Large Trader Reporting Final

8/4/2019 Large Trader Reporting Final

1/48

VerDate Mar2010 17:10 Aug 02, 2011 Jkt 223001 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 E:\FR\FM\03AUR2.SGM 03AUR2

46960 Federal Register / Vol. 76, No. 149 / Wednesday, August 3, 2011 / Rules and Regulations

SECURITIES AND EXCHANGECOMMISSION

17 CFR PARTS 240 and 249

[Release No. 3464976; File No. S71010]

RIN 3235AK55

Large Trader Reporting

AGENCY: Securities and ExchangeCommission.

ACTION: Final rule.

SUMMARY: The Securities and ExchangeCommission (Commission) isadopting new Rule 13h1 and Form 13Hunder Section 13(h) of the SecuritiesExchange Act of 1934 (Exchange Act)to assist the Commission in bothidentifying, and obtaining tradinginformation on, market participants thatconduct a substantial amount of tradingactivity, as measured by volume ormarket value, in the U.S. securities

markets. Rule 13h1 will require alarge trader, defined as a personwhose transactions in NMS securitiesequal or exceed 2 million shares or $20million during any calendar day, or 20million shares or $200 million duringany calendar month, to identify itself tothe Commission and make certaindisclosures to the Commission on Form13H. Upon receipt of Form 13H, theCommission will assign to each largetrader an identification number that willuniquely and uniformly identify thetrader, which the large trader must thenprovide to its registered broker-dealers.

Such registered broker-dealers will thenbe required to maintain records of twoadditional data elements in connectionwith transactions effected throughaccounts of such large traders (the largetrader identification number, and thetime transactions in the account areexecuted). In addition, the Commissionis requiring that such broker-dealersreport large trader transactioninformation to the Commission uponrequest through the Electronic BlueSheets systems currently used by

broker-dealers for reporting tradeinformation. Finally, certain registered

broker-dealers subject to the Rule willbe required to perform limitedmonitoring of their customers accountsfor activity that may trigger the largetrader identification requirements ofRule 13h1.

The large trader reportingrequirements are designed to providethe Commission with a valuable sourceof useful data to support itsinvestigative and enforcement activities,as well as facilitate the Commissionsability to assess the impact of largetrader activity on the securities markets,

to reconstruct trading activity followingperiods of unusual market volatility,and to analyze significant market eventsfor regulatory purposes.DATES: Effective Date: October 3, 2011.

Compliance Dates: December 1, 2011for the requirement on large traders toidentify to the Commission pursuant toRule 13h1(b). April 30, 2012 for

broker-dealers to maintain records,report, and monitor large trader activitypursuant to Rule 13h1(d), (e), and (f).FOR FURTHER INFORMATION CONTACT:Richard R. Holley III, Assistant Director,at (202) 5515614, Christopher W.Chow, Special Counsel, at (202) 5515622, Gary M. Rubin, Attorney, at (202)5515669, or Kathleen Gray, Attorney,at (202) 5515305, Division of Tradingand Markets, Securities and ExchangeCommission, 100 F Street, NE.,Washington, DC 205497010.SUPPLEMENTARY INFORMATION

Table of ContentsI. IntroductionII. Background

A. The Market Reform ActB. Rule 17a25 and the Enhanced EBS

System C. The Need for Large Trader ReportingD. Relation to Consolidated Audit Trail

ProposalIII. Description of Adopted Rule and Form

A. Large Traders1. Large Trader Statusa. Who should register as a large trader?i. Persons Who Exercise Investment

Discretion ii. Parent Company Level Registration(a) Use of LTID Suffixes

(b) Control and Minority-Owned Entitiesb. Identifying Activity Levelc. Voluntary Registration2. Duties of a Large Tradera. File Form 13H with the Commissioni. Initial filingswho must file?ii. Annual Filingsiii. Amended Filingsiv. Inactive Statusv. Reactivated Statusvi. Termination Filings

b. Self-Identification to Broker-Dealers3. Overview of Form 13Ha. Item 1

b. Item 2c. Item 3d. Item 4

e. Item 5f. Item 6g. ConfidentialityB. Broker-Dealers: Recordkeeping,

Reporting, and Monitoring 1. Recordkeeping Requirements2. Reporting Requirements3. Monitoring RequirementsC. Foreign EntitiesD. Three Specific Factors Considered by

the Commission Pursuant to Section13(h) of the Exchange Act

1. Existing Reporting Systems2. Costs Associated With Maintaining and

Reporting Large Trader Transaction Data

3. Relationship Between U.S. and International Securities Markets

E. Implementation and Compliance Dates,Exemptive Authority

IV. Paperwork Reduction ActA. Summary of Collection of InformationB. Use of InformationC. Respondents1. Number of Large Traders2. Number of Broker-Dealers Affected

D. Total Initial and Annual Burdens1. Burden on Large Tradersa. Duties of Large Traders

b. Initial and Annual Burdens2. Burden on Registered Broker-Dealersa. Recordkeeping

b. Reportingc. Monitoringd. Total BurdenE. Collection of Information is MandatoryF. ConfidentialityG. Record Retention Period

V. Consideration of Costs and BenefitsA. BenefitsB. Costs1. Large Traders2. Registered Broker-Dealers

a. Recordkeepingb. Reportingc. Monitoring

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

A. CompetitionB. Capital FormationC. Efficiency

VII. Regulatory Flexibility Act CertificationVIII. Statutory AuthorityIX. Text of the Amendments

I. Introduction

The Commissions ability to analyzemarket movements and investigate thecauses of market events in an

expeditious manner, as well asefficiently conduct investigations ofregulated entities and bring andprosecute enforcement matters, isinfluenced greatly by its ability topromptly and efficiently identifysignificant market participants acrossequities and options markets and collectuniform data on their trading activity.Though the large trader rule wasproposed before the market events ofMay 6, 2010, that incident hasemphasized the importance ofenhancing the Commissions ability toquickly and accurately analyze and

investigate major market events, and hashighlighted the need for an efficient andeffective mechanism for gathering dataon the most active market participants.1

1On May 6, 2010, the prices of many U.S.-basedequity products experienced an extraordinarilyrapid decline and recovery. See Findings Regardingthe Market Events of May 6, 2010, Report of theStaffs of the CFTC and SEC to the Joint AdvisoryCommittee on Emerging Regulatory Issues athttp://www.sec.gov/news/studies/2010/marketevents-report.pdf. See also PreliminaryFindings Regarding the Market Events of May 6,2010, Report of the Staffs of the CFTC and SEC tothe Joint Advisory Committee on Emerging
http://www.sec.gov/news/studies/2010/marketevents-report.pdfhttp://www.sec.gov/news/studies/2010/marketevents-report.pdfhttp://www.sec.gov/news/studies/2010/marketevents-report.pdfhttp://www.sec.gov/news/studies/2010/marketevents-report.pdf


2/48


Federal Register / Vol. 76, No. 149 / Wednesday, August 3, 2011 / Rules and Regulations 46961

The large trader reporting requirementsthat the Commission is now adoptingwill enhance, in the near term, theCommissions ability to identify, andcollect information on the tradingactivity of, the most significantparticipants in the U.S. markets.2

On April 23, 2010, Proposed Rule13h1 was published for public

comment in the Federal Register.3 TheCommission received 87 commentletters on the proposal from investmentadvisers, broker-dealers, institutionaland individual investors, industry tradegroups, and other market participants.4

Commenters generally supported thegoals of the proposal. As furtherdiscussed below, however, somecommenters expressed concern aboutcertain aspects of the proposal andrecommended that the proposal beamended or clarified in certain respects.Some commenters also expressedconcern with the proposed rule in light

of the separate proposal to establish aconsolidated audit trail.5

After careful review andconsideration of the comment letters,the Commission is adopting Rule 13h1 (the Rule) and Form 13H (theForm) with certain modifications,discussed below, to address concernsexpressed by some commenters.

II. Background

The Commission is in the process ofconducting a broad and critical look atU.S. market structure in light of therapid development in tradingtechnology and strategies. The

Commission has proposed severalrulemakings, including this rulemaking,to address potential discrete issues inthe current market structure.6 In

Regulatory Issues athttp://www.sec.gov/sec-cftc-prelimreport.pdf.

2Longer term, the Commission expects theconsolidated audit trail proposal, if adopted, tofurther enhance access by the Commission and self-regulatory organizations to order and trade datafrom all market participants. See SecuritiesExchange Act Release No. 62174 (May 26, 2010), 75FR 32556 (June 8, 2010) (proposed ConsolidatedAudit Trail) (File No. S71110) (CAT Proposal).As discussed further below, the aspects of the largetrader reporting rule that enable the collection ofinformation on the identity of large traders,

including a large trader identification number,would not be replicated or superseded by theconsolidated audit trail and would remain as a keytool in the Commissions oversight of the marketsfor the long term.

3See Securities Exchange Act Release No. 61908(April 14, 2010), 75 FR 21456 (April 23, 2010) (FileNo. S71010) (Proposing Release).

4Copies of comments received on the proposalare available on the Commissions Web site athttp://www.sec.gov/comments/s7-10-10/s71010.shtml.

5See CAT Proposal, supra note 2.6See, e.g., Securities Exchange Act Release Nos.

60684 (September 18, 2009), 74 FR 48632(September 23, 2009) (proposal to eliminate flash

addition, last year the Commissionpublished a concept release on equitymarket structure designed to further theCommissions broad review of whetherits rules have kept pace with, amongother things, changes in tradingtechnology and practices.7

The Commissions ongoing review of

market structure comes at a time whenU.S. securities markets are experiencinga dynamic transformation, reflecting adecades-long evolution from a marketstructure with primarily manual tradingto a market structure with primarilyautomated trading. Electronic tradingallows ever-increasing volumes ofsecurities transactions to take placeacross an expanding multitude oftrading systems that together constitutethe U.S. national market system.Competition among markets hasfacilitated the ability of largeinstitutional and other professional

market participants to employsophisticated trading methods to tradeelectronically on multiple venuessimultaneously in huge volumes withgreat speed.8

Given the dramatic changes to thesecurities markets, the Commission

believes it is appropriate to exercise itsauthority under Section 13(h) of the

order exception from Rule 602 of Regulation NMS)(File No. S72109); 60997 (November 13, 2009), 74FR 61208 (November 23, 2009) (proposal to regulatenon-public trading interest) (File No. S72709);63241 (November 3, 2010), 75 FR 69792 (November15, 2010) (File No. S70310) (adopting Rule 15c3

5 under the Exchange Act addressing riskmanagement controls for brokers or dealers withmarket access); and CAT Proposal, supra note 2.

7See Securities Exchange Act Release No. 61358(January 14, 2010), 75 FR 3594 (January 21, 2010)(File No. S70210).

8Market analysts have offered a wide range ofestimates for the level of activity attributable to onecategory of large tradershigh frequency tradersbut these estimates typically exceed 50% of totalvolume. See, e.g., Preliminary Findings Regardingthe Market Events of May 6, 2010, Report of theStaffs of the CFTC and SEC to the Joint AdvisoryCommittee on Emerging Regulatory Issues, May 18,2010, at Appendix A11 (Estimates of HFT volumein the equity markets vary widely, though theyoften are 50 percent of total volume or higher.).See also, e.g., Scott Patterson and Goeffrey Rogow,Whats Behind High-Frequency Trading, Wall Street

Journal, August 1, 2009 (High frequency tradingnow accounts for more than half of all stock-tradingvolume in the U.S.); and Rob Iati, The Real Storyof Trading Software Espionage, Advanced Trading,July 10, 2009, available athttp://advancedtrading.com/algorithms/showArticle.jhtml?articleID=218401501(highfrequency trading accounts for 73% of U.S. equitytrading volume). One source estimates that, fiveyears ago, that number was less than 25%. See RobCurran & Geoffrey Rogow, Rise of the (Market)Machines, Wall Street Journal, June 19, 2009,available athttp://blogs.wsj.com/marketbeat/2009/06/19/rise-of-the-market-machines/.The trend isclear that high frequency traders now play anincreasingly prominent role in the securitiesmarkets.

Exchange Act 9 to establish large traderreporting requirements. Large traderreporting requirements will provide theCommission with a valuable source ofuseful data that will greatly enhance theCommissions ability to identify largemarket participants, and collect andanalyze information on their tradingactivity.

Currently, to support its regulatoryand enforcement activities, theCommission collects transaction datafrom registered broker-dealers throughthe Electronic Blue Sheets (EBS)system.10The EBS system generally isused to analyze trading in a smallsample of securities over a limitedperiod of time.11 However, the EBSsystem lacks two important dataelements that limit its usefulness whenreconstructing market activity: Time ofexecution for the order and a uniformidentifier to identify the participant thateffected the trade.12In addition, EBS

does not require, as is contemplated bythe large trader reporting systemoutlined by Section 13(h)(2) of theExchange Act,13 that transaction data beavailable on a next-day basis, which candelay the Commissions ability topromptly collect and begin to analyzetransaction data following a marketevent. The Commissions adoptiontoday of Rule 13h1 and Form 13H isdesigned to address certain of theselimitations of EBS.

A. The Market Reform Act

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

915 U.S.C. 78m(h), as adopted by the MarketReform Act of 1990 (Market Reform Act), PL 101432 (HR 3657), October 16, 1990.

10See 17 CFR 240.17a25 (Electronic Submissionof Securities Transaction Information by ExchangeMembers, Brokers, and Dealers).

11The difficulties in collecting trading data foranalysis are reflected in the Commissionspreliminary report on the events of May 6, 2010.See Preliminary Findings Regarding the MarketEvents of May 6, 2010, Report of the Staffs of theCFTC and SEC to the Joint Advisory Committee onEmerging Regulatory Issues, May 18, 2010, at 1(The reconstruction of even a few hours of tradingduring an extremely active trading day in marketsas broad and complex as oursinvolving thousandsof products, millions of trades and hundreds ofmillions of data pointsis an enormousundertaking. Although trading now occurs inmicroseconds, the framework and processes forcreating, formatting, and collecting data acrossvarious types of market participants, products andtrading venues is neither standardized nor fullyautomated. Once collected, this data must becarefully validated and analyzed.)

12The shortcomings of the EBS system werenoted by the Senate Committee on Banking,Housing and Urban Affairs in the Senate Reportaccompanying the Market Reform Act of 1990. SeeSenate Report, infra note 14, at 48.

13See 15 U.S.C. 78m(h)(2) (* * * records shallbe available for reporting to the Commission * * *on the morning of the day following the day thetransactions were effected * * *.).
http://www.sec.gov/sec-cftc-prelimreport.pdfhttp://www.sec.gov/comments/s7-10-10/s71010.shtmlhttp://www.sec.gov/comments/s7-10-10/s71010.shtmlhttp://advancedtrading.com/algorithms/showArticle.jhtml?articleID=218401501http://advancedtrading.com/algorithms/showArticle.jhtml?articleID=218401501http://advancedtrading.com/algorithms/showArticle.jhtml?articleID=218401501http://blogs.wsj.com/marketbeat/2009/06/19/rise-of-the-market-machines/http://blogs.wsj.com/marketbeat/2009/06/19/rise-of-the-market-machines/http:///reader/full/system.10http:///reader/full/system.10http:///reader/full/trade.12http:///reader/full/trade.12http:///reader/full/system.10http:///reader/full/trade.12http://www.sec.gov/sec-cftc-prelimreport.pdfhttp://www.sec.gov/comments/s7-10-10/s71010.shtmlhttp://www.sec.gov/comments/s7-10-10/s71010.shtmlhttp://blogs.wsj.com/marketbeat/2009/06/19/rise-of-the-market-machines/http://blogs.wsj.com/marketbeat/2009/06/19/rise-of-the-market-machines/http://advancedtrading.com/algorithms/showArticle.jhtml?articleID=218401501http://advancedtrading.com/algorithms/showArticle.jhtml?articleID=218401501http://advancedtrading.com/algorithms/showArticle.jhtml?articleID=218401501


3/48



October 1989, Congress recognized thatthe Commissions ability to analyze thecauses of a market crisis was impeded

by its lack of authority to gather tradinginformation.14To address this concern,Congress passed the Market Reform Act,which, among other things, amendedSection 13 of the Exchange Act to addnew subsection (h), authorizing the

Commission to establish a large traderreporting system under such rules andregulations as the Commission mayprescribe.15

The Market Reform Act authorizes theCommission to require large traders toself-identify to the Commission.16Inaddition, the Market Reform Actauthorizes the Commission to collectfrom registered brokers or dealersinformation on the trading activity oflarge traders.17In particular, theCommission is authorized to requireevery registered broker or dealer tomake and keep records with respect to

securities transactions of large tradersthat equal or exceed a certain reportingactivity level and report suchtransactions upon request of theCommission.18

14The legislative history accompanying theMarket Reform Act also noted the Commissionslimited ability to analyze the causes of the marketdeclines of October 1987 and 1989. See generallySenate Comm. on Banking, Housing, and UrbanAffairs, Report to accompany the Market ReformAct of 1990, S. Rep. No. 300, 101st Cong. 2d Sess.(May 22, 1990) (reporting S. 648) (Senate Report)and House Comm. on Energy and Commerce,Report to accompany the Securities Market ReformAct of 1990, H.R. Rep. No. 524, 101st Cong. 2d Sess.(June 5, 1990) (reporting H.R. 3657) (House

Report).15See Market Reform Act, supra note 9.16Section 13(h) of the Exchange Act defines a

large trader as every person who, for his ownor an account for which he exercises investmentdiscretion, effects transactions for the purchase orsale of any publicly traded security or securities byuse of any means or instrumentality of interstatecommerce or of the mails, or of any facility of anational securities exchange, directly or indirectlyby or through a registered broker or dealer in anaggregate amount equal to or in excess of theidentifying activity level. See 15 U.S.C.78m(h)(8)(A). The term identifying activity levelis defined in Section 13(h) as transactions inpublicly traded securities at or above a level ofvolume, fair market value, or exercise value as shallbe fixed from time to time by the Commission byrule or regulation, specifying the time interval

during which such transactions shall beaggregated. See 15 U.S.C. 78m(h)(8)(C). Theidentifying activity level is set forth in paragraph(a)(7) of new Rule 13h1.

17See Senate Report, supra note 14, at 4, 44, and71. In this respect, though self-regulatoryorganization (SRO) audit trails provide a time-sequenced report of broker-dealer transactions,those audit trails do not identify the large trader ina uniform manner on an inter-market basis.Accordingly, the Commission is not presently ableto utilize existing SRO audit trail data toaccomplish the objectives of the Market Reform Act.

18See 15 U.S.C. 78m(h)(2). Section 13(h) alsoprovides the Commission with authority todetermine the manner in which transactions andaccounts should be aggregated, including

B. Rule 17a25 and the Enhanced EBSSystem

In 2001, the Commission adoptedRule 17a25 to enhance the EBS systemand facilitate the Commissions abilityto collect electronic transaction data tosupport its investigative andenforcement activities.19Rule 17a25enhanced the EBS system in threeprimary areas. First, it requires broker-dealers to submit to the Commissionsecurities transaction informationresponsive to a Blue Sheets request inelectronic format.20Second, the rule

aggregation on the basis of common ownership orcontrol. See 15 U.S.C. 78m(h)(3). The termreporting activity level is defined in Section13(h)(8)(D) of the Exchange Act to meantransactions in publicly traded securities at orabove a level of volume, fair market value, orexercise value as shall be fixed from time to timeby the Commission by rule, regulation, or order,specifying the time interval during which suchtransactions shall be aggregated. See 15 U.S.C.78m(h)(8)(D). The reporting activity level is set

forth in paragraph (a)(8) of new Rule 13h1.19See Securities Exchange Act Release No. 44494(June 29, 2001), 66 FR 35836 (July 9, 2001) (S71200) (final rulemaking) (Rule 17a25 Release); and42741 (May 2, 2000), 65 FR 26534 (May 8, 2000)(proposed rulemaking) (Rule 17a25 ProposingRelease). In the late 1980s, the Commission andthe SROs worked together to develop andimplement a system with a uniform electronicformat, commonly known as the EBS system, toreplace the process by which the Commissionwould request and collect securities trading recordsfrom broker-dealers through mailed questionnaires(known as blue sheets). See Rule 17a25Proposing Release, 65 FR at 2653435.

In the 1990s, the Commission twice proposed touse its authority under Section 13(h) of theExchange Act to establish a large trader reportingsystem; neither system was adopted. In 1991, the

Commission proposed a large trader reportingsystem that would have required large traders todisclose to the Commission their accounts andaffiliations, and would have imposed recordkeepingand reporting requirements on broker-dealers withrespect to the activity of their large tradercustomers. See Securities Exchange Act Release No.29593 (August 22, 1991), 56 FR 42550 (August 28,1991) (S72491) (1991 Proposal). The 1991proposal included an identifying activity level,the triggering level at which large traders would berequired to identify themselves to the Commission,of aggregate transactions during any 24-hour periodthat equals or exceeds either 100,000 shares or fairmarket value of $4,000,000, or any transactions thatconstitute program trading. See 1991 Proposal, 56FR at 42551. Commenters expressed concerns aboutthe initial proposal, including about the definitionof large trader, the identifying activity level, the

duty to supervise compliance, its costs, as well asvarious technical aspects of reporting. SeeSecurities Exchange Act Release No. 33608(February 9, 1994), 59 FR 7917 (February 17, 1994)(S72491) (1994 Reproposal). In 1994, theCommission again proposed a large trader reportingsystem which, among other things, included anincreased identifying activity level of aggregatetransactions in publicly traded securities effectedduring a calendar day where the account is locatedthat are equal to or greater than the lesser of 200,000shares and fair market value of $2,000,000 or fairmarket value of $10,000,000. See 1994 Reproposal.

20See 17 CFR 240.17a25. Rule 17a25 requiressubmission of the same standard customer andproprietary transaction information that SROsrequest in connection with their market

modified the EBS system to take intoaccount evolving trading strategies usedprimarily by institutional andprofessional traders. Specifically, therule requires broker-dealers to supplythree additional data elements (beyondwhat was required under Exchange ActRules 17a3 and 17a4)namely, prime

brokerage identifiers,21 average priceaccount identifiers,22 and depositoryinstitution identifiers 23to assist theCommission in aggregating securitiestransactions by entities trading throughmultiple accounts at more than one

broker-dealer.24Finally, the rulerequires broker-dealers to update theircontact person information to providethe Commission with up-to-dateinformation necessary for the

surveillance and enforcement inquiries. For aproprietary transaction, the broker-dealer mustinclude the following information: (1) Clearinghouse number or alpha symbol used by the broker-

dealer submitting the information; (2) clearinghouse number(s) or alpha symbol(s) of the broker-dealer(s) on the opposite side to the trade; (3)identifying symbol assigned to the security; (4) datetransaction was executed; (5) number of shares, orquantity of bonds or options contracts, for eachspecific transaction; whether each transaction wasa purchase, sale, or short sale; and, if an optionscontract, whether open long or short or close longor short; (6) transaction price; (7) account number;(8) identity of the exchange or market where eachtransaction was executed; (9) prime brokeridentifier; (10) average price account identifier; and(11) the identifier assigned to the account by adepository institution. For customer transactions,the broker-dealer also is required to include thecustomers name, customers tax identificationnumber, customers address(es), branch officenumber, registered representative number, whether

the order was solicited or unsolicited, and the datethe account was opened. If the transaction waseffected for a customer of another member, broker,or dealer, the broker-dealer must includeinformation on whether the other party was actingas principal or agent on the transaction.

21The Commission requires prime brokerageidentifiers to avoid double-counting of transactionswhere EBS submissions reflect the same trade byboth the executing broker-dealer and the broker-dealer acting as the prime broker. See Rule 17a25Release, supra note 19, 66 FR at 35838.

22Some broker-dealers use average priceaccounts as a mechanism to buy or sell largeamounts of a given security for their customers.Under this arrangement, a broker-dealers averageprice account may buy or sell a security in smallincrements throughout a trading session and thentransfer the accumulated long or short position toone or more accounts for an average price orvolume-weighted average price after the marketclose. Similar to prime brokerage identifiers, theCommission requires average price accountidentifiers to avoid double-counting where the EBSsubmission reflects the same transaction for boththe firms average price account and the accountsreceiving positions from the average price account.See Rule 17a25 Release, supra note 19, 66 FR at3583839.

23The inclusion of a depository identifier in EBSreports was designed to expedite the Commissionsefforts to aggregate trading when conductingcomplex trading reconstructions. See Rule 17a25Release, supra note 19, 66 FR at 35839.

24See 17 CFR 240.17a25(b).
http:///reader/full/information.14http:///reader/full/information.14http:///reader/full/prescribe.15http:///reader/full/prescribe.15http:///reader/full/Commission.16http:///reader/full/Commission.16http:///reader/full/traders.17http:///reader/full/traders.17http:///reader/full/Commission.18http:///reader/full/Commission.18http:///reader/full/activities.19http:///reader/full/activities.19http:///reader/full/format.20http:///reader/full/format.20http:///reader/full/broker-dealer.24http:///reader/full/broker-dealer.24http:///reader/full/information.14http:///reader/full/prescribe.15http:///reader/full/Commission.16http:///reader/full/traders.17http:///reader/full/Commission.18http:///reader/full/activities.19http:///reader/full/format.20http:///reader/full/broker-dealer.24


4/48



Commission to direct EBS requests tothe appropriate staff.25

C. The Need for Large Trader Reporting

While Rule 17a25 enhanced theCommissions EBS system andimproved the Commissions ability toobtain electronic transaction records, itis insufficient to accomplish the

objectives of Section 13(h) of theExchange Act and is inadequate withrespect to the Commissions efforts tomonitor the impact of large traderactivity on the securities markets.26Thelimitations of the current EBS systemalso inhibit the usefulness of EBS datain the conduct of the Commissionsinvestigative and enforcement activities.

Most importantly, the data gatheredby the EBS system does not includeinformation on the time of the trade orthe identity of the trader.27While theCommission may be able to use price asa proxy for execution time whenreconstructing trading history in aparticular security when, in limitedcases, the trading therein ischaracterized by a generallyunidirectional trend in price, suchanalysis does not necessarily produceaccurate results, is resource intensive,and hinders the Commissions ability topromptly analyze data.28 Further,information to identify each large traderin a uniform manner across markets isnecessary to permit the Commission tofully track and analyze large traderactivity, especially with respect to largetraders that trade through multipleaccounts at multiple broker-dealers or

trade using direct market accessarrangements.29

The Commission believes that theRule is necessary because, as noted

25This provision was designed to address therecurring problem of frequent staff turnover and re-organizations at broker-dealers to ensure theCommission directs EBS requests to the appropriatepersonnel. See Rule 17a25 Release, supra note 19,66 FR at 35839.

26See 15 U.S.C. 78m(h)(1).27As noted above, the Commission has proposed

to establish a consolidated audit trail for equitiesand options that would collect and consolidatedetailed information about orders entered andtrades executed on any exchange or in the over-the-counter market. See CAT Proposal, supra note 2.The large trader reporting requirements we areadopting today are designed to address the near-term need for access to more information aboutlarge traders and their activities.

28 In addition, Rule 17a25 does not require EBSdata to be available for reporting to the Commissionon a next-day basis, and therefore the Commissionmay face delays when obtaining transaction data.

29The Commission has separately adopted a rulethat addresses direct market access to exchangesand alternative trading systems (ATSs). SeeSecurities and Exchange Act Release Nos. 63241(November 3, 2010), 75 FR 69792 (November 15,2010) (File No. S70310) (final rule) and 61379(January 26, 2010), 75 FR 4713 (January 29, 2010)(proposed rule).

above, large traders appear to be playingan increasingly prominent role in thesecurities markets. For example, marketobservers have offered a wide range ofestimates for the percent of overallvolume attributable to one potentialsubcategory of large traderhighfrequency traderswhich is typicallyestimated at 50% or higher of total

volume.30The large trader reportingrequirements will provide theCommission a mechanism for obtainingthe information necessary to reliablyidentify the most significant of thesemarket participants and promptly andefficiently obtain information on theirtrading on a market-wide basis.

As the events of May 6, 2010demonstrated, the reconstruction oftrading activity during an extremelyactive trading day in our high-speed,diverse, and complex markets caninvolve an enormous undertaking tocollect uniform data and analyze

thousands of products, millions oftrades, and hundreds of millions (andperhaps even billions) of data points.31

While the large trader reportingrequirements will not be a panacea forthe challenges facing the Commission inits oversight of the markets, it representsan important enhancement to theCommissions capabilities to uniformlyidentify large traders and quickly obtaininformation on their trading activity ina manner that can be implementedexpeditiously by leveraging an existingreporting system.

This release first gives a generaldescription of Rule 13h1 as adopted

and then discusses the specificprovisions of the Rule and theaccompanying Form 13H on which largetraders will self-identify to theCommission. It then discusses therecordkeeping, reporting, andmonitoring responsibilities applicable toregistered broker-dealers under theRule. The release highlights variouscomments received and outlines themodifications made to the Rule andForm 13H from the Proposing Release inlight of these comments.

D. Relation to Consolidated Audit TrailProposal

Separately from this rulemaking, theCommission has also proposed toestablish a consolidated audit trail forequities and options that would capturecustomer and order event informationfor most orders in NMS securities acrossall markets, from time of order inception

30See supra note 8 (discussing analyst estimatesof high frequency trader activity).

31See supra note 11 (citing from the Report of theStaffs of the CFTC and SEC to the Joint AdvisoryCommittee on Emerging Regulatory Issues, May 18,2010).

through routing, cancellation,modification, or execution.32For thereasons described below, the largetrader requirements adopted today,while important, are much more limitedin terms of their scope, objectives, andimplementation burden than theconsolidated audit trail system that isstill under consideration by the

Commission.The recordkeeping and reporting

provisions of Rule 13h1 are basedsubstantially on existing Rule 17a25and the Commissions current EBSsystem, and therefore can beimplemented more expeditiously and atless cost than the consolidated audittrail proposal. In particular, the largetrader reporting requirements wouldinvolve an enhancement to the existingEBS system for broker-dealers to addtwo new data fields (i.e., LTID andexecution time of the trade) and requirethat transaction records be available for

reporting on a next-day basis. Inaddition, the large trader reportingrequirements would involve a new web-

based form (Form 13H) that large traderswould file and update to identifythemselves to the Commission.Accordingly, through relatively modeststeps, the large trader reportingrequirements will address theCommissions near-term need for accessto more information about large tradersand their trading activities and begin toimprove the Commissions ability toanalyze such information. In contrast,the consolidated audit trail, if adopted,would require the development over a

longer time frame of significanttechnology systems to collect andconsolidate more extensive informationregarding orders, trades, and customersin a uniform manner across all marketsand other execution venues.

In addition, key aspects of the largetrader reporting requirements adoptedtoday are not addressed by, and wouldcontinue to be necessary upon anyadoption of, a consolidated audit trail.In particular, Rule 13h1 requires largetraders to self-identify to theCommission by filing Form 13H, obtaina unique LTID, and provide that LTID

to their broker-dealers. As noted above,this requirement will assist theCommission in efficiently identifyingand obtaining trading and otherinformation on market participants thatconduct a substantial amount of tradingactivity. Further, these requirements arecompatible with, rather than duplicativeof, the Commissions proposedconsolidated audit trail. Indeed, byincorporating the LTID information intothe data elements that would be

32See CAT Proposal, supra note 2.
http:///reader/full/staff.25http:///reader/full/staff.25http:///reader/full/markets.26http:///reader/full/markets.26http:///reader/full/trader.27http:///reader/full/trader.27http:///reader/full/arrangements.29http:///reader/full/arrangements.29http:///reader/full/volume.30http:///reader/full/volume.30http:///reader/full/points.31http:///reader/full/points.31http:///reader/full/execution.32http:///reader/full/execution.32http:///reader/full/staff.25http:///reader/full/markets.26http:///reader/full/trader.27http:///reader/full/arrangements.29http:///reader/full/volume.30http:///reader/full/points.31http:///reader/full/execution.32


5/48



reported through the consolidated audittrail, the large trader requirementsadopted today will ultimately enrich thedata that would be available forregulatory purposes through theproposed consolidated audit trailsystem.

The Commission recognizes the

concerns of some commenters thatunnecessary overlap or duplicationbetween large trader reportingrequirements and a consolidated audittrail could result in additional costs andother burdens for market participants.33

Although for the reasons describedabove the Commission believes thatadoption of the large trader rule isappropriate at this time, it expects totake these concerns into account inconsidering the scope and requirementsof any consolidated audit trail.

III. Description of Adopted Rule and

FormThe large trader reporting

requirements have two primarycomponents: (1) Registration of largetraders with the Commission; and (2)recordkeeping, reporting, andmonitoring duties imposed on registered

broker-dealers that service large tradercustomers. First, large traders mustregister with the Commission by filingand periodically updating Form 13H onwhich they will provide contactinformation and report generalinformation concerning their business,

regulatory status, affiliates, governance,and broker-dealers. Upon receipt of aninitial Form 13H, the Commission willassign and issue to a large trader aunique LTID. The large trader mustdisclose its LTID to all of its broker-dealers and must highlight to each such

broker-dealer all accounts to which theLTID applies. Second, registered broker-dealers must: (1) Maintain specifiedrecords of transactions effected by orthrough accounts of large traders as wellas Unidentified Large Traders; 34 (2)electronically report all transactions bysuch persons to the Commission upon

request utilizing the existing EBSinfrastructure; and (3) perform a limitedmonitoring function to promoteawareness of and foster compliancewith the Rule. The specificrequirements applicable to large tradersand registered broker-dealers arediscussed in detail below.

33See, e.g., Managed Funds Association Letterand Wellington Management Letter.

34See new Rule 13h1(a)(9) (defining the termUnidentified Large Trader) and discussion infraat Section III.B.

A. Large Traders

1. Large Trader Status

Rule 13h1(a)(1) defines a largetrader as any person that: (i) Directlyor indirectly, including through otherpersons controlled by such person,exercises investment discretion over oneor more accounts and effects

transactions for the purchase or sale ofany NMS security for or on behalf ofsuch accounts, by or through one ormore registered broker-dealers, in anaggregate amount equal to or greaterthan the identifying activity level; or (ii)voluntarily registers as a large trader byfiling electronically with theCommission Form 13H. This definitionis substantially the same as theproposed definition of the term but, asdiscussed below, takes into accountcomments received on that proposeddefinition.

a. Who should register as a large trader?

The definition of large trader isdesigned to focus on the ultimate parentcompany of an entity or entities thatemploy or otherwise control theindividuals that exercise investmentdiscretion. Accordingly, the definitionof large trader, in conjunction with theprovision that allows the parentcompany to comply with the self-identification requirement on behalf ofits subsidiaries,35 is intended to allowthe Commission to gather informationabout the primary institutions thatconduct a large trading business whileat the same time mitigating the burdenof the Rule by focusing the filingrequirement on persons and entities thatcontrol large traders.

The Commission received severalcomments relating to the proposedscope of the term large trader.36Thevarious components of the definition oflarge trader, and the comments receivedabout them, are discussed below. Inaddition, one commenter questionedwhether the Rule would violate theFourth and Fifth Amendments of theU.S. Constitution.37The Commission

believes that the Rule does not infringeupon these rights.38

35The rule, however, also permits compliance bya controlled person. See new Rule 13h1(b)(3)(ii),which is discussed infra at Section III.A.2.a.0.

36See, e.g., SIFMA Letter at 7; American BenefitsCouncil Letter at 23; and Financial Engines Letterat 24.

37See Harris Letter.38The United States Court of Appeals for the

District of Columbia Circuit has found thatdisclosure to the Commission does not constitute aregulatory taking. See Full Value Advisors LLCv.SEC, 633 F.3d 1101, 2011 WL 339210 (DC Cir.February 4, 2011). The Commission believes thatthe same reasoning applies in the case of Rule 13h1. The Commission also, to the extent permissible

i. Persons Who Exercise InvestmentDiscretion

A large trader is any person thatdirectly or indirectly, includingthrough other persons controlled bysuch person, exercises investmentdiscretion over one or more accounts* * * 39 Rule 13h1(a)(4) provides thatthe term investment discretion hasthe same meaning as in Section3(a)(35) of the Securities Exchange Actof 1934. One commenter objected tothis definition, asserting that thedefinition under the Exchange Act isfraught with ambiguities andtherefore would be unhelpful indeciphering investmentrelationships.40 The commenteroffered no alternative definition, butasked for clarification regarding what ismeant by exercising investmentdiscretion. The definition ofinvestment discretion in Section3(a)(35) of the Exchange Act

encompasses a person who isauthorized to determine whatsecurities or other property shall bepurchased or sold by or for the accountas well as a person that makesdecisions as to what securities or otherproperty shall be purchased or sold byor for the account even though someother person may have responsibility forsuch investment decisions * * *. 41

Rule 13h1(a)(4) further specifies that apersons employees who exerciseinvestment discretion within the scopeof their employment are deemed to doso on behalf of such person. To the

extent that an entity employs a naturalperson that individually, or collectivelywith others, meets the definition of alarge trader, then, for purposes ofRule 13h1, the entity that controls thatperson or those persons would be alarge trader.

One commenter recommendedexcluding regulated investment

under the federal securities laws, holds and treatsas confidential certain legally-protected proprietaryinformation that it receives in connection with itsregulatory activities. Further, the Commissionbelieves that Rule 13h1 is an appropriate exerciseof its regulatory authority and does not violate theFourth Amendment.

39

See new Rule 13h1(a)(1).40See SIFMA Letter at 17, n.23.4115 U.S.C. 78c(a)(35). See also Rule 13h1(a)(3)

(defining control the term control to mean thepossession, direct or indirect, of the power to director cause the direction of the management andpolicies of a person, whether through theownership of securities, by contract, or otherwise.For purposes of this rule only, any person thatdirectly or indirectly has the right to vote or directthe vote of 25% or more of a class of votingsecurities of an entity or has the power to sell ordirect the sale of 25% or more of a class of votingsecurities of such entity, or in the case of apartnership, has the right to receive, upondissolution, or has contributed, 25% or more of thecapital, is presumed to control that entity).
http:///reader/full/participants.33http:///reader/full/participants.33http:///reader/full/trader.36http:///reader/full/trader.36http:///reader/full/Constitution.37http:///reader/full/Constitution.37http:///reader/full/rights.38http:///reader/full/rights.38http:///reader/full/participants.33http:///reader/full/trader.36http:///reader/full/Constitution.37http:///reader/full/rights.38


6/48



companies and pension fund managersfrom the definition of large trader.42TheCommission notes that an investmentcompany is a legal structure for themanagement of pooled assets by aninvestment adviser. As such, theinvestment adviser exercises investmentdiscretion over the assets of theinvestment company. Accordingly, the

Commission believes that the requestedexclusion for regulated investmentcompanies is not necessary because aninvestment adviser to an investmentcompany, like a pension manager to apension fund, is the entity that exercisesinvestment discretion either solely or inconnection with other investmentmanagers. The large trader reportingrequirements are designed to collectinformation about important marketparticipants that exercise investmentdiscretion. Accordingly, theCommission is not adopting thesuggested exclusion for pension fund

managers because it would underminethe purposes of the large traderreporting requirements. TheCommission is adopting the definitionof investment discretion substantially asproposed.

ii. Parent Company Level Registration

As noted above, the definition of largetrader is designed to focus on theultimate parent company of an entity orentities that employ or otherwisecontrol the individuals that exerciseinvestment discretion. A number ofcommenters recommended limiting theapplication of the Rule to include as

large traders only those entities thatdirectly exercise investmentdiscretion.43These commenters alsoraised a number of concerns with theproposals focus on placing the filingrequirement at the parent companylevel.

After considering the commentsreceived, the Commission hasdetermined to adopt the scope of thelarge trader identification requirementsubstantially as proposed. While theRules broader focus on identification atthe parent company level may provideless detailed information on the activity

of individual traders within a largetrader complex,44 it nevertheless willfacilitate the Commissions ability tocollect data on the full extent of trading

by persons and entities under commoncontrol. The Commission also notes

42See SIFMA Letter at 18.43See Financial Information Forum Letter at 5;

Managed Funds Association Letter at 3; T. RowePrice Letter at 2; and SIFMA Letter at 9.

44For purposes of the large trader reporting rule,references to the large trader complex is intendedto refer to all entities under the control of the largetrader parent company.

that, in addition to promoting theCommissions regulatory andenforcement responsibilities, the largetrader reporting requirements also areintended to facilitate the reconstructionof market events using transaction data.To that end, parent company-levelaggregation should enhance theCommissions ability to reconstruct

trading by significant marketparticipants by providing theCommission with access to a broad setof useful data.

Some commenters noted that parentcompanies of financial servicesorganizations often do not take part inthe day-to-day activities of theirsubsidiaries and, as a result, employeesof those parent companies are notknowledgeable about the tradingactivities of their subsidiaries andwould not be able, for example, toreadily respond to any follow-upquestions from the Commission.45The

Commission notes that, to determinewhether a parent company is a largetrader, the aggregate trading activity ofall entities controlled by the parentcompany must be collected. Controlledentities need produce only aggregatedstatistics in summary form, whichwould be added together at the parentlevel to determine whether theidentifying activity level has been met.If it has, then the parent company is alarge trader and will be required toprovide information about itself and itsaffiliates, unless all of its affiliatescomply on its behalf pursuant to Rule13h1(b)(3)(ii). Further, the Commission

believes that the additional identifyinginformation requested on Form 13Hcould most easily be collected by aparent company employee from theentities controlled by the parentcompany. The Commission expects thatcommunication of the basic informationrequired by the Form, as well asaggregate securities transactions todetermine whether the identifyingactivity threshold has been met,

between a parent company and theentities that it controls should not be

burdensome and should not require thedevelopment of new integrated trading

systems. To the extent a parentcompany is unaware of its subsidiariesaggregate transaction levels and other

basic identifying information, theCommission believes that implementingcontrol systems to capture suchinformation will be consistent withappropriate risk managementconsiderations.

One commenter expressed concernthat the filing by a parent company ofa Form 13H on behalf of its subsidiaries

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

may give the impression that itsfirewalls are weak.46 The Commissiondoes not believe a parent companysduty to determine whether it is a largetrader based on aggregated statistics thatsummarize the trading activity of itssubsidiaries should violate orundermine the effectiveness of existingfirewalls. The Rule only requires that a

parent company aggregate and considerdaily and monthly share volume anddollar value of certain transactions inNMS securities effected by the personsit controls. The Rule does not requirethe disclosure of any particulartransaction information (e.g., theidentity of or additional information onthe securities bought or sold). Rather,persons need only produce a total figureof the relevant transactions for whichthey exercised investment discretion.The parent company would thenaggregate together those figures whenmeasuring its overall activity against the

applicable trading activity threshold.(a) Use of LTID Suffixes

Some commenters questioned theutility of the information that would becollected if large traders were identifiedat the parent company level, includingwhether grouping together persons whomake trading decisions independentlyof each other would cloud theCommissions view when investigatingfor certain trading behavior, such asmanipulation.47As an alternative, somecommenters suggested that the Rulepermit, but not compel, identification atthe parent company level.48Another

commenter suggested eliminating therequirement that an LTID be affixed tothe trades of affiliates that do notindependently qualify as large traders.49

With respect to the concern about theCommissions ability to identify tradingactivity within a large trader with moreparticularity, as discussed further

below,50 Item 4(d) of Form 13H permitsa large trader to assign LTID suffixes tosub-identify persons, divisions, groups,and entities under its control. Forexample, a large trader may choose toassign a suffix to each independentdivision within the large trader. Use of

suffixes to identify various sub-groupswithin a large trader could facilitate alarge traders ability to accurately andefficiently track with more particularitythe trading for which it exercisesinvestment discretion, and as aconsequence, could facilitate the ability

46See Prudential Letter at 3.47See, e.g., Prudential Letter at 2 and Investment

Adviser Association Letter at 4.48See Investment Company Institute Letter at 6

and Prudential Letter at 3.49See Investment Adviser Association Letter at 5.50See infra Section III.A.3.0.
http:///reader/full/trader.42http:///reader/full/trader.42http:///reader/full/discretion.43http:///reader/full/discretion.43http:///reader/full/Commission.45http:///reader/full/Commission.45http:///reader/full/manipulation.47http:///reader/full/manipulation.47http:///reader/full/level.48http:///reader/full/level.48http:///reader/full/traders.49http:///reader/full/traders.49http:///reader/full/trader.42http:///reader/full/discretion.43http:///reader/full/Commission.45http:///reader/full/manipulation.47http:///reader/full/level.48http:///reader/full/traders.49


7/48



of a large trader to respond to anyCommission request to further identifyaccounts or disaggregate trading data, asdiscussed below. To the extent largetraders utilize LTID suffixes, the needfor the Commission to contact largetraders for assistance in furtheridentifying their accounts should bediminished. Accordingly, the

Commission encourages large traders toutilize LTID suffixes.

The Commission notes that,ultimately, the information limitationidentified by commenters may beaddressed by the Commissions separaterulemaking for a consolidated audit trailwhich, if adopted as proposed, wouldrequire collection of information aboutthe person with investment discretionfor each order as well as information toidentify the beneficial owner for eachorder.51In the meantime, allowing aparent company to comply on behalf ofrelated entities should provide the

Commission with important informationat lower cost to the industry, byreducing the complexity and burdens ofthe large trader reportingrequirementssuch as those proposed

by the Commission during the 1990sthat could have required reporting atmultiple levels within a control group.At the same time, this provisionaddresses the Commissions near-termneed for access to more informationabout large traders and their tradingactivities, which will enable theCommission to more efficiently analyzemarket events.

(b) Control and Minority-OwnedEntities

With respect to which persons undera parent companys control should beconsidered in determining the parentcompanys large trader status, Rule 13h1(a)(3) defines control (and the termscontrolling, controlled by, andunder common control with) as thepossession, direct or indirect, of thepower to direct or cause the direction ofthe management and policies of aperson, whether through the ownershipof securities, by contract, or otherwise.

For purposes of this rule only, anyperson that directly or indirectly has theright to vote or direct the vote of 25%or more of a class of voting securities ofan entity or has the power to sell ordirect the sale of 25% or more of a classof voting securities of such entity, or inthe case of a partnership, has the rightto receive, upon dissolution, or hascontributed, 25% or more of the capital,is presumed to control that entity.

51See CAT Proposal, supra note 2, 75 FR at32572.

One commenter stated that includingminority-owned entities would beproblematic because it may be difficultfor a large trader to obtain theinformation from a minority-ownedentity that would be necessary for it tocomplete Form 13H.52 Furthermore,according to this commenter, theminority-owned entity may resistattaching the large traders LTID to itstrades.53Another commenter suggestedattributing to a large trader only theactivity of majority-owned entities thatare actual operating subsidiaries, andnot attributing the activity of moreremote, partially-owned entities.54Afterconsidering the comments received, theCommission has decided to adopt asproposed the definition of control solelyfor purposes of this Rule. In particular,the Commission continues to believethat a minority shareholder holding atleast 25% of the ownership interests ofan entity would be in a position toexercise the influence necessary tosecure that entitys cooperation infacilitating a large traders compliancewith the federal securities laws,especially given that all that this entailsfor the controlled entity would beproviding its registered broker-dealerswith the large traders LTID and theaccounts to which it applies. Inaddition, if the controlled entity refusesto cooperate, the large trader itself may

be able to notify the broker-dealer of itsLTID. The Commission also continuesto believe that the definition of controlis appropriate and will allow theCommission to identify, and obtaintrading data from, controlled persons forwhom a large trader is in a position tomaterially influence the investmentdecisions made by such person.55

52See Prudential Letter at 3. The Commissionnotes that proposed Form 13H would have requireda large trader to identify its accounts and disclosefor each account the LTID of any unaffiliated largetrader with whom it shares investment discretion.As discussed below, the Commission has notadopted the provisions in the Form relating to theidentification of accounts, and, as a consequence,a large trader would not need to obtain the LTIDof any unaffiliated large trader for purposes ofcompleting the Form.

53See Prudential Letter at 3.54See SIFMA Letter at 18.55The Commission considered other thresholds

for control and determined that a 25% thresholdwould be the appropriate level for purposes of newRule 13h1. As discussed in the Proposing Release,the Commission notes that the definition of controlis similar to the definition of control contained inForm 1 (Application for Registration or Exemptionfrom Registration as a National SecuritiesExchange). See Proposing Release, supra note 3, 75FR at 24161. Cf. Rule 19h1(f)(2) under theExchange Act, 17 CFR 240.19h1(f)(2) (featuring a10% threshold with respect to the right to vote 10%or more of the voting securities or receive 10% ormore of the net profits).

b. Identifying Activity Level

Rule 13h1(a)(7) defines the termidentifying activity level as aggregatetransactions in NMS securities that areequal to or greater than: (1) During acalendar day, either two million sharesor shares with a fair market value of $20million; or (2) during a calendar month,either twenty million shares or shareswith a fair market value of $200million. One commenter expresslysupported these threshold levels.56

Another commenter recommendedincreasing the daily threshold limit toshares with a fair market value of $100million during any calendar day.57

Others advocated increased thresholds,but did not identify a particular level orprovide empirical support for theirrecommendations.58

Some commenters thought that theproposed identifying activity levelwould capture infrequent traders, whothey believe should not attract

regulatory interest under a large traderreporting rule.59 The Commission notesthat nothing in Section 13(h) of theExchange Act suggests that theCommission should focus its attentiononly on those large traders that arefrequent traders. The statute permits theCommission to monitor the impact onthe securities markets of securitiestransactions involving a substantialvolume or a large fair market value orexercise value. While frequency oftrading is one factor that theCommission considered in defining whois a large trader, it was not the onlyfactor. In explaining why it proposed toexclude certain transactions, theCommission stated that the proposedexclusions were designed to excludecertain small and otherwise infrequenttraders from the definition of a largetrader, but also stated: the proposedexcepted transactions are not effectedwith an intent that is commonlyassociated with an arms lengthpurchase or sale of securities in thesecondary market and therefore do notfall within the types of transactions thatare characterized by the exercise ofinvestment discretion. 60 To the extentthat a market participant trades only

infrequently, but does so in largevolume in the course of exercisinginvestment discretion, the Commissionseeks to identify that participant as a

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

2.59See Investment Adviser Association Letter at

10; Howard Hughes Medical Institute Letter at 1;Managed Funds Association Letter at 2; and SIFMALetter at 8.

60See Proposing Release, supra note 3, 75 FR at21463.
http:///reader/full/order.51http:///reader/full/order.51http:///reader/full/trades.53http:///reader/full/trades.53http:///reader/full/entities.54http:///reader/full/entities.54http:///reader/full/person.55http:///reader/full/person.55http:///reader/full/levels.56http:///reader/full/levels.56http:///reader/full/recommendations.58http:///reader/full/recommendations.58http:///reader/full/order.51http:///reader/full/trades.53http:///reader/full/entities.54http:///reader/full/person.55http:///reader/full/levels.56http:///reader/full/recommendations.58


8/48



large trader. Nevertheless, theCommission recognizes the filing

burden that could be placed on a traderwhose activity only on very rareoccasions meets the identifying activitythreshold. These persons may beeligible for Inactive Status, a conceptwhich is discussed below.

The Commission continues to believe

that the identifying activity level isappropriate because it will identify largetraders that engage in a substantialamount of trading activity relative tooverall market volumespecifically,approximately 0.01% of the dailyvolume and market value of trading inNMS securities.61Moreover, asdiscussed below, Inactive Status isavailable for large traders whose tradingactivity reaches the identifying activitylevel infrequently.

Transactions Counted Towards theIdentifying Activity Level. As proposed,Rule 13h-1(a)(6) defined the term

transactions as all transactions inNMS securities, including exercises orassignments of option contracts, exceptfor certain specifically enumeratedtransactions.62To more closely alignthis definition with the aggregationprovisions contained in paragraph (c) ofthe Rule, the Commission is adopting arevised definition that provides that theterm transaction means alltransactions in NMS securities,excluding exercises or assignments of

61See Proposing Release, supra note 3, 75 FR2146364. An NMS security is any security orclass of securities for which transaction reports are

collected, processed, and made available pursuantto an effective transaction reporting plan, or aneffective national market system plan for reportingtransactions in listed options. 17 CFR242.600(b)(46). The term refers generally toexchange-listed securities, including equities andoptions.

62Specifically, under the proposal, the followingwould not be counted as transactions forpurposes of the proposed Rule: (i) Any journal orbookkeeping entry made to an account in order torecord or memorialize the receipt or delivery offunds or securities pursuant to the settlement of atransaction; (ii) any transaction that is part of anoffering of securities by or on behalf of an issuer,or by an underwriter on behalf of an issuer, or anagent for an issuer, whether or not such offering issubject to registration under the Securities Act of1933, provided, however, that this exemption shall

not include an offering of securities effectedthrough the facilities of a national securitiesexchange; (iii) any transaction that constitutes a gift;(iv) any transaction effected by a court appointedexecutor, administrator, or fiduciary pursuant to thedistribution of a decedents estate; (v) anytransaction effected pursuant to a court order orjudgment; (vi) any transaction effected pursuant toa rollover of qualified plan or trust assets subjectto Section 402(a)(5) of the Internal Revenue Code;or (vii) any transaction between an employer andits employees effected pursuant to the award,allocation, sale, grant, or exercise of a NMSsecurity, option or other right to acquire securitiesat a pre-established price pursuant to a plan whichis primarily for the purpose of an issuer benefit planor compensatory arrangement.

option contracts, except for certainspecifically enumerated transactions.63

As noted in the Proposing Release, forpurposes of the identifying activity levelwith respect to options, only purchasesand sales of the options themselves, andnot transactions in the underlyingsecurities pursuant to exercises orassignments of such options, need to be

counted. However, for purposes of theidentifying activity level, the volumeand value of options purchased or soldwould be determined by reference to thesecurities underlying the option.64

Thus, the Rule is intended to focus onthe trading of options and the potentialimpact of those options positions on theunderlying markets. By excludingpurchases and sales pursuant toexercises or assignments, the Ruleavoids double-counting towards theapplicable identification threshold. Therevised definition of transaction moreclosely aligns it with the explanation of

the aggregation provision applicable tooptions provided in the ProposingRelease. The Commission believes thatthe definition as adopted is consistentwith Section 13(h)(1) of the ExchangeAct, and will advance its stated goals,including monitoring the impact onthe securities markets of securitiestransactions involving a substantialvolume or a large fair market value orexercise value * * * 65

In addition, the Commission receivedcomments on the enumeratedexclusions from the termtransaction.66 As indicated in theProposing Release, the proposed

exceptions from the term transactionwere designed to exclude certain

63As noted in the Proposing Release, theaggregation provisions in paragraph (c) are designedto require market participants to use a gross upapproach in calculating their activity levels.Accordingly, offsetting or netting transactionsamong or within accounts, even for hedgedpositions, would be added to a participants activitylevel in order to show the full extent of a traderspurchase and sale activity. This approach reflectsthe fact that substantial trading activity has thepotential to impact the market regardless of thetraders net position. See Proposing Release, supranote 3, 75 FR at 21464.

64See id. For example, 50,000 shares of XYZstock and 500 XYZ call options would count as

aggregate transactions of 100,000 shares in XYZ(i.e., 50,000 + 500 100 = 100,000). With respectto index options, the market value would becomputed by multiplying the number of contractspurchased or sold by the market price of the optionsand the applicable multiplier. For example, if ABCIndex has a multiplier of 100, a person whopurchased 200 ABC call options for $400 wouldhave effected aggregate transaction of $8 million(i.e., 200 400 100 = $8,000,000). Transactionsin index options are not required to be burst intoshare equivalents for each of the underlyingcomponent equities.

65See 15 U.S.C. 78m(h)(1).66See, e.g., American Benefits Council Letter;

Financial Engines Letter; Howard Hughes MedicalInstitute Letter; and SIFMA Letter.

transactions from the identifyingactivity level calculation because theyare not effected with an intent that iscommonly associated with the arms-length trading of securities in thesecondary market and therefore do notfall within the types of transactions thatare characterized by the exercise ofinvestment discretion.67One

commenter requested that theCommission allow registered broker-dealers to include the excludedtransactions when reporting transactiondata to the Commission pursuant toRule 13h1(e).68The commenterexplained that registered broker-dealersexisting infrastructure may not collectsufficient data to allow the broker-dealerto exclude excepted transactions whenreporting transaction data to theCommission. In response to thiscomment, the Commission is adopting adefinition of transaction in the Ruleto reflect its limited application, as

discussed in the Proposing Release.Specifically, to underscore that theenumerated transactions are excludedfrom the definition of transaction onlyfor the purpose of determining who isa large trader, the Commission isadopting the introductory portion of thesecond sentence of Rule 13h1(a)(6) toprovide that: The term transaction ortransactions means all transactions inNMS securities, including exercises orassignments of option contracts. For thesole purpose of determining whether a

person is a large trader, the followingtransactions are excluded from thisdefinition * * *. Accordingly, a

person need not count trading activitythat falls within one of the listedcategories of excluded transactionswhen it determines whether it meets theapplicable identifying activitythreshold. However, in response to aCommission request for data, a broker-

67See Proposing Release, supra note 3, 75 FR at21463 (The proposed exclusions are designed toexempt certain small and otherwise infrequenttraders from the definition of a large trader as wellas activity that is not characterized by activeinvestment discretion or is associated with capitalraising or employee compensation. Specifically, theCommission preliminarily believes that theproposed excepted transactions are not effected

with an intent that is commonly associated with anarms-length purchase or sale of securities in thesecondary market and therefore do not fall withinthe types of transactions that are characterized bythe exercise of investment discretion. While a largeenough one-time transaction in the proposedcategories could have an impact on the market, theCommission would be able to obtain information onthat trade through other means, including the EBSsystem. The Commission preliminarily believes thatthe benefit to the Commission of identifying suchperson as a large trader solely through one of theenumerated excepted transactions would not bejustified by the costs that would be imposed on theperson and their registered broker-dealer thataccompany meeting the definition of large trader.)

68See Financial Information Forum Letter at 3.
http:///reader/full/securities.61http:///reader/full/securities.61http:///reader/full/transactions.62http:///reader/full/transactions.62http:///reader/full/transactions.63http:///reader/full/transactions.63http:///reader/full/option.64http:///reader/full/option.64http:///reader/full/discretion.67http:///reader/full/discretion.67http:///reader/full/13h%E6%B1%A8e).68http:///reader/full/13h%E6%B1%A8e).68http:///reader/full/securities.61http:///reader/full/transactions.62http:///reader/full/transactions.63http:///reader/full/option.64http:///reader/full/discretion.67http:///reader/full/13h%E6%B1%A8e).68


9/48



dealer must report all transactions thatit effected through the accounts of alarge trader without excluding anytransactions listed in Rule 13h1(a)(6).

In the Proposing Release, theCommission requested comment aboutwhether any of the proposed exclusionsfrom the definition of transactionshould be eliminated or whether any

other types of transactions should beexcluded.69While no commenterrecommended eliminating any of theexcluded transactions, severalcommenters suggested the Commissionconsider additional exclusions. Forexample, some commenters suggestedexcluding all or some transactionseffected on behalf of definedcontribution plans.70The Commissiondoes not believe that a blanket exclusionfor transactions effected on behalf ofdefined contribution plans is warranted

because such trades are effected throughthe exercise of investment discretion

and are within the scope of activitycontemplated by the statute. Instead, theCommission believes it is appropriate toprovide additional guidance regardingthe application of the Rule totransactions effected on behalf ofdefined contribution plans. Ashighlighted by commenters, investmentdiscretion may be exercised on behalf ofdefined contribution plans differently,depending on the particular structure ofthe plan. For example, in some definedcontribution plans, participants selecttheir own investments from among thechoices offered by their employer.71Atrustee then effects the transactions

pursuant to the instructions it receivesfrom the plan participants. For purposesof determining who is a large trader, theparticipants in such plans are the oneswho exercise investment discretion overthe transactions that are effected ontheir behalf. In such plans, theCommission does not view the trusteeas exercising investment discretion overthe transactions for purposes of theRule.72 Additionally, solely forpurposes of determining who is a largetrader pursuant to Rule 13h1, the

69See Proposing Release, supra note 3, 75 FR at21472.

70See Financial Engines Letter at 7 and AmericanBenefits Council Letter at 2 (suggesting exemptingsignificant repositioning of portfolio balances byvery large defined benefit plans; investment lineupchanges by defined contribution retirement plansponsors; and plan activity in connection withacquisitions and divestitures of businesses whichmay precipitate a large movement of participantsout of a plan).

71See American Benefits Council Letter at 2.72The Commission expects that few individual

defined contribution plan participants will effectaggregate transactions greater than or equal to theidentifying activity level, and the Commissiontherefore expects that generally they will not meetthe definition of large trader.

Commission considers an employer tonot exercise investment discretionmerely by establishing investmentoptions for its employees. Other types ofdefined contribution plans may bestructured differently.73

Another commenter requestedclarification that only the trustee of a

retirement plan, not the plan sponsorand other parties involved in planadministration, must self-identify as alarge trader.74As discussed above, theRule requires the person who exercisesinvestment discretion over a certainlevel of transactions to identify as thelarge trader, which may be the trustee

but would generally not be the plansponsor or administrator if neitherexercises investment discretion.

One commenter argued for broadlyexcluding transactions associated withcorporate actions, including mergersand acquisitions and other purchases of

assets, self-tenders, buybacks (includingRule 10b18 buybacks), and certaininternal corporate actions (such asjournals between accounts within thesame entity where there is no change inthe beneficial owners).75Thecommenter also recommendedexcluding stock loans, equityrepurchases, and in-kind creations ofexchange-traded funds (ETFs). Asdiscussed below, the Commission agreesthat many, but not all,76 of theadditional categories of transactionsidentified by the commenter can beexcluded for purposes of determining

large trader status. Accordingly, theCommission is adopting subparagraph(viii) to Rule 13h1(a)(6), whichexcludes the following additionaltransactions for purposes of calculatingthe identifying activity level: anytransaction to effect a businesscombination, including areclassification, merger, consolidation,or tender offer subject to Section 14(d)of the Securities Exchange Act; an issuertender offer or other stock buyback by

73The Commission notes that, pursuant toSection 13(h)(6) of the Exchange Act and new Rule13h1, the Commission may by order exempt, uponspecified terms and conditions or for stated periods,any person or class of persons or any transactionor class of transactions from the provisions of thisrule to the extent that such exemption is consistentwith the purposes of the Exchange Act. See newRule 13h1(g), which is discussed infra at SectionIII.0.

74See American Benefits Council Letter at 23.75See SIFMA Letter at 8.76For example, the Commission is not making

any changes in response to the suggestion of onecommenter to essentially exempt all transactionseffected on behalf of organizations dedicated to acharitable purpose. See Howard Hughes MedicalInstitute Letter. See also infra text accompanyingnote 255 and the subsequent discussion.

an issuer; or a stock loan or equityrepurchase agreement.

Consistent with the views outlined inthe Proposing Release, the Commission

believes that these additional categoriesof transactions are effected formaterially different reasons than thosecommonly associated with the arms-length trading of securities in the

secondary market and the associatedexercise of investment discretion. Forexample, transactions to effect a

business combination, as well as anissuer tender offer or other stock

buyback by an issuer, reflectfundamental corporate decision-makingthat involves matters much broader thanthose traditionally associated withtrading activity in NMS securities. Suchtransactions are discrete corporateactions to effect the acquisition of a

business or to manage the extent of thedistribution of an issuers securities.Further, stock loan and equity

repurchase agreements typically areentered into to facilitate short saletransactions or as part of a largerfinancing transaction, and not as part ofan investment decision traditionallyassociated with trading activity in NMSsecurities. Accordingly, the Commission

believes it appropriate to not countthese transactions for the purpose ofdetermining whether a person meets theidentifying activity level contained inthe definition of large trader.

For purposes of the identifyingactivity level for large trader reporting,the Commission believes that it isappropriate to count transactions

effected in the secondary market toassemble, or dispose of, securities thatare transferred between an authorizedparticipant and an ETF. An authorizedparticipant is a trader that, on its own

behalf or on behalf of others, presentssecurities (or other assets) to an ETF inorder to create ETF shares or receivessecurities (or other assets) from an ETFin connection with the redemption ofETF shares. Among other reasons,authorized participants engage in suchcreations and redemptions to takeadvantage of arbitrage opportunitiesresulting from differences in the market

prices of the securities held by the ETFand the market prices of the ETF shares.The Commission expects that, ifauthorized participants are large traders,it will be useful to monitor theirsecondary market trading and to be ableto access records of their trading activityacross broker-dealers. However, theCommission does not believe that theactual transfer of the basket of securities

between an authorized participant andan ETF should be counted for purposesof large trader reporting. Accordingly,the Commission will count toward the
http:///reader/full/excluded.69http:///reader/full/excluded.69http:///reader/full/plans.70http:///reader/full/plans.70http:///reader/full/employer.71http:///reader/full/employer.71http:///reader/full/differently.73http:///reader/full/differently.73http:///reader/full/trader.74http:///reader/full/trader.74http:///reader/full/owners).75http:///reader/full/owners).75http:///reader/full/excluded.69http:///reader/full/plans.70http:///reader/full/employer.71http:///reader/full/differently.73http:///reader/full/trader.74http:///reader/full/owners).75


10/48



identifying activity level trading activityin the secondary market that relates tothe acquisition or disposition ofsecurities in connection with, forexample, the creation or redemption ofETF shares, but not the transfer of suchsecurities between an authorizedparticipant and an ETF.77

c. Voluntary Registration

One commenter suggested that theCommission allow a person to registervoluntarily as a large trader as thatperson nears the applicable tradingactivity threshold in order to reduce itsneed to actively monitor its tradinglevels.78The Commission agrees withthe commenter that the ability tovoluntarily register will mitigate themonitoring burden on marketparticipants who expect to effecttransactions equal to or greater than theidentifying activity level at some point

in the future. Accordingly, theCommission is adopting: (1) Adefinition of large trader that includesthose persons who voluntarily registeras large traders; and (2) changes to Form13H to require a large trader to indicatein its initial filing with the Commissionwhether it has chosen to voluntarilyregister. Any such person that elects tovoluntarily file will be treated as a largetrader for purposes of the Rule, and will

be subject to all of the obligations of alarge trader under the Rule,notwithstanding the fact that the personhad not effected the requisite level of

transactions at the time it registered asa large trader.

2. Duties of a Large Trader

Pursuant to Rule 13h1, a large tradermust self-identify by filing Form 13Hwith the Commission. In addition, alarge trader must disclose its LTID to theregistered broker-dealers effectingtransactions on its behalf and identifyfor them each account to which itapplies.

77Specifically, then, in connection with creationor redemption: (1) Purchases of securities by an

authorized participant for the purpose ofassembling a basket would count toward anauthorized participants identifying activity level;(2) transfers of those securities by an authorizedparticipant to the ETF would not be counted towardthe ETFs identifying activity level; (3) acquisitionsof securities by an authorized participant from theETF would not count toward the authorizedparticipants identifying activity level; and (4) salesof securities by an authorized participant into thesecondary market would count toward theauthorized participants identifying activity level.No transactions effected would be counted towardan ETFs identifying activity level because the ETFwould not be exercising investment discretion bycreating or redeeming ETF shares.

78See Investment Company Institute Letter at 7.

a. File Form 13H With the Commission

Form 13H provides for six types offilings: Initial Filing; Annual Filing;Amended Filing; Inactive Status;Termination Filing; and ReactivatedStatus. Each type is discussed below. Asreflected in the instructions to the Form,large traders must file all Forms 13H

through EDGAR,79

which is beingupdated to accept these submissions.80

Accordingly, large traders will need tohave or obtain permission to access andfile through EDGAR, and can obtain thenecessary access codes, if they do notalready have them, by filing a Form ID(Uniform Application for Access Codesto File on EDGAR).81Among otherthings, large traders will be given aCentral Index Key (CIK) number thatuniquely identifies each filer and allowsthem to submit filings through EDGAR.While Form 13H filings will beprocessed through the CommissionsEDGAR system, once filed, the Form

13H filings will not be accessiblethrough the Commissions Web site orotherwise be publicly available.

i. Initial filingswho must file?

Except as provided below, each largetrader must file a Form 13H InitialFiling to identify itself to theCommission.82In complexorganizations, more than one relatedentity can qualify as a large trader.Consider the following example:

Holding Company owns a 100%ownership interest in Broker-Dealer andInvestment Adviser. However, as a

practical matter, Holding Company isnot engaged in the day-to-day operationof either entity.

Broker-Dealer owns a 33%ownership interest in ProprietaryTrading Firm. None of the firms otherinvestors own a controlling interest of25% or more of the firm, and thereforeno LTIDs, other than that of Broker-

79One commenter requested that the Commissionnot require filing of Forms 13H until it has anelectronic filing system in place because, while therule requires electronic filing, the Commissionnoted the possibility in the Proposing Release thatpaper filings might be required for a limited periodof time. See T. Rowe Price Letter at 3. See alsoProposing Release, supra note 3, 75 FR at 21465,n. 80. The Commission shares the concernexpressed by the commenter. Form 13H will be aweb-based application and will be submittedthrough EDGAR, a secure web interface, on theapplicable compliance date.

80See generally17 CFR 232 (Regulation STGeneral Rules and Regulations for ElectronicFilings).

81An applicant must file Form ID in electronicformat via the Commissions EDGAR FilerManagement website. See 17 CFR 232 (RegulationST) and the EDGAR Filer Manual for instructionson how to file electronically, including how to usethe access codes.

82See new Rule 13h1(b)(1).

Dealer, would be attached to the tradesof Proprietary Trading Firm.

Investment Adviser owns a 100%ownership interest in Sub-Adviser #1and Sub-Adviser #2.

Sub-Adviser #1, on behalf of itsclients, exercises investment discretionover accounts and effects transactions inNMS securities on behalf of those

accounts in an aggregate amount greaterthan the identifying activity level.

Sub-Adviser #2, on behalf of itsclients, exercises investment discretionover accounts and effects transactions inNMS securities on behalf of thoseaccounts in an aggregate amount lessthan the identifying activity level.

While engaging in proprietarytrading, Broker-Dealer exercisesinvestment discretion over accounts andeffects transactions in NMS securitieson behalf of those accounts in anaggregate amount greater than theidentifying activity level.

The Proprietary Trading Firmeffects transactions in NMS securities inan aggregate amount greater than theidentifying activity level.

All of the identified entities, exceptSub-Adviser #2, independently qualifyas large traders under the Rule.Therefore, as discussed below, unlessthese entities rely on the provisions ofRule 13h1(b)(3)(i), each of them mustfile separate Forms 13H with theCommission.83

Rule 13h1(b)(3)(i) provides that alarge trader shall not be required toseparately comply with therequirements of paragraph (b) if a

person who controls the large tradercomplies with all of the requirementsunder paragraphs (b)(1), (b)(2), and(b)(4) applicable to such large traderwith respect to all of its accounts. Thisprovision allows the identificationrequirement to be pushed up thecorporate hierarchy to the parent entity(i.e., Holding Company, in the exampleabove).

Conversely, Rule 13h1(b)(3)(ii)applies the same principle on a topdown basis, providing that a largetrader shall not be required to complywith the requirements of paragraph (b)

if one or more persons controlled bysuch large trader collectively complywith all of the requirements underparagraphs (b)(1), (b)(2), and (b)(4)applicable to such large trader withrespect to all of its accounts. Acontrolling person of one or more largetraders (such as Holding Company, inthe example above) would be requiredto comply with all of the requirementsof paragraph (b) unless the entities thatit controls discharge all of the

83See new Rule 13h1(b)(1).
http:///reader/full/levels.78http:///reader/full/levels.78http:///reader/full/submissions.80http:///reader/full/submissions.80http:///reader/full/EDGAR).81http:

Large Trader Reporting Final

Documents

Transcript of Large Trader Reporting Final