Document ID: SEC-2013-1457-0001
Agency: sec
Document Type: Notice
Title: Order Temporarily Exempting: Certain Broker-Dealers and Certain Transactions from the Recordkeeping and Reporting Requirements of Rule 13h-1 under the Securities Exchange Act of 1934
Posted Date: 2013-08-14T04:00Z

[Federal Register Volume 78, Number 157 (Wednesday, August 14, 2013)]
[Notices]
[Pages 49556-49561]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-19650]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70150]

Order Temporarily Exempting Certain Broker-Dealers and Certain 
Transactions From the Recordkeeping and Reporting Requirements of Rule 
13h-1 Under the Securities Exchange Act of 1934

August 8, 2013.
    On July 27, 2011, the Securities and Exchange Commission 
(``Commission'') adopted Rule 13h-1 (the ``Rule'') under the Securities 
Exchange Act of 1934 (``Exchange Act'') concerning large trader 
reporting to assist the Commission in both identifying and obtaining 
trade information for market participants that conduct a substantial 
amount of trading activity, as measured by volume or market value, in 
U.S. securities (such persons are referred to as ``large traders'').\1\ 
The Financial Information Forum (``FIF'') and the Securities Industry 
and Financial Markets Association (``SIFMA,'' and collectively the 
``Industry Organizations''), each representing a variety of broker-
dealers and other market participants, have requested that the 
Commission grant certain substantive relief from the broker-dealer 
recordkeeping and reporting

[[Page 49557]]

requirements of the Rule.\2\ Pursuant to Section 13(h)(6) of the 
Exchange Act and Rule 13h-1(g) thereunder,\3\ the Commission, by order, 
may exempt from the provisions of Rule 13h-1, upon specified terms and 
conditions or for stated periods, any person or class of persons or any 
transaction or class of transactions from the provisions of Rule 13h-1 
to the extent that such exemption is consistent with the purposes of 
the Exchange Act.
---------------------------------------------------------------------------

    \1\ See Securities Exchange Act Release No. 64976 (July 27, 
2011), 76 FR 46960 (Aug. 3, 2011) (``Large Trader Adopting 
Release''). The effective date of Rule 13h-1 was October 3, 2011.
    \2\ See Letters from: Manisha Kimmel, Executive Director, FIF, 
to Robert Cook, Director, and David Shillman, Associate Director, 
Division of Trading and Markets, Commission, dated January 25, 2012 
(``FIF Letter''); Ann L. Vlcek, Managing Director and Associate 
General Counsel, SIFMA, to David S. Shillman, Associate Director, 
Division of Trading and Markets, Commission, dated March 29, 2012 
(``SIFMA Letter I''); and Theodore R. Lazo, Managing Director and 
Associate General Counsel, SIFMA, to David S. Shillman, Associate 
Director, Division of Trading and Markets, Commission, dated 
February 13, 2013 (``SIFMA Letter II''). These letters are available 
at: http://www.sec.gov/comments/s7-10-10/s71010.shtml.
    \3\ See 15 U.S.C. 78m and 17 CFR 240.13h-1(g), respectively.
---------------------------------------------------------------------------

    In response to the Industry Organizations' requests and as further 
discussed below, the Commission extended the compliance date for the 
broker-dealer recordkeeping, reporting, and monitoring requirements and 
took a two-phased approach to implementation of the broker-dealer 
requirements under the Rule. Commencing on November 30, 2012, the first 
phase of implementation required clearing broker-dealers for large 
traders to keep records of and report upon Commission request data 
concerning: (1) proprietary trades by large traders that are U.S.-
registered broker-dealers; and (2) transactions effected by large 
traders through a sponsored access arrangement (collectively, ``Phase 
One'').\4\
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 66839 (April 20, 
2012), 77 FR 25007, 25008 (April 26, 2012) (``Extension Order I'').
---------------------------------------------------------------------------

    The second phase of implementation concerned those remaining 
requirements of the Rule that were not covered in Phase One. As more 
fully described below, the Commission is herein modifying this second 
phase by limiting the recordkeeping and reporting requirements of the 
Rule to include transactions effected by large traders through direct 
market access arrangements (``Phase Two''). The compliance date for 
Phase Two, as modified, will remain November 1, 2013.\5\
---------------------------------------------------------------------------

    \5\ See infra note 19.
---------------------------------------------------------------------------

    Finally, the Commission is herein establishing a new third phase 
for which the compliance date will be November 1, 2015. As discussed 
further below, this new and final phase will include all of the 
remaining requirements of the Rule that have not been, or will not be, 
implemented in either Phase One or Phase Two (collectively, ``Phase 
Three'').

I. Background

A. The Requirements of Rule 13h-1 and Applicable Compliance Dates for 
Those Requirements

    Large Trader Self-Identification. Rule 13h-1 requires that large 
traders register with the Commission by electronically filing and 
periodically updating Form 13H.\6\ Additionally, promptly after 
receiving a large trader identification number (``LTID'') assigned by 
the Commission,\7\ a large trader must disclose its LTID to registered 
broker-dealers effecting transactions on its behalf and identify to 
each such broker-dealer each account to which the LTID number 
applies.\8\ These requirements have been in effect since December 1, 
2011.\9\
---------------------------------------------------------------------------

    \6\ See Rule 13h-1(b)(1)(i)-(iii).
    \7\ When a large trader files its initial Form 13H filing 
through EDGAR, the system sends an automatically generated 
confirmation email acknowledging acceptance of the filing. That 
email also contains the unique 8-digit LTID number assigned to the 
large trader.
    \8\ See Rule 13h-1(b)(2). See also Large Trader Adopting 
Release, supra note 1, 76 FR at 46971 (``the requirements that a 
large trader provide its LTID to all registered broker-dealers who 
effect transactions on its behalf, and identify each account to 
which it applies, are ongoing responsibilities that must be 
discharged promptly'').
    \9\ See Large Trader Adopting Release, supra note 1, 76 FR at 
46960.
---------------------------------------------------------------------------

    Broker-Dealer Recordkeeping and Reporting. Rule 13h-1 also requires 
that every registered broker-dealer maintain records of data specified 
in paragraphs (d)(2) and (d)(3) of the Rule (``Transaction Data''), 
including the applicable LTID(s) and execution time on each component 
trade, for all transactions effected directly or indirectly by or 
through: (1) an account such broker-dealer carries for a large trader 
or an Unidentified Large Trader; \10\ or (2) if the broker-dealer is a 
large trader, any proprietary or other account over which such broker-
dealer exercises investment discretion.\11\ Additionally, where a non-
broker-dealer carries an account for a large trader under the Rule, the 
broker-dealer effecting transactions directly or indirectly for such 
large trader must maintain records of all Transaction Data.\12\
---------------------------------------------------------------------------

    \10\ The definition of ``Unidentified Large Trader'' is 
discussed below. See infra note 20 and accompanying text. In the 
context of the broker-dealer recordkeeping and reporting 
requirements, references in this release to ``large trader'' include 
Unidentified Large Traders.
    \11\ See Rule 13h-1(d)(1)(i) and (ii).
    \12\ See Rule 13h-1(d)(1)(iii).
---------------------------------------------------------------------------

    Rule 13h-1 requires that, upon Commission request, every registered 
broker-dealer that is itself a large trader or carries an account for a 
large trader must electronically report Transaction Data to the 
Commission through the Electronic Blue Sheets (``EBS'') system for all 
transactions, equal to or greater than the reporting activity level, 
effected directly or indirectly by or through accounts carried by such 
broker-dealer for large traders.\13\ Additionally, where a non-broker-
dealer carries an account for a large trader, the broker-dealer 
effecting such transactions directly or indirectly for a large trader 
must electronically report Transaction Data to the Commission through 
the EBS system. The Rule requires that reporting broker-dealers submit 
the requested Transaction Data no later than the day and time specified 
in the Commission's request.\14\
---------------------------------------------------------------------------

    \13\ Rule 13h-1(a)(8) defines the reporting activity level as: 
(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 other transaction in NMS securities, 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.
    \14\ The Commission will not require reporting earlier than the 
opening of business of the day following such request, except under 
unusual circumstances. See Rule 13h-1(e). Accordingly, while 
information must be available on the morning after the transaction 
was effected, the reporting deadline is based upon the deadline 
specified in the Commission's request for Transaction Data.
---------------------------------------------------------------------------

    Initially, the compliance date for the broker-dealer requirements 
was April 30, 2012.\15\ To allow additional time for the Commission to 
examine implementation issues identified by the Industry Organizations 
subsequent to the Commission's adoption of the Rule, the Commission 
deferred the initial compliance date and established a two-phased 
approach to implementation of the broker-dealer requirements.\16\ 
Specifically, the Commission postponed until November 30, 2012, the 
obligations of clearing brokers for large traders (including the large 
trader itself if it is a self-clearing broker-dealer) to keep records 
and report Transaction Data for such customers' transactions that are 
either (1) proprietary trades by a U.S. registered broker-dealer; or 
(2) effected through a ``sponsored access'' arrangement (i.e., Phase 
One).\17\ The

[[Page 49558]]

Commission further deferred the compliance date for the recordkeeping 
and reporting of other large trader transactions until May 1, 2013 \18\ 
and, more recently, the Commission extended that date to November 1, 
2013 while it considered the industry's experience with Phase One 
implementation in further evaluating the requests for relief for the 
remainder of the Rule.\19\
---------------------------------------------------------------------------

    \15\ See Large Trader Adopting Release, supra note 1, 76 FR at 
46960.
    \16\ See Extension Order I, supra note 4.
    \17\ See id. at 25008-9. A sponsored access arrangement is one 
where a broker-dealer permits a customer to enter orders into a 
trading center without using the broker-dealer's trading system 
(i.e., using the customer's own technology or that of a third party 
provider). FIF indicated that broker-dealer compliance would be 
easier for sponsored access customers because those arrangements 
typically are distinct from all other business lines of the broker-
dealer, with infrastructure that processes this order flow that is 
separate from the platforms that handle other client and proprietary 
flows. See id. at 25008 n.16.
    \18\ See id. at 25008.
    \19\ See Securities Exchange Act Release No. 69281 (April 3, 
2013), 78 FR 20960 (April 8, 2013) (``Extension Order II'').
---------------------------------------------------------------------------

    Broker-Dealer Monitoring. As mentioned above, the recordkeeping and 
reporting requirements apply to customers that are large traders as 
well as Unidentified Large Traders. An ``Unidentified Large Trader'' is 
a person who (1) has not complied with the identification requirements 
of the Rule; and (2) a registered broker-dealer knows or has reason to 
know is a large trader based on transactions in NMS securities effected 
by or through such broker-dealer.\20\ The Rule provides a safe harbor 
for broker-dealers that establish and maintain certain customer 
monitoring practices. For the purposes of the Rule, a registered 
broker-dealer is deemed not to know or have reason to know that a 
person is a large trader if it does not have actual knowledge that a 
person is a large trader and it establishes policies and procedures 
reasonably designed to (among other things): (1) identify persons who 
may be large traders but have not self-identified as required; and (2) 
inform those persons of the self-identification requirements of the 
Rule.\21\ To take advantage of this safe harbor, broker-dealers are 
required to have appropriate policies and procedures in place by the 
Phase Two compliance date, which is November 1, 2013.\22\

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

    \20\ See Rule 13h-1(a)(9).
    \21\ See Rule 13h-1(f).
    \22\ See Extension Order II, supra note 19.
---------------------------------------------------------------------------

B. Relief Requests

    The Industry Organizations have requested that the Commission 
provide certain substantive relief with respect to the recordkeeping 
and reporting requirements for broker-dealers.\23\ In particular, they 
highlight implementation challenges associated with the Rule's 
recordkeeping and reporting requirements that have come to light as 
broker-dealers focused their attention on how to comply with the Rule, 
in particular with respect to obtaining and reporting the execution 
time of individual transactions by certain large traders.\24\ According 
to the Industry Organizations, these challenges are most pronounced 
when a broker-dealer effects transactions for a large trader and 
processes the activity through a multi-client average price 
account.\25\ As a result of the complexity and additional cost to 
capture and report disaggregated trades with execution time for large 
traders whose trades are processed in this manner, the Industry 
Organizations request relief from the requirement to provide execution 
times on transactions processed through average price accounts.\26\
---------------------------------------------------------------------------

    \23\ See generally FIF Letter, SIFMA Letter I, and SIFMA Letter 
II, supra note 2.
    \24\ See SIFMA Letter II, supra note 2 at 5. See also FIF 
Letter, supra note 2 at 2; and SIFMA Letter I, supra note 2 at 5.
    \25\ See FIF Letter, supra note 2 at 31-32. See also SIFMA 
Letter I, supra note 2 at B-1.
    \26\ See, e.g., SIFMA Letter I, supra note 2 at 5.
---------------------------------------------------------------------------

    The Industry Organizations also request relief for all broker-
dealers other than self-clearing and clearing broker-dealers from the 
recordkeeping and reporting requirements of the Rule.\27\ While the 
Rule focuses the reporting obligation on the universe of clearing 
brokers that currently report data through the EBS system, the Rule 
also authorizes the Commission to obtain this data directly from 
certain non-clearing broker-dealer large traders, as well as broker-
dealers that effect transactions, directly or indirectly, for large 
traders where a non-broker-dealer carries the account. The Industry 
Organizations have asked the Commission to impose the recordkeeping and 
reporting requirement exclusively on the clearing brokers that 
currently report through the EBS system.\28\
---------------------------------------------------------------------------

    \27\ See FIF Letter, supra note 2 at 25-28. See also SIFMA 
Letter I, supra note 2 at B-2.
    \28\ See FIF Letter, supra note 2 at 26-27. See also SIFMA 
Letter I, supra note 2 at B-3.
---------------------------------------------------------------------------

    In addition, the Industry Organizations argue that the complex 
structure underlying execution, clearance, and settlement flows of 
large trader transactions, including the fact that information related 
to the identity of the large trader and the execution fill details 
often reside with different broker-dealers, presents challenges to 
implementation, and that these concerns are most relevant with respect 
to large trader institutional customers.\29\ The Industry Organizations 
further highlight areas where the burdens as they relate to 
institutional large trader customers would be most extensive and impose 
the greatest potential cost for some broker-dealers, particularly for 
prime brokers, routing broker-dealers, and situations where clearing 
responsibility is transferred between multiple brokers, and the 
Industry Organizations request that the Commission provide relief from 
the recordkeeping and reporting obligations of the Rule for each of 
those areas.\30\

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

    \29\ See FIF Letter, supra note 2 at 25-28. See also SIFMA 
Letter II, supra note 2 at 5-7.
    \30\ See FIF Letter, supra note 2 at 25-28. See also SIFMA 
Letter II, supra note 2 at 5-7.
---------------------------------------------------------------------------

II. Discussion

    The Commission continues to believe that implementation of the 
large trader reporting requirements contemplated by Rule 13h-1 is 
necessary to effectively assess the impact of large trader activity on 
the securities markets in the near term and support the Commission's 
investigative and enforcement activities. The Commission also believes 
that it is appropriate and consistent with the Exchange Act to provide 
exemptive relief limiting short-term compliance costs of the Rule to 
focus near-term compliance on the large trader information that is 
likely to be most useful to the Commission.
    Accordingly, and as discussed more fully below, the Commission 
believes that it is appropriate and consistent with the purposes of the 
Exchange Act to extend the Phase Two November 1, 2013 compliance date 
for certain registered broker-dealers by temporarily exempting broker-
dealers, until November 1, 2015, from the recordkeeping and reporting 
requirements of Rule 13h-1(d) and (e), except for:
    (1) The clearing broker-dealer for a large trader,\31\ with respect 
to \32\
---------------------------------------------------------------------------

    \31\ In its letter, FIF asked the Commission for ``relief for 
broker dealers involved in Large Trader transactions that do not 
have a direct relationship with the Large Trader. Only the self-
clearing and clearing broker dealers with a direct relationship with 
the Large Trader would perform Large Trader Reporting.'' See FIF 
Letter, supra note 2, at 2. In Appendix C of its letter, FIF 
provides an example of the entities for whom it recommends imposing 
a recordkeeping and reporting obligation. See id. at 25. In 
addition, FIF recommends that the reporting of execution time should 
rest with the clearing broker for the originating broker, and any 
prime broker would be relieved from being required to report 
execution times.
    \32\ Items (a) and (b) are currently included in Phase One, 
which was effective beginning on November 30, 2012.
---------------------------------------------------------------------------

    (a) proprietary transactions by a large trader broker-dealer;
    (b) transactions effected pursuant to a ``sponsored access'' 
arrangement; \33\ and
---------------------------------------------------------------------------

    \33\ See infra note 39 (defining ``sponsored access'' 
arrangement).

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

[[Page 49559]]

    (c) transactions effected pursuant to a ``direct market access'' 
arrangement \34\; and
---------------------------------------------------------------------------

    \34\ See infra note 41 and text following note 41 (defining 
``direct market access'' arrangement).
---------------------------------------------------------------------------

    (2) a broker-dealer that carries an account for a large trader, 
with respect to transactions other than those set forth above, and for 
Transaction Data other than the execution time.\35\
---------------------------------------------------------------------------

    \35\ Accordingly, during Phase Two, a registered broker-dealer 
that is itself a large trader but does not self-clear, as well as a 
broker-dealer effecting transactions directly or indirectly for a 
large trader where a non-broker-dealer carries the account for the 
large trader, will continue to be temporarily relieved from the 
recording and reporting requirements of the Rule and therefore do 
not need to record and electronically report Transaction Data to the 
Commission through the EBS system for purposes of the Rule during 
Phase Two.
    Neither of these temporary exemptions, however, relieves a 
broker-dealer from any other recordkeeping requirement that would 
otherwise apply under the federal securities laws, rules, or 
regulations, including Rules 17a-3 and 17a-4 under the Exchange Act, 
or any self-regulatory organization rule.
---------------------------------------------------------------------------

    In accordance with Phase One, clearing broker-dealers for large 
traders have been complying with the recordkeeping and reporting 
requirements of Rule 13h-1, with respect to (a) proprietary 
transactions by a large trader broker-dealer, and (b) transactions 
effected pursuant to a ``sponsored access'' arrangement, since November 
30, 2012. As part of Phase Two, in accordance with this Order, clearing 
broker-dealers for large traders also will have to comply with the 
recordkeeping and reporting requirements of Rule 13h-1 with respect to 
transactions effected pursuant to a ``direct market access'' 
arrangement as of November 1, 2013. In addition, with respect to all 
other types of transactions, the prime broker or other carrying broker-
dealer for a large trader will have to report the applicable LTID, but 
not the execution time, as of November 1, 2013. Finally, the 
recordkeeping and reporting requirements with respect to Unidentified 
Large Traders, and the related monitoring safe harbor provided by Rule 
13h-1(f), will apply to broker-dealers that carry an account for a 
large trader as of November 1, 2013.
    The Rule as adopted requires the following broker-dealers to 
obtain, keep records of, and report Transaction Data to the Commission 
upon request through the EBS infrastructure: (1) The broker-dealer that 
``carries'' the account for the large trader (including the clearing 
broker for the large trader and the large trader's prime broker, if 
applicable); (2) broker-dealer large traders, with respect to their 
proprietary trades and transactions over which they exercise investment 
discretion; and (3) other brokers that directly or indirectly effect 
transactions for a large trader, including an executing broker, where a 
non-broker-dealer carries the large trader's account.\36\ As SIFMA 
notes, at present, carrying brokers-dealers are the primary parties 
that report through the EBS infrastructure.\37\ Accordingly, full 
compliance with the recordkeeping and reporting provisions of the Rule 
would require non-carrying broker-dealers to develop connectivity to 
the EBS system. In its initial exemption, the Commission temporarily 
limited the broker-dealer recordkeeping and reporting requirements to 
the clearing broker-dealer for a large trader.\38\
---------------------------------------------------------------------------

    \36\ See Rule 13h-1(d) and (e), respectively. See also Large 
Trader Adopting Release, supra note 1, 76 FR at 46996 (acknowledging 
SIFMA's comment that ``some broker-dealers do not have access to 
execution times in a manner that is readily reportable under the EBS 
infrastructure'' and would need to update their EBS infrastructure 
to gather that information).
    \37\ See SIFMA Letter I, supra note 2, at B-2.
    \38\ See Extension Order I, supra note 4, at 25008.
---------------------------------------------------------------------------

    To reduce implementation burdens, the Commission believes that it 
is appropriate, at this time, to continue to limit the recordkeeping 
and reporting obligations of the Rule to broker-dealers that carry 
accounts for large traders, as they are already connected to the EBS 
system. Accordingly, the Commission is extending its temporary 
exemption of non-carrying brokers from the reporting requirement of the 
Rule until November 1, 2015. In other words, for Phase Two, a 
registered broker-dealer that is itself a large trader but does not 
self-clear, as well as a broker-dealer effecting transactions directly 
or indirectly for a large trader where a non-broker-dealer carries the 
account for the large trader, are both temporarily relieved from the 
reporting requirements of the Rule and, therefore, they do not need to 
record and electronically report Transaction Data to the Commission 
through the EBS system solely for purposes of the Rule. For the types 
of large traders and transactions subject to reporting in Phases One 
and Two, the Commission will obtain the Transaction Data it needs from 
the carrying broker for the large trader, and therefore believes that 
it is reasonable, at this time, to extend the temporary exemption 
provided to other types of broker-dealers from the recordkeeping and 
reporting requirements of the Rule.
    With respect to the specific transactions to be recorded and 
reported by carrying brokers, as part of Phase One, the Commission 
required recordkeeping and reporting of Transaction Data of proprietary 
trades by broker-dealer large traders and transactions effected by a 
large trader through a ``sponsored access arrangement.'' \39\ FIF had 
previously noted that the trading activity of large traders with 
sponsored access arrangements typically is processed by clearing 
brokers on infrastructure separate from that used for other customers, 
so that implementation of the Rule for sponsored access customers would 
require less effort than for other types of large trader customers.\40\ 
According to the Industry Organizations, many broker-dealers charged 
with recordkeeping and reporting of Transaction Data under the Rule do 
not currently have ready access to all of that data for other types of 
large trader customers, particularly disaggregated trades with 
execution time, when it resides at unaffiliated broker-dealers. For 
example, according to the Industry Organizations, while the executing 
broker knows the execution time of a large trader's transaction, it 
typically does not have the means to pass that information to the 
clearing broker for the large trader in a format that is readily 
reportable through EBS. Accordingly, to comply with the recordkeeping 
and reporting requirements of the Rule, the clearing broker for the 
large trader in many cases must make new arrangements to obtain 
execution time data for large trader customers for reporting through 
EBS.
---------------------------------------------------------------------------

    \39\ In this context, a ``sponsored access arrangement'' was 
defined as an arrangement in which a broker-dealer permits a large 
trader customer to enter orders directly to a trading center where 
such orders are not processed through the broker-dealer's own 
trading system (other than any risk management controls established 
for purposes of compliance with Rule 15c3-5 under the Exchange Act) 
and where the orders are routed directly to a trading center, in 
some cases supported by a service bureau or other third party 
technology provider. See Extension Order I, supra note 4, 77 FR at 
25009 n.22 (referencing the definition of the term used in the 
adopting release for Rule 15c3-5).
    \40\ See FIF Letter, supra note 2 at 5.
---------------------------------------------------------------------------

    Phase Two, as modified herein, represents an important incremental 
step in the implementation of the Rule that is designed to allow the 
Commission to collect Transaction Data, including execution time, with 
respect to an additional group of large traders that are of particular 
interest to the Commission in fulfilling its regulatory 
responsibilities. Specifically, Phase Two will include Transaction Data 
for large trader customers that trade through a ``direct market access 
arrangement,'' which means an arrangement whereby a broker-dealer 
permits an institutional customer to enter orders into a trading center 
but such orders flow through the broker-dealer's trading systems prior 
to

[[Page 49560]]

reaching the trading center.\41\ Because large trader customers that 
trade through this type of direct market access arrangement have chosen 
to retain control over critical aspects of the handling of their 
orders, including the price, size, timing, and routing of individual 
orders, their order handling decisions are of particular interest to 
the Commission in conducting market reconstructions and analyses as 
well as investigations. Direct market access arrangements subject to 
recordkeeping and reporting in Phase Two, as modified, would include, 
for example, those where the large trader customer enters individual 
orders manually or through an algorithm under its control, but those 
orders flow through the broker-dealer's systems prior to reaching the 
trading center.\42\ Phase Two would not include, for example, large 
trader customers that delegate to the broker-dealer the discretion to 
determine the price, size, timing, or routing of individual orders.
---------------------------------------------------------------------------

    \41\ See Securities Exchange Act Release No. 63241 (November 3, 
2010), 75 FR 69792, 69793 (November 15, 2010) (File No. S7-03-10) 
(``Generally, direct market access refers to an arrangement whereby 
a broker-dealer permits customers to enter orders into a trading 
center but such orders flow through the broker-dealer's trading 
systems prior to reaching the trading center. In contrast, sponsored 
access generally refers to an arrangement whereby a broker-dealer 
permits customers to enter orders into a trading center that bypass 
the broker-dealer's trading system and are routed directly to a 
trading center, in some cases supported by a service bureau or other 
third party technology provider.''). The Commission notes that 
sponsored access arrangements and direct market access arrangements 
typically are entered into with the executing broker-dealer, which 
may or may not also be the clearing broker for the large trader.
    \42\ See id. at 69793 (discussing how a direct market access 
arrangement involves a broker-dealer allowing its customer to use 
its systems to electronically access an exchange or alternative 
trading system).
---------------------------------------------------------------------------

    From the Commission's perspective, including large trader activity 
where the large trader retains control over the material terms of the 
order and uses the broker-dealer primarily as a conduit to an execution 
venue will capture trading activity that is similar in kind to the 
sponsored access activity currently captured in Phase One, and is the 
type of activity for which the precise time and other aspects of the 
large trader's execution is of substantial regulatory interest. 
Accordingly, clearing broker-dealers for such large traders will be 
required to keep records of, and report to the Commission upon request, 
all of the Transaction Data covered by the Rule, including both LTID 
number(s) and execution time, on every EBS record for the categories of 
large trader covered in Phase One and Phase Two.
    The Commission believes that capturing all of the Transaction Data 
for the types of large trader transactions covered by Phases One and 
Two (as modified herein) is important in the near term to the 
Commission's enforcement and regulatory programs, and therefore the 
Commission is requiring the recordkeeping and reporting of this 
information as of November 1, 2013 (the current compliance date for 
Phase Two). Accordingly, as of November 1, 2013, clearing broker 
dealers for a large trader will be required to keep records and report 
to the Commission upon request all Transaction Data for: (1) 
Proprietary transactions by a large trader broker-dealer, (2) 
transactions effected pursuant to a sponsored access arrangement, and 
(3) transactions effected pursuant to a direct market access 
arrangement.
    With respect to transactions other than those set forth above, 
broker-dealers that carry an account for a large trader must record and 
report, as of November 1, 2013, Transaction Data other than execution 
time (e.g., LTID). The Commission notes that the Industry Organizations 
have indicated that carrying brokers can readily provide the LTID, 
because that information is available to them today, and the 
arrangements to report it to the Commission through the EBS system 
would not require significant technological development.\43\ Given the 
relatively low implementation burdens, the Commission believes that 
including the LTID on EBS data for all large traders would be 
beneficial to the Commission, and help support, for example, its 
investigative activities and analysis of significant market events.
---------------------------------------------------------------------------

    \43\ See, e.g., SIFMA Letter II, supra note 2 at 3.
---------------------------------------------------------------------------

    Finally, the recordkeeping and reporting requirements with respect 
to Unidentified Large Traders, and the related monitoring safe harbor 
provided by Rule 13h-1(f), will apply to broker-dealers that carry an 
account for a large trader as of November 1, 2013. The Commission 
believes that it is appropriate to apply the provisions that relate to 
Unidentified Large Traders to the broker-dealers that otherwise will be 
required to comply with the recordkeeping and reporting requirements as 
of Phase Two--namely broker-dealers that carry accounts for large 
traders--and that implementation of such provisions will help foster 
compliance with the large trader identification requirements.

III. Summary of Phased Implementation

    With respect to Phase One and Phase Two, as modified, clearing 
broker-dealers for large traders \44\ must obtain and report 
Transaction Data that includes both execution time and LTID on 
disaggregated trades for the following types of transactions:
---------------------------------------------------------------------------

    \44\ See supra note 31 and text accompanying note 31.
---------------------------------------------------------------------------

    (1) For Phase One, which began on November 30, 2012:
    (a) proprietary transactions by large traders that are U.S.-
registered broker-dealers;
    (b) transactions effected by large traders through a sponsored 
access arrangement; \45\ and
---------------------------------------------------------------------------

    \45\ See supra note 39 (defining sponsored access arrangements).
---------------------------------------------------------------------------

    (2) for Phase Two, which will begin on November 1, 2013: 
transactions effected by large traders through a direct market access 
arrangement.\46\
---------------------------------------------------------------------------

    \46\ See supra note 41 and text accompanying note 41 (defining 
direct market access arrangements).
---------------------------------------------------------------------------

    Further, with respect to all other types of transactions, for Phase 
Two, the prime broker or other carrying broker-dealer for a large 
trader must obtain and report Transaction Data, including LTID, for all 
such large traders, but is not required to report execution time.
    In addition, with respect to the requirements relating to 
Unidentified Large Traders, which will apply to carrying broker-dealers 
as of Phase Two, the compliance date for broker-dealers that wish to 
avail themselves of the monitoring safe harbor provided by Rule 13h-
1(f) to establish appropriate policies and procedures is November 1, 
2013.
    Phase Three, which will begin November 1, 2015, covers the 
remaining types of large traders and transactions not covered by Phases 
One and Two. Specifically, all other broker-dealers subject to the 
recordkeeping and reporting requirements of the Rule (i.e., broker-
dealers that are large traders but do not self-clear, and broker-
dealers effecting transactions directly or indirectly for a large 
trader where a non-broker-dealer carries the account for the large 
trader) are temporarily exempted from recording and reporting 
Transaction Data through the EBS system for the duration of Phase Two. 
Unless the Commission otherwise provides in the future, Phase Three 
will require all broker-dealers subject to the recordkeeping and 
reporting requirements of Rule 13h-1 to come into full compliance with 
those provisions.

[[Page 49561]]

IV. Conclusion

    It is hereby ordered, pursuant to Exchange Act Section 13(h)(6) and 
Rule 13h-1(g) thereunder, that broker-dealers are exempted temporarily 
until November 1, 2015 from the recordkeeping and reporting 
requirements of Rule 13h-1(d) and (e), except for (1) the clearing 
broker-dealers for large traders, with respect to (a) Proprietary 
transactions by a large trader broker-dealer; (b) transactions effected 
pursuant to a ``sponsored access'' arrangement; \47\ and (c) 
transactions effected pursuant to a ``direct market access'' 
arrangement; \48\ and (2) broker-dealers that carry an account for a 
large trader, with respect to transactions other than those set forth 
above, and for Transaction Data other than the execution time.\49\
---------------------------------------------------------------------------

    \47\ See supra note 39 (defining sponsored access arrangements).
    \48\ See supra note 41 and text accompanying note 41 (defining 
direct market access arrangements).
    \49\ See supra note 35.

By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-19650 Filed 8-13-13; 8:45 am]
BILLING CODE 8011-01-P