Federal Register, Volume 76, Number 149, August 3, 2011, Pages 46595-47054 Page: 46,966
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46966 Federal Register/Vol. 76, No. 149/Wednesday, August 3, 2011 /Rules and Regulations
of a large trader to respond to any
Commission request to further identify
accounts or disaggregate trading data, as
discussed below. To the extent large
traders utilize LTID suffixes, the need
for the Commission to contact large
traders for assistance in further
identifying their accounts should be
diminished. Accordingly, the
Commission encourages large traders to
utilize LTID suffixes.
The Commission notes that,
ultimately, the information limitation
identified by commenters may be
addressed by the Commission's separate
rulemaking for a consolidated audit trail
which, if adopted as proposed, would
require collection of information about
the person with investment discretion
for each order as well as information to
identify the beneficial owner for each
order.51 In the meantime, allowing a
parent company to comply on behalf of
related entities should provide the
Commission with important information
at lower cost to the industry, by
reducing the complexity and burdens of
the large trader reporting
requirements-such as those proposed
by the Commission during the 1990s-
that could have required reporting at
multiple levels within a control group.
At the same time, this provision
addresses the Commission's near-term
need for access to more information
about large traders and their trading
activities, which will enable the
Commission to more efficiently analyze
market events.
(b) Control and Minority-Owned
Entities
With respect to which persons under
a parent company's control should be
considered in determining the parent
company's large trader status, Rule 13h-
1(a)(3) defines "control" (and the terms
"controlling," "controlled by," and
"under common control with") as "the
possession, direct or indirect, of the
power to direct or cause the direction of
the management and policies of a
person, whether through the ownership
of securities, by contract, or otherwise.
For purposes of this rule only, any
person that directly or indirectly has the
right to vote or direct the vote of 25%
or more of a class of voting securities of
an entity or has the power to sell or
direct the sale of 250% or more of a class
of voting securities of such entity, or in
the case of a partnership, has the right
to receive, upon dissolution, or has
contributed, 25% or more of the capital,
is presumed to control that entity."51 See CAT Proposal, supra note 2, 75 FR at
32572.One commenter stated that including
minority-owned entities would be
problematic because it may be difficult
for a large trader to obtain the
information from a minority-owned
entity that would be necessary for it to
complete Form 13H.52 Furthermore,
according to this commenter, the
minority-owned entity may resist
attaching the large trader's LTID to its
trades.53 Another commenter suggested
attributing to a large trader only the
activity of majority-owned entities that
are actual operating subsidiaries, and
not attributing the activity of more
remote, partially-owned entities.54 After
considering the comments received, the
Commission has decided to adopt as
proposed the definition of control solely
for purposes of this Rule. In particular,
the Commission continues to believe
that a minority shareholder holding at
least 25% of the ownership interests of
an entity would be in a position to
exercise the influence necessary to
secure that entity's cooperation in
facilitating a large trader's compliance
with the federal securities laws,
especially given that all that this entails
for the controlled entity would be
providing its registered broker-dealers
with the large trader's LTID and the
accounts to which it applies. In
addition, if the controlled entity refuses
to cooperate, the large trader itself may
be able to notify the broker-dealer of its
LTID. The Commission also continues
to believe that the definition of control
is appropriate and will allow the
Commission to identify, and obtain
trading data from, controlled persons for
whom a large trader is in a position to
materially influence the investment
decisions made by such person.55
52 See Prudential Letter at 3. The Commission
notes that proposed Form 13H would have required
a large trader to identify its accounts and disclose
for each account the LTID of any unaffiliated large
trader with whom it shares investment discretion.
As discussed below, the Commission has not
adopted the provisions in the Form relating to the
identification of accounts, and, as a consequence,
a large trader would not need to obtain the LTID
of any unaffiliated large trader for purposes of
completing the Form.
5m e Prudential Letter at 3.
54 See SIFMA Letter at 18.
55 The Commission considered other thresholds
for control and determined that a 25% threshold
would be the appropriate level for purposes of new
Rule 13h-1. As discussed in the Proposing Release,
the Commission notes that the definition of control
is similar to the definition of control contained in
Form 1 (Application for Registration or Exemption
from Registration as a National Securities
Exchange). See Proposing Release, supra note 3, 75
FR at 24161. Cf. Rule 19h-1(f)(2) under the
Exchange Act, 17 CFR 240.19h-1(f)(2) (featuring a
10% threshold with respect to the right to vote 10%or more of the voting securities or receive 10% or
more of the net profits).b. Identifying Activity Level
Rule 13h-1(a)(7) defines the term
"identifying activity level" as "aggregate
transactions in NMS securities that are
equal to or greater than: (1) During a
calendar day, either two million shares
or shares with a fair market value of $20
million; or (2) during a calendar month,
either twenty million shares or shares
with a fair market value of $200
million." One commenter expressly
supported these threshold levels.56
Another commenter recommended
increasing the daily threshold limit to
shares with a fair market value of $100
million during any calendar day.57
Others advocated increased thresholds,
but did not identify a particular level or
provide empirical support for their
recommendations.58
Some commenters thought that the
proposed identifying activity level
would capture infrequent traders, who
they believe should not attract
regulatory interest under a large trader
reporting rule.59 The Commission notes
that nothing in Section 13(h) of the
Exchange Act suggests that the
Commission should focus its attention
only on those large traders that are
frequent traders. The statute permits the
Commission to monitor the impact on
the securities markets of securities
transactions involving a substantial
volume or a large fair market value or
exercise value. While frequency of
trading is one factor that the
Commission considered in defining who
is a large trader, it was not the only
factor. In explaining why it proposed to
exclude certain transactions, the
Commission stated that the proposed
exclusions were designed to exclude
certain small and otherwise infrequent
traders from the definition of a large
trader, but also stated: "the proposed
excepted transactions are not effected
with an intent that is commonly
associated with an arm's length
purchase or sale of securities in the
secondary market and therefore do not
fall within the types of transactions that
are characterized by the exercise of
investment discretion." 60 To the extent
that a market participant trades only
infrequently, but does so in large
volume in the course of exercising
investment discretion, the Commission
seeks to identify that participant as a
56 See T. Rowe Price Letter at 2.
57 See Financial Engines Letter at 7.
58 See, e.g., Managed Funds Association Letter at
2.
59 See Investment Adviser Association Letter at
10; Howard Hughes Medical Institute Letter at 1;
Managed Funds Association Letter at 2; and SIFMA
Letter at 8.60 See Proposing Release, supra note 3, 75 FR at
21463.
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United States. Office of the Federal Register. Federal Register, Volume 76, Number 149, August 3, 2011, Pages 46595-47054, periodical, August 3, 2011; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc52326/m1/378/: accessed April 25, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.