[Federal Register Volume 65, Number 89 (Monday, May 8, 2000)]
[Proposed Rules]
[Pages 26534-26542]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-11405]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-42741; File No. S7-12-00]
RIN 3235-AH69


Electronic Submission of Securities Trading Data by Exchange 
Members, Brokers and Dealers

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission is proposing for 
comment Rule 17a-25 under Section 17 of the Securities Exchange Act of 
1934. Proposed Rule 17a-25 would require brokers and dealers to submit 
electronically to the Commission, upon request, information on customer 
and firm securities trading. The Commission designed the proposal to 
improve its capacity to analyze electronic submissions of trading data 
and thereby facilitate Commission enforcement investigations and other 
trading reconstructions.

DATES: Comments must be received on or before June 7, 2000.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
N.W., Washington, D.C. 20549-0609. Comments may also be submitted 
electronically at the following e-mail address: [email protected]. 
All comment letters should refer to File No. S7-12-00; this file number 
should be included in the subject line if e-mail is used. All comment 
letters received will be available for public inspection and copying at 
the Commission's Public Reference Room, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Electronically submitted comment letters will 
be posted on the Commission's Internet web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Alton Harvey, Office Chief, at (202) 
942-4167; or Anitra Cassas, Attorney, at (202) 942-0089, Division of 
Market Regulation, Securities and Exchange Commission, 450 Fifth 
Street, N.W., Washington, D.C. 20549-1001.

SUPPLEMENTARY INFORMATION:

I. Introduction and Executive Summary

    In the course of its enforcement and market regulatory activities, 
the Securities and Exchange Commission (``Commission'') regularly 
requests securities trading records from broker-dealers. For many 
decades, the

[[Page 26535]]

Commission requested this data by mailing questionnaire forms (known as 
``blue sheets'' because of the color on which the forms were printed) 
to broker-dealers to be manually completed and mailed back to the 
Commission. In the late 1980s, as the volume of trading and securities 
transactions dramatically increased, the Commission and the securities 
self-regulatory organization (``SROs'') worked together to develop and 
implement a system with a universal electronic format to replace the 
less efficient manual process. This system is commonly known as the 
``electronic blue sheet'' or ``EBS'' system.
    In general, the Commission uses the EBS system to obtain securities 
transaction information for one of two purposes: (1) to assist in the 
investigation of possible federal securities law violations, primarily 
involving insider trading or market manipulation; and (2) to conduct 
market reconstructions, primarily following significant market 
volatility.\1\
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    \1\ The surveillance and enforcement staffs of othe SROs also 
routinely use the EBS system to obtain trading data from member 
firms for investigations into trading abuses such as insider trading 
or market manipulation.
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    Since its inception, the EBS system has been an effective tool for 
most investigations, which usually require analyses of trading in only 
one or two stocks over a limited time period. When used for large scale 
investigations or market reconstructions involving numerous stocks 
during peak trading volume periods, however, data provided by the EBS 
system has not met certain of the Commission's needs. Specifically, the 
current EBS system format does not provide information that is needed 
by the Commission to effectively aggregate trading by market 
participants who trade through multiple accounts with more than one 
broker-dealer.
    To ensure the continued effectiveness of the Commission's 
enforcement and regulatory programs, the Commission is therefore 
proposing to enhance certain aspects of the EBS system to take into 
account evolving trading strategies used by institutional and 
professional traders. Proposed Rule 17a-25 \2\ would codify the 
requirement that brokers and dealers electronically submit to the 
Commission, upon request by the Commission staff, information on 
customer and proprietary securities trading necessary for the 
Commission's enforcement or regulatory programs. \3\ Specifically, 
proposed Rule 17a-25 would require firms to supply specific information 
already covered by the existing EBS system. For proprietary 
transactions, firms would be required upon request to report standard 
data elements such as security symbol, date executed, amount traded, 
type of transaction, transaction price, account number, location where 
the transaction was executed, and identification information for the 
parties on either side of the transaction. For customer transactions, 
standard data elements would also include the customer name, address, 
branch office number, registered representative number, type of order, 
date account opened, taxpayer identification number, employer name, and 
the role of the intermediary (agent or principal) if any.
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    \2\ 17 CFR 240.17a-25.
    \3\ Section 17(a)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') requires registered broker-dealers to make, keep, 
furnish, and disseminate records and reports prescribed by 
Commission rule ``as necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in 
furtherance of the purposes of'' the Exchange Act. 15 U.S.C. 
78q(a)(1).
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    Proposed Rule 17a-25 would also require firms, upon request, to 
supply three additional data elements that would assist the Commission 
in aggregating transactions by entities trading through multiple 
accounts. \4\ In addition, the rule would require broker-dealers, upon 
request, to provide and keep current, information needed to process 
data requests in a timely manner (e.g., name, address, telephone and 
fax number, and e-mail address for each designated contact person 
responsible for receiving and processing EBS requests from the 
Commission).
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    \4\ See Part II.B.2, infra.
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    Proposed Rule 17a-25 is intended to accomplish three objectives. 
First, the proposed rule would codify the requirement for broker-
dealers to electronically submit securities trading data when requested 
by the Commission staff. Second, the rule is designed to improve the 
effectiveness of the Commission's enforcement and regulatory programs 
by providing the additional information necessary to aggregate the 
securities transactions of institutional and professional traders who 
maintain multiple accounts at more than one broker-dealer. Finally, by 
requiring broker-dealers to provide current contact person information, 
the proposed rule would significantly improve the Commission's ability 
to process securities trading data requests in a timely manner.

II. Discussion of Proposed Rule 17a-25

A. Background

    The securities industry has witnessed tremendous change in the past 
two decades, both in the types of market participants and in the 
variety of trading strategies and products. In particular, increasing 
numbers of institutional and professional traders now conduct their 
securities trading through multiple sub-accounts maintained at 
different broker-dealers. These market participants include 
institutional investors such as pension funds, insurance companies, 
foundations, endowments, mutual funds, and hedge funds.
    For over a decade, the Commission's primary tool for identifying 
buyers and sellers of securities in enforcement or other regulatory 
inquiries has been the EBS system. When an inquiry is opened, the 
Commission staff sends requests for trading data to the most active 
clearing firms in the relevant security. Firms are requested to submit, 
within ten business days, information concerning transactions by all 
proprietary and customer accounts that bought or sold a security or 
securities during a specified review period. For each account, firms 
must identify, among other things: the name and address of the account; 
the account type (proprietary or customer); the date of the trades; the 
types of trades (buy, sell, or sell short); the amount traded; and the 
transaction price. Firms use software to scan their account records and 
download the appropriate information into the standard EBS format. 
Firms then transmit that electronic file to the Securities Industry 
Automation Corporation (``SIAC''), which in turn routes the file 
electronically to the Commission's mainframe computer.\5\
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    \5\ If an SRO's surveillance or enforcement staff issues the 
data request, SIAC routes the EBS data from the broker-dealer to the 
appropriate SRO.
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    The EBS system has performed effectively as an enforcement tool for 
analyzing trading in one or two securities over a limited time period. 
Given the increasing complexity of trading strategies, however, the 
Commission believes that enhancements to the EBS system are necessary 
to improve the Commission's ability to analyze trading in more complex 
market-wide trading reconstructions, as well as in investigations 
involving activities in multiple securities during heavy trading 
periods. Specifically, new data elements would assist the Commission in 
aggregating transactions by entities trading through multiple accounts.
    The Commission believes that an enhanced EBS system would also 
provide a more efficient and cost-effective way to conduct timely and 
accurate reviews of the activities of large traders for regulatory or 
enforcement purposes, than would further efforts to

[[Page 26536]]

design and implement the large trader reporting system authorized by 
the Market Reform Act of 1990, and incorporated into section 13(h) of 
the Exchange Act.\6\ Although the Commission proposed Rule 13h-1 for 
comment in 1991 \7\ to implement the large trader reporting system, and 
re-proposed a revised version of the rule in 1994,\8\ the Commission 
has not proceeded with further development of this system in light of 
commenters' concerns.\9\
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    \6\ 15 U.S.C. 78m(h).
    \7\ See Securities Exchange Act Release No. 29593 (August 22, 
1991), 56 FR 42550 (August 28, 1991).
    \8\ See Securities Exchange Act Release No. 33608 (February 9, 
1994), 59 FR 7917 (February 17, 1994).
    \9\ When proposed Rule 13h-1 was published for comment in 1991 
and re-published in 1994, the Commission received numerous comments 
from the securities industry, potential large traders, and market 
commentators that the large trader reporting system would be unduly 
burdensome and costly. Public comments also raised concerns that a 
large trader registration system might cause large international 
investors to conduct their U.S. equity trading activities through 
foreign brokers and markets. Commenters also believed that the 
comprehensive system envisioned by Section 13(h) could prove 
difficult to implement and maintain, and most likely would not 
expedite trading reconstructions to the extent contemplated in 1990.
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    One of the primary objectives of the Market Reform Act of 1990 and 
proposed Rule 13h-1 was the enhancement of the Commission's ability to 
perform accurate and timely reconstructions of trading by large 
traders. The Commission believes that proposed Rule 17a-25 would 
accomplish this objective without imposing significant new burdens on 
broker-dealers or institutional investors. Under the current proposal, 
no major changes would be necessary for broker-dealer systems. The 
Commission preliminarily believes that all of the broker-dealers that 
are likely to handle large trader accounts already have in place 
systems to collect and transmit electronic reports over the existing 
EBS system. In addition, the Commission believes that the additional 
data elements contemplated by proposed Rule 17a-25 are readily 
available in broker-dealer systems and can be captured and 
electronically reported with only minor modifications to the firms' 
existing EBS software.

B. Description of Proposed Recordkeeping and Reporting Requirements

    Section 17(a)(1) of the Exchange Act requires broker-dealers to 
make, keep, furnish, and disseminate records and reports prescribed by 
the Commission ``as necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of '' the Exchange Act.\10\ Rules 17a-3 and 17a-4 under the 
Exchange Act specify minimum requirements with respect to the records 
that must be maintained by broker-dealers, as well as the periods 
during which such records and other documents relating to a broker-
dealer's business must be preserved.\11\
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    \10\ 15 U.S.C. 78q(a)(1).
    \11\ 17 CFR 240.17a-3 and 240.17a-4.
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    Proposed Rule 17a-25 would apply to entities currently subject to 
Rules 17a-3 and 17a-4. This includes any member of a national 
securities exchange who directly deals in a securities business with 
non-members of a national securities exchange. Proposed Rule 17a-25 
would also apply to any broker or dealer who conducts a securities 
business through any member of a national securities exchange, or is 
registered pursuant to Section 15 of the Exchange Act.\12\
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    \12\ 15 U.S.C. 78o.
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    The proposed rule is largely patterned after existing SRO rules 
that require member firms to use the EBS system to submit the customer 
and proprietary trading data that the SROs request in connection with 
their market surveillance or enforcement inquiries.\13\ The SRO rules, 
which have been in place for ten years,\14\ require the same standard 
transaction information to be submitted that would be required pursuant 
to proposed Rule 17a-25(a). The universal EBS format permits the SROs 
and the Commission to conduct timely and thorough surveillance and 
enforcement inquiries with minimal regulatory burdens on reporting 
broker-dealers.
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    \13\ See, e.g., Rule 410A of the New York Stock Exchange (NYSE); 
Rule 153A of the American Stock Exchange (Amex); Rule 15.7 of the 
Chicago Board Options Exchange (CBOE); Rule 8211 of the National 
Association of Securities Dealers, Inc. (NASD); and Rule 785 of the 
Philadelphia Stock Exchange (Phlx).
    \14\ See Securities Exchange Act Release Nos. 25859 (June 27, 
1988), 53 FR 25029 (July 1, 1988) (approving both the NYSE and 
Amex's rules for the electronic submission of trading data); 26235 
(November 1, 1988), 53 FR 44688 (November 4, 1988) (approving the 
CBOE's rule for the electronic submission of trading data); 26539 
(February 13, 1989), 54 FR 7318 (February 17, 1989) (approving the 
NASD's rule for the electronic submission of trading data); and 
27170 (August 23, 1989), 54 FR 37066 (approving the Phlx's rule for 
the electronic submission of trading data).
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1. Standard Transaction Information
    Proposed Rule 17a-25 would not impose additional recordkeeping 
requirements for broker-dealers; broker-dealers already maintain all of 
the information required for the proposed electronic reports pursuant 
to Exchange Act Rules 17a-3 and 17a-4. These elements include: (1) 
clearing house number or alpha symbol used by the broker-dealer 
submitting the data; (2) clearing house number(s) or alpha symbol(s) of 
the broker-dealer(s) on the opposite side to the trade; (3) the 
security identifier; (4) execution date; (5) quantity executed; (6) 
transaction price; (7) account number; and (8) identity of the exchange 
or market where each transaction was executed.\15\ If transactions are 
for customer accounts (as opposed to proprietary accounts), the 
following additional elements are included: (9) customer name, address, 
and related account information; and (10) if a transaction is effected 
for a customer of another member, broker or dealer, whether the other 
member, broker or dealer was acting as principal or agent on the 
transaction(s).\16\
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    \15\ 17 CFR 240.17a-3 and 240.17a-4.
    \16\ Id.
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2. Additional Transaction Information
    Proposed Rule 17a-25 would also set forth requirements for broker-
dealers to provide, upon request, additional data elements that are 
needed to aggregate trading by institutional and professional traders 
that often use multiple accounts maintained at different broker-
dealers. In preliminary discussions with the securities industry, the 
Commission staff has identified several additional data elements, 
discussed below, which would be useful in analyzing this type of 
trading through multiple accounts. These data elements should be 
readily available in broker-dealer systems, and only minor 
modifications to the firms' existing EBS software should be necessary 
to capture and report these data elements. We also believe that, 
because only a limited number of broker-dealers are likely to handle 
transactions for the types of entities that use multiple accounts at 
different broker-dealers (we estimate that less than 100 firms are 
likely to fall into this category), the potential costs to the 
securities industry for necessary EBS software modifications should be 
limited.
(a) Prime Brokerage Identifiers
    It is common for an institutional investor to route its buy or sell 
orders in securities through different broker-dealers, who will then 
forward the transactions to a single broker-dealer that is designated 
as the institution's ``prime broker.'' The prime broker maintains a 
master account for the institution that simplifies recordkeeping and 
oversight of the institution's trading activity.
    When an institution uses a prime brokerage arrangement, it is often

[[Page 26537]]

difficult for the Commission to identify instances when the same 
transaction may be reported twice in EBS submissions--once in the 
report by the executing broker-dealer and again in the report by the 
broker-dealer acting as prime broker. Broker-dealers employ different 
means to identify prime brokerage accounts in EBS submissions. For 
example, some broker-dealers identify the primer broker or an account 
executive at the prime broker in the account address field. Other 
broker-dealers do not indicate that an account's transactions involved 
a prime broker. As a result, some trades may be inadvertently double-
counted when the Commission performs trading analyses.
    Two new data elements in proposed Rule 17a-25 are designed to 
provide uniformity in identifying transactions involving a prime 
brokerage arrangement. First, if a broker-dealer effected trades for an 
institutional account but forwarded this account's transactions to a 
prime broker, this would have to be reflected in one of the new data 
fields in the enhanced EBS reports. This requirement is set forth in 
sub-paragraph (1)(i) under paragraph (b) of proposed Rule 17a-25. 
Second, if a broker-dealer acted as the prime broker for an 
institutional account, this also would have to be reflected in the new 
EBS data field. This requirement is set forth in sub-paragraph (1)(ii) 
under paragraph (b) of proposed Rule 17a-25.
    These new data elements would permit the Commission staff to better 
analyze this type of increasingly frequent institutional activity and 
to avoid inadvertently double-counting such transactions.\17\
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    \17\ The Commission is specifically requesting comment on prime 
brokerage identifiers; see Section III, infra.
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(b) Average Price Account Identifiers
    Broker-dealers often use their ``average price accounts'' as a 
mechanism to buy or sell large amounts of a given security for their 
institutional customers. Under this arrangement, a broker-dealer's 
average price account may buy or sell a security in small increments 
throughout a trading session, and then transfer the accumulated long or 
short position to one or more institutional accounts for a volume-
weighted average price after the market close.
    As with transactions involving prime brokerage arrangements, there 
currently is no uniformity in how broker-dealers identify these 
transactions in EBS submissions. As a result, the Commission's trading 
analyses may inadvertently double-count such transactions--once in the 
EBS submission for the firm's average price account, and again in the 
EBS submission for the institutional account receiving positions from 
the average price account. Two additional data elements in proposed 
Rule 17a-25 are designed to provide uniformity in identifying 
transactions involving average price accounts.
    First, if an institutional account's transactions involved 
transfers from the broker-dealer's average price accounts, this would 
have to be reflected in one of the new data fields in the enhanced EBS 
format. This requirement is set forth in sub-paragraph (2) (i) under 
paragraph (b) of proposed Rule 17a-25. Similarly, if the account 
covered by an EBS submission were itself an average price account, this 
also would have to be reflected in a new field in the enhanced EBS 
format. This requirement is set forth in sub-paragraph (2) (ii) under 
paragraph (b) of proposed Rule 17a-25.\18\
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    \18\ The Commission is specifically requesting comment on 
average price account identifiers; see Section III, infra.
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(c) Identifiers Used by Depository Institutions
    Many of the largest institutional investors in U.S. equity 
securities process their transactions through the Depository Trust 
Company (``DTC'') or similar organizations. Pursuant to paragraph 
(b)(3) of proposed Rule 17a-25, if a broker-dealer effected trades for 
an institutional account and processed these transactions through a 
depository institution, the account's depository identifier would have 
to be reflected in one of the new data fields in the enhanced EBS 
reports. The inclusion of a depository account identifier in EBS 
reports would greatly expedite efforts by the Commission staff to 
aggregate institutional trading when conducting a complex trading 
reconstruction involving multiple securities over an extended trading 
period.\19\
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    \19\ The Commission is specifically requesting comment on 
depository account identifiers; see Section III, infra.
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3. Information to Facilitate Data Requests
    A recurring problem with the EBS system has been the time delay in 
ensuring that data requests from the Commission staff are directed to 
the appropriate personnel at broker-dealers. Currently, the Commission 
staff initiates a data request by mailing a standard letter to the 
compliance personnel at any firm that was active in the selected 
security during the designated review period. Due to frequent staff 
turnover and reorganizations at broker-dealers, however, the correct 
compliance official at the firm often does not receive the request. 
Under certain circumstances, such as when a compliance officer has 
recently left the firm or is out of the office, it may be several days 
before a request reaches the appropriate staff person, thereby 
unnecessarily delaying the Commission's inquiry.
    The Commission believes that requiring broker-dealers to supply the 
Commission with up-to-date information about personnel responsible for 
processing EBS requests would expedite the process. The Commission 
currently stores EBS contact person information in an electronic 
database. This database, however, is often incorrect because firms fail 
to notify the Commission that contact persons have changed. 
Accordingly, paragraph (c) of the proposed rule would require broker-
dealers to submit, upon request, certain information about their 
contact persons and to keep this information current with the 
Commission. The Commission contemplates initially making such requests 
only to broker-dealers that have recently received EBS requests from 
the Commission.\20\
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    \20\ The Commission has determined that the most efficient means 
of obtaining EBS contact information from the appropriate broker-
dealers is by request rather than imposing a general reporting 
obligation on all broker-dealers. Thousands of broker-dealers who 
clear their trades through other firms never receive EBS data 
requests from the Commission. In addition, firms who do not trade 
with the public or are otherwise extremely inactive traders are 
rarely asked to supply trading data. Accordingly, the Commission 
believes it would be most cost-effective to build its database of 
EBS contacts based on the staff's experience with the types of 
broker-dealers that are likely to be recipients of future data 
requests.
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4. Other Information
    The Commission is specifically requesting comment on other types of 
information that may be useful in analyzing trading in more complex 
market-wide trading reconstructions, as well as in investigations 
involving trading in multiple securities during very active markets. 
For example, execution times would be useful in trading 
reconstructions, particularly those that focus on trading during 
critical time periods during sharp market swings. To date, however, 
execution times have not been included in EBS reports because this 
information generally has not been available through broker-dealer 
account records systems (``back office'' records) that are used to 
prepare EBS reports (although execution time information may be 
available in other broker-dealer recordkeeping systems). Some 
representatives of the securities industry have indicated to the

[[Page 26538]]

Commission staff that, at least for transactions effected through 
automated order-routing systems, ``order sequence'' identifiers \21\ 
could be used for EBS reports in lieu of actual execution times.
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    \21\ Firms use these identifiers to trace orders routed through 
automated systems. These identifiers are also routinely captured by 
some audit trail systems and other recordkeeping systems, such as 
the NYSE's daily program trading reports from member firms.
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    The inclusion of order sequence identifiers in EBS reports would 
enable the Commission staff to derive order entry times for particular 
trades. Once such trades are isolated, the transactions' order sequence 
numbers could be matched with timed order entry reports captured by 
either the broker-dealer's internal systems or with timed audit trails 
and related SRO reports. In view of the large number of institutional 
and professional trades that are routed and executed using automated 
systems, particularly program trading activity, the capture of the 
appropriate order sequence identifiers in EBS reports could greatly 
expedite trading reconstructions in which precise timing of particular 
trading activity is critical. The Commission is therefore soliciting 
comments concerning the feasibility of, and costs associated with, 
capturing order sequence identifiers in EBS reports.
    In addition, information captured by the NASD's Order Audit Trail 
System (``OATS'') and the NYSE's proposed order tracking system \22\ 
could be useful to the Commission in its trading analyses. For example, 
these systems generally capture the date and time of origination or 
receipt of the order and information on when the order is transmitted 
to another department within the member firm, to another member firm, 
or to a non-member. The Commission is, therefore, soliciting comments 
concerning the feasibility of, and costs associated with, capturing 
this type of information for Commission enforcement and trading 
reconstruction efforts.
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    \22\ See SR-NYSE-99-51.
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C. Exemptions

    The Commission recognizes that, particularly for some small broker-
dealers, it may sometimes be appropriate to exempt a firm from some of 
the reporting requirements of proposed Rule 17a-25. The Commission 
would rely on its general exemptive authority under Section 36 of the 
Exchange Act \23\ to exempt particular broker-dealers when the 
application of the reporting requirements of proposed Rule 17a-25 would 
not be necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the rule.
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    \23\ 15 U.S.C. 78mm. Procedures for Filing applications for 
orders for exemptive relief under Section 36 are found in the 
Commission's Rules of General Application, 17 CFR 240.0-12.
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III. Request for Comments

    The Commission invites interested persons to submit written 
comments on all aspects of proposed Rule 17a-25. The Commission 
specifically requests comments from broker-dealers on the feasibility 
of capturing and reporting the new data elements discussed above for 
activity by entities that use multiple accounts at broker-dealers. In 
particular, the Commission requests comments on whether prime brokerage 
and average price account identifiers are likely to prevent double 
counting, and whether there are other methods to identify and address 
this problem. The Commission also is seeking comments on the proposal 
to have EBS reports include, upon request, an institutional account's 
depository identifier. Furthermore, the Commission is soliciting 
comments concerning the feasibility of, and costs associated with, 
proposing additional data elements in EBS reports that would assist the 
Commission in determining when particular orders to buy or sell stocks 
have been entered. Finally, the Commission is soliciting comments from 
broker-dealers on the costs associated with providing and updating EBS 
contact person information. Commenters should also discuss if there are 
ways that any of the costs associated with proposed Rule 17a-25 could 
be reduced. Comments should be submitted by June 7, 2000.

IV. Paperwork Reduction Act

    Certain provisions of proposed Rule 17a-25 contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995, \24\ and the Commission has submitted them to 
the Office of Management and Budget for review in accordance with 44 
U.S.C. 3507(d) and 5 CFR 1320.11. The title for the collection of 
information is: Rule 17a-25, Electronic Submission of Securities 
Trading Data by Exchange Members, Brokers and Dealers. An agency may 
not conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a currently valid control 
number.
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    \24\ 44 U.S.C. 3501 et seq.
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A. Summary of Collection of Information under Proposed Rule 17a-25

    Proposed Rule 17a-25 would set forth the obligation of registered 
broker-dealers to electronically submit securities trading data in a 
standardized format when requested by the Commission staff for 
enforcement and other regulatory purposes. The proposed rule would also 
require the electronic submission of trading information to include, 
upon request, new data elements that will improve the Commission's 
ability to analyze securities transactions by entities that trade 
through multiple accounts maintained at different broker-dealers. The 
rule would also require broker-dealers to submit and, keep current, 
contact person information for EBS requests.

B. Proposed Use of Information

    The Commission would use the information collected pursuant to 
proposed Rule 17a-25 for enforcement inquiries or investigations and 
trading reconstructions, as well as for inspections and examinations.

C. Respondents

    While proposed Rule 17a-25 would apply to all of the approximately 
7,700 broker-dealers that are currently registered with the Commission, 
most provisions would apply only to the 5,500 broker-dealers who do 
business with the general public. Based on its experience, the 
Commission believes that the requirement for submission of new data 
elements for trade data concerning entities that use multiple accounts 
at broker-dealers would affect a significantly smaller number of 
broker-dealers, estimated at less than 100 firms. \25\
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    \25\ The estimate that less than 100 firms handle transactions 
from entities that use multiple accounts at broker-dealers is based 
on the Commission staff's use of the EBS system for several trading 
reconstructions in the 1990s.
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D. Total Annual Reporting and Recordkeeping Burden

    Proposed Rule 17a-25 should not impose additional burdens on the 
vast majority of the broker-dealers. Most of the requirements of the 
proposed rule involve collections of information that broker-dealers 
already maintain in compliance with existing regulations. In addition, 
virtually all of these firms already have systems in place that are 
routinely used to submit data to the Commission or SROs over the EBS 
system. The Commission staff will work with the few broker-dealers who 
might

[[Page 26539]]

not have EBS systems in place to develop cost-effective means of 
obtaining requested securities trading data, whether using the EBS 
system or other mechanisms. In addition, if electronic reporting of 
securities transaction data is not feasible or is unreasonably 
expensive for a particular small broker-dealer, the Commission staff 
will consider using its general exemptive authority under Section 36 of 
the Exchange Act to issue an exemptive order to the firm.
    The Commission believes the proposed rule will present new burdens 
only to those broker-dealers who have customers trading through 
multiple accounts. These broker-dealers would need to perform a one-
time modification of their EBS-related software to capture and report 
the new data elements. The cost to these firms is discussed below. In 
addition, because SIAC serves as an intermediary to route electronic 
files both to the Commission and the SROs, the analysis below discusses 
the costs SIAC and the SROs will incur to make their systems compatible 
with the broker-dealers' systems.
1. Burden-hours for broker-dealers
    The annual hour burden of the proposed rule for individual broker-
dealers would vary widely because of differences in the levels of 
activities of the respondents and because of differences in the current 
recordkeeping systems of the respondents. However, it is estimated that 
electronic response firms would spend approximately 8 minutes and 
manual response firms would spend 1\1/2\ hours responding to an average 
blue sheet request. Based on its experience with the EBS system, the 
Commission estimates that it sends approximately 14,000 electronic blue 
sheet requests per year, of which approximately 350 are sent to manual 
response firms. Accordingly, the annual aggregate hour burden for 
electronic response firms is estimated to be 1,820 hours (13,650  x  8 
 60). The annual aggregate hour burden for manual response 
firms is estimated to be 525 hours (350  x  90  60).
    In addition, the Commission estimates that it will request 1,400 
broker-dealers to supply the contact information identified in proposed 
Rule 17a-25(f), and the submission should take each broker-dealer 
approximately 5 minutes to prepare. To be conservative, the Commission 
estimates that each of these broker-dealers will revise the contact 
information twice a year, and each revision will also take 
approximately 5 minutes to prepare (10 minutes total). Accordingly, the 
annual aggregate burden for supplying the information requested in 
proposed Rule 17a-25(f) is 350 hours (1400  x  15 ( 60). The annual 
aggregate burden for all respondents to the collection of information 
requirements of proposed Rule 17a-25 is, therefore, estimated to be 
2,695 hours (1,820 + 525 + 350).
2. Capital Cost to Broker-Dealers and SROs
    As previously stated, the Commission estimates approximately 100 
broker-dealers will have to make modifications to their existing EBS 
software to capture the additional data elements. On average, each of 
these broker-dealers will incur capital or start-up costs of $150,000. 
The Commission also preliminarily believes that there will be no 
additional costs associated with the operation and maintenance of the 
modified EBS systems. Accordingly, the total start-up, operating and 
maintenance cost burden for broker-dealers is estimated to be $15 
million (100  x  $150,000).
    Based on its discussions with the SROs, the Commission estimates 
that three SROs will each incur approximately $29, 500 in capital costs 
to make their systems compatible with the broker-dealers. The 
Commission preliminary believes that the SROs will not incur additional 
costs in association with the operation and maintenance of the modified 
EBS systems.

E. General Information about the Collection of Information

    Any collection of information pursuant to proposed Rule 17a-25 
would be mandatory. The retention periods for the collection of 
information are already specified in Rule 17a-4 of the Exchange Act. 
\26\ Any collection of information pursuant to proposed Rule 17a-25 
would be kept confidential, subject to the provisions of the Freedom of 
Information Act, 5 U.S.C. 552.
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    \26\ 17 CFR 240.17a-4.
---------------------------------------------------------------------------

F. Request for Comment

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments to:
    (1) evaluate whether the proposed collection of information is 
necessary for the proposed performance of the functions of the agency, 
including whether the information shall have practical utility;
    (2) evaluate the accuracy of the Commission's estimate of the 
burden of the proposed collection of information;
    (3) enhance the quality, utility, and the clarity of the 
information to be collected; and
    (4) minimize the burden of collection on those who are to respond, 
including through the use of electronic collection techniques or other 
forms of information technology.
    Persons wishing to submit comments on the collection of information 
requirements should direct them to the following persons: (1) Desk 
Officer for the Securities and Exchange Commission, Office of 
Information and Regulatory Affairs, Office of Management and Budget, 
Washington, D.C. 20503; and (2) Jonathan G. Katz, Secretary, Securities 
and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 
20549-0609, with reference to File No. S7-12-00. The Commission has 
submitted the proposed collection of information to OMB for approval. 
Members of the public should direct any general comments to both the 
Commission and OMB within 30 days. OMB is required to make a decision 
concerning the collection of information between 30 and 60 days after 
publication in the Federal Register, so a comment to OMB is best 
assured of having its full effect if OMB receives it within 30 days of 
publication. Requests for materials submitted to OMB by the Commission 
with regard to this collection of information should be in writing, 
refer to File No. S7-12-00, and be submitted to the Securities and 
Exchange Commission, Records Management, Office of Filings and 
Information Services.

V. Costs and Benefits of the Proposed Rule

    The proposed rule will significantly assist the Commission staff's 
ability to conduct timely and accurate trading analyses for market 
reconstructions and complex enforcement inquiries or investigations, as 
well as inspections and examinations. The current system severely 
limits the Commission's ability to aggregate transactions effected by 
entities that use multiple accounts at broker-dealers and can produce 
trading compilations that double count some transactions effected 
through multiple accounts. Augmented trading analyses will improve the 
Commission's ability to monitor the securities markets and increase 
levels of investor confidence in the markets.

A. Broker-dealers \27\
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    \27\ Both the time burden and the costs were derived from 
information supplied by several broker-dealers.
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    For purposes of the PRA, the Commission has estimated that the 
annual aggregate hour burden for all respondents to the collection of 
information requirements of proposed

[[Page 26540]]

Rule 17a-25 to be 2,695 hours. The total annualized cost burden for 
those broker-dealers that make modifications to their existing EBS 
software is estimated to be $15 million in capital or start-up costs. 
The Commission also anticipates that these broker-dealers will not 
incur additional costs for the operation and maintenance of the 
modified EBS systems. The Commission specifically requests comments on 
whether the annual hour burden, the initial capital or start-up costs, 
and the costs for the operation and maintenance of broker-dealer EBS 
systems are reasonable estimates based on reasonable assumptions.

B. SROs

    The estimate of total annualized cost burden to the SROs is 
$88,500. \28\ This cost burden is computed by estimating that 
approximately three SROs will need to modify their systems to receive 
the new data elements, at an approximate cost of $29,500 per SRO. The 
Commission specifically requests comments on whether the annualized 
cost burden is a reasonable estimate.
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    \28\ The estimated cost is based upon discussions with the SROs.
---------------------------------------------------------------------------

    To assist the Commission in its evaluation of the costs and 
benefits that may result from the proposed rule, commenters are 
requested to provide analyses and data relating to the costs and 
benefits associated with any of the proposals.

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

    Section 23 of the Exchange Act requires the Commission, in adopting 
rules under the Exchange Act, to consider the anti-competitive effects 
of any rule that it adopts. The Commission does not believe the 
proposed rule would have any anti-competitive effects. We request 
comment on the anti-competitive effects, if any, of proposed Rule 17a-
25. Furthermore, Section 3(f) of the Exchange Act requires the 
Commission, when engaging in rulemaking that requires it to consider or 
determine whether an action is necessary or appropriate in the public 
interest, to consider whether the action will promote efficiency, 
competition, and capital formation. We request comment on these matters 
in conjunction with the proposed rule.
    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, the Commission is also requesting information regarding 
the potential impact of the proposed amendment on the economy on an 
annual basis. If possible, commenters should provide empirical data to 
support their views.

VII. Summary of Initial Regulatory Flexibility Act Analysis

    The Commission has prepared an Initial Regulatory Flexibility 
Analysis (``IRFA'') in accordance with 5 U.S.C. 603 concerning proposed 
Rule 17a-25. The following summarizes the IRFA.
    As discussed in the IRFA, the purpose of proposed Rule 17a-25 is to 
facilitate the collection, analysis and evaluation of relevant trading 
data for enforcement and other regulatory reviews. In particular, the 
proposed rule is intended to provide an effective system for reviewing 
securities transactions of entities that trade through multiple 
accounts at different broker-dealers. The Commission believes that the 
proposed rule will protect investors, as well as preserve the fair and 
orderly operation of the nation's securities markets.
    The IRFA also discusses the effect of proposed rule 17a-25 on small 
broker-dealers.\29\ The Commission estimates that approximately 12% of 
registered broker-dealers, or approximately 1,000 broker-dealers, 
qualify as small broker-dealers.
---------------------------------------------------------------------------

    \29\ For purposes of the regulatory flexibility analysis, a 
broker-dealer is considered a small entity if its total capital is 
less than $500,000, and it is not affiliated with a broker-dealer 
that has $500,000 or more in total capital. 17 CFR 240.0-10.
---------------------------------------------------------------------------

    The Commission's experience with the EBS system over the last ten 
years indicates that entities that trade through multiple accounts at 
different firms generally do not effect their trades through ``small'' 
broker-dealers. Accordingly, the Commission does not believe that any 
small broker-dealer would be required to modify its EBS-related 
software to capture and report the new data elements that are needed to 
analyze transactions by entities using multiple accounts.
    The IRFA further states that proposed Rule 17a-25 would not impose 
any additional recordkeeping requirements for small broker-dealers. The 
elements of trade information required for electronic reports to the 
Commission are already maintained by broker-dealers pursuant to Rules 
17a-3 and 17a-4 and SRO rules. In addition, because EBS requests are 
sent to large clearing firms or those broker-dealers that self-clear, 
these firms would also generally fall outside the definition of a small 
broker-dealer.
    Small broker-dealers would incur some costs when they report 
transaction data pursuant to requests by the Commission staff for 
enforcement purposes. The Commission believes, however, that any new 
costs associated with the current rule proposal would be minimal. As 
discussed above, small broker-dealers are already subject to SRO rules 
that mandate transaction data reports for surveillance or enforcement 
inquiries. Accordingly, even small broker-dealers are already required 
to have in place adequate systems and procedures to submit transaction 
reports to the appropriate SRO; no new systems would need to be 
developed pursuant to proposed Rule 17a-25. Moreover, the Commission 
staff has traditionally been flexible when working with small broker-
dealers who need to supply transaction reports. In cases in which a 
small broker-dealer does not already have the capacity to submit data 
over the EBS system, the Commission staff has accepted manual 
transmissions. Proposed Rule 17a-25 is not intended to change this 
flexible approach in obtaining necessary transaction reports from small 
broker-dealers.
    Small broker-dealers would also incur some costs when they are 
asked to supply information, pursuant to paragraph (c) of proposed Rule 
17a-25, about contact persons who would handle transaction data 
requests from the Commission. The Commission believes, however, that 
any new costs associated with this requirement would be minimal. Small 
broker-dealers are already required to have personnel and procedures in 
place to respond to enforcement or regulatory inquiries from the 
Commission or the SROs. In addition, because relatively few data 
requests are submitted by the Commission to small broker-dealers, only 
a small number of firms in this category would be requested to supply 
contact person information. Moreover, the costs associated with 
supplying this type of information appear to be minimal. Firms would 
simply be required to submit a brief letter or e-mail providing 
information concerning the appropriate contact person or persons, such 
as their names, telephone numbers, fax numbers, and e-mail addresses 
(if any), and to send a follow-up letter or e-mail when this 
information is no longer accurate.
    The IRFA also discusses the various alternatives considered by the 
Commission in connection with the proposed rule that might minimize the 
effect on small entities. These include, among others, creating 
differing compliance or reporting requirements or timetables that take 
into account the resources available to small entities, and whether 
such entities could be exempted from the proposed rule, or any part 
thereof. The Commission has drafted the proposal to be consistent

[[Page 26541]]

with the concerns for small entities. For example, as discussed above, 
the Commission has often permitted small broker-dealers to submit the 
trading data in a manual, rather than an electronic, format. The 
Commission will continue to rely on its exemptive authority under 
Section 36 of the Exchange Act to grant relief, when necessary, to 
small broker-dealers from the requirements of the proposed rule. A 
wholesale exemption from the proposed rule for small broker-dealers, 
however, would prevent the Commission from fully protecting investors 
and maintaining the fair and orderly operation of the nation's 
securities markets.
    The Commission encourages the submission of written comments 
regarding any aspect of the IRFA. In particular, the Commission 
requests comments on: (1) The number of small broker-dealers that would 
be affected by the proposed rule, especially the number of small 
broker-dealers which maintain institutional accounts, and (2) the 
nature and extent of new costs to small broker-dealers as a result of 
the proposed rule. Commentators are asked to describe the nature of any 
impact and provide empirical data supporting the extent of the impact. 
Written comments will be considered in preparation of the Final 
Regulatory Flexibility Analysis if the proposed rule is adopted. Such 
comments will be placed in the public file designated for the proposed 
rule. A copy of the IRFA may be obtained by contacting Anitra Cassas, 
Division of Market Regulation, Securities and Exchange Commission, 450 
Fifth Street, N.W., Washington, D.C. 20549-1001, (202) 942-0089.

VIII. Statutory Basis

    Proposed Rule 17a-25 under the Exchange Act is being proposed 
pursuant to 15 U.S.C. 78a et seq., particularly Sections 17(a) and 
23(a) of the Act, unless otherwise noted.

List of Subjects in 17 CFR Part 240

    Broker-dealers, Reporting and record-keeping requirements, 
Securities.

Text of the Proposed Rule

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

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

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

    Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee, 
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k, 
78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d), 
78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and 
80b-11, unless otherwise noted.

* * * * *
    2. Section 240.17a-25 is added to read as follows:


Sec. 240.17a-25  Electronic submission of securities trading data by 
exchange members, brokers and dealers.

    (a) Every member, broker or dealer subject to Sec. 240.17a-3 shall 
electronically submit to the Commission the data elements specified in 
this section for transactions that are the subject of a particular 
request for information made by the Commission:
    (1) If the transaction was a proprietary transaction effected or 
caused to be effected by the member, broker or dealer for any account 
in which such member, broker or dealer, or person associated with the 
member, broker or dealer, is directly or indirectly interested, such 
member, broker or dealer shall submit or cause to be submitted the 
following information:
    (i) Clearing house number, or alpha symbol as used by the member, 
broker or dealer submitting the data;
    (ii) Clearing house number(s), or alpha symbol(s) as may be used 
from time to time, of the member(s), broker(s) or dealer(s) on the 
opposite side of the transaction;
    (iii) Identifying symbol assigned to the security;
    (iv) Date transaction was executed;
    (v) Number of shares, or quantity of bonds or options contracts, 
for each specific transaction; whether each transaction was a purchase, 
sale, or short sale; and, if an options contract, whether open long or 
short or close long or short;
    (vi) Transaction price;
    (vii) Account number; and
    (viii) The identity of the exchange or other market where the 
transaction was executed.
    (2) If the transaction was effected or caused to be effected by the 
member, broker or dealer for any customer account, such member, broker 
or dealer shall submit or cause to be submitted the following 
information:
    (i) Data elements contained in paragraphs (a)(1)(i) through 
(a)(1)(viii) of this section;
    (ii) Customer name, address(es), branch office number, 
identification number for the associated person handling the account, 
whether order was solicited or unsolicited, date account opened and 
employer name and the tax identification number(s); and
    (iii) If the transaction was effected for a customer of another 
member, broker or dealer, whether the other member, broker or dealer 
was acting as principal or agent on the transaction or transactions 
that are the subject of the Commission's request.
    (b) In addition to the trading data elements in paragraph (a) of 
this section, a member, broker or dealer shall, upon request, submit or 
cause to be electronically submitted to the Commission the following 
information for transactions involving entities that trade using 
multiple accounts:
    (1)(i) If part or all of an account's transactions at the reporting 
broker-dealer have been transferred or otherwise forwarded to one or 
more accounts at another broker-dealer, the data submission to the 
Commission shall include the clearing house number, or alpha symbol 
used by the broker-dealer receiving the transaction;
    (ii) If part or all of an account's transactions at the reporting 
broker-dealer have been transferred or otherwise received from one or 
more other broker-dealers, the data submission to the Commission shall 
include the clearing house number(s), or alpha symbol(s) used by the 
broker-dealer(s) transferring or otherwise forwarding the transactions.
    (2)(i) If part or all of an account's transactions at the reporting 
broker-dealer have been transferred or otherwise received from another 
account at the reporting broker-dealer, the data submission to the 
Commission shall include the identifier for this other account;
    (ii) If part or all of an account's transactions at the reporting 
broker-dealer have been transferred or otherwise forwarded to one or 
more other accounts at the reporting broker-dealer, the data submission 
to the Commission shall include the identifiers for these other 
accounts; and
    (3) If an account's transaction was processed by a depository 
institution, the data submission to the Commission shall include the 
identifier assigned to the account by the depository institution.
    (c) Every member, broker or dealer subject to Sec. 240.17a-3 shall 
submit upon request to the Commission and keep current information 
containing the full name, title, address, telephone number(s), 
facsimile number(s), and electronic-mail address(es) for each person 
designated by the member, broker or dealer as responsible for 
processing securities transaction data requests from the Commission.
    (d) Unless otherwise specified by Commission rule or order, the 
member, broker, or dealer should comply with the format for the 
electronic submission

[[Page 26542]]

of the trading data described in paragraphs (a) and (b) of this section 
as specified by the self-regulatory organization of which it is a 
member.

    Dated: May 2, 2000.

    By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 00-11405 Filed 5-5-00; 8:45 am]
BILLING CODE 8010-01-P