Friday, April 27, 2012

Broker-Dealers Temporarily Exempted from Recordkeeping, Reporting and Monitoring Requirements of Rule 13h-1

The SEC temporarily exempted registered broker-dealers from the requirements of new Exchange Act Rule 13h-1 dealing with large traders by extending the end of April 2012 compliance date to provide broker-dealers with additional time to comply with the recordkeeping, reporting and monitoring requirements. The compliance date has been extended to May 1, 2013, except for certain broker-dealers that: (1) are large traders or (2) have large trader customers that are either broker-dealers or that trade through a “sponsored access” arrangement, for which the Commission is extending the compliance date to November 30, 2012.

In addition, the Commission is exempting certain transactions from the definition of the term “transaction” provided in Rule 13h-1(a)(6), but for the sole purpose of determining whether a person is a large trader.

Rule 13h-1 requires certain broker-dealers to, among other things, maintain specified records of transactions that they effect, directly or indirectly, for large traders, and to provide these records to the SEC on request. Registered broker-dealers who are themselves large traders or carry accounts for a large trader or an unidentified large trader must also report to the SEC, upon request, certain required transaction information on these persons whose activity is equal to or greater than the specified reporting activity level.

The Financial Information Forum, an industry group representing a variety of broker-dealers and other market participants, and the Securities Industry and Financial Markets Association had approached Commission staff seeking an extension of the compliance date and substantive relief. The SEC concluded that an extension of the compliance date would provide it with an opportunity to work with market participants to more fully examine the implementation issues raised by FIF, assess the appropriateness of any exemptive relief and allow broker-dealers time to develop, test and implement the necessary systems changes once the examination of implementation issues was complete.

The SEC also exempted from the definition of a “transaction,” for the sole purpose of determining whether a person is a large trader: (1) any transaction that is part of an offering of securities by or on behalf of an issuer, or by an underwriter on behalf of an issuer, or an agent for an issuer, whether or not such offering is subject to registration under the Securities Act, regardless of whether such transaction is effected through the facilities of a national securities exchange; and (2) sales of securities by a selling shareholder in connection with an initial public offering or in a registered secondary offering if such selling shareholder is a current or former employee of the issuer and the securities being sold were acquired as part of the person’s compensation as an employee of the issuer.

According to the SEC, this limited exemption will continue to ensure that Rule 13h-1 provides a mechanism for the Commission to gather data on persons that conduct a significant amount of secondary market trading in NMS securities, while providing limited relief to issuers and selling shareholders who would not otherwise meet the definition of large trader in the absence of these capital market transactions. Because such transactions typically are infrequent in nature and are distinguishable in character from the secondary market activity that is the focus of Rule 13h-1, the SEC believes that it will be able to identify large traders while reducing burdens on issuers and selling shareholders and thereby assist in the promotion of capital formation.

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