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News April 23, 2012 Issue

SEC Extends Broker-Dealer Compliance Deadlines Under Large Trader Reporting Rule

Broker-dealers just dodged a big bullet under the Large Trader Reporting Rule.

The SEC has extended certain compliance deadlines by temporarily exempting broker-dealers from the recordkeeping, reporting and monitoring requirements of the rule.

On April 20, ten days before compliance was due, the SEC issued an order that gives broker-dealers at least until November 30 – and for some until May 1, 2013 – to comply with those requirements.

Broker-dealers that:

  • are themselves large traders; or
  • have large trader customers that are either broker-dealers or that trade through a "sponsored access" arrangement:

now have until November 30 of this year to comply.

All other SEC-registered broker-dealers now have until May 1, 2013 to comply.

"The extension of the compliance date will allow broker-dealers additional time to develop, test, and implement enhancements to their recordkeeping and reporting systems as required under Rule 13h-1 and, for those broker-dealer requirements for which the compliance date has been extended to May 1, 2013, for the Commission to consider requests for relief from certain provisions of the Rule," said the order.

The compliance extension was requested by the Financial Information Forum and also separately by the Securities Industry and Financial Markets Association (SIFMA), who suggested a phased implementation approach (that was not adopted).

Additional transaction types excepted from the large trader calculation.

SIFMA also requested and received relief excepting certain additional transactions from the large trader "identifying activity level" calculation.

The rule targets significant arm’s length trading activity in the secondary markets. To get a more accurate picture of the larger trader activity in that space, the rule excepts categories of transactions that do not reflect "fundamental corporate decision-making or capital formation objectives."

As a result, the rule as adopted excepts transactions such as:

  • Registered or unregistered OTC offerings by an issuer or on the issuer's behalf by an underwriter;
  • Transactions to affect a business combination, such as a tender offer, merger, or acquisition;
  • Gifts and transactions executed to settle a decedent's estate;
  • Transactions executed pursuant to a court order or judgment;
  • Employer option grants, and option exercises and assignments;
  • ETF creations and redemptions;
  • Rollovers of qualified plans or trust assets; and
  • Issuer securities buy-backs, or stock loan or equity repurchase agreements.

The exclusions apply only to the determination of the identifying activity level. Broker-dealers must include all transactions in Naional Market System securities and related options from accounts where investment discretion is exercised by a large trader when the broker-dealer is reporting to the SEC.

SIFMA successfully argued for the inclusion of several more categories of exclusions:

  • Offerings that are "dribble out" programs (which permit issuers to offer and sell securities in incremental transactions over time) on a national securities exchange;
  • Offerings "crossed" for ease of settlement on a national securities exchange; and
  • Subsequent sales of stock acquired as part of employee compensation by current or former selling employees of the issuer in connection with those offerings.

SIFMA convinced the SEC staff that these types of transactions are also effected for "materially different reasons" than those associated with the secondary market trading that is the focus of the rule.