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

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

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

E. Exemptions

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

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

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

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

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

F. Foreign Entities

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

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

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

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

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

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

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

G. Proposed Implementation

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

H. Solicitation of Comments

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

Commission also requests comment on the following specific issues:

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

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

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

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

III. Specific Factors To Be Considered by the Commission

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

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

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

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

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

IV. Paperwork Reduction Act

    Certain provisions of the proposal contain ``collection of
information requirements'' within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'')\129\ and the Commission has submitted
them to the Office of Management and Budget (``OMB'') for review in
accordance with 44 U.S.C. 3507 and 5 CFR 1320.11. The title of the new
collection of information, including proposed Rule 13h-1 and proposed
Form 13H, is ``Information Required Regarding Large Traders Pursuant to
Section 13(h) of the Securities Exchange Act of 1934 and Rules
Thereunder.'' An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid control number.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

B. Proposed Use of Information

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

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

C. Respondents

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

D. Estimated Total Annual Reporting and Recordkeeping Burden

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

E. Collection of Information Is Mandatory

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

F. Confidentiality

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

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

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

G. Retention Period of Recordkeeping Requirements

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

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

H. Request for Comments

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

V. Consideration of Costs and Benefits

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

 A. Benefits

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

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

    Currently, to support its regulatory and enforcement activities,
the Commission collects transaction data through the EBS system.\161\
The Commission uses the EBS system to obtain securities transaction
information for two primary purposes: (1) To assist in the
investigation of possible federal securities law violations, primarily
involving insider trading or market manipulation; and (2) to conduct
market reconstructions.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

    The large trader reporting system envisioned by the Market Reform
Act authorizes the Commission to require large traders\167\ to self-
identify to the Commission and provide information to the Commission
identifying the trader and all accounts in or through which the trader
effects securities transactions.\168\ The Market Reform Act also
authorized the Commission to require large traders to identify their
status as large traders to any registered broker-dealer through whom
they directly or indirectly effect securities transactions.\169\
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    \167\ Section 13(h) of the Exchange Act defines a ``large
trader'' as ``every person who, for his own or an account for which
he exercises investment discretion, effects transactions for the
purchase or sale of any publicly traded security or securities by
use of any means or instrumentality of interstate commerce or of the
mails, or of any facility of a national securities exchange,
directly or indirectly by or through a registered broker or dealer
in an aggregate amount equal to or in excess of the identifying
activity level.'' See 15 U.S.C. 78m(h)(8)(A).
    \168\ See 15 U.S.C. 78m(h)(1)(A).
    \169\ See 15 U.S.C. 78m(h)(1)(B).
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    In addition to facilitating the ability of the Commission to
identify large traders, the Market Reform Act also authorizes the
Commission to collect information on the trading activity of large
traders. In particular, the Commission is authorized to require every
registered broker-dealer to make and keep records with respect to
securities transactions of large traders that equal or exceed a certain
``reporting activity level'' and report such transactions upon request
of the Commission.\170\
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    \170\ See 15 U.S.C. 78m(h)(2). Section 13(h) also provides the
Commission with authority to determine the manner in which
transactions and accounts should be aggregated, including
aggregation on the basis of common ownership or control. See 15
U.S.C. 78m(h)(3). The term ``reporting activity level'' is defined
in Section 13(h)(8)(D) of the Exchange Act to mean ``transactions in
publicly traded securities at or above a level of volume, fair
market value, or exercise value as shall be fixed from time to time
by the Commission by rule, regulation, or order, specifying the time
interval during which such transactions shall be aggregated.'' See
15 U.S.C. 78m(h)(8)(D).
---------------------------------------------------------------------------

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

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

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

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

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

B. Costs

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

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

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

    The Commission estimates that the aggregate costs for all 400
potential large trader respondents to self-identify on Form 13H and
obtain from the Commission and inform others of its LTID and the
accounts to which it applies would be $1,317,600.\177\ The Commission
believes that potential large trader respondents would not need to
modify their existing systems to comply with proposed Rule 13h-1. The
Commission believes that large traders already employ software that
tracks the number and market value of the shares they trade, and the
Commission expects that firms would be able to use their existing
systems to monitor whether they reach the identifying activity level.
Accordingly, the estimate above does not include any software
modification costs. In addition, the Commission estimates that the
aggregate cost to file interim updates and the annual updated Form 13H
would be $998,400.\178\ The Commission does not expect these minimal
costs per large trader of self-identification and reporting to the
Commission to have any significant effect on how large traders conduct
business because such costs would not be so large, when compared to
level of activity at which a large trader would be trading, so as to
result in a change in how such traders conduct business, create a
barrier to entry, or otherwise alter the competitive landscape among
large traders.
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    \177\ The Commission derived the total estimated burdens from
the following estimates, which are based on the Commission's
experience with, and burden estimates for, other existing reporting
systems including Rule 13f-1: (Compliance Manager (3 hours) at $258
per hour) + (Compliance Attorney (7 hours) at $270 per hour) +
(Compliance Clerk (10 hours) at $63 per hour) x (400 potential
respondents) = $1,317,600. Rule 13f-1, like the proposed rule,
requires the filing of a form (Form 13F) upon exceeding a certain
trading threshold. This figure is based on the estimated number of
hours and hourly costs for the one-time, initial annualized burden
for registered broker-dealers for development, including re-
programming and testing of the systems to comply with the proposed
rule. Hourly figures are from SIFMA's Management & Professional
Earnings in the Securities Industry 2008 and SIFMA's Office Salaries
in the Securities Industry 2008, modified by Commission staff to
account for an 1800-hour work-year and multiplied by 5.35 or 2.93,
as appropriate, to account for bonuses, firm size, employee
benefits, and overhead.
    \178\ The Commission derived the total estimated burdens from
the following estimates, which are based on the Commission's
experience with, and burden estimates for, other existing reporting
systems including Rule 6a-2: (Compliance Manager (2 hours) at $258
per hour) + (Compliance Attorney (5 hours) at $270 per hour) +
(Compliance Clerk (10 hours) at $63 per hour) x (400 potential
respondents) = $998,400. Rule 6a-2, like the proposed rule,
requires: (1) Form amendments when there are any material changes to
the information provided in the previous submission; and (2)
submission of periodic updates of certain information provided in
the initial Form 1, whether or not such information has changed.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A. Competition

    We consider in turn the impact of proposed new Rule 13h-1 on the
securities markets and market participants. Information provided by
market participants and broker-dealers in their registrations and
filings with us informs our views on the structure of the markets they
comprise. We begin our consideration of potential competitive impacts
with observations of the current structure of these markets.
    The securities trading industry is a competitive one with
reasonably low barriers to entry. The intensity of competition across
trading platforms in this industry has increased in the past decade as
a result of a number of factors, including market reforms and
technological advances. This increase in competition has resulted in
decreases in market concentration, more competition among trading
centers, a proliferation of trading platforms competing for order flow,
and decreases in trading fees.
    The reasonably low barriers to entry for trading centers are
evidenced, in part, by the fact that new entities, primarily
alternative trading systems (``ATSs''), continue to enter the
market.\192\ For example, currently, there are approximately 50
registered ATSs. In addition, the Commission within the past few years
has approved applications by two entities--BATS and Nasdaq--to become
registered as national securities exchanges for trading equities, and
approved proposed rule changes by two existing exchanges--International
Securities Exchange, LLC and Chicago Board Options Exchange,
Incorporated--to add equity trading facilities to their existing
options business. We believe that competition among trading centers has
been facilitated by Rule 611 of Regulation NMS,\193\ which encourages
quote-based competition between trading centers; Rule 605 of Regulation
NMS,\194\ which empowers investors and broker-dealers to compare
execution quality statistics across trading centers; and Rule 606 of
Regulation NMS,\195\ which enables customers to monitor order routing
practices.
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    \192\ See Securities Exchange Act Release No. 60997 (Nov. 13,
2009), 74 FR 61208, 61234 (Nov. 23, 2009) (discussing the reasonably
low barriers to entry for ATSs and that these reasonably low
barriers to entry have generally helped to promote competition and
efficiency).
    \193\ 17 CFR 242.611.
    \194\ 17 CFR 242.605.
    \195\ 17 CFR 242.606.
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    Broker-dealers are required to register with the Commission and at
least one SRO. The broker-dealer industry, including market makers, is
a competitive industry with most trading activity concentrated among
several larger participants and thousands of smaller participants
competing for niche or regional segments of the market. There are
approximately 5,178 registered broker-dealers, of which approximately
890 are small broker-dealers.\196\
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    \196\ These numbers are based on a review of 2007 and 2008 FOCUS
Report filings reflecting registered broker-dealers, and discussions
with SRO staff. The number does not include broker-dealers that are
delinquent on FOCUS Report filings.
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    Larger broker-dealers often enjoy economies of scale over smaller
broker-dealers and compete with each other to service the smaller
broker-dealers, who are both their competitors and customers. The
reasonably low barriers to entry for broker-dealers are evidenced, for
example, by the fact that the average number of new broker-dealers
entering the market each year between 2001 and 2008 was 389.\197\
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    \197\ This number is based on a review of FOCUS Report filings
reflecting registered broker-dealers from 2001 through 2008. The
number does not include broker-dealers that are delinquent on FOCUS
Report filings. New registered broker-dealers for each year during
the period from 2001 through 2008 were identified by comparing the
unique registration number of each broker-dealer filed for the
relevant year to the registration numbers filed for each year
between 1995 and the relevant year.
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    As discussed above, the Commission acknowledges that the proposal
would entail certain costs. In particular, requiring registered broker-
dealers to establish recordkeeping systems to capture the required
information, in particular the new fields that are not currently
captured under the existing EBS system, would require one-time initial
expenses, as discussed above. In addition, to utilize the proposed safe
harbor, registered broker-dealers would need to implement policies and
procedures to monitor their customers' trading in order to determine
whether customers' trades would trigger the threshold for large trader
status. Preliminarily, the Commission does not believe that these
expenses would adversely affect competition.
    In our judgment, the costs of proposed Rule 13h-1 would not be so
large as to significantly raise barriers to entry, or otherwise alter
the competitive landscape of the industries involved because the
incremental costs of Rule 13(h) that would be incurred by broker-
dealers would be small relative to the costs of complying with the
existing EBS system.\198\ In industries characterized by reasonably low
barriers to entry and competition, the viability of some of the less
successful competitors may be sensitive to regulatory costs.
Nonetheless, we believe that the broker-dealer industry would remain
competitive, despite the costs associated with implementing proposed
new Rule 13h-1, even if those costs influence the entry or exit
decisions of individual broker-dealer firms at the margin. The
Commission does not expect that the costs associated with proposed new
Rule 13h-1, which are small relative to the costs of complying with the
existing EBS system, would be a determining factor in a broker-dealer's
entry or exit decision or decision to accept large trader clients
because the volume of trading associated with large traders and
resultant revenue that could be gained by servicing a large trader
would outweigh the costs associated with the proposed rule.
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    \198\ See supra Sections IV (Paperwork Reduction Act) and V
(Consideration of Costs and Benefits) for a detailed description of
the expected costs.
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    Further, the Commission would not be compelled to disclose any
information required to be kept or reported under Section 13(h) of the
Exchange Act, including information kept or reported pursuant to
proposed Rule 13h-1.\199\ Accordingly, information and trading data
that the Commission would obtain pursuant to the proposed rule would
not be shared with others and would not be available to other large
traders or broker-dealers.
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    \199\ See supra text following note 89.
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    The approach of proposed new Rule 13h-1 would advance the purposes
of the Exchange Act in a number of significant ways. In light of recent
market turmoil and the increasing prominence, sophistication, and
trading capacity of large traders, the Commission believes it should
further enhance its ability to collect and analyze information on large
traders. The Commission believes that the proposed large trader
reporting system could enhance its ability to identify large traders
and collect trading data on their activity at a time when, for example,
many such traders employ rapid algorithmic systems that quote and trade
in huge volumes. The proposed large trader reporting system would
provide a basic set of tools necessary to allow the Commission to
monitor and analyze more readily and efficiently the impact of large
traders,

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

B. Capital Formation

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

C. Efficiency

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

D. Request for Comment

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

VII. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \200\ requires Federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities. Section 603(a)\201\ of the Administrative Procedure
Act,\202\ as amended by the RFA, generally requires the Commission to
undertake a regulatory flexibility analysis of all proposed rules, or
proposed rule amendments, to determine the impact of such rulemaking on
``small entities.'' \203\ Section 605(b) of the RFA states that this
requirement shall not apply to any proposed rule or proposed rule
amendment, which if adopted, would not ``have a significant economic
impact on a substantial number of small entities.'' \204\
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    \200\ 5 U.S.C. 601 et seq.
    \201\ 5 U.S.C. 603(a).
    \202\ 5 U.S.C. 551 et seq.
    \203\ Although Section 601(b) of the RFA defines the term
``small entity,'' the statute permits agencies to formulate their
own definitions. The Commission has adopted definitions for the term
small entity for the purposes of Commission rulemaking in accordance
with the RFA. Those definitions, as relevant to this proposed
rulemaking, are set forth in Rule 0-10, 17 CFR 240.0-10. See
Securities Exchange Act Release No. 18451 (January 28, 1982), 47 FR
5215 (February 4, 1982) (File No. AS-305).
    \204\ See 5 U.S.C. 605(b).
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    Paragraph (a) of Rule 0-10 provides that for purposes of the
Regulatory Flexibility Act, a small entity when used with reference to
a ``person''' other than an investment company means a person that, on
the last day of its most recent fiscal year, had total assets of $5

million or less.\205\ In reference to a broker-dealer, small entity
means total capital of less than $500,000 and not affiliated with any
person that is not a small business or small organization. Pursuant to