commission's limited ability to analyze the causes of
the market declines of October 1987 and 1989. See generally Senate
Report, supra note 9, and House Comm. on Energy and Commerce, Report
to accompany the Securities Market Reform Act of 1990, H.R. No. 524,
101st Cong. 2d Sess. (June 5, 1990) (reporting H.R. 3657).
\164\ Public Law 101-432 (HR 3657), October 16, 1990.
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The large trader reporting authority in Section 13(h) of the
Exchange Act was intended to facilitate the Commission's ability to
monitor the impact on the securities markets of securities transactions
involving a substantial volume or large fair market value, as well as
to assist the Commission's enforcement of the federal securities
laws.\165\ In particular, the Market Reform Act provided the Commission
with the authority to collect broad-based information on large traders,
including their trading activity, reconstructed in
[[Page 21479]]
time sequence, in order to provide empirical data necessary for the
Commission to evaluate market movement and volatility and enhance its
ability to detect illegal trading activity.\166\
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\165\ See 15 U.S.C. 78m(h)(1). See also Senate Report, supra
note 9, at 42.
\166\ See Senate Report, supra note 9, at 4, 44, and 71. In this
respect, though self-regulatory organization (``SRO'') audit trails
provide a time sequenced report of broker-dealer transactions, those
audit trail generally do not identify the broker-dealer's customers.
Accordingly, the Commission is not presently able to utilize
existing SRO audit trail data to accomplish the objectives of the
Market Reform Act.
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The large trader reporting system envisioned by the Market Reform
Act authorizes the Commission to require large traders\167\ to self-
identify to the Commission and provide information to the Commission
identifying the trader and all accounts in or through which the trader
effects securities transactions.\168\ The Market Reform Act also
authorized the Commission to require large traders to identify their
status as large traders to any registered broker-dealer through whom
they directly or indirectly effect securities transactions.\169\
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\167\ Section 13(h) of the Exchange Act defines a ``large
trader'' as ``every person who, for his own or an account for which
he exercises investment discretion, effects transactions for the
purchase or sale of any publicly traded security or securities by
use of any means or instrumentality of interstate commerce or of the
mails, or of any facility of a national securities exchange,
directly or indirectly by or through a registered broker or dealer
in an aggregate amount equal to or in excess of the identifying
activity level.'' See 15 U.S.C. 78m(h)(8)(A).
\168\ See 15 U.S.C. 78m(h)(1)(A).
\169\ See 15 U.S.C. 78m(h)(1)(B).
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In addition to facilitating the ability of the Commission to
identify large traders, the Market Reform Act also authorizes the
Commission to collect information on the trading activity of large
traders. In particular, the Commission is authorized to require every
registered broker-dealer to make and keep records with respect to
securities transactions of large traders that equal or exceed a certain
``reporting activity level'' and report such transactions upon request
of the Commission.\170\
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\170\ See 15 U.S.C. 78m(h)(2). Section 13(h) also provides the
Commission with authority to determine the manner in which
transactions and accounts should be aggregated, including
aggregation on the basis of common ownership or control. See 15
U.S.C. 78m(h)(3). The term ``reporting activity level'' is defined
in Section 13(h)(8)(D) of the Exchange Act to mean ``transactions in
publicly traded securities at or above a level of volume, fair
market value, or exercise value as shall be fixed from time to time
by the Commission by rule, regulation, or order, specifying the time
interval during which such transactions shall be aggregated.'' See
15 U.S.C. 78m(h)(8)(D).
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To implement its authority under section 13(h) of the Exchange Act,
the Commission now is proposing new Rule 13h-1 and Form 13H to
establish an activity-based large trader reporting system. The proposal
is intended to assist the Commission in identifying, and obtaining
certain baseline trading information about traders that conduct a
substantial volume or large fair market value of trading activity in
the U.S. securities markets. In essence, a ``large trader'' would be
defined as a person who effects transactions in NMS securities of at
least, during any calendar day, two million shares or shares with a
fair market value of $20 million or, during any calendar month, either
20 million shares or shares with a fair market value of $200
million.\171\ The proposed large trader reporting system is designed to
facilitate the Commission's ability to monitor the impact on the
securities markets of large trader activity, and allow it to conduct
trading reconstructions following periods of unusual market volatility
and analyze significant market events for regulatory purposes. It also
should enhance the Commission's ability to detect and deter fraudulent
and manipulative activity and other trading abuses.
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\171\ This test is defined in the proposed rule as the
``identifying activity level.'' See proposed Rule 13h-1(a)(7).
Section 13(h)(8)(c) of the Exchange Act authorizes the Commission to
determine, by rule or regulation, the applicable identifying
activity level. 15 U.S.C. 78m(h)(8)(c).
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The proposed identification, recordkeeping, and reporting system
would provide the Commission with a mechanism to identify large
traders, and the affiliates, accounts, and transactions of large
traders. Specifically, proposed Rule 13h--1 would require large traders
to identify themselves to the Commission and make certain disclosures
to the Commission on proposed Form 13H. Upon receipt of Form 13H, the
Commission would issue a unique identification number to the large
trader, which the large trader would then provide to its registered
broker-dealers. Registered broker-dealers would be required to maintain
transaction records for each large trader customer, and would be
required to report that information to the Commission upon request. In
addition, registered broker-dealers would be required to adopt
procedures to monitor their customers' activity for volume that would
trigger the identification requirements of the proposed rule.
In light of recent turbulent markets and the increasing
sophistication and trading capacity of large traders, the Commission
believes it needs to further enhance its ability to collect and analyze
trading information, especially with respect to the most active market
participants. In particular, the Commission believes it needs a
mechanism to reliably identify large traders, and promptly and
efficiently obtain their trading information on a market-wide basis.
The Commission believes a proposal for a large trader reporting
system is necessary because, as noted above, large traders appear to be
playing an increasingly prominent role in the securities markets.\172\
Market observers have offered a wide range of estimates for the percent
of overall volume attributable to one potential subcategory of large
trader--high frequency traders--which are typically estimated at 50% of
total volume or higher.\173\ The proposed large trader reporting system
is intended to provide a basic set of tools so that the Commission can
monitor more readily and efficiently the impact on the securities
markets of large traders.
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\172\ See 15 U.S.C. 78m(h)(1) and (h)(2) (reflecting the purpose
of Section 13(h) of the Exchange Act to allow the Commission to
monitor the impact of large traders).
\173\ See supra note 1.
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Among other things, the Commission believes that a large trader
reporting system would enhance its ability to (1) Reliably identify
large traders and their affiliates, (2) obtain more promptly trading
data on the activity of large traders, including execution time, and
(3) aggregate and analyze trading data among affiliated large traders
and affiliated accounts.
The Commission generally requests comment on the anticipated
benefits of the proposal, including whether the proposal would: (1)
Assist in the examination for and investigation of possible federal
securities law violations, including insider trading or market
manipulation; (2) assist the Commission in conducting market
reconstructions; and (3) provide the Commission with a system that
would allow it to analyze more readily and efficiently the impact of
large traders on the securities markets. Would the proposed rule
provide benefits that the Commission has not discussed?
B. Costs
1. Large Traders
The Commission preliminarily anticipates that the primary costs to
large traders from the proposal are the requirement to self-identify to
the Commission, including utilizing existing systems to detect when the
large trader meets the identifying activity level, and the filing and
information requirements when large
[[Page 21480]]
trader status is achieved, as well as the requirement to inform its
broker-dealers and others with whom it exercises investment discretion
of its LTID and all accounts to which it applies. The proposed rule
would require large traders to file Form 13H with the Commission
promptly after first effecting transactions that reach the identifying
activity level.\174\ Large traders would be required to amend their
Forms 13H by submitting an ``Interim Filing'' promptly following the
end of a calendar quarter in the event that any of the information
contained in a Form 13H filing becomes inaccurate for any reason (e.g.,
change of name or address, type of organization, principal business,
regulatory status, accounts maintained, or associations).\175\
Regardless of whether any interim amended Form 13Hs are filed, large
traders would be required to file Form 13H annually, within 45 days
after the calendar year-end, in order to ensure the accuracy of all of
the information reported to the Commission.\176\
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\174\ See proposed Rule 13h-1(b)(1)(i).
\175\ See proposed Rule 13h-1(b)(1)(iii).
\176\ See proposed Rule 13h-1(b)(1)(ii).
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The Commission estimates that the aggregate costs for all 400
potential large trader respondents to self-identify on Form 13H and
obtain from the Commission and inform others of its LTID and the
accounts to which it applies would be $1,317,600.\177\ The Commission
believes that potential large trader respondents would not need to
modify their existing systems to comply with proposed Rule 13h-1. The
Commission believes that large traders already employ software that
tracks the number and market value of the shares they trade, and the
Commission expects that firms would be able to use their existing
systems to monitor whether they reach the identifying activity level.
Accordingly, the estimate above does not include any software
modification costs. In addition, the Commission estimates that the
aggregate cost to file interim updates and the annual updated Form 13H
would be $998,400.\178\ The Commission does not expect these minimal
costs per large trader of self-identification and reporting to the
Commission to have any significant effect on how large traders conduct
business because such costs would not be so large, when compared to
level of activity at which a large trader would be trading, so as to
result in a change in how such traders conduct business, create a
barrier to entry, or otherwise alter the competitive landscape among
large traders.
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\177\ The Commission derived the total estimated burdens from
the following estimates, which are based on the Commission's
experience with, and burden estimates for, other existing reporting
systems including Rule 13f-1: (Compliance Manager (3 hours) at $258
per hour) + (Compliance Attorney (7 hours) at $270 per hour) +
(Compliance Clerk (10 hours) at $63 per hour) x (400 potential
respondents) = $1,317,600. Rule 13f-1, like the proposed rule,
requires the filing of a form (Form 13F) upon exceeding a certain
trading threshold. This figure is based on the estimated number of
hours and hourly costs for the one-time, initial annualized burden
for registered broker-dealers for development, including re-
programming and testing of the systems to comply with the proposed
rule. Hourly figures are from SIFMA's Management & Professional
Earnings in the Securities Industry 2008 and SIFMA's Office Salaries
in the Securities Industry 2008, modified by Commission staff to
account for an 1800-hour work-year and multiplied by 5.35 or 2.93,
as appropriate, to account for bonuses, firm size, employee
benefits, and overhead.
\178\ The Commission derived the total estimated burdens from
the following estimates, which are based on the Commission's
experience with, and burden estimates for, other existing reporting
systems including Rule 6a-2: (Compliance Manager (2 hours) at $258
per hour) + (Compliance Attorney (5 hours) at $270 per hour) +
(Compliance Clerk (10 hours) at $63 per hour) x (400 potential
respondents) = $998,400. Rule 6a-2, like the proposed rule,
requires: (1) Form amendments when there are any material changes to
the information provided in the previous submission; and (2)
submission of periodic updates of certain information provided in
the initial Form 1, whether or not such information has changed.
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The term ``price efficiency'' has a technical meaning in financial
economics, which is not the only way the term can be interpreted in the
Exchange Act.\179\ We have, nonetheless, considered the effect of
proposed new Rule 13h-1 on price efficiency in terms of financial
economic theory, under which the proposed large trader reporting system
could adversely affect the extent to which security prices reflect
available information. As discussed above, the Commission acknowledges
that the proposal would entail certain costs on large traders. These
costs would be incremental to certain large traders which, as part of
their business model, expend resources to gather and process public
information that is ultimately reflected into prices through their
trading activity. The Commission is sensitive to the costs of the
proposal and preliminarily believes these costs would have minimal
impact on a large trader's decision to gather and process public
information, and also have minimal impact on a large trader's decision
to ultimately trade on this information. Because the large trader
reported positions would be made available only to the Commission, and
not to the public or a trader's competitors, we expect the proposed
rule to have little impact on where a large trader conducts its
business. The Commission therefore preliminarily believes that the
proposal mitigates any potential adverse impact on price efficiency.
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\179\ Where we use the terms ``price efficiency'' in this
proposing release we are using terms of art as used in the economic
literature proceeding under the ``efficient markets hypothesis,''
under which financial prices are assumed to reflect all available
information and accordingly adjust quickly to reflect new
information. See, e.g., Fama, Eugene F., (1991), Efficient capital
markets: II, Journal of Finance; Fama E, French K. (1992), The
Cross-Section of Expected Stock Returns, Journal of Finance. It
should be noted that price efficiency is not identical with the
ordinary sense of the word ``efficiency.''
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The Commission believes that the proposed rule's requirement for
large traders to file and update Form 13H with the Commission, and to
identify itself to each registered broker-dealer through which it
effects transactions and to all others with whom it collectively
exercises investment discretion, will have minimal adverse effect on
efficiency, competition, or capital formation. In particular, the
Commission does not believe that the requirement to self-identify to
the Commission and the increased regulatory scrutiny it would entail
would deter large traders from continuing to actively participate in
the securities markets or would otherwise negatively impact large
traders. Because the large trader positions will be reported only to
the Commission, and not made public to a trader's customers or
competitors, we expect the proposed rule to have little to no impact on
competition.
The Commission acknowledges that, in addition to promoting price
efficiency, the trading activity of certain large traders also promotes
market liquidity in secondary securities markets. The Commission also
acknowledges that participation in primary market offerings may be
affected by changes in expectations about secondary market liquidity
and price efficiency. As discussed above, however, the Commission
preliminarily believes that the proposed rule would have minimal impact
on a large trader's secondary market trading activities, and therefore
believes there would be little to no impact on capital formation.
Further, the Commission believes that proposed Rule 13h-1(b) would
enhance the Commission's efforts to monitor the markets, in furtherance
of promoting efficiency and capital formation and thereby bolstering
investor confidence.
The Commission has sought to limit compliance costs wherever
possible. The Commission proposes to establish an initial ``identifying
activity level'' of: (1) 2 million shares, or shares with a fair market
value of $20 million, effected during a calendar day; or (2) 20 million
shares or shares with a fair market value of $200 million, effected
during a
[[Page 21481]]
calendar month. The Commission preliminarily believes that this
threshold identifying activity level strikes an appropriate balance
between the need to identify significant large traders and the burden
on affected entities of capturing this information.
Further, when determining who would be subject to the proposed
requirements as a ``large trader,'' the proposed definition is intended
to focus, in more complex organizations, on the parent company of the
entities that employ the individuals that exercise investment
discretion. The purpose of this focus is to narrow the number of
persons that would need to self-identify as ``large traders,'' while
allowing the Commission to identify the primary institutions that
conduct a large trading business. Focusing the identification
requirements in this manner would enable the Commission to identify
easily and be able to contact readily the principal group of persons
that control large traders, while minimizing the filing and self-
identification burdens that would be imposed on large traders.
In addition, the Commission is proposing an inactive filing status.
The inactive filing status is intended to reduce the burden on
infrequent traders who may trip the threshold on a particular occasion
but do not regularly trade at sufficient levels to merit continued
status as a large trader. In particular, large traders that have not
effected aggregate transactions at any time during the previous full
calendar year that are equal to or greater than the identifying
activity level would be eligible for inactive status upon checking a
box on the cover page of their next annual Form 13H filing.\180\ The
proposed inactive status is designed to minimize the impact of the
proposed rule on natural persons that infrequently trade in a magnitude
that may warrant imposing the added regulatory burdens of the proposed
rule. As a subset of inactive status, proposed Form 13H would provide a
space for a large trader to reflect the termination of its operations
(i.e., inactive status where the entity, because it has discontinued
operations, has no potential to requalify for large trader status in
the future). This designation would allow large traders to inform the
Commission of their status and would signal to the Commission not to
expect future amended Form 13H filings from the large trader. For
example, termination status would be relevant in the case of a merger
or acquisition where the large trader does not survive the corporate
transaction. In addition, with respect to registered broker-dealers,
the termination filing status should reduce the burden on registered
broker-dealers who would no longer have to track the entity's LTID.
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\180\ See proposed Rule 13h-1(b)(3)(iii).
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From time to time, information provided by large traders through
their Forms 13H may become inaccurate. Rather than requiring prompt
updates whenever this occurs, the proposed rule instead would require
``Interim Filings'' only quarterly (and only when the prior submission
becomes inaccurate). The quarterly period is designed specifically to
mitigate the filing burden of large traders.
A further limitation of the proposal targeted at balancing between
capturing significant trading activity and the burden of capturing this
information is that the Commission has proposed several exceptions from
the definition of ``transaction.'' These exceptions, among others,
would include: any transaction that constitutes a gift, any transaction
effected by a court-appointed executor, administrator, or fiduciary
pursuant to the distribution of a decedent's estate, any transaction
effected pursuant to a court order or judgment, and any transaction
effected pursuant to a rollover of qualified plan or trust assets
subject to Section 402(c)(1) of the Internal Revenue Code.\181\ The
Commission believes that narrowing the definition of a transaction by
adding these exclusions would reduce the impact of the proposed rule on
infrequent traders and registered broker-dealers while at the same time
allowing the Commission to focus the rule on those entities and
activities most appropriate to identify under the proposed rule.
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\181\ See proposed Rule 13h-1(a)(6).
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2. Registered Brokers and Registered Dealers
The Commission preliminarily anticipates that the three primary
costs to registered broker-dealers from the proposal are: (1)
Recordkeeping requirements; (2) reporting requirements; and (3)
monitoring requirements.
The rule would require that registered broker-dealers keep records
of transactions for each person they know is a large trader and for
each person who has not complied with the information requirements that
they have reason to know is a large trader based on transactions
effected by or through such broker-dealer (an ``Unidentified Large
Trader'').\\182 The proposed rule would require brokers and dealers to
furnish transaction records of both identified large traders and
Unidentified Large Traders to the Commission upon request. While most
of the proposed data required to be kept pursuant to proposed Rule 13h-
1 is already required under Rule 17a-25 and reported via the EBS
system, the large trader system would contain a few additional fields
of information, notably the LTID number(s) and execution time. The
proposed rule would require that such records be kept for a period of
three years, the first two in an accessible place, in accordance with
Rule 17a-4(b) under the Exchange Act.\183\
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\182\ See proposed Rule 13h-1(a)(9) (defining ``Unidentified
Large Trader'').
\183\ 17 CFR 240.17a-4.
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The Commission preliminarily estimates that the one-time, initial
expense for each registered brokers-dealer for development, including
re-programming and testing of the systems, would be approximately
$106,060.\184\ The Commission also preliminarily believes that there
would be minimal additional costs associated with the operation and
maintenance of the large trader system, because the proposed large
trader system would utilize the existing EBS system. Accordingly, the
total start-up, operating, and maintenance cost burden for registered
broker-dealers is estimated to be $31,818,000 (300 x $106,060 =
$31,818,000). As previously noted, this figure is based on the
estimated number of hours for initial internal development and
implementation, including software development, taking into account the
fact that new data elements are required to be captured and to be
available for reporting to the Commission on the morning following the
day on which the transactions were effected. Because broker-dealers
already capture most of the data required to be captured under proposal
Rule 13h-1 pursuant to Rule 17a-25, the Commission does not expect any
additional hardware costs.
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\184\ The Commission derived the total estimated one-time
burdens from the following: (Computer Ops Dept. Mgr. (30 hours) at
$335 per hour) + (Sr. Database Administrator (25 hours) at $281 per
hour) + (Sr. Programmer (150 hours) at $292 per hour) + (Programmer
Analyst (100 hours) at $193 per hour) + (Compliance Manager (20
hours) at $258 per hour) + (Compliance Attorney (10 hours) at $270
per hour) + (Compliance Clerk (20 hours) at $63 per hour) + (Sr.
Systems Analyst (50 hours) at $244 per hour) + (Director of
Compliance (5 hours) at $388 per hour) + (Sr. Computer Operator (35
hours) at $75 per hour) = $106,060. As noted above, the Commission
acknowledged that, in some instances, multiple LTIDs may be
disclosed to a registered broker-dealer for a single account.
Therefore, our cost estimate factors in the cost that registered
broker-dealers would need to develop systems capable of tracking
multiple LTIDs.
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The proposed rule would require registered broker-dealers to report
transactions that equal or exceed the
[[Page 21482]]
reporting activity level effected by or through such broker-dealer for
both identified and Unidentified Large Traders. More specifically, upon
the request of the Commission, registered broker-dealers would be
required to report electronically, in machine-readable form and in
accordance with instructions issued by the Commission, all information
required under paragraphs (d)(2) and (d)(3) for all transactions
effected directly or indirectly by or through accounts carried by such
broker-dealer for large traders and other persons for whom records must
be maintained, which equal or exceed the reporting activity level.
These broker-dealers would need to report a particular day's trading
activity only if it equals or exceeds the ``reporting activity level,''
but would be permitted to report all data without regard to that
threshold.
The Commission estimates that the costs of the proposed reporting
requirements would be $16,200,000.\185\ The Commission is taking into
account that the proposed rule would utilize the recordkeeping and
reporting infrastructure of the existing EBS system.
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\185\ See supra text accompanying note 151. The Commission
derived the total estimated ongoing burdens from the following:
(Compliance Attorney (2 hours) at $270 per hour) x (100 requests per
year) x (300 potential respondents) = $16,200,000.
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Paragraph (f) of proposed Rule 13h-1 would establish a ``safe
harbor'' for the proposed duty to monitor for Unidentified Large
Traders.\186\ Pursuant to proposed paragraph (a)(9), in the case of an
Unidentified Large Trader, a ``registered broker-dealer has reason to
know whether a person is a large trader based on the transactions in
NMS securities effected by or through such broker-dealer.'' A
registered broker-dealer would not be deemed to know or to have reason
to know that a person is an Unidentified Large Trader if: (1) It does
not have actual knowledge that a person is a large trader; and (2) it
established and maintained policies and procedures reasonably designed
to assure compliance with the identification requirements of the
proposed safe harbor. Paragraphs (f)(1) and (2) of the proposed rule
provide the specific elements that would be required for the safe
harbor. Paragraph (f)(2) of the proposed rule would require that
broker-dealer monitoring policies and procedures contain systems
reasonably designed to inform persons of their obligations to file
proposed Form 13H and disclose their large trader status.
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\186\ See proposed Rule 13h-1(a)(9) (defining an Unidentified
Large Trader as ``each person who has not complied with the
identification requirements of paragraphs (b)(1) and (b)(2) of this
rule that a registered broker-dealer knows or has reason to know is
a large trader.'')
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The Commission estimates the initial, one-time burden to establish
policies and procedures pursuant to the proposed safe harbor provision
would be $4,756,800.\187\ The Commission estimates that the ongoing
burden would be $1,215,000.\188\ The Commission believes that the
proposed safe harbor would reduce the burden of the monitoring
requirements of the proposed rule on registered broker-dealers. Among
other things, they would limit the broker-dealer's obligations to only
those Unidentified Large Traders that should be readily identifiable
and apparent to the broker-dealer, and would require the broker-dealer
to inform such persons of their obligations to file proposed Form 13H
and disclose their large trader status to the Commission.
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\187\ See supra note 153. The Commission derived the total
estimated one-time burdens from the following: (Sr. Programmer (10
hours) at $292 per hour) + (Compliance Manager (10 hours) at $258
per hour) + (Compliance Attorney (10 hours) at $270 per hour) +
(Compliance Clerk (20 hours) at $63 per hour) + (Sr. Systems Analyst
(10 hours) at $244 per hour) + (Director of Compliance (2 hours) at
$388 per hour) + (Sr. Computer Operator (8 hours) at $75 per hour) x
(300 potential respondents) = $3,982,800.
\188\ See supra note 154. The Commission derived the total
estimated ongoing burdens from the following: (Compliance Attorney
at (15 hours) at $270 per hour) x (300 potential respondents) =
$1,215,000.
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To assist the Commission in evaluating the costs that could result
from the proposed rule, the Commission requests comments on the
potential costs identified in this proposal, as well as any other costs
that could result from the proposed rule. The Commission asks
commenters to quantify those costs, where possible, and provide
analysis and data to support their views on the costs. While the
Commission does not anticipate that there would be significant adverse
consequences to a broker-dealer's business as a result of the proposed
rule, it seeks commenters' views regarding the possibility of any such
impact. For instance, would the proposed rule impact a broker-dealer's
ability to attract or retain its large trader customers?
In addition, the Commission requests specific comment on the
following questions:
Are there ways to further reduce the burdens of the filing
requirements on large traders? Is the provision for inactive status
sufficient?
Does the capture of trade execution times in a large
trader reporting system present any particular technological or other
operational challenges?
Does the potential capture of multiple LTIDs raise any
particular issues?
What other costs might registered broker-dealers incur in
developing policies and procedures to monitor for Unidentified Large
Traders? Are there ways to further reduce the burdens of monitoring for
Unidentified Large Traders and informing them of their obligations to
file Form 13H?
Do commenters believe that the costs of operating and
maintaining a large trader reporting system will result in additional
costs beyond the existing EBS system?
Are there ways to further reduce the burdens of the
proposed large trader reporting system?
Would the proposed rule have any unintended, negative
consequences for the U.S. markets?
Commenters should provide specific data and analysis to support any
comments they submit with respect to the costs and benefits discussed
above and any other costs and benefits identified by the commenters.
VI. Consideration of Burden on Competition, and Promotion of
Efficiency, Competition and Capital Formation
Section 3(f) of the Exchange Act requires the Commission, whenever
it engages in rulemaking and is required to consider or determine
whether an action is necessary or appropriate in the public interest,
to consider, in addition to the protection of investors, whether the
action would promote efficiency, competition, and capital
formation.\189\ In addition, section 23(a)(2) of the Exchange Act
requires the Commission, when making rules under the Exchange Act, to
consider the impact such rules would have on competition.\190\ Exchange
Act section 23(a)(2) prohibits the Commission from adopting any rule
that would impose a burden on competition not necessary or appropriate
in furtherance of the purposes of the Exchange Act.
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\189\ 15 U.S.C. 78c(f).
\190\ 15 U.S.C. 78w(a)(2).
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The Commission is proposing Rule 13h-1 pursuant to our authority
under section 13(h) of the Exchange Act. Section 13(h)(2) requires the
Commission, when engaging in rulemaking pursuant to that authority that
would require every registered broker-dealer to make and keep for
prescribed periods such records as the Commission by rule or regulation
prescribes, to consider whether such rule is ``necessary or appropriate
in the public interest, for the protection of
[[Page 21483]]
investors, or otherwise in furtherance of the purposes of [the Exchange
Act].'' \191\
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\191\ The Commission is proposing Rule 13h-1(b) relating to
identification requirements for large traders pursuant to Section
13(h)(1) of the Exchange Act, which does not require the Commission
to consider the factors identified in Section 3(f), 15 U.S.C.
78c(f). Analysis of the effects, including the considerations under
Section 23(a), of proposed Rule 13h-1(b) is discussed above in
Sections IV and V.
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A. Competition
We consider in turn the impact of proposed new Rule 13h-1 on the
securities markets and market participants. Information provided by
market participants and broker-dealers in their registrations and
filings with us informs our views on the structure of the markets they
comprise. We begin our consideration of potential competitive impacts
with observations of the current structure of these markets.
The securities trading industry is a competitive one with
reasonably low barriers to entry. The intensity of competition across
trading platforms in this industry has increased in the past decade as
a result of a number of factors, including market reforms and
technological advances. This increase in competition has resulted in
decreases in market concentration, more competition among trading
centers, a proliferation of trading platforms competing for order flow,
and decreases in trading fees.
The reasonably low barriers to entry for trading centers are
evidenced, in part, by the fact that new entities, primarily
alternative trading systems (``ATSs''), continue to enter the
market.\192\ For example, currently, there are approximately 50
registered ATSs. In addition, the Commission within the past few years
has approved applications by two entities--BATS and Nasdaq--to become
registered as national securities exchanges for trading equities, and
approved proposed rule changes by two existing exchanges--International
Securities Exchange, LLC and Chicago Board Options Exchange,
Incorporated--to add equity trading facilities to their existing
options business. We believe that competition among trading centers has
been facilitated by Rule 611 of Regulation NMS,\193\ which encourages
quote-based competition between trading centers; Rule 605 of Regulation
NMS,\194\ which empowers investors and broker-dealers to compare
execution quality statistics across trading centers; and Rule 606 of
Regulation NMS,\195\ which enables customers to monitor order routing
practices.
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\192\ See Securities Exchange Act Release No. 60997 (Nov. 13,
2009), 74 FR 61208, 61234 (Nov. 23, 2009) (discussing the reasonably
low barriers to entry for ATSs and that these reasonably low
barriers to entry have generally helped to promote competition and
efficiency).
\193\ 17 CFR 242.611.
\194\ 17 CFR 242.605.
\195\ 17 CFR 242.606.
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Broker-dealers are required to register with the Commission and at
least one SRO. The broker-dealer industry, including market makers, is
a competitive industry with most trading activity concentrated among
several larger participants and thousands of smaller participants
competing for niche or regional segments of the market. There are
approximately 5,178 registered broker-dealers, of which approximately
890 are small broker-dealers.\196\
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\196\ These numbers are based on a review of 2007 and 2008 FOCUS
Report filings reflecting registered broker-dealers, and discussions
with SRO staff. The number does not include broker-dealers that are
delinquent on FOCUS Report filings.
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Larger broker-dealers often enjoy economies of scale over smaller
broker-dealers and compete with each other to service the smaller
broker-dealers, who are both their competitors and customers. The
reasonably low barriers to entry for broker-dealers are evidenced, for
example, by the fact that the average number of new broker-dealers
entering the market each year between 2001 and 2008 was 389.\197\
---------------------------------------------------------------------------
\197\ This number is based on a review of FOCUS Report filings
reflecting registered broker-dealers from 2001 through 2008. The
number does not include broker-dealers that are delinquent on FOCUS
Report filings. New registered broker-dealers for each year during
the period from 2001 through 2008 were identified by comparing the
unique registration number of each broker-dealer filed for the
relevant year to the registration numbers filed for each year
between 1995 and the relevant year.
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As discussed above, the Commission acknowledges that the proposal
would entail certain costs. In particular, requiring registered broker-
dealers to establish recordkeeping systems to capture the required
information, in particular the new fields that are not currently
captured under the existing EBS system, would require one-time initial
expenses, as discussed above. In addition, to utilize the proposed safe
harbor, registered broker-dealers would need to implement policies and
procedures to monitor their customers' trading in order to determine
whether customers' trades would trigger the threshold for large trader
status. Preliminarily, the Commission does not believe that these
expenses would adversely affect competition.
In our judgment, the costs of proposed Rule 13h-1 would not be so
large as to significantly raise barriers to entry, or otherwise alter
the competitive landscape of the industries involved because the
incremental costs of Rule 13(h) that would be incurred by broker-
dealers would be small relative to the costs of complying with the
existing EBS system.\198\ In industries characterized by reasonably low
barriers to entry and competition, the viability of some of the less
successful competitors may be sensitive to regulatory costs.
Nonetheless, we believe that the broker-dealer industry would remain
competitive, despite the costs associated with implementing proposed
new Rule 13h-1, even if those costs influence the entry or exit
decisions of individual broker-dealer firms at the margin. The
Commission does not expect that the costs associated with proposed new
Rule 13h-1, which are small relative to the costs of complying with the
existing EBS system, would be a determining factor in a broker-dealer's
entry or exit decision or decision to accept large trader clients
because the volume of trading associated with large traders and
resultant revenue that could be gained by servicing a large trader
would outweigh the costs associated with the proposed rule.
---------------------------------------------------------------------------
\198\ See supra Sections IV (Paperwork Reduction Act) and V
(Consideration of Costs and Benefits) for a detailed description of
the expected costs.
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Further, the Commission would not be compelled to disclose any
information required to be kept or reported under Section 13(h) of the
Exchange Act, including information kept or reported pursuant to
proposed Rule 13h-1.\199\ Accordingly, information and trading data
that the Commission would obtain pursuant to the proposed rule would
not be shared with others and would not be available to other large
traders or broker-dealers.
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\199\ See supra text following note 89.
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The approach of proposed new Rule 13h-1 would advance the purposes
of the Exchange Act in a number of significant ways. In light of recent
market turmoil and the increasing prominence, sophistication, and
trading capacity of large traders, the Commission believes it should
further enhance its ability to collect and analyze information on large
traders. The Commission believes that the proposed large trader
reporting system could enhance its ability to identify large traders
and collect trading data on their activity at a time when, for example,
many such traders employ rapid algorithmic systems that quote and trade
in huge volumes. The proposed large trader reporting system would
provide a basic set of tools necessary to allow the Commission to
monitor and analyze more readily and efficiently the impact of large
traders,
[[Page 21484]]
including high-frequency traders, on the securities markets.
The Commission preliminarily believes that the proposal to
establish the large trader reporting system would not impose any burden
on competition not necessary or appropriate in furtherance of the
purposes of the Exchange Act. In particular, the Commission believes
that the proposal would implement the Commission's authority under
Section 13(h) of the Exchange Act at a crucial time when large traders
play an increasingly prominent role in the securities markets.
B. Capital Formation
As discussed above, the Commission preliminary believes that the
proposed rule will have little to no direct impact on capital
formation. However, proposed new Rule 13h-1 is intended to facilitate
the Commission's ability to monitor the impact on the securities
markets of securities transactions involving a substantial volume of
shares, a large fair market value or a large exercise value, as well as
to assist the Commission's enforcement of the federal securities laws.
As noted in Paragraph B of Section II, the proposed rule focuses on the
core of the large trader reporting system--the entities that control
persons that exercise investment discretion and are responsible for
trading large amounts of securities. As these entities can represent
significant sources of liquidity and overall trading volume, their
trading may have a direct impact on the cost of capital of securities
issuers. As such, the Commission's ability to promptly obtain
information from registered broker-dealers on large trader activity
should better enable the Commission to understand the impact of large
traders on the securities markets. As the Commission improves its
understanding, it should be better positioned to administer and enforce
the federal securities laws, thereby promoting the integrity and
efficiency of the markets, as well as, ultimately, investor confidence
and capital formation. For example, the information collected from Rule
13h-1(b) would allow for a more timely reconstruction of trading
activity during a market crisis and thus could better position the
Commission to craft any regulatory responses.
Proposed new Rule 13h-1 is intended to facilitate the Commission's
ability to monitor the impact on the securities markets of securities
transactions involving a substantial volume of shares, a large fair
market value or a large exercise value, as well as to assist the
Commission's enforcement of the federal securities laws. As noted in
Paragraph B of Section II, the proposed rule focuses on the core of the
large trader reporting system--the entities that control persons that
exercise investment discretion and are responsible for trading large
amounts of securities. As these entities can represent significant
sources of liquidity and overall trading volume, their trading may have
a direct impact on the cost of capital of securities issuers. As such,
the Commission's ability to promptly obtain information from registered
broker-dealers on large trader activity should assist the Commission's
efforts to indirectly promote capital formation by better enabling the
Commission to understand the impact of large traders on the securities
markets. For example, the information collected from proposed Rule 13h-
1(b) would allow for a more timely reconstruction of trading activity
of large traders during a market crisis, and thus could better position
the Commission to craft any regulatory responses. Specifically, we
believe that, armed with more current and accurate trading information
on large traders, the Commission would be able to identify regulatory
and potential enforcement issues more quickly. Thus, proposed Rule 13h-
1 could help maintain investor confidence in the markets, and thus
could add depth and liquidity to the markets and promote capital
formation. Further, the Commission preliminarily believes that the
requirements imposed on all large traders, whether U.S. or foreign, are
necessary and appropriate, not unduly burdensome, and would be imposed
uniformly on all affected entities (whether U.S. or foreign).
C. Efficiency
Proposed new Rule 13h-1 is designed to achieve the appropriate
balance between our goals of monitoring the impact on the securities
markets of securities transactions by large traders, and assisting the
Commission's enforcement of the federal securities laws, on the one
hand, and the effort to minimize the burdens and costs associated with
implementing a proposed large trader system.
The Commission preliminarily believes that the disclosure by
registered broker-dealers to regulators that would be achieved by the
proposed large trader reporting system would promote efficiency by
enabling the Commission to go beyond the EBS system, which permits
investigations of small samples of securities over a limited period of
time, to instead assist with large-scale investigations and market
reconstructions involving numerous stocks during peak trading volume
periods. The proposal also would enable the Commission to receive from
registered broker-dealers contemporaneous information on large traders'
trading activity much more promptly than is currently the case with the
EBS system. With a system designed specifically to help the Commission
reconstruct and analyze time-sequenced trading data, the Commission
could more quickly investigate the nature and causes of unusual market
movements and initiate investigations and regulatory actions where
warranted.
D. Request for Comment
The Commission requests comment on all aspects of this analysis
and, in particular, on whether the proposed large trader reporting
system would place a burden on competition, as well as the effect of
the proposal on efficiency, competition, and capital formation.
Commenters are requested to provide empirical data and other factual
support for their views if possible.
VII. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') \200\ requires Federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities. Section 603(a)\201\ of the Administrative Procedure
Act,\202\ as amended by the RFA, generally requires the Commission to
undertake a regulatory flexibility analysis of all proposed rules, or
proposed rule amendments, to determine the impact of such rulemaking on
``small entities.'' \203\ Section 605(b) of the RFA states that this
requirement shall not apply to any proposed rule or proposed rule
amendment, which if adopted, would not ``have a significant economic
impact on a substantial number of small entities.'' \204\
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\200\ 5 U.S.C. 601 et seq.
\201\ 5 U.S.C. 603(a).
\202\ 5 U.S.C. 551 et seq.
\203\ Although Section 601(b) of the RFA defines the term
``small entity,'' the statute permits agencies to formulate their
own definitions. The Commission has adopted definitions for the term
small entity for the purposes of Commission rulemaking in accordance
with the RFA. Those definitions, as relevant to this proposed
rulemaking, are set forth in Rule 0-10, 17 CFR 240.0-10. See
Securities Exchange Act Release No. 18451 (January 28, 1982), 47 FR
5215 (February 4, 1982) (File No. AS-305).
\204\ See 5 U.S.C. 605(b).
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Paragraph (a) of Rule 0-10 provides that for purposes of the
Regulatory Flexibility Act, a small entity when used with reference to
a ``person''' other than an investment company means a person that, on
the last day of its most recent fiscal year, had total assets of $5
[[Page 21485]]
million or less.\205\ In reference to a broker-dealer, small entity
means total capital of less than $500,000 and not affiliated with any
person that is not a small business or small organization. Pursuant to
Section 605(b), the Commission preliminarily believes that proposed
Rule 13h-1 and Form 13H would not, if adopted, have a significant
economic impact on a substantial number of small entities.
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\205\ 17 CFR 240.0-10(a). Investment companies are small
entities when the investment company, together with other investment
companies in the same group of related investment companies, has net
assets of $50 million or less at the end of its most recent fiscal
year. 17 CFR 270.0-10(a).
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Proposed Rule 13h-1 and Form 13H would require self-identification
by large traders, which is a term that, as discussed below, would
implicate persons and entities with the resources and capital necessary
to transact securities in substantial volumes relative to overall
market volume in publicly traded securities. Specifically, the proposed
rule defines ``large trader'' as a person that effects transactions in
an ``identifying activity level'' of: (1) 2 million shares, or shares
with a fair market value of $20 million, effected during a calendar
day; or (2) 20 million shares, or shares with a fair market value of
$200 million, effected during a calendar month.
The Commission anticipates that the types of entities that would
identify as large traders would include, for example, broker-dealers,
financial holding companies, investment advisers, and firms that trade
for their own account. The Commission does not believe that any small
entities would be engaged in the business of trading, over the course
of the applicable measuring period, in a volume that approaches the
threshold levels. Because the proposed rule focuses on parent companies
and is designed to identify the largest market participants by volume
or fair market value of trading, the Commission believes that a large
trader that trades in such substantial volumes would necessarily have
considerable assets (beyond the level of a small entity) to be able to
conduct such trading.
In addition, proposed Rule 13h-1 would apply to registered broker-
dealers that serve large trader customers. The Commission believes
that, given the considerable volume in which a large trader as defined
in the proposed rule would effect transactions, particularly in the
case of high-frequency traders, registered broker-dealers servicing
large trader customers or broker-dealers that are large traders
themselves likely would be larger entities, with total capital greater
than $500,000, that have systems and capacities capable of handling the
trading associated with such accounts. Further, because the trading
capacities of large traders will typically necessitate the services of
sophisticated broker-dealers likely to be well capitalized entities or
affiliated with well capitalized entities, the Commission does not
believe that any broker-dealer that maintains large trader customers
would be ``not affiliated with any person that is not a small business
or small organization'' under Rule 0-10.
The Commission solicits comment as to whether proposed Rule 13h-1
and Form 13H would have a significant economic impact on a substantial
number of small entities. The Commission requests that commenters
describe the nature of any impact on small entities and provide
empirical data to support the extent of such impact.
VIII. Consideration of Impact on the Economy
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996, or ``SBREFA,'' \206\ the Commission must advise the OMB as
to whether the proposed regulation constitutes a ``major'' rule. Under
SBREFA, a rule is considered ``major'' where, if adopted, it results or
is likely to result in: (1) An annual effect on the economy of $100
million or more (either in the form of an increase or a decrease); (2)
a major increase in costs or prices for consumers or individual
industries; or (3) significant adverse effect on competition,
investment or innovation. If a rule is ``major,'' its effectiveness
will generally be delayed for 60 days pending Congressional review.
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\206\ Public Law 104-121, Title II, 110 Stat. 857 (1996)
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note
to 5 U.S.C. 601).
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The Commission requests comment on the potential impact of the
proposed rule on the economy on an annual basis, on the costs or prices
for consumers or individual industries, and on competition, investment,
or innovation. Commenters are requested to provide empirical data and
other factual support for their views to the extent possible.
IX. Statutory Authority
Pursuant to the Exchange Act and particularly, sections 13(h) and
23(a) thereof, 15 U.S.C. 78m and 78w, the Commission proposes new Rule
13h-1 under the Exchange Act that would implement a large trader
reporting system to provide the Commission with a mechanism to identify
large traders, and the affiliates, accounts, and transactions of large
traders.
List of Subjects in 17 CFR Parts 240 and 249
Reporting and recordkeeping requirements; Securities.
In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations is proposed to be amended as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The authority citation for Part 240 continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5,
78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4
and 80b-ll, and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise
noted.
* * * * *
2. Add Sec. 240.13h-1 to read as follows:
Sec. 240.13h-l Large trader reporting system.
(a) Definitions.--For purposes of this section:
(1) The term large trader means any person that directly or
indirectly, including through other persons controlled by such person,
exercises investment discretion over one or more accounts and effects
transactions for the purchase or sale of any NMS security for or on
behalf of such accounts, by or through one or more registered broker-
dealers, in an aggregate amount equal to or greater than the
identifying activity level.
(2) The term person has the same meaning as in Section 13(h)(8)(E)
of the Securities Exchange Act of 1934.
(3) The term control (including the terms controlling, controlled
by and under common control with) means the possession, direct or
indirect, of the power to direct or cause the direction of the
management and policies of a person, whether through the ownership of
securities, by contract, or otherwise. Any person that directly or
indirectly has the right to vote or direct the vote of 25% or more of a
class of voting securities of an entity or has the power to sell or
direct the sale of 25% or more of a class of voting securities of such
entity, or in the case of a partnership, has the right to receive, upon
dissolution, or has contributed, 25% or more of the capital, is
presumed to control that entity.
(4) The term investment discretion has the same meaning as in
Section 3(a)(35) of the Securities Exchange Act of 1934. A person's
employees who exercise investment discretion within the scope of their
employment are deemed to do so on behalf of such person.
[[Page 21486]]
(5) The term NMS security has the meaning provided for in Rule
600(b)(46) under the Securities Exchange Act of 1934.
(6) The term transaction or transactions means all transactions in
NMS securities, including exercises or assignments of option contracts,
except for the following transactions:
(i) Any journal or bookkeeping entry made to an account in order to
record or memorialize the receipt or delivery of funds or securities
pursuant to the settlement of a transaction;
(ii) Any transaction that is part of an offering of securities by
or on behalf of an issuer, or by an underwriter on behalf of an issuer,
or an agent for an issuer, whether or not such offering is subject to
registration under the Securities Act of 1933, provided, however, that
this exemption shall not include an offering of securities effected
through the facilities of a national securities exchange;
(iii) Any transaction that constitutes a gift;
(iv) Any transaction effected by a court appointed executor,
administrator, or fiduciary pursuant to the distribution of a
decedent's estate;
(v) Any transaction effected pursuant to a court order or judgment;
(vi) Any transaction effected pursuant to a rollover of qualified
plan or trust assets subject to Section 402(a)(5) of the Internal
Revenue Code; or
(vii) Any transaction between an employer and its employees
effected pursuant to the award, allocation, sale, grant or exercise of
a NMS security, option or other right to acquire securities at a pre-
established price pursuant to a plan which is primarily for the purpose
of an issuer benefit plan or compensatory arrangement.
(7) The term identifying activity level means: aggregate
transactions in NMS securities that are equal to or greater than:
(i) During a calendar day, either two million shares or shares with
a fair market value of $20 million; or
(ii) During a calendar month, either twenty million shares or
shares with a fair market value of $200 million.
(8) The term reporting activity level means:
(i) Each transaction in NMS securities, effected in a single
account during a calendar day, that is equal to or greater than 100
shares;
(ii) Any other transaction in NMS securities, effected in a single
account during a calendar day, that a registered broker-dealer may deem
appropriate; or
(iii) Such other amount that may be established by order of the
Commission from time to time.
(9) The term Unidentified Large Trader means each person who has
not complied with the identification requirements of paragraphs (b)(1)
and (b)(2) of this section that a registered broker-dealer knows or has
reason to know is a large trader. A registered broker-dealer has reason
to know whether a person is a large trader based on the transactions in
NMS securities effected by or through such broker-dealer.
(b) Identification requirements for large traders.
(1) Form 13H. Except as provided in paragraph (b)(3) of this
section, each large trader shall file electronically Form 13H (17 CFR
249.327) with the Commission, in accordance with the instructions
contained therein:
(i) Promptly after first effecting aggregate transactions, or after
effecting aggregate transactions subsequent to becoming inactive
pursuant to paragraph (b)(3) of this rule, equal to or greater than the
identifying activity level;
(ii) Within 45 days after the end of each full calendar year; and
(iii) Promptly following the end of a calendar quarter in the event
that any of the information contained in a Form 13H filing becomes
inaccurate for any reason.
(2) Disclosure of large trader status. Each large trader shall
disclose to the registered broker-dealers effecting transactions on its
behalf its large trader identification number and each account to which
it applies. Each large trader also shall disclose its large trader
identification number to all others with whom it collectively exercises
investment discretion.
(3) Filing requirement.
(i) Compliance by controlling person. A large trader shall not be
required to separately comply with the requirements of paragraph (b) of
this section if a person who controls the large trader complies with
all of the requirements under paragraphs (b)(1), (b)(2), and (b)(4) of
this section applicable to such large trader with respect to all of its
accounts.
(ii) Compliance by controlled person. A large trader shall not be
required to separately comply with the requirements of paragraph (b) if
one or more persons controlled by such large trader collectively comply
with all of the requirements under paragraphs (b)(1), (b)(2), and
(b)(4) of this section applicable to such large trader with respect to
all of its accounts.
(iii) Inactive status. A large trader that has not effected
aggregate transactions at any time during the previous full calendar
year in an amount equal to or greater than the identifying activity
level at any time during the year shall become inactive upon filing a
Form 13H and thereafter shall not be required to file Form 13H or
disclose its large trader status unless and until its transactions
again are equal to or greater than the identifying activity level. A
large trader that has ceased operations may elect to become inactive by
filing an amended Form 13H to indicate its terminated status.
(4) Other information. Upon request, a large trader must promptly
provide additional descriptive or clarifying information that would
allow the Commission to further identify the large trader and all
accounts through which the large trader effects transactions.
(c) Aggregation.
(1) Transactions. For the purpose of determining whether a person
is a large trader, the following shall apply:
(i) The volume or fair market value of transactions in equity
securities and the volume or fair market value of the equity securities
underlying transactions in options on equity securities, purchased and
sold only, shall be aggregated;
(ii) The fair market value of transactions in options on a group or
index of equity securities (or based on the value thereof), purchased
and sold only, shall be aggregated; and
(iii) Under no circumstances shall a person be permitted to
subtract, offset, or net purchase and sale transactions, in equity
securities or option contracts, and among or within accounts, when
aggregating the volume or fair market value of transactions effected
under this rule.
(2) Accounts. Under no circumstances shall a person be permitted to
disaggregate accounts to avoid the identification requirements of this
rule.
(d) Recordkeeping requirements for broker and dealers.
(1) Generally. Every registered broker-dealer shall maintain
records of all information required under paragraphs (d)(2) and (d)(3)
of this section for all transactions effected directly or indirectly by
or through:
(i) An account such broker-dealer carries for a large trader or an
Unidentified Large Trader,
(ii) An account over which such broker-dealer exercises investment
discretion together with a large trader or an Unidentified Large
Trader, or (iii) if the broker-dealer is a large trader, any
proprietary or other account over which such broker-dealer exercises
investment discretion. Additionally, where a non-broker-dealer carries
an account for a large trader or an Unidentified Large Trader, the
broker-dealer effecting
[[Page 21487]]
transactions directly or indirectly for such large trader or
Unidentified Large Trader shall maintain records of all of the
information required under paragraphs (d)(2) and (d)(3) of this section
for those transactions.
(2) Information. The information required to be maintained for all
transactions shall include:
(i) The clearing house number of the entity maintaining the
information and the clearing house numbers of the entities on the
opposite side of the transaction;
(ii) Identifying symbol assigned to the security;
(iii) Date transaction was executed;
(iv) The number of shares or option contracts traded in each
specific transaction; whether each transaction was a purchase, sale, or
short sale; and, if an option contract, whether the transaction was a
call or put option, an opening purchase or sale, a closing purchase or
sale, or an exercise or assignment;
(v) Transaction price;
(vi) Account number;
(vii) Identity of the exchange or other market center where the
transaction was executed.
(viii) A designation of whether the transaction was effected or
caused to be effected for the account of a customer of such registered
broker-dealer, or was a proprietary transaction effected or caused to
be effected for the account of such broker-dealer;
(ix) If part or all of an account's transactions at the registered
broker-dealer have been transferred or otherwise forwarded to one or
more accounts at another registered broker-dealer, an identifier for
this type of transaction; and if part or all of an account's
transactions at the reporting broker-dealer have been transferred or
otherwise received from one or more other registered broker-dealers, an
identifier for this type of transaction;
(x) If part or all of an account's transactions at the reporting
broker-dealer have been transferred or otherwise received from another
account at the reporting broker-dealer, an identifier for this type of
transaction; and if part or all of an account's transactions at the
reporting broker-dealer have been transferred or otherwise forwarded to
one or more other accounts at the reporting broker-dealer, an
identifier for this type of transaction;
(xi) If a transaction was processed by a depository institution,
the identifier assigned to the account by the depository institution;
(xii) The time that the transaction was executed; and
(xiii) The large trader identification number(s) associated with
the account, unless the account is for an Unidentified Large Trader.
(3) Information relating to Unidentified Large Traders. With
respect to transactions effected directly or indirectly by or through
the account of an Unidentified Large Trader, the information required
to be maintained for all transactions also shall include: such
Unidentified Large Trader's name, address, date the account was opened,
and tax identification number(s).
(4) Retention. The records and information required to be made and
kept pursuant to the provisions of this rule shall be kept for such
periods of time as provided in Sec. 240.17a-4(b).
(5) Availability of information. The records and information
required to be made and kept pursuant to the provisions of this rule
shall be available on the morning after the day the transactions were
effected (including Saturdays and holidays).
(e) Reporting requirements for brokers and dealers. Upon the
request of the Commission, every registered broker-dealer who is itself
a large trader, exercises investment discretion over an account
together with a large trader or an Unidentified Large Trader, or
carries an account for a large trader or an Unidentified Large Trader
shall electronically report to the Commission, using the infrastructure
supporting 17 CFR 240.17a-25, in machine-readable form and in
accordance with instructions issued by the Commission, all information
required under paragraphs (d)(2) and (d)(3) of this section for all
transactions effected directly or indirectly by or through accounts
carried by such broker-dealer for large traders and Unidentified Large
Traders, equal to or greater than the reporting activity level.
Additionally, where a non-broker-dealer carries an account for a large
trader or an Unidentified Large Trader, the broker-dealer effecting
such transactions directly or indirectly for a large trader shall
electronically report using the infrastructure supporting 17 CFR
240.17a-25, in machine-readable form and in accordance with
instructions issued by the Commission, all information required under
paragraphs (d)(2) and (d)(3) of this section for such transactions
equal to or greater than the reporting activity level. Such reports
shall be submitted to the Commission before the close of business on
the day specified in the request for such transaction information.
(f) Monitoring safe harbor. For the purposes of this rule, a
registered broker-dealer who either is a large trader, exercises
investment discretion over an account together with a large trader or
an Unidentified Large Trader, carries an account for a large trader or
an Unidentified Large Trader, or effects transactions directly or
indirectly for a large trader where a non-broker-dealer carries the
account shall not be deemed to know or have reason to know that a
person is a large trader if it establishes policies and procedures
reasonably designed to assure compliance with the identification
requirements of this rule and does not have actual knowledge that a
person is a large trader. Policies and procedures shall be deemed to
satisfy this requirement if they include:
(1) Systems reasonably designed to detect and identify Unidentified
Large Traders based upon transactions effected through an account or a
group of accounts considering account name, tax identification number,
or other information readily available to such broker-dealer; and
(2) Systems reasonably designed to inform Unidentified Large
Traders of their obligations to file Form 13H and disclose large trader
status under this rule.
(g) Exemptions. Upon written application or upon its own motion,
the Commission may by order exempt, upon specified terms and conditions
or for stated periods, any person or class of persons or any
transaction or class of transactions from the provisions of this rule
to the extent that such exemption is consistent with the purposes of
the Securities Exchange Act.
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
3. The authority citation for Part 249 continues to read in part as
follows:
Authority: 15 U.S.C. 78a, et seq. and 7201 et seq.; and 18
U.S.C. 1350, unless otherwise noted.
* * * * *
4. Add Sec. 249.327 to read as follows:
Sec. 249.327 Form 13H Information required on large traders pursuant
to Section 13(h) of the Securities Exchange Act of 1934 and rules
thereunder.
This form shall be used by persons that are large traders required
to furnish identifying information to the Commission pursuant to
section 13(h)(1) of the Securities Exchange Act of 1934 [15 U.S.C.
78m(h)(1)] and Rule 13h-1(b) thereunder [Sec. 240.13h-1(b) of this
chapter].
Note: The text of Form 13H does not, and this amendment will
not, appear in the Code of Federal Regulations.
BILLING CODE 8011-01-P
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* * * * *
By the Commission.
Dated: April 14, 2010.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-9025 Filed 4-22-10; 8:45 am]
BILLING CODE 8011-01-C