Recordkeeping and Reporting Requirements for Trading Systems Operated by Brokers and Dealers

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249

[Release No. 34-35124; File No. S7-3-94]

RIN 3235-AG03

Recordkeeping and Reporting Requirements for Trading Systems

Operated by Brokers and Dealers

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission is adopting Rule 17a-23

(``Rule'') and Form 17A-23 under the Securities Exchange Act of 1934 to

establish recordkeeping and reporting requirements for brokers and

dealers that operate automated trading systems. Under the Rule,

registered broker-dealers that sponsor these systems would be required

to maintain participant, volume, and transaction records, and to report

system activity to the Commission and, in certain circumstances, to an

appropriate self-regulatory organization.

EFFECTIVE DATE: June 1, 1995.

FOR FURTHER INFORMATION CONTACT: Kristen N. Geyer, Senior Counsel, 202/

942-0799, Office of Automation and International Markets, Division of

Market Regulation, Securities and Exchange Commission (Mail Stop 5-1),

450 Fifth Street, N.W., Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION:

I. Introduction and Summary

On February 9, 1994, the Securities and Exchange Commission

(``Commission'') proposed for comment Rule 17a-23 (``Proposed

Rule'')1 and Form 17A-23 (``Proposed Form'')2 under the

Securities Exchange Act of 1934 (``Act'').3 The Proposed Rule

would have required specific recordkeeping and reporting by registered

broker-dealer sponsors of certain automated trading systems (as defined

in the Rule, ``Broker-Dealer Trading System,'' or ``BDTS''). The

Proposed Form specified the information to be included in each filing

required by the Proposed Rule.

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\1\17 CFR 240.17a-23.

\2\17 CFR 249.636.

\3\15 U.S.C. 78a et seq. See Securities Exchange Act Release No.

33605 (Feb. 9, 1994), 59 FR 8368 (``Proposing Release'').

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The Commission received ten comment letters in response to the

Proposing Release. Commenters generally supported the Proposed Rule's

goal of standardizing recordkeeping and reporting for BDTSs.4 The

majority of commenters recommended specific modifications to the

Proposed Rule. Two commenters, the National Association of Securities

Dealers (``NASD'') and the New York Stock Exchange (``NYSE''), objected

to the Commission's overall regulatory treatment of certain BDTSs and

the competitive implications of such regulatory treatment.5

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\4\The comment letters and a summary of comments prepared by the

Division of Market Regulation have been placed in Public File No.

S7-3-94, which is available for inspection in the Commission's

Public Reference Room. Commenters consisted of two industry

associations, two self-regulatory organizations, four sponsors of

automated proprietary trading systems, and two automated broker-

dealers. See letters from: John F. Olson, Chair, Committee on

Federal Regulation of Securities, and Roger D. Blanc, Chair,

Subcommittee on Market Regulation, the Business Law Section of the

American Bar Association, dated May 10, 1994 (``ABA''); Robert A.

McTamaney, Attorney, Carter, Ledyard & Milburn (representing RMJ

Securities Corporation, RMJ Options Trading Corporation, and RMJ

Special Brokerage, Inc.), dated April 15, 1994 (``CLM/RMJ''); John

E. Herzog, Chairman & CEO, Herzog, Heine, Geduld, dated April 12,

1994 (``HHG''); Charles R. Hood, Senior Vice President & General

Counsel, Instinet Corporation, dated April 25, 1994 (``Instinet'');

Alan D. Rudolph, Vice President, Intervest Financial Services, Inc.

and President, CrossCom Trading Network, Inc., dated March 15, 1994

(``Intervest''); Raymond L. Killian, Jr., President & CEO,

Investment Technology Group, Inc. (sponsor of Portfolio System for

Institutional Trading (``POSIT'')), dated May 18, 1994 (``ITG'');

Leonard Mayer, Vice President, Mayer & Schweitzer, Inc., dated July

11, 1994 (``M&S''); Joseph R. Hardiman, President, National

Association of Securities Dealers, Inc., dated May 27, 1994

(``NASD''); John E. Buck, Senior Vice President & Secretary, New

York Stock Exchange, dated June 30, 1994 (``NYSE''); and Mark T.

Commander, Chairman of Self-Regulation & Supervisory Practices

Committee, Securities Industry Association, dated June 17, 1994

(``SIA'').

\5\See letters from NASD and NYSE. The NASD expressly opposed

adoption of the Proposed Rule.

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After considering the comments, the Commission is adopting the Rule

and Form, with certain modifications. The Commission does not believe

that these modifications materially alter the scope of the Proposed

Rule or the entities to which it applies. The recordkeeping and

reporting approach adopted in the Rule will provide the Commission with

information necessary to effectively monitor, evaluate, and examine

such systems.

II. Basis and Purpose of the Rule

In January 1994, the Commission's Division of Market Regulation

(``Division'') published its Market 2000 Study,6 which reviewed,

among other things, the Commission's existing oversight of automated

trading systems. The Study recognized that the activities of such

systems differ from the activities of traditional broker-dealers, and

recommended that the Commission closely monitor the effects of

proliferation of such systems.7 The Commission proposed Rule 17a-

23 immediately following publication of the Market 2000 Study.8

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\6\Division of Market Regulation, Market 2000: An Examination of

Current Equity Market Developments (January 1994) (``Market 2000

Study'').

\7\Id. at 26-27.

\8\See Proposing Release, supra note 3. Concurrently with the

publication of the Proposed Rule, the Commission withdrew a previous

rule proposal (Rule 15c2-10) which would have required certain BDTSs

to seek Commission approval prior to operation of a proprietary

trading system and imposed additional conditions on the operation of

such systems. The Commission concluded that, based on its experience

since 1989 in overseeing BDTSs, including the proposal of Rule 17a-

23, a separate regulatory structure governing proprietary trading

systems was not necessary at this time. See Securities Exchange Act

Release No. 33621 (Feb. 14, 1994), 59 FR 8379.

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The majority of commenters supported the concept of a recordkeeping

and reporting rule and recognized the importance of ongoing monitoring

and evaluation of technological advances in the securities

industry.9 Several commenters, however, questioned the necessity

for applying the Proposed Rule to specific types of systems. In

particular, two commenters suggested that the Proposed Rule should not

apply to systems that allow a dealer's customers and other dealers to

execute orders against the sponsoring dealer's bid or offer (i.e.,

``hit'' the sponsor's quotations) through automated means (``automated

dealer systems'').10 Another commenter objected to application of

the Proposed Rule to non-equity systems.11

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\9\See, e.g., Letter of ABA, at 1; Letter of HHG, at 1; Letter

of ITG, at 1; and Letter of M&S, at 2.

\1\0See Letter of ABA, at 3; Letter of NASD, at 6.

\1\1See Letter of CLM/RMJ, at 3.

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In the Proposing Release, the Commission noted that, although

automated systems have proliferated in the securities industry, the

Commission receives little information about such systems.12 The

Commission concluded that its efforts to gauge the effect of automation

on the U.S. markets and to regulate broker-dealers that operate such

systems appropriately are being hindered by a lack of critical

information regarding the activity of BDTSs.

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\1\2The extent of information currently accessible to the

Commission, the history of the Commission's oversight of such

systems, and other background information can be found in the

Proposing Release. See Proposing Release, supra note 3, 59 FR at

8369-71. Currently, BDTSs are subject to Commission oversight

through broker-dealer registration, recordkeeping, and reporting

requirements in the Act. In addition, sponsors of a number of BDTSs

have obtained no-action assurances from the Division that it will

not recommend enforcement action if the systems operate without

registering as exchanges. These staff no-action letters require

supplemental recordkeeping and reporting by the sponsor as a

condition of the no-action position. See Proposing Release, supra

note 3, 59 FR at 8369. The Rule does not address the issue of

whether a particular trading system may be required to register as a

national securities exchange, clearing agency, or other self-

regulatory organization. Sponsors of BDTSs seeking relief from

exchange, clearing agency, and other registration requirements may

continue to request no-action positions from the Division.

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The Commission identified three ways in which additional

information about BDTSs would assist in evaluating, monitoring, and

examining such systems. First, the Rule will allow the Commission to

evaluate BDTSs with regard to national market system goals.13 The

Commission noted in the Proposing Release that BDTSs have the potential

to significantly affect trading patterns, market transparency, and the

distribution of trading activity among different markets; consequently,

access to uniform, reliable information about BDTSs is critical to the

Commission's evaluation of these issues.14 This is true regardless

of whether such systems automate the market-making function, automate

an order-interaction function, or automate trading of illiquid or non-

equity securities.

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\1\3See Proposing Release, supra note 3, 59 FR at 8369-70.

\1\4For example, in its Market 2000 Study, the Division

advocated improving transparency for limit orders and after-hours

trading, order-exposure rules, disclosure of broker-dealer order-

handling practices, assessment of market quality by users of

automated routing systems, and surveillance of third market trading.

Market 2000 Study, supra, note 6, at 16-32. The Commission's

consideration of each of these issues is directly affected by its

understanding of different trading mechanisms, including BDTSs. In

particular, the Commission must examine how, and the extent to

which, order flow is directed to different trading mechanisms, the

extent to which orders entered into different trading mechanisms are

integrated into national quotation and trade reporting systems, the

extent to which various trading mechanisms offer price improvement,

and the order handling and execution practices of different trading

mechanisms. Information reported pursuant to the Rule will assist

the Commission in understanding how BDTSs operate and how they

interact, and are integrated, with other market participants and

mechanisms, and consequently will assist the Commission in

evaluating these issues.

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Second, the information will help the Commission to monitor the

competitive effects of these systems and to ascertain whether broker-

dealer regulation remains appropriate for the operation of

BDTSs.15 As is clear from the comments, the ongoing debate

regarding the competitive consequences of the Commission's regulation

of BDTSs remains vigorous.16 Finally, the Rule will help the

Commission identify areas where monitoring of such systems may be

improved and where self-regulatory organization (``SRO'') surveillance

may be more appropriately tailored to the detection of fraudulent,

deceptive, and manipulative practices in an automated

environment.17

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\1\5See Proposing Release, supra note 3, 59 FR at 8370.

\1\6Three commenters discussed the competitive implications of

the Commission's adoption of a recordkeeping and reporting rule

applicable to BDTSs. See Letter of ABA, at 2; Letter of NASD, at 5;

and Letter of NYSE, at 2-4. Two of these commenters, the NASD and

NYSE, opposed the Commission's determination not to adopt previously

proposed Rule 15c2-10, which would have subjected sponsors to a

number of procedural and substantive requirements. Cf. Securities

Exchange Act Release No. 26708 (April 13, 1989), 54 FR 15429;

Proposing Release, supra note 3, 59 FR at 8369.

\1\7See Proposing Release, supra note 3, 59 FR at 8370-71.

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Notwithstanding the views of commenters that the risks posed by

automated market-maker systems are sufficiently addressed by existing

broker-dealer regulations18 or that automated systems are less

susceptible to manipulation than traditional broker-dealers,19 the

Commission believes that the evolution of both automated broker systems

and automated dealer systems present new challenges in maintaining

market quality and customer protection. BDTSs contribute to the

concentration of order flow among a few, large, automated broker-

dealers, execute trades at a more rapid rate than traditional services,

and make execution of the customers' orders dependent on the

reliability of the automated system rather than individual traders.

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\1\8See Letter of ABA, at 2; Letter of NASD, at 5.

\1\9See Letter of Instinet, at 2-4.

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The Commission believes that the Rule as adopted will provide

important information to assist it in accomplishing these goals,

without imposing unnecessary or overly burdensome requirements that do

not relate to the purposes of the Rule.

III. Discussion

As adopted, the Rule requires a registered broker-dealer who acts

as the sponsor20 of a ``broker-dealer trading system'' to make and

keep current specified records, and file reports with the Commission

(and, in certain circumstances, with the appropriate SRO) on Form 17A-

23.

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\2\0The Rule defines a sponsor as ``any entity that organizes,

operates, administers, or otherwise directly controls a broker-

dealer trading system.'' In addition, the Rule includes within this

term any registered broker-dealer that regularly executes

transactions on behalf of participants of a system operated by a

non-registered entity. See Proposing Release, supra note 3, 59 FR at

8371.

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A. Scope of the Rule and Application to Specific Types of Systems

The Rule as proposed and adopted would apply to registered brokers

or dealers21 that sponsor a ``broker-dealer trading system.''

Commenters requested clarification of which automated systems would be

considered ``broker-dealer trading systems'' as defined in the Proposed

Rule.22 Several commenters suggested narrowing the definition of

BDTS to exempt certain systems. In particular, two commenters

questioned the inclusion of automated dealer systems that allow a

dealer's customers and other dealers to execute against the sponsoring

dealer's bids and offers.23 One commenter also recommended that

the Commission exempt non-equity trading systems from application of

the Proposed Rule.24 In view of the comments, the Commission has

simplified the definition of BDTS and clarified the Rule's application

to various systems, as discussed below, but has not materially altered

the scope of the Rule.

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\2\1As noted in the Proposing Release, absent an exemption from

or exception to the broker-dealer registration provisions of the

Act, the types of activities conducted by BDTSs can be lawfully

conducted only by a broker-dealer registered with the Commission

pursuant to the Act. See Proposing Release, supra note 3, 59 FR at

8371. The Commission notes that the term ``registered broker or

dealer'' is defined in Section 3(a)(48) of the Act, and includes the

majority of broker-dealers. The term does not include government

securities brokers or government securities dealers registered under

Section 15C of the Act, which are required to comply with the

recordkeeping and reporting requirements promulgated by the

Department of the Treasury, 17 CFR 400 et seq., under the Government

Securities Act of 1986, 15 U.S.C. 78o-5. Accordingly, the Rule would

not apply to systems sponsored by broker-dealers registered solely

under Section 15C of the Act. In addition, the Rule would not apply

to operators of systems that do not involve activities requiring

broker-dealer registration. See Letters regarding Farmland

Industries, Inc. (Aug. 26, 1991); Troy Capital Services, Inc. (May

1, 1990); Real Estate Financing Partnership (May 1, 1990); Ivestex

Investment Exchange, Inc. (April 9, 1990); and Petroleum Information

Corporation (Nov. 28, 1989). Cf. Securities Exchange Act Release No.

27017 (July 11, 1989), 54 FR 30013, text accompanying n.66.

\2\2See, e.g., Letter of NASD, at 7. The Proposed Rule defined

``broker-dealer trading system'' as:

(i) any system that automates the execution of orders to buy or

sell securities based on quotations of the system sponsor or its

affiliates (whether such quotations are disseminated through the

system, a quotation consolidation system operated pursuant to a plan

approved by the Commission under Section 11A of the Act, an

electronic interdealer quotation system operated by a registered

national securities association, or otherwise); or

(ii) any system that both automates the dissemination or

collection of quotations, orders to buy or sell securities, or

indications by any person announcing a general interest in buying or

selling a security, submitted by entities other than the system

sponsor and its affiliates, and provides a mechanism for matching or

crossing, or for otherwise facilitating agreement between

participants to the basic terms of a purchase or sale of a security

through use of the system.

See Proposing Release, supra note 3, 59 FR at 8374.

\2\3See Letter of ABA, at 3; Letter of NASD, at 6.

\2\4See Letter of CLM/RMJ, at 3.

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The definition of ``broker-dealer trading system'' has been

modified in the Rule to mean any system that meets the following

criteria: the system must provide a mechanism, automated in full or in

part, for (1) collecting or disseminating system orders and (2)

matching, crossing, or executing system orders, or otherwise

facilitating agreement to the basic terms of a purchase or sale of a

security between system participants, or between a system participant

and the system sponsor, through use of the system. As made clear in the

Rule, the term ``broker-dealer trading system'' does not include any

system that does not meet both of these requirements.

The modified definition of BDTS captures the essential features of

the types of systems that the Proposed Rule was intended to encompass.

The Proposed Rule also described several types of systems that were

excluded from the definition of BDTS.25 As discussed below, the

Commission believes that those systems continue to be excluded from the

Rule as adopted, because they do not meet the required characteristics

of a BDTS as defined.26

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\2\5One commenter noted that the Proposing Release discussed

other systems that the Proposed Rule would not encompass, but that

were not expressly excluded from the definition of BDTS. The

commenter requested that the Commission reconcile the Rule with the

excluded systems described in the Proposing Release. See Letter of

ABA, at 3-4. Given the ongoing evolution of automated trading

systems, however, the Commission believes it would be impractical to

attempt to enumerate all types of systems that would not be

considered ``broker-dealer trading systems'' under the Rule. In view

of this, the Rule as adopted does not contain express exclusions.

\2\6The Proposed Rule excluded certain order routing systems.

See Proposing Release, supra note 3, 59 FR at 8372 (Sections

(b)(2)(ii)(A) and (B) of the Proposed Rule). These systems do not

meet the requirements of the Rule as adopted, and therefore are not

subject to the Rule. Specifically, systems that only allow

participants to post trading interest, or only route orders to the

execution facilities of established markets or other broker-dealers

do not effect the purchase or sale of a security between system

participants or between a system participant and the system sponsor

through the system.

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1. System Automation

As adopted, the Rule applies to systems that may be only partially

automated, as well as to fully automated systems. Some systems may

automate the collection and dissemination of orders through a screen

available for viewing by participants, but require participants to

contact the sponsor by telephone in order to finalize a trade based on

such orders. Other systems may collect orders via telephone contact

with customers, and enter those orders into a system that automates the

matching of such orders. Although neither of these systems are

``fully'' automated, both are BDTSs under the Rule as adopted. The lack

of complete automation does not alter the potential market effects of

automated execution systems, nor does it alter the need to tailor

oversight of the sponsor to reflect the distinctive characteristics of

automated systems. The Commission notes in particular that it is not

necessary for participants to have the ability to enter orders

electronically through a system terminal or screen in order for the

system to be subject to the Rule. Some systems permit customers to

participate in the system's matching, crossing, or other features by

communicating orders to the sponsor by telephone, to be entered into

the system by the sponsor's trading personnel.27 This lack of

automated access to a system does not exempt such a system from

application of the Rule.

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\2\7The Commission also notes in this context that transactions

resulting from orders entered into the system through the sponsor's

trading personnel would be considered to be executed through the

system to the same extent as trades entered directly by system

participants. One commenter noted that certain systems may permit

the system sponsor to execute trades manually and to enter the

matched trade into the system for reporting and other execution

related activities. See Letter of M&S, at 2. The commenter suggested

that system sponsors should not be required to segregate out such

trades for purposes of the recordkeeping and reporting requirements

of the Rule. Neither the Rule nor Form 17A-23 requires a system

sponsor to segregate transaction records or reports based on the

method by which the order was accepted into the system (i.e.,

telephone, computer terminal, etc.). System sponsors would not be

required, therefore, to segregate out manually handled trades. The

Commission expects, however, that a system's ability to process

manually handled orders would be described in the system sponsor's

filings pursuant to Part I of Form 17A-23.

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2. System Execution Mechanism

The Rule applies only to those automated trading systems that offer

users the ability to effect securities transactions through their use

of the system, either with other participants or with the system

sponsor. Numerous automated systems have developed that facilitate

securities trading, but do not create opportunities to effect

transactions apart from the facilities of established markets. These

systems range from purely informational ``bulletin board'' systems that

allow participants to announce their trading interest (typically by

posting quotation or order information and participant telephone

numbers on the system's screen)28 to ``routing'' systems that

direct order flow to an exchange or other established market or dealer

but do not otherwise interact with such order flow. Bulletin boards,

routing systems, and other similar systems essentially disperse

information; they do not allow users to effect securities transactions

with other system participants or with the system sponsor through the

system. Accordingly, such systems are not subject to the Rule. In the

Commission's view, these ``non-execution'' systems do not create the

same potential for market effects and correspondingly create less need

for ongoing monitoring and evaluation by the Commission than systems

that fall within the definition of broker-dealer trading system.29

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\2\8The Commission uses the term ``bulletin board systems'' in

this context to mean only those systems that allow participants to

announce their trading interest, but do not provide further

opportunity to interact with the system or the system sponsor to

execute transactions. Such systems do not allow participants to

agree to the terms of a transaction ``through use of the system'';

participants must contact each other outside of system facilities or

the system sponsor to conclude a transaction. Therefore, such

systems do not meet the definition of a BDTS under the Rule, and the

Rule would not apply to these systems.

\2\9Although the Commission requested comment on whether the

Proposed Rule should apply to ``non-execution'' systems, no

commenter suggested that such systems be subject to the Rule. See

Proposing Release, supra note 3, at 8373.

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3. Application of the Rule to Automated Dealer Systems

Two commenters argued that the Proposed Rule only should apply to

systems that offer a ``locked-in trade'' between or among customers or

other dealers as part of an interactive system.30 These commenters

questioned the Commission's rationale for applying the Proposed Rule to

automated dealer systems, arguing that automated dealer systems ``do no

more than what any market-maker has done since the enactment of the

1934 Act,'' other than providing fuller automation of the market-maker

function.31 One commenter supported inclusion of automated dealer

systems in the Proposed Rule.32

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\3\0See Letter of ABA, at 3; Letter of NASD, at 5-6.

\3\1See Letter of NASD, at 6.

\3\2See Letter of NYSE, at 2.

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The Commission has concluded that the Rule should apply to

automated dealer systems as well as other BDTSs. Systems that automate

execution functions make it possible for a broker-dealer to concentrate

a significant volume of securities transactions. This is true whether

such an ``execution'' system allows participants to interact directly

with each other, or whether the system allows participants to interact

with a single dealer. As discussed above and in the Proposing Release,

this potential concentration of volume outside of national market

systems may have significant market effects. The Commission believes

that in today's highly complex, integrated trading environment, it must

fully consider the effect of technological advances on the broker-

dealer's role in both auction market and dealer market trading.33

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\3\3The NASD in its comment letter suggested that market-maker

execution systems should be distinguished from other BDTSs because

the executions provided by a market-maker are based on the market-

maker's own quotes, subject to its best execution obligations and

affect the market-maker's own inventory. According to the NASD,

other BDTSs permit the direct interaction of customer orders or

provide for the quotations of multiple market-makers and are thus

more akin to the functions performed by traditional markets. See

Letter from NASD, at 6. The Commission is not persuaded that this

difference in operation is a sufficient basis on which to exclude

market-maker systems from the Rule. A broker-dealer firm sometimes

trades for its own account as dealer and sometimes for the account

of its customers as broker; in either case, the broker-dealer uses

its facilities to bring together buyers and sellers with the intent

of effecting a securities transaction. See Securities Exchange Act

Release No. 27611 (Jan. 12, 1990), 55 FR 1890, 1898.

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4. Application of Rule to Non-Equity Systems

The Rule as adopted applies both to systems trading equity and

systems trading non-equity securities. One commenter objected to

application of the Proposed Rule to systems that deal exclusively with

non-equity instruments.34 That commenter noted that ``[t]he nature

of and detail imposed by these recordkeeping and reporting requirements

suggest that the real intention behind the Proposed Rule is to enable

the SEC to gather and evaluate information on BDTSs dealing in equity

instruments only.''35

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\3\4See Letter of CML/RMJ, at 3-5.

\3\5Id. In addition to CML/RMJ, one other sponsor of a system

trading non-equity securities commented on the Proposed Rule. See

Letter of Intervest.

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The need for uniform, reliable information as discussed above and

in the Proposing Release is equally applicable to systems trading non-

equity securities. It is probable that sponsors will continue to create

BDTSs to facilitate transactions in products that do not trade in

organized markets, including various debt and derivative products.

Systems that trade these non-equity, and typically less liquid,

securities are especially opaque under existing regulations; they are

not integrated into market quotation and reporting mechanisms to the

same degree as systems that trade equity products. Some of these

``niche'' systems may provide the only readily identifiable source of

trading in a particular instrument. The Rule will help alleviate the

difficulty of obtaining accurate information on a regular basis about

trading in these instruments.

The Commission recognizes that information that is relevant to

equity security trading may not be relevant to non-equity security

trading. Accordingly, the Rule and Form direct the sponsor of a non-

equity trading system to provide information relevant to such non-

equity securities (such as number of bonds, contracts, etc.).36

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\3\6See 17 CFR 240.17a23(c)(1)(ii)(B) and 249.636, Form 17A-23,

Part II, 1.

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B. Regulation of Certain BDTSs

Three commenters urged the Commission to reconsider its regulatory

approach to BDTSs, or in the alternative to reconsider its regulation

of traditional markets.37 Specifically, both the NYSE and the NASD

identified concerns regarding the competitive implications of the

Commission's adoption of a recordkeeping and reporting rule governing

BDTSs in light of the regulatory structures that apply to registered

exchanges and interdealer quotation systems.38 The Commission does

not believe it is necessary at this time to adopt regulations governing

BDTSs beyond those existing requirements applicable to the broker-

dealer sponsors of such systems and the enhanced recordkeeping and

reporting that will be provided pursuant to the Rule. The Commission is

not precluded from reconsidering the issues raised by the commenters

concerning the Commission's regulatory approach to BDTSs at a later

time, should circumstances warrant such reconsideration.

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\3\7See Letter of ABA, at 5-6; Letter of NASD, at 1-7; Letter of

NYSE, at 1-2, 4.

\3\8See Letter of NASD, at 1-4; Letter of NYSE, at 1-2, 4. See

also, Letter of ABA, at 5-6.

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These commenters also urged the Commission to reconsider its

regulation of trading services provided by registered exchanges and

securities associations. In particular, commenters recommended that the

Commission streamline its requirements governing the filing of SRO rule

proposals, and that SROs be allowed to develop trading systems under

the same regulatory requirements applicable to BDTSs.39 In that

regard, the Commission notes that today it has adopted amendments to

the Commission's rules governing the SRO rule filing process.40

The Commission also notes that the regulation of SRO trading services

is largely dictated by statutory requirements. Consequently, SRO

operation of trading systems outside of existing SRO regulations would

require a careful, case-by-case analysis under the Act. BDTSs are

governed by the regulatory structure applicable to other registered

broker-dealers. The Commission has not created a separate regulatory

structure for BDTS trading; it has adopted enhanced recordkeeping and

reporting for such systems.

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\3\9See Letter of ABA, at 5-6; Letter of NASD, at 5; Letter of

NYSE, at 4.

\4\0See Securities Exchange Act Release No. 35123 (December 20,

1994). The amendments expand the category of proposed rule changes

that may become effective upon filing under Section 19(b)(3)(A) of

the Act to include certain changes to existing systems and other

noncontroversial filings.

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C. Recordkeeping Requirements

Under the Rule, system sponsors are required to keep and make

available to the Commission, upon request, records of: (1) daily

summaries of trading in the system; (2) the identities of system

participants (including any affiliations between those participants and

the sponsor); and (3) time-sequenced records of each transaction

effected through the system. The sponsor is required to keep these

records, as well as any notices provided by the sponsor to

participants, for three years (the first two years in an easily

accessible place). The Commission has modified some of the proposed

recordkeeping requirements in response to comments as discussed below.

1. Duplicative Recordkeeping

The Commission requested comment on whether the Proposed Rule's

requirements would be duplicative or burdensome. Commenters suggested

that the recordkeeping requirements appear to be duplicative of those

already required under other rules promulgated under Section 17, and

questioned the justification for such duplication.41 Two

commenters expressed reservations that the Proposed Rule would penalize

broker-dealers that use automation to become more efficient, and would

thus deter further automation.42 Only one commenter stated that

the Proposed Rule would impose undue financial burden on BDTS

sponsors.43 No commenter provided information sufficient to

quantify the extent to which BDTSs would be financially burdened by the

Proposed Rule.

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\4\1See Letter of NASD, at 7. Cf. Letter of SIA, at 2.

\4\2See Letter of ABA, at 3 and Letter of NASD, at 6.

\4\3See Letter of CLM/RMJ, at 3-4.

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While existing regulations require registered broker-dealers to

maintain much of the information required under the Rule, they do not

require broker-dealers to keep records that present BDTS activity

separately from other brokerage activity.44 Consequently, the

Commission does not have ready access to system-specific information.

The Commission's ability, and the ability of SROs,45 to adequately

evaluate, monitor, and examine these systems is correspondingly

limited.46 Although the Rule may result in changes to some

existing BDTS sponsors' recordkeeping practices, the Commission

believes that it has made sufficient provision in the Rule to minimize

the need for BDTS sponsors to keep duplicative records. The Rule does

not dictate a format for maintaining information and does not require

BDTS sponsors to maintain such information separately from its other

records, so long as the sponsor can promptly retrieve such information

upon request in the format, and for the time periods, specified in the

Rule.

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\4\4See Proposing Release, supra note 3, 59 FR at 8368-69.

\4\5Staff of the Division met with representatives of the NASD

to discuss its use of the information provided by the records

maintained pursuant to the Rule and the reports filed pursuant to

Form 17A-23. The Commission expects that the NASD and other SROs

that have the responsibility to examine and otherwise oversee BDTSs

will use such information to tailor their oversight of BDTSs to

reflect the distinctive features of automated broker-dealers.

\4\6See Proposing Release, supra note 3, 59 FR at 8370-71.

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2. Records Regarding Applicants Denied Participation on the System.

Commenters questioned the need to retain information regarding

specific applicants denied participation in the system, and indicated

that quantifying such information would be difficult.47 In view of

the comments, the Commission has deleted this requirement from the

Rule. Sponsors, however, are required to describe, in filings under

Part I and IA of Form 17A-23, the factors relied upon by the sponsor in

granting participation in the system.

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\4\7See Letter of ABA, at 5; Letter of CLM/RMJ, at 5; Letter of

HHG, at 3-4; Letter of Instinet, at 6-7; Letter of ITG, at 2; Letter

of NASD, at 7-8; and Letter of SIA, at 3.

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3. Daily Trading Summaries

The Proposed Rule required sponsors to retain daily summaries of,

among other things, securities trading in the system. The Proposed Rule

also would have required sponsors to retain daily summaries identifying

the number of ``quotations'' and ``orders'' placed in the system,

expressed separately for limit and market orders and other relevant

order specifications. This requirement was intended to provide the

Commission with a basis for comparing potential system trading interest

with trading volume. Commenters expressed concern that the

configuration of specific systems would make it difficult to determine

what would constitute a single ``quotation'' or ``order.''48

Commenters also noted that, depending upon system configuration,

identifying the number of quotations or orders may not provide the

Commission with useful information regarding system trading

interest.49

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\4\8See Letter of ABA, at 4; Letter of HHG, at 3; and Letter of

Instinet, at 8-9.

\4\9See Letter of ABA, at 4 and Letter of Instinet, at 8-9. One

commenter questioned the use of the term ``quotations'' in the

Proposed Rule to refer to trading interest entered into an automated

system, noting that its system users place ``orders,'' not

``quotations.'' See Letter of Instinet, at 8. The Commission does

not believe that such distinctions between the terms ``order'' and

``quotation'' are relevant for purposes of this Rule.

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The Commission has modified the Rule in view of these commenter

concerns regarding the terms ``quotations'' and ``orders.''50 As

adopted, the Rule requires sponsors to identify the number of ``system

orders,''51 or any other identifiable indicator that accurately

reflects participant trading interest, as appropriate in light of

system configuration. If applicable in light of system configuration,

sponsors must express such number separately for priced and unpriced

orders. In modifying this requirement, the Commission relies on the

sponsor's knowledge of its system configuration to determine which

statistics would provide the most accurate assessment of participant

trading interest, and to retain those statistics accordingly.52

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\5\0A corresponding requirement in Form 17A-23, Part II, has

been modified as well, for the reasons discussed above with regard

to modification of the recordkeeping requirement in the Rule.

\5\1The Rule defines ``system order'' as any order or other

communication or indication submitted by any system participant for

entry into the system announcing an interest in purchasing or

selling a security. The Rule also clarifies that the term ``system

order'' does not include inquiries or indications of interest that

are not entered into the system. 17 CFR 240.17a23(b)(4).

\5\2The Commission expects sponsors that intend to fulfill this

requirement by retaining and reporting statistics other than system

orders will contact staff of the Division to discuss which

statistics the sponsor wishes to retain and report instead.

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The Commission also has modified the Rule, in response to one

commenter's concern, to clarify that a sponsor must be able to identify

on a daily basis only those securities for which transactions have been

executed through the system.53

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\5\3See Letter of ITG, at 2.

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4. Participant Notices

Three commenters requested clarification of the extent to which

communications to individual participants or non-written communications

must be preserved as notices to participants under paragraph (c)(2)(ii)

of the Proposed Rule.54 The Rule as adopted requires sponsors to

preserve only those notices that are disseminated (whether through

written or other means) generally to all participants, or to one or

more classes of participants. The Rule does not require the sponsor to

preserve communications directed solely to an individual participant.

---------------------------------------------------------------------------

\5\4See Letter of ABA, at 4; Letter of Instinet, at 10; and

Letter of ITG, at 2.

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D. Reporting Requirements

Under the Rule as adopted, a BDTS sponsor is required to file

reports with the Commission (and, in certain circumstances, with the

appropriate SRO), in accordance with Form 17A-23. Form 17A-23 contains

three parts: (1) operation reports, including initial operation reports

filed at least 20 calendar days prior to the operation of the system

and subsequent operation reports filed as necessary prior to

implementing material system changes; (2) quarterly reports filed

within 30 calendar days after the end of the calendar quarter;55

and (3) a final report filed within 10 calendar days after a sponsor

ceases to operate the trading system. The operation reports would

describe the system, its procedures for reviewing capacity, security

and contingency planning, and protecting participant funds and

securities (if an entity other than the sponsor will hold or safeguard

participant funds or securities on a regular basis). It also would

identify an appropriate system contact. The quarterly reports would

contain summary trading information. The report notifying the

Commission of cessation of operations would contain, in addition to the

notification, a final transaction summary.

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\5\5In the Proposing Release, the Commission solicited comments

on the appropriate interval at which sponsors should file reports.

See Proposing Release, supra note 3, 59 FR at 8373. No commenter

addressed this issue. One commenter, however, requested that the

Commission extend the time period for filing quarterly reports from

20 calendar days to 30 calendar days after the calendar quarter. See

Letter of Instinet, at 11. The Rule has been modified accordingly.

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1. Filing Reports Prior to Operation or Implementation of a Material

Change

The Rule requires initial operation reports to be filed at least 20

days prior to operation, and subsequent operation reports regarding

material changes to be filed at least 20 days prior to implementing

such material change, or, where it is commercially impracticable to do

so, as soon as possible after the sponsor determines that it will

implement such material change and in any event no later than 10 days

following the implementation of such change.

The Commission notes that the Rule does not require system sponsors

that alter the operation of their BDTS subsequent to filing an initial

operation report to file additional or amended operation reports prior

to beginning operation. In the Commission's experience, it is not

uncommon for automated systems to be altered routinely to respond to

participant comments or concerns, incorporate technological advances,

or otherwise upgrade a system's operation. Accordingly, sponsors that

file initial operation reports with the Commission might alter the

operation of their BDTS subsequent to such filing, but prior to

beginning operation. If a sponsor materially changes system operation

subsequent to filing an initial operation report, but prior to

beginning operation, the sponsor should contact the Division to apprise

them of such material change.

The Commission also notes that currently, material changes to

automated systems generally require significant planning and

development prior to implementation. Accordingly, the Commission

believes that most sponsors will be able to notify the Commission at

least 20 days prior to implementing a material change. Nonetheless, if

a sponsor is able to implement a material system change on a greatly

expedited basis, the Commission recognizes that it may not be

commercially feasible to notify the Commission 20 days prior to

implementation without delaying implementation. In such circumstances,

the Rule allows a sponsor to notify the Commission as soon as possible

after it determines to implement a material change, but in any event no

later than 10 days following the implementation of such change.

2. Availability of Reports to SROs

As adopted, the Rule requires sponsors to file Parts I and III of

Form 17A-23 with both the Commission and the SRO that is its designated

examining authority. The quarterly reports covered by Part II of Form

17A-23 are required to be filed only with the Commission; however, the

sponsor must make such reports available to the appropriate SRO upon

request.56 Two commenters expressed concern that SRO access to

information contained in reports filed pursuant to the Proposed Rule

might adversely affect a BDTS's competitive position.57 One

commenter recommended that the Commission require SROs to adopt

procedures to restrict access to BDTS reports to the SRO's surveillance

personnel, or, in the alternative, dispense with the reporting

obligation.58

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\5\6The Commission has determined that summary trading

information filed pursuant to Part II of Form 17A-23 are not

critical to the SROs' routine oversight of BDTSs, although such

information is useful for the Commission for the reasons discussed

herein and may be useful to SROs for non-routine oversight of BDTS

sponsors. Accordingly, the Commission has revised the Rule to

require BDTS sponsors to file reports pursuant to Part II of Form

17A-23 routinely with the Commission and to make such reports

available to the appropriate SRO upon request.

\5\7See Letter of ABA, at 4-5 and Letter of Instinet, at 12-13.

\5\8See Letter of ABA, at 4-5.

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The Commission recognizes that the activities of SROs as both

market operators and market regulators may create tension between the

SROs and SRO members. For example, documents obtained in the conduct of

an SRO's regulatory duties may contain competitively sensitive

information. Notwithstanding this, SROs must have access to relevant

member information in order to fulfill their self-regulatory

obligations.59 The Commission believes that information contained

in reports filed pursuant to the Rule will be critical to appropriately

tailoring SRO examination and oversight of BDTS sponsors to reflect the

distinctive characteristics and concerns of automated trading systems.

Accordingly, the Rule continues to make such information available to

SROs designated as a BDTS's examining authority. In order to address

potential competitive issues, the Rule provides for filing of Rule 17a-

23 reports directly with surveillance personnel designated by the

examining SRO. The Commission notes that access to information made

available to an SRO in its regulatory capacity should be rigorously

restricted to those personnel who require it for surveillance and

regulatory oversight purposes only. The Commission strongly urges SROs

to carefully assess, and revise where necessary, their internal

policies and procedures for protecting the confidentiality of sensitive

information obtained in the course of fulfilling SRO regulatory

responsibilities.

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\5\9See, e.g., Exchange Act Section 15A(b), 15 U.S.C. 78o-3(b).

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3. Confidentiality of Reports

Two commenters requested that the Commission discuss whether

reports filed pursuant to the Proposed Rule may be exempt from public

disclosure under the Freedom of Information Act.60 The Commission

notes that reports filed pursuant to the Rule will be deemed to be

confidential. The Commission considers such reports to be exempt from

disclosure under the Freedom of Information Act (``FOIA'').61 The

Commission will protect the confidentiality of reports filed pursuant

to the Rule accordingly.62

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\6\0See Letter of ABA, at 4; Letter of M&S, at 3.

\6\1Such reports constitute examination, operating or condition

reports of a financial institution, and, as such, are exempt from

disclosure under FOIA pursuant to 5 U.S.C. Sec. 552(b)(8).

\6\2In addition, other exemptions from FOIA may be available,

including the exemption provided by Section 552(b)(4) for trade

secrets and commercial or financial information obtained from a

person and privileged or confidential. The availability of this

exemption depends upon a factual analysis which may require

substantiation by the sponsor of the reporting BDTS.

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E. Form 17A-23

Proposed Form 17A-23 would have required sponsors to report ``lists

of securities trading in the system,'' and to state whether it offers

services that allow system participants to trade with entities outside

of the United States. Commenters requested clarification that sponsors

may comply with the Form by identifying the categories of securities

that have actually traded in the system during the period covered by

the report.63 After reviewing the comments, the Commission

believes that the information required pursuant to Part I of Form 17A-

23 is sufficient to provide summary information regarding the

categories of securities trading, and that submission of lists

identifying individual securities in the quarterly filings under Part

II of Form 17A-23 would not be useful. Accordingly, the Commission has

deleted this requirement from the Form. The Commission also has

modified Parts I and II of Form 17A-23 to clarify that sponsors must

report whether entities located outside of the United States have

access to the system, and describe the nature of such access and

foreign participation in the system in reports filed pursuant to Part I

of the Form. Finally, the Commission has modified Part I of the Form

and paragraph (d)(1) of the Rule to require system sponsors to update

the information filed in Part I of the Form at least 20 days prior to

implementing a material change to system operation, or, where it is

commercially impracticable to do so, as soon as possible thereafter

when the sponsor determines that it will implement such material change

(and in any event no later than 10 calendar days following the

implementation of such change).

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\6\3See Letter of Instinet, at 11 and Letter of ITG, at 2.

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IV. Implementation Date

The Rule will become effective on June 1, 1995. The Commission has

modified the Rule to allow sponsors of systems currently operating to

submit the information required by Part I of Form 17A-23 no later than

July 1, 1995 (one month following the effective date), to provide

sponsors of existing systems adequate time to prepare this

filing.64

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\6\4Sponsors of existing BDTSs must submit a system description

that is current as of the date of filing.

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As discussed above, certain BDTS sponsors are subject to staff no-

action letters that require those sponsors to provide operation and

trading information to the Division that is comparable to that required

in Form 17A-23.65 These staff no-action letters do not affect the

obligation of any BDTS sponsor to comply with the Rule. Prior to

effectiveness of the Rule, the Division will revise the conditions of

no-action in each letter granted to a sponsor of an operating system

that would be subject to the Rule, to eliminate duplicative reporting

requirements. Sponsors of BDTSs subject to no-action letters that have

further questions on complying with the Rule and conditions of no-

action should contact the Division.

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\6\5See note 12, supra.

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V. Competition Findings

Section 23(a)(2) of the Act66 requires the Commission, in

adopting rules under the Act, to consider the anti-competitive effects

of such rules, if any, and to balance any impact against the regulatory

benefits gained in terms of furthering the purposes of the Act. As

discussed above, several commenters raised concerns regarding the

competitive implications of the Proposed Rule. The Commission has

considered the Rule in light of the comments and the standard cited in

Section 23(a)(2). The Rule's establishment of reporting and

recordkeeping requirements will not impose a significant burden on

competition. All BDTSs will be subject to the same requirements, and

the reporting and recordkeeping requirements, which are similar to

those currently imposed on registered brokers and dealers, should not

be unduly burdensome. In addition, the Commission has specifically

considered competitive concerns relating to SRO access to such

information.67 For the reasons discussed above, the Commission

believes that adoption of the Rule will not impose any burden on

competition not necessary or appropriate in furtherance of the Act.

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\6\615 U.S.C. 78w(a)(2).

\6\7See Availability of Reports to SROs, supra.

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VI. Summary of Final Regulatory Flexibility Analysis and Paperwork

Reduction Act

The Commission has prepared a Final Regulatory Flexibility Analysis

(``FRFA'') regarding Rule 17a-23, in accordance with 5 U.S.C. Sec. 604.

No public comment was received in response to the initial regulatory

flexibility analysis. The FRFA notes the potential costs of operation

and procedural changes that may be necessary to comply with the Rule.

As more fully explained above, however, the Commission has determined

that the proliferation of broker-dealer automated trading systems

requires increased oversight to promote investor protection and to

assess the impact of these systems on the securities markets. The

Commission finds that the benefits of Rule 17a-23 outweigh the costs

incurred by industry participants in complying with the Rule. A copy of

the FRFA may be obtained by contacting Elaine M. Darroch, Attorney-

Advisor, Office of Automation and International Markets, Division of

Market Regulation, Securities and Exchange Commission, 450 Fifth

Street, N.W. (Mail Stop 5-1), Washington, D.C. 20549.

No public comment was received in response to proposed Rule 17a-23

with respect to the Paperwork Reduction Act of 1980, 44 U.S.C.

Secs. 3501 et seq.

VII. Statutory Basis

The rules and regulations of the Commission are amended as follows,

pursuant to the Securities Exchange Act of 1934 and particularly

Sections 2, 3, 11A, 15(c), 17, and 23(a) thereof, 15 U.S.C. Secs. 78b,

78c, 78k-1, 78o(c), 78q, and 78w(a).

List of Subjects in 17 CFR Parts 240 and 249

Reporting and recordkeeping requirements, Securities.

Text of Amendments

In accordance with the foregoing, Title 17, Chapter II of the Code

of Federal Regulations is amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF

1934

1. The authority citation for Part 240 is amended by adding the

following citation:

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg,

77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p,

78q, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-

37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.

* * * * *

Section 240.17a-23 also issued under 15 U.S.C. 78b, 78c, 78o,

78q, and 78w(a);

* * * * *

2. Section 240.17a-23 is added to read as follows:

Sec. 240.17a-23 Recordkeeping and Reporting Requirements relating to

Broker-Dealer Trading Systems.

(a) Scope of section. This section shall apply to any registered

broker or dealer that acts as the sponsor of a broker-dealer trading

system.

(b) Definitions. For purposes of this section:

(1) The term registered broker or dealer shall have the meaning

ascribed to it in Section 3(a)(48) of the Act.

(2) The term broker-dealer trading system means any facility that

provides a mechanism, automated in full or in part, for:

(i) Collecting, receiving, disseminating, or displaying system

orders; and

(ii) Matching, crossing, or executing system orders, or otherwise

facilitating agreement to the basic terms of a purchase or sale of a

security between system participants, or between a system participant

and the system sponsor, through use of the system or through the system

sponsor.

(3) The term sponsor means any entity that organizes, operates,

administers, or otherwise directly controls a broker-dealer trading

system; and, if the system operator of such broker-dealer trading

system is not a registered broker or dealer, any registered broker or

dealer that, pursuant to contract, affiliation, or other agreement with

the system operator, is involved materially on a regular basis with

executing transactions in connection with use of the broker-dealer

trading system, other than solely for its own account or as a

participant in the broker-dealer trading system.

(4) The term system order means any order or other communication or

indication submitted by any system participant for entry into a trading

system announcing an interest in purchasing or selling a security. The

term ``system order'' does not include inquiries or indications of

interest that are not entered into a trading system.

(5) The term system participant means any person that is provided

access to a trading system (whether through computer terminal, access

codes, or other means) by a system sponsor for the purpose of effecting

the purchase or sale of securities through use of such system.

(c) Recordkeeping. Every registered broker or dealer subject to

this section pursuant to paragraph (a) of this section shall:

(1) Make and keep current the following records relating to the

broker-dealer trading system:

(i) A record of participants in the broker-dealer trading system

(identifying any affiliations between system participants and the

system sponsor);

(ii) Daily summaries of trading in the broker-dealer trading

system, including:

(A) Securities for which transactions have been executed through

use of such system;

(B) Transaction volume (separately stated for trading occurring

during hours when consolidated trade reporting facilities are and are

not in operation), expressed with respect to stock in trades, shares

and in dollar value, and expressed with respect to other securities in

trades, number of units of securities and in par value, dollar value,

or other appropriate commonly used measure of value of such securities;

and

(C) Number of system orders, or other identifiable indicator that

accurately reflects participant trading interest, as appropriate in

light of configuration of the broker-dealer trading system (expressed

separately for priced and unpriced orders, if applicable in light of

system configuration);

(iii) Time-sequenced records of each transaction effected through

the broker-dealer trading system, including date and time executed,

price, size, security traded, counterparty identification information,

and method of execution (if broker-dealer trading system allows

alternative means or locations for execution, such as routing to

another market, matching with limit orders, or executing against the

system sponsor's quotations); and

(2) Preserve, for a period of not less than three years, the first

two years in an easily accessible place, the following records relating

to the broker-dealer trading system:

(i) All records required to be made pursuant to paragraph (c)(1) of

this section; and

(ii) All notices provided by the system sponsor to system

participants generally (or to one or more classes of system

participant), whether written or communicated through the broker-dealer

trading system or other automated means, including, but not limited to,

notices addressing hours of system operations, system malfunctions,

changes to system procedures, maintenance of hardware and software,

instructions pertaining to access to the broker-dealer trading system.

(d) Reporting. (1) Every registered broker or dealer subject to

this section pursuant to paragraph (a) of this section shall:

(i) File the information required by Part I of Form 17A-23

(Sec. 249.636 of this chapter) at least 20 calendar days prior to

operating a broker-dealer trading system, or, if the sponsor is

operating the broker-dealer trading system on June 1, 1995, no later

than July 1, 1995;

(ii) During the operation of a broker-dealer trading system of

which the broker or dealer is the sponsor, file the information

described in Part IA of Form 17A-23 (Sec. 249.636 of this chapter)

regarding a material change to operation of the broker-dealer trading

system as described in any filing previously made with the Commission

pursuant to paragraph (d)(1)(i) of this section, at least 20 calendar

days prior to implementing such material change, or, where it is

commercially impracticable to do so, as soon as possible thereafter

when the sponsor determines that it will implement such material

change, and in any event no later than 10 calendar days following the

implementation of such change;

(iii) During the operation of a broker-dealer trading system of

which the broker or dealer is the sponsor, file the information

described in Part II of Form 17A-23 (Sec. 249.636 of this chapter)

within 30 calendar days after the end of each calendar quarter in which

the broker-dealer trading system has operated after July 1, 1995; and

(iv) Within 10 calendar days after a broker-dealer trading system

of which the broker or dealer is the sponsor ceases to operate, file

the notice described in Part III of Form 17A-23 (Sec. 249.636 of this

chapter).

(2) The reports provided for in paragraph (d) of this section shall

be considered filed upon receipt at the Commission's principal office

in Washington, DC. Duplicate originals of the reports provided for in

paragraphs (d)(1)(i), (ii), and (iv) of this section must be filed with

surveillance personnel designated as such by the self-regulatory

organization that is the designated examining authority for the broker

or dealer pursuant to Sec. 240.17d-1 simultaneously with filing with

the Commission. Duplicates of the reports required by paragraphs

(d)(1)(iii) of this section must be provided to such surveillance

personnel of such self-regulatory authority upon request. All reports

filed pursuant to this paragraph (d) shall be deemed to be

confidential.

(e) Maintenance of records in alternative form. The records

required to be maintained and preserved pursuant to this section may be

produced, reproduced and maintained pursuant to the provisions of

Sec. 240.17a-4(f).

(f) Compliance with other recordkeeping and reporting rules.

Nothing in this section obviates the need for any broker or dealer to

comply with any other applicable recordkeeping or reporting requirement

in the Act and the rules and regulations thereunder. If the information

in a record required to be made pursuant to this section is preserved

in a record made pursuant to Sec. 240.17a-3 or Sec. 240.17a-4, or

otherwise preserved by the sponsor (whether in summary or other form),

paragraph (c) of this section shall not require the sponsor to maintain

such information in a separate file, provided that the sponsor can

promptly sort and retrieve the information as if it had been kept in a

separate file as a record made pursuant to this section, and preserves

the information in accordance with the time periods specified in

paragraph (c)(2) of this section.

(g) Maintenance of records by others. The records required to be

maintained and preserved pursuant to this section may be prepared or

maintained by a service bureau, depository, or other recordkeeping

service on behalf of the sponsor of a broker-dealer trading system,

provided such entity complies with the provisions of Sec. 240.17a-4(i).

Agreement with such an entity shall not relieve the sponsor of a

broker-dealer trading system from the responsibility to prepare and

maintain records as specified in this section.

(h) Furnishing copies of records. Every broker or dealer subject to

this section pursuant to paragraph (a) of this section shall furnish to

any representative of the Commission promptly upon request, legible,

true and complete copies of those records of the sponsor that are

required to be preserved under this section.

(i) Exemption from this section. The Commission, by rule or order,

may exempt any sponsor of a broker-dealer trading system from all or

any of the provisions of this section, either unconditionally or on

specified terms and conditions, if the Commission determines that such

exemption is consistent with the public interest or the protection of

investors.

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

3. The authority citation for Part 249 continues to read in part as

follows:

Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;

* * * * *

4. Section 249.636 and Form 17A-23 are added to read as follows:

Note: The text of Form 17A-23 appears as Appendix A to this

document and will not appear in the Code of Federal Regulations.

Sec. 249.636 Form 17A-23, information required of certain broker and

dealer sponsors of broker-dealer trading systems pursuant to section 17

of the Securities Exchange Act of 1934 and Sec. 240.17a-23 of this

chapter.

This form shall be used by every registered broker and dealer that

is required to file reports under Sec. 240.17a-23 of this chapter.

By the Commission.

.Dated: December 20, 1994.

Margaret H. McFarland,

Deputy Secretary.

BILLING CODE 8010-01-P

TR28DE94.005

TR28DE94.006

TR28DE94.007

[FR Doc. 94-31656 Filed 12-27-94; 8:45 am]

BILLING CODE 8010-01-C