not adopting the proposed requirement to report account numbers.\304\
Instead, the Commission is requiring the large trader to disclose: (1)
The names of broker-dealers with whom it has an account and (2) the
types of brokerage services provided by those brokers. One commenter
noted that many traders already maintain a list of approved broker-
dealers in a readily accessible format, as they maintain approved
broker-dealer lists in the ordinary course of business and have
processes for adding and deleting broker-dealers as well as reviewing
trades with a broker-dealer not on the approved list.\305\ Requiring
the reporting on the Form of a list of broker-dealers used, rather than
all accounts held by each broker-dealer, will bring the compliance
burden for many large traders that are investment advisers in line with
the Commission's original estimate of burdens on large traders
generally. Consequently, the estimated burdens on large traders under
the Form are now in line with the requirements of the adopted Rule and
Form.
---------------------------------------------------------------------------

    \304\ See supra Section III.A.3.0 (discussing account numbers).
    \305\ See Investment Company Institute Letter at 9.
---------------------------------------------------------------------------

    With respect to the Commission's assumption that large traders will
be able to utilize existing systems when considering their trading
levels, one commenter stated that, in cases where a large trader is a
parent company, the parent may not itself be carrying on any trading
activity and, thus, will neither have the detailed knowledge about its
subsidiaries' trading activities or the systems to capture the
information required on Form 13H.\306\ Another commenter stated that
the burden of potentially needing to develop new systems would be
increased for firms with complicated corporate structures.\307\ This
commenter noted that ``[m]any corporate groups maintain operational
independence from their subsidiaries and that each affiliate may employ
its own individual system, which may not communicate with other
affiliates.'' \308\ This commenter asserted that, as a result, the
process for gathering information would have to be done on a manual
basis until a system could be developed and that gathering information
across multiple affiliates (both U.S. and non-U.S. entities) manually
will place a tremendous burden on investment managers.\309\ In
addition, this commenter noted that compliance with the Rule would be
more difficult for investment advisers in that they are required to
maintain information barriers between different affiliates in their
organizations.\310\
---------------------------------------------------------------------------

    \306\ See Prudential Letter at 5.
    \307\ See Investment Adviser Association Letter at 2, 7-8.
    \308\ See id. at 8.
    \309\ See id.
    \310\ See id.
---------------------------------------------------------------------------

    As discussed above, with respect to determining whether the
identifying activity level is met, the Commission notes that parent
companies need only collect and aggregate the total trading activity of
those entities they control when determining whether they meet the
applicable identifying activity level. To accomplish this, only summary
statistics need to be produced to the parent company, which would be
added together at the parent company level to determine whether the
parent company complex meets the applicable identifying activity level
threshold. In other words, each subsidiary will use existing systems to
calculate its trading, and then will provide that information directly
to the parent company. The

trading systems themselves need not be integrated to accomplish this
task. This limited activity should not undermine existing firewalls,
because information would not be shared among entities under common
control but would only be shared with the parent company. In addition,
general information such as ``Subsidiary XYZ executed $10,000,000 worth
of transactions on Monday representing 750,000 shares'' that is
communicated directly from the subsidiary to the parent company would
be highly unlikely to undermine firewalls. Further, the calculation of
trading volume only needs to be done until the entity meets the
applicable identification activity level. Once the entity meets this
level, it becomes a large trader and no longer needs to calculate its
trading in this manner. To the extent a parent company complex wishes
to avoid this process altogether, it may elect to register voluntarily
as a large trader.
    A few commenters believed that the proposed requirement to list
affiliates that beneficially own, as well as exercise investment
discretion over, NMS securities would be overly burdensome.\311\ One
commenter recommended that the requirement should apply to a smaller
set of affiliates, namely only those affiliates that actually conduct
trading in NMS securities.\312\ Another commenter stated that large
traders should only be obligated to identify other unaffiliated large
traders if investment discretion is exercised collectively.\313\ Two
commenters asked the Commission to not require large traders to list
bank and insurance regulators.\314\ One commenter stated that listing
all applicable regulators is likely to lead to the creation of an
extensive list in the case of a diversified financial services
company.\315\ This commenter stated that it would be required to list
approximately fifty insurance regulators for one subsidiary and more
than 25 foreign regulators for its non-U.S. affiliates.\316\ Another
commenter stated that bank regulator information is unnecessary to meet
the Rule's underlying purpose and that the Commission could seek this
information from the federal banking regulators.\317\ As discussed
above, in adopting the Rule, the Commission limited the scope of
affiliates about which it will collect information pursuant to Form
13H.\318\ Specifically, the Commission did not adopt the requirement to
disclose affiliates that merely beneficially own NMS securities and it
did not adopt proposed Items 3(b) and (c) of the Form, which would have
required the large trader to disclose whether it or any of its
affiliates is a bank or an insurance company and identify each such
entity and its respective regulators. The Commission anticipates that
focusing the Rule's scope in this regard will reduce burdens on large
traders to be in line with the Commission's original understanding,
while enabling the Commission to focus on gathering the most relevant
and useful information about large traders.
---------------------------------------------------------------------------

    \311\ See SIFMA Letter at 17; Wellington Management Letter at 5;
Financial Information Forum Letter at 4; and Prudential Letter at 4.
    \312\ See SIFMA Letter at 17.
    \313\ See Wellington Management Letter at 5-6.
    \314\ See Prudential Letter at 4 and American Bankers
Association Letter at 2.
    \315\ See Prudential Letter at 4.
    \316\ See id.
    \317\ See American Bankers Association Letter at 2.
    \318\ See supra Section III.A.3.0 (discussing Item 4 of the
Form).
---------------------------------------------------------------------------

    The Commission does not expect that the revisions to the Form,
including eliminating the requirement to disclose certain affiliates
and applicable bank and insurance regulators, discussed above, will
materially affect the Commission's initial burden estimates. In
particular, a full analysis of which affiliates need to be reported and
disclosed would still need to be conducted, even though the scope of
information that needs to be disclosed on Form 13H has been reduced
from the proposal. The disclosure on the Form of bank and insurance
regulators as proposed would have represented only a minimal additional
burden, and such information would likely have been static and
infrequently changed. Similarly, the Commission's decision to not adopt
the requirement to disclose affiliates that merely beneficially own NMS
securities likewise should not materially affect the estimated
reporting burden because the Form, as adopted, now includes additional
items such as the requirement to provide an organizational chart and to
identify any affiliates that file separately and any affiliates that
have been assigned an LTID suffix. The Commission carefully considered
the changes to the Form in light of the comments received on the Form
and the initial cost estimates, and believes that the removal of
certain required information balances the addition of new required
information of a similar scope so as to not affect the overall
reporting burdens.

2. Burden on Registered Broker-Dealers

a. Recordkeeping
    As part of the Commission's existing EBS system, pursuant to Rule
17a-25 under the Exchange Act, the Commission currently requires
registered broker-dealers to keep records of most of the information
for their customers that will be captured by Rule 13h-1.\319\ The
additional items of information that the Rule will capture are: (1)
LTID(s) and (2) transaction execution time. Some registered broker-
dealers will need to re-program their systems to capture execution time
to the extent their systems do not already capture that information in
a manner that is reportable pursuant to an EBS request for data. The
Commission believes that the burdens of the Rule on registered broker-
dealers will likely vary due to differences in their recordkeeping
systems.
---------------------------------------------------------------------------

    \319\ See 17 CFR 240.17a-25. Pursuant to Rule 17a-25, broker-
dealers are required to maintain the following information that will
be captured by new Rule 13h-1: Date on which the transaction was
executed; account number; identifying symbol assigned to the
security; transaction price; the number of shares or option
contracts traded and whether such transaction was a purchase, sale,
or short sale, and if an option transaction, whether such was a call
or put option, an opening purchase or sale, a closing purchase or
sale, or an exercise or assignment; the clearing house number of
such broker or dealer and the clearing house numbers of the brokers
or dealers on the opposite side of the transaction; a designation of
whether the transaction was effected or caused to be effected for
the account of a customer of such broker or dealer, or was a
proprietary transaction effected or caused to be effected for the
account of such broker or dealer; market center where the
transaction was executed; prime broker identifier; average price
account identifier; and the identifier assigned to the account by a
depository institution. For customer transactions, the broker-dealer
is required to also include the customer's name, customer's address,
the customer's tax identification number, and other related account
information.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission estimated that all
registered broker-dealers that either are large traders or have a
customer base that includes large traders and Unidentified Large
Traders would be required to make modifications to their existing
systems to capture the additional data elements that were not currently
captured by systems that comply with Rule 17a-25, including, for
example, LTID numbers. The Commission estimated that the one-time,
initial burden for registered broker-dealers for system development,
including re-programming and testing of the systems to comply with the
proposed rule, would be approximately 133,500 burden hours.\320\ This
figure

was based on the estimated number of hours for initial internal
development and implementation, including software development, taking
into account the fact that new data elements were required to be
captured and would need to be available for reporting to the Commission
as of the morning following the day on which the transactions were
effected. The Commission noted that because broker-dealers already
capture, pursuant to Rule 17a-25, most of the data that proposed Rule
13h-1 would capture, it did not expect broker-dealers to incur any
hardware costs as existing hardware should be able to accommodate the
additional two fields of information that would need to be captured.
---------------------------------------------------------------------------

    \320\ The Commission derived the total estimated burdens from
the following estimates, which were based on the Commission's
experience with, and burden estimates for, other existing reporting
systems including Rule 13f-1 and Rule 17a-25: (Computer Ops Dept.
Mgr. at 30 hours) + (Sr. Database Administrator at 25 hours) + (Sr.
Programmer at 150 hours) + (Programmer Analyst at 100 hours) +
(Compliance Manager at 20 hours) + (Compliance Attorney at 10 hours)
+ (Compliance Clerk at 20 hours) + (Sr. Systems Analyst at 50 hours)
+ (Director of Compliance at 5 hours) + (Sr. Computer Operator at 35
hours) x (300 potential respondents) = 133,500 burden hours. As
noted above, the Commission acknowledged that, in some instances,
multiple LTIDs may be disclosed to a registered broker-dealer for a
single account. Therefore, the hourly burden estimate factored in
the cost that registered broker-dealers would need to develop
systems capable of tracking multiple LTIDs. Rule 13f-1, like the
Rule, requires monitoring of a certain threshold and, upon reaching
that threshold, disclosure of information. As discussed supra, Rule
17a-25 requires broker-dealers to disclose information that is very
similar in scope and character to the information required under the
Rule.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission stated that the ongoing
annualized expense for the recordkeeping requirement for registered
broker-dealers would not result in a separate burden for purposes of
the PRA, as registered broker-dealers already were required to provide
to the Commission almost all of the proposed information for all of
their customers pursuant to Rule 17a-25 under the Exchange Act.
Moreover, the Commission stated that once a registered broker-dealer's
system was updated to capture the additional two fields of information
required by Rule 13h-1, the Commission did not believe that the
additional fields would result in any ongoing annualized expense beyond
what broker-dealers currently incur to maintain the existing EBS data
that is required to be kept pursuant to Rule 17a-25.
    In response to the Commission's recordkeeping burden estimates, one
commenter believed that the Commission significantly underestimated the
time and resources for broker-dealers to comply with the Rule.\321\ In
particular, the commenter stated that the build-out costs to update the
EBS system to accommodate the two new items (LTID and execution time)
would exceed the Commission's estimate of 133,500 burden hours.\322\
Though the commenter did not provide a methodology for its estimate or
provide a specific estimate of burden hours, it noted the following:
``Assuming that just the generation process alone would require three
months of effort for each firm with an electronic blue sheets reporting
responsibility and that conforming related systems would require
additional time, and then multiplied across the approximately 300
broker-dealers that the SEC estimates would be subject to the proposed
rule, the total build-out for the industry would require 75 years of
effort on a cumulative basis.'' \323\ The commenter noted that one
potential major cost of implementing the recordkeeping requirement is
that some broker-dealers do not have access to execution times in a
manner that is readily reportable under the EBS infrastructure.\324\
These broker-dealers, the commenter stated, would need to devote
considerable resources to updating EBS to gather, process, and transmit
such information.\325\ The Commenter recommended using the OATS system
maintained by FINRA instead of the EBS system for the large trader
reporting rule and argued that using the OATS infrastructure would not
be as ``onerous'' as modifying the existing EBS system.\326\ However,
the same commenter mentioned one firm it talked to that estimated that
it would cost less and take 50 percent less time to build out the EBS
system compared to expanding OATS.\327\ The Commission believes the
firm cited by the commenter supports the Commission's position that an
expansion of the EBS system is a more cost effective option to leverage
an existing reporting system for purposes of the large trader rule.
---------------------------------------------------------------------------

    \321\ See SIFMA Letter at 14.
    \322\ See id.
    \323\ See id. at 5.
    \324\ See id. at 13.
    \325\ See id.
    \326\ See id. at 5.
    \327\ See id. at 6. The commenter states that one firm has
estimated it would costs $4 to $5 million and take 18 to 24 months
to expand OATS, whereas it would cost an estimated $3 to $4 million
and take 12 to 18 months to build out the EBS system as proposed.
The commenter did not provide any basis for these estimates nor what
assumptions this firm made with regards to collection, reporting,
and monitoring requirements, or other any other aspects of the Rule.
The Commission's response to this comment in light of its estimate
of the costs applicable to broker-dealers under the recordkeeping
requirements of the Rule is discussed below in detail. See supra
Section V.B.2.a (costs applicable to broker-dealers under the
recordkeeping requirements of the Rule).
---------------------------------------------------------------------------

    A separate commenter that represents a group that focuses on
technological aspects of securities regulation expressed concern with
the proposed monitoring requirements but did not address the costs
associated with modifications to the EBS system. Rather, the commenter
believed that broker-dealers could reasonably modify their systems to
capture execution time within the proposed six-month implementation
period.\328\ However, this same commenter noted that EBS requests using
LTID as a query mechanism would take longer to implement than the
proposed six month compliance date.\329\ As discussed above, the
Commission expects that it would, on occasion, request EBS data
according to LTID.\330\ In addition, the Commission notes that it is
adopting a longer compliance date than it proposed--seven months after
the Effective Date of the Rule. Because the Rule will be effective 60
days after publication in the Federal Register, this effectively
results in a compliance date nine months after publication in the
Federal Register.
---------------------------------------------------------------------------

    \328\ See Financial Information Forum Letter at 7.
    \329\ See id.
    \330\ See supra Section III.B.2 (discussing reporting
requirements).
---------------------------------------------------------------------------

    The Commission understands that many broker-dealers will face
different challenges in capturing and reporting execution time
information, depending on the sophistication of and resources they have
previously devoted to their recordkeeping systems. The Commission's
estimate, however, is an average calculation that accommodates a broad
spectrum of broker-dealer EBS systems, including the possibility that
some firms might face larger burdens than the average since different
firms would be affected to different degrees. Not all broker-dealers
will face complexities involved with modifying non-integrated legacy
systems to capture execution time, and some broker-dealers will not
need to devote as many resources to those efforts as will others. The
Commission's estimate is based on an aggregated figure that recognizes
that different broker-dealers will need to invest different levels of
resources based on the needs of their particular technology.
Accordingly, the Commission believes that its initial 133,500 hour
burden/year estimate for the one-time burden on registered broker-
dealers to modify their existing EBS systems is reasonable and
appropriate.\331\ This figure assumes that, on average, each broker-
dealer would have to devote 445 burden hours in order to develop,
program, and test the

enhancements to their existing systems to capture and report the
additional fields of information (LTIDs and execution time).\332\
---------------------------------------------------------------------------

    \331\ The Commission notes that its estimate is in line with the
burden estimates from Rule 17a-25. See Rule 17a-25 Release, supra
note 19, 66 FR at 35840-41.
    \332\ The Commission derived the total estimated burdens from
the following estimates, which are based on the Commission's
experience with, and burden estimates for, other existing reporting
systems including Rule 13f-1 and Rule 17a-25: (Computer Ops Dept.
Mgr. at 30 hours) + (Sr. Database Administrator at 25 hours) + (Sr.
Programmer at 150 hours) + (Programmer Analyst at 100 hours) +
(Compliance Manager at 20 hours) + (Compliance Attorney at 10 hours)
+ (Compliance Clerk at 20 hours) + (Sr. Systems Analyst at 50 hours)
+ (Director of Compliance at 5 hours) + (Sr. Computer Operator at 35
hours) x (300 potential respondents) = 133,500 burden hours.
---------------------------------------------------------------------------

b. Reporting
    In addition to requiring registered broker-dealers to maintain
records of account transactions, the Rule also requires registered
broker-dealers to report transaction data to the Commission upon
request. In the Proposing Release, the Commission stated that this
collection of information would not involve any substantive or material
change in the burden that already exists as part of registered broker-
dealers providing transaction information to the Commission in the
normal course of business under the existing EBS system.\333\ However,
the Commission noted that the information would need to be available
for reporting to the Commission on a next-day basis, versus the 10
business day period that typically is associated with an EBS request
for data.\334\ Nevertheless, the Commission believes that once the
electronic recordkeeping system is in place to capture the information,
and the system is designed and built to furnish the information within
the time period specified in the Rule, the collection of information
would result in minimal additional burden.
---------------------------------------------------------------------------

    \333\ See 17 CFR 240.17a-25.
    \334\ See Rule 17a-25 Release, supra note 19.
---------------------------------------------------------------------------

    Although it is difficult to predict with certainty the Commission's
future needs to obtain large trader data, the Commission estimated in
the Proposing Release that, taking into account the Commission's likely
need for data to be used for market reconstruction purposes and
investigative matters, it would send 100 requests for large trader data
per year to each affected registered broker-dealer.\335\ The Commission
estimated that it will take a registered broker-dealer 2 hours to
comply with each request, considering that a broker-dealer would need
to run the database query of its records, download the data file, and
transmit it to the Commission.\336\ The Commission received no comments
on its reporting burden estimate and continues to believe that its
initial estimate was reasonable. Accordingly, the Commission estimates
the ongoing annual aggregate hour burden for broker-dealers to be
60,000 burden hours.\337\
---------------------------------------------------------------------------

    \335\ Compared to the EBS system, where the Commission sent
5,168 electronic blue sheets requests between January 2007 and June
2009, the Commission expects to send fewer requests for large trader
data, in particular because the Commission expects that a request
for large trader data will be broader and encompass a larger
universe of securities and a longer time period than would be the
case for the typically more targeted EBS requests it currently
sends.
    \336\ The Commission notes that the adopting release for Rule
17a-25 estimated that electronic response firms spend approximately
8 minutes and manual response firms spend 1.5 hours responding to an
average blue sheet request. See Rule 17a-25 Release, supra note 19,
at 35841. The Commission's 2-hour estimate for new Rule 13h-1 is
intended to account for the collection and reporting of additional
information on Unidentified Large Traders. This estimate also
accommodates broker-dealers that might want to perform quality
checks over the information before it is reported to the Commission.
    \337\ 100 x 300 x 2 = 60,000 burden hours. The Commission
derived the total estimated burdens based on the Commission's
experience with, and burden estimates for, other existing reporting
systems, including Rule 17a-25. The Commission estimated that each
broker-dealer who electronically responds to a request for data in
connection with Rule 17a-25 and the EBS system spends 8 minutes per
request. See Rule 17a-25 Release, supra note 19, 66 FR at 35841.
Unlike EBS, under new Rule 13h-1, a broker-dealer will also be
required to report data on Unidentified Large Traders. The
Commission therefore believes that the time to comply with a request
for data under the Rule could take longer than would a similar
request for data under the EBS system, as a broker-dealer likely
would take additional time to review and report information on any
Unidentified Large Traders, including the additional fields of
information specified in paragraph (d)(3) of the Rule, that they
would be required to report to the Commission under the Rule.
---------------------------------------------------------------------------

c. Monitoring
    In the Proposing Release, the Commission estimated that the one-
time, initial burden for registered broker-dealers to comply with the
monitoring requirements would be approximately 21,000 burden hours to
establish a compliance system to detect and identify Unidentified Large
Traders.\338\ This figure was based on the estimated number of hours to
establish policies and procedures reasonably designed to assure
compliance with the identification requirements of the Rule. The
Commission estimated that the ongoing annualized burden to broker-
dealers for the monitoring requirements of the Rule, including the
requirement on broker-dealers to inform Unidentified Large Traders of
their potential obligations under Rule 13h-1, would be approximately
4,500 burden hours.\339\
---------------------------------------------------------------------------

    \338\ The Commission derived the total estimated burdens from
the following estimates, which were based on the Commission's
experience with, and burden estimates for, other existing reporting
systems including Rule 13f-1: (Sr. Programmer at 10 hours) +
(Compliance Manager at 10 hours) + (Compliance Attorney at 10 hours)
+ (Compliance Clerk at 20 hours) + (Sr. Systems Analyst at 10 hours)
+ (Director of Compliance at 2 hours) + (Sr. Computer Operator at 8
hours) x (300 potential respondents) = 21,000 burden hours. Rule
13f-1, like new Rule 13h-1, requires monitoring of a certain trading
threshold.
    \339\ The Commission derived the total estimated burdens from
the following estimates, which were based on the Commission's
experience with, and burden estimates for, other existing reporting
systems including Rule 13f-1 and Rule 17a-25: (Compliance Attorney
at 15 hours) x (300 potential respondents) = 4,500 burden hours.
Rule 13f-1, like new Rule 13h-1, requires monitoring of a certain
threshold and, upon reaching that threshold, disclosure of
information.
---------------------------------------------------------------------------

    As discussed above, one commenter believed that the Commission's
estimate of 300 broker-dealers was underestimated and believed that the
number of broker-dealers affected by the monitoring requirements might
be closer to 1,500 because of steps the commenter believed clearing
brokers would likely impose on others in order for them to comply with
the monitoring safe harbor provision of Rule 13h-1(f), as
proposed.\340\ This commenter based its estimate on a belief that,
though the Rule itself would not specifically require it, carrying
broker-dealers might, in turn, require their introducing broker
correspondents to establish policies and procedures to collect ``other
reasonably available information'' on Unidentified Large Traders
required by the proposed safe harbor to assist the clearing firms in
complying with the requirements of the Rule that are applicable to
them.\341\ The commenter based its estimate on the fact that
approximately 1,657 FINRA members have been assigned MPIDs as of June
2010. As such, this commenter believes that the Commission's ongoing
burden estimate of 4,500 burden hours/year \342\ (equivalent to
$1,215,000/year \343\) should instead be something between 111,000
burden hours/year and 3,000,000 burden hours/year \344\ (equivalent to
$30,000,000-$750,000,000/year).\345\ The commenter noted that its
estimate included a full-time compliance professional.\346\
---------------------------------------------------------------------------

    \340\ See Financial Information Forum Letter at 6.
    \341\ See id.
    \342\ Compliance Attorney at 15 hours x 300 potential
respondents = 4,500 burden hours
    \343\ Compliance Attorney at 15 hours x $270 per hour x 300
potential respondents = $1,215,000
    \344\ Compliance Attorney at 370 hours x 300 potential
respondents = 111,000 burden hours; Compliance Attorney at 2,000
hours x 1,500 potential respondents = 3,000,000 burden hours.
    \345\ See Financial Information Forum Letter at 7.
    \346\ See id.
---------------------------------------------------------------------------

    As discussed above, the safe harbor provision of Rule 13h-1(f), as
adopted, makes clear the intended scope of ``other identifying
information'' that a

broker-dealer would need to consider, which is narrower in scope than
what the commenter assumed. As adopted, the safe harbor policies and
procedures would need to be reasonably designed to identify
Unidentified Large Traders based on accounts at the broker-dealer. In
assessing which accounts to consider, the Rule, as adopted, clarifies
that the broker-dealer's policies and procedures should consider
account name, tax identification number, or other identifying
information ``available on the books and records of such broker-
dealer.'' The policies and procedures would not need to consider
information on the books and records of another broker-dealer.
Accordingly, the Rule has been clarified to exclude a possible
expansive interpretation of ``other readily available information''
that formed the basis for the commenter's concern.
    Further, the Commission believes that large traders, whose
aggregate NMS securities transactions by definition equal or exceed the
identifying activity level, require sophisticated trade-processing
capacities on the part of broker-dealers that service them.
Consequently, the Commission believes it is unlikely that nearly all
broker-dealers that have been assigned an MPID either carry accounts
for or will effect a transaction on behalf of a large trader.
Therefore, it does not expect all such entities to be impacted by the
monitoring provisions of Rule 13h-1(f).\347\ By providing additional
guidance in the Rule, as adopted, the Commission believes it has
clarified the intended monitoring responsibilities of broker-dealers
and has shown that the burden estimates for these more limited
requirements are in line with the Commission's original estimates.
---------------------------------------------------------------------------

    \347\ To the extent that a broker-dealer that is subject to the
monitoring requirements requires, by contract or otherwise, an
entity that is not otherwise subject to the Rule's monitoring
requirements to nevertheless perform a monitoring function, the
Commission's estimate does not account for that situation.
---------------------------------------------------------------------------

d. Total Burden
    Under the Rule, the total burden on these respondents will be
214,500 hours for the first year \348\ and 64,500 hours for each
subsequent year.\349\
---------------------------------------------------------------------------

    \348\ This figure was derived from the estimated one-time
burdens from the recordkeeping requirement (133,500 burden hours) +
the reporting requirement (60,000 burden hours) + the monitoring
requirement (21,000 burden hours) = 214,500 total burden hours.
    \349\ This figure was derived from the estimated ongoing burdens
from the reporting requirement (60,000 burden hours) + the
monitoring requirement (4,500 burden hours) = 64,500 total burden
hours.
---------------------------------------------------------------------------

E. Collection of Information is Mandatory

    All collections of information pursuant to Rule 13h-1 will be
mandatory.

F. Confidentiality

    Section 13(h)(7) of the Exchange Act provides that Section 13(h)
``shall be considered a statute described in subsection (b)(3)(B) of [5
U.S.C. 552]'', which is part of the Freedom of Information Act
(``FOIA'').\350\ As such, ``the Commission shall not be compelled to
disclose any information required to be kept or reported under [Section
13(h)].'' \351\ Accordingly, the information that a large trader will
be required to disclose on Form 13H or provide in response to a
Commission request will be exempt from disclosure under FOIA. In
addition, any transaction information that a registered broker-dealer
reports to the Commission under the Rule also will be exempt from
disclosure under FOIA. The circumstances under which the Commission
will provide information collected pursuant to Rule 13h-1 and Form 13H
are discussed above.\352\
---------------------------------------------------------------------------

    \350\ 5 U.S.C. 552(b)(3)(B) is now 5 U.S.C. 552(b)(3)(A)(ii).
    \351\ See Section 13(h)(7) of the Exchange Act, 15 U.S.C.
78m(h)(7).
    \352\ See supra Section III.A.3.g.
---------------------------------------------------------------------------

G. Record Retention Period

    Registered broker-dealers will be required to retain records and
information under Rule 13h-1 for a period of three years, the first two
in an accessible place, in accordance with Rule 17a-4 under the
Exchange Act.\353\
---------------------------------------------------------------------------

    \353\ 17 CFR 240.17a-4.
---------------------------------------------------------------------------

V. Consideration of Costs and Benefits

    The Commission is sensitive to the costs and benefits that result
from its rules. In the Proposing Release, the Commission identified
certain costs and benefits of the Rule as proposed and requested
comment on all aspects of the cost-benefit analysis, including the
identification and assessment of any costs and benefits that were not
discussed in the analysis. The Commission received several comments
relating to the cost-benefit analysis, which are discussed below. For
the reasons discussed below, the Commission continues to believe that
its estimates of the benefits and costs of Rule 13h-1, as set forth in
the Proposing Release, are appropriate.

A. Benefits

    U.S. securities markets have experienced a dynamic transformation
in recent years. In large part, the changes reflect the culmination of
a decades-long trend from a market structure with primarily manual
trading to a market structure with primarily automated trading. Rapid
technological advances have produced fundamental changes in the
structure of the securities markets, the types of market participants,
the trading strategies employed, and the array of products traded. The
markets also have become even more competitive, with exchanges and
other trading centers offering innovative order types, data products
and other services, and aggressively competing for order flow by
reducing transaction fees and increasing rebates. These changes have
facilitated the ability of large institutional and other professional
market participants to employ sophisticated trading methods to trade
electronically in huge volumes with great speed. In addition, large
traders have become increasingly prominent at a time when the markets
are experiencing an increase in overall volume.\354\
---------------------------------------------------------------------------

    \354\ See supra note 8 (discussing analyst estimates of high
frequency trader activity).
---------------------------------------------------------------------------

    Currently, to support its regulatory, investigative, and
enforcement activities, the Commission collects transaction data
through the EBS system.\355\ The Commission uses the EBS system to
obtain securities transaction information for two primary purposes: (1)
To assist in the investigation of possible federal securities law
violations, primarily involving insider trading or market manipulation;
and (2) to conduct market reconstructions.
---------------------------------------------------------------------------

    \355\ See 17 CFR 240.17a-25 (Electronic Submission of Securities
Transaction Information by Exchange Members, Brokers, and Dealers).
---------------------------------------------------------------------------

    The EBS system has performed effectively as an enforcement tool for
analyzing trading in a small sample of securities over a limited period
of time. However, because the EBS system is designed for use in
narrowly-focused enforcement investigations that generally involve
trading in particular securities, it has proven to be insufficient for
large-scale market reconstructions and analyses involving numerous
stocks during peak trading volume periods. Importantly, EBS does not
address the Commission's need to identify market participants in a
uniform manner that would allow the Commission to readily aggregate
their trading activity across broker-dealers, nor does it include time
of execution information necessary to properly sequence and reconstruct
trading activity.

    Following declines in the U.S. securities markets in October 1987
and October 1989, Congress noted that the Commission's ability to
analyze the causes of a market crisis was impeded by its lack of
authority to gather trading information.\356\ 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.\357\
---------------------------------------------------------------------------

    \356\ The legislative history accompanying the Market Reform Act
also noted the Commission's limited ability to analyze the causes of
the market declines of October 1987 and 1989. See generally Senate
Report, supra note 14 and House Report, supra note 14.
    \357\ PL 101-432 (HR 3657), October 16, 1990.
---------------------------------------------------------------------------

    The large trader reporting authority in Section 13(h) of the
Exchange Act was intended to facilitate the Commission's ability to
monitor the impact on the securities markets of securities transactions
involving a substantial volume or large fair market value, as well as
to assist the Commission's enforcement of the federal securities
laws.\358\ In particular, the Market Reform Act provided the Commission
with the authority to collect broad-based information on large traders,
including their trading activity, reconstructed in time sequence, in
order to provide empirical data necessary for the Commission to perform
investigations and conduct analysis of data.\359\
---------------------------------------------------------------------------

    \358\ See 15 U.S.C. 78m(h)(1). See also Senate Report, supra
note 14, at 42.
    \359\ See Senate Report, supra note 14 at 4, 44, and 71. In this
respect, though SRO audit trails provide a time-sequenced report of
broker-dealer transactions, those audit trails generally do not
identify the broker-dealer's customers. Accordingly, the Commission
is not presently able to utilize existing SRO audit trail data to
accomplish the objectives of the Market Reform Act.
---------------------------------------------------------------------------

    The large trader reporting system envisioned by the Market Reform
Act authorizes the Commission to require large traders \360\ to self-
identify to the Commission and provide information to the Commission
that identifies the trader.\361\ The Market Reform Act also authorized
the Commission to require large traders to identify their status as
large traders to any registered broker-dealer through whom they
directly or indirectly effect securities transactions.\362\
---------------------------------------------------------------------------

    \360\ 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).
    \361\ See 15 U.S.C. 78m(h)(1)(A).
    \362\ See 15 U.S.C. 78m(h)(1)(B).
---------------------------------------------------------------------------

    In addition to facilitating the ability of the Commission to
identify large traders, the Market Reform Act also authorizes the
Commission to collect information on the trading activity of large
traders from broker-dealers. In particular, the Commission is
authorized to require every registered broker-dealer to make and keep
records with respect to securities transactions of large traders that
equal or exceed a certain ``reporting activity level'' and report such
transactions upon request of the Commission.\363\
---------------------------------------------------------------------------

    \363\ See 15 U.S.C. 78m(h)(2). Section 13(h) also provides the
Commission with authority to determine the manner in which
transactions and accounts should be aggregated, including
aggregation on the basis of common ownership or control. See 15
U.S.C. 78m(h)(3). The term ``reporting activity level'' is defined
in Section 13(h)(8)(D) of the Exchange Act to mean ``transactions in
publicly traded securities at or above a level of volume, fair
market value, or exercise value as shall be fixed from time to time
by the Commission by rule, regulation, or order, specifying the time
interval during which such transactions shall be aggregated.'' See
15 U.S.C. 78m(h)(8)(D).
---------------------------------------------------------------------------

    To implement its authority under Section 13(h) of the Exchange Act,
the Commission is adopting new Rule 13h-1 and Form 13H to establish
large trader reporting requirements. The Rule is intended to assist the
Commission in identifying traders that conduct a substantial volume or
large fair market value of trading activity in the U.S. securities
markets and obtain certain baseline information on their trading
activity. Specifically, a ``large trader'' is defined as a person who
effects transactions in NMS securities of at least, during any calendar
day, two million shares or shares with a fair market value of $20
million or, during any calendar month, either 20 million shares or
shares with a fair market value of $200 million.\364\ The large trader
reporting rule is designed to facilitate the Commission's ability to
assess the impact on the securities markets of large trader activity
and allow it to conduct trading reconstructions following periods of
unusual market volatility and analyze significant market events for
regulatory purposes.
---------------------------------------------------------------------------

    \364\ This test is defined in the Rule as the ``identifying
activity level.'' See new Rule 13h-1(a)(7). Section 13(h)(8)(c) of
the Exchange Act, 15 U.S.C. 78m(h)(8)(c), authorizes the Commission
to determine, by rule or regulation, the applicable identifying
activity level.
---------------------------------------------------------------------------

    The identification, recordkeeping, and reporting requirements will
provide the Commission with a mechanism to identify large traders, as
well as their affiliates, the broker-dealers they use, and their
transactions. Specifically, Rule 13h-1 will require large traders to
identify themselves to the Commission and make certain disclosures to
the Commission on Form 13H. Upon receipt of Form 13H, the Commission
will issue a unique identification number to the large trader, which
the large trader will then provide to its registered broker-dealers.
Registered broker-dealers will be required to maintain transaction
records for each large trader customer and will be required to report
that information to the Commission upon request. In addition, certain
registered broker-dealers will need to adopt procedures to monitor
their customers' activity for volume that triggers the identification
requirements of the Rule.
    In light of recent turbulent markets and the increasing
sophistication and trading capacity of large traders, the Commission
believes it needs to implement a large trader reporting rule to further
enhance its ability to collect and analyze trading information,
especially with respect to the most active market participants. In
particular, the Commission believes it needs to implement a large
trader reporting rule to reliably and efficiently identify large
traders and promptly obtain information on their trading on a market-
wide basis.
    The Commission believes that the large trader reporting rule is
necessary because, as noted above, large traders appear to be playing
an increasingly prominent role in the securities markets.\365\ 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% of
total volume or higher.\366\ The large trader reporting rule is
intended to provide a basic set of tools for the Commission to monitor
more readily and efficiently the impact on the securities markets of
large traders.
---------------------------------------------------------------------------

    \365\ See 15 U.S.C. 78m(h)(1) and (h)(2) (reflecting the purpose
of Section 13(h) of the Exchange Act to allow the Commission to
monitor the impact of large traders).
    \366\ See supra note 8 (discussing analyst estimates of high
frequency trader activity).
---------------------------------------------------------------------------

    Among other things, the Commission believes that the large trader
reporting rule will enhance its ability to: (1) Reliably identify large
traders and their affiliates, (2) obtain more promptly trading data on
the activity of large traders, including execution time, and (3)
aggregate and analyze trading data among affiliated large traders. In
addition to those benefits that the Commission believes will result
from the large trader reporting rule, the Commission also expects that
investors

should likewise benefit as a consequence of the Commission's enhanced
access to information to identify large traders and obtain prompt data
on their activity that the Commission would be able to employ in
carrying out its regulatory mission.
    The Commission sought comment on the benefits associated with the
proposed Rule. Many of the 87 comment letters, including those from
retail investors, expressed support for the Rule's stated intent to
obtain certain baseline trading information about traders that conduct
a substantial volume or large fair market value of trading activity in
the U.S. securities markets.\367\
---------------------------------------------------------------------------

    \367\ See, e.g. GETCO Letter; CalSTRS Letter; David L. Goret
Letter; Prudential Letter; Investment Adviser Association Letter;
American Benefits Council Letter; Howard Hughes Medical Institute
Letter; T. Rowe Price Letter; Financial Engines Letter; Investment
Company Institute Letter; Wellington Management Letter; SIFMA
Letter; and Foothill Securities Letter.
---------------------------------------------------------------------------

    One commenter, a large pension fund, stated that it believes that
its beneficiaries will benefit from a greater understanding of today's
hyper-electronic trading, which encompasses speed and volumes that were
previously unknown to most participants.\368\ Another commenter, a
large mutual fund adviser, stated that the large trader reporting
requirements are a pragmatic approach to obtain relevant data on
trading activity in the U.S. securities markets and that recent
volatility in the marketplace, as exemplified by the unprecedented
events of May 6, 2010, has emphasized the need to provide improved
regulatory access to trade data in order to detect manipulative trading
activities and to analyze significant market events that negatively
impact investor trust in the stock market.\369\ In addition, a large
broker-dealer commented that the EBS system is insufficient in today's
trading environment for large scale investigations and market
reconstructions across numerous securities during peak trading volume
periods and agreed that regulators need additional levels of
transparency into the trading practices of all firms with significant
activity.\370\
---------------------------------------------------------------------------

    \368\ See CalSTRS Letter at 1. The commenter noted that it would
be ``pleased to be subject to the rule.'' Id.
    \369\ See T. Rowe Price Letter at 1.
    \370\ See GETCO Letter at 2.
---------------------------------------------------------------------------

B. Costs

1. Large Traders
    In the Proposing Release, the Commission identified the primary
costs to large traders from the proposal as the requirement to self-
identify to the Commission, including using existing systems to detect
when they meet the identifying activity level, filing Form 13H when
large trader status is achieved, and informing its broker-dealers of
its LTID and all accounts to which it applies. The Commission is
adopting the identification requirements substantially as proposed.
However, the Commission has not adopted Form 13H as proposed.
Specifically, the Commission did not adopt the proposed requirement
that large traders report brokerage account numbers. Instead, the Rule
as adopted requires that large traders report a list of broker-dealers
with whom they have an account. As a consequence, large traders will
not have to report on Form 13H the LTID of any other large traders with
whom they collectively exercise investment discretion, and so will not
have to disclose their LTID to other traders or collect from other
large traders the LTID of such traders.
    The Rule will require large traders to file Form 13H with the
Commission promptly after first effecting transactions that reach the
identifying activity level.\371\ Further, when determining who should
register with the Commission as a ``large trader'' by filing Form 13H,
the Rule is intended to focus, in more complex organizations, on the
parent company of the entities that exercise investment discretion. The
purpose of this focus is to narrow the number of persons that will
self-identify as ``large traders'' and file Form 13H, while allowing
the Commission to identify the primary institutions that conduct a
large trading business. Focusing the identification requirements in
this manner is intended to enable the Commission to easily identify and
readily contact the principal groups that control large traders, while
minimizing the costs associated with filing and self-identification
that will be imposed on large traders. Large traders will, however, be
able to assign and attach a suffix to the LTID that is assigned to them
by the Commission.
---------------------------------------------------------------------------

    \371\ See new Rule 13h-1(b)(1)(i).
---------------------------------------------------------------------------

    To limit the impact of the Rule on entities whose trading is not
characterized by the exercise of investment discretion that the
Commission intends to capture under the definition of ``large trader,''
the Rule provides several exceptions from the definition of
``transaction'' that are considered when determining large trader
status. These exceptions are intended to balance the Commission's
desire to capture significant trading activity with the cost imposed on
market participants to register and report as large traders. These
exceptions include any transaction that constitutes a gift, any
transaction effected by a court-appointed executor, administrator, or
fiduciary pursuant to the distribution of a decedent's estate, any
transaction effected pursuant to a court order or judgment, and any
transaction effected pursuant to a rollover of qualified plan or trust
assets subject to Section 402(c)(1) of the Internal Revenue Code.\372\
As discussed above, in response to comments, the Commission is adopting
as exceptions, in addition to those proposed, several types of
transactions that focus on corporate actions that are not
characteristic of an arm's-length purchase or sale of securities in the
secondary market that would normally be characteristic of a ``trader''
in securities, such as business combinations, issuer tender offers, and
buybacks, as well as stock loans and equity repurchases. 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
involving business combinations, as well as issuer stock buybacks and
issuer tender offers, reflect fundamental corporate decision-making.
They are not effected with an intent or expectation to profit from the
trade itself, but are transactions conducted by or with issuers of
securities in furtherance of corporate objectives involving publicly-
traded securities. Further, stock loan and equity repos typically are
entered into as part of a larger financing transaction or for purposes
of generating corporate income and, as such, are effected with general
corporate intent rather than for purposes of buying or selling
positions in securities. Accordingly, the Commission believes it
appropriate to not count these transactions for the purpose of
determining whether a person meets the identifying activity threshold
contained in the definition of large trader. The Commission believes
that adding these additional exclusions will further reduce the
potential cost of the Rule on affected entities, as well as registered
broker-dealers, while at the same time allowing the Commission to focus
the Rule on those entities and activities that the Commission seeks to
identify under the Rule.
---------------------------------------------------------------------------

    \372\ See new Rule 13h-1(a)(6).
---------------------------------------------------------------------------

    In addition, the Rule provides for an Inactive Status to further
reduce the

potential costs of the Rule for infrequent traders who may trip the
threshold on a particular occasion but do not otherwise trade at
sufficient levels to merit continued status as a large trader or that
warrant imposing the regulatory burdens of the Rule. In particular,
large traders that have not effected aggregate transactions at any time
during the previous full calendar year that are equal to or greater
than the identifying activity level will be eligible for Inactive
Status upon checking a box on the cover page of their next annual Form
13H filing.\373\ Specifically, Inactive Status will relieve a person
from the requirement to file amended Forms 13H.
---------------------------------------------------------------------------

    \373\ See new Rule 13h-1(b)(3)(iii).
---------------------------------------------------------------------------

    Form 13H also allows a large trader to report the termination of
its operations (i.e., Inactive Status where the entity, because it has
discontinued operations, has no potential to requalify for large trader
status in the future). This designation is intended to allow large
traders to inform the Commission of their status and to signal to the
Commission not to expect future Form 13H filings from the large trader.
For example, termination status will be relevant in the case of a
merger or acquisition where the large trader does not survive the
corporate transaction. In addition, with respect to registered broker-
dealers, the Termination Filing is intended to reduce the potential
costs to registered broker-dealers who will no longer have to track the
entity's LTID.
    In the Proposing Release, the Commission noted that from time to
time, information provided by large traders through their Forms 13H may
become inaccurate. Rather than requiring prompt updates whenever this
occurs, the Rule instead will require ``Amended Filings'' on a
quarterly basis (and only when the prior submission becomes
inaccurate). Specifically, large traders will be required to amend
their latest Form 13H by submitting an ``Amended Filing'' promptly
following the end of a calendar quarter in the event that any of the
information contained in a Form 13H filing becomes inaccurate for any
reason (e.g., change of name or address, type of organization,
regulatory status, broker-dealers used, or affiliates).\374\ Regardless
of whether any quarterly amended Form 13Hs are filed, large traders are
required to file Form 13H annually (an ``Annual Filing''), within 45
days after the calendar year-end, in order to ensure the accuracy of
all of the information reported to the Commission.\375\ The quarterly
filing requirement for amendments is designed to mitigate the filing
burden on large traders, as large traders will not be required to file
a large number of amendments on a more prompt basis every time
something in their latest Form 13H needs to be corrected or updated. A
large trader could elect to file more promptly or frequently at its
discretion, but would not be required to do so.
---------------------------------------------------------------------------

    \374\ See new Rule 13h-1(b)(1)(iii).
    \375\ See new Rule 13h-1(b)(1)(ii).
---------------------------------------------------------------------------

    In the Proposing Release, the Commission estimated that the
aggregate costs for the estimated 400 respondents that would register
on Form 13H and obtain from the Commission an LTID and inform its
broker-dealers of its LTID and the accounts to which it applies would
be $1,317,600.\376\ The Commission stated its belief that potential
large trader respondents would not need to modify their existing
systems to comply with proposed Rule 13h-1. Rather, the Commission
believed that large traders already maintain systems that are capable
of computing their level of trading, and the Commission expected that
firms would be able to use their existing systems to assess whether
they have reached the identifying activity level. Further, as discussed
above, the Rule as adopted allows a large trader to voluntarily
register with the Commission, even before it meets the applicable
trading activity threshold, in order to eliminate the need for a person
to actively monitor its trading levels for purposes of Rule 13h-1. To
the extent a large trader does not want to track its trading levels for
the identifying activity level thresholds, it can avail itself of the
option to voluntarily register and forego the burden of such tracking.
Any person that elects to voluntarily file would be treated as a large
trader for purposes of the Rule, and would 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.
---------------------------------------------------------------------------

    \376\ The Commission derived the total estimated cost from the
following estimates, which were based on the Commission's experience
with, and cost estimates for, other existing reporting systems
including Rule 13f-1: ((Compliance Manager (3 hours) at $258 per
hour) + (Compliance Attorney (7 hours) at $270 per hour) +
(Compliance Clerk (10 hours) at $63 per hour)) x (400 potential
respondents) = $1,317,600. Rule 13f-1, like new Rule 13h-1, requires
the filing of a form (Form 13F) upon exceeding a certain trading
threshold. Hourly figures were from SIFMA's Management &
Professional Earnings in the Securities Industry 2008 and SIFMA's
Office Salaries in the Securities Industry 2008, modified by
Commission staff to account for an 1800-hour work-year and
multiplied by 5.35 or 2.93, as appropriate, to account for bonuses,
firm size, employee benefits, and overhead.
---------------------------------------------------------------------------

    In addition, the Commission estimated in the Proposing Release that
the aggregate cost to file amendments as well as an annual updated Form
13H would be $998,400.\377\ The Commission did not expect these costs
per large trader of self-identification and reporting to the Commission
to have any significant effect on how large traders conduct business
because such costs would be marginal when compared to level of activity
at which a large trader would be trading, and should not change how
such traders conduct business, create a barrier to entry, or otherwise
alter the competitive landscape among large traders. Further, the
Commission is designing an electronic filing system for Form 13H that
is intended to minimize the costs associated with filing Form 13H, for
example, by allowing filers to access and amend their most recently
filed Form 13H when filing an amended or annual update.
---------------------------------------------------------------------------

    \377\ The Commission derived the total estimated burdens from
the following estimates, which were based on the Commission's
experience with, and burden estimates for, other existing reporting
systems including Rule 6a-2: ((Compliance Manager (2 hours) at $258
per hour) + (Compliance Attorney (5 hours) at $270 per hour) +
(Compliance Clerk (10 hours) at $63 per hour)) x (400 potential
respondents) = $998,400. Rule 6a-2, like new Rule 13h-1, requires:
(1) Form amendments when there are any material changes to the
information provided in the previous submission; and (2) submission
of periodic updates of certain information provided in the initial
Form 1, whether or not such information has changed.
---------------------------------------------------------------------------

    As noted in the PRA section above, several commenters believed that
the Commission underestimated the costs of the proposed rule on large
traders.\378\ These commenters principally noted that the proposal's
requirements to gather and report information related to account
numbers and names, affiliates, and bank and insurance regulators would
be burdensome.\379\ Commenters noted that the Commission assumed that
this information was readily available for all large traders.\380\
---------------------------------------------------------------------------

    \378\ See, e.g., Prudential Letter; Investment Adviser
Association Letter; and Investment Company Institute Letter.
    \379\ See, e.g., American Bankers Association Letter.
    \380\ See, e.g., Investment Company Institute Letter.
---------------------------------------------------------------------------

    As discussed above, the Commission, in adopting the Rule, modified
Form 13H from the proposed version to reduce the potential costs
associated with filing Form 13H for affected entities. Most
significantly, the Commission did not adopt the proposed requirement
that large traders report their broker-dealer account numbers on Form
13H. Instead, large traders will be required to report a list of
broker-dealers with whom they or their Securities

Affiliates have an account. In light of these modifications from the
proposal, the Commission continues to believe that its estimate of
initial and ongoing costs is appropriate. The initial cost estimate was
based on the understanding that large traders know and can readily
identify their brokerage account numbers. As noted by commenters,
particularly investment advisers, this may not be the case for all
large traders, at least not in a form that would be conducive to
reporting on Form 13H. One commenter recommended an alternative
approach to requiring large traders to disclose a list of the broker-
dealers that the large trader is authorized to use.\381\ This commenter
noted that many investment advisers maintain an approved list of
broker-dealers and have processes for adding and deleting broker-
dealers as well as reviewing trades with a broker-dealer not on the
approved list.\382\ The Commission has considered this alternative, and
believes it is appropriate to focus the reporting burden on a list of
broker-dealers at which the large trader maintains an account, rather
than a list of accounts held at those broker-dealers. The Commission
believes, based on the comments it received from investment advisers on
this topic, that this new requirement will reduce the potential costs
for certain large traders, particularly investment advisers.
---------------------------------------------------------------------------

    \381\ See Wellington Management Letter at 4 and Investment
Company Institute Letter at 8-9.
    \382\ See Investment Company Institute Letter at 9.
---------------------------------------------------------------------------

    The adopted Rule also limits the scope of information that must be
reported on bank and insurance regulators and focuses the
identification requirement on affiliates that trade, rather than merely
beneficially own, NMS securities. However, the Commission does not
anticipate that these changes from the proposal will materially affect
the Commission's initial cost estimates. In particular, the prominence
and scope of those items on the Form, relative to the other disclosure
requirements, were minor and the fact that they were not adopted should
not materially affect the cost estimates. Further, the Form, as
adopted, now includes additional items such as the requirement to
provide an organizational chart and to identify any affiliates that
file separately and any affiliates that have been assigned an LTID
suffix. The Commission carefully considered the changes to the Form in
light of the comments received on the Form and the initial cost
estimates, and believes that the removal of certain required
information balances the addition of new requirement information of a
similar scope so as to not affect the overall reporting burdens.
Accordingly, the balanced modifications to the Rule and additional
guidance on the intended scope of the Rule result in changes that are
in line with the Commission's original estimates.
2. Registered Broker-Dealers
    The Commission anticipated that the three primary costs to
registered broker-dealers from the proposal were: (1) Recordkeeping
requirements; (2) reporting requirements; and (3) monitoring
requirements.
a. Recordkeeping
    The Rule will require registered broker-dealers to keep records of
transactions for large traders and Unidentified Large Traders.\383\ The
Rule also will require brokers and dealers to furnish transaction
records of large traders and Unidentified Large Traders to the
Commission upon request. While most of the data required to be kept
pursuant to Rule 13h-1 is already required under Rule 17a-25 and
reported via the EBS system, the large trader reporting rule will
contain two additional fields of information, notably the LTID
number(s) and execution time of the transaction. The Rule will require
records to be kept for a period of three years, the first two in an
accessible place, in accordance with Rule 17a-4(b) under the Exchange
Act.\384\
---------------------------------------------------------------------------

    \383\ See new Rule 13h-1(a)(9) (defining ``Unidentified Large
Trader'').
    \384\ 17 CFR 240.17a-4.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission estimated that the one-
time, initial costs for each registered broker-dealer for development
of enhancements to its EBS infrastructure, including re-programming and
testing of the systems, would be approximately $106,060.\385\ The
Commission also believed that there would be minimal additional costs
associated with the operation and maintenance of the large trader
reporting rule because it would utilize the existing EBS system.
Accordingly, the Commission estimated the total start-up, operating,
and maintenance cost burden for registered broker-dealers to be
$31,818,000.\386\ As previously noted, this figure was based on the
estimated number of hours for development and implementation of
enhancements to the firm's EBS systems, including software development,
taking into account the fact that two new data elements were required
to be captured and that data would be required to be available for
reporting to the Commission on the morning following the day on which
the transactions were effected. Because broker-dealers already capture
most of the data required to be captured under Rule 13h-1 pursuant to
Rule 17a-25, the Commission did not expect broker-dealers to have to
incur any additional hardware costs.
---------------------------------------------------------------------------

    \385\ The Commission derived the total estimated one-time cost
from the following: (Computer Ops Dept. Mgr. (30 hours) at $335 per
hour) + (Sr. Database Administrator (25 hours) at $281 per hour) +
(Sr. Programmer (150 hours) at $292 per hour) + (Programmer Analyst
(100 hours) at $193 per hour) + (Compliance Manager (20 hours) at
$258 per hour) + (Compliance Attorney (10 hours) at $270 per hour) +
(Compliance Clerk (20 hours) at $63 per hour) + (Sr. Systems Analyst
(50 hours) at $244 per hour) + (Director of Compliance (5 hours) at
$388 per hour) + (Sr. Computer Operator (35 hours) at $75 per hour)
= $106,060. As noted above, the Commission acknowledged that, in
some instances, multiple LTIDs may be disclosed to a registered
broker-dealer for a single account. Therefore, the cost estimate
factored in the cost that registered broker-dealers would need to
develop systems capable of tracking multiple LTIDs.
    \386\ 300 affected broker-dealers x $106,060 = $31,818,000.
---------------------------------------------------------------------------

    In response to the Commission's recordkeeping burden estimates, as
previously discussed in the PRA section above, one commenter stated
that one of its member firms estimated it would cost $3,000,000-
$4,000,000 to build out its EBS system in a manner required by the
proposed rule, though the commenter did not provide any basis for the
estimate or assumptions that were made with regards to the collection,
reporting, and monitoring requirements of the Rule.\387\ This figure,
which is an estimate of one affected entity that represents a single
data point, is significantly higher than the Commission's estimate of
$106,060 for the initial one-time costs of implementing the system
changes required by the Rule as adopted. The commenter noted that one
potential major cost of implementing the recordkeeping requirement is
that some broker-dealers do not have access to execution times in a
manner that is readily reportable under the EBS infrastructure.\388\
These broker-dealers, the commenter stated, would need to devote
considerable resources to updating EBS to gather, process, and transmit
such information.\389\
---------------------------------------------------------------------------

    \387\ See SIFMA Letter at 6.
    \388\ See id. at 13.
    \389\ See id.
---------------------------------------------------------------------------

    The Commission notes that commenters did not express particular
concern with the proposed requirement to record and report LTIDs, but
rather focused on the transmission of execution time from the
execution-facing systems to the clearing-facing systems which
traditionally are utilized in the EBS process. The Commission

understands that broker-dealers will face different challenges in
capturing and reporting execution time information, depending on the
sophistication of and resources they have previously devoted to their
recordkeeping systems. Relevant factors might include, for example, the
size of the entity, the nature, flexibility, and extent of their
existing systems, and the business and other regulatory drivers for
their technological strategies. As such, the Commission's estimate
involves an average calculation that accommodates a broad spectrum of
broker-dealer EBS systems and considers that different firms would be
affected to different degrees, including the possibility that some
firms might spend more than the average. However, not all broker-
dealers will face complexities involved with modifying non-integrated
legacy systems to capture execution time, and some broker-dealers will
not need to devote as many resources to those efforts as will others.
For example, one commenter that represents a group that focuses on
technological aspects of securities regulation expressed concern with
the proposed monitoring requirements but did not address the costs
associated with modifications to the EBS system. Rather, the commenter
believed that broker-dealers could reasonably modify their systems to
capture execution time within the proposed six-month implementation
period.\390\ The Commission's estimate is based on an aggregated figure
that recognizes that different broker-dealers will need to invest
different levels of resources based on the needs of their particular
technology.
---------------------------------------------------------------------------

    \390\ See Financial Information Forum Letter at 7.
---------------------------------------------------------------------------

b. Reporting
    The Rule will require registered broker-dealers to report
transactions that equal or exceed the reporting activity level effected
by or through such broker-dealer for both identified and Unidentified
Large Traders. More specifically, upon the request of the Commission,
registered broker-dealers will be required to report electronically, in
machine-readable form and in accordance with instructions issued by the
Commission, all information required under paragraphs (d)(2) and (d)(3)
of the Rule for all transactions effected directly or indirectly by or
through accounts carried by such broker-dealer for large traders and
other persons for whom records must be maintained, which equal or
exceed the reporting activity level. These broker-dealers will need to
report a particular day's trading activity only if it equals or exceeds
the ``reporting activity level'' but will be permitted to report all
data without regard to that threshold.
    In the Proposing Release, the Commission estimated that the costs
of the proposed reporting requirements would be $16,200,000.\391\ The
Commission's estimate took into account the design and intent of the
proposed rule to utilize the recordkeeping and reporting infrastructure
of the existing EBS system. The Commission received no comments on its
reporting cost estimate and continues to believe that its initial
estimate is appropriate.
---------------------------------------------------------------------------

    \391\ The Commission derived the total estimated ongoing cost
from the following: (Compliance Attorney (2 hours) at $270 per hour)
x (100 requests per year) x (300 potential respondents) =
$16,200,000.
---------------------------------------------------------------------------

c. Monitoring
    As proposed, paragraph (f) of Rule 13h-1 would establish a ``safe
harbor'' for the duty to monitor for Unidentified Large Traders.\392\
Specifically, for purposes of determining under the Rule whether a
registered broker-dealer has reason to know that a person is a large
trader, a registered broker-dealer generally need take into account
only transactions in NMS securities effected by or through such broker-
dealer.\393\ A registered broker-dealer would be deemed not to know or
to have reason to know that a person is a large trader if: (1) It does
not have actual knowledge that a person is a large trader; \394\ and
(2) it established and maintained policies and procedures reasonably
designed to assure compliance with the identification requirements.
Proposed paragraphs (f)(1) and (2) of the rule provided the specific
elements that will be required for the safe harbor, including policies
and procedures reasonably designed to inform persons of their
obligations to file Form 13H and disclose their large trader status.
---------------------------------------------------------------------------

    \392\ See new Rule 13h-1(a)(9) (defining an Unidentified Large
Trader as ``each person who has not complied with the identification
requirements of paragraphs (b)(1) and (b)(2) of this rule that a
registered broker-dealer knows or has reason to know is a large
trader.'')
    \393\ See new Rule 13h-1(a)(9).
    \394\ As discussed above, if a registered broker-dealer has
actual knowledge that a person is a large trader, then the broker-
dealer would treat such person as an Unidentified Large Trader under
the Rule.
---------------------------------------------------------------------------

    As discussed above, a few commenters asked for clarification of the
monitoring requirements and offered alternatives.\395\ Of those
commenters that addressed the issue, most were critical of the proposed
monitoring requirements.\396\ The Commission believes the concerns
expressed by commenters are a result of confusion as to the nature of
the contemplated monitoring requirements. As noted in the Proposing
Release, the Rule places ``the principal burden of compliance with the
identification requirements on large traders themselves.'' \397\
Further, the Commission characterized broker-dealers' monitoring
requirements as ``limited'' and ``a necessary backstop to encourage
compliance and fulfill the objectives of Section 13(h) of the Exchange
Act.'' \398\ The safe harbor in Rule 13h-1(f) references reasonably
designed systems to detect and identify persons that may be large
traders--based upon transactions effected through an account or group
of accounts or other information readily available to the broker-
dealer. Further, the safe harbor references reasonably designed systems
to inform such persons of their potential obligations under Rule 13h-1.
The broker-dealer monitoring requirements are intended to promote
awareness of and foster compliance with Rule 13h-1.
---------------------------------------------------------------------------

    \395\ See, e.g., Financial Information Forum Letter; SIFMA
Letter; and GETCO Letter.
    \396\ One commenter described the proposed safe harbor as
``anything but safe'' and, as discussed above, asserted that the
proposal exceeds the Commission's statutory authority because, among
other reasons, the safe harbor provided that a registered broker-
dealer would have reason to know that a customer is an Unidentified
Large Trader based on other readily available information, as well
as transactions effected through the broker-dealer. See SIFMA Letter
at 11.
    \397\ Proposing Release, supra note 3, 75 FR at 21470.
    \398\ Id.
---------------------------------------------------------------------------

    The Commission notes that a large trader is required to assess for
itself whether it meets the identifying activity threshold and thus
qualifies as a large trader. To this extent, the Commission notes that
there are certain exclusions, for example from the types of
transactions that are counted towards the identifying activity
threshold, that may have excused a customer from having to register as
a large trader even though its aggregate transactions exceed the
applicable identifying activity threshold. Unless a broker-dealer has
actual knowledge to the contrary that a customer is a large trader
(e.g., the customer voluntarily informs the broker-dealer that it is a
large trader under Rule 13h-1), the monitoring requirements contemplate
an inquiry by the broker-dealer into whether a customer meets the
identifying activity threshold based upon transactions effected through
an account or a group of accounts at that broker-dealer.
    In the Proposing Release, the Commission estimated the initial,
one-time cost to establish policies and

procedures pursuant to the proposed safe harbor provision would be
$3,982,800.\399\ The Commission estimated that the ongoing cost would
be $1,215,000.\400\ The Commission believed that the proposed safe
harbor would reduce the costs associated with the monitoring
requirements of the proposed rule on registered broker-dealers. Among
other things, it would limit the broker-dealer's obligations to only
those Unidentified Large Traders that should be readily identifiable
and apparent to the broker-dealer and would require the broker-dealer
to inform such persons of their obligations to file proposed Form 13H
and disclose their large trader status to the Commission.
---------------------------------------------------------------------------

    \399\ The Commission derived the total estimated one-time cost
from the following: ((Sr. Programmer (10 hours) at $292 per hour) +
(Compliance Manager (10 hours) at $258 per hour) + (Compliance
Attorney (10 hours) at $270 per hour) + (Compliance Clerk (20 hours)
at $63 per hour) + (Sr. Systems Analyst (10 hours) at $244 per hour)
+ (Director of Compliance (2 hours) at $388 per hour) + (Sr.
Computer Operator (8 hours) at $75 per hour)) x (300 potential
respondents) = $3,982,800.
    \400\ The Commission derived the total estimated ongoing cost
from the following: (Compliance Attorney at (15 hours) x $270 per
hour) x (300 potential respondents) = $1,215,000.
---------------------------------------------------------------------------

    As noted above in the PRA section, one commenter stated that the
Commission's broker-dealer estimate of 300 broker-dealers was
underestimated. This commenter believed that the number of broker-
dealers affected by the monitoring requirements might be closer to
1,500 to the extent that carrying broker-dealers require their
introducing broker correspondents to establish policies and procedures
under the safe harbor to collect the information on Unidentified Large
Traders required by the Rule to help the clearing firm comply with the
requirements of the Rule that are applicable to them.\401\ The
commenter based its estimate on the fact that approximately 1,657 FINRA
members have been assigned MPIDs as of June 2010.\402\ As such, this
commenter argued that the Commission's ongoing burden estimate of 4,500
burden hours/year \403\ (equivalent to $1,215,000/year \404\) should
really be 111,000 burden hours/year-3,000,000 burden hours/year \405\
(equivalent to about $30,000,000-$750,000,000/year).
---------------------------------------------------------------------------

    \401\ See Financial Information Forum Letter at 6.
    \402\ See id.
    \403\ Compliance Attorney at 15 hours x 300 potential
respondents = 4,500 burden hours.
    \404\ Compliance Attorney at 15 hours at $270 per hour x 300
potential respondents = $1,215,000.
    \405\ Compliance Attorney at 370 hours x 300 potential
respondents = 111,000 burden hours; Compliance Attorney at 2,000
hours x 1,500 potential respondents = 3,000,000 burden hours.
---------------------------------------------------------------------------

    As discussed above, the commenter based its analysis on the safe
harbor provisions of the proposed rule and was concerned with the
reference to ``other readily available information'' contained in the
proposed safe harbor. The commenter's estimate was based on a belief
that, though the Rule itself would not specifically require it,
carrying broker-dealers might, in turn, require their introducing
broker correspondents to establish policies and procedures to collect
information on Unidentified Large Traders required by the Rule to
assist the clearing firms in complying with the requirements of the
Rule that are applicable to them.\406\ As adopted, however, the safe
harbor provision of the Rule makes clear the intended scope of ``other
identifying information'' that a broker-dealer would need to consider,
which is narrower than what the commenter assumed. As adopted, the safe
harbor policies and procedures would need to be reasonably designed to
identify Unidentified Large Traders based on accounts at the broker-
dealer. In assessing which accounts to consider, the Rule, as adopted,
clarifies that the broker-dealer's policies and procedures should
consider account name, tax identification number, or other identifying
information ``available on the books and records of such broker-
dealer.'' As discussed above, the safe harbor policies and procedures
would not need to take into account information on the books and
records of another broker-dealer. Accordingly, the scope of the
provision cited by the commenter is not as extensive as the commenter
thought might be intended, and the revised Rule text has now clarified
the intended scope.
---------------------------------------------------------------------------

    \406\ See Financial Information Forum Letter at 6.
---------------------------------------------------------------------------

    Further, also as described with respect to the PRA, the Commission
believes that large traders, whose aggregate NMS securities
transactions equal or exceed the identifying activity level, require
sophisticated trade-processing capacities.\407\ The Commission believes
it is unlikely that all broker-dealers that have been assigned an MPID
would likely either carry accounts for or effect transactions on behalf
of a large trader. Accordingly, all such entities are not expected to
be impacted by the monitoring provisions of Rule 13h-1(f), and the
Commission continues to believe that its initial estimate of 300
affected broker-dealers is appropriate.\408\
---------------------------------------------------------------------------

    \407\ See supra text accompanying note 281 (noting one
commenter, a large investment management firm and likely large
trader, that reported that it currently has approximately 250
broker-dealers on its approved list for executing equity
transactions).
    \408\ To the extent that a broker-dealer that is subject to the
monitoring requirements requires, by contract or otherwise, an
entity that is not otherwise subject to the Rule's monitoring
requirements to nevertheless perform a monitoring function, the
Commission's estimate does not account for that situation.
---------------------------------------------------------------------------

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

    Section 3(f) of the Exchange Act requires the Commission, whenever
it engages in rulemaking and is required to consider or determine
whether an action is necessary or appropriate in the public interest,
to consider, in addition to the protection of investors, whether the
action would promote efficiency, competition, and capital
formation.\409\ In addition, Section 23(a)(2) of the Exchange Act
requires the Commission, when making rules under the Exchange Act, to
consider the impact such rules would have on competition.\410\ Exchange
Act Section 23(a)(2) prohibits the Commission from adopting any rule
that would impose a burden on competition not necessary or appropriate
in furtherance of the purposes of the Exchange Act.
---------------------------------------------------------------------------

    \409\ 15 U.S.C. 78c(f).
    \410\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The Commission is adopting Rule 13h-1 pursuant to its authority
under Sections 13(h) and 23(a) of the Exchange Act. Section 13(h)(2)
requires the Commission, when engaging in rulemaking pursuant to that
authority that would require every registered broker-dealer to make and
keep for prescribed periods such records as the Commission by rule or
regulation prescribes, to consider whether such rule is ``necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of [the Exchange Act].'' \411\
---------------------------------------------------------------------------

    \411\ The Commission is adopting new Rule 13h-1(b) relating to
identification requirements for large traders pursuant to Section
13(h)(1) of the Exchange Act, which does not require the Commission
to consider the factors identified in Section 3(f), 15 U.S.C.
78c(f). Analysis of the effects, including the considerations under
Section 23(a), of new Rule 13h-1(b) is discussed above in Sections
IV and V.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission requested comment on
whether proposed Rule 13h-1 would place a burden on competition, as
well as the effect of the proposal on efficiency, competition, and
capital formation. While the Commission did receive comment letters
that discussed the overall number of respondents that would be affected
by the proposed rule,\412\ as well as the Commission's cost and burden
estimates,\413\ the Commission only received one comment that
specifically addressed whether Rule 13h-1 would burden

competition or impact efficiency, competition, and capital
formation.\414\ The comment is addressed as part of the discussion
below.
---------------------------------------------------------------------------

    \412\ See supra Section IV.C.
    \413\ See supra Sections IV.D and V.B.
    \414\ See European Banking Federation and Swiss Bankers
Association Letter.
---------------------------------------------------------------------------

A. Competition

    In the Proposing Release, the Commission considered the impact of
proposed new Rule 13h-1 on the securities markets and market
participants. Information provided by market participants and broker-
dealers in their registrations and filings with us informs our views on
the structure of the markets in which they participate. We begin our
consideration of potential competitive impacts with observations of the
current structure of these markets.
    The securities trading industry is a competitive one with
reasonably low barriers to entry. The intensity of competition across
trading platforms in this industry has increased in the past decade as
a result of a number of factors, including market reforms and
technological advances. This increase in competition has resulted in
decreases in market concentration, more competition among trading
centers, a proliferation of trading platforms competing for order flow,
and decreases in trading fees.
    The reasonably low barriers to entry for trading centers are
evidenced, in part, by the fact that new entities, primarily ATSs,
continue to enter the market.\415\ For example, there are approximately
40 registered ATSs that trade NMS securities. In addition, the
Commission within the past few years has approved applications by two
entities--BATS Exchange, Inc. and NASDAQ Stock Market LLC--to become
registered as national securities exchanges for trading equities, and
approved proposed rule changes by two existing exchanges--International
Securities Exchange, LLC (``ISE'') and Chicago Board Options Exchange,
Incorporated--to add equity trading facilities to their existing
options business.\416\ Moreover, on March 12, 2010, Direct Edge
received approval from the Commission for its trading platforms to
operate as facilities of two newly created national securities
exchanges.\417\ We believe that competition among trading centers has
been facilitated by Rule 611 of Regulation NMS,\418\ which encourages
quote-based competition between trading centers; Rule 605 of Regulation
NMS,\419\ which empowers investors and broker-dealers to compare
execution quality statistics across trading centers; and Rule 606 of
Regulation NMS,\420\ which enables customers to monitor their broker-
dealers' order routing practices.
---------------------------------------------------------------------------

    \415\ See Securities Exchange Act Release No. 60997 (Nov. 13,
2009), 74 FR 61208, 61234 (Nov. 23, 2009) (discussing the reasonably
low barriers to entry for ATSs and that these reasonably low
barriers to entry have generally helped to promote competition and
efficiency).
    \416\ The ISE discontinued its equities platform in 2010. See
Press Release, Direct Edge, available at http://www.directedge.com/DE_ISE_Partner.aspx.
    \417\ See Securities Exchange Act Release No. 61698 (March 12,
2010), 75 FR 13151 (March 18, 2010).
    \418\ 17 CFR 242.611.
    \419\ 17 CFR 242.605.
    \420\ 17 CFR 242.606.
---------------------------------------------------------------------------

    Broker-dealers are required to register with the Commission and at
least one SRO. The broker-dealer industry, including market makers, is
a competitive industry with most trading activity concentrated among
several larger participants and thousands of smaller participants
competing for niche or regional segments of the market. There are
approximately 5,035 registered broker-dealers, of which approximately
862 are small broker-dealers.\421\
---------------------------------------------------------------------------

    \421\ These numbers are based on a review of 2009 FOCUS Report
filings reflecting registered broker-dealers, and discussions with
SRO staff. These numbers do not include broker-dealers that are
delinquent on FOCUS Report filings.
---------------------------------------------------------------------------

    Larger broker-dealers often enjoy economies of scale over smaller
broker-dealers and compete with each other to service the smaller
broker-dealers, who are both their competitors and their customers.
    As discussed above, the Commission acknowledges that the Rule will
entail costs. In particular, requiring registered broker-dealers to
establish recordkeeping systems to capture the required information, in
particular the new fields that are not currently captured under the
existing EBS system, will require one-time initial expenses, as
discussed above. In addition, registered broker-dealers will need to
implement policies and procedures to monitor their customers' trading
in order to determine whether customers' trades would trigger the
threshold for large trader status. The Commission does not believe that
these expenses would adversely affect competition.
    In our judgment, the costs of complying with Rule 13h-1 would not
be so large as to significantly raise barriers to entry, or otherwise
alter the competitive landscape of the industries involved because the
incremental costs of Rule 13h-1 that would be incurred by broker-
dealers would be marginal relative to the costs of complying with the
existing EBS system.\422\ In industries characterized by reasonably low
barriers to entry and competition, the viability of some of the less
successful competitors may be sensitive to regulatory costs.
Nonetheless, we believe that the broker-dealer industry would remain
competitive, despite the costs associated with implementing new Rule
13h-1, even if those costs influence the entry or exit decisions of
individual broker-dealer firms at the margin.
---------------------------------------------------------------------------

    \422\ See supra Sections IV (Paperwork Reduction Act) and V
(Consideration of Costs and Benefits) for a detailed description of
the expected costs.
---------------------------------------------------------------------------

    The Commission does not expect that the costs associated with new
Rule 13h-1, which are marginal relative to the costs of complying with
the existing EBS system, would be a determining factor in a broker-
dealer's entry or exit decision or decision to accept large trader
customers because the volume of trading associated with large traders
and resultant revenue that could be gained by servicing a large trader
would justify the costs associated with the Rule.
    Further, the Commission would not be compelled to disclose publicly
any information required to be kept or reported under Section 13(h) of
the Exchange Act, including information kept or reported pursuant to
Rule 13h-1.\423\ Information and trading data that the Commission would
obtain pursuant to the Rule would not be shared with others and would
not be available to other large traders or broker-dealers. Accordingly,
because the large trader transaction data will be reported only to the
Commission, and not made publicly available for use by a large trader's
customers or competitors, the Commission expects the Rule to have
little to no impact on competition.
---------------------------------------------------------------------------

    \423\ See supra Section III.A.3.g.
---------------------------------------------------------------------------

    The approach of new Rule 13h-1 will advance the purposes of the
Exchange Act in a number of significant ways. The Commission believes
that the large trader reporting rule will enhance its ability to
identify large traders and collect trading data on their activity at a
time when, for example, many such traders employ rapid algorithmic
systems that quote and trade in huge volumes. The large trader
reporting rule will provide a useful source of data to facilitate the
ability of the Commission to monitor and analyze more readily and
efficiently the impact of large traders, including high-frequency
traders, on the securities markets. Although, as noted above, several
commenters stated that the Commission underestimated the costs of the
proposed rule,\424\ the Commission has made several modifications to
the Rule to reduce reporting burdens. The Commission believes that
establishing the large trader reporting rule would not

impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act. In particular, the
Commission believes that the Rule will implement the Commission's
authority under Section 13(h) of the Exchange Act at a crucial time
when large traders play an increasingly prominent role in the
securities markets.
---------------------------------------------------------------------------

    \424\ See supra Section V.B.
---------------------------------------------------------------------------

    While one commenter raised the possibility that a U.S. large trader
reporting rule may incentivize non-U.S. traders to shift their trading
in NMS securities to transactions that provide an economically
equivalent long position but would not impose any reporting
requirement,\425\ the Commission believes that the Rule, as adopted,
has minimized this possibility. In particular, this release addresses
the concerns raised by the commenter by clarifying the obligations on
U.S. broker-dealers to collect information on customers in light of
applicable foreign laws. In summary, a registered broker-dealer must
collect the information specified by Rule 13h-1(d)(2) about the foreign
intermediary's transactions if it is a large trader or an Unidentified
Large Trader.\426\ The broker-dealer also must collect the information
specified by Rule 13h-1(d)(3) relating to Unidentified Large Traders.
The Rule does not require a registered broker-dealer to collect the
identifying information about the foreign intermediary's
client(s).\427\ Further, the Commission clarified that the Rule does
not require broker-dealers to definitively determine who is, in fact, a
large trader.
---------------------------------------------------------------------------

    \425\ See European Banking Federation and Swiss Bankers
Association Letter at 4.
    \426\ See discussion supra at Section III.B.3 (explaining when a
registered broker-dealer must treat its customer as an Unidentified
Large Trader).
    \427\ The legislative history indicates that the Commission
stated that it ``would not impose requirements on broker-dealers to
report beneficial ownership information that is not recorded in the
normal course of business.'' Senate Report, supra note 14, at 42.
The Committee specifically noted that many broker-dealers currently
maintain no beneficial ownership records of transactions of foreign
persons that are carried out through banks, particularly foreign
banks, which serve as the record holder of such securities. See id.
The Committee expected that such beneficial owners would not be
assigned LTIDs. See id. As discussed above, for all persons (both
foreign and domestic), large trader status is triggered by the
exercise of investment discretion, not mere beneficial ownership of
NMS securities.
---------------------------------------------------------------------------

    Finally, the Commission believes that, because the reporting
requirements applied to all large traders (both U.S. and foreign) will
be minimal, they will not negatively impact the competitiveness of U.S.
markets.

B. Capital Formation

    New Rule 13h-1 is intended to facilitate the Commission's ability
to monitor the impact on the securities markets of securities
transactions involving a substantial volume of shares, a large fair
market value or a large exercise value, as well as to assist the
Commission's enforcement of the federal securities laws. The Rule
focuses on the core of the large trader reporting requirements--the
entities that control persons that exercise investment discretion and
are responsible for trading large amounts of securities. As these
entities can represent significant sources of liquidity and overall
trading volume, their trading may have a direct impact on the cost of
capital of securities issuers. As such, the Commission's ability to
promptly obtain information from registered broker-dealers on large
trader activity should better enable the Commission to understand the
impact of large traders on the securities markets. As the Commission
improves its understanding, it should be better positioned to
administer and enforce the federal securities laws, thereby promoting
the integrity and efficiency of the markets, as well as, ultimately,
investor trust and capital formation. For example, the information
collected from Rule 13h-1(d) would allow for a more timely
reconstruction of trading activity during a market crisis and thus
could better position the Commission to craft any regulatory responses.
    However, one commenter expressed concern that a potential
consequence of a large trader reporting rule might be to deprive U.S.
markets of capital that will instead flow to alternative market centers
that provide an economically equivalent long position but would not
impose any reporting requirement to the extent that foreign traders
seek to avoid trading in reportable NMS securities.\428\ The
consequence could be to deprive U.S. markets of capital, and to
possibly create pricing disparities between economically equivalent
non-reportable transactions and their analog reportable
transactions.\429\
---------------------------------------------------------------------------

    \428\ See European Banking Federation and Swiss Bankers
Association Letter at 4-5.
    \429\ See id.
---------------------------------------------------------------------------

    The commenter based its concerns on certain aspects of the Proposed
Rule that it believed would impact non-U.S. traders. One concern was
that potential non-U.S. traders would have little or no experience in
dealing with Commission regulation and may not even realize they are
subject to identifying and reporting requirements.\430\ Another concern
involved how a broker-dealer would be expected to collect information
from non-U.S. intermediaries and the impact of privacy laws on the
ability to collect information and for large traders to report such
information.\431\ A third concern involved the practicality of the
proposed requirement for large traders to list account numbers on Form
13H.\432\
---------------------------------------------------------------------------

    \430\ See id. at 2.
    \431\ See id. at 3.
    \432\ See id. at 3-4.
---------------------------------------------------------------------------

    The Commission is mindful of these comments and believes that the
modifications and clarifications in the adopted Rule and discussed in
detail above should mitigate these concerns. For example, as adopted,
the Rule does not require account numbers to be included on Form 13H,
alleviating the commenters' concern about the practicality of non-U.S.
traders providing this information. Also as discussed above, the scope
of the monitoring requirements has been clarified in the adopted Rule
such that the obligations of broker-dealers to collect information from
non-U.S. parties is limited to only the non-U.S. entity with whom they
transact. Furthermore, in the event, which the Commission believes to
be unlikely, that the laws of a large trader's foreign jurisdiction
preclude or prohibit the large trader from waiving such restrictions or
otherwise voluntarily filing Form 13H with the Commission, then such
foreign large traders or representatives of foreign large traders may
request an exemption from the Commission pursuant to Section 36 of the
Exchange Act \433\ and paragraph (g) of the Rule.
---------------------------------------------------------------------------

    \433\ 15 U.S.C. 78mm.
---------------------------------------------------------------------------

    Given these mitigating factors, the Commission does not believe
that any remaining costs to a non-U.S. trader that trades in an amount
sufficient to require identification with the Commission via Form 13H
outweigh the considerable benefits of directly accessing U.S. markets
for the trading of NMS securities. Moreover, armed with more current
and accurate trading information on large traders, the Commission would
be able to identify regulatory and potential enforcement issues more
quickly. Thus, Rule 13h-1 could help maintain investor trust in the
markets, and in turn could add depth and liquidity to the markets and
promote capital formation. Further, the Commission believes that the
requirements imposed on all large traders, whether U.S. or foreign, are
necessary and appropriate, not unduly burdensome, and would be imposed

uniformly on all affected entities (whether U.S. or non-U.S.).

C. Efficiency

    New Rule 13h-1 is designed to achieve the appropriate balance
between the Commission's goals of monitoring the impact on the
securities markets of securities transactions by large traders and
assisting the Commission's enforcement of the federal securities laws,
on the one hand, and the effort to minimize the burdens and costs
associated with implementing a large trader reporting rule.
    The Commission believes that the disclosure by registered broker-
dealers to regulators that would be achieved by the large trader
reporting rule would promote efficiency by enabling the Commission to
go beyond the EBS system, which permits investigations of small samples
of securities over a limited period of time, and to instead assist with
large-scale investigations and market reconstructions involving
numerous stocks during peak trading volume periods. The Rule also would
enable the Commission to receive from registered broker-dealers
contemporaneous information on large traders' trading activity much
more promptly than is currently the case with the EBS system. With a
system designed specifically to help the Commission reconstruct and
analyze time-sequenced trading data, the Commission could more quickly
investigate the nature and causes of unusual market movements and
initiate investigations and regulatory actions where warranted.
    The Commission acknowledges that the trading activity of certain
large traders also promotes market liquidity in secondary securities
markets. The Commission also acknowledges that participation in primary
market offerings may be affected by changes in expectations about
secondary market liquidity and price efficiency. As discussed above,
however, the Commission believes that Rule 13h-1 will enhance the
Commission's efforts to monitor the markets, in furtherance of
promoting efficiency and capital formation and thereby bolstering
investor trust.

VII. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') \434\ requires Federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities. Section 603(a) \435\ of the Administrative Procedure
Act,\436\ as amended by the RFA, generally requires the Commission to
undertake a regulatory flexibility analysis of all proposed rules, or
proposed rule amendments, to determine the impact of such rulemaking on
``small entities.'' \437\ Section 605(b) of the RFA states that this
requirement shall not apply to any proposed rule or proposed rule
amendment, which if adopted, would not ``have a significant economic
impact on a substantial number of small entities.'' \438\
---------------------------------------------------------------------------

    \434\ 5 U.S.C. 601 et seq.
    \435\ 5 U.S.C. 603(a).
    \436\ 5 U.S.C. 551 et seq.
    \437\ Although Section 601(b) of the RFA defines the term
``small entity,'' the statute permits agencies to formulate their
own definitions. The Commission has adopted definitions for the term
small entity for the purposes of Commission rulemaking in accordance
with the RFA. Those definitions, as relevant to this rulemaking, are
set forth in Rule 0-10, 17 CFR 240.0-10. See Securities Exchange Act
Release No. 18451 (January 28, 1982), 47 FR 5215 (February 4, 1982)
(File No. AS-305).
    \438\ See 5 U.S.C. 605(b).
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    Paragraph (a) of Rule 0-10 provides that for purposes of the
Regulatory Flexibility Act, a small entity when used with reference to
a ``person' '' other than an investment company means a person that, on
the last day of its most recent fiscal year, had total assets of $5
million or less.\439\ In reference to a broker-dealer, small entity
means total capital of less than $500,000 and not affiliated with any
person that is not a small business or small organization. Pursuant to
Section 605(b), the Commission believes that Rule 13h-1 and Form 13H
will not have a significant economic impact on a substantial number of
small entities.
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    \439\ 17 CFR 240.0-10(a). Investment companies are small
entities when the investment company, together with other investment
companies in the same group of related investment companies, has net
assets of $50 million or less at the end of its most recent fiscal
year. 17 CFR 270.0-10(a).
---------------------------------------------------------------------------

    In the Proposing Release, the Commission requested comment on
whether proposed Rule 13h-1 and Form 13H would have a significant
economic impact on a substantial number of small entities. While the
Commission did receive comment letters that discussed the overall
number of respondents that would be affected by the proposed new
rule,\440\ the Commission did not receive any comments that
specifically addressed whether Rule 13h-1 and Form 13H would have a
significant economic impact on small entities.
---------------------------------------------------------------------------

    \440\ See supra Section IV.C.
---------------------------------------------------------------------------

    Rule 13h-1 and Form 13H will require self-identification by large
traders, which is a term that, as discussed below, would implicate
persons and entities with the resources and capital necessary to
transact securities in substantial volumes relative to overall market
volume in NMS securities.\441\ Specifically, the Rule defines ``large
trader'' as a person that effects transactions in an ``identifying
activity level'' of: (1) 2 million shares, or shares with a fair market
value of $20 million, effected during a calendar day; or (2) 20 million
shares, or shares with a fair market value of $200 million, effected
during a calendar month.
---------------------------------------------------------------------------

    \441\ See supra text accompanying note 61.
---------------------------------------------------------------------------

    The Commission anticipates that the types of entities that would
identify as large traders would include, for example, broker-dealers,
financial holding companies, investment advisers, and firms that trade
for their own account. The Commission does not believe that any small
entities would be engaged in the business of trading, over the course
of the applicable measuring period, in a volume that approaches the
threshold levels. Because the Rule focuses on parent companies and is
designed to identify the largest market participants by volume or fair
market value of trading, the Commission believes that a large trader
that trades in such substantial volumes would necessarily have
considerable assets (beyond the level of a small entity) to be able to
conduct such trading.
    In addition, Rule 13h-1 will apply to registered broker-dealers
that serve large trader customers. The Commission believes that, given
the considerable volume in which a large trader as defined in the Rule
would effect transactions, particularly in the case of high-frequency
traders, registered broker-dealers servicing large trader customers or
broker-dealers that are large traders themselves likely would be larger
entities, with total capital greater than $500,000, and have systems
and capacities capable of handling the trading associated with such
accounts. Further, because the trading capacities of large traders will
typically necessitate the services of sophisticated broker-dealers
likely to be well capitalized entities or affiliated with well
capitalized entities, the Commission does not believe that any broker-
dealer that maintains large trader customers would be ``not affiliated
with any person that is not a small business or small organization''
under Rule 0-10.
    For the foregoing reasons, the Commission hereby certifies that,
pursuant to 5 U.S.C. 605(b), Rule 13h-1 will not have a significant
economic impact on a substantial number of small entities.

VIII. Statutory Authority

    Pursuant to the Exchange Act and particularly, Sections 13(h) and
23(a)

thereof, 15 U.S.C. 78m(h) and 78w(a), the Commission adopts new Rule
13h-1 under the Exchange Act that will implement a large trader
reporting rule to provide the Commission with a mechanism to identify
large traders, and the affiliates, accounts, and transactions of large
traders.

IX. Text of the Amendments

List of Subjects in 17 CFR Parts 240 and 249

    Reporting and recordkeeping requirements; Securities.

    In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations is amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934

0
1. The authority citation for Part 240 continues to read in part as
follows:

    Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 78p, 78q,
78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37,
80b-3, 80b-4 and 80b-ll, and 7201 et seq.; 18 U.S.C. 1350, 12 U.S.C.
5221(e)(3); and 7 U.S.C. 2(c)(2)(E), unless otherwise noted.
* * * * *

0
2. Add Sec.  240.13h-1 to read as follows:

Sec.  240.13h-l  Large trader reporting.

    (a) Definitions. For purposes of this section:
    (1) The term large trader means 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 (Sec.  249.327 of this
chapter).
    (2) The term person has the same meaning as in Section 13(h)(8)(E)
of the Securities Exchange Act of 1934 (15 U.S.C. 78m(h)(8)(E)).
    (3) The term control (including the terms controlling, controlled
by and under common control with) means 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 section
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.
    (4) The term investment discretion has the same meaning as in
Section 3(a)(35) of the Securities Exchange Act of 1934 (15 U.S.C.
78c(3)(a)(35)). A person's employees who exercise investment discretion
within the scope of their employment are deemed to do so on behalf of
such person.
    (5) The term NMS security has the meaning provided for in Section
242.600(b)(46) of this chapter.
    (6) The term transaction or transactions means all transactions in
NMS securities, excluding the purchase or sale of such securities
pursuant to 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:
    (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 (15 U.S.C. 77a),
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 (26 U.S.C. 1 et seq.);
    (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; or
    (viii) 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 of 1934 (15 U.S.C.
78n(d)); an issuer tender offer or other stock buyback by an issuer; or
a stock loan or equity repurchase agreement.
    (7) The term identifying activity level means: aggregate
transactions in NMS securities that are equal to or greater than:
    (i) During a calendar day, either two million shares or shares with
a fair market value of $20 million; or
    (ii) During a calendar month, either twenty million shares or
shares with a fair market value of $200 million.
    (8) The term reporting activity level means:
    (i) Each transaction in NMS securities, effected in a single
account during a calendar day, that is equal to or greater than 100
shares;
    (ii) Any transaction in NMS securities for fewer than 100 shares,
effected in a single account during a calendar day, that a registered
broker-dealer may deem appropriate; or
    (iii) Such other amount that may be established by order of the
Commission from time to time.
    (9) The term Unidentified Large Trader means each person who has
not complied with the identification requirements of paragraphs (b)(1)
and (b)(2) of this section that a registered broker-dealer knows or has
reason to know is a large trader. For purposes of determining under
this section whether a registered broker-dealer has reason to know that
a person is large trader, a registered broker-dealer need take into
account only transactions in NMS securities effected by or through such
broker-dealer.
    (b) Identification requirements for large traders.
    (1) Form 13H. Except as provided in paragraph (b)(3) of this
section, each large trader shall file electronically Form 13H (17 CFR
249.327) with the Commission, in accordance with the instructions
contained therein:
    (i) Promptly after first effecting aggregate transactions, or after
effecting aggregate transactions subsequent to becoming inactive
pursuant to paragraph (b)(3) of this section, equal to or greater than
the identifying activity level;
    (ii) Within 45 days after the end of each full calendar year; and
    (iii) Promptly following the end of a calendar quarter in the event
that any of the information contained in a Form 13H filing becomes
inaccurate for any reason.

    (2) Disclosure of large trader status. 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. A large trader on Inactive Status pursuant to paragraph
(b)(3) of this section must notify broker-dealers promptly after filing
for reactivated status with the Commission.
    (3) Filing requirement.
    (i) Compliance by controlling person. A large trader shall not be
required to separately comply with the requirements of this 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) of this
section applicable to such large trader with respect to all of its
accounts.
    (ii) Compliance by controlled person. A large trader shall not be
required to separately comply with the requirements of this 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) of this section applicable to such large trader with respect
to all of its accounts.
    (iii) Inactive status. 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 (17 CFR 249.327) 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.
    (4) Other information. Upon request, a large trader must promptly
provide additional descriptive or clarifying information that would
allow the Commission to further identify the large trader and all
accounts through which the large trader effects transactions.
    (c) Aggregation.
    (1) Transactions. For the purpose of determining whether a person
is a large trader, the following shall apply:
    (i) The volume or fair market value of transactions in equity
securities and the volume or fair market value of the equity securities
underlying transactions in options on equity securities, purchased and
sold, shall be aggregated;
    (ii) The fair market value of transactions in options on a group or
index of equity securities (or based on the value thereof), purchased
and sold, shall be aggregated; and
    (iii) Under no circumstances shall a person subtract, offset, or
net purchase and sale transactions, in equity securities or option
contracts, and among or within accounts, when aggregating the volume or
fair market value of transactions for purposes of this section.
    (2) Accounts. Under no circumstances shall a person disaggregate