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On April 20, 2012, the SEC issued an order (the “Order”) that (1) temporarily exempts broker-dealers from the recordkeeping, reporting, and monitoring requirements of Rule 13h-11 (the “Rule”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”),2 and (2) exempts certain securities transactions for purposes of determining whether a person is a large trader.3
I. Extension of Compliance Date for Broker-Dealer Requirements
The Order generally extends the compliance date for the recordkeeping, reporting, and monitoring obligations of registered broker-dealers from April 30, 2012 to May 1, 2013.4 However, a clearing broker-dealer for a large trader5 must comply with the Rule by November 30, 2012 if the large trader (1) is a registered broker-dealer6 or (2) trades through a “sponsored access” arrangement.7 The SEC believes that the extensions of the compliance date will allow broker-dealers time to develop, test, and implement necessary systems changes and provide the SEC with an opportunity to work with market participants to more fully examine implementation issues and assess the appropriateness of exemptive relief.8 In addition, the Order provides that broker-dealers will not be required to provide execution times for options exercises and assignments or exchange traded fund creations and redemptions that they report through the Electronic Blue Sheets system until May 1, 2013, but the SEC is considering a broader request for relief in this regard.9
II. Exemptions for Certain Securities Transactions
The Rule exempts certain transactions solely for purposes of determining whether a person is a large trader.10 The SEC designed these exemptions to exclude transactions that “are not effected with an intent that is commonly associated with the arm’s-length trading of securities in the secondary market and therefore would not fall within the types of transactions that are characterized by the exercise of investment discretion for purposes of” the Rule.11
The Rule generally excludes offerings of securities by or on behalf of an issuer, but this exemption does not apply to offerings of securities effected through the facilities of a national securities exchange.12 The Rule also does not exclude sales of stock by employees in an initial public offering or registered secondary offering.13 In recognition of the fact that certain transactions are infrequent in nature and distinguishable from secondary market transactions covered by the Rule, the Order extends the exemption to (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 of 1933, as amended,14 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.15 The SEC believes that these additional exemptions will continue to ensure that the Rule provides a mechanism for the SEC “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.”16
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1 17 C.F.R. § 240.13h-1.
2 15 U.S.C. §§ 78a-78pp.
3 Order Temporarily Exempting Broker-Dealers from the Recordkeeping, Reporting, and Monitoring Requirements of Rule 13h-1 under the Securities Exchange Act of 1934 and Granting an Exemption for Certain Securities Transactions, Exchange Act Release No. 34-66839 (April 20, 2012), available at http://sec.gov/rules/exorders/2012/34-66839.pdf.
4 Id. at 2.
5 “The term ‘a clearing broker-dealer for a large trader’ refers to self-clearing and clearing broker-dealers that have a direct relationship with the large trader (including the large trader broker-dealer itself, if self-clearing).” Id. at 8 n.20.
6 This includes the large trader broker-dealer itself if the broker-dealer is self-clearing. Id. at 13 n.33.
7 Id. at 8. “A ‘sponsored access arrangement’ in this context is an arrangement in which a broker-dealer permits a large trader customer to enter orders directly to a trading center where such orders are not processed through the broker-dealer’s own trading system (other than any risk management controls established for purposes of compliance with Rule 15c3-5 under the Exchange Act) and where the orders are routed directly to a trading center, in some cases supported by a service bureau or other third party technology provider.” Id. at 8 n.22.
8 Id. at 7.
9 Id. at 9 n.23.
10 17 C.F.R. § 240.13h-1(a)(6).
11 Order, supra note 3, at 10.
12 Id. at 11.
13 Id.
14 15 U.S.C. §§ 77a-77bbbb.
15 Order, supra note 3, at 11-12.
16 Id. at 12.
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