[Federal Register Volume 76, Number 149 (Wednesday, August 3, 2011)]
[Rules and Regulations]
[Pages 46960-47007]
[FR Doc No: 2011-19419]

Vol. 76

Wednesday,

No. 149

August 3, 2011

Part III

Securities and Exchange Commission

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17 CFR Parts 240 and 249

Large Trader Reporting; Final Rule

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

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SECURITIES AND EXCHANGE COMMISSION

17 CFR PARTS 240 and 249

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

Large Trader Reporting

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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

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

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

SUPPLEMENTARY INFORMATION

Table of Contents

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

I. Introduction

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

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

II. Background

    The Commission is in the process of conducting a broad and critical
look at U.S. market structure in light of the rapid development in
trading technology and strategies. The Commission has proposed several
rulemakings, including this rulemaking, to address potential discrete
issues in the current market structure.\6\ In addition, last year the
Commission published a concept release on equity market structure
designed to further the Commission's broad review of whether its rules
have kept pace with, among other things, changes in trading technology
and practices.\7\
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    \6\ See, e.g., Securities Exchange Act Release Nos. 60684
(September 18, 2009), 74 FR 48632 (September 23, 2009) (proposal to
eliminate flash order exception from Rule 602 of Regulation NMS)
(File No. S7-21-09); 60997 (November 13, 2009), 74 FR 61208
(November 23, 2009) (proposal to regulate non-public trading
interest) (File No. S7-27-09); 63241 (November 3, 2010), 75 FR 69792
(November 15, 2010) (File No. S7-03-10) (adopting Rule 15c3-5 under
the Exchange Act addressing risk management controls for brokers or
dealers with market access); and CAT Proposal, supra note 2.
    \7\ See Securities Exchange Act Release No. 61358 (January 14,
2010), 75 FR 3594 (January 21, 2010) (File No. S7-02-10).
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    The Commission's ongoing review of market structure comes at a time
when U.S. securities markets are experiencing a dynamic transformation,
reflecting a decades-long evolution from a market structure with
primarily manual trading to a market structure with primarily automated
trading. Electronic trading allows ever-increasing volumes of
securities transactions to take place across an expanding multitude of
trading systems that together constitute the U.S. national market
system. Competition among markets has facilitated the ability of large
institutional and other professional market participants to employ
sophisticated trading methods to trade electronically on multiple
venues simultaneously in huge volumes with great speed.\8\
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    \8\ Market analysts have offered a wide range of estimates for
the level of activity attributable to one category of large
traders--high frequency traders--but these estimates typically
exceed 50% of total volume. See, e.g., Preliminary Findings
Regarding the Market Events of May 6, 2010, Report of the Staffs of
the CFTC and SEC to the Joint Advisory Committee on Emerging
Regulatory Issues, May 18, 2010, at Appendix A-11 (``Estimates of
HFT volume in the equity markets vary widely, though they often are
50 percent of total volume or higher.''). See also, e.g., Scott
Patterson and Goeffrey Rogow, What's Behind High-Frequency Trading,
Wall Street Journal, August 1, 2009 (``High frequency trading now
accounts for more than half of all stock-trading volume in the
U.S.''); and Rob Iati, The Real Story of Trading Software Espionage,
Advanced Trading, July 10, 2009, available at http://advancedtrading.com/algorithms/showArticle.jhtml?articleID=218401501
(high frequency trading accounts for 73% of U.S. equity trading
volume). One source estimates that, five years ago, that number was
less than 25%. See Rob Curran & Geoffrey Rogow, Rise of the (Market)
Machines, Wall Street Journal, June 19, 2009, available at http://blogs.wsj.com/marketbeat/2009/06/19/rise-of-the-market-machines/.
The trend is clear that high frequency traders now play an
increasingly prominent role in the securities markets.
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    Given the dramatic changes to the securities markets, the
Commission believes it is appropriate to exercise its authority under
Section 13(h) of the Exchange Act \9\ to establish large trader
reporting requirements. Large trader reporting requirements will
provide the Commission with a valuable source of useful data that will
greatly enhance the Commission's ability to identify large market
participants, and collect and analyze information on their trading
activity.
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    \9\ 15 U.S.C. 78m(h), as adopted by the Market Reform Act of
1990 (``Market Reform Act''), PL 101-432 (HR 3657), October 16,
1990.
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    Currently, to support its regulatory and enforcement activities,
the Commission collects transaction data from registered broker-dealers
through the Electronic Blue Sheets (``EBS'') system.\10\ The EBS system
generally is used to analyze trading in a small sample of securities
over a limited period of time.\11\ However, the EBS system lacks two
important data elements that limit its usefulness when reconstructing
market activity: Time of execution for the order and a uniform
identifier to identify the participant that effected the trade.\12\ In
addition, EBS does not require, as is contemplated by the large trader
reporting system outlined by Section 13(h)(2) of the Exchange Act,\13\
that transaction data be available on a next-day basis, which can delay
the Commission's ability to promptly collect and begin to analyze
transaction data following a market event. The Commission's adoption
today of Rule 13h-1 and Form 13H is designed to address certain of
these limitations of EBS.
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    \10\ See 17 CFR 240.17a-25 (Electronic Submission of Securities
Transaction Information by Exchange Members, Brokers, and Dealers).
    \11\ The difficulties in collecting trading data for analysis
are reflected in the Commission's preliminary report on the events
of May 6, 2010. See Preliminary Findings Regarding the Market Events
of May 6, 2010, Report of the Staffs of the CFTC and SEC to the
Joint Advisory Committee on Emerging Regulatory Issues, May 18,
2010, at 1 (``The reconstruction of even a few hours of trading
during an extremely active trading day in markets as broad and
complex as ours--involving thousands of products, millions of trades
and hundreds of millions of data points--is an enormous undertaking.
Although trading now occurs in microseconds, the framework and
processes for creating, formatting, and collecting data across
various types of market participants, products and trading venues is
neither standardized nor fully automated. Once collected, this data
must be carefully validated and analyzed.'')
    \12\ The shortcomings of the EBS system were noted by the Senate
Committee on Banking, Housing and Urban Affairs in the Senate Report
accompanying the Market Reform Act of 1990. See Senate Report, infra
note 14, at 48.
    \13\ See 15 U.S.C. 78m(h)(2) (``* * * records shall be available
for reporting to the Commission * * * on the morning of the day
following the day the transactions were effected * * *.'').
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A. The Market Reform Act

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

October 1989, Congress recognized that the Commission's ability to
analyze the causes of a market crisis was impeded by its lack of
authority to gather trading information.\14\ To address this concern,
Congress passed the Market Reform Act, which, among other things,
amended Section 13 of the Exchange Act to add new subsection (h),
authorizing the Commission to establish a large trader reporting system
under such rules and regulations as the Commission may prescribe.\15\
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    \14\ The legislative history accompanying the Market Reform Act
also noted the Commission's limited ability to analyze the causes of
the market declines of October 1987 and 1989. See generally Senate
Comm. on Banking, Housing, and Urban Affairs, Report to accompany
the Market Reform Act of 1990, S. Rep. No. 300, 101st Cong. 2d Sess.
(May 22, 1990) (reporting S. 648) (``Senate Report'') and House
Comm. on Energy and Commerce, Report to accompany the Securities
Market Reform Act of 1990, H.R. Rep. No. 524, 101st Cong. 2d Sess.
(June 5, 1990) (reporting H.R. 3657) (``House Report'').
    \15\ See Market Reform Act, supra note 9.
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    The Market Reform Act authorizes the Commission to require large
traders to self-identify to the Commission.\16\ In addition, the Market
Reform Act authorizes the Commission to collect from registered brokers
or dealers information on the trading activity of large traders.\17\ In
particular, the Commission is authorized to require every registered
broker or dealer to make and keep records with respect to securities
transactions of large traders that equal or exceed a certain
``reporting activity level'' and report such transactions upon request
of the Commission.\18\
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    \16\ Section 13(h) of the Exchange Act defines a ``large
trader'' as ``every person who, for his own or an account for which
he exercises investment discretion, effects transactions for the
purchase or sale of any publicly traded security or securities by
use of any means or instrumentality of interstate commerce or of the
mails, or of any facility of a national securities exchange,
directly or indirectly by or through a registered broker or dealer
in an aggregate amount equal to or in excess of the identifying
activity level.'' See 15 U.S.C. 78m(h)(8)(A). The term ``identifying
activity level'' is defined in Section 13(h) as ``transactions in
publicly traded securities at or above a level of volume, fair
market value, or exercise value as shall be fixed from time to time
by the Commission by rule or regulation, specifying the time
interval during which such transactions shall be aggregated.'' See
15 U.S.C. 78m(h)(8)(C). The ``identifying activity level'' is set
forth in paragraph (a)(7) of new Rule 13h-1.
    \17\ See Senate Report, supra note 14, at 4, 44, and 71. In this
respect, though self-regulatory organization (``SRO'') audit trails
provide a time-sequenced report of broker-dealer transactions, those
audit trails do not identify the large trader in a uniform manner on
an inter-market basis. Accordingly, the Commission is not presently
able to utilize existing SRO audit trail data to accomplish the
objectives of the Market Reform Act.
    \18\ See 15 U.S.C. 78m(h)(2). Section 13(h) also provides the
Commission with authority to determine the manner in which
transactions and accounts should be aggregated, including
aggregation on the basis of common ownership or control. See 15
U.S.C. 78m(h)(3). The term ``reporting activity level'' is defined
in Section 13(h)(8)(D) of the Exchange Act to mean ``transactions in
publicly traded securities at or above a level of volume, fair
market value, or exercise value as shall be fixed from time to time
by the Commission by rule, regulation, or order, specifying the time
interval during which such transactions shall be aggregated.'' See
15 U.S.C. 78m(h)(8)(D). The ``reporting activity level'' is set
forth in paragraph (a)(8) of new Rule 13h-1.
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B. Rule 17a-25 and the Enhanced EBS System

    In 2001, the Commission adopted Rule 17a-25 to enhance the EBS
system and facilitate the Commission's ability to collect electronic
transaction data to support its investigative and enforcement
activities.\19\ Rule 17a-25 enhanced the EBS system in three primary
areas. First, it requires broker-dealers to submit to the Commission
securities transaction information responsive to a Blue Sheets request
in electronic format.\20\ Second, the rule modified the EBS system to
take into account evolving trading strategies used primarily by
institutional and professional traders. Specifically, the rule requires
broker-dealers to supply three additional data elements (beyond what
was required under Exchange Act Rules 17a-3 and 17a-4)--namely, prime
brokerage identifiers,\21\ average price account identifiers,\22\ and
depository institution identifiers \23\--to assist the Commission in
aggregating securities transactions by entities trading through
multiple accounts at more than one broker-dealer.\24\ Finally, the rule
requires broker-dealers to update their contact person information to
provide the Commission with up-to-date information necessary for the

Commission to direct EBS requests to the appropriate staff.\25\
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    \19\ See Securities Exchange Act Release No. 44494 (June 29,
2001), 66 FR 35836 (July 9, 2001) (S7-12-00) (final rulemaking)
(``Rule 17a-25 Release''); and 42741 (May 2, 2000), 65 FR 26534 (May
8, 2000) (proposed rulemaking) (``Rule 17a-25 Proposing Release'').
In the late 1980s, the Commission and the SROs worked together to
develop and implement a system with a uniform electronic format,
commonly known as the EBS system, to replace the process by which
the Commission would request and collect securities trading records
from broker-dealers through mailed questionnaires (known as ``blue
sheets''). See Rule 17a-25 Proposing Release, 65 FR at 26534-35.
    In the 1990s, the Commission twice proposed to use its authority
under Section 13(h) of the Exchange Act to establish a large trader
reporting system; neither system was adopted. In 1991, the
Commission proposed a large trader reporting system that would have
required large traders to disclose to the Commission their accounts
and affiliations, and would have imposed recordkeeping and reporting
requirements on broker-dealers with respect to the activity of their
large trader customers. See Securities Exchange Act Release No.
29593 (August 22, 1991), 56 FR 42550 (August 28, 1991) (S7-24-91)
(``1991 Proposal''). The 1991 proposal included an ``identifying
activity level,'' the triggering level at which large traders would
be required to identify themselves to the Commission, of aggregate
transactions during any 24-hour period that equals or exceeds either
100,000 shares or fair market value of $4,000,000, or any
transactions that constitute program trading. See 1991 Proposal, 56
FR at 42551. Commenters expressed concerns about the initial
proposal, including about the definition of large trader, the
identifying activity level, the duty to supervise compliance, its
costs, as well as various technical aspects of reporting. See
Securities Exchange Act Release No. 33608 (February 9, 1994), 59 FR
7917 (February 17, 1994) (S7-24-91) (``1994 Reproposal''). In 1994,
the Commission again proposed a large trader reporting system which,
among other things, included an increased ``identifying activity
level'' of aggregate transactions in publicly traded securities
effected during a calendar day where the account is located that are
equal to or greater than the lesser of 200,000 shares and fair
market value of $2,000,000 or fair market value of $10,000,000. See
1994 Reproposal.
    \20\ See 17 CFR 240.17a-25. Rule 17a-25 requires submission of
the same standard customer and proprietary transaction information
that SROs request in connection with their market surveillance and
enforcement inquiries. For a proprietary transaction, the broker-
dealer must include the following information: (1) Clearing house
number or alpha symbol used by the broker-dealer submitting the
information; (2) clearing house number(s) or alpha symbol(s) of the
broker-dealer(s) on the opposite side to the trade; (3) identifying
symbol assigned to the security; (4) date transaction was executed;
(5) number of shares, or quantity of bonds or options contracts, for
each specific transaction; whether each transaction was a purchase,
sale, or short sale; and, if an options contract, whether open long
or short or close long or short; (6) transaction price; (7) account
number; (8) identity of the exchange or market where each
transaction was executed; (9) prime broker identifier; (10) average
price account identifier; and (11) the identifier assigned to the
account by a depository institution. For customer transactions, the
broker-dealer also is required to include the customer's name,
customer's tax identification number, customer's address(es), branch
office number, registered representative number, whether the order
was solicited or unsolicited, and the date the account was opened.
If the transaction was effected for a customer of another member,
broker, or dealer, the broker-dealer must include information on
whether the other party was acting as principal or agent on the
transaction.
    \21\ The Commission requires prime brokerage identifiers to
avoid double-counting of transactions where EBS submissions reflect
the same trade by both the executing broker-dealer and the broker-
dealer acting as the prime broker. See Rule 17a-25 Release, supra
note 19, 66 FR at 35838.
    \22\ Some broker-dealers use ``average price accounts'' as a
mechanism to buy or sell large amounts of a given security for their
customers. Under this arrangement, a broker-dealer's average price
account may buy or sell a security in small increments throughout a
trading session and then transfer the accumulated long or short
position to one or more accounts for an average price or volume-
weighted average price after the market close. Similar to prime
brokerage identifiers, the Commission requires average price account
identifiers to avoid double-counting where the EBS submission
reflects the same transaction for both the firm's average price
account and the accounts receiving positions from the average price
account. See Rule 17a-25 Release, supra note 19, 66 FR at 35838-39.
    \23\ The inclusion of a depository identifier in EBS reports was
designed to expedite the Commission's efforts to aggregate trading
when conducting complex trading reconstructions. See Rule 17a-25
Release, supra note 19, 66 FR at 35839.
    \24\ See 17 CFR 240.17a-25(b).
    \25\ This provision was designed to address the recurring
problem of frequent staff turnover and re-organizations at broker-
dealers to ensure the Commission directs EBS requests to the
appropriate personnel. See Rule 17a-25 Release, supra note 19, 66 FR
at 35839.
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C. The Need for Large Trader Reporting

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

D. Relation to Consolidated Audit Trail Proposal

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

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

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

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

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

III. Description of Adopted Rule and Form

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

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

A. Large Traders

1. Large Trader Status
    Rule 13h-1(a)(1) defines a ``large trader'' as ``any person that:
(i) Directly or indirectly, including through other persons controlled
by such person, exercises investment discretion over one or more
accounts and effects transactions for the purchase or sale of any NMS
security for or on behalf of such accounts, by or through one or more
registered broker-dealers, in an aggregate amount equal to or greater
than the identifying activity level; or (ii) voluntarily registers as a
large trader by filing electronically with the Commission Form 13H.''
This definition is substantially the same as the proposed definition of
the term but, as discussed below, takes into account comments received
on that proposed definition.
a. Who should register as a large trader?
    The definition of large trader is designed to focus on the ultimate
parent company of an entity or entities that employ or otherwise
control the individuals that exercise investment discretion.
Accordingly, the definition of large trader, in conjunction with the
provision that allows the parent company to comply with the self-
identification requirement on behalf of its subsidiaries,\35\ is
intended to allow the Commission to gather information about the
primary institutions that conduct a large trading business while at the
same time mitigating the burden of the Rule by focusing the filing
requirement on persons and entities that control large traders.
---------------------------------------------------------------------------

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

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

i. Persons Who Exercise Investment Discretion
    A large trader is any person that ``directly or indirectly,
including through other persons controlled by such person, exercises
investment discretion over one or more accounts * * *'' \39\ Rule 13h-
1(a)(4) provides that the term ``investment discretion'' has ``the same
meaning as in Section 3(a)(35) of the Securities Exchange Act of
1934.'' One commenter objected to this definition, asserting that the
definition under the Exchange Act is ``fraught with ambiguities'' and
therefore would be unhelpful in ``deciphering investment
relationships.'' \40\ The commenter offered no alternative definition,
but asked for clarification regarding what is meant by ``exercising
investment discretion.'' The definition of ``investment discretion'' in
Section 3(a)(35) of the Exchange Act encompasses a person who is
``authorized to determine what securities or other property shall be
purchased or sold by or for the account'' as well as a person that
``makes decisions as to what securities or other property shall be
purchased or sold by or for the account even though some other person
may have responsibility for such investment decisions * * *.'' \41\
Rule 13h-1(a)(4) further specifies that a ``person's employees who
exercise investment discretion within the scope of their employment are
deemed to do so on behalf of such person.'' To the extent that an
entity employs a natural person that individually, or collectively with
others, meets the definition of a ``large trader,'' then, for purposes
of Rule 13h-1, the entity that controls that person or those persons
would be a large trader.
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    \39\ See new Rule 13h-1(a)(1).
    \40\ See SIFMA Letter at 17, n.23.
    \41\ 15 U.S.C. 78c(a)(35). See also Rule 13h-1(a)(3) (defining
control the term ``control'' to mean ``the possession, direct or
indirect, of the power to direct or cause the direction of the
management and policies of a person, whether through the ownership
of securities, by contract, or otherwise. For purposes of this rule
only, any person that directly or indirectly has the right to vote
or direct the vote of 25% or more of a class of voting securities of
an entity or has the power to sell or direct the sale of 25% or more
of a class of voting securities of such entity, or in the case of a
partnership, has the right to receive, upon dissolution, or has
contributed, 25% or more of the capital, is presumed to control that
entity'').
---------------------------------------------------------------------------

    One commenter recommended excluding regulated investment

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    \52\ See Prudential Letter at 3. The Commission notes that
proposed Form 13H would have required a large trader to identify its
accounts and disclose for each account the LTID of any unaffiliated
large trader with whom it shares investment discretion. As discussed
below, the Commission has not adopted the provisions in the Form
relating to the identification of accounts, and, as a consequence, a
large trader would not need to obtain the LTID of any unaffiliated
large trader for purposes of completing the Form.
    \53\ See Prudential Letter at 3.
    \54\ See SIFMA Letter at 18.
    \55\ The Commission considered other thresholds for control and
determined that a 25% threshold would be the appropriate level for
purposes of new Rule 13h-1. As discussed in the Proposing Release,
the Commission notes that the definition of control is similar to
the definition of control contained in Form 1 (Application for
Registration or Exemption from Registration as a National Securities
Exchange). See Proposing Release, supra note 3, 75 FR at 24161. Cf.
Rule 19h-1(f)(2) under the Exchange Act, 17 CFR 240.19h-1(f)(2)
(featuring a 10% threshold with respect to the right to vote 10% or
more of the voting securities or receive 10% or more of the net
profits).
---------------------------------------------------------------------------

b. Identifying Activity Level
    Rule 13h-1(a)(7) defines the term ``identifying activity level'' as
``aggregate transactions in NMS securities that are equal to or greater
than: (1) During a calendar day, either two million shares or shares
with a fair market value of $20 million; or (2) during a calendar
month, either twenty million shares or shares with a fair market value
of $200 million.'' One commenter expressly supported these threshold
levels.\56\ Another commenter recommended increasing the daily
threshold limit to shares with a fair market value of $100 million
during any calendar day.\57\ Others advocated increased thresholds, but
did not identify a particular level or provide empirical support for
their recommendations.\58\
---------------------------------------------------------------------------

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

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

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

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

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

    \61\ See Proposing Release, supra note 3, 75 FR 21463-64. An
``NMS security'' is ``any security or class of securities for which
transaction reports are collected, processed, and made available
pursuant to an effective transaction reporting plan, or an effective
national market system plan for reporting transactions in listed
options.'' 17 CFR 242.600(b)(46). The term refers generally to
exchange-listed securities, including equities and options.
---------------------------------------------------------------------------

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

    \62\ Specifically, under the proposal, the following would not
be counted as ``transactions'' for purposes of the proposed Rule:
(i) Any journal or bookkeeping entry made to an account in order to
record or memorialize the receipt or delivery of funds or securities
pursuant to the settlement of a transaction; (ii) any transaction
that is part of an offering of securities by or on behalf of an
issuer, or by an underwriter on behalf of an issuer, or an agent for
an issuer, whether or not such offering is subject to registration
under the Securities Act of 1933, provided, however, that this
exemption shall not include an offering of securities effected
through the facilities of a national securities exchange; (iii) any
transaction that constitutes a gift; (iv) any transaction effected
by a court appointed executor, administrator, or fiduciary pursuant
to the distribution of a decedent's estate; (v) any transaction
effected pursuant to a court order or judgment; (vi) any transaction
effected pursuant to a rollover of qualified plan or trust assets
subject to Section 402(a)(5) of the Internal Revenue Code; or (vii)
any transaction between an employer and its employees effected
pursuant to the award, allocation, sale, grant, or exercise of a NMS
security, option or other right to acquire securities at a pre-
established price pursuant to a plan which is primarily for the
purpose of an issuer benefit plan or compensatory arrangement.
    \63\ As noted in the Proposing Release, the aggregation
provisions in paragraph (c) are designed to require market
participants to use a ``gross up'' approach in calculating their
activity levels. Accordingly, offsetting or netting transactions
among or within accounts, even for hedged positions, would be added
to a participant's activity level in order to show the full extent
of a trader's purchase and sale activity. This approach reflects the
fact that substantial trading activity has the potential to impact
the market regardless of the trader's net position. See Proposing
Release, supra note 3, 75 FR at 21464.
    \64\ See id. For example, 50,000 shares of XYZ stock and 500 XYZ
call options would count as aggregate transactions of 100,000 shares
in XYZ (i.e., 50,000 + 500 x 100 = 100,000). With respect to index
options, the market value would be computed by multiplying the
number of contracts purchased or sold by the market price of the
options and the applicable multiplier. For example, if ABC Index has
a multiplier of 100, a person who purchased 200 ABC call options for
$400 would have effected aggregate transaction of $8 million (i.e.,
200 x 400 x 100 = $8,000,000). Transactions in index options are not
required to be ``burst'' into share equivalents for each of the
underlying component equities.
    \65\ See 15 U.S.C. 78m(h)(1).
---------------------------------------------------------------------------

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

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

    \66\ See, e.g., American Benefits Council Letter; Financial
Engines Letter; Howard Hughes Medical Institute Letter; and SIFMA
Letter.
    \67\ See Proposing Release, supra note 3, 75 FR at 21463 (``The
proposed exclusions are designed to exempt certain small and
otherwise infrequent traders from the definition of a large trader
as well as activity that is not characterized by active investment
discretion or is associated with capital raising or employee
compensation. Specifically, the Commission preliminarily believes
that the proposed excepted transactions are not effected with an
intent that is commonly associated with an arm's-length purchase or
sale of securities in the secondary market and therefore do not fall
within the types of transactions that are characterized by the
exercise of investment discretion. While a large enough one-time
transaction in the proposed categories could have an impact on the
market, the Commission would be able to obtain information on that
trade through other means, including the EBS system. The Commission
preliminarily believes that the benefit to the Commission of
identifying such person as a large trader solely through one of the
enumerated excepted transactions would not be justified by the costs
that would be imposed on the person and their registered broker-
dealer that accompany meeting the definition of large trader.'')
    \68\ See Financial Information Forum Letter at 3.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission requested comment about
whether any of the proposed exclusions from the definition of
transaction should be eliminated or whether any other types of
transactions should be excluded.\69\ While no commenter recommended
eliminating any of the excluded transactions, several commenters
suggested the Commission consider additional exclusions. For example,
some commenters suggested excluding all or some transactions effected
on behalf of defined contribution plans.\70\ The Commission does not
believe that a blanket exclusion for transactions effected on behalf of
defined contribution plans is warranted because such trades are
effected through the exercise of investment discretion and are within
the scope of activity contemplated by the statute. Instead, the
Commission believes it is appropriate to provide additional guidance
regarding the application of the Rule to transactions effected on
behalf of defined contribution plans. As highlighted by commenters,
investment discretion may be exercised on behalf of defined
contribution plans differently, depending on the particular structure
of the plan. For example, in some defined contribution plans,
participants select their own investments from among the choices
offered by their employer.\71\ A trustee then effects the transactions
pursuant to the instructions it receives from the plan participants.
For purposes of determining who is a large trader, the participants in
such plans are the ones who exercise investment discretion over the
transactions that are effected on their behalf. In such plans, the
Commission does not view the trustee as exercising investment
discretion over the transactions for purposes of the Rule.\72\
Additionally, solely for purposes of determining who is a large trader
pursuant to Rule 13h-1, the Commission considers an employer to not
exercise investment discretion merely by establishing investment
options for its employees. Other types of defined contribution plans
may be structured differently.\73\
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    \69\ See Proposing Release, supra note 3, 75 FR at 21472.
    \70\ See Financial Engines Letter at 7 and American Benefits
Council Letter at 2 (suggesting exempting significant repositioning
of portfolio balances by very large defined benefit plans;
investment lineup changes by defined contribution retirement plan
sponsors; and plan activity in connection with acquisitions and
divestitures of businesses which may precipitate a large movement of
participants out of a plan).
    \71\ See American Benefits Council Letter at 2.
    \72\ The Commission expects that few individual defined
contribution plan participants will effect aggregate transactions
greater than or equal to the identifying activity level, and the
Commission therefore expects that generally they will not meet the
definition of large trader.
    \73\ The Commission notes that, pursuant to Section 13(h)(6) of
the Exchange Act and new Rule 13h-1, the Commission may by order
exempt, upon specified terms and conditions or for stated periods,
any person or class of persons or any transaction or class of
transactions from the provisions of this rule to the extent that
such exemption is consistent with the purposes of the Exchange Act.
See new Rule 13h-1(g), which is discussed infra at Section III.0.
---------------------------------------------------------------------------

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

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

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

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

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

identifying activity level trading activity in the secondary market
that relates to the acquisition or disposition of securities in
connection with, for example, the creation or redemption of ETF shares,
but not the transfer of such securities between an authorized
participant and an ETF.\77\
---------------------------------------------------------------------------

    \77\ Specifically, then, in connection with creation or
redemption: (1) Purchases of securities by an authorized participant
for the purpose of assembling a basket would count toward an
authorized participant's identifying activity level; (2) transfers
of those securities by an authorized participant to the ETF would
not be counted toward the ETF's identifying activity level; (3)
acquisitions of securities by an authorized participant from the ETF
would not count toward the authorized participant's identifying
activity level; and (4) sales of securities by an authorized
participant into the secondary market would count toward the
authorized participant's identifying activity level. No transactions
effected would be counted toward an ETF's identifying activity level
because the ETF would not be exercising investment discretion by
creating or redeeming ETF shares.
---------------------------------------------------------------------------

c. Voluntary Registration
    One commenter suggested that the Commission allow a person to
register voluntarily as a large trader as that person nears the
applicable trading activity threshold in order to reduce its need to
actively monitor its trading levels.\78\ The Commission agrees with the
commenter that the ability to voluntarily register will mitigate the
monitoring burden on market participants who expect to effect
transactions equal to or greater than the identifying activity level at
some point in the future. Accordingly, the Commission is adopting: (1)
A definition of large trader that includes those persons who
voluntarily register as large traders; and (2) changes to Form 13H to
require a large trader to indicate in its initial filing with the
Commission whether it has chosen to voluntarily register. Any such
person that elects to voluntarily file will be treated as a large
trader for purposes of the Rule, and will be subject to all of the
obligations of a large trader under the Rule, notwithstanding the fact
that the person had not effected the requisite level of transactions at
the time it registered as a large trader.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

    Rule 13h-1(b)(3)(i) provides that a large trader shall not be
required to separately comply with the requirements of paragraph (b) if
a person who controls the large trader complies with all of the
requirements under paragraphs (b)(1), (b)(2), and (b)(4) applicable to
such large trader with respect to all of its accounts. This provision
allows the identification requirement to be pushed up the corporate
hierarchy to the parent entity (i.e., Holding Company, in the example
above).
    Conversely, Rule 13h-1(b)(3)(ii) applies the same principle on a
``top down'' basis, providing that a large trader shall not be required
to comply with the requirements of paragraph (b) if one or more persons
controlled by such large trader collectively comply with all of the
requirements under paragraphs (b)(1), (b)(2), and (b)(4) applicable to
such large trader with respect to all of its accounts. A controlling
person of one or more large traders (such as Holding Company, in the
example above) would be required to comply with all of the requirements
of paragraph (b) unless the entities that it controls discharge all of
the

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

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

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

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

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

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

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

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

iv. Inactive Status
    Rule 13h-1(b)(3)(iii) permits a large trader who has not effected
aggregate transactions at any time during the previous full calendar
year in an amount equal to or greater than the identifying activity
level to obtain inactive status by filing for ``Inactive Status''
through a Form 13H submission.\97\ Inactive Status would be effective
upon such filing.
---------------------------------------------------------------------------

    \97\ New Rule 13h-1(b)(3)(iii) provides: ``A large trader that
has not effected aggregate transactions at any time during the
previous full calendar year in an amount equal to or greater than
the identifying activity level shall become inactive upon filing a
Form 13H and thereafter shall not be required to file Form 13H or
disclose its large trader status unless and until its transactions
again are equal to or greater than the identifying activity level. A
large trader that has ceased operations may elect to become inactive
by filing an amended Form 13H to indicate its terminated status.''
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

3. Overview of Form 13H
    Form 13H is designed to collect basic identifying information about
large traders that will allow the Commission to understand the
character and operations of the large trader. The Commission solicited
\108\ and received \109\ many comments regarding various aspects of
proposed Form 13H. The Commission, for example, received comments
requesting clarification regarding certain information required by the
proposed Form, as well as suggestions designed to reduce and streamline
the reporting burden on large traders.\110\ One commenter noted that
the large trader reporting rule is only one of many proposed new
regulations that are being contemplated by Congress and various federal
regulators that would affect commercial banks.\111\ The Commission is
sensitive to the burdens imposed by the large trader rule.\112\ As
discussed below, the Commission is incorporating some commenters'
suggestions in the Form as adopted, and many of the changes from the
proposed version of the Form are intended to reduce further the burdens
of the Form. The Commission believes that the version of Form 13H it is
adopting today will be less burdensome than the proposed version, most
notably because, as discussed further below, it replaces the proposed
requirement to provide account numbers with a more general requirement
to identify broker-dealers at which the large trader or any of its
Securities Affiliates maintains an account.\113\ In addition, the
Commission is seeking to design the electronic filing system for Form
13H to minimize the filing burden. For example, a selection of
previously filed Form 13H submissions, including the most recently
submitted version, will be readily accessible so that large traders can
simply edit and resubmit the Form when amendments are required. The
Commission believes that filing Form 13H in an electronic format will
be less burdensome and more efficient for both large traders and the
Commission.
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    \108\ See Proposing Release, supra note 3, 75 FR at 21472-73.
    \109\ See, e.g., Wellington Management Letter at 3-6; American
Bankers Association Letter at 2; David L. Goret Letter at 1-3;
Anonymous e-mail dated June 22, 2010; and Prudential Letter at 3-4.
    \110\ See, e.g., SIFMA Letter; Wellington Management Letter;
Investment Company Institute Letter; and American Bankers
Association Letter.
    \111\ See American Bankers Association Letter at 2.
    \112\ As discussed infra (see Section III.0), Section 13(h)(5)
of the Exchange Act expressly requires the Commission to take into
account, among other things, the costs associated with maintaining
information with respect to transactions effected by large traders
and reporting such information to the Commission.
    \113\ As defined in the instructions to Form 13H, ``Securities
Affiliate'' means an affiliate of the large trader that exercises
investment discretion over NMS securities.
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    The Commission is adopting the Form with some format-driven
modifications from the proposed version to better reflect its format as
an electronic, rather than paper, filing. For example, the Commission
is not adopting the proposed fields that would have required filers of
Annual Filings and Amended Filings to identify the Items and Schedules
being updated since the Commission will be able to distinguish this
information more readily in an electronic filing environment. In
addition, the Commission is not adopting the Schedules to the Form, and
the information previously contained in the proposed Schedules has been
realigned into the body of the Form. References to paper-based
``continuation sheets'' are not being adopted. Similarly, the concept
of Schedules, while relevant to a paper-based form, is unnecessary in
the context of an all-electronic filing.\114\ These and other related
non-substantive changes from the proposed version of the Form reflect
that the Form will be accessed electronically and filed by large
traders exclusively online.
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    \114\ In addition, in response to comments and as discussed in
greater detail below, the Commission is revising the scope of the
data that would have been collected in the proposed Schedules.
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    Voluntary Registration. For the reasons discussed above,\115\ in
response to a comment, the Commission is revising Form 13H from the
proposed version of the Form to allow a market participant to register
voluntarily as a large trader, even if it has not yet effected
transactions equal to or greater than the identifying activity level at
the time of filing. Correspondingly, Form 13H requires a large trader
to indicate whether its ``Initial Filing'' is voluntary. A large trader
that elects to voluntarily file is required to disclose the date upon
which it filed the Form, rather than the date on which its trading
activity equaled or exceeded the identifying activity level.
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    \115\ See supra at Section III.A.1.0.
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    Background Information About the Large Trader and Its Authorized
Person. Form 13H requires the large trader to provide its mailing
address, which may be different than its business address.
Additionally, the Form requires that the following information be
provided about the Authorized Person (i.e., the natural person
authorized to submit the Form 13H on behalf of the large trader):
business address, telephone number, facsimile number, and e-mail
address. This information was proposed to be required by Schedule 6 of
the Form and has been relocated to the introductory section of the
Form. Proposed Item 3 of Schedule 4, which would have mandated
disclosure of the large trader's principal place of business (if
different from the information disclosed on the cover page), has not
been adopted. Instead, the requested information has been moved to the
beginning of the adopted Form, where both business and mailing
addresses are requested. All of this information is necessary for the
Commission to identify and contact large traders.
a. Item 1
    In Item 1(a) of the Form, the large trader must indicate the types
of businesses that it or any of its affiliates engage in: \116\ broker
or dealer; bank holding company; \117\ non-bank holding company;
government securities broker or dealer; municipal securities broker or
dealer; bank; pension trustee; non-pension trustee; \118\ investment
adviser to one or more registered investment companies; investment
adviser to one or more hedge funds or other funds not registered under
the Investment Company Act; insurance company; commodity pool operator;
or futures commission merchant. A large trader also may check ``Other''
and disclose other types of financial businesses engaged in by the
large trader.
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    \116\ Unless otherwise specified, the Form requires information
about the large trader that is filing the Form 13H. Typically, the
filing large trader would be the large trader's ultimate parent
company, which means the person at the highest level of the
organizational chart required under Item 4(a) that controls a large
trader or multiple large traders.
    \117\ The use of the term ``Holding Company'' in the proposal
has been clarified in the adopted Form by dividing it into two
options ``Bank Holding Company'' and ``Non-Bank Holding Company.''
    \118\ To clarify that all trustees that are large traders would
be required to report, the adopted Form includes categories for
``Pension Trustee'' as well as ``Non-Pension Trustee.''
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    Item 1(b) of the Form requires that the large trader provide the
following for itself and each of its Securities Affiliates: a
description of the nature of its operations, including a general
description of its trading strategies.\119\ The instructions provide
guidance regarding the level of detail expected.\120\
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    \119\ Item 5 of proposed Schedule 4 would have required the
large trader to describe the nature of the large trader's business.
Form 13H as adopted contains this requirement in Item 1.
    \120\ For example, a large trader may describe its operations as
including an ``investment adviser specializing in fundamental
analysis'' or it may describe a broker-dealer as a ``proprietary
trader focusing on statistical arbitrage'' or ``options market
maker.''

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    Collection of this basic descriptive information will allow the
Commission to better understand each large trader and will allow the
Commission to more carefully tailor requests both to registered broker-
dealers for large trader transaction data and, if necessary, to large
traders for additional information pursuant to Rule 13h-1(b)(4).
    The Commission does not believe that the changes to the Form from
the proposed version discussed above are substantive. Instead, the
changes are intended to clarify the scope of information elicited by
Item 1 and to reflect the fully-electronic nature of the Form.
b. Item 2
    Item 2 of the Form requires the large trader to indicate whether it
or any of its Securities Affiliates files any other forms with the
Commission.\121\ If so, Item 2 requires identification of each filing
entity, the form(s) filed, and the CIK number.
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    \121\ The title of Item 2 of the adopted Form has been slightly
amended; its title is ``Securities and Exchange Commission
Filings,'' not ``Securities and Exchange Commission Registration.''
This non-substantive change reflects that registration is not the
effect of all forms filed with the Commission.
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    The Commission is narrowing the scope of Item 2 from the proposal
to require the large trader to disclose whether it or any of its
affiliates that exercise investment discretion over NMS securities (as
distinguished from all of its affiliates) file any forms with the
Commission. Additionally, rather than disclosing the filers' Central
Registration Depository (``CRD'') Numbers \122\ and SEC File Numbers
\123\ as proposed, Item 2 as adopted requires only disclosure of their
CIK numbers.\124\
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    \122\ The CRD is a computerized database that contains
information about most brokers, their representatives, and the firms
for whom they work.
    \123\ As discussed above, an SEC File Number is assigned by
EDGAR to registrants and others who file materials with the
Commission through EDGAR. See supra discussion at text accompanying
notes 79-81.
    \124\ CIK numbers, which are assigned to persons that file
material with the Commission, are applicable to a broader universe
of entities that may be large traders, as opposed to CRD numbers
which are only applicable to broker-dealers.
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    One commenter objected to the collection of information under
proposed Item 2, pointing out that the Commission already has access to
this information.\125\ The Commission believes that Item 2 is useful
because it centralizes information about a large trader's various SEC
filing obligations and will thereby allow the Commission to more
promptly access records of those filers using their CIK numbers.
Especially given the circumscribed scope of Item 2 as adopted, the
Commission believes that this requirement will not be unduly
burdensome. Further, each large trader should have ready access to this
information and be able to summarize it with minimal additional burden.
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    \125\ See American Bankers Association Letter at 2.
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c. Item 3
    Item 3 of the Form requires a large trader to disclose whether it
or any of its affiliates is registered with the Commodity Futures
Trading Commission (``CFTC'') or regulated by a foreign regulator. If
so, the large trader is required to identify each entity and the CFTC
registration number or primary foreign regulator, as applicable.
    The Commission received one comment about the aspect of proposed
Item 3 of the Form that would have required disclosure about bank
regulation.\126\ The commenter argued that the required information did
not further the underlying purpose of the proposal, and recommended
that the Commission, to the extent necessary, obtain this information
directly from applicable banking regulators instead of from the large
trader.\127\ In response to this comment, the Commission has
significantly narrowed the scope of this item by not adopting the
proposed requirement in Item 3(b) of the proposed Form to disclose
information on bank regulators. Instead, as mentioned above, the
Commission is adopting the requirement to disclose whether the large
trader includes a bank \128\ or bank holding company. The Commission
believes that collection of this basic information will be sufficient
to characterize a large trader's operations, and should reduce the
burdens of the Form while focusing the collection of information on the
securities trading operations of each large trader.
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    \126\ See id.
    \127\ Item 3(b) of the proposed Form would have required the
large trader to disclose: (1) Whether it or any of its affiliates is
a bank holding company, national bank, state member bank of the
Federal Reserve System, state non-member bank, savings bank or
association, credit union, or foreign bank; if so, the large trader
would have been required to identify each such affiliate and its
banking regulators.
    \128\ As adopted, the instructions for Form 13H define the term
``bank'' to mean a national bank, state member bank of the Federal
Reserve System, state non-member bank, savings bank or association,
credit union, or foreign bank.
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    Further, as proposed, Item 3(c) would have required the large
trader to disclose whether it or any of its affiliates is an insurance
company and identify each such regulated entity and its respective
insurance regulators. One commenter recommended limiting Item 3(c) to
only the large trader and its large trader affiliates, and suggested
that the Form require identification only of their primary
regulators.\129\ Otherwise, the commenter stated, its list of
regulators would include a long list of state insurance
regulators.\130\ In balancing the benefits of collecting such
information against the burden on large traders to provide it, the
Commission has decided to not adopt the requirements of proposed Item
3(c). The Commission again notes that Item 1 of Form 13H requires that
the large trader disclose whether the large trader includes an
insurance company. The Commission believes that collection of this
basic information will be sufficient to characterize a large trader's
operations, and should reduce the burdens of the Form while focusing
the collection of information on the large trader's securities trading
operations.
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    \129\ See Prudential Letter at 4.
    \130\ See id.
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    In addition, proposed Item 3(d) would have required the large
trader to disclose whether it or any of its affiliates is regulated by
a foreign regulator and identify each such regulated entity and all of
its foreign regulators. One commenter recommended that the information
requested in Item 3(d) only be required of the large trader and its
large trader affiliates.\131\ It further suggested that the Form
require identification only of the primary foreign regulators.\132\ The
commenter stated that its list of regulators would be very long, as
some of its foreign affiliates may have 25 foreign regulators.\133\ In
balancing the benefits of collecting such information against the
burden on large traders to provide it, the Commission is not adopting
the requirement as proposed. This adopted item, renumbered as Item
3(b), requires identification only of the primary foreign regulator.
Further, the Commission is making the requirement applicable only to
the large trader and its Securities Affiliates. In addition, two
separate questions proposed on CFTC registration have been combined
into one question to streamline the presentation of those items. No
substantive change has been made to either question. The Commission
believes that the requirement as adopted should not be as burdensome
and yet should provide the Commission with access to the basic
information it needs to understand the identity and

regulatory status of a large trader and its affiliates.
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    \131\ See id.
    \132\ See id.
    \133\ See id.
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d. Item 4
    Item 4(b) of the Form requires information on affiliates of the
large trader that exercise investment discretion over NMS securities
(i.e., Securities Affiliates).\134\ Item 5 of the proposed Form would
have required a large trader to identify each affiliate that either