Large Trader Reporting

Federal RegisterAug 3, 2011

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SECURITIES AND EXCHANGE COMMISSION

17 CFR PARTS 240 and 249

[Release No. 34-64976; File No. S7-10-10]

RIN 3235-AK55

Large Trader Reporting

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

The Securities and Exchange Commission (“Commission”) is adopting new Rule 13h-1 and Form 13H under Section 13(h) of the Securities Exchange Act of 1934 (“Exchange Act”) to assist the Commission in both identifying, and obtaining trading information on, market participants that conduct a substantial amount of trading activity, as measured by volume or market value, in the U.S. securities markets. Rule 13h-1 will require a “large trader,” defined as a person whose transactions in NMS securities equal or exceed 2 million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month, to identify itself to the Commission and make certain disclosures to the Commission on Form 13H. Upon receipt of Form 13H, the Commission will assign to each large trader an identification number that will uniquely and uniformly identify the trader, which the large trader must then provide to its registered broker-dealers. Such registered broker-dealers will then be required to maintain records of two additional data elements in connection with transactions effected through accounts of such large traders (the large trader identification number, and the time transactions in the account are executed). In addition, the Commission is requiring that such broker-dealers report large trader transaction information to the Commission upon request through the Electronic Blue Sheets systems currently used by broker-dealers for reporting trade information. Finally, certain registered broker-dealers subject to the Rule will be required to perform limited monitoring of their customers' accounts for activity that may trigger the large trader identification requirements of Rule 13h-1.

The large trader reporting requirements are designed to provide the Commission with a valuable source of useful data to support its investigative and enforcement activities, as well as 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.

DATES:

Effective Date:

October 3, 2011.

Compliance Dates:

December 1, 2011 for the requirement on large traders to identify to the Commission pursuant to Rule 13h-1(b). April 30, 2012 for broker-dealers to maintain records, report, and monitor large trader activity pursuant to Rule 13h-1(d), (e), and (f).

FOR FURTHER INFORMATION CONTACT:

Richard R. Holley III, Assistant Director, at (202) 551-5614, Christopher W. Chow, Special Counsel, at (202) 551-5622, Gary M. Rubin, Attorney, at (202) 551-5669, or Kathleen Gray, Attorney, at (202) 551-5305, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION

Table of Contents

I. Introduction

II. Background

A. The Market Reform Act

B. Rule 17a-25 and the Enhanced EBS System

C. The Need for Large Trader Reporting

D. Relation to Consolidated Audit Trail Proposal

III. Description of Adopted Rule and Form

A. Large Traders

1. Large Trader Status

a. Who should register as a large trader?

i. Persons Who Exercise Investment Discretion

ii. Parent Company Level Registration

(a) Use of LTID Suffixes

(b) Control and Minority-Owned Entities

b. Identifying Activity Level

c. Voluntary Registration

2. Duties of a Large Trader

a. File Form 13H with the Commission

i. Initial filings—who must file?

ii. Annual Filings

iii. Amended Filings

iv. Inactive Status

v. Reactivated Status

vi. Termination Filings

b. Self-Identification to Broker-Dealers

3. Overview of Form 13H

a. Item 1

b. Item 2

c. Item 3

d. Item 4

e. Item 5

f. Item 6

g. Confidentiality

B. Broker-Dealers: Recordkeeping, Reporting, and Monitoring

1. Recordkeeping Requirements

2. Reporting Requirements

3. Monitoring Requirements

C. Foreign Entities

D. Three Specific Factors Considered by the Commission Pursuant to Section 13(h) of the Exchange Act

1. Existing Reporting Systems

2. Costs Associated With Maintaining and Reporting Large Trader Transaction Data

3. Relationship Between U.S. and International Securities Markets

E. Implementation and Compliance Dates, Exemptive Authority

IV. Paperwork Reduction Act

A. Summary of Collection of Information

B. Use of Information

C. Respondents

1. Number of Large Traders

2. Number of Broker-Dealers Affected

D. Total Initial and Annual Burdens

1. Burden on Large Traders

a. Duties of Large Traders

b. Initial and Annual Burdens

2. Burden on Registered Broker-Dealers

a. Recordkeeping

b. Reporting

c. Monitoring

d. Total Burden

E. Collection of Information is Mandatory

F. Confidentiality

G. Record Retention Period

V. Consideration of Costs and Benefits

A. Benefits

B. Costs

1. Large Traders

2. Registered Broker-Dealers

a. Recordkeeping

b. Reporting

c. Monitoring

VI. Consideration of Burden on Competition, and Promotion of Efficiency, Competition, and Capital Formation

A. Competition

B. Capital Formation

C. Efficiency

VII. Regulatory Flexibility Act Certification

VIII. Statutory Authority

IX. Text of the Amendments

I. Introduction

The Commission's ability to analyze market movements and investigate the causes of market events in an expeditious manner, as well as efficiently conduct investigations of regulated entities and bring and prosecute enforcement matters, is influenced greatly by its ability to promptly and efficiently identify significant market participants across equities and options markets and collect uniform data on their trading activity. Though the large trader rule was proposed before the market events of May 6, 2010, that incident has emphasized the importance of enhancing the Commission's ability to quickly and accurately analyze and investigate major market events, and has highlighted the need for an efficient and effective mechanism for gathering data on the most active market participants.

The large trader reporting requirements that the Commission is now adopting will enhance, in the near term, the Commission's ability to identify, and collect information on the trading activity of, the most significant participants in the U.S. markets.

On May 6, 2010, the prices of many U.S.-based equity products experienced an extraordinarily rapid decline and recovery.

See

Findings Regarding the Market Events of May 6, 2010, Report of the Staffs of the CFTC and SEC to the Joint Advisory Committee on Emerging Regulatory Issues at

http://www.sec.gov/news/studies/2010/marketevents-report.pdf.

See also

Preliminary Findings Regarding the Market Events of May 6, 2010, Report of the Staffs of the CFTC and SEC to the Joint Advisory Committee on Emerging

Regulatory Issues at

http://www.sec.gov/sec-cftc-prelimreport.pdf.

Longer term, the Commission expects the consolidated audit trail proposal, if adopted, to further enhance access by the Commission and self-regulatory organizations to order and trade data from all market participants.

See

Securities Exchange Act Release No. 62174 (May 26, 2010), 75 FR 32556 (June 8, 2010) (proposed Consolidated Audit Trail) (File No. S7-11-10) (“CAT Proposal”). As discussed further below, the aspects of the large trader reporting rule that enable the collection of information on the identity of large traders, including a large trader identification number, would not be replicated or superseded by the consolidated audit trail and would remain as a key tool in the Commission's oversight of the markets for the long term.

On April 23, 2010, Proposed Rule 13h-1 was published for public comment in the

Federal Register

The Commission received 87 comment letters on the proposal from investment advisers, broker-dealers, institutional and individual investors, industry trade groups, and other market participants.

Commenters generally supported the goals of the proposal. As further discussed below, however, some commenters expressed concern about certain aspects of the proposal and recommended that the proposal be amended or clarified in certain respects. Some commenters also expressed concern with the proposed rule in light of the separate proposal to establish a consolidated audit trail.

See

Securities Exchange Act Release No. 61908 (April 14, 2010), 75 FR 21456 (April 23, 2010) (File No. S7-10-10) (“Proposing Release”).

Copies of comments received on the proposal are available on the Commission's Web site at

http://www.sec.gov/comments/s7-10-10/s71010.shtml.

See

CAT Proposal,

supra

note 2.

After careful review and consideration of the comment letters, the Commission is adopting Rule 13h-1 (the “Rule”) and Form 13H (the “Form”) with certain modifications, discussed below, to address concerns expressed by some commenters.

II. Background

The Commission is in the process of conducting a broad and critical look at U.S. market structure in light of the rapid development in trading technology and strategies. The Commission has proposed several rulemakings, including this rulemaking, to address potential discrete issues in the current market structure.

In addition, last year the Commission published a concept release on equity market structure designed to further the Commission's broad review of whether its rules have kept pace with, among other things, changes in trading technology and practices.

See, e.g.,

Securities Exchange Act Release Nos. 60684 (September 18, 2009), 74 FR 48632 (September 23, 2009) (proposal to eliminate flash order exception from Rule 602 of Regulation NMS) (File No. S7-21-09); 60997 (November 13, 2009), 74 FR 61208 (November 23, 2009) (proposal to regulate non-public trading interest) (File No. S7-27-09); 63241 (November 3, 2010), 75 FR 69792 (November 15, 2010) (File No. S7-03-10) (adopting Rule 15c3-5 under the Exchange Act addressing risk management controls for brokers or dealers with market access); and CAT Proposal,

supra

note 2.

See

Securities Exchange Act Release No. 61358 (January 14, 2010), 75 FR 3594 (January 21, 2010) (File No. S7-02-10).

The Commission's ongoing review of market structure comes at a time when U.S. securities markets are experiencing a dynamic transformation, reflecting a decades-long evolution from a market structure with primarily manual trading to a market structure with primarily automated trading. Electronic trading allows ever-increasing volumes of securities transactions to take place across an expanding multitude of trading systems that together constitute the U.S. national market system. Competition among markets has facilitated the ability of large institutional and other professional market participants to employ sophisticated trading methods to trade electronically on multiple venues simultaneously in huge volumes with great speed.

Market analysts have offered a wide range of estimates for the level of activity attributable to one category of large traders—high frequency traders—but these estimates typically exceed 50% of total volume.

See, e.g.,

See also

Rule 13h-1(a)(3) (defining control the term “control” to mean “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. For purposes of this rule only, 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”).

One commenter recommended excluding regulated investment

companies and pension fund managers from the definition of large trader.

The Commission notes that an investment company is a legal structure for the management of pooled assets by an investment adviser. As such, the investment adviser exercises investment discretion over the assets of the investment company. Accordingly, the Commission believes that the requested exclusion for regulated investment companies is not necessary because an investment adviser to an investment company, like a pension manager to a pension fund, is the entity that exercises investment discretion either solely or in connection with other investment managers. The large trader reporting requirements are designed to collect information about important market participants that exercise investment discretion. Accordingly, the Commission is not adopting the suggested exclusion for pension fund managers because it would undermine the purposes of the large trader reporting requirements. The Commission is adopting the definition of investment discretion substantially as proposed.

See

SIFMA Letter at 18.

ii. Parent Company Level Registration

As noted above, the definition of large trader is designed to focus on the ultimate parent company of an entity or entities that employ or otherwise control the individuals that exercise investment discretion. A number of commenters recommended limiting the application of the Rule to include as large traders only those entities that directly exercise investment discretion.

These commenters also raised a number of concerns with the proposal's focus on placing the filing requirement at the parent company level.

See

Financial Information Forum Letter at 5; Managed Funds Association Letter at 3; T. Rowe Price Letter at 2; and SIFMA Letter at 9.

After considering the comments received, the Commission has determined to adopt the scope of the large trader identification requirement substantially as proposed. While the Rule's broader focus on identification at the parent company level may provide less detailed information on the activity of individual traders within a large trader complex,

it nevertheless will facilitate the Commission's ability to collect data on the full extent of trading by persons and entities under common control. The Commission also notes that, in addition to promoting the Commission's regulatory and enforcement responsibilities, the large trader reporting requirements also are intended to facilitate the reconstruction of market events using transaction data. To that end, parent company-level aggregation should enhance the Commission's ability to reconstruct trading by significant market participants by providing the Commission with access to a broad set of useful data.

For purposes of the large trader reporting rule, references to the “large trader complex” is intended to refer to all entities under the control of the large trader parent company.

Some commenters noted that parent companies of financial services organizations often do not take part in the day-to-day activities of their subsidiaries and, as a result, employees of those parent companies are not knowledgeable about the trading activities of their subsidiaries and would not be able, for example, to readily respond to any follow-up questions from the Commission.

The Commission notes that, to determine whether a parent company is a large trader, the aggregate trading activity of all entities controlled by the parent company must be collected. Controlled entities need produce only aggregated statistics in summary form, which would be added together at the parent level to determine whether the identifying activity level has been met. If it has, then the parent company is a large trader and will be required to provide information about itself and its affiliates, unless all of its affiliates comply on its behalf pursuant to Rule 13h-1(b)(3)(ii). Further, the Commission believes that the additional identifying information requested on Form 13H could most easily be collected by a parent company employee from the entities controlled by the parent company. The Commission expects that communication of the basic information required by the Form, as well as aggregate securities transactions to determine whether the identifying activity threshold has been met, between a parent company and the entities that it controls should not be burdensome and should not require the development of new integrated trading systems. To the extent a parent company is unaware of its subsidiaries' aggregate transaction levels and other basic identifying information, the Commission believes that implementing control systems to capture such information will be consistent with appropriate risk management considerations.

See, e.g.,

Prudential Letter at 3.

One commenter expressed concern that the filing by a parent company of a Form 13H on behalf of its subsidiaries may give the impression that its firewalls are weak.

The Commission does not believe a parent company's duty to determine whether it is a large trader based on aggregated statistics that summarize the trading activity of its subsidiaries should violate or undermine the effectiveness of existing firewalls. The Rule only requires that a parent company aggregate and consider daily and monthly share volume and dollar value of certain transactions in NMS securities effected by the persons it controls. The Rule does not require the disclosure of any particular transaction information (

e.g.,

the identity of or additional information on the securities bought or sold). Rather, persons need only produce a total figure of the relevant transactions for which they exercised investment discretion. The parent company would then aggregate together those figures when measuring its overall activity against the applicable trading activity threshold.

See

Prudential Letter at 3.

(a) Use of LTID Suffixes

Some commenters questioned the utility of the information that would be collected if large traders were identified at the parent company level, including whether grouping together persons who make trading decisions independently of each other would cloud the Commission's view when investigating for certain trading behavior, such as manipulation.

As an alternative, some commenters suggested that the Rule permit, but not compel, identification at the parent company level.

Another commenter suggested eliminating the requirement that an LTID be affixed to the trades of affiliates that do not independently qualify as large traders.

With respect to the concern about the Commission's ability to identify trading activity within a large trader with more particularity, as discussed further below,

Item 4(d) of Form 13H permits a large trader to assign LTID suffixes to sub-identify persons, divisions, groups, and entities under its control. For example, a large trader may choose to assign a suffix to each independent division within the large trader. Use of suffixes to identify various sub-groups within a large trader could facilitate a large trader's ability to accurately and efficiently track with more particularity the trading for which it exercises investment discretion, and as a consequence, could facilitate the ability

of a large trader to respond to any Commission request to further identify accounts or disaggregate trading data, as discussed below. To the extent large traders utilize LTID suffixes, the need for the Commission to contact large traders for assistance in further identifying their accounts should be diminished. Accordingly, the Commission encourages large traders to utilize LTID suffixes.

See, e.g.,

Prudential Letter at 2 and Investment Adviser Association Letter at 4.

See

Investment Company Institute Letter at 6 and Prudential Letter at 3.

See

Investment Adviser Association Letter at 5.

See infra

Section III.A.3.0.

The Commission notes that, ultimately, the information limitation identified by commenters may be addressed by the Commission's separate rulemaking for a consolidated audit trail which, if adopted as proposed, would require collection of information about the person with investment discretion for each order as well as information to identify the beneficial owner for each order.

In the meantime, allowing a parent company to comply on behalf of related entities should provide the Commission with important information at lower cost to the industry, by reducing the complexity and burdens of the large trader reporting requirements—such as those proposed by the Commission during the 1990s—that could have required reporting at multiple levels within a control group. At the same time, this provision addresses the Commission's near-term need for access to more information about large traders and their trading activities, which will enable the Commission to more efficiently analyze market events.

See

CAT Proposal,

supra

note 2, 75 FR at 32572.

(b) Control and Minority-Owned Entities

With respect to which persons under a parent company's control should be considered in determining the parent company's large trader status, Rule 13h-1(a)(3) defines “control” (and 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. For purposes of this rule only, 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.”

One commenter stated that including minority-owned entities would be problematic because it may be difficult for a large trader to obtain the information from a minority-owned entity that would be necessary for it to complete Form 13H.

Furthermore, according to this commenter, the minority-owned entity may resist attaching the large trader's LTID to its trades.

Another commenter suggested attributing to a large trader only the activity of majority-owned entities that are actual operating subsidiaries, and not attributing the activity of more remote, partially-owned entities.

After considering the comments received, the Commission has decided to adopt as proposed the definition of control solely for purposes of this Rule. In particular, the Commission continues to believe that a minority shareholder holding at least 25% of the ownership interests of an entity would be in a position to exercise the influence necessary to secure that entity's cooperation in facilitating a large trader's compliance with the federal securities laws, especially given that all that this entails for the controlled entity would be providing its registered broker-dealers with the large trader's LTID and the accounts to which it applies. In addition, if the controlled entity refuses to cooperate, the large trader itself may be able to notify the broker-dealer of its LTID. The Commission also continues to believe that the definition of control is appropriate and will allow the Commission to identify, and obtain trading data from, controlled persons for whom a large trader is in a position to materially influence the investment decisions made by such person.

See

Prudential Letter at 3. The Commission notes that proposed Form 13H would have required a large trader to identify its accounts and disclose for each account the LTID of any unaffiliated large trader with whom it shares investment discretion. As discussed below, the Commission has not adopted the provisions in the Form relating to the identification of accounts, and, as a consequence, a large trader would not need to obtain the LTID of any unaffiliated large trader for purposes of completing the Form.

See

Prudential Letter at 3.

See

SIFMA Letter at 18.

The Commission considered other thresholds for control and determined that a 25% threshold would be the appropriate level for purposes of new Rule 13h-1. As discussed in the Proposing Release, the Commission notes that the definition of control is similar to the definition of control contained in Form 1 (Application for Registration or Exemption from Registration as a National Securities Exchange).

See

Proposing Release,

supra

note 3, 75 FR at 24161.

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% or more of the voting securities or receive 10% or more of the net profits).

b. Identifying Activity Level

Rule 13h-1(a)(7) defines the term “identifying activity level” as “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.” One commenter expressly supported these threshold levels.

Another commenter recommended increasing the daily threshold limit to shares with a fair market value of $100 million during any calendar day.

Others advocated increased thresholds, but did not identify a particular level or provide empirical support for their recommendations.

See

T. Rowe Price Letter at 2.

See

Financial Engines Letter at 7.

See, e.g.,

Managed Funds Association Letter at 2.

Some commenters thought that the proposed identifying activity level would capture infrequent traders, who they believe should not attract regulatory interest under a large trader reporting rule.

The Commission notes that nothing in Section 13(h) of the Exchange Act suggests that the Commission should focus its attention only on those large traders that are frequent traders. The statute permits the Commission to monitor the impact on the securities markets of securities transactions involving a substantial volume or a large fair market value or exercise value. While frequency of trading is one factor that the Commission considered in defining who is a large trader, it was not the only factor. In explaining why it proposed to exclude certain transactions, the Commission stated that the proposed exclusions were designed to exclude certain small and otherwise infrequent traders from the definition of a large trader, but also stated: “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.”

To the extent that a market participant trades only infrequently, but does so in large volume in the course of exercising investment discretion, the Commission seeks to identify that participant as a

large trader. Nevertheless, the Commission recognizes the filing burden that could be placed on a trader whose activity only on very rare occasions meets the identifying activity threshold. These persons may be eligible for Inactive Status, a concept which is discussed below.

See

Investment Adviser Association Letter at 10; Howard Hughes Medical Institute Letter at 1; Managed Funds Association Letter at 2; and SIFMA Letter at 8.

See

Proposing Release,

supra

note 3, 75 FR at 21463.

The Commission continues to believe that the identifying activity level is appropriate because it will identify large traders that engage in a substantial amount of trading activity relative to overall market volume—specifically, approximately 0.01% of the daily volume and market value of trading in NMS securities.

Moreover, as discussed below, Inactive Status is available for large traders whose trading activity reaches the identifying activity level infrequently.

See

Proposing Release,

supra

note 3, 75 FR 21463-64. An “NMS security” is “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.” 17 CFR 242.600(b)(46). The term refers generally to exchange-listed securities, including equities and options.

Transactions Counted Towards the Identifying Activity Level.

As proposed, Rule 13h-1(a)(6) defined the term “transactions” as “all transactions in NMS securities, including exercises or assignments of option contracts,” except for certain specifically enumerated transactions.

To more closely align this definition with the aggregation provisions contained in paragraph (c) of the Rule, the Commission is adopting a revised definition that provides that the term “transaction” means “all transactions in NMS securities, excluding exercises or assignments of option contracts,” except for certain specifically enumerated transactions.

As noted in the Proposing Release, for purposes of the identifying activity level with respect to options, only purchases and sales of the options themselves, and not transactions in the underlying securities pursuant to exercises or assignments of such options, need to be counted. However, for purposes of the identifying activity level, the volume and value of options purchased or sold would be determined by reference to the securities underlying the option.

Thus, the Rule is intended to focus on the trading of options and the potential impact of those options positions on the underlying markets. By excluding purchases and sales pursuant to exercises or assignments, the Rule avoids double-counting towards the applicable identification threshold. The revised definition of “transaction” more closely aligns it with the explanation of the aggregation provision applicable to options provided in the Proposing Release. The Commission believes that the definition as adopted is consistent with Section 13(h)(1) of the Exchange Act, and will advance its stated goals, including “monitoring the impact on the securities markets of securities transactions involving a substantial volume or a large fair market value or exercise value * * *”

Specifically, under the proposal, the following would not be counted as “transactions” for purposes of the proposed Rule: (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.

As noted in the Proposing Release, the aggregation provisions in paragraph (c) are designed to require market participants to use a “gross up” approach in calculating their activity levels. Accordingly, 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. This approach reflects the fact that substantial trading activity has the potential to impact the market regardless of the trader's net position.

See

Proposing Release,

supra

note 3, 75 FR at 21464.

See id.

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 × 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 × 400 × 100 = $8,000,000). Transactions in index options are not required to be “burst” into share equivalents for each of the underlying component equities.

See

15 U.S.C. 78m(h)(1).

In addition, the Commission received comments on the enumerated exclusions from the term “transaction.”

As indicated in the Proposing Release, the proposed exceptions from the term “transaction” were designed to exclude certain transactions from the identifying activity level calculation because they are not effected with an intent that is commonly associated with the arm's-length trading 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.

One commenter requested that the Commission allow registered broker-dealers to include the excluded transactions when reporting transaction data to the Commission pursuant to Rule 13h-1(e).

The commenter explained that registered broker-dealers' existing infrastructure may not collect sufficient data to allow the broker-dealer to exclude excepted transactions when reporting transaction data to the Commission. In response to this comment, the Commission is adopting a definition of “transaction” in the Rule to reflect its limited application, as discussed in the Proposing Release. Specifically, to underscore that the enumerated transactions are excluded from the definition of transaction

only

for the purpose of determining who is a large trader, the Commission is adopting the introductory portion of the second sentence of Rule 13h-1(a)(6) to provide that: “The term transaction or transactions means all transactions in NMS securities, including exercises or assignments of option contracts.

For the sole purpose of determining whether a person is a large trader,

the following transactions are excluded from this definition * * *.” Accordingly, a person need not count trading activity that falls within one of the listed categories of excluded transactions when it determines whether it meets the applicable identifying activity threshold. However, in response to a Commission request for data, a broker-

dealer must report all transactions that it effected through the accounts of a large trader without excluding any transactions listed in Rule 13h-1(a)(6).

See, e.g.,

American Benefits Council Letter; Financial Engines Letter; Howard Hughes Medical Institute Letter; and SIFMA Letter.

See

Proposing Release,

supra

note 3, 75 FR at 21463 (“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.”)

See

Financial Information Forum Letter at 3.

In the Proposing Release, the Commission requested comment about whether any of the proposed exclusions from the definition of transaction should be eliminated or whether any other types of transactions should be excluded.

While no commenter recommended eliminating any of the excluded transactions, several commenters suggested the Commission consider additional exclusions. For example, some commenters suggested excluding all or some transactions effected on behalf of defined contribution plans.

The Commission does not believe that a blanket exclusion for transactions effected on behalf of defined contribution plans is warranted because such trades are effected through the exercise of investment discretion and are within the scope of activity contemplated by the statute. Instead, the Commission believes it is appropriate to provide additional guidance regarding the application of the Rule to transactions effected on behalf of defined contribution plans. As highlighted by commenters, investment discretion may be exercised on behalf of defined contribution plans differently, depending on the particular structure of the plan. For example, in some defined contribution plans, participants select their own investments from among the choices offered by their employer.

A trustee then effects the transactions pursuant to the instructions it receives from the plan participants. For purposes of determining who is a large trader, the participants in such plans are the ones who exercise investment discretion over the transactions that are effected on their behalf. In such plans, the Commission does not view the trustee as exercising investment discretion over the transactions for purposes of the Rule.

Additionally, solely for purposes of determining who is a large trader pursuant to Rule 13h-1, the Commission considers an employer to not exercise investment discretion merely by establishing investment options for its employees. Other types of defined contribution plans may be structured differently.

See

Proposing Release,

supra

note 3, 75 FR at 21472.

See

Financial Engines Letter at 7 and American Benefits Council Letter at 2 (suggesting exempting significant repositioning of portfolio balances by very large defined benefit plans; investment lineup changes by defined contribution retirement plan sponsors; and plan activity in connection with acquisitions and divestitures of businesses which may precipitate a large movement of participants out of a plan).

See

American Benefits Council Letter at 2.

The Commission expects that few individual defined contribution plan participants will effect aggregate transactions greater than or equal to the identifying activity level, and the Commission therefore expects that generally they will not meet the definition of large trader.

The Commission notes that, pursuant to Section 13(h)(6) of the Exchange Act and new Rule 13h-1, 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 Exchange Act.

See

new Rule 13h-1(g), which is discussed

infra

at Section III.0.

Another commenter requested clarification that only the trustee of a retirement plan, not the plan sponsor and other parties involved in plan administration, must self-identify as a large trader.

As discussed above, the Rule requires the person who exercises investment discretion over a certain level of transactions to identify as the large trader, which may be the trustee but would generally not be the plan sponsor or administrator if neither exercises investment discretion.

See

American Benefits Council Letter at 2-3.

One commenter argued for broadly excluding transactions associated with corporate actions, including mergers and acquisitions and other purchases of assets, self-tenders, buybacks (including Rule 10b-18 buybacks), and certain internal corporate actions (such as journals between accounts within the same entity where there is no change in the beneficial owners).

The commenter also recommended excluding stock loans, equity repurchases, and in-kind creations of exchange-traded funds (“ETFs”). As discussed below, the Commission agrees that many, but not all,

of the additional categories of transactions identified by the commenter can be excluded for purposes of determining large trader status. Accordingly, the Commission is adopting subparagraph (viii) to Rule 13h-1(a)(6), which excludes the following additional transactions for purposes of calculating the identifying activity level: “any transaction to effect a business combination, including a reclassification, merger, consolidation, or tender offer subject to Section 14(d) of the Securities Exchange Act; an issuer tender offer or other stock buyback by an issuer; or a stock loan or equity repurchase agreement.”

See

SIFMA Letter at 8.

For example, the Commission is not making any changes in response to the suggestion of one commenter to essentially exempt all transactions effected on behalf of organizations dedicated to a charitable purpose.

See

Howard Hughes Medical Institute Letter.

See also

infra

text accompanying note 255 and the subsequent discussion.

Consistent with the views outlined in the Proposing Release, the Commission believes that these additional categories of transactions are effected for materially different reasons than those commonly associated with the arm's-length trading of securities in the secondary market and the associated exercise of investment discretion. For example, transactions to effect a business combination, as well as an issuer tender offer or other stock buyback by an issuer, reflect fundamental corporate decision-making that involves matters much broader than those traditionally associated with trading activity in NMS securities. Such transactions are discrete corporate actions to effect the acquisition of a business or to manage the extent of the distribution of an issuer's securities. Further, stock loan and equity repurchase agreements typically are entered into to facilitate short sale transactions or as part of a larger financing transaction, and not as part of an investment decision traditionally associated with trading activity in NMS securities. Accordingly, the Commission believes it appropriate to not count these transactions for the purpose of determining whether a person meets the identifying activity level contained in the definition of large trader.

For purposes of the identifying activity level for large trader reporting, the Commission believes that it is appropriate to count transactions effected in the secondary market to assemble, or dispose of, securities that are transferred between an “authorized participant” and an ETF. An authorized participant is a trader that, on its own behalf or on behalf of others, presents securities (or other assets) to an ETF in order to create ETF shares or receives securities (or other assets) from an ETF in connection with the redemption of ETF shares. Among other reasons, authorized participants engage in such creations and redemptions to take advantage of arbitrage opportunities resulting from differences in the market prices of the securities held by the ETF and the market prices of the ETF shares. The Commission expects that, if authorized participants are large traders, it will be useful to monitor their secondary market trading and to be able to access records of their trading activity across broker-dealers. However, the Commission does not believe that the actual transfer of the basket of securities between an authorized participant and an ETF should be counted for purposes of large trader reporting. Accordingly, the Commission will count toward the

identifying activity level trading activity in the secondary market that relates to the acquisition or disposition of securities in connection with, for example, the creation or redemption of ETF shares, but not the transfer of such securities between an authorized participant and an ETF.

Specifically, then, in connection with creation or redemption: (1) Purchases of securities by an authorized participant for the purpose of assembling a basket would count toward an authorized participant's identifying activity level; (2) transfers of those securities by an authorized participant to the ETF would not be counted toward the ETF's identifying activity level; (3) acquisitions of securities by an authorized participant from the ETF would not count toward the authorized participant's identifying activity level; and (4) sales of securities by an authorized participant into the secondary market would count toward the authorized participant's identifying activity level. No transactions effected would be counted toward an ETF's identifying activity level because the ETF would not be exercising investment discretion by creating or redeeming ETF shares.

c. Voluntary Registration

One commenter suggested that the Commission allow a person to register voluntarily as a large trader as that person nears the applicable trading activity threshold in order to reduce its need to actively monitor its trading levels.

The Commission agrees with the commenter that the ability to voluntarily register will mitigate the monitoring burden on market participants who expect to effect transactions equal to or greater than the identifying activity level at some point in the future. Accordingly, the Commission is adopting: (1) A definition of large trader that includes those persons who voluntarily register as large traders; and (2) changes to Form 13H to require a large trader to indicate in its initial filing with the Commission whether it has chosen to voluntarily register. Any such person that elects to voluntarily file will be treated as a large trader for purposes of the Rule, and will be subject to all of the obligations of a large trader under the Rule, notwithstanding the fact that the person had not effected the requisite level of transactions at the time it registered as a large trader.

See

Investment Company Institute Letter at 7.

2. Duties of a Large Trader

Pursuant to Rule 13h-1, a large trader must self-identify by filing Form 13H with the Commission. In addition, a large trader must disclose its LTID to the registered broker-dealers effecting transactions on its behalf and identify for them each account to which it applies.

a. File Form 13H With the Commission

Form 13H provides for six types of filings: Initial Filing; Annual Filing; Amended Filing; Inactive Status; Termination Filing; and Reactivated Status. Each type is discussed below. As reflected in the instructions to the Form, large traders must file all Forms 13H through EDGAR,

which is being updated to accept these submissions.

Accordingly, large traders will need to have or obtain permission to access and file through EDGAR, and can obtain the necessary access codes, if they do not already have them, by filing a Form ID (Uniform Application for Access Codes to File on EDGAR).

Among other things, large traders will be given a Central Index Key (“CIK”) number that uniquely identifies each filer and allows them to submit filings through EDGAR. While Form 13H filings will be processed through the Commission's EDGAR system, once filed, the Form 13H filings will not be accessible through the Commission's Web site or otherwise be publicly available.

One commenter requested that the Commission not require filing of Forms 13H until it has an electronic filing system in place because, while the rule requires electronic filing, the Commission noted the possibility in the Proposing Release that paper filings might be required for a limited period of time.

See

T. Rowe Price Letter at 3.

See also

Proposing Release,

supra

note 3, 75 FR at 21465, n. 80. The Commission shares the concern expressed by the commenter. Form 13H will be a web-based application and will be submitted through EDGAR, a secure web interface, on the applicable compliance date.

See generally

17 CFR 232 (Regulation S-T—General Rules and Regulations for Electronic Filings).

An applicant must file Form ID in electronic format via the Commission's EDGAR Filer Management website.

See

17 CFR 232 (Regulation S-T) and the EDGAR Filer Manual for instructions on how to file electronically, including how to use the access codes.

i. Initial filings—who must file?

Except as provided below, each large trader must file a Form 13H “Initial Filing” to identify itself to the Commission.

In complex organizations, more than one related entity can qualify as a large trader. Consider the following example:

See

new Rule 13h-1(b)(1).

• Holding Company owns a 100% ownership interest in Broker-Dealer and Investment Adviser. However, as a practical matter, Holding Company is not engaged in the day-to-day operation of either entity.

• Broker-Dealer owns a 33% ownership interest in Proprietary Trading Firm. None of the firm's other investors own a controlling interest of 25% or more of the firm, and therefore no LTIDs, other than that of Broker-Dealer, would be attached to the trades of Proprietary Trading Firm.

• Investment Adviser owns a 100% ownership interest in Sub-Adviser #1 and Sub-Adviser #2.

• Sub-Adviser #1, on behalf of its clients, exercises investment discretion over accounts and effects transactions in NMS securities on behalf of those accounts in an aggregate amount

greater than

the identifying activity level.

• Sub-Adviser #2, on behalf of its clients, exercises investment discretion over accounts and effects transactions in NMS securities on behalf of those accounts in an aggregate amount

less than

the identifying activity level.

• While engaging in proprietary trading, Broker-Dealer exercises investment discretion over accounts and effects transactions in NMS securities on behalf of those accounts in an aggregate amount

greater than

the identifying activity level.

• The Proprietary Trading Firm effects transactions in NMS securities in an aggregate amount

greater than

the identifying activity level.

All of the identified entities, except Sub-Adviser #2, independently qualify as large traders under the Rule. Therefore, as discussed below, unless these entities rely on the provisions of Rule 13h-1(b)(3)(i), each of them must file separate Forms 13H with the Commission.

See

new Rule 13h-1(b)(1).

Rule 13h-1(b)(3)(i) 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. This provision allows the identification requirement to be pushed up the corporate hierarchy to the parent entity (

i.e.,

Holding Company, in the example above).

Conversely, Rule 13h-1(b)(3)(ii) applies 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 (such as Holding Company, in the example above) 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). This provision maintains the focus on the parent company by allowing, for example, a corporate entity to comply on behalf of one or more natural persons who are its controlling owners. In the above example, if Investment Adviser and Broker-Dealer separately register as large traders, Holding Company would not have to separately register as a large trader, assuming that those two entities capture all transactions and accounts controlled by Holding Company.

Instead, Investment Adviser and Broker-Dealer would identify (in Item 4(c) of the Form) the other as an affiliate filing separately, and identify Holding Company as their affiliate's parent company on their respective Form 13H filings. In this way, the Commission will be able to tell that the entities are under the common control of Holding Company, and the Commission could assign LTIDs that reference their common parent.

In this case, Investment Adviser would be responsible for providing its LTID to each registered broker-dealer that effects transactions on its behalf, on behalf of Sub-Adviser #1, or on behalf of Sub-Adviser #2. Additionally, Broker-Dealer would be responsible for providing its LTID to each registered broker-dealer that effects transactions on its behalf or on behalf of Proprietary Trading Firm. Further, Investment Adviser would be responsible for identifying each of the accounts to which its LTID applies, which would include the accounts of Sub-Adviser #1, Sub-Adviser #2, and Broker-Dealer would be responsible for identifying each of the accounts to which its LTID applies, which would include the accounts of Proprietary Trading Firm.

When must an Initial Filing be submitted?

A large trader must file a Form 13H Initial Filing promptly after effecting aggregate transactions equal to or greater than the identifying activity level.

The Commission solicited

and received comments about the Initial Filing deadline.

Some commenters requested additional guidance on what constitutes “promptly.”

One commenter recommended that the Commission specify a 10-day filing deadline.

In contrast, another commenter suggested that the Commission define promptly as without delay, but in no circumstances later than 30 days after the trader qualifies as a large trader.

Another commenter assumed that promptly means within 30 days.

The Commission continues to believe that “promptly” is an appropriate standard because it emphasizes the need for filings to be submitted without delay to ensure their timeliness while affording filers a limited degree of flexibility.

However, given the requests for additional guidance, the Commission believes that under normal circumstances, it would be appropriate for Initial Filings (and Reactivated Filings, discussed below) to be filed within 10 days after the large trader effects aggregate transactions equal to or greater than the identifying activity level.

See

new Rule 13h-1(b)(1).

See

Proposing Release,

supra

note 3, 75 FR at 21472.

See

Investment Adviser Association Letter at 9; SIFMA Letter at 18-19; and Investment Company Institute Letter at 10.

See, e.g.,

Investment Adviser Association Letter at 9 and SIFMA Letter at 18-19.

See

Investment Adviser Association Letter at 9.

See

Investment Company Institute Letter at 10.

See

SIFMA Letter at 18-19.

See

Securities Exchange Act Release No. 55857 (June 5, 2007), 72 FR 33564, 33567 (June 18, 2007) (in declining to define the term “promptly” as used on Section 15E(b)(1) of the Exchange Act, the Commission stated that whether an amendment is furnished promptly will depend on the facts and circumstances such as the amount of information being updated).

The Commission notes that the guidance provided here regarding the “promptly” standard for Form 13H filings is based on the scope of the Form, the expected time to complete the Form, and the required submission thereof through EDGAR, and accordingly this guidance is applicable only to Form 13H filings.

ii. Annual Filings

All large traders must submit an Annual Filing within 45 days after the end of each full calendar year,

except that large traders on Inactive Status (discussed below) are not required to file Form 13H while they are on Inactive Status.

See

new Rule 13h-1(b)(1)(ii).

See

new Rule 13h-1(b)(3)(iii).

iii. Amended Filings

If any of the information contained in a Form 13H filing becomes inaccurate for any reason, a large trader must file an Amended Filing no later than the end of the calendar quarter in which the information became stale.

While not required by the Rule, a large trader may voluntarily file an amended filing more frequently than quarterly at its discretion. A large trader on “Inactive Status” (described below) is not required to file any Amended Filings while it is on Inactive Status.

See

new Rule 13h-1(b)(1)(iii). The Commission expects that significantly less information will need to be inputted for an Amended Filing and the large trader may have a considerable amount of lead time before the end of the calendar quarter to submit the Amended Filing.

iv. Inactive Status

Rule 13h-1(b)(3)(iii) permits a large trader who 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 to obtain inactive status by filing for “Inactive Status” through a Form 13H submission.

Inactive Status would be effective upon such filing.

New Rule 13h-1(b)(3)(iii) provides: “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 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.”

Inactive status is designed 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 support continued status as a large trader. In particular, Inactive Status is designed to minimize the impact of the Rule on natural persons who infrequently effect transactions of a magnitude that otherwise warrant the added regulatory requirements under the Rule. Inactive status relieves the large trader from the requirement to file amended Forms 13H. It also permits the large trader to request that its broker-dealers stop maintaining records of its transactions by LTID.

The Commission requested comment about whether the proposed provision for Inactive Status is appropriate and sufficient and whether it should be modified or eliminated.

The Commission did not receive any comments regarding Inactive Status.

The Commission is adopting this provision, as proposed.

See

Proposing Release,

supra

note 3, 75 FR at 21472.

One commenter, however, asked about broker-dealers' duties regarding inactive persons.

See

Financial Information Forum Letter at 5;

see also

infra

text accompanying note 167.

v. Reactivated Status

A person on Inactive Status who effects aggregate transactions that are equal to or greater than the identifying activity threshold must file a “Reactivated Status” Form 13H promptly after effecting such transactions.

100

Upon filing for Reactivated Status, the person once again would be subject to the filing requirements of Rule 13h-1 and must inform its broker-dealers of its reactivated status.

101

The Commission

did not receive any comments regarding Reactivated Status. The Commission is adopting this provision, as proposed. In particular, the provision for reactivated status is designed to ensure that a large trader on Inactive Status that becomes active above the identifying activity threshold is once again required to file and update Form 13H and inform its broker-dealers of the need to record its trading activity by its LTID.

100

See

new Rule 13h-1(b)(1)(i). In addition, a person may voluntarily elect to file for Reactivated Status prior to effecting aggregate transactions that are equal to or greater than the identifying activity threshold. As with initial filings, a person may elect to file for Reactivated Status if it did not wish to monitor its trading for purposes of the identifying activity threshold.

101

New Rule 13h-1(b)(2) provides that 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. Additionally, a large trader on Inactive

Status pursuant to paragraph (b)(3) of new Rule 13h-1 must notify broker-dealers promptly after filing for reactivated status with the Commission.

vi. Termination Filings

Under Rule 13h-1(b)(3)(iii), a person, under certain narrow circumstances, may permanently end its large trader status by submitting a “Termination Filing.” This filing is designed to allow a large trader to inform the Commission that it has terminated operations, and therefore there is no chance of it requalifying for large trader status in the future.

102

Termination status is designed to signal to the Commission to not expect future amended or annual Form 13H filings from that large trader, such as when a large trader dissolves, ceases doing business, or, in some cases, is acquired, as described below.

102

By contrast, as described above, Inactive Status may be only temporary.

The Commission believes it may be helpful to provide additional examples to illustrate the narrow circumstances under which a large trader may file a “Termination Filing.” These examples also should provide guidance to large traders on how to amend their Forms 13H when a large trader is involved in a merger.

•

Example 1:

A large trader merges into another large trader, resulting in only one entity. The non-surviving large trader would submit a “Termination Filing” that specifies the effective date of the merger. The surviving large trader, in an Amended Filing or its next Annual Filing (depending on the effective date of the merger), would update Item 4 to list the non-surviving company as an affiliate that files separately and provide the additional identifying information required in Item 4. Specifically, in the Description of Business and Relationship to the Large Trader fields, the surviving entity would disclose that the non-surviving entity has been acquired and no longer exists as a separate entity. The non-surviving company's market participation identification number (“MPID”) and LTID number (including suffix, if any) should also be listed. Capture of this information will allow the Commission to track the control of the non-surviving entity. In this scenario, the surviving large trader would continue using its LTID.

•

Example 2:

An existing large trader acquires another large trader and the target is maintained as a separate subsidiary. Following the acquisition, the target's trading would need to be tagged with the acquirer's LTID. The acquired subsidiary company may file a Termination Filing so long as all of its trading is tagged with its new parent's LTID.

103

Alternatively, the acquired entity may maintain its original LTID and have its trading tagged with both its original LTID and its new parent's LTID. If a Termination Filing is not made, then both companies would have to amend Items 4 of their Forms 13H to list the other as an affiliate and disclose their affiliate's information, including its MPID and LTID.

103

If a Termination Filing is elected, the acquirer may wish to use an LTID suffix to separately identify the acquired entity's trading activity.

•

Example 3:

A large trader is acquired by a company that was not previously a large trader. The new parent company is now a “large trader” due to acquiring control of a large trader. Accordingly, the acquirer would file an “Initial” Form 13H and obtain a new LTID, which would be used to identify all of its trades and the trades of its affiliates (including its newly acquired large trader subsidiary). The acquired subsidiary company may file a Termination Filing so long as all of its trading is tagged with its new parent's LTID.

104

Alternatively, the acquired entity may maintain its original LTID and have its trading tagged with both its original LTID and its new parent's LTID. If a Termination Filing is not made, then both companies would have to identify the other as an affiliate in Items 4 of their Forms 13H.

104

If a Termination Filing is elected, the acquirer may wish to use an LTID suffix to separately identify the acquired entity's trading activity.

The Commission did not receive any comments regarding Termination Filings. The Commission is adopting this provision, as proposed. In particular, the ability to submit Termination Filings will allow the Commission to accurately track only active large traders and will allow large traders that cease operation to formally terminate their filing obligations under Rule 13h-1.

b. Self-Identification to Broker-Dealers

As proposed, Rule 13h-1(b)(2) would have required a large trader to disclose to the registered broker-dealers effecting transactions on its behalf its LTID and each account to which it applies. Second, the provision, as proposed, would have required a large trader to disclose its LTID to all others with whom it collectively exercises investment discretion. The Commission received comments about the latter requirement.

105

See, e.g.,

Wellington Management Letter at 5.

Proposed Schedule 6 to the Form would have required a large trader, in connection with disclosing its brokerage accounts, to also list the LTID(s) of all other large traders that exercise investment discretion over the particular account. To assure that large traders had access to other large traders' LTIDs, the proposed rule would have required large traders to disclose their status to one another. One commenter requested clarification regarding whether a large trader would be obligated to identify unaffiliated large traders only if investment discretion is exercised collectively.

106

See

Wellington Management Letter at 5-6. Another commenter recommended that the Commission not require investment advisers to identify other advisers of a client account that trade separately and without collaboration in a different custodial account.

See

Investment Company Institute Letter at 10.

As discussed below, the Commission is not adopting the requirement to disclose brokerage account numbers on Form 13H and instead is requiring a large trader to provide a list of all registered broker-dealers with whom it has an account. Consequently, the requirement to provide the LTID(s) of all other large traders that exercise investment discretion over the particular account now is no longer relevant and is not being adopted. Because the requirement to disclose the information is not being adopted, it would not be necessary for large traders to inform others of their LTIDs, and the Commission is similarly not adopting the proposed requirement for a large trader to disclose its LTID to all others with whom it collectively exercises investment discretion. Accordingly, Rule 13h-1(b)(2), as adopted, requires a large trader to disclose to the registered broker-dealers effecting transactions on its behalf its LTID and each account to which it applies.

Lastly, the requirements that a large trader provide its LTID to all registered broker-dealers who effect transactions on its behalf, and identify each account to which it applies, are ongoing responsibilities that must be discharged promptly. For example, if a subsidiary of a large trader is acquired by another large trader, to the extent that subsidiary effects transactions in NMS securities equal to or greater than the reporting activity level, both large traders must

promptly notify their registered broker-dealers of the LTID change.

107

This responsibility is in addition to the large traders' duty to amend Form 13H pursuant to Rule 13h-1(b)(1).

3. Overview of Form 13H

Form 13H is designed to collect basic identifying information about large traders that will allow the Commission to understand the character and operations of the large trader. The Commission solicited

108

and received

109

many comments regarding various aspects of proposed Form 13H. The Commission, for example, received comments requesting clarification regarding certain information required by the proposed Form, as well as suggestions designed to reduce and streamline the reporting burden on large traders.

110

One commenter noted that the large trader reporting rule is only one of many proposed new regulations that are being contemplated by Congress and various federal regulators that would affect commercial banks.

111

The Commission is sensitive to the burdens imposed by the large trader rule.

112

As discussed below, the Commission is incorporating some commenters' suggestions in the Form as adopted, and many of the changes from the proposed version of the Form are intended to reduce further the burdens of the Form. The Commission believes that the version of Form 13H it is adopting today will be less burdensome than the proposed version, most notably because, as discussed further below, it replaces the proposed requirement to provide account numbers with a more general requirement to identify broker-dealers at which the large trader or any of its Securities Affiliates maintains an account.

113

In addition, the Commission is seeking to design the electronic filing system for Form 13H to minimize the filing burden. For example, a selection of previously filed Form 13H submissions, including the most recently submitted version, will be readily accessible so that large traders can simply edit and resubmit the Form when amendments are required. The Commission believes that filing Form 13H in an electronic format will be less burdensome and more efficient for both large traders and the Commission.

108

See

Proposing Release,

supra

note 3, 75 FR at 21472-73.

109

See, e.g.,

Wellington Management Letter at 3-6; American Bankers Association Letter at 2; David L. Goret Letter at 1-3; Anonymous e-mail dated June 22, 2010; and Prudential Letter at 3-4.

110

See, e.g.,

SIFMA Letter; Wellington Management Letter; Investment Company Institute Letter; and American Bankers Association Letter.

111

See

American Bankers Association Letter at 2.

112

As discussed

infra

(

see

Section III.0), Section 13(h)(5) of the Exchange Act expressly requires the Commission to take into account, among other things, the costs associated with maintaining information with respect to transactions effected by large traders and reporting such information to the Commission.

113

As defined in the instructions to Form 13H, “Securities Affiliate” means an affiliate of the large trader that exercises investment discretion over NMS securities.

The Commission is adopting the Form with some format-driven modifications from the proposed version to better reflect its format as an electronic, rather than paper, filing. For example, the Commission is not adopting the proposed fields that would have required filers of Annual Filings and Amended Filings to identify the Items and Schedules being updated since the Commission will be able to distinguish this information more readily in an electronic filing environment. In addition, the Commission is not adopting the Schedules to the Form, and the information previously contained in the proposed Schedules has been realigned into the body of the Form. References to paper-based “continuation sheets” are not being adopted. Similarly, the concept of Schedules, while relevant to a paper-based form, is unnecessary in the context of an all-electronic filing.

114

These and other related non-substantive changes from the proposed version of the Form reflect that the Form will be accessed electronically and filed by large traders exclusively online.

114

In addition, in response to comments and as discussed in greater detail below, the Commission is revising the scope of the data that would have been collected in the proposed Schedules.

Voluntary Registration.

For the reasons discussed above,

115

in response to a comment, the Commission is revising Form 13H from the proposed version of the Form to allow a market participant to register voluntarily as a large trader, even if it has not yet effected transactions equal to or greater than the identifying activity level at the time of filing. Correspondingly, Form 13H requires a large trader to indicate whether its “Initial Filing” is voluntary. A large trader that elects to voluntarily file is required to disclose the date upon which it filed the Form, rather than the date on which its trading activity equaled or exceeded the identifying activity level.

115

See supra

at Section III.A.1.0.

Background Information About the Large Trader and Its Authorized Person.

Form 13H requires the large trader to provide its mailing address, which may be different than its business address. Additionally, the Form requires that the following information be provided about the Authorized Person (

i.e.,

the natural person authorized to submit the Form 13H on behalf of the large trader): business address, telephone number, facsimile number, and e-mail address. This information was proposed to be required by Schedule 6 of the Form and has been relocated to the introductory section of the Form. Proposed Item 3 of Schedule 4, which would have mandated disclosure of the large trader's principal place of business (if different from the information disclosed on the cover page), has not been adopted. Instead, the requested information has been moved to the beginning of the adopted Form, where both business and mailing addresses are requested. All of this information is necessary for the Commission to identify and contact large traders.

a. Item 1

In Item 1(a) of the Form, the large trader must indicate the types of businesses that it or any of its affiliates engage in:

116

broker or dealer; bank holding company;

117

non-bank holding company; government securities broker or dealer; municipal securities broker or dealer; bank; pension trustee; non-pension trustee;

118

investment adviser to one or more registered investment companies; investment adviser to one or more hedge funds or other funds not registered under the Investment Company Act; insurance company; commodity pool operator; or futures commission merchant. A large trader also may check “Other” and disclose other types of financial businesses engaged in by the large trader.

116

Unless otherwise specified, the Form requires information about the large trader that is filing the Form 13H. Typically, the filing large trader would be the large trader's ultimate parent company, which means the person at the highest level of the organizational chart required under Item 4(a) that controls a large trader or multiple large traders.

117

The use of the term “Holding Company” in the proposal has been clarified in the adopted Form by dividing it into two options “Bank Holding Company” and “Non-Bank Holding Company.”

118

To clarify that all trustees that are large traders would be required to report, the adopted Form includes categories for “Pension Trustee” as well as “Non-Pension Trustee.”

Item 1(b) of the Form requires that the large trader provide the following for itself and each of its Securities Affiliates: a description of the nature of its operations, including a general description of its trading strategies.

119

The instructions provide guidance regarding the level of detail expected.

120

119

Item 5 of proposed Schedule 4 would have required the large trader to describe the nature of the large trader's business. Form 13H as adopted contains this requirement in Item 1.

120

For example, a large trader may describe its operations as including an “investment adviser specializing in fundamental analysis” or it may describe a broker-dealer as a “proprietary trader

focusing on statistical arbitrage” or “options market maker.”

Collection of this basic descriptive information will allow the Commission to better understand each large trader and will allow the Commission to more carefully tailor requests both to registered broker-dealers for large trader transaction data and, if necessary, to large traders for additional information pursuant to Rule 13h-1(b)(4).

The Commission does not believe that the changes to the Form from the proposed version discussed above are substantive. Instead, the changes are intended to clarify the scope of information elicited by Item 1 and to reflect the fully-electronic nature of the Form.

b. Item 2

Item 2 of the Form requires the large trader to indicate whether it or any of its Securities Affiliates files any other forms with the Commission.

121

If so, Item 2 requires identification of each filing entity, the form(s) filed, and the CIK number.

121

The title of Item 2 of the adopted Form has been slightly amended; its title is “Securities and Exchange Commission Filings,” not “Securities and Exchange Commission Registration.” This non-substantive change reflects that registration is not the effect of all forms filed with the Commission.

The Commission is narrowing the scope of Item 2 from the proposal to require the large trader to disclose whether it or any of its affiliates that exercise investment discretion over NMS securities (as distinguished from all of its affiliates) file any forms with the Commission. Additionally, rather than disclosing the filers' Central Registration Depository (“CRD”) Numbers

122

and SEC File Numbers

123

as proposed, Item 2 as adopted requires only disclosure of their CIK numbers.

124

122

The CRD is a computerized database that contains information about most brokers, their representatives, and the firms for whom they work.

123

As discussed above, an SEC File Number is assigned by EDGAR to registrants and others who file materials with the Commission through EDGAR.

See supra

discussion at text accompanying notes 79-81.

124

CIK numbers, which are assigned to persons that file material with the Commission, are applicable to a broader universe of entities that may be large traders, as opposed to CRD numbers which are only applicable to broker-dealers.

One commenter objected to the collection of information under proposed Item 2, pointing out that the Commission already has access to this information.

125

The Commission believes that Item 2 is useful because it centralizes information about a large trader's various SEC filing obligations and will thereby allow the Commission to more promptly access records of those filers using their CIK numbers. Especially given the circumscribed scope of Item 2 as adopted, the Commission believes that this requirement will not be unduly burdensome. Further, each large trader should have ready access to this information and be able to summarize it with minimal additional burden.

125

See

American Bankers Association Letter at 2.

c. Item 3

Item 3 of the Form requires a large trader to disclose whether it or any of its affiliates is registered with the Commodity Futures Trading Commission (“CFTC”) or regulated by a foreign regulator. If so, the large trader is required to identify each entity and the CFTC registration number or primary foreign regulator, as applicable.

The Commission received one comment about the aspect of proposed Item 3 of the Form that would have required disclosure about bank regulation.

126

The commenter argued that the required information did not further the underlying purpose of the proposal, and recommended that the Commission, to the extent necessary, obtain this information directly from applicable banking regulators instead of from the large trader.

127

In response to this comment, the Commission has significantly narrowed the scope of this item by not adopting the proposed requirement in Item 3(b) of the proposed Form to disclose information on bank regulators. Instead, as mentioned above, the Commission is adopting the requirement to disclose whether the large trader includes a bank

128

or bank holding company. The Commission believes that collection of this basic information will be sufficient to characterize a large trader's operations, and should reduce the burdens of the Form while focusing the collection of information on the securities trading operations of each large trader.

126

See id.

127

Item 3(b) of the proposed Form would have required the large trader to disclose: (1) Whether it or any of its affiliates 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; if so, the large trader would have been required to identify each such affiliate and its banking regulators.

128

As adopted, the instructions for Form 13H define the term “

bank”

to mean a national bank, state member bank of the Federal Reserve System, state non-member bank, savings bank or association, credit union, or foreign bank.

Further, as proposed, Item 3(c) would have required the large trader to disclose whether it or any of its affiliates is an insurance company and identify each such regulated entity and its respective insurance regulators. One commenter recommended limiting Item 3(c) to only the large trader and its large trader affiliates, and suggested that the Form require identification only of their primary regulators.

129

Otherwise, the commenter stated, its list of regulators would include a long list of state insurance regulators.

130

In balancing the benefits of collecting such information against the burden on large traders to provide it, the Commission has decided to not adopt the requirements of proposed Item 3(c). The Commission again notes that Item 1 of Form 13H requires that the large trader disclose whether the large trader includes an insurance company. The Commission believes that collection of this basic information will be sufficient to characterize a large trader's operations, and should reduce the burdens of the Form while focusing the collection of information on the large trader's securities trading operations.

129

See

Prudential Letter at 4.

130

See id.

In addition, proposed Item 3(d) would have required the large trader to disclose whether it or any of its affiliates is regulated by a foreign regulator and identify each such regulated entity and all of its foreign regulators. One commenter recommended that the information requested in Item 3(d) only be required of the large trader and its large trader affiliates.

131

It further suggested that the Form require identification only of the primary foreign regulators.

132

The commenter stated that its list of regulators would be very long, as some of its foreign affiliates may have 25 foreign regulators.

133

In balancing the benefits of collecting such information against the burden on large traders to provide it, the Commission is not adopting the requirement as proposed. This adopted item, renumbered as Item 3(b), requires identification only of the primary foreign regulator. Further, the Commission is making the requirement applicable only to the large trader and its Securities Affiliates. In addition, two separate questions proposed on CFTC registration have been combined into one question to streamline the presentation of those items. No substantive change has been made to either question. The Commission believes that the requirement as adopted should not be as burdensome and yet should provide the Commission with access to the basic information it needs to understand the identity and

regulatory status of a large trader and its affiliates.

131

See id.

132

See id.

133

See id.

d. Item 4

Item 4(b) of the Form requires information on affiliates of the large trader that exercise investment discretion over NMS securities (

i.e.,

Securities Affiliates).

134

Item 5 of the proposed Form would have required a large trader to identify each affiliate that either exercises investment discretion over accounts that hold NMS securities or that beneficially owns NMS securities. In response to comments received, the Commission is not adopting the requirement to disclose affiliates that merely beneficially own NMS securities.

135

Accordingly, large traders will not have to identify or further describe affiliates who merely beneficially own NMS securities. The Commission believes that limiting the scope of required information to focus on affiliates that exercise investment discretion over NMS securities is appropriate and may reduce reporting burdens, while providing the Commission with important information about affiliates that are engaged in trading activities consistent with the primary focus of the Rule.

134

Information from proposed Item 5 (on affiliates) has been integrated into Item 4 of the adopted Form, which covers the organization of the large trader generally. This change was intended to consolidate under one Item similar information that is requested on the organization of each large trader.

135

One commenter suggested that the Commission require identification of only those affiliates that trade in NMS securities.

See

SIFMA Letter at 17.

Given the narrower scope of affiliates about which information is now requested, the Commission is adopting as Item 4(a) a requirement to attach an organizational chart. At a minimum, the organizational chart must depict the large trader, its parent company (if applicable), all of its Securities Affiliates, and all entities identified in Item 3(a).

136

The organizational chart requirement is intended to help the Commission to quickly understand the affiliate structure of the large trader and should be useful, among other things, in assigning LTIDs and understanding any suffixes that are assigned. At the same time, a narrative description of the relationship between affiliates can also be useful where the relationships are difficult to portray in an organizational chart.

137

Accordingly, as part of Item 4(b), the Commission is requiring a narrative description of the relationship between (1) the large trader; and (2) each Securities Affiliate and each entity identified in Item 3(a).

136

As long as its organizational chart lists all required entities, a large trader may submit its standard organizational chart that it keeps in the ordinary course of its business. The organizational chart, as part of the Form 13H submission, would be treated as confidential by the Commission.

See infra

Section III.A.3.g (discussing confidentiality).

137

As proposed, Item 5 of the Form would have collected information about the relationships of affiliates in a list form.

As part of Item 4(b), the Commission is adopting a requirement that the large trader list its Securities Affiliates and all entities identified in Item 3(a). Additionally, the large trader must describe the business and disclose the MPID (if any) for each of those entities. The MPIDs of Securities Affiliates will be useful to the Commission when analyzing trading data on affiliates identified on the Form. The Commission believes that MPIDs will allow the staff to more carefully tailor requests to registered broker-dealers for large trader trade data, and they may reduce the need for the Commission to send disaggregation requests to a large trader.

138

One commenter suggested that assignment of a LTID to track the trades of large traders does not go far enough.

See

GETCO Letter at 3. The commenter recommended that all market participants be required to have and use a unique MPID when entering orders on market centers, either directly or through sponsored market access arrangements. The Commission believes that such an initiative is beyond the scope of this particular rulemaking, which requires

large traders

to provide such information to the Commission. If the Commission were to consider extending such a requirement to other market participants, it would be subject to a separate rulemaking providing interested persons an opportunity to comment.

Item 4(c) of the Form requires the provision of the LTIDs, including LTID suffixes, for all entities within the large trader that file separately (if any). This requirement is very similar to what was proposed under Item 5. Item 4(c) as adopted, however, expressly requires that a large trader include the LTID suffix (if any) of all identified entities.

Item 4(d) of the Form allows a large trader to assign suffixes to its affiliates. In the Proposing Release, the Commission specified that a large trader could elect to append additional characters (a suffix) to sub-identify particular units that directly control an account.

139

Use of a suffix might be useful, for example, to facilitate a large trader's internal recordkeeping and to facilitate responses to Commission disaggregation requests.

140

The instructions to Item 4(d) of the Form provide guidance on the format for suffixes.

141

A list of the entities within the large trader complex that have been assigned suffixes will help the Commission understand the large trader's use of suffixes and may facilitate the ability of a large trader to track and manage its assigned suffixes.

139

See

Proposing Release,

supra

note 3, 75 FR at 21460, n.40.

140

See id.

at 75 FR at 21460, n.44.

141

Specifically, suffixes must have three characters, all of which must be numbers. No letters or special characters may be used in a suffix. Further, the same suffix should not be assigned to more than one entity using the same LTID, and large traders should avoid reusing suffixes.

The Commission believes that the information about large trader affiliates required by Item 4 of the Form is necessary to provide the Commission with the background necessary to understand the character and trading activities of a large trader.

e. Item 5

Item 5 of Form 13H requires information about the governance of the large trader.

142

Item 5(a) mandates disclosure of one or more of the following statuses of the large trader: individual;

143

partnership; limited liability partnership; limited partnership; corporation; trustee; or limited liability company. Additionally, the Form permits the large trader to check “Other” and specify a form of organization that is not comparable to any of the enumerated organization types.

142

Information from proposed Schedule 4 (on governance) has been integrated into Item 5 (also on governance). Specifically, the Commission is consolidating proposed Schedule 4 of Form 13H into Item 5 and re-titling it “Governance of the Large Trader.” This change was intended to consolidate under one Item similar information concerning the governance of each large trader.

143

The proposed categories for individuals (“self employed” and “otherwise employed”) have been condensed into a single requirement to identify a large trader as an individual.

Item 5(b) requires the identification of each partner in the large trader partnership and partnership status (

i.e.,

general partner or limited partner).

Item 5(c) requires the identification of each executive officer, director, or trustee of a large trader corporation or trustee. The column title in Item 5(c) reflects the instruction that the large trader identify its Executive Officers.

144

Although proposed Schedule 4 to Form 13H did not specify that only the identities of executive officers were required, the proposed instructions to the Form indicated that the proposed Form did not seek to collect the identities of all officers of the large trader.

f. Item 6

Item 6 of Form 13H requires large traders to identify broker-dealers at which the large trader has an account. As proposed, Item 6 would have required large traders to provide information concerning each broker-dealer account through which it or certain of its affiliates trade. The Commission received several comments concerning Schedule 6 to the proposed

Form.

145

As discussed below, some commenters, particularly investment advisers, noted that this requirement would be impractical or at least very burdensome and could require disclosure of potentially hundreds of thousands of account numbers.

146

One commenter explained that many investment advisers do not know the account numbers assigned to them by broker-dealers because that information is not required by the software they use to communicate order allocation and settlement instructions to broker-dealers.

147

Other commenters stated that some investment advisers for defined contribution plans do not have access to account information because the plan record-keepers, not the investment advisers who provide instructions to the record-keepers, establish and maintain the relationships with the broker-dealers.

148

Even for large traders that have ready access to their brokerage account numbers, commenters suggested that the sheer volume of that information, and the frequency with which it might change, would make regular disclosure extremely burdensome.

149

Other commenters stated that account numbers sometimes are embedded with personally identifiable information and objected to the requirement because: (1) The Commission should not require investment advisers to disclose their clients' identities;

150

and (2) the burdens necessary for the Commission to establish sufficiently robust safeguards to protect the confidentiality of this information would be considerable.

151

145

See, e.g.,

Anonymous e-mail dated June 22, 2010; Wellington Management Letter at 3-6; and Financial Engines Letter at 4-6.

146

See, e.g.,

Wellington Management Letter at 3-4.

147

See id.

148

See

Financial Engines Letter at 4-5 and Investment Adviser Association Letter at 6. One commenter added that some investment managers do not have account number information because they execute trades with registered broker-dealers with whom they have only an informal relationship and no contract.

See

Investment Adviser Association Letter at 6.

149

For example, one investment adviser stated that there are over 400,000 separate broker-dealer account numbers associated with its clients.

See

Wellington Management Letter at 3. It further stated that it currently does not maintain a list of those account numbers.

See id.

150

One commenter stated the requirement, which would disclose client information, may: (1) raise numerous privacy issues, particularly with respect to transmission of confidential information from foreign jurisdictions such as members of the European Union and Switzerland and (2) harm relationships between investment managers and their clients.

See

Investment Adviser Association Letter at 6.

151

See

David L. Goret Letter at 3.

Some commenters suggested alternatives to disclosing account numbers in the proposed Form. One commenter suggested that the Commission instead require large traders to maintain and submit only upon request the required brokerage account information.

152

Two other commenters suggested revising the proposed Form to instead collect the names of broker-dealers through which the large trader executes transactions.

153

152

See

American Banking Association Letter at 2.

153

See

Wellington Management Letter at 4 and Investment Company Institute Letter at 8-9.

Based on the comments received, the Commission understands that the provision of brokerage account information through Form 13H could burden some large traders in light of current industry practices. While this information could be of value to the Commission, the Commission has determined to not adopt Schedule 6 as proposed. Instead, the adopted Form requires that large traders identify the registered broker-dealers at which the large trader or any of its Securities Affiliates has an account and disclose whether each such broker-dealer provides prime broker, executing broker, and/or clearing broker services. If the Commission needs more specific individual account-level information, it can use the provided list of broker-dealers and the services they provide to make targeted requests to those entities for more detailed information.

154

In addition, the Commission notes that it may contact the large trader directly pursuant to Rule 13h-1(b)(4) to seek additional information to further identify the large trader and all accounts through which the large trader effects transactions.

155

154

Under Exchange Act Rules 17a-25 and 13h-1, broker-dealers are required to maintain and report the applicable account numbers in which a transaction was effected. Accordingly, the Commission will obtain information on account numbers in connection with a particular request for data.

155

One commenter suggested it was unnecessary to collect brokerage account information because, if necessary, the Commission could request more detailed information from the large trader pursuant to proposed Rule 13h-1(b)(4).

See

Investment Adviser Association Letter at 7.

One of the commenters who suggested this approach cautioned that any list of broker-dealers provided by large traders should be kept confidential because leakage of such information (and particularly leakage of changes to such a list) could impact the stock price of publicly traded broker-dealers on that list.

156

The confidential treatment of all information collected through Form 13H is discussed below.

156

See

Investment Company Institute Letter at 9, n.18.

g. Confidentiality

A number of commenters underscored the sensitive nature of the information collected on Form 13H and expressed support for the Commission's position that the information would be protected as contemplated by the Market Reform Act.

157

Two commenters expressed concern about the risk of theft and/or inadvertent disclosure of private client names and account numbers.

158

One commenter asked whether the Commission would share information about Unidentified Large Traders with other regulatory agencies for supervisory or enforcement purposes.

159

Additionally, two commenters suggested that the Commission monitor for misuses of confidential information such as front-running.

160

157

See, e.g.,

Wellington Management Letter at 6; Financial Engines Letter at 7; Investment Adviser Association Letter at 10; and Investment Company Institute Letter at 2, 4.

158

See

Anonymous e-mail dated June 22, 2010 and Managed Funds Association Letter at 3-4.

159

See

SIFMA Letter at 19.

160

See

T. Rowe Price Letter at 2 and Investment Adviser Association Letter at 10.

The Commission is committed to maintaining the information collected pursuant to Rule 13h-1 in a manner consistent with Section 13(h)(7) of the Exchange Act.

161

The statute specifies that the Commission shall not be compelled to disclose information collected from large traders and registered broker-dealers under a large trader reporting system, subject to limited exceptions. Specifically, the statute provides that:

161

See

15 U.S.C. 78m(h)(7).

Nothing in this subsection shall authorize the Commission to withhold information from Congress, or prevent the Commission from complying with a request for information from any other Federal department or agency requesting information for purposes within the scope of its jurisdiction, or complying with an order of a court of the United States in an action brought by the United States or the Commission. For purposes of section 552 of title 5, United States Code, this subsection shall be considered a statute described in subsection (b)(3)(B) of such section 552.

162

15 U.S.C. 78m(h)(7).

The legislative history of Exchange Act Section 13(h) suggests that Congress: (1) Understood that confidential information that could reveal proprietary trading strategies to competitors would be collected and correspondingly restricted public access to this information; and (2) crafted the exceptions to (a) ensure that it could obtain information from the

Commission; (b) allow the Commission to grant access to federal departments and other federal agencies acting within the scope of their jurisdictions; and (c) allow the Commission to comply with an order of a court of the United States in certain actions.

163

See

Senate Report,

supra

note 14, at 41.

While the Commission must share the information it collects on large traders as outlined above, the Commission is committed to protecting the confidentiality of that information to the fullest extent permitted by applicable law. By assuring large traders of the confidentiality of information they provide to the Commission, the Commission is addressing commenters' concerns.

B. Broker-Dealers: Recordkeeping, Reporting, and Monitoring

As proposed, Rule 13h-1 would impose recordkeeping and reporting responsibilities 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. In addition, the proposed rule would require certain registered broker-dealers to implement procedures to encourage and foster compliance with the self-identification requirements of the proposed rule. As discussed in greater detail below, after considering the comments received on the Rule's application to registered broker-dealers, the Commission is adopting these provisions of the Rule substantially as proposed, but with some modifications to reflect certain comments and to clarify the requirements applicable to registered broker-dealers.

1. Recordkeeping Requirements

The Commission received few comments concerning the proposed recordkeeping requirements,

164

and is adopting Rule 13h-1(d) substantially as proposed with one modification.

165

As proposed, every registered broker-dealer would have been required to maintain records of information for, among others, “(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.” The Commission is not adopting the requirement to maintain records for accounts over which such broker-dealer exercises investment discretion together with a large trader or an Unidentified Large Trader.

164

See

SIFMA Letter at 10, 14 and Financial Information Forum Letter at 5.

165

While paragraph (d)(2) of the Rule sets forth the information that is to be maintained for each transaction, subparagraph (xiii) requires that the broker-dealer record the LTIDs “associated with the account, unless the account is for an Unidentified Large Trader.” This provision effectively requires that a broker-dealer tag an LTID to an account rather than to each transaction. In addition, for an Unidentified Large Trader, the Commission expects broker-dealers to assign their own unique identifier to the applicable account(s).

As described above, in connection with the requirement for large traders to disclose on Form 13H a list of broker-dealers at which a large trader or any Securities Affiliate has an account rather than a list of account numbers at such broker-dealers as proposed, the Commission is not adopting the proposed requirement that large traders disclose their LTIDs to other large traders.

166

Thererfore, large traders will not be required to communicate their LTIDs to other traders, and, consequently, there is no mechanism in the Rule for a large trader to be informed of the status of another trader with whom it jointly exercises investment discretion.

166

See

discussion

supra

at Section III.A.2.b. The proposed requirement that large traders disclose their LTIDs to other large traders was intended to facilitate the ability of a large trader to complete Form 13H, including the provisions that required it to identify its account numbers and the LTID of any trader with whom it shared investment discretion over the account.

Similarly, the Commission believes it is appropriate to narrow the scope of the recordkeeping duty concerning accounts over which a broker-dealer exercises investment discretion together with a large trader or an Unidentified Large Trader. Accordingly, under the Rule as adopted, registered broker-dealers must maintain records 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 or (ii) if the broker-dealer is a large trader, any proprietary or other account over which such broker-dealer exercises investment discretion. As a practical matter, however, the Commission will continue to have access to records of any account over which a broker-dealer exercises investment discretion together with a large trader or an Unidentified Large Trader by virtue of the fact that such an account is an account of a large trader subject to the recordkeeping requirements.

In addition, the Commission is adopting as proposed the requirement that, 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 maintain records of all of the required information.

One commenter asked whether registered broker-dealers would be required to maintain records of transactions by inactive large traders.

167

In the Proposing Release, the Commission stated that an inactive large trader could inform its broker-dealers of its Inactive Status and request that they discontinue tagging its transactions with its LTID.

168

The Rule does not require a broker-dealer to maintain records of transactions by an inactive large trader after receiving notice from the large trader that the trader had filed for inactive status with the Commission on Form 13H.

167

See

Financial Information Forum Letter at 5.

168

See

Proposing Release,

supra

note 3, at 21464. As discussed above, Inactive Status relieves a former large trader from having to file and amend Form 13H with the Commission. The Rule, however, does not specifically require a registered broker-dealer to discontinue tagging the trader's transactions with its LTID. As discussed below, Form 13H and the information contained therein, is confidential. Accordingly, the Commission would not reveal a large trader's status to a broker-dealer that sought to confirm a reported Inactive Status.

One commenter asked the Commission to clarify Rule 13h-1(d)(5),

169

which requires that 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).”

170

Specifically, the commenter asked whether, by requiring that records be available on Saturdays and holidays, the Commission expects that broker-dealers might be required to submit transaction data on Saturdays and holidays. The Commission notes that the Rule contemplates that broker-dealers might be called upon by the Commission to report data to the Commission on a Saturday or holiday, consistent with the legislative history that accompanies Section 13(h).

171

Depending on the

urgency of the situation, the Commission may need prompt access to large trader data and the Rule contemplates that possibility.

172

The provisions applicable to the reporting of data to the Commission are discussed below.

169

See

Financial Information Forum Letter at 3.

170

See id.

171

See

Senate Report,

supra

note 14, at 40.

See also

Section 13(h) of the Exchange Act, 15 U.S.C. 78m(h)(2), providing that “[r]ecords shall be

reported to the Commission * * * immediately upon request by the Commission

* * *.”

172

The Commission notes that while new Rule 13h-1(d)(5) governs the

availability

of data, new Rule 13h-1(e) governs the

reporting

of transaction data by broker-dealers to the Commission. Specifically, that provision requires registered broker-dealers to submit transaction data “no later than the day and time specified in the request for transaction information, which shall be no earlier than the opening of business of the day following such request, unless in unusual circumstances the same-day submission of information is requested.” Accordingly, while information must be available on the morning after the transaction was effected, the reporting deadline is based upon the day of the Commission's request.

2. Reporting Requirements

As proposed, Rule 13h-1(e) would require 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 to report to the Commission upon request records they keep pursuant to Rule 13h-1(d)(1). In addition, as proposed, 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 would be required to report such records.

As described above, the Commission is not adopting the proposed requirement on large traders to disclose their LTIDs to other large traders.

173

The Commission believes it is appropriate to similarly narrow the scope of the reporting duty to not extend the reporting requirement to broker-dealers that exercise investment discretion over an account together with a large trader or an Unidentified Large Trader.

173

See

discussion

supra

at Section III.A.2.b.

Accordingly, as adopted, upon the request of the Commission, every registered broker-dealer who is itself a large trader or carries an account for a large trader or an Unidentified Large Trader shall electronically report to 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 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 such information.

Broker-dealers will be required to report a particular day's trading activity if it equals or exceeds the “reporting activity level” of 100 shares.

174

Transaction reports must be submitted to the Commission no later than the day and time specified in the request for transaction information, which shall be no earlier than the opening of business of the day following such request, unless in unusual circumstances the same-day submission of information is requested.

175

174

New Rule 13h-1(a)(8) defines 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.” The Commission solicited comment about a number of aspects of the proposed reporting activity level,

see

Proposing Release,

supra

note 3, 75 FR at 21473, but received no comments regarding the proposed threshold.

175

Cf.

Exchange Act Section 13(h)(2), 15 U.S.C. 78m(h)(2), which 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.”

The Commission solicited

176

and received comments regarding the reporting duty of registered broker-dealers.

177

One commenter, in observing that the proposed rule would require registered broker-dealers to submit transaction data to the Commission before the close of business on the day specified in the request for such transaction information, asked for clarification about whether the day could be the same day the request is made.

178

The same commenter suggested that the Commission should allow registered broker-dealers a full business day, based on the time of the request, to respond to data requests.

179

Other commenters suggested longer periods. One suggested two days,

180

and one suggested affording registered broker-dealers 10 business days to respond, which could be shortened over time to three business days.

181

The latter commenter opposed the proposed deadline, stating that broker-dealers' existing infrastructure cannot respond to data requests for large trader transactions within one business day. As noted in the Proposing Release, the Commission expects that certain system enhancements will be required to prepare broker-dealers' existing EBS infrastructure for compliance with Rule 13h-1, including the provisions regarding the availability of data.

182

While the Commission does not anticipate that, under normal circumstances, it would request delivery of large trader transaction data on the same day the request is made, the Commission believes it is important that it have the flexibility to do so if required by the urgency of the situation.

183

176

See

Proposing Release,

supra

note 3, 75 FR at 21473.

177

See, e.g.,

Financial Information Forum Letter at 4 and SIFMA Letter at 13-17.

178

See

Financial Information Forum Letter at 2.

179

See id.

180

See

Prudential Letter at 5.

181

See

SIFMA Letter at 15.

182

See

Proposing Release,

supra

note 3, 75 FR at 21471.

183

The Commission notes that the Rule requires that trade data be available for reporting to the Commission on the morning after the day the transactions were effected (which could include Saturdays and holidays). As specified in new Rule 13h-1(e), in response to a Commission request for transaction data, the information must be reported to the Commission no later than the day and time specified in the request for transaction information, which shall be no earlier than the opening of business of the day following such request, unless in unusual circumstances the same-day submission of information is requested.

In response to the requests of commenters to provide additional guidance on the expected timeframe within which broker-dealers would need to submit transaction data to the Commission, the Commission is adopting a modified version of Rule 13h-1(e) to provide that reports of transactions must be “submitted to the Commission no later than the day and time specified in the request for transaction information, which shall be no earlier than the opening of business of the day following such request, unless in unusual circumstances the same-day submission of information is requested.”

The Commission understands from one commenter that EBS data processes are normally done during overnight batch runs.

184

In light of these considerations, the Commission believes it would be appropriate for broker-dealers to utilize any overnight process they may have currently in production, and the Rule as adopted provides that the Commission will normally request reports to be submitted in manner that allows time for such overnight processing.

184

See

Financial Information Forum Letter at 3.

However, under unusual circumstances, the Commission may request more immediate responses that may require some broker-dealers to perform a manual process in order to provide reports to the Commission

sooner than could be accommodated by an overnight batch process. For example, on the morning following a market event such as May 6, 2010, the Commission could request data about the prior day to be submitted the same day as the request is made. The Commission recognizes that under these circumstances, depending on the nature of broker-dealer's systems, the report data may be preliminary and require updating by the opening of business of the day following the request. One commenter inquired whether registered broker-dealers would be required to submit transaction data directly to the Commission instead of through the normal channel for EBS submissions.

185

As adopted, Rule 13h-1(e) requires that reports be submitted “electronically, in machine-readable form and in accordance with a format specified by the Commission that is based on the existing EBS system format.” Like Exchange Act Rule 17a-25, this provision does not require (or prohibit) preparation or transmission of reports by any intermediary. However, as stated in the Proposing Release, in order to mitigate costs on registered broker-dealers, the Commission intends to utilize the existing infrastructure of the EBS system for the large trader reporting rule.

185

See id.

Another commenter asked whether the Commission intended to request transaction data according to LTID.

186

The Commission expects that it would, on occasion, request EBS data according to LTID. A narrowly-focused request for transaction records of a particular large trader would help the Commission obtain in the most efficient manner possible targeted and limited data and should reduce the burden on broker-dealers by allowing them to provide smaller files in response to an EBS request for records of specific large traders.

186

See id.

at 2.

One commenter recommended using the OATS system maintained by the Financial Industry Regulatory Authority (“FINRA”) instead of the EBS system for the large trader reporting rule. The commenter pointed out that, unlike the EBS system, OATS processes are tied to front office order and execution systems and thus could more readily incorporate the proposed new field of execution time.

187

Further, the commenter noted that OATS should be able to provide next day reporting.

188

The Commission, however, believes that the large trader reporting requirements can be most efficiently implemented and operated through relatively modest enhancements to the existing EBS system. Use of OATS, which is maintained by FINRA, would involve expanding OATS to additional categories of securities (

e.g.,

options) and making additional enhancements to accommodate the records that would need to be kept pursuant to the Rule. For these reasons, the Commission does not believe basing the large trader reporting rule on OATS is appropriate at this time.

187

See

SIFMA Letter at 15.

188

See id.

3. Monitoring Requirements

Overview of Proposed Rule.

Under proposed Rule 13h-1(d) and (e), certain registered broker-dealers would be subject to recordkeeping and reporting responsibilities for their customers that meet the criteria for Unidentified Large Traders. Proposed Rule 13h-1(a)(9) defined “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 proposed Rule provided that 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.”

In assessing whether a broker-dealer “has reason to know” whether one of its customers may be a large trader, the proposed rule effectively would have required the broker-dealer to take into account trading activity in its own customer accounts.

Proposed Rule 13h-1(f) also contained a safe harbor that was designed to reduce the broker-dealer's burdens in connection with monitoring its customers' trading for purposes of identifying possible large traders.

189

The safe harbor in proposed Rule 13h-1(f) required reasonably designed systems to detect and identify persons that may be large traders—based upon transactions effected through an account or group of accounts or other information readily available to the broker-dealer. Further, the proposed safe harbor required reasonably designed systems to inform such persons of their potential obligations under Rule 13h-1.

189

See

Proposing Release,

supra

note 3, 75 FR at 21470.

The proposed monitoring requirements were intended to promote awareness of and foster compliance with Rule 13h-1 by customers who might not be aware of their large trader reporting responsibilities. As noted in the Proposing Release, the proposed rule placed “the principal burden of compliance with the identification requirements on large traders themselves”

190

while the broker-dealer monitoring requirements were intended to be “limited” and “a necessary backstop to encourage compliance and fulfill the objectives of Section 13(h) of the Exchange Act.”

191

190

Id.

191

Id.

Comments Received.

In the Proposing Release, the Commission requested comments on the proposed monitoring requirements and the related safe harbor.

192

The Commission received several comments that addressed the proposed duty to monitor customers for purposes of Rule 13h-1.

193

One commenter asserted that the Commission lacks the statutory authority to impose a monitoring requirement on registered broker-dealers in connection with the large trader reporting rule.

194

A few commenters asked for clarification of the monitoring requirements and offered alternatives.

195

Of those commenters that addressed the issue, most were critical of the proposed monitoring requirements.

196

One commenter characterized the role of broker-dealers under the proposed rule as “gatekeepers,” and asserted that “the proposed rule would impose on broker-dealers much of the operational monitoring regarding registration of large traders.”

197

Two commenters asked whether the Rule would require broker-dealers to stop doing business with Unidentified Large Traders.

198

One of those commenters asserted that it should not because that would have the unintended consequence of driving customers to broker-dealers who may be less diligent in monitoring for large traders.

199

These two commenters also requested guidance about whether the monitoring provisions required any

specific policies and procedures.

200

Another commenter asked whether a broker-dealer has a duty to proactively determine whether a customer is an Unidentified Large Trader based on the broker-dealer's knowledge that its customer maintains accounts at other broker-dealers.

201

192

See id.

at 21472-73.

193

See, e.g.,

Financial Information Forum Letter at 4-5; GETCO Letter at 3; and SIFMA Letter at 9-13.

194

See

SIFMA Letter at 11.

195

See, e.g.,

Financial Information Forum Letter; SIFMA Letter; and GETCO Letter.

196

One commenter described the proposed safe harbor as “anything but safe” and, as discussed above, asserted that the proposal exceeds the Commission's statutory authority because, among other reasons, the safe harbor provided that a registered broker-dealer would have reason to know that a customer is an Unidentified Large Trader based on other readily available information, as well as transactions effected through the broker-dealer.

See

SIFMA Letter at 11.

197

Id.

at 9.

198

See id.

at 11 and Financial Information Forum Letter at 5.

199

See

SIFMA Letter at 11.

200

See id.

at 10 and Financial Information Forum Letter at 5.

201

See

SIFMA Letter at 10.

Summary of Monitoring Requirements in Final Rule.

The Commission addresses these comments below, but for purposes of clarity we also will briefly summarize the monitoring requirements in the final Rule. As adopted, the Rule requires that a registered broker-dealer treat as an Unidentified Large Trader (for purposes of the recordkeeping and reporting provisions in paragraphs (d) and (e) of the Rule) any person that the broker-dealer “knows or has reason to know” is a large trader where such person has not complied with the identification requirement applicable to large traders (

i.e.,

identified itself as a large trader to the broker-dealer and disclosed the accounts to which its LTID applies). As noted in Rule 13h-1(a)(9), in considering whether the broker-dealer has “reason to know” that a person is a large trader, however, the broker-dealer need take into account only transactions in NMS securities effected by or through such broker-dealer (

i.e.,

it need not seek out information on transactions effected by that person through another broker-dealer). Moreover, a broker-dealer may determine that it has no “reason to know” that a person is a large trader through two methods. First, the broker-dealer may simply conclude, based on its knowledge of the nature of its customers an

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