On October 30, 2015, the U.S. Securities and Exchange Commission (SEC) issued an order temporarily exempting certain broker-dealers from the recordkeeping, reporting and monitoring responsibilities under Rule 13h-1 and exempting certain large traders from the self-identification requirements of Rule 13h-1.1
Temporary Exemption for Certain Broker-Dealers from Recordkeeping, Reporting and Monitoring Responsibilities
The SEC’s order temporarily exempts broker-dealers until November 1, 2017 from the recordkeeping and reporting responsibilities under Rule 13h-1, except for:
- The clearing broker-dealer for a large trader, with respect to:
- Proprietary transactions by a large trader broker-dealer;
- Transactions effected pursuant to a “sponsored access” arrangement; and
- Transactions effected pursuant to a “direct market access” arrangement.
- A broker-dealer that carries an account for a large trader, with respect to transactions other than those set forth above, and for transaction data other than the execution time.
This delays the so-called “Phase Three” of the SEC’s staggered implementation of broker-dealers’ obligations under Rule 13h-1 for two years.
The SEC noted that it is hesitant to require broker-dealers to incur the costs associated with the remaining Phase Three requirements while the timing of implementing the Consolidated Audit Trail (CAT) remains unclear. The SEC has acknowledged that the CAT, once implemented, may supersede certain broker-dealer recordkeeping and reporting requirements under Rule 13h-1. However, the SEC believes that a two-year extension of the Phase Three compliance date provides sufficient time for the SEC to consider whether to revisit broker-dealer obligations under Rule 13h-1 in light of future developments, including progress on the CAT.
Permanent Exemption for Certain Large Traders in Options from Self-Identification Requirements
The SEC has recognized that the current methodology for calculating the fair market value of equity options under Rule 13h-1 has resulted in the self-identification of a number of equity options investors as large traders. These investors’ activity is unlikely to have a material impact on the options market or underlying equities market. For example, a market participant may transact in deep out-of-the-money equity options on high-priced securities but may never exercise these options. Accordingly, the SEC’s order provides relief by using the existing fair market value thresholds of the identifying activity level with reference to the premium paid for equity options instead of the price of the underlying equity at the time of the trade.
More specifically, the SEC’s order provides a conditional exemption from the self-identification requirements of Rule 13h-1 for persons that trade equity options if:
- The aggregate value of their equity option transactions based on premium paid, combined with the aggregate value of their transactions in all other NMS securities (if any) does not reach or exceed the current fair market value thresholds of the identifying activity level; and
- They also do not reach or exceed the share volume thresholds of the identifying activity level.
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1See Exchange Act Release No. 76322 (October 30, 2015), available at https://www.sec.gov/rules/exorders/2015/34-76322.pdf.
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