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2012-17918

2012-17918

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Vol. 77 Wednesday,No. 148 August 1, 2012Part II
Securities and Exchange Commission
17 CFR Part 242Consolidated Audit Trail; Final Rule
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45722
Federal Register
/Vol. 77, No. 148/Wednesday, August 1, 2012/Rules and Regulations
1
EBSs are trading records requested by theCommission and SROs from broker-dealers that areused in regulatory investigations to identify buyersand sellers of specific securities.
See
SecuritiesExchange Act Release No. 44494 (June 29, 2001), 66FR 35836 (July 9, 2001) (File No. S7–12–00)(adopting Rule 17a–25).
See also
SecuritiesExchange Act Release Nos. 26235 (November 1,1988), 53 FR 44688 (November 4, 1988) (approvingthe Chicago Board Options Exchange’s (‘‘CBOE’’)rule for the electronic submission of transactioninformation); 26539 (February 13, 1989), 54 FR7318 (February 17, 1989) (approving the NationalAssociation of Securities Dealers’ (n/k/a FINRA)rule for the electronic submission of transactioninformation); and 27170 (August 23, 1989), 54 FR37066 (September 6, 1989) (approving thePhiladelphia Stock Exchange’s (n/k/a NASDAQ OMX PHLX LLC) (‘‘Phlx’’) rule for the electronicsubmission of transaction information).To partially address some of the currentlimitations of the EBS system, and to provide theCommission, in the short term, with more detailedand timely trade information for large traders, theCommission recently adopted new Rule 13h–1concerning large trader reporting.
See
SecuritiesExchange Act Release No. 61908 (July 27, 2011), 76FR 46960 (August 3, 2011) (‘‘Large TraderRelease’’). Rule 13h–1 requires ‘‘large traders’’ toidentify themselves to the Commission and makecertain disclosures to the Commission on Form13H. As adopted, Rule 13h–1 requires certain broker-dealers to capture and report through EBSthe time of execution for any trade involving a largetrader and a Commission-issued large traderidentifier that identifies the large trader.
See also
Section II.A.3.,
infra.
On April 20, 2012, the Commission, among otherthings, extended the time by which registered broker-dealers were required to comply with Rule13h–1 to allow broker-dealers additional time todevelop, test, and implement enhancements to theirrecordkeeping and reporting systems as requiredunder Rule 13h–1.
See
Securities Exchange ActRelease No. 66839, 77 FR 25007 (April 26, 2012)(Order Temporarily Exempting Broker-Dealers Fromthe Recordkeeping, Reporting, and MonitoringRequirements of Rule 13h–1 Under the SecuritiesExchange Act of 1934 and Granting an Exemptionfor Certain Securities Transactions) (‘‘Large TraderExtension’’).
2
The Commission uses the National SecuritiesClearing Corporation’s (‘‘NSCC’’) equity clearedreport for initial regulatory inquiries. This report isgenerated on a daily basis by the SROs and isprovided to the NSCC in a database accessible bythe Commission, and shows the number of tradesand daily volume of all equity securities in whichtransactions took place, sorted by clearing member.The information provided is end-of-day data and issearchable by security name and CUSIP number.
SECURITIES AND EXCHANGECOMMISSION17 CFR Part 242
[Release No. 34–67457; File No. S7–11–10]RIN 3235–AK51
Consolidated Audit Trail
AGENCY
:
Securities and ExchangeCommission.
ACTION
:
Final rule.
SUMMARY
:
The Securities and ExchangeCommission (‘‘Commission’’) isadopting Rule 613 under the SecuritiesExchange Act of 1934 (‘‘Exchange Act’’or ‘‘Act’’) to require national securitiesexchanges and national securitiesassociations (‘‘self-regulatoryorganizations’’ or ‘‘SROs’’) to submit anational market system (‘‘NMS’’) plan tocreate, implement, and maintain aconsolidated order tracking system, orconsolidated audit trail, with respect tothe trading of NMS securities, thatwould capture customer and order eventinformation for orders in NMSsecurities, across all markets, from thetime of order inception through routing,cancellation, modification, or execution.
DATES
:
Effective Date: 
October 1, 2012.
FOR FURTHER INFORMATION CONTACT
:
Rebekah Liu, Special Counsel, at (202)551–5665; Jennifer Colihan, SpecialCounsel, at (202) 551–5642; CarlTugberk, Special Counsel, at (202) 551–6049; or Leigh Duffy, Special Counsel,at (202) 551–5928, Division of Tradingand Markets, Securities and ExchangeCommission, 100 F Street NE.,Washington, DC 20549–7010.
SUPPLEMENTARY INFORMATION
:
Table of Contents
I. Executive SummaryII. IntroductionA. Need for, and Objectives of, aConsolidated Audit Trail1. Use and Limitations of Current Sourcesof Trading Data2. Regulatory Improvements With aConsolidated Audit Trail3. Large Trader Reporting System RuleB. Summary of Proposed Rule 613C. Summary of General Comments on theProposed Rule1. Industry Support for a ConsolidatedAudit Trail2. Commenters’ Views on the Overall Costsof the Proposed Rule and the ResultingFramework of the Adopted Rule3. Comments on the Process for Creating aConsolidated Audit Trail4. Comments on Alternatives to theProposed Consolidated Audit TrailIII. DiscussionA. NMS Plan1. Description of the RuleB. Elements of the NMS Plan1. Recording and Reporting2. Central Repository3. Other Required Provisions of the NMSPlanC. NMS Plan Process1. Comments on the NMS Plan Process2. Adopted Rule3. NMS Plan Costs4. Consideration of Burden on Competitionand Promotion of Efficiency,Competition, and Capital FormationD. Implementation of Rule 613 AfterApproval of the NMS PlanIV. Paperwork Reduction ActA. Summary of Collection of InformationUnder Rule 613B. Use of InformationC. RespondentsD. Total Annual Reporting andRecordkeeping Burden for the Creationand Filing of the NMS Plan1. Preliminary Burden Hour EstimatesFrom Proposing Release2. Revised Burden Hour EstimatesE. Collection of Information Is MandatoryF. ConfidentialityG. Retention Period of RecordkeepingRequirementsV. Regulatory Flexibility Act CertificationVI. Statutory Authority
I. Executive Summary
In today’s high-speed electronicmarkets, trading is widely dispersedacross a variety of market centers,including exchanges, AlternativeTrading Systems (‘‘ATSs’’), such as darkpools and Electronic CommunicationNetworks (‘‘ECNs’’), and over-the-counter broker-dealers acting as marketmakers or block positioners. In theircapacity as SROs, the Financial IndustryRegulatory Authority (‘‘FINRA’’) andsome of the exchanges currentlymaintain their own separate audit trailsystems for certain segments of thistrading activity, which vary in scope,required data elements and format. Inperforming their market oversightresponsibilities, SRO and Commissionstaffs today must rely heavily on datafrom these various SRO audit trails.As discussed more fully in part II.A below, there are shortcomings in thecompleteness, accuracy, accessibility,and timeliness of these existing audittrail systems. Some of theseshortcomings are a result of thedisparate nature of the systems, whichmake it impractical, for example, tofollow orders through their entirelifecycle as they may be routed,aggregated, re-routed, and disaggregatedacross multiple markets. The lack of keyinformation in the audit trails thatwould be useful for regulatory oversight,such as the identity of the customerswho originate orders, or even the factthat two sets of orders may have beenoriginated by the same customer, isanother shortcoming.Though SRO and Commission staff also have access to sources of marketactivity data other than SRO audit trails,these systems each suffer their owndrawbacks. For example, data obtainedfrom the Electronic Blue Sheet (‘‘EBS’’)
1
 system and equity cleared reports
2
 comprise only trade executions, and notorders or quotes. In addition, like datafrom existing audit trails, data fromthese sources lacks key elementsimportant to regulators, such as the timeof execution, and, in the case of equitycleared reports, the identity of thecustomer. Furthermore, recentexperience with implementingincremental improvements to the EBSsystem has illustrated some of the
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45723
Federal Register
/Vol. 77, No. 148/Wednesday, August 1, 2012/Rules and Regulations
3
See
Large Trader Extension,
supra
note 1.
4
See
Securities Exchange Act Release No. 62174(May 26, 2010), 75 FR 32556 (June 8, 2010)(‘‘Proposing Release’’). The comment file is on theCommission’s Web site at:
5
In this release, ‘‘consolidated audit trail’’ means both a system capable of capturing a completerecord of all transactions relating to an order, fromorigination to execution or cancellation, and thecomplete record for an order generated by such asystem, as the context may require.
6
NMS plan is defined in Rule 600(b)(43) to mean‘‘any joint self-regulatory organization plan inconnection with: (i) [t]he planning, development,operation or regulation of a national market system(or a subsystem thereof) or one or more facilitiesthereof; or (ii) [t]he development andimplementation of procedures and/or facilitiesdesigned to achieve compliance by self-regulatoryorganizations and their members with any sectionof [Regulation NMS] ***.’’ 17 CFR240.600(b)(43). Such NMS plan may be subject tomodification prior to approval by the Commissionpursuant to Rule 608 of Regulation NMS, asdiscussed in Section III.C.2.a.v.,
infra.
7
‘‘NMS security’’ is defined in Rule 600(a)(46) of Regulation NMS to mean ‘‘any security or class of securities for which transaction reports arecollected, processed, and made available pursuantto an effective transaction reporting plan, or aneffective national market system plan for reportingtransactions in listed options.’’ 17 CFR242.600(a)(46). NMS stock is defined in Rule600(47) to mean ‘‘any NMS security other than anoption.’’ 17 CFR 242.600(a)(46). A listed option isdefined in Rule 600(a)(35) of Regulation NMS tomean ‘‘any option traded on a registered nationalsecurities exchange or automated facility of anational securities association.’’ 17 CFR242.600(a)(35).
8
See
Exhibit A for a citation key to the commentletters received by the Commission on the proposedrule. The Commission also received four commentletters that do not address the substance of theconsolidated audit trail proposal.
See
EricsonLetter; Kondracki Letter; Grady Letter; DeepLiquidity Letter.
9
The Commission notes that, in some cases,commenters fell into more than one such category.
10
See
Vannelli Letter; Beach Letter; FoothillLetter; Green Letter; Wealth Management Letter;McCrary Letter; Anastasopoulos Letter; TriageLetter; FTEN Letter; Middle Office Letter; CorrelixLetter; Lettieri Letter; Bean Letter.
11
See
ICI Letter; Thomson Reuters Letter;Scottrade Letter; Liquidnet Letter; FINRA/NYSEEuronext Letter; BOX Letter; Nasdaq Letter I;Nasdaq Letter II; TIAA–CREF Letter; GETCO Letter;BATS Letter; SIFMA Letter; SIFMA February 2012Letter; CBOE Letter; Direct Edge Letter; AngelLetter; IAG Letter; Managed Funds AssociationLetter; Mansfield Letter; Marketcore Letter;Kumaraguru Letter; Ameritrade Letter; FINRALetter; Wells Fargo Letter; Noetic Partners Letters;Knight Letter; FIF Letter; FIF Letter II; AlbanyLetter; Endace Letter; Ross Letter; FINRA ProposalLetter; Schumer Letter; FIA Letter; STA Letter; VanBokkelen Letter.
12
See
Belanger Letters; SIFMA Drop Copy Letter;Wachtel Letter; High Speed Letter (recommendingnext steps in the development of the consolidatedaudit trail).
13
See
BondMart Letter; Leuchtkafter Letter.
14
See
Broadridge Letter; FIX Letter; Know MoreLetter; Aditat Letter; iSys Letter; Kaufman Letter;Berkeley Letter.
15
See
Scottrade Letter, p. 1; ICI Letter, p. 4–6;FINRA/NYSE Euronext Letter, p. 4; GETCO Letter,p. 2; BATS Letter, p. 1–2; SIFMA Letter, p. 3–8;SIFMA February 2012 Letter, p. 1; CBOE Letter, p.4–5; Direct Edge Letter, p. 3; FINRA Letter, p. 10–13; Wells Fargo Letter, p. 3; Knight Letter, p. 2–3;Leuchtkafer Letter; Broadridge Letter, p. 3; FIFLetter, p. 4; SIFMA Drop Copy Letter, p. 1; RossLetter, p. 1; FINRA Proposal Letter, p. 3; FIA Letter,p. 1–2.
16
See
Ameritrade Letter, p. 3; Kumaraguru Letter,p. 1; FINRA Proposal Letter, p. 6–8, 13 andAppendix A.; Angel Letter, p. 2–3; Managed FundsAssociation Letter, p. 2; SIFMA Letter, p. 11–12, 14;SIFMA Drop Copy Letter, p. 2; Liquidnet Letter p.6–7; FINRA Letter, p. 4, 7–9; CBOE Letter, p. 2;Knight Letter, p. 2; Scottrade Letter, p. 1; DirectEdgeLetter, p. 3; FIF Letter, p. 2–3, 6–7; FIF Letter II,p. 2; BOX Letter, p. 2; Wells Fargo Letter, p. 3; RossLetter, p. 1; ICI Letter, p. 3; Thomson Reuters Letter,p. 3; Endace Letter, p. 1–2; GETCO Letter, p. 4.
17
See
Thomson Reuters Letter, p. 2; LiquidnetLetter, p. 1; CBOE Letter, p. 2, 4–5; Nasdaq LetterI, p. 2; Angel Letter, p. 1–2; IAG Letter, p. 3.;Kaufman Letter, attachment p. 3; Wells Fargo Letter,p. 3–4; Noetic Partners Letter, p. 2; LeuchtkaferLetter, p. 1–5; Broadridge Letter, p. 3; FINRAProposal Letter, p. 2–3.; High Speed Letter, p. 1;Belanger Letter, p. 7–8; Correlix Letter, p. 2.; FTENLetter, p. 13; SIFMA Letter, p.1–8, 15–16; FINRA/NYSE Euronext Letter, p 4, 7; FINRA Letter, p. 3,10–13; Scottrade Letter, p. 1; ICI Letter, p. 4–6;GETCO Letter, p. 2; BATS Letter, p. 1–2; DirectEdge Letter, p. 3; Knight Letter, p. 2–3; LeuchtkaferLetter; Broadridge Letter, p. 3; FIF Letter, p. 4;SIFMA Drop Copy Letter, p. 1; Ross Letter, p. 1;SIFMA February 2012 Letter; FIA Letter, p. 1–2;Noetic Partners Letter II, p. 2; High Speed Letter,p. 1.
18
See
FINRA Proposal Letter; Angel Letter, p. 3;BOX Letter, p. 2; BATS Letter, p. 2; CBOE Letter,
Continued
overall limitations of the currenttechnologies and mechanisms used bythe industry to collect, record, and makeavailable market activity data forregulatory purposes.
3
 The Commission therefore believesthat the regulatory data infrastructure onwhich the SROs and the Commissioncurrently must rely generally isoutdated and inadequate to effectivelyoversee a complex, dispersed, andhighly automated national marketsystem. In performing their oversightresponsibilities, regulators today mustattempt to cobble together disparate datafrom a variety of existing informationsystems lacking in completeness,accuracy, accessibility, and/ortimeliness—a model that neithersupports the efficient aggregation of datafrom multiple trading venues nor yieldsthe type of complete and accuratemarket activity data needed for robustmarket oversight.To address this problem and improvethe ability of the SROs and theCommission to oversee the securitiesmarkets, on May 26, 2010, theCommission proposed Rule 613,
4
withthe goal of creating a comprehensiveconsolidated audit trail
5
that allowsregulators to efficiently and accuratelytrack all activity in NMS securitiesthroughout the U.S. markets. Asproposed—and summarized in part II.B below—Rule 613 required SROs tojointly submit an NMS plan
6
that wouldgovern the creation, implementation,and maintenance of a consolidated audittrail, including a central repository toreceive and store consolidated audittrail data. In the proposed Rule, theCommission specified manyrequirements that the NMS plan, and byextension the consolidated audit trail,must meet, ranging from details of thedata elements to be collected, to thetiming of data transmissions, to specificstandards for data formatting.Among its various requirements, theproposed Rule mandated that the NMSplan developed by the SROs must inturn require each SRO and its membersto capture and report specified trade,quote, and order activity in all NMSsecurities
7
to the central repository inreal time, across all markets, from orderinception through routing, cancellation,modification, and execution. Theproposed Rule also mandated that theNMS plan require the creation of uniqueorder identifiers to facilitate the abilityof regulators to view cross-marketactivity, as well as unique customeridentifiers to enhance the ability of regulators to reliably and efficientlyidentify the beneficial owner of theaccount originating an order or theperson exercising investment discretionfor the account originating the order, if different from the beneficial owner.The Commission received 64comment letters from 56 commenters inresponse to the proposed consolidatedaudit trail representing a wide range of viewpoints, as summarized in part II.C below.
8
The commenters includednational securities exchanges, a nationalsecurities association, technologyproviders, academics, broker-dealers,organizations representing industryparticipants, individual investors, andmembers of Congress.
9
Of the commentletters received, 13 expressed supportfor the proposal;
10
36 expressedsupport, but suggested modifications tocertain provisions of the proposal;
11
 five solely suggested modifications tothe proposal;
12
two opposed theproposal;
13
and seven neithersupported nor opposed the substance of the proposal.
14
Concerns raised in thesecomment letters included: (1) Theappropriateness of real-time reporting of required data to the centralrepository;
15
(2) the scope of therequired data elements, including theuse of unique order identifiers andunique customer identifiers;
16
and (3)the burden and costs associated with theproposal.
17
In addition, a number of commenters offered alternativeapproaches and made suggestionsregarding the creation, implementation,and maintenance of the consolidatedaudit trail.
18
 
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