[Federal Register Volume 76, Number 149 (Wednesday, August 3, 2011)]
[Rules and Regulations]
[Pages 46960-47007]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-19419]



[[Page 46959]]

Vol. 76

Wednesday,

No. 149

August 3, 2011

Part III





Securities and Exchange Commission





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17 CFR Parts 240 and 249





Large Trader Reporting; Final Rule

  Federal Register / Vol. 76 , No. 149 / Wednesday, August 3, 2011 / 
Rules and Regulations  

[[Page 46960]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR PARTS 240 and 249

[Release No. 34-64976; File No. S7-10-10]
RIN 3235-AK55


Large Trader Reporting

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
adopting new Rule 13h-1 and Form 13H under Section 13(h) of the 
Securities Exchange Act of 1934 (``Exchange Act'') to assist the 
Commission in both identifying, and obtaining trading information on, 
market participants that conduct a substantial amount of trading 
activity, as measured by volume or market value, in the U.S. securities 
markets. Rule 13h-1 will require a ``large trader,'' defined as a 
person whose transactions in NMS securities equal or exceed 2 million 
shares or $20 million during any calendar day, or 20 million shares or 
$200 million during any calendar month, to identify itself to the 
Commission and make certain disclosures to the Commission on Form 13H. 
Upon receipt of Form 13H, the Commission will assign to each large 
trader an identification number that will uniquely and uniformly 
identify the trader, which the large trader must then provide to its 
registered broker-dealers. Such registered broker-dealers will then be 
required to maintain records of two additional data elements in 
connection with transactions effected through accounts of such large 
traders (the large trader identification number, and the time 
transactions in the account are executed). In addition, the Commission 
is requiring that such broker-dealers report large trader transaction 
information to the Commission upon request through the Electronic Blue 
Sheets systems currently used by broker-dealers for reporting trade 
information. Finally, certain registered broker-dealers subject to the 
Rule will be required to perform limited monitoring of their customers' 
accounts for activity that may trigger the large trader identification 
requirements of Rule 13h-1.
    The large trader reporting requirements are designed to provide the 
Commission with a valuable source of useful data to support its 
investigative and enforcement activities, as well as 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.

DATES: Effective Date: October 3, 2011.
    Compliance Dates: December 1, 2011 for the requirement on large 
traders to identify to the Commission pursuant to Rule 13h-1(b). April 
30, 2012 for broker-dealers to maintain records, report, and monitor 
large trader activity pursuant to Rule 13h-1(d), (e), and (f).

FOR FURTHER INFORMATION CONTACT: Richard R. Holley III, Assistant 
Director, at (202) 551-5614, Christopher W. Chow, Special Counsel, at 
(202) 551-5622, Gary M. Rubin, Attorney, at (202) 551-5669, or Kathleen 
Gray, Attorney, at (202) 551-5305, Division of Trading and Markets, 
Securities and Exchange Commission, 100 F Street, NE., Washington, DC 
20549-7010.

SUPPLEMENTARY INFORMATION

Table of Contents

I. Introduction
II. Background
    A. The Market Reform Act
    B. Rule 17a-25 and the Enhanced EBS System
    C. The Need for Large Trader Reporting
    D. Relation to Consolidated Audit Trail Proposal
III. Description of Adopted Rule and Form
    A. Large Traders
    1. Large Trader Status
    a. Who should register as a large trader?
    i. Persons Who Exercise Investment Discretion
    ii. Parent Company Level Registration
    (a) Use of LTID Suffixes
    (b) Control and Minority-Owned Entities
    b. Identifying Activity Level
    c. Voluntary Registration
    2. Duties of a Large Trader
    a. File Form 13H with the Commission
    i. Initial filings--who must file?
    ii. Annual Filings
    iii. Amended Filings
    iv. Inactive Status
    v. Reactivated Status
    vi. Termination Filings
    b. Self-Identification to Broker-Dealers
    3. Overview of Form 13H
    a. Item 1
    b. Item 2
    c. Item 3
    d. Item 4
    e. Item 5
    f. Item 6
    g. Confidentiality
    B. Broker-Dealers: Recordkeeping, Reporting, and Monitoring
    1. Recordkeeping Requirements
    2. Reporting Requirements
    3. Monitoring Requirements
    C. Foreign Entities
    D. Three Specific Factors Considered by the Commission Pursuant 
to Section 13(h) of the Exchange Act
    1. Existing Reporting Systems
    2. Costs Associated With Maintaining and Reporting Large Trader 
Transaction Data
    3. Relationship Between U.S. and International Securities 
Markets
    E. Implementation and Compliance Dates, Exemptive Authority
IV. Paperwork Reduction Act
    A. Summary of Collection of Information
    B. Use of Information
    C. Respondents
    1. Number of Large Traders
    2. Number of Broker-Dealers Affected
    D. Total Initial and Annual Burdens
    1. Burden on Large Traders
    a. Duties of Large Traders
    b. Initial and Annual Burdens
    2. Burden on Registered Broker-Dealers
    a. Recordkeeping
    b. Reporting
    c. Monitoring
    d. Total Burden
    E. Collection of Information is Mandatory
    F. Confidentiality
    G. Record Retention Period
V. Consideration of Costs and Benefits
    A. Benefits
    B. Costs
    1. Large Traders
    2. Registered Broker-Dealers
    a. Recordkeeping
    b. Reporting
    c. Monitoring
VI. Consideration of Burden on Competition, and Promotion of 
Efficiency, Competition, and Capital Formation
    A. Competition
    B. Capital Formation
    C. Efficiency
VII. Regulatory Flexibility Act Certification
VIII. Statutory Authority
IX. Text of the Amendments

I. Introduction

    The Commission's ability to analyze market movements and 
investigate the causes of market events in an expeditious manner, as 
well as efficiently conduct investigations of regulated entities and 
bring and prosecute enforcement matters, is influenced greatly by its 
ability to promptly and efficiently identify significant market 
participants across equities and options markets and collect uniform 
data on their trading activity. Though the large trader rule was 
proposed before the market events of May 6, 2010, that incident has 
emphasized the importance of enhancing the Commission's ability to 
quickly and accurately analyze and investigate major market events, and 
has highlighted the need for an efficient and effective mechanism for 
gathering data on the most active market participants.\1\

[[Page 46961]]

The large trader reporting requirements that the Commission is now 
adopting will enhance, in the near term, the Commission's ability to 
identify, and collect information on the trading activity of, the most 
significant participants in the U.S. markets.\2\
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    \1\ On May 6, 2010, the prices of many U.S.-based equity 
products experienced an extraordinarily rapid decline and recovery. 
See Findings Regarding the Market Events of May 6, 2010, Report of 
the Staffs of the CFTC and SEC to the Joint Advisory Committee on 
Emerging Regulatory Issues at http://www.sec.gov/news/studies/2010/marketevents-report.pdf. See also Preliminary Findings Regarding the 
Market Events of May 6, 2010, Report of the Staffs of the CFTC and 
SEC to the Joint Advisory Committee on Emerging Regulatory Issues at 
http://www.sec.gov/sec-cftc-prelimreport.pdf.
    \2\ Longer term, the Commission expects the consolidated audit 
trail proposal, if adopted, to further enhance access by the 
Commission and self-regulatory organizations to order and trade data 
from all market participants. See Securities Exchange Act Release 
No. 62174 (May 26, 2010), 75 FR 32556 (June 8, 2010) (proposed 
Consolidated Audit Trail) (File No. S7-11-10) (``CAT Proposal''). As 
discussed further below, the aspects of the large trader reporting 
rule that enable the collection of information on the identity of 
large traders, including a large trader identification number, would 
not be replicated or superseded by the consolidated audit trail and 
would remain as a key tool in the Commission's oversight of the 
markets for the long term.
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    On April 23, 2010, Proposed Rule 13h-1 was published for public 
comment in the Federal Register.\3\ The Commission received 87 comment 
letters on the proposal from investment advisers, broker-dealers, 
institutional and individual investors, industry trade groups, and 
other market participants.\4\ Commenters generally supported the goals 
of the proposal. As further discussed below, however, some commenters 
expressed concern about certain aspects of the proposal and recommended 
that the proposal be amended or clarified in certain respects. Some 
commenters also expressed concern with the proposed rule in light of 
the separate proposal to establish a consolidated audit trail.\5\
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    \3\ See Securities Exchange Act Release No. 61908 (April 14, 
2010), 75 FR 21456 (April 23, 2010) (File No. S7-10-10) (``Proposing 
Release'').
    \4\ Copies of comments received on the proposal are available on 
the Commission's Web site at http://www.sec.gov/comments/s7-10-10/s71010.shtml.
    \5\ See CAT Proposal, supra note 2.
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    After careful review and consideration of the comment letters, the 
Commission is adopting Rule 13h-1 (the ``Rule'') and Form 13H (the 
``Form'') with certain modifications, discussed below, to address 
concerns expressed by some commenters.

II. Background

    The Commission is in the process of conducting a broad and critical 
look at U.S. market structure in light of the rapid development in 
trading technology and strategies. The Commission has proposed several 
rulemakings, including this rulemaking, to address potential discrete 
issues in the current market structure.\6\ In addition, last year the 
Commission published a concept release on equity market structure 
designed to further the Commission's broad review of whether its rules 
have kept pace with, among other things, changes in trading technology 
and practices.\7\
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    \6\ See, e.g., Securities Exchange Act Release Nos. 60684 
(September 18, 2009), 74 FR 48632 (September 23, 2009) (proposal to 
eliminate flash order exception from Rule 602 of Regulation NMS) 
(File No. S7-21-09); 60997 (November 13, 2009), 74 FR 61208 
(November 23, 2009) (proposal to regulate non-public trading 
interest) (File No. S7-27-09); 63241 (November 3, 2010), 75 FR 69792 
(November 15, 2010) (File No. S7-03-10) (adopting Rule 15c3-5 under 
the Exchange Act addressing risk management controls for brokers or 
dealers with market access); and CAT Proposal, supra note 2.
    \7\ See Securities Exchange Act Release No. 61358 (January 14, 
2010), 75 FR 3594 (January 21, 2010) (File No. S7-02-10).
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    The Commission's ongoing review of market structure comes at a time 
when U.S. securities markets are experiencing a dynamic transformation, 
reflecting a decades-long evolution from a market structure with 
primarily manual trading to a market structure with primarily automated 
trading. Electronic trading allows ever-increasing volumes of 
securities transactions to take place across an expanding multitude of 
trading systems that together constitute the U.S. national market 
system. Competition among markets has facilitated the ability of large 
institutional and other professional market participants to employ 
sophisticated trading methods to trade electronically on multiple 
venues simultaneously in huge volumes with great speed.\8\
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    \8\ Market analysts have offered a wide range of estimates for 
the level of activity attributable to one category of large 
traders--high frequency traders--but these estimates typically 
exceed 50% of total volume. See, e.g., Preliminary Findings 
Regarding the Market Events of May 6, 2010, Report of the Staffs of 
the CFTC and SEC to the Joint Advisory Committee on Emerging 
Regulatory Issues, May 18, 2010, at Appendix A-11 (``Estimates of 
HFT volume in the equity markets vary widely, though they often are 
50 percent of total volume or higher.''). See also, e.g., 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.''); and 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.
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    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 \9\ to establish large trader 
reporting requirements. Large trader reporting requirements will 
provide the Commission with a valuable source of useful data that will 
greatly enhance the Commission's ability to identify large market 
participants, and collect and analyze information on their trading 
activity.
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    \9\ 15 U.S.C. 78m(h), as adopted by the Market Reform Act of 
1990 (``Market Reform Act''), PL 101-432 (HR 3657), October 16, 
1990.
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    Currently, to support its regulatory and enforcement activities, 
the Commission collects transaction data from registered broker-dealers 
through the Electronic Blue Sheets (``EBS'') system.\10\ The EBS system 
generally is used to analyze trading in a small sample of securities 
over a limited period of time.\11\ However, the EBS system lacks two 
important data elements that limit its usefulness when reconstructing 
market activity: Time of execution for the order and a uniform 
identifier to identify the participant that effected the trade.\12\ In 
addition, EBS does not require, as is contemplated by the large trader 
reporting system outlined by Section 13(h)(2) of the Exchange Act,\13\ 
that transaction data be available on a next-day basis, which can delay 
the Commission's ability to promptly collect and begin to analyze 
transaction data following a market event. The Commission's adoption 
today of Rule 13h-1 and Form 13H is designed to address certain of 
these limitations of EBS.
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    \10\ See 17 CFR 240.17a-25 (Electronic Submission of Securities 
Transaction Information by Exchange Members, Brokers, and Dealers).
    \11\ The difficulties in collecting trading data for analysis 
are reflected in the Commission's preliminary report on the events 
of May 6, 2010. See Preliminary Findings Regarding the Market Events 
of May 6, 2010, Report of the Staffs of the CFTC and SEC to the 
Joint Advisory Committee on Emerging Regulatory Issues, May 18, 
2010, at 1 (``The reconstruction of even a few hours of trading 
during an extremely active trading day in markets as broad and 
complex as ours--involving thousands of products, millions of trades 
and hundreds of millions of data points--is an enormous undertaking. 
Although trading now occurs in microseconds, the framework and 
processes for creating, formatting, and collecting data across 
various types of market participants, products and trading venues is 
neither standardized nor fully automated. Once collected, this data 
must be carefully validated and analyzed.'')
    \12\ 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 14, at 48.
    \13\ See 15 U.S.C. 78m(h)(2) (``* * * records shall be available 
for reporting to the Commission * * * on the morning of the day 
following the day the transactions were effected * * *.'').
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A. The Market Reform Act

    Following declines in the U.S. securities markets in October 1987 
and

[[Page 46962]]

October 1989, Congress recognized that the Commission's ability to 
analyze the causes of a market crisis was impeded by its lack of 
authority to gather trading information.\14\ 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.\15\
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    \14\ 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. Rep. No. 524, 101st Cong. 2d Sess. 
(June 5, 1990) (reporting H.R. 3657) (``House Report'').
    \15\ See Market Reform Act, supra note 9.
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    The Market Reform Act authorizes the Commission to require large 
traders to self-identify to the Commission.\16\ In addition, the Market 
Reform Act authorizes the Commission to collect from registered brokers 
or dealers information on the trading activity of large traders.\17\ In 
particular, the Commission is authorized to require every registered 
broker or 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.\18\
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    \16\ 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 ``identifying activity level'' is set 
forth in paragraph (a)(7) of new Rule 13h-1.
    \17\ See Senate Report, supra note 14, 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 do not identify the large trader in a uniform manner on 
an inter-market basis. Accordingly, the Commission is not presently 
able to utilize existing SRO audit trail data to accomplish the 
objectives of the Market Reform Act.
    \18\ 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 ``reporting activity level'' is set 
forth in paragraph (a)(8) of new Rule 13h-1.
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B. Rule 17a-25 and the Enhanced EBS System

    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.\19\ 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.\20\ 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 
broker-dealers to supply three additional data elements (beyond what 
was required under Exchange Act Rules 17a-3 and 17a-4)--namely, prime 
brokerage identifiers,\21\ average price account identifiers,\22\ and 
depository institution identifiers \23\--to assist the Commission in 
aggregating securities transactions by entities trading through 
multiple accounts at more than one broker-dealer.\24\ Finally, the rule 
requires broker-dealers to update their contact person information to 
provide the Commission with up-to-date information necessary for the

[[Page 46963]]

Commission to direct EBS requests to the appropriate staff.\25\
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    \19\ See Securities Exchange Act Release No. 44494 (June 29, 
2001), 66 FR 35836 (July 9, 2001) (S7-12-00) (final rulemaking) 
(``Rule 17a-25 Release''); and 42741 (May 2, 2000), 65 FR 26534 (May 
8, 2000) (proposed rulemaking) (``Rule 17a-25 Proposing Release''). 
In the late 1980s, the Commission and the SROs worked together to 
develop and implement a system with a uniform electronic format, 
commonly known as the EBS system, to replace the process by which 
the Commission would request and collect securities trading records 
from broker-dealers through mailed questionnaires (known as ``blue 
sheets''). See Rule 17a-25 Proposing Release, 65 FR at 26534-35.
    In the 1990s, the Commission twice proposed to use its authority 
under Section 13(h) of the Exchange Act to establish a large trader 
reporting system; neither system was adopted. In 1991, the 
Commission proposed a large trader reporting system that would have 
required large traders to disclose to the Commission their accounts 
and affiliations, and would have imposed recordkeeping and reporting 
requirements on broker-dealers with respect to the activity of their 
large trader customers. See Securities Exchange Act Release No. 
29593 (August 22, 1991), 56 FR 42550 (August 28, 1991) (S7-24-91) 
(``1991 Proposal''). The 1991 proposal included 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, 56 
FR at 42551. Commenters expressed concerns about the initial 
proposal, including about the definition of large trader, the 
identifying activity level, the duty to supervise compliance, its 
costs, as well as various technical aspects of reporting. See 
Securities Exchange Act Release No. 33608 (February 9, 1994), 59 FR 
7917 (February 17, 1994) (S7-24-91) (``1994 Reproposal''). In 1994, 
the Commission again proposed a large trader reporting system which, 
among other things, included an increased ``identifying activity 
level'' of aggregate transactions in publicly traded securities 
effected during a calendar day where the account is located that are 
equal to or greater than the lesser of 200,000 shares and fair 
market value of $2,000,000 or fair market value of $10,000,000. See 
1994 Reproposal.
    \20\ 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.
    \21\ 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 Rule 17a-25 Release, supra 
note 19, 66 FR at 35838.
    \22\ 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 Rule 17a-25 Release, supra note 19, 66 FR at 35838-39.
    \23\ 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 Rule 17a-25 
Release, supra note 19, 66 FR at 35839.
    \24\ See 17 CFR 240.17a-25(b).
    \25\ 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 Rule 17a-25 Release, supra note 19, 66 FR 
at 35839.
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C. The Need for Large Trader Reporting

    While Rule 17a-25 enhanced the Commission's EBS system and improved 
the Commission's ability to obtain electronic transaction records, it 
is insufficient to accomplish the objectives of Section 13(h) of the 
Exchange Act and is inadequate with respect to the Commission's efforts 
to monitor the impact of large trader activity on the securities 
markets.\26\ The limitations of the current EBS system also inhibit the 
usefulness of EBS data in the conduct of the Commission's investigative 
and enforcement activities.
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    \26\ See 15 U.S.C. 78m(h)(1).
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    Most importantly, the data gathered by the EBS system does not 
include information on the time of the trade or the identity of the 
trader.\27\ While the Commission may be able to use price as a proxy 
for execution time when reconstructing trading history in a particular 
security when, in limited cases, the trading therein is characterized 
by a generally unidirectional trend in price, such analysis does not 
necessarily produce accurate results, is resource intensive, and 
hinders the Commission's ability to promptly analyze data.\28\ Further, 
information to identify each large trader in a uniform manner across 
markets is necessary to permit the Commission to fully track and 
analyze large trader activity, especially with respect to large traders 
that trade through multiple accounts at multiple broker-dealers or 
trade using direct market access arrangements.\29\
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    \27\ As noted above, the Commission has proposed 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. See CAT 
Proposal, supra note 2. The large trader reporting requirements we 
are adopting today are designed to address the near-term need for 
access to more information about large traders and their activities.
    \28\ In addition, Rule 17a-25 does not require EBS data to be 
available for reporting to the Commission on a next-day basis, and 
therefore the Commission may face delays when obtaining transaction 
data.
    \29\ The Commission has separately adopted a rule that addresses 
direct market access to exchanges and alternative trading systems 
(``ATSs''). See Securities and Exchange Act Release Nos. 63241 
(November 3, 2010), 75 FR 69792 (November 15, 2010) (File No. S7-03-
10) (final rule) and 61379 (January 26, 2010), 75 FR 4713 (January 
29, 2010) (proposed rule).
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    The Commission believes that the Rule 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 is typically estimated at 50% or higher of 
total volume.\30\ The large trader reporting requirements will provide 
the Commission a mechanism for obtaining the information necessary to 
reliably identify the most significant of these market participants and 
promptly and efficiently obtain information on their trading on a 
market-wide basis.
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    \30\ See supra note 8 (discussing analyst estimates of high 
frequency trader activity).
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    As the events of May 6, 2010 demonstrated, the reconstruction of 
trading activity during an extremely active trading day in our high-
speed, diverse, and complex markets can involve an enormous undertaking 
to collect uniform data and analyze thousands of products, millions of 
trades, and hundreds of millions (and perhaps even billions) of data 
points.\31\ While the large trader reporting requirements will not be a 
panacea for the challenges facing the Commission in its oversight of 
the markets, it represents an important enhancement to the Commission's 
capabilities to uniformly identify large traders and quickly obtain 
information on their trading activity in a manner that can be 
implemented expeditiously by leveraging an existing reporting system.
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    \31\ See supra note 11 (citing from the Report of the Staffs of 
the CFTC and SEC to the Joint Advisory Committee on Emerging 
Regulatory Issues, May 18, 2010).
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    This release first gives a general description of Rule 13h-1 as 
adopted and then discusses the specific provisions of the Rule and the 
accompanying Form 13H on which large traders will self-identify to the 
Commission. It then discusses the recordkeeping, reporting, and 
monitoring responsibilities applicable to registered broker-dealers 
under the Rule. The release highlights various comments received and 
outlines the modifications made to the Rule and Form 13H from the 
Proposing Release in light of these comments.

D. Relation to Consolidated Audit Trail Proposal

    Separately from this rulemaking, the Commission has also proposed 
to establish a consolidated audit trail for equities and options that 
would capture customer and order event information for most orders in 
NMS securities across all markets, from time of order inception through 
routing, cancellation, modification, or execution.\32\ For the reasons 
described below, the large trader requirements adopted today, while 
important, are much more limited in terms of their scope, objectives, 
and implementation burden than the consolidated audit trail system that 
is still under consideration by the Commission.
---------------------------------------------------------------------------

    \32\ See CAT Proposal, supra note 2.
---------------------------------------------------------------------------

    The recordkeeping and reporting provisions of Rule 13h-1 are based 
substantially on existing Rule 17a-25 and the Commission's current EBS 
system, and therefore can be implemented more expeditiously and at less 
cost than the consolidated audit trail proposal. In particular, the 
large trader reporting requirements would involve an enhancement to the 
existing EBS system for broker-dealers to add two new data fields 
(i.e., LTID and execution time of the trade) and require that 
transaction records be available for reporting on a next-day basis. In 
addition, the large trader reporting requirements would involve a new 
web-based form (Form 13H) that large traders would file and update to 
identify themselves to the Commission. Accordingly, through relatively 
modest steps, the large trader reporting requirements will address the 
Commission's near-term need for access to more information about large 
traders and their trading activities and begin to improve the 
Commission's ability to analyze such information. In contrast, the 
consolidated audit trail, if adopted, would require the development 
over a longer time frame of significant technology systems to collect 
and consolidate more extensive information regarding orders, trades, 
and customers in a uniform manner across all markets and other 
execution venues.
    In addition, key aspects of the large trader reporting requirements 
adopted today are not addressed by, and would continue to be necessary 
upon any adoption of, a consolidated audit trail. In particular, Rule 
13h-1 requires large traders to self-identify to the Commission by 
filing Form 13H, obtain a unique LTID, and provide that LTID to their 
broker-dealers. As noted above, this requirement will assist the 
Commission in efficiently identifying and obtaining trading and other 
information on market participants that conduct a substantial amount of 
trading activity. Further, these requirements are compatible with, 
rather than duplicative of, the Commission's proposed consolidated 
audit trail. Indeed, by incorporating the LTID information into the 
data elements that would be

[[Page 46964]]

reported through the consolidated audit trail, the large trader 
requirements adopted today will ultimately enrich the data that would 
be available for regulatory purposes through the proposed consolidated 
audit trail system.
    The Commission recognizes the concerns of some commenters that 
unnecessary overlap or duplication between large trader reporting 
requirements and a consolidated audit trail could result in additional 
costs and other burdens for market participants.\33\ Although for the 
reasons described above the Commission believes that adoption of the 
large trader rule is appropriate at this time, it expects to take these 
concerns into account in considering the scope and requirements of any 
consolidated audit trail.
---------------------------------------------------------------------------

    \33\ See, e.g., Managed Funds Association Letter and Wellington 
Management Letter.
---------------------------------------------------------------------------

III. Description of Adopted Rule and Form

    The large trader reporting requirements have two primary 
components: (1) Registration of large traders with the Commission; and 
(2) recordkeeping, reporting, and monitoring duties imposed on 
registered broker-dealers that service large trader customers. First, 
large traders must register with the Commission by filing and 
periodically updating Form 13H on which they will provide contact 
information and report general information concerning their business, 
regulatory status, affiliates, governance, and broker-dealers. Upon 
receipt of an initial Form 13H, the Commission will assign and issue to 
a large trader a unique LTID. The large trader must disclose its LTID 
to all of its broker-dealers and must highlight to each such broker-
dealer all accounts to which the LTID applies. Second, registered 
broker-dealers must: (1) Maintain specified records of transactions 
effected by or through accounts of large traders as well as 
Unidentified Large Traders; \34\ (2) electronically report all 
transactions by such persons to the Commission upon request utilizing 
the existing EBS infrastructure; and (3) perform a limited monitoring 
function to promote awareness of and foster compliance with the Rule. 
The specific requirements applicable to large traders and registered 
broker-dealers are discussed in detail below.
---------------------------------------------------------------------------

    \34\ See new Rule 13h-1(a)(9) (defining the term ``Unidentified 
Large Trader'') and discussion infra at Section III.B.
---------------------------------------------------------------------------

A. Large Traders

1. Large Trader Status
    Rule 13h-1(a)(1) defines a ``large trader'' as ``any person that: 
(i) 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; or (ii) voluntarily registers as a 
large trader by filing electronically with the Commission Form 13H.'' 
This definition is substantially the same as the proposed definition of 
the term but, as discussed below, takes into account comments received 
on that proposed definition.
a. Who should register as a large trader?
    The definition of large trader is designed to focus on the ultimate 
parent company of an entity or entities that employ or otherwise 
control the individuals that exercise investment discretion. 
Accordingly, the definition of large trader, in conjunction with the 
provision that allows the parent company to comply with the self-
identification requirement on behalf of its subsidiaries,\35\ is 
intended to allow the Commission to gather information about the 
primary institutions that conduct a large trading business while at the 
same time mitigating the burden of the Rule by focusing the filing 
requirement on persons and entities that control large traders.
---------------------------------------------------------------------------

    \35\ The rule, however, also permits compliance by a controlled 
person. See new Rule 13h-1(b)(3)(ii), which is discussed infra at 
Section III.A.2.a.0.
---------------------------------------------------------------------------

    The Commission received several comments relating to the proposed 
scope of the term large trader.\36\ The various components of the 
definition of large trader, and the comments received about them, are 
discussed below. In addition, one commenter questioned whether the Rule 
would violate the Fourth and Fifth Amendments of the U.S. 
Constitution.\37\ The Commission believes that the Rule does not 
infringe upon these rights.\38\
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    \36\ See, e.g., SIFMA Letter at 7; American Benefits Council 
Letter at 2-3; and Financial Engines Letter at 2-4.
    \37\ See Harris Letter.
    \38\ The United States Court of Appeals for the District of 
Columbia Circuit has found that disclosure to the Commission does 
not constitute a regulatory taking. See Full Value Advisors LLC v. 
SEC, 633 F.3d 1101, 2011 WL 339210 (DC Cir. February 4, 2011). The 
Commission believes that the same reasoning applies in the case of 
Rule 13h-1. The Commission also, to the extent permissible under the 
federal securities laws, holds and treats as confidential certain 
legally-protected proprietary information that it receives in 
connection with its regulatory activities. Further, the Commission 
believes that Rule 13h-1 is an appropriate exercise of its 
regulatory authority and does not violate the Fourth Amendment.
---------------------------------------------------------------------------

i. Persons Who Exercise Investment Discretion
    A large trader is any person that ``directly or indirectly, 
including through other persons controlled by such person, exercises 
investment discretion over one or more accounts * * *'' \39\ Rule 13h-
1(a)(4) provides that the term ``investment discretion'' has ``the same 
meaning as in Section 3(a)(35) of the Securities Exchange Act of 
1934.'' One commenter objected to this definition, asserting that the 
definition under the Exchange Act is ``fraught with ambiguities'' and 
therefore would be unhelpful in ``deciphering investment 
relationships.'' \40\ The commenter offered no alternative definition, 
but asked for clarification regarding what is meant by ``exercising 
investment discretion.'' The definition of ``investment discretion'' in 
Section 3(a)(35) of the Exchange Act encompasses a person who 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 * * *.'' \41\ 
Rule 13h-1(a)(4) further specifies that a ``person's employees who 
exercise investment discretion within the scope of their employment are 
deemed to do so on behalf of such person.'' To the extent that an 
entity employs a natural person that individually, or collectively with 
others, meets the definition of a ``large trader,'' then, for purposes 
of Rule 13h-1, the entity that controls that person or those persons 
would be a large trader.
---------------------------------------------------------------------------

    \39\ See new Rule 13h-1(a)(1).
    \40\ See SIFMA Letter at 17, n.23.
    \41\ 15 U.S.C. 78c(a)(35). See also Rule 13h-1(a)(3) (defining 
control the term ``control'' to mean ``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. For purposes of this rule 
only, 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'').
---------------------------------------------------------------------------

    One commenter recommended excluding regulated investment

[[Page 46965]]

companies and pension fund managers from the definition of large 
trader.\42\ The Commission notes that an investment company is a legal 
structure for the management of pooled assets by an investment adviser. 
As such, the investment adviser exercises investment discretion over 
the assets of the investment company. Accordingly, the Commission 
believes that the requested exclusion for regulated investment 
companies is not necessary because an investment adviser to an 
investment company, like a pension manager to a pension fund, is the 
entity that exercises investment discretion either solely or in 
connection with other investment managers. The large trader reporting 
requirements are designed to collect information about important market 
participants that exercise investment discretion. Accordingly, the 
Commission is not adopting the suggested exclusion for pension fund 
managers because it would undermine the purposes of the large trader 
reporting requirements. The Commission is adopting the definition of 
investment discretion substantially as proposed.
---------------------------------------------------------------------------

    \42\ See SIFMA Letter at 18.
---------------------------------------------------------------------------

ii. Parent Company Level Registration
    As noted above, the definition of large trader is designed to focus 
on the ultimate parent company of an entity or entities that employ or 
otherwise control the individuals that exercise investment discretion. 
A number of commenters recommended limiting the application of the Rule 
to include as large traders only those entities that directly exercise 
investment discretion.\43\ These commenters also raised a number of 
concerns with the proposal's focus on placing the filing requirement at 
the parent company level.
---------------------------------------------------------------------------

    \43\ See Financial Information Forum Letter at 5; Managed Funds 
Association Letter at 3; T. Rowe Price Letter at 2; and SIFMA Letter 
at 9.
---------------------------------------------------------------------------

    After considering the comments received, the Commission has 
determined to adopt the scope of the large trader identification 
requirement substantially as proposed. While the Rule's broader focus 
on identification at the parent company level may provide less detailed 
information on the activity of individual traders within a large trader 
complex,\44\ it nevertheless will facilitate the Commission's ability 
to collect data on the full extent of trading by persons and entities 
under common control. The Commission also notes that, in addition to 
promoting the Commission's regulatory and enforcement responsibilities, 
the large trader reporting requirements also are intended to facilitate 
the reconstruction of market events using transaction data. To that 
end, parent company-level aggregation should enhance the Commission's 
ability to reconstruct trading by significant market participants by 
providing the Commission with access to a broad set of useful data.
---------------------------------------------------------------------------

    \44\ For purposes of the large trader reporting rule, references 
to the ``large trader complex'' is intended to refer to all entities 
under the control of the large trader parent company.
---------------------------------------------------------------------------

    Some commenters noted that parent companies of financial services 
organizations often do not take part in the day-to-day activities of 
their subsidiaries and, as a result, employees of those parent 
companies are not knowledgeable about the trading activities of their 
subsidiaries and would not be able, for example, to readily respond to 
any follow-up questions from the Commission.\45\ The Commission notes 
that, to determine whether a parent company is a large trader, the 
aggregate trading activity of all entities controlled by the parent 
company must be collected. Controlled entities need produce only 
aggregated statistics in summary form, which would be added together at 
the parent level to determine whether the identifying activity level 
has been met. If it has, then the parent company is a large trader and 
will be required to provide information about itself and its 
affiliates, unless all of its affiliates comply on its behalf pursuant 
to Rule 13h-1(b)(3)(ii). Further, the Commission believes that the 
additional identifying information requested on Form 13H could most 
easily be collected by a parent company employee from the entities 
controlled by the parent company. The Commission expects that 
communication of the basic information required by the Form, as well as 
aggregate securities transactions to determine whether the identifying 
activity threshold has been met, between a parent company and the 
entities that it controls should not be burdensome and should not 
require the development of new integrated trading systems. To the 
extent a parent company is unaware of its subsidiaries' aggregate 
transaction levels and other basic identifying information, the 
Commission believes that implementing control systems to capture such 
information will be consistent with appropriate risk management 
considerations.
---------------------------------------------------------------------------

    \45\ See, e.g., Prudential Letter at 3.
---------------------------------------------------------------------------

    One commenter expressed concern that the filing by a parent company 
of a Form 13H on behalf of its subsidiaries may give the impression 
that its firewalls are weak.\46\ The Commission does not believe a 
parent company's duty to determine whether it is a large trader based 
on aggregated statistics that summarize the trading activity of its 
subsidiaries should violate or undermine the effectiveness of existing 
firewalls. The Rule only requires that a parent company aggregate and 
consider daily and monthly share volume and dollar value of certain 
transactions in NMS securities effected by the persons it controls. The 
Rule does not require the disclosure of any particular transaction 
information (e.g., the identity of or additional information on the 
securities bought or sold). Rather, persons need only produce a total 
figure of the relevant transactions for which they exercised investment 
discretion. The parent company would then aggregate together those 
figures when measuring its overall activity against the applicable 
trading activity threshold.
---------------------------------------------------------------------------

    \46\ See Prudential Letter at 3.
---------------------------------------------------------------------------

(a) Use of LTID Suffixes
    Some commenters questioned the utility of the information that 
would be collected if large traders were identified at the parent 
company level, including whether grouping together persons who make 
trading decisions independently of each other would cloud the 
Commission's view when investigating for certain trading behavior, such 
as manipulation.\47\ As an alternative, some commenters suggested that 
the Rule permit, but not compel, identification at the parent company 
level.\48\ Another commenter suggested eliminating the requirement that 
an LTID be affixed to the trades of affiliates that do not 
independently qualify as large traders.\49\ With respect to the concern 
about the Commission's ability to identify trading activity within a 
large trader with more particularity, as discussed further below,\50\ 
Item 4(d) of Form 13H permits a large trader to assign LTID suffixes to 
sub-identify persons, divisions, groups, and entities under its 
control. For example, a large trader may choose to assign a suffix to 
each independent division within the large trader. Use of suffixes to 
identify various sub-groups within a large trader could facilitate a 
large trader's ability to accurately and efficiently track with more 
particularity the trading for which it exercises investment discretion, 
and as a consequence, could facilitate the ability

[[Page 46966]]

of a large trader to respond to any Commission request to further 
identify accounts or disaggregate trading data, as discussed below. To 
the extent large traders utilize LTID suffixes, the need for the 
Commission to contact large traders for assistance in further 
identifying their accounts should be diminished. Accordingly, the 
Commission encourages large traders to utilize LTID suffixes.
---------------------------------------------------------------------------

    \47\ See, e.g., Prudential Letter at 2 and Investment Adviser 
Association Letter at 4.
    \48\ See Investment Company Institute Letter at 6 and Prudential 
Letter at 3.
    \49\ See Investment Adviser Association Letter at 5.
    \50\ See infra Section III.A.3.0.
---------------------------------------------------------------------------

    The Commission notes that, ultimately, the information limitation 
identified by commenters may be addressed by the Commission's separate 
rulemaking for a consolidated audit trail which, if adopted as 
proposed, would require collection of information about the person with 
investment discretion for each order as well as information to identify 
the beneficial owner for each order.\51\ In the meantime, allowing a 
parent company to comply on behalf of related entities should provide 
the Commission with important information at lower cost to the 
industry, by reducing the complexity and burdens of the large trader 
reporting requirements--such as those proposed by the Commission during 
the 1990s--that could have required reporting at multiple levels within 
a control group. At the same time, this provision addresses the 
Commission's near-term need for access to more information about large 
traders and their trading activities, which will enable the Commission 
to more efficiently analyze market events.
---------------------------------------------------------------------------

    \51\ See CAT Proposal, supra note 2, 75 FR at 32572.
---------------------------------------------------------------------------

(b) Control and Minority-Owned Entities
    With respect to which persons under a parent company's control 
should be considered in determining the parent company's large trader 
status, Rule 13h-1(a)(3) defines ``control'' (and 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. For 
purposes of this rule only, 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.''
    One commenter stated that including minority-owned entities would 
be problematic because it may be difficult for a large trader to obtain 
the information from a minority-owned entity that would be necessary 
for it to complete Form 13H.\52\ Furthermore, according to this 
commenter, the minority-owned entity may resist attaching the large 
trader's LTID to its trades.\53\ Another commenter suggested 
attributing to a large trader only the activity of majority-owned 
entities that are actual operating subsidiaries, and not attributing 
the activity of more remote, partially-owned entities.\54\ After 
considering the comments received, the Commission has decided to adopt 
as proposed the definition of control solely for purposes of this Rule. 
In particular, the Commission continues to believe that a minority 
shareholder holding at least 25% of the ownership interests of an 
entity would be in a position to exercise the influence necessary to 
secure that entity's cooperation in facilitating a large trader's 
compliance with the federal securities laws, especially given that all 
that this entails for the controlled entity would be providing its 
registered broker-dealers with the large trader's LTID and the accounts 
to which it applies. In addition, if the controlled entity refuses to 
cooperate, the large trader itself may be able to notify the broker-
dealer of its LTID. The Commission also continues to believe that the 
definition of control is appropriate and will allow the Commission to 
identify, and obtain trading data from, controlled persons for whom a 
large trader is in a position to materially influence the investment 
decisions made by such person.\55\
---------------------------------------------------------------------------

    \52\ See Prudential Letter at 3. The Commission notes that 
proposed Form 13H would have required a large trader to identify its 
accounts and disclose for each account the LTID of any unaffiliated 
large trader with whom it shares investment discretion. As discussed 
below, the Commission has not adopted the provisions in the Form 
relating to the identification of accounts, and, as a consequence, a 
large trader would not need to obtain the LTID of any unaffiliated 
large trader for purposes of completing the Form.
    \53\ See Prudential Letter at 3.
    \54\ See SIFMA Letter at 18.
    \55\ The Commission considered other thresholds for control and 
determined that a 25% threshold would be the appropriate level for 
purposes of new Rule 13h-1. As discussed in the Proposing Release, 
the Commission notes that the definition of control is similar to 
the definition of control contained in Form 1 (Application for 
Registration or Exemption from Registration as a National Securities 
Exchange). See Proposing Release, supra note 3, 75 FR at 24161. 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% or 
more of the voting securities or receive 10% or more of the net 
profits).
---------------------------------------------------------------------------

b. Identifying Activity Level
    Rule 13h-1(a)(7) defines the term ``identifying activity level'' as 
``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.'' One commenter expressly supported these threshold 
levels.\56\ Another commenter recommended increasing the daily 
threshold limit to shares with a fair market value of $100 million 
during any calendar day.\57\ Others advocated increased thresholds, but 
did not identify a particular level or provide empirical support for 
their recommendations.\58\
---------------------------------------------------------------------------

    \56\ See T. Rowe Price Letter at 2.
    \57\ See Financial Engines Letter at 7.
    \58\ See, e.g., Managed Funds Association Letter at 2.
---------------------------------------------------------------------------

    Some commenters thought that the proposed identifying activity 
level would capture infrequent traders, who they believe should not 
attract regulatory interest under a large trader reporting rule.\59\ 
The Commission notes that nothing in Section 13(h) of the Exchange Act 
suggests that the Commission should focus its attention only on those 
large traders that are frequent traders. The statute permits the 
Commission to monitor the impact on the securities markets of 
securities transactions involving a substantial volume or a large fair 
market value or exercise value. While frequency of trading is one 
factor that the Commission considered in defining who is a large 
trader, it was not the only factor. In explaining why it proposed to 
exclude certain transactions, the Commission stated that the proposed 
exclusions were designed to exclude certain small and otherwise 
infrequent traders from the definition of a large trader, but also 
stated: ``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.'' \60\ To the extent that a market 
participant trades only infrequently, but does so in large volume in 
the course of exercising investment discretion, the Commission seeks to 
identify that participant as a

[[Page 46967]]

large trader. Nevertheless, the Commission recognizes the filing burden 
that could be placed on a trader whose activity only on very rare 
occasions meets the identifying activity threshold. These persons may 
be eligible for Inactive Status, a concept which is discussed below.
---------------------------------------------------------------------------

    \59\ See Investment Adviser Association Letter at 10; Howard 
Hughes Medical Institute Letter at 1; Managed Funds Association 
Letter at 2; and SIFMA Letter at 8.
    \60\ See Proposing Release, supra note 3, 75 FR at 21463.
---------------------------------------------------------------------------

    The Commission continues to believe that the identifying activity 
level is appropriate because it will identify large traders that engage 
in a substantial amount of trading activity relative to overall market 
volume--specifically, approximately 0.01% of the daily volume and 
market value of trading in NMS securities.\61\ Moreover, as discussed 
below, Inactive Status is available for large traders whose trading 
activity reaches the identifying activity level infrequently.
---------------------------------------------------------------------------

    \61\ See Proposing Release, supra note 3, 75 FR 21463-64. An 
``NMS security'' is ``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.'' 17 CFR 242.600(b)(46). The term refers generally to 
exchange-listed securities, including equities and options.
---------------------------------------------------------------------------

    Transactions Counted Towards the Identifying Activity Level. As 
proposed, Rule 13h-1(a)(6) defined the term ``transactions'' as ``all 
transactions in NMS securities, including exercises or assignments of 
option contracts,'' except for certain specifically enumerated 
transactions.\62\ To more closely align this definition with the 
aggregation provisions contained in paragraph (c) of the Rule, the 
Commission is adopting a revised definition that provides that the term 
``transaction'' means ``all transactions in NMS securities, excluding 
exercises or assignments of option contracts,'' except for certain 
specifically enumerated transactions.\63\ As noted in the Proposing 
Release, for purposes of the identifying activity level with respect to 
options, only purchases and sales of the options themselves, and not 
transactions in the underlying securities pursuant to exercises or 
assignments of such options, need to be counted. However, for purposes 
of the identifying activity level, the volume and value of options 
purchased or sold would be determined by reference to the securities 
underlying the option.\64\ Thus, the Rule is intended to focus on the 
trading of options and the potential impact of those options positions 
on the underlying markets. By excluding purchases and sales pursuant to 
exercises or assignments, the Rule avoids double-counting towards the 
applicable identification threshold. The revised definition of 
``transaction'' more closely aligns it with the explanation of the 
aggregation provision applicable to options provided in the Proposing 
Release. The Commission believes that the definition as adopted is 
consistent with Section 13(h)(1) of the Exchange Act, and will advance 
its stated goals, including ``monitoring the impact on the securities 
markets of securities transactions involving a substantial volume or a 
large fair market value or exercise value * * *'' \65\
---------------------------------------------------------------------------

    \62\ Specifically, under the proposal, the following would not 
be counted as ``transactions'' for purposes of the proposed Rule: 
(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.
    \63\ As noted in the Proposing Release, the aggregation 
provisions in paragraph (c) are designed to require market 
participants to use a ``gross up'' approach in calculating their 
activity levels. Accordingly, 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. This approach reflects the 
fact that substantial trading activity has the potential to impact 
the market regardless of the trader's net position. See Proposing 
Release, supra note 3, 75 FR at 21464.
    \64\ See id. 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.
    \65\ See 15 U.S.C. 78m(h)(1).
---------------------------------------------------------------------------

    In addition, the Commission received comments on the enumerated 
exclusions from the term ``transaction.'' \66\ As indicated in the 
Proposing Release, the proposed exceptions from the term 
``transaction'' were designed to exclude certain transactions from the 
identifying activity level calculation because they are not effected 
with an intent that is commonly associated with the arm's-length 
trading 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.\67\ One commenter requested that the 
Commission allow registered broker-dealers to include the excluded 
transactions when reporting transaction data to the Commission pursuant 
to Rule 13h-1(e).\68\ The commenter explained that registered broker-
dealers' existing infrastructure may not collect sufficient data to 
allow the broker-dealer to exclude excepted transactions when reporting 
transaction data to the Commission. In response to this comment, the 
Commission is adopting a definition of ``transaction'' in the Rule to 
reflect its limited application, as discussed in the Proposing Release. 
Specifically, to underscore that the enumerated transactions are 
excluded from the definition of transaction only for the purpose of 
determining who is a large trader, the Commission is adopting the 
introductory portion of the second sentence of Rule 13h-1(a)(6) to 
provide that: ``The term transaction or transactions means all 
transactions in NMS securities, including exercises or assignments of 
option contracts. For the sole purpose of determining whether a person 
is a large trader, the following transactions are excluded from this 
definition * * *.'' Accordingly, a person need not count trading 
activity that falls within one of the listed categories of excluded 
transactions when it determines whether it meets the applicable 
identifying activity threshold. However, in response to a Commission 
request for data, a broker-

[[Page 46968]]

dealer must report all transactions that it effected through the 
accounts of a large trader without excluding any transactions listed in 
Rule 13h-1(a)(6).
---------------------------------------------------------------------------

    \66\ See, e.g., American Benefits Council Letter; Financial 
Engines Letter; Howard Hughes Medical Institute Letter; and SIFMA 
Letter.
    \67\ See Proposing Release, supra note 3, 75 FR at 21463 (``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.'')
    \68\ See Financial Information Forum Letter at 3.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission requested comment about 
whether any of the proposed exclusions from the definition of 
transaction should be eliminated or whether any other types of 
transactions should be excluded.\69\ While no commenter recommended 
eliminating any of the excluded transactions, several commenters 
suggested the Commission consider additional exclusions. For example, 
some commenters suggested excluding all or some transactions effected 
on behalf of defined contribution plans.\70\ The Commission does not 
believe that a blanket exclusion for transactions effected on behalf of 
defined contribution plans is warranted because such trades are 
effected through the exercise of investment discretion and are within 
the scope of activity contemplated by the statute. Instead, the 
Commission believes it is appropriate to provide additional guidance 
regarding the application of the Rule to transactions effected on 
behalf of defined contribution plans. As highlighted by commenters, 
investment discretion may be exercised on behalf of defined 
contribution plans differently, depending on the particular structure 
of the plan. For example, in some defined contribution plans, 
participants select their own investments from among the choices 
offered by their employer.\71\ A trustee then effects the transactions 
pursuant to the instructions it receives from the plan participants. 
For purposes of determining who is a large trader, the participants in 
such plans are the ones who exercise investment discretion over the 
transactions that are effected on their behalf. In such plans, the 
Commission does not view the trustee as exercising investment 
discretion over the transactions for purposes of the Rule.\72\ 
Additionally, solely for purposes of determining who is a large trader 
pursuant to Rule 13h-1, the Commission considers an employer to not 
exercise investment discretion merely by establishing investment 
options for its employees. Other types of defined contribution plans 
may be structured differently.\73\
---------------------------------------------------------------------------

    \69\ See Proposing Release, supra note 3, 75 FR at 21472.
    \70\ See Financial Engines Letter at 7 and American Benefits 
Council Letter at 2 (suggesting exempting significant repositioning 
of portfolio balances by very large defined benefit plans; 
investment lineup changes by defined contribution retirement plan 
sponsors; and plan activity in connection with acquisitions and 
divestitures of businesses which may precipitate a large movement of 
participants out of a plan).
    \71\ See American Benefits Council Letter at 2.
    \72\ The Commission expects that few individual defined 
contribution plan participants will effect aggregate transactions 
greater than or equal to the identifying activity level, and the 
Commission therefore expects that generally they will not meet the 
definition of large trader.
    \73\ The Commission notes that, pursuant to Section 13(h)(6) of 
the Exchange Act and new Rule 13h-1, 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 Exchange Act. 
See new Rule 13h-1(g), which is discussed infra at Section III.0.
---------------------------------------------------------------------------

    Another commenter requested clarification that only the trustee of 
a retirement plan, not the plan sponsor and other parties involved in 
plan administration, must self-identify as a large trader.\74\ As 
discussed above, the Rule requires the person who exercises investment 
discretion over a certain level of transactions to identify as the 
large trader, which may be the trustee but would generally not be the 
plan sponsor or administrator if neither exercises investment 
discretion.
---------------------------------------------------------------------------

    \74\ See American Benefits Council Letter at 2-3.
---------------------------------------------------------------------------

    One commenter argued for broadly excluding transactions associated 
with corporate actions, including mergers and acquisitions and other 
purchases of assets, self-tenders, buybacks (including Rule 10b-18 
buybacks), and certain internal corporate actions (such as journals 
between accounts within the same entity where there is no change in the 
beneficial owners).\75\ The commenter also recommended excluding stock 
loans, equity repurchases, and in-kind creations of exchange-traded 
funds (``ETFs''). As discussed below, the Commission agrees that many, 
but not all,\76\ of the additional categories of transactions 
identified by the commenter can be excluded for purposes of determining 
large trader status. Accordingly, the Commission is adopting 
subparagraph (viii) to Rule 13h-1(a)(6), which excludes the following 
additional transactions for purposes of calculating the identifying 
activity level: ``any transaction to effect a business combination, 
including a reclassification, merger, consolidation, or tender offer 
subject to Section 14(d) of the Securities Exchange Act; an issuer 
tender offer or other stock buyback by an issuer; or a stock loan or 
equity repurchase agreement.''
---------------------------------------------------------------------------

    \75\ See SIFMA Letter at 8.
    \76\ For example, the Commission is not making any changes in 
response to the suggestion of one commenter to essentially exempt 
all transactions effected on behalf of organizations dedicated to a 
charitable purpose. See Howard Hughes Medical Institute Letter. See 
also infra text accompanying note 255 and the subsequent discussion.
---------------------------------------------------------------------------

    Consistent with the views outlined in the Proposing Release, the 
Commission believes that these additional categories of transactions 
are effected for materially different reasons than those commonly 
associated with the arm's-length trading of securities in the secondary 
market and the associated exercise of investment discretion. For 
example, transactions to effect a business combination, as well as an 
issuer tender offer or other stock buyback by an issuer, reflect 
fundamental corporate decision-making that involves matters much 
broader than those traditionally associated with trading activity in 
NMS securities. Such transactions are discrete corporate actions to 
effect the acquisition of a business or to manage the extent of the 
distribution of an issuer's securities. Further, stock loan and equity 
repurchase agreements typically are entered into to facilitate short 
sale transactions or as part of a larger financing transaction, and not 
as part of an investment decision traditionally associated with trading 
activity in NMS securities. Accordingly, the Commission believes it 
appropriate to not count these transactions for the purpose of 
determining whether a person meets the identifying activity level 
contained in the definition of large trader.
    For purposes of the identifying activity level for large trader 
reporting, the Commission believes that it is appropriate to count 
transactions effected in the secondary market to assemble, or dispose 
of, securities that are transferred between an ``authorized 
participant'' and an ETF. An authorized participant is a trader that, 
on its own behalf or on behalf of others, presents securities (or other 
assets) to an ETF in order to create ETF shares or receives securities 
(or other assets) from an ETF in connection with the redemption of ETF 
shares. Among other reasons, authorized participants engage in such 
creations and redemptions to take advantage of arbitrage opportunities 
resulting from differences in the market prices of the securities held 
by the ETF and the market prices of the ETF shares. The Commission 
expects that, if authorized participants are large traders, it will be 
useful to monitor their secondary market trading and to be able to 
access records of their trading activity across broker-dealers. 
However, the Commission does not believe that the actual transfer of 
the basket of securities between an authorized participant and an ETF 
should be counted for purposes of large trader reporting. Accordingly, 
the Commission will count toward the

[[Page 46969]]

identifying activity level trading activity in the secondary market 
that relates to the acquisition or disposition of securities in 
connection with, for example, the creation or redemption of ETF shares, 
but not the transfer of such securities between an authorized 
participant and an ETF.\77\
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    \77\ Specifically, then, in connection with creation or 
redemption: (1) Purchases of securities by an authorized participant 
for the purpose of assembling a basket would count toward an 
authorized participant's identifying activity level; (2) transfers 
of those securities by an authorized participant to the ETF would 
not be counted toward the ETF's identifying activity level; (3) 
acquisitions of securities by an authorized participant from the ETF 
would not count toward the authorized participant's identifying 
activity level; and (4) sales of securities by an authorized 
participant into the secondary market would count toward the 
authorized participant's identifying activity level. No transactions 
effected would be counted toward an ETF's identifying activity level 
because the ETF would not be exercising investment discretion by 
creating or redeeming ETF shares.
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c. Voluntary Registration
    One commenter suggested that the Commission allow a person to 
register voluntarily as a large trader as that person nears the 
applicable trading activity threshold in order to reduce its need to 
actively monitor its trading levels.\78\ The Commission agrees with the 
commenter that the ability to voluntarily register will mitigate the 
monitoring burden on market participants who expect to effect 
transactions equal to or greater than the identifying activity level at 
some point in the future. Accordingly, the Commission is adopting: (1) 
A definition of large trader that includes those persons who 
voluntarily register as large traders; and (2) changes to Form 13H to 
require a large trader to indicate in its initial filing with the 
Commission whether it has chosen to voluntarily register. Any such 
person that elects to voluntarily file will be treated as a large 
trader for purposes of the Rule, and will be subject to all of the 
obligations of a large trader under the Rule, notwithstanding the fact 
that the person had not effected the requisite level of transactions at 
the time it registered as a large trader.
---------------------------------------------------------------------------

    \78\ See Investment Company Institute Letter at 7.
---------------------------------------------------------------------------

2. Duties of a Large Trader
    Pursuant to Rule 13h-1, a large trader must self-identify by filing 
Form 13H with the Commission. In addition, a large trader must disclose 
its LTID to the registered broker-dealers effecting transactions on its 
behalf and identify for them each account to which it applies.
a. File Form 13H With the Commission
    Form 13H provides for six types of filings: Initial Filing; Annual 
Filing; Amended Filing; Inactive Status; Termination Filing; and 
Reactivated Status. Each type is discussed below. As reflected in the 
instructions to the Form, large traders must file all Forms 13H through 
EDGAR,\79\ which is being updated to accept these submissions.\80\ 
Accordingly, large traders will need to have or obtain permission to 
access and file through EDGAR, and can obtain the necessary access 
codes, if they do not already have them, by filing a Form ID (Uniform 
Application for Access Codes to File on EDGAR).\81\ Among other things, 
large traders will be given a Central Index Key (``CIK'') number that 
uniquely identifies each filer and allows them to submit filings 
through EDGAR. While Form 13H filings will be processed through the 
Commission's EDGAR system, once filed, the Form 13H filings will not be 
accessible through the Commission's Web site or otherwise be publicly 
available.
---------------------------------------------------------------------------

    \79\ One commenter requested that the Commission not require 
filing of Forms 13H until it has an electronic filing system in 
place because, while the rule requires electronic filing, the 
Commission noted the possibility in the Proposing Release that paper 
filings might be required for a limited period of time. See T. Rowe 
Price Letter at 3. See also Proposing Release, supra note 3, 75 FR 
at 21465, n. 80. The Commission shares the concern expressed by the 
commenter. Form 13H will be a web-based application and will be 
submitted through EDGAR, a secure web interface, on the applicable 
compliance date.
    \80\ See generally 17 CFR 232 (Regulation S-T--General Rules and 
Regulations for Electronic Filings).
    \81\ An applicant must file Form ID in electronic format via the 
Commission's EDGAR Filer Management website. See 17 CFR 232 
(Regulation S-T) and the EDGAR Filer Manual for instructions on how 
to file electronically, including how to use the access codes.
---------------------------------------------------------------------------

i. Initial filings--who must file?
    Except as provided below, each large trader must file a Form 13H 
``Initial Filing'' to identify itself to the Commission.\82\ In complex 
organizations, more than one related entity can qualify as a large 
trader. Consider the following example:
---------------------------------------------------------------------------

    \82\ See new Rule 13h-1(b)(1).
---------------------------------------------------------------------------

     Holding Company owns a 100% ownership interest in Broker-
Dealer and Investment Adviser. However, as a practical matter, Holding 
Company is not engaged in the day-to-day operation of either entity.
     Broker-Dealer owns a 33% ownership interest in Proprietary 
Trading Firm. None of the firm's other investors own a controlling 
interest of 25% or more of the firm, and therefore no LTIDs, other than 
that of Broker-Dealer, would be attached to the trades of Proprietary 
Trading Firm.
     Investment Adviser owns a 100% ownership interest in Sub-
Adviser 1 and Sub-Adviser 2.
     Sub-Adviser 1, on behalf of its clients, 
exercises investment discretion over accounts and effects transactions 
in NMS securities on behalf of those accounts in an aggregate amount 
greater than the identifying activity level.
     Sub-Adviser 2, on behalf of its clients, 
exercises investment discretion over accounts and effects transactions 
in NMS securities on behalf of those accounts in an aggregate amount 
less than the identifying activity level.
     While engaging in proprietary trading, Broker-Dealer 
exercises investment discretion over accounts and effects transactions 
in NMS securities on behalf of those accounts in an aggregate amount 
greater than the identifying activity level.
     The Proprietary Trading Firm effects transactions in NMS 
securities in an aggregate amount greater than the identifying activity 
level.
    All of the identified entities, except Sub-Adviser 2, 
independently qualify as large traders under the Rule. Therefore, as 
discussed below, unless these entities rely on the provisions of Rule 
13h-1(b)(3)(i), each of them must file separate Forms 13H with the 
Commission.\83\
---------------------------------------------------------------------------

    \83\ See new Rule 13h-1(b)(1).
---------------------------------------------------------------------------

    Rule 13h-1(b)(3)(i) 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. This provision 
allows the identification requirement to be pushed up the corporate 
hierarchy to the parent entity (i.e., Holding Company, in the example 
above).
    Conversely, Rule 13h-1(b)(3)(ii) applies 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 (such as Holding Company, in the 
example above) would be required to comply with all of the requirements 
of paragraph (b) unless the entities that it controls discharge all of 
the

[[Page 46970]]

responsibilities of the controlling person under paragraph (b). This 
provision maintains the focus on the parent company by allowing, for 
example, a corporate entity to comply on behalf of one or more natural 
persons who are its controlling owners. In the above example, if 
Investment Adviser and Broker-Dealer separately register as large 
traders, Holding Company would not have to separately register as a 
large trader, assuming that those two entities capture all transactions 
and accounts controlled by Holding Company.\84\ Instead, Investment 
Adviser and Broker-Dealer would identify (in Item 4(c) of the Form) the 
other as an affiliate filing separately, and identify Holding Company 
as their affiliate's parent company on their respective Form 13H 
filings. In this way, the Commission will be able to tell that the 
entities are under the common control of Holding Company, and the 
Commission could assign LTIDs that reference their common parent.
---------------------------------------------------------------------------

    \84\ In this case, Investment Adviser would be responsible for 
providing its LTID to each registered broker-dealer that effects 
transactions on its behalf, on behalf of Sub-Adviser 1, or 
on behalf of Sub-Adviser 2. Additionally, Broker-Dealer 
would be responsible for providing its LTID to each registered 
broker-dealer that effects transactions on its behalf or on behalf 
of Proprietary Trading Firm. Further, Investment Adviser would be 
responsible for identifying each of the accounts to which its LTID 
applies, which would include the accounts of Sub-Adviser 1, 
Sub-Adviser 2, and Broker-Dealer would be responsible for 
identifying each of the accounts to which its LTID applies, which 
would include the accounts of Proprietary Trading Firm.
---------------------------------------------------------------------------

    When must an Initial Filing be submitted? A large trader must file 
a Form 13H Initial Filing promptly after effecting aggregate 
transactions equal to or greater than the identifying activity 
level.\85\ The Commission solicited \86\ and received comments about 
the Initial Filing deadline.\87\ Some commenters requested additional 
guidance on what constitutes ``promptly.'' \88\ One commenter 
recommended that the Commission specify a 10-day filing deadline.\89\ 
In contrast, another commenter suggested that the Commission define 
promptly as without delay, but in no circumstances later than 30 days 
after the trader qualifies as a large trader.\90\ Another commenter 
assumed that promptly means within 30 days.\91\ The Commission 
continues to believe that ``promptly'' is an appropriate standard 
because it emphasizes the need for filings to be submitted without 
delay to ensure their timeliness while affording filers a limited 
degree of flexibility.\92\ However, given the requests for additional 
guidance, the Commission believes that under normal circumstances, it 
would be appropriate for Initial Filings (and Reactivated Filings, 
discussed below) to be filed within 10 days after the large trader 
effects aggregate transactions equal to or greater than the identifying 
activity level.\93\
---------------------------------------------------------------------------

    \85\ See new Rule 13h-1(b)(1).
    \86\ See Proposing Release, supra note 3, 75 FR at 21472.
    \87\ See Investment Adviser Association Letter at 9; SIFMA 
Letter at 18-19; and Investment Company Institute Letter at 10.
    \88\ See, e.g., Investment Adviser Association Letter at 9 and 
SIFMA Letter at 18-19.
    \89\ See Investment Adviser Association Letter at 9.
    \90\ See Investment Company Institute Letter at 10.
    \91\ See SIFMA Letter at 18-19.
    \92\ See Securities Exchange Act Release No. 55857 (June 5, 
2007), 72 FR 33564, 33567 (June 18, 2007) (in declining to define 
the term ``promptly'' as used on Section 15E(b)(1) of the Exchange 
Act, the Commission stated that whether an amendment is furnished 
promptly will depend on the facts and circumstances such as the 
amount of information being updated).
    \93\ The Commission notes that the guidance provided here 
regarding the ``promptly'' standard for Form 13H filings is based on 
the scope of the Form, the expected time to complete the Form, and 
the required submission thereof through EDGAR, and accordingly this 
guidance is applicable only to Form 13H filings.
---------------------------------------------------------------------------

ii. Annual Filings
    All large traders must submit an Annual Filing within 45 days after 
the end of each full calendar year,\94\ except that large traders on 
Inactive Status (discussed below) are not required to file Form 13H 
while they are on Inactive Status.\95\
---------------------------------------------------------------------------

    \94\ See new Rule 13h-1(b)(1)(ii).
    \95\ See new Rule 13h-1(b)(3)(iii).
---------------------------------------------------------------------------

iii. Amended Filings
    If any of the information contained in a Form 13H filing becomes 
inaccurate for any reason, a large trader must file an Amended Filing 
no later than the end of the calendar quarter in which the information 
became stale.\96\ While not required by the Rule, a large trader may 
voluntarily file an amended filing more frequently than quarterly at 
its discretion. A large trader on ``Inactive Status'' (described below) 
is not required to file any Amended Filings while it is on Inactive 
Status.
---------------------------------------------------------------------------

    \96\ See new Rule 13h-1(b)(1)(iii). The Commission expects that 
significantly less information will need to be inputted for an 
Amended Filing and the large trader may have a considerable amount 
of lead time before the end of the calendar quarter to submit the 
Amended Filing.
---------------------------------------------------------------------------

iv. Inactive Status
    Rule 13h-1(b)(3)(iii) permits a large trader who 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 to obtain inactive status by filing for ``Inactive Status'' 
through a Form 13H submission.\97\ Inactive Status would be effective 
upon such filing.
---------------------------------------------------------------------------

    \97\ New Rule 13h-1(b)(3)(iii) provides: ``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 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.''
---------------------------------------------------------------------------

    Inactive status is designed 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 support continued status as a 
large trader. In particular, Inactive Status is designed to minimize 
the impact of the Rule on natural persons who infrequently effect 
transactions of a magnitude that otherwise warrant the added regulatory 
requirements under the Rule. Inactive status relieves the large trader 
from the requirement to file amended Forms 13H. It also permits the 
large trader to request that its broker-dealers stop maintaining 
records of its transactions by LTID.
    The Commission requested comment about whether the proposed 
provision for Inactive Status is appropriate and sufficient and whether 
it should be modified or eliminated.\98\ The Commission did not receive 
any comments regarding Inactive Status.\99\ The Commission is adopting 
this provision, as proposed.
---------------------------------------------------------------------------

    \98\ See Proposing Release, supra note 3, 75 FR at 21472.
    \99\ One commenter, however, asked about broker-dealers' duties 
regarding inactive persons. See Financial Information Forum Letter 
at 5; see also infra text accompanying note 167.
---------------------------------------------------------------------------

v. Reactivated Status
    A person on Inactive Status who effects aggregate transactions that 
are equal to or greater than the identifying activity threshold must 
file a ``Reactivated Status'' Form 13H promptly after effecting such 
transactions.\100\ Upon filing for Reactivated Status, the person once 
again would be subject to the filing requirements of Rule 13h-1 and 
must inform its broker-dealers of its reactivated status.\101\ The 
Commission

[[Page 46971]]

did not receive any comments regarding Reactivated Status. The 
Commission is adopting this provision, as proposed. In particular, the 
provision for reactivated status is designed to ensure that a large 
trader on Inactive Status that becomes active above the identifying 
activity threshold is once again required to file and update Form 13H 
and inform its broker-dealers of the need to record its trading 
activity by its LTID.
---------------------------------------------------------------------------

    \100\ See new Rule 13h-1(b)(1)(i). In addition, a person may 
voluntarily elect to file for Reactivated Status prior to effecting 
aggregate transactions that are equal to or greater than the 
identifying activity threshold. As with initial filings, a person 
may elect to file for Reactivated Status if it did not wish to 
monitor its trading for purposes of the identifying activity 
threshold.
    \101\ New Rule 13h-1(b)(2) provides that 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. Additionally, a large trader on Inactive Status 
pursuant to paragraph (b)(3) of new Rule 13h-1 must notify broker-
dealers promptly after filing for reactivated status with the 
Commission.
---------------------------------------------------------------------------

vi. Termination Filings
    Under Rule 13h-1(b)(3)(iii), a person, under certain narrow 
circumstances, may permanently end its large trader status by 
submitting a ``Termination Filing.'' This filing is designed to allow a 
large trader to inform the Commission that it has terminated 
operations, and therefore there is no chance of it requalifying for 
large trader status in the future.\102\ Termination status is designed 
to signal to the Commission to not expect future amended or annual Form 
13H filings from that large trader, such as when a large trader 
dissolves, ceases doing business, or, in some cases, is acquired, as 
described below.
---------------------------------------------------------------------------

    \102\ By contrast, as described above, Inactive Status may be 
only temporary.
---------------------------------------------------------------------------

    The Commission believes it may be helpful to provide additional 
examples to illustrate the narrow circumstances under which a large 
trader may file a ``Termination Filing.'' These examples also should 
provide guidance to large traders on how to amend their Forms 13H when 
a large trader is involved in a merger.
     Example 1: A large trader merges into another large 
trader, resulting in only one entity. The non-surviving large trader 
would submit a ``Termination Filing'' that specifies the effective date 
of the merger. The surviving large trader, in an Amended Filing or its 
next Annual Filing (depending on the effective date of the merger), 
would update Item 4 to list the non-surviving company as an affiliate 
that files separately and provide the additional identifying 
information required in Item 4. Specifically, in the Description of 
Business and Relationship to the Large Trader fields, the surviving 
entity would disclose that the non-surviving entity has been acquired 
and no longer exists as a separate entity. The non-surviving company's 
market participation identification number (``MPID'') and LTID number 
(including suffix, if any) should also be listed. Capture of this 
information will allow the Commission to track the control of the non-
surviving entity. In this scenario, the surviving large trader would 
continue using its LTID.
     Example 2: An existing large trader acquires another large 
trader and the target is maintained as a separate subsidiary. Following 
the acquisition, the target's trading would need to be tagged with the 
acquirer's LTID. The acquired subsidiary company may file a Termination 
Filing so long as all of its trading is tagged with its new parent's 
LTID.\103\ Alternatively, the acquired entity may maintain its original 
LTID and have its trading tagged with both its original LTID and its 
new parent's LTID. If a Termination Filing is not made, then both 
companies would have to amend Items 4 of their Forms 13H to list the 
other as an affiliate and disclose their affiliate's information, 
including its MPID and LTID.
---------------------------------------------------------------------------

    \103\ If a Termination Filing is elected, the acquirer may wish 
to use an LTID suffix to separately identify the acquired entity's 
trading activity.
---------------------------------------------------------------------------

     Example 3: A large trader is acquired by a company that 
was not previously a large trader. The new parent company is now a 
``large trader'' due to acquiring control of a large trader. 
Accordingly, the acquirer would file an ``Initial'' Form 13H and obtain 
a new LTID, which would be used to identify all of its trades and the 
trades of its affiliates (including its newly acquired large trader 
subsidiary). The acquired subsidiary company may file a Termination 
Filing so long as all of its trading is tagged with its new parent's 
LTID.\104\ Alternatively, the acquired entity may maintain its original 
LTID and have its trading tagged with both its original LTID and its 
new parent's LTID. If a Termination Filing is not made, then both 
companies would have to identify the other as an affiliate in Items 4 
of their Forms 13H.
---------------------------------------------------------------------------

    \104\ If a Termination Filing is elected, the acquirer may wish 
to use an LTID suffix to separately identify the acquired entity's 
trading activity.
---------------------------------------------------------------------------

    The Commission did not receive any comments regarding Termination 
Filings. The Commission is adopting this provision, as proposed. In 
particular, the ability to submit Termination Filings will allow the 
Commission to accurately track only active large traders and will allow 
large traders that cease operation to formally terminate their filing 
obligations under Rule 13h-1.
b. Self-Identification to Broker-Dealers
    As proposed, Rule 13h-1(b)(2) would have required a large trader to 
disclose to the registered broker-dealers effecting transactions on its 
behalf its LTID and each account to which it applies. Second, the 
provision, as proposed, would have required a large trader to disclose 
its LTID to all others with whom it collectively exercises investment 
discretion. The Commission received comments about the latter 
requirement.\105\
---------------------------------------------------------------------------

    \105\ See, e.g., Wellington Management Letter at 5.
---------------------------------------------------------------------------

    Proposed Schedule 6 to the Form would have required a large trader, 
in connection with disclosing its brokerage accounts, to also list the 
LTID(s) of all other large traders that exercise investment discretion 
over the particular account. To assure that large traders had access to 
other large traders' LTIDs, the proposed rule would have required large 
traders to disclose their status to one another. One commenter 
requested clarification regarding whether a large trader would be 
obligated to identify unaffiliated large traders only if investment 
discretion is exercised collectively.\106\
---------------------------------------------------------------------------

    \106\ See Wellington Management Letter at 5-6. Another commenter 
recommended that the Commission not require investment advisers to 
identify other advisers of a client account that trade separately 
and without collaboration in a different custodial account. See 
Investment Company Institute Letter at 10.
---------------------------------------------------------------------------

    As discussed below, the Commission is not adopting the requirement 
to disclose brokerage account numbers on Form 13H and instead is 
requiring a large trader to provide a list of all registered broker-
dealers with whom it has an account. Consequently, the requirement to 
provide the LTID(s) of all other large traders that exercise investment 
discretion over the particular account now is no longer relevant and is 
not being adopted. Because the requirement to disclose the information 
is not being adopted, it would not be necessary for large traders to 
inform others of their LTIDs, and the Commission is similarly not 
adopting the proposed requirement for a large trader to disclose its 
LTID to all others with whom it collectively exercises investment 
discretion. Accordingly, Rule 13h-1(b)(2), as adopted, requires a large 
trader to disclose to the registered broker-dealers effecting 
transactions on its behalf its LTID and each account to which it 
applies.
    Lastly, the requirements that a large trader provide its LTID to 
all registered broker-dealers who effect transactions on its behalf, 
and identify each account to which it applies, are ongoing 
responsibilities that must be discharged promptly. For example, if a 
subsidiary of a large trader is acquired by another large trader, to 
the extent that subsidiary effects transactions in NMS securities equal 
to or greater than the reporting activity level, both large traders 
must

[[Page 46972]]

promptly notify their registered broker-dealers of the LTID 
change.\107\
---------------------------------------------------------------------------

    \107\ This responsibility is in addition to the large traders' 
duty to amend Form 13H pursuant to Rule 13h-1(b)(1).
---------------------------------------------------------------------------

3. Overview of Form 13H
    Form 13H is designed to collect basic identifying information about 
large traders that will allow the Commission to understand the 
character and operations of the large trader. The Commission solicited 
\108\ and received \109\ many comments regarding various aspects of 
proposed Form 13H. The Commission, for example, received comments 
requesting clarification regarding certain information required by the 
proposed Form, as well as suggestions designed to reduce and streamline 
the reporting burden on large traders.\110\ One commenter noted that 
the large trader reporting rule is only one of many proposed new 
regulations that are being contemplated by Congress and various federal 
regulators that would affect commercial banks.\111\ The Commission is 
sensitive to the burdens imposed by the large trader rule.\112\ As 
discussed below, the Commission is incorporating some commenters' 
suggestions in the Form as adopted, and many of the changes from the 
proposed version of the Form are intended to reduce further the burdens 
of the Form. The Commission believes that the version of Form 13H it is 
adopting today will be less burdensome than the proposed version, most 
notably because, as discussed further below, it replaces the proposed 
requirement to provide account numbers with a more general requirement 
to identify broker-dealers at which the large trader or any of its 
Securities Affiliates maintains an account.\113\ In addition, the 
Commission is seeking to design the electronic filing system for Form 
13H to minimize the filing burden. For example, a selection of 
previously filed Form 13H submissions, including the most recently 
submitted version, will be readily accessible so that large traders can 
simply edit and resubmit the Form when amendments are required. The 
Commission believes that filing Form 13H in an electronic format will 
be less burdensome and more efficient for both large traders and the 
Commission.
---------------------------------------------------------------------------

    \108\ See Proposing Release, supra note 3, 75 FR at 21472-73.
    \109\ See, e.g., Wellington Management Letter at 3-6; American 
Bankers Association Letter at 2; David L. Goret Letter at 1-3; 
Anonymous e-mail dated June 22, 2010; and Prudential Letter at 3-4.
    \110\ See, e.g., SIFMA Letter; Wellington Management Letter; 
Investment Company Institute Letter; and American Bankers 
Association Letter.
    \111\ See American Bankers Association Letter at 2.
    \112\ As discussed infra (see Section III.0), Section 13(h)(5) 
of the Exchange Act expressly requires the Commission to take into 
account, among other things, the costs associated with maintaining 
information with respect to transactions effected by large traders 
and reporting such information to the Commission.
    \113\ As defined in the instructions to Form 13H, ``Securities 
Affiliate'' means an affiliate of the large trader that exercises 
investment discretion over NMS securities.
---------------------------------------------------------------------------

    The Commission is adopting the Form with some format-driven 
modifications from the proposed version to better reflect its format as 
an electronic, rather than paper, filing. For example, the Commission 
is not adopting the proposed fields that would have required filers of 
Annual Filings and Amended Filings to identify the Items and Schedules 
being updated since the Commission will be able to distinguish this 
information more readily in an electronic filing environment. In 
addition, the Commission is not adopting the Schedules to the Form, and 
the information previously contained in the proposed Schedules has been 
realigned into the body of the Form. References to paper-based 
``continuation sheets'' are not being adopted. Similarly, the concept 
of Schedules, while relevant to a paper-based form, is unnecessary in 
the context of an all-electronic filing.\114\ These and other related 
non-substantive changes from the proposed version of the Form reflect 
that the Form will be accessed electronically and filed by large 
traders exclusively online.
---------------------------------------------------------------------------

    \114\ In addition, in response to comments and as discussed in 
greater detail below, the Commission is revising the scope of the 
data that would have been collected in the proposed Schedules.
---------------------------------------------------------------------------

    Voluntary Registration. For the reasons discussed above,\115\ in 
response to a comment, the Commission is revising Form 13H from the 
proposed version of the Form to allow a market participant to register 
voluntarily as a large trader, even if it has not yet effected 
transactions equal to or greater than the identifying activity level at 
the time of filing. Correspondingly, Form 13H requires a large trader 
to indicate whether its ``Initial Filing'' is voluntary. A large trader 
that elects to voluntarily file is required to disclose the date upon 
which it filed the Form, rather than the date on which its trading 
activity equaled or exceeded the identifying activity level.
---------------------------------------------------------------------------

    \115\ See supra at Section III.A.1.0.
---------------------------------------------------------------------------

    Background Information About the Large Trader and Its Authorized 
Person. Form 13H requires the large trader to provide its mailing 
address, which may be different than its business address. 
Additionally, the Form requires that the following information be 
provided about the Authorized Person (i.e., the natural person 
authorized to submit the Form 13H on behalf of the large trader): 
business address, telephone number, facsimile number, and e-mail 
address. This information was proposed to be required by Schedule 6 of 
the Form and has been relocated to the introductory section of the 
Form. Proposed Item 3 of Schedule 4, which would have mandated 
disclosure of the large trader's principal place of business (if 
different from the information disclosed on the cover page), has not 
been adopted. Instead, the requested information has been moved to the 
beginning of the adopted Form, where both business and mailing 
addresses are requested. All of this information is necessary for the 
Commission to identify and contact large traders.
a. Item 1
    In Item 1(a) of the Form, the large trader must indicate the types 
of businesses that it or any of its affiliates engage in: \116\ broker 
or dealer; bank holding company; \117\ non-bank holding company; 
government securities broker or dealer; municipal securities broker or 
dealer; bank; pension trustee; non-pension trustee; \118\ investment 
adviser to one or more registered investment companies; investment 
adviser to one or more hedge funds or other funds not registered under 
the Investment Company Act; insurance company; commodity pool operator; 
or futures commission merchant. A large trader also may check ``Other'' 
and disclose other types of financial businesses engaged in by the 
large trader.
---------------------------------------------------------------------------

    \116\ Unless otherwise specified, the Form requires information 
about the large trader that is filing the Form 13H. Typically, the 
filing large trader would be the large trader's ultimate parent 
company, which means the person at the highest level of the 
organizational chart required under Item 4(a) that controls a large 
trader or multiple large traders.
    \117\ The use of the term ``Holding Company'' in the proposal 
has been clarified in the adopted Form by dividing it into two 
options ``Bank Holding Company'' and ``Non-Bank Holding Company.''
    \118\ To clarify that all trustees that are large traders would 
be required to report, the adopted Form includes categories for 
``Pension Trustee'' as well as ``Non-Pension Trustee.''
---------------------------------------------------------------------------

    Item 1(b) of the Form requires that the large trader provide the 
following for itself and each of its Securities Affiliates: a 
description of the nature of its operations, including a general 
description of its trading strategies.\119\ The instructions provide 
guidance regarding the level of detail expected.\120\
---------------------------------------------------------------------------

    \119\ Item 5 of proposed Schedule 4 would have required the 
large trader to describe the nature of the large trader's business. 
Form 13H as adopted contains this requirement in Item 1.
    \120\ For example, a large trader may describe its operations as 
including an ``investment adviser specializing in fundamental 
analysis'' or it may describe a broker-dealer as a ``proprietary 
trader focusing on statistical arbitrage'' or ``options market 
maker.''

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

[[Page 46973]]

    Collection of this basic descriptive information will allow the 
Commission to better understand each large trader and will allow the 
Commission to more carefully tailor requests both to registered broker-
dealers for large trader transaction data and, if necessary, to large 
traders for additional information pursuant to Rule 13h-1(b)(4).
    The Commission does not believe that the changes to the Form from 
the proposed version discussed above are substantive. Instead, the 
changes are intended to clarify the scope of information elicited by 
Item 1 and to reflect the fully-electronic nature of the Form.
b. Item 2
    Item 2 of the Form requires the large trader to indicate whether it 
or any of its Securities Affiliates files any other forms with the 
Commission.\121\ If so, Item 2 requires identification of each filing 
entity, the form(s) filed, and the CIK number.
---------------------------------------------------------------------------

    \121\ The title of Item 2 of the adopted Form has been slightly 
amended; its title is ``Securities and Exchange Commission 
Filings,'' not ``Securities and Exchange Commission Registration.'' 
This non-substantive change reflects that registration is not the 
effect of all forms filed with the Commission.
---------------------------------------------------------------------------

    The Commission is narrowing the scope of Item 2 from the proposal 
to require the large trader to disclose whether it or any of its 
affiliates that exercise investment discretion over NMS securities (as 
distinguished from all of its affiliates) file any forms with the 
Commission. Additionally, rather than disclosing the filers' Central 
Registration Depository (``CRD'') Numbers \122\ and SEC File Numbers 
\123\ as proposed, Item 2 as adopted requires only disclosure of their 
CIK numbers.\124\
---------------------------------------------------------------------------

    \122\ The CRD is a computerized database that contains 
information about most brokers, their representatives, and the firms 
for whom they work.
    \123\ As discussed above, an SEC File Number is assigned by 
EDGAR to registrants and others who file materials with the 
Commission through EDGAR. See supra discussion at text accompanying 
notes 79-81.
    \124\ CIK numbers, which are assigned to persons that file 
material with the Commission, are applicable to a broader universe 
of entities that may be large traders, as opposed to CRD numbers 
which are only applicable to broker-dealers.
---------------------------------------------------------------------------

    One commenter objected to the collection of information under 
proposed Item 2, pointing out that the Commission already has access to 
this information.\125\ The Commission believes that Item 2 is useful 
because it centralizes information about a large trader's various SEC 
filing obligations and will thereby allow the Commission to more 
promptly access records of those filers using their CIK numbers. 
Especially given the circumscribed scope of Item 2 as adopted, the 
Commission believes that this requirement will not be unduly 
burdensome. Further, each large trader should have ready access to this 
information and be able to summarize it with minimal additional burden.
---------------------------------------------------------------------------

    \125\ See American Bankers Association Letter at 2.
---------------------------------------------------------------------------

c. Item 3
    Item 3 of the Form requires a large trader to disclose whether it 
or any of its affiliates is registered with the Commodity Futures 
Trading Commission (``CFTC'') or regulated by a foreign regulator. If 
so, the large trader is required to identify each entity and the CFTC 
registration number or primary foreign regulator, as applicable.
    The Commission received one comment about the aspect of proposed 
Item 3 of the Form that would have required disclosure about bank 
regulation.\126\ The commenter argued that the required information did 
not further the underlying purpose of the proposal, and recommended 
that the Commission, to the extent necessary, obtain this information 
directly from applicable banking regulators instead of from the large 
trader.\127\ In response to this comment, the Commission has 
significantly narrowed the scope of this item by not adopting the 
proposed requirement in Item 3(b) of the proposed Form to disclose 
information on bank regulators. Instead, as mentioned above, the 
Commission is adopting the requirement to disclose whether the large 
trader includes a bank \128\ or bank holding company. The Commission 
believes that collection of this basic information will be sufficient 
to characterize a large trader's operations, and should reduce the 
burdens of the Form while focusing the collection of information on the 
securities trading operations of each large trader.
---------------------------------------------------------------------------

    \126\ See id.
    \127\ Item 3(b) of the proposed Form would have required the 
large trader to disclose: (1) Whether it or any of its affiliates 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; if so, the large trader 
would have been required to identify each such affiliate and its 
banking regulators.
    \128\ As adopted, the instructions for Form 13H define the term 
``bank'' to mean a national bank, state member bank of the Federal 
Reserve System, state non-member bank, savings bank or association, 
credit union, or foreign bank.
---------------------------------------------------------------------------

    Further, as proposed, Item 3(c) would have required the large 
trader to disclose whether it or any of its affiliates is an insurance 
company and identify each such regulated entity and its respective 
insurance regulators. One commenter recommended limiting Item 3(c) to 
only the large trader and its large trader affiliates, and suggested 
that the Form require identification only of their primary 
regulators.\129\ Otherwise, the commenter stated, its list of 
regulators would include a long list of state insurance 
regulators.\130\ In balancing the benefits of collecting such 
information against the burden on large traders to provide it, the 
Commission has decided to not adopt the requirements of proposed Item 
3(c). The Commission again notes that Item 1 of Form 13H requires that 
the large trader disclose whether the large trader includes an 
insurance company. The Commission believes that collection of this 
basic information will be sufficient to characterize a large trader's 
operations, and should reduce the burdens of the Form while focusing 
the collection of information on the large trader's securities trading 
operations.
---------------------------------------------------------------------------

    \129\ See Prudential Letter at 4.
    \130\ See id.
---------------------------------------------------------------------------

    In addition, proposed Item 3(d) would have required the large 
trader to disclose whether it or any of its affiliates is regulated by 
a foreign regulator and identify each such regulated entity and all of 
its foreign regulators. One commenter recommended that the information 
requested in Item 3(d) only be required of the large trader and its 
large trader affiliates.\131\ It further suggested that the Form 
require identification only of the primary foreign regulators.\132\ The 
commenter stated that its list of regulators would be very long, as 
some of its foreign affiliates may have 25 foreign regulators.\133\ In 
balancing the benefits of collecting such information against the 
burden on large traders to provide it, the Commission is not adopting 
the requirement as proposed. This adopted item, renumbered as Item 
3(b), requires identification only of the primary foreign regulator. 
Further, the Commission is making the requirement applicable only to 
the large trader and its Securities Affiliates. In addition, two 
separate questions proposed on CFTC registration have been combined 
into one question to streamline the presentation of those items. No 
substantive change has been made to either question. The Commission 
believes that the requirement as adopted should not be as burdensome 
and yet should provide the Commission with access to the basic 
information it needs to understand the identity and

[[Page 46974]]

regulatory status of a large trader and its affiliates.
---------------------------------------------------------------------------

    \131\ See id.
    \132\ See id.
    \133\ See id.
---------------------------------------------------------------------------

d. Item 4
    Item 4(b) of the Form requires information on affiliates of the 
large trader that exercise investment discretion over NMS securities 
(i.e., Securities Affiliates).\134\ Item 5 of the proposed Form would 
have required a large trader to identify each affiliate that either 
exercises investment discretion over accounts that hold NMS securities 
or that beneficially owns NMS securities. In response to comments 
received, the Commission is not adopting the requirement to disclose 
affiliates that merely beneficially own NMS securities.\135\ 
Accordingly, large traders will not have to identify or further 
describe affiliates who merely beneficially own NMS securities. The 
Commission believes that limiting the scope of required information to 
focus on affiliates that exercise investment discretion over NMS 
securities is appropriate and may reduce reporting burdens, while 
providing the Commission with important information about affiliates 
that are engaged in trading activities consistent with the primary 
focus of the Rule.
---------------------------------------------------------------------------

    \134\ Information from proposed Item 5 (on affiliates) has been 
integrated into Item 4 of the adopted Form, which covers the 
organization of the large trader generally. This change was intended 
to consolidate under one Item similar information that is requested 
on the organization of each large trader.
    \135\ One commenter suggested that the Commission require 
identification of only those affiliates that trade in NMS 
securities. See SIFMA Letter at 17.
---------------------------------------------------------------------------

    Given the narrower scope of affiliates about which information is 
now requested, the Commission is adopting as Item 4(a) a requirement to 
attach an organizational chart. At a minimum, the organizational chart 
must depict the large trader, its parent company (if applicable), all 
of its Securities Affiliates, and all entities identified in Item 
3(a).\136\ The organizational chart requirement is intended to help the 
Commission to quickly understand the affiliate structure of the large 
trader and should be useful, among other things, in assigning LTIDs and 
understanding any suffixes that are assigned. At the same time, a 
narrative description of the relationship between affiliates can also 
be useful where the relationships are difficult to portray in an 
organizational chart.\137\ Accordingly, as part of Item 4(b), the 
Commission is requiring a narrative description of the relationship 
between (1) the large trader; and (2) each Securities Affiliate and 
each entity identified in Item 3(a).
---------------------------------------------------------------------------

    \136\ As long as its organizational chart lists all required 
entities, a large trader may submit its standard organizational 
chart that it keeps in the ordinary course of its business. The 
organizational chart, as part of the Form 13H submission, would be 
treated as confidential by the Commission. See infra Section 
III.A.3.g (discussing confidentiality).
    \137\ As proposed, Item 5 of the Form would have collected 
information about the relationships of affiliates in a list form.
---------------------------------------------------------------------------

    As part of Item 4(b), the Commission is adopting a requirement that 
the large trader list its Securities Affiliates and all entities 
identified in Item 3(a). Additionally, the large trader must describe 
the business and disclose the MPID (if any) for each of those entities. 
The MPIDs of Securities Affiliates will be useful to the Commission 
when analyzing trading data on affiliates identified on the Form. The 
Commission believes that MPIDs will allow the staff to more carefully 
tailor requests to registered broker-dealers for large trader trade 
data, and they may reduce the need for the Commission to send 
disaggregation requests to a large trader.\138\
---------------------------------------------------------------------------

    \138\ One commenter suggested that assignment of a LTID to track 
the trades of large traders does not go far enough. See GETCO Letter 
at 3. The commenter recommended that all market participants be 
required to have and use a unique MPID when entering orders on 
market centers, either directly or through sponsored market access 
arrangements. The Commission believes that such an initiative is 
beyond the scope of this particular rulemaking, which requires large 
traders to provide such information to the Commission. If the 
Commission were to consider extending such a requirement to other 
market participants, it would be subject to a separate rulemaking 
providing interested persons an opportunity to comment.
---------------------------------------------------------------------------

    Item 4(c) of the Form requires the provision of the LTIDs, 
including LTID suffixes, for all entities within the large trader that 
file separately (if any). This requirement is very similar to what was 
proposed under Item 5. Item 4(c) as adopted, however, expressly 
requires that a large trader include the LTID suffix (if any) of all 
identified entities.
    Item 4(d) of the Form allows a large trader to assign suffixes to 
its affiliates. In the Proposing Release, the Commission specified that 
a large trader could elect to append additional characters (a suffix) 
to sub-identify particular units that directly control an account.\139\ 
Use of a suffix might be useful, for example, to facilitate a large 
trader's internal recordkeeping and to facilitate responses to 
Commission disaggregation requests.\140\ The instructions to Item 4(d) 
of the Form provide guidance on the format for suffixes.\141\ A list of 
the entities within the large trader complex that have been assigned 
suffixes will help the Commission understand the large trader's use of 
suffixes and may facilitate the ability of a large trader to track and 
manage its assigned suffixes.
---------------------------------------------------------------------------

    \139\ See Proposing Release, supra note 3, 75 FR at 21460, n.40.
    \140\ See id. at 75 FR at 21460, n.44.
    \141\ Specifically, suffixes must have three characters, all of 
which must be numbers. No letters or special characters may be used 
in a suffix. Further, the same suffix should not be assigned to more 
than one entity using the same LTID, and large traders should avoid 
reusing suffixes.
---------------------------------------------------------------------------

    The Commission believes that the information about large trader 
affiliates required by Item 4 of the Form is necessary to provide the 
Commission with the background necessary to understand the character 
and trading activities of a large trader.
e. Item 5
    Item 5 of Form 13H requires information about the governance of the 
large trader.\142\ Item 5(a) mandates disclosure of one or more of the 
following statuses of the large trader: individual; \143\ partnership; 
limited liability partnership; limited partnership; corporation; 
trustee; or limited liability company. Additionally, the Form permits 
the large trader to check ``Other'' and specify a form of organization 
that is not comparable to any of the enumerated organization types.
---------------------------------------------------------------------------

    \142\ Information from proposed Schedule 4 (on governance) has 
been integrated into Item 5 (also on governance). Specifically, the 
Commission is consolidating proposed Schedule 4 of Form 13H into 
Item 5 and re-titling it ``Governance of the Large Trader.'' This 
change was intended to consolidate under one Item similar 
information concerning the governance of each large trader.
    \143\ The proposed categories for individuals (``self employed'' 
and ``otherwise employed'') have been condensed into a single 
requirement to identify a large trader as an individual.
---------------------------------------------------------------------------

    Item 5(b) requires the identification of each partner in the large 
trader partnership and partnership status (i.e., general partner or 
limited partner).
    Item 5(c) requires the identification of each executive officer, 
director, or trustee of a large trader corporation or trustee. The 
column title in Item 5(c) reflects the instruction that the large 
trader identify its Executive Officers.\144\
---------------------------------------------------------------------------

    \144\ Although proposed Schedule 4 to Form 13H did not specify 
that only the identities of executive officers were required, the 
proposed instructions to the Form indicated that the proposed Form 
did not seek to collect the identities of all officers of the large 
trader.
---------------------------------------------------------------------------

f. Item 6
    Item 6 of Form 13H requires large traders to identify broker-
dealers at which the large trader has an account. As proposed, Item 6 
would have required large traders to provide information concerning 
each broker-dealer account through which it or certain of its 
affiliates trade. The Commission received several comments concerning 
Schedule 6 to the proposed

[[Page 46975]]

Form.\145\ As discussed below, some commenters, particularly investment 
advisers, noted that this requirement would be impractical or at least 
very burdensome and could require disclosure of potentially hundreds of 
thousands of account numbers.\146\ One commenter explained that many 
investment advisers do not know the account numbers assigned to them by 
broker-dealers because that information is not required by the software 
they use to communicate order allocation and settlement instructions to 
broker-dealers.\147\ Other commenters stated that some investment 
advisers for defined contribution plans do not have access to account 
information because the plan record-keepers, not the investment 
advisers who provide instructions to the record-keepers, establish and 
maintain the relationships with the broker-dealers.\148\ Even for large 
traders that have ready access to their brokerage account numbers, 
commenters suggested that the sheer volume of that information, and the 
frequency with which it might change, would make regular disclosure 
extremely burdensome.\149\ Other commenters stated that account numbers 
sometimes are embedded with personally identifiable information and 
objected to the requirement because: (1) The Commission should not 
require investment advisers to disclose their clients' identities; 
\150\ and (2) the burdens necessary for the Commission to establish 
sufficiently robust safeguards to protect the confidentiality of this 
information would be considerable.\151\
---------------------------------------------------------------------------

    \145\ See, e.g., Anonymous e-mail dated June 22, 2010; 
Wellington Management Letter at 3-6; and Financial Engines Letter at 
4-6.
    \146\ See, e.g., Wellington Management Letter at 3-4.
    \147\ See id.
    \148\ See Financial Engines Letter at 4-5 and Investment Adviser 
Association Letter at 6. One commenter added that some investment 
managers do not have account number information because they execute 
trades with registered broker-dealers with whom they have only an 
informal relationship and no contract. See Investment Adviser 
Association Letter at 6.
    \149\ For example, one investment adviser stated that there are 
over 400,000 separate broker-dealer account numbers associated with 
its clients. See Wellington Management Letter at 3. It further 
stated that it currently does not maintain a list of those account 
numbers. See id.
    \150\ One commenter stated the requirement, which would disclose 
client information, may: (1) raise numerous privacy issues, 
particularly with respect to transmission of confidential 
information from foreign jurisdictions such as members of the 
European Union and Switzerland and (2) harm relationships between 
investment managers and their clients. See Investment Adviser 
Association Letter at 6.
    \151\ See David L. Goret Letter at 3.
---------------------------------------------------------------------------

    Some commenters suggested alternatives to disclosing account 
numbers in the proposed Form. One commenter suggested that the 
Commission instead require large traders to maintain and submit only 
upon request the required brokerage account information.\152\ Two other 
commenters suggested revising the proposed Form to instead collect the 
names of broker-dealers through which the large trader executes 
transactions.\153\
---------------------------------------------------------------------------

    \152\ See American Banking Association Letter at 2.
    \153\ See Wellington Management Letter at 4 and Investment 
Company Institute Letter at 8-9.
---------------------------------------------------------------------------

    Based on the comments received, the Commission understands that the 
provision of brokerage account information through Form 13H could 
burden some large traders in light of current industry practices. While 
this information could be of value to the Commission, the Commission 
has determined to not adopt Schedule 6 as proposed. Instead, the 
adopted Form requires that large traders identify the registered 
broker-dealers at which the large trader or any of its Securities 
Affiliates has an account and disclose whether each such broker-dealer 
provides prime broker, executing broker, and/or clearing broker 
services. If the Commission needs more specific individual account-
level information, it can use the provided list of broker-dealers and 
the services they provide to make targeted requests to those entities 
for more detailed information.\154\ In addition, the Commission notes 
that it may contact the large trader directly pursuant to Rule 13h-
1(b)(4) to seek additional information to further identify the large 
trader and all accounts through which the large trader effects 
transactions.\155\
---------------------------------------------------------------------------

    \154\ Under Exchange Act Rules 17a-25 and 13h-1, broker-dealers 
are required to maintain and report the applicable account numbers 
in which a transaction was effected. Accordingly, the Commission 
will obtain information on account numbers in connection with a 
particular request for data.
    \155\ One commenter suggested it was unnecessary to collect 
brokerage account information because, if necessary, the Commission 
could request more detailed information from the large trader 
pursuant to proposed Rule 13h-1(b)(4). See Investment Adviser 
Association Letter at 7.
---------------------------------------------------------------------------

    One of the commenters who suggested this approach cautioned that 
any list of broker-dealers provided by large traders should be kept 
confidential because leakage of such information (and particularly 
leakage of changes to such a list) could impact the stock price of 
publicly traded broker-dealers on that list.\156\ The confidential 
treatment of all information collected through Form 13H is discussed 
below.
---------------------------------------------------------------------------

    \156\ See Investment Company Institute Letter at 9, n.18.
---------------------------------------------------------------------------

g. Confidentiality
    A number of commenters underscored the sensitive nature of the 
information collected on Form 13H and expressed support for the 
Commission's position that the information would be protected as 
contemplated by the Market Reform Act.\157\ Two commenters expressed 
concern about the risk of theft and/or inadvertent disclosure of 
private client names and account numbers.\158\ One commenter asked 
whether the Commission would share information about Unidentified Large 
Traders with other regulatory agencies for supervisory or enforcement 
purposes.\159\ Additionally, two commenters suggested that the 
Commission monitor for misuses of confidential information such as 
front-running.\160\
---------------------------------------------------------------------------

    \157\ See, e.g., Wellington Management Letter at 6; Financial 
Engines Letter at 7; Investment Adviser Association Letter at 10; 
and Investment Company Institute Letter at 2, 4.
    \158\ See Anonymous e-mail dated June 22, 2010 and Managed Funds 
Association Letter at 3-4.
    \159\ See SIFMA Letter at 19.
    \160\ See T. Rowe Price Letter at 2 and Investment Adviser 
Association Letter at 10.
---------------------------------------------------------------------------

    The Commission is committed to maintaining the information 
collected pursuant to Rule 13h-1 in a manner consistent with Section 
13(h)(7) of the Exchange Act.\161\ The statute specifies that the 
Commission shall not be compelled to disclose information collected 
from large traders and registered broker-dealers under a large trader 
reporting system, subject to limited exceptions. Specifically, the 
statute provides that:
---------------------------------------------------------------------------

    \161\ See 15 U.S.C. 78m(h)(7).

    Nothing in this subsection shall authorize the Commission to 
withhold information from Congress, or prevent the Commission from 
complying with a request for information from any other Federal 
department or agency requesting information for purposes within the 
scope of its jurisdiction, or complying with an order of a court of 
the United States in an action brought by the United States or the 
Commission. For purposes of section 552 of title 5, United States 
Code, this subsection shall be considered a statute described in 
subsection (b)(3)(B) of such section 552.\162\
---------------------------------------------------------------------------

    \162\ 15 U.S.C. 78m(h)(7).

    The legislative history of Exchange Act Section 13(h) suggests that 
Congress: (1) Understood that confidential information that could 
reveal proprietary trading strategies to competitors would be collected 
and correspondingly restricted public access to this information; and 
(2) crafted the exceptions to (a) ensure that it could obtain 
information from the

[[Page 46976]]

Commission; (b) allow the Commission to grant access to federal 
departments and other federal agencies acting within the scope of their 
jurisdictions; and (c) allow the Commission to comply with an order of 
a court of the United States in certain actions.\163\
---------------------------------------------------------------------------

    \163\ See Senate Report, supra note 14, at 41.
---------------------------------------------------------------------------

    While the Commission must share the information it collects on 
large traders as outlined above, the Commission is committed to 
protecting the confidentiality of that information to the fullest 
extent permitted by applicable law. By assuring large traders of the 
confidentiality of information they provide to the Commission, the 
Commission is addressing commenters' concerns.

B. Broker-Dealers: Recordkeeping, Reporting, and Monitoring

    As proposed, Rule 13h-1 would impose recordkeeping and reporting 
responsibilities 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. In 
addition, the proposed rule would require certain registered broker-
dealers to implement procedures to encourage and foster compliance with 
the self-identification requirements of the proposed rule. As discussed 
in greater detail below, after considering the comments received on the 
Rule's application to registered broker-dealers, the Commission is 
adopting these provisions of the Rule substantially as proposed, but 
with some modifications to reflect certain comments and to clarify the 
requirements applicable to registered broker-dealers.
1. Recordkeeping Requirements
    The Commission received few comments concerning the proposed 
recordkeeping requirements,\164\ and is adopting Rule 13h-1(d) 
substantially as proposed with one modification.\165\ As proposed, 
every registered broker-dealer would have been required to maintain 
records of information for, among others, ``(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.'' The Commission is not adopting the requirement 
to maintain records for accounts over which such broker-dealer 
exercises investment discretion together with a large trader or an 
Unidentified Large Trader.
---------------------------------------------------------------------------

    \164\ See SIFMA Letter at 10, 14 and Financial Information Forum 
Letter at 5.
    \165\ While paragraph (d)(2) of the Rule sets forth the 
information that is to be maintained for each transaction, 
subparagraph (xiii) requires that the broker-dealer record the LTIDs 
``associated with the account, unless the account is for an 
Unidentified Large Trader.'' This provision effectively requires 
that a broker-dealer tag an LTID to an account rather than to each 
transaction. In addition, for an Unidentified Large Trader, the 
Commission expects broker-dealers to assign their own unique 
identifier to the applicable account(s).
---------------------------------------------------------------------------

    As described above, in connection with the requirement for large 
traders to disclose on Form 13H a list of broker-dealers at which a 
large trader or any Securities Affiliate has an account rather than a 
list of account numbers at such broker-dealers as proposed, the 
Commission is not adopting the proposed requirement that large traders 
disclose their LTIDs to other large traders.\166\ Thererfore, large 
traders will not be required to communicate their LTIDs to other 
traders, and, consequently, there is no mechanism in the Rule for a 
large trader to be informed of the status of another trader with whom 
it jointly exercises investment discretion.
---------------------------------------------------------------------------

    \166\ See discussion supra at Section III.A.2.b. The proposed 
requirement that large traders disclose their LTIDs to other large 
traders was intended to facilitate the ability of a large trader to 
complete Form 13H, including the provisions that required it to 
identify its account numbers and the LTID of any trader with whom it 
shared investment discretion over the account.
---------------------------------------------------------------------------

    Similarly, the Commission believes it is appropriate to narrow the 
scope of the recordkeeping duty concerning accounts over which a 
broker-dealer exercises investment discretion together with a large 
trader or an Unidentified Large Trader. Accordingly, under the Rule as 
adopted, registered broker-dealers must maintain records 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 or (ii) if the broker-dealer is a large 
trader, any proprietary or other account over which such broker-dealer 
exercises investment discretion. As a practical matter, however, the 
Commission will continue to have access to records of any account over 
which a broker-dealer exercises investment discretion together with a 
large trader or an Unidentified Large Trader by virtue of the fact that 
such an account is an account of a large trader subject to the 
recordkeeping requirements.
    In addition, the Commission is adopting as proposed the requirement 
that, 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 maintain records of all of the required 
information.
    One commenter asked whether registered broker-dealers would be 
required to maintain records of transactions by inactive large 
traders.\167\ In the Proposing Release, the Commission stated that an 
inactive large trader could inform its broker-dealers of its Inactive 
Status and request that they discontinue tagging its transactions with 
its LTID.\168\ The Rule does not require a broker-dealer to maintain 
records of transactions by an inactive large trader after receiving 
notice from the large trader that the trader had filed for inactive 
status with the Commission on Form 13H.
---------------------------------------------------------------------------

    \167\ See Financial Information Forum Letter at 5.
    \168\ See Proposing Release, supra note 3, at 21464. As 
discussed above, Inactive Status relieves a former large trader from 
having to file and amend Form 13H with the Commission. The Rule, 
however, does not specifically require a registered broker-dealer to 
discontinue tagging the trader's transactions with its LTID. As 
discussed below, Form 13H and the information contained therein, is 
confidential. Accordingly, the Commission would not reveal a large 
trader's status to a broker-dealer that sought to confirm a reported 
Inactive Status.
---------------------------------------------------------------------------

    One commenter asked the Commission to clarify Rule 13h-
1(d)(5),\169\ which requires that 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).'' \170\ Specifically, the 
commenter asked whether, by requiring that records be available on 
Saturdays and holidays, the Commission expects that broker-dealers 
might be required to submit transaction data on Saturdays and holidays. 
The Commission notes that the Rule contemplates that broker-dealers 
might be called upon by the Commission to report data to the Commission 
on a Saturday or holiday, consistent with the legislative history that 
accompanies Section 13(h).\171\ Depending on the

[[Page 46977]]

urgency of the situation, the Commission may need prompt access to 
large trader data and the Rule contemplates that possibility.\172\ The 
provisions applicable to the reporting of data to the Commission are 
discussed below.
---------------------------------------------------------------------------

    \169\ See Financial Information Forum Letter at 3.
    \170\ See id.
    \171\ See Senate Report, supra note 14, at 40. See also Section 
13(h) of the Exchange Act, 15 U.S.C. 78m(h)(2), providing that 
``[r]ecords shall be reported to the Commission * * * immediately 
upon request by the Commission * * *.''
    \172\ The Commission notes that while new Rule 13h-1(d)(5) 
governs the availability of data, new Rule 13h-1(e) governs the 
reporting of transaction data by broker-dealers to the Commission. 
Specifically, that provision requires registered broker-dealers to 
submit transaction data ``no later than the day and time specified 
in the request for transaction information, which shall be no 
earlier than the opening of business of the day following such 
request, unless in unusual circumstances the same-day submission of 
information is requested.'' Accordingly, while information must be 
available on the morning after the transaction was effected, the 
reporting deadline is based upon the day of the Commission's 
request.
---------------------------------------------------------------------------

2. Reporting Requirements
    As proposed, Rule 13h-1(e) would require 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 to report to the Commission upon request records they keep 
pursuant to Rule 13h-1(d)(1). In addition, as proposed, 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 would be required to report such records.
    As described above, the Commission is not adopting the proposed 
requirement on large traders to disclose their LTIDs to other large 
traders.\173\ The Commission believes it is appropriate to similarly 
narrow the scope of the reporting duty to not extend the reporting 
requirement to broker-dealers that exercise investment discretion over 
an account together with a large trader or an Unidentified Large 
Trader.
---------------------------------------------------------------------------

    \173\ See discussion supra at Section III.A.2.b.
---------------------------------------------------------------------------

    Accordingly, as adopted, upon the request of the Commission, every 
registered broker-dealer who is itself a large trader or carries an 
account for a large trader or an Unidentified Large Trader shall 
electronically report to 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 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 such information.
    Broker-dealers will be required to report a particular day's 
trading activity if it equals or exceeds the ``reporting activity 
level'' of 100 shares.\174\ Transaction reports must be submitted to 
the Commission no later than the day and time specified in the request 
for transaction information, which shall be no earlier than the opening 
of business of the day following such request, unless in unusual 
circumstances the same-day submission of information is requested.\175\
---------------------------------------------------------------------------

    \174\ New Rule 13h-1(a)(8) defines 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.'' The 
Commission solicited comment about a number of aspects of the 
proposed reporting activity level, see Proposing Release, supra note 
3, 75 FR at 21473, but received no comments regarding the proposed 
threshold.
    \175\ Cf. Exchange Act Section 13(h)(2), 15 U.S.C. 78m(h)(2), 
which 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.''
---------------------------------------------------------------------------

    The Commission solicited \176\ and received comments regarding the 
reporting duty of registered broker-dealers.\177\ One commenter, in 
observing that the proposed rule would require registered broker-
dealers to submit transaction data to the Commission before the close 
of business on the day specified in the request for such transaction 
information, asked for clarification about whether the day could be the 
same day the request is made.\178\ The same commenter suggested that 
the Commission should allow registered broker-dealers a full business 
day, based on the time of the request, to respond to data 
requests.\179\ Other commenters suggested longer periods. One suggested 
two days,\180\ and one suggested affording registered broker-dealers 10 
business days to respond, which could be shortened over time to three 
business days.\181\ The latter commenter opposed the proposed deadline, 
stating that broker-dealers' existing infrastructure cannot respond to 
data requests for large trader transactions within one business day. As 
noted in the Proposing Release, the Commission expects that certain 
system enhancements will be required to prepare broker-dealers' 
existing EBS infrastructure for compliance with Rule 13h-1, including 
the provisions regarding the availability of data.\182\ While the 
Commission does not anticipate that, under normal circumstances, it 
would request delivery of large trader transaction data on the same day 
the request is made, the Commission believes it is important that it 
have the flexibility to do so if required by the urgency of the 
situation.\183\
---------------------------------------------------------------------------

    \176\ See Proposing Release, supra note 3, 75 FR at 21473.
    \177\ See, e.g., Financial Information Forum Letter at 4 and 
SIFMA Letter at 13-17.
    \178\ See Financial Information Forum Letter at 2.
    \179\ See id.
    \180\ See Prudential Letter at 5.
    \181\ See SIFMA Letter at 15.
    \182\ See Proposing Release, supra note 3, 75 FR at 21471.
    \183\ The Commission notes that the Rule requires that trade 
data be available for reporting to the Commission on the morning 
after the day the transactions were effected (which could include 
Saturdays and holidays). As specified in new Rule 13h-1(e), in 
response to a Commission request for transaction data, the 
information must be reported to the Commission no later than the day 
and time specified in the request for transaction information, which 
shall be no earlier than the opening of business of the day 
following such request, unless in unusual circumstances the same-day 
submission of information is requested.
---------------------------------------------------------------------------

    In response to the requests of commenters to provide additional 
guidance on the expected timeframe within which broker-dealers would 
need to submit transaction data to the Commission, the Commission is 
adopting a modified version of Rule 13h-1(e) to provide that reports of 
transactions must be ``submitted to the Commission no later than the 
day and time specified in the request for transaction information, 
which shall be no earlier than the opening of business of the day 
following such request, unless in unusual circumstances the same-day 
submission of information is requested.''
    The Commission understands from one commenter that EBS data 
processes are normally done during overnight batch runs.\184\ In light 
of these considerations, the Commission believes it would be 
appropriate for broker-dealers to utilize any overnight process they 
may have currently in production, and the Rule as adopted provides that 
the Commission will normally request reports to be submitted in manner 
that allows time for such overnight processing.
---------------------------------------------------------------------------

    \184\ See Financial Information Forum Letter at 3.
---------------------------------------------------------------------------

    However, under unusual circumstances, the Commission may request 
more immediate responses that may require some broker-dealers to 
perform a manual process in order to provide reports to the Commission

[[Page 46978]]

sooner than could be accommodated by an overnight batch process. For 
example, on the morning following a market event such as May 6, 2010, 
the Commission could request data about the prior day to be submitted 
the same day as the request is made. The Commission recognizes that 
under these circumstances, depending on the nature of broker-dealer's 
systems, the report data may be preliminary and require updating by the 
opening of business of the day following the request. One commenter 
inquired whether registered broker-dealers would be required to submit 
transaction data directly to the Commission instead of through the 
normal channel for EBS submissions.\185\ As adopted, Rule 13h-1(e) 
requires that reports be submitted ``electronically, in machine-
readable form and in accordance with a format specified by the 
Commission that is based on the existing EBS system format.'' Like 
Exchange Act Rule 17a-25, this provision does not require (or prohibit) 
preparation or transmission of reports by any intermediary. However, as 
stated in the Proposing Release, in order to mitigate costs on 
registered broker-dealers, the Commission intends to utilize the 
existing infrastructure of the EBS system for the large trader 
reporting rule.
---------------------------------------------------------------------------

    \185\ See id.
---------------------------------------------------------------------------

    Another commenter asked whether the Commission intended to request 
transaction data according to LTID.\186\ The Commission expects that it 
would, on occasion, request EBS data according to LTID. A narrowly-
focused request for transaction records of a particular large trader 
would help the Commission obtain in the most efficient manner possible 
targeted and limited data and should reduce the burden on broker-
dealers by allowing them to provide smaller files in response to an EBS 
request for records of specific large traders.
---------------------------------------------------------------------------

    \186\ See id. at 2.
---------------------------------------------------------------------------

    One commenter recommended using the OATS system maintained by the 
Financial Industry Regulatory Authority (``FINRA'') instead of the EBS 
system for the large trader reporting rule. The commenter pointed out 
that, unlike the EBS system, OATS processes are tied to front office 
order and execution systems and thus could more readily incorporate the 
proposed new field of execution time.\187\ Further, the commenter noted 
that OATS should be able to provide next day reporting.\188\ The 
Commission, however, believes that the large trader reporting 
requirements can be most efficiently implemented and operated through 
relatively modest enhancements to the existing EBS system. Use of OATS, 
which is maintained by FINRA, would involve expanding OATS to 
additional categories of securities (e.g., options) and making 
additional enhancements to accommodate the records that would need to 
be kept pursuant to the Rule. For these reasons, the Commission does 
not believe basing the large trader reporting rule on OATS is 
appropriate at this time.
---------------------------------------------------------------------------

    \187\ See SIFMA Letter at 15.
    \188\ See id.
---------------------------------------------------------------------------

3. Monitoring Requirements
    Overview of Proposed Rule. Under proposed Rule 13h-1(d) and (e), 
certain registered broker-dealers would be subject to recordkeeping and 
reporting responsibilities for their customers that meet the criteria 
for Unidentified Large Traders. Proposed Rule 13h-1(a)(9) defined 
``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 proposed Rule provided that 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.''
    In assessing whether a broker-dealer ``has reason to know'' whether 
one of its customers may be a large trader, the proposed rule 
effectively would have required the broker-dealer to take into account 
trading activity in its own customer accounts.
    Proposed Rule 13h-1(f) also contained a safe harbor that was 
designed to reduce the broker-dealer's burdens in connection with 
monitoring its customers' trading for purposes of identifying possible 
large traders.\189\ The safe harbor in proposed Rule 13h-1(f) required 
reasonably designed systems to detect and identify persons that may be 
large traders--based upon transactions effected through an account or 
group of accounts or other information readily available to the broker-
dealer. Further, the proposed safe harbor required reasonably designed 
systems to inform such persons of their potential obligations under 
Rule 13h-1.
---------------------------------------------------------------------------

    \189\ See Proposing Release, supra note 3, 75 FR at 21470.
---------------------------------------------------------------------------

    The proposed monitoring requirements were intended to promote 
awareness of and foster compliance with Rule 13h-1 by customers who 
might not be aware of their large trader reporting responsibilities. As 
noted in the Proposing Release, the proposed rule placed ``the 
principal burden of compliance with the identification requirements on 
large traders themselves'' \190\ while the broker-dealer monitoring 
requirements were intended to be ``limited'' and ``a necessary backstop 
to encourage compliance and fulfill the objectives of Section 13(h) of 
the Exchange Act.'' \191\
---------------------------------------------------------------------------

    \190\ Id.
    \191\ Id.
---------------------------------------------------------------------------

    Comments Received. In the Proposing Release, the Commission 
requested comments on the proposed monitoring requirements and the 
related safe harbor.\192\ The Commission received several comments that 
addressed the proposed duty to monitor customers for purposes of Rule 
13h-1.\193\ One commenter asserted that the Commission lacks the 
statutory authority to impose a monitoring requirement on registered 
broker-dealers in connection with the large trader reporting rule.\194\ 
A few commenters asked for clarification of the monitoring requirements 
and offered alternatives.\195\ Of those commenters that addressed the 
issue, most were critical of the proposed monitoring requirements.\196\ 
One commenter characterized the role of broker-dealers under the 
proposed rule as ``gatekeepers,'' and asserted that ``the proposed rule 
would impose on broker-dealers much of the operational monitoring 
regarding registration of large traders.'' \197\ Two commenters asked 
whether the Rule would require broker-dealers to stop doing business 
with Unidentified Large Traders.\198\ One of those commenters asserted 
that it should not because that would have the unintended consequence 
of driving customers to broker-dealers who may be less diligent in 
monitoring for large traders.\199\ These two commenters also requested 
guidance about whether the monitoring provisions required any

[[Page 46979]]

specific policies and procedures.\200\ Another commenter asked whether 
a broker-dealer has a duty to proactively determine whether a customer 
is an Unidentified Large Trader based on the broker-dealer's knowledge 
that its customer maintains accounts at other broker-dealers.\201\
---------------------------------------------------------------------------

    \192\ See id. at 21472-73.
    \193\ See, e.g., Financial Information Forum Letter at 4-5; 
GETCO Letter at 3; and SIFMA Letter at 9-13.
    \194\ See SIFMA Letter at 11.
    \195\ See, e.g., Financial Information Forum Letter; SIFMA 
Letter; and GETCO Letter.
    \196\ One commenter described the proposed safe harbor as 
``anything but safe'' and, as discussed above, asserted that the 
proposal exceeds the Commission's statutory authority because, among 
other reasons, the safe harbor provided that a registered broker-
dealer would have reason to know that a customer is an Unidentified 
Large Trader based on other readily available information, as well 
as transactions effected through the broker-dealer. See SIFMA Letter 
at 11.
    \197\ Id. at 9.
    \198\ See id. at 11 and Financial Information Forum Letter at 5.
    \199\ See SIFMA Letter at 11.
    \200\ See id. at 10 and Financial Information Forum Letter at 5.
    \201\ See SIFMA Letter at 10.
---------------------------------------------------------------------------

    Summary of Monitoring Requirements in Final Rule. The Commission 
addresses these comments below, but for purposes of clarity we also 
will briefly summarize the monitoring requirements in the final Rule. 
As adopted, the Rule requires that a registered broker-dealer treat as 
an Unidentified Large Trader (for purposes of the recordkeeping and 
reporting provisions in paragraphs (d) and (e) of the Rule) any person 
that the broker-dealer ``knows or has reason to know'' is a large 
trader where such person has not complied with the identification 
requirement applicable to large traders (i.e., identified itself as a 
large trader to the broker-dealer and disclosed the accounts to which 
its LTID applies). As noted in Rule 13h-1(a)(9), in considering whether 
the broker-dealer has ``reason to know'' that a person is a large 
trader, however, the broker-dealer need take into account only 
transactions in NMS securities effected by or through such broker-
dealer (i.e., it need not seek out information on transactions effected 
by that person through another broker-dealer). Moreover, a broker-
dealer may determine that it has no ``reason to know'' that a person is 
a large trader through two methods. First, the broker-dealer may simply 
conclude, based on its knowledge of the nature of its customers and 
their trading activity with the broker-dealer, that it has no reason to 
expect that any of these customers' transactions approach the 
identifying activity level.\202\ Second, the broker-dealer may rely on 
the safe harbor provision in paragraph (f) of the Rule. Under the safe 
harbor, a registered broker-dealer would be deemed not to know or have 
reason to know that a person is a large trader if it does not have 
actual knowledge that a person is a large trader and it establishes 
policies and procedures reasonably designed to identify customers whose 
transactions at the broker-dealer equal or exceed the identifying 
activity level and, if so, to treat such persons as Unidentified Large 
Traders and notify them of their potential reporting obligations under 
this Rule. Under either approach, a broker-dealer's obligation with 
respect to an Unidentified Large Trader is limited to compliance with 
the requirements of paragraphs (d) and (e) of the Rule, and the broker-
dealer would not be required to cease trading or take other action with 
respect to that Unidentified Large Trader.\203\ The Commission notes 
that, pursuant to the reporting requirements of the Rule, it may 
periodically request reports from broker-dealers regarding all 
customers they may be treating as Unidentified Large Traders.
---------------------------------------------------------------------------

    \202\ For example, the broker-dealer may know, or learn from its 
customer, that the transactions over the identifying activity level 
were effected in connection with a tender offer, which are excluded 
under the Rule for purposes of determining whether a person is a 
Large Trader. Alternatively, the broker-dealer may know, or learn 
from its customer, that the account in question is an omnibus 
account and that the individual subaccounts do not exceed the 
identifying activity level.
    \203\ The Commission reiterates that the monitoring requirements 
are intended to be a ``limited'' duty that serves as ``a necessary 
backstop to encourage compliance and fulfill the objectives of 
Section 13(h) of the Exchange Act.'' Proposing Release, supra note 
3, 75 FR at 21470. The Commission believes that requiring limited 
monitoring by broker-dealers will help assure that the objectives of 
the Rule are met and is consistent with the statutory intent of 
Section 13(h) of the Exchange Act.
---------------------------------------------------------------------------

    Response to Comments and Discussion of the Final Rule. The 
Commission carefully considered the comments on the proposed rule, and 
therefore is providing responses and additional clarifications below 
regarding the monitoring requirements required under this Rule. In 
response to the comment asserting that the Commission lacks authority 
to impose monitoring requirements, we note that the explicit authority 
under Section 13(h) of the Exchange Act to adopt this Rule is 
supplemented by Section 23(a) of the Exchange Act, which allows the 
Commission to ``make such rules and regulations as may be necessary or 
appropriate to implement the provisions of this title for which they 
are responsible or for the execution of the functions vested in them by 
this title. * * *'' \204\ Further, 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 [them] * * 
* for any person that such broker or dealer has reason to know is a 
large trader on the basis of transactions in securities effected by or 
through such broker or dealer'' (emphasis added).\205\ That section, 
then, contemplates that registered broker-dealers would take into 
account their own customers' trading (which they have reason to know). 
The Commission believes, therefore, that it is reasonable to require 
broker-dealers to take into account a customer's trading activity 
through the broker-dealer's accounts to implement Section 13(h).
---------------------------------------------------------------------------

    \204\ 15 U.S.C. 78w(a).
    \205\ 15 U.S.C. 78m(h)(2).
---------------------------------------------------------------------------

    The Commission is, however, making several modifications to the 
proposed rule in response to commenters' requests for additional 
clarification. First, in response to questions regarding the scope of 
the information that a broker-dealer must consider in determining 
whether a person may be a large trader, the Commission is adopting a 
definition of Unidentified Large Trader to clarify what was intended in 
the proposed Rule--that a broker-dealer does not have ``reason to 
know'' that a person is a large trader other than by reference to 
transactions in accounts of the broker-dealer. In particular, proposed 
paragraph (a)(9) of the Rule would have defined an Unidentified Large 
Trader as a ``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.'' It further provided that ``[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.'' To clarify the Commission's intent for determining whether a 
registered broker-dealer has reason to know, the Commission is adopting 
a revised second sentence of paragraph (a)(9) of the Rule to provide: 
``For purposes of determining under this rule whether a registered 
broker-dealer has reason to know that a person is a large trader, a 
registered broker-dealer need take into account only transactions in 
NMS securities effected by or through such broker-dealer.'' In other 
words, when considering whether a customer's trading activity has 
exceeded the ``identifying activity level,'' the broker-dealer need 
only consider the customer's activity effected through an account or a 
group of accounts at that broker-dealer. If that activity rose to the 
``identifying activity level'', the broker-dealer would be required to 
treat the customer as an Unidentified Large Trader. Beyond considering 
the transactions effected through an account or a group of accounts at 
the broker-dealer, however, the broker-dealer is not required to 
proactively make further inquiries for the purpose of determining its 
customer's status (e.g., by seeking to determine the customer's trading 
activity at other broker-dealers). However, if a registered broker-
dealer

[[Page 46980]]

nevertheless has actual knowledge that a person is a large trader and 
the person has not provided the broker-dealer with a LTID, then the 
broker-dealer must treat the person as an Unidentified Large Trader 
under the recordkeeping and reporting requirements of the Rule.
    Further, in response to questions regarding the scope of a broker-
dealer's obligations with respect to an Unidentified Large Trader, the 
Commission notes that the Rule does not require a broker-dealer to stop 
doing business with Unidentified Large Traders. Rather, paragraph 
(d)(3) of the Rule requires broker-dealers to maintain information on 
Unidentified Large Traders, and paragraph (e) requires broker-dealers 
to report that information to the Commission on request.\206\ Moreover, 
the Rule does not require a broker-dealer to proactively or 
affirmatively determine who is in fact a large trader. A potential 
large trader is required to assess for itself whether it meets the 
identifying activity threshold and thus qualifies as a large trader. 
The Commission notes that in some cases only the potential large trader 
would know whether it in fact is a large trader because certain types 
of transactions are excluded from the identifying activity level 
calculation. For example, a broker-dealer may have a customer that 
effected $22,000,000 worth of transactions through that broker-dealer 
in a given day, in excess of the identifying activity threshold. If 
that customer did not previously identify itself as a large trader to 
the broker-dealer by providing an LTID and identifying the accounts to 
which it applies, then the broker-dealer would treat the customer as an 
Unidentified Large Trader. However, the customer may not, in fact, be 
required to register as a large trader because the customer may not 
have exercised investment discretion over those transactions.
---------------------------------------------------------------------------

    \206\ The Rule does not address any other obligation or 
potential liability of the broker-dealer under any other provisions 
of the federal securities laws.
---------------------------------------------------------------------------

    The Commission also is making several modifications to paragraph 
(f) from the proposal to clarify the requirements of the safe harbor 
provision contained in that paragraph. As noted above, this safe harbor 
would provide a broker-dealer with assurance as to whether it has 
``reason to know'' that a person is a large trader, and therefore 
whether the broker-dealer must treat such person as an Unidentified 
Large Trader. As a practical matter, the Commission expects that 
broker-dealers with customers whose trading activities could exceed the 
identifying activity level will likely elect to avail themselves of the 
safe harbor. To qualify under the safe harbor, the broker-dealer must 
(i) implement policies and procedures reasonably designed to identify 
customers whose trading activity exceeds the identifying activity 
level, (ii) treat such customers as Unidentified Large Traders for 
purposes of the Rule, and (iii) notify such customers of their 
potential obligation to comply with the rule as a large trader.
    Certain technical changes to paragraph (f) have been made to 
clarify these requirements. For example, paragraphs (f)(1) and (2) now 
make clear that if a customer's trading activity exceeds the 
identifying activity level, and the customer has not self-identified as 
a large trader, the broker-dealer must treat that customer as an 
Unidentified Large Trader for purposes of the Rule. In addition, 
paragraph (f)(1) has been revised to clarify that--consistent with the 
definition of Unidentified Large Trader--the broker-dealer's policies 
and procedures for measuring a customer's trading activity need only 
consider transactions effected in accounts carried by the broker-dealer 
or through which the broker-dealer executes transactions.\207\
---------------------------------------------------------------------------

    \207\ In addition, as proposed, paragraph (f) applied to broker-
dealers that are large traders, exercise investment discretion over 
an account together with a large trader or Unidentified Large 
Trader, carry an account for a large trader or Unidentified Large 
Trader, or effect transactions directly or indirectly for a large 
trader where a non-broker-dealer carries the account. Because the 
Commission is not adopting the proposed requirement to disclose 
account numbers or the corresponding requirements on large traders 
to disclose their LTIDs to other large traders, the Commission 
believes it is appropriate to streamline the introduction to 
paragraph (f) to refer to broker-dealers generally, and to modify 
sub-paragraph (1) to refer to transactions effected through an 
account or a group of accounts carried by such broker-dealer or 
through which such broker-dealer executes transactions, as 
applicable.
---------------------------------------------------------------------------

    ATSs. One commenter,\208\ a broker-dealer that operates an ATS, 
argued that an ATS should not have a duty to monitor its subscribers' 
compliance with the large trader identification requirements. The 
commenter argued that, just as an exchange would not have an obligation 
to monitor its broker-dealer members' compliance with proposed Rule 
13h-1, a broker-dealer that operates an ATS should not be required to 
monitor whether its subscribers are complying with the requirements of 
the rule. The Commission notes that the monitoring requirements are 
only applicable to registered broker-dealers that are large traders, 
carry accounts for large traders or Unidentified Large Traders, or 
effect transactions on behalf of large trader customers whose accounts 
are carried by non-broker-dealers. If an ATS is not operating in those 
capacities, then it is not subject to the monitoring requirements.
---------------------------------------------------------------------------

    \208\ See GETCO Letter at 3.
---------------------------------------------------------------------------

C. Foreign Entities

    In the Proposing Release, the Commission requested comment about 
whether the proposed treatment of foreign entities is appropriate and 
the extent to which foreign statutes might complicate compliance with 
the proposed rule by foreign large traders.\209\ In addition, the 
Commission solicited comment concerning whether the proposed rule would 
have any unintended negative consequences for the U.S. markets.\210\ 
The Commission received a number of comments, both general and 
specific, on these topics.\211\ One commenter expressed concern with 
the broad definition of ``large trader'' applying to non-U.S. entities, 
and suggested that the Commission modify the proposed rule to impose 
recordkeeping and reporting requirements solely on registered broker-
dealers.\212\ The Commission believes that limiting the definition of 
``large trader'' in the suggested manner would be inconsistent with the 
legislative intent behind Section 13(h), as evidenced by the plain 
language of the statute.\213\ The statute contemplates that the 
Commission would be able to identify all persons who are large traders, 
not just large traders who are U.S. entities. Accordingly, the Rule 
requires a foreign entity that is a large trader to comply with the 
identification requirements of paragraph (b) of the Rule. With respect 
to the recordkeeping and reporting requirements, however, the 
Commission notes that paragraphs (d) and (e) of the Rule, concerning

[[Page 46981]]

recordkeeping and reporting, respectively, explicitly apply only to 
U.S.-registered broker-dealers.
---------------------------------------------------------------------------

    \209\ See Proposing Release, supra note 3, 75 FR at 21473.
    \210\ See id. at 21482.
    \211\ See, e.g., European Banking Federation and Swiss Bankers 
Association Letter at 2-5 and SIFMA Letter at 12-13.
    \212\ See European Banking Federation and Swiss Bankers 
Association Letter at 3.
    \213\ Section 13(h)(1) in pertinent part provides that each 
large trader shall: (A) Provide such information to the Commission 
as the Commission may by rule or regulation prescribe as necessary 
or appropriate, identifying such large trader and all accounts in or 
through which such large trader effects such transactions; and (B) 
identify, in accordance with such rules or regulations as the 
Commission may prescribe as necessary or appropriate, to any 
registered broker or dealer by or through whom such large trader 
directly or indirectly effects securities transactions, such large 
trader and all accounts directly or indirectly maintained with such 
broker or dealer by such large trader in or through which such 
transactions are effected.
---------------------------------------------------------------------------

    One commenter suggested that it would be impractical for a 
registered broker-dealer to collect identifying information required by 
proposed Rule 13h-1(d)(3) when such collections may be prohibited under 
foreign laws.\214\ The commenter further suggested that, because 
registered broker-dealers may not be able to comply with this 
provision, they ``may effectively be forced to cease providing services 
to non-U.S. intermediaries acting on behalf of unidentified non-U.S. 
Traders. * * *'' \215\ Another commenter suggested that it would be 
impractical for a registered broker-dealer to monitor for foreign 
Unidentified Large Traders who trade through intermediaries.\216\ The 
commenter asked for clarification in this context regarding a 
registered broker-dealer's duty to inform its customers about the self-
identification requirements of the Rule.\217\ Specifically, the 
commenter asked whether it would be sufficient for the broker-dealer to 
notify the foreign intermediary of its customer's possible obligation 
to comply with the self-identification requirements of the Rule. As 
discussed further below, when a U.S. registered broker-dealer deals 
directly with a foreign entity that is an intermediary, it would treat 
that foreign intermediary like any other customer: it must collect the 
information specified by Rule 13h-1(d)(2) about the foreign 
intermediary's transactions if it is a large trader and, if it is an 
Unidentified Large Trader,\218\ the broker-dealer must also collect the 
information specified by Rule 13h-1(d)(3).\219\ The Rule does not 
require a registered broker-dealer to collect the identifying 
information about the foreign intermediary's customers.\220\
---------------------------------------------------------------------------

    \214\ See European Banking Federation and Swiss Bankers 
Association Letter at 3.
    \215\ See id.
    \216\ See SIFMA Letter at 12.
    \217\ See id.
    \218\ See discussion supra at Section III.B.3 (concerning 
monitoring for Unidentified Large Traders).
    \219\ Rule 13h-1(d)(3) requires a broker-dealer to maintain the 
following additional information for an Unidentified Large Trader: 
name, address, date the account was opened, and tax identification 
number(s). If an Unidentified Large Trader is a non-U.S. entity and 
does not have a U.S.-issued tax identification number, then the 
broker-dealer would only need to maintain the entity's name, 
address, and date the account was opened.
    \220\ The legislative history indicates Congress's expectation 
that the Commission, in implementing a large trader reporting 
system, ``would not impose requirements on broker-dealers to report 
beneficial ownership information that is not recorded in the normal 
course of business.'' Senate Report, supra note 14, at 42. The 
Committee specifically noted that many broker-dealers did not 
maintain beneficial ownership records of transactions of foreign 
persons that are carried out through banks, particularly foreign 
banks, which serve as the record holder of such securities. See id. 
The Committee expected that such beneficial owners would not be 
assigned LTIDs. See id. As discussed above, for all persons (both 
foreign and domestic), large trader status is triggered by the 
exercise of investment discretion, not mere beneficial ownership of 
NMS securities.
---------------------------------------------------------------------------

    As discussed above, Rule 13h-1(f) provides that a registered 
broker-dealer shall be deemed not 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 the Rule and does not have actual knowledge to the 
contrary. Those policies and procedures would need to be reasonably 
designed to identify potential large traders based upon transactions 
effected through an account or a group of accounts considering account 
name, tax identification number, or other identifying information 
available on the books and records of the broker-dealer. The Rule does 
not require broker-dealers to definitively determine who is, in fact, a 
large trader.
    Further, in the case of foreign intermediaries, the Commission 
recognizes that the U.S. registered broker-dealer may only know as its 
customer the foreign intermediary, not the persons trading through the 
account of the foreign intermediary. In such case, the registered 
broker-dealer's policies and procedures would apply to its contact with 
the foreign intermediary. If the intermediary effects transactions 
through the U.S. broker-dealer that exceed the identifying activity 
level, then the safe harbor contemplates, as discussed above, that the 
broker-dealer inform the intermediary that the intermediary may be a 
large trader under Rule 13h-1. The foreign intermediary, then, bears 
the principal burden of compliance in determining whether it is a large 
trader.
    With respect to the requirement on large traders to file Form 13H 
with the Commission, the Commission is aware that the laws of certain 
foreign jurisdictions may hinder a foreign large trader's ability to 
disclose certain personal identifying information. In the event, which 
the Commission believes to be unlikely, that the laws of a large 
trader's foreign jurisdiction preclude or prohibit the large trader 
from waiving such restrictions or otherwise voluntarily filing Form 13H 
with the Commission, then such foreign large traders or representatives 
of foreign large traders may request an exemption from the Commission 
pursuant to Section 36 of the Exchange Act \221\ and paragraph (g) of 
the Rule.\222\
---------------------------------------------------------------------------

    \221\ 15 U.S.C. 78mm.
    \222\ A registered broker-dealer, however, would remain subject 
to the recordkeeping, reporting, and monitoring provisions of the 
Rule with respect to any Unidentified Large Traders independent of 
whether any such entity had received an exemption from the 
requirements to file Form 13H with the Commission.
---------------------------------------------------------------------------

    Commenters also discussed the practical difficulties associated 
with requiring large traders (such as investment advisers) to disclose 
account numbers. A few commenters stated that the proposal was unclear 
as to whether it would have required collection of brokerage account 
information or the account numbers assigned by investment advisers that 
sometimes contain client-identifying information.\223\ The Commission 
has addressed this concern by not adopting the proposed requirement to 
report brokerage account numbers, as discussed above.\224\ Instead, the 
Commission is requiring that a large trader provide information about 
the registered broker-dealers through which Securities Affiliates have 
an account. One commenter asserted that many foreign large traders do 
not have a direct relationship with any registered broker-dealer 
because they utilize intermediaries.\225\ The commenter stated that the 
large trader's ability to provide information about the ``ultimate 
broker may be incomplete at best and may result in inadvertently 
misleading the Commission.'' \226\ The Commission does not believe that 
it is unduly burdensome to expect a large trader to be able to identify 
the foreign intermediary with which it maintains accounts. The 
Commission expects all large traders, regardless of their place of 
domicile, to identify each broker-dealer at which it or any Securities 
Affiliate has an account and disclose the type(s) of services provided.
---------------------------------------------------------------------------

    \223\ See European Banking Federation and Swiss Bankers 
Association Letter at 3; T. Rowe Price Letter at 2; and Financial 
Engines Letter at 4.
    \224\ See supra at Section III.A.3.0.
    \225\ See European Banking Federation and Swiss Bankers 
Association Letter at 2.
    \226\ See id. at 4 (discussing the challenges associated with 
foreign large traders providing account information).
---------------------------------------------------------------------------

D. Three Specific Factors Considered by the Commission Pursuant to 
Section 13(h) of the Exchange Act

    When engaging in rulemaking pursuant to its authority under Section 
13(h), the Commission is required to take into account the following 
factors: (A) Existing reporting systems; (B) the costs associated with 
maintaining information with respect to transactions effected by large 
traders and reporting

[[Page 46982]]

such information to the Commission or self-regulatory organizations; 
and (C) the relationship between the United States and international 
securities markets.\227\ These considerations have informed this final 
rule, as discussed below.
---------------------------------------------------------------------------

    \227\ See Section 13(h)(5) of the Exchange Act, 15 U.S.C. 
78m(h)(5).
---------------------------------------------------------------------------

1. Existing Reporting Systems
    Currently, the Commission collects transaction data from registered 
broker-dealers through the EBS system.\228\ At present, neither the EBS 
system nor any other source of data available to the Commission allows 
it to definitively identify traders that conduct a substantial amount 
of trading activity or assess the impact of their activities on the 
securities markets.
---------------------------------------------------------------------------

    \228\ See 17 CFR 240.17a-25 (Electronic Submission of Securities 
Transaction Information by Exchange Members, Brokers, and Dealers). 
See also Rule 17a-25 Release, supra note 19.
---------------------------------------------------------------------------

    Rule 13h-1 is focused on collecting information about large traders 
through modifications to existing EBS systems. Specifically, the Rule 
will provide the Commission with background information about all large 
traders through Form 13H submissions,\229\ and will allow the 
Commission to obtain information on their transactions through the 
requirement on registered broker-dealers to track large trader trades 
according to the trader's LTID. Moreover, by requiring registered 
broker-dealers to collect and report (upon request) the execution time 
of all large trader transactions, the Commission is significantly 
enhancing its ability to investigate trading. Accordingly, the 
Commission believes that this new rule, which will be implemented 
through modifications to existing EBS systems, is narrowly tailored to 
address specific regulatory interests by requiring the disclosure of 
information that is not otherwise collected.\230\
---------------------------------------------------------------------------

    \229\ See supra Section 0.
    \230\ The Commission notes that Form 13H requires a large trader 
to identify other forms it and its Securities Affiliates file with 
the Commission. As discussed above, this disclosure is designed to 
facilitate and expedite investigations connected to large traders.
---------------------------------------------------------------------------

2. Costs Associated With Maintaining and Reporting Large Trader 
Transaction Data
    As discussed in detail below,\231\ the Commission considered the 
costs associated with maintaining and reporting the large trader 
transaction data required under the Rule by registered broker-dealers. 
In particular, as discussed below, the Commission has designed the 
proposed rule to minimize the burdens of the large trader reporting 
requirements on both large traders and registered broker-dealers.
---------------------------------------------------------------------------

    \231\ See infra Section 0.
---------------------------------------------------------------------------

3. Relationship Between U.S. and International Securities Markets
    In adopting Rule 13h-1 and Form 13H, the Commission is mindful of 
the danger of disadvantaging U.S. securities markets vis-[aacute]-vis 
foreign securities markets. In the Proposing Release, the Commission 
expressed concern 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.\232\ Commenters raised issues about the application of the 
Rule to foreign entities, which are addressed above.\233\
---------------------------------------------------------------------------

    \232\ See Proposing Release, supra note 3, 75 FR at 21471.
    \233\ See supra Section III.0.
---------------------------------------------------------------------------

    The Commission solicited comment specifically about: whether the 
proposed rule might incentivize trading through certain market centers; 
whether large traders would effect their trades through entities other 
than registered broker-dealers (e.g., foreign brokers); whether large 
traders might trade increasingly in foreign jurisdictions to evade the 
proposed reporting requirements; whether the proposed treatment of 
foreign entities is appropriate; the extent to which foreign statutes 
complicate foreign large traders' ability to comply with the proposed 
rule; and whether the proposal would have any unintended negative 
consequences for the U.S. markets.\234\ The Commission received few 
comments that specifically addressed these topics.
---------------------------------------------------------------------------

    \234\ See Proposing Release, supra note 3, 75 FR at 21473, 
21482.
---------------------------------------------------------------------------

    One commenter warned that, to the extent that registered broker-
dealers incur higher costs as a result of the complying with the Rule, 
the Rule may result in some brokerage business being driven offshore to 
foreign brokers who will not bear the same compliance burden.\235\ As 
discussed above, the Commission clarified the extent and nature of the 
monitoring responsibilities applicable to registered broker-dealers and 
does not believe that the limited, high-level monitoring requirements 
would impose a cost so high as to drive business offshore. Further, as 
discussed in the Proposing Release and further below, the Commission 
believes that the Rule has been narrowly tailored to produce a core set 
of information necessary for the Commission to effectuate its authority 
under Section 13(h) of the Exchange Act in a manner that only results 
in minimal increased costs and burdens.
---------------------------------------------------------------------------

    \235\ See Prudential Letter at 2, n.4.
---------------------------------------------------------------------------

    Another commenter suggested that the Rule may shift business away 
from trading in NMS securities and to other financial products that are 
not subject to the large trader reporting requirements but that allow 
market participants to undertake economically equivalent 
positions.\236\ Specifically, the commenter asserted that market 
participants may gain the equivalent exposure through European 
Depositary Receipts, Global Depositary Receipts, European exchange-
traded funds, futures, and swaps and that, if the Rule is adopted, it 
may cost less to use these alternatives than to invest directly in NMS 
securities.\237\ The commenter provided no data to support its position 
and did not take into account the liquidity profiles or transaction 
cost differences among those alternatives. The Rule is designed to be 
minimally burdensome both to large traders and the registered broker-
dealers who must record and report trading information. The Commission 
also notes that the costs associated with some of the alternatives 
identified by the commenter may soon change. For example, Title VII of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act \238\ 
directs the Commission and the CFTC to regulate over-the-counter 
derivatives. Thus, these investments will be subject to regulation and 
oversight that have not applied in the past. In addition, the CFTC has 
a large trader reporting regime that currently applies to traders and 
transactions that are subject to the CFTC's regulatory authority. The 
Senate Report that accompanied the Market Reform Act observed that the 
U.S. futures markets, where reporting of large futures positions is 
required, have not been competitively disadvantaged by the CFTC's large 
trader reporting system, and that participants in those U.S. markets 
have generally not left for foreign markets.\239\ On balance, as 
discussed further below, the Commission believes that the costs 
associated with Rule 13h-1 will not negatively impact the 
attractiveness of U.S. securities markets, capital formation in the 
U.S.,\240\ or the

[[Page 46983]]

competitive position of U.S. market participants.
---------------------------------------------------------------------------

    \236\ See European Banking Federation and Swiss Bankers 
Association Letter at 4-5.
    \237\ See id.
    \238\ Public Law No. 111-203 (July 21, 2010).
    \239\ See Senate Report, supra note 14, at 42.
    \240\ The Senate Committee on Banking, Housing and Urban Affairs 
expected the Commission, in adopting any direct reporting rules, to 
consider carefully the total impact of such rules on capital 
formation in the U.S. See id.
---------------------------------------------------------------------------

E. Implementation and Compliance Dates, Exemptive Authority

    The Commission proposed that the broker-dealer recordkeeping 
requirements contained in Rule 13h-1(d) and the reporting requirements 
contained in Rule 13h-1(e) would become effective six months after 
adoption of a final rule.\241\ In the Proposing Release, the Commission 
solicited comment regarding the proposed implementation period.\242\ 
The few commenters who specifically responded to this inquiry expected 
that it would take longer than six months to implement the necessary 
system changes.\243\ One commenter suggested that 18 months would be a 
more appropriate implementation period to accommodate the system 
changes and testing required to implement the proposed T+1 reporting 
requirement.\244\
---------------------------------------------------------------------------

    \241\ See Proposing Release, supra note 3, 75 FR at 21471.
    \242\ See id. at 21473.
    \243\ See Financial Information Forum Letter at 7 and SIFMA 
Letter at 6.
    \244\ See SIFMA Letter at 19.
---------------------------------------------------------------------------

    After considering the comments, the Commission continues to believe 
that, because the Rule utilizes the existing EBS system infrastructure, 
broker-dealers should be able to enhance their existing recordkeeping 
and reporting systems to meet the requirements of the proposed large 
trader rule within a relatively short time period. Nevertheless, to 
accommodate commenters' requests for more time to test and implement 
their systems, the Commission is adopting an implementation date for 
the requirements applicable to registered broker-dealers three months 
later than proposed. The Commission believes that this additional time 
should allow registered broker-dealers to plan, design, implement, and 
test the small number of enhancements to their existing transaction 
reporting systems required by the Rule. Accordingly, the deadline for 
implementing the recordkeeping and reporting requirements applicable to 
registered broker-dealers is seven months after the Effective Date of 
the Rule.\245\
---------------------------------------------------------------------------

    \245\ The Effective Date of the Rule, as noted above, is 60 days 
after publication in the Federal Register.
---------------------------------------------------------------------------

    The Commission also proposed that the self-identification 
requirements for large traders under Rule 13h-1(b) would become 
effective three months after adoption of a final rule.\246\ In the 
Proposing Release, the Commission requested comments about whether that 
implementation period was sufficient.\247\ A number of commenters 
suggested lengthening the three-month implementation period, 
recommending either 12 months \248\ or 18 months.\249\ Two commenters 
\250\ suggested that the self-identification requirements should be 
delayed until the Commission is prepared to receive electronic Forms 
13H.\251\
---------------------------------------------------------------------------

    \246\ See Proposing Release, supra note 3, 75 FR at 21471.
    \247\ See id. at 21473.
    \248\ See Prudential Letter at 5; Investment Adviser Association 
Letter at 9; and Investment Company Institute Letter at 12.
    \249\ See SIFMA Letter at 19.
    \250\ See T. Rowe Price Letter at 3 and Investment Adviser 
Association Letter at 9-10.
    \251\ In the Proposing Release, the Commission mentioned the 
possibility that large traders might be required to file Forms 13H 
in paper form in the event that the agency's electronic filing 
system is not operational as of the implementation deadline. See 
Proposing Release, supra note 3, 75 FR at 21465.
---------------------------------------------------------------------------

    As discussed above, the Commission has streamlined the Form 13H 
from the proposed version to minimize the reporting burdens. For 
example, the Commission did not adopt the most detailed question in the 
proposed Form that would have required large traders to identify all of 
the brokerage account numbers through which they trade. With these 
changes from the proposal, the Commission believes that the three-month 
time frame provides large traders adequate time to gather together the 
information required by the Form. Further, the Commission expects that 
its electronic filing system will be operational and capable of 
receiving fully-electronic Form 13H filings by the proposed compliance 
date. Nevertheless, to accommodate commenters' requests for more time, 
the Commission is adopting a longer compliance date for large traders. 
Accordingly, the self-identification requirement for large traders will 
commence two months after the Effective Date of the Rule.\252\
---------------------------------------------------------------------------

    \252\ The Effective Date of the Rule, as noted above, is 60 days 
after publication in the Federal Register.
---------------------------------------------------------------------------

    Section 13(h)(6) of the Exchange Act \253\ 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.'' Rule 13h-1(g) implements 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 
transactions from the provisions of this rule to the extent that such 
exemption is consistent with the purposes of the Securities Exchange 
Act.''
---------------------------------------------------------------------------

    \253\ 15 U.S.C. 78m(h)(6).
---------------------------------------------------------------------------

    The Commission requested comment about whether certain categories 
of persons (such as floor brokers, specialists, and market makers) 
should be exempted from the proposed rule.\254\ One commenter suggested 
exempting persons whose trading activities are an ancillary activity in 
support of a core charitable purpose.\255\ The commenter asserted that 
such non-profit entities generally are infrequent traders, and that the 
Rule is designed to capture the activities of frequent traders.\256\
---------------------------------------------------------------------------

    \254\ See Proposing Release, supra note 3, 75 FR at 21473.
    \255\ See Howard Hughes Medical Institute Letter at 2.
    \256\ See id. at 1.
---------------------------------------------------------------------------

    As discussed above, frequency of trading alone does not affect 
whether a person is a large trader.\257\ Non-profit organizations may 
engage in arm's-length purchases and sales of NMS securities in the 
secondary market, and their transactions may involve the exercise of 
investment discretion. Therefore, at this time, the Commission does not 
believe that a blanket exemption for such entities is appropriate.
---------------------------------------------------------------------------

    \257\ See supra text following note 60.
---------------------------------------------------------------------------

    The Commission notes, as discussed above, that any entity that 
merely beneficially owns NMS securities would not qualify as a large 
trader; only an entity that exercises investment discretion, directly 
or indirectly, on behalf of itself or others (e.g., a registered 
investment adviser or a pension fund manager), and effects transactions 
equal to or greater than the identifying activity level, can qualify as 
a large trader.

IV. Paperwork Reduction Act

    The Rule contains ``collection of information'' requirements within 
the meaning of the Paperwork Reduction Act of 1995 (``PRA'').\258\ In 
accordance with 44 U.S.C. 3507 and 5 CFR 1320.11, the Commission 
submitted the provisions to the Office of Management and Budget 
(``OMB'') for review. The title for the proposed collection of 
information requirement, 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

[[Page 46984]]

a person is not required to respond to, a collection of information 
unless it displays a currently valid control number.
---------------------------------------------------------------------------

    \258\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission solicited comment on the 
collection of information requirements. The Commission noted that the 
estimates of the effect that the Rule would have on the collection of 
information were based on the Commission's experience with similar 
reporting requirements. As discussed above, the Commission received 87 
comment letters on the proposed rulemaking. Various commenters 
addressed the collection of information aspects of the proposal.\259\
---------------------------------------------------------------------------

    \259\ See, e.g., Managed Funds Association Letter, Prudential 
Letter, Investment Adviser Association Letter, Wellington Management 
Letter, Investment Company Institute Letter.
---------------------------------------------------------------------------

A. Summary of Collection of Information

    Under Rule 13h-1, a ``large trader'' is 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 will be required to identify themselves to the 
Commission by filing Form 13H and will be required to update their Form 
13H from time to time.\260\ Upon receiving an initial Form 13H, the 
Commission will assign to the large trader a unique LTID. Each large 
trader will be required to disclose to registered broker-dealers 
effecting transactions on its behalf its LTID and each account to which 
it applies.\261\ In addition, upon request by the Commission, a large 
trader will be required promptly to provide additional information to 
the Commission that will allow the Commission to further identify the 
large trader and all accounts through which the large trader effects 
transactions.\262\
---------------------------------------------------------------------------

    \260\ See new Rule 13h-1(b).
    \261\ See new Rule 13h-1(b)(2).
    \262\ See new Rule 13h-1(b)(4).
---------------------------------------------------------------------------

    As discussed above, in response to comments, the Commission has 
adopted Form 13H without the proposed requirement that large traders 
report their broker-dealer account numbers on Form 13H. Instead, large 
traders will be required to report a list of broker-dealers with whom 
they have an account. As a consequence, as discussed above, large 
traders will not have to report on Form 13H the LTID of any 
unaffiliated large trader with whom they share investment discretion, 
as that proposed requirement was connected to the identification of 
accounts.
    Rule 13h-1 also imposes recordkeeping, reporting, and monitoring 
requirements on registered broker-dealers. Paragraph (d)(1) of the Rule 
requires 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 or (ii) if the broker-dealer is a large 
trader, any proprietary or other account over which such broker-dealer 
exercises investment discretion.\263\ 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 transactions 
directly or indirectly for such person must maintain records of all of 
the information required under paragraphs (d)(2) and (d)(3) for those 
transactions. The term ``Unidentified Large Trader'' is defined to mean 
each person who has not complied with the identification requirements 
of paragraphs (b)(1) and (b)(2) of the Rule that a registered broker-
dealer knows or has reason to know is a large trader. For purposes of 
determining under the Rule whether a registered broker-dealer has 
reason to know that a person is a large trader, a registered broker-
dealer need take into account only transactions in NMS securities 
effected by or through such broker-dealer.\264\ Further, a registered 
broker-dealer will be deemed not 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 not have actual knowledge that a person is a 
large trader.\265\ In response to comments, the Commission clarified 
that a broker-dealer need only look to aggregate transactions it 
effected for its customer in assessing whether a person may be an 
Unidentified Large Trader. The Commission also clarified that even if a 
person's transactions at a broker-dealer meet the applicable 
identifying activity threshold, the customer might or might not be a 
large trader under Rule 13h-1, and the person itself is responsible for 
determining whether it is a large trader.\266\
---------------------------------------------------------------------------

    \263\ A broker-dealer that exercises discretion over an account 
with someone else would know that that person is an Unidentified 
Large Trader based on the transactions effected through that jointly 
managed account.
    \264\ See new Rule 13h-1(a)(9) (defining ``Unidentified Large 
Trader'').
    \265\ See new Rule 13h-1(f) (the monitoring safe harbor). The 
policies and procedures contemplated by the safe harbor contemplate 
systems that are reasonably designed to detect and identify a large 
trader based upon transactions effected through an account or groups 
of accounts considering the identity of the trader by using 
information readily available to the broker-dealer, such as name or 
tax identification number.
    \266\ For example, the customer might have effected transactions 
that, for purposes of determining whether a person is a large 
trader, are excluded from consideration under new Rule 13h-1(a)(6), 
in which case the customer would not qualify as a ``large trader'' 
based solely on those transactions.
---------------------------------------------------------------------------

    Complementing the recordkeeping requirements on broker-dealers, 
Rule 13h-1(e) requires registered broker-dealers that are required to 
keep records pursuant to paragraph (d)(1) to report that information to 
the Commission upon request.\267\ Specifically, upon the request of the 
Commission, a registered broker-dealer 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.\268\
---------------------------------------------------------------------------

    \267\ See new Rule 13h-1(e).
    \268\ In addition to reporting transaction data on large 
traders, the Rule requires broker-dealers to report transaction data 
for Unidentified Large Traders, along with additional information to 
help the Commission identify the Unidentified Large Trader. 
Specifically, paragraph (e) of the Rule requires broker-dealers to 
maintain and report for Unidentified Large Traders such person's 
name, address, date the account was opened, and tax identification 
number(s). See also new Rule 13h-1(d)(3).
---------------------------------------------------------------------------

    Broker-dealers will 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 data for a given 
day 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. Further, as 
discussed above, the Commission clarified in response to comments that 
while a person need not count trading activity that falls within one of 
the listed categories of excluded transactions when it determines 
whether it meets the

[[Page 46985]]

applicable identifying activity threshold, a broker-dealer must report 
all transactions that it effected through the accounts of a large 
trader without reference to or exclusion of any transactions listed in 
Rule 13h-1(a)(6).
    In recognition of the value of utilizing existing reporting 
systems,\269\ the Rule requires broker-dealers to transmit the 
transaction records to the Commission utilizing the infrastructure of 
the existing EBS system. With respect to timing, 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.\270\ Rule 13h-1 incorporates this requirement in 
paragraph (d)(5). Therefore, transaction reports, including data on 
transactions up to and including the day immediately preceding the 
request, will need to be submitted to the Commission no later than the 
day and time specified in the request for transaction information, 
which shall be no earlier than the opening of business of the day 
following such request, unless in unusual circumstances the same-day 
submission of information is requested. Paragraph (d)(4) of the Rule 
requires 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.\271\
---------------------------------------------------------------------------

    \269\ As noted above, in connection with exercising rulemaking 
authority under Exchange Act Section 13(h), the Commission must 
consider existing reporting systems. See supra Section III.0.
    \270\ See 15 U.S.C. 78m(h)(2). See also discussion supra at 
Section III.B.2 (concerning reporting requirements).
    \271\ 17 CFR 240.17a-4.
---------------------------------------------------------------------------

B. Use of Information

    The Commission will use the information collected pursuant to Rule 
13h-1 to identify significant market participants and collect data on 
their trading activity. The large trader reporting requirements will 
provide the Commission with access to a new data source that will 
contribute to its ability to conduct investigations and enforcement 
matters, as well as analyze market activity, and should enhance its 
ability to assess the impact of large traders on the securities 
markets. It also will facilitate the Commission's trading 
reconstruction efforts, as transaction data that will be reported to 
the Commission pursuant to Rule 13h-1 will include the time of 
execution of the order as well as the identity of the large trader that 
effected the trade.
    Registered broker-dealers will use the information they collect 
pursuant to Rule 13h-1, including LTID numbers, to comply with the 
requirement of the Rule to report to the Commission upon request all 
transactions they effect for large traders. In addition, registered 
broker-dealers that take advantage of the monitoring safe harbor will 
use the information they collect pursuant to Rule 13h-1 in connection 
with their policies and procedures under the Rule to monitor for 
Unidentified Large Traders and inform them of their potential 
obligations under Rule 13h-1. Registered broker-dealers also will be 
required to disclose the additional information they collect on 
Unidentified Large Traders pursuant to Rule 13h-1(d)(3) to the 
Commission upon request.

C. Respondents

    In the Proposing Release, the Commission estimated that the 
``collection of information'' associated with the Rule would apply to 
approximately 400 large traders and 300 registered broker-dealers. In 
the Proposing Release, the Commission solicited comment on the 
estimated number of respondents. Several commenters believed that the 
Commission's estimated number of respondents appeared to be too low, 
though few provided data or analysis to support their conclusions.\272\ 
For the reasons discussed below, the Commission continues to believe 
that the Rule will affect approximately 400 large traders and 300 
registered broker-dealers.
---------------------------------------------------------------------------

    \272\ See, e.g., Investment Adviser Association Letter at 10; 
Managed Funds Association Letter at 2; SIFMA Letter at 7; and 
Financial Information Forum Letter at 5-6.
---------------------------------------------------------------------------

1. Number of Large Traders
    The estimated number of large traders was based on Commission 
experience in reviewing EBS data and overseeing market participants. 
Notably, the estimate reflects Rule 13h-1(b)(3) filing requirement 
provisions, which focus, in more complex organizations, on the parent 
company of the entities that employ or otherwise control the 
individuals that exercise investment discretion. One commenter believed 
that the estimate of 400 large traders was underestimated and that the 
proposed thresholds may capture more than 400 large traders, including 
especially infrequent large traders, based on the proposed identifying 
activity level.\273\ In particular, the commenter argued that the rule 
should not impose a self-identification requirement on traders that 
only infrequently trade in substantial volume.\274\ The Commission 
agrees with this view, which reflects some of the considerations that 
informed the Commission's proposed provision for inactive status, which 
it is adopting. As discussed above, inactive status is designed to 
reduce the burden on infrequent traders who may trip the large trader 
threshold on a particular occasion but who do not regularly trade at 
sufficient levels to otherwise warrant the regulatory requirements 
under the Rule. Inactive status relieves the large trader from the 
requirement to file amended Forms 13H. However, as discussed above, 
even where a market participant trades in an amount that reaches the 
identifying activity threshold only infrequently--which at those times 
nonetheless would represent a substantial amount of trading activity 
relative to overall market volume--the Commission seeks to identify 
that participant as a large trader at those times so as to be able to 
obtain information about the participant. In light of the proposed 
provision for inactive status, which the Commission is adopting as 
proposed, the Commission's original estimate of 400 large traders 
accounted for traders that only infrequently trade in excess of the 
proposed identifying activity threshold, which the Commission also is 
adopting as proposed.
---------------------------------------------------------------------------

    \273\ See Managed Funds Association Letter at 2.
    \274\ See id.
---------------------------------------------------------------------------

    The Commission continues to believe that the estimate of 400 large 
traders is appropriate for other reasons. The estimate reflects the 
Rule's focus on identification and registration of large traders at the 
parent company level. As noted in the Proposing Release, the purpose of 
this focus is to narrow the number of persons that will need to self-
identify and register on Form 13H as ``large traders,'' thereby 
allowing the Commission to identify the primary institutions that 
conduct a large trading business. One commenter believed that the 
number was underestimated and that 400 option traders alone would 
qualify as large traders.\275\ However, this concern does not reflect 
the fact that the Rule contemplates registration as a large trader at 
the parent company level. Most, if not all, large trader control 
groups, as a natural consequence of their substantial trading and 
hedging activities, would involve persons that are active across a 
broad array of financial products trading in multiple venues, including 
cash equities and derivatives. The Commission's estimate, which was 
based on its experience with EBS data, takes into account this fact. 
Accordingly, the estimate does not separately count the number of 
subsidiary traders that conduct an options business (or any other 
securities

[[Page 46986]]

business) as separate from the number of large trader complexes since 
the estimated number of large traders considers that large traders will 
identify at the parent company level, which is generally less 
burdensome than registering at the subsidiary level, as discussed 
above.
---------------------------------------------------------------------------

    \275\ See SIFMA Letter at 7.
---------------------------------------------------------------------------

    In addition, as discussed above, in response to comments the Rule 
as adopted allows a large trader to voluntarily register with the 
Commission, even before it meets the applicable trading activity 
threshold, in order to eliminate its need to actively monitor its 
trading levels.\276\ The Commission is not adjusting its estimate of 
the number of large traders to account for such voluntary registrations 
because it expects that only persons whose trading activity would 
eventually equal or exceed the identifying activity level will take 
advantage of this new provision. In other words, the Commission expects 
that the only persons who would take advantage of the voluntary 
registration provision are persons that wish to avoid the burdens of 
monitoring their trading activity where such trading generally meets or 
exceeds the identifying activity threshold--that is, who in fact will 
be large traders. Accordingly, the Commission's original estimate of 
400 large traders already includes persons who might consider voluntary 
registration because such persons were effectively deemed to be large 
traders for purposes of that estimate.
---------------------------------------------------------------------------

    \276\ See supra text accompanying note 115 (for a discussion of 
voluntary filing).
---------------------------------------------------------------------------

2. Number of Broker-Dealers Affected
    In the Proposing Release, the Commission estimated that 300 
registered broker-dealers would be subject to the recordkeeping, 
reporting, and monitoring requirements of the rule. This estimate was 
based on broker-dealer responses to FOCUS report filings with the 
Commission made in 2009. This estimate reflected 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 an Unidentified Large Trader where a 
non-broker-dealer carries the account.
    One commenter thought that the Commission's broker-dealer estimate 
of 300 broker-dealers was underestimated and believed that the number 
of broker-dealers affected by the monitoring requirements might be 
closer to 1,500.\277\ This commenter, whose analysis was based on the 
monitoring safe harbor provisions of the proposed rule, expressed 
concern with the reference to ``other readily available information'' 
contained in the proposed safe harbor. The commenter explained that 
``other readily available information might only be available at the 
introducing broker-dealer, and therefore clearing firms might 
reasonably require the broker-dealers that introduce customer accounts 
to them to implement their own policies and procedures * * *''.\278\ 
Thus, the commenter's assertion was based on a belief that, though the 
Rule itself would not specifically require it, carrying broker-dealers 
might, in turn, require their introducing broker correspondents to 
establish policies and procedures to collect information on 
Unidentified Large Traders required by the Rule to assist the clearing 
firms in complying with the requirements of the Rule that are 
applicable to them.\279\ The commenter's estimate of 1,500 entities was 
based on the fact that approximately 1,657 FINRA members have been 
assigned MPIDs as of June 2010.\280\
---------------------------------------------------------------------------

    \277\ See Financial Information Forum Letter at 6. The commenter 
focused its comment on the proposed monitoring requirement.
    \278\ See id.
    \279\ See id.
    \280\ See id.
---------------------------------------------------------------------------

    The Commission is mindful of this commenter's concern and has 
clarified in the adopted monitoring safe harbor provision of Rule 13h-
1(f) the more limited scope intended of ``other identifying 
information'' that a broker-dealer would need to consider. 
Specifically, as adopted, the safe harbor policies and procedures would 
need to be reasonably designed to identify Unidentified Large Traders 
based only on accounts at the broker-dealer. In assessing which 
accounts to consider, the Rule, as adopted, clarifies that the broker-
dealer's policies and procedures should consider account name, tax 
identification number, or other identifying information ``available on 
the books and records of such broker-dealer.'' The broker-dealer's safe 
harbor policies and procedures would not need to take into account 
identifying information on the books and records of another broker-
dealer. The Commission believes it has addressed the commenter's 
concerns by clarifying in the adopted Rule that the approximately 300 
brokers affected by this Rule would not be required to consider 
information that would otherwise have required, as estimated by the 
commenter, as many as 1,500 broker-dealers that introduce customer 
accounts to implement their own policies and procedures.
    In addition, the Commission believes that large traders, whose 
aggregate NMS securities transactions equal or exceed the identifying 
activity level, require sophisticated trade-processing capacities. 
Accordingly, it is unlikely that 1,500 broker-dealers that have been 
assigned an MPID either carry accounts for or will effect a transaction 
on behalf of a large trader because not all such entities will have, or 
will be in the business of, effecting trades for large traders. For 
example, one commenter, a large investment management firm and likely 
large trader, reported that it currently has ``approximately 250 
broker-dealers on our approved list for executing equity 
transactions''.\281\ This number is lower than the Commission's 
estimate of 300 affected broker-dealers.
---------------------------------------------------------------------------

    \281\ See Wellington Management Letter at 3.
---------------------------------------------------------------------------

    Further, as discussed above, in considering whether a broker-dealer 
has ``reason to know'' that a person is a large trader, the broker-
dealer need take into account only transactions in NMS securities 
effected by or through such broker-dealer.\282\ Moreover, a broker-
dealer may determine that it has no ``reason to know'' that a person is 
a large trader through two methods. First, the broker-dealer may rely 
on the safe harbor of Rule 13h-1(f). Alternatively, however, a broker-
dealer may simply conclude, based on its knowledge of the nature of its 
customers and their trading activity with the broker-dealer, that it 
has no reason to expect that any of these customers' transactions 
approach the identifying activity level. Accordingly, an introducing 
broker-dealer whose customers do not effect transactions in NMS 
securities by or through it at levels close to the identifying activity 
level could simply draw such conclusion and would not need to implement 
any new policies and procedures.
---------------------------------------------------------------------------

    \282\ Section III.B.3 (discussing the monitoring requirements).
---------------------------------------------------------------------------

    Therefore, for the reasons described above, all 1,500 entities are 
not expected to be impacted by the monitoring provisions of Rule 13h-
1(f) and the Commission continues to believe that its initial estimate 
of 300 affected broker-dealers is appropriate consistent with the 
additional guidance provided in Rule 13h-1(f), as adopted.\283\ As 
discussed above, the Commission's estimate of 300 broker-dealers was 
based on broker-dealer responses to FOCUS report filings with the

[[Page 46987]]

Commission, and reflected the number of broker-dealers that the 
Commission believes would be reasonably likely to carry accounts for 
large traders or that would be reasonably likely to effect transactions 
directly or indirectly for a large trader where a non-broker-dealer 
carries the account.
---------------------------------------------------------------------------

    \283\ To the extent that a broker-dealer that is subject to the 
monitoring requirements requires, by contract or otherwise, an 
entity that is not otherwise subject to the Rule's monitoring 
requirements to nevertheless perform a monitoring function, the 
Commission's estimate does not account for that situation.
---------------------------------------------------------------------------

    Further, as discussed above, the Commission received a comment 
letter from a broker-dealer that operates an ATS inquiring whether the 
requirement to monitor for Unidentified Large Traders would extend to 
other registered broker-dealers, including a broker-dealer that 
operates an ATS.\284\ The monitoring requirements are applicable to 
registered broker-dealers that are large traders, carry accounts for 
large traders or Unidentified Large Traders, or effect transactions on 
behalf of large trader customers whose accounts are carried by non-
broker-dealers. If an ATS is not operating in those capacities, then it 
is not subject to the monitoring requirements. The Commission does not 
expect ATSs to act in these capacities, and so the Commission is not 
amending its estimate of the number of affected registered broker-
dealers to include ATSs.
---------------------------------------------------------------------------

    \284\ See GETCO Letter at 3.
---------------------------------------------------------------------------

D. Total Initial and Annual Burdens

1. Burden on Large Traders
a. Duties of Large Traders
    Rule 13h-1 will present new burdens to persons 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'' will become 
subject to a new reporting duty, as the Rule will require each large 
trader to identify itself to the Commission by filing a Form 13H and 
submitting annual updates, as well as updates on as frequently as a 
quarterly basis when necessary to correct information previously 
disclosed that has become inaccurate. Additionally, each large trader 
will be required to identify itself to each registered broker-dealer 
through which it effects transactions. As discussed above, however, the 
Commission did not adopt the proposed requirement that large traders 
disclose their LTIDs to others with whom they collectively exercise 
investment discretion.\285\
---------------------------------------------------------------------------

    \285\ See supra text following note 106 (for a discussion of the 
change).
---------------------------------------------------------------------------

    Paragraph (b)(1) of the Rule requires large traders to file Form 
13H with the Commission promptly after first effecting transactions 
that reach the identifying activity level.\286\ Thereafter, large 
traders are 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 
contact information, type of organization, trading strategy, regulatory 
status, list of broker-dealers at which the large trader has an 
account, or description of affiliates).\287\ Regardless of whether any 
amended Forms 13H are filed, large traders also are 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.\288\ Additionally, 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. Such requests for 
additional information may include, for example, a disaggregation 
request to assist the Commission in identifying accounts through which 
a large trader effects specific transactions.
---------------------------------------------------------------------------

    \286\ See new Rule 13h-1(b)(1)(i).
    \287\ See new Rule 13h-1(b)(1)(iii).
    \288\ See new Rule 13h-1(b)(1)(ii).
---------------------------------------------------------------------------

b. Initial and Annual Burdens
    In the Proposing Release, the Commission estimated 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 based 
this estimate on its understanding that large traders currently 
maintain systems that capture their trading activity and 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 estimated that the one-time burden for large traders 
would be approximately 8,000 burden hours.\289\
---------------------------------------------------------------------------

    \289\ The Commission derived the total estimated burdens from 
the following estimates, which were based on the Commission's 
experience with, and burden estimates for, other existing reporting 
systems including those required by 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 new Rule 13h-1, requires monitoring of a certain 
threshold and, upon reaching that threshold, disclosure of 
information.
---------------------------------------------------------------------------

    The Commission also estimated that the ongoing annualized burden 
for complying with proposed Rule 13h-1 would be approximately 6,800 
burden hours for all large trader respondents.\290\ This figure was 
based on the estimated number of hours it would take to file any 
amendments as well as the required annual update to Form 13H. The 
Commission estimated that the average large trader would be required to 
file one annual update and three amended updates annually.\291\
---------------------------------------------------------------------------

    \290\ The Commission derived the total estimated burdens from 
the following estimates, which were 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 new Rule 13h-1, requires monitoring of a certain 
threshold and, upon reaching that threshold, disclosure of 
information. As discussed above, Rule 17a-25 requires broker-dealers 
to disclose information that is very similar in scope and character 
to the information required under new Rule 13h-1. The Commission 
believed that determining whether a firm reaches the identifying 
activity level was a compliance function and that no software 
reprogramming would be required.
    \291\ This estimate was 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 
considered that large traders would file one required annual update 
and three quarterly updates when information contained in the Form 
13H became inaccurate.
---------------------------------------------------------------------------

    Several commenters believed that the Commission underestimated the 
burden hour estimates for large traders.\292\ Some commenters suggested 
that large trader organizations may need to develop integrated systems 
in order to accomplish parent company-level reporting, and 
correspondingly asserted that the estimate should account for 
this.\293\ As described below, however, a parent company need only add 
together the aggregate gross trading activity of its subsidiaries when 
it calculates whether it has reached the identifying activity level and 
need not integrate trading or other systems. In addition, importantly, 
with respect to the information that must be assembled and reported on 
the Form that would require the development of an integrated system, as 
discussed directly below, the Commission has not adopted what 
commenters identified as the single most burdensome item--the reporting 
of

[[Page 46988]]

brokerage account numbers. Instead, the Form, as adopted, requires 
large traders to disclose only basic identifying information, such as a 
list of affiliates and a list of broker-dealers at which it has 
accounts, and would not require the development of integrated systems 
to track brokerage account numbers across subsidiaries.
---------------------------------------------------------------------------

    \292\ See, e.g., Prudential Letter; Investment Adviser 
Association Letter; and Investment Company Institute Letter.
    \293\ See Prudential Letter at 5; Investment Adviser Association 
Letter at 7-8; and Investment Company Institute Letter at 4-5, 9.
---------------------------------------------------------------------------

    Several commenters indicated that the proposed requirement to 
report account numbers and names could be unduly burdensome.\294\ These 
commenters, notably the investment advisers, expressed concern over 
potential burden on large traders associated with reporting brokerage 
account numbers. One commenter noted that it has more than 400,000 
separate broker-dealer account numbers associated with its clients that 
reside on the systems of the broker-dealers with whom it 
transacts.\295\ This commenter stated that it does not track or 
maintain a list of these internal broker-dealer account numbers and 
does not utilize these account numbers when communicating with broker-
dealers about trades.\296\
---------------------------------------------------------------------------

    \294\ See, e.g., Wellington Management Letter and American 
Bankers Association Letter.
    \295\ See Wellington Management Letter at 3. See also American 
Bankers Association Letter at 2 (stating that it believes reporting 
account numbers and names is unduly burdensome because it may 
require the reporting of potentially thousands of brokerage 
accounts).
    \296\ See Wellington Management Letter at 3. See also Financial 
Engines Letter at 4-5 (stating that although investment advisers may 
execute trades with broker-dealers indirectly, the adviser does not 
technically maintain brokerage accounts with those broker-dealers 
and is therefore not privy to information about brokerage accounts).
---------------------------------------------------------------------------

    Another commenter suggested that account information may not be on 
the premises of the large trader and that, even if it were, this data 
would not be in automated form that is amenable to reporting on Form 
13H.\297\ One commenter explained that many investment advisers do not 
know the account numbers assigned to them by their broker-dealers 
because that information is not required by the software they use to 
communicate order allocation and settlement instructions to broker-
dealers.\298\ Another commenter stated that many investment advisers 
have a large number of discretionary advisory clients and effect 
transactions on behalf of such clients through a substantial number of 
different broker-dealers, through multiple prime brokers, and, in the 
case of multi-managed accounts, in concert with other advisers.\299\ 
This commenter stated that the proposal assumes that for each advisory 
client, the investment adviser can easily identify brokerage accounts 
by name and number.\300\ This commenter stated that in practice, 
however, each transaction can be executed on behalf of many clients and 
that with respect to each such transaction, although a particular 
broker-dealer may have assigned an account number for its own internal 
recordkeeping purposes, the adviser does not have this 
information.\301\
---------------------------------------------------------------------------

    \297\ See Investment Company Institute Letter at 11.
    \298\ See Wellington Management Letter at 3-4. As an alternative 
to reporting the account number, the commenter suggested that an 
investment adviser report the codes utilized by its software 
solution to communicate with its broker-dealers.
    \299\ See Investment Company Institute Letter at 7-8.
    \300\ See id.
    \301\ See id.
---------------------------------------------------------------------------

    Based on these comments, the Commission agrees that its proposal 
underestimated the burden hour estimates for large traders to report 
account numbers on Form 13H. In particular, the Commission based its 
initial burden estimate for reporting account numbers on its 
understanding that large traders have systems in place to readily track 
and manage their brokerage account numbers. According to certain 
commenters, particularly investment advisers, this may not be the case 
for some large traders, as some advisers rely on software to 
intermediate the process of communicating with their broker.\302\ For 
these entities, the information may not be in a form that is amenable 
to reporting on the Form without the use of third-party software.\303\
---------------------------------------------------------------------------

    \302\ See id. at 8.
    \303\ See, e.g., Investment Company Institute Letter and 
Wellington Management Letter.
---------------------------------------------------------------------------

    As discussed above, the Commission is addressing these comments by 
not adopting the proposed requirement to report account numbers.\304\ 
Instead, the Commission is requiring the large trader to disclose: (1) 
The names of broker-dealers with whom it has an account and (2) the 
types of brokerage services provided by those brokers. One commenter 
noted that many traders already maintain a list of approved broker-
dealers in a readily accessible format, as they maintain approved 
broker-dealer lists in the ordinary course of business and have 
processes for adding and deleting broker-dealers as well as reviewing 
trades with a broker-dealer not on the approved list.\305\ Requiring 
the reporting on the Form of a list of broker-dealers used, rather than 
all accounts held by each broker-dealer, will bring the compliance 
burden for many large traders that are investment advisers in line with 
the Commission's original estimate of burdens on large traders 
generally. Consequently, the estimated burdens on large traders under 
the Form are now in line with the requirements of the adopted Rule and 
Form.
---------------------------------------------------------------------------

    \304\ See supra Section III.A.3.0 (discussing account numbers).
    \305\ See Investment Company Institute Letter at 9.
---------------------------------------------------------------------------

    With respect to the Commission's assumption that large traders will 
be able to utilize existing systems when considering their trading 
levels, one commenter stated that, in cases where a large trader is a 
parent company, the parent may not itself be carrying on any trading 
activity and, thus, will neither have the detailed knowledge about its 
subsidiaries' trading activities or the systems to capture the 
information required on Form 13H.\306\ Another commenter stated that 
the burden of potentially needing to develop new systems would be 
increased for firms with complicated corporate structures.\307\ This 
commenter noted that ``[m]any corporate groups maintain operational 
independence from their subsidiaries and that each affiliate may employ 
its own individual system, which may not communicate with other 
affiliates.'' \308\ This commenter asserted that, as a result, the 
process for gathering information would have to be done on a manual 
basis until a system could be developed and that gathering information 
across multiple affiliates (both U.S. and non-U.S. entities) manually 
will place a tremendous burden on investment managers.\309\ In 
addition, this commenter noted that compliance with the Rule would be 
more difficult for investment advisers in that they are required to 
maintain information barriers between different affiliates in their 
organizations.\310\
---------------------------------------------------------------------------

    \306\ See Prudential Letter at 5.
    \307\ See Investment Adviser Association Letter at 2, 7-8.
    \308\ See id. at 8.
    \309\ See id.
    \310\ See id.
---------------------------------------------------------------------------

    As discussed above, with respect to determining whether the 
identifying activity level is met, the Commission notes that parent 
companies need only collect and aggregate the total trading activity of 
those entities they control when determining whether they meet the 
applicable identifying activity level. To accomplish this, only summary 
statistics need to be produced to the parent company, which would be 
added together at the parent company level to determine whether the 
parent company complex meets the applicable identifying activity level 
threshold. In other words, each subsidiary will use existing systems to 
calculate its trading, and then will provide that information directly 
to the parent company. The

[[Page 46989]]

trading systems themselves need not be integrated to accomplish this 
task. This limited activity should not undermine existing firewalls, 
because information would not be shared among entities under common 
control but would only be shared with the parent company. In addition, 
general information such as ``Subsidiary XYZ executed $10,000,000 worth 
of transactions on Monday representing 750,000 shares'' that is 
communicated directly from the subsidiary to the parent company would 
be highly unlikely to undermine firewalls. Further, the calculation of 
trading volume only needs to be done until the entity meets the 
applicable identification activity level. Once the entity meets this 
level, it becomes a large trader and no longer needs to calculate its 
trading in this manner. To the extent a parent company complex wishes 
to avoid this process altogether, it may elect to register voluntarily 
as a large trader.
    A few commenters believed that the proposed requirement to list 
affiliates that beneficially own, as well as exercise investment 
discretion over, NMS securities would be overly burdensome.\311\ One 
commenter recommended that the requirement should apply to a smaller 
set of affiliates, namely only those affiliates that actually conduct 
trading in NMS securities.\312\ Another commenter stated that large 
traders should only be obligated to identify other unaffiliated large 
traders if investment discretion is exercised collectively.\313\ Two 
commenters asked the Commission to not require large traders to list 
bank and insurance regulators.\314\ One commenter stated that listing 
all applicable regulators is likely to lead to the creation of an 
extensive list in the case of a diversified financial services 
company.\315\ This commenter stated that it would be required to list 
approximately fifty insurance regulators for one subsidiary and more 
than 25 foreign regulators for its non-U.S. affiliates.\316\ Another 
commenter stated that bank regulator information is unnecessary to meet 
the Rule's underlying purpose and that the Commission could seek this 
information from the federal banking regulators.\317\ As discussed 
above, in adopting the Rule, the Commission limited the scope of 
affiliates about which it will collect information pursuant to Form 
13H.\318\ Specifically, the Commission did not adopt the requirement to 
disclose affiliates that merely beneficially own NMS securities and it 
did not adopt proposed Items 3(b) and (c) of the Form, which would have 
required the large trader to disclose whether it or any of its 
affiliates is a bank or an insurance company and identify each such 
entity and its respective regulators. The Commission anticipates that 
focusing the Rule's scope in this regard will reduce burdens on large 
traders to be in line with the Commission's original understanding, 
while enabling the Commission to focus on gathering the most relevant 
and useful information about large traders.
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    \311\ See SIFMA Letter at 17; Wellington Management Letter at 5; 
Financial Information Forum Letter at 4; and Prudential Letter at 4.
    \312\ See SIFMA Letter at 17.
    \313\ See Wellington Management Letter at 5-6.
    \314\ See Prudential Letter at 4 and American Bankers 
Association Letter at 2.
    \315\ See Prudential Letter at 4.
    \316\ See id.
    \317\ See American Bankers Association Letter at 2.
    \318\ See supra Section III.A.3.0 (discussing Item 4 of the 
Form).
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    The Commission does not expect that the revisions to the Form, 
including eliminating the requirement to disclose certain affiliates 
and applicable bank and insurance regulators, discussed above, will 
materially affect the Commission's initial burden estimates. In 
particular, a full analysis of which affiliates need to be reported and 
disclosed would still need to be conducted, even though the scope of 
information that needs to be disclosed on Form 13H has been reduced 
from the proposal. The disclosure on the Form of bank and insurance 
regulators as proposed would have represented only a minimal additional 
burden, and such information would likely have been static and 
infrequently changed. Similarly, the Commission's decision to not adopt 
the requirement to disclose affiliates that merely beneficially own NMS 
securities likewise should not materially affect the estimated 
reporting burden because the Form, as adopted, now includes additional 
items such as the requirement to provide an organizational chart and to 
identify any affiliates that file separately and any affiliates that 
have been assigned an LTID suffix. The Commission carefully considered 
the changes to the Form in light of the comments received on the Form 
and the initial cost estimates, and believes that the removal of 
certain required information balances the addition of new required 
information of a similar scope so as to not affect the overall 
reporting burdens.

2. Burden on Registered Broker-Dealers

a. Recordkeeping
    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 will be captured by Rule 13h-1.\319\ The 
additional items of information that the Rule will capture are: (1) 
LTID(s) and (2) transaction execution time. Some registered broker-
dealers will 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. The 
Commission believes that the burdens of the Rule on registered broker-
dealers will likely vary due to differences in their recordkeeping 
systems.
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    \319\ See 17 CFR 240.17a-25. Pursuant to Rule 17a-25, broker-
dealers are required to maintain the following information that will 
be captured by new Rule 13h-1: 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.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission estimated that all 
registered broker-dealers that either are large traders or have a 
customer base that includes large traders and Unidentified Large 
Traders would be required to make modifications to their existing 
systems to capture the additional data elements that were not currently 
captured by systems that comply with Rule 17a-25, including, for 
example, LTID numbers. The Commission estimated that the one-time, 
initial 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.\320\ This 
figure

[[Page 46990]]

was 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 were required to be 
captured and would need to be available for reporting to the Commission 
as of the morning following the day on which the transactions were 
effected. The Commission noted that because broker-dealers already 
capture, pursuant to Rule 17a-25, most of the data that proposed Rule 
13h-1 would capture, it did not expect broker-dealers to incur any 
hardware costs as existing hardware should be able to accommodate the 
additional two fields of information that would need to be captured.
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    \320\ The Commission derived the total estimated burdens from 
the following estimates, which were 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 acknowledged that, in some instances, 
multiple LTIDs may be disclosed to a registered broker-dealer for a 
single account. Therefore, the hourly burden estimate factored in 
the cost that registered broker-dealers would need to develop 
systems capable of tracking multiple LTIDs. Rule 13f-1, like the 
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 
Rule.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission stated that the ongoing 
annualized expense for the recordkeeping requirement for registered 
broker-dealers would not result in a separate burden for purposes of 
the PRA, as registered broker-dealers already were 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. 
Moreover, the Commission stated that once a registered broker-dealer's 
system was updated to capture the additional two fields of information 
required by Rule 13h-1, the Commission did not believe that the 
additional fields would result in any ongoing annualized expense beyond 
what broker-dealers currently incur to maintain the existing EBS data 
that is required to be kept pursuant to Rule 17a-25.
    In response to the Commission's recordkeeping burden estimates, one 
commenter believed that the Commission significantly underestimated the 
time and resources for broker-dealers to comply with the Rule.\321\ In 
particular, the commenter stated that the build-out costs to update the 
EBS system to accommodate the two new items (LTID and execution time) 
would exceed the Commission's estimate of 133,500 burden hours.\322\ 
Though the commenter did not provide a methodology for its estimate or 
provide a specific estimate of burden hours, it noted the following: 
``Assuming that just the generation process alone would require three 
months of effort for each firm with an electronic blue sheets reporting 
responsibility and that conforming related systems would require 
additional time, and then multiplied across the approximately 300 
broker-dealers that the SEC estimates would be subject to the proposed 
rule, the total build-out for the industry would require 75 years of 
effort on a cumulative basis.'' \323\ The commenter noted that one 
potential major cost of implementing the recordkeeping requirement is 
that some broker-dealers do not have access to execution times in a 
manner that is readily reportable under the EBS infrastructure.\324\ 
These broker-dealers, the commenter stated, would need to devote 
considerable resources to updating EBS to gather, process, and transmit 
such information.\325\ The Commenter recommended using the OATS system 
maintained by FINRA instead of the EBS system for the large trader 
reporting rule and argued that using the OATS infrastructure would not 
be as ``onerous'' as modifying the existing EBS system.\326\ However, 
the same commenter mentioned one firm it talked to that estimated that 
it would cost less and take 50 percent less time to build out the EBS 
system compared to expanding OATS.\327\ The Commission believes the 
firm cited by the commenter supports the Commission's position that an 
expansion of the EBS system is a more cost effective option to leverage 
an existing reporting system for purposes of the large trader rule.
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    \321\ See SIFMA Letter at 14.
    \322\ See id.
    \323\ See id. at 5.
    \324\ See id. at 13.
    \325\ See id.
    \326\ See id. at 5.
    \327\ See id. at 6. The commenter states that one firm has 
estimated it would costs $4 to $5 million and take 18 to 24 months 
to expand OATS, whereas it would cost an estimated $3 to $4 million 
and take 12 to 18 months to build out the EBS system as proposed. 
The commenter did not provide any basis for these estimates nor what 
assumptions this firm made with regards to collection, reporting, 
and monitoring requirements, or other any other aspects of the Rule. 
The Commission's response to this comment in light of its estimate 
of the costs applicable to broker-dealers under the recordkeeping 
requirements of the Rule is discussed below in detail. See supra 
Section V.B.2.a (costs applicable to broker-dealers under the 
recordkeeping requirements of the Rule).
---------------------------------------------------------------------------

    A separate commenter that represents a group that focuses on 
technological aspects of securities regulation expressed concern with 
the proposed monitoring requirements but did not address the costs 
associated with modifications to the EBS system. Rather, the commenter 
believed that broker-dealers could reasonably modify their systems to 
capture execution time within the proposed six-month implementation 
period.\328\ However, this same commenter noted that EBS requests using 
LTID as a query mechanism would take longer to implement than the 
proposed six month compliance date.\329\ As discussed above, the 
Commission expects that it would, on occasion, request EBS data 
according to LTID.\330\ In addition, the Commission notes that it is 
adopting a longer compliance date than it proposed--seven months after 
the Effective Date of the Rule. Because the Rule will be effective 60 
days after publication in the Federal Register, this effectively 
results in a compliance date nine months after publication in the 
Federal Register.
---------------------------------------------------------------------------

    \328\ See Financial Information Forum Letter at 7.
    \329\ See id.
    \330\ See supra Section III.B.2 (discussing reporting 
requirements).
---------------------------------------------------------------------------

    The Commission understands that many broker-dealers will face 
different challenges in capturing and reporting execution time 
information, depending on the sophistication of and resources they have 
previously devoted to their recordkeeping systems. The Commission's 
estimate, however, is an average calculation that accommodates a broad 
spectrum of broker-dealer EBS systems, including the possibility that 
some firms might face larger burdens than the average since different 
firms would be affected to different degrees. Not all broker-dealers 
will face complexities involved with modifying non-integrated legacy 
systems to capture execution time, and some broker-dealers will not 
need to devote as many resources to those efforts as will others. The 
Commission's estimate is based on an aggregated figure that recognizes 
that different broker-dealers will need to invest different levels of 
resources based on the needs of their particular technology. 
Accordingly, the Commission believes that its initial 133,500 hour 
burden/year estimate for the one-time burden on registered broker-
dealers to modify their existing EBS systems is reasonable and 
appropriate.\331\ This figure assumes that, on average, each broker-
dealer would have to devote 445 burden hours in order to develop, 
program, and test the

[[Page 46991]]

enhancements to their existing systems to capture and report the 
additional fields of information (LTIDs and execution time).\332\
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    \331\ The Commission notes that its estimate is in line with the 
burden estimates from Rule 17a-25. See Rule 17a-25 Release, supra 
note 19, 66 FR at 35840-41.
    \332\ 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.
---------------------------------------------------------------------------

b. Reporting
    In addition to requiring registered broker-dealers to maintain 
records of account transactions, the Rule also requires registered 
broker-dealers to report transaction data to the Commission upon 
request. In the Proposing Release, the Commission stated 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 under the existing EBS system.\333\ However, 
the Commission noted that the information would need to be available 
for reporting to the Commission on a next-day basis, versus the 10 
business day period that typically is associated with an EBS request 
for data.\334\ Nevertheless, the Commission believes that once the 
electronic recordkeeping system is in place to capture the information, 
and the system is designed and built to furnish the information within 
the time period specified in the Rule, the collection of information 
would result in minimal additional burden.
---------------------------------------------------------------------------

    \333\ See 17 CFR 240.17a-25.
    \334\ See Rule 17a-25 Release, supra note 19.
---------------------------------------------------------------------------

    Although it is difficult to predict with certainty the Commission's 
future needs to obtain large trader data, the Commission estimated in 
the Proposing Release that, taking into account the Commission's likely 
need for data to be used for market reconstruction purposes and 
investigative matters, it would send 100 requests for large trader data 
per year to each affected registered broker-dealer.\335\ The Commission 
estimated that it will 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.\336\ The Commission received no comments 
on its reporting burden estimate and continues to believe that its 
initial estimate was reasonable. Accordingly, the Commission estimates 
the ongoing annual aggregate hour burden for broker-dealers to be 
60,000 burden hours.\337\
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    \335\ Compared to the EBS system, where the Commission sent 
5,168 electronic blue sheets requests between January 2007 and June 
2009, the Commission expects to send fewer requests for large trader 
data, in particular because the Commission expects that a request 
for large trader data will 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 currently 
sends.
    \336\ The Commission notes that the adopting release for Rule 
17a-25 estimated that electronic response firms spend approximately 
8 minutes and manual response firms spend 1.5 hours responding to an 
average blue sheet request. See Rule 17a-25 Release, supra note 19, 
at 35841. The Commission's 2-hour estimate for new Rule 13h-1 is 
intended to account for the collection and reporting of additional 
information on Unidentified Large Traders. This estimate also 
accommodates broker-dealers that might want to perform quality 
checks over the information before it is reported to the Commission.
    \337\ 100 x 300 x 2 = 60,000 burden hours. 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 Rule 17a-25 Release, supra note 19, 66 FR at 35841. 
Unlike EBS, under new Rule 13h-1, a broker-dealer will 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 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 Rule, that they 
would be required to report to the Commission under the Rule.
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c. Monitoring
    In the Proposing Release, the Commission estimated that the one-
time, initial burden for registered broker-dealers to comply with the 
monitoring requirements would be approximately 21,000 burden hours to 
establish a compliance system to detect and identify Unidentified Large 
Traders.\338\ This figure was based on the estimated number of hours to 
establish policies and procedures reasonably designed to assure 
compliance with the identification requirements of the Rule. The 
Commission estimated that the ongoing annualized burden to broker-
dealers for the monitoring requirements of the Rule, including the 
requirement on broker-dealers to inform Unidentified Large Traders of 
their potential obligations under Rule 13h-1, would be approximately 
4,500 burden hours.\339\
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    \338\ The Commission derived the total estimated burdens from 
the following estimates, which were 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 new Rule 13h-1, requires monitoring of a certain trading 
threshold.
    \339\ The Commission derived the total estimated burdens from 
the following estimates, which were 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 new Rule 13h-1, requires monitoring of a certain 
threshold and, upon reaching that threshold, disclosure of 
information.
---------------------------------------------------------------------------

    As discussed above, one commenter believed that the Commission's 
estimate of 300 broker-dealers was underestimated and believed that the 
number of broker-dealers affected by the monitoring requirements might 
be closer to 1,500 because of steps the commenter believed clearing 
brokers would likely impose on others in order for them to comply with 
the monitoring safe harbor provision of Rule 13h-1(f), as 
proposed.\340\ This commenter based its estimate on a belief that, 
though the Rule itself would not specifically require it, carrying 
broker-dealers might, in turn, require their introducing broker 
correspondents to establish policies and procedures to collect ``other 
reasonably available information'' on Unidentified Large Traders 
required by the proposed safe harbor to assist the clearing firms in 
complying with the requirements of the Rule that are applicable to 
them.\341\ The commenter based its estimate on the fact that 
approximately 1,657 FINRA members have been assigned MPIDs as of June 
2010. As such, this commenter believes that the Commission's ongoing 
burden estimate of 4,500 burden hours/year \342\ (equivalent to 
$1,215,000/year \343\) should instead be something between 111,000 
burden hours/year and 3,000,000 burden hours/year \344\ (equivalent to 
$30,000,000-$750,000,000/year).\345\ The commenter noted that its 
estimate included a full-time compliance professional.\346\
---------------------------------------------------------------------------

    \340\ See Financial Information Forum Letter at 6.
    \341\ See id.
    \342\ Compliance Attorney at 15 hours x 300 potential 
respondents = 4,500 burden hours
    \343\ Compliance Attorney at 15 hours x $270 per hour x 300 
potential respondents = $1,215,000
    \344\ Compliance Attorney at 370 hours x 300 potential 
respondents = 111,000 burden hours; Compliance Attorney at 2,000 
hours x 1,500 potential respondents = 3,000,000 burden hours.
    \345\ See Financial Information Forum Letter at 7.
    \346\ See id.
---------------------------------------------------------------------------

    As discussed above, the safe harbor provision of Rule 13h-1(f), as 
adopted, makes clear the intended scope of ``other identifying 
information'' that a

[[Page 46992]]

broker-dealer would need to consider, which is narrower in scope than 
what the commenter assumed. As adopted, the safe harbor policies and 
procedures would need to be reasonably designed to identify 
Unidentified Large Traders based on accounts at the broker-dealer. In 
assessing which accounts to consider, the Rule, as adopted, clarifies 
that the broker-dealer's policies and procedures should consider 
account name, tax identification number, or other identifying 
information ``available on the books and records of such broker-
dealer.'' The policies and procedures would not need to consider 
information on the books and records of another broker-dealer. 
Accordingly, the Rule has been clarified to exclude a possible 
expansive interpretation of ``other readily available information'' 
that formed the basis for the commenter's concern.
    Further, the Commission believes that large traders, whose 
aggregate NMS securities transactions by definition equal or exceed the 
identifying activity level, require sophisticated trade-processing 
capacities on the part of broker-dealers that service them. 
Consequently, the Commission believes it is unlikely that nearly all 
broker-dealers that have been assigned an MPID either carry accounts 
for or will effect a transaction on behalf of a large trader. 
Therefore, it does not expect all such entities to be impacted by the 
monitoring provisions of Rule 13h-1(f).\347\ By providing additional 
guidance in the Rule, as adopted, the Commission believes it has 
clarified the intended monitoring responsibilities of broker-dealers 
and has shown that the burden estimates for these more limited 
requirements are in line with the Commission's original estimates.
---------------------------------------------------------------------------

    \347\ To the extent that a broker-dealer that is subject to the 
monitoring requirements requires, by contract or otherwise, an 
entity that is not otherwise subject to the Rule's monitoring 
requirements to nevertheless perform a monitoring function, the 
Commission's estimate does not account for that situation.
---------------------------------------------------------------------------

d. Total Burden
    Under the Rule, the total burden on these respondents will be 
214,500 hours for the first year \348\ and 64,500 hours for each 
subsequent year.\349\
---------------------------------------------------------------------------

    \348\ This figure was derived from the estimated one-time 
burdens from the recordkeeping requirement (133,500 burden hours) + 
the reporting requirement (60,000 burden hours) + the monitoring 
requirement (21,000 burden hours) = 214,500 total burden hours.
    \349\ This figure was derived from the estimated ongoing burdens 
from the reporting requirement (60,000 burden hours) + the 
monitoring requirement (4,500 burden hours) = 64,500 total burden 
hours.
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E. Collection of Information is Mandatory

    All collections of information pursuant to Rule 13h-1 will be 
mandatory.

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'').\350\ As such, ``the Commission shall not be compelled to 
disclose any information required to be kept or reported under [Section 
13(h)].'' \351\ Accordingly, the information that a large trader will 
be required to disclose on Form 13H or provide in response to a 
Commission request will be exempt from disclosure under FOIA. In 
addition, any transaction information that a registered broker-dealer 
reports to the Commission under the Rule also will be exempt from 
disclosure under FOIA. The circumstances under which the Commission 
will provide information collected pursuant to Rule 13h-1 and Form 13H 
are discussed above.\352\
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    \350\ 5 U.S.C. 552(b)(3)(B) is now 5 U.S.C. 552(b)(3)(A)(ii).
    \351\ See Section 13(h)(7) of the Exchange Act, 15 U.S.C. 
78m(h)(7).
    \352\ See supra Section III.A.3.g.
---------------------------------------------------------------------------

G. Record Retention Period

    Registered broker-dealers will be required to retain records and 
information under Rule 13h-1 for a period of three years, the first two 
in an accessible place, in accordance with Rule 17a-4 under the 
Exchange Act.\353\
---------------------------------------------------------------------------

    \353\ 17 CFR 240.17a-4.
---------------------------------------------------------------------------

V. Consideration of Costs and Benefits

    The Commission is sensitive to the costs and benefits that result 
from its rules. In the Proposing Release, the Commission identified 
certain costs and benefits of the Rule as proposed and requested 
comment on all aspects of the cost-benefit analysis, including the 
identification and assessment of any costs and benefits that were not 
discussed in the analysis. The Commission received several comments 
relating to the cost-benefit analysis, which are discussed below. For 
the reasons discussed below, the Commission continues to believe that 
its estimates of the benefits and costs of Rule 13h-1, as set forth in 
the Proposing Release, are appropriate.

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.\354\
---------------------------------------------------------------------------

    \354\ See supra note 8 (discussing analyst estimates of high 
frequency trader activity).
---------------------------------------------------------------------------

    Currently, to support its regulatory, investigative, and 
enforcement activities, the Commission collects transaction data 
through the EBS system.\355\ 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.
---------------------------------------------------------------------------

    \355\ 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. Importantly, EBS does not 
address the Commission's need to identify market participants in a 
uniform manner that would allow the Commission to readily aggregate 
their trading activity across broker-dealers, nor does it include time 
of execution information necessary to properly sequence and reconstruct 
trading activity.

[[Page 46993]]

    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.\356\ 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.\357\
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    \356\ 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 14 and House Report, supra note 14.
    \357\ PL 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.\358\ 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 perform 
investigations and conduct analysis of data.\359\
---------------------------------------------------------------------------

    \358\ See 15 U.S.C. 78m(h)(1). See also Senate Report, supra 
note 14, at 42.
    \359\ See Senate Report, supra note 14 at 4, 44, and 71. In this 
respect, though 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 \360\ to self-
identify to the Commission and provide information to the Commission 
that identifies the trader.\361\ 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.\362\
---------------------------------------------------------------------------

    \360\ 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).
    \361\ See 15 U.S.C. 78m(h)(1)(A).
    \362\ 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 from broker-dealers. 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.\363\
---------------------------------------------------------------------------

    \363\ 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 is adopting new Rule 13h-1 and Form 13H to establish 
large trader reporting requirements. The Rule is intended to assist the 
Commission in identifying traders that conduct a substantial volume or 
large fair market value of trading activity in the U.S. securities 
markets and obtain certain baseline information on their trading 
activity. Specifically, a ``large trader'' is 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.\364\ The large trader 
reporting rule is designed to facilitate the Commission's ability to 
assess 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.
---------------------------------------------------------------------------

    \364\ This test is defined in the Rule as the ``identifying 
activity level.'' See new Rule 13h-1(a)(7). Section 13(h)(8)(c) of 
the Exchange Act, 15 U.S.C. 78m(h)(8)(c), authorizes the Commission 
to determine, by rule or regulation, the applicable identifying 
activity level.
---------------------------------------------------------------------------

    The identification, recordkeeping, and reporting requirements will 
provide the Commission with a mechanism to identify large traders, as 
well as their affiliates, the broker-dealers they use, and their 
transactions. Specifically, Rule 13h-1 will require large traders to 
identify themselves to the Commission and make certain disclosures to 
the Commission on Form 13H. Upon receipt of Form 13H, the Commission 
will issue a unique identification number to the large trader, which 
the large trader will then provide to its registered broker-dealers. 
Registered broker-dealers will be required to maintain transaction 
records for each large trader customer and will be required to report 
that information to the Commission upon request. In addition, certain 
registered broker-dealers will need to adopt procedures to monitor 
their customers' activity for volume that triggers the identification 
requirements of the Rule.
    In light of recent turbulent markets and the increasing 
sophistication and trading capacity of large traders, the Commission 
believes it needs to implement a large trader reporting rule 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 to implement a large 
trader reporting rule to reliably and efficiently identify large 
traders and promptly obtain information on their trading on a market-
wide basis.
    The Commission believes that the large trader reporting rule is 
necessary because, as noted above, large traders appear to be playing 
an increasingly prominent role in the securities markets.\365\ 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 is typically estimated at 50% of 
total volume or higher.\366\ The large trader reporting rule is 
intended to provide a basic set of tools for the Commission to monitor 
more readily and efficiently the impact on the securities markets of 
large traders.
---------------------------------------------------------------------------

    \365\ 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).
    \366\ See supra note 8 (discussing analyst estimates of high 
frequency trader activity).
---------------------------------------------------------------------------

    Among other things, the Commission believes that the large trader 
reporting rule will 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. In 
addition to those benefits that the Commission believes will result 
from the large trader reporting rule, the Commission also expects that 
investors

[[Page 46994]]

should likewise benefit as a consequence of the Commission's enhanced 
access to information to identify large traders and obtain prompt data 
on their activity that the Commission would be able to employ in 
carrying out its regulatory mission.
    The Commission sought comment on the benefits associated with the 
proposed Rule. Many of the 87 comment letters, including those from 
retail investors, expressed support for the Rule's stated intent to 
obtain 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.\367\
---------------------------------------------------------------------------

    \367\ See, e.g. GETCO Letter; CalSTRS Letter; David L. Goret 
Letter; Prudential Letter; Investment Adviser Association Letter; 
American Benefits Council Letter; Howard Hughes Medical Institute 
Letter; T. Rowe Price Letter; Financial Engines Letter; Investment 
Company Institute Letter; Wellington Management Letter; SIFMA 
Letter; and Foothill Securities Letter.
---------------------------------------------------------------------------

    One commenter, a large pension fund, stated that it believes that 
its beneficiaries will benefit from a greater understanding of today's 
hyper-electronic trading, which encompasses speed and volumes that were 
previously unknown to most participants.\368\ Another commenter, a 
large mutual fund adviser, stated that the large trader reporting 
requirements are a pragmatic approach to obtain relevant data on 
trading activity in the U.S. securities markets and that recent 
volatility in the marketplace, as exemplified by the unprecedented 
events of May 6, 2010, has emphasized the need to provide improved 
regulatory access to trade data in order to detect manipulative trading 
activities and to analyze significant market events that negatively 
impact investor trust in the stock market.\369\ In addition, a large 
broker-dealer commented that the EBS system is insufficient in today's 
trading environment for large scale investigations and market 
reconstructions across numerous securities during peak trading volume 
periods and agreed that regulators need additional levels of 
transparency into the trading practices of all firms with significant 
activity.\370\
---------------------------------------------------------------------------

    \368\ See CalSTRS Letter at 1. The commenter noted that it would 
be ``pleased to be subject to the rule.'' Id.
    \369\ See T. Rowe Price Letter at 1.
    \370\ See GETCO Letter at 2.
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B. Costs

1. Large Traders
    In the Proposing Release, the Commission identified the primary 
costs to large traders from the proposal as the requirement to self-
identify to the Commission, including using existing systems to detect 
when they meet the identifying activity level, filing Form 13H when 
large trader status is achieved, and informing its broker-dealers of 
its LTID and all accounts to which it applies. The Commission is 
adopting the identification requirements substantially as proposed. 
However, the Commission has not adopted Form 13H as proposed. 
Specifically, the Commission did not adopt the proposed requirement 
that large traders report brokerage account numbers. Instead, the Rule 
as adopted requires that large traders report a list of broker-dealers 
with whom they have an account. As a consequence, large traders will 
not have to report on Form 13H the LTID of any other large traders with 
whom they collectively exercise investment discretion, and so will not 
have to disclose their LTID to other traders or collect from other 
large traders the LTID of such traders.
    The Rule will require large traders to file Form 13H with the 
Commission promptly after first effecting transactions that reach the 
identifying activity level.\371\ Further, when determining who should 
register with the Commission as a ``large trader'' by filing Form 13H, 
the Rule is intended to focus, in more complex organizations, on the 
parent company of the entities that exercise investment discretion. The 
purpose of this focus is to narrow the number of persons that will 
self-identify as ``large traders'' and file Form 13H, while allowing 
the Commission to identify the primary institutions that conduct a 
large trading business. Focusing the identification requirements in 
this manner is intended to enable the Commission to easily identify and 
readily contact the principal groups that control large traders, while 
minimizing the costs associated with filing and self-identification 
that will be imposed on large traders. Large traders will, however, be 
able to assign and attach a suffix to the LTID that is assigned to them 
by the Commission.
---------------------------------------------------------------------------

    \371\ See new Rule 13h-1(b)(1)(i).
---------------------------------------------------------------------------

    To limit the impact of the Rule on entities whose trading is not 
characterized by the exercise of investment discretion that the 
Commission intends to capture under the definition of ``large trader,'' 
the Rule provides several exceptions from the definition of 
``transaction'' that are considered when determining large trader 
status. These exceptions are intended to balance the Commission's 
desire to capture significant trading activity with the cost imposed on 
market participants to register and report as large traders. These 
exceptions 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.\372\ 
As discussed above, in response to comments, the Commission is adopting 
as exceptions, in addition to those proposed, several types of 
transactions that focus on corporate actions that are not 
characteristic of an arm's-length purchase or sale of securities in the 
secondary market that would normally be characteristic of a ``trader'' 
in securities, such as business combinations, issuer tender offers, and 
buybacks, as well as stock loans and equity repurchases. The Commission 
believes that these additional categories of transactions are effected 
for materially different reasons than those commonly associated with 
the arm's-length trading of securities in the secondary market and the 
associated exercise of investment discretion. For example, transactions 
involving business combinations, as well as issuer stock buybacks and 
issuer tender offers, reflect fundamental corporate decision-making. 
They are not effected with an intent or expectation to profit from the 
trade itself, but are transactions conducted by or with issuers of 
securities in furtherance of corporate objectives involving publicly-
traded securities. Further, stock loan and equity repos typically are 
entered into as part of a larger financing transaction or for purposes 
of generating corporate income and, as such, are effected with general 
corporate intent rather than for purposes of buying or selling 
positions in securities. Accordingly, the Commission believes it 
appropriate to not count these transactions for the purpose of 
determining whether a person meets the identifying activity threshold 
contained in the definition of large trader. The Commission believes 
that adding these additional exclusions will further reduce the 
potential cost of the Rule on affected entities, as well as registered 
broker-dealers, while at the same time allowing the Commission to focus 
the Rule on those entities and activities that the Commission seeks to 
identify under the Rule.
---------------------------------------------------------------------------

    \372\ See new Rule 13h-1(a)(6).
---------------------------------------------------------------------------

    In addition, the Rule provides for an Inactive Status to further 
reduce the

[[Page 46995]]

potential costs of the Rule for infrequent traders who may trip the 
threshold on a particular occasion but do not otherwise trade at 
sufficient levels to merit continued status as a large trader or that 
warrant imposing the regulatory burdens of the Rule. 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 will be eligible for Inactive 
Status upon checking a box on the cover page of their next annual Form 
13H filing.\373\ Specifically, Inactive Status will relieve a person 
from the requirement to file amended Forms 13H.
---------------------------------------------------------------------------

    \373\ See new Rule 13h-1(b)(3)(iii).
---------------------------------------------------------------------------

    Form 13H also allows a large trader to report 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 is intended to allow large 
traders to inform the Commission of their status and to signal to the 
Commission not to expect future Form 13H filings from the large trader. 
For example, termination status will 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 is intended to reduce the potential 
costs to registered broker-dealers who will no longer have to track the 
entity's LTID.
    In the Proposing Release, the Commission noted that 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 Rule instead will require ``Amended Filings'' on a 
quarterly basis (and only when the prior submission becomes 
inaccurate). Specifically, large traders will be required to amend 
their latest Form 13H by submitting an ``Amended 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, 
regulatory status, broker-dealers used, or affiliates).\374\ Regardless 
of whether any quarterly amended Form 13Hs are filed, large traders are 
required to file Form 13H annually (an ``Annual Filing''), within 45 
days after the calendar year-end, in order to ensure the accuracy of 
all of the information reported to the Commission.\375\ The quarterly 
filing requirement for amendments is designed to mitigate the filing 
burden on large traders, as large traders will not be required to file 
a large number of amendments on a more prompt basis every time 
something in their latest Form 13H needs to be corrected or updated. A 
large trader could elect to file more promptly or frequently at its 
discretion, but would not be required to do so.
---------------------------------------------------------------------------

    \374\ See new Rule 13h-1(b)(1)(iii).
    \375\ See new Rule 13h-1(b)(1)(ii).
---------------------------------------------------------------------------

    In the Proposing Release, the Commission estimated that the 
aggregate costs for the estimated 400 respondents that would register 
on Form 13H and obtain from the Commission an LTID and inform its 
broker-dealers of its LTID and the accounts to which it applies would 
be $1,317,600.\376\ The Commission stated its belief that potential 
large trader respondents would not need to modify their existing 
systems to comply with proposed Rule 13h-1. Rather, the Commission 
believed that large traders already maintain systems that are capable 
of computing their level of trading, and the Commission expected that 
firms would be able to use their existing systems to assess whether 
they have reached the identifying activity level. Further, as discussed 
above, the Rule as adopted allows a large trader to voluntarily 
register with the Commission, even before it meets the applicable 
trading activity threshold, in order to eliminate the need for a person 
to actively monitor its trading levels for purposes of Rule 13h-1. To 
the extent a large trader does not want to track its trading levels for 
the identifying activity level thresholds, it can avail itself of the 
option to voluntarily register and forego the burden of such tracking. 
Any person that elects to voluntarily file would be treated as a large 
trader for purposes of the Rule, and would be subject to all of the 
obligations of a large trader under the Rule, notwithstanding the fact 
that the person had not effected the requisite level of transactions at 
the time it registered as a large trader.
---------------------------------------------------------------------------

    \376\ The Commission derived the total estimated cost from the 
following estimates, which were based on the Commission's experience 
with, and cost 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 new Rule 13h-1, requires 
the filing of a form (Form 13F) upon exceeding a certain trading 
threshold. Hourly figures were 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.
---------------------------------------------------------------------------

    In addition, the Commission estimated in the Proposing Release that 
the aggregate cost to file amendments as well as an annual updated Form 
13H would be $998,400.\377\ The Commission did not expect these 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 be marginal when compared to level of activity 
at which a large trader would be trading, and should not change how 
such traders conduct business, create a barrier to entry, or otherwise 
alter the competitive landscape among large traders. Further, the 
Commission is designing an electronic filing system for Form 13H that 
is intended to minimize the costs associated with filing Form 13H, for 
example, by allowing filers to access and amend their most recently 
filed Form 13H when filing an amended or annual update.
---------------------------------------------------------------------------

    \377\ The Commission derived the total estimated burdens from 
the following estimates, which were 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 new Rule 13h-1, 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.
---------------------------------------------------------------------------

    As noted in the PRA section above, several commenters believed that 
the Commission underestimated the costs of the proposed rule on large 
traders.\378\ These commenters principally noted that the proposal's 
requirements to gather and report information related to account 
numbers and names, affiliates, and bank and insurance regulators would 
be burdensome.\379\ Commenters noted that the Commission assumed that 
this information was readily available for all large traders.\380\
---------------------------------------------------------------------------

    \378\ See, e.g., Prudential Letter; Investment Adviser 
Association Letter; and Investment Company Institute Letter.
    \379\ See, e.g., American Bankers Association Letter.
    \380\ See, e.g., Investment Company Institute Letter.
---------------------------------------------------------------------------

    As discussed above, the Commission, in adopting the Rule, modified 
Form 13H from the proposed version to reduce the potential costs 
associated with filing Form 13H for affected entities. Most 
significantly, the Commission did not adopt the proposed requirement 
that large traders report their broker-dealer account numbers on Form 
13H. Instead, large traders will be required to report a list of 
broker-dealers with whom they or their Securities

[[Page 46996]]

Affiliates have an account. In light of these modifications from the 
proposal, the Commission continues to believe that its estimate of 
initial and ongoing costs is appropriate. The initial cost estimate was 
based on the understanding that large traders know and can readily 
identify their brokerage account numbers. As noted by commenters, 
particularly investment advisers, this may not be the case for all 
large traders, at least not in a form that would be conducive to 
reporting on Form 13H. One commenter recommended an alternative 
approach to requiring large traders to disclose a list of the broker-
dealers that the large trader is authorized to use.\381\ This commenter 
noted that many investment advisers maintain an approved list of 
broker-dealers and have processes for adding and deleting broker-
dealers as well as reviewing trades with a broker-dealer not on the 
approved list.\382\ The Commission has considered this alternative, and 
believes it is appropriate to focus the reporting burden on a list of 
broker-dealers at which the large trader maintains an account, rather 
than a list of accounts held at those broker-dealers. The Commission 
believes, based on the comments it received from investment advisers on 
this topic, that this new requirement will reduce the potential costs 
for certain large traders, particularly investment advisers.
---------------------------------------------------------------------------

    \381\ See Wellington Management Letter at 4 and Investment 
Company Institute Letter at 8-9.
    \382\ See Investment Company Institute Letter at 9.
---------------------------------------------------------------------------

    The adopted Rule also limits the scope of information that must be 
reported on bank and insurance regulators and focuses the 
identification requirement on affiliates that trade, rather than merely 
beneficially own, NMS securities. However, the Commission does not 
anticipate that these changes from the proposal will materially affect 
the Commission's initial cost estimates. In particular, the prominence 
and scope of those items on the Form, relative to the other disclosure 
requirements, were minor and the fact that they were not adopted should 
not materially affect the cost estimates. Further, the Form, as 
adopted, now includes additional items such as the requirement to 
provide an organizational chart and to identify any affiliates that 
file separately and any affiliates that have been assigned an LTID 
suffix. The Commission carefully considered the changes to the Form in 
light of the comments received on the Form and the initial cost 
estimates, and believes that the removal of certain required 
information balances the addition of new requirement information of a 
similar scope so as to not affect the overall reporting burdens. 
Accordingly, the balanced modifications to the Rule and additional 
guidance on the intended scope of the Rule result in changes that are 
in line with the Commission's original estimates.
2. Registered Broker-Dealers
    The Commission anticipated that the three primary costs to 
registered broker-dealers from the proposal were: (1) Recordkeeping 
requirements; (2) reporting requirements; and (3) monitoring 
requirements.
a. Recordkeeping
    The Rule will require registered broker-dealers to keep records of 
transactions for large traders and Unidentified Large Traders.\383\ The 
Rule also will require brokers and dealers to furnish transaction 
records of large traders and Unidentified Large Traders to the 
Commission upon request. While most of the data required to be kept 
pursuant to Rule 13h-1 is already required under Rule 17a-25 and 
reported via the EBS system, the large trader reporting rule will 
contain two additional fields of information, notably the LTID 
number(s) and execution time of the transaction. The Rule will require 
records to 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.\384\
---------------------------------------------------------------------------

    \383\ See new Rule 13h-1(a)(9) (defining ``Unidentified Large 
Trader'').
    \384\ 17 CFR 240.17a-4.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission estimated that the one-
time, initial costs for each registered broker-dealer for development 
of enhancements to its EBS infrastructure, including re-programming and 
testing of the systems, would be approximately $106,060.\385\ The 
Commission also believed that there would be minimal additional costs 
associated with the operation and maintenance of the large trader 
reporting rule because it would utilize the existing EBS system. 
Accordingly, the Commission estimated the total start-up, operating, 
and maintenance cost burden for registered broker-dealers to be 
$31,818,000.\386\ As previously noted, this figure was based on the 
estimated number of hours for development and implementation of 
enhancements to the firm's EBS systems, including software development, 
taking into account the fact that two new data elements were required 
to be captured and that data would be required 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 Rule 13h-1 pursuant to 
Rule 17a-25, the Commission did not expect broker-dealers to have to 
incur any additional hardware costs.
---------------------------------------------------------------------------

    \385\ The Commission derived the total estimated one-time cost 
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, the cost estimate 
factored in the cost that registered broker-dealers would need to 
develop systems capable of tracking multiple LTIDs.
    \386\ 300 affected broker-dealers x $106,060 = $31,818,000.
---------------------------------------------------------------------------

    In response to the Commission's recordkeeping burden estimates, as 
previously discussed in the PRA section above, one commenter stated 
that one of its member firms estimated it would cost $3,000,000-
$4,000,000 to build out its EBS system in a manner required by the 
proposed rule, though the commenter did not provide any basis for the 
estimate or assumptions that were made with regards to the collection, 
reporting, and monitoring requirements of the Rule.\387\ This figure, 
which is an estimate of one affected entity that represents a single 
data point, is significantly higher than the Commission's estimate of 
$106,060 for the initial one-time costs of implementing the system 
changes required by the Rule as adopted. The commenter noted that one 
potential major cost of implementing the recordkeeping requirement is 
that some broker-dealers do not have access to execution times in a 
manner that is readily reportable under the EBS infrastructure.\388\ 
These broker-dealers, the commenter stated, would need to devote 
considerable resources to updating EBS to gather, process, and transmit 
such information.\389\
---------------------------------------------------------------------------

    \387\ See SIFMA Letter at 6.
    \388\ See id. at 13.
    \389\ See id.
---------------------------------------------------------------------------

    The Commission notes that commenters did not express particular 
concern with the proposed requirement to record and report LTIDs, but 
rather focused on the transmission of execution time from the 
execution-facing systems to the clearing-facing systems which 
traditionally are utilized in the EBS process. The Commission

[[Page 46997]]

understands that broker-dealers will face different challenges in 
capturing and reporting execution time information, depending on the 
sophistication of and resources they have previously devoted to their 
recordkeeping systems. Relevant factors might include, for example, the 
size of the entity, the nature, flexibility, and extent of their 
existing systems, and the business and other regulatory drivers for 
their technological strategies. As such, the Commission's estimate 
involves an average calculation that accommodates a broad spectrum of 
broker-dealer EBS systems and considers that different firms would be 
affected to different degrees, including the possibility that some 
firms might spend more than the average. However, not all broker-
dealers will face complexities involved with modifying non-integrated 
legacy systems to capture execution time, and some broker-dealers will 
not need to devote as many resources to those efforts as will others. 
For example, one commenter that represents a group that focuses on 
technological aspects of securities regulation expressed concern with 
the proposed monitoring requirements but did not address the costs 
associated with modifications to the EBS system. Rather, the commenter 
believed that broker-dealers could reasonably modify their systems to 
capture execution time within the proposed six-month implementation 
period.\390\ The Commission's estimate is based on an aggregated figure 
that recognizes that different broker-dealers will need to invest 
different levels of resources based on the needs of their particular 
technology.
---------------------------------------------------------------------------

    \390\ See Financial Information Forum Letter at 7.
---------------------------------------------------------------------------

b. Reporting
    The Rule will require registered broker-dealers to report 
transactions that equal or exceed the 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 will 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) 
of the Rule 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 will need to 
report a particular day's trading activity only if it equals or exceeds 
the ``reporting activity level'' but will be permitted to report all 
data without regard to that threshold.
    In the Proposing Release, the Commission estimated that the costs 
of the proposed reporting requirements would be $16,200,000.\391\ The 
Commission's estimate took into account the design and intent of the 
proposed rule to utilize the recordkeeping and reporting infrastructure 
of the existing EBS system. The Commission received no comments on its 
reporting cost estimate and continues to believe that its initial 
estimate is appropriate.
---------------------------------------------------------------------------

    \391\ The Commission derived the total estimated ongoing cost 
from the following: (Compliance Attorney (2 hours) at $270 per hour) 
x (100 requests per year) x (300 potential respondents) = 
$16,200,000.
---------------------------------------------------------------------------

c. Monitoring
    As proposed, paragraph (f) of Rule 13h-1 would establish a ``safe 
harbor'' for the duty to monitor for Unidentified Large Traders.\392\ 
Specifically, for purposes of determining under the Rule whether a 
registered broker-dealer has reason to know that a person is a large 
trader, a registered broker-dealer generally need take into account 
only transactions in NMS securities effected by or through such broker-
dealer.\393\ A registered broker-dealer would be deemed not to know or 
to have reason to know that a person is a large trader if: (1) It does 
not have actual knowledge that a person is a large trader; \394\ and 
(2) it established and maintained policies and procedures reasonably 
designed to assure compliance with the identification requirements. 
Proposed paragraphs (f)(1) and (2) of the rule provided the specific 
elements that will be required for the safe harbor, including policies 
and procedures reasonably designed to inform persons of their 
obligations to file Form 13H and disclose their large trader status.
---------------------------------------------------------------------------

    \392\ See new 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.'')
    \393\ See new Rule 13h-1(a)(9).
    \394\ As discussed above, if a registered broker-dealer has 
actual knowledge that a person is a large trader, then the broker-
dealer would treat such person as an Unidentified Large Trader under 
the Rule.
---------------------------------------------------------------------------

    As discussed above, a few commenters asked for clarification of the 
monitoring requirements and offered alternatives.\395\ Of those 
commenters that addressed the issue, most were critical of the proposed 
monitoring requirements.\396\ The Commission believes the concerns 
expressed by commenters are a result of confusion as to the nature of 
the contemplated monitoring requirements. As noted in the Proposing 
Release, the Rule places ``the principal burden of compliance with the 
identification requirements on large traders themselves.'' \397\ 
Further, the Commission characterized broker-dealers' monitoring 
requirements as ``limited'' and ``a necessary backstop to encourage 
compliance and fulfill the objectives of Section 13(h) of the Exchange 
Act.'' \398\ The safe harbor in Rule 13h-1(f) references reasonably 
designed systems to detect and identify persons that may be large 
traders--based upon transactions effected through an account or group 
of accounts or other information readily available to the broker-
dealer. Further, the safe harbor references reasonably designed systems 
to inform such persons of their potential obligations under Rule 13h-1. 
The broker-dealer monitoring requirements are intended to promote 
awareness of and foster compliance with Rule 13h-1.
---------------------------------------------------------------------------

    \395\ See, e.g., Financial Information Forum Letter; SIFMA 
Letter; and GETCO Letter.
    \396\ One commenter described the proposed safe harbor as 
``anything but safe'' and, as discussed above, asserted that the 
proposal exceeds the Commission's statutory authority because, among 
other reasons, the safe harbor provided that a registered broker-
dealer would have reason to know that a customer is an Unidentified 
Large Trader based on other readily available information, as well 
as transactions effected through the broker-dealer. See SIFMA Letter 
at 11.
    \397\ Proposing Release, supra note 3, 75 FR at 21470.
    \398\ Id.
---------------------------------------------------------------------------

    The Commission notes that a large trader is required to assess for 
itself whether it meets the identifying activity threshold and thus 
qualifies as a large trader. To this extent, the Commission notes that 
there are certain exclusions, for example from the types of 
transactions that are counted towards the identifying activity 
threshold, that may have excused a customer from having to register as 
a large trader even though its aggregate transactions exceed the 
applicable identifying activity threshold. Unless a broker-dealer has 
actual knowledge to the contrary that a customer is a large trader 
(e.g., the customer voluntarily informs the broker-dealer that it is a 
large trader under Rule 13h-1), the monitoring requirements contemplate 
an inquiry by the broker-dealer into whether a customer meets the 
identifying activity threshold based upon transactions effected through 
an account or a group of accounts at that broker-dealer.
    In the Proposing Release, the Commission estimated the initial, 
one-time cost to establish policies and

[[Page 46998]]

procedures pursuant to the proposed safe harbor provision would be 
$3,982,800.\399\ The Commission estimated that the ongoing cost would 
be $1,215,000.\400\ The Commission believed that the proposed safe 
harbor would reduce the costs associated with the monitoring 
requirements of the proposed rule on registered broker-dealers. Among 
other things, it 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.
---------------------------------------------------------------------------

    \399\ The Commission derived the total estimated one-time cost 
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.
    \400\ The Commission derived the total estimated ongoing cost 
from the following: (Compliance Attorney at (15 hours) x $270 per 
hour) x (300 potential respondents) = $1,215,000.
---------------------------------------------------------------------------

    As noted above in the PRA section, one commenter stated that the 
Commission's broker-dealer estimate of 300 broker-dealers was 
underestimated. This commenter believed that the number of broker-
dealers affected by the monitoring requirements might be closer to 
1,500 to the extent that carrying broker-dealers require their 
introducing broker correspondents to establish policies and procedures 
under the safe harbor to collect the information on Unidentified Large 
Traders required by the Rule to help the clearing firm comply with the 
requirements of the Rule that are applicable to them.\401\ The 
commenter based its estimate on the fact that approximately 1,657 FINRA 
members have been assigned MPIDs as of June 2010.\402\ As such, this 
commenter argued that the Commission's ongoing burden estimate of 4,500 
burden hours/year \403\ (equivalent to $1,215,000/year \404\) should 
really be 111,000 burden hours/year-3,000,000 burden hours/year \405\ 
(equivalent to about $30,000,000-$750,000,000/year).
---------------------------------------------------------------------------

    \401\ See Financial Information Forum Letter at 6.
    \402\ See id.
    \403\ Compliance Attorney at 15 hours x 300 potential 
respondents = 4,500 burden hours.
    \404\ Compliance Attorney at 15 hours at $270 per hour x 300 
potential respondents = $1,215,000.
    \405\ Compliance Attorney at 370 hours x 300 potential 
respondents = 111,000 burden hours; Compliance Attorney at 2,000 
hours x 1,500 potential respondents = 3,000,000 burden hours.
---------------------------------------------------------------------------

    As discussed above, the commenter based its analysis on the safe 
harbor provisions of the proposed rule and was concerned with the 
reference to ``other readily available information'' contained in the 
proposed safe harbor. The commenter's estimate was based on a belief 
that, though the Rule itself would not specifically require it, 
carrying broker-dealers might, in turn, require their introducing 
broker correspondents to establish policies and procedures to collect 
information on Unidentified Large Traders required by the Rule to 
assist the clearing firms in complying with the requirements of the 
Rule that are applicable to them.\406\ As adopted, however, the safe 
harbor provision of the Rule makes clear the intended scope of ``other 
identifying information'' that a broker-dealer would need to consider, 
which is narrower than what the commenter assumed. As adopted, the safe 
harbor policies and procedures would need to be reasonably designed to 
identify Unidentified Large Traders based on accounts at the broker-
dealer. In assessing which accounts to consider, the Rule, as adopted, 
clarifies that the broker-dealer's policies and procedures should 
consider account name, tax identification number, or other identifying 
information ``available on the books and records of such broker-
dealer.'' As discussed above, the safe harbor policies and procedures 
would not need to take into account information on the books and 
records of another broker-dealer. Accordingly, the scope of the 
provision cited by the commenter is not as extensive as the commenter 
thought might be intended, and the revised Rule text has now clarified 
the intended scope.
---------------------------------------------------------------------------

    \406\ See Financial Information Forum Letter at 6.
---------------------------------------------------------------------------

    Further, also as described with respect to the PRA, the Commission 
believes that large traders, whose aggregate NMS securities 
transactions equal or exceed the identifying activity level, require 
sophisticated trade-processing capacities.\407\ The Commission believes 
it is unlikely that all broker-dealers that have been assigned an MPID 
would likely either carry accounts for or effect transactions on behalf 
of a large trader. Accordingly, all such entities are not expected to 
be impacted by the monitoring provisions of Rule 13h-1(f), and the 
Commission continues to believe that its initial estimate of 300 
affected broker-dealers is appropriate.\408\
---------------------------------------------------------------------------

    \407\ See supra text accompanying note 281 (noting one 
commenter, a large investment management firm and likely large 
trader, that reported that it currently has approximately 250 
broker-dealers on its approved list for executing equity 
transactions).
    \408\ To the extent that a broker-dealer that is subject to the 
monitoring requirements requires, by contract or otherwise, an 
entity that is not otherwise subject to the Rule's monitoring 
requirements to nevertheless perform a monitoring function, the 
Commission's estimate does not account for that situation.
---------------------------------------------------------------------------

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.\409\ 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.\410\ 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.
---------------------------------------------------------------------------

    \409\ 15 U.S.C. 78c(f).
    \410\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The Commission is adopting Rule 13h-1 pursuant to its authority 
under Sections 13(h) and 23(a) 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 investors, or 
otherwise in furtherance of the purposes of [the Exchange Act].'' \411\
---------------------------------------------------------------------------

    \411\ The Commission is adopting new 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 new Rule 13h-1(b) is discussed above in Sections 
IV and V.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission requested comment on 
whether proposed Rule 13h-1 would place a burden on competition, as 
well as the effect of the proposal on efficiency, competition, and 
capital formation. While the Commission did receive comment letters 
that discussed the overall number of respondents that would be affected 
by the proposed rule,\412\ as well as the Commission's cost and burden 
estimates,\413\ the Commission only received one comment that 
specifically addressed whether Rule 13h-1 would burden

[[Page 46999]]

competition or impact efficiency, competition, and capital 
formation.\414\ The comment is addressed as part of the discussion 
below.
---------------------------------------------------------------------------

    \412\ See supra Section IV.C.
    \413\ See supra Sections IV.D and V.B.
    \414\ See European Banking Federation and Swiss Bankers 
Association Letter.
---------------------------------------------------------------------------

A. Competition

    In the Proposing Release, the Commission considered 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 in which they participate. 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 ATSs, 
continue to enter the market.\415\ For example, there are approximately 
40 registered ATSs that trade NMS securities. In addition, the 
Commission within the past few years has approved applications by two 
entities--BATS Exchange, Inc. and NASDAQ Stock Market LLC--to become 
registered as national securities exchanges for trading equities, and 
approved proposed rule changes by two existing exchanges--International 
Securities Exchange, LLC (``ISE'') and Chicago Board Options Exchange, 
Incorporated--to add equity trading facilities to their existing 
options business.\416\ Moreover, on March 12, 2010, Direct Edge 
received approval from the Commission for its trading platforms to 
operate as facilities of two newly created national securities 
exchanges.\417\ We believe that competition among trading centers has 
been facilitated by Rule 611 of Regulation NMS,\418\ which encourages 
quote-based competition between trading centers; Rule 605 of Regulation 
NMS,\419\ which empowers investors and broker-dealers to compare 
execution quality statistics across trading centers; and Rule 606 of 
Regulation NMS,\420\ which enables customers to monitor their broker-
dealers' order routing practices.
---------------------------------------------------------------------------

    \415\ 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).
    \416\ The ISE discontinued its equities platform in 2010. See 
Press Release, Direct Edge, available at http://www.directedge.com/DE_ISE_Partner.aspx.
    \417\ See Securities Exchange Act Release No. 61698 (March 12, 
2010), 75 FR 13151 (March 18, 2010).
    \418\ 17 CFR 242.611.
    \419\ 17 CFR 242.605.
    \420\ 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 5,035 registered broker-dealers, of which approximately 
862 are small broker-dealers.\421\
---------------------------------------------------------------------------

    \421\ These numbers are based on a review of 2009 FOCUS Report 
filings reflecting registered broker-dealers, and discussions with 
SRO staff. These numbers do 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 their customers.
    As discussed above, the Commission acknowledges that the Rule will 
entail 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, will require one-time initial expenses, as 
discussed above. In addition, registered broker-dealers will 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. The Commission does not believe that 
these expenses would adversely affect competition.
    In our judgment, the costs of complying with 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 13h-1 that would be incurred by broker-
dealers would be marginal relative to the costs of complying with the 
existing EBS system.\422\ 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 new Rule 
13h-1, even if those costs influence the entry or exit decisions of 
individual broker-dealer firms at the margin.
---------------------------------------------------------------------------

    \422\ See supra Sections IV (Paperwork Reduction Act) and V 
(Consideration of Costs and Benefits) for a detailed description of 
the expected costs.
---------------------------------------------------------------------------

    The Commission does not expect that the costs associated with new 
Rule 13h-1, which are marginal 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 
customers because the volume of trading associated with large traders 
and resultant revenue that could be gained by servicing a large trader 
would justify the costs associated with the Rule.
    Further, the Commission would not be compelled to disclose publicly 
any information required to be kept or reported under Section 13(h) of 
the Exchange Act, including information kept or reported pursuant to 
Rule 13h-1.\423\ Information and trading data that the Commission would 
obtain pursuant to the Rule would not be shared with others and would 
not be available to other large traders or broker-dealers. Accordingly, 
because the large trader transaction data will be reported only to the 
Commission, and not made publicly available for use by a large trader's 
customers or competitors, the Commission expects the Rule to have 
little to no impact on competition.
---------------------------------------------------------------------------

    \423\ See supra Section III.A.3.g.
---------------------------------------------------------------------------

    The approach of new Rule 13h-1 will advance the purposes of the 
Exchange Act in a number of significant ways. The Commission believes 
that the large trader reporting rule will 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 large trader 
reporting rule will provide a useful source of data to facilitate the 
ability of the Commission to monitor and analyze more readily and 
efficiently the impact of large traders, including high-frequency 
traders, on the securities markets. Although, as noted above, several 
commenters stated that the Commission underestimated the costs of the 
proposed rule,\424\ the Commission has made several modifications to 
the Rule to reduce reporting burdens. The Commission believes that 
establishing the large trader reporting rule would not

[[Page 47000]]

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 Rule will 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.
---------------------------------------------------------------------------

    \424\ See supra Section V.B.
---------------------------------------------------------------------------

    While one commenter raised the possibility that a U.S. large trader 
reporting rule may incentivize non-U.S. traders to shift their trading 
in NMS securities to transactions that provide an economically 
equivalent long position but would not impose any reporting 
requirement,\425\ the Commission believes that the Rule, as adopted, 
has minimized this possibility. In particular, this release addresses 
the concerns raised by the commenter by clarifying the obligations on 
U.S. broker-dealers to collect information on customers in light of 
applicable foreign laws. In summary, a registered broker-dealer must 
collect the information specified by Rule 13h-1(d)(2) about the foreign 
intermediary's transactions if it is a large trader or an Unidentified 
Large Trader.\426\ The broker-dealer also must collect the information 
specified by Rule 13h-1(d)(3) relating to Unidentified Large Traders. 
The Rule does not require a registered broker-dealer to collect the 
identifying information about the foreign intermediary's 
client(s).\427\ Further, the Commission clarified that the Rule does 
not require broker-dealers to definitively determine who is, in fact, a 
large trader.
---------------------------------------------------------------------------

    \425\ See European Banking Federation and Swiss Bankers 
Association Letter at 4.
    \426\ See discussion supra at Section III.B.3 (explaining when a 
registered broker-dealer must treat its customer as an Unidentified 
Large Trader).
    \427\ The legislative history indicates that the Commission 
stated that it ``would not impose requirements on broker-dealers to 
report beneficial ownership information that is not recorded in the 
normal course of business.'' Senate Report, supra note 14, at 42. 
The Committee specifically noted that many broker-dealers currently 
maintain no beneficial ownership records of transactions of foreign 
persons that are carried out through banks, particularly foreign 
banks, which serve as the record holder of such securities. See id. 
The Committee expected that such beneficial owners would not be 
assigned LTIDs. See id. As discussed above, for all persons (both 
foreign and domestic), large trader status is triggered by the 
exercise of investment discretion, not mere beneficial ownership of 
NMS securities.
---------------------------------------------------------------------------

    Finally, the Commission believes that, because the reporting 
requirements applied to all large traders (both U.S. and foreign) will 
be minimal, they will not negatively impact the competitiveness of U.S. 
markets.

B. Capital Formation

    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. The Rule 
focuses on the core of the large trader reporting requirements--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 trust and capital formation. For example, the information 
collected from Rule 13h-1(d) 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.
    However, one commenter expressed concern that a potential 
consequence of a large trader reporting rule might be to deprive U.S. 
markets of capital that will instead flow to alternative market centers 
that provide an economically equivalent long position but would not 
impose any reporting requirement to the extent that foreign traders 
seek to avoid trading in reportable NMS securities.\428\ The 
consequence could be to deprive U.S. markets of capital, and to 
possibly create pricing disparities between economically equivalent 
non-reportable transactions and their analog reportable 
transactions.\429\
---------------------------------------------------------------------------

    \428\ See European Banking Federation and Swiss Bankers 
Association Letter at 4-5.
    \429\ See id.
---------------------------------------------------------------------------

    The commenter based its concerns on certain aspects of the Proposed 
Rule that it believed would impact non-U.S. traders. One concern was 
that potential non-U.S. traders would have little or no experience in 
dealing with Commission regulation and may not even realize they are 
subject to identifying and reporting requirements.\430\ Another concern 
involved how a broker-dealer would be expected to collect information 
from non-U.S. intermediaries and the impact of privacy laws on the 
ability to collect information and for large traders to report such 
information.\431\ A third concern involved the practicality of the 
proposed requirement for large traders to list account numbers on Form 
13H.\432\
---------------------------------------------------------------------------

    \430\ See id. at 2.
    \431\ See id. at 3.
    \432\ See id. at 3-4.
---------------------------------------------------------------------------

    The Commission is mindful of these comments and believes that the 
modifications and clarifications in the adopted Rule and discussed in 
detail above should mitigate these concerns. For example, as adopted, 
the Rule does not require account numbers to be included on Form 13H, 
alleviating the commenters' concern about the practicality of non-U.S. 
traders providing this information. Also as discussed above, the scope 
of the monitoring requirements has been clarified in the adopted Rule 
such that the obligations of broker-dealers to collect information from 
non-U.S. parties is limited to only the non-U.S. entity with whom they 
transact. Furthermore, in the event, which the Commission believes to 
be unlikely, that the laws of a large trader's foreign jurisdiction 
preclude or prohibit the large trader from waiving such restrictions or 
otherwise voluntarily filing Form 13H with the Commission, then such 
foreign large traders or representatives of foreign large traders may 
request an exemption from the Commission pursuant to Section 36 of the 
Exchange Act \433\ and paragraph (g) of the Rule.
---------------------------------------------------------------------------

    \433\ 15 U.S.C. 78mm.
---------------------------------------------------------------------------

    Given these mitigating factors, the Commission does not believe 
that any remaining costs to a non-U.S. trader that trades in an amount 
sufficient to require identification with the Commission via Form 13H 
outweigh the considerable benefits of directly accessing U.S. markets 
for the trading of NMS securities. Moreover, 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, Rule 13h-1 could help maintain investor trust in the 
markets, and in turn could add depth and liquidity to the markets and 
promote capital formation. Further, the Commission 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

[[Page 47001]]

uniformly on all affected entities (whether U.S. or non-U.S.).

C. Efficiency

    New Rule 13h-1 is designed to achieve the appropriate balance 
between the Commission's 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 large trader reporting rule.
    The Commission believes that the disclosure by registered broker-
dealers to regulators that would be achieved by the large trader 
reporting rule 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, and to instead assist with 
large-scale investigations and market reconstructions involving 
numerous stocks during peak trading volume periods. The Rule 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.
    The Commission acknowledges that 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 believes that Rule 13h-1 will enhance the 
Commission's efforts to monitor the markets, in furtherance of 
promoting efficiency and capital formation and thereby bolstering 
investor trust.

VII. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') \434\ requires Federal 
agencies, in promulgating rules, to consider the impact of those rules 
on small entities. Section 603(a) \435\ of the Administrative Procedure 
Act,\436\ 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.'' \437\ 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.'' \438\
---------------------------------------------------------------------------

    \434\ 5 U.S.C. 601 et seq.
    \435\ 5 U.S.C. 603(a).
    \436\ 5 U.S.C. 551 et seq.
    \437\ 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 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).
    \438\ 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 
million or less.\439\ 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 believes that Rule 13h-1 and Form 13H 
will not have a significant economic impact on a substantial number of 
small entities.
---------------------------------------------------------------------------

    \439\ 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).
---------------------------------------------------------------------------

    In the Proposing Release, the Commission requested comment on 
whether proposed Rule 13h-1 and Form 13H would have a significant 
economic impact on a substantial number of small entities. While the 
Commission did receive comment letters that discussed the overall 
number of respondents that would be affected by the proposed new 
rule,\440\ the Commission did not receive any comments that 
specifically addressed whether Rule 13h-1 and Form 13H would have a 
significant economic impact on small entities.
---------------------------------------------------------------------------

    \440\ See supra Section IV.C.
---------------------------------------------------------------------------

    Rule 13h-1 and Form 13H will 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 NMS securities.\441\ Specifically, the 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.
---------------------------------------------------------------------------

    \441\ See supra text accompanying note 61.
---------------------------------------------------------------------------

    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 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, Rule 13h-1 will 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 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, and 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.
    For the foregoing reasons, the Commission hereby certifies that, 
pursuant to 5 U.S.C. 605(b), Rule 13h-1 will not have a significant 
economic impact on a substantial number of small entities.

VIII. Statutory Authority

    Pursuant to the Exchange Act and particularly, Sections 13(h) and 
23(a)

[[Page 47002]]

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

IX. Text of the Amendments

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 amended as follows:

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

0
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, 78n-1, 78o, 78o-4, 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.; 18 U.S.C. 1350, 12 U.S.C. 
5221(e)(3); and 7 U.S.C. 2(c)(2)(E), unless otherwise noted.
* * * * *

0
2. Add Sec.  240.13h-1 to read as follows:


Sec.  240.13h-l  Large trader reporting.

    (a) Definitions. For purposes of this section:
    (1) The term large trader means any person that:
    (i) 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; or
    (ii) Voluntarily registers as a large trader by filing 
electronically with the Commission Form 13H (Sec.  249.327 of this 
chapter).
    (2) The term person has the same meaning as in Section 13(h)(8)(E) 
of the Securities Exchange Act of 1934 (15 U.S.C. 78m(h)(8)(E)).
    (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. For purposes of this section 
only, 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 (15 U.S.C. 
78c(3)(a)(35)). A person's employees who exercise investment discretion 
within the scope of their employment are deemed to do so on behalf of 
such person.
    (5) The term NMS security has the meaning provided for in Section 
242.600(b)(46) of this chapter.
    (6) The term transaction or transactions means all transactions in 
NMS securities, excluding the purchase or sale of such securities 
pursuant to exercises or assignments of option contracts. For the sole 
purpose of determining whether a person is a large trader, the 
following transactions are excluded from this definition:
    (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 (15 U.S.C. 77a), 
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 (26 U.S.C. 1 et seq.);
    (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; or
    (viii) Any transaction to effect a business combination, including 
a reclassification, merger, consolidation, or tender offer subject to 
Section 14(d) of the Securities Exchange Act of 1934 (15 U.S.C. 
78n(d)); an issuer tender offer or other stock buyback by an issuer; or 
a stock loan or equity repurchase agreement.
    (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 transaction in NMS securities for fewer than 100 shares, 
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. For purposes of determining under 
this section whether a registered broker-dealer has reason to know that 
a person is large trader, a registered broker-dealer need take into 
account only 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 section, 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.

[[Page 47003]]

    (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. A large trader on Inactive Status pursuant to paragraph 
(b)(3) of this section must notify broker-dealers promptly after filing 
for reactivated status with the Commission.
    (3) Filing requirement.
    (i) Compliance by controlling person. A large trader shall not be 
required to separately comply with the requirements of this 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) 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 this 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 shall become inactive upon filing a Form 13H (17 CFR 249.327) 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, 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, shall be aggregated; and
    (iii) Under no circumstances shall a person 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 for purposes of this section.
    (2) Accounts. Under no circumstances shall a person disaggregate 
accounts to avoid the identification requirements of this section.
    (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, or
    (ii) If the broker-dealer is a large trader, any proprietary or 
other account over which such broker-dealer exercises investment 
discretion.
    (iii) 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) of this section 
for those transactions.
    (2) Information. The information required to be maintained for all 
transactions shall include:
    (i) The clearing house number or alpha symbol of the broker or 
dealer submitting the information and the clearing house numbers or 
alpha symbols 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 section 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 or carries an account for a large trader or an 
Unidentified Large Trader shall electronically report to the 
Commission, using the infrastructure supporting Sec.  240.17a-25, in 
machine-readable form

[[Page 47004]]

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 
Sec.  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 no later than the day and time 
specified in the request for transaction information, which shall be no 
earlier than the opening of business of the day following such request, 
unless in unusual circumstances the same-day submission of information 
is requested.
    (f) Monitoring safe harbor. For the purposes of this rule, a 
registered broker-dealer shall be deemed not to know or have reason to 
know that a person is a large trader if it does not have actual 
knowledge that a person is a large trader and it establishes policies 
and procedures reasonably designed to:
    (1) Identify persons who have not complied with the identification 
requirements of paragraphs (b)(1) and (b)(2) of this section but whose 
transactions effected through an account or a group of accounts carried 
by such broker-dealer or through which such broker-dealer executes 
transactions, as applicable (and considering account name, tax 
identification number, or other identifying information available on 
the books and records of such broker-dealer) equal or exceed the 
identifying activity level;
    (2) Treat any persons identified in paragraph (f)(1) of this 
section as an Unidentified Large Trader for purposes of this section; 
and
    (3) Inform any person identified in paragraph (f)(1) of this 
section of its potential obligations under this section.
    (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 
section to the extent that such exemption is consistent with the 
purposes of the Securities Exchange Act of 1934 (15 U.S.C. 78a).

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
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.

* * * * *


0
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 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.

     OMB Number: 3235-0862
     Estimated average burden hours per response: 18
United States Securities and Exchange Commission

FORM 13H

Large Trader Registration

Information Required of Large Traders Pursuant to Section 13(h) of the 
Securities Exchange Act of 1934 and Rules Thereunder

[ ] INITIAL FILING: Date identifying transactions first effected (mm/
dd/yyyy) ------------------

Voluntary filing? [ ] no [ ] yes
Date of voluntary filing --------------

[ ] ANNUAL FILING: Calendar year ending ------------------------

[ ] AMENDED FILING

[ ] INACTIVE STATUS: Date commencing Inactive Status (mm/dd/yyyy) ----
--------------

[ ] TERMINATION FILING: Effective date (mm/dd/yyyy) --------------

[ ] REACTIVATED STATUS: Date identifying transactions first effected, 
post-Inactive Status (mm/dd/yyyy) ------------------

-----------------------------------------------------------------------
Name of Large Trader Filing This Form

-----------------------------------------------------------------------
LTID

-----------------------------------------------------------------------
Taxpayer Identification Number

-----------------------------------------------------------------------
Business Address of the Large Trader (Street, City, State, Zip, 
Country)

-----------------------------------------------------------------------
Mailing Address of the Large Trader (Street, City, State, Zip, Country)

Telephone No ( ) ----- ------ Facsimile No. ( ) ---- - ------ Email --
----------------------------

    The Form and the schedules thereto must be submitted by a natural 
person who is authorized to make this submission on behalf of the large 
trader.
-----------------------------------------------------------------------
Name of Authorized Person (First, Middle Initial, Last)

-----------------------------------------------------------------------
Title of Authorized Person

-----------------------------------------------------------------------
Relationship to Large Trader

-----------------------------------------------------------------------
Business Address of Authorized Person (Street, City, State, Zip, 
Country)

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

Authorized Person's Telephone
No. ( ) ------ - ------
Facsimile No. ( ) ------ - ------
Authorized Person's Email

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

ATTENTION

    Intentional misstatements or omissions of facts constitute Federal 
Criminal Violations. See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a). 
Intentional misstatements or omissions of facts may result in civil 
fines and other sanctions pursuant to the Securities Exchange Act of 
1934.
    The authorized person signing this form represents that all 
information contained in the form, schedules, and continuation sheets 
is true, correct, and complete. It is understood that all information 
whether contained in the form, schedules, or continuation sheets, is 
considered an integral part of this form and that any amendment 
represents that all unamended information remains true, correct, and 
complete.
-----------------------------------------------------------------------
Signature of Person Authorized to Submit this Form
FORM 13H
INFORMATION REQUIRED OF ALL LARGE TRADERS
ITEM 1. BUSINESSES OF THE LARGE TRADER (check as many as applicable)
    (a) Businesses engaged in by the large trader and any of the large 
trader's affiliates (check as many as applicable)
[ ] Broker or Dealer
[ ] Government Securities Broker or Dealer
[ ] Municipal Securities Broker or Dealer

[[Page 47005]]

[ ] Investment Adviser
    [ ] to Registered Investment Companies
    [ ] to Hedge Funds or other Funds not registered under the 
Investment Company Act
[ ] Futures Commission Merchant
[ ] Commodity Pool Operator
[ ] Bank Holding Company
[ ] Non-Bank Holding Company
[ ] Bank
[ ] Pension Trustee
[ ] Non-Pension Trustee
[ ] Insurance Company
[ ] Other (specify)----------------------------------------------------

    (b) Describe the nature of the business of the large trader 
including a description for each Securities Affiliate:
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
ITEM 2. SECURITIES AND EXCHANGE COMMISSION FILINGS
    Does the large trader or any of its Securities Affiliates file any 
other forms with the Commission?
    [ ] Yes [ ] No
    If yes, specify the entity and the forms filed:

 
             Entity                  Form(s) filed          CIK No.
 
------------                      ------------        ------------
------------                      ------------        ------------
------------                      ------------        ------------
------------                      ------------        ------------
 

ITEM 3. CFTC REGISTRATION AND FOREIGN REGULATORS
    (a) Is the large trader or any of its affiliates registered with 
the Commodity Futures Trading Commission in any capacity, including as 
a ``registered trader'' pursuant to sections 4i and 9 of the Commodity 
Exchange Act?
    [ ] Yes [ ] No
    If yes, identify each entity and specify the registration number:

 
                  Entity                          Registration No.
 
--------------------                        ----------------
--------------------                        ----------------
--------------------                        ----------------
--------------------                        ----------------
 


    (b) Is the large trader or any of its Securities Affiliates 
regulated by a foreign regulator?
    [ ] Yes [ ] No
    If yes, identify each entity and its primary foreign regulator(s):

 
                  Entity                     Primary foreign  regulator
 
--------------------                        ----------------
--------------------                        ----------------
--------------------                        ----------------
--------------------                        ----------------
 

ITEM 4. ORGANIZATION INFORMATION
    (a) Attach an Organizational Chart that identifies the large 
trader, its parent company (if applicable), all Securities Affiliates, 
and all entities identified in Item 3(a).
    (b) Provide the following information on all Securities Affiliates 
and all entities identified in Item 3(a):

 
                                                                     Description of        Relationship to the
                Entity                         MPID(s)                  business               large trader
 
----------                             ------.................  --------...............  --------
----------                             ------.................  --------...............  --------
----------                             ------.................  --------...............  --------
----------                             ------.................  --------...............  --------
 

    (c) If any affiliates file separately, identify each entity:

 
             Entity                      LTID          Suffix  (if any)
 
------------                      ----------          ----------
------------                      ----------........  ----------
------------                      ----------          ----------
 

    (d) If any affiliates have been assigned an LTID suffix, identify 
such entities and their corresponding suffixes:

 
 
                  Entity                               Suffix
 
------------------                          ----------------
------------------                          ----------------
------------------                          ----------------
 

ITEM 5. GOVERNANCE OF THE LARGE TRADER
    (a) STATUS OF THE LARGE TRADER (check as many as apply)
[ ] Individual
[ ] Trustee
[ ] Limited Liability Company
[ ] Partnership
[ ] Limited Partnership
[ ] Corporation
[ ] Other (specify)----------------------------------------------------

    (b) Complete the following for each general partner, and in the 
case of limited partnerships, each limited partner that is the owner of 
more than a 10 percent financial interest in the accounts of the large 
trader:

 
                   Name                     Status  (check one for each)
 
------------------                          [ ] General Partner
                                            [ ] Limited Partner.
------------------                          [ ] General Partner
                                            [ ] Limited Partner.
------------------                          [ ] General Partner
                                            [ ] Limited Partner.
------------------                          [ ] General Partner
                                            [ ] Limited Partner.
------------------                          [ ] General Partner
                                            [ ] Limited Partner.
------------------                          [ ] General Partner
                                            [ ] Limited Partner.
------------------                          [ ] General Partner
                                            [ ] Limited Partner.
 

    (c) Complete the following for each executive officer, director, or 
trustee of a large trader corporation or trustee:

 
                   Name                     Status  (check one for each)
 
----------------                            [ ] Executive Officer
                                            [ ] Director
                                            [ ] Trustee.
----------------                            [ ] Executive Officer
                                            [ ] Director
                                            [ ] Trustee.
----------------                            [ ] Executive Officer
                                            [ ] Director
                                            [ ] Trustee.
----------------                            [ ] Executive Officer
                                            [ ] Director
                                            [ ] Trustee.
----------------                            [ ] Executive Officer
                                            [ ] Director
                                            [ ] Trustee.
----------------                            [ ] Executive Officer
                                            [ ] Director
                                            [ ] Trustee.
----------------                            [ ] Executive Officer
                                            [ ] Director
                                            [ ] Trustee.
 

    (d) Jurisdiction in which the large trader entity is incorporated 
or organized:

-----------------------------------------------------------------------
(state and country)
ITEM 6. LIST OF BROKER-DEALERS AT WHICH THE LARGE TRADER OR ITS 
SECURITIES AFFILIATES HAS AN ACCOUNT
    Identify each broker-dealer at which the large trader or any of its 
Securities Affiliates has an account and the types of services 
provided.

[[Page 47006]]



 
          Name of  Broker-Dealer
 
----------------                           [ ] Prime Broker
                                           [ ] Executing Broker
                                           [ ] Clearing Broker.
----------------                           [ ] Prime Broker
                                           [ ] Executing Broker
                                           [ ] Clearing Broker.
----------------                           [ ] Prime Broker
                                           [ ] Executing Broker
                                           [ ] Clearing Broker.
----------------                           [ ] Prime Broker
                                           [ ] Executing Broker
                                           [ ] Clearing Broker.
----------------                           [ ] Prime Broker
                                           [ ] Executing Broker
                                           [ ] Clearing Broker.
----------------                           [ ] Prime Broker
                                           [ ] Executing Broker
                                           [ ] Clearing Broker.
----------------                           [ ] Prime Broker
                                           [ ] Executing Broker
                                           [ ] Clearing Broker.
----------------                           [ ] Prime Broker
                                           [ ] Executing Broker
                                           [ ] Clearing Broker.
----------------                           [ ] Prime Broker
                                           [ ] Executing Broker
                                           [ ] Clearing Broker.
----------------                           [ ] Prime Broker
                                           [ ] Executing Broker
                                           [ ] Clearing Broker.
 

INSTRUCTIONS FOR FORM 13H
    Submission of the Form. All submissions on Form 13H must be filed 
electronically through the Commission's Electronic Data Gathering, 
Analysis, and Retrieval (``EDGAR'') system. For more information on 
filing through EDGAR, including instructions on how to obtain access to 
and file electronically through EDGAR, see the EDGAR Filer Manual 
(available on the Commission's website at: http://www.sec.gov/info/edgar.shtml).
    Definitions. The term ``Securities Affiliate'' means an affiliate 
of the large trader that exercises investment discretion over NMS 
securities.
    The term ``affiliate'' means any person that directly or indirectly 
controls, is under common control with, or is controlled by the large 
trader.
    The term ``bank'' means a national bank, state member bank of the 
Federal Reserve System, state non-member bank, savings bank or 
association, credit union, or foreign bank.
    The term ``executive officer'' means ``policy-making officer'' and 
otherwise is interpreted in accordance with Rule 16a-1(f) under the 
Exchange Act.
    Type of Filing. Indicate the type of Form 13H filing by checking 
the appropriate box at the top of the cover page to Form 13H. All 
filings must include a valid digital signature.
    If the filing is an ``Initial Filing,'' indicate whether it is a 
voluntary filing. Voluntary filings are submitted regardless of whether 
the aggregate number of transactions effected reached the identifying 
activity level. For voluntary filings, the large trader must input the 
date on which it submits its voluntary filing. For non-voluntary 
filings, the large trader must input the first date on which the 
aggregate number of transactions effected reached the identifying 
activity level. A non-voluntary ``Initial Filing'' must be submitted 
promptly after first effecting an aggregate number of transactions 
equal to or greater than the identifying activity level.
    If the filing is an ``Annual Filing,'' input the applicable 
calendar year.
    An ``Amended Filing'' must be filed promptly following the end of 
the calendar quarter in which any of the information contained in a 
Form 13H filing becomes inaccurate for any reason. A large trader must 
file an ``Amended Filing'' when, for example, it changes its name, 
business address, organization type (e.g., the large trader partnership 
reincorporates as a limited liability company), or regulatory status 
(e.g., a hedge fund registers under the Investment Company Act), or 
when its organizational chart changes in a manner relevant under Item 
4(a) (e.g., it adds or removes a Securities Affiliate).
    If the filing is for ``Inactive Status,'' input the date that the 
large trader qualified for Inactive Status. A large trader that has not 
effected aggregate transactions at any time during the previous full 
calendar year in an aggregate amount equal to or greater than the 
identifying activity level may file for Inactive Status. A large trader 
shall become inactive, and exempt from the filing and self-
identification requirements upon filing for Inactive Status until the 
identifying activity level is reached again.
    If the filing is for ``Reactivated Status,'' indicate the date that 
the aggregate number of transactions again reached or exceeded the 
identifying activity level. A filing for ``Reactivated Status'' must be 
submitted promptly after effecting an aggregate number of 
transactions--subsequent to filing for ``Inactive Status''--equal to or 
greater than the identifying activity level. In addition, a person may 
voluntarily elect to file for Reactivated Status prior to effecting 
aggregate transactions that are equal to or greater than the 
identifying activity threshold. For such voluntarily filings for 
``Reactivated Status,'' the date of the voluntarily filing should be 
entered rather than the date that the aggregate number of transactions 
again reached or exceeded the identifying activity level.
    If the filing is a ``Termination Filing,'' indicate the date on 
which the large trader ceased operation. For example, when one large 
trader merges into another large trader, resulting in only one 
surviving entity, the non-surviving large trader should specify the 
effective date of the merger in its Termination Filing.
    The Form also requires that a large trader input its Taxpayer 
Identification Number. The Form further requires a large trader to 
input its business and mailing addresses. If those addresses are the 
same, for the mailing address field, the large trader may either input 
its address again or input ``same.''
    The Form must be filed by a natural person who is authorized to 
submit it on behalf of the large trader. The Commission may require the 
large trader to provide descriptive or clarifying information about the 
information disclosed in the Form 13H, and will contact the Authorized 
Person to provide such information.
    To amend the name, phone number, and email address of the large 
trader, the large trader must modify its EDGAR profile. Thereafter, 
changes will automatically be reflected in the Form 13H.
    Item 1. Businesses of the Large Trader. Item 1 of the Form requires 
the large trader to specify, from among the enumerated choices, the 
types of business engaged in by the large trader, by checking as many 
as are applicable. Select ``Other'' to indicate a financial entity not 
included in any of the enumerated categories and enter a short 
description for each such entity. In addition, select ``Other'' if the 
large trader is an individual and input his or her occupation.
    A large trader also is required, for itself and each of its 
Securities Affiliates, to describe the nature of its operations, 
including a general description of its trading strategies. As an 
example, the following would be an appropriate description: 
``Registered market-maker on [SRO], authorized participant for a number 
of ETFs based on foreign indices, and proprietary trading focusing on 
statistical arbitrage.''
    Item 2. Securities and Exchange Commission Filings. The large 
trader must indicate whether it or any of its Securities Affiliates 
files forms with the Commission. If it checks ``Yes,'' the large trader 
must input the names of the filing entities and, for each of them, 
input the form(s) they file and the applicable CIK number.
    Item 3. CFTC Registration and Foreign Regulators.
    Item 3(a) requires the large trader to indicate whether it or any 
of its affiliates

[[Page 47007]]

is registered with the Commodity Futures Trading Commission in any 
capacity, including as a ``registered trader'' pursuant to Sections 4i 
and 9 of the Commodity Exchange Act. If it checks ``Yes,'' the large 
trader must input the name of each such entity and the registration 
number for each such entity.
    Item 3(b) requires the large trader to indicate whether it or any 
of its Securities Affiliates is regulated by a foreign regulator. 
Unlike Item 3(a), Item 3(b) applies only to the large trader and its 
Securities Affiliates. If it checks ``Yes,'' the large trader must 
input the name of each such regulated entity and its primary foreign 
regulator.
    Item 4. Organization Information.
    To comply with Item 4(a), the large trader must attach an 
organizational chart that depicts the organization of the large trader. 
At a minimum, the chart must include the large trader, its parent 
company (if applicable), all Securities Affiliates, and all entities 
identified in Item 3(a) of the Form (if any) (collectively, ``Item 4 
Affiliates'').
    Item 4(b) requires that a large trader provide information about 
the Item 4 Affiliates. Specifically, the large trader must input the 
names of Item 4 Affiliates and, for each one of them, also input the 
following information: MPID(s); a brief description of its business, 
and its relationship to the large trader.
    Item 4(c) requires that a large trader identify all affiliates that 
file a separate Form 13H. Those affiliates will have a different LTID.
    Item 4(d) permits a large trader to assign LTID suffixes to one or 
more of its Securities Affiliates. A suffix should have no more than 
three characters, all of which must be numbers; no letters or special 
characters may be used. The same suffix may not be assigned to more 
than one affiliate using the same LTID.
    Item 5. Governance of the Large Trader.
    Item 5 captures basic information about the large trader 
organization. All terms have the meanings generally ascribed to them in 
the United States. If a foreign organization type has no comparable 
corporate form, check ``Other'' and input the organization type. A 
large trader who is a natural person must check ``Individual.''
    Item 6. List of Broker-Dealers at Which the Large Trader or Its 
Securities Affiliates Has an Account.
    Item 6 requires that a large trader identify each broker-dealer at 
which the large trader and any Securities Affiliate has an account. 
Additionally, for each such broker-dealer, the large trader must 
indicate the type(s) of services provided. The large trader must check 
as many of the following that apply: Prime Broker; Executing Broker; 
Clearing Broker.
    Paperwork Reduction Act Disclosures. This collection of information 
has been reviewed by OMB in accordance with the clearance requirements 
of 44 U.S.C. 3507. 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.
    Responses to this collection are mandatory, pursuant to Section 
13(h) of the Exchange Act and Rule 13h-1 thereunder. The Commission 
will treat as confidential the information collected pursuant to this 
Form in a manner consistent with Section 13(h)(7) of the Exchange Act, 
which sets forth a few limited exceptions.
    The Commission will use the information collected pursuant to this 
Form 13H to identify significant market participants, i.e., large 
traders. Form 13H will allow the Commission to collect background 
information about large traders, which will contribute to the agency's 
ability to conduct investigations and enforcement matters. The 
Commission estimates that the average burden to respond to the Form 13H 
will be 18 hours. Any member of the public may direct to the Commission 
any comments concerning the accuracy of this burden estimate and any 
suggestions for reducing this burden.

    By the Commission.

    Dated: July 27, 2011.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-19419 Filed 8-2-11; 8:45 am]
BILLING CODE 8011-01-P