65FR26534A Electronic Submission of Securities Trading Data by Exchange Members, Brokers and Dealers
robop...@us.govnews.org
Posting-number: Volume 65, Issue 89, Page 26534A
[Federal Register: May 8, 2000 (Volume 65, Number 89)]
[Proposed Rules]
[Page 26534-26542]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08my00-10]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-42741; File No. S7-12-00]
RIN 3235-AH69
Electronic Submission of Securities Trading Data by Exchange
Members, Brokers and Dealers
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission is proposing for
comment Rule 17a-25 under Section 17 of the Securities Exchange Act of
1934. Proposed Rule 17a-25 would require brokers and dealers to submit
electronically to the Commission, upon request, information on customer
and firm securities trading. The Commission designed the proposal to
improve its capacity to analyze electronic submissions of trading data
and thereby facilitate Commission enforcement investigations and other
trading reconstructions.
DATES: Comments must be received on or before June 7, 2000.
ADDRESSES: Comments should be submitted in triplicate to Jonathan G.
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549-0609. Comments may also be submitted
electronically at the following e-mail address: rule-c...@sec.gov.
All comment letters should refer to File No. S7-12-00; this file number
should be included in the subject line if e-mail is used. All comment
letters received will be available for public inspection and copying at
the Commission's Public Reference Room, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Electronically submitted comment letters will
be posted on the Commission's Internet web site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT: Alton Harvey, Office Chief, at (202)
942-4167; or Anitra Cassas, Attorney, at (202) 942-0089, Division of
Market Regulation, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549-1001.
SUPPLEMENTARY INFORMATION:
I. Introduction and Executive Summary
In the course of its enforcement and market regulatory activities,
the Securities and Exchange Commission (``Commission'') regularly
requests securities trading records from broker-dealers. For many
decades, the
[[Page 26535]]
Commission requested this data by mailing questionnaire forms (known as
``blue sheets'' because of the color on which the forms were printed)
to broker-dealers to be manually completed and mailed back to the
Commission. In the late 1980s, as the volume of trading and securities
transactions dramatically increased, the Commission and the securities
self-regulatory organization (``SROs'') worked together to develop and
implement a system with a universal electronic format to replace the
less efficient manual process. This system is commonly known as the
``electronic blue sheet'' or ``EBS'' system.
In general, the Commission uses the EBS system to obtain securities
transaction information for one of two 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, primarily following significant market
volatility.\1\
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\1\ The surveillance and enforcement staffs of othe SROs also
routinely use the EBS system to obtain trading data from member
firms for investigations into trading abuses such as insider trading
or market manipulation.
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Since its inception, the EBS system has been an effective tool for
most investigations, which usually require analyses of trading in only
one or two stocks over a limited time period. When used for large scale
investigations or market reconstructions involving numerous stocks
during peak trading volume periods, however, data provided by the EBS
system has not met certain of the Commission's needs. Specifically, the
current EBS system format does not provide information that is needed
by the Commission to effectively aggregate trading by market
participants who trade through multiple accounts with more than one
broker-dealer.
To ensure the continued effectiveness of the Commission's
enforcement and regulatory programs, the Commission is therefore
proposing to enhance certain aspects of the EBS system to take into
account evolving trading strategies used by institutional and
professional traders. Proposed Rule 17a-25 \2\ would codify the
requirement that brokers and dealers electronically submit to the
Commission, upon request by the Commission staff, information on
customer and proprietary securities trading necessary for the
Commission's enforcement or regulatory programs. \3\ Specifically,
proposed Rule 17a-25 would require firms to supply specific information
already covered by the existing EBS system. For proprietary
transactions, firms would be required upon request to report standard
data elements such as security symbol, date executed, amount traded,
type of transaction, transaction price, account number, location where
the transaction was executed, and identification information for the
parties on either side of the transaction. For customer transactions,
standard data elements would also include the customer name, address,
branch office number, registered representative number, type of order,
date account opened, taxpayer identification number, employer name, and
the role of the intermediary (agent or principal) if any.
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\2\ 17 CFR 240.17a-25.
\3\ Section 17(a)(1) of the Securities Exchange Act of 1934
(``Exchange Act'') requires registered broker-dealers to make, keep,
furnish, and disseminate records and reports prescribed by
Commission rule ``as necessary or appropriate in the public
interest, for the protection of investors, or otherwise in
furtherance of the purposes of'' the Exchange Act. 15 U.S.C.
78q(a)(1).
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Proposed Rule 17a-25 would also require firms, upon request, to
supply three additional data elements that would assist the Commission
in aggregating transactions by entities trading through multiple
accounts. \4\ In addition, the rule would require broker-dealers, upon
request, to provide and keep current, information needed to process
data requests in a timely manner (e.g., name, address, telephone and
fax number, and e-mail address for each designated contact person
responsible for receiving and processing EBS requests from the
Commission).
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\4\ See Part II.B.2, infra.
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Proposed Rule 17a-25 is intended to accomplish three objectives.
First, the proposed rule would codify the requirement for broker-
dealers to electronically submit securities trading data when requested
by the Commission staff. Second, the rule is designed to improve the
effectiveness of the Commission's enforcement and regulatory programs
by providing the additional information necessary to aggregate the
securities transactions of institutional and professional traders who
maintain multiple accounts at more than one broker-dealer. Finally, by
requiring broker-dealers to provide current contact person information,
the proposed rule would significantly improve the Commission's ability
to process securities trading data requests in a timely manner.
II. Discussion of Proposed Rule 17a-25
A. Background
The securities industry has witnessed tremendous change in the past
two decades, both in the types of market participants and in the
variety of trading strategies and products. In particular, increasing
numbers of institutional and professional traders now conduct their
securities trading through multiple sub-accounts maintained at
different broker-dealers. These market participants include
institutional investors such as pension funds, insurance companies,
foundations, endowments, mutual funds, and hedge funds.
For over a decade, the Commission's primary tool for identifying
buyers and sellers of securities in enforcement or other regulatory
inquiries has been the EBS system. When an inquiry is opened, the
Commission staff sends requests for trading data to the most active
clearing firms in the relevant security. Firms are requested to submit,
within ten business days, information concerning transactions by all
proprietary and customer accounts that bought or sold a security or
securities during a specified review period. For each account, firms
must identify, among other things: the name and address of the account;
the account type (proprietary or customer); the date of the trades; the
types of trades (buy, sell, or sell short); the amount traded; and the
transaction price. Firms use software to scan their account records and
download the appropriate information into the standard EBS format.
Firms then transmit that electronic file to the Securities Industry
Automation Corporation (``SIAC''), which in turn routes the file
electronically to the Commission's mainframe computer.\5\
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\5\ If an SRO's surveillance or enforcement staff issues the
data request, SIAC routes the EBS data from the broker-dealer to the
appropriate SRO.
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The EBS system has performed effectively as an enforcement tool for
analyzing trading in one or two securities over a limited time period.
Given the increasing complexity of trading strategies, however, the
Commission believes that enhancements to the EBS system are necessary
to improve the Commission's ability to analyze trading in more complex
market-wide trading reconstructions, as well as in investigations
involving activities in multiple securities during heavy trading
periods. Specifically, new data elements would assist the Commission in
aggregating transactions by entities trading through multiple accounts.
The Commission believes that an enhanced EBS system would also
provide a more efficient and cost-effective way to conduct timely and
accurate reviews of the activities of large traders for regulatory or
enforcement purposes, than would further efforts to
[[Page 26536]]
design and implement the large trader reporting system authorized by
the Market Reform Act of 1990, and incorporated into section 13(h) of
the Exchange Act.\6\ Although the Commission proposed Rule 13h-1 for
comment in 1991 \7\ to implement the large trader reporting system, and
re-proposed a revised version of the rule in 1994,\8\ the Commission
has not proceeded with further development of this system in light of
commenters' concerns.\9\
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\6\ 15 U.S.C. 78m(h).
\7\ See Securities Exchange Act Release No. 29593 (August 22,
1991), 56 FR 42550 (August 28, 1991).
\8\ See Securities Exchange Act Release No. 33608 (February 9,
1994), 59 FR 7917 (February 17, 1994).
\9\ When proposed Rule 13h-1 was published for comment in 1991
and re-published in 1994, the Commission received numerous comments
from the securities industry, potential large traders, and market
commentators that the large trader reporting system would be unduly
burdensome and costly. Public comments also raised concerns that a
large trader registration system might cause large international
investors to conduct their U.S. equity trading activities through
foreign brokers and markets. Commenters also believed that the
comprehensive system envisioned by Section 13(h) could prove
difficult to implement and maintain, and most likely would not
expedite trading reconstructions to the extent contemplated in 1990.
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One of the primary objectives of the Market Reform Act of 1990 and
proposed Rule 13h-1 was the enhancement of the Commission's ability to
perform accurate and timely reconstructions of trading by large
traders. The Commission believes that proposed Rule 17a-25 would
accomplish this objective without imposing significant new burdens on
broker-dealers or institutional investors. Under the current proposal,
no major changes would be necessary for broker-dealer systems. The
Commission preliminarily believes that all of the broker-dealers that
are likely to handle large trader accounts already have in place
systems to collect and transmit electronic reports over the existing
EBS system. In addition, the Commission believes that the additional
data elements contemplated by proposed Rule 17a-25 are readily
available in broker-dealer systems and can be captured and
electronically reported with only minor modifications to the firms'
existing EBS software.
B. Description of Proposed Recordkeeping and Reporting Requirements
Section 17(a)(1) of the Exchange Act requires broker-dealers to
make, keep, furnish, and disseminate records and reports prescribed by
the Commission ``as necessary or appropriate in the public interest,
for the protection of investors, or otherwise in furtherance of the
purposes of '' the Exchange Act.\10\ Rules 17a-3 and 17a-4 under the
Exchange Act specify minimum requirements with respect to the records
that must be maintained by broker-dealers, as well as the periods
during which such records and other documents relating to a broker-
dealer's business must be preserved.\11\
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\10\ 15 U.S.C. 78q(a)(1).
\11\ 17 CFR 240.17a-3 and 240.17a-4.
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Proposed Rule 17a-25 would apply to entities currently subject to
Rules 17a-3 and 17a-4. This includes any member of a national
securities exchange who directly deals in a securities business with
non-members of a national securities exchange. Proposed Rule 17a-25
would also apply to any broker or dealer who conducts a securities
business through any member of a national securities exchange, or is
registered pursuant to Section 15 of the Exchange Act.\12\
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\12\ 15 U.S.C. 78o.
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The proposed rule is largely patterned after existing SRO rules
that require member firms to use the EBS system to submit the customer
and proprietary trading data that the SROs request in connection with
their market surveillance or enforcement inquiries.\13\ The SRO rules,
which have been in place for ten years,\14\ require the same standard
transaction information to be submitted that would be required pursuant
to proposed Rule 17a-25(a). The universal EBS format permits the SROs
and the Commission to conduct timely and thorough surveillance and
enforcement inquiries with minimal regulatory burdens on reporting
broker-dealers.
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\13\ See, e.g., Rule 410A of the New York Stock Exchange (NYSE);
Rule 153A of the American Stock Exchange (Amex); Rule 15.7 of the
Chicago Board Options Exchange (CBOE); Rule 8211 of the National
Association of Securities Dealers, Inc. (NASD); and Rule 785 of the
Philadelphia Stock Exchange (Phlx).
\14\ See Securities Exchange Act Release Nos. 25859 (June 27,
1988), 53 FR 25029 (July 1, 1988) (approving both the NYSE and
Amex's rules for the electronic submission of trading data); 26235
(November 1, 1988), 53 FR 44688 (November 4, 1988) (approving the
CBOE's rule for the electronic submission of trading data); 26539
(February 13, 1989), 54 FR 7318 (February 17, 1989) (approving the
NASD's rule for the electronic submission of trading data); and
27170 (August 23, 1989), 54 FR 37066 (approving the Phlx's rule for
the electronic submission of trading data).
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1. Standard Transaction Information
Proposed Rule 17a-25 would not impose additional recordkeeping
requirements for broker-dealers; broker-dealers already maintain all of
the information required for the proposed electronic reports pursuant
to Exchange Act Rules 17a-3 and 17a-4. These elements include: (1)
clearing house number or alpha symbol used by the broker-dealer
submitting the data; (2) clearing house number(s) or alpha symbol(s) of
the broker-dealer(s) on the opposite side to the trade; (3) the
security identifier; (4) execution date; (5) quantity executed; (6)
transaction price; (7) account number; and (8) identity of the exchange
or market where each transaction was executed.\15\ If transactions are
for customer accounts (as opposed to proprietary accounts), the
following additional elements are included: (9) customer name, address,
and related account information; and (10) if a transaction is effected
for a customer of another member, broker or dealer, whether the other
member, broker or dealer was acting as principal or agent on the
transaction(s).\16\
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\15\ 17 CFR 240.17a-3 and 240.17a-4.
\16\ Id.
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2. Additional Transaction Information
Proposed Rule 17a-25 would also set forth requirements for broker-
dealers to provide, upon request, additional data elements that are
needed to aggregate trading by institutional and professional traders
that often use multiple accounts maintained at different broker-
dealers. In preliminary discussions with the securities industry, the
Commission staff has identified several additional data elements,
discussed below, which would be useful in analyzing this type of
trading through multiple accounts. These data elements should be
readily available in broker-dealer systems, and only minor
modifications to the firms' existing EBS software should be necessary
to capture and report these data elements. We also believe that,
because only a limited number of broker-dealers are likely to handle
transactions for the types of entities that use multiple accounts at
different broker-dealers (we estimate that less than 100 firms are
likely to fall into this category), the potential costs to the
securities industry for necessary EBS software modifications should be
limited.
(a) Prime Brokerage Identifiers
It is common for an institutional investor to route its buy or sell
orders in securities through different broker-dealers, who will then
forward the transactions to a single broker-dealer that is designated
as the institution's ``prime broker.'' The prime broker maintains a
master account for the institution that simplifies recordkeeping and
oversight of the institution's trading activity.
When an institution uses a prime brokerage arrangement, it is often
[[Page 26537]]
difficult for the Commission to identify instances when the same
transaction may be reported twice in EBS submissions--once in the
report by the executing broker-dealer and again in the report by the
broker-dealer acting as prime broker. Broker-dealers employ different
means to identify prime brokerage accounts in EBS submissions. For
example, some broker-dealers identify the primer broker or an account
executive at the prime broker in the account address field. Other
broker-dealers do not indicate that an account's transactions involved
a prime broker. As a result, some trades may be inadvertently double-
counted when the Commission performs trading analyses.
Two new data elements in proposed Rule 17a-25 are designed to
provide uniformity in identifying transactions involving a prime
brokerage arrangement. First, if a broker-dealer effected trades for an
institutional account but forwarded this account's transactions to a
prime broker, this would have to be reflected in one of the new data
fields in the enhanced EBS reports. This requirement is set forth in
sub-paragraph (1)(i) under paragraph (b) of proposed Rule 17a-25.
Second, if a broker-dealer acted as the prime broker for an
institutional account, this also would have to be reflected in the new
EBS data field. This requirement is set forth in sub-paragraph (1)(ii)
under paragraph (b) of proposed Rule 17a-25.
These new data elements would permit the Commission staff to better
analyze this type of increasingly frequent institutional activity and
to avoid inadvertently double-counting such transactions.\17\
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\17\ The Commission is specifically requesting comment on prime
brokerage identifiers; see Section III, infra.
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(b) Average Price Account Identifiers
Broker-dealers often use their ``average price accounts'' as a
mechanism to buy or sell large amounts of a given security for their
institutional customers. Under this arrangement, a broker-dealer's
average price account may buy or sell a security in small increments
throughout a trading session, and then transfer the accumulated long or
short position to one or more institutional accounts for a volume-
weighted average price after the market close.
As with transactions involving prime brokerage arrangements, there
currently is no uniformity in how broker-dealers identify these
transactions in EBS submissions. As a result, the Commission's trading
analyses may inadvertently double-count such transactions--once in the
EBS submission for the firm's average price account, and again in the
EBS submission for the institutional account receiving positions from
the average price account. Two additional data elements in proposed
Rule 17a-25 are designed to provide uniformity in identifying
transactions involving average price accounts.
First, if an institutional account's transactions involved
transfers from the broker-dealer's average price accounts, this would
have to be reflected in one of the new data fields in the enhanced EBS
format. This requirement is set forth in sub-paragraph (2) (i) under
paragraph (b) of proposed Rule 17a-25. Similarly, if the account
covered by an EBS submission were itself an average price account, this
also would have to be reflected in a new field in the enhanced EBS
format. This requirement is set forth in sub-paragraph (2) (ii) under
paragraph (b) of proposed Rule 17a-25.\18\
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\18\ The Commission is specifically requesting comment on
average price account identifiers; see Section III, infra.
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(c) Identifiers Used by Depository Institutions
Many of the largest institutional investors in U.S. equity
securities process their transactions through the Depository Trust
Company (``DTC'') or similar organizations. Pursuant to paragraph
(b)(3) of proposed Rule 17a-25, if a broker-dealer effected trades for
an institutional account and processed these transactions through a
depository institution, the account's depository identifier would have
to be reflected in one of the new data fields in the enhanced EBS
reports. The inclusion of a depository account identifier in EBS
reports would greatly expedite efforts by the Commission staff to
aggregate institutional trading when conducting a complex trading
reconstruction involving multiple securities over an extended trading
period.\19\
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\19\ The Commission is specifically requesting comment on
depository account identifiers; see Section III, infra.
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3. Information to Facilitate Data Requests
A recurring problem with the EBS system has been the time delay in
ensuring that data requests from the Commission staff are directed to
the appropriate personnel at broker-dealers. Currently, the Commission
staff initiates a data request by mailing a standard letter to the
compliance personnel at any firm that was active in the selected
security during the designated review period. Due to frequent staff
turnover and reorganizations at broker-dealers, however, the correct
compliance official at the firm often does not receive the request.
Under certain circumstances, such as when a compliance officer has
recently left the firm or is out of the office, it may be several days
before a request reaches the appropriate staff person, thereby
unnecessarily delaying the Commission's inquiry.
The Commission believes that requiring broker-dealers to supply the
Commission with up-to-date information about personnel responsible for
processing EBS requests would expedite the process. The Commission
currently stores EBS contact person information in an electronic
database. This database, however, is often incorrect because firms fail
to notify the Commission that contact persons have changed.
Accordingly, paragraph (c) of the proposed rule would require broker-
dealers to submit, upon request, certain information about their
contact persons and to keep this information current with the
Commission. The Commission contemplates initially making such requests
only to broker-dealers that have recently received EBS requests from
the Commission.\20\
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\20\ The Commission has determined that the most efficient means
of obtaining EBS contact information from the appropriate broker-
dealers is by request rather than imposing a general reporting
obligation on all broker-dealers. Thousands of broker-dealers who
clear their trades through other firms never receive EBS data
requests from the Commission. In addition, firms who do not trade
with the public or are otherwise extremely inactive traders are
rarely asked to supply trading data. Accordingly, the Commission
believes it would be most cost-effective to build its database of
EBS contacts based on the staff's experience with the types of
broker-dealers that are likely to be recipients of future data
requests.
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4. Other Information
The Commission is specifically requesting comment on other types of
information that may be useful in analyzing trading in more complex
market-wide trading reconstructions, as well as in investigations
involving trading in multiple securities during very active markets.
For example, execution times would be useful in trading
reconstructions, particularly those that focus on trading during
critical time periods during sharp market swings. To date, however,
execution times have not been included in EBS reports because this
information generally has not been available through broker-dealer
account records systems (``back office'' records) that are used to
prepare EBS reports (although execution time information may be
available in other broker-dealer recordkeeping systems). Some
representatives of the securities industry have indicated to the
[[Page 26538]]
Commission staff that, at least for transactions effected through
automated order-routing systems, ``order sequence'' identifiers \21\
could be used for EBS reports in lieu of actual execution times.
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\21\ Firms use these identifiers to trace orders routed through
automated systems. These identifiers are also routinely captured by
some audit trail systems and other recordkeeping systems, such as
the NYSE's daily program trading reports from member firms.
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The inclusion of order sequence identifiers in EBS reports would
enable the Commission staff to derive order entry times for particular
trades. Once such trades are isolated, the transactions' order sequence
numbers could be matched with timed order entry reports captured by
either the broker-dealer's internal systems or with timed audit trails
and related SRO reports. In view of the large number of institutional
and professional trades that are routed and executed using automated
systems, particularly program trading activity, the capture of the
appropriate order sequence identifiers in EBS reports could greatly
expedite trading reconstructions in which precise timing of particular
trading activity is critical. The Commission is therefore soliciting
comments concerning the feasibility of, and costs associated with,
capturing order sequence identifiers in EBS reports.
In addition, information captured by the NASD's Order Audit Trail
System (``OATS'') and the NYSE's proposed order tracking system \22\
could be useful to the Commission in its trading analyses. For example,
these systems generally capture the date and time of origination or
receipt of the order and information on when the order is transmitted
to another department within the member firm, to another member firm,
or to a non-member. The Commission is, therefore, soliciting comments
concerning the feasibility of, and costs associated with, capturing
this type of information for Commission enforcement and trading
reconstruction efforts.
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\22\ See SR-NYSE-99-51.
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C. Exemptions
The Commission recognizes that, particularly for some small broker-
dealers, it may sometimes be appropriate to exempt a firm from some of
the reporting requirements of proposed Rule 17a-25. The Commission
would rely on its general exemptive authority under Section 36 of the
Exchange Act \23\ to exempt particular broker-dealers when the
application of the reporting requirements of proposed Rule 17a-25 would
not be necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the purposes of
the rule.
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\23\ 15 U.S.C. 78mm. Procedures for Filing applications for
orders for exemptive relief under Section 36 are found in the
Commission's Rules of General Application, 17 CFR 240.0-12.
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III. Request for Comments
The Commission invites interested persons to submit written
comments on all aspects of proposed Rule 17a-25. The Commission
specifically requests comments from broker-dealers on the feasibility
of capturing and reporting the new data elements discussed above for
activity by entities that use multiple accounts at broker-dealers. In
particular, the Commission requests comments on whether prime brokerage
and average price account identifiers are likely to prevent double
counting, and whether there are other methods to identify and address
this problem. The Commission also is seeking comments on the proposal
to have EBS reports include, upon request, an institutional account's
depository identifier. Furthermore, the Commission is soliciting
comments concerning the feasibility of, and costs associated with,
proposing additional data elements in EBS reports that would assist the
Commission in determining when particular orders to buy or sell stocks
have been entered. Finally, the Commission is soliciting comments from
broker-dealers on the costs associated with providing and updating EBS
contact person information. Commenters should also discuss if there are
ways that any of the costs associated with proposed Rule 17a-25 could
be reduced. Comments should be submitted by June 7, 2000.
IV. Paperwork Reduction Act
Certain provisions of proposed Rule 17a-25 contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995, \24\ and the Commission has submitted them to
the Office of Management and Budget for review in accordance with 44
U.S.C. 3507(d) and 5 CFR 1320.11. The title for the collection of
information is: Rule 17a-25, Electronic Submission of Securities
Trading Data by Exchange Members, Brokers and Dealers. An agency may
not conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid control
number.
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\24\ 44 U.S.C. 3501 et seq.
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A. Summary of Collection of Information under Proposed Rule 17a-25
Proposed Rule 17a-25 would set forth the obligation of registered
broker-dealers to electronically submit securities trading data in a
standardized format when requested by the Commission staff for
enforcement and other regulatory purposes. The proposed rule would also
require the electronic submission of trading information to include,
upon request, new data elements that will improve the Commission's
ability to analyze securities transactions by entities that trade
through multiple accounts maintained at different broker-dealers. The
rule would also require broker-dealers to submit and, keep current,
contact person information for EBS requests.
B. Proposed Use of Information
The Commission would use the information collected pursuant to
proposed Rule 17a-25 for enforcement inquiries or investigations and
trading reconstructions, as well as for inspections and examinations.
C. Respondents
While proposed Rule 17a-25 would apply to all of the approximately
7,700 broker-dealers that are currently registered with the Commission,
most provisions would apply only to the 5,500 broker-dealers who do
business with the general public. Based on its experience, the
Commission believes that the requirement for submission of new data
elements for trade data concerning entities that use multiple accounts
at broker-dealers would affect a significantly smaller number of
broker-dealers, estimated at less than 100 firms. \25\
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\25\ The estimate that less than 100 firms handle transactions
from entities that use multiple accounts at broker-dealers is based
on the Commission staff's use of the EBS system for several trading
reconstructions in the 1990s.
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D. Total Annual Reporting and Recordkeeping Burden
Proposed Rule 17a-25 should not impose additional burdens on the
vast majority of the broker-dealers. Most of the requirements of the
proposed rule involve collections of information that broker-dealers
already maintain in compliance with existing regulations. In addition,
virtually all of these firms already have systems in place that are
routinely used to submit data to the Commission or SROs over the EBS
system. The Commission staff will work with the few broker-dealers who
might
[[Page 26539]]
not have EBS systems in place to develop cost-effective means of
obtaining requested securities trading data, whether using the EBS
system or other mechanisms. In addition, if electronic reporting of
securities transaction data is not feasible or is unreasonably
expensive for a particular small broker-dealer, the Commission staff
will consider using its general exemptive authority under Section 36 of
the Exchange Act to issue an exemptive order to the firm.
The Commission believes the proposed rule will present new burdens
only to those broker-dealers who have customers trading through
multiple accounts. These broker-dealers would need to perform a one-
time modification of their EBS-related software to capture and report
the new data elements. The cost to these firms is discussed below. In
addition, because SIAC serves as an intermediary to route electronic
files both to the Commission and the SROs, the analysis below discusses
the costs SIAC and the SROs will incur to make their systems compatible
with the broker-dealers' systems.
1. Burden-hours for broker-dealers
The annual hour burden of the proposed rule for individual broker-
dealers would vary widely because of differences in the levels of
activities of the respondents and because of differences in the current
recordkeeping systems of the respondents. However, it is estimated that
electronic response firms would spend approximately 8 minutes and
manual response firms would spend 1\1/2\ hours responding to an average
blue sheet request. Based on its experience with the EBS system, the
Commission estimates that it sends approximately 14,000 electronic blue
sheet requests per year, of which approximately 350 are sent to manual
response firms. Accordingly, the annual aggregate hour burden for
electronic response firms is estimated to be 1,820 hours (13,650 x 8
<divide> 60). The annual aggregate hour burden for manual response
firms is estimated to be 525 hours (350 x 90 <divide> 60).
In addition, the Commission estimates that it will request 1,400
broker-dealers to supply the contact information identified in proposed
Rule 17a-25(f), and the submission should take each broker-dealer
approximately 5 minutes to prepare. To be conservative, the Commission
estimates that each of these broker-dealers will revise the contact
information twice a year, and each revision will also take
approximately 5 minutes to prepare (10 minutes total). Accordingly, the
annual aggregate burden for supplying the information requested in
proposed Rule 17a-25(f) is 350 hours (1400 x 15 ( 60). The annual
aggregate burden for all respondents to the collection of information
requirements of proposed Rule 17a-25 is, therefore, estimated to be
2,695 hours (1,820 + 525 + 350).
2. Capital Cost to Broker-Dealers and SROs
As previously stated, the Commission estimates approximately 100
broker-dealers will have to make modifications to their existing EBS
software to capture the additional data elements. On average, each of
these broker-dealers will incur capital or start-up costs of $150,000.
The Commission also preliminarily believes that there will be no
additional costs associated with the operation and maintenance of the
modified EBS systems. Accordingly, the total start-up, operating and
maintenance cost burden for broker-dealers is estimated to be $15
million (100 x $150,000).
Based on its discussions with the SROs, the Commission estimates
that three SROs will each incur approximately $29, 500 in capital costs
to make their systems compatible with the broker-dealers. The
Commission preliminary believes that the SROs will not incur additional
costs in association with the operation and maintenance of the modified
EBS systems.
E. General Information about the Collection of Information
Any collection of information pursuant to proposed Rule 17a-25
would be mandatory. The retention periods for the collection of
information are already specified in Rule 17a-4 of the Exchange Act.
\26\ Any collection of information pursuant to proposed Rule 17a-25
would be kept confidential, subject to the provisions of the Freedom of
Information Act, 5 U.S.C. 552.
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\26\ 17 CFR 240.17a-4.
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F. Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comments to:
(1) evaluate whether the proposed collection of information is
necessary for the proposed performance of the functions of the agency,
including whether the information shall have practical utility;
(2) evaluate the accuracy of the Commission's estimate of the
burden of the proposed collection of information;
(3) enhance the quality, utility, and the clarity of the
information to be collected; and
(4) minimize the burden of collection on those who are to respond,
including through the use of electronic collection techniques or other
forms of information technology.
Persons wishing to submit comments on the collection of information
requirements should direct them to the following persons: (1) Desk
Officer for the Securities and Exchange Commission, Office of
Information and Regulatory Affairs, Office of Management and Budget,
Washington, D.C. 20503; and (2) Jonathan G. Katz, Secretary, Securities
and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C.
20549-0609, with reference to File No. S7-12-00. The Commission has
submitted the proposed collection of information to OMB for approval.
Members of the public should direct any general comments to both the
Commission and OMB within 30 days. OMB is required to make a decision
concerning the collection of information between 30 and 60 days after
publication in the Federal Register, so a comment to OMB is best
assured of having its full effect if OMB receives it within 30 days of
publication. Requests for materials submitted to OMB by the Commission
with regard to this collection of information should be in writing,
refer to File No. S7-12-00, and be submitted to the Securities and
Exchange Commission, Records Management, Office of Filings and
Information Services.
V. Costs and Benefits of the Proposed Rule
The proposed rule will significantly assist the Commission staff's
ability to conduct timely and accurate trading analyses for market
reconstructions and complex enforcement inquiries or investigations, as
well as inspections and examinations. The current system severely
limits the Commission's ability to aggregate transactions effected by
entities that use multiple accounts at broker-dealers and can produce
trading compilations that double count some transactions effected
through multiple accounts. Augmented trading analyses will improve the
Commission's ability to monitor the securities markets and increase
levels of investor confidence in the markets.
A. Broker-dealers \27\
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\27\ Both the time burden and the costs were derived from
information supplied by several broker-dealers.
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For purposes of the PRA, the Commission has estimated that the
annual aggregate hour burden for all respondents to the collection of
information requirements of proposed
[[Page 26540]]
Rule 17a-25 to be 2,695 hours. The total annualized cost burden for
those broker-dealers that make modifications to their existing EBS
software is estimated to be $15 million in capital or start-up costs.
The Commission also anticipates that these broker-dealers will not
incur additional costs for the operation and maintenance of the
modified EBS systems. The Commission specifically requests comments on
whether the annual hour burden, the initial capital or start-up costs,
and the costs for the operation and maintenance of broker-dealer EBS
systems are reasonable estimates based on reasonable assumptions.
B. SROs
The estimate of total annualized cost burden to the SROs is
$88,500. \28\ This cost burden is computed by estimating that
approximately three SROs will need to modify their systems to receive
the new data elements, at an approximate cost of $29,500 per SRO. The
Commission specifically requests comments on whether the annualized
cost burden is a reasonable estimate.
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\28\ The estimated cost is based upon discussions with the SROs.
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To assist the Commission in its evaluation of the costs and
benefits that may result from the proposed rule, commenters are
requested to provide analyses and data relating to the costs and
benefits associated with any of the proposals.
VI. Consideration of Burden on Competition, and Promotion of
Efficiency, Competition, and Capital Formation
Section 23 of the Exchange Act requires the Commission, in adopting
rules under the Exchange Act, to consider the anti-competitive effects
of any rule that it adopts. The Commission does not believe the
proposed rule would have any anti-competitive effects. We request
comment on the anti-competitive effects, if any, of proposed Rule 17a-
25. Furthermore, Section 3(f) of the Exchange Act requires the
Commission, when engaging in rulemaking that requires it to consider or
determine whether an action is necessary or appropriate in the public
interest, to consider whether the action will promote efficiency,
competition, and capital formation. We request comment on these matters
in conjunction with the proposed rule.
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996, the Commission is also requesting information regarding
the potential impact of the proposed amendment on the economy on an
annual basis. If possible, commenters should provide empirical data to
support their views.
VII. Summary of Initial Regulatory Flexibility Act Analysis
The Commission has prepared an Initial Regulatory Flexibility
Analysis (``IRFA'') in accordance with 5 U.S.C. 603 concerning proposed
Rule 17a-25. The following summarizes the IRFA.
As discussed in the IRFA, the purpose of proposed Rule 17a-25 is to
facilitate the collection, analysis and evaluation of relevant trading
data for enforcement and other regulatory reviews. In particular, the
proposed rule is intended to provide an effective system for reviewing
securities transactions of entities that trade through multiple
accounts at different broker-dealers. The Commission believes that the
proposed rule will protect investors, as well as preserve the fair and
orderly operation of the nation's securities markets.
The IRFA also discusses the effect of proposed rule 17a-25 on small
broker-dealers.\29\ The Commission estimates that approximately 12% of
registered broker-dealers, or approximately 1,000 broker-dealers,
qualify as small broker-dealers.
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\29\ For purposes of the regulatory flexibility analysis, a
broker-dealer is considered a small entity if its total capital is
less than $500,000, and it is not affiliated with a broker-dealer
that has $500,000 or more in total capital. 17 CFR 240.0-10.
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The Commission's experience with the EBS system over the last ten
years indicates that entities that trade through multiple accounts at
different firms generally do not effect their trades through ``small''
broker-dealers. Accordingly, the Commission does not believe that any
small broker-dealer would be required to modify its EBS-related
software to capture and report the new data elements that are needed to
analyze transactions by entities using multiple accounts.
The IRFA further states that proposed Rule 17a-25 would not impose
any additional recordkeeping requirements for small broker-dealers. The
elements of trade information required for electronic reports to the
Commission are already maintained by broker-dealers pursuant to Rules
17a-3 and 17a-4 and SRO rules. In addition, because EBS requests are
sent to large clearing firms or those broker-dealers that self-clear,
these firms would also generally fall outside the definition of a small
broker-dealer.
Small broker-dealers would incur some costs when they report
transaction data pursuant to requests by the Commission staff for
enforcement purposes. The Commission believes, however, that any new
costs associated with the current rule proposal would be minimal. As
discussed above, small broker-dealers are already subject to SRO rules
that mandate transaction data reports for surveillance or enforcement
inquiries. Accordingly, even small broker-dealers are already required
to have in place adequate systems and procedures to submit transaction
reports to the appropriate SRO; no new systems would need to be
developed pursuant to proposed Rule 17a-25. Moreover, the Commission
staff has traditionally been flexible when working with small broker-
dealers who need to supply transaction reports. In cases in which a
small broker-dealer does not already have the capacity to submit data
over the EBS system, the Commission staff has accepted manual
transmissions. Proposed Rule 17a-25 is not intended to change this
flexible approach in obtaining necessary transaction reports from small
broker-dealers.
Small broker-dealers would also incur some costs when they are
asked to supply information, pursuant to paragraph (c) of proposed Rule
17a-25, about contact persons who would handle transaction data
requests from the Commission. The Commission believes, however, that
any new costs associated with this requirement would be minimal. Small
broker-dealers are already required to have personnel and procedures in
place to respond to enforcement or regulatory inquiries from the
Commission or the SROs. In addition, because relatively few data
requests are submitted by the Commission to small broker-dealers, only
a small number of firms in this category would be requested to supply
contact person information. Moreover, the costs associated with
supplying this type of information appear to be minimal. Firms would
simply be required to submit a brief letter or e-mail providing
information concerning the appropriate contact person or persons, such
as their names, telephone numbers, fax numbers, and e-mail addresses
(if any), and to send a follow-up letter or e-mail when this
information is no longer accurate.
The IRFA also discusses the various alternatives considered by the
Commission in connection with the proposed rule that might minimize the
effect on small entities. These include, among others, creating
differing compliance or reporting requirements or timetables that take
into account the resources available to small entities, and whether
such entities could be exempted from the proposed rule, or any part
thereof. The Commission has drafted the proposal to be consistent
[[Page 26541]]
with the concerns for small entities. For example, as discussed above,
the Commission has often permitted small broker-dealers to submit the
trading data in a manual, rather than an electronic, format. The
Commission will continue to rely on its exemptive authority under
Section 36 of the Exchange Act to grant relief, when necessary, to
small broker-dealers from the requirements of the proposed rule. A
wholesale exemption from the proposed rule for small broker-dealers,
however, would prevent the Commission from fully protecting investors
and maintaining the fair and orderly operation of the nation's
securities markets.
The Commission encourages the submission of written comments
regarding any aspect of the IRFA. In particular, the Commission
requests comments on: (1) The number of small broker-dealers that would
be affected by the proposed rule, especially the number of small
broker-dealers which maintain institutional accounts, and (2) the
nature and extent of new costs to small broker-dealers as a result of
the proposed rule. Commentators are asked to describe the nature of any
impact and provide empirical data supporting the extent of the impact.
Written comments will be considered in preparation of the Final
Regulatory Flexibility Analysis if the proposed rule is adopted. Such
comments will be placed in the public file designated for the proposed
rule. A copy of the IRFA may be obtained by contacting Anitra Cassas,
Division of Market Regulation, Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549-1001, (202) 942-0089.
VIII. Statutory Basis
Proposed Rule 17a-25 under the Exchange Act is being proposed
pursuant to 15 U.S.C. 78a et seq., particularly Sections 17(a) and
23(a) of the Act, unless otherwise noted.
List of Subjects in 17 CFR Part 240
Broker-dealers, Reporting and record-keeping requirements,
Securities.
Text of the Proposed Rule
In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations is proposed to be amended as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
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, 77eee,
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k,
78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d),
78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and
80b-11, unless otherwise noted.
* * * * *
2. Section 240.17a-25 is added to read as follows:
Sec. 240.17a-25 Electronic submission of securities trading data by
exchange members, brokers and dealers.
(a) Every member, broker or dealer subject to Sec. 240.17a-3 shall
electronically submit to the Commission the data elements specified in
this section for transactions that are the subject of a particular
request for information made by the Commission:
(1) If the transaction was a proprietary transaction effected or
caused to be effected by the member, broker or dealer for any account
in which such member, broker or dealer, or person associated with the
member, broker or dealer, is directly or indirectly interested, such
member, broker or dealer shall submit or cause to be submitted the
following information:
(i) Clearing house number, or alpha symbol as used by the member,
broker or dealer submitting the data;
(ii) Clearing house number(s), or alpha symbol(s) as may be used
from time to time, of the member(s), broker(s) or dealer(s) on the
opposite side of the transaction;
(iii) Identifying symbol assigned to the security;
(iv) Date transaction was executed;
(v) Number of shares, or quantity of bonds or options contracts,
for each specific transaction; whether each transaction was a purchase,
sale, or short sale; and, if an options contract, whether open long or
short or close long or short;
(vi) Transaction price;
(vii) Account number; and
(viii) The identity of the exchange or other market where the
transaction was executed.
(2) If the transaction was effected or caused to be effected by the
member, broker or dealer for any customer account, such member, broker
or dealer shall submit or cause to be submitted the following
information:
(i) Data elements contained in paragraphs (a)(1)(i) through
(a)(1)(viii) of this section;
(ii) Customer name, address(es), branch office number,
identification number for the associated person handling the account,
whether order was solicited or unsolicited, date account opened and
employer name and the tax identification number(s); and
(iii) If the transaction was effected for a customer of another
member, broker or dealer, whether the other member, broker or dealer
was acting as principal or agent on the transaction or transactions
that are the subject of the Commission's request.
(b) In addition to the trading data elements in paragraph (a) of
this section, a member, broker or dealer shall, upon request, submit or
cause to be electronically submitted to the Commission the following
information for transactions involving entities that trade using
multiple accounts:
(1)(i) If part or all of an account's transactions at the reporting
broker-dealer have been transferred or otherwise forwarded to one or
more accounts at another broker-dealer, the data submission to the
Commission shall include the clearing house number, or alpha symbol
used by the broker-dealer receiving the transaction;
(ii) If part or all of an account's transactions at the reporting
broker-dealer have been transferred or otherwise received from one or
more other broker-dealers, the data submission to the Commission shall
include the clearing house number(s), or alpha symbol(s) used by the
broker-dealer(s) transferring or otherwise forwarding the transactions.
(2)(i) If part or all of an account's transactions at the reporting
broker-dealer have been transferred or otherwise received from another
account at the reporting broker-dealer, the data submission to the
Commission shall include the identifier for this other account;
(ii) If part or all of an account's transactions at the reporting
broker-dealer have been transferred or otherwise forwarded to one or
more other accounts at the reporting broker-dealer, the data submission
to the Commission shall include the identifiers for these other
accounts; and
(3) If an account's transaction was processed by a depository
institution, the data submission to the Commission shall include the
identifier assigned to the account by the depository institution.
(c) Every member, broker or dealer subject to Sec. 240.17a-3 shall
submit upon request to the Commission and keep current information
containing the full name, title, address, telephone number(s),
facsimile number(s), and electronic-mail address(es) for each person
designated by the member, broker or dealer as responsible for
processing securities transaction data requests from the Commission.
(d) Unless otherwise specified by Commission rule or order, the
member, broker, or dealer should comply with the format for the
electronic submission
[[Page 26542]]
of the trading data described in paragraphs (a) and (b) of this section
as specified by the self-regulatory organization of which it is a
member.
Dated: May 2, 2000.
By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 00-11405 Filed 5-5-00; 8:45 am]
BILLING CODE 8010-01-P