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Annette Nazareth on the Proposed Large Trader Reporting System

As we reported in our April 19 post, the SEC has proposed new rules that would create a system tracking large traders, and potentially enhance the agency's "ability to identify large market participants, collect information on their trades, and analyze their trading activities."  The Commission indicated that the new tracking system is necessary because large traders, particularly high-frequency traders, are playing an increasingly significant role in the securities markets. The proposal defines a large trader as "a person, including a firm or individual, whose transactions in exchange-listed securities equal or exceed (i) two million shares or $20 million during any calendar day, or (ii) 20 million shares or $200 million during any calendar month." These large traders would be required under the proposed rules to:

  • File a form with the Commission identifying themselves;
  • Begin using a Commission issued large trader identification number;
  • Maintain records similar to the information covered by the Commission's Electronic Blue Sheets; and
  • Make these records readily available to the SEC.

Former SEC Commissioner, Annette L. Nazareth, now a partner at Davis Polk & Wardwell LLP, has posted a detailed breakdown of the proposal, including some of the challenges the rules would impose if adopted. The particular challenges pointed out by Nazareth include:

  • [W]e believe that the registration requirements would nonetheless present particular challenges for financial conglomerates that do not currently obtain or manage this information centrally and for companies that do not exert sufficient practical control over affiliates to permit adequate compliance oversight.
     
  • Because the trigger level for registration is relatively low and has few exceptions, many entities would cross the threshold level unexpectedly (such as by acquiring a block of NMS securities with a value of $20 million in a single corporate transaction) and then be subject to registration and updating requirements for at least a year.
     
  • The broad jurisdictional reach of the registration requirements would ensure that many non-U.S. investors and investment managers would likely be subject to the registration requirements merely because their trades are effected through or their accounts are carried at U.S. broker-dealers. This might well spur the growth of offshore trading of U.S. stocks on organized foreign markets. The expansive jurisdictional reach of the rule would likely also create potential conflicts with foreign laws concerning bank secrecy. The article provides an excellent breakdown of the provisions of the proposed rules, and a roadmap for those wishing to comment on the proposal.


Annette Nazareth's article is available at: http://blogs.law.harvard.edu/corpgov/2010/04/29/sec-proposes-large-trader-reporting-system/

Comments on the proposal may be submitted via: http://www.sec.gov/cgi-bin/ruling-comments?ruling=s71010&rule_path=/comments/s7-10-10&file_num=S7-10-10&action=Show_Form&title=Large%20Trader%20Reporting%20System

The full text of the Commissions large trader system proposal is available at: http://www.sec.gov/rules/proposed/2010/34-61908.pdf