Federal Register, Volume 76, Number 149, August 3, 2011, Pages 46595-47054 Page: 47,000
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47000 Federal Register/Vol. 76, No. 149 /Wednesday, August 3, 2011 /Rules and Regulations
impose any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Exchange Act. In
particular, the Commission believes that
the Rule will implement the
Commission's authority under Section
13(h) of the Exchange Act at a crucial
time when large traders play an
increasingly prominent role in the
While one commenter raised the
possibility that a U.S. large trader
reporting rule may incentivize non-U.S.
traders to shift their trading in NMS
securities to transactions that provide an
economically equivalent long position
but would not impose any reporting
requirement,425 the Commission
believes that the Rule, as adopted, has
minimized this possibility. In particular,
this release addresses the concerns
raised by the commenter by clarifying
the obligations on U.S. broker-dealers to
collect information on customers in
light of applicable foreign laws. In
summary, a registered broker-dealer
must collect the information specified
by Rule 13h-1(d)(2) about the foreign
intermediary's transactions if it is a
large trader or an Unidentified Large
Trader.426 The broker-dealer also must
collect the information specified by
Rule 13h-1(d)(3) relating to
Unidentified Large Traders. The Rule
does not require a registered broker-
dealer to collect the identifying
information about the foreign
intermediary's client(s).427 Further, the
Commission clarified that the Rule does
not require broker-dealers to definitively
determine who is, in fact, a large trader.
Finally, the Commission believes that,
because the reporting requirements
applied to all large traders (both U.S.
and foreign) will be minimal, they will
not negatively impact the
competitiveness of U.S. markets.
425 See European Banking Federation and Swiss
Bankers Association Letter at 4.
426 See discussion supra at Section III.B.3
(explaining when a registered broker-dealer must
treat its customer as an Unidentified Large Trader).
427 The legislative history indicates that the
Commission stated that it "would not impose
requirements on broker-dealers to report beneficial
ownership information that is not recorded in the
normal course of business." Senate Report, supra
note 14, at 42. The Committee specifically noted
that many broker-dealers currently maintain no
beneficial ownership records of transactions of
foreign persons that are carried out through banks,
particularly foreign banks, which serve as the
record holder of such securities. See id. The
Committee expected that such beneficial owners
would not be assigned LTIDs. See id. As discussed
above, for all persons (both foreign and domestic),
large trader status is triggered by the exercise of
investment discretion, not mere beneficial
ownership of NMS securities.
B. Capital Formation
New Rule 13h-1 is intended to
facilitate the Commission's ability to
monitor the impact on the securities
markets of securities transactions
involving a substantial volume of
shares, a large fair market value or a
large exercise value, as well as to assist
the Commission's enforcement of the
federal securities laws. The Rule focuses
on the core of the large trader reporting
requirements-the entities that control
persons that exercise investment
discretion and are responsible for
trading large amounts of securities. As
these entities can represent significant
sources of liquidity and overall trading
volume, their trading may have a direct
impact on the cost of capital of
securities issuers. As such, the
Commission's ability to promptly obtain
information from registered broker-
dealers on large trader activity should
better enable the Commission to
understand the impact of large traders
on the securities markets. As the
Commission improves its
understanding, it should be better
positioned to administer and enforce the
federal securities laws, thereby
promoting the integrity and efficiency of
the markets, as well as, ultimately,
investor trust and capital formation. For
example, the information collected from
Rule 13h-1(d) would allow for a more
timely reconstruction of trading activity
during a market crisis and thus could
better position the Commission to craft
any regulatory responses.
However, one commenter expressed
concern that a potential consequence of
a large trader reporting rule might be to
deprive U.S. markets of capital that will
instead flow to alternative market
centers that provide an economically
equivalent long position but would not
impose any reporting requirement to the
extent that foreign traders seek to avoid
trading in reportable NMS securities.428
The consequence could be to deprive
U.S. markets of capital, and to possibly
create pricing disparities between
economically equivalent non-reportable
transactions and their analog reportable
The commenter based its concerns on
certain aspects of the Proposed Rule that
it believed would impact non-U.S.
traders. One concern was that potential
non-U.S. traders would have little or no
experience in dealing with Commission
regulation and may not even realize
they are subject to identifying and
reporting requirements.430 Another
428 See European Banking Federation and Swiss
Bankers Association Letter at 4-5.
429 See id.
430 See id. at 2.
concern involved how a broker-dealer
would be expected to collect
information from non-U.S.
intermediaries and the impact of
privacy laws on the ability to collect
information and for large traders to
report such information.431 A third
concern involved the practicality of the
proposed requirement for large traders
to list account numbers on Form 13H.432
The Commission is mindful of these
comments and believes that the
modifications and clarifications in the
adopted Rule and discussed in detail
above should mitigate these concerns.
For example, as adopted, the Rule does
not require account numbers to be
included on Form 13H, alleviating the
commenters' concern about the
practicality of non-U.S. traders
providing this information. Also as
discussed above, the scope of the
monitoring requirements has been
clarified in the adopted Rule such that
the obligations of broker-dealers to
collect information from non-U.S.
parties is limited to only the non-U.S.
entity with whom they transact.
Furthermore, in the event, which the
Commission believes to be unlikely, that
the laws of a large trader's foreign
jurisdiction preclude or prohibit the
large trader from waiving such
restrictions or otherwise voluntarily
filing Form 13H with the Commission,
then such foreign large traders or
representatives of foreign large traders
may request an exemption from the
Commission pursuant to Section 36 of
the Exchange Act 433 and paragraph (g)
of the Rule.
Given these mitigating factors, the
Commission does not believe that any
remaining costs to a non-U.S. trader that
trades in an amount sufficient to require
identification with the Commission via
Form 13H outweigh the considerable
benefits of directly accessing U.S.
markets for the trading of NMS
securities. Moreover, armed with more
current and accurate trading
information on large traders, the
Commission would be able to identify
regulatory and potential enforcement
issues more quickly. Thus, Rule 13h-1
could help maintain investor trust in the
markets, and in turn could add depth
and liquidity to the markets and
promote capital formation. Further, the
Commission believes that the
requirements imposed on all large
traders, whether U.S. or foreign, are
necessary and appropriate, not unduly
burdensome, and would be imposed
431 See id. at 3.
432 See id. at 3-4.
433 15 U.S.C. 78mm.
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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.. (digital.library.unt.edu/ark:/67531/metadc52326/m1/412/: accessed July 24, 2017), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.