[Federal Register Volume 75, Number 78 (Friday, April 23, 2010)]
[Proposed Rules]
[Pages 21456-21498]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-9025]



[[Page 21455]]

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

Part III





Securities and Exchange Commission





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



17 CFR Parts 240 and 249



Large Trader Reporting System; Proposed Rule

  Federal Register / Vol. 75, No. 78 / Friday, April 23, 2010 / 
Proposed Rules  

[[Page 21456]]


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

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249

[Release No. 34-61908; File No. S7-10-10]
RIN 3235-AK55


Large Trader Reporting System

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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

SUMMARY: The Securities and Exchange Commission (``Commission'') is 
proposing new Rule 13h-1 and Form 13H under Section 13(h) of the 
Securities Exchange Act of 1934 (``Exchange Act'') to establish a large 
trader reporting system. The proposal is intended to assist the 
Commission in identifying and obtaining certain baseline trading 
information about traders that conduct a substantial amount of trading 
activity, as measured by volume or market value, in the U.S. securities 
markets. In essence, a ``large trader'' would be defined as a person 
whose transactions in NMS securities equal or exceed two million shares 
or $20 million during any calendar day, or 20 million shares or $200 
million during any calendar month. The proposed large trader reporting 
system is designed to facilitate the Commission's ability to assess the 
impact of large trader activity on the securities markets, to 
reconstruct trading activity following periods of unusual market 
volatility, and to analyze significant market events for regulatory 
purposes. It also should enhance the Commission's ability to detect and 
deter fraudulent and manipulative activity and other trading abuses, 
and should provide the Commission with a valuable source of useful data 
to study markets and market activity.
    The proposed identification, recordkeeping, and reporting system 
would provide the Commission with a mechanism to identify large traders 
and their affiliates, accounts, and transactions. Specifically, 
proposed Rule 13h-1 would require large traders to identify themselves 
to the Commission and make certain disclosures to the Commission on 
proposed Form 13H. Upon receipt of Form 13H, the Commission would issue 
a unique identification number to the large trader, which the large 
trader would then provide to its registered broker-dealers. Registered 
broker-dealers would be required to maintain transaction records for 
each large trader, and would be required to report that information to 
the Commission upon request. In addition, registered broker-dealers 
would be required to adopt procedures to monitor their customers for 
activity that would trigger the identification requirements of the 
proposed rule.

DATES: Comments should be submitted on or before June 22, 2010.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number S7-10-10 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F St., NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-10-10. This file number 
should be included on the subject line if e-mail is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments 
are also available for Web site viewing and copying in the Commission's 
Public Reference Room, 100 F St., NE., Washington, DC 20549 on official 
business days between the hours of 10 a.m. and 3 p.m. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Richard R. Holley III, Senior Special 
Counsel, at (202) 551-5614, Christopher W. Chow, Special Counsel, at 
(202) 551-5622, or Gary M. Rubin, Attorney, at (202) 551-5669, Division 
of Trading and Markets, Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: 

I. Introduction

    U.S. securities markets have experienced a dynamic transformation 
in recent years. In large part, the changes reflect the culmination of 
a decades-long trend from a market structure with primarily manual 
trading to a market structure with primarily automated trading. Rapid 
technological advances have produced fundamental changes in the 
structure of the securities markets, the types of market participants, 
the trading strategies employed, and the array of products traded. The 
markets also have become even more competitive, with exchanges and 
other trading centers offering innovative order types, data products 
and other services, and aggressively competing for order flow by 
reducing transaction fees and increasing rebates. These changes have 
facilitated the ability of large institutional and other professional 
market participants to employ sophisticated trading methods to trade 
electronically in huge volumes with great speed. For example, high 
frequency traders have become increasingly prominent at a time when the 
markets are experiencing an increase in overall volume. Market analysts 
have offered a wide range of estimates for the level of activity 
attributable to high frequency traders, but these estimates typically 
exceed 50% of total volume.\1\ Meanwhile, consolidated average daily 
share volume and trades in NYSE-listed stocks increased from just 2.1 
billion shares and 2.9 million trades in January 2005, to 5.9 billion 
shares (an increase of 181%) and 22.1 million trades (an increase of 
662%) in September 2009.\2\
---------------------------------------------------------------------------

    \1\ See, e.g., Jonathan Spicer and Herbert Lash, Who's Afraid of 
High-Frequency Trading?, Reuters.com, December 2, 2009, available at 
http://www.reuters.com/article/idUSN173583920091202 (``High-
frequency trading now accounts for 60 percent of total U.S. equity 
volume, and is spreading overseas and into other markets.''); Scott 
Patterson and Goeffrey Rogow, What's Behind High-Frequency Trading, 
Wall Street Journal, August 1, 2009 (``High frequency trading now 
accounts for more than half of all stock-trading volume in the 
U.S.''). See also Rob Iati, The Real Story of Trading Software 
Espionage, Advanced Trading, July 10, 2009, available at http://advancedtrading.com/algorithms/showArticle.jhtml?articleID=218401501 
(high frequency trading accounts for 73% of U.S. equity trading 
volume). One source estimates that, five years ago, that number was 
less than 25%. See Rob Curran & Geoffrey Rogow, Rise of the (Market) 
Machines, Wall Street Journal, June 19, 2009, available at http://blogs.wsj.com/marketbeat/2009/06/19/rise-of-the-market-machines/. 
The trend is clear that high frequency traders now play an 
increasingly prominent role in the securities markets.
    \2\ See NYSE Euronext, Consolidated Volume in NYSE Listed Issues 
2000-2009 (available at http://www.nyxdata.com/nysedata/NYSE/FactsFigures/tabid/115/Default.aspx). In addition, NYSE's average 
speed of execution for small (100-499 shares) market orders and 
marketable limit orders was 10.1 seconds in January 2005, compared 
to 0.7 seconds in October 2009. See NYSE Euronext, Rule 605 Reports 
for January 2005 and October 2009, available at http://www.nyse.com/equities/nyseequities/1201780422054.html. Consolidated average trade 
size in NYSE-listed stocks was 724 shares in 2005, compared to 268 
shares in January through October 2009. See NYSE Euronext, 
Consolidated Volume in NYSE Listed Issues 2000-2009, available at 
http://www.nyxdata.com/nysedata/NYSE/FactsFigures/tabid/115/Default.aspx.

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

[[Page 21457]]

    With respect to market movements and volatility, 2008 marked the 
third largest yearly decline for the Dow Jones Industrial Average 
(``Dow'') since it was inaugurated in 1896, with the Dow finishing down 
approximately 34% for the year. However, through the end of December 
2009, the Dow had advanced approximately 19%.\3\ While such market 
movements are pronounced in absolute terms, volatility and expectations 
of volatility have fluctuated considerably. Notably, the CBOE VIX 
volatility index (based on the S&P 500) marked a high of 80.86 on 
November 20, 2008, but had fallen back to the low 20s by late 2009.\4\
---------------------------------------------------------------------------

    \3\ Bloomberg L.P. ``Stock price graph for Dow Jones Industrial 
Average 12/31/08 to 12/31/09.'' (2010) (18.82%).
    \4\ For purposes of comparison, the high in the VIX for 2007 was 
31.09. See CBOE's Volatility Indexes (January 2009) available at 
http://www.cboe.com/micro/vix/volatility_qrg.pdf. The VIX is a 
measure of market expectations of near-term volatility conveyed by 
stock index option prices. Specifically, VIX measures 30-day 
expected volatility of the S&P 500 Index. The components of VIX are 
near- and next-term put and call options, usually in the first and 
second SPX contract months. See Chicago Board Options Exchange, 
``The CBOE Volatility Index--VIX,'' at 1 and 4, available at http://www.cboe.com/micro/vix/vixwhite.pdf.
---------------------------------------------------------------------------

    In light of the dramatic changes to the securities markets, 
including increased volumes, volatility, and the growing prominence of 
large traders, the Commission recently published a Concept Release to 
solicit public comment on a broad range of market structure issues.\5\ 
Given the dramatic changes to the securities markets, the Commission 
believes it is appropriate to exercise its authority under Section 
13(h) of the Exchange Act and propose to establish a large trader 
reporting system, so as to enhance the Commission's ability to identify 
large market participants, collect information on their trading, and 
analyze their trading activity.
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 61358 (January 14, 
2010), 75 FR 3594 (January 21, 2010) (File No. S7-02-10) (Concept 
Release on Equity Market Structure).
---------------------------------------------------------------------------

    Currently, to support its regulatory and enforcement activities, 
the Commission collects transaction data from registered broker-dealers 
through the Electronic Blue Sheets (``EBS'') system.\6\ The Commission 
uses the EBS system to obtain securities transaction information for 
two primary 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.
---------------------------------------------------------------------------

    \6\ See 17 CFR 240.17a-25 (Electronic Submission of Securities 
Transaction Information by Exchange Members, Brokers, and Dealers).
---------------------------------------------------------------------------

    The EBS system has performed relatively effectively as an 
enforcement tool for analyzing trading in a small sample of securities 
over a limited period of time. However, because the EBS system is 
designed for use in narrowly-focused enforcement investigations that 
generally involve trading in particular securities, it has proven to be 
insufficient for large-scale market reconstructions and analyses 
involving numerous stocks during peak trading volume periods.\7\ 
Further, it does not address the Commission's need to identify 
important market participants and their trading activity. To enhance 
the Commission's ability to identify large traders and collect 
information on their trading activity, Congress passed the Market 
Reform Act of 1990 (``Market Reform Act'').\8\
---------------------------------------------------------------------------

    \7\ The shortcomings of the EBS system were noted by the Senate 
Committee on Banking, Housing and Urban Affairs in the Senate Report 
accompanying the Market Reform Act of 1990. See Senate Report, infra 
note 9, at 48.
    \8\ Public Law 101-432 (HR 3657), October 16, 1990.
---------------------------------------------------------------------------

A. The Market Reform Act

    Following declines in the U.S. securities markets in October 1987 
and October 1989, Congress noted that the Commission's ability to 
analyze the causes of a market crisis was impeded by its lack of 
authority to gather trading information.\9\ To address this concern, 
Congress passed the Market Reform Act, which, among other things, 
amended Section 13 of the Exchange Act to add new subsection (h), 
authorizing the Commission to establish a large trader reporting system 
under such rules and regulations as the Commission may prescribe.
---------------------------------------------------------------------------

    \9\ The legislative history accompanying the Market Reform Act 
also noted the Commission's limited ability to analyze the causes of 
the market declines of October 1987 and 1989. See generally Senate 
Comm. on Banking, Housing, and Urban Affairs, Report to accompany 
the Market Reform Act of 1990, S. Rep. No. 300, 101st Cong. 2d Sess. 
(May 22, 1990) (reporting S. 648) (``Senate Report'') and House 
Comm. on Energy and Commerce, Report to accompany the Securities 
Market Reform Act of 1990, H.R. No. 524, 101st Cong. 2d Sess. (June 
5, 1990) (reporting H.R. 3657).
---------------------------------------------------------------------------

    The large trader reporting authority in section 13(h) of the 
Exchange Act was intended to facilitate the Commission's ability to 
monitor the impact on the securities markets of securities transactions 
involving a substantial volume or large fair market value, as well as 
to assist the Commission's enforcement of the federal securities 
laws.\10\ In particular, the Market Reform Act provided the Commission 
with the authority to collect broad-based information on large traders, 
including their trading activity, reconstructed in time sequence, in 
order to provide empirical data necessary for the Commission to 
evaluate market movement and volatility and enhance its ability to 
detect illegal trading activity.\11\
---------------------------------------------------------------------------

    \10\ See 15 U.S.C. 78m(h)(1). See also Senate Report, supra note 
9, at 42.
    \11\ See Senate Report, supra note 9, at 4, 44, and 71. In this 
respect, though self-regulatory organization (``SRO'') audit trails 
provide a time-sequenced report of broker-dealer transactions, those 
audit trails generally do not identify the broker-dealer's 
customers. Accordingly, the Commission is not presently able to 
utilize existing SRO audit trail data to accomplish the objectives 
of the Market Reform Act.
---------------------------------------------------------------------------

    The large trader reporting system envisioned by the Market Reform 
Act authorizes the Commission to require large traders \12\ to self-
identify to the Commission and provide information to the Commission 
identifying the trader and all accounts in or through which the trader 
effects securities transactions.\13\ The Market Reform Act also 
contemplated that the Commission could require large traders to 
identify their status as large traders to any registered broker-dealer 
through whom they directly or indirectly effect securities 
transactions.\14\
---------------------------------------------------------------------------

    \12\ Section 13(h) of the Exchange Act defines a ``large 
trader'' as ``every person who, for his own or an account for which 
he exercises investment discretion, effects transactions for the 
purchase or sale of any publicly traded security or securities by 
use of any means or instrumentality of interstate commerce or of the 
mails, or of any facility of a national securities exchange, 
directly or indirectly by or through a registered broker or dealer 
in an aggregate amount equal to or in excess of the identifying 
activity level.'' See 15 U.S.C. 78m(h)(8)(A). The term ``identifying 
activity level'' is defined in Section 13(h) as ``transactions in 
publicly traded securities at or above a level of volume, fair 
market value, or exercise value as shall be fixed from time to time 
by the Commission by rule or regulation, specifying the time 
interval during which such transactions shall be aggregated.'' See 
15 U.S.C. 78m(h)(8)(C). The proposed ``identifying activity level'' 
is set forth in paragraph (a)(7) of proposed Rule 13h-1.
    \13\ See 15 U.S.C. 78m(h)(1)(A).
    \14\ See 15 U.S.C. 78m(h)(1)(B).
---------------------------------------------------------------------------

    In addition to facilitating the ability of the Commission to 
identify large traders, the Market Reform Act authorizes the Commission 
to collect information on the trading activity of large traders. In 
particular, the Commission is authorized to require every registered 
broker-dealer to make and keep records with respect to securities 
transactions of large traders that equal or exceed a certain 
``reporting activity level'' and report such

[[Page 21458]]

transactions upon request of the Commission.\15\
---------------------------------------------------------------------------

    \15\ See 15 U.S.C. 78m(h)(2). Section 13(h) also provides the 
Commission with authority to determine the manner in which 
transactions and accounts should be aggregated, including 
aggregation on the basis of common ownership or control. See 15 
U.S.C. 78m(h)(3). The term ``reporting activity level'' is defined 
in Section 13(h)(8)(D) of the Exchange Act to mean ``transactions in 
publicly traded securities at or above a level of volume, fair 
market value, or exercise value as shall be fixed from time to time 
by the Commission by rule, regulation, or order, specifying the time 
interval during which such transactions shall be aggregated.'' See 
15 U.S.C. 78m(h)(8)(D).
---------------------------------------------------------------------------

    The Market Reform Act specifies that the information collected from 
large traders and registered broker-dealers under a large trader 
reporting system would be considered confidential, subject to limited 
exceptions.\16\ In addition, the Market Reform Act provides the 
Commission with the authority to exempt any person or class of persons 
or any transaction or class of transactions from the large trader 
reporting system requirements.\17\
---------------------------------------------------------------------------

    \16\ See 15 U.S.C. 78m(h)(7).
    \17\ See 15 U.S.C. 78m(h)(6).
---------------------------------------------------------------------------

B. Prior Rulemaking

    The Commission initially proposed to use its authority under 
Section 13(h) of the Exchange Act to establish a large trader reporting 
system in 1991.\18\ Similar to the current proposal, the earlier 
proposed rulemaking would have required large traders to disclose to 
the Commission their accounts and affiliations by filing Form 13H and 
would have imposed recordkeeping and reporting requirements on broker-
dealers with respect to the activity of their large trader 
customers.\19\
---------------------------------------------------------------------------

    \18\ See Securities Exchange Act Release No. 29593 (August 22, 
1991), 56 FR 42550 (August 28, 1991) (S7-24-91) (``1991 Proposal'').
    \19\ In 1991, the Commission proposed an ``identifying activity 
level,'' the triggering level at which large traders would be 
required to identify themselves to the Commission, of aggregate 
transactions during any 24-hour period that equals or exceeds either 
100,000 shares or fair market value of $4,000,000, or any 
transactions that constitute program trading. See 1991 Proposal, 
supra note 18, 56 FR at 42551.
---------------------------------------------------------------------------

    After considering the comments received on the 1991 Proposal, the 
Commission clarified and revised its proposed large trader system and 
issued a re-proposal in 1994.\20\ Among other things, the re-proposal 
sought to: clarify the definition of large trader and to increase the 
reporting thresholds; \21\ streamline the filing requirements and 
include provisions for an inactive filing status; \22\ and provide a 
safe harbor for a broker-dealer's duty to monitor compliance with the 
rule.\23\
---------------------------------------------------------------------------

    \20\ See Securities Exchange Act Release No. 33608 (February 9, 
1994), 59 FR 7917 (February 17, 1994) (S7-24-91) (``1994 
Reproposal'').
    \21\ Specifically, the Commission proposed to increase the 
``identifying activity level'' to aggregate transactions in publicly 
traded securities that are equal to or greater than the lesser of 
200,000 shares and fair market value of $2,000,000 or fair market 
value of $10,000,000. The Commission left unchanged the provision 
that captured transactions that constitute program trading. See 1994 
Reproposal, supra note 20, 59 FR at 7922.
    \22\ See 1994 Reproposal, supra note 20, 59 FR at 7927.
    \23\ See id. at 7918.
---------------------------------------------------------------------------

C. Rule 17a-25 and the Enhanced EBS System

    The Commission did not adopt the large trader reporting rule as re-
proposed in 1994. However, in 2001 the Commission adopted Rule 17a-25 
to enhance the EBS system and facilitate the Commission's ability to 
collect electronic transaction data to support its investigative and 
enforcement activities.\24\
---------------------------------------------------------------------------

    \24\ See Securities Exchange Act Release No. 44494 (June 29, 
2001), 66 FR 35836 (July 9, 2001) (S7-12-00) (final rulemaking) 
(``EBS Release''); 42741 (May 2, 2000), 65 FR 26534 (May 8, 2000) 
(proposed rulemaking).
---------------------------------------------------------------------------

    Rule 17a-25 enhanced the EBS system in three primary areas. First, 
it requires broker-dealers to submit to the Commission securities 
transaction information responsive to a Blue Sheets request in 
electronic format.\25\ Second, the rule modified the EBS system to take 
into account evolving trading strategies used primarily by 
institutional and professional traders. Specifically, the rule requires 
firms to supply three additional data elements--prime brokerage 
identifiers,\26\ average price account identifiers,\27\ and depository 
institution identifiers \28\--to assist the Commission in aggregating 
securities transactions by entities trading through multiple accounts 
at more than one broker-dealer.\29\ Finally, the rule requires broker-
dealers to update their contact person information to provide the 
Commission with up-to-date information necessary for the Commission to 
direct EBS requests to the appropriate staff.\30\
---------------------------------------------------------------------------

    \25\ See 17 CFR 240.17a-25. Rule 17a-25 requires submission of 
the same standard customer and proprietary transaction information 
that SROs request in connection with their market surveillance and 
enforcement inquiries. For a proprietary transaction, the broker-
dealer must include the 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) identifying 
symbol assigned to the security; (4) date transaction was executed; 
(5) 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; (6) transaction price; (7) account 
number; (8) identity of the exchange or market where each 
transaction was executed; (9) prime broker identifier; (10) average 
price account identifier; and (11) the identifier assigned to the 
account by a depository institution. For customer transactions, the 
broker-dealer also is required to include the customer's name, 
customer's tax identification number, customer's address(es), branch 
office number, registered representative number, whether the order 
was solicited or unsolicited, and the date the account was opened. 
If the transaction was effected for a customer of another member, 
broker, or dealer, the broker-dealer must include information on 
whether the other party was acting as principal or agent on the 
transaction.
    \26\ The Commission requires prime brokerage identifiers to 
avoid double-counting of transactions where EBS submissions reflect 
the same trade by both the executing broker-dealer and the broker-
dealer acting as the prime broker. See EBS Release, supra note 24, 
66 FR at 35838.
    \27\ Some broker-dealers 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 prime 
brokerage identifiers, the Commission requires average price account 
identifiers to avoid double-counting where the EBS submission 
reflects the same transaction for both the firm's average price 
account and the accounts receiving positions from the average price 
account. See EBS Release, supra note 24, 66 FR at 35838-39.
    \28\ The inclusion of a depository identifier in EBS reports was 
designed to expedite the Commission's efforts to aggregate trading 
when conducting complex trading reconstructions. See EBS Release, 
supra note 24, 66 FR at 35839.
    \29\ See 17 CFR 240.17a-25(b).
    \30\ This provision was designed to address the recurring 
problem of frequent staff turnover and re-organizations at broker-
dealers to ensure the Commission directs EBS requests to the 
appropriate personnel. See EBS Release, supra note 24, 66 FR at 
35839.
---------------------------------------------------------------------------

D. The Current Proposal

    While Rule 17a-25 enhanced the Commission's EBS system and improved 
the Commission's ability to obtain electronic transaction records, it 
is insufficient for large-scale investigations and market 
reconstructions involving numerous stocks during peak trading volume 
periods, and is therefore inadequate with respect to the Commission's 
efforts to monitor the impact of large trader activity on the 
securities markets.\31\
---------------------------------------------------------------------------

    \31\ See 15 U.S.C. 78m(h)(1).
---------------------------------------------------------------------------

    In particular, Rule 17a-25 does not specify a definitive deadline 
by which EBS trade information must be furnished to the Commission and, 
in the Commission's experience, data collected through the EBS system 
often is subject to lengthy delays, particularly with respect to files 
involving a large number of transactions over an extended time period. 
Commission staff often must make multiple requests to broker-dealers to 
obtain sufficient order information about the purchase or sale of a 
specific security to be able to

[[Page 21459]]

adequately analyze the trading. These multiple requests and responses 
can take a significant amount of time and delay the Commission's 
efforts to analyze the data on a contemporaneous basis. Further, since 
decimal trading has increased the number of price points for 
securities, the volume of transaction data subject to reporting under 
the EBS system, particularly in the case of active large traders, can 
be significantly greater than the EBS system was intended to 
accommodate in a typical request for data. Thus, the current EBS system 
does not efficiently collect large volumes of data in a timely manner 
that allows the Commission to perform contemporaneous analysis of 
market events.
    Further, the data generated by the EBS system does not include 
important information on the time of the trade or the identity of the 
customer.\32\ While the Commission may be able to use price as a proxy 
for execution time when reconstructing trading history in a particular 
security, such analysis is extremely resource intensive and hinders the 
Commission's ability to promptly analyze data on a contemporaneous 
basis. Further, information to identify the large trader customer can 
provide valuable information to permit the Commission to track large 
trader activity across markets and through various broker-dealers. The 
ability to track and analyze this information would facilitate the 
Commission's efforts both to investigate potential manipulative 
activity and to reconstruct a more accurate market history and would be 
particularly useful when analyzing information on large traders, as 
some large traders may trade through multiple accounts at multiple 
broker-dealers and may trade using sponsored access.\33\
---------------------------------------------------------------------------

    \32\ The Commission staff also is developing, for Commission 
consideration, a proposal to establish a consolidated audit trail 
for equities and options that would collect and consolidate detailed 
information about orders entered and trades executed on any exchange 
or in the over-the-counter market. As Commission staff is unable to 
estimate when that proposal could potentially be operational, the 
large trader reporting system proposed today is designed to address 
in the near term the Commission's current need for access to more 
information about large traders and their activities. Longer term, 
the proposed large trader reporting system should continue to 
provide a uniquely valuable tool for efficiently identifying the 
most significant market participants, in particular with respect to 
the requirement on large traders to self-identify to the Commission, 
as this aspect is uniquely addressed by Section 13(h) of the 
Exchange Act and proposed Rule 13h-1.
    \33\ The Commission recently proposed rules that would address 
sponsored access to exchanges. See Securities and Exchange Act 
Release No. 61379 (January 26, 2010), 75 FR 4713 (January 29, 2010) 
(File No. S7-03-10).
---------------------------------------------------------------------------

    In light of recent turbulent markets and the increasing 
sophistication and trading capacity of large traders, the Commission 
needs to enhance further its ability to collect and analyze trading 
information more efficiently, especially with respect to the most 
active market participants. In particular, the Commission needs a 
mechanism to reliably identify large traders, and promptly and 
efficiently obtain their trading information on a market-wide basis.
    The Commission believes a proposal for a large trader reporting 
system is necessary because, as noted above, large traders appear to be 
playing an increasingly prominent role in the securities markets. For 
example, market observers have offered a wide range of estimates for 
the percent of overall volume attributable to one potential subcategory 
of large trader--high frequency traders--which are typically estimated 
at 50% of total volume or higher.\34\ The proposed large trader 
reporting system is intended to provide the Commission with an 
efficient system for obtaining the information necessary to monitor 
more effectively the impact on the securities markets of ``large 
traders.'' As discussed in greater detail below, the Commission 
proposes to define a ``large trader'' as a person who, in exercising 
investment discretion, effects transactions in NMS securities \35\ in 
an amount equal to or greater than (1) during a calendar day, either 2 
million shares or shares with a fair market value of $20 million; or 
(2) during a calendar month, either 20 million shares or shares with a 
fair market value of $200 million.\36\
---------------------------------------------------------------------------

    \34\ See supra note 1.
    \35\ 17 CFR 240.600(b)(46) (defining ``NMS security'' as ``any 
security or class of securities for which transaction reports are 
collected, processed, and made available pursuant to an effective 
transaction reporting plan, or an effective national market system 
plan for reporting transactions in listed options.''). The term 
refers to all exchange-listed securities, including equities and 
options.
    \36\ See infra notes 72-73 and accompanying text (discussing the 
calculation of the identifying activity level when determining who 
meets the definition of large trader).
---------------------------------------------------------------------------

    Among other things, the Commission believes that a large trader 
reporting system would enhance its ability to (1) reliably identify 
large traders and their affiliates, (2) obtain far more promptly 
trading data on the activity of large traders, including execution 
time,\37\ and (3) aggregate and analyze trading data among affiliated 
large traders.
---------------------------------------------------------------------------

    \37\ See infra note 149 and accompanying text.
---------------------------------------------------------------------------

II. Description of the Proposed Rule

A. Application and Scope

    As discussed in detail below, under proposed Rule 13h-1, any person 
would be a ``large trader'' that ``directly or indirectly, including 
through other persons controlled by such person, exercises investment 
discretion over one or more accounts and effects transactions for the 
purchase or sale of any NMS security for or on behalf of such accounts, 
by or through one or more registered broker-dealers, in an aggregate 
amount equal to or greater than the identifying activity level.'' \38\ 
All large traders would be required to identify themselves to the 
Commission by filing Form 13H, and would be required to update their 
Form 13H at least annually and more frequently as necessary.\39\
---------------------------------------------------------------------------

    \38\ See proposed Rule 13h-1(a)(1).
    \39\ See proposed Rule 13h-1(b)(1).
---------------------------------------------------------------------------

    Upon receiving an initial Form 13H, the Commission would assign 
each large trader a unique Large Trader Identification Number 
(``LTID''). The LTID is a critical component of the proposal, and is 
intended, among other things, to enable the Commission to aggregate 
accounts and transactions of large traders on an inter-broker-dealer 
basis to capture a large trader's trading activity even where the large 
trader executes trades through a number of different registered broker-
dealers. In particular, the LTID would allow the Commission to 
efficiently sort trade information by large trader.
    A large trader would be required to disclose to each of its 
registered broker-dealers its LTID and identify all of the accounts 
held by that broker-dealer through which the large trader trades.\40\ 
By requiring the large trader to identify all applicable accounts to 
its registered broker-dealer, the proposed rule would place the self-
identification requirement directly on the large trader, which should 
assist the registered broker-dealer in easily identifying and marking 
all of the large trader's accounts held by the broker-dealer. A broker-
dealer also would be required to identify itself as a large trader if 
it effected transactions for a proprietary account (or other account 
over which it exercises investment discretion) at or above the 
identifying activity level. Further, the proposed rule would require 
large traders to provide, upon request, additional information to the 
Commission that would allow the Commission to further identify the 
large

[[Page 21460]]

trader and all accounts through which the large trader effects 
transactions.\41\
---------------------------------------------------------------------------

    \40\ See proposed Rule 13h-1(b)(2).
    \41\ See proposed Rule 13h-1(b)(4). For example, the Commission 
might request additional information regarding a response provided 
in Schedule 6 to a large trader's Form 13H concerning the 
identification of accounts.
---------------------------------------------------------------------------

    Proposed Rule 13h-1 also would impose recordkeeping and reporting 
requirements on registered broker-dealers, and would require registered 
broker-dealers to provide large trader transaction data to the 
Commission upon request. Finally, the proposed rule would require 
registered broker-dealers to establish and maintain systems and 
procedures designed to help assure compliance with the identification 
requirements of the proposed rule.
    Accordingly, the proposed rule would impose the following 
obligations on a large trader: (1) Self-identify to the Commission by 
filing and updating Form 13H; (2) disclose its LTID to its registered 
broker-dealers and others with whom it collectively exercises 
investment discretion; and (3) provide certain additional information 
in response to a Commission request. The proposed rule would impose the 
following obligations on registered broker-dealers: (1) Maintain 
records of transactions effected for large traders that are identified 
by the specific large trader; (2) electronically report large trader 
transaction information to the Commission upon request; and (3) monitor 
compliance with the proposed rule.

B. Defining Large Trader

    The proposed definition of a large trader is based on the 
definition of ``large trader'' in Section 13(h)(8)(A) of the Exchange 
Act.\42\ Specifically, paragraph (a)(1) of the proposed rule defines a 
``large trader'' as ``any person that directly or indirectly, including 
through other persons controlled by such person, exercises investment 
discretion over one or more accounts and effects transactions for the 
purchase or sale of any NMS security for or on behalf of such accounts, 
by or through one or more registered broker-dealers, in an aggregate 
amount equal to or greater than the identifying activity level.''
---------------------------------------------------------------------------

    \42\ See 15 U.S.C. 78m(h)(8)(A) (providing that ``the term 
`large trader' means every person who, for his own account or an 
account for which he exercises investment discretion, effects 
transactions for the purchase or sale of any publicly traded 
security or securities by use of any means or instrumentality of 
interstate commerce or of the mails, or of any facility of a 
national securities exchange, directly or indirectly by or through a 
registered broker or dealer in an aggregate amount equal to or in 
excess of the identifying activity level'').
---------------------------------------------------------------------------

    When determining who would be subject to the proposed requirements 
as a ``large trader,'' the proposed definition is intended to focus, in 
more complex organizations, on the parent company of the entities that 
employ or otherwise control the individuals that exercise investment 
discretion. The purpose of this focus is to narrow the number of 
persons that would need to self-identify as ``large traders'' while 
allowing the Commission to identify the primary institutions that 
conduct a large trading business. As discussed further below, the 
proposed rule provides specific guidance as to who should self-identify 
as a ``large trader.'' Paragraph (b)(3)(i) of the proposed rule 
provides that a large trader shall not be required to separately comply 
with the requirements of paragraph (b) if a person who controls the 
large trader complies with all of the requirements under paragraphs 
(b)(1), (b)(2), and (b)(4) applicable to such large trader with respect 
to all of its accounts.\43\ The intent of this proposed provision is to 
push the identification requirement up the corporate hierarchy to the 
parent entity to identify the primary institutions that conduct a large 
trading business. By focusing the identification requirements in this 
manner, the Commission would be able to identify easily the controlling 
persons that themselves, or through subsidiaries or employees, operate 
as large traders, while limiting the filing and self-identification 
burdens that would be imposed to a relatively small group of persons. 
Accordingly, if a natural person or a subsidiary entity within a large 
organization independently qualifies as a large trader, but the parent 
company files Form 13H and identifies itself as the large trader, then 
the natural person or subsidiary entity would not be required to 
separately identify itself as a large trader, file Form 13H, or be 
subject to the other requirements that would apply to large traders. 
Importantly, this provision would require that the entity that self-
identifies as the ``large trader'' comply with the proposed rule with 
respect to all accounts within the entity over which investment 
discretion is exercised, directly or indirectly. Accordingly, if the 
parent company files Form 13H, then all accounts over which any 
controlled person exercises investment discretion should be tagged with 
the parent company's LTID.\44\
---------------------------------------------------------------------------

    \43\ Notably, the definition of ``investment discretion'' in 
Section 3(a)(35) of the Exchange Act, 15 U.S.C. 78c(a)(35), applies 
to a person that is ``authorized to determine what securities or 
other property shall be purchased or sold by or for the account'' as 
well as a person that ``makes decisions as to what securities or 
other property shall be purchased or sold by or for the account even 
though some other person may have responsibility for such investment 
decisions* * *.'' To the extent that an entity employs a natural 
person that individually, or collectively with others, would meet 
the proposed definition of a ``large trader,'' then, for purposes of 
proposed Rule 13h-1, the entity that controls that person or those 
persons would be considered a ``large trader.''
    \44\ Although the proposed rule would relieve a controlled 
person from separately reporting as a large trader so long as its 
parent entity complies with the rule with respect to all of its 
accounts, the Commission anticipates designing the large trader 
reporting system to accommodate those large traders that wish to 
voluntarily identify with more granularity the subsidiary, trading 
desk, or other unit that is directly exercising investment 
discretion over the account. For example, although the large trader 
parent entity would be assigned a single LTID by the Commission, the 
LTID could include a number of blank fields, so that the large 
trader could elect to append additional characters to sub-identify 
the relevant unit that directly controls the account. The large 
trader could then use its generic LTID, along with the more 
particularized information, when identifying its accounts to its 
broker-dealers. Large traders voluntarily using these additional 
characters on their LTID may choose to do so for internal 
recordkeeping purposes and to facilitate responses to Commission 
requests for information.
---------------------------------------------------------------------------

    Conversely, paragraph (b)(3)(ii) of the proposed rule would apply 
the same principle on a ``top down'' basis, providing that a large 
trader shall not be required to comply with the requirements of 
paragraph (b) if one or more persons controlled by such large trader 
collectively comply with all of the requirements under paragraphs 
(b)(1), (b)(2), and (b)(4) applicable to such large trader with respect 
to all of its accounts. A controlling person of one or more large 
traders would be required to comply with all of the requirements of 
paragraph (b) unless the entities that it controls discharge all of the 
responsibilities of the controlling person under paragraph (b). The 
intent of this provision is to focus the identification requirement on 
the parent company, and avoid the application of the requirement to 
natural persons who may be controlling owners of the parent company. 
This provision is designed to limit the reporting burden to a 
relatively small group of persons and avoid redundant identification of 
accounts, while allowing the Commission to identify the controlling 
institutions that operate as large traders and obtain information on 
their trading. As with paragraph (b)(3)(i), this provision would 
require that the entities that self-identify as large traders (i.e., an 
entity that is ``controlled by'' the non-filer) comply with the 
proposed rule with respect to all accounts of the non-filer controlling 
person. In other words, a controlling person would not be excused from 
the large trader requirements under this provision if it directly or 
indirectly exercises investment discretion over any other accounts, 
including those of other large traders, unless all of those other large 
traders have also self-identified

[[Page 21461]]

with respect to all of its accounts. The purpose of this proposed 
provision is to make sure that the entity that self-identifies as a 
large trader encompasses the full extent of the large trader activity 
within its domain and those of its controlling person.
    For example, a parent holding company generally would file a Form 
13H on behalf of itself and each of its large trader subsidiaries. So 
long as the Form provides all of the relevant information (e.g., 
discloses contact information and all of the accounts through which it 
and its affiliates trade), and the holding company makes the necessary 
disclosures to its and its subsidiaries' broker-dealers, then the large 
trader subsidiaries would not be required to individually file Forms 
13H.\45\ Alternatively, if all of the large trader's subsidiaries 
collectively comply with all of the requirements of proposed paragraphs 
(b)(1), (b)(2), and (b)(4) with respect to all of the parent company's 
trading activity, then the holding company would not be required to 
file a Form 13H.\46\ If however, a holding company has two subsidiaries 
that independently qualify as large traders, and only one elects to 
file its own Form 13H, then the holding company still would be required 
to file its own Form 13H that encompasses both subsidiaries.\47\ The 
holding company's Form 13H therefore would include information on each 
of its subsidiaries, and transactions of both subsidiaries would be 
tagged with the parent company's LTID.\48\
---------------------------------------------------------------------------

    \45\ See proposed paragraph (b)(3)(i).
    \46\ See proposed paragraph (b)(3)(ii).
    \47\ Both the holding company and subsidiary that elected to 
file its own Form 13H would identify the other as an affiliated 
large trader in Item 5 of the Form.
    \48\ Transactions of the subsidiary that filed its own Form 13H 
would also be tagged with its unique LTID. See infra text 
accompanying note 113 (discussing multiple LTIDs).
---------------------------------------------------------------------------

    The examples above describe situations in which, for the limited 
purpose of determining who should self-identify as a large trader, 
investment discretion would be considered to be indirectly exercised by 
a parent company by virtue of the direct or indirect power that the 
parent company exercises over its subsidiaries. Those who do not 
exercise investment discretion--either directly or indirectly through, 
for example controlled persons--would not be large traders, and so mere 
ownership of accounts--by trusts,\49\ custodians, or nominees, for 
example--through which the requisite number of securities transactions 
are effected would not trigger large trader status.
---------------------------------------------------------------------------

    \49\ Trustees exercising investment discretion on behalf of such 
trusts would be large traders.
---------------------------------------------------------------------------

    The proposed rule focuses on entities that directly or indirectly 
exercise investment discretion and are responsible for trading large 
amounts of securities. As these entities can represent significant 
sources of liquidity and overall trading volume, their trading may have 
a direct impact on the markets. As such, the Commission believes that 
the proposed rule, if adopted, would allow the Commission to more 
readily identify these large traders and obtain current information on 
their trading activity. The Commission also believes that the proposed 
rule is tailored to achieve the objectives of section 13(h) of the 
Exchange Act by allowing the Commission to monitor the impact of large 
traders on the securities markets and assisting the Commission's 
enforcement of the Federal securities laws, while at the same time 
minimizing the burden on affected entities.
1. Definition of Person and Control
    Section 13(h)(8)(E) of the Exchange Act defines ``person'' as 
having ``the meaning given in Section 3(a)(9) [of the Exchange Act] and 
also includes two or more persons acting as a partnership, limited 
partnership, syndicate, or other group, but does not include a foreign 
central bank.'' \50\ Section 3(a)(9) of the Exchange Act defines person 
as ``a natural person, company, government, or political subdivision, 
agency, or instrumentality of a government.'' \51\ Paragraph (a)(2) of 
the proposed rule defines ``person'' by reference to the definition 
contained in Section 13(h)(8)(E) of the Exchange Act.'' \52\ 
Accordingly ``person,'' for purposes of proposed Rule 13h-1, would 
include, among other things, two or more persons acting together for 
the purpose of trading, acquiring, holding, or disposing of NMS 
securities.\53\
---------------------------------------------------------------------------

    \50\ See 15 U.S.C. 78m(h)(8)(E).
    \51\ 15 U.S.C. 78c(a)(9).
    \52\ As required by Section 13(h)(8)(E) of the Exchange Act, the 
proposed rule expressly excludes foreign central banks from the 
definition of a person. See 15 U.S.C. 78m(h)(8)(E). See also Senate 
Report, supra note 9, at 49 (noting that foreign central banks were 
to be excluded in the interest of comity and due to the nature of 
the specific functions of such entities).
    \53\ See, e.g., House Comm. on Energy and Commerce, Report to 
Accompany the Securities Market Reform Act of 1990, H.R. No. 524, 
101st Cong. 2d Sess. (June 5, 1990) (reporting H.R. 3657).
---------------------------------------------------------------------------

    In addition, paragraph (a)(3) of the proposed rule defines control 
(including the terms ``controlling,'' ``controlled by,'' and ``under 
common control with'') as ``the possession, direct or indirect, of the 
power to direct or cause the direction of the management and policies 
of a person, whether through the ownership of securities, by contract, 
or otherwise. Any person that directly or indirectly has the right to 
vote or direct the vote of 25% or more of a class of voting securities 
of an entity or has the power to sell or direct the sale of 25% of more 
of a class of voting securities of such entity, or in the case of a 
partnership, has the right to receive, upon dissolution, or has 
contributed, 25% or more of the capital, is presumed to control that 
entity.'' The proposed definition of control is based on the definition 
of control contained in Form 1 (Application for Registration or 
Exemption from Registration as a National Securities Exchange). The 
Commission preliminarily believes that the proposed definition of 
control is sufficiently limited to capture only those persons with a 
significant enough controlling interest to warrant identification as a 
large trader.\54\
---------------------------------------------------------------------------

    \54\ In particular, the Commission notes that the definition of 
control contained in Form 1 is among the least expansive definitions 
of control referenced in Commission rules. Cf. Rule 19h-1(f)(2) 
under the Exchange Act, 17 CFR 240.19h-1(f)(2) (featuring a 10% 
threshold with respect to the right to vote 10 percent or more of 
the voting securities or receive 10 percent or more of the net 
profits). The Commission believes that this definition of control 
represents a less burdensome option that still achieves the goal of 
identifying persons who exert direct or indirect control over large 
traders. Further, the Commission has not incorporated the provision 
contained in the Form 1 definition of control that is applicable to 
directors, general partners, or officers that exercise executive 
responsibility. Rather, given the proposed rule's focus on parent 
companies, the Commission's proposed definition focuses on the 
existence of a corporate control relationship over the large trader 
entity.
---------------------------------------------------------------------------

    While a natural person typically exercises investment discretion 
over an account, the proposed large trader reporting system is intended 
to capture the activity of the entity that employs the natural person 
doing the trading.\55\ As discussed above, the proposed rule is 
intended to push requirements triggered by the large trader definition 
up the hierarchy of corporate control to the parent company, where 
applicable. For example, a company that controls persons who, 
collectively or individually, meet the definition of large trader would 
file Form 13H and identify itself as the large trader, and all 
transactions by its employee traders, as well as the employee traders 
of entities under its control, would be marked with the parent's LTID 
number.
---------------------------------------------------------------------------

    \55\ Where a firm trades through an algorithmic trading system 
in which trading decisions are performed by a computer program 
without the intervention of a natural person, the exercise of 
investment discretion would be attributed to the firm by way of the 
natural person or persons who are responsible for the design of the 
trading engine.

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

[[Page 21462]]

    The following examples elaborate on which person would identify 
itself as the ``large trader.'' For example, if a firm (e.g., a 
corporation, limited liability company, partnership, limited 
partnership) employs two natural persons who exercise investment 
discretion and trade in an amount that would qualify them individually 
as ``large traders,'' then the firm, as their employer, would file Form 
13H and identify itself as a large trader, and the individual employees 
would not file Form 13H. In addition, if a firm employs two natural 
persons who exercise investment discretion and trade in an amount that 
would not individually qualify them as ``large traders,'' but, when 
taken together, the exercise of investment discretion and trading 
effected by those two natural persons would qualify the firm as a large 
trader, then the firm, as their employer, would file Form 13H and 
identify itself as a large trader. This would be the case as long as 
the firm, directly or indirectly, is the employer of the natural 
persons and exercises control over them in the context of the employer 
relationship.\56\
---------------------------------------------------------------------------

    \56\ The Commission notes that the proposed rule would require 
the aggregation of accounts over which employees exercise investment 
discretion in the scope of their employment. See proposed Rule 13h-
1(a)(4) (defining ``investment discretion''). Therefore, as an 
entity determines whether it is a large trader, it would not count 
transactions effected by employees in their personal (e.g., 401(k)) 
accounts.
---------------------------------------------------------------------------

    In the case of a large firm that is composed of numerous operating 
subsidiaries, to accomplish the Commission's goals, the Commission 
intends that the entity that is the ultimate parent company would file 
Form 13H and identify itself as the large trader, not the individual 
subsidiaries. For example, in the case of a large financial holding 
company, if an adviser and a registered broker-dealer subsidiary both 
employ persons who exercise investment discretion over accounts and 
effect the requisite level of transactions (either collectively or 
individually), the financial holding company could identify itself as 
the large trader by filing Form 13H, and the adviser and broker-dealer 
subsidiaries need not file Form 13H.
    The following additional examples are intended to provide further 
clarity as to the party the Commission believes should self-identify as 
a large trader under the proposed rule:
     In the case of a registered investment adviser that acts 
as the adviser to several investment companies registered under the 
Investment Company Act (e.g., mutual funds), even if each fund is 
managed by one natural person that would meet the applicable large 
trader threshold, the investment adviser would file Form 13H and 
identify itself as a large trader and the individual fund manager would 
not file Form 13H. For purposes of the proposed rule, the investment 
company would not directly or indirectly exercise investment discretion 
over one or more accounts and therefore would not file Form 13H.
     Where four individuals form a partnership and operate a 
proprietary trading business through a computerized algorithmic trading 
engine, the partnership entity would file Form 13H and identify itself 
as a large trader, and the four individual partners would not file Form 
13H, so long as the partnership covers all of the partners' trading 
activity for the partnership.\57\
---------------------------------------------------------------------------

    \57\ See proposed Rule 13h-1(b)(3)(ii).
---------------------------------------------------------------------------

     If a natural person large trader is not employed by an 
entity (e.g., the person is self-employed), then the natural person 
would file Form 13H and identify itself as a large trader.
    By focusing on parent companies, the proposed rule requires large 
traders to aggregate accounts over which persons they control exercise 
investment discretion.\58\ Accordingly, even if any individual 
employee, group, or subsidiary within a company would not effect 
transactions that equal or exceed the identifying activity threshold by 
itself, if collectively the ultimate parent company operates 
subsidiaries or controls individuals that together effect transactions 
that equal or exceed the identifying activity threshold, then the 
parent company would need to identify itself as a large trader.
---------------------------------------------------------------------------

    \58\ See proposed Rule 13h-1(a)(1) (defining the term ``large 
trader'' to include ``any person that directly or indirectly, 
including through other persons controlled by such person, exercises 
investment discretion * * *'').
---------------------------------------------------------------------------

    The Commission believes that the proposed focus on parent company-
level entities should reduce the burden of the proposed rule by 
requiring self-identification by a concentrated group of parent 
companies, while capturing those organizations that in the aggregate 
are responsible for exercising investment discretion over the trading 
of a substantial volume or fair market value of NMS securities. 
Notably, companies would not be able to divide their trading among 
employees, groups, or subsidiaries for the purpose of avoiding meeting 
the definition of large trader under the proposed rule.
2. Definition of Investment Discretion
    Paragraph (a)(4) of proposed Rule 13h-1 states that the definition 
of ``investment discretion'' shall have the meaning provided for in 
Section 3(a)(35) of the Exchange Act. Section 3(a)(35) provides that 
``[a] person exercises `investment discretion' with respect to an 
account if, directly or indirectly, such person (A) is authorized to 
determine what securities or other property shall be purchased or sold 
by or for the account, (B) makes decisions as to what securities or 
other property shall be purchased or sold by or for the account even 
though some other person may have responsibility for such investment 
decisions, or (C) otherwise exercises such influence with respect to 
the purchase and sale of securities or other property by or for the 
account as the Commission, by rule, determines, in the public interest 
or for the protection of investors, should be subject to the operation 
of the provisions of this title and the rules and regulations 
thereunder.'' \59\ A person's employees would be deemed to exercise 
investment discretion on behalf of that person when they act within the 
scope of their employment. This provision is intended to clarify that 
when an entity determines whether it meets the definition of large 
trader, it would not count, for example, transactions effected by 
employees in their personal accounts. The Commission preliminarily 
believes that this proposed definition would identify those persons and 
entities responsible for making trading decisions concerning securities 
transactions involving a substantial volume or a large fair market 
value consistent with the purposes of section 13(h) of the Exchange 
Act.
---------------------------------------------------------------------------

    \59\ 15 U.S.C. 78c(a)(35)(B).
---------------------------------------------------------------------------

3. Definition of Transaction and NMS Security
    Paragraph (a)(6) of the proposed rule defines the term 
``transaction'' to mean all transactions in NMS securities, including 
exercises or assignments of option contracts, except for a limited 
number of transactions that are specifically identified in that 
paragraph, which are discussed below. The term ``NMS security'' is 
defined in Rule 600(b)(46) under the Exchange Act.\60\ The proposed 
rule would apply to trading in NMS securities that are traded through 
any facility of a national securities exchange, as well as traded in 
foreign or domestic over-the-counter markets and after-hours systems.
---------------------------------------------------------------------------

    \60\ 17 CFR 240.600(b)(46). An ``NMS security'' means ``any 
security or class of securities for which transaction reports are 
collected, processed, and made available pursuant to an effective 
transaction reporting plan, or an effective national market system 
plan for reporting transactions in listed options.''

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

[[Page 21463]]

    Section 13(h)(8)(B) defines the term ``publicly traded security'' 
to mean ``any equity security (including an option on individual equity 
securities, and an option on a group or index of such securities) 
listed, or admitted to unlisted trading privileges, on a national 
securities exchange, or quoted in an automated interdealer quotation 
system.'' \61\ The Commission preliminarily believes that the 
definition of ``NMS security'' encompasses the universe of securities 
that the term ``publicly traded security'' used in Section 13(h)(8)(B) 
was intended to cover.\62\
---------------------------------------------------------------------------

    \61\ See 15 U.S.C. 78m(h)(8)(B).
    \62\ The Commission notes that the term ``NMS security'' was 
adopted in 2005, fourteen years after the adoption of Section 13(h). 
See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 
37496 (June 29, 2005) (File No. S7-10-04) (Regulation NMS adopting 
release).
---------------------------------------------------------------------------

    For purposes of determining whether a person effects the requisite 
amount of transactions in NMS securities to meet the definition of 
``large trader,'' paragraph (a)(6) of the proposed rule would exclude a 
limited set of transactions from the term ``transaction'' and the 
requirements of the proposed rule. The proposed exclusions are designed 
to exempt certain small and otherwise infrequent traders from the 
definition of a large trader as well as activity that is not 
characterized by active investment discretion or is associated with 
capital raising or employee compensation.
    Specifically, the Commission preliminarily believes that the 
proposed excepted transactions are not effected with an intent that is 
commonly associated with an arm's length purchase or sale of securities 
in the secondary market and therefore do not fall within the types of 
transactions that are characterized by the exercise of investment 
discretion. While a large enough one-time transaction in the proposed 
categories could have an impact on the market, the Commission would be 
able to obtain information on that trade through other means, including 
the EBS system. The Commission preliminarily believes that the benefit 
to the Commission of identifying such person as a large trader solely 
through one of the enumerated excepted transactions would not be 
justified by the costs that would be imposed on the person and their 
registered broker-dealer that accompany meeting the definition of large 
trader. Accordingly, the Commission proposes to exclude the following 
types of transactions, described below, from the proposed definition of 
``transaction'':
     Any journal or bookkeeping entry made to an account to 
record or memorialize the receipt or delivery of funds or securities 
pursuant to the settlement of a transaction; \63\
---------------------------------------------------------------------------

    \63\ The Commission notes that such activity is part of the 
clearance and settlement process. Because proposed Rule 13h-1 
focuses on effecting transactions for the purchase or sale of an NMS 
security, the Commission does not believe that the capture of this 
activity is useful in the context of a rule that is designed to 
identify trading activity.
---------------------------------------------------------------------------

     Any transaction that is part of an offering of securities 
by or on behalf of an issuer, or by an underwriter on behalf of an 
issuer, or an agent for an issuer, whether or not such offering is 
subject to registration under the Securities Act of 1933, provided, 
however, that this exemption shall not include an offering of 
securities effected through the facilities of a national securities 
exchange;
     Any transaction that constitutes a gift;
     Any transaction effected by a court-appointed executor, 
administrator, or fiduciary pursuant to the distribution of a 
decedent's estate; \64\
---------------------------------------------------------------------------

    \64\ This proposed exclusion draws a distinction between the 
distribution and continuing administration of an estate. A court-
appointed fiduciary may be authorized to invest and reinvest in 
securities for many years. Transactions effected pursuant to the 
continuing administration or investment of an estate's assets would 
fall outside the exclusion for transactions of a decedent or marital 
estate, as they would indicate an on-going exercise of investment 
discretion and extend beyond a one-time event. Only those 
transactions effected pursuant to the distribution or liquidation of 
such estates would be excluded.
---------------------------------------------------------------------------

     Any transaction effected pursuant to a court order or 
judgment;
     Any transaction effected pursuant to a rollover of 
qualified plan or trust assets subject to Section 402(c)(1) of the 
Internal Revenue Code; \65\ and
---------------------------------------------------------------------------

    \65\ 26 U.S.C. 402(c)(1).
---------------------------------------------------------------------------

     Any transaction between an employer and its employees 
effected pursuant to the award, allocation, sale, grant or exercise of 
a NMS security, option or other right to acquire securities at a pre-
established price pursuant to a plan which is primarily for the purpose 
of an issuer benefit plan or compensatory arrangement.

The Commission preliminarily believes that narrowing the definition of 
a transaction should reduce the impact of the proposed rule on 
infrequent traders and at the same time allow the Commission to focus 
the proposed rule on those persons and activities that require large 
trader identification.
4. Identifying Activity Level
    Section 13(h)(8)(C) defined the term ``identifying activity level'' 
to mean ``transactions in publicly traded securities at or above a 
level of volume, fair market value, or exercise value as shall be fixed 
from time to time by the Commission by rule or regulation, specifying 
the time interval during which such transactions shall be aggregated.'' 
\66\ The ``identifying activity level'' is the threshold level of 
transaction activity at which a market participant would be considered 
a ``large trader'' and required to identify itself to the Commission. 
The Commission proposes that ``identifying activity level'' mean 
aggregate transactions in NMS securities that are equal to or greater 
than: during a calendar day, either two million shares or shares with a 
fair market value of $20 million; or (2) during a calendar month, 
either twenty million shares or shares with a fair market value of $200 
million.\67\
---------------------------------------------------------------------------

    \66\ See 15 U.S.C. 78m(h)(8)(C).
    \67\ See proposed Rule 13h-1(a)(7).
---------------------------------------------------------------------------

    The thresholds are designed to identify large traders that effect 
transactions of a substantial magnitude relative to overall volume. In 
formulating the proposed threshold, the Commission considered a level 
that would identify those entities that effect transactions in an 
amount corresponding to approximately 0.01% of the daily volume and 
market value of trading in NMS stocks. The Commission staff estimates 
that daily matched volume in NMS stocks traded on U.S. securities 
exchanges or reported through a transaction reporting facility \68\ is 
within a range of 7 to 10 billion shares in late 2009.\69\ Doubling 
that matched volume figure to account for the two sides of every trade, 
considering that the large trader proposal is focused on the aggregated 
buy and sell activity of traders, results in a figure of between 14 
billion and 20 billion shares. Given the Commission's objective to 
define a ``large'' trader to be one who effects

[[Page 21464]]

transactions of approximately .01% of overall daily volume on the 
equities markets, then a large trader would be a trader who effects 
transactions involving 2 million shares daily. The Commission estimates 
that, based on its experience with information gathered in connection 
with transaction fees pursuant to Section 31 of the Exchange Act,\70\ 
the daily market value of trading in NMS stocks, also on a double-
counted basis, is approximately $200 billion. Applying the same 0.01% 
standard to market value that was applied to daily volume results in a 
threshold of approximately $20 million.
---------------------------------------------------------------------------

    \68\ Over-the-counter trades, including trades executed by 
alternative trading systems, are reported to the consolidated trade 
streams through one of the trade reporting facilities operated by 
FINRA on behalf of exchanges, or through FINRA's ADF.
    \69\ While the proposed large trader definition would include 
options trading in defining a large trader, the proposed threshold 
was based on information for NMS stock trading. This figure does not 
count transactions conducted on derivatives markets. Consequently, 
the Commission believes that the 7 to 10 billion figure understates 
overall volume relative to the proposed gross-up methodology for 
calculating the identifying activity threshold. Nevertheless, the 
Commission preliminarily believes that considering reported volume 
in NMS stocks provides an appropriate and relevant benchmark, using 
figures that are widely accessible, for determining the threshold 
for large trader status. The Commission notes that several exchanges 
provide daily and moving average volume figures on public Web sites. 
See, e.g., http://www.nasdaqtrader.com.
    \70\ 15 U.S.C. 78ee.
---------------------------------------------------------------------------

    The first prong of the proposed threshold is designed to identify 
large traders who effect transactions, on a daily basis, in a 
substantial volume. The second prong of the proposed threshold is 
intended to identify large traders who might not trigger the calendar-
day threshold but might nevertheless effect transactions in large 
enough amounts over the course of a calendar month to warrant becoming 
subject to the proposed requirements that would be applicable to large 
traders. In addition, the second prong should allow the Commission to 
establish a high enough first prong so as to not pick up small or 
infrequent traders who might trigger identification based on a single 
transaction.
    Section 13(h)(3) of the Exchange Act authorizes the Commission to 
prescribe rules governing the manner in which transactions and accounts 
shall be aggregated for purposes of determining who should be defined 
as a large trader.\71\ The proposal would require market participants 
to use a ``gross up'' approach in calculating their activity levels. 
Offsetting or netting transactions among or within accounts, even for 
hedged positions, would be added to a participant's activity level in 
order to show the full extent of a trader's purchase and sale 
activity.\72\ Specifically, paragraph (c)(1) of proposed Rule 13h-1 
would specify that the volume or fair market value of equity securities 
purchased and sold would be aggregated with the market value of 
transactions in options or on a group or index of equity 
securities.\73\ For purposes of the identifying activity level, with 
respect to options, only purchases and sales, and not exercises, would 
be counted. By considering only purchases and sales, the proposed rule 
is intended to focus on the trading of options and avoid double-
counting towards the applicable identification threshold.
---------------------------------------------------------------------------

    \71\ See 15 U.S.C. 78m(h)(3).
    \72\ In particular, a trader that nets or hedges its positions, 
e.g., one that seeks to achieve a net position of zero at the end of 
a trading day, may nevertheless have transacted in a substantial 
volume or fair market value during the course of the day. Through 
the proposed rule, the Commission seeks to identify any person who 
effects transactions in the requisite amount. Substantial trading 
activity has the potential to impact the market regardless of the 
person's net position.
    \73\ For example, 50,000 shares of XYZ stock and 500 XYZ call 
options would count as aggregate transactions of 100,000 shares in 
XYZ (i.e., 50,000 + 500 x 100 = 100,000). With respect to index 
options, the market value would be computed by multiplying the 
number of contracts purchased or sold by the market price of the 
options and the applicable multiplier. For example, if ABC Index has 
a multiplier of 100, a person who purchased 200 ABC call options for 
$400 would have effected aggregate transaction of $8 million (i.e., 
200 x 400 x 100 = $8,000,000). Transactions in index options are not 
required to be ``burst'' into share equivalents for each of the 
underlying component equities.
---------------------------------------------------------------------------

    The Commission believes that this approach would accurately 
identify those traders that effect purchase and sale transactions in a 
large volume of securities in absolute terms and is designed to 
minimize the burden on affected entities in calculating the applicable 
thresholds by utilizing a bright line standard that is readily applied.
    To help prevent circumvention of the proposed rule, paragraph 
(c)(2) further would prohibit a person from disaggregating accounts to 
avoid identification and the accompanying proposed requirements of a 
large trader. Accordingly, the proposal would prohibit, among other 
things, persons from splitting activity among multiple registered 
broker-dealers, accounts, or transactions for the purpose of evading 
the large trader identification requirement. Additionally, where two 
separate entities engage in a coordinated trading strategy that results 
in the joint exercise of investment discretion over their individual 
accounts, each entity must count the transactions in NMS securities 
effected through those ``joint'' accounts toward its identifying 
activity level.\74\
---------------------------------------------------------------------------

    \74\ The definition of ``person'' includes two or more persons 
acting as a partnership, limited partnership, syndicate, or other 
group. As discussed infra, if a person meets the identifying 
activity level, the person would be a large trader and would need to 
list the applicable accounts in proposed Schedule 6 to Form 13H.
---------------------------------------------------------------------------

    The Commission believes that the capture of substantial trading 
activity would be essential to accomplish the purposes of Section 13(h) 
of the Exchange Act. The Commission has balanced this need against the 
burden of capturing the information and preliminarily believes that the 
proposed identifying activity level strikes an appropriate balance. In 
particular, the Commission preliminarily believes that trading activity 
in an amount corresponding to the proposed identifying activity level 
effected during the applicable measuring periods is sufficiently 
substantial to warrant identification as a large trader so that the 
Commission can more readily obtain information about that trader and 
its market activity. The Commission also preliminarily believes that 
the proposed identifying activity level would establish a simple 
bright-line threshold consistent with the activity-based threshold 
contemplated by Section 13(h) of the Exchange Act.
5. Inactive Status
    Proposed Rule 13h-1(b)(3)(iii) would establish an optional inactive 
status for large traders. Specifically, large traders previously 
assigned an LTID whose aggregate transactions during the previous full 
calendar year did not reach the identifying activity level at any time 
during the year would be eligible to file for inactive status upon 
checking a box on the cover page of a Form 13H filing. This status 
would be available to traders that become less active and no longer 
meet the threshold at which large trader status is realized. After a 
large trader files for inactive status, it would be relieved from the 
Form 13H filing requirements, as well as the requirement to inform its 
registered broker-dealers and others with whom it shares investment 
discretion, of its LTID.\75\
---------------------------------------------------------------------------

    \75\ In addition, a large trader on inactive status could inform 
its broker-dealers of its inactive status and request that the 
broker-dealer cease tagging its transactions with its LTID.
---------------------------------------------------------------------------

    As proposed, large traders on inactive status who once again reach 
the identifying activity level would be required to reactivate their 
large trader status by filing Form 13H promptly after effecting 
transactions in an amount that equals or exceeds the large trader 
identifying activity threshold.\76\ In submitting a ``Reactivated 
Status'' Form 13H, the large trader would retain the LTID initially 
assigned to it, and would be required to notify registered broker-
dealers and others of its status and LTID.
---------------------------------------------------------------------------

    \76\ See infra note 81 (discussing the ``promptly'' standard).
---------------------------------------------------------------------------

    The Commission believes that the proposed provision for an inactive 
status should eliminate the ongoing costs of compliance with the 
proposed rule, including the requirement to file amendments to Form 13H 
with the Commission, for those entities that no longer trade in amounts 
that would meet the definition of large trader. The Commission 
preliminarily believes that

[[Page 21465]]

the provision for an inactive status is consistent with the objectives 
of Section 13(h) of the Exchange Act.
    As a subset of inactive status, proposed Form 13H would allow a 
large trader that discontinues operations to file an amended Form 13H 
reflecting its ``Termination'' status. For example, this status would 
be applicable in the event of certain mergers or acquisitions involving 
a large trader, including a merger of two large traders. In that 
instance, the non-surviving large trader would be required to submit a 
``Termination Filing'' that specifies the effective date of the merger. 
In Item 5b of the Form 13H, the surviving large trader would be 
required to list as an affiliate the non-surviving company, note that 
the company no longer exists, and provide the LTID of the non-surviving 
company. The Commission believes that specifically allowing a large 
trader to file an updated Form 13H indicating that it has discontinued 
operations will allow large traders to accurately reflect their status 
to the Commission and will enhance the utility of the proposed large 
trader reporting system.

C. Large Trader Self-Identification

    Section 13(h)(1) of the Exchange Act authorizes the Commission to 
prescribe identification requirements for large traders for the purpose 
of monitoring the impact on the securities markets of securities 
transactions involving a substantial volume, or a large fair market 
value or exercise value, and to assist the Commission in the 
enforcement of the Exchange Act.\77\ The Commission is specifically 
authorized to require large traders to provide it with the information 
deemed necessary or appropriate to identify large traders and all 
accounts in or through which large traders effect transactions.\78\ The 
Commission also is authorized to require large traders to disclose 
their large trader status to the registered broker-dealers that carry 
the accounts through which they effect transactions.\79\ The Commission 
is proposing Rule 13h-1(b) and Form 13H to implement these provisions 
of Section 13(h)(1) of the Exchange Act.
---------------------------------------------------------------------------

    \77\ See 15 U.S.C. 78m(h)(1).
    \78\ See 15 U.S.C. 78m(h)(1)(A).
    \79\ See 15 U.S.C. 78m(h)(1)(B).
---------------------------------------------------------------------------

    As discussed below, under the proposed rule, each large trader 
would be required to identify itself to the Commission by filing 
electronically with the Commission a Form 13H.\80\ Additionally, each 
large trader would be required to identify itself to the broker-dealers 
through which it effects transactions as well as to any other entity 
with which it shares investment discretion over an account. Finally, 
the proposed rule would require a large trader to promptly provide the 
Commission with such other descriptive or clarifying information that 
the Commission may request from time to time to further identify the 
large trader and all accounts through which the large trader effects 
transactions.\81\ Under this provision, the Commission would be able to 
obtain, for example, clarifying information concerning information 
provided in a Form 13H filing.
---------------------------------------------------------------------------

    \80\ The Commission is proposing an electronic filing system for 
proposed Form 13H, and the proposed rule would require electronic 
filing. See proposed Rule 13h-1(b)(1). If the Commission adopts the 
proposed rule as proposed, it is possible that large traders might 
be required to file Form 13H in paper until such time as an 
electronic filing system is operational and capable of receiving the 
Form. Large traders would be notified as soon as the electronic 
system can accept filings of Form 13H.
    \81\ See proposed Rule 13h-1(b)(4). See also infra note 83 
(referencing the ``promptly'' standard of Rule 15b3-1).''
---------------------------------------------------------------------------

1. Form 13H Filing Requirements
    Paragraph (b)(1) of the proposed rule would require large traders 
to file Form 13H with the Commission promptly after first effecting 
transactions that reach the identifying activity level.\82\ Thereafter, 
large traders would be required to file an amended Form 13H promptly 
following the end of a calendar quarter, but only if any of the 
information contained in the Form 13H becomes inaccurate for any reason 
(e.g., change of name or address, contact number, type of organization, 
principal business, regulatory status, or accounts maintained).\83\ To 
the extent none of the information contained in the Form became 
inaccurate during the quarterly period, the large trader would not be 
required to file an amended form. Regardless of whether it files any 
amended Forms 13H, a large trader would still be required to file 
proposed Form 13H annually, within 45 days after the calendar year-end, 
in order to help ensure the accuracy and currency of all of the 
information reported to the Commission.\84\
---------------------------------------------------------------------------

    \82\ See proposed Rule 13h-1(b)(1)(i).
    \83\ See proposed Rule 13h-1(b)(1)(iii) (requiring registered 
broker-dealers to ``promptly file'' amendments to Form 13H as 
necessary). See also 17 CFR 240.15b3-1 (concerning a similar 
standard for Form BD).
    \84\ See proposed Rule 13h-1(b)(1)(ii).
---------------------------------------------------------------------------

    The Commission believes that the proposed requirement that large 
traders keep current the information contained in their Form 13H 
submissions will provide the Commission with up-to-date information 
that the Commission could utilize promptly when needed. Unless the 
Commission has up-to-date Forms 13H for each large trader, the 
Commission could be impaired in its ability quickly to identify and 
contact large traders, as well as identify their accounts, affiliates, 
and trading activity. Given the limited amount of information proposed 
to be collected on the Form 13H, the Commission believes the burden of 
amending the form would be justified by the benefit to the Commission 
of minimizing problems that could arise from otherwise stale 
information.
2. Form 13H and Instructions
    Proposed Form 13H, and the Schedules and Instructions thereto, are 
designed to capture basic information on each large trader consistent 
with the Commission's authority under Section 13(h) of the Exchange 
Act. The proposed Instructions to the proposed form provide all of the 
pertinent definitions, examples of who would be a large trader, and 
what information must be provided on Form 13H. The proposed 
Instructions also provide guidance and cross-references to Rule 13h-1 
and other related instructions. The Commission believes that a careful 
review of the Instructions to Form 13H should assist large traders and 
facilitate the completion and filing of Form 13H.
    The cover page to proposed Form 13H requires a large trader to 
indicate the nature of the submission it is filing, including: 
``Initial Filing,'' ``Annual Filing,'' ``Interim Filing,'' ``Inactive 
Status,'' ``Reactivated Status,'' and ``Termination Filing.'' It also 
requires that a large trader provide its LTID. For its ``Initial 
Filing,'' a large trader would not be able to provide an LTID, as the 
Commission would issue the LTID only after it receives the initial Form 
13H submission. After receiving its LTID, the large trader would need 
to file promptly an ``Interim Filing'' to include the LTID and any new 
information.\85\ The cover page also would require contact information 
for the large trader, and requires the signature of the large trader's 
representative. The cover page contains a statement for the person 
signing the form to acknowledge that all of the information contained 
in the form

[[Page 21466]]

is true, correct, and complete. In addition, the cover page notes that 
intentional misstatements or omissions of fact constitute a federal 
crime and may result in civil penalties or other sanctions.
---------------------------------------------------------------------------

    \85\ Proposed Schedule 6 of Form 13H would require a large 
trader to provide the LTID for all other large traders (if any) that 
also exercise investment discretion over the accounts it identifies. 
When large traders submit their ``Initial Filings'' after 
implementation of this rule, large traders may not have the LTID of 
these other large traders for the same reason: the Commission may 
not have issued them yet. Therefore, as the Commission issues LTID 
numbers, and as large traders disclose their LTIDs to each other as 
required under proposed paragraph (b)(2), large traders would need 
to file ``Interim Filings.''
---------------------------------------------------------------------------

    Proposed Item 1 to Form 13H would require large traders to identify 
their business by checking the appropriate pre-populated categories or 
by indicating ``other.'' In Item 2, a large trader would be required to 
disclose whether it or any of its affiliates files forms with the 
Commission and, if so, to indicate the types of forms and all 
applicable SEC File and CRD numbers. The Commission anticipates that 
some of the most common registrations or filings that large traders may 
list in proposed Item 2 would include, for example, Form BD, Form ADV, 
or Form 10-K. Identification of this information will allow the 
Commission to readily ascertain the regulatory status of the large 
trader and its controlled persons.
    Proposed Item 3 to Form 13H would require a large trader to 
disclose whether it or any of its affiliates is: (1) A registered 
trader or otherwise registered with the Commodity Futures Trading 
Commission; (2) is a bank holding company, national bank, state member 
bank of the Federal Reserve System, state non-member bank, savings bank 
or association, credit union, or foreign bank; (3) an insurance 
company; or (4) regulated by a foreign regulator. For each entity that 
is, the form requires additional identifying information, which will 
allow the Commission to readily ascertain the regulated status of the 
large trader, and provide context for the Commission to understand the 
large trader's operations. Such entities must be identified and, for 
entities registered under the Commodity Exchange Act, the large trader 
would be required to provide its registration type and number. For 
other identified entities, a large trader would be required to disclose 
the applicable regulator(s).
    Proposed Item 4 to Form 13H, and the corresponding Schedule 4, 
would require the large trader to disclose basic business information. 
For example, the large trader must disclose whether it exercises 
investment discretion as a trustee, partnership, or corporation. 
Natural person large traders would be required to disclose whether they 
are self-employed or otherwise employed. Entities would be required to 
disclose the jurisdiction in which they are organized and their 
organization type: partnership, limited partnership, corporation, 
limited liability company, or other. In addition, entities would be 
required to identify those persons who own or control a large trader 
corporation, partnership, limited partnership, or trust. The term 
``executive officer,'' used in proposed Schedule 4, would mean 
``policy-making officer'' and otherwise would be interpreted in 
accordance with Rule 16a-1(f) under the Exchange Act.\86\ Further, each 
large trader would be required to describe the nature of its business. 
Identification of this information will help the Commission understand 
the corporate structure of the large trader and the nature of its 
business. Among other things, this information would be useful to the 
Commission to provide context to a large trader's operations, and would 
help the Commission understand the control relationships surrounding 
the large trader. This information also would be useful to the 
Commission in tailoring any requests for additional information that it 
may send to a large trader.
---------------------------------------------------------------------------

    \86\ 17 CFR 240.16a-1(f).
---------------------------------------------------------------------------

    Proposed Item 5 to Form 13H would collect information about the 
affiliates of large traders that either exercise investment discretion 
over accounts that hold NMS securities or that beneficially own NMS 
securities, if any. For purposes of this form, ``affiliate'' would be 
defined to mean any person that directly or indirectly controls, is 
under common control with, or is controlled by the large trader. This 
proposed definition of affiliate is designed to allow the Commission to 
collect comprehensive identifying information relating to the large 
trader and is consistent with other similar definitions of the 
term.\87\ The large trader would be required to identify each affiliate 
that either exercises investment discretion over accounts that hold NMS 
securities or that beneficially owns NMS securities, state the nature 
of its affiliate's business, and explain the relationship to the large 
trader (e.g., limited partner, direct subsidiary). Additionally, the 
large trader would be required to provide any applicable LTID for its 
large trader affiliates. Among other things, proposed Item 5 would 
allow the Commission to more carefully tailor any request that it may 
make to disaggregate large trader activity, and should also assist the 
Commission in understanding the affiliate relationships of the large 
trader and determine whether the correct entities had self-identified 
with the Commission.
---------------------------------------------------------------------------

    \87\ This definition is similar to the definition of 
``affiliate'' provided in the instructions to Form 1, 17 CFR 249.1. 
See also supra note 54.
---------------------------------------------------------------------------

    Proposed Item 6, and the accompanying Schedule 6, are designed to 
collect information concerning accounts over which the large trader 
exercises investment discretion. Specifically, the proposed schedule 
would require the large trader to identify all the accounts over which 
it directly or indirectly (e.g., through controlled persons) exercises 
investment discretion for purposes of the proposed rule. Proposed 
Schedule 6 also would require a large trader to disclose the LTID of 
any other large traders that exercise investment discretion over the 
identified accounts. The Commission would use this information to 
cross-reference accounts and avoid the double counting of transactions. 
To reduce the burden on large traders, the proposed Instructions 
specify that large traders may submit internally produced lists of 
accounts, provided that such lists contain all required information in 
a format substantially similar to the applicable Schedule. Finally, 
Schedule 6 would require the identification of a designated contact 
person at the large trader that the Commission could consult concerning 
the accounts listed on Schedule 6.
3. Confidentiality
    Section 13(h)(7) of the Exchange Act provides that Section 13(h) 
``shall be considered a statute described in subsection (b)(3)(B) of [5 
U.S.C. 552]'', which is part of the Freedom of Information Act 
(``FOIA'').\88\ As such, ``the Commission shall not be compelled to 
disclose any information required to be kept or reported under [Section 
13(h)].'' \89\ Accordingly, the information that a large trader would 
be required to disclose on proposed Form 13H or provide in response to 
a Commission request would be exempt from disclosure under FOIA. In 
addition, any transaction information that a registered broker-dealer 
would report under the proposed rule also would be exempt from 
disclosure under FOIA.
---------------------------------------------------------------------------

    \88\ 5 U.S.C. 552(b)(3)(B) is now 5 U.S.C. 552(b)(3)(A)(ii).
    \89\ See section 13(h)(7) of the Exchange Act, 15 U.S.C. 
78m(h)(7).
---------------------------------------------------------------------------

4. Self-Identification to Others
    Proposed paragraph (b)(2) of Rule 13h-1 would require each large 
trader to disclose its LTID to those registered broker-dealers that 
effect transactions on its behalf. In doing so, a large trader would be 
required to identify all of the accounts held by such broker-dealer to 
which its LTID applies. For example, a large trader would not be 
required to disclose to Broker-Dealer A the large trader's accounts 
held by Broker-Dealer B, but the large trader would need to

[[Page 21467]]

specifically highlight to Broker-Dealer A all of the accounts held by 
Broker-Dealer A over which the large trader exercises investment 
discretion. Requiring large traders to provide this information to 
their broker-dealers would place the primary account identification 
responsibilities on those who can most readily satisfy them--the large 
traders themselves--and would facilitate the ability of registered 
broker-dealers to fulfill their recordkeeping and reporting 
requirements under the proposed rule by facilitating their ability to 
identify and properly mark all applicable accounts through which a 
large trader trades.
    Proposed paragraph (b)(2) of Rule 13h-1 also would require each 
large trader to disclose its LTID to others with whom it collectively 
exercises investment discretion. The purpose of this provision is to 
enable large traders to provide all information required under Schedule 
6 of Form 13H.\90\ In addition, the proposed requirement would 
facilitate the ability of a large trader to provide a broker-dealer 
with the LTID of all large traders that exercise investment discretion 
over an account.\91\
---------------------------------------------------------------------------

    \90\ Specifically, Schedule 6 would require a large trader to 
disclose the LTID of all other large traders who exercise investment 
discretion over the accounts listed. Absent this requirement, large 
traders would have no reason to know the LTIDs of the large traders 
with whom they share investment discretion.
    \91\ For example, where two advisers co-manage an account, 
Adviser A would inform Adviser B of its LTID, and Adviser B would 
provide both its LTID and Adviser A's LTID to the broker-dealer 
carrying the account.
---------------------------------------------------------------------------

D. Recordkeeping, Reporting, and Monitoring Responsibilities

    Section 13(h)(2) of the Exchange Act authorizes the Commission to 
prescribe for registered broker-dealers recordkeeping requirements 
related to large trader activity that it deems necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Exchange Act.\92\ The Commission 
also is authorized to conduct reasonable periodic, special, or other 
examinations of registered broker-dealers of all records required to be 
made and kept pursuant to the rule.\93\ Paragraph (d) of the proposed 
rule would implement the recordkeeping provisions of Section 13(h)(2) 
of the Exchange Act.
---------------------------------------------------------------------------

    \92\ See 15 U.S.C. 78m(h)(2).
    \93\ See 15 U.S.C. 78m(h)(4).
---------------------------------------------------------------------------

    In addition, Section 13(h)(2) of the Exchange Act specifically 
authorizes the Commission to require registered broker-dealers to 
report transactions that equal or exceed the reporting activity level 
effected directly or indirectly by or through such broker-dealer for 
persons who they know are large traders, or any persons who they have 
reason to know are large traders on the basis of transactions effected 
by or through such broker-dealers.\94\ The Commission is proposing 
paragraph (e) of Rule 13h-1 to implement the transaction reporting 
provisions of Section 13(h)(2) of the Exchange Act. The proposed rule 
would mirror the statutory requirement that records and information 
required to be made and kept pursuant to the proposed rule be available 
for reporting to the Commission on the morning after the day the 
transactions were effected.\95\ While such information must be 
available for reporting to the Commission on the following day, the 
proposed rule further clarifies that transaction data would be required 
to be submitted to the Commission before the close of business on the 
day specified in the request for such transaction information.\96\ 
Further, the Commission is authorized to require that such transaction 
reports be transmitted in any format that it may prescribe, including 
machine-readable form.\97\ The proposed rule mirrors this requirement 
and, as discussed further below, the proposed rule would utilize the 
general format applicable to the EBS system, as modified to accommodate 
the specific requirements of the proposed rule, including the fields of 
LTID and execution time.\98\
---------------------------------------------------------------------------

    \94\ See 15 U.S.C. 78m(h)(2).
    \95\ See proposed Rule 13h-1(d)(5). This requirement was 
intended to include Saturdays or holidays. See Senate Report, supra 
note 9, at 40.
    \96\ See proposed Rule 13h-1(e).
    \97\ See 15 U.S.C. 78m(h)(2).
    \98\ See infra note 104 and accompanying text.
---------------------------------------------------------------------------

    The proposed rule would impose certain duties on broker-dealers. In 
particular, the proposed rule would impose recordkeeping and reporting 
requirements on the following: registered broker-dealers that are large 
traders; registered broker-dealers that, together with a large trader 
or Unidentified Large Trader, exercise investment discretion over an 
account; and registered broker-dealers that carry accounts for large 
traders or Unidentified Large Traders or, with respect to accounts 
carried by a non-broker-dealer, broker-dealers that execute 
transactions for large traders or Unidentified Large Traders. 
Additionally, the proposed rule would require registered broker-dealers 
to implement procedures to encourage and foster compliance with the 
self-identification requirements of the proposed rule.
1. Broker-Dealer Recordkeeping
    Proposed paragraph (d)(1) of Rule 13h-1 would provide that 
``[e]very registered broker-dealer shall maintain records of all 
information required under paragraphs (d)(2) and (d)(3) for all 
transactions effected directly or indirectly by or through (i) An 
account such broker-dealer carries for a large trader or an 
Unidentified Large Trader, (ii) an account over which such broker-
dealer exercises investment discretion together with a large trader or 
an Unidentified Large Trader, or (iii) if the broker-dealer is a large 
trader, any proprietary or other account over which such broker-dealer 
exercises investment discretion. Additionally, where a non-broker-
dealer carries an account for a large trader or an Unidentified Large 
Trader, the broker-dealer effecting transactions directly or indirectly 
for such large trader or Unidentified Large Trader shall maintain 
records of all of the information required under paragraphs (d)(2) and 
(d)(3) for those transactions.''
    The term ``Unidentified Large Trader'' would be defined to mean 
``each person who has not complied with the identification requirements 
of paragraphs (b)(1) and (b)(2) of this rule that a registered broker-
dealer knows or has reason to know is a large trader.'' \99\ The 
proposed ``reason to know'' standard is discussed in more detail below 
in the context of a registered broker-dealer's responsibility to 
monitor for Unidentified Large Traders.
---------------------------------------------------------------------------

    \99\ See proposed Rule 13h-1(a)(9).
---------------------------------------------------------------------------

    To help the Commission monitor the impact on the securities markets 
of securities transactions involving a substantial volume or a large 
fair market value, assist in the Commission's investigation of possible 
Federal securities law violations, and allow the Commission to conduct 
time-sequenced market reconstructions, the proposed rule would require 
registered broker-dealers to maintain specified data that would be 
relevant for these purposes. Notably, as discussed below, registered 
broker-dealers already are required to maintain most of the proposed 
fields of information for all of their customers pursuant to Rule 17a-
25 under the Exchange Act and the EBS system. In particular, the 
proposed rule would require registered broker-dealers to maintain the 
following information:
     Date the transaction was executed;
     Account number;
     Identifying symbol assigned to the security;

[[Page 21468]]

     Transaction price;
     Number of shares or option contracts traded in each 
specific transaction; whether each transaction was a purchase, sale, or 
short sale; and, if an option contract, whether the transaction was a 
call or put option, an opening purchase or sale, a closing purchase or 
sale, or an exercise or assignment
     Clearing house number of the entity maintaining the 
information and the clearing house numbers of the entities on the 
opposite side of the transaction;
     Designation of whether the transaction was effected or 
caused to be effected for the account of a customer of such registered 
broker-dealer, or was a proprietary transaction effected or caused to 
be effected for the account of such broker-dealer;
     Identity of the exchange or other market center where the 
transaction was executed;
     Time that the transaction was executed;
     LTID(s) associated with the account, unless the account is 
for an Unidentified Large Trader;
     Prime broker identifier;
     Average price account identifier; and
     If the transaction was processed by a depository 
institution, the identifier assigned to the account by the depository 
institution.
    In addition, proposed paragraph (d)(3) broadens the list of 
required broker-dealer records for transactions effected by 
Unidentified Large Traders beyond those that would be required for a 
self-identified large trader in order to assist the Commission in 
identifying the Unidentified Large Trader. Specifically, for 
Unidentified Large Traders, in addition to the above fields, the 
registered broker-dealer also would be required to retain and report 
such person's name, address, date the account was opened, and tax 
identification number(s).
    The proposed rule would incorporate the requirement contained in 
Section 13(h)(2) that transaction records be available for reporting to 
the Commission on the morning of the day following the day the 
transactions were effected.\100\ When the Commission makes a request 
for data, the proposed rule specifies that registered broker-dealers 
would be required to furnish it before the close of business on the day 
specified in the request for such transaction information.\101\ 
Paragraph (d)(4) of the proposed rule would require that such records 
be kept for a period of three years, the first two in an accessible 
place, in accordance with Rule 17a-4(b) under the Exchange Act.\102\
---------------------------------------------------------------------------

    \100\ See proposed Rule 13h-1(d)(5). This time frame is 
established in Section 13(h)(2) of the Exchange Act. See 15 U.S.C. 
78m(h)(2).
    \101\ See proposed Rule 13h-1(e).
    \102\ 17 CFR 240.17a-4(b).
---------------------------------------------------------------------------

    Currently, broker-dealers already are required to provide most of 
the proposed fields of information for all of their customers pursuant 
to Rule 17a-25 under the Exchange Act and the EBS system.\103\ The only 
additional items of information that this proposal would capture beyond 
what is currently captured by the existing EBS system are: (1) LTID and 
(2) transaction execution time.\104\ In this respect, the proposed rule 
is intended to address the principal limitations of the EBS system when 
applied to a large trader reporting system under Section 13(h) of the 
Exchange Act, namely the EBS system's lack of transaction execution 
time information and lack of a LTID to uniformly identify large traders 
on a market-wide basis. The proposed rule also would require registered 
broker-dealers to be able to report trading information for large 
traders to the Commission much more promptly than the EBS system.\105\ 
The Commission preliminarily believes that the collection of current 
trading information is necessary to allow it to monitor the impact on 
the securities markets of large trader activity, particularly during 
times of market stress when such analyses are particularly relevant, as 
well as to support the Commission's efforts to detect and deter 
fraudulent and manipulative activity and other trading abuses.
---------------------------------------------------------------------------

    \103\ Rule 17a-25 requires that broker-dealers provide to the 
Commission upon request the following information for proprietary 
transactions: (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; (8) 
identity of the exchange or market where each transaction was 
executed; (9) prime broker identifier; (10) average price account 
identifier; and (11) the identifier assigned to the account by a 
depository institution. For transactions effected for a customer 
account, a broker-dealer must provide to the Commission upon request 
the following information: The customer's name, customer's address, 
the customer's tax identification number, and other related account 
information. See Rule 17a-25(a)(2)(ii). Additionally, 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. See Rule 17a-
25(a)(2)(iii).
    \104\ While the recording of execution time is already required 
of registered broker-dealers pursuant to Rule 17a-3, 17 CFR 240.17a-
3, and is currently captured by many SRO audit trails, see, e.g., 
CBOE Chapter VI, Rule 6.51 (Reporting Duties), with respect to the 
proposed large trader reporting system, the reporting of execution 
times within the specified period would constitute a new requirement 
compared to the existing EBS system. Execution times would need to 
be recorded and reported with the same degree of precision that is 
required by applicable rules.
    \105\ See EBS Release, supra note 24, 66 FR at 35836 (noting 
that firms are requested to submit the electronic bluesheets data 
within 10 business days).
---------------------------------------------------------------------------

    In particular, the capture of transaction execution times would 
allow the Commission to reconstruct a more accurate and complete time-
sequenced market history and facilitate the Commission's ability to 
more accurately assess the market impact of large traders, particularly 
during times of peak activity and market stress. The Commission 
preliminarily believes that capturing execution time would be essential 
for accomplishing the purposes of Section 13(h) of the Exchange Act, as 
the Market Reform Act intended a large trader system through which the 
Commission could perform time-sequenced reconstruction of trading 
activity.\106\
---------------------------------------------------------------------------

    \106\ See Senate Report, supra note 9, at 38-40.
---------------------------------------------------------------------------

    The Commission acknowledges that, in some instances, multiple LTIDs 
may be disclosed to a registered broker-dealer for a single account. 
For example, such a situation could arise where more than one large 
trader exercises investment discretion over an account (e.g., where two 
large trader investment managers co-manage an account), or where a 
parent company and one of its subsidiaries both identify themselves as 
large traders. Therefore, registered broker-dealers would need to 
develop systems capable of tracking multiple LTIDs. The Commission 
preliminarily believes that capturing the LTID of all large traders 
that exercise investment discretion for an account would be essential 
to adequately monitor the trading activity of each large trader that 
exercises investment discretion over those transactions that are 
reported to the Commission by broker-dealers and thereby accomplish the 
purposes of Section 13(h) of the Exchange Act. Without that 
information, the Commission could be hindered in its ability to readily 
use large trader data as contemplated in Section 13(h), including to 
support its regulatory and enforcement activities.
 2. Broker-Dealer Reporting
    Complementing the proposed recordkeeping requirements on brokers 
and dealers, proposed paragraph (e) of Rule 13h-1 would implement the 
transaction reporting provisions of Section 13(h)(2) of the Exchange 
Act.
    a. General Requirements

[[Page 21469]]

    Under proposed paragraph (e) of proposed Rule 13h-1, the broker-
dealers required to keep records pursuant to paragraph (d)(1) also 
would have a duty to report that information upon request. More 
specifically, upon the request of the Commission, those broker-dealers 
would be required to report electronically, in machine-readable form 
and in accordance with a format specified by the Commission that is 
based on the existing EBS system format, all required information for 
all transactions effected directly or indirectly by or through accounts 
carried by such broker-dealer for large traders and Unidentified Large 
Traders if they equal or exceed the reporting activity level.\107\ 
Broker-dealers would need to report a particular day's trading activity 
only if it equals or exceeds the ``reporting activity level,'' which is 
defined and discussed below. Transaction reports, including data on 
transactions up to and including the day immediately preceding the 
request, would need to be furnished to the Commission before the close 
of business on the day specified in the request for such transaction 
information.\108\ In recognition of the value of using existing 
reporting systems where practicable, the proposed rule would require 
broker-dealers to utilize the existing technology and infrastructure of 
the EBS system to the greatest degree possible to maintain large trader 
data and transmit it to the Commission.\109\
---------------------------------------------------------------------------

    \107\ Section 13(h)(2) requires that ``[s]uch records and 
reports shall be in a format and transmitted in a manner prescribed 
by the Commission (including, but not limited to, machine readable 
form).'' See 15 U.S.C. 78m(h)(2).
    \108\ Section 13(h)(2) requires that ``[s]uch records shall be 
available for reporting to the Commission, or any self-regulatory 
organization that the Commission shall designate to receive such 
reports, on the morning of the day following the day the 
transactions were effected, and shall be reported to the Commission 
or a self-regulatory organization designated by the Commission 
immediately upon request by the Commission or such a self-regulatory 
organization.'' See 15 U.S.C. 78m(h)(2).
    \109\ Section 13(h)(5)(A) of the Exchange Act directs the 
Commission to take into account existing reporting systems in 
exercising its authority under Section 13(h). See 15 U.S.C. 
78m(h)(5)(A).
---------------------------------------------------------------------------

b. Reporting Activity Level
    Consistent with Section 13(h)(2) of the Exchange Act, the proposed 
rule would require a registered broker-dealer to report only those 
transactions that equal or exceed the reporting activity level for that 
particular day of trading being reported. Paragraph (a)(8) of Rule 13h-
1 would define the ``reporting activity level'' as: (i) Each 
transaction in NMS securities, effected in a single account during a 
calendar day, that is equal to or greater than 100 shares; (ii) any 
other transaction in NMS securities, effected in a single account 
during a calendar day, that a registered broker-dealer may deem 
appropriate; or (iii) such other amount that may be established by 
order of the Commission from time to time. While a registered broker-
dealer would be required to report for a given day data only if it 
equals or exceeds the reporting activity level, the rule specifically 
would allow a broker-dealer to voluntarily report a day's trading 
activity that falls short of the applicable threshold. For example, 
registered broker-dealers may consider it more appropriate, given the 
low level of the proposed reporting activity level, to take this 
approach if they prefer to avoid implementing systems to filter the 
transaction activity and would rather utilize a ``data dump'' approach 
to reporting large trader transaction information to the Commission.
    In proposing a reporting activity level of 100 shares, the 
Commission notes that large traders often break-up large-size orders 
and disburse their trading interest across multiple market centers in 
an effort to maintain the confidentiality of the trade and minimize any 
market impact it might otherwise have if it were revealed to its full 
extent. Such large orders often are processed by algorithmic systems 
that split the order into smaller orders of a hundred to a few hundred 
shares. For example, high frequency traders often quote and trade in 
round lots of 100 shares or a few hundred shares. By establishing a low 
reporting activity level, the Commission intends for the proposed rule 
to result in the reporting of substantially all large trader activity 
in response to a request for data.\110\ Access to substantially all 
trading data would allow the Commission to perform more complete and 
accurate reconstructions of aggregate large trader activity.
---------------------------------------------------------------------------

    \110\ See proposed Rule 13h-1(a)(6) (exceptions to the 
definition of transaction).
---------------------------------------------------------------------------

    The proposed rule also would implement the authority in Section 
13(h)(8)(D) of the Exchange Act, allowing the Commission to establish, 
from time to time, such reporting activity level that the Commission 
shall specify by rule, regulation, or order, by proposing that the 
Commission would be able to alter the reporting activity level by 
order.\111\ The Commission could use this authority to change the 
reporting activity level if necessary to assure, for example, the 
quality of 13H Reports and the level of compliance with the 
identification requirements.\112\
---------------------------------------------------------------------------

    \111\ See proposed Rule 13h-1(a)(8). See also Senate Report, 
supra note 9, at 73 (noting that this authority to act by order was 
intended to provide the Commission with the flexibility necessary 
for responding to changing market conditions).
    \112\ The Commission might, for example, consider whether an 
alternative threshold amount would be more appropriate if large 
traders were managing their account activity to avoid the proposed 
100 share reporting activity level.
---------------------------------------------------------------------------

    Unlike the identifying activity level, when considering the 
reporting activity level, a registered broker-dealer would consider 
only the trading activity for each of its large trader and unidentified 
accounts, and would not need to aggregate transaction information on an 
intra-broker-dealer basis solely for calculating the reporting activity 
level. Thus, if a large trader maintains two separate accounts at a 
registered broker-dealer under the same LTID, the broker-dealer would 
be required to report activity in each account only if the activity in 
such account equaled or exceeded the reporting activity level on the 
specified day. A registered broker-dealer would report each account 
separately and would not need to aggregate accounts with the same LTID. 
By establishing a low reporting activity level, the Commission's 
proposal eliminates the need to propose aggregation requirements to 
assure that most large trader accounts would be reported in response to 
a request for data. The Commission believes that most active large 
trader accounts on any given day should contain sufficient transactions 
(i.e., at least 100 shares traded) to make the accounts reportable in 
response to a particular Commission request.
c. Multiple LTIDs
    Under the proposal, it is possible that more than one LTID could be 
associated with a particular account. For example, such a situation 
could arise where two or more large traders share investment discretion 
over the account. For transactions involving these accounts, the 
registered broker-dealer would be required to record each LTID for 
every trade effected in such account.\113\ In response to a request for 
records, the registered broker-dealer would report transaction 
information containing each LTID associated with the account. For 
identified large traders, the Commission could then use the LTID 
information collected on Schedule 6 to proposed Form 13H to filter the 
data and avoid double counting transactions.
---------------------------------------------------------------------------

    \113\ Broker-dealers also would need to monitor for Unidentified 
Large Traders that effect transactions through a shared account.

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

[[Page 21470]]

 3. Broker-Dealer Monitoring and Safe Harbor
    The proposed rule places the principal burden of compliance with 
the identification requirements on large traders themselves. The 
Commission, however, believes that a limited monitoring requirement at 
the broker-dealer level would provide a necessary backstop to encourage 
compliance and fulfill the objectives of Section 13(h) of the Exchange 
Act.
    Section 13(h) of the Exchange Act contemplates that registered 
broker-dealers would assist in fostering compliance with a large trader 
reporting system by monitoring their customers' compliance with the 
large trader self-identification requirements. Specifically, Section 
13(h)(2) of the Exchange Act authorizes the Commission to establish 
rules for recordkeeping and reporting of transactions effected by 
persons a registered broker-dealer ``knows or has reason to know'' is a 
large trader, based on transactions effected directly or indirectly by 
or through such broker-dealer. Proposed paragraphs (d) and (e) of Rule 
13h-1 would implement that authority by requiring registered broker-
dealers to maintain records of and report to the Commission information 
about transactions effected by Unidentified Large Traders.\114\
---------------------------------------------------------------------------

    \114\ See supra text accompanying note 99 (discussing 
recordkeeping requirements for Unidentified Large Traders). In 
particular, proposed Rule 13h-1(d)(3) would broaden the list of 
required elements for transactions effected by Unidentified Large 
Traders, and would require broker-dealers to report for Unidentified 
Large Traders such person's name, address, date the account was 
opened, and tax identification number(s).
---------------------------------------------------------------------------

    With respect to identifying large traders, the Commission 
emphasizes that the principal burden of compliance with the proposed 
identification requirements is placed squarely on large traders 
themselves. However, the Commission also believes that requiring some 
form of monitoring by the entities that are in the best position to 
know the details of a large trader's account would help assure that the 
objectives of the rule are met.
    The Commission acknowledges that the duty to monitor its large 
trader customers would impose a burden on registered broker-dealers. To 
minimize this burden, paragraph (f) of proposed Rule 13h-1 would 
establish a ``safe harbor'' for the duty to monitor for Unidentified 
Large Traders.\115\ Pursuant to proposed paragraph (a)(9), in the case 
of an Unidentified Large Trader, a ``registered broker-dealer has 
reason to know whether a person is a large trader based on the 
transactions in NMS securities effected by or through such broker-
dealer.'' A registered broker-dealer would not be deemed to know or to 
have reason to know that a person is an Unidentified Large Trader if: 
(1) It does not have actual knowledge that a person is a large trader; 
and (2) it established and maintained policies and procedures 
reasonably designed to assure compliance with the identification 
requirements of the proposed safe harbor. Paragraphs (f)(1) and (2) of 
the proposed rule provide the specific elements that would be required 
for the safe harbor.
---------------------------------------------------------------------------

    \115\ See proposed Rule 13h-1(a)(9) (defining an Unidentified 
Large Trader as ``each person who has not complied with the 
identification requirements of paragraphs (b)(1) and (b)(2) of this 
rule that a registered broker-dealer knows or has reason to know is 
a large trader.'')
---------------------------------------------------------------------------

    The safe harbor contained in paragraph (f)(1) of the proposed rule 
would require the establishment of systems ``reasonably designed to 
detect and identify'' persons who have not complied with the 
identification requirements by providing the broker-dealer with their 
LTID and highlighting all accounts to which it applies. This paragraph 
incorporates the ``reason to know'' standard and clarifies that, with 
respect to an account or group of accounts that may be identified as 
large traders (e.g., commonly owned or controlled accounts), policies 
and procedures would be within the safe harbor if they are reasonably 
designed to detect and identify such groups of accounts based on 
account name, tax identification number, or other readily available 
information.
    The Commission would consider ``other readily available 
information'' to include, for example, those instances where a single 
customer effects the requisite transactions through a single registered 
representative, trading desk, or branch office in his or her personal 
accounts, accounts of family members, or accounts of others, pursuant 
to written trading authorizations. In that case, a broker-dealer should 
be able to identify a large trader based on readily available 
information. Similarly, customer authorization to transfer funds or 
securities among accounts in order to receive approval for trading 
activities, meet margin requirements, or to settle transactions, would 
be considered to be readily available information, as broker-dealers 
could use that information to readily identify accounts that may be 
related. Accordingly, a broker-dealer's responsibility would be limited 
to those Unidentified Large Traders that are readily identifiable and 
apparent to the broker-dealer.
    Paragraph (f)(2) of the proposed rule would require that broker-
dealer monitoring policies and procedures contain systems reasonably 
designed to inform persons of their obligations to file proposed Form 
13H and disclose their large trader status. In this respect, the 
Commission would consider questions and informative disclosures on new 
account applications, as well as notices to Unidentified Large Traders 
when their transactions approach the reporting level, among other 
things, to fulfill this element of the safe harbor. The Commission 
believes that, because broker-dealers are in the best position to know 
the details of a large trader's account, a proposed requirement on 
broker-dealers to inform a large trader customer of the customer's 
responsibility to self-identify to the Commission would help educate 
large traders on their obligations under the proposed rule and foster 
compliance with it.
    The Commission notes that the elements of the safe harbor do not 
contain precise compliance prescriptions such as automated systems, 
employee training programs, or other specific systems or procedures. 
The adequacy of monitoring procedures would depend on the nature and 
characteristics of a broker-dealer's business. The Commission believes 
that a variety of systems or procedures may be effective for 
accomplishing the objectives of the monitoring requirements and, 
therefore, could satisfy the requirements of the safe harbor. The 
Commission preliminarily believes that the proposed safe harbor 
contains sufficient detail and adds objectivity to the ``reason to 
know'' requirements of Section 13(h)(2) of the Exchange Act in a manner 
that is designed to minimize the burden of the monitoring requirements 
of the proposed large trader system.

E. Exemptions

    Section 13(h)(6) of the Exchange Act authorizes the Commission ``by 
rule, regulation, or order, consistent with the purposes of this title, 
[to] exempt any person or class of persons or any transaction or class 
of transactions, either conditionally or upon specified terms and 
conditions or for stated periods, from the operation of [Section 
13(h)], and the rules and regulations thereunder.'' \116\ Proposed Rule 
13h-1(g) would implement this authority, providing that: ``[u]pon 
written application or upon its own motion, the Commission may by order 
exempt, upon specified terms and conditions or for stated periods, any 
person or class of persons or any transaction or class of

[[Page 21471]]

transactions from the provisions of this rule to the extent that such 
exemption is consistent with the purposes of the Securities Exchange 
Act.'' Accordingly, persons desiring an exemption from Rule 13h-1 could 
request exemptive relief under proposed paragraph (g) of the rule.
---------------------------------------------------------------------------

    \116\ 15 U.S.C. 78m(h)(6).
---------------------------------------------------------------------------

    The Commission is not proposing at this time any specific or class 
exemptions with respect to persons or classes of persons covered by the 
proposed rule.\117\ The Commission is proposing a comprehensive large 
trader system that is designed to track all large traders through a 
system capable of producing comprehensive trading records.
---------------------------------------------------------------------------

    \117\ As discussed above, however, the Commission does propose 
limiting the application of those provisions of the proposed rule 
that concern broker-dealers to carrying broker-dealers, or executing 
broker-dealers where the account is carried by a bank. In addition, 
the proposed rule proposes to exclude certain types of transactions 
from the definition of ``transaction.'' See proposed Rule 13h-
1(a)(6). See also supra text accompanying notes 60-65 (discussing 
the exceptions for transactions not covered by the proposed rule).
---------------------------------------------------------------------------

F. Foreign Entities

    Section 13(h)(5)(C) of the Exchange Act directs the Commission, in 
exercising its authority under Section 13(h), to take into account the 
relationship between U.S. and international securities markets.\118\ 
The Commission is concerned that excluding foreign large traders from 
the proposed rule's requirements could create a competitive disparity 
between domestic markets and persons and foreign markets and persons. 
In particular, including foreign large traders within the scope of the 
proposed rule would provide the Commission with information on entities 
contemplated by the statute that trade substantial amounts of NMS 
securities regardless of their legal domicile and would subject all 
such entities equally to the self-identification and filing 
requirements that the Commission is proposing herein.
---------------------------------------------------------------------------

    \118\ 15 U.S.C. 78m(h)(5)(C).
---------------------------------------------------------------------------

    As discussed above, the application and scope of the proposed rule 
would be established by the proposed definition of a large trader, 
which is based on Section 13(h)(8)(A) of the Exchange Act.\119\ The 
Commission notes that foreign broker-dealers that are not U.S. 
registered would not be subject to the broker-dealer recordkeeping or 
transaction reporting requirements of the proposed rule. Accordingly, 
the only foreign entities that would be subject to the proposed rule 
are those that would qualify as large traders. As discussed above, 
under the proposal, the duties and burdens imposed on each large trader 
would be to: (1) File and update Form 13H; \120\ (2) disclose large 
trader status; \121\ and (3) upon request, provide additional 
descriptive or clarifying information with respect to information 
provided on Form 13H.\122\
---------------------------------------------------------------------------

    \119\ 15 U.S.C. 78m(h)(8)(A).
    \120\ See proposed Rule 13h-1(b)(1).
    \121\ See proposed Rule 13h-1(b)(2).
    \122\ See proposed Rule 13h-1(b)(4).
---------------------------------------------------------------------------

    Pursuant to the proposal, a foreign entity or person could be a 
large trader, and thus subject to the proposed rule, if the following 
elements were present: (1) The person exercises investment discretion 
over accounts; \123\ (2) the aggregate transactions in NMS securities 
for those accounts reach the identifying activity level; \124\ and (3) 
such transactions were effected by use of any means or instrumentality 
of interstate commerce or the mails or any facility of a national 
securities exchange.\125\
---------------------------------------------------------------------------

    \123\ See proposed Rule 13h-1(a)(4) (defining ``investment 
discretion'').
    \124\ See proposed Rule 13h-1(a)(7) (defining ``identifying 
activity level'').
    \125\ See 15 U.S.C. 78m(h)(8)(A) (defining ``large trader'' as 
``every person who, for his own account or an account for which he 
exercises investment discretion, effects transactions for the 
purchase or sale of any publicly traded security or securities by 
use of any means or instrumentality of interstate commerce or of the 
mails, or of any facility of a national securities exchange * * 
*'').
---------------------------------------------------------------------------

    By way of example of how the proposal would operate, assume that a 
foreign investment adviser maintains accounts with a registered broker-
dealer. Assume further that, through these accounts, the foreign 
investment adviser effects trades in NMS securities on a national 
securities exchange for its foreign clients (i.e., citizens of, or 
persons domiciled in, a foreign country) that reach the identifying 
activity level. In this case, the foreign investment adviser would be 
required to file Form 13H and Schedules 4 and 6. If a foreign client of 
the foreign investment adviser also were a large trader by virtue of 
exercising investment discretion (together with the foreign investment 
adviser) over its investments, then the foreign investment adviser 
would be required to include in its Schedule 6 the client's LTID when 
listing that client's account. The foreign investment adviser would not 
be required to disclose on its Form 13H the identities of any of its 
clients that have not been issued a LTID. Additionally, under the 
proposal, the foreign investment adviser would be required to disclose 
its LTID to its registered broker-dealers and anyone else with whom it 
shares investment discretion.
    As a second example of how the proposal would operate, assume that 
a registered broker-dealer receives an order from a customer to effect 
transactions in NMS securities in a foreign over-the-counter market or 
exchange. To effect these trades, the registered broker-dealer 
transmits the order information to a foreign broker-dealer affiliate. 
Further, assume that the affiliated foreign broker-dealer effects the 
transaction for an account that it carries in the name of the domestic 
broker-dealer. Because the transaction was effected through a 
registered broker-dealer, this activity could cause the customer to be 
a large trader if the activity reached the identifying activity level. 
The customer exercised investment discretion over its own account and 
effected indirectly, through an account maintained by a registered 
broker-dealer, the requisite level of transactions in NMS securities.

G. Proposed Implementation

    The Commission proposes that the broker-dealer recordkeeping 
requirements contained in paragraph (d) and the reporting requirements 
contained in paragraph (e) of the proposed rule become effective 6 
months after adoption of a final rule. The Commission believes that 
this time frame would provide sufficient time for the registered 
broker-dealers to plan, design, and implement the various enhancements 
to their existing transaction reporting systems required by the 
proposed rule. In particular, because the proposed rule would utilize 
the existing infrastructure of the EBS system, the Commission 
preliminarily believes that broker-dealers should be able to 
efficiently enhance their existing recordkeeping and reporting systems 
to meet the requirements of the proposed large trader system within the 
proposed implementation period. In addition, the Commission proposes 
that the identification requirements for large traders contained in 
paragraph (b) become effective 3 months after adoption of a final rule. 
The Commission believes that this time frame would provide sufficient 
time for large traders to familiarize themselves with the new form and 
the applicable filing requirements, and would give large traders 
sufficient time to calculate their trading over the applicable 
measuring period, which includes aggregate transactions during a 
calendar month.

H. Solicitation of Comments

    The Commission generally requests comment on all aspects of the 
proposed rule and the proposed large trader reporting system. In 
addition, the

[[Page 21472]]

Commission also requests comment on the following specific issues:

     Is the definition of ``large trader'' in proposed Rule 
13h-1(a)(1) to mean ``any person that directly or indirectly, 
including through other persons controlled by such person, exercises 
investment discretion over one or more accounts and effects 
transactions for the purchase or sale of any NMS security for or on 
behalf of such accounts, with or through one or more registered 
broker-dealers, in an aggregate amount equal to or greater than the 
identifying activity level'' appropriate and sufficiently clear? 
Should the Commission consider an alternative definition?
     Would the proposed definition of ``identifying activity 
level'' (aggregate transactions in NMS securities that are equal to 
or greater than: (1) During a calendar day, either two million 
shares or shares with a fair market value of $20 million; or (2) 
during a calendar month, either twenty million shares or shares with 
a fair market value of $200 million) identify those market 
participants that transact in a significant enough volume such that 
the Commission should identify the person as a large trader? Should 
the Commission consider different levels? Should they be higher or 
lower than what has been proposed? Please explain your reasoning and 
provide relevant data.
     Is 0.01% of daily volume and market value of trading in 
NMS stocks an appropriate basis from which to determine the 
identifying activity level? Should the Commission consider an 
alternative level?
     Are there other factors the Commission should take into 
consideration when determining who should be a large trader or what 
should be the identifying activity level?
     Would basing the large trader definition on aggregated 
transactions during a different measuring period be more 
appropriate? For example, to minimize the applicability of the rule 
to persons that effect one-time transactions greater than the 
identifying level but who otherwise never or rarely trade anywhere 
near a substantial volume or large fair market value, instead of 
considering activity over a calendar day, should the Commission 
consider activity over several days, a week, or some other time 
period?
     Instead of requiring large traders to file Form 13H 
with the Commission ``promptly'' after first effecting transactions 
that reach the identifying activity level, should the Commission 
consider an alternative deadline, such as 10 business days?
     Are the proposed definitions of person, control, and 
investment discretion appropriate? Should the Commission consider 
alternative definitions?
     Is the definition of ``transaction'' in proposed Rule 
13h-1(a)(6) and the exceptions thereto appropriate to accomplish the 
Commission's goals of focusing on trading activity that constitutes 
an arm's length purchase or sale and warrants the continuing burdens 
associated with the proposed requirements? Should any other 
transactions be excluded from the definition of ``transaction?'' 
Should any of the transactions proposed to be excepted instead be 
included? Please explain your reasoning.
     Are the aggregation provisions in proposed Rule 13h-
1(c) for the purpose of determining whether a person meets the 
definition of a large trader appropriate? Should the Commission 
consider any other alternatives?
     Is the definition of Unidentified Large Trader in 
proposed Rule 13h-1(a)(9), i.e., a person who has not complied with 
the identification requirements of paragraphs (b)(1) and (b)(2) of 
the proposed rule that a registered broker-dealer knows or has 
reason to know is a large trader, appropriate? Should the Commission 
consider an alternative definition?
     Is the proposal sufficiently drafted to identify the 
appropriate person as a large trader? Is the proposed focus on 
identifying the parent company appropriate to accomplish the 
Commission's goals and the goals of Section 13(h) of the Exchange 
Act? Or should the rule take a more granular focus and instead 
require identification and the assignment of an LTID at a more 
particularized level within the parent company? Would such an 
approach be more or less burdensome? In the alternative, should the 
LTID contain information on both the parent company and the trading 
entity and the individual trader for a particular trade? Should the 
Commission consider any other alternatives in this regard? Does 
assigning a LTID at the parent level pose any difficulties to 
achieving the goals of the proposed rule?
     Are there other types of large trader identification 
alternatives that would achieve the Commission's objectives without 
diminishing the effectiveness of a large trader system in 
accomplishing the objectives of Section 13(h) of the Exchange Act? 
Are there any existing identifiers that could serve as an 
alternative or supplement to the LTID?
     In a situation where fiduciary duties require 
segregation of proprietary trading from customer trading, should 
separate LTIDs be required?
     Should the LTID number be structured in any particular 
manner? For example, should the LTID number be structured so that it 
discloses both the identity of the parent company and the actual 
legal entity that effects the trade? Should the LTID number be 
designed to be ``extensible'' so that it could be expanded for use 
in recording aggregated equity and equity option position (as 
opposed to trade) information, OTC derivatives trades, OTC 
derivatives positions, and different categories of trader (e.g., 
hedge fund, insurance company, pension plan), if tracking this 
information becomes required under applicable law?
     Are the filing requirements applicable to large traders 
contained in proposed Rule 13h-1(b) sufficiently clear? Is the 
provision for inactive status appropriate and sufficient, or should 
it be modified or eliminated? Are the provisions in proposed Rule 
13h-1(b)(3)(i) and (ii) regarding compliance by controlling or 
controlled persons sufficiently clear, or should they be modified? 
Are there other considerations or alternatives that the Commission 
should consider?
     Item 5 of proposed Form 13H requests information on a 
large trader's affiliates, including name, description of their 
business, relationship to the large trader, and LTID (if any). 
Should the Commission require any other information on affiliates, 
such as the tax identification number(s) of the affiliate?
     Should the Commission implement an electronic filing 
system for the receipt of Form 13H, and, if so, should any 
particular features be incorporated into the system?
     Is an Annual Filing requirement redundant, in light of 
the proposed requirement to submit Interim Filings as necessary, or 
is it necessary to require that large traders keep current their 
disclosed information?
     How often would large traders need to file ``Interim 
Filings'' to correct information that has become inaccurate? The 
Commission also solicits comments concerning the requirement to 
submit Interim Filings ``promptly'' following the end of a calendar 
quarter in the event that any of the information contained in a Form 
13H filing becomes inaccurate for any reason. Are there some items 
required by the Form that could be more efficiently updated on a 
less frequent basis? Are there any items required by the Form that 
ought to be updated more frequently?
     For the broker-dealer recordkeeping requirements 
contained in proposed Rule 13h-1(d)(2), are there any other fields, 
elements, codes, designations, or identifiers that the Commission 
should consider in order to be able to conduct market 
reconstructions or to aid its investigatory program? Should any of 
the proposed fields be modified or eliminated? If so, please explain 
why.
     Should registered broker-dealers also be required to 
maintain (and report upon request) the exercise price and expiration 
date of the option position? \126\
---------------------------------------------------------------------------

    \126\ This information is not covered by Rule 17a-25 under the 
Exchange Act, 17 CFR 240.17a-25.
---------------------------------------------------------------------------

     Is the time frame for the availability of transaction 
information specified in proposed Rule 13h-1(d)(5) appropriate to 
ensure that the Commission has access to timely transaction data? 
Should the Commission consider an alternative time frame?
     Are the proposed monitoring responsibilities that would 
apply to registered broker-dealers sufficient, or are there other or 
more effective means, within the limitations provided by Section 
13(h), that would help assure compliance with the large trader 
identification requirements?
     Is the safe harbor provided for in proposed Rule 13h-
1(f) sufficient to clarify the conditions under which a broker-
dealer would be deemed to know or have reason to know whether a 
person is a large trader? Would an alternative formulation better 
achieve the Commission's purpose to rely on broker-dealers to help 
assure compliance by large traders with the self-identification 
requirements of the proposed rule? Are the policies and procedures 
that a broker-dealer would need to adopt to take advantage of the 
proposed safe harbor sufficiently clear and appropriate? Are there 
any other factors the Commission should consider?
     Would the proposed monitoring responsibility on 
registered broker-dealers

[[Page 21473]]

and the related safe harbor contained in proposed Rule 13h-1(f) 
encourage entities that satisfy the large trader standard to 
identify themselves? Should the Commission consider imposing other 
types of monitoring duties on broker-dealers? Should the Commission 
consider requiring a broker-dealer to report promptly to the 
Commission any Unidentified Large Trader that it detects? Should the 
Commission require a broker-dealer to report to the Commission a 
list of all large traders for which it effects transactions?
     Should the Commission consider imposing a duty on large 
traders to monitor for Unidentified Large Traders among persons with 
whom they share investment discretion?
     Should the Commission consider exempting certain 
categories of persons from the proposed rule? The Commission is 
interested in comments concerning whether certain categories of 
persons also should be exempt, including the following categories, 
and if so why:
     A registered broker-dealer that does not carry accounts 
for itself or others and is registered by a national securities 
exchange as a specialist or market maker.
     A registered broker-dealer that does not carry accounts 
for itself or others and is a member of a national securities 
exchange that exclusively executes transactions on the floor of such 
national securities exchange (i.e., a ``floor broker'').
     The Commission is also interested in whether other 
categories of persons should be excluded.
     Is the proposed ``reporting activity level'' of 
transactions in NMS securities, effected in a single account during 
a calendar day, equal to or greater than 100 shares or any other 
transaction in NMS securities, effected in a single account during a 
calendar day, that a registered broker-dealer may consider an 
appropriate threshold? Why or why not? If not, please identify a 
more appropriate level and explain your rationale. Should 
aggregation principles apply to the reporting activity level and 
could doing so deter non-compliance with the rule? Would doing so 
impose a significant technological burden on reporting systems?
     Does the proposed 6-month implementation period with 
respect to the recordkeeping and reporting requirements for broker-
dealers, and the 3-month implementation period with respect to the 
large trader identification requirements, strike an appropriate 
balance between timely implementation and time needed for system 
changes, or would a longer or shorter period be more appropriate? If 
another implementation period is suggested, please also estimate the 
corresponding change in implementation costs (if any).
     What are the expected costs and related burdens of 
modifying firms' existing systems to accommodate the proposed new 
data elements of LTID and execution time?
     Currently, firms are requested to comply with an EBS 
request for equity and equity option trade data in 10 business days. 
Is it realistic to expect that broker-dealers will, the first time a 
request for production is made by the Commission under the proposed 
rule, be able to produce the required data elements for a day's 
trades for a large trader in electronic, machine-readable form on 
the morning after the day the transactions occur?
     Is requiring broker-dealers to maintain the required 
large trader trade information for prompt production to the 
Commission upon request the best way to make this information 
available to the Commission for the rule's purposes? In this 
connection, we note that the CFTC's Large Trader Reporting Program 
requires large traders of commodity futures and commodity options to 
report positions periodically without the CFTC being required to 
make a prior request for the information. Is this a meaningful 
precedent for the Commission's large trader reporting system? Why or 
why not?
     Would a system that requests weekly or daily reporting 
of large trader trade information to the Commission be unduly 
burdensome to broker-dealers? Or would it actually be less 
burdensome to broker-dealers than complying with occasional 
Commission requests for such information, without having a reliable 
system in place for providing such information to the Commission? 
Does data production have to be systematized to be efficient and 
reasonably free of errors? If a broker-dealer sets up a system to 
provide large trader information to the Commission on a daily basis 
as a matter of routine, would the ongoing costs to the broker-dealer 
for providing large trader information be de minimis because the 
information consists of data the broker-dealer produces on a daily 
basis anyway in the course of operating its business?
     The proposed rule also is designed to enhance the 
Commission's ability to conduct market surveillance and to detect 
and deter fraudulent and manipulative activity. Would it be 
preferable and ultimately less burdensome for broker-dealers to 
report large trader activity on a more routine basis (e.g., daily, 
weekly, or monthly) rather than provide requested information on an 
infrequent or ad hoc basis?
     Should Item 5a of Form 13H and the corresponding 
instructions be amended to permit large traders that are registered 
broker-dealers to incorporate by reference the information provided 
on Form BD about affiliates?
     Does the proposed rule sufficiently minimize the burden 
on natural persons?
     Should the proposed rule be expanded to include 
securities other than NMS securities? If so, what other types of 
securities should be included?
     Would the large trader reporting requirements influence 
the day-to-day decisions made by large traders in any substantive 
way? Would the proposed requirements impact trading strategies? For 
example, might traders choose in some cases to avoid trading in 
equities or options in favor of alternative vehicles such as OTC 
derivatives to avoid reporting? Might they curtail the extent of 
their trading? Might they trade in foreign jurisdictions?
     Would the application of the proposed rule provide 
incentives for trading to be effected through certain entities or 
market centers? If so, how and which ones? For example, would large 
traders direct their trading through non-registered broker-dealers, 
like those relying on the foreign broker/dealer exemption (Rule 15a-
6)?
     Is the proposed three-year record retention requirement 
for registered broker-dealers adequate for the Commission to achieve 
the objectives of the proposed rule? Should the Commission provide 
for a longer retention period, for example five or more years?
     Is the proposed treatment of foreign entities 
appropriate? Why or why not? The Commission is aware that some 
foreign jurisdictions may have statutes that could potentially 
restrict the ability of a large trader to provide information to the 
Commission on Form 13H, and that the ability of large traders 
organized in such jurisdictions would depend on the provisions of 
such statutes as applied to the scope of information solicited in 
proposed Form 13H. To what extent do any foreign statutes complicate 
foreign large traders' ability to comply with the proposed rule?

III. Specific Factors To Be Considered by the Commission

    Section 13(h)(5) of the Exchange Act requires the Commission, when 
exercising its rulemaking authority under Section 13(h) to take into 
account: (1) Existing reporting systems; (2) the costs associated with 
maintaining information with respect to transactions effected by large 
traders and reporting such information to the Commission; and (3) the 
relationship between United States and international securities 
markets. As discussed in this release, the Commission took into account 
these factors when formulating the proposed rule in exercising its 
authority under Section 13(h) of the Exchange Act.
    The proposed rule reflects the Commission's commitment to utilize 
existing industry systems, such as the EBS system, in an effort to 
minimize the costs associated with the proposed large trader system 
while accomplishing the purposes of the proposed rule. Further, the 
application of the proposed rule to foreign entities has been 
considered in light of its impact on the relationship between U.S. and 
international securities markets.
    The Commission has attempted to propose an efficient large trader 
system that accommodates different types of large traders and business 
practices while at the same time providing the Commission with a useful 
tool to identify large traders and their trading activity and assist 
the Commission in monitoring the impact of large traders on the 
securities markets. The Commission preliminarily believes that the 
proposed rule would establish a narrow definition of large trader, and 
thus limit the costs and burdens of the

[[Page 21474]]

system on the relevant entities that are responsible for trading 
decisions.
    The Commission preliminarily believes that the information to be 
captured and disclosed under the proposed identification requirements 
would be the minimum necessary for creating an effective large trader 
system that would achieve the purposes of section 13(h) of the Exchange 
Act. Moreover, the recordkeeping and reporting requirements of the 
proposed rule have been designed to minimize costs while accomplishing 
the purposes of section 13(h) of the Exchange Act. In particular, much 
of the information that would be required to be retained by registered 
broker-dealers under the proposed rule is similar to the information 
currently required to be provided by broker-dealers under Rule 17a-25 
of the Exchange Act. Further, the rule contemplates that registered 
broker-dealers would use the existing reporting infrastructure of the 
EBS system to transmit trading data to the Commission. As such, large 
trader transaction data would be collected and disclosed in a manner 
that utilizes the existing reporting systems. Accordingly, the 
Commission preliminarily believes that the proposed recordkeeping and 
reporting requirements are designed to minimize costs and provide a 
tailored method of collecting large trader transaction information.
    The Commission acknowledges that certain provisions of the proposed 
rule would cause market participants to incur costs including: (1) 
Preparation, filing, and updating of Form 13H; (2) maintenance and 
reporting of large trader transaction information; (3) maintenance and 
reporting of LTIDs and execution times; and (4) development and 
implementation of monitoring systems and procedures.\127\ However, the 
Commission preliminarily believes that the proposal minimizes the costs 
of a proposed large trader reporting requirement to the greatest extent 
possible while still allowing the Commission to implement a system that 
captures a unique large trader identifier and execution times, both of 
which the Commission believes would be critical elements necessary to 
accomplish the objectives of Section 13(h) of the Exchange Act.
---------------------------------------------------------------------------

    \127\ See infra Sections IV (Paperwork Reduction Act) and V 
(Consideration of Costs and Benefits).
---------------------------------------------------------------------------

    In addition, the monitoring provisions of the proposed rule would 
require a registered broker-dealer to monitor its customers' trading. 
These obligations are intended to facilitate compliance with the 
proposed rule. The Commission preliminarily believes that the proposed 
safe harbor provision would provide meaningful detail and objectivity 
that would considerably reduce the burden of the monitoring 
responsibility on registered broker-dealers.
    Finally, the Commission believes that the proposed rule's 
application to foreign persons accomplishes the objectives of Section 
13(h) in part by maintaining uniformity between domestic and 
international securities markets.\128\
---------------------------------------------------------------------------

    \128\ See House Comm. on Energy and Commerce, Report to 
Accompany the Securities Market Reform Act of 1990, H.R. No. 524, 
101st Cong. 2d Sess. (June 5, 1990) (reporting H.R. 3657) 
(expressing the intent that the Commission consider ``the 
relationship between our domestic markets and the international 
market place for securities.'').
---------------------------------------------------------------------------

IV. Paperwork Reduction Act

    Certain provisions of the proposal contain ``collection of 
information requirements'' within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'')\129\ and the Commission has submitted 
them to the Office of Management and Budget (``OMB'') for review in 
accordance with 44 U.S.C. 3507 and 5 CFR 1320.11. The title of the new 
collection of information, including proposed Rule 13h-1 and proposed 
Form 13H, is ``Information Required Regarding Large Traders Pursuant to 
Section 13(h) of the Securities Exchange Act of 1934 and Rules 
Thereunder.'' 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.
---------------------------------------------------------------------------

    \129\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

A. Summary of Collection of Information Under Proposed Rule p13h-1

    Under proposed Rule 13h-1, a ``large trader'' would be any person 
that directly or indirectly, including through other persons controlled 
by such person, exercises investment discretion over one or more 
accounts and effects transactions for the purchase or sale of any NMS 
security for or on behalf of such accounts, with or through one or more 
registered broker-dealers, in an aggregate amount equal to or greater 
than the identifying activity level.
    All large traders would be required to identify themselves to the 
Commission by filing Form 13H, and would be required to update their 
Form 13H from time to time.\130\ Upon receiving an initial Form 13H, 
the Commission would assign to the large trader a unique large trader 
identification number (``LTID''). Each large trader would be required 
to disclose to registered broker-dealers effecting transactions on its 
behalf its large trader identification number and each account to which 
it applies.\131\ Each large trader also would be required to disclose 
its large trader identification number to all others with whom it 
collectively exercises investment discretion. Further, upon request by 
the Commission, a large trader would be required promptly to provide 
additional information to the Commission that would allow the 
Commission to further identify the large trader and all accounts 
through which the large trader effects transactions.\132\
---------------------------------------------------------------------------

    \130\ See proposed Rule 13h-1(b).
    \131\ See proposed Rule 13h-1(b)(2).
    \132\ See proposed Rule 13h-1(b)(4).
---------------------------------------------------------------------------

    Proposed Rule 13h-1 also would impose recordkeeping, reporting, and 
monitoring requirements on registered broker-dealers. Proposed 
paragraph (d)(1) would require every registered broker-dealer to 
maintain records of all information required under paragraphs (d)(2) 
and (d)(3) for all transactions effected directly or indirectly by or 
through (i) An account such broker-dealer carries for a large trader or 
an Unidentified Large Trader, (ii) an account over which such broker-
dealer exercises investment discretion together with a large trader or 
an Unidentified Large Trader, or (iii) if the broker-dealer is a large 
trader, any proprietary or other account over which such broker-dealer 
exercises investment discretion. Additionally, where a non-broker-
dealer such as a bank carries an account for a large trader or an 
Unidentified Large Trader, the broker-dealer effecting such 
transactions directly or indirectly for a large trader would be 
required to maintain records of all of the information required under 
paragraphs (d)(2) and (d)(3) for those transactions. The term 
``Unidentified Large Trader'' would be defined to mean each person who 
has not complied with the identification requirements of paragraphs 
(b)(1) and (b)(2) of proposed Rule 13h-1 that a registered broker-
dealer knows or has reason to know is a large trader.\133\ A registered 
broker-dealer would have reason to know whether a person is a large 
trader based on the transactions in NMS securities effected by or 
through such broker-dealer. Further, a registered broker-dealer would 
not be deemed to know or have reason to know that a person is a large 
trader if it establishes policies and procedures reasonably designed to 
assure compliance with the identification requirements and does

[[Page 21475]]

not have actual knowledge that a person is a large trader.\134\
---------------------------------------------------------------------------

    \133\ See proposed Rule 13h-1(a)(9).
    \134\ See proposed Rule 13h-1(f).
---------------------------------------------------------------------------

    Section 13(h)(2) of the Exchange Act provides that records of a 
large trader's transactions must be made available on the morning after 
the day the transactions were effected.\135\ The proposed rule would 
incorporate this requirement in paragraph (d)(5). Paragraph (d)(4) of 
the proposed rule would require that such records be kept for a period 
of three years, the first two in an accessible place, in accordance 
with Rule 17a-4 under the Exchange Act.\136\
---------------------------------------------------------------------------

    \135\ See 15 U.S.C. 78m(h)(2).
    \136\ 17 CFR 240.17a-4.
---------------------------------------------------------------------------

    Complementing the recordkeeping requirements on broker-dealers, 
under proposed paragraph (e), registered broker-dealers that are 
required to keep records pursuant to paragraph (d)(1) also would have a 
duty to report that information.\137\ Specifically, upon the request of 
the Commission, registered broker-dealers must report electronically, 
in machine-readable form and in accordance with instructions issued by 
the Commission, all information required under paragraphs (d)(2) and 
(d)(3) for all transactions effected directly or indirectly by or 
through accounts carried by such broker-dealer for large traders and 
other persons for whom records must be maintained, equal to or greater 
than the reporting activity level.\138\
---------------------------------------------------------------------------

    \137\ See proposed Rule 13h-1(e).
    \138\ To assist the Commission in enforcing the self-
identification requirements of the proposed rule, paragraph (e) of 
the proposed rule would require broker-dealers to maintain and 
report certain information about all transactions effected by 
Unidentified Large Traders. In addition to the information required 
to be maintained for identified large traders, a broker-dealer would 
be required to retain and report for Unidentified Large Traders such 
person's name, address, date the account was opened, and tax 
identification number(s). See proposed Rule 13h-1(d)(3).
---------------------------------------------------------------------------

    Broker-dealers would need to report a particular day's trading 
activity only if it equals or exceeds the ``reporting activity level.'' 
While a registered broker-dealer is required to report for a given day 
data only if it is equal to or greater than the reporting activity 
level, the rule specifically allows a broker-dealer to voluntarily 
report a day's trading activity that falls short of the applicable 
threshold. Registered broker-dealers may wish to take this approach if 
they prefer to avoid implementing systems to filter the transaction 
activity and would rather utilize a ``data dump'' approach to reporting 
large trader transaction information to the Commission.
    In recognition of the value of utilizing existing reporting 
systems, the proposed rule would require broker-dealers to transmit the 
transaction records by utilizing the infrastructure of the existing EBS 
system. Transaction reports, including data on transactions up to and 
including the day immediately preceding the request, would need to be 
furnished before the close of business on the day specified in the 
request for the information.

B. Proposed Use of Information

    The Commission would use the information collected pursuant to 
proposed Rule 13h-1 to identify large traders and collect data on the 
trading activity of large traders. The proposed large trader reporting 
system would allow the Commission to monitor more readily and 
efficiently the impact of large traders on the securities markets and 
would facilitate the Commission's trading reconstruction efforts as 
well as enhance its monitoring, enforcement, and regulatory activities. 
Registered broker-dealers would use the information they collect 
pursuant to proposed Rule 13h-1, namely the LTID, to comply with the 
proposed recordkeeping requirements and the proposed requirement to 
report to the Commission upon request all transactions effected for 
large traders. In addition, any registered broker-dealer that chooses 
to rely on the proposed safe harbor provisions would use the 
information they collect pursuant to proposed Rule 13h-1 as well as 
policies and procedures consistent with the proposed rule as part of 
their systems to detect and identify Unidentified Large Traders and 
inform them of their obligations to file Form 13H and disclose large 
trader status under the proposed rule. Self-regulatory organizations, 
pursuant to their obligations to enforce compliance by their members 
and persons associated with their members with the rules and 
regulations under the Exchange Act,\139\ would evaluate whether a 
broker-dealer has collected and maintained the information required by 
proposed Rule 13h-1 to surveil for and enforce compliance with the 
proposed rule.
---------------------------------------------------------------------------

    \139\ See 15 U.S.C. 78f(b)(1).
---------------------------------------------------------------------------

C. Respondents

    While we are not aware of a database that would allow the 
Commission to calculate the precise number of persons that would meet 
the definition of large trader, based on the Commission's experience in 
this area, the Commission estimates that there would be 400 large 
traders subject to the proposed rule. The estimated number of large 
traders accounts for the proposed filing requirement provisions 
contained in proposed Rule 13h-1(b)(3), including the rule's focus, in 
more complex organizations, on the parent company of the entities that 
employ or otherwise control the individuals that exercise investment 
discretion. In addition, the Commission estimates from broker-dealer 
responses to FOCUS report filings with the Commission made in 2009 that 
there would be 300 registered broker-dealers subject to the proposed 
rule, including some broker-dealers that will also themselves be large 
traders. This estimate reflects the number of broker-dealer carrying 
firms that the Commission believes would carry accounts for large 
traders or that would effect transactions directly or indirectly for a 
large trader or Unidentified Large Trader where a non-broker-dealer 
carries the account. The Commission seeks comment on the number of 
large traders and registered broker-dealers that could be affected by 
the proposed rule and the nature of the proposed rule's effect on those 
persons and entities.

D. Estimated Total Annual Reporting and Recordkeeping Burden

1. Estimated Burden on Large Traders
    Proposed Rule 13h-1 would present new burdens to persons and 
entities that meet the definition of large trader. In particular, 
persons, including those that might not presently be registered with 
the Commission in some capacity, that meet the definition of ``large 
trader'' would become subject to a new reporting duty, as the proposed 
rule would require each large trader to identify itself to the 
Commission by filing a Form 13H and submitting annual updates, as well 
as updates on a quarterly basis if necessary to correct information 
that becomes inaccurate. Additionally, each large trader would be 
required to identify itself to each registered broker-dealer through 
which it effects transactions and to all others with whom it 
collectively exercises investment discretion.
    Paragraph (b)(1) of the proposed rule would require large traders 
to file Form 13H with the Commission promptly after first effecting 
transactions that reach the identifying activity level.\140\ 
Thereafter, large traders would be required to file an amended Form 13H 
promptly following the end of a calendar quarter in the event that any 
of the information contained therein becomes inaccurate for any reason 
(e.g., change of name and address, type of organization, principal 
business,

[[Page 21476]]

regulatory status, accounts maintained, or associations).\141\ 
Regardless of whether any interim amended Form 13Hs are filed, large 
traders also would be required to file Form 13H annually, within 45 
days after the calendar year-end, in order to ensure the accuracy of 
all of the information reported to the Commission.\142\ Additionally, 
proposed Rule 13h-1(b)(4) provides that the Commission may require 
large traders to provide, upon request, additional information to 
identify the large trader and all accounts through which the large 
trader effects transactions.
---------------------------------------------------------------------------

    \140\ See proposed Rule 13h-1(b)(1)(i).
    \141\ See proposed Rule 13h-1(b)(1)(iii).
    \142\ See proposed Rule 13h-1(b)(1)(ii).
---------------------------------------------------------------------------

    For purposes of the PRA, the Commission estimates that it would 
take a large trader approximately 20 hours to calculate whether its 
trading activity qualifies it as a large trader, complete the initial 
Form 13H with all required information, obtain a LTID from the 
Commission, and inform its registered broker-dealers and other entities 
of its LTID and the accounts to which it applies. The Commission 
understands that large traders currently maintain systems that capture 
their trading activity, and believes that these existing systems would 
be sufficient without further modification to enable a large trader to 
determine whether it effects transactions for the purchase or sale of 
any NMS security for or on behalf of accounts over which it exercises 
investment discretion in an aggregate amount equal to or greater than 
the identifying activity level. Accordingly, the Commission 
preliminarily estimates that the one-time burden for large traders 
would be approximately 8,000 burden hours.\143\
---------------------------------------------------------------------------

    \143\ The Commission derived the total estimated burdens from 
the following estimates, which are based on the Commission's 
experience with, and burden estimates for, other existing reporting 
systems including Rule 13f-1: (Compliance Manager at 3 hours) + 
(Compliance Attorney at 7 hours) + (Compliance Clerk at 10 hours) x 
(400 potential respondents) = 8,000 burden hours. Rule 13f-1, like 
the proposed rule, requires monitoring of a certain threshold and, 
upon reaching that threshold, disclosure of information.
---------------------------------------------------------------------------

    The Commission preliminarily estimates that the ongoing annualized 
burden for complying with proposed Rule 13h-1 would be approximately 
6,800 burden hours for all large trader respondents.\144\ This figure 
is based on the estimated number of hours it would take to file interim 
updates and the annual updated Form 13H. The Commission estimates that 
the average large trader would be required to file 1 annual update and 
3 interim updates.\145\
---------------------------------------------------------------------------

    \144\ The Commission derived the total estimated burdens from 
the following estimates, which are based on the Commission's 
experience with, and burden estimates for, other existing reporting 
systems including Rule 13f-1 and Rule 17a-25: (Compliance Manager at 
2 hours) + (Compliance Attorney at 5 hours) + (Compliance Clerk at 
10 hours) x (400 potential respondents) = 6,800 burden hours. Rule 
13f-1, like the proposed rule, requires monitoring of a certain 
threshold and, upon reaching that threshold, disclosure of 
information. As discussed supra, Rule 17a-25 requires broker-dealers 
to disclose information that is very similar in scope and character 
to the information required under the proposed rule. The Commission 
believes that determining whether a firm reaches the identifying 
activity level is a compliance function and that no software 
reprogramming would be required. See infra note 177.
    \145\ This estimate is based on the varied characteristics of 
large traders and the nature and scope of the items that would be 
disclosed on proposed Form 13H that would require updating, and 
considers that large traders would file one required annual update 
and three quarterly updates when information contained in the Form 
13H becomes inaccurate.
---------------------------------------------------------------------------

    Therefore, in summary, under the proposed rule, the total burden on 
large trader respondents would be 8,000 hours for the first year and 
6,800 hours for each subsequent year.
2. Estimated Burden on Registered Broker-Dealers
    As part of the Commission's existing EBS system, pursuant to Rule 
17a-25 under the Exchange Act, the Commission currently requires 
registered broker-dealers to keep records of most of the information 
for their customers that would be captured by proposed Rule 13h-1.\146\ 
The additional items of information that this proposal would capture 
are: (1) LTID; and (2) transaction execution time. To capture the 
additional field that includes the LTID number, all registered broker-
dealers with large trader customers or that are themselves large 
traders would have to re-program their systems. Some registered broker-
dealers also would need to re-program their systems to capture 
execution time, to the extent their systems do not already capture that 
information in a manner that is reportable pursuant to an EBS request 
for data, and LTID.
---------------------------------------------------------------------------

    \146\ See 17 CFR 240.17a-25. Pursuant to Rule 17a-25, broker-
dealers are required to maintain the following information that 
would be captured by the proposed rule: date on which the 
transaction was executed; account number; identifying symbol 
assigned to the security; transaction price; the number of shares or 
option contracts traded and whether such transaction was a purchase, 
sale, or short sale, and if an option transaction, whether such was 
a call or put option, an opening purchase or sale, a closing 
purchase or sale, or an exercise or assignment; the clearing house 
number of such broker or dealer and the clearing house numbers of 
the brokers or dealers on the opposite side of the transaction; a 
designation of whether the transaction was effected or caused to be 
effected for the account of a customer of such broker or dealer, or 
was a proprietary transaction effected or caused to be effected for 
the account of such broker or dealer; market center where the 
transaction was executed; prime broker identifier; average price 
account identifier; and the identifier assigned to the account by a 
depository institution. For customer transactions, the broker-dealer 
is required to also include the customer's name, customer's address, 
the customer's tax identification number, and other related account 
information.
---------------------------------------------------------------------------

    The Commission believes that the burden of the proposed rule for 
individual registered broker-dealers would likely vary due to 
differences in their recordkeeping systems. The Commission estimates 
that all registered broker-dealers that have a client base that 
includes large traders and Unidentified Large Traders, or broker-
dealers that are themselves large traders, would be required to make 
modifications to their existing systems to capture the additional data 
elements that are not currently captured by systems that comply with 
Rule 17a-25, including, for example, the LTID number. The Commission 
estimates from broker-dealer responses to FOCUS report filings with the 
Commission made in 2009 that there would be 300 registered broker-
dealers subject to the proposed rule, including some of those broker-
dealers that will also themselves be large traders. The Commission 
preliminary estimates that the one-time, initial annualized burden for 
registered broker-dealers for system development, including re-
programming and testing of the systems to comply with the proposed 
rule, would be approximately 133,500 burden hours.\147\
---------------------------------------------------------------------------

    \147\ The Commission derived the total estimated burdens from 
the following estimates, which are based on the Commission's 
experience with, and burden estimates for, other existing reporting 
systems including Rule 13f-1 and Rule 17a-25: (Computer Ops Dept. 
Mgr. at 30 hours) + (Sr. Database Administrator at 25 hours) + (Sr. 
Programmer at 150 hours) + (Programmer Analyst at 100 hours) + 
(Compliance Manager at 20 hours) + (Compliance Attorney at 10 hours) 
+ (Compliance Clerk at 20 hours) + (Sr. Systems Analyst at 50 hours) 
+ (Director of Compliance at 5 hours) + (Sr. Computer Operator at 35 
hours) x (300 potential respondents) = 133,500 burden hours. As 
noted above, the Commission acknowledges that, in some instances, 
multiple LTIDs may be disclosed to a registered broker-dealer for a 
single account. Therefore, our hourly burden estimate factors in the 
cost that registered broker-dealers would need to develop systems 
capable of tracking multiple LTIDs. Rule 13f-1, like the proposed 
rule, requires monitoring of a certain threshold and, upon reaching 
that threshold, disclosure of information. As discussed supra, Rule 
17a-25 requires broker-dealers to disclose information that is very 
similar in scope and character to the information required under the 
proposed rule.
---------------------------------------------------------------------------

    This figure is based on the estimated number of hours for initial 
internal development and implementation, including software 
development, taking into account the fact that new data elements are 
required to be captured and must be available for reporting to the 
Commission as of the morning following the day on which the 
transactions were effected. Because broker-dealers already capture, 
pursuant

[[Page 21477]]

to Rule 17a-25, most of the data that proposed Rule 13h-1 would 
capture, the Commission does not expect broker-dealers to incur any 
hardware costs.
    The Commission preliminarily believes that the ongoing annualized 
expense for the recordkeeping requirement for registered broker-dealers 
would not result in a burden for purposes of the PRA, as registered 
broker-dealers already are required to provide to the Commission almost 
all of the proposed information for all of their customers pursuant to 
Rule 17a-25 under the Exchange Act. Once a registered broker-dealer's 
system is revised to capture the additional fields of information, the 
Commission does not believe that the additional fields would result in 
any ongoing annualized expense beyond what broker-dealers already incur 
under Rule 17a-25.
    In addition to requiring registered broker-dealers to maintain 
records of account transactions, the proposed rule would also require 
registered broker-dealers to report such transactions to the Commission 
upon request. The Commission preliminarily believes that this 
collection of information would not involve any substantive or material 
change in the burden that already exists as part of registered broker-
dealers providing transaction information to the Commission in the 
normal course of business.\148\ However, the Commission notes that the 
information would need to be available for reporting to the Commission 
on a next-day basis, versus the 10 business day period associated with 
an EBS request for data.\149\ Nevertheless, once the electronic 
recordkeeping system is in place to capture the information, where such 
system is designed and built to furnish the information within the time 
period specified in the proposal, the Commission preliminarily believes 
that the collection of information would result in minimal additional 
burden.
---------------------------------------------------------------------------

    \148\ See 17 CFR 240.17a-25.
    \149\ See Securities Exchange Act Release No. 44494 (June 29, 
2001), 66 FR 35836 (July 9, 2001) (S7-12-00) (17a-25 adopting 
release).
---------------------------------------------------------------------------

    Although it is difficult to predict with certainty the Commission's 
future needs to obtain large trader data, the Commission preliminarily 
believes that, taking into account the Commission's likely need for 
data to be used in market reconstruction purposes and investigative 
matters, the Commission estimates that it would likely send 100 
requests for large trader data per year to each registered broker-
dealer.\150\ The Commission estimates that it would take a registered 
broker-dealer 2 hours to comply with each request, considering that a 
broker-dealer would need to run the database query of its records, 
download the data file, and transmit it to the Commission. Accordingly, 
the ongoing annual aggregate hour burden for broker-dealers is 
estimated to be 60,000 hours (100 x 300 x 2 = 60,000).\151\
---------------------------------------------------------------------------

    \150\ Compared to the EBS system, where the Commission sent 
5,168 electronic blue sheets requests between January 2007 and June 
2009, the Commission preliminarily expects to send fewer requests 
for large trader data, in particular because the Commission 
preliminarily expects that a request for large trader data would be 
broader and encompass a larger universe of securities and a longer 
time period than would be the case for the typically more targeted 
EBS requests it sends to broker-dealers.
    \151\ The Commission derived the total estimated burdens based 
on the Commission's experience with, and burden estimates for, other 
existing reporting systems, including Rule 17a-25. The Commission 
estimated that each broker-dealer who electronically responds to a 
request for data in connection with Rule 17a-25 and the EBS system 
spends 8 minutes per request. See EBS Release, supra note 24, at 66 
FR 35841. Unlike EBS, under proposed Rule 13h-1, a broker-dealer 
would also be required to report data on Unidentified Large Traders. 
The Commission therefore believes that the time to comply with a 
request for data under the proposed rule could take longer than 
would a similar request for data under the EBS system, as a broker-
dealer likely would take additional time to review and report 
information on any Unidentified Large Traders, including the 
additional fields of information specified in paragraph (d)(3) of 
the proposed rule, that they would be required to report to the 
Commission under the proposed rule.
---------------------------------------------------------------------------

    The proposed rule also would require registered broker-dealers to 
monitor large traders to help ensure compliance by large traders with 
the self-identification requirements of the rule. In particular, 
proposed paragraph (e) would require certain broker-dealers to maintain 
and report to the Commission certain information about all transactions 
effected by Unidentified Large Traders.
    The Commission acknowledges that the duty to monitor would impose 
burdens on broker-dealers. To reduce the monitoring burden, the 
Commission has proposed a safe harbor provision for the monitoring 
duty. Specifically, registered broker-dealers would be deemed to not 
know or to have no reason to know that a person is an Unidentified 
Large Trader if: (1) It has established and maintains policies and 
procedures reasonably designed to assure compliance with the 
identification requirements of the proposed rule; and (2) it does not 
have actual knowledge that a person is a large trader.\152\
---------------------------------------------------------------------------

    \152\ See proposed Rule 13h-1(f).
---------------------------------------------------------------------------

    The Commission preliminary estimates that the one-time, initial 
burden for all registered broker-dealers to comply with the proposed 
monitoring requirements would be approximately 21,000 burden hours to 
establish a compliance system to detect and identify Unidentified Large 
Traders.\153\ This figure is based on the estimated number of hours to 
establish policies and procedures reasonably designed to assure 
compliance with the identification requirements of the proposed rule. 
The Commission preliminarily estimates that the ongoing annualized 
burden to all broker-dealers for the monitoring requirements of the 
proposed rule, including the proposed requirement on broker-dealers to 
inform Unidentified Large Traders of their obligations to File Form 13H 
and disclose their large trader status under proposed Rule 13h-1, would 
be approximately 4,500 burden hours.\154\
---------------------------------------------------------------------------

    \153\ The Commission derived the total estimated burdens from 
the following estimates, which are based on the Commission's 
experience with, and burden estimates for, other existing reporting 
systems including Rule 13f-1: (Sr. Programmer at 10 hours) + 
(Compliance Manager at 10 hours) + (Compliance Attorney at 10 hours) 
+ (Compliance Clerk at 20 hours) + (Sr. Systems Analyst at 10 hours) 
+ (Director of Compliance at 2 hours) + (Sr. Computer Operator at 8 
hours) x (300 potential respondents) = 21,000 burden hours. Rule 
13f-1, like the proposed rule, requires monitoring of a certain 
trading threshold.
    \154\ The Commission derived the total estimated burdens from 
the following estimates, which are based on the Commission's 
experience with, and burden estimates for, other existing reporting 
systems including Rule 13f-1 and Rule 17a-25: (Compliance Attorney 
at 15 hours) x (300 potential respondents) = 4,500 burden hours. 
Rule 13f-1, like the proposed rule, requires monitoring of a certain 
threshold and, upon reaching that threshold, disclosure of 
information.
---------------------------------------------------------------------------

    Therefore, under the proposed rule, the total burden on these 
respondents would be 164,500 hours for the first year \155\ and 14,500 
hours for each subsequent year.\156\
---------------------------------------------------------------------------

    \155\ This figure is derived from the estimated one-time burdens 
from the recordkeeping requirement (133,500 burden hours) + the 
reporting requirement (10,000 burden hours) + the monitoring 
requirement (21,000 burden hours) = 164,500 total burden hours.
    \156\ This figure is derived from the estimated ongoing burdens 
from the reporting requirement (10,000 burden hours) + the 
monitoring requirement (4,500 burden hours) = 14,500 total burden 
hours.
---------------------------------------------------------------------------

E. Collection of Information Is Mandatory

    All collections of information pursuant to the proposed rule would 
be a mandatory collection of information.

F. Confidentiality

    Section 13(h)(7) of the Exchange Act provides that Section 13(h) 
``shall be considered a statute described in subsection (b)(3)(B) of [5 
U.S.C. 552]'', which is part of the Freedom of Information Act 
(``FOIA'').\157\ As such,

[[Page 21478]]

``the Commission shall not be compelled to disclose any information 
required to be kept or reported under [Section 13(h)].'' \158\ 
Accordingly, the information that a large trader would be required to 
disclose on proposed Form 13H or provide in response to a Commission 
request would be exempt from disclosure under FOIA. In addition, any 
transaction information that a registered broker-dealer would report to 
the Commission under the proposed rule also would be exempt from 
disclosure under FOIA.
---------------------------------------------------------------------------

    \157\ 5 U.S.C. 552(b)(3)(B) is now 5 U.S.C. 552(b)(3)(A)(ii).
    \158\ See section 13(h)(7) of the Exchange Act, 15 U.S.C. 
78m(h)(7).
---------------------------------------------------------------------------

G. Retention Period of Recordkeeping Requirements

    Registered broker-dealers would be required to retain records and 
information under the proposed rule for a period of three years, the 
first two in an accessible place, in accordance with Rule 17a-4 under 
the Exchange Act.\159\
---------------------------------------------------------------------------

    \159\ 17 CFR 240.17a-4.
---------------------------------------------------------------------------

H. Request for Comments

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comment to: (1) Evaluate whether the proposed collection of information 
is necessary for the performance of the functions of the agency, 
including whether the information shall have practical utility; (2) 
evaluate the accuracy of the agency's estimate of the burden of the 
proposed collection of information; (3) enhance the quality, utility, 
and clarity of the information to be collected; and (4) minimize the 
burden of collection of information on those who are to respond, 
including through the use of automated collection techniques or other 
forms of information technology.
    Persons wishing to submit comments on the collection of information 
requirements should direct them to the Office of Management and Budget, 
Attention: Desk Officer for the Securities and Exchange Commission, 
Office of Information and Regulatory Affairs, Room 3208, New Executive 
Office Building, Washington, DC 20503; and should send a copy to 
Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 
F Street, NE., Washington, DC 20549-1090 with reference to File No. S7-
10-10. OMB is required to make a decision concerning the collection of 
information between 30 and 60 days after publication, so a comment to 
OMB is best assured of having its full effect if OMB receives it within 
30 days of publication. The Commission has submitted the proposed 
collection of information to OMB for approval. Requests for the 
materials submitted to OMB by the Commission with regard to this 
collection of information should be in writing, refer to File No. S7-
10-10, and be submitted to the Securities and Exchange Commission, 
Office of Investor Education and Advocacy, 100 F Street, NE., 
Washington, DC 20549-0213.

V. Consideration of Costs and Benefits

    The Commission is sensitive to the costs and benefits of our 
proposal to establish a large trader reporting system. We request 
comment on the costs and benefits associated with the proposal. The 
Commission has identified certain costs and benefits associated with 
the proposal and requests comment on all aspects of its preliminary 
cost-benefit analysis, including identification and assessment of any 
costs and benefits not discussed in this analysis. The Commission also 
seeks comments on the benefits identified and the costs described in 
each section of this cost-benefit analysis, as well as elsewhere in 
this release. Finally, the Commission requests that commenters provide 
data and any other information or statistics that the commenters relied 
on to reach any conclusions on such estimates.

 A. Benefits

    U.S. securities markets have experienced a dynamic transformation 
in recent years. In large part, the changes reflect the culmination of 
a decades-long trend from a market structure with primarily manual 
trading to a market structure with primarily automated trading. Rapid 
technological advances have produced fundamental changes in the 
structure of the securities markets, the types of market participants, 
the trading strategies employed, and the array of products traded. The 
markets also have become even more competitive, with exchanges and 
other trading centers offering innovative order types, data products 
and other services, and aggressively competing for order flow by 
reducing transaction fees and increasing rebates. These changes have 
facilitated the ability of large institutional and other professional 
market participants to employ sophisticated trading methods to trade 
electronically in huge volumes with great speed. In addition, large 
traders have become increasingly prominent at a time when the markets 
are experiencing an increase in overall volume.\160\
---------------------------------------------------------------------------

    \160\ See, e.g., infra note 1.
---------------------------------------------------------------------------

    Currently, to support its regulatory and enforcement activities, 
the Commission collects transaction data through the EBS system.\161\ 
The Commission uses the EBS system to obtain securities transaction 
information for two primary 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.
---------------------------------------------------------------------------

    \161\ See 17 CFR 240.17a-25 (Electronic Submission of Securities 
Transaction Information by Exchange Members, Brokers, and Dealers).
---------------------------------------------------------------------------

    The EBS system has performed effectively as an enforcement tool for 
analyzing trading in a small sample of securities over a limited period 
of time. However, because the EBS system is designed for use in 
narrowly-focused enforcement investigations that generally involve 
trading in particular securities, it has proven to be insufficient for 
large-scale market reconstructions and analyses involving numerous 
stocks during peak trading volume periods.\162\ Further, it does not 
address the Commission's need to identify important market participants 
and their trading activity.
---------------------------------------------------------------------------

    \162\ See supra note 7 and accompanying text.
---------------------------------------------------------------------------

    Following declines in the U.S. securities markets in October 1987 
and October 1989, Congress noted that the Commission's ability to 
analyze the causes of a market crisis was impeded by its lack of 
authority to gather trading information.\163\ To address this concern, 
Congress passed the Market Reform Act, which, among other things, 
amended Section 13 of the Exchange Act to add new subsection (h), 
authorizing the Commission to establish a large trader reporting system 
under such rules and regulations as the Commission may prescribe.\164\
---------------------------------------------------------------------------

    \163\ The legislative history accompanying the Market Reform Act 
also noted the Commission's limited ability to analyze the causes of 
the market declines of October 1987 and 1989. See generally Senate 
Report, supra note 9, and House Comm. on Energy and Commerce, Report 
to accompany the Securities Market Reform Act of 1990, H.R. No. 524, 
101st Cong. 2d Sess. (June 5, 1990) (reporting H.R. 3657).
    \164\ Public Law 101-432 (HR 3657), October 16, 1990.
---------------------------------------------------------------------------

    The large trader reporting authority in Section 13(h) of the 
Exchange Act was intended to facilitate the Commission's ability to 
monitor the impact on the securities markets of securities transactions 
involving a substantial volume or large fair market value, as well as 
to assist the Commission's enforcement of the federal securities 
laws.\165\ In particular, the Market Reform Act provided the Commission 
with the authority to collect broad-based information on large traders, 
including their trading activity, reconstructed in

[[Page 21479]]

time sequence, in order to provide empirical data necessary for the 
Commission to evaluate market movement and volatility and enhance its 
ability to detect illegal trading activity.\166\
---------------------------------------------------------------------------

    \165\ See 15 U.S.C. 78m(h)(1). See also Senate Report, supra 
note 9, at 42.
    \166\ See Senate Report, supra note 9, at 4, 44, and 71. In this 
respect, though self-regulatory organization (``SRO'') audit trails 
provide a time sequenced report of broker-dealer transactions, those 
audit trail generally do not identify the broker-dealer's customers. 
Accordingly, the Commission is not presently able to utilize 
existing SRO audit trail data to accomplish the objectives of the 
Market Reform Act.
---------------------------------------------------------------------------

    The large trader reporting system envisioned by the Market Reform 
Act authorizes the Commission to require large traders\167\ to self-
identify to the Commission and provide information to the Commission 
identifying the trader and all accounts in or through which the trader 
effects securities transactions.\168\ The Market Reform Act also 
authorized the Commission to require large traders to identify their 
status as large traders to any registered broker-dealer through whom 
they directly or indirectly effect securities transactions.\169\
---------------------------------------------------------------------------

    \167\ Section 13(h) of the Exchange Act defines a ``large 
trader'' as ``every person who, for his own or an account for which 
he exercises investment discretion, effects transactions for the 
purchase or sale of any publicly traded security or securities by 
use of any means or instrumentality of interstate commerce or of the 
mails, or of any facility of a national securities exchange, 
directly or indirectly by or through a registered broker or dealer 
in an aggregate amount equal to or in excess of the identifying 
activity level.'' See 15 U.S.C. 78m(h)(8)(A).
    \168\ See 15 U.S.C. 78m(h)(1)(A).
    \169\ See 15 U.S.C. 78m(h)(1)(B).
---------------------------------------------------------------------------

    In addition to facilitating the ability of the Commission to 
identify large traders, the Market Reform Act also authorizes the 
Commission to collect information on the trading activity of large 
traders. In particular, the Commission is authorized to require every 
registered broker-dealer to make and keep records with respect to 
securities transactions of large traders that equal or exceed a certain 
``reporting activity level'' and report such transactions upon request 
of the Commission.\170\
---------------------------------------------------------------------------

    \170\ See 15 U.S.C. 78m(h)(2). Section 13(h) also provides the 
Commission with authority to determine the manner in which 
transactions and accounts should be aggregated, including 
aggregation on the basis of common ownership or control. See 15 
U.S.C. 78m(h)(3). The term ``reporting activity level'' is defined 
in Section 13(h)(8)(D) of the Exchange Act to mean ``transactions in 
publicly traded securities at or above a level of volume, fair 
market value, or exercise value as shall be fixed from time to time 
by the Commission by rule, regulation, or order, specifying the time 
interval during which such transactions shall be aggregated.'' See 
15 U.S.C. 78m(h)(8)(D).
---------------------------------------------------------------------------

    To implement its authority under section 13(h) of the Exchange Act, 
the Commission now is proposing new Rule 13h-1 and Form 13H to 
establish an activity-based large trader reporting system. The proposal 
is intended to assist the Commission in identifying, and obtaining 
certain baseline trading information about traders that conduct a 
substantial volume or large fair market value of trading activity in 
the U.S. securities markets. In essence, a ``large trader'' would be 
defined as a person who effects transactions in NMS securities of at 
least, during any calendar day, two million shares or shares with a 
fair market value of $20 million or, during any calendar month, either 
20 million shares or shares with a fair market value of $200 
million.\171\ The proposed large trader reporting system is designed to 
facilitate the Commission's ability to monitor the impact on the 
securities markets of large trader activity, and allow it to conduct 
trading reconstructions following periods of unusual market volatility 
and analyze significant market events for regulatory purposes. It also 
should enhance the Commission's ability to detect and deter fraudulent 
and manipulative activity and other trading abuses.
---------------------------------------------------------------------------

    \171\ This test is defined in the proposed rule as the 
``identifying activity level.'' See proposed Rule 13h-1(a)(7). 
Section 13(h)(8)(c) of the Exchange Act authorizes the Commission to 
determine, by rule or regulation, the applicable identifying 
activity level. 15 U.S.C. 78m(h)(8)(c).
---------------------------------------------------------------------------

    The proposed identification, recordkeeping, and reporting system 
would provide the Commission with a mechanism to identify large 
traders, and the affiliates, accounts, and transactions of large 
traders. Specifically, proposed Rule 13h--1 would require large traders 
to identify themselves to the Commission and make certain disclosures 
to the Commission on proposed Form 13H. Upon receipt of Form 13H, the 
Commission would issue a unique identification number to the large 
trader, which the large trader would then provide to its registered 
broker-dealers. Registered broker-dealers would be required to maintain 
transaction records for each large trader customer, and would be 
required to report that information to the Commission upon request. In 
addition, registered broker-dealers would be required to adopt 
procedures to monitor their customers' activity for volume that would 
trigger the identification requirements of the proposed rule.
    In light of recent turbulent markets and the increasing 
sophistication and trading capacity of large traders, the Commission 
believes it needs to further enhance its ability to collect and analyze 
trading information, especially with respect to the most active market 
participants. In particular, the Commission believes it needs a 
mechanism to reliably identify large traders, and promptly and 
efficiently obtain their trading information on a market-wide basis.
    The Commission believes a proposal for a large trader reporting 
system is necessary because, as noted above, large traders appear to be 
playing an increasingly prominent role in the securities markets.\172\ 
Market observers have offered a wide range of estimates for the percent 
of overall volume attributable to one potential subcategory of large 
trader--high frequency traders--which are typically estimated at 50% of 
total volume or higher.\173\ The proposed large trader reporting system 
is intended to provide a basic set of tools so that the Commission can 
monitor more readily and efficiently the impact on the securities 
markets of large traders.
---------------------------------------------------------------------------

    \172\ See 15 U.S.C. 78m(h)(1) and (h)(2) (reflecting the purpose 
of Section 13(h) of the Exchange Act to allow the Commission to 
monitor the impact of large traders).
    \173\ See supra note 1.
---------------------------------------------------------------------------

    Among other things, the Commission believes that a large trader 
reporting system would enhance its ability to (1) Reliably identify 
large traders and their affiliates, (2) obtain more promptly trading 
data on the activity of large traders, including execution time, and 
(3) aggregate and analyze trading data among affiliated large traders 
and affiliated accounts.
    The Commission generally requests comment on the anticipated 
benefits of the proposal, including whether the proposal would: (1) 
Assist in the examination for and investigation of possible federal 
securities law violations, including insider trading or market 
manipulation; (2) assist the Commission in conducting market 
reconstructions; and (3) provide the Commission with a system that 
would allow it to analyze more readily and efficiently the impact of 
large traders on the securities markets. Would the proposed rule 
provide benefits that the Commission has not discussed?

B. Costs

1. Large Traders
    The Commission preliminarily anticipates that the primary costs to 
large traders from the proposal are the requirement to self-identify to 
the Commission, including utilizing existing systems to detect when the 
large trader meets the identifying activity level, and the filing and 
information requirements when large

[[Page 21480]]

trader status is achieved, as well as the requirement to inform its 
broker-dealers and others with whom it exercises investment discretion 
of its LTID and all accounts to which it applies. The proposed rule 
would require large traders to file Form 13H with the Commission 
promptly after first effecting transactions that reach the identifying 
activity level.\174\ Large traders would be required to amend their 
Forms 13H by submitting an ``Interim Filing'' promptly following the 
end of a calendar quarter in the event that any of the information 
contained in a Form 13H filing becomes inaccurate for any reason (e.g., 
change of name or address, type of organization, principal business, 
regulatory status, accounts maintained, or associations).\175\ 
Regardless of whether any interim amended Form 13Hs are filed, large 
traders would be required to file Form 13H annually, within 45 days 
after the calendar year-end, in order to ensure the accuracy of all of 
the information reported to the Commission.\176\
---------------------------------------------------------------------------

    \174\ See proposed Rule 13h-1(b)(1)(i).
    \175\ See proposed Rule 13h-1(b)(1)(iii).
    \176\ See proposed Rule 13h-1(b)(1)(ii).
---------------------------------------------------------------------------

    The Commission estimates that the aggregate costs for all 400 
potential large trader respondents to self-identify on Form 13H and 
obtain from the Commission and inform others of its LTID and the 
accounts to which it applies would be $1,317,600.\177\ The Commission 
believes that potential large trader respondents would not need to 
modify their existing systems to comply with proposed Rule 13h-1. The 
Commission believes that large traders already employ software that 
tracks the number and market value of the shares they trade, and the 
Commission expects that firms would be able to use their existing 
systems to monitor whether they reach the identifying activity level. 
Accordingly, the estimate above does not include any software 
modification costs. In addition, the Commission estimates that the 
aggregate cost to file interim updates and the annual updated Form 13H 
would be $998,400.\178\ The Commission does not expect these minimal 
costs per large trader of self-identification and reporting to the 
Commission to have any significant effect on how large traders conduct 
business because such costs would not be so large, when compared to 
level of activity at which a large trader would be trading, so as to 
result in a change in how such traders conduct business, create a 
barrier to entry, or otherwise alter the competitive landscape among 
large traders.
---------------------------------------------------------------------------

    \177\ The Commission derived the total estimated burdens from 
the following estimates, which are based on the Commission's 
experience with, and burden estimates for, other existing reporting 
systems including Rule 13f-1: (Compliance Manager (3 hours) at $258 
per hour) + (Compliance Attorney (7 hours) at $270 per hour) + 
(Compliance Clerk (10 hours) at $63 per hour) x (400 potential 
respondents) = $1,317,600. Rule 13f-1, like the proposed rule, 
requires the filing of a form (Form 13F) upon exceeding a certain 
trading threshold. This figure is based on the estimated number of 
hours and hourly costs for the one-time, initial annualized burden 
for registered broker-dealers for development, including re-
programming and testing of the systems to comply with the proposed 
rule. Hourly figures are from SIFMA's Management & Professional 
Earnings in the Securities Industry 2008 and SIFMA's Office Salaries 
in the Securities Industry 2008, modified by Commission staff to 
account for an 1800-hour work-year and multiplied by 5.35 or 2.93, 
as appropriate, to account for bonuses, firm size, employee 
benefits, and overhead.
    \178\ The Commission derived the total estimated burdens from 
the following estimates, which are based on the Commission's 
experience with, and burden estimates for, other existing reporting 
systems including Rule 6a-2: (Compliance Manager (2 hours) at $258 
per hour) + (Compliance Attorney (5 hours) at $270 per hour) + 
(Compliance Clerk (10 hours) at $63 per hour) x (400 potential 
respondents) = $998,400. Rule 6a-2, like the proposed rule, 
requires: (1) Form amendments when there are any material changes to 
the information provided in the previous submission; and (2) 
submission of periodic updates of certain information provided in 
the initial Form 1, whether or not such information has changed.
---------------------------------------------------------------------------

    The term ``price efficiency'' has a technical meaning in financial 
economics, which is not the only way the term can be interpreted in the 
Exchange Act.\179\ We have, nonetheless, considered the effect of 
proposed new Rule 13h-1 on price efficiency in terms of financial 
economic theory, under which the proposed large trader reporting system 
could adversely affect the extent to which security prices reflect 
available information. As discussed above, the Commission acknowledges 
that the proposal would entail certain costs on large traders. These 
costs would be incremental to certain large traders which, as part of 
their business model, expend resources to gather and process public 
information that is ultimately reflected into prices through their 
trading activity. The Commission is sensitive to the costs of the 
proposal and preliminarily believes these costs would have minimal 
impact on a large trader's decision to gather and process public 
information, and also have minimal impact on a large trader's decision 
to ultimately trade on this information. Because the large trader 
reported positions would be made available only to the Commission, and 
not to the public or a trader's competitors, we expect the proposed 
rule to have little impact on where a large trader conducts its 
business. The Commission therefore preliminarily believes that the 
proposal mitigates any potential adverse impact on price efficiency.
---------------------------------------------------------------------------

    \179\ Where we use the terms ``price efficiency'' in this 
proposing release we are using terms of art as used in the economic 
literature proceeding under the ``efficient markets hypothesis,'' 
under which financial prices are assumed to reflect all available 
information and accordingly adjust quickly to reflect new 
information. See, e.g., Fama, Eugene F., (1991), Efficient capital 
markets: II, Journal of Finance; Fama E, French K. (1992), The 
Cross-Section of Expected Stock Returns, Journal of Finance. It 
should be noted that price efficiency is not identical with the 
ordinary sense of the word ``efficiency.''
---------------------------------------------------------------------------

    The Commission believes that the proposed rule's requirement for 
large traders to file and update Form 13H with the Commission, and to 
identify itself to each registered broker-dealer through which it 
effects transactions and to all others with whom it collectively 
exercises investment discretion, will have minimal adverse effect on 
efficiency, competition, or capital formation. In particular, the 
Commission does not believe that the requirement to self-identify to 
the Commission and the increased regulatory scrutiny it would entail 
would deter large traders from continuing to actively participate in 
the securities markets or would otherwise negatively impact large 
traders. Because the large trader positions will be reported only to 
the Commission, and not made public to a trader's customers or 
competitors, we expect the proposed rule to have little to no impact on 
competition.
    The Commission acknowledges that, in addition to promoting price 
efficiency, the trading activity of certain large traders also promotes 
market liquidity in secondary securities markets. The Commission also 
acknowledges that participation in primary market offerings may be 
affected by changes in expectations about secondary market liquidity 
and price efficiency. As discussed above, however, the Commission 
preliminarily believes that the proposed rule would have minimal impact 
on a large trader's secondary market trading activities, and therefore 
believes there would be little to no impact on capital formation. 
Further, the Commission believes that proposed Rule 13h-1(b) would 
enhance the Commission's efforts to monitor the markets, in furtherance 
of promoting efficiency and capital formation and thereby bolstering 
investor confidence.
    The Commission has sought to limit compliance costs wherever 
possible. The Commission proposes to establish an initial ``identifying 
activity level'' of: (1) 2 million shares, or shares with a fair market 
value of $20 million, effected during a calendar day; or (2) 20 million 
shares or shares with a fair market value of $200 million, effected 
during a

[[Page 21481]]

calendar month. The Commission preliminarily believes that this 
threshold identifying activity level strikes an appropriate balance 
between the need to identify significant large traders and the burden 
on affected entities of capturing this information.
    Further, when determining who would be subject to the proposed 
requirements as a ``large trader,'' the proposed definition is intended 
to focus, in more complex organizations, on the parent company of the 
entities that employ the individuals that exercise investment 
discretion. The purpose of this focus is to narrow the number of 
persons that would need to self-identify as ``large traders,'' while 
allowing the Commission to identify the primary institutions that 
conduct a large trading business. Focusing the identification 
requirements in this manner would enable the Commission to identify 
easily and be able to contact readily the principal group of persons 
that control large traders, while minimizing the filing and self-
identification burdens that would be imposed on large traders.
    In addition, the Commission is proposing an inactive filing status. 
The inactive filing status is intended to reduce the burden on 
infrequent traders who may trip the threshold on a particular occasion 
but do not regularly trade at sufficient levels to merit continued 
status as a large trader. In particular, large traders that have not 
effected aggregate transactions at any time during the previous full 
calendar year that are equal to or greater than the identifying 
activity level would be eligible for inactive status upon checking a 
box on the cover page of their next annual Form 13H filing.\180\ The 
proposed inactive status is designed to minimize the impact of the 
proposed rule on natural persons that infrequently trade in a magnitude 
that may warrant imposing the added regulatory burdens of the proposed 
rule. As a subset of inactive status, proposed Form 13H would provide a 
space for a large trader to reflect the termination of its operations 
(i.e., inactive status where the entity, because it has discontinued 
operations, has no potential to requalify for large trader status in 
the future). This designation would allow large traders to inform the 
Commission of their status and would signal to the Commission not to 
expect future amended Form 13H filings from the large trader. For 
example, termination status would be relevant in the case of a merger 
or acquisition where the large trader does not survive the corporate 
transaction. In addition, with respect to registered broker-dealers, 
the termination filing status should reduce the burden on registered 
broker-dealers who would no longer have to track the entity's LTID.
---------------------------------------------------------------------------

    \180\ See proposed Rule 13h-1(b)(3)(iii).
---------------------------------------------------------------------------

    From time to time, information provided by large traders through 
their Forms 13H may become inaccurate. Rather than requiring prompt 
updates whenever this occurs, the proposed rule instead would require 
``Interim Filings'' only quarterly (and only when the prior submission 
becomes inaccurate). The quarterly period is designed specifically to 
mitigate the filing burden of large traders.
    A further limitation of the proposal targeted at balancing between 
capturing significant trading activity and the burden of capturing this 
information is that the Commission has proposed several exceptions from 
the definition of ``transaction.'' These exceptions, among others, 
would include: any transaction that constitutes a gift, any transaction 
effected by a court-appointed executor, administrator, or fiduciary 
pursuant to the distribution of a decedent's estate, any transaction 
effected pursuant to a court order or judgment, and any transaction 
effected pursuant to a rollover of qualified plan or trust assets 
subject to Section 402(c)(1) of the Internal Revenue Code.\181\ The 
Commission believes that narrowing the definition of a transaction by 
adding these exclusions would reduce the impact of the proposed rule on 
infrequent traders and registered broker-dealers while at the same time 
allowing the Commission to focus the rule on those entities and 
activities most appropriate to identify under the proposed rule.
---------------------------------------------------------------------------

    \181\ See proposed Rule 13h-1(a)(6).
---------------------------------------------------------------------------

2. Registered Brokers and Registered Dealers
    The Commission preliminarily anticipates that the three primary 
costs to registered broker-dealers from the proposal are: (1) 
Recordkeeping requirements; (2) reporting requirements; and (3) 
monitoring requirements.
    The rule would require that registered broker-dealers keep records 
of transactions for each person they know is a large trader and for 
each person who has not complied with the information requirements that 
they have reason to know is a large trader based on transactions 
effected by or through such broker-dealer (an ``Unidentified Large 
Trader'').\\182 The proposed rule would require brokers and dealers to 
furnish transaction records of both identified large traders and 
Unidentified Large Traders to the Commission upon request. While most 
of the proposed data required to be kept pursuant to proposed Rule 13h-
1 is already required under Rule 17a-25 and reported via the EBS 
system, the large trader system would contain a few additional fields 
of information, notably the LTID number(s) and execution time. The 
proposed rule would require that such records be kept for a period of 
three years, the first two in an accessible place, in accordance with 
Rule 17a-4(b) under the Exchange Act.\183\
---------------------------------------------------------------------------

    \182\ See proposed Rule 13h-1(a)(9) (defining ``Unidentified 
Large Trader'').
    \183\ 17 CFR 240.17a-4.
---------------------------------------------------------------------------

    The Commission preliminarily estimates that the one-time, initial 
expense for each registered brokers-dealer for development, including 
re-programming and testing of the systems, would be approximately 
$106,060.\184\ The Commission also preliminarily believes that there 
would be minimal additional costs associated with the operation and 
maintenance of the large trader system, because the proposed large 
trader system would utilize the existing EBS system. Accordingly, the 
total start-up, operating, and maintenance cost burden for registered 
broker-dealers is estimated to be $31,818,000 (300 x $106,060 = 
$31,818,000). As previously noted, this figure is based on the 
estimated number of hours for initial internal development and 
implementation, including software development, taking into account the 
fact that new data elements are required to be captured and to be 
available for reporting to the Commission on the morning following the 
day on which the transactions were effected. Because broker-dealers 
already capture most of the data required to be captured under proposal 
Rule 13h-1 pursuant to Rule 17a-25, the Commission does not expect any 
additional hardware costs.
---------------------------------------------------------------------------

    \184\ The Commission derived the total estimated one-time 
burdens from the following: (Computer Ops Dept. Mgr. (30 hours) at 
$335 per hour) + (Sr. Database Administrator (25 hours) at $281 per 
hour) + (Sr. Programmer (150 hours) at $292 per hour) + (Programmer 
Analyst (100 hours) at $193 per hour) + (Compliance Manager (20 
hours) at $258 per hour) + (Compliance Attorney (10 hours) at $270 
per hour) + (Compliance Clerk (20 hours) at $63 per hour) + (Sr. 
Systems Analyst (50 hours) at $244 per hour) + (Director of 
Compliance (5 hours) at $388 per hour) + (Sr. Computer Operator (35 
hours) at $75 per hour) = $106,060. As noted above, the Commission 
acknowledged that, in some instances, multiple LTIDs may be 
disclosed to a registered broker-dealer for a single account. 
Therefore, our cost estimate factors in the cost that registered 
broker-dealers would need to develop systems capable of tracking 
multiple LTIDs.
---------------------------------------------------------------------------

    The proposed rule would require registered broker-dealers to report 
transactions that equal or exceed the

[[Page 21482]]

reporting activity level effected by or through such broker-dealer for 
both identified and Unidentified Large Traders. More specifically, upon 
the request of the Commission, registered broker-dealers would be 
required to report electronically, in machine-readable form and in 
accordance with instructions issued by the Commission, all information 
required under paragraphs (d)(2) and (d)(3) for all transactions 
effected directly or indirectly by or through accounts carried by such 
broker-dealer for large traders and other persons for whom records must 
be maintained, which equal or exceed the reporting activity level. 
These broker-dealers would need to report a particular day's trading 
activity only if it equals or exceeds the ``reporting activity level,'' 
but would be permitted to report all data without regard to that 
threshold.
    The Commission estimates that the costs of the proposed reporting 
requirements would be $16,200,000.\185\ The Commission is taking into 
account that the proposed rule would utilize the recordkeeping and 
reporting infrastructure of the existing EBS system.
---------------------------------------------------------------------------

    \185\ See supra text accompanying note 151. The Commission 
derived the total estimated ongoing burdens from the following: 
(Compliance Attorney (2 hours) at $270 per hour) x (100 requests per 
year) x (300 potential respondents) = $16,200,000.
---------------------------------------------------------------------------

    Paragraph (f) of proposed Rule 13h-1 would establish a ``safe 
harbor'' for the proposed duty to monitor for Unidentified Large 
Traders.\186\ Pursuant to proposed paragraph (a)(9), in the case of an 
Unidentified Large Trader, a ``registered broker-dealer has reason to 
know whether a person is a large trader based on the transactions in 
NMS securities effected by or through such broker-dealer.'' A 
registered broker-dealer would not be deemed to know or to have reason 
to know that a person is an Unidentified Large Trader if: (1) It does 
not have actual knowledge that a person is a large trader; and (2) it 
established and maintained policies and procedures reasonably designed 
to assure compliance with the identification requirements of the 
proposed safe harbor. Paragraphs (f)(1) and (2) of the proposed rule 
provide the specific elements that would be required for the safe 
harbor. Paragraph (f)(2) of the proposed rule would require that 
broker-dealer monitoring policies and procedures contain systems 
reasonably designed to inform persons of their obligations to file 
proposed Form 13H and disclose their large trader status.
---------------------------------------------------------------------------

    \186\ See proposed Rule 13h-1(a)(9) (defining an Unidentified 
Large Trader as ``each person who has not complied with the 
identification requirements of paragraphs (b)(1) and (b)(2) of this 
rule that a registered broker-dealer knows or has reason to know is 
a large trader.'')
---------------------------------------------------------------------------

    The Commission estimates the initial, one-time burden to establish 
policies and procedures pursuant to the proposed safe harbor provision 
would be $4,756,800.\187\ The Commission estimates that the ongoing 
burden would be $1,215,000.\188\ The Commission believes that the 
proposed safe harbor would reduce the burden of the monitoring 
requirements of the proposed rule on registered broker-dealers. Among 
other things, they would limit the broker-dealer's obligations to only 
those Unidentified Large Traders that should be readily identifiable 
and apparent to the broker-dealer, and would require the broker-dealer 
to inform such persons of their obligations to file proposed Form 13H 
and disclose their large trader status to the Commission.
---------------------------------------------------------------------------

    \187\ See supra note 153. The Commission derived the total 
estimated one-time burdens from the following: (Sr. Programmer (10 
hours) at $292 per hour) + (Compliance Manager (10 hours) at $258 
per hour) + (Compliance Attorney (10 hours) at $270 per hour) + 
(Compliance Clerk (20 hours) at $63 per hour) + (Sr. Systems Analyst 
(10 hours) at $244 per hour) + (Director of Compliance (2 hours) at 
$388 per hour) + (Sr. Computer Operator (8 hours) at $75 per hour) x 
(300 potential respondents) = $3,982,800.
    \188\ See supra note 154. The Commission derived the total 
estimated ongoing burdens from the following: (Compliance Attorney 
at (15 hours) at $270 per hour) x (300 potential respondents) = 
$1,215,000.
---------------------------------------------------------------------------

    To assist the Commission in evaluating the costs that could result 
from the proposed rule, the Commission requests comments on the 
potential costs identified in this proposal, as well as any other costs 
that could result from the proposed rule. The Commission asks 
commenters to quantify those costs, where possible, and provide 
analysis and data to support their views on the costs. While the 
Commission does not anticipate that there would be significant adverse 
consequences to a broker-dealer's business as a result of the proposed 
rule, it seeks commenters' views regarding the possibility of any such 
impact. For instance, would the proposed rule impact a broker-dealer's 
ability to attract or retain its large trader customers?
    In addition, the Commission requests specific comment on the 
following questions:
     Are there ways to further reduce the burdens of the filing 
requirements on large traders? Is the provision for inactive status 
sufficient?
     Does the capture of trade execution times in a large 
trader reporting system present any particular technological or other 
operational challenges?
     Does the potential capture of multiple LTIDs raise any 
particular issues?
     What other costs might registered broker-dealers incur in 
developing policies and procedures to monitor for Unidentified Large 
Traders? Are there ways to further reduce the burdens of monitoring for 
Unidentified Large Traders and informing them of their obligations to 
file Form 13H?
     Do commenters believe that the costs of operating and 
maintaining a large trader reporting system will result in additional 
costs beyond the existing EBS system?
     Are there ways to further reduce the burdens of the 
proposed large trader reporting system?
     Would the proposed rule have any unintended, negative 
consequences for the U.S. markets?

Commenters should provide specific data and analysis to support any 
comments they submit with respect to the costs and benefits discussed 
above and any other costs and benefits identified by the commenters.

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

    Section 3(f) of the Exchange Act requires the Commission, whenever 
it engages in rulemaking and is required to consider or determine 
whether an action is necessary or appropriate in the public interest, 
to consider, in addition to the protection of investors, whether the 
action would promote efficiency, competition, and capital 
formation.\189\ In addition, section 23(a)(2) of the Exchange Act 
requires the Commission, when making rules under the Exchange Act, to 
consider the impact such rules would have on competition.\190\ Exchange 
Act section 23(a)(2) prohibits the Commission from adopting any rule 
that would impose a burden on competition not necessary or appropriate 
in furtherance of the purposes of the Exchange Act.
---------------------------------------------------------------------------

    \189\ 15 U.S.C. 78c(f).
    \190\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The Commission is proposing Rule 13h-1 pursuant to our authority 
under section 13(h) of the Exchange Act. Section 13(h)(2) requires the 
Commission, when engaging in rulemaking pursuant to that authority that 
would require every registered broker-dealer to make and keep for 
prescribed periods such records as the Commission by rule or regulation 
prescribes, to consider whether such rule is ``necessary or appropriate 
in the public interest, for the protection of

[[Page 21483]]

investors, or otherwise in furtherance of the purposes of [the Exchange 
Act].'' \191\
---------------------------------------------------------------------------

    \191\ The Commission is proposing Rule 13h-1(b) relating to 
identification requirements for large traders pursuant to Section 
13(h)(1) of the Exchange Act, which does not require the Commission 
to consider the factors identified in Section 3(f), 15 U.S.C. 
78c(f). Analysis of the effects, including the considerations under 
Section 23(a), of proposed Rule 13h-1(b) is discussed above in 
Sections IV and V.
---------------------------------------------------------------------------

A. Competition

    We consider in turn the impact of proposed new Rule 13h-1 on the 
securities markets and market participants. Information provided by 
market participants and broker-dealers in their registrations and 
filings with us informs our views on the structure of the markets they 
comprise. We begin our consideration of potential competitive impacts 
with observations of the current structure of these markets.
    The securities trading industry is a competitive one with 
reasonably low barriers to entry. The intensity of competition across 
trading platforms in this industry has increased in the past decade as 
a result of a number of factors, including market reforms and 
technological advances. This increase in competition has resulted in 
decreases in market concentration, more competition among trading 
centers, a proliferation of trading platforms competing for order flow, 
and decreases in trading fees.
    The reasonably low barriers to entry for trading centers are 
evidenced, in part, by the fact that new entities, primarily 
alternative trading systems (``ATSs''), continue to enter the 
market.\192\ For example, currently, there are approximately 50 
registered ATSs. In addition, the Commission within the past few years 
has approved applications by two entities--BATS and Nasdaq--to become 
registered as national securities exchanges for trading equities, and 
approved proposed rule changes by two existing exchanges--International 
Securities Exchange, LLC and Chicago Board Options Exchange, 
Incorporated--to add equity trading facilities to their existing 
options business. We believe that competition among trading centers has 
been facilitated by Rule 611 of Regulation NMS,\193\ which encourages 
quote-based competition between trading centers; Rule 605 of Regulation 
NMS,\194\ which empowers investors and broker-dealers to compare 
execution quality statistics across trading centers; and Rule 606 of 
Regulation NMS,\195\ which enables customers to monitor order routing 
practices.
---------------------------------------------------------------------------

    \192\ See Securities Exchange Act Release No. 60997 (Nov. 13, 
2009), 74 FR 61208, 61234 (Nov. 23, 2009) (discussing the reasonably 
low barriers to entry for ATSs and that these reasonably low 
barriers to entry have generally helped to promote competition and 
efficiency).
    \193\ 17 CFR 242.611.
    \194\ 17 CFR 242.605.
    \195\ 17 CFR 242.606.
---------------------------------------------------------------------------

    Broker-dealers are required to register with the Commission and at 
least one SRO. The broker-dealer industry, including market makers, is 
a competitive industry with most trading activity concentrated among 
several larger participants and thousands of smaller participants 
competing for niche or regional segments of the market. There are 
approximately 5,178 registered broker-dealers, of which approximately 
890 are small broker-dealers.\196\
---------------------------------------------------------------------------

    \196\ These numbers are based on a review of 2007 and 2008 FOCUS 
Report filings reflecting registered broker-dealers, and discussions 
with SRO staff. The number does not include broker-dealers that are 
delinquent on FOCUS Report filings.
---------------------------------------------------------------------------

    Larger broker-dealers often enjoy economies of scale over smaller 
broker-dealers and compete with each other to service the smaller 
broker-dealers, who are both their competitors and customers. The 
reasonably low barriers to entry for broker-dealers are evidenced, for 
example, by the fact that the average number of new broker-dealers 
entering the market each year between 2001 and 2008 was 389.\197\
---------------------------------------------------------------------------

    \197\ This number is based on a review of FOCUS Report filings 
reflecting registered broker-dealers from 2001 through 2008. The 
number does not include broker-dealers that are delinquent on FOCUS 
Report filings. New registered broker-dealers for each year during 
the period from 2001 through 2008 were identified by comparing the 
unique registration number of each broker-dealer filed for the 
relevant year to the registration numbers filed for each year 
between 1995 and the relevant year.
---------------------------------------------------------------------------

    As discussed above, the Commission acknowledges that the proposal 
would entail certain costs. In particular, requiring registered broker-
dealers to establish recordkeeping systems to capture the required 
information, in particular the new fields that are not currently 
captured under the existing EBS system, would require one-time initial 
expenses, as discussed above. In addition, to utilize the proposed safe 
harbor, registered broker-dealers would need to implement policies and 
procedures to monitor their customers' trading in order to determine 
whether customers' trades would trigger the threshold for large trader 
status. Preliminarily, the Commission does not believe that these 
expenses would adversely affect competition.
    In our judgment, the costs of proposed Rule 13h-1 would not be so 
large as to significantly raise barriers to entry, or otherwise alter 
the competitive landscape of the industries involved because the 
incremental costs of Rule 13(h) that would be incurred by broker-
dealers would be small relative to the costs of complying with the 
existing EBS system.\198\ In industries characterized by reasonably low 
barriers to entry and competition, the viability of some of the less 
successful competitors may be sensitive to regulatory costs. 
Nonetheless, we believe that the broker-dealer industry would remain 
competitive, despite the costs associated with implementing proposed 
new Rule 13h-1, even if those costs influence the entry or exit 
decisions of individual broker-dealer firms at the margin. The 
Commission does not expect that the costs associated with proposed new 
Rule 13h-1, which are small relative to the costs of complying with the 
existing EBS system, would be a determining factor in a broker-dealer's 
entry or exit decision or decision to accept large trader clients 
because the volume of trading associated with large traders and 
resultant revenue that could be gained by servicing a large trader 
would outweigh the costs associated with the proposed rule.
---------------------------------------------------------------------------

    \198\ See supra Sections IV (Paperwork Reduction Act) and V 
(Consideration of Costs and Benefits) for a detailed description of 
the expected costs.
---------------------------------------------------------------------------

    Further, the Commission would not be compelled to disclose any 
information required to be kept or reported under Section 13(h) of the 
Exchange Act, including information kept or reported pursuant to 
proposed Rule 13h-1.\199\ Accordingly, information and trading data 
that the Commission would obtain pursuant to the proposed rule would 
not be shared with others and would not be available to other large 
traders or broker-dealers.
---------------------------------------------------------------------------

    \199\ See supra text following note 89.
---------------------------------------------------------------------------

    The approach of proposed new Rule 13h-1 would advance the purposes 
of the Exchange Act in a number of significant ways. In light of recent 
market turmoil and the increasing prominence, sophistication, and 
trading capacity of large traders, the Commission believes it should 
further enhance its ability to collect and analyze information on large 
traders. The Commission believes that the proposed large trader 
reporting system could enhance its ability to identify large traders 
and collect trading data on their activity at a time when, for example, 
many such traders employ rapid algorithmic systems that quote and trade 
in huge volumes. The proposed large trader reporting system would 
provide a basic set of tools necessary to allow the Commission to 
monitor and analyze more readily and efficiently the impact of large 
traders,

[[Page 21484]]

including high-frequency traders, on the securities markets.
    The Commission preliminarily believes that the proposal to 
establish the large trader reporting system would not impose any burden 
on competition not necessary or appropriate in furtherance of the 
purposes of the Exchange Act. In particular, the Commission believes 
that the proposal would implement the Commission's authority under 
Section 13(h) of the Exchange Act at a crucial time when large traders 
play an increasingly prominent role in the securities markets.

B. Capital Formation

    As discussed above, the Commission preliminary believes that the 
proposed rule will have little to no direct impact on capital 
formation. However, proposed new Rule 13h-1 is intended to facilitate 
the Commission's ability to monitor the impact on the securities 
markets of securities transactions involving a substantial volume of 
shares, a large fair market value or a large exercise value, as well as 
to assist the Commission's enforcement of the federal securities laws. 
As noted in Paragraph B of Section II, the proposed rule focuses on the 
core of the large trader reporting system--the entities that control 
persons that exercise investment discretion and are responsible for 
trading large amounts of securities. As these entities can represent 
significant sources of liquidity and overall trading volume, their 
trading may have a direct impact on the cost of capital of securities 
issuers. As such, the Commission's ability to promptly obtain 
information from registered broker-dealers on large trader activity 
should better enable the Commission to understand the impact of large 
traders on the securities markets. As the Commission improves its 
understanding, it should be better positioned to administer and enforce 
the federal securities laws, thereby promoting the integrity and 
efficiency of the markets, as well as, ultimately, investor confidence 
and capital formation. For example, the information collected from Rule 
13h-1(b) would allow for a more timely reconstruction of trading 
activity during a market crisis and thus could better position the 
Commission to craft any regulatory responses.
    Proposed new Rule 13h-1 is intended to facilitate the Commission's 
ability to monitor the impact on the securities markets of securities 
transactions involving a substantial volume of shares, a large fair 
market value or a large exercise value, as well as to assist the 
Commission's enforcement of the federal securities laws. As noted in 
Paragraph B of Section II, the proposed rule focuses on the core of the 
large trader reporting system--the entities that control persons that 
exercise investment discretion and are responsible for trading large 
amounts of securities. As these entities can represent significant 
sources of liquidity and overall trading volume, their trading may have 
a direct impact on the cost of capital of securities issuers. As such, 
the Commission's ability to promptly obtain information from registered 
broker-dealers on large trader activity should assist the Commission's 
efforts to indirectly promote capital formation by better enabling the 
Commission to understand the impact of large traders on the securities 
markets. For example, the information collected from proposed Rule 13h-
1(b) would allow for a more timely reconstruction of trading activity 
of large traders during a market crisis, and thus could better position 
the Commission to craft any regulatory responses. Specifically, we 
believe that, armed with more current and accurate trading information 
on large traders, the Commission would be able to identify regulatory 
and potential enforcement issues more quickly. Thus, proposed Rule 13h-
1 could help maintain investor confidence in the markets, and thus 
could add depth and liquidity to the markets and promote capital 
formation. Further, the Commission preliminarily believes that the 
requirements imposed on all large traders, whether U.S. or foreign, are 
necessary and appropriate, not unduly burdensome, and would be imposed 
uniformly on all affected entities (whether U.S. or foreign).

C. Efficiency

    Proposed new Rule 13h-1 is designed to achieve the appropriate 
balance between our goals of monitoring the impact on the securities 
markets of securities transactions by large traders, and assisting the 
Commission's enforcement of the federal securities laws, on the one 
hand, and the effort to minimize the burdens and costs associated with 
implementing a proposed large trader system.
    The Commission preliminarily believes that the disclosure by 
registered broker-dealers to regulators that would be achieved by the 
proposed large trader reporting system would promote efficiency by 
enabling the Commission to go beyond the EBS system, which permits 
investigations of small samples of securities over a limited period of 
time, to instead assist with large-scale investigations and market 
reconstructions involving numerous stocks during peak trading volume 
periods. The proposal also would enable the Commission to receive from 
registered broker-dealers contemporaneous information on large traders' 
trading activity much more promptly than is currently the case with the 
EBS system. With a system designed specifically to help the Commission 
reconstruct and analyze time-sequenced trading data, the Commission 
could more quickly investigate the nature and causes of unusual market 
movements and initiate investigations and regulatory actions where 
warranted.

D. Request for Comment

    The Commission requests comment on all aspects of this analysis 
and, in particular, on whether the proposed large trader reporting 
system would place a burden on competition, as well as the effect of 
the proposal on efficiency, competition, and capital formation. 
Commenters are requested to provide empirical data and other factual 
support for their views if possible.

VII. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \200\ requires Federal 
agencies, in promulgating rules, to consider the impact of those rules 
on small entities. Section 603(a)\201\ of the Administrative Procedure 
Act,\202\ as amended by the RFA, generally requires the Commission to 
undertake a regulatory flexibility analysis of all proposed rules, or 
proposed rule amendments, to determine the impact of such rulemaking on 
``small entities.'' \203\ Section 605(b) of the RFA states that this 
requirement shall not apply to any proposed rule or proposed rule 
amendment, which if adopted, would not ``have a significant economic 
impact on a substantial number of small entities.'' \204\
---------------------------------------------------------------------------

    \200\ 5 U.S.C. 601 et seq.
    \201\ 5 U.S.C. 603(a).
    \202\ 5 U.S.C. 551 et seq.
    \203\ Although Section 601(b) of the RFA defines the term 
``small entity,'' the statute permits agencies to formulate their 
own definitions. The Commission has adopted definitions for the term 
small entity for the purposes of Commission rulemaking in accordance 
with the RFA. Those definitions, as relevant to this proposed 
rulemaking, are set forth in Rule 0-10, 17 CFR 240.0-10. See 
Securities Exchange Act Release No. 18451 (January 28, 1982), 47 FR 
5215 (February 4, 1982) (File No. AS-305).
    \204\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    Paragraph (a) of Rule 0-10 provides that for purposes of the 
Regulatory Flexibility Act, a small entity when used with reference to 
a ``person''' other than an investment company means a person that, on 
the last day of its most recent fiscal year, had total assets of $5

[[Page 21485]]

million or less.\205\ In reference to a broker-dealer, small entity 
means total capital of less than $500,000 and not affiliated with any 
person that is not a small business or small organization. Pursuant to 
Section 605(b), the Commission preliminarily believes that proposed 
Rule 13h-1 and Form 13H would not, if adopted, have a significant 
economic impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \205\ 17 CFR 240.0-10(a). Investment companies are small 
entities when the investment company, together with other investment 
companies in the same group of related investment companies, has net 
assets of $50 million or less at the end of its most recent fiscal 
year. 17 CFR 270.0-10(a).
---------------------------------------------------------------------------

    Proposed Rule 13h-1 and Form 13H would require self-identification 
by large traders, which is a term that, as discussed below, would 
implicate persons and entities with the resources and capital necessary 
to transact securities in substantial volumes relative to overall 
market volume in publicly traded securities. Specifically, the proposed 
rule defines ``large trader'' as a person that effects transactions in 
an ``identifying activity level'' of: (1) 2 million shares, or shares 
with a fair market value of $20 million, effected during a calendar 
day; or (2) 20 million shares, or shares with a fair market value of 
$200 million, effected during a calendar month.
    The Commission anticipates that the types of entities that would 
identify as large traders would include, for example, broker-dealers, 
financial holding companies, investment advisers, and firms that trade 
for their own account. The Commission does not believe that any small 
entities would be engaged in the business of trading, over the course 
of the applicable measuring period, in a volume that approaches the 
threshold levels. Because the proposed rule focuses on parent companies 
and is designed to identify the largest market participants by volume 
or fair market value of trading, the Commission believes that a large 
trader that trades in such substantial volumes would necessarily have 
considerable assets (beyond the level of a small entity) to be able to 
conduct such trading.
    In addition, proposed Rule 13h-1 would apply to registered broker-
dealers that serve large trader customers. The Commission believes 
that, given the considerable volume in which a large trader as defined 
in the proposed rule would effect transactions, particularly in the 
case of high-frequency traders, registered broker-dealers servicing 
large trader customers or broker-dealers that are large traders 
themselves likely would be larger entities, with total capital greater 
than $500,000, that have systems and capacities capable of handling the 
trading associated with such accounts. Further, because the trading 
capacities of large traders will typically necessitate the services of 
sophisticated broker-dealers likely to be well capitalized entities or 
affiliated with well capitalized entities, the Commission does not 
believe that any broker-dealer that maintains large trader customers 
would be ``not affiliated with any person that is not a small business 
or small organization'' under Rule 0-10.
    The Commission solicits comment as to whether proposed Rule 13h-1 
and Form 13H would have a significant economic impact on a substantial 
number of small entities. The Commission requests that commenters 
describe the nature of any impact on small entities and provide 
empirical data to support the extent of such impact.

VIII. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, or ``SBREFA,'' \206\ the Commission must advise the OMB as 
to whether the proposed regulation constitutes a ``major'' rule. Under 
SBREFA, a rule is considered ``major'' where, if adopted, it results or 
is likely to result in: (1) An annual effect on the economy of $100 
million or more (either in the form of an increase or a decrease); (2) 
a major increase in costs or prices for consumers or individual 
industries; or (3) significant adverse effect on competition, 
investment or innovation. If a rule is ``major,'' its effectiveness 
will generally be delayed for 60 days pending Congressional review.
---------------------------------------------------------------------------

    \206\ Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note 
to 5 U.S.C. 601).
---------------------------------------------------------------------------

    The Commission requests comment on the potential impact of the 
proposed rule on the economy on an annual basis, on the costs or prices 
for consumers or individual industries, and on competition, investment, 
or innovation. Commenters are requested to provide empirical data and 
other factual support for their views to the extent possible.

IX. Statutory Authority

    Pursuant to the Exchange Act and particularly, sections 13(h) and 
23(a) thereof, 15 U.S.C. 78m and 78w, the Commission proposes new Rule 
13h-1 under the Exchange Act that would implement a large trader 
reporting system to provide the Commission with a mechanism to identify 
large traders, and the affiliates, accounts, and transactions of large 
traders.

List of Subjects in 17 CFR Parts 240 and 249

    Reporting and recordkeeping requirements; Securities.
    In accordance with the foregoing, Title 17, Chapter II of the Code 
of Federal Regulations is proposed to be amended as follows:

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

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

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 
and 80b-ll, and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise 
noted.
* * * * *
    2. Add Sec.  240.13h-1 to read as follows:


Sec.  240.13h-l  Large trader reporting system.

    (a) Definitions.--For purposes of this section:
    (1) The term large trader means any person that directly or 
indirectly, including through other persons controlled by such person, 
exercises investment discretion over one or more accounts and effects 
transactions for the purchase or sale of any NMS security for or on 
behalf of such accounts, by or through one or more registered broker-
dealers, in an aggregate amount equal to or greater than the 
identifying activity level.
    (2) The term person has the same meaning as in Section 13(h)(8)(E) 
of the Securities Exchange Act of 1934.
    (3) The term control (including the terms controlling, controlled 
by and under common control with) means the possession, direct or 
indirect, of the power to direct or cause the direction of the 
management and policies of a person, whether through the ownership of 
securities, by contract, or otherwise. Any person that directly or 
indirectly has the right to vote or direct the vote of 25% or more of a 
class of voting securities of an entity or has the power to sell or 
direct the sale of 25% or more of a class of voting securities of such 
entity, or in the case of a partnership, has the right to receive, upon 
dissolution, or has contributed, 25% or more of the capital, is 
presumed to control that entity.
    (4) The term investment discretion has the same meaning as in 
Section 3(a)(35) of the Securities Exchange Act of 1934. A person's 
employees who exercise investment discretion within the scope of their 
employment are deemed to do so on behalf of such person.

[[Page 21486]]

    (5) The term NMS security has the meaning provided for in Rule 
600(b)(46) under the Securities Exchange Act of 1934.
    (6) The term transaction or transactions means all transactions in 
NMS securities, including exercises or assignments of option contracts, 
except for the following transactions:
    (i) Any journal or bookkeeping entry made to an account in order to 
record or memorialize the receipt or delivery of funds or securities 
pursuant to the settlement of a transaction;
    (ii) Any transaction that is part of an offering of securities by 
or on behalf of an issuer, or by an underwriter on behalf of an issuer, 
or an agent for an issuer, whether or not such offering is subject to 
registration under the Securities Act of 1933, provided, however, that 
this exemption shall not include an offering of securities effected 
through the facilities of a national securities exchange;
    (iii) Any transaction that constitutes a gift;
    (iv) Any transaction effected by a court appointed executor, 
administrator, or fiduciary pursuant to the distribution of a 
decedent's estate;
    (v) Any transaction effected pursuant to a court order or judgment;
    (vi) Any transaction effected pursuant to a rollover of qualified 
plan or trust assets subject to Section 402(a)(5) of the Internal 
Revenue Code; or
    (vii) Any transaction between an employer and its employees 
effected pursuant to the award, allocation, sale, grant or exercise of 
a NMS security, option or other right to acquire securities at a pre-
established price pursuant to a plan which is primarily for the purpose 
of an issuer benefit plan or compensatory arrangement.
    (7) The term identifying activity level means: aggregate 
transactions in NMS securities that are equal to or greater than:
    (i) During a calendar day, either two million shares or shares with 
a fair market value of $20 million; or
    (ii) During a calendar month, either twenty million shares or 
shares with a fair market value of $200 million.
    (8) The term reporting activity level means:
    (i) Each transaction in NMS securities, effected in a single 
account during a calendar day, that is equal to or greater than 100 
shares;
    (ii) Any other transaction in NMS securities, effected in a single 
account during a calendar day, that a registered broker-dealer may deem 
appropriate; or
    (iii) Such other amount that may be established by order of the 
Commission from time to time.
    (9) The term Unidentified Large Trader means each person who has 
not complied with the identification requirements of paragraphs (b)(1) 
and (b)(2) of this section that a registered broker-dealer knows or has 
reason to know is a large trader. A registered broker-dealer has reason 
to know whether a person is a large trader based on the transactions in 
NMS securities effected by or through such broker-dealer.
    (b) Identification requirements for large traders.
    (1) Form 13H. Except as provided in paragraph (b)(3) of this 
section, each large trader shall file electronically Form 13H (17 CFR 
249.327) with the Commission, in accordance with the instructions 
contained therein:
    (i) Promptly after first effecting aggregate transactions, or after 
effecting aggregate transactions subsequent to becoming inactive 
pursuant to paragraph (b)(3) of this rule, equal to or greater than the 
identifying activity level;
    (ii) Within 45 days after the end of each full calendar year; and
    (iii) Promptly following the end of a calendar quarter in the event 
that any of the information contained in a Form 13H filing becomes 
inaccurate for any reason.
    (2) Disclosure of large trader status. Each large trader shall 
disclose to the registered broker-dealers effecting transactions on its 
behalf its large trader identification number and each account to which 
it applies. Each large trader also shall disclose its large trader 
identification number to all others with whom it collectively exercises 
investment discretion.
    (3) Filing requirement.
    (i) Compliance by controlling person. A large trader shall not be 
required to separately comply with the requirements of paragraph (b) of 
this section if a person who controls the large trader complies with 
all of the requirements under paragraphs (b)(1), (b)(2), and (b)(4) of 
this section applicable to such large trader with respect to all of its 
accounts.
    (ii) Compliance by controlled person. A large trader shall not be 
required to separately comply with the requirements of paragraph (b) if 
one or more persons controlled by such large trader collectively comply 
with all of the requirements under paragraphs (b)(1), (b)(2), and 
(b)(4) of this section applicable to such large trader with respect to 
all of its accounts.
    (iii) Inactive status. A large trader that has not effected 
aggregate transactions at any time during the previous full calendar 
year in an amount equal to or greater than the identifying activity 
level at any time during the year shall become inactive upon filing a 
Form 13H and thereafter shall not be required to file Form 13H or 
disclose its large trader status unless and until its transactions 
again are equal to or greater than the identifying activity level. A 
large trader that has ceased operations may elect to become inactive by 
filing an amended Form 13H to indicate its terminated status.
    (4) Other information. Upon request, a large trader must promptly 
provide additional descriptive or clarifying information that would 
allow the Commission to further identify the large trader and all 
accounts through which the large trader effects transactions.
    (c) Aggregation.
    (1) Transactions. For the purpose of determining whether a person 
is a large trader, the following shall apply:
    (i) The volume or fair market value of transactions in equity 
securities and the volume or fair market value of the equity securities 
underlying transactions in options on equity securities, purchased and 
sold only, shall be aggregated;
    (ii) The fair market value of transactions in options on a group or 
index of equity securities (or based on the value thereof), purchased 
and sold only, shall be aggregated; and
    (iii) Under no circumstances shall a person be permitted to 
subtract, offset, or net purchase and sale transactions, in equity 
securities or option contracts, and among or within accounts, when 
aggregating the volume or fair market value of transactions effected 
under this rule.
    (2) Accounts. Under no circumstances shall a person be permitted to 
disaggregate accounts to avoid the identification requirements of this 
rule.
    (d) Recordkeeping requirements for broker and dealers.
    (1) Generally. Every registered broker-dealer shall maintain 
records of all information required under paragraphs (d)(2) and (d)(3) 
of this section for all transactions effected directly or indirectly by 
or through:
    (i) An account such broker-dealer carries for a large trader or an 
Unidentified Large Trader,
    (ii) An account over which such broker-dealer exercises investment 
discretion together with a large trader or an Unidentified Large 
Trader, or (iii) if the broker-dealer is a large trader, any 
proprietary or other account over which such broker-dealer exercises 
investment discretion. Additionally, where a non-broker-dealer carries 
an account for a large trader or an Unidentified Large Trader, the 
broker-dealer effecting

[[Page 21487]]

transactions directly or indirectly for such large trader or 
Unidentified Large Trader shall maintain records of all of the 
information required under paragraphs (d)(2) and (d)(3) of this section 
for those transactions.
    (2) Information. The information required to be maintained for all 
transactions shall include:
    (i) The clearing house number of the entity maintaining the 
information and the clearing house numbers of the entities on the 
opposite side of the transaction;
    (ii) Identifying symbol assigned to the security;
    (iii) Date transaction was executed;
    (iv) The number of shares or option contracts traded in each 
specific transaction; whether each transaction was a purchase, sale, or 
short sale; and, if an option contract, whether the transaction was a 
call or put option, an opening purchase or sale, a closing purchase or 
sale, or an exercise or assignment;
    (v) Transaction price;
    (vi) Account number;
    (vii) Identity of the exchange or other market center where the 
transaction was executed.
    (viii) A designation of whether the transaction was effected or 
caused to be effected for the account of a customer of such registered 
broker-dealer, or was a proprietary transaction effected or caused to 
be effected for the account of such broker-dealer;
    (ix) If part or all of an account's transactions at the registered 
broker-dealer have been transferred or otherwise forwarded to one or 
more accounts at another registered broker-dealer, an identifier for 
this type of transaction; and 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 registered broker-dealers, an 
identifier for this type of transaction;
    (x) 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, an identifier for this type of 
transaction; and 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, an 
identifier for this type of transaction;
    (xi) If a transaction was processed by a depository institution, 
the identifier assigned to the account by the depository institution;
    (xii) The time that the transaction was executed; and
    (xiii) The large trader identification number(s) associated with 
the account, unless the account is for an Unidentified Large Trader.
    (3) Information relating to Unidentified Large Traders. With 
respect to transactions effected directly or indirectly by or through 
the account of an Unidentified Large Trader, the information required 
to be maintained for all transactions also shall include: such 
Unidentified Large Trader's name, address, date the account was opened, 
and tax identification number(s).
    (4) Retention. The records and information required to be made and 
kept pursuant to the provisions of this rule shall be kept for such 
periods of time as provided in Sec.  240.17a-4(b).
    (5) Availability of information. The records and information 
required to be made and kept pursuant to the provisions of this rule 
shall be available on the morning after the day the transactions were 
effected (including Saturdays and holidays).
    (e) Reporting requirements for brokers and dealers. Upon the 
request of the Commission, every registered broker-dealer who is itself 
a large trader, exercises investment discretion over an account 
together with a large trader or an Unidentified Large Trader, or 
carries an account for a large trader or an Unidentified Large Trader 
shall electronically report to the Commission, using the infrastructure 
supporting 17 CFR 240.17a-25, in machine-readable form and in 
accordance with instructions issued by the Commission, all information 
required under paragraphs (d)(2) and (d)(3) of this section for all 
transactions effected directly or indirectly by or through accounts 
carried by such broker-dealer for large traders and Unidentified Large 
Traders, equal to or greater than the reporting activity level. 
Additionally, where a non-broker-dealer carries an account for a large 
trader or an Unidentified Large Trader, the broker-dealer effecting 
such transactions directly or indirectly for a large trader shall 
electronically report using the infrastructure supporting 17 CFR 
240.17a-25, in machine-readable form and in accordance with 
instructions issued by the Commission, all information required under 
paragraphs (d)(2) and (d)(3) of this section for such transactions 
equal to or greater than the reporting activity level. Such reports 
shall be submitted to the Commission before the close of business on 
the day specified in the request for such transaction information.
    (f) Monitoring safe harbor. For the purposes of this rule, a 
registered broker-dealer who either is a large trader, exercises 
investment discretion over an account together with a large trader or 
an Unidentified Large Trader, carries an account for a large trader or 
an Unidentified Large Trader, or effects transactions directly or 
indirectly for a large trader where a non-broker-dealer carries the 
account shall not be deemed to know or have reason to know that a 
person is a large trader if it establishes policies and procedures 
reasonably designed to assure compliance with the identification 
requirements of this rule and does not have actual knowledge that a 
person is a large trader. Policies and procedures shall be deemed to 
satisfy this requirement if they include:
    (1) Systems reasonably designed to detect and identify Unidentified 
Large Traders based upon transactions effected through an account or a 
group of accounts considering account name, tax identification number, 
or other information readily available to such broker-dealer; and
    (2) Systems reasonably designed to inform Unidentified Large 
Traders of their obligations to file Form 13H and disclose large trader 
status under this rule.
    (g) Exemptions. Upon written application or upon its own motion, 
the Commission may by order exempt, upon specified terms and conditions 
or for stated periods, any person or class of persons or any 
transaction or class of transactions from the provisions of this rule 
to the extent that such exemption is consistent with the purposes of 
the Securities Exchange Act.

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

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

    Authority: 15 U.S.C. 78a, et seq. and 7201 et seq.; and 18 
U.S.C. 1350, unless otherwise noted.
* * * * *
    4. Add Sec.  249.327 to read as follows:


Sec.  249.327  Form 13H Information required on large traders pursuant 
to Section 13(h) of the Securities Exchange Act of 1934 and rules 
thereunder.

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

    Note:  The text of Form 13H does not, and this amendment will 
not, appear in the Code of Federal Regulations.

BILLING CODE 8011-01-P

[[Page 21488]]

[GRAPHIC] [TIFF OMITTED] TP23AP10.031


[[Page 21489]]


[GRAPHIC] [TIFF OMITTED] TP23AP10.032


[[Page 21490]]


[GRAPHIC] [TIFF OMITTED] TP23AP10.033


[[Page 21491]]


[GRAPHIC] [TIFF OMITTED] TP23AP10.034


[[Page 21492]]


[GRAPHIC] [TIFF OMITTED] TP23AP10.035


[[Page 21493]]


[GRAPHIC] [TIFF OMITTED] TP23AP10.036


[[Page 21494]]


[GRAPHIC] [TIFF OMITTED] TP23AP10.037


[[Page 21495]]


[GRAPHIC] [TIFF OMITTED] TP23AP10.038


[[Page 21496]]


[GRAPHIC] [TIFF OMITTED] TP23AP10.039


[[Page 21497]]


[GRAPHIC] [TIFF OMITTED] TP23AP10.040


[[Page 21498]]


[GRAPHIC] [TIFF OMITTED] TP23AP10.041

* * * * *

    By the Commission.

    Dated: April 14, 2010.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-9025 Filed 4-22-10; 8:45 am]
BILLING CODE 8011-01-C