Order Temporarily Exempting Certain Broker-Dealers From Specified Provisions of the Recordkeeping, Reporting, and Monitoring Responsibilities of Rule 13h-1 Under the Securities Exchange Act of 1934, 51449-51453 [2017-24056]

Download as PDF Federal Register / Vol. 82, No. 213 / Monday, November 6, 2017 / Notices one or more major market data vendors, without undue delay. Therefore, the Commission designates the proposed rule change to be operative upon filing.12 At any time within 60 days of the filing of such proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– NYSEArca–2017–127 on the subject line. Pmangrum on DSK3GDR082PROD with NOTICES Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NYSEArca–2017–127. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549 on official business days between the hours of 12 For purposes only of waiving the 30-day operative delay, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). VerDate Sep<11>2014 14:48 Nov 03, 2017 Jkt 244001 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–NYSEArca–2017–127 and should be submitted on or before November 27, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.13 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–24045 Filed 11–3–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–81993] Order Temporarily Exempting Certain Broker-Dealers From Specified Provisions of the Recordkeeping, Reporting, and Monitoring Responsibilities of Rule 13h–1 Under the Securities Exchange Act of 1934 October 31, 2017. I. Introduction On July 27, 2011, the Securities and Exchange Commission (‘‘Commission’’) adopted Rule 13h–1 (‘‘Rule 13h–1’’ or the ‘‘Rule’’) under the Securities Exchange Act of 1934 (‘‘Exchange Act’’) 1 to assist the Commission in both identifying and obtaining information on market participants that conduct a substantial amount of trading activity, as measured by volume or market value, in national market system (‘‘NMS’’) securities (such persons are referred to as ‘‘large traders’’).2 The Rule requires certain large traders to identify themselves to the Commission on Form 13H. The Rule also requires, among other things, certain broker-dealers to maintain records of large trader transaction information and to report such information to the Commission upon request. Since December 1, 2011, persons whose trading activity reached or exceeded the identifying activity 13 17 CFR 200.30–3(a)(12). CFR 240.13h–1. 2 See Securities Exchange Act Release No. 64976 (July 27, 2011), 76 FR 46960 (August 3, 2011) (‘‘Large Trader Adopting Release’’). The effective date of Rule 13h–1 was October 3, 2011. See also Exchange Act Rule 600(b)(46) of Regulation NMS (defining ‘‘NMS security’’). 1 17 PO 00000 Frm 00066 Fmt 4703 Sfmt 4703 51449 level specified in the Rule have been required to identify themselves to the Commission by filing Form 13H through the Commission’s EDGAR system. The Commission has implemented the broker-dealer recordkeeping, reporting, and monitoring requirements of the Rule in phases through a series of exemptive orders establishing certain delayed compliance dates.3 Currently, certain broker-dealers are required to keep records of and report to the Commission upon request transaction data for certain of their customers that are either a large trader or an Unidentified Large Trader.4 Most recently, the Commission provided a temporary exemption from specified provisions of the Rule for certain brokerdealers (‘‘Phase Three’’)—provisions which otherwise would have fully implemented the entirety of the recordkeeping and reporting responsibilities of Rule 13h–1 by, in particular, requiring the capture and reporting of execution time on trades of all large traders—until November 1, 2017.5 The Financial Information Forum (‘‘FIF’’) and Securities Industry and Financial Markets Association (‘‘SIFMA,’’ and, together with FIF, the ‘‘Industry Organizations’’) have asked the Commission to eliminate Phase Three of the Rule, which would impose the remaining requirements on all broker-dealers and all large trader customers.6 Alternatively, the Industry 3 See Securities Exchange Act Release Nos. 66839 (April 20, 2012), 77 FR 25007 (April 26, 2012) (‘‘Phase One Order’’) (establishing Phase One); 69281 (April 3, 2013), 78 FR 20960 (April 8, 2013) (‘‘Phase Two Extension Order’’) (extending the compliance date for Phase Two to November 1, 2013); 70150 (August 8, 2013), 78 FR 49556 (August 14, 2013) (‘‘Phases Two and Three Order’’) (modifying Phase Two and providing for Phase Three); and 76322 (October 30, 2015), 80 FR 68590 (November 5, 2015) (‘‘Phase Three Extension Order’’) (extension of compliance date for Phase Three until November 1, 2017). 4 Rule 13h–1(a)(9) defines ‘‘Unidentified Large Trader’’ as ‘‘each person who has not complied with the [large trader identification requirements of the Rule] that a registered broker-dealer knows or has reason to know is a large trader.’’ The Rule provides that, for purposes of determining 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 brokerdealer.’’ Rule 13h–1(a)(9). 5 See Phase Three Extension Order, supra note 3 (extending the Phase Three compliance date until November 1, 2017). See also Phases Two and Three Order, supra note 3, 78 FR at 49560. 6 See Undated letter from William H. Herbert, Managing Director, FIF, to Heather Seidel, Acting Director, Division of Trading and Markets (‘‘Division’’), Commission (‘‘FIF I’’), available at https://www.sec.gov/comments/s7-10-10/s710101558852-131535.pdf; Letter from Thomas F. Price, Managing Director, Operations, Technology, and E:\FR\FM\06NON1.SGM Continued 06NON1 51450 Federal Register / Vol. 82, No. 213 / Monday, November 6, 2017 / Notices Pmangrum on DSK3GDR082PROD with NOTICES Organizations have asked the Commission to extend the compliance date for Phase Three for an additional period of three or five years.7 For the reasons discussed below, the Commission believes that it is consistent with the purposes of the Exchange Act to grant a limited extension of the compliance date for Phase Three by temporarily exempting broker-dealers until November 15, 2018 from the recordkeeping and reporting obligations of the Rule that would otherwise have been implemented in Phase Three on November 1, 2017. As discussed below, the Commission approved the Consolidated Audit Trail (‘‘CAT NMS Plan’’) 8 submitted by FINRA and the national securities exchanges (collectively, the ‘‘SROs’’) pursuant to Rule 613 under the Exchange Act.9 In adopting Rule 613 BCP, SIFMA, to Heather Seidel, Acting Director, Division, Commission, dated March 3, 2017 (‘‘SIFMA Letter’’), available at https://www.sec.gov/ comments/s7-10-10/s71010-1610783-135970.pdf; and Letter from William H. Herbert, Managing Director, FIF, to Heather Seidel, Acting Director, Division, Commission, dated September 14, 2017 (‘‘FIF II’’), available at https://www.sec.gov/ comments/s7-10-10/s71010-2445134-161065.pdf. and In the alternative, FIF ‘‘recommends postponing the compliance date for five years’’ and SIFMA requests an extension ‘‘to a date no sooner than the earlier of the date of the full implementation of the CAT or November 1, 2022.’’ See FIF I at 2; and SIFMA Letter at 3. In a subsequent letter, FIF requested that the Commission eliminate Phase Three or, alternatively, extend the compliance date for Phase Three to November 1, 2020 to allow for the implementation of CAT Phase 1. See FIF II at 3. 7 See FIF II at 3 (asking the Commission, if it chooses not to eliminate Phase Three, to extend the compliance date for Phase Three until November 1, 2020 ‘‘to allow full implementation of CAT Phase 1 for both Large and Small Industry Members’’); FIF I at 2 (stating that ‘‘If it is not possible to eliminate Phase 3 of the Rule, FIF recommends postponing the compliance date for five years’’); and SIFMA Letter at 3 (requesting an extension ‘‘to a date no sooner than the earlier of the date of the full implementation of the CAT or November 1, 2022’’). 8 See Securities Exchange Act Release No. 79318 (November 15, 2016), 81 FR 84696 (November 23, 2016) (File No. 4–698) (‘‘CAT NMS Plan Order’’). 9 17 CFR 242.613 (‘‘Rule 613’’). See also Securities Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722 (August 1, 2012) (‘‘Rule 613 Adopting Release’’). Rule 613 requires the SROs to submit a national market system (‘‘NMS’’) plan to create, implement, and maintain a consolidated audit trail (‘‘CAT’’) that would capture customer and order event information for orders in NMS securities, across all markets, from the time of order inception though routing, cancellation, modification, or execution in a single, consolidated data source. See Rule 613(a)(1), (c)(1), and (c)(7). Specifically, Rule 613 requires the SROs to ‘‘jointly file . . . a national market system plan to govern the creation, implementation, and maintenance of a consolidated audit trail and Central Repository.’’ See Rule 613(a)(1). As described more fully in the CAT NMS Plan Order, supra note 8, to satisfy the requirements of Rule 613, the SROs in February 2015 filed an NMS plan governing the CAT (the ‘‘CAT NMS Plan’’) that replaced and amended an earlier version of the plan. The Commission VerDate Sep<11>2014 14:48 Nov 03, 2017 Jkt 244001 and later when it approved the CAT NMS Plan, the Commission contemplated that the CAT would be duplicative of the reporting requirements of Rule 13h–1 under the Exchange Act.10 To focus broker-dealer attention and resources on implementing the CAT in the near term, the Commission hereby is exempting temporarily, until November 15, 2018, broker-dealers from the remaining recordkeeping and reporting obligations of Rule 13h–1, beyond those previously implemented in Phases One and Two.11 During that time, the Commission will consider progress in implementing the CAT as it determines implementation of Phase Three. II. Background A. Large Trader Status Rule 13h–1 defines a large trader as a person who ‘‘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 National Market System (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’’ (emphasis added), or voluntarily registers as such.12 The term ‘‘identifying activity level’’ is defined in the Rule to mean aggregate transactions in NMS securities that are equal to or greater than (1) during a calendar day, either 2 million shares or shares with a fair market value of $20 million; or (2) during a calendar month, either 20 million shares or shares with a fair market value of $200 million.13 approved the CAT NMS Plan, as amended, in November 2016. See CAT NMS Plan Order, supra note 8. The purpose of the CAT NMS Plan, and the creation, implementation, and maintenance of a comprehensive audit trail for the U.S. securities markets, is to ‘‘substantially enhance the ability of the SROs and the Commission to oversee today’s securities markets and fulfill their responsibilities under the federal securities laws.’’ See Rule 613 Adopting Release, supra note 9, 77 FR at 45726. As contemplated by Rule 613, the CAT ‘‘will allow for the prompt and accurate recording of material information about all orders in NMS securities, including the identity of customers, as these orders are generated and then routed throughout the U.S. markets until execution, cancellation, or modification. This information will be consolidated and made readily available to regulators in a uniform electronic format.’’ See id. 10 See Rule 613 Adopting Release, supra note 9, 77 FR at 45734; and CAT NMS Plan Order, supra note 8, 81 FR at 84777. 11 See infra notes 24–27 and accompanying text (describing Phases One and Two). 12 See Rule 13h–1(a)(1). 13 See Rule 13h–1(a)(7). See also Phase Three Extension Order, supra note 3 (establishing an alternative ‘‘premium paid’’ methodology for calculating equity options value). PO 00000 Frm 00067 Fmt 4703 Sfmt 4703 B. The Requirements of Rule 13h–1 1. Large Trader Self-Identification The Rule requires large traders to selfidentify to the Commission on Form 13H and to periodically update their Form 13H submission,14 obtain a unique large trader identification number (‘‘LTID’’) from the Commission,15 and provide this number to their broker-dealers and identify each account to which the LTID applies.16 These large trader responsibilities are referred to collectively as the ‘‘SelfIdentification Requirements.’’ 2. Broker-Dealers’ Recordkeeping and Reporting Responsibilities Regarding Unidentified Large Traders and the Customer Monitoring Safe Harbor Under Rules 13h–1(d) and (e), registered broker-dealers are responsible for, among other things, maintaining records of certain transaction information and information relating to Unidentified Large Traders and then reporting such information to the Commission upon request. Specifically, Rule 13h–1 requires that every registered broker-dealer maintain records of information specified in paragraphs (d)(2) and (d)(3) of the Rule (‘‘Transaction Data’’), including, among other things, the applicable LTID(s) and execution time of each 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; or (2) if the broker-dealer is a large trader, any proprietary or other account over which such broker-dealer exercises investment discretion. Additionally, where a non-broker-dealer carries an account for a large trader or an Unidentified Large Trader under the Rule, the broker-dealer effecting transactions directly or indirectly for such large trader or Unidentified Large Trader must maintain records of all Transaction Data.17 These recordkeeping obligations are referred to 14 See Rule 13h–1(b)(1)(i)–(iii). Form 13H and all updates to it are filed electronically through the Commission’s EDGAR system. 15 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. 16 See Rule 13h–1(b)(2). See also Large Trader Adopting Release, supra note 2, 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’’). 17 See Rule 13h–1(d)(1)(iii). E:\FR\FM\06NON1.SGM 06NON1 Pmangrum on DSK3GDR082PROD with NOTICES Federal Register / Vol. 82, No. 213 / Monday, November 6, 2017 / Notices collectively as the ‘‘Recordkeeping Responsibilities.’’ The Rule also requires that, upon Commission request, every registered broker-dealer that is itself a large trader or carries an account for a large trader or an Unidentified Large Trader must electronically report Transaction Data to the Commission through the Electronic Blue Sheets (‘‘EBS’’) system for all transactions effected directly or indirectly by or through accounts carried by such broker-dealer for large traders or Unidentified Large Traders equal to or greater than the reporting activity level.18 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 the large trader or Unidentified Large Trader must electronically report Transaction Data to the Commission through the EBS system for such transactions equal to or greater than the reporting activity level.19 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.20 These reporting obligations are referred to collectively as the ‘‘Reporting Responsibilities.’’ Rule 13h–1(f) provides a safe harbor that is designed to reduce brokerdealers’ recordkeeping and reporting burdens with respect to Unidentified Large Traders by, among other things, providing relief for when a brokerdealer shall be deemed to know or have reason to know that a person is a large trader and thus subject to reporting obligations related to Unidentified Large Traders under Rule 3h-1. Under the safe harbor, a registered broker-dealer is deemed not to know or have reason to know that a person is a large trader if the broker-dealer 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 effected through an account or group of accounts carried by such broker-dealer or through which such broker-dealer executes transactions, as applicable, 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.21 18 See Rule 13h–1(e). id. 20 See id. 21 See Rule 13h–1(f). 19 See VerDate Sep<11>2014 14:48 Nov 03, 2017 Jkt 244001 C. Phased Implementation of Rule 13h–1 When the Commission adopted the Rule, it characterized the large trader reporting requirements as ‘‘relatively modest steps’’ to ‘‘address the Commission’s near-term need for access to more information about large traders and their trading activities. . . .’’ 22 After the Commission adopted the Rule, industry commenters began to identify specific implementation challenges and offered more detailed estimates of the cost of compliance for broker-dealers with the Recordkeeping and Reporting Responsibilities.23 Such concerns led the Commission to implement the Recordkeeping and Reporting Responsibilities in phases.24 In Phase One, which began on November 30, 2012, the Commission temporarily exempted from the Recordkeeping and Reporting Responsibilities all broker-dealers, except clearing brokers for large traders (including the large trader itself if it is a self-clearing broker-dealer), with respect to large trader transactions that were either (1) proprietary trades by a U.S. registered broker-dealer, or (2) effected through a ‘‘sponsored access’’ arrangement.25 In Phase Two, which began on November 1, 2013, the Commission further implemented the Rule by subjecting transactions effected pursuant to ‘‘direct market access’’ arrangements to the Recordkeeping and Reporting Responsibilities.26 Specifically, Phase Two temporarily exempted broker-dealers, until November 1, 2015, from the Recordkeeping and Reporting Responsibilities, except for: (1) The clearing broker-dealer for a large trader, with respect to (a) proprietary transactions by the large trader brokerdealer; (b) transactions effected pursuant to a ‘‘sponsored access’’ arrangement; and (c) transactions 22 See Large Trader Adopting Release, supra note 2, 76 FR at 46963. 23 See, e.g., Phase Three Extension Order, supra note 3, 80 FR at 68594. 24 See id. See also supra note 3 (citing to the applicable releases). 25 See Phase One Order, supra note 3, 77 FR at 25008–9. A ‘‘sponsored access’’ arrangement is an arrangement 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). 26 See Phases Two and Three Order, supra note 3, 78 FR at 49559–60. See also 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.’’). PO 00000 Frm 00068 Fmt 4703 Sfmt 4703 51451 effected pursuant to a ‘‘direct market access’’ arrangement; and (2) a brokerdealer 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.27 In other words, the Recordkeeping and Reporting Responsibilities under Phase Two require capture and reporting of LTID numbers for all large traders, but require capture and reporting of execution time only for the three specific categories of large trader activity outlined above. Phase Three, scheduled to commence on November 1, 2017, would require compliance with the entirety of the Recordkeeping and Reporting Responsibilities for all broker-dealers, covering the remaining types of large traders and transactions not covered by Phases One and Two.28 Notably, implementation of Phase Three would require the capture and reporting of execution time for all large trader transactions, not just for the three specific categories of large trader activity already implemented through Phases One and Two. D. Adoption of Rule 613 and Implementation of the CAT The Commission adopted Rule 613 to create a CAT that would allow regulators to more efficiently and accurately track activity in NMS securities.29 Rule 613 requires the SROs to jointly submit an NMS plan to create, implement and maintain a consolidated audit trail.30 In November 2016, the Commission approved the SROs’ proposed CAT NMS Plan.31 When the Commission adopted Rule 613 it stated that, while certain aspects of Rule 13h–1 are not addressed by Rule 613, Rule 613 may supersede certain of the broker-dealer Recordkeeping and Reporting Responsibilities of Rule 13h–1.32 Specifically, the Commission stated ‘‘[t]o the extent that . . . data reported to the central repository under Rule 613 obviates the need for the EBS system, the Commission expects that the separate [trade] reporting requirements of Rule 13h–1 related to the EBS system would be eliminated.’’ 33 Further, when it approved the CAT NMS Plan, the Commission noted that ‘‘CAT will provide Commission Staff with much of 27 See Phases Two and Three Order, supra note 3, 78 FR at 49558–9. 28 See id. at 78 FR at 49560; and Phase Three Extension Order, supra note 3. 29 See Rule 613 Adopting Release, supra note 9. 30 See Rule 613(a)(1). 31 See CAT NMS Plan Order, supra note 8. 32 See Rule 613 Adopting Release, supra note 9, 77 FR at 45734. 33 Id. at text accompanying n.95. E:\FR\FM\06NON1.SGM 06NON1 51452 Federal Register / Vol. 82, No. 213 / Monday, November 6, 2017 / Notices the equity and option data that is currently obtained through equity and option cleared reports and EBS, including the additional transaction data captured in connection with Rule 13h–1 concerning large traders.’’ 34 Pmangrum on DSK3GDR082PROD with NOTICES III. Exemptive Relief Pursuant to Section 13(h)(6) of the Exchange Act and Rule 13h–1(g) thereunder,35 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. As noted above, the Industry Organizations have requested that the Commission eliminate Phase Three of the implementation of the Rule.36 In the alternative, FIF recommends postponing the compliance date for Phase Three for five years 37 or until November 1, 2020,38 and SIFMA requested an extension of the compliance date until the earlier of full implementation of the CAT or November 1, 2022.39 The Industry Organizations both expressed the view that granting exemptive relief would allow the industry to focus resources on implementing the CAT.40 In addition, SIFMA asserted that ‘‘the reporting structure that would ultimately be developed and implemented under Phase III would become redundant when the Consolidated Audit Trail (CAT) is instituted.’’ 41 SIFMA further stated that ‘‘[c]ertain aspects of Phase III implementation continue to be infeasible except at a prohibitive cost and involving significant industry coordination for the development of new operational flows and processing standards that is disproportionate to the anticipated relatively short-lived corresponding benefit. Specifically, with the progress on CAT . . . the useful life of a costly and specialized Phase III solution is now described in 34 See CAT NMS Plan Order, supra note 8, 81 FR at 84777 (citations omitted). 35 See 15 U.S.C. 78m and Rule 13h–1(g), respectively. 36 See FIF I, supra note 6, at 2; and SIFMA Letter, supra note 6, at 3. 37 See FIF I, supra note 6, at 2. 38 See FIF II, supra note 6, at 3. 39 See SIFMA Letter, supra note 6, at 3. 40 See FIF I, supra note 6, at 1–2; and SIFMA Letter, supra note 6, at 2. See also FIF II, supra note 6, at 1 (stating that mandating implementation of Phase Three would ‘‘divert scarce resources from the [i]mplementation of CAT’’). 41 SIFMA Letter, supra note 6, at 2. See also FIF II at 2 (expressing the view that the implementation of Phase Three ‘‘would be redundant of the CAT initiative’’). VerDate Sep<11>2014 14:48 Nov 03, 2017 Jkt 244001 months.’’ 42 FIF stated that the implementation of Phase Three would represent ‘‘significant duplicative costs to the broker-dealer community because [the Phase Three] recordkeeping and reporting obligations are already included in the CAT.’’ 43 The Commission notes that there has been significant progress on the implementation of the CAT since it issued the Phase Three Extension Order on October 30, 2015. As noted above, the Commission approved the CAT NMS Plan submitted by the SROs on November 15, 2016,44 and to date the SROs have taken a series of steps to implement the CAT in accordance with the CAT NMS Plan. Among other things, the Plan Processor for the CAT NMS Plan has been selected,45 draft technical specifications for the SROs’ submission of order and quote data to the CAT have been developed,46 and compliance rules requiring SRO members to synchronize their business clocks used to report information required under the CAT NMS Plan to within 50 milliseconds of the time maintained by the National Institute of Standards and Technology have been adopted.47 In addition, the SROs have 42 SIFMA Letter, supra note 6, at 2. SIFMA stated that it had previously described the significant implementation challenges that would need to be resolved to meet the compliance requirements of Phase Three. Id. at 1. Quoting its February 13, 2013, letter to the Commission, SIFMA stated that ‘‘‘it would require a massive restructuring of most of the current execution and clearing flows and systems at considerable cost to aggregate all of [the relevant reporting] information at one broker-dealer’ and that ‘individual broker-dealers must make significant internal changes to their systems, the fundamental restructuring of certain industry standard clearing processes may be required, and concerted and coordinated development activities will be required throughout the broker-dealer industry.’ ’’ Id. at 1–2, citing Letter from Theodore R. Lazo, Managing Director and Associate General Counsel, SIFMA, to David S. Shillman, Associate Director, Division, Commission, dated February 13, 2013, available at https://www.sec.gov/comments/ s7-10-10/s71010-102.pdf. SIFMA stated that ‘‘[t]hese challenges continue to persist and are no less burdensome today,’’ and asserted that the reporting structure that would be developed and implemented under Phase Three would become redundant when the CAT is instituted. SIFMA Letter, supra note 6, at 2. See also FIF II, supra note 6, at 2 (referencing FIF’s previous descriptions of the implementation challenges associated with Phase Three). 43 See FIF II, supra note 6, at 2. 44 See CAT NMS Plan Order, supra note 8. 45 See Letter from the Selection Committee of the CAT NMS Plan to Brent J. Fields, Secretary, Commission, dated January 18, 2017, available at https://www.sec.gov/divisions/marketreg/rule613info-notice-of-plan-processor-selection.pdf. 46 See CAT NMS Plan, Appendix C, Section 10(b). 47 See, e.g., NYSE Rules 6820(a) and 6895(b), CBOE Rules 6.86(a) and 6.96(b), and Nasdaq Rules 6820(a) and 6895(b). In accordance with an exemption to the CAT NMS Plan, the SROs’ compliance rules require members that were capturing time in milliseconds on March 8, 2017, PO 00000 Frm 00069 Fmt 4703 Sfmt 4703 adopted rules requiring member compliance with relevant portions of the CAT NMS Plan,48 and they have filed proposed rule changes that are designed to eliminate systems that are duplicative of the CAT.49 In light of the fact that the CAT NMS Plan has now been approved and the CAT is being built and implemented, the Commission believes that it is appropriate to issue this temporary exemption so that broker-dealer resources can be focused on CAT.50 Reporting pursuant to the CAT NMS Plan will provide the Commission with information concerning the trading in equity and listed options transactions of all types of large traders that would otherwise be reported pursuant to Rule 13h–1. In particular, the CAT will capture detailed information on each order, including the time of execution for orders executed in whole or in part 51 as well as information concerning allocation to subaccounts.52 Accordingly, because the CAT will capture the order execution information that would be covered in Phase Three, the Commission believes that a temporary exemption is appropriate to defer the burdens that would be imposed on the industry to implement Phase Three and instead focus finite broker-dealer resources on completing and implementing the CAT in the near term. The Commission notes that, prior to have synchronized their business clocks on or before March 15, 2017. The compliance rules require members that did not capture time in milliseconds on March 8, 2017, to synchronize their business clocks on or before February 19, 2018. See Securities Exchange Act Release No. 80142 (March 2, 2017), 82 FR 13034 (March 8, 2017) (Order Granting Limited Exemptive Relief from the CAT NMS Plan requirement that members synchronize their business clocks no later than March 15, 2017). 48 See Securities Exchange Act Release No. 80256 (March 15, 2017), 82 FR 14526 (March 21, 2017) (order approving File Nos. SR–BatsBYX–2017–02; SR–BatsBZX–2017–08; SR–BatsEDGA–2017–03; SR–BatsEDGX–2017–08; SR–BOX–2017–07; SR– C2–2017–007; SR–CBOE–2017–012; SR–CHX– 2017–03; SR–ISE–2017–08; SR–IEX–2017–04; SR– ISEGemini–2017–04; SR–ISEMercury–2017–03; SR–MIAX–2017–03; SR–PEARL–2017–04; SR– NASDAQ–2017–008; SRBX–2017–007; SR–PHLX– 2017–07; SR–NYSE–2017–01; SR–NYSEArca– 2017–03; SR–NYSEArca–2017–04; SR–NYSEMKT– 2017–02; and SR–NSX–2017–03). 49 See, e.g., Securities Exchange Act Release Nos. 80783 (May 26, 2017), 82 FR 2542 (June 1, 2017) (SR–FINRA–2017–13); 80789 (May 26, 2017), 82 FR 25492 (June 1, 2017) (SR–BOX–2017–17); 80813 (May 30, 2017), 82 FR 25820 (June 5, 2017) (SR– Nasdaq–2017–055). 50 This order does not affect Rule 13h–1 requirements implemented in Phases One and Two. 51 See Rule 613(c)(7)(v)(C) (requiring, for an order executed in whole or in part, ‘‘[t]ime of execution’’). See also CAT NMS Plan, supra note 8, at Section 6.3(d)(v). 52 See CAT NMS Plan Order, supra note 8, 81 FR at 84777 (citations omitted); and CAT NMS Plan, supra note 8, at Section 6.4(d)(ii)(A)(1) (concerning Allocation Reports). E:\FR\FM\06NON1.SGM 06NON1 Federal Register / Vol. 82, No. 213 / Monday, November 6, 2017 / Notices to the Commission’s issuance of the Phase Three Extension Order, FIF and SIFMA requested a permanent exemption or alternatively a five year deferment of the compliance date for Phase Three.53 In the Phase Three Extension Order, the Commission provided a two year exemption, until November 1, 2017. At that time, the Commission stated its belief that ‘‘two years will give the Commission enough time to evaluate future developments, including any investment in or progress on a CAT.’’ Further, FIF and SIFMA now have requested a permanent exemption, or alternatively a three or five year deferment of the compliance date for Phase Three.54 The Commission believes at this time that an extension to November 15, 2018 responds to requests from FIF and SIFMA to extend the Phase Three compliance date, but having a short exemption instead will allow broker-dealers to focus on implementing the CAT in the near term and will allow the Commission to revisit the implementation of Phase Three as it evaluates future developments during this period, including progress in implementing the CAT.55 During that time, the Commission will consider progress in implementing the CAT as it determines implementation of Phase Three. Accordingly, the Commission finds that it is consistent with the purposes of the Exchange Act to extend the compliance date for Phase Three by temporarily exempting broker-dealers until November 15, 2018 from compliance with specified provisions of the Rule. Thus, the Recordkeeping and Reporting Responsibilities under Rule 13h–1 will continue to apply with respect to: (1) The clearing broker-dealer for a large trader, with respect to (a) proprietary transactions by a large trader broker-dealer; (b) transactions effected pursuant to a ‘‘sponsored access’’ arrangement; and (c) transactions effected pursuant to a ‘‘direct market access’’ arrangement; and (2) brokerdealers that carry an account for a large Pmangrum on DSK3GDR082PROD with NOTICES 53 See Phase Three Extension Order at note 62 (citing Letter from Mary Lou VonKaenel, Managing Director, FIF, to Stephen Luparello, Director, Division, Commission, dated March 27, 2015, available at https://www.sec.gov/comments/s7-1010/s71010.shtml and Letter from Theodore R. Lazo, Managing Director and Associate General Counsel, SIFMA to Stephen Luparello, Director, Division, Commission, dated April 9, 2015, available at https://www.sec.gov/comments/s7-10-10/ s71010.shtml). 54 See supra note 7 (citing to the SIFMA and FIF letters). 55 The Commission notes that November 15, 2018 currently is the date by which large industry SRO members are required to begin reporting to the CAT central repository. See CAT NMS Plan Order, supra note 8, at Ex. A, Sec. 6.7(a)(v), 81 FR at 84963. VerDate Sep<11>2014 14:48 Nov 03, 2017 Jkt 244001 trader for Transaction Data other than execution time. IV. Conclusion It is hereby ordered, pursuant to Section 13(h)(6) of the Exchange Act and Rule 13h–1(g) thereunder, that broker-dealers are exempted temporarily until November 15, 2018 from the recordkeeping and reporting requirements of Rule 13h–1(d) and (e) except for: (1) 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, and (c) transactions effected pursuant to a ‘‘direct market access’’ arrangement; and, for other types of transactions, (2) broker-dealers that carry an account for a large trader for Transaction Data other than execution time. By the Commission. Jill M. Peterson, Assistant Secretary. [FR Doc. 2017–24056 Filed 11–3–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–81986; File No. SR– NASDAQ–2017–088] Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Designation of a Longer Period for Commission Action on a Proposed Rule Change To Amend Rule 4703(a) To Allow Members To Designate When an Order With a RTFY or SCAN Routing Order Attribute Will Be Activated 51453 Section 19(b)(2) of the Act 4 provides that, within 45 days of the publication of notice of the filing of a proposed rule change, or within such longer period up to 90 days as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or as to which the self-regulatory organization consents, the Commission shall either approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether the proposed rule change should be disapproved. The 45th day after publication of the notice for this proposed rule change is November 2, 2017. The Commission is extending this 45-day time period. The Commission finds that it is appropriate to designate a longer period within which to take action on the proposed rule change so that it has sufficient time to consider the proposed rule change. Accordingly, the Commission, pursuant to Section 19(b)(2) of the Act,5 designates December 17, 2017, as the date by which the Commission shall either approve or disapprove or institute proceedings to determine whether to disapprove the proposed rule change (File Number SR–NASDAQ–2017–088). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.6 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–24046 Filed 11–3–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–81991; File No. SR–ISE– 2017–96] October 31, 2017. On August 30, 2017, The Nasdaq Stock Market LLC (‘‘Nasdaq’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to amend Nasdaq Rule 4703(a) to allow members to designate when an Order with a RTFY or SCAN routing Order Attribute will be activated. The proposed rule change was published for comment in the Federal Register on September 18, 2017.3 The Commission has received no comment letters on the proposed rule change. Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Rule 1614 October 31, 2017. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on October 27, 2017, Nasdaq ISE, LLC (‘‘ISE’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared 4 15 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 81579 (September 12, 2017), 82 FR 43584. PO 00000 Frm 00070 Fmt 4703 Sfmt 4703 U.S.C. 78s(b)(2). U.S.C. 78s(b)(2). 6 17 CFR 200.30–3(a)(31). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 5 15 E:\FR\FM\06NON1.SGM 06NON1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 82, Number 213 (Monday, November 6, 2017)]
[Notices]
[Pages 51449-51453]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-24056]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81993]


Order Temporarily Exempting Certain Broker-Dealers From Specified 
Provisions of the Recordkeeping, Reporting, and Monitoring 
Responsibilities of Rule 13h-1 Under the Securities Exchange Act of 
1934

October 31, 2017.

I. Introduction

    On July 27, 2011, the Securities and Exchange Commission 
(``Commission'') adopted Rule 13h-1 (``Rule 13h-1'' or the ``Rule'') 
under the Securities Exchange Act of 1934 (``Exchange Act'') \1\ to 
assist the Commission in both identifying and obtaining information on 
market participants that conduct a substantial amount of trading 
activity, as measured by volume or market value, in national market 
system (``NMS'') securities (such persons are referred to as ``large 
traders'').\2\ The Rule requires certain large traders to identify 
themselves to the Commission on Form 13H. The Rule also requires, among 
other things, certain broker-dealers to maintain records of large 
trader transaction information and to report such information to the 
Commission upon request. Since December 1, 2011, persons whose trading 
activity reached or exceeded the identifying activity level specified 
in the Rule have been required to identify themselves to the Commission 
by filing Form 13H through the Commission's EDGAR system. The 
Commission has implemented the broker-dealer recordkeeping, reporting, 
and monitoring requirements of the Rule in phases through a series of 
exemptive orders establishing certain delayed compliance dates.\3\ 
Currently, certain broker-dealers are required to keep records of and 
report to the Commission upon request transaction data for certain of 
their customers that are either a large trader or an Unidentified Large 
Trader.\4\ Most recently, the Commission provided a temporary exemption 
from specified provisions of the Rule for certain broker-dealers 
(``Phase Three'')--provisions which otherwise would have fully 
implemented the entirety of the recordkeeping and reporting 
responsibilities of Rule 13h-1 by, in particular, requiring the capture 
and reporting of execution time on trades of all large traders--until 
November 1, 2017.\5\
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    \1\ 17 CFR 240.13h-1.
    \2\ See Securities Exchange Act Release No. 64976 (July 27, 
2011), 76 FR 46960 (August 3, 2011) (``Large Trader Adopting 
Release''). The effective date of Rule 13h-1 was October 3, 2011. 
See also Exchange Act Rule 600(b)(46) of Regulation NMS (defining 
``NMS security'').
    \3\ See Securities Exchange Act Release Nos. 66839 (April 20, 
2012), 77 FR 25007 (April 26, 2012) (``Phase One Order'') 
(establishing Phase One); 69281 (April 3, 2013), 78 FR 20960 (April 
8, 2013) (``Phase Two Extension Order'') (extending the compliance 
date for Phase Two to November 1, 2013); 70150 (August 8, 2013), 78 
FR 49556 (August 14, 2013) (``Phases Two and Three Order'') 
(modifying Phase Two and providing for Phase Three); and 76322 
(October 30, 2015), 80 FR 68590 (November 5, 2015) (``Phase Three 
Extension Order'') (extension of compliance date for Phase Three 
until November 1, 2017).
    \4\ Rule 13h-1(a)(9) defines ``Unidentified Large Trader'' as 
``each person who has not complied with the [large trader 
identification requirements of the Rule] that a registered broker-
dealer knows or has reason to know is a large trader.'' The Rule 
provides that, for purposes of determining 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.'' Rule 13h-1(a)(9).
    \5\ See Phase Three Extension Order, supra note 3 (extending the 
Phase Three compliance date until November 1, 2017). See also Phases 
Two and Three Order, supra note 3, 78 FR at 49560.
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    The Financial Information Forum (``FIF'') and Securities Industry 
and Financial Markets Association (``SIFMA,'' and, together with FIF, 
the ``Industry Organizations'') have asked the Commission to eliminate 
Phase Three of the Rule, which would impose the remaining requirements 
on all broker-dealers and all large trader customers.\6\ Alternatively, 
the Industry

[[Page 51450]]

Organizations have asked the Commission to extend the compliance date 
for Phase Three for an additional period of three or five years.\7\
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    \6\ See Undated letter from William H. Herbert, Managing 
Director, FIF, to Heather Seidel, Acting Director, Division of 
Trading and Markets (``Division''), Commission (``FIF I''), 
available at https://www.sec.gov/comments/s7-10-10/s71010-1558852-131535.pdf; Letter from Thomas F. Price, Managing Director, 
Operations, Technology, and BCP, SIFMA, to Heather Seidel, Acting 
Director, Division, Commission, dated March 3, 2017 (``SIFMA 
Letter''), available at https://www.sec.gov/comments/s7-10-10/s71010-1610783-135970.pdf; and Letter from William H. Herbert, 
Managing Director, FIF, to Heather Seidel, Acting Director, 
Division, Commission, dated September 14, 2017 (``FIF II''), 
available at https://www.sec.gov/comments/s7-10-10/s71010-2445134-161065.pdf. and In the alternative, FIF ``recommends postponing the 
compliance date for five years'' and SIFMA requests an extension 
``to a date no sooner than the earlier of the date of the full 
implementation of the CAT or November 1, 2022.'' See FIF I at 2; and 
SIFMA Letter at 3. In a subsequent letter, FIF requested that the 
Commission eliminate Phase Three or, alternatively, extend the 
compliance date for Phase Three to November 1, 2020 to allow for the 
implementation of CAT Phase 1. See FIF II at 3.
    \7\ See FIF II at 3 (asking the Commission, if it chooses not to 
eliminate Phase Three, to extend the compliance date for Phase Three 
until November 1, 2020 ``to allow full implementation of CAT Phase 1 
for both Large and Small Industry Members''); FIF I at 2 (stating 
that ``If it is not possible to eliminate Phase 3 of the Rule, FIF 
recommends postponing the compliance date for five years''); and 
SIFMA Letter at 3 (requesting an extension ``to a date no sooner 
than the earlier of the date of the full implementation of the CAT 
or November 1, 2022'').
---------------------------------------------------------------------------

    For the reasons discussed below, the Commission believes that it is 
consistent with the purposes of the Exchange Act to grant a limited 
extension of the compliance date for Phase Three by temporarily 
exempting broker-dealers until November 15, 2018 from the recordkeeping 
and reporting obligations of the Rule that would otherwise have been 
implemented in Phase Three on November 1, 2017. As discussed below, the 
Commission approved the Consolidated Audit Trail (``CAT NMS Plan'') \8\ 
submitted by FINRA and the national securities exchanges (collectively, 
the ``SROs'') pursuant to Rule 613 under the Exchange Act.\9\ In 
adopting Rule 613 and later when it approved the CAT NMS Plan, the 
Commission contemplated that the CAT would be duplicative of the 
reporting requirements of Rule 13h-1 under the Exchange Act.\10\ To 
focus broker-dealer attention and resources on implementing the CAT in 
the near term, the Commission hereby is exempting temporarily, until 
November 15, 2018, broker-dealers from the remaining recordkeeping and 
reporting obligations of Rule 13h-1, beyond those previously 
implemented in Phases One and Two.\11\ During that time, the Commission 
will consider progress in implementing the CAT as it determines 
implementation of Phase Three.
---------------------------------------------------------------------------

    \8\ See Securities Exchange Act Release No. 79318 (November 15, 
2016), 81 FR 84696 (November 23, 2016) (File No. 4-698) (``CAT NMS 
Plan Order'').
    \9\ 17 CFR 242.613 (``Rule 613''). See also Securities Exchange 
Act Release No. 67457 (July 18, 2012), 77 FR 45722 (August 1, 2012) 
(``Rule 613 Adopting Release''). Rule 613 requires the SROs to 
submit a national market system (``NMS'') plan to create, implement, 
and maintain a consolidated audit trail (``CAT'') that would capture 
customer and order event information for orders in NMS securities, 
across all markets, from the time of order inception though routing, 
cancellation, modification, or execution in a single, consolidated 
data source. See Rule 613(a)(1), (c)(1), and (c)(7). Specifically, 
Rule 613 requires the SROs to ``jointly file . . . a national market 
system plan to govern the creation, implementation, and maintenance 
of a consolidated audit trail and Central Repository.'' See Rule 
613(a)(1). As described more fully in the CAT NMS Plan Order, supra 
note 8, to satisfy the requirements of Rule 613, the SROs in 
February 2015 filed an NMS plan governing the CAT (the ``CAT NMS 
Plan'') that replaced and amended an earlier version of the plan. 
The Commission approved the CAT NMS Plan, as amended, in November 
2016. See CAT NMS Plan Order, supra note 8. The purpose of the CAT 
NMS Plan, and the creation, implementation, and maintenance of a 
comprehensive audit trail for the U.S. securities markets, is to 
``substantially enhance the ability of the SROs and the Commission 
to oversee today's securities markets and fulfill their 
responsibilities under the federal securities laws.'' See Rule 613 
Adopting Release, supra note 9, 77 FR at 45726. As contemplated by 
Rule 613, the CAT ``will allow for the prompt and accurate recording 
of material information about all orders in NMS securities, 
including the identity of customers, as these orders are generated 
and then routed throughout the U.S. markets until execution, 
cancellation, or modification. This information will be consolidated 
and made readily available to regulators in a uniform electronic 
format.'' See id.
    \10\ See Rule 613 Adopting Release, supra note 9, 77 FR at 
45734; and CAT NMS Plan Order, supra note 8, 81 FR at 84777.
    \11\ See infra notes 24-27 and accompanying text (describing 
Phases One and Two).
---------------------------------------------------------------------------

II. Background

A. Large Trader Status

    Rule 13h-1 defines a large trader as a person who ``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 National Market System 
(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'' (emphasis added), or 
voluntarily registers as such.\12\ The term ``identifying activity 
level'' is defined in the Rule to mean aggregate transactions in NMS 
securities that are equal to or greater than (1) during a calendar day, 
either 2 million shares or shares with a fair market value of $20 
million; or (2) during a calendar month, either 20 million shares or 
shares with a fair market value of $200 million.\13\
---------------------------------------------------------------------------

    \12\ See Rule 13h-1(a)(1).
    \13\ See Rule 13h-1(a)(7). See also Phase Three Extension Order, 
supra note 3 (establishing an alternative ``premium paid'' 
methodology for calculating equity options value).
---------------------------------------------------------------------------

B. The Requirements of Rule 13h-1

1. Large Trader Self-Identification
    The Rule requires large traders to self-identify to the Commission 
on Form 13H and to periodically update their Form 13H submission,\14\ 
obtain a unique large trader identification number (``LTID'') from the 
Commission,\15\ and provide this number to their broker-dealers and 
identify each account to which the LTID applies.\16\ These large trader 
responsibilities are referred to collectively as the ``Self-
Identification Requirements.''
---------------------------------------------------------------------------

    \14\ See Rule 13h-1(b)(1)(i)-(iii). Form 13H and all updates to 
it are filed electronically through the Commission's EDGAR system.
    \15\ 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.
    \16\ See Rule 13h-1(b)(2). See also Large Trader Adopting 
Release, supra note 2, 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'').
---------------------------------------------------------------------------

2. Broker-Dealers' Recordkeeping and Reporting Responsibilities 
Regarding Unidentified Large Traders and the Customer Monitoring Safe 
Harbor
    Under Rules 13h-1(d) and (e), registered broker-dealers are 
responsible for, among other things, maintaining records of certain 
transaction information and information relating to Unidentified Large 
Traders and then reporting such information to the Commission upon 
request. Specifically, Rule 13h-1 requires that every registered 
broker-dealer maintain records of information specified in paragraphs 
(d)(2) and (d)(3) of the Rule (``Transaction Data''), including, among 
other things, the applicable LTID(s) and execution time of each 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; or (2) if the broker-dealer is a large 
trader, any proprietary or other account over which such broker-dealer 
exercises investment discretion. Additionally, where a non-broker-
dealer carries an account for a large trader or an Unidentified Large 
Trader under the Rule, the broker-dealer effecting transactions 
directly or indirectly for such large trader or Unidentified Large 
Trader must maintain records of all Transaction Data.\17\ These 
recordkeeping obligations are referred to

[[Page 51451]]

collectively as the ``Recordkeeping Responsibilities.''
---------------------------------------------------------------------------

    \17\ See Rule 13h-1(d)(1)(iii).
---------------------------------------------------------------------------

    The Rule also requires that, upon Commission request, every 
registered broker-dealer that is itself a large trader or carries an 
account for a large trader or an Unidentified Large Trader must 
electronically report Transaction Data to the Commission through the 
Electronic Blue Sheets (``EBS'') system for all transactions effected 
directly or indirectly by or through accounts carried by such broker-
dealer for large traders or Unidentified Large Traders equal to or 
greater than the reporting activity level.\18\ 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 the large trader or 
Unidentified Large Trader must electronically report Transaction Data 
to the Commission through the EBS system for such transactions equal to 
or greater than the reporting activity level.\19\ 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.\20\ 
These reporting obligations are referred to collectively as the 
``Reporting Responsibilities.''
---------------------------------------------------------------------------

    \18\ See Rule 13h-1(e).
    \19\ See id.
    \20\ See id.
---------------------------------------------------------------------------

    Rule 13h-1(f) provides a safe harbor that is designed to reduce 
broker-dealers' recordkeeping and reporting burdens with respect to 
Unidentified Large Traders by, among other things, providing relief for 
when a broker-dealer shall be deemed to know or have reason to know 
that a person is a large trader and thus subject to reporting 
obligations related to Unidentified Large Traders under Rule 3h-1. 
Under the safe harbor, a registered broker-dealer is deemed not to know 
or have reason to know that a person is a large trader if the broker-
dealer 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 effected through an account or 
group of accounts carried by such broker-dealer or through which such 
broker-dealer executes transactions, as applicable, 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.\21\
---------------------------------------------------------------------------

    \21\ See Rule 13h-1(f).
---------------------------------------------------------------------------

C. Phased Implementation of Rule 13h-1

    When the Commission adopted the Rule, it characterized the large 
trader reporting requirements as ``relatively modest steps'' to 
``address the Commission's near-term need for access to more 
information about large traders and their trading activities. . . .'' 
\22\ After the Commission adopted the Rule, industry commenters began 
to identify specific implementation challenges and offered more 
detailed estimates of the cost of compliance for broker-dealers with 
the Recordkeeping and Reporting Responsibilities.\23\ Such concerns led 
the Commission to implement the Recordkeeping and Reporting 
Responsibilities in phases.\24\
---------------------------------------------------------------------------

    \22\ See Large Trader Adopting Release, supra note 2, 76 FR at 
46963.
    \23\ See, e.g., Phase Three Extension Order, supra note 3, 80 FR 
at 68594.
    \24\ See id. See also supra note 3 (citing to the applicable 
releases).
---------------------------------------------------------------------------

    In Phase One, which began on November 30, 2012, the Commission 
temporarily exempted from the Recordkeeping and Reporting 
Responsibilities all broker-dealers, except clearing brokers for large 
traders (including the large trader itself if it is a self-clearing 
broker-dealer), with respect to large trader transactions that were 
either (1) proprietary trades by a U.S. registered broker-dealer, or 
(2) effected through a ``sponsored access'' arrangement.\25\ In Phase 
Two, which began on November 1, 2013, the Commission further 
implemented the Rule by subjecting transactions effected pursuant to 
``direct market access'' arrangements to the Recordkeeping and 
Reporting Responsibilities.\26\ Specifically, Phase Two temporarily 
exempted broker-dealers, until November 1, 2015, from the Recordkeeping 
and Reporting Responsibilities, except for: (1) The clearing broker-
dealer for a large trader, with respect to (a) proprietary transactions 
by the large trader broker-dealer; (b) transactions effected pursuant 
to a ``sponsored access'' arrangement; and (c) transactions effected 
pursuant to a ``direct market access'' arrangement; 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.\27\ In other words, the Recordkeeping 
and Reporting Responsibilities under Phase Two require capture and 
reporting of LTID numbers for all large traders, but require capture 
and reporting of execution time only for the three specific categories 
of large trader activity outlined above.
---------------------------------------------------------------------------

    \25\ See Phase One Order, supra note 3, 77 FR at 25008-9. A 
``sponsored access'' arrangement is an arrangement 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).
    \26\ See Phases Two and Three Order, supra note 3, 78 FR at 
49559-60. See also 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.'').
    \27\ See Phases Two and Three Order, supra note 3, 78 FR at 
49558-9.
---------------------------------------------------------------------------

    Phase Three, scheduled to commence on November 1, 2017, would 
require compliance with the entirety of the Recordkeeping and Reporting 
Responsibilities for all broker-dealers, covering the remaining types 
of large traders and transactions not covered by Phases One and 
Two.\28\ Notably, implementation of Phase Three would require the 
capture and reporting of execution time for all large trader 
transactions, not just for the three specific categories of large 
trader activity already implemented through Phases One and Two.
---------------------------------------------------------------------------

    \28\ See id. at 78 FR at 49560; and Phase Three Extension Order, 
supra note 3.
---------------------------------------------------------------------------

D. Adoption of Rule 613 and Implementation of the CAT

    The Commission adopted Rule 613 to create a CAT that would allow 
regulators to more efficiently and accurately track activity in NMS 
securities.\29\ Rule 613 requires the SROs to jointly submit an NMS 
plan to create, implement and maintain a consolidated audit trail.\30\ 
In November 2016, the Commission approved the SROs' proposed CAT NMS 
Plan.\31\
---------------------------------------------------------------------------

    \29\ See Rule 613 Adopting Release, supra note 9.
    \30\ See Rule 613(a)(1).
    \31\ See CAT NMS Plan Order, supra note 8.
---------------------------------------------------------------------------

    When the Commission adopted Rule 613 it stated that, while certain 
aspects of Rule 13h-1 are not addressed by Rule 613, Rule 613 may 
supersede certain of the broker-dealer Recordkeeping and Reporting 
Responsibilities of Rule 13h-1.\32\ Specifically, the Commission stated 
``[t]o the extent that . . . data reported to the central repository 
under Rule 613 obviates the need for the EBS system, the Commission 
expects that the separate [trade] reporting requirements of Rule 13h-1 
related to the EBS system would be eliminated.'' \33\ Further, when it 
approved the CAT NMS Plan, the Commission noted that ``CAT will provide 
Commission Staff with much of

[[Page 51452]]

the equity and option data that is currently obtained through equity 
and option cleared reports and EBS, including the additional 
transaction data captured in connection with Rule 13h-1 concerning 
large traders.'' \34\
---------------------------------------------------------------------------

    \32\ See Rule 613 Adopting Release, supra note 9, 77 FR at 
45734.
    \33\ Id. at text accompanying n.95.
    \34\ See CAT NMS Plan Order, supra note 8, 81 FR at 84777 
(citations omitted).
---------------------------------------------------------------------------

III. Exemptive Relief

    Pursuant to Section 13(h)(6) of the Exchange Act and Rule 13h-1(g) 
thereunder,\35\ 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.
---------------------------------------------------------------------------

    \35\ See 15 U.S.C. 78m and Rule 13h-1(g), respectively.
---------------------------------------------------------------------------

    As noted above, the Industry Organizations have requested that the 
Commission eliminate Phase Three of the implementation of the Rule.\36\ 
In the alternative, FIF recommends postponing the compliance date for 
Phase Three for five years \37\ or until November 1, 2020,\38\ and 
SIFMA requested an extension of the compliance date until the earlier 
of full implementation of the CAT or November 1, 2022.\39\ The Industry 
Organizations both expressed the view that granting exemptive relief 
would allow the industry to focus resources on implementing the 
CAT.\40\ In addition, SIFMA asserted that ``the reporting structure 
that would ultimately be developed and implemented under Phase III 
would become redundant when the Consolidated Audit Trail (CAT) is 
instituted.'' \41\ SIFMA further stated that ``[c]ertain aspects of 
Phase III implementation continue to be infeasible except at a 
prohibitive cost and involving significant industry coordination for 
the development of new operational flows and processing standards that 
is disproportionate to the anticipated relatively short-lived 
corresponding benefit. Specifically, with the progress on CAT . . . the 
useful life of a costly and specialized Phase III solution is now 
described in months.'' \42\ FIF stated that the implementation of Phase 
Three would represent ``significant duplicative costs to the broker-
dealer community because [the Phase Three] recordkeeping and reporting 
obligations are already included in the CAT.'' \43\
---------------------------------------------------------------------------

    \36\ See FIF I, supra note 6, at 2; and SIFMA Letter, supra note 
6, at 3.
    \37\ See FIF I, supra note 6, at 2.
    \38\ See FIF II, supra note 6, at 3.
    \39\ See SIFMA Letter, supra note 6, at 3.
    \40\ See FIF I, supra note 6, at 1-2; and SIFMA Letter, supra 
note 6, at 2. See also FIF II, supra note 6, at 1 (stating that 
mandating implementation of Phase Three would ``divert scarce 
resources from the [i]mplementation of CAT'').
    \41\ SIFMA Letter, supra note 6, at 2. See also FIF II at 2 
(expressing the view that the implementation of Phase Three ``would 
be redundant of the CAT initiative'').
    \42\ SIFMA Letter, supra note 6, at 2. SIFMA stated that it had 
previously described the significant implementation challenges that 
would need to be resolved to meet the compliance requirements of 
Phase Three. Id. at 1. Quoting its February 13, 2013, letter to the 
Commission, SIFMA stated that ```it would require a massive 
restructuring of most of the current execution and clearing flows 
and systems at considerable cost to aggregate all of [the relevant 
reporting] information at one broker-dealer' and that `individual 
broker-dealers must make significant internal changes to their 
systems, the fundamental restructuring of certain industry standard 
clearing processes may be required, and concerted and coordinated 
development activities will be required throughout the broker-dealer 
industry.' '' Id. at 1-2, citing Letter from Theodore R. Lazo, 
Managing Director and Associate General Counsel, SIFMA, to David S. 
Shillman, Associate Director, Division, Commission, dated February 
13, 2013, available at https://www.sec.gov/comments/s7-10-10/s71010-102.pdf. SIFMA stated that ``[t]hese challenges continue to persist 
and are no less burdensome today,'' and asserted that the reporting 
structure that would be developed and implemented under Phase Three 
would become redundant when the CAT is instituted. SIFMA Letter, 
supra note 6, at 2. See also FIF II, supra note 6, at 2 (referencing 
FIF's previous descriptions of the implementation challenges 
associated with Phase Three).
    \43\ See FIF II, supra note 6, at 2.
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    The Commission notes that there has been significant progress on 
the implementation of the CAT since it issued the Phase Three Extension 
Order on October 30, 2015. As noted above, the Commission approved the 
CAT NMS Plan submitted by the SROs on November 15, 2016,\44\ and to 
date the SROs have taken a series of steps to implement the CAT in 
accordance with the CAT NMS Plan. Among other things, the Plan 
Processor for the CAT NMS Plan has been selected,\45\ draft technical 
specifications for the SROs' submission of order and quote data to the 
CAT have been developed,\46\ and compliance rules requiring SRO members 
to synchronize their business clocks used to report information 
required under the CAT NMS Plan to within 50 milliseconds of the time 
maintained by the National Institute of Standards and Technology have 
been adopted.\47\ In addition, the SROs have adopted rules requiring 
member compliance with relevant portions of the CAT NMS Plan,\48\ and 
they have filed proposed rule changes that are designed to eliminate 
systems that are duplicative of the CAT.\49\
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    \44\ See CAT NMS Plan Order, supra note 8.
    \45\ See Letter from the Selection Committee of the CAT NMS Plan 
to Brent J. Fields, Secretary, Commission, dated January 18, 2017, 
available at https://www.sec.gov/divisions/marketreg/rule613-info-notice-of-plan-processor-selection.pdf.
    \46\ See CAT NMS Plan, Appendix C, Section 10(b).
    \47\ See, e.g., NYSE Rules 6820(a) and 6895(b), CBOE Rules 
6.86(a) and 6.96(b), and Nasdaq Rules 6820(a) and 6895(b). In 
accordance with an exemption to the CAT NMS Plan, the SROs' 
compliance rules require members that were capturing time in 
milliseconds on March 8, 2017, to have synchronized their business 
clocks on or before March 15, 2017. The compliance rules require 
members that did not capture time in milliseconds on March 8, 2017, 
to synchronize their business clocks on or before February 19, 2018. 
See Securities Exchange Act Release No. 80142 (March 2, 2017), 82 FR 
13034 (March 8, 2017) (Order Granting Limited Exemptive Relief from 
the CAT NMS Plan requirement that members synchronize their business 
clocks no later than March 15, 2017).
    \48\ See Securities Exchange Act Release No. 80256 (March 15, 
2017), 82 FR 14526 (March 21, 2017) (order approving File Nos. SR-
BatsBYX-2017-02; SR-BatsBZX-2017-08; SR-BatsEDGA-2017-03; SR-
BatsEDGX-2017-08; SR-BOX-2017-07; SR-C2-2017-007; SR-CBOE-2017-012; 
SR-CHX-2017-03; SR-ISE-2017-08; SR-IEX-2017-04; SR-ISEGemini-2017-
04; SR-ISEMercury-2017-03; SR-MIAX-2017-03; SR-PEARL-2017-04; SR-
NASDAQ-2017-008; SRBX-2017-007; SR-PHLX-2017-07; SR-NYSE-2017-01; 
SR-NYSEArca-2017-03; SR-NYSEArca-2017-04; SR-NYSEMKT-2017-02; and 
SR-NSX-2017-03).
    \49\ See, e.g., Securities Exchange Act Release Nos. 80783 (May 
26, 2017), 82 FR 2542 (June 1, 2017) (SR-FINRA-2017-13); 80789 (May 
26, 2017), 82 FR 25492 (June 1, 2017) (SR-BOX-2017-17); 80813 (May 
30, 2017), 82 FR 25820 (June 5, 2017) (SR-Nasdaq-2017-055).
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    In light of the fact that the CAT NMS Plan has now been approved 
and the CAT is being built and implemented, the Commission believes 
that it is appropriate to issue this temporary exemption so that 
broker-dealer resources can be focused on CAT.\50\ Reporting pursuant 
to the CAT NMS Plan will provide the Commission with information 
concerning the trading in equity and listed options transactions of all 
types of large traders that would otherwise be reported pursuant to 
Rule 13h-1. In particular, the CAT will capture detailed information on 
each order, including the time of execution for orders executed in 
whole or in part \51\ as well as information concerning allocation to 
subaccounts.\52\ Accordingly, because the CAT will capture the order 
execution information that would be covered in Phase Three, the 
Commission believes that a temporary exemption is appropriate to defer 
the burdens that would be imposed on the industry to implement Phase 
Three and instead focus finite broker-dealer resources on completing 
and implementing the CAT in the near term. The Commission notes that, 
prior

[[Page 51453]]

to the Commission's issuance of the Phase Three Extension Order, FIF 
and SIFMA requested a permanent exemption or alternatively a five year 
deferment of the compliance date for Phase Three.\53\ In the Phase 
Three Extension Order, the Commission provided a two year exemption, 
until November 1, 2017. At that time, the Commission stated its belief 
that ``two years will give the Commission enough time to evaluate 
future developments, including any investment in or progress on a 
CAT.'' Further, FIF and SIFMA now have requested a permanent exemption, 
or alternatively a three or five year deferment of the compliance date 
for Phase Three.\54\ The Commission believes at this time that an 
extension to November 15, 2018 responds to requests from FIF and SIFMA 
to extend the Phase Three compliance date, but having a short exemption 
instead will allow broker-dealers to focus on implementing the CAT in 
the near term and will allow the Commission to revisit the 
implementation of Phase Three as it evaluates future developments 
during this period, including progress in implementing the CAT.\55\ 
During that time, the Commission will consider progress in implementing 
the CAT as it determines implementation of Phase Three.
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    \50\ This order does not affect Rule 13h-1 requirements 
implemented in Phases One and Two.
    \51\ See Rule 613(c)(7)(v)(C) (requiring, for an order executed 
in whole or in part, ``[t]ime of execution''). See also CAT NMS 
Plan, supra note 8, at Section 6.3(d)(v).
    \52\ See CAT NMS Plan Order, supra note 8, 81 FR at 84777 
(citations omitted); and CAT NMS Plan, supra note 8, at Section 
6.4(d)(ii)(A)(1) (concerning Allocation Reports).
    \53\ See Phase Three Extension Order at note 62 (citing Letter 
from Mary Lou VonKaenel, Managing Director, FIF, to Stephen 
Luparello, Director, Division, Commission, dated March 27, 2015, 
available at https://www.sec.gov/comments/s7-10-10/s71010.shtml and 
Letter from Theodore R. Lazo, Managing Director and Associate 
General Counsel, SIFMA to Stephen Luparello, Director, Division, 
Commission, dated April 9, 2015, available at https://www.sec.gov/comments/s7-10-10/s71010.shtml).
    \54\ See supra note 7 (citing to the SIFMA and FIF letters).
    \55\ The Commission notes that November 15, 2018 currently is 
the date by which large industry SRO members are required to begin 
reporting to the CAT central repository. See CAT NMS Plan Order, 
supra note 8, at Ex. A, Sec. 6.7(a)(v), 81 FR at 84963.
---------------------------------------------------------------------------

    Accordingly, the Commission finds that it is consistent with the 
purposes of the Exchange Act to extend the compliance date for Phase 
Three by temporarily exempting broker-dealers until November 15, 2018 
from compliance with specified provisions of the Rule. Thus, the 
Recordkeeping and Reporting Responsibilities under Rule 13h-1 will 
continue to apply with respect to: (1) The clearing broker-dealer for a 
large trader, with respect to (a) proprietary transactions by a large 
trader broker-dealer; (b) transactions effected pursuant to a 
``sponsored access'' arrangement; and (c) transactions effected 
pursuant to a ``direct market access'' arrangement; and (2) broker-
dealers that carry an account for a large trader for Transaction Data 
other than execution time.

IV. Conclusion

    It is hereby ordered, pursuant to Section 13(h)(6) of the Exchange 
Act and Rule 13h-1(g) thereunder, that broker-dealers are exempted 
temporarily until November 15, 2018 from the recordkeeping and 
reporting requirements of Rule 13h-1(d) and (e) except for: (1) 
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, 
and (c) transactions effected pursuant to a ``direct market access'' 
arrangement; and, for other types of transactions, (2) broker-dealers 
that carry an account for a large trader for Transaction Data other 
than execution time.

    By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2017-24056 Filed 11-3-17; 8:45 am]
BILLING CODE 8011-01-P

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