[Federal Register Volume 59, Number 33 (Thursday, February 17, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: X94-10217]


[[Page Unknown]]

[Federal Register: February 17, 1994]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249

[Release No. 34-33608; International Series Release No. 635; File No. 
S7-24-91]
RIN 3235-AE42

 

Large Trader Reporting System

AGENCY: Securities and Exchange Commission.

ACTION: Reproposed rulemaking.

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SUMMARY: The Commission is reproposing Rule 13h-1 and Form 13H under 
Section 13(h) of the Securities Exchange Act of 1934 (``Exchange 
Act''). Rule 13h-1 was initially proposed by the Commission in Exchange 
Act Release No. 29593 (August 22, 1991), 56 FR 42550 (August 28, 1991). 
Reproposed Rule 13h-1 would establish an activity-based identification, 
recordkeeping, and reporting system for large trader accounts and 
transactions. Reproposed Rule 13h-1 also would establish a definition 
for large traders and require such large traders to file Form 13H with 
the Commission. Registered broker-dealers would be required to maintain 
transaction records for each large trader account and report 
transactions upon the request of the Commission or a self-regulatory 
organization (``SRO'') designated by the Commission. Reproposed Rule 
13h-1 would fulfill the goals of the Market Reform Act of 1990 
(``Market Reform Act'') by providing the Commission with the 
information necessary to reconstruct trading activity in periods of 
market stress and for enforcement or other regulatory purposes, without 
imposing undue burdens or costs on market participants.

DATES: Comments must be received on or before April 18, 1994.

ADDRESSES: Persons wishing to submit written comments should file three 
copies with Jonathan G. Katz, Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington, DC 20549. All comment 
letters should refer to File No. S7-24-91. All comments received will 
be available for public inspection and copying in the Commission's 
Public Reference Room, 450 Fifth Street, NW, Washington, DC 20549.

FOR FURTHER INFORMATION CONTACT: Julio A. Mojica, Assistant Director, 
(202) 272-7497, Nicholas T. Chapekis, Special Counsel, (202) 272-3115, 
or Cameron D. Smith, Staff Attorney, (202) 272-5418, Division of Market 
Regulation, 450 Fifth Street, NW., Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

I. Introduction

    The Commission is reproposing Rule 13h-1 to implement the large 
trader reporting provisions of the Market Reform Act1 and section 
13(h) of the Exchange Act.2 The Large Trader Reporting System that 
would be established by reproposed Rule 13h-1 was initially proposed in 
Securities Exchange Act Release No. 29593 (August 22, 1991), 56 FR 
42550 (August 28, 1991) (``Proposing Release'').
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    \1\Public Law 101-432, 104 Stat. 963 (1990).
    \2\15 U.S.C. 78m(h) (1990).
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    The Proposing Release chronicled the fundamental changes in 
participants, information systems, and investment techniques that have 
shaped the securities markets during the last decade.3 As a result 
of these changes, today's securities markets are global in nature and 
characterized by large foreign and domestic investors that rapidly 
trade large quantities of securities, for themselves and others, 
throughout the world. During this period of change, the securities 
markets have experienced an increase in activity and the potential for 
volatility.
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    \3\See Proposing Release, 56 FR 42550.
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    The legislative history accompanying the Market Reform Act noted 
the Commission's limited ability to analyze the causes of the 
significant market declines of October 1987 and 1989.4 The 
Commission's inability to analyze trading activity was attributed to 
its lack of specific statutory authority to gather broad-based samples 
of investor trading information. To resolve this problem, Congress 
provided the Commission with specific authority to establish a large 
trader reporting system.
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    \4\See generally Senate Comm. on Banking, Housing, and Urban 
Affairs, Report to accompany the Market Reform Act of 1990, S. Rep. 
No. 300, 101st Cong. 2d Sess. (May 22, 1990) (reporting S. 648) 
(``Senate Report'') and House Comm. on Energy and Commerce, Report 
to accompany the Securities Market Reform Act of 1990, H.R. Rep. No. 
524, 101st Cong. 2d Sess. (June 5, 1990) (reporting H.R. 3657) 
(``House Report'').
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    In the Proposing Release, the Commission proposed rules that 
defined the term large trader, required the disclosure of a large 
trader's identity and accounts to the Commission or others, and 
provided for the assignment of unique identifying numbers to large 
traders. The proposed rule also required broker-dealers that carry 
large trader accounts to maintain records of identified large trader 
transactions as well as transactions of those persons who have not 
identified themselves, but whom the broker-dealer knew or had reason to 
know were large traders. In addition, the proposed rule required 
broker-dealers to report large trader transactions in machine-readable 
form through the industry's existing electronic bluesheet system to the 
Commission upon request.
    The Commission solicited comments on various aspects of the 
proposed rule, including the definition of a large trader, the 
identifying and reporting activity thresholds, exemptions, Form 13H 
filing requirements, execution time recordkeeping and reporting, and 
the proposed rule's application to foreign entities. The Commission was 
particularly sensitive to the burdens imposed by the proposed system 
and sought alternatives that would reduce such burdens and still 
accomplish the objectives of the Market Reform Act.
    The Commission received 77 written comments on the proposed 
rule.5 In addition, members of the Division of Market Regulation 
met on numerous occasions with the Securities Industry Association 
(``SIA''), the American Bankers Association, the Intermarket 
Surveillance Group (``ISG''), the Securities Industry Automation 
Corporation (``SIAC''), and two broker-dealers, to answer questions and 
discuss issues related to the operation of the proposed system and its 
impact on market participants.6
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    \5\The comment letters and the Division of Market Regulation's 
summary thereof have been placed in the Commission's public files. 
See SEC File No. S7-24-91.
    \6\Memoranda summarizing the Division of Market Regulation's 
meetings with these entities have been placed in the Commission's 
public files. See SEC File No. S7-24-91.
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    While generally supportive of the goals of the Market Reform 
Act,7 the commenters expressed concern that the proposed rule 
would be unduly burdensome and costly. The commenters generally sought 
clarification of ``who'' would be a large trader, ``what'' information 
must be disclosed on Form 13H, and ``when'' Form 13H or trade report 
information must be submitted. These concerns were manifested in 
specific questions and comments regarding the rules for aggregation, 
the definitions of ownership and control, the scope of Form 13H 
information, and time frames for filing Form 13H. The commenters also 
addressed the identifying activity level, exemptions, and the duty to 
supervise compliance with the proposed rule. Finally, the broker-dealer 
community raised several concerns regarding the technical aspects of 
the reporting requirements for execution times, multiple large trader 
identification numbers (``LTID''), and the time frame for submitting 
trade reports.
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    \7\Comments were received from seven types of market 
participants and regulatory organizations, which may be grouped as 
follows: 12 broker-dealers; 24 investment advisers; 13 industry or 
professional associations; 8 banks or trust companies; 6 regulatory 
organizations; 4 law firms; and 9 other affected market 
participants.
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    The reproposed rule has been revised to incorporate many of the 
suggestions made in the comment letters. These provisions are intended 
to clarify the operation of the reproposed system and reduce the costs 
associated with all aspects of the reproposed rule. The changes found 
in the reproposed rule would: (1) Clarify the definition of a large 
trader and provide a flexible concept of aggregation; (2) increase the 
identifying and reporting activity levels; (3) reduce the scope of 
information captured on Form 13H; (4) streamline Form 13H filing and 
updating requirements that include an inactive filing status; (5) 
provide more informative and detailed instructions to Form 13H; (6) 
reduce the recordkeeping and reporting requirements for LTIDs; (7) 
provide special reporting requirements for execution times; and (8) 
provide a safe harbor for the duty to supervise.
    The reproposed rule also addresses today's complex global trading 
environment and attempts to maintain a level playing field between 
broker-dealers and banks, both domestic and foreign. The Commission has 
endeavored to maintain an equal competitive environment between these 
entities by imposing requirements on custodians or nominees of omnibus 
accounts. These duties include: (1) Form 13H filings; (2) confidential 
and limited disclosures to the Commission or others; and (3) limited 
duties to disaggregate and assure compliance with omnibus account 
identification requirements.
    Essentially, the reproposed large trader reporting system would 
require that a person that falls within the definition of a large 
trader would file Form 13H with the Commission. Upon receipt of Form 
13H, the Commission would assign an LTID to the large trader. After 
receiving a LTID, large traders would contact their broker-dealers and 
inform them of their number and all accounts to which it applies. 
Thereafter, the large trader only would be required to file an updated 
Form 13H annually. The broker-dealers carrying the large trader's 
accounts would maintain records of the trades for the account. These 
broker-dealers would electronically report transactions upon receiving 
a request from the Commission. Broker-dealers also would be required to 
supervise compliance with the reproposed rule by their customers.
    Fundamentally, the burdens that would be imposed on large traders 
by the reproposed rule would include: (1) Filing Form 13H (See Sections 
III.B.1. and 2.); (2) disclosing it's LTIDs to broker-dealers (See 
Section III.B.3.); (3) updating Form 13H annually (See Section 
III.B.1.); and (4) providing additional information when the Commission 
requests (See Section III.B.5.). The burdens imposed on broker-dealers 
would include: (1) Maintaining records of transactions effected for 
large trader accounts (See Section III.C.); (2) electronically 
reporting large trader transaction information when the Commission 
requests (See Section III.D.); and (3) supervising their customers' 
compliance with the reproposed rule (See Section III.E.).
    The specific changes to the proposed rule and several examples of 
how they would affect the reproposed system are discussed below. The 
Commission believes that the reproposed rule accomplishes the 
objectives of the Market Reform Act by creating an effective market 
reconstruction tool, minimizing burdens and costs, and maintaining a 
fair competitive environment among markets and market participants.

II. Solicitation of Comments

    The Commission believes that the modifications and additions found 
in the reproposed rule would significantly reduce the burdens and costs 
of the proposed system without impeding its effectiveness and, 
therefore, would accomplish the objectives of the Market Reform Act. As 
discussed below, the Commission staff has engaged in extended 
discussions with market participants and securities information 
processors, and many alternatives have been identified. The Commission 
has incorporated in the reproposed rule those alternatives that it 
believes would accomplish the objectives of the Market Reform Act.
    Because the changes to the proposed rule are significant, the 
Commission seeks comments on any aspect of the reproposed rule and, 
specifically, comments that relate to the: (1) The identifying activity 
level; (2) other means to assure that natural persons who were not 
intended to be large traders are not affected by the reproposed rule; 
(3) the use of the Depository Trust Company's (``DTC'') Institutional 
Delivery System (``ID System''); (4) the rules for aggregation of 
accounts; (5) Form 13H and Schedules; (6) the supervisory safe harbor; 
and (7) the plan for implementing the transaction reporting system. 
Finally, the Commission invites comments as to whether there are more 
cost-effective alternatives to the reproposed rule or system that would 
provide similar benefits, including particular alternatives that adopt 
a different structure. The Commission also continues to solicit 
specific comments that explore the relative costs and benefits of the 
reproposed system generally, or any other alternatives. Furthermore, 
because of the time that has elapsed, comments that identify any new 
information technologies that accomplish the objectives of the Market 
Reform Act and minimize costs to a greater extent would be appreciated.
    With respect to the reproposed identifying activity level, the 
Commission solicits comments on the appropriateness of the new 
thresholds. The new identifying activity level, combined with certain 
exemptions from the definition of a transaction and the new inactive 
status, were designed to minimize the impact of the reproposed rule on 
natural persons that infrequently trade in a magnitude that may warrant 
imposing the added regulatory burdens of the reproposed system. The 
Commission would welcome comments regarding any other means for 
eliminating the impact of the reproposed rule on these types of 
persons. In particular, the Commission solicits comments on whether a 
separate identifying activity level for natural persons or an exemption 
for natural persons that effect less 1,000,000 shares or fair market 
value of $25 million in a calendar day, would be a more appropriate 
means for minimizing the impact of the Rule.
    The ID System is an electronic communications and book-entry 
settlement system through which most large institutional investors, 
their brokers or advisers, or their custodians or nominees confirm and 
settle trades.8 As discussed below, the ID System has been 
incorporated into the reproposed rule to reduce its burdens in three 
respects. Under the reproposed rule, the use of numbers assigned by DTC 
to ID System participants would: (1) Be incorporated into the Schedules 
to Form 13H by permitting their use in lieu of LTIDs; (2) minimize the 
amount of communication among members of an investment complex that 
would be necessary to complete Form 13H and fulfill the LTID disclosure 
requirements; and (3) establish a limit on the number of identification 
numbers that would be required to be maintained for each account, and 
reported for each transaction, by broker-dealers.
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    \8\See DTC Participant Operating Procedures, Section M, ID 
System Procedures (April 1983). DTC also has established a similar 
system for international institutional activity called the 
International Institutional Delivery System (``IID System''). See 
Securities Exchange Act Release No. 27545 (December 18, 1989) 54 FR 
53017 (December 26, 1989). The IID System varies from the ID System 
in that it does not provide a mechanism for automated book-entry 
settlement. DTC has proposed enhancements to the ID System that 
would unify existing ID and IID Systems into an ``Interactive ID 
System.'' See Securities Exchange Act Release No. 33010 (October 4, 
1993), 58 FR 53007 (October 13, 1993); and DTC An Interactive Option 
for the Institutional Delivery System, Memorandum to Participants 
and Other ID Users (March 31, 1993).
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    The Commission specifically solicits comments on the 
appropriateness and feasibility of these proposed uses of the ID 
System. The Commission would welcome comments that identify other ID 
System information or procedures that would reduce the burden of the 
reproposed rule without diminishing its effectiveness for accomplishing 
the objectives of the Market Reform Act.
    With respect to the reproposed rules for aggregation of accounts 
and Form 13H, the Commission solicits comments on additional 
simplification or means for reducing the burden of determining who is a 
large trader and completing Form 13H. The Commission also solicits 
comments on the appropriateness of the supervisory safe harbor. 
Finally, the Commission solicits comments on whether a proposed plan 
for implementing the transaction reporting requirements would be 
feasible.

III. Discussion of the Reproposed Rule

A. Application and Scope

    The fundamental scope and application of the reproposed rule is 
established by the definition of a large trader. The definition of a 
large trader and its separately defined terms were found in paragraph 
(f) of the proposed rule. These definitions have been reorganized into 
paragraph (a) of the reproposed rule in order to clarify the 
fundamental application and scope of the reproposed rule. As mentioned 
above, many of the comments raised concerns that generally may be 
described as a question of ``who is a large trader.'' The terms of the 
reproposed rule essentially would provide that every person who effects 
aggregate transactions reaching the identifying activity level, through 
accounts carried by a registered broker-dealer, which are aggregated 
based on ownership or control, would be a large trader.
1. Definition of a Large Trader
    The term large trader, as defined in paragraph (a)(1) of the 
reproposed rule, would mean every person who, for an account that he 
owns or controls, effects transactions for the purchase or sale of any 
publicly traded security or securities by use of any means or 
instrumentality of interstate commerce or of the mails, or of any 
facility of a national securities exchange, directly or indirectly by 
or through a registered broker or dealer in an aggregate amount equal 
to or in excess of the identifying activity level. The reproposed 
definition of a large trader closely tracks the definition provided in 
Section 13(h)(8)(A) of the Exchange Act.9
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    \9\ See 15 U.S.C. 78m(h)(8)(A) (1990).
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    The reproposed rule varies from the proposed rule and statutory 
definition only to the extent that the phrase ``* * * for an account 
that he owns or controls * * *'' has replaced the phrase ``* * * for 
his own account or an account for which he exercises investment 
discretion * * *''10 The Commission believes that this 
modification does not change the proposed definition of a large trader, 
but merely clarifies the interrelationship between the definition of a 
large trader and its separately defined terms.
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    \1\0 See Proposing Release, 56 FR 42561 (proposed text).
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    The definition of a large trader remains dependent upon the 
definitions of a person, account, ownership, control, publicly traded 
security, transaction, the identifying activity level, and the rules 
for aggregation. The Commission believes that the modifications to the 
proposed definitions of these terms address the questions raised by the 
commenters, clarify the proposed rule, and narrow the proposed 
definition of a large trader.
    a. Definition of a person. The definition of a person found in 
paragraph (a)(2) of the reproposed rule varies only slightly from the 
proposed definition.11 The lone modification to this definition 
would be the deletion of the term ``trust'' and the addition of the 
phrase ``persons, entities, partnerships, or other groups acting as a 
trustee.'' The addition of this phrase addresses a legal issue raised 
by a private pension trust, which asserted that a trust may not be 
deemed a person because it does not have a present ability to act 
(e.g., effect transactions) separate from its trustee. The Market 
Reform Act intended that trusts of all types be included in the 
definition of a large trader.12 The definition of a person 
contained in paragraph (a)(2) of the reproposed rule would assure that 
all trusts, through their trustees, are included within the definition 
of a person and thus may be large traders.
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    \1\1Id.
    \1\2See Proposing Release, 56 FR 42552, at n. 26 and 
accompanying text.
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    b. Definition of an account. Paragraph (a)(3) of the reproposed 
rule would add a definition for the term ``account or accounts.'' This 
term was not defined in the proposed rule and the comments received 
from banks, investment advisers, and other non-broker-dealer market 
participants exhibited substantial confusion in this respect. The 
Commission believes that this confusion led the commenters to 
incorrectly interpret ``who'' the Commission intended to be included 
within the definition of a large trader. These commenters appear to 
have believed, incorrectly, that the accounts of ``small'' trust or 
advisory customers would become large traders, with all of the duties 
attendant thereto, by virtue of the fact that a large trader exercised 
control over such accounts.
    The Commission, therefore, is proposing new paragraph (a)(3) that 
would define the term account or accounts to mean each proprietary and 
customer account maintained or carried by a registered broker or 
dealer, which is disclosed or undisclosed to such broker or dealer as 
to ownership, and for which books and records are required to be kept 
in accordance with the provisions of Rule 17a-3 under the Exchange Act. 
This definition would clarify that only accounts maintained or carried 
by broker-dealers under the Exchange Act would be subject to the 
reproposed rule.
    c. Definition of ownership. The definition of ownership would be 
narrowed and reorganized in paragraph (a)(4) of the reproposed rule. 
The apparent breadth of this definition received extensive comments, 
especially with respect to its impact on the proposed rules for 
aggregation and the information required to be provided on Form 
13H.13 The Commission also received many comments on the proposed 
inclusion of custodians or nominees within the definition of ownership.
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    \1\3 See infra Sections III.A.2. and III.B.2., for a discussion 
of the reproposed rules pertaining to aggregation and Form 13H, 
respectively.
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    The Commission believes that the commenters failed to understand 
that the concept of ownership is focused on the ``accounts of a 
person.'' The Commission, however, acknowledges that the proposed 
definition of ownership, combined with the rules for aggregation, may 
support some of the sweeping interpretations of the proposed definition 
of a large trader expressed in the comments. These commenters broadly 
interpreted the proposed definition of ownership and the rules for 
aggregation to require: (1) The aggregation of individual accounts of 
all employees, officers, directors, controlling shareholders, and 
partners with their large trader corporation, trust, or partnership, 
irrespective of such individual's role in the trading decisions of the 
large trader entity; (2) the accounts of all parent, subsidiary, and 
affiliated companies within a holding company structure to be 
aggregated by and with each parent, subsidiary, or affiliate; and (3) 
the accounts of wholly unrelated large trader entities to be aggregated 
due to common directors, controlling shareholders, partners, or 
trustees. In response to these comments, the Commission has revised the 
proposed definition of ownership.
    i. General definition. The definition of ownership, as reproposed 
in paragraph (a)(4), would provide that an account of a person shall be 
deemed to be owned or under common ownership of the person in whose 
name an account is maintained, or custodian or nominee that maintains 
an omnibus account, and any other person who has more than a 10 percent 
financial interest in the equity in the account or accounts of such 
person. This reproposed definition of ownership would incorporate 
existing rules, procedures, and practices that require broker-dealers 
to maintain the name and address of the beneficial owner of an account 
and would be interpreted consistently with such rules, procedures, and 
practices.14
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    \1\4See Rule 17a-3(a)(9)(i) under the Exchange Act, 17 CFR 
240.17a-3(a)(9)(i).
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    The reproposed rule states that ``an account of a person'' would be 
deemed to be owned or under common ownership, thus emphasizing that the 
primary focus of the concept of ownership would be the ``accounts of a 
person,'' and not ownership of the person itself. Accordingly, under 
the reproposed rule, accounts maintained in the name of a parent, 
subsidiary, or affiliate would be deemed to be owned by that parent, 
subsidiary, or affiliate. This focus would be made evident in the 
reproposed Schedules 6a and 6b to Form 13H.
    The focus on accounts also would address those comments that deemed 
the accounts of employees, officers, directors, controlling 
shareholders, and partners to be owned by their respective corporation 
or partnership, irrespective of such individual's role or lack thereof, 
in the trading decisions of the large trader entity. The reproposed 
rule would eliminate the sweeping nature of the proposed definition by 
providing that an account is owned or under common ownership of the 
entity.
    ii. Custodians or nominees. As discussed in the Proposing Release, 
institutional investors engage the services of different investment 
advisers and executing broker-dealers, yet the trades effected by these 
persons may be settled and the investment assets may be deposited 
centrally with one custodian bank, trust company, or broker-dealer that 
is sometimes referred to as a prime broker.\15\ The Commission 
believes, based upon its experience with broad-based trade 
reconstructions, that the increased size and specialization of market 
participants has led to the increased use of these multi-layered 
accounts. Typically, these accounts fragment or obscure the information 
about large trader accounts and activity that the Commission needs to 
analyze market trading.
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    \15\See Proposing Release, 56 FR 42554, at nn. 47-49 and 
accompanying text.
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    Substantial comments were received with respect to the inclusion of 
custodians or nominees within the definition of ownership. The 
commenters all questioned the appropriateness of including passive 
custodians or nominees. These commenters argued that passive custodians 
or nominees, which merely act as a conduit for delivery/receipt versus 
payment (``DVP/RVP'') settlement of transactions, should not be 
included within the definition of a large trader. However, the comments 
regarding custodians and nominees acknowledged that many custodians or 
nominees act as a discretionary agent or fiduciary for the execution of 
trades and thus may be large traders that control accounts owned by 
other persons.
    The inclusion of custodians and nominees also caused broker-
dealers, banks, and trust companies to question the capture of multiple 
LTIDs for a single account or transaction. These commenters asserted 
that the cost of keeping and reporting multiple LTIDs, for a single 
account or trade, would be unduly burdensome.\16\ It also was suggested 
that the capture of multiple LTIDs may cause duplication or distortion 
of total reconstructed trade activity. Many of these commenters also 
noted the possible applications of the ID System. Lastly, the 
commenters confirmed that, in these multi-layered accounts, the 
participants usually do not have knowledge of each other's activities 
and, individually, none of the participants may know or have access to 
all of the information that the Commission needs to analyze market 
trading activity.
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    \16\See infra Section III.C.2. and III.D.3., for discussions of 
the reproposed LTID recordkeeping and reporting requirements, 
respectively.
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    The Commission believes that the inclusion of custodians and 
nominees in the definition of ownership would serve three important 
purposes. First, it would assure that banks and broker-dealers, both 
foreign and domestic, are treated consistently under the reproposed 
rule. Second, it would assure disclosure of the appropriate LTIDs for 
each account. Finally, the inclusion of custodians and nominees would 
enable the Commission to efficiently characterize trading activity.
    The problem that the Commission has sought to address with respect 
to custodians and nominees is its inability to obtain information about 
the ultimate or actual beneficial owners and controllers of omnibus 
accounts or accounts otherwise undisclosed as to ownership. Although 
the number of these accounts may be small in relation to fully 
disclosed accounts, the Commission believes that the nature of large 
trader activity causes a significant percentage of this activity to be 
effected through these accounts. Accordingly, the definition of 
ownership in the reproposed rule would include only those custodians or 
nominees that maintain omnibus accounts or accounts otherwise 
undisclosed as to ownership.
    These changes would work in conjunction with the other 
modifications to the definition of ownership to assure that the fully 
disclosed owner of an account, or the custodian or nominee of an 
omnibus account, is deemed to be the owner of that account, not the 
broker-dealer, bank, or trust company that acts only as an agent for 
settlement of transactions effected through a fully disclosed account. 
Moreover, reproposed Schedule 8 to Form 13H has been designed to 
capture information about a custodian or nominee large trader and the 
undisclosed large traders that effect trades in or through his omnibus 
accounts, not small or otherwise infrequent traders whose trades may be 
effected through such accounts. Reproposed Schedule 8 is designed in a 
manner that the Commission believes would approximate existing ID 
System practices and procedures for maintaining such information.\17\
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    \17\Essentially, the ID System captures information regarding 
the capacity of the participants to a multi-layered account. 
Participants are grouped and numbered as agents, broker-dealers, 
institutions, and interested parties. The term ``Agent'' is defined 
as the entity appointed by the buyer and seller to clear their 
trades. The term ``Broker-dealer'' means the entity that executes a 
trade on behalf of the buyer or seller. The term ``Institution'' 
means those parties that initiate the trade as buyer or seller, on 
its own behalf or on behalf of another. Finally, the term 
``Interested Party'' is defined as those entities, other than the 
Agent or Institution, which receive a confirmation because they have 
a role to play in the settlement of a trade. It is important to note 
that these capacities are not mutually exclusive and one participant 
may perform the tasks associated with any number of these 
capacities. See ID System Directory, Volume X, Number 9, September 
1992.
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    The Commission believes that the revisions to the reproposed 
definition of ownership would significantly clarify the obligations of 
persons that own and/or act as custodians or nominees for large trading 
accounts. The Commission also believes that the reproposed definition 
of ownership would minimize the burden of the identification 
requirements on such large traders.
    d. Definition of control. As with the definition of ownership, the 
commenters uniformly criticized the sweeping impact of the proposed 
definition of control when combined with the proposed rules for 
aggregation. Some commenters questioned whether merely controlling the 
accounts or trading of a large trader would, by itself, cause such 
controller to be a large trader.
    Many of the commenters also indicated that the persons or entities 
that control trading activities usually have the most knowledge of 
large trader accounts, activity, or objectives and, therefore, should 
be the focus of the identification requirements. Finally, one commenter 
questioned the appropriateness of the inclusion of limited 
discretionary investment authority within the definition of control. 
This commenter asserted that the definition of limited discretion would 
force broker-dealers to aggregate the activity of all customers for 
whom they executed not held orders.\18\
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    \18\Not held orders relieve the executing broker of 
responsibility with respect to the time and price of execution, if 
the broker uses ``brokerage judgment'' when executing the order. See 
e.g., New York Stock Exchange (``NYSE'') Rule 123A.44, NYSE Guide 
(CCH) 2123A. Not held orders may be characterized as: (1) defensive 
orders required by brokers in times of unusual market volatility 
(i.e., fast markets); or (2) consideration provided by a customer to 
a broker for the commitment of capital or expertise in the execution 
of large ``block trades.'' See e.g., NYSE Rule 127.10, NYSE Guide 
(CCH) 2127 (definition of block trade).
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    The definition of control has been modified in paragraph (a)(5) of 
the reproposed rule.\19\ These revisions would emphasize that the focus 
of the reproposed concept of control is ``control of the accounts of a 
person,'' not control of the person itself. The reproposed rule also 
would provide that the owner of an account, as well as any person with 
full or limited discretion over an account, is deemed to control that 
account.
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    \19\See Proposing Release, 56 FR 42561 (proposed text).
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    The reproposed rule would clarify that a person's mere exercise of 
control over a large trader's accounts or transactions, without 
effecting the requisite level of transactions, would not cause such 
person to be a large trader under the reproposed rule. Additionally, 
new paragraphs (a)(5)(i) and (ii) of the reproposed rule would add the 
definitions of full and limited discretionary investment authority 
suggested in the Proposing Release.\20\ With respect to the execution 
of not held orders, the Commission would interpret their execution to 
not fall within the reproposed definition of control.
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    \20\See Proposing Release, 56 FR 42553, at nn. 34 and 35.
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    Finally, the reproposed rule would acknowledge that persons who 
control accounts usually are in possession of most of the information 
required by Form 13H and required to be disclosed to broker-dealers. 
Accordingly, reproposed Schedules 7a and 7b to Form 13H and the 
reproposed LTID disclosure requirements would be specifically designed 
to capture and disclose information regarding fully disclosed or 
omnibus accounts controlled by a large trader.
    The Commission believes that these requirements take into account 
the existing industry practices and procedures for the maintenance of 
such information. The Commission also believes that the changes to the 
proposed definition of control would clarify the obligations of large 
traders who control accounts owned by others and would minimize their 
burdens.
    e. Definition of a transaction. The definition of a transaction or 
transactions provided in paragraph (a)(7) of the reproposed rule, also 
would clarify and narrow the scope of the definition of a large trader. 
The modifications to this definition address technical issues raised in 
the comments regarding the inclusion of cancellations, corrections, and 
exercises or assignments of option contracts, within the meaning of the 
term transaction or transactions.
    The reproposed rule states that the term transaction or 
transactions would mean all transactions in publicly traded securities, 
including cancellations, corrections, exercises, and assignments.\21\ 
The definition of publicly traded securities found in reproposed 
paragraph (a)(6) would be unchanged, and would mean any national market 
system security as defined in Rule 11Aa2-1 under the Exchange Act.\22\
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    \21\See infra text accompanying n. 67, for the impact of this 
definition on the trade reporting requirements of the reproposed 
rule.
    \22\17 CFR 240.11Aa2-1. A national market system security is any 
security that is subject to an effective real-time transaction 
reporting plan filed with the Commission, and includes all 
securities listed on a national securities exchange and all National 
Association of Securities Dealers, Inc., Automated Quotation System 
(``NASDAQ''), National Market System (``NMS'') securities. See 
Proposing Release, 56 FR 42552, at text accompanying nn. 16-19.
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    New paragraph (a)(7)(i) of the reproposed rule was added to exclude 
from the term ``transaction'' certain activity commonly posted to 
customer accounts by clearing broker-dealers and passive custodians or 
nominees. This paragraph would exclude from the definition of a 
transaction any journal or bookkeeping entry made to an account to 
record or memorialize the receipt or delivery of funds or securities 
pursuant to the settlement of a transaction.
    Three new exclusions to the term transaction also have been added 
in paragraphs (a)(7)(v), (vi), and (vii) of the reproposed rule. These 
exclusions track the trading objectives or characteristics, identified 
in the Proposing Release, of small or otherwise infrequent traders that 
the Commission did not intend to be included in the definition of a 
large trader.\23\ These new exclusions would include: (1) Transactions 
effected by a court appointed executor, administrator, or fiduciary 
pursuant to the distribution of a decedent's estate; (2) transactions 
effected pursuant to a court order or judgment for distribution of 
property in a marital proceeding; and (3) a qualified plan or trust 
rollover afforded favorable tax treatment under section 402(a)(5) of 
the Internal Revenue Code.\24\
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    \23\See Proposing Release, 56 FR 42551, at n. 12 and 
accompanying text.
    \24\26 U.S.C. 402(a)(5) (1988).
---------------------------------------------------------------------------

    It should be noted that the exclusion for transactions of a 
decedent or marital estate would include only those transactions 
effected pursuant to the distribution or liquidation of such estates 
and would not include transactions effected pursuant to the continuing 
administration or investment of such estate's assets. The distinction 
drawn between the distribution and the administration of an estate 
pursuant to a court order acknowledges that court appointed fiduciaries 
may be authorized to invest and reinvest in securities for many years. 
The Commission believes that the exclusion of such estates from the 
identification requirements of the reproposed rule would be 
inappropriate.
    The Commission believes that these new exclusions from the 
definition of a transaction would indirectly exempt a significant 
number of those small or otherwise infrequent traders that were not 
intended to be large traders under the Market Reform Act. Moreover, the 
Commission believes that the definition of a transaction would reduce 
the impact of the reproposed rule on registered broker-dealers.
    f. Identifying activity level. The Commission expressly solicited 
comment on the appropriateness of the volume, market value, exercise 
value, and time period proposed for the identifying activity level. 
Generally, the commenters felt that the threshold was too low and 
recommended higher levels that ranged from a low of 200,000 shares and 
$10 million, to a high of 5 million shares and $50 million. A few 
commenters suggested that only market value should determine large 
trader status, while others suggested that market price, rather than 
exercise price, would be more appropriate for valuing options. Finally, 
many of the commenters expressed support for a calendar day measure 
because of the inherent difficulty of aggregating transactions effected 
in different time zones.
    The definition of the identifying activity level contained in 
paragraph (a)(8) of the reproposed rule would increase and change the 
thresholds contained in the proposed rule from 100,000 shares to 
200,000 shares and fair market value of $2 million, and from a fair 
market value of $4 million to $10 million. The Commission believes that 
the addition of the $2 million fair market value requirement to the 
fundamental share volume threshold would act as a floor to minimize the 
impact of the reproposed rule on those persons that effect transactions 
in lower priced securities. The Commission solicits comments on whether 
this new element of the identifying activity level would be 
appropriate. The Commission also solicits comments regarding the 
effectiveness of the new identifying activity level for minimizing the 
impact of the reproposed rule on natural persons that infrequently 
trade large amounts of publicly traded securities.
    The time period for aggregating transactions also would be changed 
from a 24 hour period to ``a calendar day where the account is 
located.'' The Commission would deem a calendar day to be a 24-hour 
period starting at 12 a.m. and ending at 11:59 p.m. An account would be 
deemed to be located at the principal place of business of the broker-
dealer, not where the customer or registered representative servicing 
the account is located. Finally, the provisions regarding program 
trading are reproposed without changes in paragraphs (a)(9) and 
(10).25
---------------------------------------------------------------------------

    \2\5See Proposing Release, 56 FR 42552, at text accompanying n. 
15.
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    The Commission continues to believe that the capture of significant 
trading activity concurrently with program trading activity is 
essential for accomplishing the purposes of the Market Reform Act. The 
Commission has balanced this need against the burden of capturing the 
information and believes that the reproposed identifying activity level 
would strike an appropriate balance. The Commission also believes that 
the reproposed identifying activity level would establish a relatively 
simple and bright-line threshold that would be squarely within the 
activity-based mandate of the Market Reform Act.
2. Aggregation of Accounts and Transactions
    Section 13(h)(3) of the Exchange Act authorizes the Commission to 
prescribe rules governing the manner in which transactions and accounts 
shall be aggregated, including the basis of ownership or 
control.26 The commenters uniformly criticized the proposed rules 
for aggregation as overly broad and inflexible. Generally, these 
criticisms were levied by diversified financial service holding 
companies whose affiliates, subsidiaries, and divisions engage in 
related and unrelated trading activities. As discussed above, much of 
this criticism emanated from the definitions of ownership and control.
---------------------------------------------------------------------------

    \2\6See 15 U.S.C. 78m(h)(3) (1990).
---------------------------------------------------------------------------

    These commenters argued that the mandatory nature of the proposed 
rules would cause overlapping and duplicative aggregation among the 
various entities within a holding company structure. The commenters 
made a variety of recommendations, including a flexible approach, 
approaches designed to meet the needs of the specific commenter, an 
``acting in concert'' approach, and the elimination of the concept of 
aggregation. The comments regarding aggregation highlight the 
complexity of designing a simple and efficient large trader system that 
accommodates the different corporate structures and business practices 
of large traders. The proposed aggregation requirements, however, were 
intended to deter non-compliance by prohibiting a person or group of 
persons from splitting activity among many broker-dealers, accounts, 
and transactions for the purpose of avoiding the identification 
requirements of the proposed rule.
    a. General Description. The rules for aggregation have been 
reorganized into paragraphs (c)(1) and (2) of the reproposed rule to 
distinguish the requirements for the aggregation of accounts and the 
aggregation of transactions, respectively. The rules for the 
aggregation of transactions found in reproposed paragraph (c)(2) 
contain only minor changes that reflect the reorganization of the 
proposed rules.27
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    \2\7See Proposing Release, 56 FR 42561 (proposed text).
---------------------------------------------------------------------------

    The focus of the reproposed rule would be the ``aggregation of 
accounts owned or controlled by a person.'' Paragraph (c)(1)(i) of the 
reproposed rule would implement a new flexible approach to the 
aggregation of accounts by permitting, but not requiring, the 
aggregation of accounts that are owned or controlled or under common 
ownership or control of a person, which independently would be a large 
trader. Conversely, paragraph (c)(1)(ii) of the reproposed rule would 
require aggregation of accounts of a person who independently would not 
be a large trader.
    In order to assure compliance and deter the use of this flexible 
approach to circumvent the reproposed rule, new paragraph (c)(1)(iii) 
would provide that, under no circumstances, shall a person or group of 
persons acting in concert toward a common investment objective be 
permitted to disaggregate accounts in order to avoid the identification 
requirements of the reproposed rule. Finally, reproposed Form 13H and 
Schedules have been redesigned to explain and facilitate the various 
choices that large traders may make with respect to aggregation.
    b. Disaggregation. The concept of disaggregation would be 
reorganized into paragraph (c)(3)(i) of the reproposed rule. The 
reproposed rule provides that the Commission may require a large trader 
to disaggregate accounts or transactions in any manner and authorizes 
the Commission to require the submission of additional transaction or 
other information relating to transactions reported under the 
reproposed rule. To assure that the Commission's requests for 
disaggregation are reasonable, however, the reproposed rule would 
require the Commission to consider the operational capabilities of the 
large trader when making a request for disaggregation.
    The Commission's efforts to assure the credibility of the 
reproposed system would require the imposition of certain duties on 
omnibus large traders. These duties would include supplying information 
that would facilitate analysis of market trading activity. The duties 
would arise from, and pertain to, the disaggregation and identification 
requirements.28 These duties are found in paragraph (c)(3)(ii) of 
the reproposed rule and would only apply to those large traders that 
maintain, or effect transactions through, omnibus accounts carried by a 
registered broker-dealer. The obligations imposed on these large 
traders would be to establish systems and procedures designed to assure 
compliance with the disaggregation and identification requirements and, 
in particular, assure that the information regarding omnibus accounts, 
disclosed to the Commission on reproposed Schedules 7b and 8, is 
accurate and complete.
---------------------------------------------------------------------------

    \2\8See infra Section III.E., for a discussion of the 
supervisory safe harbor for broker-dealers.
---------------------------------------------------------------------------

    Systems and procedures designed to assure compliance with the 
identification and disaggregation requirements that are substantially 
comparable to those described in reproposed paragraph (f) would be 
deemed to be in compliance with reproposed paragraph (c)(3)(ii). 
Systems and procedures designed to assure that Schedules 7b and 8 are 
accurate and complete may include recordkeeping procedures triggered by 
the opening of new accounts and prescribing how, or for whom, a given 
omnibus account may be used. These systems and procedures are not 
intended to affect the existing disclosure practices and procedures 
between broker-dealers and banks or trust companies.29
---------------------------------------------------------------------------

    \2\9Custodian or nominee large traders generally are required to 
maintain and report information to their respective regulatory 
authorities that is similar to that required on these Schedules. 
These large traders, however, are not normally required to disclose 
proprietary information (e.g., customer lists) to competitors or 
other non-primary regulatory authorities.
---------------------------------------------------------------------------

    The need to impose these duties on omnibus large traders results 
from the undisclosed nature of omnibus accounts. The Commission 
believes that the obligations found in reproposed paragraph (c)(3)(ii) 
would be necessary to assure the effectiveness and credibility of the 
large trader system. The Commission also believes that these 
requirements would establish consistent duties with respect to omnibus 
accounts maintained by banks or broker-dealers.
    c. Aggregation examples. A diversified financial services holding 
company, for example, may engage in all forms of banking, corporate 
finance, and trust services in addition to the full range of broker-
dealer activities, such as proprietary trading, market making, 
brokerage execution, and clearing services for retail and institutional 
customer accounts. This holding company also may provide discretionary 
and non-discretionary investment management services for retail and 
institutional customers, as well as for affiliated and unaffiliated 
investment companies, pension funds, and insurance companies.
    Under the reproposed rules for the aggregation of accounts, the 
holding company is permitted to formulate its own methodology for 
filing of Form 13H.30 For example, it may file a single Form 13H 
that would include accounts of all its owned or controlled and commonly 
owned or controlled persons, divisions, subsidiaries, and affiliates. 
In the alternative, the holding company may file separate Form 13Hs for 
its divisions, subsidiaries, and affiliates that independently would be 
a large trader. Finally, the holding company may file a separate Form 
13H for individual traders or trading desks which also would 
independently qualify as a large trader.
---------------------------------------------------------------------------

    \3\0See infra Section III.B.2., for a discussion of Form 13H and 
instructions.
---------------------------------------------------------------------------

    In another example, a diversified broker-dealer that engages in 
investment banking, proprietary trading, discretionary and non-
discretionary investment management services, and clearing and custody 
services may also adopt its own methodology for the filing of Form 13H. 
First, the broker-dealer could file a single Form 13H for all of its 
activities. Second, the broker-dealer could file separate forms by 
dividing its activities along the three large trader capacities and 
then further subdivide each capacity in a fashion that best suits its 
business needs. Accordingly, this broker-dealer may wish to file one 
Form 13H for each proprietary trader due to operational considerations, 
two Form 13Hs for its investment management subsidiary due to 
confidentiality considerations (e.g., one for affiliated investment 
company accounts and one for other managed accounts), and for 
supervisory considerations, one Form 13H for all of the omnibus 
accounts for which it acts as custodian/nominee only.
    The Commission believes that this flexible approach to aggregation 
would accommodate the needs of the greatest number of large traders in 
the least burdensome manner possible. The Commission also believes that 
the reorganization and revision of the reproposed rules for aggregation 
would clarify the reproposed definition of a large trader. 
Nevertheless, the Commission solicits comments on whether there are 
other more effective means for aggregating accounts that would 
accomplish the objectives of the Market Reform Act.

B. Identification Requirements for Large Traders

    Section 13(h)(1) of the Exchange Act authorizes the Commission to 
prescribe identification requirements for large traders for the purpose 
of monitoring the impact of large transactions on securities markets 
and to assist the Commission in the enforcement of the Exchange 
Act.31 The Commission is specifically authorized to require large 
traders to provide it with the information deemed necessary or 
appropriate to identify large traders and all accounts in or through 
which large traders effect transactions.32 The Commission also is 
authorized to require large traders to disclose their large trader 
status to the registered broker-dealers that carry the accounts through 
which they effect transactions.33 The Commission is reproposing 
Rule 13h-1(b) and Form 13H to implement these provisions of Section 
13(h)(1) of the Exchange Act.
---------------------------------------------------------------------------

    \3\1See 15 U.S.C. 78m(h)(1) (1990).
    \3\2See 15 U.S.C. 78m(h)(1)(A) (1990).
    \3\3See 15 U.S.C. 78m(h)(1)(B) (1990).
---------------------------------------------------------------------------

1. Form 13H Filing Requirements
    Paragraph (b)(1) of the reproposed rule provides that each large 
trader shall file Form 13H with the Commission in accordance with the 
instructions contained therein. The filing requirement for Form 13H is 
the most significant burden imposed on large traders by the reproposed 
rule. The time for filing Form 13H is contained in new paragraphs 
(b)(1) (i) and (ii) of the reproposed rule.
    The Commission recognizes that, due to the nature of many large 
trader's business activities, much of the information required by the 
proposed form may change daily. Accordingly, new paragraph (b)(1) of 
the reproposed rule would eliminate the proposed requirement that a 
large trader file a Form 13H every time the ``information contained 
therein becomes inaccurate for any reason.''
    Paragraph (b)(1) of the reproposed rule would require a large 
trader to file Form 13H within 10 business days after it first effects 
transactions that reach the identifying activity level and within 60 
calendar days after the end of each full calendar year thereafter. It 
should be noted, however, that a large trader would still be required 
to disclose its LTID or ID System number when a new account is opened 
during a calendar year.34 The Commission believes that the 
reproposed Form 13H filing requirements would substantially reduce the 
frequency of filings and accomplish the purposes of the Market Reform 
Act.
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    \3\4See infra Section III.B.3., for a discussion of the duty to 
disclose large trader status.
---------------------------------------------------------------------------

2. Form 13H and Instructions
    The Commission received many negative comments about Form 13H. The 
majority of the commenters argued that the proposed Form 13H and 
Schedules were duplicative or burdensome, and would be required to be 
filed too frequently. The commenters made various suggestions to 
eliminate or reduce the burdens of the proposed form. These suggestions 
included: (1) eliminating the listing of certain types of 
accounts;35 (2) incorporating information contained in other 
Commission filings by reference; (3) limiting the number of officers, 
directors, and partners for whom information must be provided; and (4) 
redesigning the proposed Schedules to capture the particular 
information possessed by each of the three basic types of large trader 
(i.e., owner, controller, or custodian/nominee).
---------------------------------------------------------------------------

    \3\5These comments argued that the proposed Schedules, 
especially proposed Schedule 5, should not require a large trader 
that controls accounts to list the fully disclosed accounts of small 
or otherwise infrequent traders that it controls or the undisclosed 
sub-accounts of persons for whom trades are effected through an 
omnibus account.
---------------------------------------------------------------------------

    a. General description. The Commission is reproposing a 
substantially revised Form 13H, Schedules, and Instructions. The 
revisions to proposed Form 13H reflect the modifications to the 
definition of a large trader and LTID disclosure requirements and 
incorporate other recommendations made in the comments. As discussed in 
the Proposing Release, the information disclosed on Form 13H would be 
exempt from disclosure under the Freedom of Information Act (``FOIA'') 
pursuant to Section 13(h)(7) of the Exchange Act.36 A few 
commenters questioned the apparent lack of a similar exemption for the 
transaction information reported under the proposed rule. Section 
13(h)(7) provides that ``any information required to be kept or 
reported'' is exempt from disclosure under FOIA. Therefore, transaction 
information reported under the reproposed rule also would be exempt 
from disclosure under FOIA. The Commission believes that the non-
disclosure of such information also may be covered by other existing 
Commission rules.37
---------------------------------------------------------------------------

    \3\615 U.S.C. 78m(h)(7) (1990). See Proposing Release, 56 FR 
42554 at text accompanying nn. 50-52.
    \3\7See e.g., 17 CFR 200.80(b)(3), (4)(iii), (5), (7), and (8).
---------------------------------------------------------------------------

    The cover page to reproposed Form 13H would remain substantially 
unchanged except for the exclusion of the amended filing requirement, 
the addition of an inactive filing status, and the capture of 
applicable LTID or ID System numbers. Item 1 to Form 13H also would be 
unchanged, except for minor changes that conform with the reproposed 
definition of a person.38 The remaining Items and Schedules of the 
proposed form have been substantially revised in the reproposed Form 
13H.
---------------------------------------------------------------------------

    \3\8See supra Section II.A.1.a., for a discussion of the 
addition of persons or entities acting as a trustee to the 
definition of a person.
---------------------------------------------------------------------------

    Reproposed Item 2 to Form 13H would implement a new exemption from 
the filing requirements of reproposed Item 4 for persons and entities 
regulated by the Commission by allowing the incorporation by reference 
of information already on file with the Commission. The Commission 
anticipates that some of the most common registrations or filings that 
large traders may list in reproposed Item 2 would include: Form BD; 
Form ADV; Forms 3, 4, or 5; Form 10-K or 10-Q; and Form U-4.
    The Instructions to reproposed Item 2 also would inform large 
traders that the listed registrations and filings should reflect the 
registrations of all other large traders and persons whose accounts the 
large trader has decided to aggregate into its Form 13H. Finally, the 
reproposed Instructions would inform large traders that Item 4 and the 
appropriate Schedule must be filed for those persons who are not 
registered with the Commission and whose accounts have been aggregated 
with a ``registered person.''
    The Schedules to reproposed Item 4 also have been refined to 
capture only minimal descriptive information about the persons who own 
or control a large trader corporation, partnership, limited 
partnership, or trust. For the most part, the collection of addresses, 
telephone and facsimile numbers, and regulatory information has been 
eliminated. The terms ``officer and partner'' also have been changed in 
the reproposed Schedules 4b and 4c to ``executive officer'' and 
``limited partner that is the owner of more than a 10 percent financial 
interest in the accounts of the large trader.'' The term ``executive 
officer'' would be deemed to mean ``policy-making officer'' and 
otherwise would be interpreted in accordance with Rule 16a-1(f) under 
the Exchange Act.39 As suggested in the comments, these changes 
should substantially reduce the number of persons for whom such 
Schedules must be prepared and filed under the reproposed rule.
---------------------------------------------------------------------------

    \3\917 CFR 240.16a-1(f).
---------------------------------------------------------------------------

    Reproposed Item 5 to Form 13H would facilitate the new flexible 
rules for aggregation. Item 5(a) would require the large trader to list 
all commonly owned or commonly controlled persons whose accounts are 
aggregated into the particular Form 13H that independently would be a 
large trader (i.e., aggregated accounts). Conversely, Item 5(b) would 
require the large trader to list all other commonly owned or controlled 
large traders that independently filed Form 13H and that could have 
been, but were not, aggregated into the particular large trader's Form 
13H (i.e., disaggregated accounts). Again, the reproposed Instructions 
would caution large traders that the information supplied in Item 5 
must accurately reflect their choice for aggregation or disaggregation 
of accounts.
    The reproposed Schedules to new Items 6 through 8, which gather 
account information, address the concerns expressed in the comments and 
reorganize, substantially reduce, or eliminate much of the information 
regarding a large trader's accounts that may have been captured by the 
proposed Schedules. These reproposed Schedules have been completely 
redesigned to require the identification of only one contact person for 
each Schedule and establish a ``single-line-item'' type of account 
listing. The reproposed Instructions indicate that the proposed 
qualifications for designated contact persons would be retained without 
meaningful changes. The reproposed Instructions also advise large 
traders that they may submit internally produced lists of accounts, 
provided that such lists contain all required information in a format 
substantially similar to the applicable Schedule.
    The new account Schedules also have been reorganized to track the 
three capacities in which a large trader may act with respect to a 
given account (i.e., owner, controller, or custodian/nominee). The 
reproposed Schedules would capture different combinations of large 
trader capacities, based upon the large trader's knowledge of accounts 
and the extent of beneficial ownership disclosure made to the carrying 
broker-dealer. Reproposed Schedules 6a and 6b would be used by those 
market participants who own accounts.
    Reproposed Schedules 7a and 7b would be used by market participants 
who control accounts owned by others. These Schedules have been 
redesigned to indicate that accounts controlled by the large trader 
that are owned by small or otherwise infrequent traders would not be 
required to be specifically listed on these Schedules. Instead, 
reproposed Item 2 of Schedule 7a would capture general information 
about fully disclosed ``non-large trader'' accounts controlled by the 
large trader (i.e., the total number of such accounts and broker-
dealers carrying them). If applicable, information regarding other 
large traders whose activity may be controlled by the large trader 
through one of the listed accounts would be provided in reproposed Item 
3 of Schedule 7a and Item 2 of Schedule 7b.
    Lastly, Schedule 8 would be used by those broker-dealers, banks, 
and trust companies that market their clearing or depository services 
independently from their other brokerage or investment management 
services. It should be noted that reproposed Schedules 7b and 8 
incorporate the ID System to the extent that they permit a large trader 
to list the applicable ID System numbers or LTIDs of the custodian or 
nominee for an omnibus account and other interested parties (i.e., 
owners and controllers). The Commission believes that, due to the wide-
spread use and automated nature of the ID System, most of these numbers 
are routinely communicated among, and maintained in an automated 
fashion by, market participants. The disclosure of other large traders 
required by these Schedules would provide an important and common basis 
for disaggregation.
    Rarely would a large trader be required to complete all five of 
these reproposed Schedules. The Commission believes that such a filing 
probably would occur only if a diversified financial services company 
decided to aggregate the accounts of all of its divisions, 
subsidiaries, or affiliates into a single Form 13H filing.
    The complexity of the Form 13H disclosures under the reproposed 
rules would be greatest for a single aggregated filing and would become 
progressively less complex for multiple Form 13H filings. Generally, 
the large trader's organizational structure and business practices, 
combined with the reproposed requirements of Item 2, Item 5, and the 
account Schedules, would dictate the complexity of a Form 13H filing.
    The number of LTIDs that would be assigned varies directly with the 
number of Form 13H filings. The commenters indicate that some broker-
dealers and large traders may prefer to be assigned many LTIDs for 
supervisory purposes while others may prefer a single LTID for 
confidentiality reasons. In this respect, the SIA suggested that a 
broker-dealer be permitted to use its LTID for the confidential 
numbered accounts of its customers. Similarly, a few commenters, 
primarily foreign financial services holding companies or universal 
banks, asserted that the LTID disclosure requirements may cause them to 
breach ``Chinese Walls'' between investment banking, investment 
advisory, market making, or brokerage units. The Commission believes 
that these entities would be able to avoid this result under the 
reproposed rules by carefully aggregating or disaggregating accounts.
    The Commission acknowledges that excessive aggregation or 
disaggregation of commonly owned or controlled accounts may increase 
the overall costs and burdens on large traders and the Commission. The 
probability of receiving a request for disaggregation, and the cost 
thereof, also would vary directly with the extent of aggregation chosen 
by a large trader. The Commission would remind all market participants 
to evaluate their business practices and weigh the costs and benefits 
of aggregation or disaggregation in light of all the considerations 
outlined above.
    The Commission believes that perhaps the most important revisions 
to proposed Form 13H are the reproposed set of General and Special 
Instructions.\40\ These new Instructions provide answers to many of the 
specific questions raised in the comments. The Instructions provide all 
of the pertinent definitions, the rules for aggregation, and examples 
of who would be a large trader and what information must be provided on 
Form 13H. The reproposed Instructions also provide guidance and cross-
references to the reproposed rule, other related instructions, and 
particular burden reducing features or alternatives of reproposed Form 
13H. Accordingly, the Commission would encourage all market 
participants to carefully review the reproposed General and Special 
Instructions for Form 13H before completing and filing Form 13H.
---------------------------------------------------------------------------

    \40\See infra Appendix A.
---------------------------------------------------------------------------

    b. Form 13H Examples. Assume a trustee for a large pension fund is 
not registered with the Commission and personally manages 75% of the 
pension's assets. Assume further that the pension trustee delegates 
full discretionary investment authority over the remaining 25% of the 
pension's total assets to several investment advisers (e.g., a growth 
stock adviser, an index arbitrager, and a portfolio hedging 
strategist).
    This pension trustee would be required to complete one of the 
reproposed Schedules to Item 4 depending on the organizational type of 
the trustee (i.e., individual, corporation, or partnership). With 
respect to the 75% of the pension's total assets that the pension fund 
trustee personally manages, he would be deemed to own and control the 
accounts and would know the carrying broker-dealers and account 
numbers. The pension fund trustee, therefore, would list these accounts 
on reproposed Schedule 6a.
    Depending on the nature of the delegations of authority to each of 
the advisers, the pension trustee may not know the broker-dealers the 
advisers use to execute trades or maintain accounts. Accordingly, 
reproposed Schedule 6b has been designed to capture the information 
that the pension trustee knows (i.e., the advisers' names, addresses, 
numbers, and type of delegation), and reproposed Schedules 7a and 7b 
would capture the information in the possession of the adviser (i.e., 
carrying broker-dealer, account number, disclosure of ownership, and 
other large traders).
    Assuming that the advisers are large traders and were registered 
with the Commission, they would list Form BD or ADV in Item 2 of their 
Form 13Hs, and therefore, would be exempt from the requirements of Item 
4. It should be noted that if any of these advisers is not a large 
trader, then such adviser would not file Form 13H under the reproposed 
rules. In such cases, the Commission would be able to identify and 
contact the non-large trader adviser, if necessary, through the 
information provided by the pension trustee on its Schedule 6b to Form 
13H.
    In addition, assume that the trustee of the pension fund also 
engages the services of a prime broker, bank, or trust company to act 
only as the custodian or nominee for omnibus accounts that are owned 
and controlled by the pension trustee or owned by such trustee and 
controlled by the different advisers. In this case, the pension fund 
trustee would list on its Form 13H the omnibus accounts for which he or 
she is the owner and controller on Schedule 6a and the delegations of 
investment discretion on Schedule 6b. The advisers that control the 
pension fund's trading through the omnibus accounts would list such 
accounts on Schedule 7b of their Form 13Hs.
    The prime broker, bank, or trust company acting only as custodian 
or nominee for all of the omnibus accounts (i.e., the custodian or 
nominee large trader) would list such accounts, carrying broker-dealer, 
and the relevant controllers on reproposed Schedule 8. It should be 
noted that if the omnibus account custodian or nominee also controlled 
these accounts, in whole or in part, then it would complete Schedule 7b 
instead.\41\ The custodian or nominee large trader would be in 
possession of the information required by Schedule 7b or 8, for the 
following reasons. First, it is the carrying broker-dealer's customer 
with respect to the omnibus accounts and, therefore, would be required 
to complete a new account application and provide all other information 
requested by the broker-dealer with respect to settlement instructions 
and the persons authorized to effect transactions through the accounts. 
Second, the various advisers and the trustee of the pension fund, to 
the extent that he or she controls transactions, would be required by 
the reproposed rule to disclose such information to the prime broker, 
bank, or trust company acting as custodian or nominee.\42\ Finally, if 
the custodian bank or trust company was an issuer of publicly-traded 
securities, it may list Form 10-K or 10-Q in Item 2 and would not be 
required to complete Item 4 on its Form 13H.
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    \41\Of course, if the pension trustee retained the prime broker, 
bank, or trust company to act only as agent for settlement of its 
fully disclosed accounts, then such agent would not be deemed to own 
such account and would not be a large trader required to file Form 
13H and Schedule 8.
    \42\See infra Section III.B.3., with respect to this required 
disclosure under reproposed paragraph (b)(2)(ii).
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    Another example of how the reproposed Schedules to Form 13H may be 
applied would be where a registered investment adviser for a mutual 
fund complex chooses to file one Form 13H, covering all of the accounts 
controlled for affiliated or unaffiliated investment companies. 
Assuming that each mutual fund independently would be a large trader, 
they would be listed in Item 5(a) of the adviser's Form 13H. The Form 
ADV of the adviser and each investment company's registration statement 
or periodic reports also would be listed in Item 2 of the adviser's 
Form 13H. If the accounts through which the adviser effects 
transactions are fully disclosed as to ownership by a particular 
investment company within the fund complex, the adviser would complete 
Schedule 7a. Alternatively, if such accounts do not disclose the 
particular investment company for whom the adviser is effecting 
transactions (i.e., are maintained on an omnibus basis), then the 
adviser would complete Schedule 7b.
    The Commission believes that the revisions to the reproposed Form 
13H and Instructions would dispel many of the misconceptions regarding 
the information that would be required to be disclosed on Form 13H. The 
revised Schedules to Form 13H also minimize the burdens of the 
reproposed rule by utilizing existing ID System practices and 
procedures for disclosure and maintenance of information among large 
traders and other parties to multi-layered accounts. The Commission 
specifically solicits comments on the appropriateness of all the 
changes found in reproposed Form 13H and Schedules.
3. Disclosure of Large Trader Status
    Many of the commenters expressed concerns that the proposed 
disclosure requirements would cause overlapping, confusing, or 
unnecessary disclosures by more than one large trader for a given 
account. The broker-dealer commenters also indicated that the cost of 
modifying automated brokerage accounting systems to maintain and report 
multiple LTIDs for a single account or trade would be substantial.
    The reproposed rule would retain the proposed LTID assignment 
system43 and would modify the duty of large traders to disclose 
their LTIDs and accounts to broker-dealers. The reproposed rule also 
would require similar disclosures of information to custodians or 
nominees and large traders that control transactions.
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    \4\3Upon filing Form 13H a large trader would be assigned an 
LTID by the Commission. See Proposing Release, 56 FR 42553, at text 
immediately following n. 37.
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    Reproposed paragraph (b)(2)(i) would require a large trader who 
controls a fully disclosed account or the custodian or nominee for an 
omnibus account to disclose its LTID and accounts to the carrying 
broker-dealers. Hence, under the reproposed rules, each large trader 
account should have only one LTID number associated with it, namely the 
LTID number of the controlling large trader or of the custodian or 
nominee large trader.
    The Commission notes that the reproposed definition of control 
states that an account would be controlled by the owner of the account. 
Consequently, if an account is controlled only by its owner, then the 
owner would be required to disclose its LTID to the carrying broker-
dealer. This duty also would apply to fully disclosed accounts of small 
or otherwise infrequent traders whose accounts are controlled by large 
traders, even though these accounts would not be listed on the 
reproposed Schedules to Item 7.
    Paragraph (b)(2)(i) of the reproposed rule would effectively 
eliminate the majority of situations where multiple LTIDs would be 
disclosed to a broker-dealer for a single account. The Commission 
believes that the only situation where more than one LTID would be 
disclosed to a broker-dealer for a single account would be where more 
than one large trader controls transactions in an account that is fully 
disclosed as to ownership. These situations would include fully 
disclosed accounts controlled by their owner and another adviser or 
such accounts controlled by two or more advisers.
    Reproposed paragraph (b)(2)(ii) would require a large trader who 
controls omnibus accounts to disclose its LTID or ID System number to 
the broker-dealer or large trader acting as the custodian or nominee 
for such account. Similarly, reproposed paragraph (b)(2)(iii) would 
require a large trader that owns accounts but has delegated full or 
limited discretionary investment authority to another person to 
disclose its LTID or ID System number to such person. These duties are 
coordinated with the filing requirements for Schedules 7a, 7b, and 8 to 
reproposed Form 13H.44
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    \4\4See supra Section III.A.2.b., for a discussion of the 
omnibus account identification and disaggregation duties that attach 
to the filing of Schedules 7b and 8.
---------------------------------------------------------------------------

    The Commission acknowledges that reproposed paragraphs (b)(2) (ii) 
and (iii) may cause multiple LTIDs or ID System numbers to be disclosed 
to custodian or nominee and controlling large traders, respectively. 
The Commission believes that these required disclosures of large trader 
status would not be overlapping or unnecessarily burdensome and would 
utilize existing ID System practices and procedures. The Commission 
also believes that these disclosure requirements would minimize the 
amount of communication among members of an investment complex that 
would be necessary to complete Form 13H. Moreover, these changes to the 
proposed rule would conform with the various rules and regulations that 
require financial institutions of all types to identify the beneficial 
owners of accounts, confirm trades, and maintain possession and control 
of customer funds and securities.
    The Commission believes that the revisions to the reproposed rules 
for disclosure of large trader status incorporate many of the 
recommendations made by the commenters and reduce the burdens imposed 
on market participants. The Commission solicits comment on this use of 
the ID System and whether other ID System procedures or information 
would further the purposes of the Market Reform Act.
4. Inactive Filing Status
    In the Proposing Release, the Commission specifically solicited 
comments on various means of minimizing the impact of the proposed rule 
on small or otherwise infrequent traders. The Commission received many 
comments in this respect and all were supportive of minimizing the 
impact of the proposed system on small or otherwise infrequent traders. 
Many of the commenters suggested that an annual activity threshold 
could be used to limit the impact of the proposed system on infrequent 
large traders. The commenters did not identify any common trading 
objectives or characteristics of small or infrequent traders that may 
inadvertently become large traders, other than those suggested in the 
Proposing Release.45
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    \4\5See Proposing Release, 56 FR 42551, at nn. 12-14 and 
accompanying text.
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    The reproposed rule would implement a new ``inactive filing 
status,'' pursuant to paragraph (b)(3) of the reproposed rule. This new 
paragraph provides that large traders whose aggregate transactions 
during the previous full calendar year, which do not reach the 
identifying activity level and an aggregate calendar year total of 
2,000,000 shares or fair market value of $30,000,000, shall become 
inactive upon filing Form 13H. This threshold would incorporate the 
identifying activity threshold and would add an ``aggregate calendar 
year activity threshold.'' Aggregate calendar year activity would be 
computed in accordance with the rules for aggregation of transactions 
found in paragraph (c)(2) of the reproposed rule.
    The reproposed Instructions explain that this new inactive status 
would be invoked by checking the appropriate box on the cover page when 
filing an annual Form 13H for the calendar year in which the large 
trader was inactive. Once a large trader has made an ``inactive 
filing,'' he would be exempt from the reproposed annual filing 
requirements contained in paragraph (b)(1)(ii) and the LTID disclosure 
requirements of paragraph (b)(2). However, if an inactive large trader 
subsequently effects transactions that reach the identifying activity 
level, then the large trader again would be required to reactivate its 
large trader status by filing Form 13H within 10 business days. The 
reproposed Instructions indicate that such ``reactivated large 
traders'' would retain the LTID initially assigned to them by the 
Commission.
    The Commission believes that this new inactive filing status would 
eliminate the burdens of the identification requirements on small or 
otherwise infrequent traders and, therefore, would accomplish the 
objectives of the Market Reform Act. Nevertheless, the Commission 
solicits comments on whether this new provision would adequately reduce 
or eliminate the impact of the reproposed rule on natural persons that 
infrequently effect large trades. The Commission also solicits 
suggestions for other means of eliminating the burden of the reproposed 
rule on natural persons.
5. Other Information
    Paragraph (b)(4) of the reproposed rule has been added to the 
identification requirements to assure that the Commission has the 
authority to obtain, from time to time, other descriptive or clarifying 
information regarding accounts, or transactions effected through 
accounts, identified on Form 13H. This new paragraph would provide the 
Commission with the express authority to obtain other information from 
large traders that is not otherwise disclosed on Form 13H and may be 
crucial for understanding or analyzing information collected through 
the system. The Commission believes that the reproposed rule would not 
be unduly burdensome and would assure that the Form 13H filing 
requirements accomplish the objectives of the Market Reform Act.

C. Recordkeeping Requirements for Brokers and Dealers

    Section 13(h)(2) of the Exchange Act authorizes the Commission to 
prescribe recordkeeping requirements for large trader activity that it 
deems necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Exchange Act.\46\ The Commission also is authorized to conduct 
reasonable periodic, special, or other examinations of all records 
required to be made and kept pursuant to the Rule.\47\ Paragraph (d) of 
the reproposed rule would implement the recordkeeping provisions of 
section 13(h)(2) of the Exchange Act.
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    \46\See 15 U.S.C. 78m(h)(2) (1990).
    \47\See 15 U.S.C. 78m(h)(4) (1990).
---------------------------------------------------------------------------

1. General Requirements
    The general recordkeeping requirements, which contain minor changes 
from the proposed rule,\48\ would provide that every registered broker-
dealer that carries accounts for itself or others shall make and keep 
records of transactions effected directly or indirectly by or through 
such broker or dealer for all large traders. In addition, as 
specifically authorized by the Market Reform Act, the reproposed rule 
also would require that broker-dealers keep records of transactions for 
each person such broker or dealer knows or has reason to know is a 
large trader based on transactions effected by or through such broker 
or dealer. Further, paragraph (d)(4) of the reproposed rule would 
provide that such records shall be kept for a period of three years, 
the first two in an accessible place, in accordance with Rule 17a-4(b) 
under the Exchange Act.\49\
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    \48\See Proposing Release, 56 FR 42560 (proposed text).
    \49\17 CFR 240.17a-4(b).
---------------------------------------------------------------------------

    The reproposed rule would explicitly provide that only registered 
broker-dealers that carry accounts for themselves or others would be 
affected. The term ``registered broker-dealer'' is defined in Section 
3(a)(48) of the Exchange Act as a broker or dealer registered or 
required to be registered pursuant to Section 15 or 15B of the Exchange 
Act.\50\ Executing broker-dealers and prime brokers that do not carry 
large trader accounts would not be subject to the recordkeeping 
requirements of paragraph (d) of the reproposed rule, notwithstanding 
that these persons may perform other specific tasks for large traders 
and may be large traders. The Commission believes that these 
modifications would clarify the applicability of the general 
recordkeeping requirements of the reproposed rule.
---------------------------------------------------------------------------

    \50\See 15 U.S.C. 78c(a)(48) (1988).
---------------------------------------------------------------------------

2. Elements of Transaction Information
    Paragraph (d)(2) of the reproposed rule would provide the elements 
of information required to be maintained for all transactions. The 
Commission believes that these elements incorporate, to the extent 
possible, existing recordkeeping requirements under the Exchange Act 
and SRO rules for the electronic bluesheet system and, thereby, 
minimize the burdens imposed on registered broker-dealers.
    Due to changes to the LTID disclosure requirements, the 
recordkeeping requirement for LTIDs found in paragraph (d)(2)(x) of the 
reproposed rule would now require a broker-dealer to maintain only the 
LTID of the controllers of a fully disclosed account, or the custodian 
or nominee of an omnibus account. In addition, paragraphs (d)(2)(v) and 
(d)(2)(vii) of the reproposed rule have been modified to incorporate 
suggestions made by the commenters. Paragraph (d)(2)(v) has been 
modified to include the designation of exercises or assignments of 
option contracts. Paragraph (d)(2)(vii) has been modified to clarify 
that the personal accounts of officers, directors, or employees of a 
broker-dealer are not required to be aggregated with accounts owned or 
controlled by such broker-dealer.
    In addition, the reproposed rule includes three new elements that 
the Commission believes are necessary to reduce the burden of 
maintaining multiple LTIDs and execution times. First, paragraph 
(d)(2)(xi) of the reproposed rule would provide that broker-dealers 
must maintain the ID System numbers of agents, broker-dealers, 
institutions, and other interested parties otherwise maintained for the 
account for which a transaction is effected.\51\ The use of ID System 
numbers would have the effect of limiting the number of LTIDs that a 
broker-dealer must maintain and report with respect to a given account. 
The Commission understands that broker-dealers currently maintain these 
ID System numbers in their automated name and address records.\52\ The 
Commission specifically solicits comments on the appropriateness of the 
use of ID System numbers and whether other information, systems, or 
procedures may further reduce the burden of multiple LTID 
recordkeeping.
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    \51\See supra n. 17, describing ID System participants.
    \52\These automated records, and the ID System numbers contained 
therein, provide the data processing mechanism for the automated 
issuance of affirmations (i.e., confirmations) to the respective 
parties to an ID System trade. Under the proposed Interactive ID 
System, a Standing Instructions Database (``SID'') is planned to be 
implemented. This database would establish a standing repository for 
customer account and settlement information furnished by 
institutions, agents, and broker-dealers. This information would 
include the customer name, agent for the customer, the agent's 
internal account number, and interested parties. When entering trade 
data to the ID System, a broker-dealer could simply refer to account 
designations contained in the SID, and the system would 
automatically add details (e.g., customer name, agent, and 
interested parties) to the confirmations of the trade. The 
Commission notes that, absent large trader recordkeeping and 
reporting requirements, the proposed SID may eliminate the need for 
broker-dealers to maintain this information in their internal 
records. See Securities Exchange Act Release No. 33010 (October 4, 
1993), 58 FR 53007 (October 13, 1993).
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    Second, paragraph (d)(2)(xii) of the reproposed rule would provide 
that broker-dealers must maintain the code, identification, or sequence 
number assigned to a transaction that was routed or effected through an 
automated order routing system maintained by an SRO, such as the NYSE 
SuperDOT system. These numbers are uniformly maintained and used by 
broker-dealers and SROs to route reports of executed transactions to 
the appropriate broker-dealer branch offices or to research the status 
of unexecuted orders. The Commission would use these numbers to ``link 
or match'' transaction reports to the applicable SRO audit trail, in 
order to determine or verify the reported execution time.
    Finally, paragraph (d)(2)(xiii) of the reproposed rule would 
establish a miscellaneous or unspecified field that would provide the 
Commission with flexibility to accommodate future changes or problems. 
This flexibility also could be used to facilitate specific requests 
that would reduce the burdens of the reproposed system for a given 
broker-dealer. The Commission believes that the reproposed 
recordkeeping requirements would assure that the information necessary 
to accomplish the objectives of the Market Reform Act would be 
maintained. The Commission also believes that these reproposed 
requirements would reduce burdens substantially.

D. Trade Reporting Requirements of Brokers and Dealers

    Section 13(h)(2) of the Exchange Act specifically authorizes the 
Commission to require registered broker-dealers to report transactions 
that equal or exceed the reporting activity level effected by or 
through such broker-dealer for persons who they know are large traders, 
or any persons who they have reason to know are large traders on the 
basis of transactions effected by or through such broker-dealers.\53\ 
The Commission also is authorized to require broker-dealers to report 
transactions to the Commission or an SRO designated by the Commission 
on the morning following the day on which the transactions were 
effected or otherwise immediately upon request of the Commission or 
designated SRO. Further, the Commission is authorized to require that 
such transaction reports be transmitted in any format that it may 
prescribe, including machine-readable form. The Commission is 
reproposing paragraph (e) to implement the transaction reporting 
provisions of Section 13(h)(2) of the Exchange Act.
---------------------------------------------------------------------------

    \53\15 U.S.C. 78m(h)(2) (1990).
---------------------------------------------------------------------------

1. General Requirements
    The general reporting requirement would provide that every 
registered broker-dealer that carries accounts for large traders, or 
other persons for whom records must be maintained, shall electronically 
report transactions in machine-readable form and in accordance with 
instructions issued by the Commission. Transaction reports would be 
required to contain all elements of information for transactions 
effected through accounts carried by such broker-dealer for large 
traders and other persons for whom records must be maintained, which 
equal or exceed the reporting activity level. The Commission continues 
to propose that transaction reports be transmitted through the existing 
electronic bluesheet system.\54\ The special reporting requirement for 
trades of ``unidentified large traders,'' has been reorganized without 
changes into paragraph (e)(5) of the reproposed rule.
---------------------------------------------------------------------------

    \54\See Proposing Release, 56 FR 42557, at text accompanying nn. 
85-86.
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2. Reporting Activity Level
    The Commission expressly solicited comment on the appropriateness 
of the proposed reporting activity level. Generally, the commenters 
felt that the threshold was too low, and eight recommended higher 
levels that ranged from a low of 5,000 shares and $200,000 to a high of 
100,000 shares and $5 million. In response to these comments, the 
proposed reporting activity level has been modified.
    The reporting activity level contained in paragraph (e)(2)(i) of 
the reproposed rule would increase the thresholds contained in the 
proposed rule from 1,000 to 2,000 shares, and from a fair market value 
of $40,000 to $100,000. The reproposed rule also would add a ``calendar 
day where the account is located'' time frame, which would address 
today's global trading environment.55 As noted in the Proposing 
Release, the reproposed rules for aggregation would not apply to the 
reporting activity level.56
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    \5\5 For example, a registered investment company whose 
portfolio is composed of international securities may enter orders 
to effect transactions in domestic, European, and Asian securities 
markets. These orders may be effected on different calendar days 
where the account is located because of the various time zones in 
which the markets are located. As a consequence, the Commission 
notes that it may need to request 13H transaction reports for the 
calendar days immediately preceding or following the calendar day on 
which a significant market event occurred.
    \5\6See Proposing Release, 56 FR 42556, at n. 68.
---------------------------------------------------------------------------

    In addition, the reproposed rule would recognize that broker-
dealers may prefer to report or ``dump'' all transactions in a given 
security.57 In this regard, new paragraph (e)(2)(ii) of the 
reproposed rule would be added to permit broker-dealers to report 
transactions that are less than 2,000 shares or fair market value of 
$100,000. Finally, paragraph (e)(2)(iii) of the reproposed rule 
clarifies the proposed reporting provision for program trades and 
states that each transaction that is part of a program trade shall be 
reported regardless of share quantity or fair market value. The 
Commission believes that the reproposed reporting activity level would 
reduce the burden of the transaction reporting requirements.
---------------------------------------------------------------------------

    \5\7See Proposing Release, 56 FR 42556, at n. 74.
---------------------------------------------------------------------------

3. Multiple Large Trader Identification Numbers
    The broker-dealer and bank commenters indicated that significant 
costs would be incurred for enlarging systems and manually loading 
multiple LTIDs into their automated name and address records.58 
This concern was a direct result of the proposed definition of a large 
trader and broad requirements for disclosure, recordkeeping, and 
reporting of LTIDs of persons who own and control a given account. This 
concern was compounded with respect to the proposed treatment of 
omnibus accounts.59 The commenters generally suggested that tax 
identification numbers or ID System numbers be used to alleviate this 
burden.
---------------------------------------------------------------------------

    \5\8See Memoranda to SEC File No. S7-24-91 from the Division of 
Market Regulation dated March 20, 1992, which outline this issue as 
discussed at meetings with the SIA and the American Bankers 
Association.
    \5\9See Proposing Release, 56 FR 42557, at text accompanying n. 
79.
---------------------------------------------------------------------------

    The Commission has sought to reduce the burden of multiple LTIDs. 
The Commission has chosen to accomplish this objective through a 
narrowed definition of a large trader, reduced Form 13H information, 
limited disclosure of LTIDs, the use of ID System numbers, and trade 
reporting requirements that incorporate these changes.
    The SIA generally expressed its concurrence with this solution to 
the concerns with the multiple LTID reporting requirements.60 The 
Commission, however, specifically solicits comments on the transaction 
reporting aspects of the reproposed use of ID System numbers and any 
other information, systems, or procedures that would more effectively 
accomplish the objectives of the Market Reform Act.
---------------------------------------------------------------------------

    \6\0See Memoranda to SEC File No. S7-24-91 from the Division of 
Market Regulation dated June 8, 1992 and June 11, 1992 outlining 
discussions with the American Bankers Association and the SIA, 
respectively. See also supra n. 52, however, describing the Standing 
Instructions Database features of the proposed Interactive ID System 
and the potential elimination of the need for broker-dealers to 
maintain such information.
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4. Execution Times
    Due to the anticipated burden of automating execution times, the 
Commission proposed and solicited comments on a two year plan to phase-
in the automation of execution time reporting requirements. The 
Commission received substantial comments from broker-dealers regarding 
the proposed execution time reporting requirements. One commenter 
acknowledged that automated execution times were essential for reliable 
time-sequenced trading reconstructions and expressed support for the 
proposed two year phase-in plan. However, the majority of the 
commenters asserted that the development and implementation of 
automated systems for maintaining and reporting execution times would 
be costly.
    The commenters generally explained that in order to comply with the 
proposed rule, broker-dealers would be required to develop and 
implement so-called ``automated order match systems.'' These order 
match systems would automatically link or match the execution time 
recorded on customer order tickets with the execution time recorded on 
the corresponding trade tickets prepared on the floor of an exchange. 
Without these systems broker-dealers would be required to manually 
research and identify the execution time for each customer trade.
    Five broker-dealers and the SIA, on behalf of its members, supplied 
cost estimates. These cost estimates ranged from a high of $8.5 million 
to a low of $17,000.61 These cost estimates included many 
different items, some of which were not intended by the proposed rule. 
For example, many of these estimates included the cost of developing 
sophisticated systems that would fulfill the obligation of broker-
dealers to supervise compliance with the proposed rule. These systems 
presumably would identify related accounts that may be required to be 
aggregated, through computer systems that employ forms of ``artificial 
intelligence.''
---------------------------------------------------------------------------

    \61\At the request of the Division of Market Regulation, 16 
broker-dealers subsequently submitted cost estimates ranging from 
$8.6 million to $100,000.
---------------------------------------------------------------------------

    During the review of these cost estimates, it appeared to the 
Commission that the magnitude of the cost may be dependent upon the 
type of business conducted by a broker-dealer. The SIA acknowledged 
that broker-dealers with large retail client bases, branch networks, or 
widely marketed clearing services would be more likely to have 
implemented an order match system as a necessary cost of doing such 
business. Conversely, broker-dealers that primarily have institutional 
clients and few branches would be less likely to have automated order 
match systems and the ability to enhance their automated systems in a 
cost-effective manner.
    The commenters also indicated that ``average price'' trades and 
accounts compound their execution time concerns exponentially.62 
In addition, the commenters noted that a Commission request for 
transaction reports would likely come at times of severe market stress, 
which typically stretch broker-dealer trade processing capabilities to 
their limits. Finally, as a result of the proposed next business day 
reporting time frame, the commenters indicated that automation would be 
the only feasible means to assure compliance.
---------------------------------------------------------------------------

    \6\2Average price trades usually entail the execution of one 
large order, for one or more customers, through many small trades at 
varying prices throughout a given day. Customers who employ a 
broker-dealer, bank, or trust company as their centralized custodian 
and agent for settlement typically request that trades be confirmed 
and submitted for settlement as one trade at an average price in 
order to minimize the ``ticket charges or fees'' levied by the 
custodian. For example, a 150,000 share order may be filled through 
the execution of 100 trades of 1,500 shares each, at 50 different 
prices, and beginning at 9:30 a.m. and ending at 4:00 p.m. This 
average price trade may be posted to the customer account, and 
settled, as one ``ticket'' for 150,000 shares at an average price, 
without any indication of the many smaller lots, different prices, 
or actual execution times.
---------------------------------------------------------------------------

    A few commenters suggested alternatives for reducing this burden 
that included requesting execution times on a need-to-know basis, 
lengthening the reporting time frame, and postponing the effectiveness 
of the requirements to see how frequently the data would be required. 
From the outset, the Commission has sought alternative solutions that 
would minimize this burden while achieving the fundamental purpose of 
the large trader reporting provisions of the Market Reform Act. The 
Commission staff, SIA, and SIAC have not identified existing industry 
systems that would gather execution times for investor trading activity 
in a simple and accurate manner.
    Three alternatives that would require the development of new 
systems, however, were proposed. First, it was suggested that ``branch 
or DOT'' sequence numbers could be used in conjunction with SRO audit 
trail data. While this suggestion appeared to be workable with respect 
to ``system orders,''63 the SIA and SIAC agreed that this proposal 
would still require some form of automated order match system and may 
be considered by some broker-dealers to be equally as burdensome with 
respect to ``manual orders.''64
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    \6\3``System orders'' are those orders that are routed and 
reported through SRO order routing systems and are automatically 
posted to back-office accounting systems by the system. These 
orders, generally, may be characterized as orders for small 
individual investors or program trades.
    \6\4``Manual orders'' are those orders that are routed and 
reported manually over the telephone or telegraph and are manually 
posted to back-office accounting systems by broker-dealer personnel. 
These orders, generally, may be characterized as large block trades 
for institutional investors.
---------------------------------------------------------------------------

    Second, after acknowledging that system order execution times did 
not pose a significant problem, the SIA proposed the development of 
computer algorithms that would match ``order entry times'' with SRO 
audit trail data to determine the execution time of manual orders. 
Third, the Division of Market Regulation proposed a hybrid of these 
alternatives that bifurcates the execution time reporting requirements 
along the lines of system and manual orders.65
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    \6\5See Memoranda to SEC File No. S7-24-91 from the Division of 
Market Regulation dated April 16, 1992, May 7, 1992, and June 11, 
1992 outlining meetings where these proposals were discussed.
---------------------------------------------------------------------------

    After carefully weighing costs and benefits, the Commission has 
decided to repropose the Division's alternative for reducing the 
burdens of the execution time reporting requirements. The reproposed 
reporting requirements are found in new paragraphs (e) (3) and (4).
    Paragraph (e)(3) of the reproposed rule would provide that with 
respect to system orders, all transaction information required to be 
maintained under the reproposed rule, including execution time, would 
be required to be reported to the Commission or an SRO designated by 
the Commission before the close of business on the day specified in a 
request for such information. As indicated in the Proposing Release, 
the Commission would not require reports to be submitted prior to trade 
comparison and would consider pertinent market conditions as well as 
the capabilities of the industry's trade processing facilities.66 
Moreover, under the reproposed rule, the Commission may require the 
transmission of transaction reports after final settlement because of 
the inclusion of cancellations and corrections within the definition of 
a transaction.67
---------------------------------------------------------------------------

    \6\6See Proposing Release, 56 FR 42557, at n. 84 and 
accompanying text.
    \6\7See supra Section III.A.1.e., for a discussion of the 
definition of a transaction.
---------------------------------------------------------------------------

    Paragraph (e)(4)(i) of the reproposed rule would provide that with 
respect to manual orders, all transaction information required to be 
maintained, except execution time, would be required to be reported 
before the close of business on the day specified in a request for such 
information. Lastly, new paragraph (e)(4)(ii) of the reproposed rule 
would provide that the execution times of manual order transactions, 
which were initially reported without execution times, would be 
required to be reported within 15 calendar days after a subsequent 
request for such information. It should be noted that the Commission 
may request that broker-dealers provide such information for entire 
transaction report submissions, individual transactions, or a group of 
related transactions. Further, these manual order execution times would 
be required to be transmitted electronically, in machine-readable form, 
with all of the previously reported information regarding each of the 
manual order transactions for which execution times were requested.
    The Commission would carefully use these new reporting requirements 
to minimize the extent of extraneous information gathered through the 
system. The combination of the reporting requirements for execution 
times and sequence numbers would enable the Commission to generate 
accurate reconstructions of all large trader activity. Although these 
new provisions may slow down the completion of trading reconstructions, 
the Commission believes that the resulting analyses of trading 
reconstructions will be superior to any previous efforts in terms of 
accuracy, completeness, and timeliness. The SIA expressed its 
concurrence with this solution to the execution time reporting 
requirement concerns.68
---------------------------------------------------------------------------

    \6\8See Memorandum to SEC File No. S7-24-91 from the Division of 
Market Regulation dated June 11, 1992 indicating the SIA's 
concurrence.
---------------------------------------------------------------------------

    The Commission believes that the reporting requirements contained 
in the reproposed rule incorporate all existing information or systems 
and would minimize associated burdens. Further, the Commission believes 
that these requirements would strike a fair and reasonable balance 
between the costs of such reporting and the Commission's need to obtain 
execution times. Finally, the Commission believes that the reproposed 
reporting requirements would establish an efficient means for analyzing 
multi-layered accounts.

E. Supervisory Safe Harbor

    Section 13(h)(2) of the Exchange Act provides a mechanism for 
supervision of the large trader reporting system by authorizing the 
Commission to establish rules for recordkeeping and reporting of 
transactions effected by persons a broker-dealer ``knows or has reason 
to know'' is a large trader, based on transactions effected directly or 
indirectly by or through such broker-dealer.69 As proposed, the 
duty to supervise would apply to compliance with the identification 
requirements and would be imposed on all broker-dealers and other large 
traders that effect transactions through, or maintain omnibus accounts 
with, broker-dealers.70
---------------------------------------------------------------------------

    \6\915 U.S.C. 78m(h)(2) (1990).
    \7\0See Proposing Release 56 FR 42554, at text accompanying nn. 
44-46, 53-54, and 108.
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    A number of comments on this aspect of the proposed rule were 
received from broker-dealers and banks. These comments revolved around 
the scope of this duty and sought clarification concerning the steps to 
be taken to avoid liability for their customers' intentional or 
unintentional failure to comply with the identification requirements of 
the proposed rule.71 Many of the commenters focused on the lack of 
automated systems for cross-referencing or aggregating accounts that 
may be commonly owned or controlled. The commenters extrapolated from 
this premise that the development of automated systems for this purpose 
would be extremely expensive and unduly burdensome. The commenters also 
suggested that the principal compliance burden should be placed on 
large traders and that an objective standard or ``safe harbor'' should 
be created.
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    \7\1See Proposing Release, 56 FR 42554, at n. 46, for the 
administrative remedies that the Commission may impose for a failure 
to supervise. The Commission also notes that it may institute 
proceedings and impose any other remedies that it may deem 
appropriate.
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    The Commission emphasizes that the reproposed rule places the 
principal burden of compliance with the identification requirements on 
large traders. The Commission, however, also believes that some form of 
supervisory requirements and systems, which are consistent with the 
self-regulatory framework of the Exchange Act, are necessary to assure 
that the objectives of the Market Reform Act are fulfilled.
    Paragraph (f) of the reproposed rule would clarify and minimize the 
burden of the duty to supervise imposed by the ``reason to know'' 
provisions of Section 13(h)(2) of the Exchange Act. This duty to 
supervise would apply to registered introducing or correspondent 
broker-dealers that clear their transactions on an omnibus basis 
through a self-clearing broker-dealer. Absent other indications, self-
clearing broker-dealers would not normally be expected to supervise 
compliance by such broker-dealers or their customers for whom 
transactions are effected through omnibus accounts.
    The Commission acknowledges that this duty to supervise would 
impose additional burdens on broker-dealers. Accordingly, paragraph (f) 
of the reproposed rule would establish a ``safe harbor'' for the 
supervisory duty. This new paragraph would initially provide that 
registered broker-dealers would not be deemed to know or have reason to 
know that a person is a large trader if it does not have actual 
knowledge that a person is a large trader and has established policies 
and procedures reasonably designed to assure compliance with the 
identification requirements of the reproposed rule. Paragraphs (f) (1) 
and (2) of the reproposed rule provide the specific elements that would 
be required for the supervisory safe harbor.
    Paragraph (f)(1) of the reproposed rule requires the establishment 
of systems ``reasonably designed to detect and identify'' persons who 
have not complied with the identification requirements. This paragraph 
incorporates the ``reason to know'' standard and clarifies that, with 
respect to groups of accounts that may be identified as large traders 
(i.e., commonly owned or controlled accounts), policies and procedures 
would be within the safe harbor if they are reasonably designed to 
detect and identify such groups of accounts based on account name, tax 
identification number, or other readily available information.
    The Commission would deem ``other readily available information'' 
to include, for example, those instances where a single customer 
effects the requisite transactions through a single registered 
representative, trading desk, or branch office in his or her personal 
accounts, accounts of family members, or accounts of others, pursuant 
to written trading authorizations. Similarly, customer authorization to 
transfer funds or securities among accounts in order to receive 
approval for trading activities, meet margin requirements, or to settle 
transactions, may be deemed other readily available information.
    Paragraph (f)(2) of the reproposed rule also would require that 
broker-dealer supervisory policies and procedures contain systems 
reasonably designed to inform persons and large traders of their 
obligations to file Form 13H and disclose their large trader status. In 
this respect, questions and informative disclosures on new account 
applications, as well as annual notices to identified and unidentified 
large traders, among other things, would be deemed by the Commission to 
fulfill this element of the safe harbor.
    The Commission notes that the elements of the safe harbor do not 
specifically require automated systems, employee training programs, or 
any other systems or procedures. The adequacy of supervisory procedures 
would depend on the nature and characteristics of a broker-dealer's 
business. The Commission believes that many different systems or 
procedures may be effective for accomplishing the objectives of the 
supervisory duties and, therefore, would satisfy the requirements of 
the safe harbor.
    Paragraph (f) of the reproposed rule incorporates many of the 
suggestions contained in the comments for reducing the burdens 
attendant to supervision of the system. The Commission believes that 
these new paragraphs add detail and objectivity to the reason to know 
requirements of the Market Reform Act and, therefore, reduce the burden 
of the supervisory scheme of the reproposed rule. The Commission also 
believes that these provisions are consistent with the general 
supervisory obligation imposed on broker-dealers by the Exchange 
Act.72 The Commission, however, specifically solicits comments on 
the reproposed supervisory scheme and whether other more effective 
means exist, within the limitations provided by the Market Reform Act, 
for assuring the accuracy or reliability of information collected 
through the reproposed system and maintaining a level playing field 
between broker-dealers and banks.
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    \7\2 See e.g., Sections 15(b)(4)(E) of the Exchange Act, 15 
U.S.C. 78o(b)(4)(E) (1988).
---------------------------------------------------------------------------

F. Exemptions

    Section 13(h)(6) of the Exchange Act authorizes the Commission to 
exempt any person or class of persons or any transaction or class of 
transactions, either conditionally, upon specific terms and conditions, 
or for stated periods. The Commission may provide for such exemptions 
through rules or orders that are consistent with the purposes of the 
Exchange Act.73
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    \7\3 See 15 U.S.C. 78m(h)(6) (1990).
---------------------------------------------------------------------------

    The commenters did not express objections to the proposed 
exemptions, which were based upon the capture of similar information by 
SROs or involve activity generally deemed not to affect markets for 
publicly traded securities. The commenters, however, suggested 
additional classes of persons and transactions that should be exempt. 
These suggested exemptions included: (1) Introducing broker-dealers; 
(2) foreign and domestic market makers; (3) certain custodian banks; 
(4) small investment managers; (5) unit investment trusts; (6) issuer 
repurchases; and (7) after-hours foreign trading activity.
    Paragraph (g)(1) of the reproposed rule would specifically provide 
that certain broker-dealers are exempt from the identification, 
recordkeeping, and reporting requirements of the Rule. The reproposed 
rule would retain the exemptions proposed (i.e., specialists, option 
market makers, and floor brokers) and add market makers registered by a 
national securities association to the extent that they are acting in 
their market making capacity.
    Paragraph (g)(2) of the reproposed rule would exempt certain 
transactions and introducing broker-dealers from the reporting 
requirements. The specific transactions that would be exempt from the 
reporting requirements only include those transactions effected by 
specialists, option market makers, and other market makers in the 
publicly traded securities for which they are registered. In addition, 
paragraph (g)(2)(iii) has been added to definitively exempt introducing 
broker-dealers that do not carry accounts for themselves or others from 
the reporting requirements of the reproposed rule.
    The Commission believes that the comprehensive exemptions for 
entities that are subject to similar SRO recordkeeping and reporting 
requirements would establish an equal competitive environment between 
all forms of market professionals that are registered with an SRO. The 
Commission also believes that these exemptions would assure that the 
reproposed system collects the appropriate information from the 
appropriate registered broker-dealers.
    With respect to other suggested exemptions, the Commission believes 
that some have been incorporated in portions of the reproposed rule. 
For instance, the reproposed definition of a large trader, reduced 
scope of Form 13H, and inactive filing status, would implicitly exempt 
or significantly reduce the burden on custodian banks or trust 
companies, foreign market makers, and unit investment trusts.74 On 
the other hand, the Commission believes that some of the other 
suggested exemptions would not be consistent with the purposes of the 
large trader reporting provisions of the Exchange Act.75
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    \7\4 Unit investment trusts, and similar ``closed-end mutual 
funds,'' essentially are fixed portfolios of securities assembled by 
a sponsor and held for the life of the trust. Typically, these 
entities investments are static and, therefore, the identification 
or reporting requirements of the reproposed rule may be triggered 
only at their inception and termination. The new inactive status was 
designed, in part, with these entities in mind and would effectively 
eliminate the ongoing burdens of the reproposed rule on these 
entities.
    \7\5 These suggested exemptions would include: (1) ``small'' 
investment advisers that control ``large transactions'' (i.e., 
transactions that reach the identifying activity level); (2) issuer 
repurchases; and (3) after-hours foreign trading activity.
---------------------------------------------------------------------------

    The exemptive provisions of the reproposed rule acknowledge the 
existing systems for collecting similar information. The Commission 
believes that these exemptions accomplish the purposes of the Market 
Reform Act and minimize the number of persons affected by the various 
aspects of the reproposed rule.

G. Application to Foreign Entities

    In the Proposing Release, the Commission discussed the application 
of the proposed rule to foreign entities.76 The Commission was, 
and continues to be, concerned that excluding foreign entities and 
persons would leave domestic markets and exchanges at a competitive 
disadvantage relative to foreign markets and exchanges. Moreover, the 
Commission is concerned that the exclusion of foreign intermediaries 
(i.e., broker-dealers and banks) that maintain omnibus accounts with 
domestic broker-dealers would competitively disadvantage domestic 
intermediaries that perform omnibus trade execution or custodial 
functions for large traders. The Commission believes that the 
preservation of a fair competitive environment is fundamental to the 
accomplishment of the purposes of the Market Reform Act.
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    \7\6 See Proposing Release, 56 FR 42558, at text accompanying 
nn. 105-109.
---------------------------------------------------------------------------

    The Commission solicited comments from foreign and domestic market 
participants and foreign regulatory agencies regarding the application 
of the proposed rule and, specifically, alternative means for filing 
Form 13H, maintaining Form 13H information, and assigning LTIDs. The 
Commission received 15 comments from foreign entities.77 These 
commenters questioned the extent to which the proposed rule would apply 
and asserted that compliance with the proposed rule may cause breaches 
of certain local confidentiality requirements.
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    \7\7 Of these 15 comments, 12 were submitted by regulatory 
organizations or industry associations, including; the Ambassador of 
France, London Stock Exchange, British Department of Trade and 
Industry, German Ministry of Finance, Association of German Banks, 
British Merchant Banking and Securities House Association, 
Delegation of the Commission of the European Communities, 
Institutional Fund Managers Association, Institute of International 
Bankers, Swiss Bankers Association, Hong Kong Association of Banks, 
and Thesaurier-Generaal of the Netherlands.
---------------------------------------------------------------------------

    Many of these commenters generally asserted, without explanation, 
that the application of the proposed rule was unacceptable. A few of 
the commenters acknowledged the existence of memoranda of understanding 
(``MOUs''), however, none offered specific ideas or sought further 
discussions regarding alternatives or the development of ``MOU-type'' 
understandings. It should be noted that, in an enforcement context, the 
Commission would continue to obtain information from foreign regulatory 
authorities pursuant to existing MOU protocols.
    As discussed above, the application and scope of the reproposed 
rule would be established by the definition of a large trader, which 
closely tracks Section 13(h)(8)(A) of the Exchange Act.78 The 
Commission also notes that foreign broker-dealers would not be subject 
to recordkeeping or transaction reporting requirements of the 
reproposed rule. Accordingly, only foreign entities that are large 
traders would be subject to the reproposed rule. The duties and burdens 
imposed on all large traders include: (1) Filing Form 13H; (2) 
disclosing large trader status; (3) providing other information about 
accounts and reported transactions; and (4) if the foreign large trader 
maintains or controls transactions in an omnibus account carried by a 
registered broker-dealer, and the duty to assure compliance with the 
identification and disaggregation requirements of the reproposed rule.
---------------------------------------------------------------------------

    \7\8 15 U.S.C. 78m(h)(8)(A) (1990).
---------------------------------------------------------------------------

    A foreign entity or person would be a large trader, thus subject to 
the reproposed rule, only if the following four elements are present: 
(1) A person owns or controls an account or aggregated accounts; (2) 
such person effects aggregate transactions in publicly traded 
securities that reach the identifying activity level; (3) such 
transactions are effected directly or indirectly by or through accounts 
maintained by a registered broker-dealer; and (4) such transactions are 
effected by use of any means or instrumentality of interstate commerce 
or the mails or any facility of a national securities exchange.
    The various combinations of these elements are too numerous to 
discuss at length. However, the bounds of the application of the 
reproposed rule may be explored through the analysis of two typical 
examples of securities activity that may be referred to as ``foreign 
activity.'' First, assume that a foreign bank maintains an omnibus 
account with a domestic registered broker-dealer. Through this omnibus 
account, the foreign bank effects trades in publicly traded securities 
on a national securities exchange for its foreign customers (i.e., 
citizens of, or persons domiciled in, a foreign country) that reach the 
identifying activity level. In this case, the foreign bank would be a 
custodian or nominee large trader and would be required to: (1) File 
Form 13H and Schedules 7b and/or 8; (2) disclose its LTID and all such 
accounts to the registered broker-dealers carrying such accounts; (3) 
assure compliance with the disaggregation and identification 
requirements as well as the accuracy of Schedules 7b or 8; and (4) if 
requested, disaggregate accounts or transactions.
    As noted above, the foreign bank large trader would not be required 
to disclose on its Form 13H the non-large trader foreign customers 
whose trades are effected through its omnibus accounts. However, the 
reproposed rules would require the foreign bank large trader to assure 
that the information contained on Schedules 7b and 8 is accurate and 
complete. Accordingly, the foreign bank large trader would be required 
to disclose to the Commission the LTID or IID System numbers of its 
identified large trader customers.
    In addition, if the foreign bank large trader effects transactions 
through such omnibus accounts for one of its customers and such 
transactions reach the identifying activity level, then in order to 
assure compliance with the disaggregation and identification 
requirements of the reproposed rule, the foreign bank large trader 
would have a duty to advise such foreign customer of its duty to file 
Form 13H and disclose its status in accordance with the reproposed 
rule. This duty would apply to the foreign bank large trader whether 
the customer's transactions were effected on a discretionary or non-
discretionary basis.
    For a second example, assume that a registered broker-dealer 
carries the account of a domestic or foreign customer, and it effects a 
program trade in publicly traded securities in a foreign over-the-
counter market or exchange. In order to effect the trade, the 
registered broker-dealer transmits the order information by facsimile 
to a foreign broker-dealer affiliate. Further, assume that the 
affiliated foreign broker-dealer effects the transaction for an omnibus 
account which it carries in the name of the domestic broker-dealer.
    This activity would cause the foreign or domestic customer to be a 
large trader because it owned accounts, had effected the requisite 
trades indirectly through an account maintained by a registered broker-
dealer, and through the means or instrumentality of interstate 
commerce.
    Alternatively, if the foreign broker-dealer exercised control over 
the transaction then it also would be a large trader because it would 
have controlled accounts and effected the requisite trades by or 
through an account carried by a registered broker-dealer. Conversely, 
neither the customer or foreign broker-dealer would be large traders if 
the trade was effected exclusively by or for an account owned or 
controlled by the foreign or domestic customer and carried by the 
foreign broker-dealer, because the transaction would not be effected 
directly or indirectly by or for an account carried by a registered 
broker-dealer.
    As discussed above, the identification requirements would 
significantly clarify and narrow the scope of the reproposed rule and, 
thereby, reduce the associated burdens on all large traders. 
Accordingly, the Commission believes that the burdens imposed on 
foreign large traders are necessary and appropriate, not unduly 
burdensome, and are imposed uniformly on domestic and foreign markets, 
exchanges, intermediaries, and investors.

H. Proposed Implementation

    The Commission proposes that the transaction reporting requirements 
contained in paragraph (e) of the reproposed rule become effective 18 
months after adoption of the final rule. The Commission believes that 
this time frame would provide sufficient time for the securities 
information processors and broker-dealers to plan, design, and 
implement all of the various enhancements to existing transaction 
reporting systems required by the reproposed rule. During this 
implementation period, the Commission would conduct periodic tests of 
the trade reporting system and work closely with broker-dealers, SIAC, 
and the ISG to develop all of the technical data processing software 
required by the reproposed rule.
    The Commission believes that this implementation objective would 
facilitate the cost-effective development of the transaction reporting 
systems required by the reproposed rule. The Commission specifically 
solicits comments on whether the proposed 18 month period would be 
feasible.

I. Statutory Authority

    Section 13(h)(5) of the Exchange Act requires the Commission, when 
exercising its rulemaking authority for large trader reporting, to 
consider: (1) Existing reporting systems; (2) the costs associated with 
keeping and reporting large trader information; and (3) the 
relationship between United States and international securities 
markets. The Commission considered these requirements when formulating 
the proposed rule and firmly believed that, notwithstanding certain 
elements of the proposed rule that may cause market participants to 
incur additional costs, the proposed system minimized costs in 
virtually every respect. The additional costs acknowledged by the 
Commission, included: (1) Preparation, filing, and updating Form 13H; 
(2) maintenance and reporting of large trader transaction information; 
(3) maintenance and reporting of LTIDs and execution times; and (4) 
development and implementation of supervisory systems and procedures.
    The reproposed rule reflects the Commission's commitment to work 
with market participants to incorporate all existing industry systems 
that would minimize the costs associated with the reproposed system. 
The reproposed rule also reflects the Commission's conscious decision 
to shift substantial portions of the burdens imposed by the proposed 
rule from market participants to the Commission. Further, the foreign 
application of the reproposed rule has been carefully considered in 
light of its impact on the relationship between foreign and domestic 
securities markets, intermediaries, and investors.
    The Commission believes that the comments on the proposed rule 
highlight the complexity of designing a simple and efficient large 
trader system that accommodates many different types of large traders 
as well as business practices and procedures. Faced with these 
conflicting needs and practices, the Commission is reproposing rules 
that it believes would minimize the costs and burdens imposed on the 
greatest number of affected market participants.
    The Commission believes that the reproposed rule narrows and 
clarifies the definition of a large trader, and thus reduces the costs 
and burdens of the system. The revisions to the identification 
requirements, through the various definitions and rules for 
aggregation, have significantly reduced the number of persons who would 
be subject to the identification requirements of the reproposed rule. 
The inactive filing status, and the other filing or disclosure 
requirements, have been revised to incorporate other existing 
information and eliminate unnecessary information.
    The Commission believes that the information captured and disclosed 
under the reproposed identification requirements would be the minimum 
necessary for creating an effective large trader reconstruction tool. 
Moreover, the Commission believes that such information would be 
collected or disclosed in a fashion that approximates existing systems, 
practices, and procedures commonly used by all forms of large 
traders.79
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    \7\9The Commission reiterates its belief that the reproposed 
rule is consistent with the intent of the Market Reform Act and only 
requires identification or disclosure of large traders whose 
transactions are effected through omnibus accounts, and not ``small 
beneficial owners'' whose trades are effected through such accounts. 
See Proposing Release, 56 FR 42553, at n. 41 (citing the Senate 
Report); and House Report, supra n. 4, at 25.
---------------------------------------------------------------------------

    The modifications and additions to the recordkeeping and reporting 
requirements of the reproposed rule would significantly clarify their 
application and reduce technical burdens. The Commission believes that 
the reproposed rule's additional elements of transaction information, 
combined with the new reporting requirements for multiple LTIDs and 
system or manual order execution times, incorporate existing 
recordkeeping and reporting practices, procedures, and systems for 
customer trade information. As a result, the Commission believes that 
the reproposed recordkeeping and reporting requirements would provide 
the least burdensome method of collecting large trader transaction 
information.
    The supervisory provisions of the reproposed rule would clarify the 
duty to supervise. The supervisory obligations also would assure the 
credibility of the reproposed system and a level playing field between 
broker-dealers and other omnibus large traders to the greatest extent 
permitted by the Market Reform Act. The Commission believes that the 
new safe harbor provision provides meaningful detail and objectivity 
that would considerably reduce the burden of the supervisory duties. 
The Commission also believes that the reduced burdens of the 
identification requirements may foster greater compliance with the 
reproposed rule and indirectly reduce the supervisory burden of broker-
dealers and omnibus large traders.
    The Commission believes that the reproposed rule's application to 
foreign entities and persons would accomplish the objectives of the 
Market Reform Act by maintaining uniformity between domestic and 
foreign markets, exchanges, intermediaries, and investors. Finally, the 
Commission believes that the proposed plan for implementing the 
transaction reporting system would facilitate its cost-effective 
development.

IV. Conclusion

    The Commission is reproposing Rule 13h-1 and Form 13H, which would 
establish an activity-based identification, recordkeeping, and 
reporting system for large trader accounts and transactions. This 
system would enable the Commission to gather large trader information 
in a timely manner and in the form necessary to reconstruct trading 
activity in periods of market stress and for surveillance, enforcement, 
and other regulatory purposes. The Commission believes that the 
reproposed rule achieves the objectives of the Market Reform Act and 
would establish an effective market reconstruction tool that minimizes 
costs.

V. Effects on Competition and Regulatory Flexibility Analysis

    Section 23(a) of the Exchange Act80 requires that the 
Commission, when proposing rules under the Exchange Act, consider the 
effects on competition of such rules, if any, and balance any anti-
competitive impact against the regulatory benefits gained in terms of 
furthering the purposes of the Exchange Act. The Commission is of the 
view that the Rule will not result in any burden on competition that is 
not necessary or appropriate in furtherance of the purposes of the 
Exchange Act.
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    \8\015 U.S.C. 78w(a) (1988).
---------------------------------------------------------------------------

    Pursuant to the requirements of the Regulatory Flexibility 
Act,81 the Commission previously prepared an Initial Regulatory 
Flexibility Analysis (``IRFA''), concerning the proposed rule. The IRFA 
indicated that the proposed rule may impose some additional costs on 
small broker-dealers, small investment advisers, and small investors. 
The Commission has prepared a revised IRFA that details the changes to 
the proposed rule found in the reproposed rule. The Commission believes 
that the reproposed rule has been structured in a manner that further 
minimizes the costs of the reproposed system and fulfills the 
requirements of the Market Reform Act and section 13(h) of the Exchange 
Act. A copy of the revised IRFA may be obtained from Cameron D. Smith, 
Staff Attorney, Division of Market Regulation, Securities and Exchange 
Commission, 450 Fifth Street NW., Washington, DC 20549, (202) 272-5418.
---------------------------------------------------------------------------

    \8\15 U.S.C. 604 (1988).
---------------------------------------------------------------------------

VI. List of Subjects in 17 CFR Parts 240 and 249

    Reporting and recordkeeping requirements, Securities.

    In accordance with the foregoing, title 17, chapter II of the Code 
of Federal Regulations is proposed to be amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg, 
77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p, 
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.
* * * * *
    2. By adding Sec. 240.13h-1 to read as follows:


Sec. 240.13h-1  Large trader reporting system.

    (a) Definitions. For purposes of this section--
    (1) The term large trader means every person who, for an account 
that he owns or controls, effects transactions for the purchase or sale 
of any publicly traded security or securities by use of any means or 
instrumentality of interstate commerce or of the mails, or of any 
facility of a national securities exchange, directly or indirectly by 
or through a registered broker or dealer in an aggregate amount equal 
to or in excess of the identifying activity level.
    (2) The term person shall mean those persons and entities specified 
in Section 3(a)(9) of the Securities Exchange Act of 1934, two or more 
persons acting as a partnership, limited partnership, syndicate, or 
other group, but does not include a foreign central bank, and also 
includes such persons, entities, partnerships, or groups acting as a 
trustee.
    (3) The term account or accounts means each proprietary and 
customer account maintained or carried by a registered broker or 
dealer, which is disclosed or undisclosed to such broker or dealer as 
to ownership, and for which books and records are required to be made 
and kept in accordance with the provisions of Sec. 240.17a-3.
    (4) Ownership. An account of a person shall be deemed to be owned 
or under common ownership of the person in whose name an account is 
maintained, or a custodian or nominee that maintains an omnibus account 
or accounts otherwise undisclosed as to ownership, and any other person 
who has more than a 10 percent financial interest in the equity in the 
account or accounts of such person.
    (5) Control. An account of a person shall be deemed to be 
controlled or under the common control of the owner of such account, 
and any other person that has received or been assigned full or limited 
investment discretion from the owner of such account. For purposes of 
this section:
    (i) The term full discretionary investment authority means the 
discretion to enter orders for an account owned by another person, for 
the purchase or sale of any publicly traded security or securities, of 
any size, and at any time or price, without prior instruction or 
approval of the owner of such account; and
    (ii) The term limited discretionary investment authority means the 
discretion to enter orders for an account owned by another person, for 
the purchase or sale of any publicly traded security or securities, 
limited only to the price or time of execution, upon the express prior 
instruction or approval of the owner of such account.
    (6) The term publicly traded security means any equity security, 
option on an equity security, or an option on a group or index of 
equity securities (or based on the value thereof) listed, or admitted 
to unlisted trading privileges, on a national securities exchange and 
all other national market system securities as defined in 
Sec. 240.11Aa2-1.
    (7) The term transaction or transactions means all transactions in 
publicly traded securities, including cancellations, corrections, and 
exercises or assignments of option contracts, except for the following 
transactions:
    (i) Any journal or bookkeeping entry made to an account in order to 
record or memorialize the receipt or delivery of funds or securities 
pursuant to the settlement of a transaction;
    (ii) Any transaction that is part of an offering of securities by 
or on behalf of an issuer, or by an underwriter on behalf of an issuer, 
or an agent for an issuer, whether or not such offering is subject to 
registration under the Securities Act of 1933, provided, however, That 
this exemption shall not include an offering of securities effected 
through the facilities of a national securities exchange;
    (iii) Any transaction effected in reliance on Sec. 230.144A of this 
chapter;
    (iv) Any transaction that constitutes a gift;
    (v) Any transaction effected by a court appointed executor, 
administrator, or fiduciary pursuant to the distribution of a 
decedent's estate;
    (vi) Any transaction effected pursuant to a court order or judgment 
for distribution of property in settlement of a marital proceeding;
    (vii) Any transaction effected pursuant to a rollover of qualified 
plan or trust assets subject to section 402(a)(5) of the Internal 
Revenue Code (26 U.S.C. 402(a)(5)); or
    (viii) Any transaction between an employer and its employee(s) 
effected pursuant to the award, allocation, sale, grant or exercise of 
a publicly traded 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.
    (8) The term identifying activity level means:
    (i) Aggregate transactions in publicly traded securities, effected 
during a calendar day where the account is located, that are equal to 
or greater than the lesser of 200,000 shares and fair market value of 
$2,000,000, or fair market value of $10,000,000; or
    (ii) Any transaction or transactions that constitute program 
trading.
    (9) The term program trading means either index arbitrage or any 
trading strategy involving the related purchase or sale of a group or 
basket of 15 or more publicly traded securities that have a total fair 
market value of $1,000,000 or more.
    (10) The term index arbitrage means a trading strategy involving 
the purchase or sale of a group or basket of publicly traded securities 
in conjunction with the purchase or sale, or intended purchase or sale, 
of one or more cash-settled option or futures contracts on a group or 
index of equity securities (or based on the value thereof), or options 
on such futures contracts (collectively, derivative index products) in 
an attempt to profit from a difference between the price of a group or 
basket of equity securities and the price of a derivative index product 
through transactions that need not be executed contemporaneously.
    (b) Identification requirements for large traders.--(1) Form 13H. 
Each large trader shall file Form 13H (17 CFR 249.327) with the 
Commission, in accordance with the instructions contained therein:
    (i) Within 10 business days after first effecting aggregate 
transactions, or after effecting aggregate transactions subsequent to 
becoming inactive pursuant to paragraph (b)(3) of this section, which 
equal or exceed the identifying activity level; and
    (ii) Within 60 calendar days after the end of each full calendar 
year thereafter.
    (2) Disclosure of large trader status. Each large trader that:
    (i) Controls an account, or acts as a custodian or nominee for an 
omnibus account, shall disclose its large trader identification number 
and all of its owned or controlled accounts to any registered broker or 
dealer that carries such accounts;
    (ii) Controls an omnibus account, shall disclose its large trader 
identification number or Depository Trust Company Institutional 
Delivery System number to the custodian or nominee of such omnibus 
account; or
    (iii) Owns an account for which it has assigned control to another 
person, shall disclose its large trader identification number or 
Depository Trust Company Institutional Delivery System number to such 
other person.
    (3) Inactive Status. A large trader that has not effected aggregate 
transactions during the previous full calendar year that equal or 
exceed the identifying activity level and an aggregate calendar year 
total of 2,000,000 shares or fair market value of $30,000,000, shall 
become inactive upon filing and shall not be required to file Form 13H 
or disclose its large trader status thereafter.
    (4) Other Information. Large traders shall provide the Commission 
with such other descriptive or clarifying information it may request 
from time to time regarding accounts, or transactions effected through 
accounts, identified on Form 13H.
    (c) Aggregation of accounts and transactions.--(1) Accounts. For 
the purpose of determining whether a person is a large trader, the 
following shall apply:
    (i) All accounts through which transactions are effected directly 
or indirectly by a person that are owned or controlled by, or under 
common ownership or control with such person, which independently would 
be a large trader, may be aggregated;
    (ii) All accounts through which transactions are effected directly 
or indirectly by a person owned or controlled by, or under common 
ownership or control with such person, which independently would not be 
a large trader, shall be aggregated; and
    (iii) Under no circumstances shall a person or group of persons 
acting in concert toward a common investment objective, be permitted to 
disaggregate accounts owned or controlled by or under the common 
ownership or control of such person or group of persons, in order to 
avoid the identification requirements of this section.
    (2) Transactions. For the purpose of determining whether a person 
is a large trader, the following shall apply:
    (i) The gross volume or fair market value of transactions in equity 
securities and the gross exercise volume or exercise value of the 
equity securities underlying transactions in options on equity 
securities, purchased and sold, shall be aggregated;
    (ii) The gross exercise value of transactions in options on a group 
or index of equity securities (or based on the value thereof), 
purchased and sold, shall be aggregated; and
    (iii) Under no circumstances shall a person or group of persons be 
permitted to subtract, offset, or net purchase and sale transactions, 
in equity securities or option contracts, and among or within accounts, 
when aggregating the volume or fair market value of transactions 
effected under this section.
    (3) Disaggregation.--(i) Generally. The Commission may require a 
large trader to disaggregate accounts or transactions in any manner, 
and provide additional transaction or other information relating to 
transactions previously reported by a registered broker or dealer, in 
such cases and upon reasonable terms and conditions considering the 
operational capabilities of such large trader, when it determines such 
to be necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in the furtherance of the 
purposes of this section.
    (ii) Omnibus accounts. Large traders that effect transactions 
through or maintain omnibus accounts with a registered broker or dealer 
shall establish and maintain policies and procedures reasonably 
designed to assure compliance with the disaggregation and 
identification requirements of this section and, in particular, assure 
the accuracy and completeness of Schedules 7b or 8 to Form 13H. 
Policies and procedures that are substantially comparable to those 
described in paragraph (f) of this section shall be deemed to be in 
compliance with this section.
    (d) Recordkeeping requirements for brokers and dealers.--(1) 
Generally. Every registered broker or dealer that carries accounts for 
large traders and persons such broker or dealer knows or has reason to 
know are large traders, based on transactions effected by or through 
such broker or dealer, shall maintain records of all elements of 
information for all transactions effected directly or indirectly by or 
through an account carried by such broker or dealer for all large 
traders and persons that such broker or dealer knows or has reason to 
know are large traders.
    (2) Specific information. The elements of information required to 
be maintained for all transactions, shall include:
    (i) Date on which the transaction was executed;
    (ii) Account number;
    (iii) Identifying symbol assigned to the security;
    (iv) Transaction price;
    (v) The number of shares or option contracts traded and whether 
such transaction was a purchase, sale, or short sale, and if an option 
transaction, whether such was a call or put option, an opening purchase 
or sale, a closing purchase or sale, or an exercise or assignment;
    (vi) The clearing house number of such broker or dealer and the 
clearing house numbers of the brokers or dealers on the opposite side 
of the transaction;
    (vii) A designation of whether the transaction was effected or 
caused to be effected for the account of a customer of such broker or 
dealer, or was a proprietary transaction effected or caused to be 
effected for the account of such broker or dealer;
    (viii) Market center where the transaction was executed;
    (ix) The time that the transaction was executed, as required to be 
reported under paragraph (e) of this section;
    (x) The large trader identification number, of the person that 
controls the account or the custodian or nominee of an omnibus account, 
for which the transaction was effected;
    (xi) The Depository Trust Company Institutional Delivery System 
numbers of agents, broker-dealers, institutions, and other interested 
parties otherwise maintained by such broker or dealer for the account 
for which a transaction is effected;
    (xii) The code, identification, or sequence number assigned to a 
transaction that was routed or effected through an automated order 
routing system maintained by a self-regulatory organization; and
    (xiii) Any other codes, designations, or identifiers that the 
Commission may deem necessary or appropriate for compliance with the 
recordkeeping or reporting requirements of this section.
    (3) Retention. The records and information required to be made and 
kept pursuant to the provisions of this section shall be kept for such 
periods of time as provided in Sec. 240.17a-4(b).
    (e) Reporting requirements for brokers and dealers.--(1) Generally. 
Upon the request of the Commission, or a self-regulatory organization 
designated by the Commission, every registered broker or dealer that 
carries accounts for large traders and other persons for whom records 
must be maintained, shall electronically report in machine-readable 
form and in accordance with instructions issued by the Commission, all 
elements of information for all transactions effected directly or 
indirectly by or through accounts carried by such broker or dealer for 
large traders and other persons for whom records must be maintained, 
which equal or exceed the reporting activity level.
    (2) The term reporting activity level means:
    (i) Each transaction in publicly traded securities, effected during 
a calendar day where the account is located, that is equal to or 
greater than the lesser of 2,000 shares or fair market value of 
$100,000;
    (ii) Any other transaction in publicly traded securities of lesser 
amount, that a registered broker or dealer may deem appropriate;
    (iii) Each transaction, regardless of share quantity or fair market 
value, that is part of a group of transactions that constitute program 
trading; or
    (iv) Such other amount that may be established by order of the 
Commission from time to time.
    (3) System orders. With respect to transactions routed or effected 
through an automated order routing system maintained by a self-
regulatory organization, registered brokers or dealers shall report, 
all elements of information for all transactions required to be 
maintained, including the time that the transaction was executed, 
before the close of business on the day specified in the request for 
such transaction information.
    (4) Manual orders. With respect to transactions that are not routed 
or effected through an automated order routing system maintained by a 
self-regulatory organization, registered brokers or dealers shall 
report:
    (i) All elements of information for all transactions required to be 
maintained, except the time that the transaction was executed, before 
the close of business on the day specified in a request for such 
transaction information; and
    (ii) The time that each of such transactions were executed, within 
15 calendar days after receipt of a specific request for such 
information.
    (5) Unidentified large traders. With respect to transactions 
effected directly or indirectly by or through the account of a person 
that a registered broker or dealer knows or has reason to know is a 
large trader, all elements of information for all transactions required 
to be maintained and such person's name, address, date that the account 
was opened, and tax identification number(s) shall be reported.
    (f) Supervisory safe harbor. For the purposes of this section, a 
registered broker or dealer shall not be deemed to know or have reason 
to know that a person is a large trader if it establishes policies and 
procedures reasonably designed to assure compliance with the 
identification requirements of this section and does not have actual 
knowledge that a person is a large trader. Policies and procedures 
shall be deemed to satisfy this section, if they include:
    (1) Systems reasonably designed to detect and identify persons that 
have not complied with the identification requirements of this section, 
which such broker-dealer knows or has reason to know is a large trader, 
based upon transactions effected through an account or a group of 
accounts, that may be identified as a large trader, based on account 
name, tax identification number, or other information readily available 
to such broker-dealer; and
    (2) Systems reasonably designed to inform large traders of their 
obligations to file Form 13H and disclose large trader status under 
this section.
    (g) Exemptions.--(1) Comprehensive. The identification, 
recordkeeping, and reporting requirements of this section shall not 
apply to any registered broker or dealer that does not carry accounts 
for itself or others, and:
    (i) Is registered as a specialist or option market maker by a 
national securities exchange;
    (ii) Is a member or allied member of a national securities exchange 
that exclusively executes transactions on the floor of such national 
securities exchange; or
    (iii) Is registered as a market maker by a national securities 
association to the extent that it effects transactions in its capacity 
as a registered market maker.
    (2) Reporting requirements. The reporting requirements of this 
section shall not apply to:
    (i) Transactions for the account of a specialist or option market 
maker registered by a national securities exchange, effected in its 
capacity as a registered specialist or option market maker;
    (ii) Transactions for the account of a market maker registered by a 
national securities association, effected in its capacity as a 
registered market maker; or
    (iii) Any broker or dealer that does not carry accounts for itself 
or others.
    (3) Written requests. The Commission may, upon written application, 
exempt from the provisions of this section, either unconditionally or 
on specified terms and conditions, any person, large trader, broker or 
dealer, or class of transactions for which the Commission determines 
that application of this section is not necessary or appropriate in the 
public interest, for the protection of investors, or otherwise in 
furtherance of the purposes of this section.

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. By adding Sec. 249.327 to read as follows:


Sec. 249.327  Form 13H, information required of large traders pursuant 
to section 13(h) of the Securities Exchange Act of 1934 and rules 
thereunder.

    This form shall be used by persons that are large traders required 
to furnish identifying information to the Commission pursuant to 
section 13(h)(1) of the Securities Exchange Act of 1934 (15 U.S.C. 
78m(h)(1)) and Rule 13h-1(b)) thereunder (Sec. 240.13h-1(b) of this 
chapter).


    Dated: February 9, 1994.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.

    Note: Appendix A will not appear in the Code of Federal 
Regulations.

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