[Federal Register Volume 74, Number 195 (Friday, October 9, 2009)]
[Notices]
[Pages 52276-52278]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-24358]


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SECURITIES AND EXCHANGE COMMISSION


Submission for OMB Review; Comment Request

Upon written request, copies available from: Securities and Exchange 
Commission, Office of Investor Education and Advocacy, Washington, DC 
20549-0213.

Extension: Rule 204; OMB Control No. 3235-0647; SEC File No. 270-
586.

    Notice is hereby given that pursuant to the Paperwork Reduction Act 
of 1995 (44 U.S.C. 3501 et seq.), the Securities and Exchange 
Commission (``Commission'') has submitted to the Office of Management 
and Budget a request for extension of the previously approved 
collection of information provided for in Rule 204 (17 CFR

[[Page 52277]]

242.204) under the Securities Exchange Act of 1934 (15 U.S.C. 78a et 
seq.).
    Rule 204 requires that, subject to certain limited exceptions, if a 
participant of a registered clearing agency has a fail to deliver 
position at a registered clearing agency it must immediately close out 
the fail to deliver position by purchasing or borrowing securities by 
no later than the beginning of regular trading hours on the settlement 
day following the day the participant incurred the fail to deliver 
position. Rule 204 is intended to help further the Commission's goal of 
reducing fails to deliver by maintaining the reductions in fails to 
deliver achieved by the adoption of temporary Rule 204T, as well as 
other actions taken by the Commission. In addition, Rule 204 is 
intended to help further the Commission's goal of addressing 
potentially abusive ``naked'' short selling in all equity securities.
    The information collected under Rule 204 will continue to be 
retained and/or provided to other entities pursuant to the specific 
rule provisions and will be available to the Commission and self-
regulatory organization (``SRO'') examiners upon request. The 
information collected will continue to aid the Commission and SROs in 
monitoring compliance with these requirements. In addition, the 
information collected will aid those subject to Rule 204 in complying 
with its requirements. These collections of information are mandatory.
    Several provisions under Rule 204 will impose a ``collection of 
information'' within the meaning of the Paperwork Reduction Act.
    I. Allocation Notification Requirement: As of December 31, 2007, 
there were 5,561 registered broker-dealers. Each of these broker-
dealers could clear trades through a participant of a registered 
clearing agency and, therefore, become subject to the notification 
requirements of Rule 204(d). If a broker-dealer has been allocated a 
portion of a fail to deliver position in an equity security and after 
the beginning of regular trading hours on the applicable close-out 
date, the broker-dealer has to determine whether or not that portion of 
the fail to deliver position was not closed out in accordance with Rule 
204(a), we estimate that a broker-dealer will have to make such 
determination with respect to approximately 1.76 equity securities per 
day.\1\ We estimate a total of 2,466,415 notifications in accordance 
with Rule 204(d) across all broker-dealers (that were allocated 
responsibility to close out a fail to deliver position) per year (5,561 
broker-dealers notifying participants once per day \2\ on 1.76 
securities, multiplied by 252 trading days in a year). The total 
estimated annual burden hours per year will be approximately 394,626 
burden hours (2,466,415 multiplied by 0.16 hours/notification).
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    \1\ As stated in the adopting release for Interim Final 
Temporary Rule 204T, the Commission's Office of Economic Analysis 
(``OEA'') estimates that there are approximately 9,809 fail to 
deliver positions per settlement day. Across 5,561 broker-dealers, 
the number of securities per broker-dealer per day is approximately 
1.76 equity securities. During the period from January to July 2008, 
approximately 4,321 new fail to deliver positions occurred per day. 
The National Securities Clearing Corporation (``NSCC'') data for 
this period includes only securities with at least 10,000 shares in 
fails to deliver. To account for securities with fails to deliver 
below 10,000 shares, the figure is multiplied by a factor of 2.27. 
The factor is estimated from a more complete data set obtained from 
NSCC during the period from September 16, 2008 to September 22, 
2008. It should be noted that these numbers include securities that 
were not subject to the close-out requirement of Rule 203(b)(3) of 
Regulation SHO. Exchange Act Release No. 58733 (Oct. 14, 2008), 73 
FR 61706, 61718 n.107 (Oct. 17, 2008) (``Rule 204T Adopting 
Release'').
    \2\ Because failure to comply with the close-out requirements of 
Rule 204(a) is a violation of the rule, we believe that a broker-
dealer would make the notification to a participant that it is 
subject to the borrowing requirements of Rule 204(b) at most once 
per day.
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    II. Demonstration Requirement for Fails to Deliver on Long Sales: 
As of July 31, 2008, there were 197 participants of NSCC, the primary 
registered clearing agency responsible for clearing U.S. transactions 
that were registered as broker-dealers.\3\ If a participant of a 
registered clearing agency has a fail to deliver position in an equity 
security at a registered clearing agency and determines that such fail 
to deliver position resulted from a long sale, we estimate that a 
participant of a registered clearing agency will have to make such 
determination with respect to approximately 34 securities per day.\4\ 
We estimate a total of 1,687,896 demonstrations in accordance with Rule 
204(a)(1) across all participants per year (197 participants checking 
for compliance once per day on 34 securities, multiplied by 252 trading 
days in a year). The total approximate estimated annual burden hour per 
year will be approximately 270,063 burden hours (1,687,896 multiplied 
by 0.16 hours/documentation).
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    \3\ Those participants not registered as broker-dealers include 
such entities as banks, U.S.-registered exchanges, and clearing 
agencies. Although these entities are participants of a registered 
clearing agency, generally these entities do not engage in the types 
of activities that will implicate the close-out requirements of the 
rule. Such activities of these entities include creating and 
redeeming Exchange Traded Funds, trading in municipal securities, 
and using NSCC's Envelope Settlement Service or Inter-city Envelope 
Settlement Service. These activities rarely lead to fails to deliver 
and, if fails to deliver do occur, they are small in number and are 
usually closed out within a day.
    \4\ OEA estimates approximately 68% of trades are long sales and 
applies this percentage to the number of fail to deliver positions 
per day. OEA estimates that there are approximately 9,809 fail to 
deliver positions per settlement day. Across 197 broker-dealer 
participants of the NSCC, the number of securities per participant 
per day is approximately 50 equity securities. 68% of 50 securities 
per day is 34 securities per day. The 68% figure is estimated as 
100% minus the proportion of short sale trades found in the 
Regulation SHO Pilot Study. See http://www.sec.gov/news/studies/2007/regshopilot020607.pdf.
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    III. Pre-Borrow Notification Requirement: As of July 31, 2008, 
there were 197 participants of NSCC, the primary registered clearing 
agency responsible for clearing U.S. transactions that were registered 
as broker-dealers.\5\ If a participant of a registered clearing agency 
has a fail to deliver position in an equity security and after the 
beginning of regular trading hours on the applicable close-out date, 
the participant has to determine whether or not the fail to deliver 
position was closed out in accordance with Rule 204(a), we estimate 
that a participant of a registered clearing agency will have to make 
such determination with respect to approximately 50 equity securities 
per day.\6\ We estimate a total of 2,482,200 notifications in 
accordance with Rule 204(c) across all participants per year (197 
participants notifying broker-dealers once per day on 50 securities, 
multiplied by 252 trading days in a year). The total estimated annual 
burden hours per year will be approximately 397,152 burden hours 
(2,482,200 @ 0.16 hours/documentation).
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    \5\ See supra note 3.
    \6\ OEA estimates that there are approximately 9,809 fail to 
deliver positions per day. Across 197 broker-dealer participants of 
the NSCC, the number of securities per participant per day is 
approximately 50 equity securities. During the period from January 
to July 2008, approximately 4,321 new fail to deliver positions 
occurred per day. The NSCC data for this period includes only 
securities with at least 10,000 shares in fails to deliver. To 
account for securities with fails to deliver below 10,000 shares, 
the figure is grossed-up by a factor of 2.27. The factor is 
estimated from a more complete data set obtained from NSCC during 
the period from September 16, 2008 to September 22, 2008. It should 
be noted that these numbers include securities that were not subject 
to the close-out requirement of Rule 203(b)(3) of Regulation SHO.
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    IV. Certification Requirement: If the broker-dealer determines that 
it has not incurred a fail to deliver position on settlement date in an 
equity security for which the participant has a fail to deliver 
position at a registered clearing agency or has purchased securities in 
accordance with the conditions

[[Page 52278]]

specified in Rule 204(e), we estimate that a broker-dealer will have to 
make such determinations with respect to approximately 1.76 securities 
per day. As of December 31, 2007, there were 5,561 registered broker-
dealers. Each of these broker-dealers may clear trades through a 
participant of a registered clearing agency. We estimate that on 
average, a broker-dealer will have to certify to the participant that 
it has not incurred a fail to deliver position on settlement date in an 
equity security for which the participant has a fail to deliver 
position at a registered clearing agency or, alternatively, that it is 
in compliance with the requirements set forth in Rule 204(e), 2,466,415 
times per year (5,561 broker-dealers certifying once per day on 1.76 
securities, multiplied by 252 trading days in a year). The total 
approximate estimated annual burden hour per year will be approximately 
394,626 burden hours (2,466,415 multiplied by 0.16 hours/
certification).
    V. Pre-Fail Credit Demonstration Requirement: If a broker-dealer 
purchases or borrows securities in accordance with the conditions 
specified in Rule 204(e) and determines that it has a net long position 
or net flat position on the settlement day on which the broker-dealer 
purchases or borrows securities we estimate that a broker-dealer will 
have to make such determination with respect to approximately 1.76 
securities per day.\7\ As of December 31, 2007, there were 5,561 
registered broker-dealers. We estimate that on average, a broker-dealer 
will have to demonstrate in its books and records that it has a net 
long position or net flat position on the settlement day for which the 
broker-dealer is claiming credit, 2,466,415 times per year (5,561 
broker-dealers checking for compliance once per day on 1.76 securities, 
multiplied by 252 trading days in a year). The total approximate 
estimated annual burden hour per year will be approximately 394,626 
burden hours (2,466,415 multiplied by 0.16 hours/demonstration).
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    \7\ See supra note 1.
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    Please note that 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 OMB control number. We submitted the 
collection of information to OMB for review and approval in accordance 
with 44 U.S.C. 3507(j) and 5 CFR 1320.13. The title for the collection 
of information is ``Rule 204'' and the OMB control number for the 
collection of information is 3235-0647.
    General comments regarding the above information should be directed 
to the following persons: (i) Desk Officer for the Securities and 
Exchange Commission, Office of Information and Regulatory Affairs, 
Office of Management and Budget, Room 10102, New Executive Office 
Building, Washington, DC 20503 or by sending an e-mail to: [email protected]; and (ii) Charles Boucher, Director/Chief Information 
Officer, Securities and Exchange Commission, c/o Shirley Martinson, 
6432 General Green Way, Alexandria, Virginia 22312 or send an e-mail 
to: [email protected]. Comments must be submitted within 30 days of 
this notice.

    Dated: October 5, 2009.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-24358 Filed 10-8-09; 8:45 am]
BILLING CODE 8011-01-P