Order Temporarily Exempting Certain Broker-Dealers and Certain Transactions From the Recordkeeping and Reporting Requirements of Rule 13h-1 Under the Securities Exchange Act of 1934, 49556-49561 [2013-19650]
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49556
Federal Register / Vol. 78, No. 157 / Wednesday, August 14, 2013 / Notices
underlying fund after it receives a
proxy. SPE also states that ‘‘there is
almost never sufficient time for an
acquiring fund to seek and actually
obtain instructions from its own
shareholders as to how to vote a specific
proxy solicited by a particular acquired
fund.’’ SPE further states that ‘‘SPE has
no such relationship with any fund and
it would be futile for SPE to try to
persuade an unrelated acquired fund to
transmit its proxy materials to SPE’s
stockholders.’’
4. SPE requests an order under section
554(e) of the APA declaring that the
Voting Procedure ‘‘does not cause it to
be in violation of Section 12(d)(1) of the
Act.’’ Section 554(e) of the APA
provides that ‘‘[t]he agency, with like
effect as in the case of other orders, and
in its sound discretion, may issue a
declaratory order to terminate a
controversy or remove uncertainty.’’
SPE states that, if the Commission
issues the requested declaratory order,
SPE intends to submit the Voting
Procedure for shareholder approval on
an annual basis ‘‘to insure that its
standing proxy voting instructions do
not become stale.’’
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The Commission’s Preliminary Views
1. Section 12(d)(1)(F) of the 1940 Act
provides a conditional exemption from
the restrictions in Section 12(d)(1)(A) on
an acquiring fund purchasing or
otherwise acquiring a security issued by
an underlying fund. The legislative
history of Section 12(d)(1)(A) suggests
that these restrictions were designed, in
part, to address the concern that an
acquiring fund could be used by an
investment adviser, among others, as a
vehicle to control or unduly influence,
through voting, threat of redemption or
otherwise, an underlying fund for its
own benefit and to the detriment of the
shareholders of both funds.1 The
conditions contained in the exemption
provided by Section 12(d)(1)(F), and in
particular the condition requiring voting
in accordance with Section
12(d)(1)(E)(iii), attempts to minimize the
influence that an acquiring fund may
exercise over an underlying fund
through voting.2
2. Shortly after Section 12(d)(1)(F)
was enacted in 1970, the Commission
issued a release providing guidance on
the various provisions enacted by the
new legislation, including specifically
1 See U.S. Securities and Exchange Commission,
Investment Trusts and Investment Companies, H.R.
Doc No. 279, 76th Cong., 1st Sess., pt. 3, at 2721–
95 (1939).
2 See Fund of Funds Investments, Investment
Company Act Release No. 27399 (June 20, 2006) at
n.11 and accompanying text.
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the Pass-Through Voting Condition.3
The 1971 Release stated that the PassThrough Voting Condition in Section
12(d)(1)(F) ‘‘in effect, requires the fund
holding company to make an
arrangement with the issuer or principal
underwriter of the issuer whereby
sufficient proxy solicitation or other
material may be transmitted to the fund
holding company’s security holders so
that their instructions may be
obtained.’’ 4 This approach addresses
the concern underlying the restrictions
in Section 12(d)(1)(A)—that the fund of
funds’ investment adviser or another
affiliate not exercise undue influence
over the management or policies of an
underlying fund—by placing the voting
of the underlying fund’s proxies in the
hands of the fund of funds’ shareholders
(rather than its investment adviser).
Consistent with the Commission’s
analysis in the 1971 Release, the
Commission interprets Section
12(d)(1)(F), through the incorporation of
the requirement in Section
12(d)(1)(E)(iii), to require SPE, if it
chooses the Pass-Through Voting
Condition, to have an arrangement with
each underlying fund or its principal
underwriter whereby SPE will pass
through the proxies to SPE’s
shareholders and vote according to their
instructions.
3. In the Commission’s preliminary
view, SPE’s Voting Procedure does not
appear to be consistent with the
purposes and policies behind Section
12(d)(1)(F) of the Act, or with the
guidance that the Commission
articulated in the 1971 Release. The
Voting Procedure gives the Adviser
broad discretion in voting the
underlying funds’ proxies and thus
presents the potential for the Adviser to
exercise undue influence over the
management and policies of the
underlying funds. As to SPE’s assertion
that soliciting proxies as described in
the 1971 Release is ‘‘prohibitively
expensive and logistically impractical,’’
we note that Section 12(d)(1)(E) requires
there to be ‘‘an arrangement’’ between
the acquiring fund and an underlying
fund concerning the voting of proxies,
which suggests that at least the logistics
of the Pass-Through Voting Condition
could be addressed as part of ‘‘the
arrangement.’’ We also note that funds
3 Changes in the Investment Company Act of 1940
Made by the Investment Company Amendments Act
of 1970 (Pub. L. 91–547) Relating to the Repeal and
Modification of Exemptions for Certain Companies;
The Pyramiding of Investment Companies and the
Regulation of Fund Holding Companies; and
Rescission of Rule 11b-1 under the Investment
Company Act, Investment Company Act Release
No. 6440 (Apr. 6, 1971) (‘‘1971 Release’’).
4 Id. at 4.
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of funds similar to SPE existed at the
time the 1971 Release was issued and
the Pass-Through Voting Condition was
enacted as an alternative to Mirror
Voting, yet Congress nevertheless
determined the statutory conditions to
be appropriate.5 To the extent that SPE
finds making ‘‘an arrangement’’ with an
underlying fund under the PassThrough Voting Condition ‘‘futile,’’ SPE
has the option of using Mirror Voting.
Therefore, absent a request for a hearing
that is granted by the Commission, the
Commission intends to respond to SPE’s
application by issuing an order under
Section 554(e) of the APA declaring that
the Voting Procedure does not satisfy
Section 12(d)(1)(F) of the Act.
By the Commission.
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–19693 Filed 8–13–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–70150]
Order Temporarily Exempting Certain
Broker-Dealers and Certain
Transactions From the Recordkeeping
and Reporting Requirements of Rule
13h–1 Under the Securities Exchange
Act of 1934
August 8, 2013.
On July 27, 2011, the Securities and
Exchange Commission (‘‘Commission’’)
adopted Rule 13h–1 (the ‘‘Rule’’) under
the Securities Exchange Act of 1934
(‘‘Exchange Act’’) concerning large
trader reporting to assist the
Commission in both identifying and
obtaining trade information for market
participants that conduct a substantial
amount of trading activity, as measured
by volume or market value, in U.S.
securities (such persons are referred to
as ‘‘large traders’’).1 The Financial
Information Forum (‘‘FIF’’) and the
Securities Industry and Financial
Markets Association (‘‘SIFMA,’’ and
collectively the ‘‘Industry
Organizations’’), each representing a
variety of broker-dealers and other
market participants, have requested that
the Commission grant certain
substantive relief from the broker-dealer
recordkeeping and reporting
5 See Mutual Fund Legislation of 1967: Hearings
on S. 1659 Before the Senate Comm. on Banking
and Currency, 90th Cong., 1st Sess. 882–891 (1967)
(statement of Milton Mound, President, First
Multifund of America, Inc.).
1 See Securities Exchange Act Release No. 64976
(July 27, 2011), 76 FR 46960 (Aug. 3, 2011) (‘‘Large
Trader Adopting Release’’). The effective date of
Rule 13h–1 was October 3, 2011.
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requirements of the Rule.2 Pursuant to
Section 13(h)(6) of the Exchange Act
and Rule 13h–1(g) thereunder,3 the
Commission, by order, may exempt
from the provisions of Rule 13h–1, 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 Rule
13h–1 to the extent that such exemption
is consistent with the purposes of the
Exchange Act.
In response to the Industry
Organizations’ requests and as further
discussed below, the Commission
extended the compliance date for the
broker-dealer recordkeeping, reporting,
and monitoring requirements and took a
two-phased approach to implementation
of the broker-dealer requirements under
the Rule. Commencing on November 30,
2012, the first phase of implementation
required clearing broker-dealers for
large traders to keep records of and
report upon Commission request data
concerning: (1) proprietary trades by
large traders that are U.S.-registered
broker-dealers; and (2) transactions
effected by large traders through a
sponsored access arrangement
(collectively, ‘‘Phase One’’).4
The second phase of implementation
concerned those remaining
requirements of the Rule that were not
covered in Phase One. As more fully
described below, the Commission is
herein modifying this second phase by
limiting the recordkeeping and
reporting requirements of the Rule to
include transactions effected by large
traders through direct market access
arrangements (‘‘Phase Two’’). The
compliance date for Phase Two, as
modified, will remain November 1,
2013.5
Finally, the Commission is herein
establishing a new third phase for
which the compliance date will be
November 1, 2015. As discussed further
below, this new and final phase will
2 See Letters from: Manisha Kimmel, Executive
Director, FIF, to Robert Cook, Director, and David
Shillman, Associate Director, Division of Trading
and Markets, Commission, dated January 25, 2012
(‘‘FIF Letter’’); Ann L. Vlcek, Managing Director and
Associate General Counsel, SIFMA, to David S.
Shillman, Associate Director, Division of Trading
and Markets, Commission, dated March 29, 2012
(‘‘SIFMA Letter I’’); and Theodore R. Lazo,
Managing Director and Associate General Counsel,
SIFMA, to David S. Shillman, Associate Director,
Division of Trading and Markets, Commission,
dated February 13, 2013 (‘‘SIFMA Letter II’’). These
letters are available at: https://www.sec.gov/
comments/s7-10-10/s71010.shtml.
3 See 15 U.S.C. 78m and 17 CFR 240.13h–1(g),
respectively.
4 See Securities Exchange Act Release No. 66839
(April 20, 2012), 77 FR 25007, 25008 (April 26,
2012) (‘‘Extension Order I’’).
5 See infra note 19.
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include all of the remaining
requirements of the Rule that have not
been, or will not be, implemented in
either Phase One or Phase Two
(collectively, ‘‘Phase Three’’).
I. Background
A. The Requirements of Rule 13h–1 and
Applicable Compliance Dates for Those
Requirements
Large Trader Self-Identification. Rule
13h–1 requires that large traders register
with the Commission by electronically
filing and periodically updating Form
13H.6 Additionally, promptly after
receiving a large trader identification
number (‘‘LTID’’) assigned by the
Commission,7 a large trader must
disclose its LTID to registered brokerdealers effecting transactions on its
behalf and identify to each such brokerdealer each account to which the LTID
number applies.8 These requirements
have been in effect since December 1,
2011.9
Broker-Dealer Recordkeeping and
Reporting. Rule 13h–1 also requires that
every registered broker-dealer maintain
records of data specified in paragraphs
(d)(2) and (d)(3) of the Rule
(‘‘Transaction Data’’), including the
applicable LTID(s) and execution time
on each component trade, for all
transactions effected directly or
indirectly by or through: (1) an account
such broker-dealer carries for a large
trader or an Unidentified Large
Trader; 10 or (2) if the broker-dealer is a
large trader, any proprietary or other
account over which such broker-dealer
exercises investment discretion.11
Additionally, where a non-broker-dealer
carries an account for a large trader
under the Rule, the broker-dealer
effecting transactions directly or
indirectly for such large trader must
maintain records of all Transaction
Data.12
6 See
Rule 13h–1(b)(1)(i)–(iii).
a large trader files its initial Form 13H
filing through EDGAR, the system sends an
automatically generated confirmation email
acknowledging acceptance of the filing. That email
also contains the unique 8-digit LTID number
assigned to the large trader.
8 See Rule 13h–1(b)(2). See also Large Trader
Adopting Release, supra note 1, 76 FR at 46971
(‘‘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’’).
9 See Large Trader Adopting Release, supra note
1, 76 FR at 46960.
10 The definition of ‘‘Unidentified Large Trader’’
is discussed below. See infra note 20 and
accompanying text. In the context of the brokerdealer recordkeeping and reporting requirements,
references in this release to ‘‘large trader’’ include
Unidentified Large Traders.
11 See Rule 13h–1(d)(1)(i) and (ii).
12 See Rule 13h–1(d)(1)(iii).
7 When
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49557
Rule 13h–1 requires that, upon
Commission request, every registered
broker-dealer that is itself a large trader
or carries an account for a large trader
must electronically report Transaction
Data to the Commission through the
Electronic Blue Sheets (‘‘EBS’’) system
for all transactions, equal to or greater
than the reporting activity level, effected
directly or indirectly by or through
accounts carried by such broker-dealer
for large traders.13 Additionally, where
a non-broker-dealer carries an account
for a large trader, the broker-dealer
effecting such transactions directly or
indirectly for a large trader must
electronically report Transaction Data to
the Commission through the EBS
system. The Rule requires that reporting
broker-dealers submit the requested
Transaction Data no later than the day
and time specified in the Commission’s
request.14
Initially, the compliance date for the
broker-dealer requirements was April
30, 2012.15 To allow additional time for
the Commission to examine
implementation issues identified by the
Industry Organizations subsequent to
the Commission’s adoption of the Rule,
the Commission deferred the initial
compliance date and established a twophased approach to implementation of
the broker-dealer requirements.16
Specifically, the Commission postponed
until November 30, 2012, the
obligations of clearing brokers for large
traders (including the large trader itself
if it is a self-clearing broker-dealer) to
keep records and report Transaction
Data for such customers’ transactions
that are either (1) proprietary trades by
a U.S. registered broker-dealer; or (2)
effected through a ‘‘sponsored access’’
arrangement (i.e., Phase One).17 The
13 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.
14 The Commission will not require reporting
earlier than the opening of business of the day
following such request, except under unusual
circumstances. See Rule 13h–1(e). Accordingly,
while information must be available on the morning
after the transaction was effected, the reporting
deadline is based upon the deadline specified in the
Commission’s request for Transaction Data.
15 See Large Trader Adopting Release, supra note
1, 76 FR at 46960.
16 See Extension Order I, supra note 4.
17 See id. at 25008–9. A sponsored access
arrangement is one where a broker-dealer permits
a customer to enter orders into a trading center
without using the broker-dealer’s trading system
(i.e., using the customer’s own technology or that
of a third party provider). FIF indicated that brokerdealer compliance would be easier for sponsored
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Commission further deferred the
compliance date for the recordkeeping
and reporting of other large trader
transactions until May 1, 2013 18 and,
more recently, the Commission
extended that date to November 1, 2013
while it considered the industry’s
experience with Phase One
implementation in further evaluating
the requests for relief for the remainder
of the Rule.19
Broker-Dealer Monitoring. As
mentioned above, the recordkeeping
and reporting requirements apply to
customers that are large traders as well
as Unidentified Large Traders. An
‘‘Unidentified Large Trader’’ is a person
who (1) has not complied with the
identification requirements of the Rule;
and (2) a registered broker-dealer knows
or has reason to know is a large trader
based on transactions in NMS securities
effected by or through such brokerdealer.20 The Rule provides a safe
harbor for broker-dealers that establish
and maintain certain customer
monitoring practices. For the purposes
of the Rule, a registered broker-dealer is
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 (among other
things): (1) identify persons who may be
large traders but have not self-identified
as required; and (2) inform those
persons of the self-identification
requirements of the Rule.21 To take
advantage of this safe harbor, brokerdealers are required to have appropriate
policies and procedures in place by the
Phase Two compliance date, which is
November 1, 2013.22
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B. Relief Requests
The Industry Organizations have
requested that the Commission provide
certain substantive relief with respect to
the recordkeeping and reporting
requirements for broker-dealers.23 In
particular, they highlight
implementation challenges associated
with the Rule’s recordkeeping and
access customers because those arrangements
typically are distinct from all other business lines
of the broker-dealer, with infrastructure that
processes this order flow that is separate from the
platforms that handle other client and proprietary
flows. See id. at 25008 n.16.
18 See id. at 25008.
19 See Securities Exchange Act Release No. 69281
(April 3, 2013), 78 FR 20960 (April 8, 2013)
(‘‘Extension Order II’’).
20 See Rule 13h–1(a)(9).
21 See Rule 13h–1(f).
22 See Extension Order II, supra note 19.
23 See generally FIF Letter, SIFMA Letter I, and
SIFMA Letter II, supra note 2.
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reporting requirements that have come
to light as broker-dealers focused their
attention on how to comply with the
Rule, in particular with respect to
obtaining and reporting the execution
time of individual transactions by
certain large traders.24 According to the
Industry Organizations, these challenges
are most pronounced when a brokerdealer effects transactions for a large
trader and processes the activity
through a multi-client average price
account.25 As a result of the complexity
and additional cost to capture and
report disaggregated trades with
execution time for large traders whose
trades are processed in this manner, the
Industry Organizations request relief
from the requirement to provide
execution times on transactions
processed through average price
accounts.26
The Industry Organizations also
request relief for all broker-dealers other
than self-clearing and clearing brokerdealers from the recordkeeping and
reporting requirements of the Rule.27
While the Rule focuses the reporting
obligation on the universe of clearing
brokers that currently report data
through the EBS system, the Rule also
authorizes the Commission to obtain
this data directly from certain nonclearing broker-dealer large traders, as
well as broker-dealers that effect
transactions, directly or indirectly, for
large traders where a non-broker-dealer
carries the account. The Industry
Organizations have asked the
Commission to impose the
recordkeeping and reporting
requirement exclusively on the clearing
brokers that currently report through the
EBS system.28
In addition, the Industry
Organizations argue that the complex
structure underlying execution,
clearance, and settlement flows of large
trader transactions, including the fact
that information related to the identity
of the large trader and the execution fill
details often reside with different
broker-dealers, presents challenges to
implementation, and that these
concerns are most relevant with respect
to large trader institutional customers.29
The Industry Organizations further
24 See SIFMA Letter II, supra note 2 at 5. See also
FIF Letter, supra note 2 at 2; and SIFMA Letter I,
supra note 2 at 5.
25 See FIF Letter, supra note 2 at 31–32. See also
SIFMA Letter I, supra note 2 at B–1.
26 See, e.g., SIFMA Letter I, supra note 2 at 5.
27 See FIF Letter, supra note 2 at 25–28. See also
SIFMA Letter I, supra note 2 at B–2.
28 See FIF Letter, supra note 2 at 26–27. See also
SIFMA Letter I, supra note 2 at B–3.
29 See FIF Letter, supra note 2 at 25–28. See also
SIFMA Letter II, supra note 2 at 5–7.
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highlight areas where the burdens as
they relate to institutional large trader
customers would be most extensive and
impose the greatest potential cost for
some broker-dealers, particularly for
prime brokers, routing broker-dealers,
and situations where clearing
responsibility is transferred between
multiple brokers, and the Industry
Organizations request that the
Commission provide relief from the
recordkeeping and reporting obligations
of the Rule for each of those areas.30
II. Discussion
The Commission continues to believe
that implementation of the large trader
reporting requirements contemplated by
Rule 13h–1 is necessary to effectively
assess the impact of large trader activity
on the securities markets in the near
term and support the Commission’s
investigative and enforcement activities.
The Commission also believes that it is
appropriate and consistent with the
Exchange Act to provide exemptive
relief limiting short-term compliance
costs of the Rule to focus near-term
compliance on the large trader
information that is likely to be most
useful to the Commission.
Accordingly, and as discussed more
fully below, the Commission believes
that it is appropriate and consistent
with the purposes of the Exchange Act
to extend the Phase Two November 1,
2013 compliance date for certain
registered broker-dealers by temporarily
exempting broker-dealers, until
November 1, 2015, from the
recordkeeping and reporting
requirements of Rule 13h–1(d) and (e),
except for:
(1) The clearing broker-dealer for a
large trader,31 with respect to 32
(a) proprietary transactions by a large
trader broker-dealer;
(b) transactions effected pursuant to a
‘‘sponsored access’’ arrangement; 33 and
30 See FIF Letter, supra note 2 at 25–28. See also
SIFMA Letter II, supra note 2 at 5–7.
31 In its letter, FIF asked the Commission for
‘‘relief for broker dealers involved in Large Trader
transactions that do not have a direct relationship
with the Large Trader. Only the self-clearing and
clearing broker dealers with a direct relationship
with the Large Trader would perform Large Trader
Reporting.’’ See FIF Letter, supra note 2, at 2. In
Appendix C of its letter, FIF provides an example
of the entities for whom it recommends imposing
a recordkeeping and reporting obligation. See id. at
25. In addition, FIF recommends that the reporting
of execution time should rest with the clearing
broker for the originating broker, and any prime
broker would be relieved from being required to
report execution times.
32 Items (a) and (b) are currently included in
Phase One, which was effective beginning on
November 30, 2012.
33 See infra note 39 (defining ‘‘sponsored access’’
arrangement).
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(c) transactions effected pursuant to a
‘‘direct market access’’ arrangement 34;
and
(2) a broker-dealer that carries an
account for a large trader, with respect
to transactions other than those set forth
above, and for Transaction Data other
than the execution time.35
In accordance with Phase One,
clearing broker-dealers for large traders
have been complying with the
recordkeeping and reporting
requirements of Rule 13h–1, with
respect to (a) proprietary transactions by
a large trader broker-dealer, and (b)
transactions effected pursuant to a
‘‘sponsored access’’ arrangement, since
November 30, 2012. As part of Phase
Two, in accordance with this Order,
clearing broker-dealers for large traders
also will have to comply with the
recordkeeping and reporting
requirements of Rule 13h–1 with respect
to transactions effected pursuant to a
‘‘direct market access’’ arrangement as
of November 1, 2013. In addition, with
respect to all other types of transactions,
the prime broker or other carrying
broker-dealer for a large trader will have
to report the applicable LTID, but not
the execution time, as of November 1,
2013. Finally, the recordkeeping and
reporting requirements with respect to
Unidentified Large Traders, and the
related monitoring safe harbor provided
by Rule 13h–1(f), will apply to brokerdealers that carry an account for a large
trader as of November 1, 2013.
The Rule as adopted requires the
following broker-dealers to obtain, keep
records of, and report Transaction Data
to the Commission upon request
through the EBS infrastructure: (1) The
broker-dealer that ‘‘carries’’ the account
for the large trader (including the
clearing broker for the large trader and
the large trader’s prime broker, if
applicable); (2) broker-dealer large
traders, with respect to their proprietary
trades and transactions over which they
exercise investment discretion; and (3)
34 See infra note 41 and text following note 41
(defining ‘‘direct market access’’ arrangement).
35 Accordingly, during Phase Two, a registered
broker-dealer that is itself a large trader but does not
self-clear, as well as a broker-dealer effecting
transactions directly or indirectly for a large trader
where a non-broker-dealer carries the account for
the large trader, will continue to be temporarily
relieved from the recording and reporting
requirements of the Rule and therefore do not need
to record and electronically report Transaction Data
to the Commission through the EBS system for
purposes of the Rule during Phase Two.
Neither of these temporary exemptions, however,
relieves a broker-dealer from any other
recordkeeping requirement that would otherwise
apply under the federal securities laws, rules, or
regulations, including Rules 17a-3 and 17a-4 under
the Exchange Act, or any self-regulatory
organization rule.
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other brokers that directly or indirectly
effect transactions for a large trader,
including an executing broker, where a
non-broker-dealer carries the large
trader’s account.36 As SIFMA notes, at
present, carrying brokers-dealers are the
primary parties that report through the
EBS infrastructure.37 Accordingly, full
compliance with the recordkeeping and
reporting provisions of the Rule would
require non-carrying broker-dealers to
develop connectivity to the EBS system.
In its initial exemption, the Commission
temporarily limited the broker-dealer
recordkeeping and reporting
requirements to the clearing brokerdealer for a large trader.38
To reduce implementation burdens,
the Commission believes that it is
appropriate, at this time, to continue to
limit the recordkeeping and reporting
obligations of the Rule to broker-dealers
that carry accounts for large traders, as
they are already connected to the EBS
system. Accordingly, the Commission is
extending its temporary exemption of
non-carrying brokers from the reporting
requirement of the Rule until November
1, 2015. In other words, for Phase Two,
a registered broker-dealer that is itself a
large trader but does not self-clear, as
well as a broker-dealer effecting
transactions directly or indirectly for a
large trader where a non-broker-dealer
carries the account for the large trader,
are both temporarily relieved from the
reporting requirements of the Rule and,
therefore, they do not need to record
and electronically report Transaction
Data to the Commission through the
EBS system solely for purposes of the
Rule. For the types of large traders and
transactions subject to reporting in
Phases One and Two, the Commission
will obtain the Transaction Data it needs
from the carrying broker for the large
trader, and therefore believes that it is
reasonable, at this time, to extend the
temporary exemption provided to other
types of broker-dealers from the
recordkeeping and reporting
requirements of the Rule.
With respect to the specific
transactions to be recorded and reported
by carrying brokers, as part of Phase
One, the Commission required
recordkeeping and reporting of
Transaction Data of proprietary trades
by broker-dealer large traders and
36 See Rule 13h–1(d) and (e), respectively. See
also Large Trader Adopting Release, supra note 1,
76 FR at 46996 (acknowledging SIFMA’s comment
that ‘‘some broker-dealers do not have access to
execution times in a manner that is readily
reportable under the EBS infrastructure’’ and would
need to update their EBS infrastructure to gather
that information).
37 See SIFMA Letter I, supra note 2, at B–2.
38 See Extension Order I, supra note 4, at 25008.
PO 00000
Frm 00116
Fmt 4703
Sfmt 4703
49559
transactions effected by a large trader
through a ‘‘sponsored access
arrangement.’’ 39 FIF had previously
noted that the trading activity of large
traders with sponsored access
arrangements typically is processed by
clearing brokers on infrastructure
separate from that used for other
customers, so that implementation of
the Rule for sponsored access customers
would require less effort than for other
types of large trader customers.40
According to the Industry
Organizations, many broker-dealers
charged with recordkeeping and
reporting of Transaction Data under the
Rule do not currently have ready access
to all of that data for other types of large
trader customers, particularly
disaggregated trades with execution
time, when it resides at unaffiliated
broker-dealers. For example, according
to the Industry Organizations, while the
executing broker knows the execution
time of a large trader’s transaction, it
typically does not have the means to
pass that information to the clearing
broker for the large trader in a format
that is readily reportable through EBS.
Accordingly, to comply with the
recordkeeping and reporting
requirements of the Rule, the clearing
broker for the large trader in many cases
must make new arrangements to obtain
execution time data for large trader
customers for reporting through EBS.
Phase Two, as modified herein,
represents an important incremental
step in the implementation of the Rule
that is designed to allow the
Commission to collect Transaction Data,
including execution time, with respect
to an additional group of large traders
that are of particular interest to the
Commission in fulfilling its regulatory
responsibilities. Specifically, Phase Two
will include Transaction Data for large
trader customers that trade through a
‘‘direct market access arrangement,’’
which means an arrangement whereby a
broker-dealer permits an institutional
customer to enter orders into a trading
center but such orders flow through the
broker-dealer’s trading systems prior to
39 In this context, a ‘‘sponsored access
arrangement’’ was defined as an arrangement in
which a broker-dealer permits a large trader
customer to enter orders directly to a trading center
where such orders are not processed through the
broker-dealer’s own trading system (other than any
risk management controls established for purposes
of compliance with Rule 15c3–5 under the
Exchange Act) and where the orders are routed
directly to a trading center, in some cases supported
by a service bureau or other third party technology
provider. See Extension Order I, supra note 4, 77
FR at 25009 n.22 (referencing the definition of the
term used in the adopting release for Rule 15c3–5).
40 See FIF Letter, supra note 2 at 5.
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tkelley on DSK3SPTVN1PROD with NOTICES
reaching the trading center.41 Because
large trader customers that trade
through this type of direct market access
arrangement have chosen to retain
control over critical aspects of the
handling of their orders, including the
price, size, timing, and routing of
individual orders, their order handling
decisions are of particular interest to the
Commission in conducting market
reconstructions and analyses as well as
investigations. Direct market access
arrangements subject to recordkeeping
and reporting in Phase Two, as
modified, would include, for example,
those where the large trader customer
enters individual orders manually or
through an algorithm under its control,
but those orders flow through the
broker-dealer’s systems prior to reaching
the trading center.42 Phase Two would
not include, for example, large trader
customers that delegate to the brokerdealer the discretion to determine the
price, size, timing, or routing of
individual orders.
From the Commission’s perspective,
including large trader activity where the
large trader retains control over the
material terms of the order and uses the
broker-dealer primarily as a conduit to
an execution venue will capture trading
activity that is similar in kind to the
sponsored access activity currently
captured in Phase One, and is the type
of activity for which the precise time
and other aspects of the large trader’s
execution is of substantial regulatory
interest. Accordingly, clearing brokerdealers for such large traders will be
required to keep records of, and report
to the Commission upon request, all of
the Transaction Data covered by the
Rule, including both LTID number(s)
and execution time, on every EBS
record for the categories of large trader
covered in Phase One and Phase Two.
41 See Securities Exchange Act Release No. 63241
(November 3, 2010), 75 FR 69792, 69793 (November
15, 2010) (File No. S7–03–10) (‘‘Generally, direct
market access refers to an arrangement whereby a
broker-dealer permits customers to enter orders into
a trading center but such orders flow through the
broker-dealer’s trading systems prior to reaching the
trading center. In contrast, sponsored access
generally refers to an arrangement whereby a
broker-dealer permits customers to enter orders into
a trading center that bypass the broker-dealer’s
trading system and are routed directly to a trading
center, in some cases supported by a service bureau
or other third party technology provider.’’). The
Commission notes that sponsored access
arrangements and direct market access
arrangements typically are entered into with the
executing broker-dealer, which may or may not also
be the clearing broker for the large trader.
42 See id. at 69793 (discussing how a direct
market access arrangement involves a broker-dealer
allowing its customer to use its systems to
electronically access an exchange or alternative
trading system).
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16:16 Aug 13, 2013
Jkt 229001
The Commission believes that
capturing all of the Transaction Data for
the types of large trader transactions
covered by Phases One and Two (as
modified herein) is important in the
near term to the Commission’s
enforcement and regulatory programs,
and therefore the Commission is
requiring the recordkeeping and
reporting of this information as of
November 1, 2013 (the current
compliance date for Phase Two).
Accordingly, as of November 1, 2013,
clearing broker dealers for a large trader
will be required to keep records and
report to the Commission upon request
all Transaction Data for: (1) Proprietary
transactions by a large trader brokerdealer, (2) transactions effected
pursuant to a sponsored access
arrangement, and (3) transactions
effected pursuant to a direct market
access arrangement.
With respect to transactions other
than those set forth above, brokerdealers that carry an account for a large
trader must record and report, as of
November 1, 2013, Transaction Data
other than execution time (e.g., LTID).
The Commission notes that the Industry
Organizations have indicated that
carrying brokers can readily provide the
LTID, because that information is
available to them today, and the
arrangements to report it to the
Commission through the EBS system
would not require significant
technological development.43 Given the
relatively low implementation burdens,
the Commission believes that including
the LTID on EBS data for all large
traders would be beneficial to the
Commission, and help support, for
example, its investigative activities and
analysis of significant market events.
Finally, the recordkeeping and
reporting requirements with respect to
Unidentified Large Traders, and the
related monitoring safe harbor provided
by Rule 13h–1(f), will apply to brokerdealers that carry an account for a large
trader as of November 1, 2013. The
Commission believes that it is
appropriate to apply the provisions that
relate to Unidentified Large Traders to
the broker-dealers that otherwise will be
required to comply with the
recordkeeping and reporting
requirements as of Phase Two—namely
broker-dealers that carry accounts for
large traders—and that implementation
of such provisions will help foster
compliance with the large trader
identification requirements.
43 See,
PO 00000
e.g., SIFMA Letter II, supra note 2 at 3.
Frm 00117
Fmt 4703
Sfmt 4703
III. Summary of Phased
Implementation
With respect to Phase One and Phase
Two, as modified, clearing brokerdealers for large traders 44 must obtain
and report Transaction Data that
includes both execution time and LTID
on disaggregated trades for the following
types of transactions:
(1) For Phase One, which began on
November 30, 2012:
(a) proprietary transactions by large
traders that are U.S.-registered brokerdealers;
(b) transactions effected by large
traders through a sponsored access
arrangement; 45 and
(2) for Phase Two, which will begin
on November 1, 2013: transactions
effected by large traders through a direct
market access arrangement.46
Further, with respect to all other types
of transactions, for Phase Two, the
prime broker or other carrying brokerdealer for a large trader must obtain and
report Transaction Data, including
LTID, for all such large traders, but is
not required to report execution time.
In addition, with respect to the
requirements relating to Unidentified
Large Traders, which will apply to
carrying broker-dealers as of Phase Two,
the compliance date for broker-dealers
that wish to avail themselves of the
monitoring safe harbor provided by Rule
13h–1(f) to establish appropriate
policies and procedures is November 1,
2013.
Phase Three, which will begin
November 1, 2015, covers the remaining
types of large traders and transactions
not covered by Phases One and Two.
Specifically, all other broker-dealers
subject to the recordkeeping and
reporting requirements of the Rule (i.e.,
broker-dealers that are large traders but
do not self-clear, and broker-dealers
effecting transactions directly or
indirectly for a large trader where a nonbroker-dealer carries the account for the
large trader) are temporarily exempted
from recording and reporting
Transaction Data through the EBS
system for the duration of Phase Two.
Unless the Commission otherwise
provides in the future, Phase Three will
require all broker-dealers subject to the
recordkeeping and reporting
requirements of Rule 13h–1 to come
into full compliance with those
provisions.
44 See
supra note 31 and text accompanying note
31.
45 See supra note 39 (defining sponsored access
arrangements).
46 See supra note 41 and text accompanying note
41 (defining direct market access arrangements).
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IV. Conclusion
It is hereby ordered, pursuant to
Exchange Act Section 13(h)(6) and Rule
13h–1(g) thereunder, that broker-dealers
are exempted temporarily until
November 1, 2015 from the
recordkeeping and reporting
requirements of Rule 13h–1(d) and (e),
except for (1) the clearing broker-dealers
for large traders, with respect to (a)
Proprietary transactions by a large trader
broker-dealer; (b) transactions effected
pursuant to a ‘‘sponsored access’’
arrangement; 47 and (c) transactions
effected pursuant to a ‘‘direct market
access’’ arrangement; 48 and (2) brokerdealers that carry an account for a large
trader, with respect to transactions other
than those set forth above, and for
Transaction Data other than the
execution time.49
By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013–19650 Filed 8–13–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–70134; File No. SR–EDGX–
2013–26]
Self-Regulatory Organizations; EDGX
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Relating to Amendments
to the EDGX Exchange, Inc. Fee
Schedule
August 8, 2013.
tkelley on DSK3SPTVN1PROD with NOTICES
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on July 30,
2013, EDGX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘EDGX’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II and III
below, which items have been prepared
by the self-regulatory organization. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
47 See supra note 39 (defining sponsored access
arrangements).
48 See supra note 41 and text accompanying note
41 (defining direct market access arrangements).
49 See supra note 35.
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
VerDate Mar<15>2010
16:16 Aug 13, 2013
Jkt 229001
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend its
fees and rebates applicable to Members 3
pursuant to EDGX Rule 15.1(a) and (c)
(‘‘Fee Schedule’’) to increase the fee
charged from $0.0017 per share to
$0.0050 per share for orders that yield
Flag RW, which routes to CBOE Stock
Exchange, LLC (‘‘CBSX’’) and adds
liquidity. All of the changes described
herein are applicable to EDGA
Members. The text of the proposed rule
change is available on the Exchange’s
Internet Web site at
www.directedge.com, at the Exchange’s
principal office, and at the Public
Reference Room of the Commission.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of these statements may be examined at
the places specified in Item IV below.
The self-regulatory organization has
prepared summaries, set forth in
sections A, B and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend its
Fee Schedule to increase the fee charged
from $0.0017 per share to $0.0050 per
share for orders that yield Flag RW,
which routes to CBSX and adds
liquidity.
In securities priced at or above $1.00,
the Exchange currently assesses a fee of
$0.0017 per share for Members’ orders
that yield Flag RW. The Exchange
proposes to amend its Fee Schedule to
increase this fee to $0.0050 per share for
Members’ orders that yield Flag RW.
The proposed change represents a pass
through of the rate of $0.0050 that Direct
Edge ECN LLC (d/b/a DE Route) (‘‘DE
Route’’), the Exchange’s affiliated
routing broker-dealer, is charged for
routing orders in select symbols to
3 ‘‘Member’’ is defined as ‘‘any registered broker
or dealer, or any person associated with a registered
broker or dealer, that has been admitted to
membership in the Exchange. A Member will have
the status of a ‘‘member’’ of the Exchange as that
term is defined in Section 3(a)(3) of the Act.’’ EDGX
Rule 1.5(n).
PO 00000
Frm 00118
Fmt 4703
Sfmt 4703
49561
CBSX when it does not qualify for a
volume tiered discount.4 DE Route
passes through this rate on CBSX to the
Exchange and the Exchange, in turn,
passes through this rate to its Members.
The Exchange notes that the proposed
change is in response to CBSX’s July
2013 fee change where CBSX exempted
select symbols out of its standard fee
structure.5 Instead, CBSX amended its
fee schedule to assess a fee of $0.0050
per share for maker transactions in such
symbols and a rebate of $0.0045 per
share for taker transactions in such
symbols.6 The Exchange notes that its
internal billing system is unable to
assign different rates by symbols.
Therefore, due to internal system
limitations and to protect the Exchange
from potentially significant financial
loss for orders routed to CBSX in the
select symbols, it is necessary that the
Exchange assess a flat fee of $0.0050 per
share for all orders that yield Flag RW.
The Exchange further notes that routing
through DE Route is voluntary and that
Members would continue to be able to
send orders in symbols that CBSX does
not subject to the $0.0050 per share fee
directly to CBSX if they so choose.
Implementation Date
The Exchange proposes to implement
these amendments to its Fee Schedule
on August 1, 2013.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
the objectives of Section 6 of the Act,7
in general, and furthers the objectives of
Section 6(b)(4),8 in particular, as it is
designed to provide for the equitable
allocation of reasonable dues, fees and
other charges among its Members and
other persons using its facilities.
Fee Change for Flag RW
The Exchange believes that its
proposal to increase the charge for
Members’ orders that yield Flag RW
from $0.0017 to $0.0050 per share
represents an equitable allocation of
reasonable dues, fees, and other charges
4 The Exchange notes that to the extent DE Route
does or does not achieve any volume tiered
discount on CBSX, its rate for Flag RW will not
change.
5 Securities Exchange Act Release No. 69916 (July
2, 2013), 78 FR 41158 (July 9, 2013) (SR–CBOE–
2013–065). CBSX lists these select symbols in
footnote 6 to its fee schedule. CBSX, CBOE Stock
Exchange Fees Schedule, available at https://
www.cboe.com/publish/cbsxfeeschedule/
cbsxfeeschedule.pdf (last visited July 23, 2013).
6 CBSX, CBOE Stock Exchange Fees Schedule,
available at https://www.cboe.com/publish/
cbsxfeeschedule/cbsxfeeschedule.pdf (last visited
July 23, 2013).
7 15 U.S.C. 78f.
8 15 U.S.C. 78f(b)(4).
E:\FR\FM\14AUN1.SGM
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]]>Agencies
[Federal Register Volume 78, Number 157 (Wednesday, August 14, 2013)]
[Notices]
[Pages 49556-49561]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-19650]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70150]
Order Temporarily Exempting Certain Broker-Dealers and Certain
Transactions From the Recordkeeping and Reporting Requirements of Rule
13h-1 Under the Securities Exchange Act of 1934
August 8, 2013.
On July 27, 2011, the Securities and Exchange Commission
(``Commission'') adopted Rule 13h-1 (the ``Rule'') under the Securities
Exchange Act of 1934 (``Exchange Act'') concerning large trader
reporting to assist the Commission in both identifying and obtaining
trade information for market participants that conduct a substantial
amount of trading activity, as measured by volume or market value, in
U.S. securities (such persons are referred to as ``large traders'').\1\
The Financial Information Forum (``FIF'') and the Securities Industry
and Financial Markets Association (``SIFMA,'' and collectively the
``Industry Organizations''), each representing a variety of broker-
dealers and other market participants, have requested that the
Commission grant certain substantive relief from the broker-dealer
recordkeeping and reporting
[[Page 49557]]
requirements of the Rule.\2\ Pursuant to Section 13(h)(6) of the
Exchange Act and Rule 13h-1(g) thereunder,\3\ the Commission, by order,
may exempt from the provisions of Rule 13h-1, 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 Rule 13h-1
to the extent that such exemption is consistent with the purposes of
the Exchange Act.
---------------------------------------------------------------------------
\1\ See Securities Exchange Act Release No. 64976 (July 27,
2011), 76 FR 46960 (Aug. 3, 2011) (``Large Trader Adopting
Release''). The effective date of Rule 13h-1 was October 3, 2011.
\2\ See Letters from: Manisha Kimmel, Executive Director, FIF,
to Robert Cook, Director, and David Shillman, Associate Director,
Division of Trading and Markets, Commission, dated January 25, 2012
(``FIF Letter''); Ann L. Vlcek, Managing Director and Associate
General Counsel, SIFMA, to David S. Shillman, Associate Director,
Division of Trading and Markets, Commission, dated March 29, 2012
(``SIFMA Letter I''); and Theodore R. Lazo, Managing Director and
Associate General Counsel, SIFMA, to David S. Shillman, Associate
Director, Division of Trading and Markets, Commission, dated
February 13, 2013 (``SIFMA Letter II''). These letters are available
at: https://www.sec.gov/comments/s7-10-10/s71010.shtml.
\3\ See 15 U.S.C. 78m and 17 CFR 240.13h-1(g), respectively.
---------------------------------------------------------------------------
In response to the Industry Organizations' requests and as further
discussed below, the Commission extended the compliance date for the
broker-dealer recordkeeping, reporting, and monitoring requirements and
took a two-phased approach to implementation of the broker-dealer
requirements under the Rule. Commencing on November 30, 2012, the first
phase of implementation required clearing broker-dealers for large
traders to keep records of and report upon Commission request data
concerning: (1) proprietary trades by large traders that are U.S.-
registered broker-dealers; and (2) transactions effected by large
traders through a sponsored access arrangement (collectively, ``Phase
One'').\4\
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 66839 (April 20,
2012), 77 FR 25007, 25008 (April 26, 2012) (``Extension Order I'').
---------------------------------------------------------------------------
The second phase of implementation concerned those remaining
requirements of the Rule that were not covered in Phase One. As more
fully described below, the Commission is herein modifying this second
phase by limiting the recordkeeping and reporting requirements of the
Rule to include transactions effected by large traders through direct
market access arrangements (``Phase Two''). The compliance date for
Phase Two, as modified, will remain November 1, 2013.\5\
---------------------------------------------------------------------------
\5\ See infra note 19.
---------------------------------------------------------------------------
Finally, the Commission is herein establishing a new third phase
for which the compliance date will be November 1, 2015. As discussed
further below, this new and final phase will include all of the
remaining requirements of the Rule that have not been, or will not be,
implemented in either Phase One or Phase Two (collectively, ``Phase
Three'').
I. Background
A. The Requirements of Rule 13h-1 and Applicable Compliance Dates for
Those Requirements
Large Trader Self-Identification. Rule 13h-1 requires that large
traders register with the Commission by electronically filing and
periodically updating Form 13H.\6\ Additionally, promptly after
receiving a large trader identification number (``LTID'') assigned by
the Commission,\7\ a large trader must disclose its LTID to registered
broker-dealers effecting transactions on its behalf and identify to
each such broker-dealer each account to which the LTID number
applies.\8\ These requirements have been in effect since December 1,
2011.\9\
---------------------------------------------------------------------------
\6\ See Rule 13h-1(b)(1)(i)-(iii).
\7\ When a large trader files its initial Form 13H filing
through EDGAR, the system sends an automatically generated
confirmation email acknowledging acceptance of the filing. That
email also contains the unique 8-digit LTID number assigned to the
large trader.
\8\ See Rule 13h-1(b)(2). See also Large Trader Adopting
Release, supra note 1, 76 FR at 46971 (``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'').
\9\ See Large Trader Adopting Release, supra note 1, 76 FR at
46960.
---------------------------------------------------------------------------
Broker-Dealer Recordkeeping and Reporting. Rule 13h-1 also requires
that every registered broker-dealer maintain records of data specified
in paragraphs (d)(2) and (d)(3) of the Rule (``Transaction Data''),
including the applicable LTID(s) and execution time on each component
trade, for all transactions effected directly or indirectly by or
through: (1) an account such broker-dealer carries for a large trader
or an Unidentified Large Trader; \10\ or (2) if the broker-dealer is a
large trader, any proprietary or other account over which such broker-
dealer exercises investment discretion.\11\ Additionally, where a non-
broker-dealer carries an account for a large trader under the Rule, the
broker-dealer effecting transactions directly or indirectly for such
large trader must maintain records of all Transaction Data.\12\
---------------------------------------------------------------------------
\10\ The definition of ``Unidentified Large Trader'' is
discussed below. See infra note 20 and accompanying text. In the
context of the broker-dealer recordkeeping and reporting
requirements, references in this release to ``large trader'' include
Unidentified Large Traders.
\11\ See Rule 13h-1(d)(1)(i) and (ii).
\12\ See Rule 13h-1(d)(1)(iii).
---------------------------------------------------------------------------
Rule 13h-1 requires that, upon Commission request, every registered
broker-dealer that is itself a large trader or carries an account for a
large trader must electronically report Transaction Data to the
Commission through the Electronic Blue Sheets (``EBS'') system for all
transactions, equal to or greater than the reporting activity level,
effected directly or indirectly by or through accounts carried by such
broker-dealer for large traders.\13\ Additionally, where a non-broker-
dealer carries an account for a large trader, the broker-dealer
effecting such transactions directly or indirectly for a large trader
must electronically report Transaction Data to the Commission through
the EBS system. The Rule requires that reporting broker-dealers submit
the requested Transaction Data no later than the day and time specified
in the Commission's request.\14\
---------------------------------------------------------------------------
\13\ 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.
\14\ The Commission will not require reporting earlier than the
opening of business of the day following such request, except under
unusual circumstances. See Rule 13h-1(e). Accordingly, while
information must be available on the morning after the transaction
was effected, the reporting deadline is based upon the deadline
specified in the Commission's request for Transaction Data.
---------------------------------------------------------------------------
Initially, the compliance date for the broker-dealer requirements
was April 30, 2012.\15\ To allow additional time for the Commission to
examine implementation issues identified by the Industry Organizations
subsequent to the Commission's adoption of the Rule, the Commission
deferred the initial compliance date and established a two-phased
approach to implementation of the broker-dealer requirements.\16\
Specifically, the Commission postponed until November 30, 2012, the
obligations of clearing brokers for large traders (including the large
trader itself if it is a self-clearing broker-dealer) to keep records
and report Transaction Data for such customers' transactions that are
either (1) proprietary trades by a U.S. registered broker-dealer; or
(2) effected through a ``sponsored access'' arrangement (i.e., Phase
One).\17\ The
[[Page 49558]]
Commission further deferred the compliance date for the recordkeeping
and reporting of other large trader transactions until May 1, 2013 \18\
and, more recently, the Commission extended that date to November 1,
2013 while it considered the industry's experience with Phase One
implementation in further evaluating the requests for relief for the
remainder of the Rule.\19\
---------------------------------------------------------------------------
\15\ See Large Trader Adopting Release, supra note 1, 76 FR at
46960.
\16\ See Extension Order I, supra note 4.
\17\ See id. at 25008-9. A sponsored access arrangement is one
where a broker-dealer permits a customer to enter orders into a
trading center without using the broker-dealer's trading system
(i.e., using the customer's own technology or that of a third party
provider). FIF indicated that broker-dealer compliance would be
easier for sponsored access customers because those arrangements
typically are distinct from all other business lines of the broker-
dealer, with infrastructure that processes this order flow that is
separate from the platforms that handle other client and proprietary
flows. See id. at 25008 n.16.
\18\ See id. at 25008.
\19\ See Securities Exchange Act Release No. 69281 (April 3,
2013), 78 FR 20960 (April 8, 2013) (``Extension Order II'').
---------------------------------------------------------------------------
Broker-Dealer Monitoring. As mentioned above, the recordkeeping and
reporting requirements apply to customers that are large traders as
well as Unidentified Large Traders. An ``Unidentified Large Trader'' is
a person who (1) has not complied with the identification requirements
of the Rule; and (2) a registered broker-dealer knows or has reason to
know is a large trader based on transactions in NMS securities effected
by or through such broker-dealer.\20\ The Rule provides a safe harbor
for broker-dealers that establish and maintain certain customer
monitoring practices. For the purposes of the Rule, a registered
broker-dealer is 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 (among other things): (1) identify persons who
may be large traders but have not self-identified as required; and (2)
inform those persons of the self-identification requirements of the
Rule.\21\ To take advantage of this safe harbor, broker-dealers are
required to have appropriate policies and procedures in place by the
Phase Two compliance date, which is November 1, 2013.\22\
---------------------------------------------------------------------------
\20\ See Rule 13h-1(a)(9).
\21\ See Rule 13h-1(f).
\22\ See Extension Order II, supra note 19.
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B. Relief Requests
The Industry Organizations have requested that the Commission
provide certain substantive relief with respect to the recordkeeping
and reporting requirements for broker-dealers.\23\ In particular, they
highlight implementation challenges associated with the Rule's
recordkeeping and reporting requirements that have come to light as
broker-dealers focused their attention on how to comply with the Rule,
in particular with respect to obtaining and reporting the execution
time of individual transactions by certain large traders.\24\ According
to the Industry Organizations, these challenges are most pronounced
when a broker-dealer effects transactions for a large trader and
processes the activity through a multi-client average price
account.\25\ As a result of the complexity and additional cost to
capture and report disaggregated trades with execution time for large
traders whose trades are processed in this manner, the Industry
Organizations request relief from the requirement to provide execution
times on transactions processed through average price accounts.\26\
---------------------------------------------------------------------------
\23\ See generally FIF Letter, SIFMA Letter I, and SIFMA Letter
II, supra note 2.
\24\ See SIFMA Letter II, supra note 2 at 5. See also FIF
Letter, supra note 2 at 2; and SIFMA Letter I, supra note 2 at 5.
\25\ See FIF Letter, supra note 2 at 31-32. See also SIFMA
Letter I, supra note 2 at B-1.
\26\ See, e.g., SIFMA Letter I, supra note 2 at 5.
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The Industry Organizations also request relief for all broker-
dealers other than self-clearing and clearing broker-dealers from the
recordkeeping and reporting requirements of the Rule.\27\ While the
Rule focuses the reporting obligation on the universe of clearing
brokers that currently report data through the EBS system, the Rule
also authorizes the Commission to obtain this data directly from
certain non-clearing broker-dealer large traders, as well as broker-
dealers that effect transactions, directly or indirectly, for large
traders where a non-broker-dealer carries the account. The Industry
Organizations have asked the Commission to impose the recordkeeping and
reporting requirement exclusively on the clearing brokers that
currently report through the EBS system.\28\
---------------------------------------------------------------------------
\27\ See FIF Letter, supra note 2 at 25-28. See also SIFMA
Letter I, supra note 2 at B-2.
\28\ See FIF Letter, supra note 2 at 26-27. See also SIFMA
Letter I, supra note 2 at B-3.
---------------------------------------------------------------------------
In addition, the Industry Organizations argue that the complex
structure underlying execution, clearance, and settlement flows of
large trader transactions, including the fact that information related
to the identity of the large trader and the execution fill details
often reside with different broker-dealers, presents challenges to
implementation, and that these concerns are most relevant with respect
to large trader institutional customers.\29\ The Industry Organizations
further highlight areas where the burdens as they relate to
institutional large trader customers would be most extensive and impose
the greatest potential cost for some broker-dealers, particularly for
prime brokers, routing broker-dealers, and situations where clearing
responsibility is transferred between multiple brokers, and the
Industry Organizations request that the Commission provide relief from
the recordkeeping and reporting obligations of the Rule for each of
those areas.\30\
---------------------------------------------------------------------------
\29\ See FIF Letter, supra note 2 at 25-28. See also SIFMA
Letter II, supra note 2 at 5-7.
\30\ See FIF Letter, supra note 2 at 25-28. See also SIFMA
Letter II, supra note 2 at 5-7.
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II. Discussion
The Commission continues to believe that implementation of the
large trader reporting requirements contemplated by Rule 13h-1 is
necessary to effectively assess the impact of large trader activity on
the securities markets in the near term and support the Commission's
investigative and enforcement activities. The Commission also believes
that it is appropriate and consistent with the Exchange Act to provide
exemptive relief limiting short-term compliance costs of the Rule to
focus near-term compliance on the large trader information that is
likely to be most useful to the Commission.
Accordingly, and as discussed more fully below, the Commission
believes that it is appropriate and consistent with the purposes of the
Exchange Act to extend the Phase Two November 1, 2013 compliance date
for certain registered broker-dealers by temporarily exempting broker-
dealers, until November 1, 2015, from the recordkeeping and reporting
requirements of Rule 13h-1(d) and (e), except for:
(1) The clearing broker-dealer for a large trader,\31\ with respect
to \32\
---------------------------------------------------------------------------
\31\ In its letter, FIF asked the Commission for ``relief for
broker dealers involved in Large Trader transactions that do not
have a direct relationship with the Large Trader. Only the self-
clearing and clearing broker dealers with a direct relationship with
the Large Trader would perform Large Trader Reporting.'' See FIF
Letter, supra note 2, at 2. In Appendix C of its letter, FIF
provides an example of the entities for whom it recommends imposing
a recordkeeping and reporting obligation. See id. at 25. In
addition, FIF recommends that the reporting of execution time should
rest with the clearing broker for the originating broker, and any
prime broker would be relieved from being required to report
execution times.
\32\ Items (a) and (b) are currently included in Phase One,
which was effective beginning on November 30, 2012.
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(a) proprietary transactions by a large trader broker-dealer;
(b) transactions effected pursuant to a ``sponsored access''
arrangement; \33\ and
---------------------------------------------------------------------------
\33\ See infra note 39 (defining ``sponsored access''
arrangement).
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[[Page 49559]]
(c) transactions effected pursuant to a ``direct market access''
arrangement \34\; and
---------------------------------------------------------------------------
\34\ See infra note 41 and text following note 41 (defining
``direct market access'' arrangement).
---------------------------------------------------------------------------
(2) a broker-dealer that carries an account for a large trader,
with respect to transactions other than those set forth above, and for
Transaction Data other than the execution time.\35\
---------------------------------------------------------------------------
\35\ Accordingly, during Phase Two, a registered broker-dealer
that is itself a large trader but does not self-clear, as well as a
broker-dealer effecting transactions directly or indirectly for a
large trader where a non-broker-dealer carries the account for the
large trader, will continue to be temporarily relieved from the
recording and reporting requirements of the Rule and therefore do
not need to record and electronically report Transaction Data to the
Commission through the EBS system for purposes of the Rule during
Phase Two.
Neither of these temporary exemptions, however, relieves a
broker-dealer from any other recordkeeping requirement that would
otherwise apply under the federal securities laws, rules, or
regulations, including Rules 17a-3 and 17a-4 under the Exchange Act,
or any self-regulatory organization rule.
---------------------------------------------------------------------------
In accordance with Phase One, clearing broker-dealers for large
traders have been complying with the recordkeeping and reporting
requirements of Rule 13h-1, with respect to (a) proprietary
transactions by a large trader broker-dealer, and (b) transactions
effected pursuant to a ``sponsored access'' arrangement, since November
30, 2012. As part of Phase Two, in accordance with this Order, clearing
broker-dealers for large traders also will have to comply with the
recordkeeping and reporting requirements of Rule 13h-1 with respect to
transactions effected pursuant to a ``direct market access''
arrangement as of November 1, 2013. In addition, with respect to all
other types of transactions, the prime broker or other carrying broker-
dealer for a large trader will have to report the applicable LTID, but
not the execution time, as of November 1, 2013. Finally, the
recordkeeping and reporting requirements with respect to Unidentified
Large Traders, and the related monitoring safe harbor provided by Rule
13h-1(f), will apply to broker-dealers that carry an account for a
large trader as of November 1, 2013.
The Rule as adopted requires the following broker-dealers to
obtain, keep records of, and report Transaction Data to the Commission
upon request through the EBS infrastructure: (1) The broker-dealer that
``carries'' the account for the large trader (including the clearing
broker for the large trader and the large trader's prime broker, if
applicable); (2) broker-dealer large traders, with respect to their
proprietary trades and transactions over which they exercise investment
discretion; and (3) other brokers that directly or indirectly effect
transactions for a large trader, including an executing broker, where a
non-broker-dealer carries the large trader's account.\36\ As SIFMA
notes, at present, carrying brokers-dealers are the primary parties
that report through the EBS infrastructure.\37\ Accordingly, full
compliance with the recordkeeping and reporting provisions of the Rule
would require non-carrying broker-dealers to develop connectivity to
the EBS system. In its initial exemption, the Commission temporarily
limited the broker-dealer recordkeeping and reporting requirements to
the clearing broker-dealer for a large trader.\38\
---------------------------------------------------------------------------
\36\ See Rule 13h-1(d) and (e), respectively. See also Large
Trader Adopting Release, supra note 1, 76 FR at 46996 (acknowledging
SIFMA's comment that ``some broker-dealers do not have access to
execution times in a manner that is readily reportable under the EBS
infrastructure'' and would need to update their EBS infrastructure
to gather that information).
\37\ See SIFMA Letter I, supra note 2, at B-2.
\38\ See Extension Order I, supra note 4, at 25008.
---------------------------------------------------------------------------
To reduce implementation burdens, the Commission believes that it
is appropriate, at this time, to continue to limit the recordkeeping
and reporting obligations of the Rule to broker-dealers that carry
accounts for large traders, as they are already connected to the EBS
system. Accordingly, the Commission is extending its temporary
exemption of non-carrying brokers from the reporting requirement of the
Rule until November 1, 2015. In other words, for Phase Two, a
registered broker-dealer that is itself a large trader but does not
self-clear, as well as a broker-dealer effecting transactions directly
or indirectly for a large trader where a non-broker-dealer carries the
account for the large trader, are both temporarily relieved from the
reporting requirements of the Rule and, therefore, they do not need to
record and electronically report Transaction Data to the Commission
through the EBS system solely for purposes of the Rule. For the types
of large traders and transactions subject to reporting in Phases One
and Two, the Commission will obtain the Transaction Data it needs from
the carrying broker for the large trader, and therefore believes that
it is reasonable, at this time, to extend the temporary exemption
provided to other types of broker-dealers from the recordkeeping and
reporting requirements of the Rule.
With respect to the specific transactions to be recorded and
reported by carrying brokers, as part of Phase One, the Commission
required recordkeeping and reporting of Transaction Data of proprietary
trades by broker-dealer large traders and transactions effected by a
large trader through a ``sponsored access arrangement.'' \39\ FIF had
previously noted that the trading activity of large traders with
sponsored access arrangements typically is processed by clearing
brokers on infrastructure separate from that used for other customers,
so that implementation of the Rule for sponsored access customers would
require less effort than for other types of large trader customers.\40\
According to the Industry Organizations, many broker-dealers charged
with recordkeeping and reporting of Transaction Data under the Rule do
not currently have ready access to all of that data for other types of
large trader customers, particularly disaggregated trades with
execution time, when it resides at unaffiliated broker-dealers. For
example, according to the Industry Organizations, while the executing
broker knows the execution time of a large trader's transaction, it
typically does not have the means to pass that information to the
clearing broker for the large trader in a format that is readily
reportable through EBS. Accordingly, to comply with the recordkeeping
and reporting requirements of the Rule, the clearing broker for the
large trader in many cases must make new arrangements to obtain
execution time data for large trader customers for reporting through
EBS.
---------------------------------------------------------------------------
\39\ In this context, a ``sponsored access arrangement'' was
defined as an arrangement in which a broker-dealer permits a large
trader customer to enter orders directly to a trading center where
such orders are not processed through the broker-dealer's own
trading system (other than any risk management controls established
for purposes of compliance with Rule 15c3-5 under the Exchange Act)
and where the orders are routed directly to a trading center, in
some cases supported by a service bureau or other third party
technology provider. See Extension Order I, supra note 4, 77 FR at
25009 n.22 (referencing the definition of the term used in the
adopting release for Rule 15c3-5).
\40\ See FIF Letter, supra note 2 at 5.
---------------------------------------------------------------------------
Phase Two, as modified herein, represents an important incremental
step in the implementation of the Rule that is designed to allow the
Commission to collect Transaction Data, including execution time, with
respect to an additional group of large traders that are of particular
interest to the Commission in fulfilling its regulatory
responsibilities. Specifically, Phase Two will include Transaction Data
for large trader customers that trade through a ``direct market access
arrangement,'' which means an arrangement whereby a broker-dealer
permits an institutional customer to enter orders into a trading center
but such orders flow through the broker-dealer's trading systems prior
to
[[Page 49560]]
reaching the trading center.\41\ Because large trader customers that
trade through this type of direct market access arrangement have chosen
to retain control over critical aspects of the handling of their
orders, including the price, size, timing, and routing of individual
orders, their order handling decisions are of particular interest to
the Commission in conducting market reconstructions and analyses as
well as investigations. Direct market access arrangements subject to
recordkeeping and reporting in Phase Two, as modified, would include,
for example, those where the large trader customer enters individual
orders manually or through an algorithm under its control, but those
orders flow through the broker-dealer's systems prior to reaching the
trading center.\42\ Phase Two would not include, for example, large
trader customers that delegate to the broker-dealer the discretion to
determine the price, size, timing, or routing of individual orders.
---------------------------------------------------------------------------
\41\ See Securities Exchange Act Release No. 63241 (November 3,
2010), 75 FR 69792, 69793 (November 15, 2010) (File No. S7-03-10)
(``Generally, direct market access refers to an arrangement whereby
a broker-dealer permits customers to enter orders into a trading
center but such orders flow through the broker-dealer's trading
systems prior to reaching the trading center. In contrast, sponsored
access generally refers to an arrangement whereby a broker-dealer
permits customers to enter orders into a trading center that bypass
the broker-dealer's trading system and are routed directly to a
trading center, in some cases supported by a service bureau or other
third party technology provider.''). The Commission notes that
sponsored access arrangements and direct market access arrangements
typically are entered into with the executing broker-dealer, which
may or may not also be the clearing broker for the large trader.
\42\ See id. at 69793 (discussing how a direct market access
arrangement involves a broker-dealer allowing its customer to use
its systems to electronically access an exchange or alternative
trading system).
---------------------------------------------------------------------------
From the Commission's perspective, including large trader activity
where the large trader retains control over the material terms of the
order and uses the broker-dealer primarily as a conduit to an execution
venue will capture trading activity that is similar in kind to the
sponsored access activity currently captured in Phase One, and is the
type of activity for which the precise time and other aspects of the
large trader's execution is of substantial regulatory interest.
Accordingly, clearing broker-dealers for such large traders will be
required to keep records of, and report to the Commission upon request,
all of the Transaction Data covered by the Rule, including both LTID
number(s) and execution time, on every EBS record for the categories of
large trader covered in Phase One and Phase Two.
The Commission believes that capturing all of the Transaction Data
for the types of large trader transactions covered by Phases One and
Two (as modified herein) is important in the near term to the
Commission's enforcement and regulatory programs, and therefore the
Commission is requiring the recordkeeping and reporting of this
information as of November 1, 2013 (the current compliance date for
Phase Two). Accordingly, as of November 1, 2013, clearing broker
dealers for a large trader will be required to keep records and report
to the Commission upon request all Transaction Data for: (1)
Proprietary transactions by a large trader broker-dealer, (2)
transactions effected pursuant to a sponsored access arrangement, and
(3) transactions effected pursuant to a direct market access
arrangement.
With respect to transactions other than those set forth above,
broker-dealers that carry an account for a large trader must record and
report, as of November 1, 2013, Transaction Data other than execution
time (e.g., LTID). The Commission notes that the Industry Organizations
have indicated that carrying brokers can readily provide the LTID,
because that information is available to them today, and the
arrangements to report it to the Commission through the EBS system
would not require significant technological development.\43\ Given the
relatively low implementation burdens, the Commission believes that
including the LTID on EBS data for all large traders would be
beneficial to the Commission, and help support, for example, its
investigative activities and analysis of significant market events.
---------------------------------------------------------------------------
\43\ See, e.g., SIFMA Letter II, supra note 2 at 3.
---------------------------------------------------------------------------
Finally, the recordkeeping and reporting requirements with respect
to Unidentified Large Traders, and the related monitoring safe harbor
provided by Rule 13h-1(f), will apply to broker-dealers that carry an
account for a large trader as of November 1, 2013. The Commission
believes that it is appropriate to apply the provisions that relate to
Unidentified Large Traders to the broker-dealers that otherwise will be
required to comply with the recordkeeping and reporting requirements as
of Phase Two--namely broker-dealers that carry accounts for large
traders--and that implementation of such provisions will help foster
compliance with the large trader identification requirements.
III. Summary of Phased Implementation
With respect to Phase One and Phase Two, as modified, clearing
broker-dealers for large traders \44\ must obtain and report
Transaction Data that includes both execution time and LTID on
disaggregated trades for the following types of transactions:
---------------------------------------------------------------------------
\44\ See supra note 31 and text accompanying note 31.
---------------------------------------------------------------------------
(1) For Phase One, which began on November 30, 2012:
(a) proprietary transactions by large traders that are U.S.-
registered broker-dealers;
(b) transactions effected by large traders through a sponsored
access arrangement; \45\ and
---------------------------------------------------------------------------
\45\ See supra note 39 (defining sponsored access arrangements).
---------------------------------------------------------------------------
(2) for Phase Two, which will begin on November 1, 2013:
transactions effected by large traders through a direct market access
arrangement.\46\
---------------------------------------------------------------------------
\46\ See supra note 41 and text accompanying note 41 (defining
direct market access arrangements).
---------------------------------------------------------------------------
Further, with respect to all other types of transactions, for Phase
Two, the prime broker or other carrying broker-dealer for a large
trader must obtain and report Transaction Data, including LTID, for all
such large traders, but is not required to report execution time.
In addition, with respect to the requirements relating to
Unidentified Large Traders, which will apply to carrying broker-dealers
as of Phase Two, the compliance date for broker-dealers that wish to
avail themselves of the monitoring safe harbor provided by Rule 13h-
1(f) to establish appropriate policies and procedures is November 1,
2013.
Phase Three, which will begin November 1, 2015, covers the
remaining types of large traders and transactions not covered by Phases
One and Two. Specifically, all other broker-dealers subject to the
recordkeeping and reporting requirements of the Rule (i.e., broker-
dealers that are large traders but do not self-clear, and broker-
dealers effecting transactions directly or indirectly for a large
trader where a non-broker-dealer carries the account for the large
trader) are temporarily exempted from recording and reporting
Transaction Data through the EBS system for the duration of Phase Two.
Unless the Commission otherwise provides in the future, Phase Three
will require all broker-dealers subject to the recordkeeping and
reporting requirements of Rule 13h-1 to come into full compliance with
those provisions.
[[Page 49561]]
IV. Conclusion
It is hereby ordered, pursuant to Exchange Act Section 13(h)(6) and
Rule 13h-1(g) thereunder, that broker-dealers are exempted temporarily
until November 1, 2015 from the recordkeeping and reporting
requirements of Rule 13h-1(d) and (e), except for (1) the clearing
broker-dealers for large traders, with respect to (a) Proprietary
transactions by a large trader broker-dealer; (b) transactions effected
pursuant to a ``sponsored access'' arrangement; \47\ and (c)
transactions effected pursuant to a ``direct market access''
arrangement; \48\ and (2) broker-dealers that carry an account for a
large trader, with respect to transactions other than those set forth
above, and for Transaction Data other than the execution time.\49\
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\47\ See supra note 39 (defining sponsored access arrangements).
\48\ See supra note 41 and text accompanying note 41 (defining
direct market access arrangements).
\49\ See supra note 35.
By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-19650 Filed 8-13-13; 8:45 am]
BILLING CODE 8011-01-P
