[Federal Register Volume 59, Number 248 (Wednesday, December 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31656]
[Federal Register: December 28, 1994]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240 and 249
[Release No. 34-35124; File No. S7-3-94]
RIN 3235-AG03
Recordkeeping and Reporting Requirements for Trading Systems
Operated by Brokers and Dealers
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission is adopting Rule 17a-23
(``Rule'') and Form 17A-23 under the Securities Exchange Act of 1934 to
establish recordkeeping and reporting requirements for brokers and
dealers that operate automated trading systems. Under the Rule,
registered broker-dealers that sponsor these systems would be required
to maintain participant, volume, and transaction records, and to report
system activity to the Commission and, in certain circumstances, to an
appropriate self-regulatory organization.
EFFECTIVE DATE: June 1, 1995.
FOR FURTHER INFORMATION CONTACT: Kristen N. Geyer, Senior Counsel, 202/
942-0799, Office of Automation and International Markets, Division of
Market Regulation, Securities and Exchange Commission (Mail Stop 5-1),
450 Fifth Street, N.W., Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION:
I. Introduction and Summary
On February 9, 1994, the Securities and Exchange Commission
(``Commission'') proposed for comment Rule 17a-23 (``Proposed
Rule'')1 and Form 17A-23 (``Proposed Form'')2 under the
Securities Exchange Act of 1934 (``Act'').3 The Proposed Rule
would have required specific recordkeeping and reporting by registered
broker-dealer sponsors of certain automated trading systems (as defined
in the Rule, ``Broker-Dealer Trading System,'' or ``BDTS''). The
Proposed Form specified the information to be included in each filing
required by the Proposed Rule.
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\1\17 CFR 240.17a-23.
\2\17 CFR 249.636.
\3\15 U.S.C. 78a et seq. See Securities Exchange Act Release No.
33605 (Feb. 9, 1994), 59 FR 8368 (``Proposing Release'').
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The Commission received ten comment letters in response to the
Proposing Release. Commenters generally supported the Proposed Rule's
goal of standardizing recordkeeping and reporting for BDTSs.4 The
majority of commenters recommended specific modifications to the
Proposed Rule. Two commenters, the National Association of Securities
Dealers (``NASD'') and the New York Stock Exchange (``NYSE''), objected
to the Commission's overall regulatory treatment of certain BDTSs and
the competitive implications of such regulatory treatment.5
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\4\The comment letters and a summary of comments prepared by the
Division of Market Regulation have been placed in Public File No.
S7-3-94, which is available for inspection in the Commission's
Public Reference Room. Commenters consisted of two industry
associations, two self-regulatory organizations, four sponsors of
automated proprietary trading systems, and two automated broker-
dealers. See letters from: John F. Olson, Chair, Committee on
Federal Regulation of Securities, and Roger D. Blanc, Chair,
Subcommittee on Market Regulation, the Business Law Section of the
American Bar Association, dated May 10, 1994 (``ABA''); Robert A.
McTamaney, Attorney, Carter, Ledyard & Milburn (representing RMJ
Securities Corporation, RMJ Options Trading Corporation, and RMJ
Special Brokerage, Inc.), dated April 15, 1994 (``CLM/RMJ''); John
E. Herzog, Chairman & CEO, Herzog, Heine, Geduld, dated April 12,
1994 (``HHG''); Charles R. Hood, Senior Vice President & General
Counsel, Instinet Corporation, dated April 25, 1994 (``Instinet'');
Alan D. Rudolph, Vice President, Intervest Financial Services, Inc.
and President, CrossCom Trading Network, Inc., dated March 15, 1994
(``Intervest''); Raymond L. Killian, Jr., President & CEO,
Investment Technology Group, Inc. (sponsor of Portfolio System for
Institutional Trading (``POSIT'')), dated May 18, 1994 (``ITG'');
Leonard Mayer, Vice President, Mayer & Schweitzer, Inc., dated July
11, 1994 (``M&S''); Joseph R. Hardiman, President, National
Association of Securities Dealers, Inc., dated May 27, 1994
(``NASD''); John E. Buck, Senior Vice President & Secretary, New
York Stock Exchange, dated June 30, 1994 (``NYSE''); and Mark T.
Commander, Chairman of Self-Regulation & Supervisory Practices
Committee, Securities Industry Association, dated June 17, 1994
(``SIA'').
\5\See letters from NASD and NYSE. The NASD expressly opposed
adoption of the Proposed Rule.
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After considering the comments, the Commission is adopting the Rule
and Form, with certain modifications. The Commission does not believe
that these modifications materially alter the scope of the Proposed
Rule or the entities to which it applies. The recordkeeping and
reporting approach adopted in the Rule will provide the Commission with
information necessary to effectively monitor, evaluate, and examine
such systems.
II. Basis and Purpose of the Rule
In January 1994, the Commission's Division of Market Regulation
(``Division'') published its Market 2000 Study,6 which reviewed,
among other things, the Commission's existing oversight of automated
trading systems. The Study recognized that the activities of such
systems differ from the activities of traditional broker-dealers, and
recommended that the Commission closely monitor the effects of
proliferation of such systems.7 The Commission proposed Rule 17a-
23 immediately following publication of the Market 2000 Study.8
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\6\Division of Market Regulation, Market 2000: An Examination of
Current Equity Market Developments (January 1994) (``Market 2000
Study'').
\7\Id. at 26-27.
\8\See Proposing Release, supra note 3. Concurrently with the
publication of the Proposed Rule, the Commission withdrew a previous
rule proposal (Rule 15c2-10) which would have required certain BDTSs
to seek Commission approval prior to operation of a proprietary
trading system and imposed additional conditions on the operation of
such systems. The Commission concluded that, based on its experience
since 1989 in overseeing BDTSs, including the proposal of Rule 17a-
23, a separate regulatory structure governing proprietary trading
systems was not necessary at this time. See Securities Exchange Act
Release No. 33621 (Feb. 14, 1994), 59 FR 8379.
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The majority of commenters supported the concept of a recordkeeping
and reporting rule and recognized the importance of ongoing monitoring
and evaluation of technological advances in the securities
industry.9 Several commenters, however, questioned the necessity
for applying the Proposed Rule to specific types of systems. In
particular, two commenters suggested that the Proposed Rule should not
apply to systems that allow a dealer's customers and other dealers to
execute orders against the sponsoring dealer's bid or offer (i.e.,
``hit'' the sponsor's quotations) through automated means (``automated
dealer systems'').10 Another commenter objected to application of
the Proposed Rule to non-equity systems.11
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\9\See, e.g., Letter of ABA, at 1; Letter of HHG, at 1; Letter
of ITG, at 1; and Letter of M&S, at 2.
\1\0See Letter of ABA, at 3; Letter of NASD, at 6.
\1\1See Letter of CLM/RMJ, at 3.
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In the Proposing Release, the Commission noted that, although
automated systems have proliferated in the securities industry, the
Commission receives little information about such systems.12 The
Commission concluded that its efforts to gauge the effect of automation
on the U.S. markets and to regulate broker-dealers that operate such
systems appropriately are being hindered by a lack of critical
information regarding the activity of BDTSs.
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\1\2The extent of information currently accessible to the
Commission, the history of the Commission's oversight of such
systems, and other background information can be found in the
Proposing Release. See Proposing Release, supra note 3, 59 FR at
8369-71. Currently, BDTSs are subject to Commission oversight
through broker-dealer registration, recordkeeping, and reporting
requirements in the Act. In addition, sponsors of a number of BDTSs
have obtained no-action assurances from the Division that it will
not recommend enforcement action if the systems operate without
registering as exchanges. These staff no-action letters require
supplemental recordkeeping and reporting by the sponsor as a
condition of the no-action position. See Proposing Release, supra
note 3, 59 FR at 8369. The Rule does not address the issue of
whether a particular trading system may be required to register as a
national securities exchange, clearing agency, or other self-
regulatory organization. Sponsors of BDTSs seeking relief from
exchange, clearing agency, and other registration requirements may
continue to request no-action positions from the Division.
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The Commission identified three ways in which additional
information about BDTSs would assist in evaluating, monitoring, and
examining such systems. First, the Rule will allow the Commission to
evaluate BDTSs with regard to national market system goals.13 The
Commission noted in the Proposing Release that BDTSs have the potential
to significantly affect trading patterns, market transparency, and the
distribution of trading activity among different markets; consequently,
access to uniform, reliable information about BDTSs is critical to the
Commission's evaluation of these issues.14 This is true regardless
of whether such systems automate the market-making function, automate
an order-interaction function, or automate trading of illiquid or non-
equity securities.
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\1\3See Proposing Release, supra note 3, 59 FR at 8369-70.
\1\4For example, in its Market 2000 Study, the Division
advocated improving transparency for limit orders and after-hours
trading, order-exposure rules, disclosure of broker-dealer order-
handling practices, assessment of market quality by users of
automated routing systems, and surveillance of third market trading.
Market 2000 Study, supra, note 6, at 16-32. The Commission's
consideration of each of these issues is directly affected by its
understanding of different trading mechanisms, including BDTSs. In
particular, the Commission must examine how, and the extent to
which, order flow is directed to different trading mechanisms, the
extent to which orders entered into different trading mechanisms are
integrated into national quotation and trade reporting systems, the
extent to which various trading mechanisms offer price improvement,
and the order handling and execution practices of different trading
mechanisms. Information reported pursuant to the Rule will assist
the Commission in understanding how BDTSs operate and how they
interact, and are integrated, with other market participants and
mechanisms, and consequently will assist the Commission in
evaluating these issues.
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Second, the information will help the Commission to monitor the
competitive effects of these systems and to ascertain whether broker-
dealer regulation remains appropriate for the operation of
BDTSs.15 As is clear from the comments, the ongoing debate
regarding the competitive consequences of the Commission's regulation
of BDTSs remains vigorous.16 Finally, the Rule will help the
Commission identify areas where monitoring of such systems may be
improved and where self-regulatory organization (``SRO'') surveillance
may be more appropriately tailored to the detection of fraudulent,
deceptive, and manipulative practices in an automated
environment.17
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\1\5See Proposing Release, supra note 3, 59 FR at 8370.
\1\6Three commenters discussed the competitive implications of
the Commission's adoption of a recordkeeping and reporting rule
applicable to BDTSs. See Letter of ABA, at 2; Letter of NASD, at 5;
and Letter of NYSE, at 2-4. Two of these commenters, the NASD and
NYSE, opposed the Commission's determination not to adopt previously
proposed Rule 15c2-10, which would have subjected sponsors to a
number of procedural and substantive requirements. Cf. Securities
Exchange Act Release No. 26708 (April 13, 1989), 54 FR 15429;
Proposing Release, supra note 3, 59 FR at 8369.
\1\7See Proposing Release, supra note 3, 59 FR at 8370-71.
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Notwithstanding the views of commenters that the risks posed by
automated market-maker systems are sufficiently addressed by existing
broker-dealer regulations18 or that automated systems are less
susceptible to manipulation than traditional broker-dealers,19 the
Commission believes that the evolution of both automated broker systems
and automated dealer systems present new challenges in maintaining
market quality and customer protection. BDTSs contribute to the
concentration of order flow among a few, large, automated broker-
dealers, execute trades at a more rapid rate than traditional services,
and make execution of the customers' orders dependent on the
reliability of the automated system rather than individual traders.
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\1\8See Letter of ABA, at 2; Letter of NASD, at 5.
\1\9See Letter of Instinet, at 2-4.
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The Commission believes that the Rule as adopted will provide
important information to assist it in accomplishing these goals,
without imposing unnecessary or overly burdensome requirements that do
not relate to the purposes of the Rule.
III. Discussion
As adopted, the Rule requires a registered broker-dealer who acts
as the sponsor20 of a ``broker-dealer trading system'' to make and
keep current specified records, and file reports with the Commission
(and, in certain circumstances, with the appropriate SRO) on Form 17A-
23.
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\2\0The Rule defines a sponsor as ``any entity that organizes,
operates, administers, or otherwise directly controls a broker-
dealer trading system.'' In addition, the Rule includes within this
term any registered broker-dealer that regularly executes
transactions on behalf of participants of a system operated by a
non-registered entity. See Proposing Release, supra note 3, 59 FR at
8371.
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A. Scope of the Rule and Application to Specific Types of Systems
The Rule as proposed and adopted would apply to registered brokers
or dealers21 that sponsor a ``broker-dealer trading system.''
Commenters requested clarification of which automated systems would be
considered ``broker-dealer trading systems'' as defined in the Proposed
Rule.22 Several commenters suggested narrowing the definition of
BDTS to exempt certain systems. In particular, two commenters
questioned the inclusion of automated dealer systems that allow a
dealer's customers and other dealers to execute against the sponsoring
dealer's bids and offers.23 One commenter also recommended that
the Commission exempt non-equity trading systems from application of
the Proposed Rule.24 In view of the comments, the Commission has
simplified the definition of BDTS and clarified the Rule's application
to various systems, as discussed below, but has not materially altered
the scope of the Rule.
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\2\1As noted in the Proposing Release, absent an exemption from
or exception to the broker-dealer registration provisions of the
Act, the types of activities conducted by BDTSs can be lawfully
conducted only by a broker-dealer registered with the Commission
pursuant to the Act. See Proposing Release, supra note 3, 59 FR at
8371. The Commission notes that the term ``registered broker or
dealer'' is defined in Section 3(a)(48) of the Act, and includes the
majority of broker-dealers. The term does not include government
securities brokers or government securities dealers registered under
Section 15C of the Act, which are required to comply with the
recordkeeping and reporting requirements promulgated by the
Department of the Treasury, 17 CFR 400 et seq., under the Government
Securities Act of 1986, 15 U.S.C. 78o-5. Accordingly, the Rule would
not apply to systems sponsored by broker-dealers registered solely
under Section 15C of the Act. In addition, the Rule would not apply
to operators of systems that do not involve activities requiring
broker-dealer registration. See Letters regarding Farmland
Industries, Inc. (Aug. 26, 1991); Troy Capital Services, Inc. (May
1, 1990); Real Estate Financing Partnership (May 1, 1990); Ivestex
Investment Exchange, Inc. (April 9, 1990); and Petroleum Information
Corporation (Nov. 28, 1989). Cf. Securities Exchange Act Release No.
27017 (July 11, 1989), 54 FR 30013, text accompanying n.66.
\2\2See, e.g., Letter of NASD, at 7. The Proposed Rule defined
``broker-dealer trading system'' as:
(i) any system that automates the execution of orders to buy or
sell securities based on quotations of the system sponsor or its
affiliates (whether such quotations are disseminated through the
system, a quotation consolidation system operated pursuant to a plan
approved by the Commission under Section 11A of the Act, an
electronic interdealer quotation system operated by a registered
national securities association, or otherwise); or
(ii) any system that both automates the dissemination or
collection of quotations, orders to buy or sell securities, or
indications by any person announcing a general interest in buying or
selling a security, submitted by entities other than the system
sponsor and its affiliates, and provides a mechanism for matching or
crossing, or for otherwise facilitating agreement between
participants to the basic terms of a purchase or sale of a security
through use of the system.
See Proposing Release, supra note 3, 59 FR at 8374.
\2\3See Letter of ABA, at 3; Letter of NASD, at 6.
\2\4See Letter of CLM/RMJ, at 3.
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The definition of ``broker-dealer trading system'' has been
modified in the Rule to mean any system that meets the following
criteria: the system must provide a mechanism, automated in full or in
part, for (1) collecting or disseminating system orders and (2)
matching, crossing, or executing system orders, or otherwise
facilitating agreement to the basic terms of a purchase or sale of a
security between system participants, or between a system participant
and the system sponsor, through use of the system. As made clear in the
Rule, the term ``broker-dealer trading system'' does not include any
system that does not meet both of these requirements.
The modified definition of BDTS captures the essential features of
the types of systems that the Proposed Rule was intended to encompass.
The Proposed Rule also described several types of systems that were
excluded from the definition of BDTS.25 As discussed below, the
Commission believes that those systems continue to be excluded from the
Rule as adopted, because they do not meet the required characteristics
of a BDTS as defined.26
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\2\5One commenter noted that the Proposing Release discussed
other systems that the Proposed Rule would not encompass, but that
were not expressly excluded from the definition of BDTS. The
commenter requested that the Commission reconcile the Rule with the
excluded systems described in the Proposing Release. See Letter of
ABA, at 3-4. Given the ongoing evolution of automated trading
systems, however, the Commission believes it would be impractical to
attempt to enumerate all types of systems that would not be
considered ``broker-dealer trading systems'' under the Rule. In view
of this, the Rule as adopted does not contain express exclusions.
\2\6The Proposed Rule excluded certain order routing systems.
See Proposing Release, supra note 3, 59 FR at 8372 (Sections
(b)(2)(ii)(A) and (B) of the Proposed Rule). These systems do not
meet the requirements of the Rule as adopted, and therefore are not
subject to the Rule. Specifically, systems that only allow
participants to post trading interest, or only route orders to the
execution facilities of established markets or other broker-dealers
do not effect the purchase or sale of a security between system
participants or between a system participant and the system sponsor
through the system.
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1. System Automation
As adopted, the Rule applies to systems that may be only partially
automated, as well as to fully automated systems. Some systems may
automate the collection and dissemination of orders through a screen
available for viewing by participants, but require participants to
contact the sponsor by telephone in order to finalize a trade based on
such orders. Other systems may collect orders via telephone contact
with customers, and enter those orders into a system that automates the
matching of such orders. Although neither of these systems are
``fully'' automated, both are BDTSs under the Rule as adopted. The lack
of complete automation does not alter the potential market effects of
automated execution systems, nor does it alter the need to tailor
oversight of the sponsor to reflect the distinctive characteristics of
automated systems. The Commission notes in particular that it is not
necessary for participants to have the ability to enter orders
electronically through a system terminal or screen in order for the
system to be subject to the Rule. Some systems permit customers to
participate in the system's matching, crossing, or other features by
communicating orders to the sponsor by telephone, to be entered into
the system by the sponsor's trading personnel.27 This lack of
automated access to a system does not exempt such a system from
application of the Rule.
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\2\7The Commission also notes in this context that transactions
resulting from orders entered into the system through the sponsor's
trading personnel would be considered to be executed through the
system to the same extent as trades entered directly by system
participants. One commenter noted that certain systems may permit
the system sponsor to execute trades manually and to enter the
matched trade into the system for reporting and other execution
related activities. See Letter of M&S, at 2. The commenter suggested
that system sponsors should not be required to segregate out such
trades for purposes of the recordkeeping and reporting requirements
of the Rule. Neither the Rule nor Form 17A-23 requires a system
sponsor to segregate transaction records or reports based on the
method by which the order was accepted into the system (i.e.,
telephone, computer terminal, etc.). System sponsors would not be
required, therefore, to segregate out manually handled trades. The
Commission expects, however, that a system's ability to process
manually handled orders would be described in the system sponsor's
filings pursuant to Part I of Form 17A-23.
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2. System Execution Mechanism
The Rule applies only to those automated trading systems that offer
users the ability to effect securities transactions through their use
of the system, either with other participants or with the system
sponsor. Numerous automated systems have developed that facilitate
securities trading, but do not create opportunities to effect
transactions apart from the facilities of established markets. These
systems range from purely informational ``bulletin board'' systems that
allow participants to announce their trading interest (typically by
posting quotation or order information and participant telephone
numbers on the system's screen)28 to ``routing'' systems that
direct order flow to an exchange or other established market or dealer
but do not otherwise interact with such order flow. Bulletin boards,
routing systems, and other similar systems essentially disperse
information; they do not allow users to effect securities transactions
with other system participants or with the system sponsor through the
system. Accordingly, such systems are not subject to the Rule. In the
Commission's view, these ``non-execution'' systems do not create the
same potential for market effects and correspondingly create less need
for ongoing monitoring and evaluation by the Commission than systems
that fall within the definition of broker-dealer trading system.29
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\2\8The Commission uses the term ``bulletin board systems'' in
this context to mean only those systems that allow participants to
announce their trading interest, but do not provide further
opportunity to interact with the system or the system sponsor to
execute transactions. Such systems do not allow participants to
agree to the terms of a transaction ``through use of the system'';
participants must contact each other outside of system facilities or
the system sponsor to conclude a transaction. Therefore, such
systems do not meet the definition of a BDTS under the Rule, and the
Rule would not apply to these systems.
\2\9Although the Commission requested comment on whether the
Proposed Rule should apply to ``non-execution'' systems, no
commenter suggested that such systems be subject to the Rule. See
Proposing Release, supra note 3, at 8373.
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3. Application of the Rule to Automated Dealer Systems
Two commenters argued that the Proposed Rule only should apply to
systems that offer a ``locked-in trade'' between or among customers or
other dealers as part of an interactive system.30 These commenters
questioned the Commission's rationale for applying the Proposed Rule to
automated dealer systems, arguing that automated dealer systems ``do no
more than what any market-maker has done since the enactment of the
1934 Act,'' other than providing fuller automation of the market-maker
function.31 One commenter supported inclusion of automated dealer
systems in the Proposed Rule.32
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\3\0See Letter of ABA, at 3; Letter of NASD, at 5-6.
\3\1See Letter of NASD, at 6.
\3\2See Letter of NYSE, at 2.
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The Commission has concluded that the Rule should apply to
automated dealer systems as well as other BDTSs. Systems that automate
execution functions make it possible for a broker-dealer to concentrate
a significant volume of securities transactions. This is true whether
such an ``execution'' system allows participants to interact directly
with each other, or whether the system allows participants to interact
with a single dealer. As discussed above and in the Proposing Release,
this potential concentration of volume outside of national market
systems may have significant market effects. The Commission believes
that in today's highly complex, integrated trading environment, it must
fully consider the effect of technological advances on the broker-
dealer's role in both auction market and dealer market trading.33
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\3\3The NASD in its comment letter suggested that market-maker
execution systems should be distinguished from other BDTSs because
the executions provided by a market-maker are based on the market-
maker's own quotes, subject to its best execution obligations and
affect the market-maker's own inventory. According to the NASD,
other BDTSs permit the direct interaction of customer orders or
provide for the quotations of multiple market-makers and are thus
more akin to the functions performed by traditional markets. See
Letter from NASD, at 6. The Commission is not persuaded that this
difference in operation is a sufficient basis on which to exclude
market-maker systems from the Rule. A broker-dealer firm sometimes
trades for its own account as dealer and sometimes for the account
of its customers as broker; in either case, the broker-dealer uses
its facilities to bring together buyers and sellers with the intent
of effecting a securities transaction. See Securities Exchange Act
Release No. 27611 (Jan. 12, 1990), 55 FR 1890, 1898.
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4. Application of Rule to Non-Equity Systems
The Rule as adopted applies both to systems trading equity and
systems trading non-equity securities. One commenter objected to
application of the Proposed Rule to systems that deal exclusively with
non-equity instruments.34 That commenter noted that ``[t]he nature
of and detail imposed by these recordkeeping and reporting requirements
suggest that the real intention behind the Proposed Rule is to enable
the SEC to gather and evaluate information on BDTSs dealing in equity
instruments only.''35
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\3\4See Letter of CML/RMJ, at 3-5.
\3\5Id. In addition to CML/RMJ, one other sponsor of a system
trading non-equity securities commented on the Proposed Rule. See
Letter of Intervest.
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The need for uniform, reliable information as discussed above and
in the Proposing Release is equally applicable to systems trading non-
equity securities. It is probable that sponsors will continue to create
BDTSs to facilitate transactions in products that do not trade in
organized markets, including various debt and derivative products.
Systems that trade these non-equity, and typically less liquid,
securities are especially opaque under existing regulations; they are
not integrated into market quotation and reporting mechanisms to the
same degree as systems that trade equity products. Some of these
``niche'' systems may provide the only readily identifiable source of
trading in a particular instrument. The Rule will help alleviate the
difficulty of obtaining accurate information on a regular basis about
trading in these instruments.
The Commission recognizes that information that is relevant to
equity security trading may not be relevant to non-equity security
trading. Accordingly, the Rule and Form direct the sponsor of a non-
equity trading system to provide information relevant to such non-
equity securities (such as number of bonds, contracts, etc.).36
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\3\6See 17 CFR 240.17a23(c)(1)(ii)(B) and 249.636, Form 17A-23,
Part II, 1.
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B. Regulation of Certain BDTSs
Three commenters urged the Commission to reconsider its regulatory
approach to BDTSs, or in the alternative to reconsider its regulation
of traditional markets.37 Specifically, both the NYSE and the NASD
identified concerns regarding the competitive implications of the
Commission's adoption of a recordkeeping and reporting rule governing
BDTSs in light of the regulatory structures that apply to registered
exchanges and interdealer quotation systems.38 The Commission does
not believe it is necessary at this time to adopt regulations governing
BDTSs beyond those existing requirements applicable to the broker-
dealer sponsors of such systems and the enhanced recordkeeping and
reporting that will be provided pursuant to the Rule. The Commission is
not precluded from reconsidering the issues raised by the commenters
concerning the Commission's regulatory approach to BDTSs at a later
time, should circumstances warrant such reconsideration.
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\3\7See Letter of ABA, at 5-6; Letter of NASD, at 1-7; Letter of
NYSE, at 1-2, 4.
\3\8See Letter of NASD, at 1-4; Letter of NYSE, at 1-2, 4. See
also, Letter of ABA, at 5-6.
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These commenters also urged the Commission to reconsider its
regulation of trading services provided by registered exchanges and
securities associations. In particular, commenters recommended that the
Commission streamline its requirements governing the filing of SRO rule
proposals, and that SROs be allowed to develop trading systems under
the same regulatory requirements applicable to BDTSs.39 In that
regard, the Commission notes that today it has adopted amendments to
the Commission's rules governing the SRO rule filing process.40
The Commission also notes that the regulation of SRO trading services
is largely dictated by statutory requirements. Consequently, SRO
operation of trading systems outside of existing SRO regulations would
require a careful, case-by-case analysis under the Act. BDTSs are
governed by the regulatory structure applicable to other registered
broker-dealers. The Commission has not created a separate regulatory
structure for BDTS trading; it has adopted enhanced recordkeeping and
reporting for such systems.
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\3\9See Letter of ABA, at 5-6; Letter of NASD, at 5; Letter of
NYSE, at 4.
\4\0See Securities Exchange Act Release No. 35123 (December 20,
1994). The amendments expand the category of proposed rule changes
that may become effective upon filing under Section 19(b)(3)(A) of
the Act to include certain changes to existing systems and other
noncontroversial filings.
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C. Recordkeeping Requirements
Under the Rule, system sponsors are required to keep and make
available to the Commission, upon request, records of: (1) daily
summaries of trading in the system; (2) the identities of system
participants (including any affiliations between those participants and
the sponsor); and (3) time-sequenced records of each transaction
effected through the system. The sponsor is required to keep these
records, as well as any notices provided by the sponsor to
participants, for three years (the first two years in an easily
accessible place). The Commission has modified some of the proposed
recordkeeping requirements in response to comments as discussed below.
1. Duplicative Recordkeeping
The Commission requested comment on whether the Proposed Rule's
requirements would be duplicative or burdensome. Commenters suggested
that the recordkeeping requirements appear to be duplicative of those
already required under other rules promulgated under Section 17, and
questioned the justification for such duplication.41 Two
commenters expressed reservations that the Proposed Rule would penalize
broker-dealers that use automation to become more efficient, and would
thus deter further automation.42 Only one commenter stated that
the Proposed Rule would impose undue financial burden on BDTS
sponsors.43 No commenter provided information sufficient to
quantify the extent to which BDTSs would be financially burdened by the
Proposed Rule.
---------------------------------------------------------------------------
\4\1See Letter of NASD, at 7. Cf. Letter of SIA, at 2.
\4\2See Letter of ABA, at 3 and Letter of NASD, at 6.
\4\3See Letter of CLM/RMJ, at 3-4.
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While existing regulations require registered broker-dealers to
maintain much of the information required under the Rule, they do not
require broker-dealers to keep records that present BDTS activity
separately from other brokerage activity.44 Consequently, the
Commission does not have ready access to system-specific information.
The Commission's ability, and the ability of SROs,45 to adequately
evaluate, monitor, and examine these systems is correspondingly
limited.46 Although the Rule may result in changes to some
existing BDTS sponsors' recordkeeping practices, the Commission
believes that it has made sufficient provision in the Rule to minimize
the need for BDTS sponsors to keep duplicative records. The Rule does
not dictate a format for maintaining information and does not require
BDTS sponsors to maintain such information separately from its other
records, so long as the sponsor can promptly retrieve such information
upon request in the format, and for the time periods, specified in the
Rule.
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\4\4See Proposing Release, supra note 3, 59 FR at 8368-69.
\4\5Staff of the Division met with representatives of the NASD
to discuss its use of the information provided by the records
maintained pursuant to the Rule and the reports filed pursuant to
Form 17A-23. The Commission expects that the NASD and other SROs
that have the responsibility to examine and otherwise oversee BDTSs
will use such information to tailor their oversight of BDTSs to
reflect the distinctive features of automated broker-dealers.
\4\6See Proposing Release, supra note 3, 59 FR at 8370-71.
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2. Records Regarding Applicants Denied Participation on the System.
Commenters questioned the need to retain information regarding
specific applicants denied participation in the system, and indicated
that quantifying such information would be difficult.47 In view of
the comments, the Commission has deleted this requirement from the
Rule. Sponsors, however, are required to describe, in filings under
Part I and IA of Form 17A-23, the factors relied upon by the sponsor in
granting participation in the system.
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\4\7See Letter of ABA, at 5; Letter of CLM/RMJ, at 5; Letter of
HHG, at 3-4; Letter of Instinet, at 6-7; Letter of ITG, at 2; Letter
of NASD, at 7-8; and Letter of SIA, at 3.
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3. Daily Trading Summaries
The Proposed Rule required sponsors to retain daily summaries of,
among other things, securities trading in the system. The Proposed Rule
also would have required sponsors to retain daily summaries identifying
the number of ``quotations'' and ``orders'' placed in the system,
expressed separately for limit and market orders and other relevant
order specifications. This requirement was intended to provide the
Commission with a basis for comparing potential system trading interest
with trading volume. Commenters expressed concern that the
configuration of specific systems would make it difficult to determine
what would constitute a single ``quotation'' or ``order.''48
Commenters also noted that, depending upon system configuration,
identifying the number of quotations or orders may not provide the
Commission with useful information regarding system trading
interest.49
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\4\8See Letter of ABA, at 4; Letter of HHG, at 3; and Letter of
Instinet, at 8-9.
\4\9See Letter of ABA, at 4 and Letter of Instinet, at 8-9. One
commenter questioned the use of the term ``quotations'' in the
Proposed Rule to refer to trading interest entered into an automated
system, noting that its system users place ``orders,'' not
``quotations.'' See Letter of Instinet, at 8. The Commission does
not believe that such distinctions between the terms ``order'' and
``quotation'' are relevant for purposes of this Rule.
---------------------------------------------------------------------------
The Commission has modified the Rule in view of these commenter
concerns regarding the terms ``quotations'' and ``orders.''50 As
adopted, the Rule requires sponsors to identify the number of ``system
orders,''51 or any other identifiable indicator that accurately
reflects participant trading interest, as appropriate in light of
system configuration. If applicable in light of system configuration,
sponsors must express such number separately for priced and unpriced
orders. In modifying this requirement, the Commission relies on the
sponsor's knowledge of its system configuration to determine which
statistics would provide the most accurate assessment of participant
trading interest, and to retain those statistics accordingly.52
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\5\0A corresponding requirement in Form 17A-23, Part II, has
been modified as well, for the reasons discussed above with regard
to modification of the recordkeeping requirement in the Rule.
\5\1The Rule defines ``system order'' as any order or other
communication or indication submitted by any system participant for
entry into the system announcing an interest in purchasing or
selling a security. The Rule also clarifies that the term ``system
order'' does not include inquiries or indications of interest that
are not entered into the system. 17 CFR 240.17a23(b)(4).
\5\2The Commission expects sponsors that intend to fulfill this
requirement by retaining and reporting statistics other than system
orders will contact staff of the Division to discuss which
statistics the sponsor wishes to retain and report instead.
---------------------------------------------------------------------------
The Commission also has modified the Rule, in response to one
commenter's concern, to clarify that a sponsor must be able to identify
on a daily basis only those securities for which transactions have been
executed through the system.53
---------------------------------------------------------------------------
\5\3See Letter of ITG, at 2.
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4. Participant Notices
Three commenters requested clarification of the extent to which
communications to individual participants or non-written communications
must be preserved as notices to participants under paragraph (c)(2)(ii)
of the Proposed Rule.54 The Rule as adopted requires sponsors to
preserve only those notices that are disseminated (whether through
written or other means) generally to all participants, or to one or
more classes of participants. The Rule does not require the sponsor to
preserve communications directed solely to an individual participant.
---------------------------------------------------------------------------
\5\4See Letter of ABA, at 4; Letter of Instinet, at 10; and
Letter of ITG, at 2.
---------------------------------------------------------------------------
D. Reporting Requirements
Under the Rule as adopted, a BDTS sponsor is required to file
reports with the Commission (and, in certain circumstances, with the
appropriate SRO), in accordance with Form 17A-23. Form 17A-23 contains
three parts: (1) operation reports, including initial operation reports
filed at least 20 calendar days prior to the operation of the system
and subsequent operation reports filed as necessary prior to
implementing material system changes; (2) quarterly reports filed
within 30 calendar days after the end of the calendar quarter;55
and (3) a final report filed within 10 calendar days after a sponsor
ceases to operate the trading system. The operation reports would
describe the system, its procedures for reviewing capacity, security
and contingency planning, and protecting participant funds and
securities (if an entity other than the sponsor will hold or safeguard
participant funds or securities on a regular basis). It also would
identify an appropriate system contact. The quarterly reports would
contain summary trading information. The report notifying the
Commission of cessation of operations would contain, in addition to the
notification, a final transaction summary.
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\5\5In the Proposing Release, the Commission solicited comments
on the appropriate interval at which sponsors should file reports.
See Proposing Release, supra note 3, 59 FR at 8373. No commenter
addressed this issue. One commenter, however, requested that the
Commission extend the time period for filing quarterly reports from
20 calendar days to 30 calendar days after the calendar quarter. See
Letter of Instinet, at 11. The Rule has been modified accordingly.
---------------------------------------------------------------------------
1. Filing Reports Prior to Operation or Implementation of a Material
Change
The Rule requires initial operation reports to be filed at least 20
days prior to operation, and subsequent operation reports regarding
material changes to be filed at least 20 days prior to implementing
such material change, or, where it is commercially impracticable to do
so, as soon as possible after the sponsor determines that it will
implement such material change and in any event no later than 10 days
following the implementation of such change.
The Commission notes that the Rule does not require system sponsors
that alter the operation of their BDTS subsequent to filing an initial
operation report to file additional or amended operation reports prior
to beginning operation. In the Commission's experience, it is not
uncommon for automated systems to be altered routinely to respond to
participant comments or concerns, incorporate technological advances,
or otherwise upgrade a system's operation. Accordingly, sponsors that
file initial operation reports with the Commission might alter the
operation of their BDTS subsequent to such filing, but prior to
beginning operation. If a sponsor materially changes system operation
subsequent to filing an initial operation report, but prior to
beginning operation, the sponsor should contact the Division to apprise
them of such material change.
The Commission also notes that currently, material changes to
automated systems generally require significant planning and
development prior to implementation. Accordingly, the Commission
believes that most sponsors will be able to notify the Commission at
least 20 days prior to implementing a material change. Nonetheless, if
a sponsor is able to implement a material system change on a greatly
expedited basis, the Commission recognizes that it may not be
commercially feasible to notify the Commission 20 days prior to
implementation without delaying implementation. In such circumstances,
the Rule allows a sponsor to notify the Commission as soon as possible
after it determines to implement a material change, but in any event no
later than 10 days following the implementation of such change.
2. Availability of Reports to SROs
As adopted, the Rule requires sponsors to file Parts I and III of
Form 17A-23 with both the Commission and the SRO that is its designated
examining authority. The quarterly reports covered by Part II of Form
17A-23 are required to be filed only with the Commission; however, the
sponsor must make such reports available to the appropriate SRO upon
request.56 Two commenters expressed concern that SRO access to
information contained in reports filed pursuant to the Proposed Rule
might adversely affect a BDTS's competitive position.57 One
commenter recommended that the Commission require SROs to adopt
procedures to restrict access to BDTS reports to the SRO's surveillance
personnel, or, in the alternative, dispense with the reporting
obligation.58
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\5\6The Commission has determined that summary trading
information filed pursuant to Part II of Form 17A-23 are not
critical to the SROs' routine oversight of BDTSs, although such
information is useful for the Commission for the reasons discussed
herein and may be useful to SROs for non-routine oversight of BDTS
sponsors. Accordingly, the Commission has revised the Rule to
require BDTS sponsors to file reports pursuant to Part II of Form
17A-23 routinely with the Commission and to make such reports
available to the appropriate SRO upon request.
\5\7See Letter of ABA, at 4-5 and Letter of Instinet, at 12-13.
\5\8See Letter of ABA, at 4-5.
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The Commission recognizes that the activities of SROs as both
market operators and market regulators may create tension between the
SROs and SRO members. For example, documents obtained in the conduct of
an SRO's regulatory duties may contain competitively sensitive
information. Notwithstanding this, SROs must have access to relevant
member information in order to fulfill their self-regulatory
obligations.59 The Commission believes that information contained
in reports filed pursuant to the Rule will be critical to appropriately
tailoring SRO examination and oversight of BDTS sponsors to reflect the
distinctive characteristics and concerns of automated trading systems.
Accordingly, the Rule continues to make such information available to
SROs designated as a BDTS's examining authority. In order to address
potential competitive issues, the Rule provides for filing of Rule 17a-
23 reports directly with surveillance personnel designated by the
examining SRO. The Commission notes that access to information made
available to an SRO in its regulatory capacity should be rigorously
restricted to those personnel who require it for surveillance and
regulatory oversight purposes only. The Commission strongly urges SROs
to carefully assess, and revise where necessary, their internal
policies and procedures for protecting the confidentiality of sensitive
information obtained in the course of fulfilling SRO regulatory
responsibilities.
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\5\9See, e.g., Exchange Act Section 15A(b), 15 U.S.C. 78o-3(b).
---------------------------------------------------------------------------
3. Confidentiality of Reports
Two commenters requested that the Commission discuss whether
reports filed pursuant to the Proposed Rule may be exempt from public
disclosure under the Freedom of Information Act.60 The Commission
notes that reports filed pursuant to the Rule will be deemed to be
confidential. The Commission considers such reports to be exempt from
disclosure under the Freedom of Information Act (``FOIA'').61 The
Commission will protect the confidentiality of reports filed pursuant
to the Rule accordingly.62
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\6\0See Letter of ABA, at 4; Letter of M&S, at 3.
\6\1Such reports constitute examination, operating or condition
reports of a financial institution, and, as such, are exempt from
disclosure under FOIA pursuant to 5 U.S.C. Sec. 552(b)(8).
\6\2In addition, other exemptions from FOIA may be available,
including the exemption provided by Section 552(b)(4) for trade
secrets and commercial or financial information obtained from a
person and privileged or confidential. The availability of this
exemption depends upon a factual analysis which may require
substantiation by the sponsor of the reporting BDTS.
---------------------------------------------------------------------------
E. Form 17A-23
Proposed Form 17A-23 would have required sponsors to report ``lists
of securities trading in the system,'' and to state whether it offers
services that allow system participants to trade with entities outside
of the United States. Commenters requested clarification that sponsors
may comply with the Form by identifying the categories of securities
that have actually traded in the system during the period covered by
the report.63 After reviewing the comments, the Commission
believes that the information required pursuant to Part I of Form 17A-
23 is sufficient to provide summary information regarding the
categories of securities trading, and that submission of lists
identifying individual securities in the quarterly filings under Part
II of Form 17A-23 would not be useful. Accordingly, the Commission has
deleted this requirement from the Form. The Commission also has
modified Parts I and II of Form 17A-23 to clarify that sponsors must
report whether entities located outside of the United States have
access to the system, and describe the nature of such access and
foreign participation in the system in reports filed pursuant to Part I
of the Form. Finally, the Commission has modified Part I of the Form
and paragraph (d)(1) of the Rule to require system sponsors to update
the information filed in Part I of the Form at least 20 days prior to
implementing a material change to system operation, or, where it is
commercially impracticable to do so, as soon as possible thereafter
when the sponsor determines that it will implement such material change
(and in any event no later than 10 calendar days following the
implementation of such change).
---------------------------------------------------------------------------
\6\3See Letter of Instinet, at 11 and Letter of ITG, at 2.
---------------------------------------------------------------------------
IV. Implementation Date
The Rule will become effective on June 1, 1995. The Commission has
modified the Rule to allow sponsors of systems currently operating to
submit the information required by Part I of Form 17A-23 no later than
July 1, 1995 (one month following the effective date), to provide
sponsors of existing systems adequate time to prepare this
filing.64
---------------------------------------------------------------------------
\6\4Sponsors of existing BDTSs must submit a system description
that is current as of the date of filing.
---------------------------------------------------------------------------
As discussed above, certain BDTS sponsors are subject to staff no-
action letters that require those sponsors to provide operation and
trading information to the Division that is comparable to that required
in Form 17A-23.65 These staff no-action letters do not affect the
obligation of any BDTS sponsor to comply with the Rule. Prior to
effectiveness of the Rule, the Division will revise the conditions of
no-action in each letter granted to a sponsor of an operating system
that would be subject to the Rule, to eliminate duplicative reporting
requirements. Sponsors of BDTSs subject to no-action letters that have
further questions on complying with the Rule and conditions of no-
action should contact the Division.
---------------------------------------------------------------------------
\6\5See note 12, supra.
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V. Competition Findings
Section 23(a)(2) of the Act66 requires the Commission, in
adopting rules under the Act, to consider the anti-competitive effects
of such rules, if any, and to balance any impact against the regulatory
benefits gained in terms of furthering the purposes of the Act. As
discussed above, several commenters raised concerns regarding the
competitive implications of the Proposed Rule. The Commission has
considered the Rule in light of the comments and the standard cited in
Section 23(a)(2). The Rule's establishment of reporting and
recordkeeping requirements will not impose a significant burden on
competition. All BDTSs will be subject to the same requirements, and
the reporting and recordkeeping requirements, which are similar to
those currently imposed on registered brokers and dealers, should not
be unduly burdensome. In addition, the Commission has specifically
considered competitive concerns relating to SRO access to such
information.67 For the reasons discussed above, the Commission
believes that adoption of the Rule will not impose any burden on
competition not necessary or appropriate in furtherance of the Act.
---------------------------------------------------------------------------
\6\615 U.S.C. 78w(a)(2).
\6\7See Availability of Reports to SROs, supra.
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VI. Summary of Final Regulatory Flexibility Analysis and Paperwork
Reduction Act
The Commission has prepared a Final Regulatory Flexibility Analysis
(``FRFA'') regarding Rule 17a-23, in accordance with 5 U.S.C. Sec. 604.
No public comment was received in response to the initial regulatory
flexibility analysis. The FRFA notes the potential costs of operation
and procedural changes that may be necessary to comply with the Rule.
As more fully explained above, however, the Commission has determined
that the proliferation of broker-dealer automated trading systems
requires increased oversight to promote investor protection and to
assess the impact of these systems on the securities markets. The
Commission finds that the benefits of Rule 17a-23 outweigh the costs
incurred by industry participants in complying with the Rule. A copy of
the FRFA may be obtained by contacting Elaine M. Darroch, Attorney-
Advisor, Office of Automation and International Markets, Division of
Market Regulation, Securities and Exchange Commission, 450 Fifth
Street, N.W. (Mail Stop 5-1), Washington, D.C. 20549.
No public comment was received in response to proposed Rule 17a-23
with respect to the Paperwork Reduction Act of 1980, 44 U.S.C.
Secs. 3501 et seq.
VII. Statutory Basis
The rules and regulations of the Commission are amended as follows,
pursuant to the Securities Exchange Act of 1934 and particularly
Sections 2, 3, 11A, 15(c), 17, and 23(a) thereof, 15 U.S.C. Secs. 78b,
78c, 78k-1, 78o(c), 78q, and 78w(a).
List of Subjects in 17 CFR Parts 240 and 249
Reporting and recordkeeping requirements, Securities.
Text of Amendments
In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations is amended as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The authority citation for Part 240 is amended by adding the
following citation:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg,
77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p,
78q, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-
37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *
Section 240.17a-23 also issued under 15 U.S.C. 78b, 78c, 78o,
78q, and 78w(a);
* * * * *
2. Section 240.17a-23 is added to read as follows:
Sec. 240.17a-23 Recordkeeping and Reporting Requirements relating to
Broker-Dealer Trading Systems.
(a) Scope of section. This section shall apply to any registered
broker or dealer that acts as the sponsor of a broker-dealer trading
system.
(b) Definitions. For purposes of this section:
(1) The term registered broker or dealer shall have the meaning
ascribed to it in Section 3(a)(48) of the Act.
(2) The term broker-dealer trading system means any facility that
provides a mechanism, automated in full or in part, for:
(i) Collecting, receiving, disseminating, or displaying system
orders; and
(ii) Matching, crossing, or executing system orders, or otherwise
facilitating agreement to the basic terms of a purchase or sale of a
security between system participants, or between a system participant
and the system sponsor, through use of the system or through the system
sponsor.
(3) The term sponsor means any entity that organizes, operates,
administers, or otherwise directly controls a broker-dealer trading
system; and, if the system operator of such broker-dealer trading
system is not a registered broker or dealer, any registered broker or
dealer that, pursuant to contract, affiliation, or other agreement with
the system operator, is involved materially on a regular basis with
executing transactions in connection with use of the broker-dealer
trading system, other than solely for its own account or as a
participant in the broker-dealer trading system.
(4) The term system order means any order or other communication or
indication submitted by any system participant for entry into a trading
system announcing an interest in purchasing or selling a security. The
term ``system order'' does not include inquiries or indications of
interest that are not entered into a trading system.
(5) The term system participant means any person that is provided
access to a trading system (whether through computer terminal, access
codes, or other means) by a system sponsor for the purpose of effecting
the purchase or sale of securities through use of such system.
(c) Recordkeeping. Every registered broker or dealer subject to
this section pursuant to paragraph (a) of this section shall:
(1) Make and keep current the following records relating to the
broker-dealer trading system:
(i) A record of participants in the broker-dealer trading system
(identifying any affiliations between system participants and the
system sponsor);
(ii) Daily summaries of trading in the broker-dealer trading
system, including:
(A) Securities for which transactions have been executed through
use of such system;
(B) Transaction volume (separately stated for trading occurring
during hours when consolidated trade reporting facilities are and are
not in operation), expressed with respect to stock in trades, shares
and in dollar value, and expressed with respect to other securities in
trades, number of units of securities and in par value, dollar value,
or other appropriate commonly used measure of value of such securities;
and
(C) Number of system orders, or other identifiable indicator that
accurately reflects participant trading interest, as appropriate in
light of configuration of the broker-dealer trading system (expressed
separately for priced and unpriced orders, if applicable in light of
system configuration);
(iii) Time-sequenced records of each transaction effected through
the broker-dealer trading system, including date and time executed,
price, size, security traded, counterparty identification information,
and method of execution (if broker-dealer trading system allows
alternative means or locations for execution, such as routing to
another market, matching with limit orders, or executing against the
system sponsor's quotations); and
(2) Preserve, for a period of not less than three years, the first
two years in an easily accessible place, the following records relating
to the broker-dealer trading system:
(i) All records required to be made pursuant to paragraph (c)(1) of
this section; and
(ii) All notices provided by the system sponsor to system
participants generally (or to one or more classes of system
participant), whether written or communicated through the broker-dealer
trading system or other automated means, including, but not limited to,
notices addressing hours of system operations, system malfunctions,
changes to system procedures, maintenance of hardware and software,
instructions pertaining to access to the broker-dealer trading system.
(d) Reporting. (1) Every registered broker or dealer subject to
this section pursuant to paragraph (a) of this section shall:
(i) File the information required by Part I of Form 17A-23
(Sec. 249.636 of this chapter) at least 20 calendar days prior to
operating a broker-dealer trading system, or, if the sponsor is
operating the broker-dealer trading system on June 1, 1995, no later
than July 1, 1995;
(ii) During the operation of a broker-dealer trading system of
which the broker or dealer is the sponsor, file the information
described in Part IA of Form 17A-23 (Sec. 249.636 of this chapter)
regarding a material change to operation of the broker-dealer trading
system as described in any filing previously made with the Commission
pursuant to paragraph (d)(1)(i) of this section, at least 20 calendar
days prior to implementing such material change, or, where it is
commercially impracticable to do so, as soon as possible thereafter
when the sponsor determines that it will implement such material
change, and in any event no later than 10 calendar days following the
implementation of such change;
(iii) During the operation of a broker-dealer trading system of
which the broker or dealer is the sponsor, file the information
described in Part II of Form 17A-23 (Sec. 249.636 of this chapter)
within 30 calendar days after the end of each calendar quarter in which
the broker-dealer trading system has operated after July 1, 1995; and
(iv) Within 10 calendar days after a broker-dealer trading system
of which the broker or dealer is the sponsor ceases to operate, file
the notice described in Part III of Form 17A-23 (Sec. 249.636 of this
chapter).
(2) The reports provided for in paragraph (d) of this section shall
be considered filed upon receipt at the Commission's principal office
in Washington, DC. Duplicate originals of the reports provided for in
paragraphs (d)(1)(i), (ii), and (iv) of this section must be filed with
surveillance personnel designated as such by the self-regulatory
organization that is the designated examining authority for the broker
or dealer pursuant to Sec. 240.17d-1 simultaneously with filing with
the Commission. Duplicates of the reports required by paragraphs
(d)(1)(iii) of this section must be provided to such surveillance
personnel of such self-regulatory authority upon request. All reports
filed pursuant to this paragraph (d) shall be deemed to be
confidential.
(e) Maintenance of records in alternative form. The records
required to be maintained and preserved pursuant to this section may be
produced, reproduced and maintained pursuant to the provisions of
Sec. 240.17a-4(f).
(f) Compliance with other recordkeeping and reporting rules.
Nothing in this section obviates the need for any broker or dealer to
comply with any other applicable recordkeeping or reporting requirement
in the Act and the rules and regulations thereunder. If the information
in a record required to be made pursuant to this section is preserved
in a record made pursuant to Sec. 240.17a-3 or Sec. 240.17a-4, or
otherwise preserved by the sponsor (whether in summary or other form),
paragraph (c) of this section shall not require the sponsor to maintain
such information in a separate file, provided that the sponsor can
promptly sort and retrieve the information as if it had been kept in a
separate file as a record made pursuant to this section, and preserves
the information in accordance with the time periods specified in
paragraph (c)(2) of this section.
(g) Maintenance of records by others. The records required to be
maintained and preserved pursuant to this section may be prepared or
maintained by a service bureau, depository, or other recordkeeping
service on behalf of the sponsor of a broker-dealer trading system,
provided such entity complies with the provisions of Sec. 240.17a-4(i).
Agreement with such an entity shall not relieve the sponsor of a
broker-dealer trading system from the responsibility to prepare and
maintain records as specified in this section.
(h) Furnishing copies of records. Every broker or dealer subject to
this section pursuant to paragraph (a) of this section shall furnish to
any representative of the Commission promptly upon request, legible,
true and complete copies of those records of the sponsor that are
required to be preserved under this section.
(i) Exemption from this section. The Commission, by rule or order,
may exempt any sponsor of a broker-dealer trading system from all or
any of the provisions of this section, either unconditionally or on
specified terms and conditions, if the Commission determines that such
exemption is consistent with the public interest or the protection of
investors.
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
3. The authority citation for Part 249 continues to read in part as
follows:
Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;
* * * * *
4. Section 249.636 and Form 17A-23 are added to read as follows:
Note: The text of Form 17A-23 appears as Appendix A to this
document and will not appear in the Code of Federal Regulations.
Sec. 249.636 Form 17A-23, information required of certain broker and
dealer sponsors of broker-dealer trading systems pursuant to section 17
of the Securities Exchange Act of 1934 and Sec. 240.17a-23 of this
chapter.
This form shall be used by every registered broker and dealer that
is required to file reports under Sec. 240.17a-23 of this chapter.
By the Commission.
.Dated: December 20, 1994.
Margaret H. McFarland,
Deputy Secretary.
BILLING CODE 8010-01-P
TR28DE94.005
TR28DE94.006
TR28DE94.007
[FR Doc. 94-31656 Filed 12-27-94; 8:45 am]
BILLING CODE 8010-01-C
