[Federal Register Volume 66, Number 131 (Monday, July 9, 2001)]
[Rules and Regulations]
[Pages 35836-35843]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-17000]



[[Page 35835]]

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Part II





Securities and Exchange Commission





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17 CFR Parts 200 and 240



Electronic Submission of Securities Transaction Information by Exchange 
Members, Brokers, and Dealers; Final Rule

  Federal Register / Vol. 66, No. 131 / Monday, July 9, 2001 / Rules 
and Regulations  

[[Page 35836]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200 and 240

[Release No. 34-44494; File No. S7-12-00]
RIN 3235-AH69


Electronic Submission of Securities Transaction Information by 
Exchange Members, Brokers, and Dealers

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
adopting Rule 17a-25 under Section 17 of the Securities Exchange Act of 
1934 (``Exchange Act''), to require brokers and dealers to submit 
electronically to the Commission, upon request, information on customer 
and firm securities trading. Rule 17a-25 is designed to improve the 
Commission's capacity to analyze electronic submissions of transaction 
information, thereby facilitating Commission enforcement investigations 
and other trading reconstructions.

EFFECTIVE DATE: August 8, 2001, except Sec. 240.17a-25(b), which shall 
become effective on January 7, 2002.

FOR FURTHER INFORMATION CONTACT: Alton Harvey, Office Chief, at (202) 
942-4167; or Anitra Cassas, Special Counsel, 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

    On May 2, 2000, the Commission proposed for comment Rule 17a-25 \1\ 
under the Exchange Act to require brokers and dealers to submit 
electronically to the Commission, upon request, information on customer 
and firm securities trading.\2\ The rule is designed to more fully 
account for evolving trading strategies used primarily by institutional 
and professional traders, thereby improving the Commission's ability to 
analyze trading in complex market-wide reconstructions and enforcement 
investigations. Based on the Commission's experience in analyzing 
securities transaction information, and after careful consideration of 
the comments submitted in response to the proposed rule, the Commission 
is adopting Rule 17a-25 with certain changes discussed below.
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    \1\ Sec. 240.17a-25.
    \2\ See Securities Exchange Act Release No. 42741 (May 2, 2000), 
65 FR 26534 (May 8, 2000) (``Proposing Release'').
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II. 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 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.
    To identify buyers and sellers of securities in enforcement or 
other regulatory inquiries, the Commission staff regularly sends 
requests for securities trading records 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 during 
a specified review period.
    For several decades, the Commission requested this information 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 organizations 
(``SROs'') worked together to develop and implement a system with a 
universal electronic format, commonly known as the ``electronic blue 
sheet'' or ``EBS'' system, to replace the manual process.\3\
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    \3\ For the last decade, the SROs have required their member 
firms to use the EBS system to submit customer and proprietary 
trading data for use in connection with market surveillance and 
enforcement inquiries, particularly investigations into insider 
trading and market manipulation. See, e.g., Securities Exchange Act 
Release Nos. 25859 (June 27, 1988), 53 FR 25029 (July 1, 1988) 
(approving both the New York Stock Exchange (NYSE) and the American 
Stock Exchange's (Amex) rules for the electronic submission of 
transaction information); 26235 (November 1, 1988), 53 FR 44688 
(November 4, 1988) (approving the Chicago Board Options Exchange's 
(CBOE) rule for the electronic submission of transaction 
information); 26539 (February 13, 1989), 54 FR 7318 (February 17, 
1989) (approving the National Association of Securities Dealer's 
(NASD) rule for the electronic submission of transaction 
information); and 27170 (August 23, 1989), 54 FR 37066 (September 6, 
1989) (approving the Philadelphia Stock Exchange's (Phlx) rule for 
the electronic submission of transaction information).
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    The universal EBS format permits the Commission and the SROs to 
conduct timely and thorough surveillance and enforcement inquiries. 
Firms generally use software to scan their account records and download 
the appropriate information into the standard EBS format, and then 
transmit the data to the Securities Industry Automation Corporation 
(``SIAC''). In turn, SIAC routes the file electronically to the 
Commission's mainframe computer.\4\
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    \4\ If an SRO's surveillance or enforcement staff issues the 
request, SIAC routes the EBS data from the broker-dealer to the 
appropriate SRO.
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    In general, the Commission uses the EBS system to obtain securities 
transaction information for one of two purposes: (1) To assist in the 
examination for and 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. Since its inception, the EBS system has 
performed effectively as an enforcement tool for analyzing trading in 
one or two securities over a limited time period. When used for large-
scale investigations or market reconstructions involving numerous 
stocks during peak trading volume periods, however, the information 
provided by the EBS system has been insufficient. Specifically, the 
Commission has found it difficult to effectively aggregate EBS 
transaction information by market participants.\5\ To ensure the 
continued effectiveness of the Commission's enforcement and regulatory 
programs that rely on EBS information, the Commission proposed Rule 
17a-25.
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    \5\ Aggregation of EBS transaction data is rarely a problem for 
trading reconstructions conducted by Enforcement and OCIE staff 
because most such inquiries or investigations involve trading in a 
limited number of stocks over a relatively short time frame. The EBS 
data transmissions under these circumstances are almost always small 
enough to permit the Commission staff to use standardized desk-top 
applications or even manual reviews to eliminate potential double-
counting of some transactions. For massive market reconstructions 
performed by Market Regulation staff, however, the magnitude of the 
EBS data transmissions precludes the effective use of desk-top 
applications or manual reviews. As a result, market reconstructions 
normally require that mainframe computer applications be used for 
aggregation purposes. The new data elements set forth in Rule 17a-25 
will permit the staff to develop mainframe computer applications to 
sort through massive EBS data transmissions to avoid double counting 
transactions for market reconstructions.
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    As proposed, Rule 17a-25 would require broker-dealers to 
electronically submit securities transaction information, including 
identifiers for prime brokerage arrangements, average price accounts, 
and depository institutions, in a standardized format, when requested 
by the Commission staff for enforcement and other regulatory

[[Page 35837]]

purposes. In addition, the rule would require broker-dealers to submit, 
and keep current, contact person information for EBS requests. Proposed 
Rule 17a-25 was largely patterned after existing SRO rules.\6\
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    \6\ See, e.g., NYSE Rule 410A; Amex Rule 153A; CBOE Rule 15.7; 
NASD Rule 8211; and Phlx Rule 785.
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III. Summary of Comments

    The Commission received comments from the Securities Industry 
Association (``SIA'') and the Pacific Exchange (``PCX'') on the 
proposed rule.\7\ The SIA generally stated that it understood the 
Commission's need for proposed Rule 17a-25, but noted that there would 
be difficulties in implementing certain aspects of the proposal. The 
PCX asked for clarification on the application of the proposed rule to 
NASD Regulation's new web-based EBS system.\8\
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    \7\ See Letter from Bernard L. Madoff, Chair, SIA Ad hoc 
Committee on Electronic Bluesheeting, SIA, to Jonathan G. Katz, 
Secretary, Commission, dated June 15, 2000; and E-mail from Sarah E. 
Althoff, PCX, dated May 4, 2000.
    \8\ The PCX indicated that certain clearing firms have opted out 
of the SIAC EBS system, and now exclusively use the NASDR's new web-
based EBS system. The PCX asked if this change alters the scope and 
goals of proposed Rule 17a-25.
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A. Transaction Information

    The SIA had a concern with respect to the standard transaction 
information required under subsection (a)(2) of the proposed rule. One 
of the data elements required under subsection (a)(2)(ii) of proposed 
Rule 17a-25 and existing SRO rules \9\ is the employer's name of a 
customer who bought or sold a security that is under review. The SIA 
indicated that many firms would not be able to readily access this 
information on their EBS-related systems.\10\ As a result, these firms 
would either have to manually enter this information, or redesign their 
recordkeeping systems to automatically insert the customer's employer 
identification.
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    \9\ See supra note 4.
    \10\ SIA Letter, at 5-6.
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    The SIA also expressed concern about the additional information 
required under subsection (b) of the proposed rule. The SIA noted that, 
although the Proposing Release made it clear that subsection (b)(1)(i) 
of proposed Rule 17a-25 is designed for prime broker arrangements, the 
generic language might cover other types of transactions that involve 
shifting a position from one firm to another. These transactions 
include ``give-ups'' (the executing broker-dealer provides the clearing 
number of another broker-dealer when reporting a transaction for the 
comparison process) and ``step-outs'' (the executing broker-dealer 
provides the clearing number of another broker-dealer after submission 
of a transaction for the comparison process). The SIA requested rule 
language tailored more closely to prime brokerage arrangements.\11\
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    \11\ SIA Letter, at 4-5.
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    Subsection (b)(1)(ii) of proposed Rule 17a-25 requires the prime 
broker to indicate the clearinghouse number or alpha symbol of each 
executing broker-dealer that forwarded part or all of the transaction. 
The SIA indicated that information concerning prime brokerage 
arrangements is typically easier for executing brokers to automatically 
pull up on their systems than for prime brokers. As a result, prime 
brokers would be required to implement more systems changes than 
executing brokers.\12\
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    \12\ SIA Letter, at 5.
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    The SIA also asked for clarification on the amount of information 
required by subsection (b)(2) of Rule 17a-25, which pertains to average 
price account identifiers. Citing formatting difficulties and 
programming costs, the SIA urged the Commission to allow a single 
identifier to denote that an account is part of an average price 
account arrangement, rather than requiring broker-dealers to generate 
separate identifiers for the master account and each sub-account.\13\
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    \13\ Id.
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B. Other Information

    In the Proposing Release, the Commission solicited comments on the 
feasibility of requiring EBS reports to include execution times or 
other indicators, such as ``order sequence numbers'' for transactions 
effected through an automated order routing system. In response, the 
SIA identified a number of practical problems in implementing these 
data elements, and suggested that the cost of reformatting broker-
dealers' systems or building new systems would outweigh the regulatory 
need for this information.\14\
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    \14\ SIA Letter, at 6-7.
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    Finally, the SIA stressed that delays in implementing Rule 17a-25 
may be required due to other systems challenges facing the securities 
industry over the coming months, such as preparations for the full 
implementation of decimal pricing.\15\
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    \15\ SIA Letter, at 3.
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IV. Discussion and Basis for Adoption

    Today, the Commission is adopting Rule 17a-25 substantially as 
proposed, with certain changes designed to reflect the comments. The 
rule applies to all exchange members, brokers and dealers subject to 
Rule 17a-3 of the Exchange Act.\16\ Rule 17a-25 will not impose any 
additional recordkeeping requirements for broker-dealers; broker-
dealers already maintain all of the information required for the EBS 
reports pursuant to Section 17(a)(1) and Rules 17a-3 and 17a-4 under 
the Exchange Act.\17\
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    \16\ 17 CFR 240.17a-3.
    \17\ Section 17(a)(1) of the Exchange Act requires registered 
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. 15 
U.S.C. 78q(a)(1). 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 
these records and other documents relating to a broker-dealer's 
business must be preserved. 17 CFR 240.17a-3 and 240.17a-4.
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    Rule 17a-25 is intended to accomplish three objectives. First, the 
rule codifies the requirement that brokers and dealers must 
electronically submit to the Commission, upon request, information on 
customer and proprietary securities transaction information. Second, 
the rule should improve the effectiveness of the Commission's 
enforcement and regulatory programs by enhancing certain aspects of the 
EBS system to take into account evolving trading strategies used 
primarily by institutional and professional traders. Specifically, 
subsection (b) of Rule 17a-25 requires firms, upon request, to supply 
three additional data elements that will assist the Commission in 
aggregating securities transactions by entities trading through 
multiple accounts at more than one broker-dealer.\18\ Finally, by 
requiring broker-dealers to provide current contact person information, 
the proposed rule should help ensure that the Commission can 
effectively direct its EBS requests to broker-dealers.
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    \18\ As noted in the Proposing Release, the Commission believes 
that an enhanced EBS system will 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 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. 15 U.S.C. 
78m(h). See Proposing Release, at 7.
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A. Standard Transaction Information

    Subsection (a) of the proposed rule requires submission of the same 
standard customer and proprietary transaction information the SROs 
request in connection with their market surveillance or enforcement 
inquiries.\19\ For a proprietary transaction, the broker-dealer must 
include the

[[Page 35838]]

following information: (1) Clearing house number or alpha symbol used 
by the broker-dealer submitting the information; (2) clearing house 
number(s) or alpha symbol(s) of the broker-dealer(s) on the opposite 
side to the trade; (3) 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. 
Under the proposed rule, if a transaction was effected for a customer 
account (as opposed to a proprietary account), the broker-dealer would 
have been required to also include the customer's name, customer's 
address, name of the customer's employer, the customer's tax 
identification number, and other related account information. As noted 
below, the Commission has modified certain of these requirements in 
response to comments. Finally, if the transaction was effected for a 
customer of another firm or broker-dealer, the broker-dealer must state 
whether the other broker-dealer was acting as principal or agent on the 
transaction.
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    \19\ See supra note 2.
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    The SIA cited two concerns regarding submission of this standard 
transaction information. First, the SIA noted the practical 
difficulties faced by firms in readily obtaining the name of the 
customer's employer on their EBS-related systems. The Commission 
believes that the identity of a customer's employer, if accurate, would 
be extremely useful for many investigations, particularly those 
involving insider trading. However, the Commission, if necessary, can 
obtain this information from the specific broker-dealer and customer 
during follow-up inquiries. Accordingly, the Commission is deleting 
this requirement from subsection (a)(2)(ii) of Rule 17a-25, as adopted.
    Second, the SIA asked for clarification as to whether the tax 
identification number is that of the customer or the customer's 
employer.\20\ Subsection (a)(2)(ii) of Rule 17a-25, as adopted, makes 
it clear that it is intended to capture the customer's tax 
identification number, not that of the customer's employer.
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    \20\ SIA Letter, at 6.
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B. Additional Transaction Information

    Subsection (b) of proposed Rule 17a-25 requires broker-dealers, 
upon request by Commission staff, to provide prime brokerage 
identifiers, average price account identifiers, and depository 
institution identifiers. As described in detail below, these additional 
data elements are needed to aggregate trading by customers that use 
multiple accounts maintained at different broker-dealers. The 
Commission is adopting these additional data elements in Rule 17a-25(b) 
with certain modifications suggested by the SIA.
    The SIA asked for additional information on how the Commission 
estimated that less than 100 broker-dealers would have to make 
modifications to their existing EBS software. The Commission estimates 
that EBS requests for prime-brokerage and average price account 
information will be made almost exclusively to active clearing broker-
dealers. The Commission based its estimate of less than 100 clearing 
firms upon our experience with the EBS system--specifically, the 
Division of Market Regulation's requests for information for market 
reconstructions in 1994 and 1997, and the Division of Enforcement's 
daily use of the EBS system for the last decade. Accordingly, the 
Commission continues to believe that its estimates are reasonable.
1. Prime Brokerage Identifiers
    It is common for an institutional or professional trader to route 
buy or sell orders through different broker-dealers, who, in turn, 
forward executed orders to a single broker-dealer--the ``prime 
broker.'' The prime broker maintains a master account for the 
institution or professional trader, which simplifies recordkeeping and 
oversight of trading activity.
    Because broker-dealers use different means to identify prime 
brokerage accounts in EBS submissions, the Commission has had 
difficulty identifying instances where a transaction was reported 
twice--by the executing broker-dealer and by the prime broker. As a 
result, when the Commission performed trading analyses, it may have 
inadvertently double-counted some trades.
    To better analyze this increasingly frequent activity and to avoid 
inadvertently double-counting these transactions, the Commission 
proposed two new data elements to uniformly identify prime brokerage 
transactions. First, under subsection (b)(1)(i) of Rule 17a-25, if a 
reporting broker-dealer effects trades for a customer, and forwards the 
account's transactions to a prime broker, then the EBS submission will 
have to include an identifier for this type of transaction as specified 
by its designated SRO under Rule 17d-1 of the Exchange Act.\21\ The SIA 
expressed concern that the language in subsection (b)(1)(i) of the 
proposed rule may cover other types of transactions that involve 
shifting a position from one firm to another, such as ``give-ups'' or 
``step-outs.'' The Commission reiterates that subsection (b)(1)(i) is 
intended to account for prime brokerage arrangements.\22\
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    \21\ 17 CFR 240.17d-1.
    \22\ If a broker-dealer has a question concerning whether a 
transaction should be reported under Rule 17a-25(b), as adopted, the 
broker-dealer can request interpretive guidance from the Commission 
staff.
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    Second, as proposed, subsection (b)(1)(ii) of Rule 17a-25 would 
have required a prime broker receiving transactions from multiple 
executing broker-dealers to include in its EBS submission the clearing 
house number or alpha symbol used by each of the executing brokers. 
Both the SIA and the SROs \23\ raised concerns, however, that this 
reporting requirement would pose formatting problems.
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    \23\ Commission staff discussed the feasibility of capturing the 
prime brokerage identifiers, average price account identifiers, and 
depository institution identifiers, including cost estimates, with 
the Intermarket Surveillance Group and the SIA on May 10, 2000 and 
May 16, 2000, respectively.
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    The Commission believes that the reporting framework as proposed in 
subsection (b)(1)(ii) of Rule 17a-25 would have provided the Commission 
staff with the optimal crosschecking capabilities for transactions 
involving prime brokerage arrangements. Nevertheless, in response to 
the concerns raised by the SIA and the SROs, the Commission has 
modified the language in subsection (b)(1)(ii) of Rule 17a-25, as 
adopted, to require prime brokers to report using an identifier for 
this type of transaction as specified by their designated SRO under 
Rule 17d-1 of the Exchange Act.\24\ The Commission will work with the 
SROs to develop a universal identifier that will help the Commission 
identify a prime brokerage arrangement.
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    \24\ 17 CFR 240.17d-1.
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2. Average Price Account Identifiers
    Broker-dealers often use ``average price accounts'' as a mechanism 
to buy or sell large amounts of a given security for their customers. 
Under this arrangement, a broker-dealer's average price account may buy 
or sell a security in small increments throughout a trading session, 
and then transfer the accumulated long or short position to one or more 
accounts for an average price or volume-weighted average price after 
the market close.
    Similar to 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 have inadvertently

[[Page 35839]]

double-counted these transactions--once in the EBS submission for the 
firm's average price account, and again in the EBS submission for the 
accounts receiving positions from the average price account. Therefore, 
the Commission proposed two new data elements in subsection (b)(2) of 
Rule 17a-25 to uniformly identify average price account transactions.
    As proposed, under subsection (b)(2)(i), an EBS report for a 
customer account receiving average price transactions would have had to 
include identifiers for each relevant average price account. Under 
subsection (b)(2)(ii), as proposed, an EBS report for a firm's average 
price account would need to include identifiers for each of the 
accounts receiving positions from the average price account.
    Both the SIA and the SROs \25\ cited formatting difficulties and 
programming costs if subsection (b)(2) was adopted as proposed. While 
the Commission believes that the reporting framework as proposed in 
subsection (b)(2) of Rule 17a-25 would have provided the optimal 
crosschecking capabilities for transactions involving average price 
accounts, the Commission has modified the language in subsections 
(b)(2)(i) and (b)(2)(ii) to require a firm to distinguish average price 
account arrangements with an identifier for this type of transaction as 
specified by the broker-dealer's designated SRO under Rule 17d-1 of the 
Exchange Act.\26\ The Commission will work with the SROs to develop 
simple universal identifiers that will help the Commission identify an 
average price account arrangement.
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    \25\ See supra note.
    \26\ 17 CFR 240.17d-1.
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3. Identifiers Used by Depository Institutions
    The Commission did not receive any comments on subsection (b)(3) of 
proposed Rule 17a-25, which requires a broker-dealer that processes a 
trade for an account through a depository institution to report the 
account's depository identifier. The inclusion of a depository account 
identifier in EBS reports should greatly expedite efforts by the 
Commission staff to aggregate trading when conducting complex trading 
reconstructions.

C. Information To Facilitate EBS Requests

    The Commission did not receive any comments on paragraph (c) of 
proposed Rule 17a-25. Paragraph (c) requires broker-dealers to submit 
to the Commission, upon request, certain information about their 
contact persons, and to keep this information current. The Commission 
proposed this portion of the rule because it has encountered a 
recurring problem, due to frequent staff turnover and reorganizations 
at broker-dealers, in directing EBS requests to the appropriate 
personnel at broker-dealers. The Commission contemplates initially 
asking only those broker-dealers that have recently received EBS 
requests from the Commission to supply current contact information.\27\
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    \27\ 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 inactive traders are rarely asked 
to supply transaction information. Accordingly, the Commission 
believes it would be most cost-effective to maintain its list of EBS 
contacts based on the staff's experience with the types of broker-
dealers that are likely to be recipients of future EBS requests.
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D. Other Information

    In the Proposing Release, the Commission specifically requested 
comment on other types of information that could be useful in analyzing 
trading in more complex market-wide trading reconstructions and 
enforcement investigations. For example, the Commission noted that 
execution times would be useful in trading reconstructions, 
particularly those that focus on trading 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 the 
broker-dealer account records systems that are used to prepare EBS 
reports (although execution time information may be available in other 
broker-dealer recordkeeping systems).
    The Commission also noted in the Proposing Release that some 
representatives of the securities industry have previously indicated to 
the Commission staff that, at least for transactions effected through 
automated order-routing systems, ``order sequence'' identifiers might 
be used for EBS reports in lieu of actual execution times.\28\ 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.
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    \28\ 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. The 
Commission further noted in the Proposing Release that other types 
of information captured by the SROs' audit trail systems, such as 
the NASD's Order Audit Trail System, may also 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 SIA noted, however, that connecting information 
maintained under OATS to the EBS system would raise difficulties and 
costs. SIA Letter, at 6-7.
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    The SIA identified a number of problems with expanding the EBS 
system to include execution times or order sequence identifiers. For 
example, the SIA noted that many clearing firms that handle proprietary 
accounts of an introducing broker do not typically keep this type of 
information about the introducing firm. Further, many broker-dealers do 
not have an automated link between the order file, where this type of 
information would be kept, to the trade file, which interfaces with the 
EBS system.\29\
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    \29\ Id.
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    The Commission continues to believe that, in view of the large 
number of trades that are routed and executed using automated systems, 
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. Nevertheless, due to 
the current configuration of broker-dealers' systems, broker-dealers 
would incur certain costs and practical difficulties in capturing 
execution times or order sequence identifiers. Accordingly, the 
Commission is not modifying Rule 17a-25 to require this type of 
information at this time.

E. Exemptions

    The Commission notes that it 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 the information over the EBS system, the 
Commission staff has accepted manual transmissions. Proposed Rule 17a-
25 is neither intended to, nor will it, change this flexible approach 
in obtaining necessary transaction reports from small broker-dealers. 
In addition, the Commission may rely on its general exemptive authority 
under Section 36 of the Exchange Act \30\ to exempt particular broker-
dealers when the application of

[[Page 35840]]

the reporting requirements of 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.\31\
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    \30\ 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.
    \31\ The Commission is amending Rules 30-3, 30-4, and 30-18 of 
its Rules of Practice to add new paragraphs (a)(69), (a)(12), and 
(h), respectively. 17 CFR 200.30-3, 200.30-4, and 200.30-18. These 
paragraphs delegate the authority to the Directors of the Division 
of Market Regulation, the Division of Enforcement, and the Office of 
Compliance Inspections and Examinations to grant or deny, in whole 
or in part, exemptions from the requirements of Rule 17a-25. The 
Office of Compliance Inspections and Examinations uses the EBS 
system as part of its inspections and examinations.
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F. Format

    Broker-dealers will submit the information required under Rule 17a-
25 in the format specified by the broker-dealer's SRO that is 
designated under Rule 17d-1 of the Exchange Act, unless otherwise 
specified by Commission rule. At the current time, we understand that 
the SROs intend to have their technical specifications revised by 120 
days before the effective date for Rule 17a-25(b). In the absence of 
the necessary SRO technical specifications to implement this paragraph 
by 120 days before the effective date, the Commission will promulgate 
rules specifying the technical filing format for EBS submissions.\32\
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    \32\ If the Commission sets the technical filing requirements 
for EBS submissions, we anticipate adopting these requirements using 
a similar approach to that used by the Commission in specifying the 
technical formatting requirements for electronic filings through the 
EDGAR system. Securities Act Release No. 7858 (May 16, 2000), 65 FR 
34079 (May 26, 2000).
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    The PCX asked how the implementation of the NASDR's new web-based 
EBS system would alter the scope and goals of Rule 17a-25. The 
Commission believes that the framework for Rule 17a-25 provides 
sufficient flexibility to allow broker-dealers to report transactions 
in whatever EBS formats are established by their designated SROs. In 
particular, the Commission's computer systems are prepared to 
accommodate the new NASDR system.

V. Effective Date

    The provisions of Rule 17a-25 will be effective on August 8, 2001, 
except for subsection (b) of Rule 17a-25, which shall become effective 
on January 7, 2002.
    The SIA requested that, in adopting and implementing Rule 17a-25, 
the Commission be mindful of the ongoing systems challenges in the 
securities industry, including conversion of the trading cycle from a 
three-day to a one-day cycle and the full implementation of decimal 
pricing in stocks and options. The Commission is cognizant of the 
technological challenges that will be faced by the securities industry 
over the next few months. Thus, the Commission is delaying the 
effective date of subsection (b) of Rule 17a-25, and is committed to 
working with the SROs and the securities industry in developing a 
strategy for reformatting the EBS system in a manner that does not 
disrupt other critical systems initiatives in the coming months.

VI. Paperwork Reduction Act

    As described in the Proposing Release, Rule 17a-25 contains 
``collection of information'' requirements within the meaning of the 
Paperwork Reduction Act of 1995,\33\ and the Commission submitted them 
to the Office of Management and Budget (``OMB'') for review. OMB 
approved the collection of information, and assigned control number 
3235-0540. The collection of information is in accordance with the 
clearance requirements of 44 U.S.C. 3507.
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    \33\ 44 U.S.C. 3501 et seq.
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    The title for the collection of information is: Rule 17a-25, 
Electronic Submission of Securities Transaction Information by Exchange 
Members, Brokers, and Dealers. The final rule does not contain 
substantive or material modifications to the collections of information 
originally set forth in the Proposing Release. The collection of 
information obligations imposed by Rule 17a-25 is mandatory. The 
retention periods for the collection of information are already 
specified in Rule 17a-4 of the Exchange Act.\34\ The information filed 
pursuant to Rule 17a-25 will be kept confidential, subject to the 
provisions of the Freedom of Information Act, 5 U.S.C. 552. 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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    \34\ 17 CFR 240.17a-4.
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    The Commission solicited public comment on the collection of 
information requirements contained in the Proposing Release. As 
discussed below, the SIA submitted one comment concerning the number of 
broker-dealers that will have to modify their EBS-related software to 
capture and report the new data elements pursuant to subsection (b) of 
Rule 17a-25.

A. Summary of Collection of Information Under Rule 17a-25

    Rule 17a-25 requires broker-dealers to electronically submit 
securities transaction information, including identifiers for prime 
brokerage arrangements, average price accounts, and depository 
institutions, in a standardized format when requested by the Commission 
staff for enforcement and other regulatory purposes. In addition, the 
rule will also require broker-dealers to submit, and keep current, 
contact person information for EBS requests.

B. Use of Information

    The Commission will 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

    As explained in the Proposing Release, although Rule 17a-25 will 
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. The Commission further estimated in the Proposing Release that 
the requirement for submission of identifiers for prime brokerage 
arrangements, average price accounts, and depository institutions would 
affect a significantly smaller number of broker-dealers, estimated at 
less than 100 firms.
    In its comment letter, the SIA asked for further explanation of the 
basis for the Commission's estimate that less than 100 firms would need 
to perform a one-time modification of their EBS-related software to 
capture and report the new data elements. As previously discussed, the 
Commission has used the EBS system for over a decade. For example, the 
Division of Market Regulation used the EBS reports for market 
reconstructions in 1994 and 1997, and the Division of Enforcement sends 
out EBS requests almost on a daily basis. Based on this experience, the 
Commission estimated the number of active clearing firms that regularly 
receive EBS requests. Accordingly, the Commission continues to believe 
that its estimate of less than 100 firms is reasonable.

D. Total Annual Reporting and Recordkeeping Burden

    As stated in the Proposing Release, Rule 17a-25 should not impose 
additional burdens on the vast majority of broker-dealers. The 
Commission staff will work with the few broker-dealers who might not 
have EBS systems in place to develop cost-effective means of obtaining 
requested securities

[[Page 35841]]

transaction information, whether using the EBS system or other 
mechanisms. In addition, if electronic reporting of securities 
transaction information is not feasible or is unreasonably expensive 
for a particular small broker-dealer, the Commission may use its 
general exemptive authority under Section 36 of the Exchange Act.
1. Burden-Hours for Broker-Dealers \35\
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    \35\ The time burden was derived from information supplied by 
several broker-dealers.
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    As discussed in the Proposing Release, the annual hour burden of 
the proposed rule for individual broker-dealers varies 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(c), 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). The annual 
aggregate burden for supplying the information requested in proposed 
Rule 17a-25(c) is 350 hours (1400  x  15  60).
    Overall, the annual aggregate burden for all respondents to the 
collection of information requirements of Rule 17a-25 is estimated to 
be 2,695 hours (1,820 + 525 + 350).
2. Capital Cost to Broker-Dealers and SROs \36\
    As stated in the Proposing Release, the Commission estimates that 
less than 100 broker-dealers will have to perform a one-time 
modification of their EBS-related software to capture and report new 
data elements. On average, each of these broker-dealers will incur 
capital or start-up costs of $150,000 to modify their EBS systems. The 
Commission also estimates that there will be no additional costs 
associated with the operation and maintenance of the modified EBS 
systems. Accordingly, the total cost burden for broker-dealers to 
modify their EBS systems is estimated to be $15 million (100  x  
$150,000).
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    \36\ The costs estimates were derived using information supplied 
by the broker-dealers and the SROs.
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    In addition, 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 also estimates that the SROs will not incur additional 
costs for the operation and maintenance of the modified EBS systems.

VII. Costs and Benefits of the Rule

    The Commission identified several benefits and costs to investors 
and market participants in the Proposing Release. To assist the 
Commission in its evaluation of the costs and benefits that may result 
from Rule 17a-25, commenters were requested to provide analyses and 
data relating to the costs and benefits associated with the proposal. 
As previously noted, the SIA questioned the Commission's estimate of 
the number of broker-dealers that must modify their existing EBS 
software to capture prime brokerage identifiers, average price account 
identifiers, and depository institution identifiers. However, as 
explained above, the Commission continues to believe that its 
estimates, including its costs estimates, are reasonable.
    The Commission is not making any changes to Rule 17a-25, as 
adopted, which will increase the cost estimates for broker-dealers or 
SROs. In particular, subsection (a) of Rule 17a-25 merely codifies 
existing SRO requirements for EBS. The estimated annual aggregate hour 
burden for all respondents to the collection of information 
requirements is 2,695 hours. The total annualized cost burden for those 
broker-dealers to modify their existing EBS software is estimated to be 
$15 million in capital or start-up costs. And the estimated total 
annualized cost burden for SROs is $88,500. The Commission believes 
that neither the broker-dealers nor the SROs will incur additional 
costs for the operation and maintenance of the modified EBS systems.
    The Commission continues to believe that any costs to market 
participants are justified by the overall benefits of Rule 17a-25. The 
rule will significantly assist the Commission'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 these transactions. Augmented trading 
analyses will improve the Commission's ability to monitor the 
securities markets, and, thereby, promote investor protection.

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

    Section 23(a)(2) of the Exchange Act \37\ requires the Commission, 
when promulgating rules under the Exchange Act, to consider the impact 
any rule would have on competition, and not adopt any rule that would 
impose a burden on competition that is not necessary or appropriate in 
furtherance of the Exchange Act. Section 3(f) of the Exchange Act \38\ 
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. In the Proposing 
Release, the Commission solicited comments on the effects of Rule 17a-
25 on competition, efficiency, and capital formation. The Commission 
did not receive any comments regarding these specific issues.
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    \37\ 15 U.S.C. 78w(a)(2).
    \38\ 15 U.S.C. 78c(f).
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    The Commission has considered Rule 17a-25 in light of the standards 
cited in Sections 3(f) and 23(a)(2) of the Exchange Act, and believes 
that the rule will not impose any significant burden on competition not 
necessary or appropriate in furtherance of the Exchange Act. As 
discussed in the cost-benefit section, only some broker-dealers will 
incur capital or start-up costs to modify their EBS-related software. 
However, the Commission believes the modifications are necessary to 
promote efficiency in the blue-sheeting process, and promote investor 
protection.

IX. Summary of Final Regulatory Flexibility Act Analysis

    A Final Regulatory Flexibility Analysis (``FRFA'') has been 
prepared in accordance with section 4 of the Regulatory Flexibility Act 
(``RFA''), to

[[Page 35842]]

provide a description and estimate of the number of small entities that 
will be affected by Rule 17a-25. The following summarizes the FRFA.
    The Commission estimates that approximately 12% of registered 
broker-dealers, or approximately 1,000 broker-dealers, qualify as small 
broker-dealers.\39\ As discussed more fully in the FRFA, Rule 17a-25 
will affect these small broker-dealers because all broker-dealers will 
be required to submit securities transaction information to the 
Commission, upon request. However, the Commission believes that only a 
relatively few EBS requests are sent to small broker-dealers. 
Generally, EBS requests are sent to large clearing firms or those 
broker-dealers that self-clear. These entities fall outside the 
definition of a small broker-dealer.
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    \39\ 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.
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    In addition, 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 will be required to modify its 
EBS-related software to capture and report the new data elements in 
subsection (b) of Rule 17a-25.
    The FRFA 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 EBS reports to the 
Commission are already maintained by broker-dealers pursuant to Rules 
17a-3 and 17a-4 of the Exchange Act and SRO rules.
    When small broker-dealers receive the occasional EBS request, they 
will incur some costs when they report transaction information pursuant 
to requests by the Commission staff for enforcement purposes. The 
Commission believes, however, that any new costs associated with Rule 
17a-25 will be minimal because broker-dealers are already required to 
have in place adequate systems and procedures to submit transaction 
reports to the appropriate SRO. 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 information 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.
    The FRFA 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 with 
the concerns of small entities. For example, as discussed above, the 
Commission has often permitted small broker-dealers to submit the 
transaction information manually, rather than electronically. The 
Commission may also use its exemptive authority under section 36 of the 
Exchange Act. 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 received no comments on the Initial Regulatory 
Flexibility Analysis (``IRFA'') prepared in connection with the 
Proposing Release. A copy of the FRFA may be obtained by contacting 
Anitra Cassas, Division of Market Regulation, Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington, DC 20549-1001; (202) 
942-0089.

X. Statutory Authority

    Rule 17a-25 under the Exchange Act is being adopted 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

17 CFR Part 200

    Administrative practice and procedure, Authority delegations 
(Government agencies).

17 CFR Part 240

    Broker-dealers, Reporting and recordkeeping requirements, 
Securities.

Text of the Final Rule and Amendments

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

PART 200--ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND 
REQUESTS

    1. The authority citation for Part 200 continues to read, in part, 
as follows:

    Authority: 15 U.S.C. 77s, 78d-1, 78d-2, 78w, 78ll(d), 78mm, 79t, 
77sss, 80a-37, 80b-11, unless otherwise noted.
* * * * *

    2. Section 200.30-3 is amended by adding paragraph (a)(74) to read 
as follows:


Sec. 200.30-3  Delegation of authority to Director of Division of 
Market Regulation.

* * * * *
    (a) * * *
    (74) Pursuant to section 36 of the Act (15 U.S.C. 78mm) to review 
and, either unconditionally or on specified terms and conditions, 
grant, or deny exemptions from rule 17a-25 of the Act (Sec. 240.17a-25 
of this chapter).
* * * * *

    3. Section 200.30-4 is amended by adding paragraph (a)(12) to read 
as follows:


Sec. 200.30-4  Delegation of authority to Director of Division of 
Enforcement.

* * * * *
    (a) * * *
    (12) Pursuant to Section 36 of the Securities Exchange Act of 1934 
(15 U.S.C. 78mm) to review and, either unconditionally or on specified 
terms and conditions, grant, or deny exemptions from rule 17a-25 of the 
Act (Sec. 240.17a-25 of this chapter), provided that the Division of 
Market Regulation is notified of any such granting or denial of an 
exemption.
* * * * *

    4. Section 200.30-18 is amended by redesignating paragraphs (h) and 
(i) as paragraphs (i) and (j); and by adding new paragraph (h) to read 
as follows:


Sec. 200.30-18  Delegation of authority to Director of the Office of 
Compliance Inspections and Examinations.

* * * * *
    (h) Pursuant to Section 36 of the Exchange Act (15 U.S.C. 78mm) to 
review and, either unconditionally or on specified terms and 
conditions, grant, or deny exemptions from rule 17a-25 of the Act 
(Sec. 240.17a-25 of this chapter), provided that the Division of Market 
Regulation is notified of any such granting or denial of an exemption.
* * * * *

[[Page 35843]]

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

    5. 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.
* * * * *

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


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

    (a) Every member, broker, or dealer subject to Sec. 240.17a-3 
shall, upon request, electronically submit to the Commission the 
securities transaction information as required in this section:
    (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 the following information:
    (i) Clearing house number, or alpha symbol of the member, broker, 
or dealer submitting the information;
    (ii) Clearing house number(s), or alpha symbol(s) 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 the following information:
    (i) Information contained in paragraphs (a)(1)(i) through 
(a)(1)(viii) of this section;
    (ii) Customer name, address(es), branch office number, registered 
representative number, whether the order was solicited or unsolicited, 
date account opened, and the customer's 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.
    (b) In addition to the information in paragraph (a) of this 
section, a member, broker, or dealer shall, upon request, 
electronically submit to the Commission the following securities 
transaction information for transactions involving entities that trade 
using multiple accounts:
    (1)(i) If part or all of an account's transactions at the reporting 
member, broker, or dealer have been transferred or otherwise forwarded 
to one or more accounts at another member, broker, or dealer, an 
identifier for this type of transaction; and
    (ii) If part or all of an account's transactions at the reporting 
member, broker, or dealer have been transferred or otherwise received 
from one or more other members, brokers, or dealers, an identifier for 
this type of transaction.
    (2)(i) If part or all of an account's transactions at the reporting 
member, broker, or dealer have been transferred or otherwise received 
from another account at the reporting member, broker, or dealer, an 
identifier for this type of transaction; and
    (ii) If part or all of an account's transactions at the reporting 
member, broker, or dealer have been transferred or otherwise forwarded 
to one or more other accounts at the reporting member, broker, or 
dealer, an identifier for this type of transaction.
    (3) If an account's transaction was processed by a depository 
institution, the identifier assigned to the account by the depository 
institution.
    (c) Every member, broker, or dealer shall, upon request, submit 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 
information requests from the Commission.
    (d) The member, broker, or dealer should comply with the format for 
the electronic submission of the securities transaction information 
described in paragraphs (a) and (b) of this section as specified by the 
member, broker, or dealer's designated self-regulatory organization 
under Sec. 240.17d-1, unless otherwise specified by Commission rule.

    Dated: June 29, 2001.

    By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 01-17000 Filed 7-6-01; 8:45 am]
BILLING CODE 8010-01-P